Jan Stráský
Federico Giovannelli
OECD Economic Surveys: European Union and Euro Area 2025
Abstract
The EU budget needs to address objectives and priorities such as innovation and productivity as well as prospects of enlargement. Hence, the next Multiannual Financial Framework will likely have to involve both increasing the overall budgetary envelope and re-prioritising existing spending. In addition to reinforcing administrative capacity, cohesion policy spending would benefit from better prioritisation and more targeting at less developed regions. At the same time, the approach of the Recovery and Resilience Facility may not be the most suitable for regional policy and should be used with caution. Spending on agriculture is still dominated by direct payments that are not effective in protecting incomes and employment. More efficient and better administered CAP spending would free up resources in the EU budget for other priorities. Further strengthening the anti‑corruption framework would help protect the EU financial interests and safeguard the EU budget from corruption and misappropriation.
There is a growing need to reform the EU budgetary rules, reviewing both the budget size and the spending priorities. The EU budget is not sufficiently focused on public goods that are best provided at the EU level, as Cohesion Policy and Common Agricultural Policy (CAP) spending together represent more than 60% of the budget. Yet, a greater share of public investment could be co-ordinated and financed at the EU level, including spending on cross-border infrastructure, green R&D and public procurement for defence, as discussed in Chapter 4 and in the 2023 OECD Economic Survey of the EU and the Euro Area. Instead, budget resources are set to shrink. The Recovery and Resilience Facility (RRF) will expire in 2026, sharply reducing funding channelled into areas such as energy, decarbonisation and the digital transition. At the same time, the debt issued under the NGEU programme will have to be repaid starting from 2028, with interest payments already accruing.
The EU’s annual budget is small, at about 1% of EU GDP or 0.89% of EU Gross National Income (GNI) in 2023. In addition, the Next Generation EU (NGEU) grants in 2023 amounted to just under 0.4% of EU GNI. Over the years, the distribution of net contributions to the EU budget has reflected differences in population and income. This measure, which does not capture cross-country spillovers and broader benefits of EU membership, has remained broadly stable, except for the departure of the United Kingdom (Figure 2.1).
Net fiscal receipts from the EU budget, billion EUR
Note: Difference between EU budget receipts (excluding NGEU and European public administration costs) and contributions. The "rebate" ad hoc mechanism for the United Kingdom is deducted from its contributions. MFF 2021-2027 only includes data up to 2023. Expenditure that appears to go only to a Member State may benefit several or all of them given strong spillovers of EU expenditure, or provide a European public good.
Source: European Commission; and OECD calculations.
EU countries unanimously agree on the overall envelope for annual EU spending. During the Multiannual Financial Framework (MFF) 2021-2027, the so-called own resources ceiling for each year is 1.4% of EU GNI, excepting NGEU debt service. The own resources of the EU budget comprise traditional own resources, such as customs duties and levies, a value added tax-based own resource and the non-recycled plastics packaging waste own resource and the GNI-based own resource. As the EU’s budget must be balanced each year, the GNI-based own resource, which is a uniform fraction of national GNI collected by the EU as needed, acts as a balancing item after all other own resources and other revenue are deducted. It currently represents about 59% of EU budget revenues (EPRS, 2023[1]). Since it is the agreed size of expenditures that effectively determines the revenue, one could argue that there is a little difference between financing through the GNI-based own resource and other own resources determined by the underlying revenue base and specific formulas. However, designating new own resources could better align the budget to EU objectives and priorities and reduce net balance considerations of EU countries (the so-called juste retour). For example, the non-recycled plastic packaging waste own resource, while not increasing overall revenue of the EU budget (since the balancing GNI-based contributions are reduced correspondingly), still incentivises national recycling policies (Buti, Darvas and Steinbach, 2024[2]). Moreover, to repay NGEU debt, the own resources decision (Council Decision 2020/2053) established a separate own resource ceiling of 0.6% of GNI up to 2058, which will have to be met either by new own resources or increased national contributions (see Chapter 1). In June 2023, the Commission amended its proposal for new own resources comprising 30% of proceeds from the ETS, 75% of revenues from the Carbon Border Adjustment Mechanism and additional transfers based on a new common consolidated corporate tax base (CCCTB), which would expand the existing revenue by about 0.2% of EU GNI (Bankowski et al., 2024[3]) and which the Council of the EU has not yet approved.
To meet additional spending on strategic priorities, including European public goods and defence spending, EU countries could decide to increase the EU own resources in line with the Commission’s June 2023 proposal or set up a common fiscal capacity, similar to that discussed in the 2021 OECD Economic Survey of the Euro Area. For example, the Security Action for Europe (SAFE) instrument proposes an EU budget instrument to effectively contribute to defence financing. The next EU budget will also entail reprioritisation of current spending and reallocation of resources in support of competitiveness priorities. A new European Competitiveness Fund is to establish an investment capacity for commonly agreed EU public goods and multi-country investment projects with a strengthened policy steering mechanism (European Commission, 2025[4]).
2.1.1. Transition periods and built-in caps could help contain the cost of enlargement
Following the Russian war of aggression against Ukraine and the sharp increase in geopolitical risk, EU enlargement has come to the fore again. While Moldova and Ukraine opened accession negotiations in 2024, progress of the Western Balkan countries has been slow. Support for administrative and institutional capacity building, already provided through the Instrument for Pre-Accession Assistance, could be reinforced by involving candidate countries in the European Semester process and the European Green Deal (Darvas and Grabbe, 2024[5]).
Estimating the budgetary cost of enlargement is difficult, as many relevant factors are not known. However, the existing studies suggest that, at least under current budgetary rules, the financial burden of further EU enlargement would be limited, in the range of 0.1% to 0.3% of EU GNI. This cost is mainly coming from an increase in the Common Agricultural Policy spending of up to 25% (Rubio et al., 2025[6]). Although the EU candidate countries are poorer than the EU average and more dependent on agriculture, recent quantitative assessments of the financial implications of enlargement agree that the hypothetical size of the new EU budget would be below 1.4% of EU GNI, the maximum level of own resources agreed for the MFF 2021-2027. For example, using population and GDP data and projections from 2020 and modelling reallocation of cohesion spending towards new EU regions, the inclusion of Ukraine, Moldova, Georgia and the six Western Balkan countries would increase the overall size of the current MFF budget from 1.12% of EU GDP to 1.23% (Darvas and Lopez, 2024[7]). Similarly, using the 2021 data and keeping the annual expenditure for all existing EU members constant, the accession of Ukraine, Moldova and the Western Balkans would increase the EU budget to 1.3% of the expanded EU’s GDP (Lindner, Nguyen and Hansum, 2023[8]). The impact on net positions would be modest, as many net beneficiaries have already experienced a reduction in net transfers from the EU budget since 2021. Most net payers would need to contribute an additional 0.1% of their GDP to the EU budget. However, these estimates do not include the cost of future reconstruction of Ukraine.
The budgetary impact under current financing rules could be further reduced by the introduction of long transition periods. For example, in the 2004 enlargement to Central and Eastern Europe, the EU phased in direct payments under the CAP to the new members over 10 years, starting at 25% of the final level, and the same practice of staggering direct payments over 10 years was followed in 2007 for Bulgaria and Romania and in 2013 for Croatia (Matthews, 2024[9]). Moreover, under the Common Provisions Regulation (CPR), there are caps limiting the amount any EU country can receive in cohesion funds. For the current MFF, cohesion funds going to any EU country cannot exceed 2.3% of national GDP or 107% of the national allocation in the previous programming period. The CPR also provides a safety net for cohesion policy funds for current beneficiaries, meaning that national allocations in 2021‑2027 cannot be less than 76% of funds received in the previous MFF (Lindner, Nguyen and Hansum, 2023[8]). At the same time, extending the European Green Deal and other EU programmes to candidates, for example by increasing funding for the Western Balkans Growth Plan under the next MFF, could increase financing needs prior to the EU accession.
2.1.1. Cohesion policy needs a sharper focus and better prioritisation of challenges
The EU allocates almost a third of the Multiannual Financial Framework (MFF) to cohesion policy. For the 2021‑2027 MFF period, structural and investment funds in the EU budget amount to EUR 392 billion, of which EUR 378 billion is allocated to cohesion policy including European Territorial cooperation. Together with national cofinancing, cohesion policy spending from the European Regional Development Fund (ERDF), European Social Fund Plus (ESF+), Cohesion Fund and Just Transition Fund sums up to EUR 527 billion (European Commission, 2024[10]). Importantly, Cohesion Policy funds are not limited to less developed regions (Figure 2.2). While most cohesion funds have gone to areas with GDP per capita below 75% of the EU average, the EU has since 2007 distributed funds across all EU regions, including the wealthiest (Box 2.1).
Note: For all MFFs data refer to EU financing only (excluding national co-financing). In Panel A and Panel B, MFF 2021-2027 data refer to planned allocations over the whole budgetary period for the following funds: European Regional Development Fund (ERDF) and European Social Fund plus (ESF+). The data does not include payments to Outermost or northern sparsely populated regions and payments of Interregional funds, which form a part of the European Regional Development Fund (EDRF). In Panel B, MFF 2014-2020 data refer to allocations over the whole period for the following funds: European Regional Development Fund (ERDF) and European Social Fund (ESF).
Source: Open Data Platform for the European Structural and Investment Funds; Eurostat; and OECD calculations.
In the 2021-2027 Multiannual Financial Framework, cohesion policy comprises four funds. The European Regional Development Fund (ERDF) and the European Social Fund Plus (ESF+) are the two largest instruments with initial allocations under the MFF 2021-2027 of EUR 309 billion. The EDRF aims at reducing economic disparities between regions, while also funding projects in the areas of innovation and competitiveness, climate neutrality and social inclusion. The ESF+ aims more specifically at reducing unemployment, promoting social inclusion and supporting workers training. Funds from the ERDF and ESF+ are distributed among three categories of regions, classified according to their GDP per capita in purchasing power parity terms relative to the EU average in 2018, “less developed regions” with GDP below 75%, “transition regions” with GDP between 75% and 100%, and “more developed regions” with GDP above 100% of the EU average. The initial allocations under the MFF 2021-2027, excluding payments to Outermost or northern sparsely populated regions and Interregional funds, amount to EUR 217 billion or 71% of the total to less developed regions, EUR 56 billion (18%) to transition regions and EUR 34 billion (11%) to more developed regions.
The other two funds are considerably smaller and more targeted. The Cohesion Fund supports investment in transport and environment infrastructure in EU countries with Gross National Income below 90% of the EU average and does not have any sub-national allocation key. The Just Transition Fund (JTF) supports regions and territories most affected by the green transition. Support from the Just Transition Fund can be allocated to specific territories in all EU countries based on factors such as industrial emissions and employment in fossil‑fuel intensive sectors. Furthermore, a small subset of funds from the ERDF, about 3% of total cohesion policy spending, is reserved for projects that cut across regions and EU countries, under the name of Interreg.
All cohesion policy spending is regulated by the Common Provision Regulation (CPR) and falls under shared management between the Commission and EU countries. The CPR sets the broad policy goals as well as common rules for allocation and implementation of the funds. EU countries and their regions are in charge of designing the specific programmes involving consultations with a range of stakeholders. Importantly, all cohesion policy is co-financed from national resources, with co-financing rates differing according to programmes and categories of regions.
Source: European Commission (2024[10]) and Redeker, Bischof and Lang (2024[11]).
Many regions struggle to spend the available funds due to considerable administrative burden and capacity constraints at the national and subnational level. Cohesion policy is complex and incorporates priorities that are not directly related to the objectives of reducing economic disparities and fostering social cohesion specified in the Treaty on the Functioning of the European Union (TFEU). For example, regional innovation and competitiveness were introduced in 2007 under the Lisbon Strategy and benchmarks for the digital transition and climate investment were added in 2014 (Figure 2.3). In addition, cohesion policy is sometimes used to address short-term spending needs triggered by unforeseen events, such as migration and the energy crisis (Schwab, 2024[12]). This broad scope undermines the effectiveness of cohesion policy, complicates its evaluation and burdens regional and national managing authorities. One way forward would be to ensure cohesion policy spending focuses on items with long‑term growth benefits, such as education and training, innovation and infrastructure. For example, minimum standards for education capacities, medical services and elderly care, as well as transport and communication could be defined and cohesion funds targeted to provide them everywhere in Europe (Krieger-Boden, 2018[13]). In addition, cohesion spending could encourage cross-border collaboration under the Interreg programme or be channelled into Integrated Territorial Investments, which can be used to foster cooperation across municipalities in countries that lack legal frameworks to do so.
Multiannual financial framework (MFF) 2021-27 by purpose, billion EUR
Note: Data refer to the following funds: the Cohesion Fund, European Regional Development Fund, European Social Fund Plus and Just Transition Fund.
Source: Open Data Platform for the European Structural and Investment Funds; and OECD calculations.
Improvements in institutional quality and administrative capacities at national and regional levels are needed to ensure efficient use of cohesion funds. The Cohesion Policy framework emphasises accountability and protection of the EU’s financial interest but leads to significant administrative burdens. Beneficiaries often hire specialist consultants to navigate the application and payment process. The new simplified payment schemes still require upfront work by managing bodies, which falls more heavily on low-capacity regions (Berkowitz, Storper and Herbertson, 2025[14]). Subnational governments often lack the skills and resources to carry out robust monitoring and evaluation, as even commissioning such work requires capacity for contracting and oversight (Mason, Nathan and Overman, 2023[15]). Reducing the number of instruments and harmonising implementation and reporting rules would help alleviate the administrative burden. Moreover, additional training for staff, improved policies to recruit and retain talent as well as stronger partnerships with intermediate bodies and beneficiaries would help improve the implementation of various Cohesion Policy programmes (OECD, 2020[16]).
Empirical evidence is mixed, but many studies show that cohesion policy has a positive impact on regional GDP growth, or, a usually less pronounced, impact on regional employment and productivity, often with substantial cross-country heterogeneity (Bachtrögler, Fratesi and Perucca, 2020[17]; Crescenzi and Giua, 2020[18]). Other studies find positive effects conditional on further determinants, such as human capital or institutional quality (Rodríguez-Pose and Garcilazo, 2015[19]). Moreover, research on opportunity zones in the United States and regions in the United Kingdom shows that the economic benefits of place-based policies are greater in distressed areas, suggesting that targeting more economically deprived regions may enhance both equality and the return on cohesion spending (Bartik, 2020[20]; Di Cataldo and Monastiriotis, 2020[21]). For example, cohesion policy spending in the wake of the 2008 financial crisis effectively protected public investment in many Southern European countries, while supporting GDP growth (OECD, 2020[22]). However, there is also growing evidence that cohesion spending is insufficiently targeted, leading to slowdown in convergence in vulnerable regions (Diemer et al., 2022[23]). First, inequality within regions seems to be a more important driver of the overall inequality in Europe than inequality across regions. Second, although cohesion policy spending raises average incomes in the targeted regions, these gains seem to accrue more strongly to higher-income households (Redeker, Bischof and Lang, 2024[11]). Using combined data from 260 national household surveys covering 231 European regions, the authors show that place-based funds tend to boost labour incomes of the highly skilled.
Although this would be politically challenging, a greater share of cohesion funding could be focused on less developed regions with a GDP per capita of less than 75% of the EU average. For example, spending under the ERDF and the ESF+ programmes currently allocated to transition and more developed regions, with GDP above 75% of the EU average, could be redirected towards less developed regions or into an EU-level investment instrument targeting cross-border infrastructure projects, in addition to other instruments such as the Connecting Europe Facility (CEF), and other EU-wide priorities. Such targeting would keep regions in most EU countries eligible for cohesion funds. If cohesion spending under the current MFF were to be redirected fully towards NUTS-2 regions that contain at least one NUTS-3 region with GDP below the 75% threshold, Denmark, Finland and Sweden would become not eligible for it.
2.1.2. The experience with the Recovery and Resilience Facility is mixed
The Commission has proposed a new approach to the EU budget, built around a plan for each country with key reforms linked to investments, and focusing on joint priorities, including promoting economic, social and territorial cohesion (European Commission, 2025[24]). The approach seems inspired by the national Resilience and Recovery Plans. However, the approach used to implement the Recovery and Resilience Facility (RRF) may not be the best one for regional development policy. On the one hand, the RRF supported the implementation of structural reforms by combining complementary reforms and investments in a single plan, significantly advancing the implementation of country-specific recommendations under the European Semester. On the other hand, the RRF did not bring the administrative simplification that was hoped for and sufficient involvement of regional and local authorities in its implementation (European Commission, 2024[25]). However, Cohesion Policy so far relied on multi-level governance, involving national, regional and local authorities in identifying regional priorities.
Hence, the lessons from the RRF need to be applied carefully in the context of Cohesion Policy, for several reasons. While policy execution may be accelerated, the approach may fail to identify the best local development strategies. In addition, there is the issue of conditionality, which should in principle be addressed to the same level of government as the policy support. Regions may benefit from a cash-for-reforms approach similar to that of the RRF, provided that such conditions and recommendations can be acted upon by the regional level of government. The recommendations under the European Semester, which are mainly directed at national governments responsible for systemic reforms, such as labour market or pension reforms, may not be most suitable for this purpose, as the regions may lack the policy levers to implement them.
Another concern is how to implement output-based budgeting. The RRF Regulation and the implementation guidance do not require reporting on results, also because of the short life of the programme, which will end in 2026. However, a full ex post evaluation is planned for 2028. Hence, milestones and targets under RRF are defined as measures of progress towards a reform or an investment, which is not the same as achievement of measurable results that are sometimes beyond the control of government and slow to materialise. Although the data on milestones and targets are closely monitored, there is only limited reporting on common indicators monitoring progress towards the RRF’s objectives (ECA, 2023[26]). At the same time, national recovery plans are rather heterogenous: some include many result indicators, while others, such as those of Germany and France, rely heavily on input indicators (Darvas and Welslau, 2023[27]). To improve effectiveness, the EU should use its existing policies and the RRF experience to continue developing performance-based instruments, focused on achieving results. For example, common output and results indicators for regional policy formulated in Regulation (EU) 2021/1058 on the European Regional Development Fund and the Cohesion Fund could be useful in designing harmonised result indicators for EU countries.
The problems with absorbing the RRF funds can to some extent be explained by supply-side bottlenecks and effects of higher-than-expected inflation in the initial years of the programme as well as the need to include the RePowerEU chapter in the national plans in 2023. Aside from these shocks, the RRF spending, currently at 47% of the total, was slowed down by limits on the administrative capacity to spend, which are similar to those under Cohesion Policy. The need to administer performance-based spending under the RRF and cost-based spending under Cohesion policy in parallel may have exacerbated the low absorption rates in the current MFF (Figure 2.4). In some EU countries, the absorption may have suffered from the lack of administrative resources for tenders and procurement. To address these difficulties, efforts to improve national administrative capacities, for example by improving public procurement, permitting procedures and digitalisation of public administration, should continue (European Commission, 2024[28]). In addition to the delays in the absorption of RRF funds, there are also risks to the completion of agreed measures in the second half of the programme when actions shift from reforms to investment, further increasing the risk of delays. Moreover, the RRF Regulation does not specify a procedure for the recovery of funds paid out for achieved milestones and targets if measures are not completed (ECA, 2024[29]). To address these risks, the Commission should provide additional support and guidance to address any remaining uncertainties identified by EU countries. Together with national authorities, the Commission could also identify the RRF projects most at risk of non-completion by 2026 and agree actions to overcome the delays to mitigate the risk of funding measures that will eventually not be completed. These actions and lessons from the RRF implementation should also be reflected in further efforts by the Commission to design instruments based on financing not linked to costs (ECA, 2024[29]). Another option for improving the RRF approach to delivery of EU funding would be a stronger role for multi-stakeholder Monitoring Committees responsible for oversight and evaluation of cohesion policy spending, in which Commission representatives participate as observers (Zeitlin, Bokhorst and Eihmanis, 2023[30]).
Fraction of cohesion funds spent at year-end under the last three Multiannual Financial Frameworks, %
Source: Open Data Platform for the European Structural and Investment Funds; and OECD calculations.
2.1.3. Spending on agriculture should be rationalised
The Common Agricultural Policy (CAP) covers multiple objectives including income support for farmers, a stable supply of affordable food, tackling climate change and protecting biodiversity and the environment (Figure 2.5). The absolute budget figure for the CAP more than doubled between 1990 and 2010, partly reflecting the 2004 Eastern enlargement of the EU, but remained relatively stable since then. At the same time, CAP expenditures as a share of the total EU budget declined sharply from 62% in 1990 to 32% in 2021. The latest CAP reform was fully implemented in January 2023. The new delivery model applied in the period 2023-2027 has brought both pillars of the CAP under a single strategic planning process centred around the national CAP Strategic Plans (Box 2.2).
CAP expenditure by broad category, EUR billion
Note: Next Generation EU funds are excluded when calculating CAP's share of EU budget.
Source: European Commission, CAP expenditure database (accessed on 28-Jan-2025).
Empirical evidence on the effects of CAP direct payments is mixed. Although direct payments seem to have limited positive effect on the level or stability of farm income, their contribution to broader resilience capacities is more doubtful (Sauer and Antón, 2023[31]). Even the farm income stabilisation feature is not fully effective, as direct payments were found to be capitalised in the value of land and land rents, hence benefiting other stakeholders than farmers (Varacca et al., 2022[32]). Moreover, direct payments are not designed to deal with variation of income over time. Payments are made to farmers when prices are low, but also when prices are high. Moreover, the payments are not targeted to farms that experience the greatest income variability (Severini, Tantari and Di Tommaso, 2016[33]). The literature does not agree on the impact of CAP payments on agricultural employment. Some studies find a positive impact, depending on the type of payment, while others find a negative impact; see (Bojnec and Fertő, 2022[34]) and (Schuh et al., 2019[35]) for reviews. Generally, the identified effects tend to be small (OECD, 2023[36]).
Direct payments under Pillar 1 should be targeted to the achievement of specific objectives rather than provided as a general entitlement to farmers. Such targeted payments could be linked to specific needs and identified market failures, such as risk management, competitiveness and the provision of public goods, including climate change adaptation and mitigation. For example, the CAP crisis measures, including the agricultural reserve, could be beefed up and the eligibility for certain emergency aid programmes made conditional on producers’ participation in risk mitigation schemes (Mahé and Bureau, 2016[37]). Similarly to the cohesion spending, to reduce inequality both between and within countries, the CAP support needs to be re-directed from the richest to the poorest EU countries and from the richest to the poorest farm households within a country (Marino, Rocchi and Severini, 2024[38]). Given the dependence of many farms on direct payments as a major source of income, transitional provisions could be made for the continuation of the support during the next programming period, before phasing it out. Moreover, the existing rule for returning unused Pillar 1 funds to the EU at the end of each year should be replaced by a multi-year rule (Grethe and Chemnitz, 2023[39]).
The EU could reduce and rationalise the CAP spending in several ways. Notably, following the mid-term review of the current MFF, the EU countries decided to redeploy EUR 1.1 billion from the CAP and cohesion funds to other programmes. Although the national CAP budgets were not reduced as EU countries agreed instead to reduce the operating costs funded by the EU budget, the drive to improve ex ante and ex post assessment of CAP expenditures should continue. It is welcome that the Commission will undertake the first biannual review of the national CAP Strategic Plans in 2025 and in case of a significant deviation from a milestone will be able to enforce a specific remediation action plan or withhold payments. However, such a corrective process is unlikely to be applicable before 2027, when the current MFF ends (Guyomard et al., 2024[40]). Other possible policy tools include a robust monitoring, reporting and verification system at the farm level and an EU-wide benchmarking system to increase the harmonisation of sustainability metrics and indicators (OECD, 2023[41]).
The CAP remains focused on direct payments
For the 2021-2027 financing period, EUR 387 billion in funding has been allocated to the CAP. This represents 32% of the EU budget excluding Next Generation EU funding (19% of the budget including the NGEU). 75% of funds, EUR 291 billion, are allocated to the European agricultural guarantee fund (EAGF, the first pillar of the CAP), which mainly provides direct income support to agricultural producers. A small share of 5% of Pillar 1 funds is also used to intervene in certain agricultural markets in case of adverse price shocks. Until 2003, direct payments to farmers were based on production volumes. Since then, such payments based on production were reduced and replaced by payments based on eligible hectares.
The remaining EUR 96 billion, which includes the NGEU top-up of EUR 8.1 billion, are allocated to the European fund for rural development (EAFRD, the second pillar of the CAP), which finances rural development activities as well as environmental and climate objectives. It requires national co-financing of at least 40% by EU countries.
About 95% of the CAP budget is implemented under so-called shared management. The EU Commission monitors the work of national agencies and is accountable for the use of EU funds, while EU countries are responsible for making payments and carrying out checks on recipients. The remaining 5% is implemented under direct management by the Commission.
The new delivery model
To increase national responsibility and accountability, EU countries were asked to develop CAP Strategic Plans (CSP) outlining their proposed interventions for 2023-2027. The 28 CSPs (one for each EU country, except for Wallonia and Flanders in Belgium) include the ambition of the European Green Deal and the Farm to Fork Strategy to dedicate 40% of total CAP spending to climate action. For example, a third of all direct payments under Pillar 1 have since 2015 been subject to compulsory agricultural practices beneficial for the climate and environment (green direct payments). In addition, all direct payments to farmers are subject to meeting certain environmental and public health standards. Furthermore, as of 2023, a quarter of the direct payments is dedicated to eco-schemes providing stronger incentives for environmental-friendly farming practices, such as organic farming. Greater subsidiarity allows EU countries and regions to better take account of local conditions and decide how to tailor CAP interventions to maximise their contribution to EU objectives. This programming approach is applied to interventions under both CAP pillars, not only to rural development interventions, as previously.
The key governance challenge of the new model is to ensure that the incentives and targets at the national level are also transmitted at the farm level, because required changes at the EU level will only be achieved with changes in actual farming practices. This will depend on several factors, including the improvement of monitoring and evaluation systems and the availability of data.
Source: OECD (2023[36]) and OECD (2023[42]).
At the same time, the rationalisation will require a simplification of the CAP for both beneficiaries and administrations and a reduction of the associated administrative burden. The evidence from the CAP implementation at national level suggests improvements are needed in the application phase, in the implementation phase, as well as in the monitoring and control phase. In the application phase, it is mainly the number of application requirements and the lack of clear communication with beneficiaries. In the latter phases, the main issue is the overlap of processes and reporting requirements, together with the lack of proportionality of checks and the perceived lack of transparency (European Commission, 2025[43]). However, the efficiency benefits of simplification need to be weighed against the possibility of compromising the effects of interventions.
National co-financing is another accountability mechanism that could help rationalise the CAP, which already exists in Pillar 2 of CAP spending and in other EU spending such as the cohesion spending. Requiring co-financing for direct payments under Pillar 1 would ensure that agricultural funds are used more efficiently, while releasing budget resources for new EU priorities or returning funds to national budgets. When local taxpayers fund a fraction, say, 50% of a specific agricultural or rural development programme, they have a material interest in ensuring value for money. In addition, national spending must be approved through a budgetary process under the control of the Ministry of Finance, providing oversight by non-agricultural interests on how agricultural funds are used. Such oversight is missing under the current rules where EU funds earmarked for agriculture are primarily allocated by Ministries of Agriculture (Matthews, 2016[44]).
Protecting the EU financial interests and safeguarding the EU budget from corruption and misappropriation is crucial. In this regard, fighting corruption is among the top priorities of the Commission, as it is an important determinant of economic growth, efficient allocation of resources, as well as economic and social equality. A strong anti-corruption and public integrity system ensures that citizens rely on impartial institutions that create rules and conditions for a fair distribution of resources and the creation of a dynamic and transparent business environment, hence attracting investment and strengthening economic growth (OECD, 2023[45]; OECD, 2022[46]; OECD, 2024[47]). To this end, the Commission has continued to put in place several initiatives and measures to tackle corruption, such as the proposal for an anti-corruption package, the review of the anti-fraud architecture, the adoption of the new Anti-Money Laundering legislation, and the establishment of an EU-wide independent ethics body, ultimately aiming to protect the EU’s financial interest and to ensure a transparent and accountable allocation of resources. However, the control and prevention of corruption still poses challenges and perceptions vary across EU countries (Figure 2.6).
The Commission launched its latest anti-corruption package proposal in May 2023. The package includes a proposal for a Directive on combating corruption through criminal law and the establishment of a dedicated sanction regime to target “corruption worldwide” under the Common Foreign and Security Policy (CFSP). More importantly, the Directive foresees anti-corruption rules applying to both the private and public sectors in a single legal instrument for the first time (Council of the EU, 2024[48]; European Parliament, 2024[49]). The proposal seeks to update the EU anti-corruption framework and make it more effective, building on the already existing instruments, such as the Framework Decision 2003/568/JHA on Corruption in the Private Sector, the 1997 Convention on Combating Corruption against Officials of the EU or EU Member States, and the Directive on the fight against fraud to protect the Union’s financial interests by means of criminal law (the “PIF Directive”). All in all, the new Directive aims to align the legislation on forms of corruption and harmonise penalties across countries, by also strengthening prevention and enforcement tools, as discussed in the 2023 OECD Economic Survey of the European Union and euro area (OECD, 2023[50]; Eucrim, 2024[51]).
In January 2024, the Parliament’s Committee on Civil Liberties, Justice and Home Affairs adopted its opinion on the package. Compared to the original Commission’s proposal, the opinion suggested to make penalties stricter and broaden the scope of the criminal liability, such as the extension of the definition of “national official” to include any individual performing public service duties and the classification of members of the EU Parliament as “high‑level officials” to be subject to more severe rules (European Parliament, 2025[52]; European Parliament, 2024[49]; European Parliament, 2024[53]). The Parliament also proposed amendments for more detailed measures on conflict of interest, lobbying and “revolving doors”, additional categories of offences, and mandatory national anti‑corruption strategies to be reviewed periodically in consultation with a varied range of stakeholders. Subsequently, the Council adopted its opinion in June 2024, narrowing the scope of the Commission’s proposal. For example, the Council required to limit the “abuse of function” offence to the public sector only and to make its criminalisation optional. Moreover, the Council emphasised the importance of granting institutional and administrative autonomy to EU countries, for example where the proposed Directive requires the establishment of specialised bodies for the prevention and repression of corruption, as well as of respecting the national constitutional principles on privileges and immunities where the Directive asks for appropriate procedures to lift them (Council of the EU, 2024[54]).
In January 2025, the newly elected Parliament confirmed the opinion adopted in 2024, opening the way to “trilogue” negotiations on the anti-corruption Directive. Given the different views of the two co-legislators, the Council and the Parliament, the Commission should steer trilogue negotiations as close to the original proposal as possible to avoid restricting its scope and compromising the original aim of the reform, namely optimising and strengthening the existing EU anti-corruption legislative framework. At the same time, success of the reform hinges on cooperation of EU countries.
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy Project, V-Dem Dataset v12.
Another positive feature of the anti-corruption reform package is the alignment to the principles of the United Nations Convention Against Corruption (UNCAC), such as the recognition of the corruption crimes agreed internationally under the UNCAC (European Commission, 2025[55]). The UNCAC is a legal anti-corruption instrument to which the EU, recognised as a state party, committed in 2008, whose membership involves a two-phase implementation review. The first phase started in 2023 and covers the implementation of important articles of the UNCAC on criminalisation and law enforcement, as well as international cooperation (European Commission, 2020[56]). The finalisation of the first phase of the review is expected in 2025 with a report including recommendations on how to comply with UNCAC standards. Afterwards, the second phase of the review process will start, with a focus on prevention measures and cross-border asset recovery (United Nations, 2024[57]).
In parallel to the review process, the EU and UNODC established the Anti-Corruption Dialogue held annually since 2022. The initiative provided an opportunity to discuss possible synergies, including staff exchange, and share good practices in the fight against corruption (European Commission, 2023[58]; European Commission, 2024[59]). The Commission, the UNOCD and other international organisations, including the OECD, also cooperate in the framework of the EU Network against corruption, established by the EU in 2023 to discuss corruption issues and solutions with various stakeholders in the EU, as well as in the Anti-corruption partnership Forum, aiming to foster information exchange among and reduce administrative burden for reviewed countries (Eucrim, 2023[60]; United Nations, 2024[57]). It is important that the Commission continues its partnership with the UNODC and concludes the UNCAC implementation review, with the ultimate aim to improve the EU legal anti-corruption framework by introducing good practices and international standards that may currently be lacking.
In the area of protection of the EU’s financial interests, the 2023 anti-corruption package proposal foresees a possible amendment of the 2017 PIF Directive, by tightening penalties for both natural and legal persons, increasing the spectrum of aggravating and mitigating circumstances, and extending statutes of limitation (Eucrim, 2023[61]; European Union, 2017[62]). The proposal also includes plans for a generic assessment of the PIF Directive to evaluate the possible extension of its scope in terms of corruption offences. Currently, there are several infringement procedures ongoing, mainly in relation to the non-conformity of transposition of the definition of criminal offences, sanctions and limitation periods provided by the PIF Directive. To protect the financial interests of the European Union by means of criminal law and to create the basis for potential future amendments stemming from the new anti‑corruption package, EU countries should complete and speed up the correct transposition of the 2017 PIF Directive.
The rules established by the PIF Directive lay the foundations for the competences of the European Public Prosecutor's Office (EPPO). The EPPO is responsible for investigating and prosecuting crimes affecting the EU’s financial interests, including corruption cases that damage the EU budget and misappropriation of EU funds (EPPO, 2025[63]). Twenty-four EU countries have joined the EPPO so far, with two of them in 2024 (i.e., Poland and Sweden). EPPO membership is not mandatory for EU countries but bilateral cooperation has been established with non‑participating EU countries (i.e., Denmark, Hungary and Ireland). Cooperation has also been established with non-EU countries, such as Switzerland, the United Kingdom and the United States (Council of the EU, 2024[64]). The EPPOs’ global perspective is particularly important since national investigation and public prosecutor’s offices do not often have adequate resources to deal with sophisticated criminal organisations. The EPPO also cooperates closely with the European Union agencies for criminal justice cooperation (Eurojust) and for law enforcement cooperation (Europol), as well as with the European Anti-Fraud Office (OLAF), which conducts administrative investigations into fraud, corruption and any other illegal activity affecting the EU budget.
In 2024, the EPPO processed more than 6500 crime reports, an increase of 56% compared to 2023, with active investigations into damages estimated at more than 24 billion euro, of which 53% related to cross-border VAT fraud and 11% to the Next Generation EU funding (EPPO, 2025[65]; EPPO, 2025[66]). The discussion whether EPPO’s competences should be extended, notably to crimes that have a cross-border nature, has been inconclusive so far. The Directive on the violation of the Union restrictive measures, which entered into force in 2024, makes explicit reference to the need for “Member States, Europol, Eurojust, the European Public Prosecutor’s Office and the Commission, within their respective competences”, to cooperate to fight the criminal offences set in the Directive. The Directive is a step forward for the implementation and enforcement of EU sanctions, for instance in the context of Russia’s war of aggression against Ukraine. The Parliament’s call for extending EPPO’s current competencies to these violations were so far not successful (Eucrim, 2024[67]; European Parliament, 2024[68]; European Union, 2024[69]). Given the EPPO’s effectiveness and expertise in the investigation and prosecution of cross-border crimes, trilogue negotiations for the adoption of the anti-corruption reform package should further assess the EPPO’s area of intervention and consider extending it, especially in view of a possible extension of the scope of the PIF Directive (see above).
For the preparation of the next MFF, commencing in 2028, strengthening the EU’s anti-fraud framework is a priority for the new Commission to further protect the EU budget, recognising the central role of the EPPO and OLAF (European Commission, 2024[70]). In this regard, the Commission is currently reviewing the EU anti-fraud architecture, for instance by assessing the necessity to amend the mandate of OLAF to make EU law enforcement more effective in EU countries, by ensuring that the EPPO has the necessary support and resources to perform its activities and by strengthening the Commission’s cooperation with the EPPO to speed up the recovery of EU funds. The review also foresees the possible development of a framework for timely and effective information exchange among EU’s bodies ensuring the protection of the EU’s financial interests, such as the EPPO and OLAF, as well as Eurojust and Europol. In this context, the application of the 2021 Conditionality Regulation also remains a priority. More specifically, this legal instrument makes the payments from the EU budget to countries conditional to the respect of the ‘rule of law’ principles, such as the non-arbitrary use of power and the independence of the judicial system.
The Commission recently finalised the adoption of other important reforms in the area of protecting the EU’s financial interests. In 2024, the comprehensive reform on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CTF) was adopted, as a result of trilogue negotiations following the Commission proposal in 2021 discussed in the 2023 OECD Economic Survey of the European Union and euro area (OECD, 2023[50]). The application of the new rules, including the transposition of the new Directive (6th AML Directive) and the Regulation, will be gradual and should be completed by July 2027 (Figure 2.7). The adopted package has broader scope than the Commission’s proposal. For instance, the AML rules will also regulate professional football clubs and football agents. According to a recent study of the Commission, the sport sector is one of the highest risk areas of corruption (European Commission, 2024[71]). In addition, the new AML Authority will have a double role, both in terms of supervision and facilitation of the cooperation among EU financial intelligence units (FIUs). Compared to the initial proposal, the Authority staff resources were doubled.
Note: Panel A summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. The figure shows results from the ongoing second round when available, otherwise first round results are displayed. Panel B shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD, Financial Action Task Force (FATF).
To further improve EU’s financial interests safeguards, an amendment (recast) of the Financial Regulation was adopted in September 2024 (European Union, 2024[72]). It extends the scope of the Early Detection and Exclusion System (EDES), the EU’s debarment tool to detect early and exclude entities putting at risk its financial interests from EU funding, for specific reasons such us breach of obligations relating to the payment of taxes, bankruptcy, fraud and corruption. According to the new rules, the system will also apply to EU funds disbursed under shared management with member states (representing around 75% of EU programmes) for the most serious misconducts such as corruption, fraud and terrorist offences, for programmes adopted or financed as of 1 January 2028. Previously, EDES only applied to EU funds under direct or indirect management, covering only 24% of the EU budget. As in the past, also with the new measure, the obligation of national authorities to exclude EDES-debarred entities from funding only applies to EU funds allocation, but not to funding from national budget. Exclusion from national funding remains at the countries’ discretion, despite the European Parliament's recommendation to the contrary. Moreover, the publication of EDES’s exclusion decisions is considered an additional measure when facts are serious enough and significantly harm EU's finances, but this should be balanced against the need to protect investigations, individuals, and proportionality (Council of the EU, 2024[73]). In practice, the publication of information contained in the EDES list is not permitted if this compromises the confidentiality of an investigation, where this concerns a natural person, or is disproportionate in terms of damage caused. However, the new Regulation remains unclear on how such criteria, namely “the seriousness of the conduct or its impact on the financial interests of the Union”, should be assessed and identified. Clearer rules and guidance should be provided on how exception criteria set by the Financial Regulation should be interpreted and applied to publication of information on the EDES list.
Measures have also been taken to strengthen public integrity in EU institutions. Following the December 2022 corruption scandal allegedly involving some Members of the European Parliament (MEP), measures were adopted to tighten existing internal rules on transparency and lobbying. These were followed by even more stringent rules, adopted in September 2023, on MEP’s asset declarations and lobbying activity with a potential direct impact on EU’s decision-making processes (European Parliamen, 2024[74]) (Atlantic Council, 2024[75]). More importantly, in May 2024 an EU-wide independent ethics body was established, as a result of an EU inter-institutional agreement (European Union, 2024[76]) (European Commission, 2023[77]) (European Commission, 2023[78]). The new body will develop, update and promote a common code of conduct to ensure ethical behaviour across the EU institutions (Eucrim, 2024[79]). However, the body will only be able to issue non-binding opinions on ethics-specific cases, which may be raised exclusively on the own initiative of one of the founding institutions. The body does not have power to enforce integrity rules, nor the possibility to recommend sanctions for misbehaviour. As these powers remain in the hands of the EU institutions themselves, it is possible that the credibility of the new body and its ability to strengthen EU’s institutional integrity be weakened (Transparency International, 2024[80]). To make the EU integrity system stronger and more credible, EU institutions should extend the competencies of the new independent ethics body to include oversight and enforcement powers.
As announced in the aftermath of the above-mentioned scandal, the Parliament in 2023 tasked the EU Special Committee on Foreign Interference to identify and assess existing shortcomings in the Parliament’s rules regarding transparency, integrity, accountability and anti-corruption, with the aim to make proposals for reforms in these areas (European Parliament, 2023[81]) (European Parliament, 2023[82]) (European Parliament, 2022[83]). This is welcome and results and follow-up actions from the inquiry should be published. The need to further strengthen public integrity in the EU institutions is also reflected in the Parliament’s opinion on the Commission’s proposal for the new anti-corruption reform package, where stricter integrity rules for its members have been proposed (see above).
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