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Key takeaways
- New analysis warns that EU countries face a heavy future debt burden if they fail to increase public investment in climate action now, and delaying investment into the 2030s significantly worsens the debt outlook up to 2070.
- The report from the New Economics Foundation (NEF) says the EU must overhaul its economic governance and fiscal rules, arguing that public investments in the green transition should be excluded from budgetary constraints, similar to the flexibility given for defence spending.
- Better coordination between monetary and fiscal policy in Europe is essential, NEF says, urging central banks to maintain low borrowing costs for green infrastructure while governments manage inflationary pressures with targeted tools like energy price caps and windfall taxes.
The EU’s fiscal forecasts underestimate the cost of climate breakdown and the bloc should spend more on mitigation and adaptation to limit the impact to public finances in future decades, according to a new report by the New Economics Foundation (NEF).
Debt-to-GDP ratios across the EU will be 58 percentage points higher than official projections by 2050 if member states fail to increase investment in fighting the climate crisis, the report states.
“Some say European governments don’t have the money to invest in fighting the climate crisis. This research shows the opposite: Europe can’t afford not to,” said Sebastian Mang, EU programme lead at NEF.
Mang noted that the economic shock from the Iran war was underlining the case for investing in renewables. “If we had spent more or done more to speed up the transition in the last 20 years, we would be in a much better position now and our economy would be more resilient to these kinds of shocks.”
NEF said current economic policy was poorly equipped for this environment of growing risks, with central banks largely responding to surges in energy and food prices by raising interest rates, increasing borrowing costs and making it harder to finance investments in clean energy, infrastructure, housing and food security.
“The result is a damaging contradiction: fiscal authorities are expected to scale up climate investment just as monetary policy constrains their ability to do so,” the report says.
It also argues that investment in projects like public transportation, grid upgrades, renewable energy and heat pumps, which contribute to the green transition, should be excluded from fiscal rules in the same way the EU gives member states extra budgetary flexibility to boost defence spending.
The report models how the EU’s average debt, in relation to GDP, would change by 2050 and 2070 under various scenarios of climate action.
If the EU postpones investments until the 2030s but then ramps up sharply, the report predicts debt-to-GDP will be 53 percentage points higher than currently projected by 2050, and 99 percentage points higher by 2070.
However, if the EU takes early action and spends an additional 1% of GDP on tackling the climate crisis plus additional investment on adaptation, debt-to-GDP would be 47 percentage points higher than projected by 2050 and 84 percentage points higher by 2070. This scenario also assumes supportive monetary policy that lowers borrowing costs by 50 basis points.
The most optimistic scenario assumes global cooperation to reach net zero by 2050, including the EU spending an extra 1% of GDP on the crisis, plus more on adaptation. In this case, EU debt-to-GDP is just 4 percentage points higher than projected by 2050, while by 2070 debt has dropped by 12 percentage points.
NEF points to estimates by the Institut Rousseau, indicating that the EU will need around 1.6% of GDP in additional annual public investment to meet the 2040 and 2050 climate targets.
The report recommends that the EU establish a permanent climate resilience facility for common borrowing and expand the solidarity fund.
“Eurobonds can help by pooling our resources, which would allow us to achieve the transition faster, more cheaply and more fairly than any member state can alone,” Mang said. “This would also help the role of the euro internationally.”
The NEF report calls for an overhaul of the EU’s economic governance, starting with reform of the European Commission’s debt sustainability analysis to capture the cost of delay of climate action.
It suggests the EU should move away from rigid rules for government borrowing and towards a preventative model that incorporates qualitative assessments of climate and resilience spending.
“Choosing between massive defense spending needs, social spending needs and green investment spending needs are all really difficult political decisions so fiscal rules need to change,” Mang said.
Finally, the report says the EU should phase out fossil fuel subsidies, raise wealth taxes and improve coordination between monetary and fiscal policy, an argument also supported by political economist Ann Pettifor in her new book The Global Casino.
NEF said central banks should keep borrowing costs low for investments in green infrastructure, energy security and resilience, while governments should manage inflationary pressures with tools like energy price caps, strategic reserves, and windfall or excess-profit taxes, reducing reliance on the blunt tool of interest rates.
“This does not imply compromising central bank independence, but rather fostering coordination through clear mandates and complementary policy frameworks,” it said.
This page was last updated March 11, 2026
Written by
Emma Thomasson is a British journalist, consultant and trainer based in Berlin. She is an expert in economics, politics, business and technology. She previously worked for Reuters as a correspondent and bureau chief in Germany, Switzerland, the Netherlands, South Africa and the UK.
