BRUSSELS — The European Commission on Tuesday slapped a red flag on Finland for spending too much and warned others to tighten their belts to avoid getting the same treatment.  The EU executive unveiled the full list of countries that are overspending, as part of the Commission’s biannual “European Semester” that checks whether governments are within the EU’s rules for public spending.  Red flags, known as excessive deficit procedures (EDPs), signal concerns about countries’ financial health to investors. Brussels can impose a fine if governments refuse to adopt measures to bring their finances back in line. Brussels reintroduced the EU’s rules for public spending last year after the Commission gave capitals free license during the pandemic, which plunged the EU’s economy into the worst recession since the Second World War. While the bloc’s economy has picked up this year, many governments are struggling to comply with the EU’s rules amid trade tensions with the U.S. and mounting defense budgets to deter Russian aggression. One of the countries on Russia’s doorstep, Finland, was reprimanded for exceeding the EU’s cap on budget deficits, which limits how much a country can spend beyond what it collects in taxes.  Economy Commissioner Valdis Dombrovskis. | Thierry Monasse/Getty Images The rules limit the deficit to 3 percent of a country’s economic output. Recent tweaks to the rules allow governments to spend an additional 1.5 percent of GDP on defense. But the numbers still don’t add up for Helsinki. “The deficit in excess of 3 percent of GDP is not fully explained by the increase in defense spending alone,” Economy Commissioner Valdis Dombrovskis told reporters in Strasbourg. Germany narrowly avoided the same punishment. Separately, the Commission checked whether governments’ expected spending in 2026 complies with their five or seven-year plans that were approved by Brussels. So far, Croatia, Lithuania, Slovenia, Spain, Bulgaria, Hungary, the Netherlands, and Malta aren’t doing enough. Failure to act could see Brussels reprimand the eight countries at the next European Semester in June.  POLITICO took a deeper look at some of the key countries and graded their current performances. FINLAND: E The Nordic state got a slap on the wrist from Brussels as its deficit is set to exceed the EU’s limit for the next two years. Once a paragon of fiscal stability, Finland is now in the same EDP basket as the indebted nations of France, Italy, and Belgium. As a result, Helsinki will have to reduce the deficit. That’s a tall order for a country facing overstretched social and health budgets, as well as a ballooning defense bill. ROMANIA: D+ Romania can breathe a sigh of relief after today’s announcement. Dombrovskis praised the country’s recent economic reforms and ruled out triggering the nuclear option — a suspension of the country’s payouts from the EU budget, which are worth billions.  But the country is not out of the woods. At 8.4 percent of GDP, its 2025 deficit remains by far the highest in the EU, and painful domestic reforms will be required to reduce it significantly in the years to come. GERMANY: C The country’s budget deficit is expected to reach 3.1 percent of GDP this year. That’s technically a breach of the rules. But Brussels refrained from punishing the bloc’s economic powerhouse, because the breach is “fully explained by the increase in defense spending,” the Commission said in a statement. But there is trouble ahead. Germany plans to continue its spending spree next year to juice growth, only curbing expenditure later. That won’t be easy, as China threatens the country’s export-driven economy and Chancellor Friedrich Merz’s grand coalition needs to deliver reforms to revive growth. Berlin is taking a huge gamble. Brussels too. FRANCE: C- France is in the middle of a budget crisis and is not even sure that it will manage to adopt the 2026 budget by the end of this year. That doesn’t seem to worry Brussels too much for the time being, especially considering that France received its EDP red flag in 2023. The Commission found that the French budget plans for next year are compliant with its recommendations and encouraged Paris to continue on this path.  But not even France’s prime minister knows what his budget for next year will look like. Sébastien Lecornu has pledged to bring the deficit down to 5 percent of GDP. But that goal is at risk, as contradictory amendments to the draft budget in parliament undermine the chances of a deal before Christmas. HUNGARY: F  Hungary is facing a worrying situation because it’s not making the necessary cuts in 2026 to exit the EDP. For now, the Commission has merely warned Hungary to cut spending in 2026. But if Budapest ignores such calls, Brussels might threaten to issue fines during its next budget review in Spring. Hungarian Prime Minister Viktor Orbán is unlikely to heed Brussels’ calls as the country is heading to the polls next spring and he faces the risk of losing power after almost a decade.  ITALY: B- Has Europe’s perennial fiscal bad boy turned good? That’s what it looks like, with Italy’s deficit set to fall to 2.6 percent of GDP next year, while government spending is forecast to stay below the limits imposed by the EU’s fiscal rules. That puts it on track to exit its EDP, if it can prove that debt is set to trend lower in the long term. Other good news: Rome’s tax take is trending above economic growth, helping to fill its coffers and pay down debt.  It’s not all good news. Italy remains the second-most indebted country in the EU. That isn’t changing next year, with government debt expected to increase to 137.9 percent of GDP. But any positive change is welcome, especially when it’s the class clown who is finally hitting the books.

The European Commission is considering tying pension reform to cash payouts from the EU’s next €2 trillion budget as it attempts to protect member countries’ finances from a looming demographic crisis. Three EU senior officials told POLITICO that the EU executive’s economic and finance legislative arms are looking into buttressing countries’ creaking state pension systems by recommending retirement savings policies to individual countries. If EU capitals ignore these country-specific recommendations, or CSRs, then they might not get their full share of the EU’s seven-year budget from 2028. “Our job in the Commission is to help countries do the difficult stuff,” said a senior Commission official, who, like others quoted in this story, spoke on the condition of anonymity to speak freely. “CSRs would be well suited to do it” by “linking reforms to investment.” The EU faces a toxic cocktail of high debt, an aging population and declining birthrates. Combined, they will cripple any public “pay-as-you-go” pension system that relies on taxpayers to provide retirees with a source of income. That’s a problem today as well as tomorrow. Over 80 percent of EU pensioners relied on a state pension as their only source of income in 2023. That overreliance has left one in five EU citizens above the age of 65 at risk of poverty, the equivalent of 18.5 million people. Brussels’ goal is twofold: Alleviate the pressure on the state coffers to keep pensioners afloat, and help create a U.S.-style capital market by putting people’s long-term savings to work. The idea, while well-intended, would be politically difficult and has deputy finance ministers wincing at the thought. Pension policy lies well outside of the EU executive arm’s legal reach. Even then, the risks of tying EU funds to politically toxic issues could spell disaster for governments, especially when democracy’s most loyal participants are above the age of 50. “You can’t buy pension reform,” said a deputy finance minister. “It’s going to hit the nerve of what democracy is about.” Over 80 percent of EU pensioners relied on a state pension as their only source of income in 2023. | Dumitru Doru/EPA Pension reform also has a habit of bringing protesters onto the streets. In Brussels, police clashed with trade unions on Tuesday, who were demonstrating over austerity measures that include raising the age of retirement from 65 to 67 by 2030. Belgium got off lightly when compared to France, which witnessed months of protests in 2023 when President Emmanuel Macron raised the retirement age from 62 to 64. Even then, France’s recently reinstated prime minister, Sébastien Lecornu, announced Tuesday that he’d put Macron’s pensions reforms on ice to overcome a parliamentary crisis that’s made it impossible to pass a budget. Postponing the reforms could cost Paris up to €400 million next year at a time when the government tries to tighten its belt and reduce the country’s ballooning debt burden. The Commission’s focus would stop short of setting retirement age or mandating monthly payouts to pensioners. Brussels’ reform plans instead home in on incentivizing citizens to save for retirement and encouraging companies to offer corporate pension plans to employees. CSRs are part of an annual fiscal surveillance exercise that the Commission uses to coordinate economic policies across the bloc. These recommendations are negotiated with EU capitals in a bid to fix a country’s most pressing economic problems. The Commission doesn’t consider this coercion, just sound economics. “If it’s on pensions, then so be it,” a second senior Commission official said. POST-PANDEMIC CARROTS AND STICKS EU capitals have had a habit of ignoring CSRs in the past. That could change if the Commission adds cash incentives, an idea that was born out of the EU’s €800 billion post-pandemic recovery fund. The Commission also saw an opportunity to incentivize governments to enforce costly reforms to modernize the bloc’s economy by setting targets that’d unlock EU funds in tranches. For countries like Spain, these included pension reform. The carrot and stick strategy proved such a hit within the Berlaymont that it wants to use the same system in the next EU budget, especially if it helps add teeth to CSRs. Not everyone’s a fan. The mountains of paperwork that governments had to amass to prove they’d met the Commission’s demands slowed progress, leaving hundreds of billions of euros on the table. “We don’t know why the Commission is so fond of this model,” said another deputy finance minister, who poured cold water on the idea. “[Pension reform is] hugely controversial. I highly doubt anyone’ll do it.” Giorgio Leali contributed reporting from Paris.

WARSAW — Donald Tusk’s coalition is scrambling after an ill-judged transparency drive revealed that some of Poland’s long-awaited EU Covid recovery cash went to eyebrow-raising projects, including a swingers’ club, a pizzeria with a solarium and a chain of vodka bars. The uproar, which erupted after the government published interactive online maps of grant recipients in a bid to showcase openness, has handed the far-right Law and Justice (PiS) party an irresistible target. Clicking through the data revealed that the 1.2 billion złoty (€282.3 million) program meant to revive hotels, restaurants and cultural venues battered by the pandemic had also bankrolled yachts, a pizzeria that added tanning beds, and, in one widely shared case, a business in southern Poland registered at the same address as a sex club. PiS, clawing at every opportunity to regain momentum since losing power in 2023, has wasted no time in framing the row as proof of Tusk-era cronyism and waste. “One of the biggest scandals since 1989,” thundered PiS MEP Tobiasz Bocheński, staging a stunt on Saturday outside the prime minister’s office with a mock plaque for the fictional “Ministry of Herring and Vodka” — a nod to one grant recipient. The party has promised parliamentary inspections and prosecutor referrals to trace every “link, dependency and decision-making chain.” FROM FLAGSHIP TO FLAK MAGNET The 1.2 billion złoty HoReCa scheme is part of the 254 billion złoty (€59.8 billion) Poland is due from the EU’s National Recovery Plan. Brussels had frozen the funds during PiS rule due to rule-of-law concerns, and unlocking them was a central promise of Tusk’s 2023 election campaign. The HoReCa cash was designed to help small and medium-sized tourism and hospitality businesses diversify so they could survive another crisis. Instead, the map swiftly transformed the program from a showcase into a political headache. One restaurant owner in Łódź, whose grant was flagged online for financing two yachts, defended the purchase as a legitimate way to diversify his business in case of future lockdowns. Clicking through the data revealed that the 1.2 billion złoty program meant to revive hotels, restaurants and cultural venues battered by the pandemic. | Pawel Supernak/EPA “We didn’t get this money for vacations,” Grzegorz Urbaniak told the portal Money.pl, arguing that boats could be rented to tourists when restaurants were closed.  The owner of the business registered at the same address as a swingers’ club said his grant had paid for metalworking machinery, not adult entertainment. Officials stress that many of the eyebrow-raising purchases met program rules negotiated by the PiS government in 2021, which allowed spending on “diversification” projects such as tourist rentals or eco-friendly attractions. Tusk has promised “zero tolerance” for abuse of EU funds.  “We put too much effort into unlocking these billions to allow anyone to waste them,” Tusk said on X on Saturday, vowing that “anyone who made mistakes will face consequences, regardless of their position or party affiliation.” Prosecutors have opened preliminary inquiries, and the funds ministry says an audit will deliver initial results by late September. COALITION STRAIN For Tusk, the row piles fresh pressure onto an already crowded agenda. The ministry overseeing the funds is run by Polska 2050, a coalition partner led by parliament speaker Szymon Hołownia. His 31-seat party is crucial to Tusk’s majority but has had its own PR headaches, including a summer scandal over a late-night meeting with PiS leader Jarosław Kaczyński. For PiS, the flap has become a way to question Tusk’s ability to manage his coalition and to highlight tensions between the prime minister and Hołownia. The controversy has drawn attention to the role of Polska 2050 in overseeing the program and given PiS an opportunity to criticize both leaders at once. The spending row comes only weeks after Tusk reshuffled his Cabinet in a bid to regain momentum following a presidential election loss, a shake-up that underscored both the fragility of his coalition and the difficulty of keeping it aligned. The presidential election saw nationalist Karol Nawrocki defeat Tusk’s preferred candidate, Warsaw Mayor Rafał Trzaskowski, a result that dealt a major blow to the government’s reform agenda and is expected to make passing legislation far more difficult.

Ukraine is getting another recovery fund, but this time, it’s coming from Europe. European Commission President Ursula von der Leyen announced the creation of the European Flagship Fund for the Reconstruction of Ukraine on Thursday during a speech at the Ukraine Recovery Conference in Rome. “[It will be] the largest equity fund globally to support reconstruction. It will, together with the private sector, kickstart investment in energy, transport, critical raw materials, dual-use industries,” von der Leyen said. “We are taking a stake in Ukraine’s future by leveraging public money to bring large-scale private sector investments and help the rebuilding of the country,” she added. As for who will contribute to the fund, von der Leyen named Italy, Germany, France, Poland and the European Investment Bank and added, “I trust others will be eager to join. The people of Ukraine are ready to drive their country’s economy into the future. The time to invest is now.” She did not specify how much the fund aims to collect. Ukraine needs at least $40 billion in external financing in 2026, as it continues to allocate most of its state budget to defense needs, Ukrainian Finance Minister Serhii Marchenko said Wednesday. Ukraine needs regular and predictable external support to maintain the financial stability it has achieved with its partners since 2022. This also lays the foundation for the country’s successful reconstruction,” Marchenko added. Russia’s ongoing full-scale invasion has devastated towns and cities across Ukraine and shows no sign of ending as the Kremlin’s military continues to bombard the country on a nightly basis. In April, Ukraine’s government signed a deal with the Trump administration to establish an American-Ukrainian Reconstruction Investment Fund, which will draw on cash from Ukraine’s natural resources development projects. While in Rome, von der Leyen also celebrated that Europe has become the largest donor for Ukraine, providing €165 billion and planning to keep supporting Ukraine at least until 2028. “This year alone, we will cover 84 percent of the external financing needed. As part of this support, I can announce €1 billion payment in macro financial support. I can also announce a payment of more than €3 billion from the Ukraine facility,” von der Leyen said. Over the next decade, Ukraine needs an estimated $524 billion (around €450 billion) for reconstruction caused by relentless Russian attacks, the Ukrainian economy ministry reported in February. Ukrainian President Volodymyr Zelenskyy said investments in reconstruction are beneficial not just for Ukraine but for Europe too, as Kyiv can share its robust and cost-effective military technologies that could strengthen the EU in the face of Russian aggression.