Next Generation EU as an Evolutionary Step in EMU: Euroscepticism, Institutional Change, and the Limits of Integration

This paper investigates why the European Union (EU) adopted the Next Generation EU (NGEU) programme in response to the Covid-19 crisis, while less than a decade earlier it had addressed the sovereign debt crisis through an austerity-oriented paradigm. It argues that the key factor explaining this divergent policy response is the rise of euroscepticism across Member States, which acted as a powerful agent of institutional change within the still-evolving architecture of the Economic and Monetary Union (EMU). Following the financial and sovereign debt crises, the EU’s reliance on restrictive fiscal rules and pro-cyclical adjustment mechanisms not only proved economically inadequate but also fuelled widespread public dissatisfaction with European governance. This discontent fostered the growth of Eurosceptic and even Europhobic parties, altering the political incentives of national governments and EU institutions. When confronted with unprecedented shock of the Covid-19 pandemic – combined with mounting geopolitical uncertainty – the EU could no longer rely on the same policy tools without exacerbating this political backlash. As a result, NGEU emerged as a strategic response aimed at stabilising the economy while also mitigating centrifugal political pressures threatening the Union’s cohesion. The paper shows that euroscepticism shaped not only the adoption of NGEU but also its design: for the first time, the European Commission was authorised to borrow on capital markets and to transfer resources to Member States through both loans and grants. This marked a sharp break with the austerity paradigm and redefined conditionality as a forward-looking tool guiding reforms towards EU-level priorities rather than imposing fiscal restraint. In contrast to the traditional narrative of European integration, the European Parliament (EP) – historically an engine of federalisation – played only a marginal role in the political process leading to NGEU. The EP neither drove the shift towards a more solidaristic economic governance nor succeeded in securing a stronger institutional position in the programme’s governance structure. This limited influence is crucial for understanding the paradox at the heart of the EU’s current trajectory: although NGEU represents a transformative departure in policy substance, it remains a temporary instrument, and no concrete prospects for treaty reform or for a permanent common fiscal capacity have emerged. Methodologically, the paper employs a qualitative approach drawing on new institutional economics and international political economy to analyse institutional change, focusing on the interplay between aggregating forces (euroscepticism as a catalyst of innovation) and fragmenting forces (transaction costs, tensions between intergovernmental and supranational methods, interinstitutional tensions). The analysis suggest that while euroscepticism functioned as the primary aggregating force pushing the EU towards NGEU, the EP failed to play this role. The combination of high transaction costs, the EP’s marginalisation, and the temporary nature of NGEU indicates that the programme’s institutionalisation – and any meaningful step towards a common fiscal policy – remains unlikely in the absence of deeper constitutional reform.