EU Infrastructure Funding and Environmental Policy Risks: Assessing Regulatory Scrutiny on Southern Europe's Megaprojects

The European Union's push for climate neutrality by 2050 has intensified regulatory scrutiny of infrastructure projects, particularly in Southern Europe, where economic constraints and policy gaps amplify the risks of non-compliance. As the EU recalibrates its sustainability agenda to balance environmental goals with economic competitiveness, high-profile megaprojects in Italy, Spain, and Greece face mounting challenges. These projects, often reliant on EU funding, must navigate evolving regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), while addressing fiscal and institutional barriers.

Italy: Climate Plans Under Fire and Funding Gaps

Italy's National Energy and Climate Plan (NECP) has drawn sharp criticism from the European Commission for falling short of EU targets. The plan, which aims for a 55% reduction in CO₂ emissions by 2030 compared to 1990 levels, lacks clarity on nuclear energy policy and underestimates the impact of climate change on water supply and drought mitigation7 Rail Megaprojects Get More EU Funds than 84 Other Key Upgrades^[4]. The Commission also flagged the country's ambitious but hard-to-implement clean mobility strategy. Meanwhile, the Meloni government's allocation of 40% of National Recovery and Resilience Plan (NRRP) funds to environmental transition is undermined by continued fossil fuel subsidiesEU 2025 Sustainability Regulation Outlook | Deloitte^[3].

The 2025 Environmental Implementation Review (EIR) highlights Italy's struggles with water protection, noting a EUR 22.4 billion funding gap for the Water Framework Directive (WFD) alone2025 Environmental Implementation Review^[2]. This shortfall, compounded by insufficient digitalization of water data, risks delaying critical upgrades to infrastructure. For instance, the EUR 12.4 billion Puglia high-speed rail project, intended to connect Bari to the Adriatic coast, has faced delays due to environmental impact assessments and procurement bottlenecksEurope's environmental dichotomy: The impact of regulations^[1].

Spain: Fiscal Constraints and Renewable Energy Ambitions

Spain's climate investments are constrained by its high public debt, which complicates the financing of green megaprojects. A 2024 study warns that countries like Spain may require austerity measures to sustain climate neutrality efforts2025 Environmental Implementation Review^[2]. Despite this, Spain remains a leader in renewable energy, with projects such as the EUR 3.5 billion Almería Solar Park, which aims to generate 2.2 GW of capacity. However, these projects face scrutiny under the EU's Nature Restoration Law, which mandates biodiversity protection and stricter chemical use regulationsEU 2025 Sustainability Regulation Outlook | Deloitte^[3].

The 2025 EIR also underscores Spain's challenges in circular economy implementation and waste management, with regional disparities exacerbating compliance risksEurope's environmental dichotomy: The impact of regulations^[1]. For example, the Madrid-Barcelona high-speed rail expansion, a flagship project under the EU's Connecting Europe Facility (CEF), has encountered delays due to disputes over land acquisition and environmental assessments7 Rail Megaprojects Get More EU Funds than 84 Other Key Upgrades^[4].

Greece: Balancing Modernization and Environmental Compliance

Greece's infrastructure projects, such as the EUR 2.1 billion Athens Metro extension and the EUR 1.8 billion Kozani solar farm, are central to its EU-funded green transition. However, the 2025 EIR identifies gaps in Greece's water resilience strategy and insufficient progress on digitalizing environmental dataEIB Group commits record financial support for climate and innovation projects in Greece^[5]. The country's EUR 1.2 billion plan to connect the Cyclades islands to the mainland electrical grid has also faced regulatory hurdles, including concerns over marine ecosystem impactsEIB Group commits record financial support for climate and innovation projects in Greece^[5].

The European Investment Bank (EIB) has committed record funding for Greece's climate projects, but developers must now align with the EU Taxonomy Regulation, which requires stringent sustainability disclosuresEIB Group commits record financial support for climate and innovation projects in Greece^[5]. This has increased the cost of compliance for projects like the Thessaloniki Port modernization, which must now integrate ESG risk assessments into its planningEU 2025 Sustainability Regulation Outlook | Deloitte^[3].

Regulatory Risks and ESG Integration

The EU's evolving regulatory landscape, including the CSRD (phased in from 2024–2028) and the EBA's 2026 ESG risk guidelines, is reshaping infrastructure financing. Financial institutions must now embed ESG data into risk assessments, with older, less energy-efficient assets facing devaluation risksEU 2025 Sustainability Regulation Outlook | Deloitte^[3]. For Southern Europe, where Government Climate Significant Investment (GCSI) and foreign direct investment (FDI) levels are lower, these requirements pose significant challenges. A study of EU-22 nations found that stricter environmental policies reduce carbon emissions without harming GDP only when paired with robust GCSI and renewable energy adoptionEurope's environmental dichotomy: The impact of regulations^[1].

Conclusion: Navigating the Green Transition

Southern Europe's megaprojects are at a crossroads, where regulatory scrutiny and funding constraints test their viability. While the EU's Clean Industrial Deal and strategic industrial policy aim to bolster competitiveness through green innovation, Southern countries must address fiscal gaps and institutional inefficiencies. For investors, the key lies in projects that align with the EU Taxonomy and leverage sustainable financing, while governments must prioritize policy interventions to bridge the GCSI and FDI divide. As the EIR and CSRD deadlines loom, the region's ability to harmonize environmental compliance with economic growth will define its role in the EU's climate transition.