Luis Garicano has been Vice-President and Economic Spokesman for Renew Europe for the last three years and head of the Spanish Ciudadanos delegation to the European Parliament. He will be visiting professor of economics at Columbia University for the coming academic year.
Ukraine urgently needs financial help from its friends.
Although the European Commission announced nearly €9 billion in cheap loans to Ukraine in May, the response has been desperately slow. And even though the European Union has declared economic war on Russia, we don’t seem to be winning. In fact, several indicators suggest that Ukraine is suffering much more than Russia.
The ruble hit a seven-year high of 54.47 per dollar in June since Russian President Vladimir Putin’s aggression in Ukraine began. Meanwhile, the Ukrainian hryvnia is trading at a 10-year low – 36.84 to the dollar. Russia’s GDP is estimated to fall by 11.2 percent this year, while Ukraine’s GDP could contract by 45 percent. And while inflation in Russia peaked at 17 percent in April, inflation in Ukraine continues to climb, reaching 22.2 percent in July.
A major reason for this is Russia’s exports of fossil fuels. Since the start of Russian aggression, the EU has transferred 82 billion euros in fossil fuel payments to Russia. It has now mobilized just €6.1 billion to support Ukraine’s overall economic, social, financial and military resilience.
Currently, the next major package of support for Ukraine is expected to come via macro-financial assistance (MFA) – an EU financial instrument that will be extended to partner countries experiencing a balance of payments crisis. It allows the bloc to borrow money from the financial markets and is usually provided in the form of loans.
Since the Crimea invasion in 2014, Ukraine has received €6.2 billion in MFA. But now more financial help is urgently needed to prevent the country from going bankrupt during the war, which would mean immediate defeat.
With that in mind, the International Monetary Fund estimated in April that Ukraine would face a fiscal deficit of around $15 billion before June, to which the Commission responded by announcing an additional €9 billion of MFA to fill part of that gap.
The good news: the money seems to be there. The current Multiannual Financial Framework (MFF) 2021-2027 envisages MFA of a maximum of EUR 11 billion over its seven years.
The bad news, however, is that while MFA arrangements will under normal circumstances be provided at a rate of 9 per cent from the External Action Guarantee (EAG) – which has €1 billion earmarked for this purpose – the Commission will do so from the new MFA requires Ukraine to be set aside at 70 percent due to the higher risk of default. Therefore, the EU would have to block at least EUR 6 billion from the EAG, which is more than is available.
These budgetary hurdles explain why the latest MFA announced for Ukraine is taking so long to be approved and distributed. The Commission only presented the draft for the first EUR 1 billion tranche on July 1, which will already use up EUR 700 million from the EAG, leaving only EUR 229.5 million available.
There are only two options for the Commission to deliver the rest of the macro-financial assistance to Ukraine:
First, through Article 37 of the Regulation, “Member States, third countries and other third parties” could contribute additional funds to the Guidelines as external assigned revenue. The process would be similar to that used when the Emergency Unemployment Risk Reduction Support (SURE) instrument was set up during COVID-19, which allowed the Commission to borrow up to €100 billion, with €25 billion made available in guarantees member states. After the Commission proposed SURE in April 2020, it took just a month for the Council to approve it and five months for it to be activated.
However, given the energy crisis, this path seems to be an uphill battle at the moment, as member countries will be reluctant to provide additional guarantees.
The second solution would then be an early revision of the 2021-2027 MFF, which would lead to a significant increase in the resources earmarked for external policy, as well as greater flexibility in the distribution of EU funds. Such a revision would also better prepare the EU to respond to successive crises and hostile actions by third countries.
Although the second option is desirable in the medium term, the quickest way to meet Ukraine’s urgent financing needs is for EU governments to provide additional guarantees for the EAG to allow the remaining €7.8 billion of MFA in September can be released.
Putin is now playing a waiting game – just like he did in Crimea and Georgia. He hopes that the western world will soon be too busy dealing with a recession and fresh waves of immigration to care about Ukraine.
But governments should not lose sight of the root cause of their domestic difficulties. Inflation, low GDP growth, and energy and food shortages are all direct effects of the Russian invasion – we shouldn’t treat them as competing crises.
The EU will only win this economic war if it acts united and swiftly, as it did during COVID-19. Hesitation only increases Putin’s advantage, and that’s why we’ve sent more than 10 times more money to Russia than to Ukraine since the invasion began.
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