Luis Garicano has been vice president and economics spokesman of Renew Europe and head of Spain’s Ciudadanos delegation in the European Parliament over the last three years. He will be a visiting professor of economics at Columbia University during the upcoming academic year.
Ukraine urgently needs financial assistance from its friends.
Though the European Commission announced almost €9 billion in favorable loans to Ukraine in May, the response has been desperately slow. And while the European Union has declared economic war on Russia, we don’t seem to be winning. In fact, multiple indicators suggest that Ukraine is suffering much more than Russia.
Since the start of Russian President Vladimir Putin’s aggression in Ukraine, the ruble reached a seven-year peak value in June — 54.47 to the dollar. Meanwhile, the Ukrainian hryvnia is trading at a ten-year low — 36.84 to the dollar. Russian GDP is estimated to fall by 11.2 percent this year, while Ukrainian GDP could contract by 45 percent. And while inflation in Russia peaked at 17 percent in April, Ukraine’s inflation continues rising, reaching 22.2 percent in July.
A key reason for this is Russia’s fossil fuel exports. Since the start of Russian aggression, the EU has sent Russia €82 billion in payments for fossil fuels. Meanwhile, it has only mobilized €6.1 billion to support Ukraine’s overall economic, social, financial and military resilience.
Currently, the next big package of support for Ukraine is expected to come via Macro-Financial Assistance (MFA) — an EU financial instrument that is extended to partner countries experiencing a balance-of-payments crisis. It allows the bloc to borrow money in the financial markets and is normally provided in the form of loans.
Since Crimea’s invasion in 2014, Ukraine has received €6.2 billion in MFA. But now, additional financial assistance is urgently needed to prevent the country from going bankrupt during the war, which would mean immediate defeat.
Along these lines, the International Monetary Fund estimated in April that Ukraine would face a financial shortfall of around $15 billion before June, to which the Commission responded by announcing an additional €9 billion MFA to fill part of that gap.
The good news is the money appears to be available. The current Multiannual Financial Framework (MFF) 2021-2027 foresees a maximum of €11 billion in MFA throughout its seven years.
The bad news, however, is that while MFA agreements are, under normal circumstances, provisioned at a 9 percent rate from the External Action Guarantee (EAG) — which has €1 billion earmarked to this end — the Commission demands that the new MFA to Ukraine be provisioned at a 70 percent rate due to the higher risk of default. Hence, the EU would need to block at least €6 billion from the EAG, which is more than what 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 €1 billion tranche, which will already consume 700 million from the EAG, on July 1, leaving just €229.5 million available.
There are only two ways for the Commission to deliver the rest of the MFA to Ukraine:
First, through Article 37 of the regulation, “member states, third countries and other third parties” could contribute to the EAG, with additional resources as external assigned revenue. The process would be similar to the one used to set up the Support to mitigate Unemployment Risks in an Emergency (SURE) instrument during COVID-19, which allowed the Commission to borrow up to €100 billion, with €25 billion in guarantees provided by member countries. After the Commission proposed SURE in April 2020, it took only one month for the Council to approve it, and five months to be activated.
Given the energy crisis, however, this path appears to be an uphill battle right now, as member countries will hesitate to provide additional guarantees.
The second solution would then be an early revision of the MFF 2021-2027, which would lead to a significant increase in the resources dedicated to external policy, as well as greater flexibility in the distribution of EU resources. Such a revision would also better prepare the EU to respond to consecutive crises and hostile policies from third countries.
Although the second option is desirable in the medium term, the quickest way to meet Ukraine’s urgent financial needs is by having EU governments provide additional guarantees to the EAG, so that the remaining €7.8 billion in MFA can be unblocked in September.
Putin is now playing a waiting game — just as he did in Crimea and Georgia. He hopes that soon the Western world will be too busy coping with a recession and new waves of immigration to care about Ukraine.
But governments shouldn’t lose sight of the root cause of their domestic difficulties. Inflation, low GDP growth, and energy and food scarcity 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 quickly, as it did during COVID-19. Hesitation only widens Putin’s advantage, and it’s the reason why we’ve sent over 10 times more money to Russia than to Ukraine since the invasion began.