Funding Ukraine’s reconstruction

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While Russia’s invasion of Ukraine rages on, a group of renowned economists have devised a plan to reconstruct Ukraine after peace returns. The amount of money and planning needed is daunting, but maybe the EU can learn something from this as well.

While the real extent of the needed funds for reconstruction is unknown due to the ongoing destruction of much of Eastern Ukraine, some estimate it would cost at least several hundred billion euros, while some say even more.

“I think we should all be mentally prepared to talk about a trillion euros,” Yuriy Gorodnichenko, professor of economics and one of the authors of the recently published ebook about the reconstruction of Ukraine, said in an online panel discussion among the book’s authors.

Part of this could be funded through Russia’s currently frozen international reserves, amounting to about $300 billion.

“This is a legitimate source of funds for the Ukrainian government to use for the benefit of the Ukrainian people,” said Sergei Guriev, professor of economics at SciencesPo in Paris. Moreover, he argued, some additional funds could be accessed by seizing the assets of sanctioned Russian oligarchs.

Nevertheless, the EU and other Western countries will likely have to chip in to reconstruct Ukraine.

Here, the blueprint offered by the economists sets a clear preference for grants over debts.

“Grants should be favoured rather than loans,” said Professor Beatrice Weder di Mauro from the Graduate institute in Geneva, arguing that the Marshall Plan that helped reconstruct Europe’s economy after the Second World War was about 90% grants as well.

This is also supported by Professor Kenneth Rogoff from Harvard University who argued that some of the current Ukrainian debt would have to be forgiven. “Ukraine probably will need to substantially restructure the debt that it does have, and giving it new loans is really not helpful,” he said.

Along with the other co-authors of the book, he argued that the reconstruction should be organised by a new agency of the European Union.

“We really think the intermediary for the funding needs to be housed in the European Union, not the International Monetary Fund or the World Bank,” he said.

The book argues that reconstruction should be a step towards EU membership. Moreover, it calls not just for a reconstruction but for a modernisation of Ukraine.

“Reconstruction offers a unique opportunity to radically upgrade Ukraine’s productive capacity to bring it close to the technological frontier, lay foundations for long-term growth, and integrate Ukraine even more tightly into the global economy,” the book states.

A reconstruction based on such enormous amounts of money and explicitly state-led investment and modernisation will be a challenge for the EU, which has long held dear to the principles of letting market forces play, restricting state aid, and limiting state spending.

However, given the alternative of a languishing, impoverished Ukraine at the front door, the EU does not have much choice but to go this way.

Moreover, for the new challenges it faces in the form of more defence investment and the financing of the digital and green transition, the EU needs to learn to take a more strategic view of the economy anyway.


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Chart of the Week

A new study by the Kiel Institute for the World Economy, a German research institute, compiled data on the support committed by EU member states and other countries to Ukraine in the first month of the war.

The figures show that the US is, for now, still the most prominent supporter of Ukraine. One could argue that the US has more possibilities to support Ukraine since its economy is less influenced by the war than the European economy.

However, it is still remarkable that the EU, which is more directly affected by the security implications of the war and has a higher total economic firepower than the US, contributes less than the US. The numbers do not show much strategic autonomy.

Graph by Esther Snippe

It is also remarkable which countries within the EU have committed more than other countries, with Poland providing more aid than France and Germany during the first month of the war.

In a general trend, eastern and central EU member states tend to pledge much more support than Western member states, with Spain, for example, failing to provide much aid to Ukraine in the first month.

Graph by Esther Snippe

When the figures are put in context with the economic power of the donor countries, Estonia nearly breaks the chart. The Baltic country has committed aid worth about 0.8% of its national GDP, while most other countries (except Poland) have committed less than 0.1% of their national GDP.

Moreover, the extent of the Swedish support is notable. Corrected for GDP, the neutral country has provided more support than the US.

Finally, the total amount of aid relative to the donor countries’ GDP simply shows that countries have not yet given very much. There is not much reason to celebrate European solidarity with Ukraine just yet.

Graph by Esther Snippe

 

Literature Corner

Do the MTO’s Cyclically Adjusted Budget Balances Serve Their Purpose? An Analysis and a Reform Proposal: A fundamental legislative reform of the Stability and Growth Pact seems unrealistic at the moment. This is why the German think tank Dezernat Zukunft has produced this proposal on how the EU Commission could calculate potential growth differently so that EU countries are less hindered in their growth by EU fiscal rules.

The Amazon Union Exposes the Emptiness of ‘Woke Capital’: In this essay, Adam Serwer argues that companies will not on their own create a society that works for everybody. For example, they will have to be forced to do it by organised workers.

Lessons from History for our Response to Ukrainian Refugees: Millions of people have fled Ukraine, mainly to EU countries. What can we learn from past refugee movements for this moment? One of the arguments Sascha O. Becker makes in this article is that immediate access for children to education is essential. You can also listen to him describe his findings in this podcast.

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