Luis Garicano has been Vice-President and Economic Spokesperson of Renew Europe and Head of the Spanish Ciudadanos Delegation to the European Parliament for the past three years. He will be a visiting professor of economics at Columbia University in the next academic year..
Ukraine urgently needs financial help from its friends.
Although the European Commission announced nearly €9 billion in favorable loans to Ukraine in May, the response has been frustratingly slow. And while 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.
Since the beginning of Russian President Vladimir Putin’s aggression in Ukraine, the ruble in June reached a seven-year high – 54.47 per dollar. Meanwhile, the Ukrainian hryvnia is trading at its lowest level in ten years – 36.84 per dollar. Russian GDP is expected to fall by 11.2% this year, while Ukrainian GDP could contract by 45%. And while inflation in Russia peaked at 17% in April, inflation in Ukraine continues to rise, reaching 22.2% in July.
One of the main reasons for this is Russia’s fossil fuel exports. Since the start of the Russian aggression, the EU has sent Russia €82 billion in fossil fuel payments. In the meantime, 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 from macro-financial assistance (MFA) – an EU financial instrument that is extended to partner countries facing a balance of payments crisis. It allows the bloc to borrow money from the financial markets and is normally provided in the form of loans.
Since the invasion of Crimea in 2014, Ukraine has received 6.2 billion euros from MFA. But now additional financial aid is urgently needed to prevent the country from going bankrupt during the war, which would mean immediate defeat.
In this sense, the International Monetary Fund estimated in April that Ukraine would face a financial gap of around 15 billion dollars before June, to which the Commission responded by announcing an additional MFA of 9 billion euros to fill part of this deficit.
The good news is that the money seems to be available. The current Multiannual Financial Framework (MFF) 2021-2027 foresees a maximum of €11 billion of MFA over its seven years.
The bad news, however, is that while MFA agreements are, under normal circumstances, provisioned at a rate of 9% by the External Action Guarantee (EAG) – which has a billion euros earmarked to this end – the Commission requires that the new MFA Ukraine be provisioned at a rate of 70% due to the higher risk of default. Therefore, the EU should block at least €6 billion from the EAG, which is more than is available.
These budgetary obstacles explain why the latest MFA announced for Ukraine is slow to be approved and distributed. The Commission only presented the project for the first tranche of €1 billion, which will already consume €700 million from the EAG, on July 1, leaving only €229.5 million available.
There are only two ways for the Commission to provide 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 in the form of external assigned revenue. The process would be similar to that used to set up the Support for Emergency Unemployment Risk Mitigation (SURE) instrument during COVID-19, which allowed the Commission to borrow up to 100 billion euros, with 25 billion euros of guarantees provided by member countries. After the Commission proposed SURE in April 2020, it only took the Council one month to approve it and five months to activate it.
Given the energy crisis, however, this path appears 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 MFF 2021-2027, which would lead to a significant increase in resources dedicated to external policy, as well as greater flexibility in the distribution of EU resources. Such a review would also better prepare the EU to respond to subsequent crises and hostile policies of third countries.
Although the second option is desirable in the medium term, the fastest way to meet Ukraine’s urgent financial needs is to ask EU governments to provide additional guarantees to the EAG, so that the 7, The remaining 8 billion euros of MFA can be released in September.
Putin is now playing a waiting game – just like he did in Crimea and Georgia. He hopes that soon the Western world will be too busy dealing with a recession and new waves of immigration to care about Ukraine.
But governments must 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 quickly, as it did during COVID-19. Hesitation only widens Putin’s advantage, and that’s why we’ve sent 10 times more money to Russia than to Ukraine since the invasion began.