In addition to supplying weapons and taking in millions of refugees, numerous countries, including those in Europe, have agreed to provide financial support for the reconstruction of Ukraine. However, the price for Europe is high, because the damage of the sanctions policy is already enormous.
More than 40 states and international organizations have pledged their support for the reconstruction of Ukraine, called the "Lugano Declaration". Representatives of Germany, France, Great Britain, and the USA, among others, signed the document on July 5th, 2022. So far, Ukraine has put the volume for the reconstruction of the country at around 720 billion euros.
In the face of high inflation rates, rapidly rising energy prices, and an increasing flow of refugees - after Ukraine now again from the African and Asian region - the governments in the EU countries concerned are facing growing criticism from their societies. Can these enormous costs at all be afforded? Is it justified to support Ukraine not only with weapons but also with loans, without this country making binding commitments about its own efforts - military and political - to restore calm in Europe as quickly as possible?
Ulrike Reisner, the Austrian political scientist, continues her analysis of the current military conflict and its consequences for the European economy.
Model Marshall Plan
However, claims of "official Ukraine" against the West date even earlier. The Ukrainian President had already called on participants at the World Economic Forum (WEF) in Davos and the international community to help his country finance reconstruction. Already then, the cost was estimated at more than 500 billion US dollars.
In keeping with American tradition, plans are already in place for the reconstruction of Ukraine. Suggestions are provided by the authors of a research report recently published by the London-based think tank "Centre for Economic Policy Research" (CEPR). In "A Blueprint for the Reconstruction of Ukraine" the authors also take their cue from historical reconstruction projects. Among them: The Marshall Plan, the reconstruction of Afghanistan and Iraq, reconstruction projects after natural disasters - and the reunification of Germany:
Then, we argue that the reconstruction should include three distinct phases: i) emergency response (akin to the response to a natural disaster hitting a country); ii) rapid restoration of critical infrastructure and services to revive the basic functions of the economy and the government; iii) laying foundations for a rapid, sustained growth trajectory."
It should be noted that in numerous EU states, massive propaganda around Ukraine has been carried out by governments and the system-compliant media. This makes a reasonable debate difficult and obscures the view of facts. However, it is precisely these facts that need to be examined in order to assess the position of this country, Ukraine, which is to receive such generous support.
Despite major reform efforts, Ukraine ranked 122 out of 180 in Transparency International's corruption index before February 2022. The Ukrainian government has already built digital platforms for government services to make corruption impossible, said the Head of the Ukrainian Government at the donors' conference in Switzerland. The Ukrainian President who joined the event by video promised: "maximum transparency" in all projects. Critical voices in various European countries are increasing with regard to the undoubted corruption in Ukraine but also in view of the country's weak economic data.
In the wake of the global corona pandemic, the Ukrainian economy shrunk by 4% in 2020. Private consumption (75% of GDP) was by far the most important economic driver. This recovered unexpectedly quickly and already rose by 0.5% in 2020 as a whole. Forecasts of 2020 said that this consumption enthusiasm would continue in the first half of 2021 thanks to rising real incomes and persistently high cash payments by Ukrainians living abroad. Regarding foreign trade, Ukraine would benefit from rising world market prices for raw materials and strong demand from China.
Things have changed: According to the World Bank, Ukraine's economy will shrink by an estimated 45.1% this year. The International Monetary Fund IMF estimates that Ukraine will need around 4.8 billion US dollars by the end of 2022. Economic reconstruction, once the conflict ends, will require substantially more funds over the next several years. Also of concern is Ukraine's external debt, which stood at 57 billion US dollars at the end of 2021. This included 13.4 billion US dollars owed to the IMF, 6.5 billion US dollars to bilateral official creditors, and 22.7 million US dollars in Eurobonds.
The banks game
However, the economic situation in Ukraine has been anything but stable for the last decade. Even before February 2022, it was clear that Ukraine would need financial help from donors to get its sputtering economic engine running again.
It is therefore worth looking at the activities of international banks because they have been active for a long time - and will probably continue to be so for a long time, at the expense of the European states. The following lists are exemplary and do not claim to be complete.
In 2022, the European Investment Bank EIB deployed 668 million euros in financing for the Ukrainian government to meet urgent liquidity needs. A 2.5 million Euro humanitarian aid package coordinated by the EIB Institute should help people affected by the war. The EIB also contributed a 4 billion Euro credit line for municipalities in Ukraine's neighboring EU countries that received refugees.
The European Bank for Reconstruction and Development EBRD announced a 2 billion euro support package for the Ukrainian private sector in March 2022.
Prior to February 2022, the IMF had a 5 billion US dollar loan in place for Ukraine, which had been extended through June 2022. On March 8, 2022, the IMF approved a 1.4 billion US dollar assistance package to help Ukraine cope with the economic shock. In addition to IMF loans, Ukraine uses its allocation of Special Drawing Rights (SDRs), which are international reserve assets to replenish Ukraine's official foreign exchange reserves. In 2021, 650 billion US dollars in SDRs were allocated worldwide, of which Ukraine received 2.7 billion and has already largely used up these funds between August and December 2021.
The World Bank approved a 489 million US dollar supplemental budget support package for Ukraine in March 2022, called Financing of Recovery from Economic Emergency in Ukraine (FREE Ukraine). The package comprises a supplemental loan for 350 million and guarantees in the amount of 139 million; the board is also mobilizing grant financing of 134 million and parallel financing of 100 million, resulting in total support of 723 million. (This package is in addition to the 11 ongoing World Bank projects in Ukraine, in areas such as energy, education, and transportation networks).
The New Debt of the West
The World Bank also established a multi-donor trust fund in March 2022 to facilitate grant resources from donors to Ukraine, with contributions from Denmark, Iceland, Latvia, Lithuania, and the United Kingdom. The U.S. government wanted to contribute 500 million US dollars to this fund. In addition, Japan is linking 100 million US dollars in parallel, bilateral financing to the World Bank support package.
In April 2022, the IMF established a special account to allow individual countries to donate resources (grants or loans), disbursed into Ukraine's account at the IMF. The so-called "administered account" allows interested countries to pool and channel resources to help Ukraine meet balance-of-payments and budget needs arising from the war and support macroeconomic stability while taking advantage of the IMF's expertise and capacity. Canada has indicated that it will offer up to 795 million US dollars in loan resources for Ukraine, disbursed through the account in its current federal budget.
Yet the donor countries themselves are anything but economically stable. A look at the debt situation, for example of the EU countries, shows this: At the end of the fourth quarter of 2021, the government debt to GDP ratio in the euro area stood at 95.6%, in the EU at 88.1%. (Russia: app. 15% in March 2022).
As far as the stability of European states is concerned, additional debt in favor of Ukraine's reconstruction is a delicate matter:
The consequences of the lockdowns and corona policies will be felt for many years and cause further enormous economic damage. The energy crisis, triggered by the sanctions policy of the West, has brought to light decades of failures and undesirable developments in the energy infrastructure of the states. It will take enormous efforts and financial resources to keep these infrastructures stable and slowly bring them up to the state of the art. Last but not least the social costs are also exploding because the migration crisis from 2015 is not yet over.
All this constitutes a highly explosive, dangerous mixture that can very quickly boomerang for one or other EU state. Ongoing protests against the government in Italy or the already violent demonstrations in the Netherlands show how unstable the situation is in many places. In countries like Germany and Austria, there are already petitions to the governments to lift the economic sanctions against Russia. It is to be hoped that the so-called state leaders will take the helm again and not allow themselves to be steered by third parties.