Economists welcome the unexpected agreement on the 90 billion loan package in Brussels. However, it should not be expected that the money will ever come back – not even from Russia.
German economists welcomed the solution found after a long struggle to provide further financial support for Ukraine. However, they do not assume that the European Union will ever get the 90 billion euros back.
“It cannot be assumed that Ukraine will be able to repay the loan later,” said Clemens Fuest, President of the Munich Ifo Institute, to WELT. In his view, it is therefore important to ensure that the loan can be serviced in the medium term by cutting spending in other areas of the EU budget. “The priorities in Europe have changed, and this must also be reflected in the EU budget,” the economist continued.
Friedrich Heinemann from the Center for European Economic Research (ZEW) in Mannheim made a similar statement: “A repayment of the Ukraine loans can hardly be expected in any scenario.” In the foreseeable future, Russia will be able to enforce the refusal of reparations payments and the return of its foreign exchange reserves in every conceivable scenario for a peace agreement, said the head of the public finance research department.
On the other hand, after the agreement was reached at night in Brussels, Chancellor Friedrich Merz (CDU) pointed out: “The EU expressly reserves the right: If Russia does not pay compensation, we will – in full accordance with international law – use Russian assets for repayment.” The current decision stipulates that Kiev only has to pay back the money once it has received reparations payments from Moscow.
Contrary to Merz’s plan, the Russian Central Bank’s frozen assets will not be used directly for the loans totaling 90 billion euros over the next two years. Rather, the money should come from the EU budget.
The Chancellor not only had to bow to the concerns of Belgium, where the central securities depository Euroclear is based. In the end it also failed due to resistance from countries like France and Italy. They also saw great legal and political risks in misusing the money and providing corresponding guarantees.
How would China behave?
Some economists had also warned early against using the confiscated Russian assets after Merz made public advances in a guest article for the British business newspaper “Financial Times” at the end of September. ZEW researcher Heinemann was one of the warnings: “Using frozen assets damages the reputation of Western reserve currencies,” he told WELT in October.
Heinemann already raised the questions back then: “How will the People’s Republic of China behave if it presses ahead with its Taiwan planning? Will it then withdraw all assets from the euro area as a precautionary measure?” If we go it alone, especially without the United States, the potential damage to the European financial center would be particularly great. “That would be a point gain for the dollar against the euro,” said Heinemann at the time. Instead, he suggested securing the loans through the EU budget.
This is how it should happen now. Heinemann also welcomed the agreement: “Ukraine will receive the indispensable resources for its fight for survival and there will be a reasonably fair European burden-sharing,” he said. The default guarantees would be distributed according to the economic performance of the member states. In other words, Germany will bear the largest share, just in case.
The flaw from Heinemann’s point of view, however, is that this principle of fair burden sharing is crumbling because Hungary, the Czech Republic and Slovakia were expressly excluded from these guarantees. “This could set a precedent among future populist EU governments.”
It is planned that the EU Commission will raise bonds on the capital market. The bonds are secured via the so-called headroom. In the case of EU budgets, this describes the buffer in the billions between the maximum spending limit legally permitted by the states and the actual spending in the annual EU budgets. This buffer should now serve as security for the donors. The EU Commission then passes on the loan taken out to Ukraine.
Since supporting Ukraine is an urgent common interest of Europeans, financing via the European Union can be well justified, said Fuest. From his point of view, however, it would have been better to use at least some of the frozen Russian assets and to credibly signal to Russia that the longer Russia continues the war, the more will be used. The EU should definitely retain the option of confiscating Russian assets for Ukraine. This would be an important means of pressure in any future negotiations with Russia.
Eurobonds would be legally sensitive
The extent to which the path initially found by the heads of state and government amounts to a mutualization of debts is controversial. Eurobonds would be legally sensitive. When it came to Corona aid, the federal government pointed out that, unlike Eurobonds, Germany would not have to assume joint and several liability in an emergency. It was ultimately decided that the EU budget would provide security, for which the states would only have to be responsible proportionately and in proportion to their economic strength.
ZEW expert Heinemann sees the construction as at least very close to what was imagined under Eurobonds during the debt crisis. “These are bonds for which there is an indirect joint liability for 24 EU member states via the EU budget,” he said. In the first step, in the event of a failure, the member states would be asked to pay based on their economic strength. However, if a country cannot or does not want to pay, these further losses would also be passed on to the remaining EU member states.
But Heinemann also does not expect that the EU’s debt deal will have an impact on national budgets – and that the German taxpayer will have to pay for it. There are financial techniques that, although at the expense of transparency, have already proven themselves in the rescue of Greece. This means that the loans can run for many decades. “Then the problem will be pushed far into the distant future,” said Heinemann.
And the interest? Ukraine should not pay interest on EU loans. However, the investors who lend the EU the money demand some. These are currently 3.2 percent per annum for a ten-year term. This means that the EU budget will incur interest costs of around three billion euros annually as a result of the new Ukraine loans. This can be seen as manageable. For comparison: the federal government alone expects to spend around 30 billion euros on its debt service in 2026.
Despite balance sheet cosmetics and a lack of transparency, from Heinemann’s point of view, the loans are “very well invested money”. A military collapse of Ukraine and an annexation of the country by Russia would be many times more expensive for Germany and the EU.
This article was written for the WELT and Economic Competence Center Business Insider created.
Karsten Seibel is a business editor in Berlin. Among other things, he reports on budget and tax policy.
