Europe’s long-term security will rest on the reconstruction of Ukraine | Popgen Tech
The author is an FT contributing editor and global chief economist at Kroll
The full economic impact of Russia’s war on Ukraine is impossible to determine in the fog of war. What is clear is that Ukraine will need a lot of financial aid when the fighting stops. Now is the time for major donors to put plans and procedures in place to provide it. The potential geopolitical costs of failure are high.
G7 leaders suggested that Ukraine needs an initiative comparable to the Marshall Plan. But rebuilding Ukraine will be more complex than the US-funded project for Europe’s post-World War II reconstruction. The Marshall Plan involved one donor for 16 recipients. Post-war Ukraine will be the other way around, with one recipient and at least 16 donors, including individual countries, development institutions, international organizations, private sector actors and, possibly, seized Russian assets and reparations.
This raises a host of coordination issues, and so far progress in addressing them has been lacking. It may seem premature to discuss rebuilding Ukraine while war rages and the risk of a frozen conflict for years is high. But now is precisely the time to establish the infrastructure for a comprehensive reconstruction, so that work can begin as soon as the shooting stops.
There is broad agreement among economists that Ukraine must own any recovery plan if it is to have lasting success. The Ukrainian government should come up with the proposal in consultation with local and civil society organizations and get it approved by the large and diverse donor community. Ukraine has already started this process. The government presented a national recovery plan at a donor conference in Lugano in July, and a Berlin G7 event hosted by the German presidency in October.
In Lugano, however, donors were reportedly unprepared, and the US and others did not send their top officials. Few concrete proposals emerged from the Berlin meeting. The US, Ukraine’s biggest donor, was barely represented and Western leaders were relatively disorganized. G7 leaders agreed last week to set up a donor platform for Ukraine, but did not provide any details.
Europe should spearhead a recovery program. In June, the EU agreed to accept Ukraine as a candidate country. European leadership can ensure that the country develops institutions and standards in accordance with EU requirements.
However, the EU should not take the lead in collecting and disbursing funding. Most economists agree that Ukraine needs debt restructuring and grants instead of loans if it is to emerge with sustainable debt. Loans must be repaid eventually, and will increase the risk of a debt crisis. But the EU’s consensus-based decision-making means that loans are easier to approve than grants (although Hungary has shown that this is not always easy). Almost all funding from EU institutions came as loans, while most US funding took the form of grants.
Final disbursement of loans has also been a problem for the EU. By the end of November, the US had delivered about 60 percent of the funding it had promised, while the EU had distributed only about 27 percent. The urgency to deliver may fade after the existential threat subsides and rebuilding begins.
Instead, the EU should play a leading role in a new independent agency set up to match funding to projects in Ukraine and monitor the implementation of those projects. It would be similar to the Economic Cooperation Administration established to administer the Marshall Plan. The agency should be based in Brussels, with a strong presence in Kyiv to ensure local ownership of the program and a management team made up of non-Europeans so that all donor interests are represented.
As outlined in a Center for Economic Policy Research proposal, the new agency should establish a multi-donor trust fund, a vehicle often used by the World Bank to pool diverse sources of funding. To mobilize capital immediately, the agency needs to set up a facility that can pre-issue bonds against long-term commitments from donors.
There is never a guarantee of success with reconstruction programs, as Afghanistan and Iraq have shown. However, the cost of failure in this case could be enormous for Ukraine, Europe and the world.
A failed state in Europe, bordering Russia, would be a security nightmare. This will ensure a refugee crisis as millions of displaced Ukrainians will have no reason to return home. And it will strengthen skepticism about the west’s values and intentions among countries that refused to take sides in the war. The fighting continues, but the time to plan for peace is now.