The War In Ukraine Will Reshape The European Union

Giles Merritt looks at the unprecedented pressures that Putin’s war against Ukraine will impose on the EU’s finances, and perhaps its structures.

Full marks to the European Union for the speed, agility and unity with which it responded to the Ukraine crisis.

Some commentators warn that this may not last, but the EU has undeniably come through the opening phase with flying colours.

The war in Ukraine is much more than a crisis. 

It’s a catalyst for far-reaching change to the European integration project. 

The question is not whether the EU’s member states will continue to act in concert but whether they can elevate their cooperation to a much higher plane.

Nobody can say when, how or where Russia’s war of invasion will end. 

But the one certainty is that the EU can’t return to business as usual. 

The convulsions over the EU’s €750 billion post-Covid Recovery and Resilience Facility and its new powers to issue debt will pale beside the coming demands on Brussels.

The impact on Europe of a Russian meltdown would be very damaging

However much (or little) of eastern Ukraine Russia wrests away, once the fighting ends the EU probably can’t avoid taking on a candidate member state with enormous financial liabilities and a track record for state corruption that Transparency International has said is second only to Russia’s.

As well as bailing out the crippled Ukrainian economy, the EU will find that future relations with Russia present it with an expensive dilemma.

The costs of Putin’s war will be astronomical for both countries, and the EU will probably have to shoulder much of the burden.

The Economist Intelligence Unit reckons that Ukraine’s GDP of $164 billion in 2021 will this year be almost halved. 

In Kyiv, the government has put the war’s likely overall cost to the country at €1 trillion.

Russia’s outlook is little better. Its economic resilience has relied so far on energy exports and short-term measures to prop up the rouble. 

Moscow’s greatest vulnerability is its reliance on international financial markets, with imminent debt defaults prompting forecasts of an eventual collapse of the Russian currency. 

But far from representing a victory, the impact on Europe of a Russian meltdown would be very damaging.

The focus has so far been on comparatively painless decisions – the weaponry to be supplied to Ukraine, and the sanctions to be imposed on Russia. 

Neither has been to Kyiv’s satisfaction, but by the standards of the 27-nation EU both have been tackled with unusual alacrity and determination. 

Not enough to stop the Kremlin in its tracks, but certainly enough to show unity of purpose and resolve.

The future policy challenges the EU must confront are arguably greater than today’s brinkmanship; they will be geopolitical as well as financial. 

In addition to reviving Ukraine’s crippled economy and physical reconstruction costs estimated at €500 billion, there’s the need to address the serious global food shortages arising from cuts in Ukrainian and Russian cereals exports. 

As major trade and aid players, the EU along with the US will be expected to lead famine responses around the world.

The financial burdens being created by Russia’s invasion of Ukraine will sooner or later lead to huge increases in the EU budget

Closer political and economic integration, and then its ‘Big Bang’ enlargement, often saw the EU criticised for navel-gazing because of its preoccupation with internal policies. 

That’s no longer an option because external pressures such as its support for Ukraine and whether to promote reconciliation with a post-Putin Russia will dominate the EU agenda.

How these factors will reshape the EU can only be guessed at. Perhaps the need for consistently faster decision-making will trigger long-discussed institutional and constitutional reforms. What we can be sure of is that the financial burdens being created by Russia’s invasion of Ukraine will sooner or later lead to huge increases in the EU budget. 

This in turn will demand greater democratic accountability to Europe’s taxpayers.

The chaos and uncertainties of the Ukraine crisis cannot be handled by individual member states. 

Politically and financially they need one another. Nor, even if they wished to do so, can individual European governments turn their backs on Ukraine’s millions of refugees and the horrors of warfare and war crimes.

Public sympathy may well override fiscal considerations and drive fresh waves of spending by EU governments that are already struggling with Covid’s two-year economic paralysis. The EU’s 2021-27 budget totalling a bit more than a trillion euros – one per cent of Europe’s GDP – will clearly need further funding once the present murmurings of a “Marshall Plan for Ukraine” become concrete.

It’s possible, of course, that somehow the EU will muddle through without radical change. 

Much will depend on the degree to which the Ukraine war upsets not just Europe but global relationships. Although the EU is sure to be heavily stressed, there are signs that on the world stage it could emerge as a stronger and more influential player.

The second part of this article on the consequences of the war in Ukraine, to be published on 10 May, will focus on the EU’s role in a possible ‘new world order’.

*This article first appeared on the Friends of Europe website and is reproduced with kind permission. The views he expresses are not necessarily those of The Bulrushes.