Too big to fail? Saving Ukraine would cost Europe almost $400 billion

In the history of ideas around war and strategic confrontation, there are strokes of genius, grave mistakes, and everything in between. And then, in a category of its own, there is The Economist’s cover story of 30 October, purporting to explain “Why funding Ukraine is a giant opportunity for Europe”. The argument is a breathtaking window into the final bankruptcy of elite thinking on the big issues of statecraft confronting the continent. In a turn to the positively absurd, the liberal paper – a flagship of the “sophisticated” globalist intelligentsia – urges the Continent’s capitals to commit some $390 billion over the next four years to sustain Kyiv’s beleaguered war effort. The paper admits this is “a lot, but still excellent value” for the European taxpayer.

This marks a nadir in the liberal transatlantic discourse on Ukraine, with the last flickers of realism yielding to a kind of messianic arithmetic. The article frames this prodigious outlay not as a burden, but as a kind of historic bargain in which we get to “corner” (not even defeat) Putin and build out Europe’s “financial and industrial muscle” while boosting its military power and thus reducing the dependency on the US. 

It is effectively the old trick of presenting bad debt as prosperity-boosting investment. How bad? Just note that much of the money would be poured directly into the bottomless pit of Ukraine’s budget deficit, with negligible benefits to Europe’s economy. And what’s not sent in cash straight into Kyiv’s coffers would be used to buy European weapons that would then be gifted to Ukraine; this is the “defence investment” bit. It will certainly expand Europe’s defence-industrial base, but defence is one of the least efficient areas for investment: low-productivity, capital-intensive, and prone to low spill overs.

 Before considering the enormity of The Economist’s proposed sum, it is worth noting the moral hazard involved in the mere principle of it. This is a concept from economics that points to the risk that someone will take more risks because they don’t have to face the full consequences of those risks. Moral hazard arises when one party is insulated from potential losses and can afford to behave recklessly because someone else is bearing the cost. For example, this could a company or industry receiving subsidies from the state, or a bank deemed too big to fail and which can thus count on the state to bail it out. We had an unforgettable experience of this through the 2008 financial crisis. 

In the case at hand, the idea of giving Ukraine effectively a blank check by guaranteeing all of its financial requirements for the next four years no matter what, runs the serious risk of incentivising Kyiv’s maximalism, foreclosing negotiations that could preserve what remains of Ukrainian sovereignty. To hail this as an “opportunity” is far from statesmanship and more like the rhetoric of a gambler doubling down on a huge bet in a game of chance. Anyone who even begins to suggest that there is any certainty to be found in calculations about the future course of this war, and of Russia’s resilience and performance in the field, is not serious about this debate or has not been paying attention to what has been happening since 2022.

But it is in the financial aspects of The Economist article where the full lunacy of this proposal is exposed. The paper envisions a form of financing of which the first part is the outright “seizing” of the $160 billion in frozen Russian assets located in Europe. This is an even worse idea than the more convoluted scheme dreamt up by the EU, which would avoid – initially – a direct confiscation, but which would nonetheless be a blunder of the first rate, as explained in these pages last month.

But, of course, even if the bullet is bitten and the Russian State’s money simply stolen and given to Ukraine, this sum would not be nearly enough. Europe would have to find a further $230 billion to meet the Ukraine target. For The Economist, the solution, of course, would be “some sort of joint borrowing”, to distribute the load across 27 member states. Presumably this would be similar to what was done for €390 billion of the Covid-19 recovery instrument, which was financed through the first-ever issuance of common EU debt on capital markets. (The rest of the instrument, up to the total of €750 billion – i.e. some €360 billion – was also borrowed via the EU but then disbursed and thus held by individual countries, not mutualised.)

Leaving aside for a moment the principle and the politics of all this, the main question is whether adding an extra €200 billion (or $230 billion) to the EU’s existing debt stock is sustainable or extremely risky. At present that EU debt (counting only EU-bonds, and including the mutualised debt from Covid) stands at almost €700 billion. The extra borrowing for Ukraine would blow this up to €900 billion, of which almost €600 billion would be common debt.

To understand how irresponsible this is, consider that already back in 2023, when the outstanding EU debt was a “mere” €400 billion, the Bruegel think tank warned against the rising cost of EU borrowing. The more debt, the higher the interest payments as a proportion of the overall budget and the greater the pressure on other budgetary commitments. With total debt pushing €1 trillion, very hard questions will arise about the EU’s political willingness and budgetary headroom to sustain debt service at a time when European economies are struggling and even France teeters on the brink. The economic and political effects would be incalculable. 

So what’s going on, why take the risk? Why would the liberal economic priesthood of the EU, represented by The Economist, advocate this course of action and insist that it is “excellent value”? For whom? As discussed, this jumbo-debt package, or what would be left of it after the cash payments to Kyiv are discounted, would have only a relatively narrow and relatively restricted positive economic effect within Europe, as defence industrial investment. So it’s not really about boosting European defence; not least because such plans are already in train, and a great deal of “normal” money already pledged to this end especially by Germany.

Is it really about saving Ukraine then – or rather, saving Europe from some dreadful effect of a Ukrainian defeat? On this point The Economist piece is oddly restrained. The most it has to offer is a picture of a Ukraine which in the wake of losing the war would become “embittered” and a “semi-failed state” – either of which can describe many similar countries around the world. There is also a hint that Putin might add Ukraine’s military and industrial strength to Russia’s own; but Kyiv would have the option – indeed, it has it today – to sue for (a bad) peace long before it comes to that.

So, only one response remains to our “why” question, and The Economist in fact lays it out in clear: More common debt, it says, would “deepen Europe’s single capital market and boost the role of the euro as a reserve currency”. In other words, funding Ukraine through this vast level of borrowing is really just a way to advance the EU project by effectively forcing European countries down the road to fiscal union through financial integration and common liabilities, the only logical place this ends. It is truly remarkable how many delusions, distortions, fallacies and brazen self-serving ambitions can be packed into a single “statement” of European liberal elite thinking. No wonder their world is crumbling.