Once Kyiv burns through its €90bn, will EU float another loan to keep it in fight?

Hallelujah, we have an agreement to keep Ukraine solvent!  After yet another contentious late night negotiation, the EU Council emerged with a plan to issue €90 billion in Eurobonds to keep Kyiv in business for another year. Devout Euro-federalists must be happy to see an expansion of the NextGen pandemic rescue fund precedent, which broke the long-standing bar against common debt. Yet this latest tranche of Euro debt isn’t exactly “common” in that Hungary, Slovakia, and the Czech Republic are exempted from any obligation to repay it.  Such is the price of consensus in the European Union: It always comes with an asterisk.  

The original plan touted by Ursula von der Leyen was to use frozen Russian assets as collateral for Ukrainian funding.  Belgian PM De Wever demanded full indemnification from the EU for the legal consequences of the seizure of these assets held in trust by Brussels-based Euroclear. De Wever may have been painted as disloyal European by the big beasts in the EU, but he clearly represented the interests of Belgian taxpayers who understandably did not wish to be on the hook to repay tens of billions to Russia. Loud assertions of a common European interest in defending Ukraine failed to persuade three member states to impose the associated costs on their citizens. Under existing EU rules, they didn’t have to, and so they didn’t. That a Flemish separatist from a minor EU country can stand down the Commission President shows she is less the EU’s senior executive and more its pleader in chief.  

What the EU lacks is an institutionalised funding mechanism to repay not only the €90 billion going out the door to Ukraine, but the €750 billion borrowed for pandemic relief. Both are backed by nothing more than a general promise to tap the EU budget, the next draft of which is already under great stress as member states haggle over their pet programmes. The financial credibility of the EU and the status of the Euro as a global reserve currency demands that these new Eurobonds be as safe as US treasuries. But while the US government backs its debts with direct taxing authority over its $30 trillion economy, the EU budget depends on subventions from member states. Carve outs to free funds for debt repayment will come at the expense of existing programmes, including sacred cows like agricultural support and regional development aid. Without independent taxing authority, the EU will face chronic disputes as it seeks to prioritise its debt payments over its subsidy expenditures.

A larger problem facing the EU is a populace growing tired of supporting Ukraine. Polls in Germany and France show a plurality of voters support reducing financial aid to Ukraine. Both countries are engaged in ugly fights to trim their extensive social programmes, prompting their citizens to question the primacy of Ukraine over their own benefits. Voter discontent could be assuaged if the EU coupled its support for Kyiv with a credible plan for ending the war. Echoing Zelensky’s forlorn hopes of reclaiming all Ukrainian territory looks like an open-ended claim on European tax money. Once Kyiv burns through its €90 billion, will the EU float another loan to keep it in the fight? Is the Commission prepared to ask French farmers to accept less support so that it can make greater debt repayments?

The current shambolic means of funding the EU are insufficient for the bloc to achieve its stated goal of strategic autonomy. America’s emergence as a superpower depended on revenues derived from federal income taxes, which were not broadly levied until the financial exigencies of war emerged in 1917. If NATO chief Mark Rutte is correct and Europe faces existential peril from Russian military aggression, then it must acquire a similar means of extracting direct tax revenues. Putin has imposed a war economy on his state, and even with a national economy one tenth the size of the EU, Russia is far out producing Europe in critical armaments. European governments are strapped for cash and facing a looming financial crash as social welfare spending outstrips future tax revenues. They cannot individually muster the resources needed to stand down Russia or replace the American security guarantee. Direct taxation of its €17 trillion economy is the sine qua non of strategic autonomy for the EU. 

Alas for those Euro-federalists temporarily heartened by the decision to issue new Eurobonds this week, the EU is unlikely to gain such powers anytime soon. State parliaments guard their tax authority jealously, and more than a few members distrust the capacity of Brussels to spend new revenues wisely or effectively. The failure this week to forge a common policy on Ukraine suggests that an unprecedented agreement to give Brussels the power to levy taxes is distant if not impossible. Donald Trump’s threatened disengagement has transformed states such as Germany, which unleashed a Keynesian bonanza for arms manufacturer Rheinmetall, but has yet to result in any new EU-wide strategic capacities. The EU remains trapped in a political limbo between a jumped up international organisation and a true federal state. Absent the financial underpinnings of strategic autonomy, the EU will remain dependent on the decisions of its member states and reliant on US-led NATO for its security. The financial structure of the union remains at odds with the requirements of its military security. Russia cannot be deterred at the sufferance of the Belgian Prime Minister.