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Analyses Last Updated: Feb 6, 2024 - 2:52:06 PM

The EU lifebelt
By German Foreign Policy, 31 Jan 2024 
Feb 2, 2024 - 2:10:51 PM

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The EU resorts to desperate measures to meet Kiev’s massive deficit: tapping into frozen Russian funds and threatening economic war against a recalcitrant Hungary.

In its efforts to procure more funding for Ukraine, the European Union is adopting unusually aggressive methods. The big powers in the EU have chosen a path of escalation and growing tension within the Union. In order to force Hungary to agree to the 50 billion euro aid package for Kiev at tomorrow’s special EU summit, Brussels has threatened Budapest with a severe economic attack. By making an official declaration to the effect that all EU funding for Hungary might be cut, the European Council intends to trigger a shock on the financial markets. This could cause the Hungarian currency to crash and do severe damage to Hungary’s economy and people. Brussels also plans to tap future profits from Russian assets frozen in the EU. Expropriated profits would then be used to support Kiev in its war. Critics warn that this would set a dangerous precedent, signalling to future foreign investors that money and assets in the EU are not safe. Moreover, other countries, including Russia, could then retaliate and recoup their losses by seizing EU assets on their territory. The Brussels initiatives come in the context of Ukraine’s budget deficit reaching 36 billion US dollars last year, while the United States is increasingly unwilling to underwrite the mounting costs. The government in Kiev is left with the EU as its “lifebelt”.
Kiev’s billion-dollar deficit
The background to the fierce disputes over financial aid for Ukraine is the desolate budgetary situation in which the country finds itself. In an already failing economy, government revenues collapsed in 2022 with the outbreak of war, while spending on the armed forces has skyrocketed. The budget deficit is now enormous. Last year, thanks to massive external support, Kiev could just about keep afloat. The largest donor of budget support was the EU, injecting around 19.5 billion US dollars. The US provided 10.9 billion dollars, while contributions in the billions also came from Japan, Canada and the UK, the International Monetary Fund (IMF) and the World Bank. A huge budget deficit is again expected this year, with experts estimating a 36 billion dollar hole to be filled.[1] As for the longer term, the IMF forecasts a budgetary shortfall of 85 billion dollars for the next four years. To help cover this giant gap, 41 billion US dollars would come from the EU’s 50 billion euro package, which comprises other aid pledges in addition to budget support. The IMF intends to make eleven billion dollars available. The remaining 33 billion would probably have to come chiefly from the US and Japan.

Soldiers, not workers
Estimates of the Ukraine’s budgetary shortfall could even be revised upwards by a considerable margin due to President Volodymyr Zelensky’s push to mobilise around half a million additional soldiers. The newly mobilised troops would, assuming the army could actually recruit such numbers, demand very large military expenditures. What is more, those soldiers would no longer be available to do their civilian jobs. There are already dire labour shortages. “Finding labour is a huge problem,” confirms the head of a Ukrainian agricultural company recently quoted. Irrespective of this, it is now becoming clear that the US is unlikely to remain a major donor in the long term. Even if President Joe Biden were to win another election, continued spending on Ukraine would be blocked by the powerful group of right-wing Republicans in the US Congress. It is becoming “increasingly clear” that “the EU is Ukraine’s financial lifebelt”, as the Neue Zürcher Zeitung reported yesterday, Monday. The EU must “prepare itself for a long phase as financial backer”; for “without continuous help” from the West, the paper continues, Ukraine would inevitably be “doomed” by facing financial collapse.[2]

Economic attack on a member state
This largely explains why the EU is currently insisting on integrating its 50 billion euro aid package into the EU budget and locking it now into future spending. For if the plan succeeds, Kiev would have almost half of its already clearly foreseeable budget deficit covered relatively reliably for the next four years. This is why Brussels is exerting such fierce pressure on Hungary to abandon its previous resistance to the adoption of the package at tomorrow’s special EU summit on Thursday. According to a report in the Financial Times, internal EU documents envisage a severe economic assault on the country if Hungarian Prime Minister Viktor Orbán once again refuses to give his consent. According to the report, the EU heads of state and government will officially declare that they are in favour of withdrawing all EU funding from Budapest.[3] Though not fully feasible, the threat would probably be enough to trigger a severe shock on the financial markets, cause the Hungarian currency to crash and deter foreign companies from new investment in Hungary. The Hungarian government would have to reckon with higher costs of servicing the national debt and negative impacts on growth and jobs.

Tapping foreign assets
In an effort to raise additional funds for the financial stabilisation of Ukraine the EU is also preparing to siphon off future profits from frozen Russian assets. There are consistent reports that of the approximately 260 billion euros in Russian currency reserves frozen by the West shortly after the start of the war in Ukraine, around 191 billion euros are held in the EU. These funds are mainly sitting in Euroclear, a Belgium-based central security depository. On Monday evening EU ambassadors in Brussels agreed to withdraw the profits generated from the frozen funds and make them available to Ukraine.[4] The EU claims that the levy will be “consistent with applicable contractual obligations, and in accordance with EU and international law”. The planned levy would not be applied retroactively but only affect future profits from now on. The measure is now to be set out in a supposedly secure legal form and put forward for official ratification. Around 15 to 17 billion euros could, by this means, be confiscated over the next four years and passed on to Kiev, according to reports. This expropriation would cover almost half of Ukraine’s 33 billion dollar deficit not yet secured.

Setting a precedent
In both cases, the EU is taking qualitatively new steps with potentially very grave consequences in order to raise the necessary funds for Ukraine’s war economy. The plan to launch a serious economic attack on a member state that does not politically cooperate as demanded by the European Council sets a precedent. It amounts to a warning to any government that chooses in future to oppose the EU’s big powers. As for the plan to siphon off profits from frozen foreign assets and spend them as Brussels sees fit, this will send a signal to investors from all over the world that their assets are not safe in the EU. Indeed, it is precisely this problem that has led the European Central Bank (ECB), already concerned about a weakening of the EU’s role as a financial hub, to warn explicitly against the plan – but to no avail. There is also the clear danger of retaliation. Not only Russia, but also other countries could use the initiative as an opportunity to seize the profits from European, including German, assets invested in their territory. In addition to Russia taking revenge for the EU’s grabbing of its profits there are plenty of other possible reasons taking such action, including unpaid reparations and uncompensated war crimes and colonial misdeeds committed by European powers, not least by Germany.

Into the debt trap
The EU’s financial support for Kiev is designed in such a way that Ukraine will emerge from the war, however it ends, with crippling amounts of debt. Ukraine’s national debt has already risen from around 50 per cent of GDP at the start of the war to around 90 per cent [5], and it continues to grow. The EU wants to grant only 17 billion euros of its 50 billion euro aid package as a subsidy. Ukraine will receive 33 billion euros only as a loan, which will have to be repaid sooner or later.

 [1], [2] Daniel Imwinkelried: Mit dem Ukraine-Krieg kommen riesige Lasten auf Europa zu. Neue Zürcher Zeitung 30.01.2024.

[3] Henry Foy, Andy Bounds, Marton Dunai: Brussels threatens to hit Hungary’s economy if Victor Orbán vetoes Ukraine aid. ft.com 28.01.2024.

[4] Alexandra Brzozowski: Ukraine-Wiederaufbau mit Gewinnen aus eingefrorenen russischen Vermögen. euractiv.de 30.01.2024.

[5] Daniel Imwinkelried: Mit dem Ukraine-Krieg kommen riesige Lasten auf Europa zu. Neue Zürcher Zeitung 30.01.2024.

Source:Ocnus.net 2024

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