The cost of wars

In 2024, Western governments, led by the US, need to find compromises over their financial commitments and weapons supply to Ukraine as internal opposition grows to the cost.

| 7 min read

The year began under the long shadow of the Ukraine invasion and is ending with military action in Gaza. Both these conflicts have entailed too much suffering and death and our hearts go out to those who have been victims of war. Bond and share markets have learned to live with the damage, assuming that neither will drag the main powers into direct conflict with each other.

We hope that in 2024 there will be diplomatic progress, as all wars end with negotiations and peace treaties with or without surrenders. US President Joe Biden is clearly signalling he wants to see a short war in Gaza with due concern for civilians, whilst much of the rest of the world has called for a ceasefire that neither side is yet ready to agree.

Ukraine needs large sums to fight and to govern

The state of Ukraine remains a matter of concern to governments on both sides of the Atlantic. The Ukrainian government needs substantial help with the supply of weapons and the provision of grants and loans to allow a war-ravaged economy to continue.

The International Monetary Fund (IMF) figures estimate a substantial loss of national output and income in 2022, with the loss somewhere between 20% and 30% depending on the period. Losses came from many Ukrainians fleeing the country, from the loss of territory to Russia and from the war damage. They think this year there will be a rebound in GDP as some parts of the country avoid so much disruption and as the base figure is depressed.

Military aid to Ukraine by country to October 2023

  • $49.3bn US
  • $17.1bn Germany
  • $6.3bn UK

Up until October 2023, the US provided $43.9bn of military aid, Germany $17.1bn, the UK $6.6bn and the European Union (EU) $5.6bn. The EU has given much more general financial support as loans and grants to keep government going. The total of all types of support have now reached $83bn from the EU and $75bn from the US, with contributions from various allies including the UK, Norway, Canada, Japan and others as well.

There is little prospect of Ukraine returning to self-sufficiency any time soon, with parts of her economy annexed by Russia, with a displaced workforce and bomb damage. The potential reconstruction costs have been estimated at a minimum of $400bn.

The US debates an increase in aid

These contributions are large enough to have a bearing on public finances either side of the Atlantic. The US Senate failed to approve a package of aid to Ukraine, amounting to an additional $60bn. The president has been told by Republicans to fix the southern border first, which is a difficult task.

Republicans are running out of patience with the war, asking for plans of how to speed it up and how to secure a Ukrainian victory. This is asking a lot of Ukrainian forces who have tried their best against superior numbers and firepower and have been limited in how much weaponry they can receive from their Western allies.

Wars are dangerous and unpredictable, making it more difficult to persuade the opponents. Many US voters do think money needs to be spent on priorities at home or new debts brought down. Senate and House may find a compromise in the new year. Whatever happens it looks likely that the US will be able to spare less money and weaponry going forward than it has managed so far. Many in the US see Ukraine as a European problem. Smarting over the failure of many European states to reach the 2% of GDP target for minimum spend in NATO they see Ukraine as an opportunity to let the Europeans catch up with their responsibilities.

The EU has its own concerns over the cost. Hungary wielded a rare veto to block payments under a €50bn plan set out by the Commission. This is an even more serious blow for President Volodymyr Zelensky, as EU money is crucial to maintaining public services and benefits in Ukraine. It is true the EU gave the go ahead to proper talks on joining the EU, but that does not pay any bills or help win the war. The EU will seek a compromise to renew its payments.

Likely policy developments

Given the logjam in Congress – and the wish of more politicians to be seen putting the US first when it comes to spending public money – the President is likely to shift more in favour of diplomatic and negotiated outcomes in an election year. He will be required to reduce the US financial and military commitments of the two wars. Donald Trump is quite clear in shaping the Republican response that the US has been spending too much on Ukraine.

The EU will press for more cash for Ukraine and individual states will also help. Germany has been the largest individual donor but is now under a budget control from the Constitutional Court, which makes more generosity less likely.

Markets would welcome any moves towards a negotiated peace in either case, but will see that Hamas and Vladimir Putin make that extremely difficult, given the way they and their forces have behaved. We have probably seen a peak in governments wanting to increase military spending. Whilst order books have expanded – and budgets will remain higher – we have now probably seen the major announcements of larger budgets. Governments are now wrestling with how to get the items produced to time and budget, as well as striving to control overall government spending.

Ukraine needs more ammunition

The Ukraine war has been dominated by artillery exchanges across the long front line between the two forces. Ukraine wants to fire far more shells than its allies can supply. The US has produced the most but has struggled to meet all the needs.

The EU promised one million shells in the year from March 2023, but has delivered less than half that amount with just four months to go. The EU had a three-pronged approach, asking member states to supply from stock, to place more orders for new, and to create more production capacity. Order books are full and companies are struggling to increase output. The Europeans are well behind in shell production, as the Ukrainian forces have been firing very large amounts of ammunition which peace-time factories have not been able to match.

Hopefully, 2024 will see a further tilt towards seeking talks and reduced hostilities. Western governments, led by the US, need to find compromises over their financial commitments and weapons supply to Ukraine as internal opposition grows to the cost.

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The cost of wars

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