Ukraine reveals strains in the finances of the US and Europe

The lives lost and suffering that have been the worst cost of the Ukraine war have been incurred by the Ukrainian people. The financial cost has also been very high and has been shouldered by Ukraine’s allies as well as by Ukraine, led by the USA and Europe.

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The EU heads the list with €84.9bn of total support, mainly financial aid. The US is second with €71.4bn, where the majority is military aid. Germany with €20.9bn and the UK with €13.3 bn are in third and fourth place. Norway at €7.3bn and Japan at €6.8bn complete the list of the larger donors. France has offered very little. Some 54 countries including 30 NATO members have contributed to military aid through the Ukraine Defence Contact Group.

The Ukraine government has had to find large sums to pay for its armed forces and to cover the costs of lost revenue and war damage. In 2023 it got its finances under control with help from the EU, US and IMF. Inflation returned to 5% after the first year of war acceleration when the authorities printed too much money to cover the deficit. Where it has borrowed rather than receiving grants it will have to meet the continuing costs in future years.

The Ukraine economy grew well in 2023 after a fall of 30% in GDP in 2022. Ukraine has lost six million people who went abroad to avoid the conflict, a decline of 14% in the population. The loss of territory to Russia has compounded the population decline for Ukraine, adding the loss of more in the occupied territories. The loss of the Donbass area means the loss of big deposits of coal with the mines and the metallurgical industries based on them. The earlier loss of Crimea meant the loss of gas deposits and the opportunities of the Black Sea geology. The economy has suffered at estimated $135 bn of war damage to homes, commercial property and farms, and faces a bill that some think could be much higher for full restoration and renewal after the war.

As we enter 2024 there are struggles over maintaining the high level of financial and military support to Ukraine in Washington and Brussels. The President of the USA wants to provide an additional $61.4bn but as part of a $100 bn supplementary finance package for wars and border security that is being blocked by the House of Representatives. The Freedom caucus of Republicans along with Mr Trump are sceptical about more money for the war and favour a negotiated peace. Republican votes are needed to secure approval. A Congress already at fever pitch over the year’s elections is so far unwilling to make the longer-term commitment needed.

In the EU 26 of the 27 members are agreed to provide €50bn in the period 2024-27. Hungary blocked it late last year, wanting the EU to unblock funds to Hungary. Hungary under Mr Orban refuses to accept some EU requirements on rights for migrants and others and so faces financial penalties. The EU is working on a compromise for the 1st February Council meeting. Alternatively, it could reach an agreement between the 26 states to go ahead where they might have to combine using national votes and authorities for the money.

It is possible both the USA and the EU find ways to send more money, but it looks as if the sums will be less and the despatch slower than in the first two years of the war.

There are also issues over weapons supply. Germany as the leading EU supplier is pressing to change the arrangements. At the moment the EU itself sends support through the European Peace Facility. This is an off-budget mechanism to finance EU military activities. Member states contribute separately to this fund in proportion to their respective GDPs. Germany wants to be able to offset its direct supply of weapons to Ukraine against its large contribution to this fund, complaining that a country like France can supply weapons from its stockpile and get reimbursed from this fund. Given the bind Germany is in with her spending following the adverse finding of her constitutional court over the deficit, it is no surprise the government is looking to cut the costs of Ukraine one way or another.

Ukraine herself has done a good job keeping the economy going outside the combat zones , and is progressing in making changes the western institutions and the EU are demanding in her legal system and her anti- corruption policies.

Ukraine is taking seriously the tasks to meet EU requirements for potential membership at the same time as containing Putin’s forces. Despite all the warm words from those who have supplied most military and financial aid to date it is likely Ukraine will be receiving less from here on.

NATO wants Ukraine to win but has no intention of directly joining battle with Russia. NATO governments are now finding it hard to find the money and the weapons Ukraine needs. All this makes continued stalemate more likely. President Putin would be wrong to calculate the West as sufficiently tired of the war to want Ukraine to sue for peace, but will note the slowing flow of support.

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Ukraine reveals strains in the finances of the US and Europe

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