The European Union is preparing a back-up plan worth up to 20 billion euros for Ukraine, with a debt structure that bypasses Hungarian Prime Minister Viktor Orbán's opposition to funding the war-torn country.
Since EU leaders failed to agree on a proposed four-year package of €50 billion in funding to Ukraine earlier this month, they have been looking for alternatives to save Kyiv from a looming budget crisis if the EU is unable to resolve its differences.
If Orban refuses to give up his veto at the EU summit scheduled for February 1 next year, a debt-funded model has gained support as the most practical way to support Ukraine, said the negotiators**. The plan, which would involve participating member states providing guarantees to the EU budget, will allow the European Commission to borrow up to 20 billion euros for Kyiv in the capital markets next year, people familiar with the talks said. The specific provisions are still being discussed, and the final amount will be determined according to Ukraine's needs, the people added.
This arrangement is similar to the structure of 2020, when the European Commission provided EU countries with cheap financing of up to €100 billion for short-term work support programmes during the pandemic. On top of that, the scheme does not require guarantees from all 27 EU member states, as long as the main participants include those with the highest credit ratings. This would allow the EU to circumvent Hungary's veto, as the proposal would not require unanimous support.
A number of countries, including Germany and the Netherlands, need parliamentary approval for state guarantees, and they hope the process will be completed in time for aid to be provided to Ukraine by March next year. A person familiar with the discussion said that there are no "technical problems" that hinder the provision of budget funds to Kiev, but politically "more complicated." If EU leaders agree on the plan on Feb. 1, the IMF can confidently release about $900 million worth of next funds to Ukraine, people with knowledge of the talks said.
This will provide Kyiv with enough money to avoid resorting to monetary financing, i.e. printing money to maintain the deficit and thus avoid the risk of soaring inflation, the people added. One disadvantage of the scheme compared to the original proposal, which was based on the EU budget, is that it is limited to loans and does not include grants. However, EU Member States may still decide to grant grants bilaterally.
Another fallback option being considered is to extend the structure of funds used this year, according to which the EU has provided Ukraine with a cheap loan of 18 billion euros, which can be extended for a period of months to a year. This option requires the consent of a weighted majority. However, they stressed that their preferred option would be to approve the unmodified aid package that was first proposed in June but blocked by Hungary.
This supplement to the EU budget remains the European Commission's top choice, as it covers a four-year period and also includes 4 billion euros for other priorities such as defense investment and migration. According to the G7 phone call last week, the EU has promised Ukraine that it will provide funding by March next year at the latest, regardless of the model chosen. A spokesman for the European Commission declined to comment.