“Don’t ask what you can do for Ukraine – ask what Ukraine can do for you. President John Kennedy’s paraphrased 1961 inaugural address provides a taste of the potential benefits across Europe if the reconstruction and integration of the war-torn country continues.
Although the war sparked by Russia’s invasion in February 2022 shows no signs of ending, it has significantly accelerated planning for Ukraine’s membership in the European Union. EU leaders last week broadly endorsed reform plans aimed at allowing Ukraine and eight other candidate countries to join the bloc over the next decade. The meeting in the city of Granada, in the south of Spain has been overshadowed by differences between member countries on immigration – just an indication of the obstacles to come.
A OMFIF seminar in Brussels on October 5 on the economic and monetary situation of the euro zone and on the gigantic reconstruction needs of Ukraine analyzed the numerous challenges. Experts from both the public and private sectors agree that the destinies of Ukraine and the EU are linked. Although the United States and China will be the main players in shaping a possible Russian-Ukrainian settlement, the EU will play a diplomatic role, if only to contribute to the financing and results of the integration .
The possible reconstruction and integration of Ukraine
Efforts to resolve Ukraine’s reconstruction problems overlap with its bid for EU membership, linked to growing cooperation with the North Atlantic Treaty Organization – the subject of further talks with President Volodymyr Zelenskyy in Brussels on October 11. A major condition for the flow of private and public capital to Ukraine will be the implementation of reforms promoting transparency and strong governance. The use of technology, for example through blockchain systems that can track and guide reconstruction spending and limit opportunities for corruption, figured prominently in OMFIF discussions.
Alongside a war on its doorstep, the EU faces colossal financial pressures and challenges to energy security and strategic autonomy. These are interrelated questions that require block-wide answers. Optimistically, Ukraine’s membership – subject to a relatively favorable geopolitical environment – can help overcome these difficulties, by fostering additional economic activity and providing important strategic resources.
A pessimistic reading would produce less benevolent results. The new war in the Middle East following Hamas’ deadly attack on Israeli territory on October 7 will complicate the Ukrainian conflict in ways that cannot yet be fully assessed.
Change of plane and “concentric circles”
The EU will need to change its internal procedures to cope with a wave of accessions that could increase its membership from 27 to 36 by the early 2030s. This would include Ukraine, Moldova and possibly Georgia , as well as six Western Balkan countries: Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia. The EU’s informal timetable for the accession of new members by 2030 is very ambitious. Yet without a rigorous objective, the objective risks being missed even more widely.
The EU would like to bring together new members as a group to increase pressure for necessary reforms from potential members. But membership will be “on merit,” so some could be left behind. Ukraine tops the list, although its size, relative poverty and reconstruction requirements significantly increase the complexity of its bid.
European officials speak of a balance between costs and rewards for candidates. A system involving long transition periods for access to EU funds and markets, as well as compromises on voting and access rights, seems likely. This restarted discussions on ‘concentric circles’ encompassing different categories of EU membership – an idea which could prove relevant to the UK if British attempts to re-enter the European mainstream gather pace in the coming years.
What overshadows everything is the scale of the reconstruction in Ukraine, where experts are only just beginning to make estimates. There is positive news regarding the return to normal in many parts of the country and the relative localization of military activity. Large question marks surround the conditions which could favor the return of the 8 million Ukrainian citizens, today refugees abroad. Rebuilding this human capital in Ukraine is essential for the future of the country.
Governance framework and blockchain solutions useful for controlling disbursements
At the same time, the European Council is due to issue a decision approving membership on November 8. Officials warn against inflated expectations, saying “nothing revolutionary” is likely. The support is already similar to the structural funds provided to many EU member states, totaling around €50 billion over four years, with 80% in the form of loans and 20% in the form of grants – unprecedented funding for a non-member.
The coordination challenges between the different partners are similar to those the EU has faced since disburse Next Generation EU funds to member countries. As is often the case in international aid, the recipient’s governance framework is essential. Lenders and donors will be reluctant to send money into an environment where they cannot be sure it will be used as intended. The reforms required for EU membership will go some way to establishing a strong governance architecture, but Ukraine faces operational challenges in ensuring it has the capacity to track how money what it receives is used and what is its impact. Blockchain solutions can come in handy here. The systems used to track NGEU spending also provide a valuable opportunity to learn what is technically necessary to provide a high degree of oversight of the use of stimulus grants.
Ukraine’s agricultural and energy sectors, if managed correctly, could contribute to Europe’s strategic autonomy and growth. While the war is active, insurance and reinsurance require special attention and even afterwards some investment projects are unlikely to be commercially viable and must be financed through grants. But much of the work required represents a major opportunity for private investors. Certain features of the Ukrainian economy are particularly suitable. The predominance of large-scale agribusiness makes this sector easier to finance than the relatively small farms that are common in parts of Europe. Ensuring access to bank loans and capital markets will be an important factor.
The scale of required investments far exceeds Ukraine’s absorption capacity. Cross-border effects – for example for Polish construction companies – could boost Ukraine’s neighbors. A seminar participant highlighted Ukraine’s potential to improve Europe’s security in military technology, energy, food and materials. When it comes to lithium mining, nuclear production, development of hydropower and other renewable energy, and exploitation of large-scale agriculture, Ukraine has a lot to offer, the delegate said. None of these areas is free of controversy. All of these topics offer grounds for hope and much debate in the years to come.
David Marsh is President of OMFIF and Lewis McLellan is Editor-in-Chief of OMFIF’s Digital Monetary Institute.
