How Ukraine reconstruction could help Europe

Hopes and hurdles for enlargement process spurred by Russian war

‘Ask not what you can do for Ukraine – ask what Ukraine can do for you.’ President John Kennedy’s paraphrased inaugural 1961 address provides a foretaste of potential benefits across Europe if reconstruction and integration of the war-torn country go ahead.

Although the war triggered by Russia’s invasion in February 2022 shows no signs of ending, it has significantly accelerated planning for Ukraine’s European Union membership. EU leaders last week broadly endorsed plans for reform to enable membership of the bloc by Ukraine, and up to eight other aspirants, over the next decade. The meeting in the southern Spanish city of Granada was overshadowed by member countries’ differences on immigration – just one indication of the hurdles ahead.

An OMFIF seminar in Brussels on 5 October on the euro area’s economic and monetary position and Ukraine’s gigantic reconstruction needs analysed the many challenges. Public and private sector experts agreed that the fates of Ukraine and the EU are intertwined. Even though the US and China will be the main players in engineering an eventual Russo-Ukrainian settlement, the EU will play a role in the diplomacy, if only to help with funding and integration outcomes.

Ukraine’s possible reconstruction and integration

Efforts to resolve Ukraine’s reconstruction problems overlap with its EU accession request, linked to growing co-operation with the North Atlantic Treaty Organisation – the subject of further talks with President Volodymyr Zelenskyy in Brussels on 11 October. A major condition for moving private and public capital into Ukraine will be enactment of reforms for transparency and robust governance. The use of technology, for example, through blockchain systems that can track and guide reconstruction spending and constrain opportunities for corruption, loomed large in the OMFIF discussions.

Along with a war on its doorstep, the EU faces colossal spending pressures and challenges of energy security and strategic autonomy. These are interlocking issues that demand bloc-wide answers. On an optimistic view, Ukraine’s accession – assuming a relatively favourable geopolitical environment – can help overcome these difficulties, promoting additional economic activity and delivering important strategic resources.

A pessimistic reading would produce a less benevolent set of outcomes. The fresh Middle East war following the murderous 7 October Hamas assault on Israeli territory will complicate the Ukrainian conflict in ways which cannot yet be fully assessed.

A change of plan and ‘concentric circles’

The EU will have to change its internal procedures to cope with a wave of accession that could take membership from 27 to 36 by the early 2030s. This would include Ukraine together with Moldova and possibly Georgia, as well as six western Balkan countries – Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia. The informal EU timetable for bringing in the new members by 2030 is highly ambitious. Yet without a rigorous target, the aim is likely to be missed by a still larger margin.

The EU would like to advance new adherents as a group to intensify pressure for necessary reform by would-be members. But adherence will be ‘on merit’, so some could be left behind. Ukraine is at the head of the queue, although its size, relative poverty and rebuilding requirements increase immeasurably the complexity of its candidature.

European officials speak about a balance of costs and rewards for the aspirants. A system involving long transition periods for access to EU funds and markets, and trade-offs over rights to both votes and access, seems likely. This has revived talk of ‘concentric circles’ encompassing different EU membership categories – an idea that could prove relevant for the UK if British attempts to rejoin the European mainstream accelerate in coming years.

Overshadowing everything is the scale of reconstruction for Ukraine, where specialists are only beginning to prepare estimates. There is positive news about life returning to normal in many parts of the country and the relative localisation of military activity.  Big question marks surround the conditions which could help spur the return of the 8m Ukrainian citizens, now refugees abroad. Reassembling this human capital in Ukraine is essential for the country’s future.

Governance framework and blockchain solutions valuable for controlling disbursements

Meanwhile, the European Council is due to deliver an accession endorsement decision on 8 November. Officials warn against inflated expectations, saying ‘nothing revolutionary’ is likely. Support is already similar to structural funds channeled to many EU member states, totaling around   €50bn over four years, of which 80% is in loans and 20% in grants – unprecedented funding for a non-member.

Coordination challenges among various partners are similar to those facing the EU over disbursing Next Generation EU funds for member countries. As is frequently the case in international aid, the recipient’s governance framework is pivotal. Lenders and donors will be reluctant to send money into an environment where they cannot be confident that it will be used as intended. The reforms required for EU accession will go some way towards establishing a robust governance architecture, but Ukraine faces operational challenges to ensure that it has the capacity to track how the money it receives is used and what impact it has. Blockchain solutions may prove valuable here. The systems being used to track NGEU spending also provide a valuable opportunity to learn what is technically required to deliver a high degree of oversight on the use of recovery grants.

Ukraine’s agriculture and energy sectors, if handled properly, could contribute to Europe’s strategic autonomy and growth. While the war is active, insurance and reinsurance require careful attention and even afterwards, some investment projects are unlikely to be commercially viable and must be funded with grants. But much of the work needed represents a major opportunity for private investors. Some features of Ukraine’s economy are particularly suitable. The prevalence of large scale agribusiness makes this sector easier to finance than the relatively small farms that are common in parts of Europe. Securing access to both bank lending and capital markets will be a significant factor.

The scale of investment required is far beyond Ukraine’s absorption capacity. The cross-border effects – for example, for Polish construction companies – could boost Ukraine’s neighbours. One participant at the seminar outlined Ukraine’s potential for improving Europe’s security in military technology, energy, food and materials. In lithium extraction, nuclear generation, development of hydroelectricity and other renewables and harnessing of large-scale agriculture, Ukraine has much to offer, the delegate said. None of these fields is free from controversy. All of them offer grounds for hope as well as plentiful debate in years to come.

David Marsh is Chairman of OMFIF and Lewis McLellan is Editor of the Digital Monetary Institute at OMFIF.

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