EU to launch changes to its budget to accommodate Ukraine, new challenges

The European Commission will propose on Tuesday changes to the European Union’s long-term budget to support Ukraine in coming years and deal with higher debt servicing costs for joint debt, EU officials said.

This year, the EU is providing 18 billion euros ($19.67 billion) to Ukraine, but wants to find a stable, longer-term solution so that Kyiv has financing certainty as it fights off Russia’s invasion.

“The EU is ready to provide Ukraine with sustainable and predictable financial support beyond 2023 to maintain both macro-financial stability and support reconstruction,” European Commission Vice President Valdis Dombrovskis said.

“We are looking at this as part of the ongoing mid-term review of the 2024-2027 Multi-annual Financial Framework,” he told a news conference.

Some officials estimated the extra room in the EU budget for Ukraine could be around 20 billion euros annually, adding up to more than 80 billion euros from next year until 2027.

EU officials said the review would also likely include a proposal for a new source of revenue for the budget, in EU jargon called an “own resource”, linked to corporate profits.

EU coffers are in need of fresh money because of rising interest rates that sharply increase debt servicing costs for the 800 billion euros that EU government will have jointly borrowed and spent by 2026.

The 800 billion scheme, called Next Generation EU, is to make the economy greener and more adapted to the digital age and when the plan was agreed in December 2020, expectations for the repayment of the debt were at 15 billion euros a year.

At the time European Central Bank interest rates were negative and they have since risen to 3.5% and are likely to continue growing to stave off high inflation.

“The increase in interest rates has made the cost of the debt double what was initially projected and could reach 30 billion euros,” Member of European Parliament Jose Manuel Fernandes, involved in the EU budget review, said.

“An ambitious revision of the MFF is urgently needed to cope with the increase in interest rates, alongside with and a new package of own resources,” Fernandes said.

“If we don’t have new own resources, from 2027 onwards, we will have to cut the EU budget every year to repay the debt or member states will have to substantially increase their contributions,” he said.

But German and Dutch finance ministers ruled out on Friday contributing more to EU coffers, saying that to accommodate the higher interest payments the Commission will have to make savings elsewhere, just like national governments did.

The push to consolidate national public finances after lavish support to economies during the pandemic and the cost-of-living crisis will also affect another idea the Commission floated last year: the creation a European Sovereignty Fund.

The fund, the size of which was never specified, was to boost Europe’s strategic investment in key high-tech and renewable energy sectors for the bloc, to better compete with China and the United States.

But with no new money available, the European Sovereignty Fund is likely to be renamed, officials said, and get its funding by moving money from existing programmes like InvestEU, Horizon Europe and the Innovation Fund.