A European Marshall Plan for Ukraine on the Way to the EU

Abstract

This chapter details a plan for the reconstruction of Ukraine with the aim of the country one day becoming a full member of the EU. When the war is over the EU must be ready to help Ukraine build new and better for a future in the union. Every day that the war continues, the enormous cost of reconstruction increases. Ukraine will need extensive support which the authors argue should be handled by an EU agency that coordinates donors in a close dialogue with the Ukrainian government on goals and processes. Other important principles of reconstruction are that aid should arrive quickly, but with appropriate conditions; that the money sent to Ukraine is grants and not loans; and that the focus of the reconstruction is to create a sustainable economy with a clear green transition in terms of energy and infrastructure. Ukraine's entry into the EU should be used to prioritize institutional reforms that strengthen the reconstruction of all sections of Ukrainian society. The authors point out that a successful Ukraine in the EU will strengthen not only Ukraine's but also the entire EU's economic prosperity and security.

On February 24, 2022, Russia attacked Ukraine without any legitimate cause. Until the very end, Russia’s President Vladimir Putin denied that he would attack Ukraine, but he did so anyway, starting the biggest war Europe has seen since World War II. At the end of 2023, the war is still in full swing, and its outcome remains unclear, but the start of the war united the EU like never before in its foreign policy in favor of Ukraine and against Russia.

Russia's war of aggression against Ukraine will affect Europe's borders for a long time to come. In June 2022, the EU declared that Ukraine had become a candidate to become a member of the EU (European Union, 2022). At the same time, the EU gave Moldova the same important status. Russia and Belarus, on the other hand, have ended up outside Europe for as long as their current authoritarian and lawless regimes remain.

Without predicting when the war will end, for our analysis we make three assumptions. First, we assume that the war will wind down or end in a reasonably near future that we believe is measured in months rather than years. It does not necessarily mean that a peace agreement is reached, but that regular fighting no longer continues. Second, we assume that a large part of Ukraine remains an independent state. Third, we assume that the EU’s support for Ukraine will continue, and that Ukraine will eventually become a full member of the EU. Based on these three assumptions we propose a European Marshall Plan for Ukraine aimed at a combination of three important processes: reconstruction, reform, and EU accession.

In the second half of 2022, a Marshall Plan for Ukraine became a major topic, for which many argued. The first more comprehensive proposal was presented in Becker et al. (2022a) already in April of 2022. Based on that proposal we here outline our view on how a European Marshall Plan for Ukraine can be designed while planning for a future EU membership for Ukraine. The plan presented at the G7 and EU meeting in Berlin in October 2022 has many similarities to the proposals in the above-mentioned CEPR report, and these principles and ideas hold.

Several factors make Ukraine’s case special. Russia’s terror bombing of Ukraine has been crude and ruthless and it has caused enormous costs to Ukraine. How can these costs be financed? The reconstruction consists of many elements. How should it be implemented over time? For three decades, Ukraine has balanced between a post-Soviet system and a freer European system with actual rule of law. Can Ukraine get rid of the corrupt post-Soviet system and become a normal EU state when the war is over? Finally, is it realistic that Ukraine will become a member of the EU and how soon can it happen?

We tackle these questions by first describing the devastation of the war and expected costs of reconstruction. Then we set out the principles that we believe should guide the reconstruction process and the different phases of that process are addressed. Next, we go through how the reconstruction can be financed and what reforms are required. This leads to the central discussion of whether Ukraine can really become a member of the EU. This chapter ends with our conclusions about what should be done in the future to rebuild Ukraine and set out a clear path to the EU.

The Costs of War and Reconstruction

Russia's war on Ukraine has caused the country enormous costs. The Kyiv School of Economics has built up a database where all reported material damages are recorded, and the cost estimated. Of course, these are rough estimates based on what infrastructure has cost historically, but it is the most systematic analysis of the costs of devastation that we know of. It mainly concerns buildings and infrastructure. In June 2023, the Kyiv School of Economics (KSE, 2023) assessed the total direct damage to US$150 billion, which is dominated by destroyed buildings and infrastructure. It should be viewed as a lower mark of the physical damage since it will likely but much more expensive to rebuild than what the past values indicate and also the fact that some historical and cultural sites are hard to value more generally. In February 2023, the World Bank (2023) assessed the cost of Ukraine’s recovery and rebuilding from Russia’s invasion at $411 billion over the next decade. Given the great uncertainty associated with these calculations, this figure could be doubled. Added to this is the cost of tens of thousands of dead and perhaps three times as many injured and disabled. If the relatives of the dead are to be compensated, the amounts will be very large and the disabled need financial support anyway. In addition, the war has led to large migration flows, lost income, and missed investments that will affect the country's income for a long time.

Ukraine's gross domestic product (GDP) decreased by 29% in 2022, while it appears likely that the GDP will grow by a few percent in 2023 (see Constantinescu et al, 2022). Since Ukraine's GDP was $200 billion in 2021, this would mean a $58 billion shortfall in each of 2022 and 2023. Of course, waging war is also extremely costly and, apart from a large amount of support in the form of military equipment from Ukraine’s partners in the West, about half of the state budget goes to the country's defense, according to Ukraine's Ministry of Finance (2023). The reduced production combined with the huge costs of defending the country against Russian aggression have also created immediate challenges for Ukraine's macro economy.

In Becker et al. (2022b), the authors go through these challenges and propose how best to deal with them under the grim constraint that the country must invest so many resources in its defense to survive the war. Hard priorities must be set on the government's expenditure side at the same time that new revenues need to be mobilized so that funding via the banknote press can be reduced. The alternative is a risky macroeconomic path that could lead to high inflation and a currency that falls sharply. The EU and other economic powers such as the US have much to gain by contributing foreign currency to Ukraine's public finances to avoid this scenario. This economic support both reduces the need to print money to manage the state finances internally and enables the import of many essential goods that cannot be produced domestically while the war is going on. Ukraine’s government requested budget support from the West of $60 billion in 2022, but it received only $33 billion, which led to inflation of 27% year-over-year in the fourth quarter. Fortunately, the EU and the US have stepped up their financial support for the Ukrainian budget in 2023, so it appears that it will be fully financed with $40 billion in external support (Dragon Capital, 2023a). As a consequence, inflation more than halve in the first half of 2023.

Even before the 2022 war, Ukraine was Europe's poorest country after taking over the bottom spot from Moldova after Russia's first war in 2014, which cost Ukraine a 17% drop in GDP in 2014–15. Russia then occupied 7% of Ukraine's surface, but significantly more of its GDP in the densely populated and highly industrialized Donbass in eastern Ukraine. At the end of 2023, Russia occupied 17% of Ukraine’s territory, but the territories occupied since February 2022 contain rather few people.

Ukraine's demographics are astonishingly fluid. The country had 52 million inhabitants in 1989 in the last Soviet census. The population has gradually decreased due to emigration and low birth rates as everywhere in Europe. Before the 2014 war, Ukraine had at most 44 million inhabitants. Furthermore, 5–6 million Ukrainians have occasionally worked abroad for many years but are usually included in the population of Ukraine. Crimea had a population of 2.3 million and the occupied Donbass probably 5 million, of which 1.7 million fled to Ukraine and 0.8 million to Russia. Summing up these figures, Ukraine's remaining population was at most 39 million. Our estimate, however, lands at about 34 million because an estimated 5 million Ukrainians worked in the EU, which was facilitated by visa freedom with the EU.

After the outbreak of war in February 2022, another 6 million Ukrainians fled to Europe, while approximately the same number have taken refuge elsewhere in Ukraine, mainly in western Ukraine. Almost half of the refugees, about 2.5 million, appear to have stayed in Poland. The large number of refugees means high costs in the short term for both Ukraine and the host countries. As the refugees are primarily women, children, and the elderly and not entire families, many have already returned to Ukraine. For example, according to a presentation by Kyiv’s Mayor Vitali Klitschko in April 2023, Kyiv had a population before the war of 3.8 million, which shrunk to 1 million soon after the start of the war, but it has at the beginning of 2024 recovered to 3.5 million, of whom 0.5 million are internally displaced people from the east and the south of Ukraine.

This discussion does not touch on the cost if Ukraine loses part of its land. Piketty (2014) estimates a country’s capital relative to its GDP over long periods of time and finds that it averages four times GDP. In Ukraine, that corresponds to about $800 billion before the war started. In August 2022, the World Bank made its own calculations of the capital stock, which ended up at 1 trillion dollars (World Bank, 2022, p. 11). Currently, Russia occupies 17% of Ukraine’s territory and if the capital were evenly distributed over the country, the loss of capital could be in the order of 160–200 billion dollars.

The war between Russia and Ukraine will also have major structural consequences. Before the 2014 war, Russia accounted for more than a third of Ukraine’s foreign trade. Now this trade has fallen to a few percent, while Ukraine's trade with Europe has expanded. Therefore, Ukraine's entire infrastructure needs to be rebuilt for integration with Europe instead of with Russia.

Of course, the entire economy of Ukraine needs to be restructured and modernized. Its traditional strength was the armaments industry, but it was part of Russia's military-industrial complex, which was broken up in 2014. Instead, the new Ukrainian economy consists of modern large-scale agriculture, high technology, and integration into Europe’s supply chain, notably the production of auto parts in the West Ukraine. All this modernization and integration with Europe is of course an important part of Ukraine's accession process to the EU.

Principles of Ukraine’s Reconstruction

The principles of Ukraine's reconstruction have been discussed in many different contexts. The principles advanced in Becker et al. (2022a) have gained wide support and can be summarized in the following points:

• 1. The aid should be rapid but conditional. Ukraine is suffering from a humanitarian disaster. Therefore, speed is important. At the same time, the aid must be associated with reasonable conditions so that the international aid really helps the country, not least in fighting corruption.

• 2. Since Ukraine’s debt burden is already high, the bulk of aid must consist of grants rather than loans. If Ukraine takes out large new loans, it will be forced to renegotiate its sovereign debt, which would likely delay aid.

• 3. Coordination. Given the multitude of aid sources, close coordination across funding sources and with the recipient will minimize waste and delays.

• 4. The aid should be administered by a self-standing EU-affiliated agency. Ideally, it should be a new Marshall Plan-style institution.

• 5. Ukraine must feel that it owns the reconstruction. The aid must be designed in line with Ukraine’s democratic processes and not implemented without Ukrainian participation.

• 6. Ukraine’s EU accession should guide institutional reforms. It creates the conditions for the legal framework to be adapted to EU standards, which, among other things, promote free trade and attract foreign direct investment, which are important complements to international aid.

• 7. The reconstruction offers Ukraine a unique opportunity to modernize its infrastructure and production apparatus. It should raise Ukraine’s technological level and integrate Ukraine into the world economy.

• 8. Finally, reconstruction must be organized so that corruption is controlled and reduced. While the Marshall Aid was a positive experience, the recent aid to Afghanistan and Iraq has been discouraging. High demands must be made with regard to transparency and accountability, while such procedures must not become too bureaucratic and time-consuming. The sums that will be involved are likely to be very large. Ukraine has had many corruption scandals, which is a good indicator of openness, but corruption scandals can easily lead to international opposition to support for Ukraine. Since the funds come from foreign donors, they will demand full transparency on how the funds are used.

The Ukraine aid differs from a normal macroeconomic stabilization program. The IMF has led Ukraine’s reform processes and the Ukrainian institutions that work the best, after the military and the church, are probably the central bank, the finance ministry, and the fiscal service. The big issues in 2024, are instead reconstruction (widely defined but with a heavy focus on critical infrastructure and green transition), reform of the legal institutions, and EU accession. Therefore, the IMF is not suitable to be the leading institution in this phase of Ukraine’s development. Moreover, international financial institutions, such as the IMF, provide loans, but Ukraine mainly needs grant aid. As EU accession is the central issue, it is natural that the EU takes a central position, but considering that the contributors are many, they should all be given a role in Ukraine’s reconstruction.

The best model seems to be the Marshall Plan, which was administered by an American-led team from the Hotel de Talleyrand on the Rue de Rivoli in Paris (see Hogan, 1987). A new governing body needs to be set up. The two largest donors, the EU and the US, should take the lead, but all other major donors should also be invited, i.e. the United Kingdom, Canada, Japan, Norway, Switzerland, and other interested countries as well as the international financial institutions IMF, World Bank, European Development Bank (EBRD) and European Investment Bank (EIB). Russia’s role in the IMF and the World Bank should not be problematic because Russia is regularly voted down on matters concerning Ukraine. All of these institutions have important specialist skills that must be engaged.

Since 2017, various Western countries have held annual Ukrainian reform conferences. On July 4–5, 2022, the Swiss state organized a Ukrainian reconstruction conference in Lugano. This meeting should have had three main tasks. First, the Ukrainian government should have presented its plans for reconstruction, which it did. A second point should have been a donor conference, but such did not take place. No new promises of aid were presented. Thirdly, the parties should have presented their ideas on the organization of a coordinating body for the aid to Ukraine, but this did not happen either. As the main speaker was European Commission President Ursula von der Leyen, it appeared that the EU alone would be the coordinator, but the EU did not propose a clear structure.

Several proposals have been put forward in different forms about how the long-term aid to Ukraine should be administered. Initially, the Ukrainian government argued that it should receive all the funds and administer them itself. Since Ukraine has had major problems with corruption, this Ukrainian approach was met with firm Western opposition and, if implemented, it would have led to the delay of foreign aid due to Western mistrust. Suggestions for how the risks of corruption can be reduced through, among other things, how aid is organized and monitored to how procurement is managed and how state enterprises are handled in the reconstruction process are discussed by Becker et al. (2022c). As EU accession has become a central issue for Ukraine's reforms and development, the European Commission has come to play the most prominent role among the Western parties. But the US has contributed with both more financial and military support, so the US and other Western parties should also be involved in deciding how aid to Ukraine be administered. Since January 2023, the G7 has become the effective coordinating group for Ukraine’s economic reconstruction. They hold monthly meetings ad hoc.

While it is good that such a body has been formed, it is unfortunate that not all the donors can be at the table as is the case with the monthly Ramstein roundtables for military support, where the United States has taken a firm stance with some fifty countries that provide military aid to Ukraine. The main reason for the G7 taking the lead is that the United States so desires, and it is important that the US is fully engaged.

On June 21–22, 2023, a new Ukraine Reconstruction Conference was held in London. It was a huge event co-chaired by the British and Ukrainian prime ministers with 61 government represented at high levels, mostly by their foreign ministers. All the G7 foreign ministers attended. President of the European Commission Ursula von der Leyen committed €50 billion in EU support for Ukraine for the four years 2024–27. She and many others have called for Russian war reparations to Ukraine. Antezza et al. (2022) provide regular updates on the military and financial aid Ukraine receives from different countries. The European Commission has set up a special Ukrainian Service, which appears as if it will become the actual Ukraine reconstruction agency, while the US has done little. In 2024, a Ukraine Reconstruction Conference is to be held in Germany.

Three Phases of Reconstruction

At the previously mentioned Ukraine conference in Lugano, the Ukrainian government presented a detailed and ambitious reconstruction plan for 2022–2032 (see Ukraine’s National Recovery Council, 2022). It contained a lot of details about how much should be spent on various projects and which government agencies should be responsible for them.

The Ukrainian government divided its reconstruction plan into three phases—2022, 2023–25, and 2026–2032. The government specified how much funding it wanted for each of these phases. It called for $60–65 billion for 2022, which did not include security and defense, $300 billion for the three years 2023–25, and $400 billion for 2026–32. The amounts that donors have envisaged and actually paid out in 2022 are about half of what the Ukrainian government has pleaded for. However, two central elements were missing from the government's plan, namely where the funds are to come from and how these funds are to be administered.

The end of 2023 is approaching, but no end of the war is in sight. This means that the Ukrainian needs have increased. The draft Ukrainian budget for 2024 requires current budget financing of $39 billion for 2024 (Dragon Capital, 2023b). It remains impossible to predict for how long the war will last—or how it will end, but it is clear that Ukraine's reconstruction consists of two completely different phases: the current crisis phase, and hopefully a more predictable reconstruction phase. The latter, in turn, can be divided into a medium-term reconstruction phase and a long-term development phase. The international organization of these phases needs to be completely different.

In large parts of Ukraine, the war appeared to be over by early autumn 2022 and reconstruction had already begun. This changed in October 2022 when Russia began a period of widespread terror bombing of civilian targets far from the front lines, trying to kill civilians in the whole country. The Russians bombed electrical infrastructure, hospitals, and grain port infrastructure. Nevertheless, reconstruction needs to begin as soon as possible so that people can return and businesses can resume work and critical infrastructure be restored. Thanks to Ukraine's strong local self-government, the local mayors can initiate this work and many countries have decided to cooperate with specially selected cities.

For long-term support, a different structure with a central strategy is required, where the Ukrainian government sets its development goals, and Western donors cooperate with the Ukrainian government. The planning of how best to distribute aid cannot be fully decentralized, although most of the construction work should be decentralized.

Financing Needs in the Short and the Long Term

The Ukrainian government’s funding target of $750 billion over a decade, nearly four times Ukraine's GDP in 2021, is extraordinarily ambitious. Well managed, however, it is possible. This funding could come from many sources: confiscation of Russian Central Bank foreign reserves in the West, possible confiscation of frozen assets of sanctioned Russian oligarchs in the West, bilateral aid, multilateral aid, and private investment.

The financing should be discussed in two phases, the first crisis phase while the war is going on and the more long-term reconstruction over the following ten years. During the crisis phase, funding must necessarily be decentralized. Ukraine needs to obtain the necessary resources quickly. Each donor country decides how to support Ukraine with humanitarian and military aid without much coordination.

The IMF (2022) estimated that Ukraine needed $5 billion a month or $60 billion in 2022 to cover its budget financing, as tax revenues had fallen sharply since the start of the war. In the end, Ukraine received only $33 billion, which led to higher inflation as discussed above (Dragon Capital 2023a, p.2). The US did its part, regularly paying $1.5 billion a month, and all US aid consists of grants. The US Congress legislated a total of 66 billion dollars for Ukraine in 2022. The main part goes to military aid and the rest goes to budget support and humanitarian aid. Unfortunately, the EU delivered less and not even what it had promised in May 2022 (EU Neighbours East, 2022). As a result of the meager and late European payments in 2022, Ukraine was forced into monetary financing, which led to inflation rising to 27% from October to December 2022.

For 2023, the Ukrainian government estimated that it will need a total of $40 billion in budget support. Fortunately, the EU managed to mobilize macro-financial support of €18 billion for the whole of 2023, and the US Congress legislated $ 9.9 billion for the first nine months. With some additional bilateral and IFI financing, it looks at the end of 2023 as if the Ukrainian budget deficit will be fully financed by international donors. As a consequence, inflation had fallen to 8.7% in August 2023.

In the longer term, even greater funding is required. The most important thing for Ukraine's financing is whether the foreign currency reserves of the Russian Central Bank in the West that have been immobilized can be confiscated and used for the reconstruction of Ukraine. The moral argument is obvious. Russia has started an unprovoked war of aggression against Ukraine and committed all kinds of war crimes. The relevant bodies of international law are the UN International Court of Justice in The Hague and the United Nations. On March 16, 2022, the court issued a first preliminary ruling that Russia must stop military operations in Ukraine (United Nations, 2022a). This ruling was supported by thirteen of the fifteen judges. Only the Russian and Chinese judges went against the majority. A later, definitive ruling could establish that Russia has committed an unacceptable act of aggression and that the country should pay war reparations.

The UN General Assembly has adopted numerous resolutions condemning Russia for its war of aggression against Ukraine. On November 14, 2022, it went further and called for Russia to pay war reparations to Ukraine and its members to set up the appropriate institutions for facilitating the reparations (United Nations, 2022b).

These two rulings give all Western countries a good basis for domestic legislation to confiscate the Russian central bank reserves, but the countries that have reserves can act without this UN sanction. Canada has already passed a law for the confiscation of sanctioned Russian reserves in Canada. European Commission President Ursula von der Leyen has advocated for the EU to adopt such a law, which would cover Russian central bank reserves in the EU. Belgium alone holds some $200 billion in the Euroclear system. In the United States Congress, multiple members of both parties have filed an act confiscating Russian sovereign assets in the US. Britain and Japan also need to act. In the fall of 2023, some legal developments in this area are likely, primarily US legislation.

The Russian Central Bank’s foreign exchange reserves, which Western countries have immobilized, are held in a very liquid form, mainly in government bonds from various Western countries, with the central banks of various countries. According to the statistics of the Russian Central Bank for January 1, 2022, these assets amounted to 316 billion dollars, which were held by seven countries: 96 billion dollars in Germany, 61 billion in France, 57 billion in Japan, 39 billion in the United States, 31 billion in the United Kingdom, 15 billion in Austria, and 17 billion in Canada (Hufbauer and Schott, 2022). In Europe, most of this money has been moved to Euroclear in Belgium. The official Russian reactions, for example by Foreign Minister Sergey Lavrov, indicate that the Russian central bank was caught off guard by the G7’s hasty decision to freeze these reserves at the end of February 2022.

Several arguments have been advanced against the confiscation of Russian Central Bank reserves. One is that other countries, such as China, Saudi Arabia, and Nigeria, would be discouraged from holding their foreign exchange reserves in Western countries or in dollars or euros if those countries confiscated Russia's reserves. A counterargument is that the US has already confiscated central bank reserves from Iraq and Afghanistan without deterring anyone. President Joe Biden confiscated some of Afghanistan's central bank reserves as late as 2021 and he did so by decree based on previous laws.

Another argument against confiscation is that it would undermine private property rights, but central bank reserves are clearly government and not private property. Furthermore, Russia has been guilty of obvious war crimes, although they have not yet been determined in an international court. In practice, confiscation of central bank reserves faces strong silent resistance, making it difficult to push through the necessary legislation.

An argument that has more weight is where the confiscated reserves should be sent. So far, no Marshall Plan administration exists and Western countries are reluctant to transfer large resources to the Ukrainian government without full control over the intended use of the money. Both donor countries and Ukraine have a great interest in a strong administration for Western aid to Ukraine being set up soon and in full transparency.

The EU, UK, US, and Canada have imposed sanctions against a large number of Russian government officials and oligarchs. Many voices have been raised that these assets should be confiscated and used for Ukraine's warfare and reconstruction. In total, Russian private financial assets abroad are estimated at around $1 trillion. However, while these ideas enjoy great popularity, they are not very practical.

To begin with, it is difficult to establish in court whether the rich oligarchs are to blame for the war in Ukraine, which they will surely dispute. Controversial Russian businessmen have usually hidden their assets in layers of 20–30 shell companies registered in a dozen obscure tax havens. It is extremely difficult to determine who owns what without the owner's assistance. The various tax havens, especially the two most important, Dubai and the Cayman Islands, are likely to do everything they can to prevent assets there from being confiscated.

Our estimate is that the oligarch assets that should be frozen amount to some $500 billion, but by the end of 2022 only $30 billion worth of assets had been frozen. To a large extent, these are illiquid assets such as luxury yachts, palaces, and jets, which would fetch significantly less than their estimated value at an executive auction.

The frozen oligarch assets give rise to a number of other problems, as few countries have dealt with such large frozen assets before. Who will cover the often large administrative costs? How can these assets be insured? Who is responsible if frozen properties are burned down? All of these issues are likely to lead to new legislation and a large number of expensive court cases, where states with inferior lawyers will find it difficult to defend themselves against wealthy oligarchs with the best lawyers money can buy. Our conclusion is therefore that, due to these factors, one should not count on any major gains from any sale of oligarch assets in the foreseeable future.

Canada has passed a law allowing the confiscation of all sorts of frozen Russian assets but it has not confiscated anything yet. Other countries are discussing the issue but not very actively, although the Russian Central Bank reserves should be confiscated. We have both participated in the Yermak-McFaul International Working Group on Russian Sanctions which, among other things, has published a White Paper which was largely written by Anders Åslund and which advocates the confiscation of the Russian Central Bank reserves in the West (International Working Group on Russian Sanctions, 2023).

Normally, the international financial institutions—the IMF, the World Bank, and the EBRD—provide the bulk of the financial assistance. The IMF usually takes the lead because macroeconomic stabilization is the central concern. The World Bank focuses on general development issues, while the EBRD deals primarily with privatization, private investment, and corporate governance. In Ukraine, however, the situation should be different because vast sums will be required for reconstruction and they need to consist mainly of grant aid and not loans, which means that bilateral aid should become more important than multilateral aid, and the focus should be on reconstruction rather than macroeconomic stabilization. However, it is important that the impressive expertise of the international financial institutions is fully engaged.

The five major bilateral donors should be the EU, USA, UK, Japan and Canada. The EU has pledged to assist with 100 billion euros, but it is still unclear how much will consist of loans and gifts respectively. In 2022, the US allocated $66 billion in grants to Ukraine. A large number of Western countries have up to the end of 2023 given bilateral aid, mainly in the form of grants, and many intend to give more.

Of course, all the relevant international financial institutions should also play their traditional roles to the maximum. The IMF with its expertise and funding is needed to maintain Ukraine's financial balance. The World Bank can potentially play a major role as a coordinator of Ukraine's reforms and reconstruction together with the European Commission. The EBRD and the EIB should contribute with large investments. The EBRD is also important for assisting with privatization and improving the governance of the large state-owned enterprises. All these international institutions should expand and maximize their frameworks for financing Ukraine during reconstruction.

The Ukrainian government holds high hopes for significant foreign direct investment. However, in the last two years before the war, Ukraine had almost no foreign investment due to that the state complicated all business activities. In the initial talks on reconstruction, the Ukrainian state promises far better business conditions, simplified state administration, and a better legal system (see for example Ukraine’s National Recovery Council, 2022). If that really happens, Ukraine could attract 5 percent of GDP a year in foreign investment, which would mean $10 billion a year to begin with. But that would require far-reaching reforms.

Unless special support measures are undertaken, it will be some time before foreign private companies dare to invest in Ukraine. Therefore, a series of such measures should be introduced, above all insurance against political risks, which bilateral export agencies as well as some international financial institutions stand for.

How Can Ukraine Be Reformed?

The most important factor for a country's future development is institutional transformation, the development of a free democratic society with free information and a strong rule of law that can guarantee private property rights. For three decades, Ukraine has strived to build a rule of law with democracy, freedom, and a market economy, but progress has at the beginning of 2024 been mixed.

The central national interest was to build a Ukrainian state after centuries of rule from Moscow. By and large, it has succeeded, as evidenced by Ukraine's successful resistance to the strong Russian military power. Ukraine has a functioning state administration at all levels. One of the most important reforms after Euromaidan 2014 has been a decentralization of power and funding to the local level, while the too many and too small municipalities have been merged to become viable.

Another major advance has been that Ukraine has built strong macroeconomic institutions—a strong central bank, a well-functioning finance ministry, a computerized tax system, and a solid banking system—in good cooperation with the IMF and the World Bank. Ukraine has had a large number of IMF agreements since 1994. Although they generally did not last for long, they gradually built up Ukraine’s financial institutions. Yet, at the beginning of 2024 Ukraine still does not have a functioning stock market.

The two central problems for Ukraine remain to fight corruption and to secure private property rights. The independent non-governmental organization Transparency International produces an annual index of perceptions of corruption. According to the latest survey (Transparency International, 2022) Ukraine was ranked as a not-so-honorable 116th out of 180 countries, while thoroughly corrupt Russia was ranked 137th. All international institutions involved in Ukraine focus on these problems, but with slightly different angles. Although the corruption indicators for Ukraine before the war were poor, significant improvements in these indicators have been achieved after Euromaidan 2014, when Ukraine ranked below Russia.

In June 2022, the European Commission recommended that Ukraine should not only receive a membership perspective but also receive candidate status, which is a prerequisite for starting negotiations for full EU membership (see European Union, 2022). The EU demanded that Ukraine took seven important steps by the end of 2022 to meet the Copenhagen criteria, which have now been postponed until the end of 2023. The EU’s demands were unusually concrete.

• 1. To legislate on the selection of judges to the Constitutional Court of Ukraine;

• 2. To complete the examination of the integrity of the candidates for the members of the Supreme Council of Justice that appoints the Supreme Judge of Ukraine;

• 3. To strengthen the fight against corruption, especially at high levels, through effective investigations, prosecutions and convictions, and to appoint a new head of the specialized anticorruption prosecutor’s office and appoint a new director of the National Anti-Corruption Bureau of Ukraine;

• 4. Ensuring that anti-money laundering legislation complies with the Financial Action Task Force (FATF) standard;

• 5. To implement the law against oligarchs to limit the influence of oligarchs in economic, political, and public life, but this should be done in a legally correct way;

• 6. Addressing the influence of special interests by adopting a media law that aligns Ukrainian legislation with the EU’s audiovisual media services directive and strengthens the powers of the independent media regulator;

• 7. To secure the rights of national minorities.

The EU assumes that Ukraine will meet all seven of these conditions by December 2023. Tellingly, the first four EU conditions are of a legal nature, while the other three are democratic principles. Either the EU is satisfied with Ukraine's macroeconomic achievements or it leaves such issues to the IMF. The preliminary EU judgment in June 2023 was that Ukraine had fulfilled two of the conditions (anticorruption appointments and law on media freedom) and had initiated work on all the remaining five conditions.

An important political issue missing from the EU's list is the reform of the Ukrainian state apparatus. The problem is not only corruption but also old-fashioned Soviet bureaucracy that needs to be reformed and simplified, but this is a big complex, which Ukraine’s EU adaptation should be able to solve.

Ukraine needs several major economic reforms to make its economy competitive. First and foremost, the bulk of Ukraine's 3500 still state-owned enterprises must be privatized. Privatization is always controversial no matter how it is being done, but it is necessary for a normal market economy to be built. Half of Ukraine’s state-owned enterprises are not active but really just ruins that should be auctioned off as real estate. About one hundred state-owned companies are of real value and several of them need to remain state-owned for the sake of national security. In these companies, Ukraine needs to develop transparency and good corporate governance. Attempts have been made but their success appears to have been limited.

Finally, the Ukrainian market needs to be opened up to more domestic and foreign competition. Too many markets in Ukraine are monopolized or exposed to little competition. The explanations vary. Some complain about the oligarchs, others about state bureaucracy. In any case, Ukraine needs a strong competition policy, which is traditionally one of the EU's strengths.

Ukraine's political leadership does not pronounce any economic ideology, as demonstrated by the fact that President Volodymyr Zelenskyi's first government in 2019–20 had a clear liberal stance, while the current government is fairly traditional and state-oriented. It is unclear which line Ukraine will choose and it depends to a large extent on Western influence and demands for reform.

Ukraine's First Deputy Prime Minister and Minister of Economy Yuliya Svyrydenko published a sensational liberal programmatic article in July 2022 (Svyrydenko, 2022). She declared that Ukraine's main task was to achieve an average growth rate of 7 percent per year over the next decade. The country would do this through three measures. First, the government tax burden on the economy would be reduced from 45 percent of GDP to 30 percent of GDP in one year. Second, Ukraine would minimize economic regulation and let the economy run free, which she calls the “philosophy of the free steppe”. Third, she advocated a radical reform of Ukraine's judiciary so that it can guarantee all entrepreneurs their property rights. This is an extraordinarily liberal program and very much reflects what bureaucratic Ukraine needs, but it remains to be seen whether this program will have President Zelensky's support.

Can Ukraine Really Become a Member of the EU?

Before Russia attacked Ukraine on February 24, 2022, only a few enthusiasts advocated Ukraine’s membership of the EU. The EU had not even promised Ukraine a “membership perspective”, let alone a candidate status. As friends of Ukraine have always pointed out, a declaration of membership perspective is not very important because Article 49 of the EU Charter states that any “European” country can apply for membership in the EU and however Europe is defined, Ukraine is clearly a European country.

Article 6 of the EU Charter also clarifies that a country that wants to become a member of the EU must fulfill certain principles. They were established by the European Council in Copenhagen in June 1993 and are therefore called the Copenhagen criteria. They are fairly simple and consist of three criteria, one political, one economic, and one administrative:

• 1. The political criterion requires that the applicant country has stable institutions, which guarantee democracy, the rule of law, human rights, and the protection of minority rights.

• 2. The economic criterion requires that the applicant country has a functioning market economy that can cope with competitive pressure and market forces within the Union.

• 3. The administrative criterion requires that the applicant country has the capacity to undertake the obligations arising from membership.

Ukraine's main supporters have always been Poland and the three Baltic states. Russia's attack changed everything. On the same day that Russia attacked Ukraine, the EU agreed to support Ukraine and impose far-reaching sanctions against Russia. Above all, the President of the European Commission, Ursula von der Leyen, and the President of the European Council, Charles Michel, strongly committed themselves to Ukraine. On 23 June 2022, the EU offered Ukraine (and Moldova) not only a European membership perspective but also candidate status. Former Prime Minister of Lithuania and now member of the European Parliament Andrius Kubilius, who is deeply involved in Ukraine, has suggested that Ukraine can become a full member of the EU in 2029. He bases his assessment on the best past experiences of EU accession (Kubilius, 2022).

The next critical step is for the EU to open negotiations with Ukraine on membership. For this to be possible, the government of Ukraine must first fulfill the seven aforementioned conditions that the EU has identified as the basis for Ukraine to become a candidate. The European Commission then needs to confirm that all these seven conditions have been met in a report by the end of 2023. In that case, the EU can at best formulate its negotiating mandate and start negotiations in the first half of 2024. However, the EU can delay the start of negotiations indefinitely, and it is likely to happen if Ukraine does not meet the EU's seven basic conditions. The most important of these is the reform of the Constitutional Court.

Then, negotiations should begin. Kubilius sees the big EU enlargement in 2004 as the model to be followed. The actual EU negotiations with Lithuania lasted for three years and with Poland for four years. For Ukraine, it would mean that the negotiations could be completed in 2027–28 at best. After the negotiations are completed, it normally takes two years to prepare and ratify the accession agreement, which means that 2029 would be the earliest possible time for Ukraine's EU accession.

However, for this to become possible, the EU must change its enlargement philosophy. After 2007, when Bulgaria and Romania became EU members, the EU has become stuck in the Western Balkans. Since then, only Croatia has managed to join the EU, which happened in 2013. EU member states must realize that it is in the EU’s political, security policy, and economic interest that Ukraine becomes a member.

The EU’s previous enlargements have all strengthened the Union in so many ways. The fundamental purpose of the EU was to ensure that war was not possible for long in Europe, which has succeeded so well that Europeans tend to forget it. We argue that after Russia's unjustified war of aggression in Ukraine, no security policy act in Europe is more important than Ukraine becoming a member of the EU. Of course, a new expansion of the EU will increase the Union’s security policy strength and weight. Ukraine has one of Europe's strongest military forces (if we do not include Russia and Turkey). As the EU increases its defense and security policy ambitions, it becomes increasingly important to include a country with such military competence.

Central Europe's integration into the EU contributed to Europe’s great economic growth during the record years 2004–2007 (European Commission, 2014). Ukraine’s entry into the EU will, according to our assessment, lead to a similar expansion of the European market and stimulation of growth as European companies establish themselves in Ukraine and thus can expand both sales and production. The reconstruction of Ukraine will also be a strong economic driving force in which many companies from the EU will be involved.

The EU needs to analyze its mistakes in the Western Balkans and correct its organization and policies so that it can assist applicant countries more effectively in making the necessary reforms to become a member of the EU. These EU reforms are of all kinds. To begin with, the European Commission must start working faster on enlargement. At the beginning of 2024, the EU has a Commissioner for Enlargement who is so negative about enlargement as such that he has rightly been sidelined by the Commission's leadership. Secondly, EU countries should be deprived of the right to oppose enlargement negotiations with countries with which they had old neighborly disputes.

For many reasons, Ukraine's EU accession will be different from previous EU accessions. First, the process will begin with a major reconstruction. While this entails a large cost, it also offers new opportunities. The infrastructure—roads, railways, power lines, and pipelines—needs to be rerouted so that they lead to Europe and not to Russia. Ukraine's power grid has already made the transition to continental Europe's power grid. A major strategic investment issue is whether Ukraine should switch from Russia's railway width of 1520 cm to Europe’s 1435 cm. Many of Ukraine’s old industries are hardly possible to modernize. While Ukraine has all the prerequisites for steel production in the future as well, new technology with electric steel furnaces is probably required instead of the old-fashioned blast furnaces. Ukraine has many skilled engineers, but as in Central Europe, they should move to new industries. Ukraine already has an excellent software industry, which should expand.

Another reason why Ukraine's EU accession should be special is that the reconstruction will hopefully involve large sums of money, which should lead to strict financial rules and great dynamism.

Like any other EU accession, Ukraine's will require major reforms. Many of these reforms have been discussed for thirty years, but for many years Ukraine has not had the relevant human capital to carry out these reforms. In the last decade, this has changed and the country has access to all the relevant experts and can carry out the necessary reforms if only the political will is there. The EU and other foreign donors need to ensure that the Ukrainian authorities stay on track and make the necessary reforms.

Ukraine has three important advantages in joining the EU. First, the Ukrainian nation is more positive about the EU than any other nation. Remember that 125 Ukrainians died in their fight for an EU Association Agreement during Euromaidan in January and February 2014. Has anyone died for the EU anywhere else? More than 80 percent of Ukrainians are consistently in favor of EU membership in credible opinion polls (see for example Kyiv International Institute of Sociology, 2022).

Another advantage is that Ukraine already has a very far-reaching association agreement with the EU of more than 2,135 pages. Negotiations began in 2007, after which the agreement was adopted in 2014 and entered into force in 2016 (European Union, 2014). The main part of this agreement is a “Deep and Comprehensive Free Trade Agreement”, but the association agreement also contains several hundred pages detailing hundreds of reforms that Ukraine has committed to implementing. This part includes a large part of the EU's acquis communautaire, and the Ukrainian government claims that it has already adopted the bulk of the reforms required by the EU. This applies to a large extent to technical legislation, while the main politically sensitive issues, such as control over the courts and the police, have not been implemented.

An EU accession consists of several important elements, perhaps above all institutional development, free trade, free travel, and large inflows of EU grants. They are all interrelated, and the first three factors occur before a country becomes a member of the EU. Adopting the acquis communautaire means adopting all the laws a country needs to build a stable legal society.

The EU's greatest attraction is perhaps its large internal market. The EU has traditionally been generous in opening its vast market to candidate countries at an early stage. Already in 1994, the Baltic and Central European countries had more than two-thirds of their foreign trade with EU countries, while they joined the EU only in 2004. Until 2000, Ukraine had minimal trade with the EU, only one tenth of its exports because Ukraine’s exports were dominated by two commodity groups, steel and agricultural products, which have traditionally been subject to far-reaching protectionism.

The most important short-term EU action is to fully open the single market to Ukraine. To a large extent, this has already happened. As mentioned, the EU’s free trade agreement entered into force in 2016, but it contained 36 import quotas for all of Ukraine’s most important export goods, i.e. agricultural commodities and steel. Gradually, these quotas were eased, but only on a limited scale. In 2021, the EU still accounted for only 45% of Ukraine’s foreign trade, while Moldova already had 70 % of its trade with the EU. In 2022, the EU’s share of Ukraine’s trade in goods had risen to 55%, a doubling since 2016, and it is set to rise further.

The war with Russia has accelerated the liberalization of EU trade with Ukraine. Temporarily, the EU has released all these import quotas and introduced true free trade. Hopefully, the EU will preserve this full free trade with Ukraine and incorporate Ukraine into the single market. As Russia blockaded all of Ukraine's Black Sea ports from February 2022, shipments from Ukraine could only go by truck or rail to Eastern Europe, mainly to Poland and Romania. Due to a number of reasons, this led to queues that took several days to cross these borders. Twenty kilometers long lines of trucks on both sides of the Polish-Ukrainian border are unfortunately common. The EU has too many bureaucratic controls and too few customs officials. The EU has tried to improve that situation, but the lack of infrastructure and the different gages of the railways remain a problem.

In early 2023, a new problem arose. Five neighboring countries - Poland, Slovakia, Hungary, Romania, and Bulgaria—protested against large cheap grain imports from Ukraine and blocked them, receiving EU acceptance to this violation of EU trade rules. To Ukraine, this was costly. The EU ended these grain export restrictions on September 15, 2023, but then Poland, Slovakia, and Hungary introduced unilateral illegal import restrictions, which led to severe acrimony between especially Poland and Ukraine.

The cooperation with the EU that Ukrainians generally attach the most importance to is the EU’s visa freedom, which was introduced in 2017. This means that Ukrainians can spend 90 days in an EU country without applying for a special permit. Even before the war, some EU countries attracted large numbers of Ukrainians, especially Poland, which had an itinerant Ukrainian population of perhaps 1.5 million, the Czech Republic, which had at least half a million Ukrainians, Germany, and the southern European countries. Several EU countries gave the Ukrainians work and residence permits, which is a national prerogative, while the EU takes responsibility for Schengen visas. In practice, Ukrainians replaced the Central European workforce that had moved to Western Europe to earn more. Germany suffers from a substantial labor shortage and therefore wants half a million Ukrainian workers. The Ukrainians mainly worked temporarily in the construction industry, agriculture, the restaurant industry, and in households. Because they worked well and did not cause any problems, they were appreciated and attracted surprisingly little public attention. According to a report by Perspektywy Education Foundation, a non-profit national organization supporting education, 48,100 students from Ukraine are studying in Poland in 2022–23 (Erudera News, 2023).

The many Ukrainians who work, study, and temporarily live in Europe are a great asset for Ukraine's future development that receives too little attention. In a similar fashion, millions of Poles spent long periods in Europe during the 1980s but only for a limited time and they mainly returned home with European values and insights. These millions were an important reason why the Polish transformation was so successful.

However, many argue that Ukraine neither can nor should become a member of the EU as quickly as after seven years. They refer to the situation in the Western Balkans, problems with the justice system in Bulgaria and Romania, and the decline in Hungary and Poland. But none of these protests should stop Ukraine's membership negotiations.

The weakest argument concerns the Western Balkans because the main problem is that the EU has not driven the process due to internal EU opposition. First, Greece opposed enlargement to North Macedonia out of purely nationalist concerns about the name of that country. Next France slowed the candidate status of North Macedonia and Albania out of rather vague wishes for a reform of the EU, which had nothing to do with the potential candidates. Then the Bulgarian government protested against North Macedonia, claiming that the Macedonians were in fact Bulgarians. The EU's lack of interest in the Western Balkans has naturally reduced this region’s interest in the EU. Ukraine's commitment to the EU should not be questioned but be welcomed by the EU. Tellingly, the EU's commitment to Ukraine has also led to the EU finally starting its accession negotiations with North Macedonia and Albania twenty years after they were declared candidates for EU membership.

Another argument against quick EU accession for Ukraine is that Bulgaria and Romania still have major difficulties with their legal systems. Bulgaria has severe organized crime and Romania has had great difficulties with high-level corruption. However, this is not an argument against reforming the legal system in Ukraine, but rather a reason to do so more firmly and decisively.

A third argument is the democratic and legal regression of Hungary, but the EU seems to be solving that problem of members who stop behaving in line with the EU's treaties by limiting transfers to such members. The EU cannot end all requirements after a country has become a member of the EU. It must have an effective auditing operation and it must have the ability to impose meaningful penalties on governments that abandon normal legal norms.

Ukraine’s Path into the EU

On February 24, 2022, Russia started the biggest post-World War II war in Europe when it attacked Ukraine without any legitimate reason. This war has drawn Europe’s new outer border for a long time to come. Ukraine belongs to Europe, while Russia has placed itself outside.

The principles we have outlined here are in line with Becker et al. (2022a) and they have been largely repeated in the Lugano and London meetings. At the beginning of 2024, a broad Western consensus reigns that the support needs to be delivered quickly but be conditional. It should mainly consist of grants and not loans. Good coordination is central and requires a joint organization of donors and the Ukrainian government. It is important that Ukraine feels ownership of the reconstruction, and the process must be transparent and control corruption. A central element of the reconstruction process should be Ukraine's entry into the EU, and this should not only be a reconstruction but a modernization of the entire Ukrainian state and economy. The principle that is sometimes questioned is whether the institution that will coordinate the reconstruction should be linked to the EU or some other organization, such as the G7 or the World Bank. Given that the long-term goal for Ukraine is EU membership, we argue that it must be an EU-affiliated institution to provide the right planning horizon and steering mechanism.

The Ukrainian government foresees that the reconstruction will be divided into three phases. The first phase is the crisis phase while the war is going on. A second phase is predicted to be three years, probably 2023–25 but the start may be delayed by the war, and that is the actual reconstruction. The third phase is modernization 2026–32. The government has tentatively estimated the cost of this program at $750 billion, which sounds reasonable.

If such financing is to become possible, a Russian war reparation must account for a large part of it. Thanks to Western countries freezing $316 billion of the Russian central bank's foreign exchange reserves, these funds can be confiscated and used for war reparations (Hufbauer and Schott, 2022; Zelikow and Johnson, 2022; Summers, Zelikow & Zoellick, 2023).

Ukraine has so far not adopted a clear reform plan, but it will likely be largely driven by the EU's demands after the EU gave Ukraine a membership perspective and declared the country a candidate for membership. In the next step, the EU should open negotiations on membership. At best, Ukraine could become a member of the EU in 2029.

In Åslund (2022) the author suggested that in 2023 the EU should focus on five points that well summarize our view on how Ukraine can be rebuilt and become a member of the EU:

• 1. Ensure that the EU contributes EUR 1.5 billion a month to Ukraine’s state budget. This has been fulfilled for 2013 and that will probably be the case also in 2024.

• 2. Insist that the West confiscate the Russian Central Bank’s foreign exchange reserves in the West of $316 billion and that these funds be used as Russian war reparations to Ukraine. This is increasingly discussed but has not been done as yet. Canada and the US have moved faster, but two-thirds of this money sits in Belgium

• 3. Push through that the EU starts membership negotiations with Ukraine. Hopefully this will happen in December 2023, but that might be too optimistic.

• 4. Help the West set up a joint Marshall Plan and authority to coordinate the reconstruction of Ukraine. The European Commission is laudably setting up a large Ukraine Service, and in October the US finally appointed a special representative of the President for Ukraine’s reconstruction, former Secretary of Commerce Penny Pritzker.

• 5. Secure long-term Western funding for Ukraine's reconstruction. In June 2023, the European Commission pledged €50 billion for 2024–27. Hopefully, this will be approved by the European Parliament and the EU Council in the fall of 2023.