In a traditional middle-of-the-night deal, European Union leaders agreed on December 19 to borrow another €90 billion together, for the purpose of helping Ukraine. This was a big win, despite the winners-and-losers headlines that appeared the morning after. The European Union came up with a substantial amount of money, it did so despite pushback from multiple member states, and it left its options open for future talks.
German Chancellor Friedrich Merz deserves a lot of credit for getting the deal over the line. Yes, he “lost” by not convincing Belgium to drop resistance to a financing plan involving cash from frozen Russian assets. But he also showed true statesmanship by making it clear that money for Ukraine would be found, while being able to go home and tell his voters truthfully that more joint debt was not his first choice yet had to be done.
As a result, the EU agreement was “the most realistic and the most practical solution,” as French President Emmanuel Macron put it. This gets Ukraine more than halfway to the €135 billion that the European Commission estimates it will need over the next two years and makes European support for Kyiv clear.
Money Left on the Table
While €90 billion in new joint borrowing would have been a big win in prior years, it presented itself as a second-best solution this time around. Going into the three-day leaders’ summit, which began on December 17, hopes were high that the EU could leverage immobilized assets that belong to Russia’s central bank. There is about €210 billion on hold around Europe, including about €185 billion at Belgium-based Euroclear, a securities depository.
The principal of those frozen assets cannot be confiscated, nor should it be. The EU prides itself on its excellent legal system and also wants to inspire confidence that any other assets parked within its borders are safe from outright theft.
Freezing the money, on the other hand, was a strong and swift move by the EU in February 2022, just days after Russia’s full-scale invasion of Ukraine. That decision blocked Russia’s access to those funds and paved the way for billions of euros in interest to flow toward Kyiv: Given that Euroclear does not pay interest on cash balances it holds for clients, any interest earned on the frozen assets is not Russia’s and can be taxed or otherwise put to work. At the December summit, the leaders voted to keep the assets frozen for as long as needed while the war continues, over the objections of Slovakia and Hungary.
Given that the assets will stay where they are until there is a workable peace deal, the EU had—and still has—the opportunity to borrow against the piled-up cash at zero interest, instead of paying market rates on publicly traded bonds.
The basic mechanics of this plan call for the EU to issue “zero-coupon” bonds for Euroclear to hold, while the cash itself is lent to Ukraine to support the war effort and economic reconstruction. Ukraine would not need to pay back this loan until after hostilities have ended and reparations talks with Russia had concluded. Because Euroclear would have the EU bonds, the principal of Russia’s holdings would be safe, just not returned to Russia without a peace agreement.
Risk and Tradeoffs
Belgian Prime Minister Bart De Wever felt this path still exposed his country, where Euroclear is based and regulated, to too much risk. He sought extensive and complex guarantees while marshalling opposition to the proposed loan. At one point, a purported US peace plan complicated the talks, with Washington asking that the frozen assets be channeled across the Atlantic on their way to Ukraine as part of an overall flawed proposal. Later on, Belgium marshalled support from Malta, Italy, and Bulgaria to seek alternatives to using the frozen-asset cash.
At various points during the debate, it seemed the EU would be able to meet Belgium’s demands and give the green light. In the end, however, it proved too complicated to finish by year-end.
Germany’s Merz had given full-throated support to leveraging the Euroclear assets, which he saw as preferable to more joint debt. German voters generally are leery of common borrowing, which they see as putting their citizens at disproportionate risk of losses compared to taxpayers in other member states.
When the deal fell through, Merz insisted that the EU leave itself room to revisit the question later. The summit conclusions say the assets will remain frozen “until Russia ceases its war of aggression against Ukraine and compensates it for the damage caused by this war.” This means the EU could ultimately keep some of the money as reparations. And it could revisit the question of leveraging in future years, should the situation change.
By some estimates the EU may end up paying €3 billion per year in interest on its marketable debt, compared to the zero interest it would pay on any bonds issued for Euroclear to hold. That said, the net impact of this is complicated by other tradeoffs including interest proceeds and Belgian taxes related to Euroclear’s windfall.
Generational Shifts
When it comes to joint finances, Europe has a strong track record of making progress over time. It is astonishing—and heartening—that the joint borrowing agreed in December can be implemented with almost no fanfare once the political process wraps up.
In 2010, during the euro crisis, member states drew a hard line at increasing the “headroom” between the EU’s planned spending and its total possible budget commitments based on member state guarantees. Leaders finally reversed course and put the headroom in play with their historic 2020 decision to use joint borrowing for pandemic recovery.
Since then, the mechanics of going to the market have been straightforward and de-politicized. Since 2023, the EU has issued debt for all of its spending under a diversified borrowing strategy that does not differentiate which bonds go to which project. As with any democracy, the budget itself is still divisive and up for extensive debate. But once that spending is agreed, the borrowing infrastructure is there.
This made December’s Ukraine debate far less of a funding precipice than it could have been, since the EU’s debt management team was staffed up and waiting in the wings. Furthermore, the EU now has time to consider its options. It took 10 years for a change of opinion on joint borrowing headroom. Perhaps leveraging the frozen Russian assets could become politically acceptable in one or two.
A New Consensus Forms
In agreeing on the new round of borrowing for Ukraine, the EU made clear that small member states would not be empowered to block top European priorities. The Czech Republic, Slovakia, and Hungary all opposed the new Ukraine loan and related borrowing, and they sought assurances that they would not be held financially responsible.
Those three countries “opted out” of the final decision while allowing it to proceed, not even requiring the EU to invoke emergency procedures allowing qualified majority voting where unanimity is normally required.
This should still be interpreted as finding consensus, argued Belgium’s De Wever. “At the end of the day there is a decision with unanimous support, so what’s your problem,” he said in a post-summit press conference.
For the Czechs, Slovaks, and Hungarians, their standing aside will cost them. The EU is starting talks on its next seven-year budget, among other looming battles. Media reports suggest the abstainers could pay a hefty political price. The EU center has further broken the seal on divided votes, giving future standoffs a different calculus.
A Good Story for the Voters
The December summit decision appears to work with voter concerns, rather than against them, and gives national leaders strong stories to take home to their voters.
De Wever, leader of the far-right New Flemish Alliance, can play the hometown hero, reassuring his conservative voters that he has protected Belgium from even the appearance of risk related to borrowing the Euroclear cash.
Meanwhile Merz can tell his pro-European, debt-shy centrists that he only agreed to more joint borrowing as a last resort. Hopefully, German voters will accept the necessity of supporting Ukraine, just as they ultimately respected former Chancellor Angela Merkel’s decision to open financial spigots during the pandemic.
Even the beleaguered Macron can limp home with a narrative that fits France’s internal turmoil. He kept a low profile during the summit run-up, not opposing the reparations loan outright but also supporting a search for alternatives. This is perhaps because Russia’s central bank may have frozen assets held at French lenders, but also because France itself has had a very bumpy ride this year and it is not at all clear which direction the country will turn when Macron leaves office. For now he can take solace from the EU finding a functional way forward as he returns to divisive budget talks.
The latest Ukraine deal shows Europe’s strength and how far it has come since its financial crisis 15 years ago. On December 11, eurozone finance ministers chose Greek Finance Minister Kyriakos Pierrakakis as the next Eurogroup president. This is a tremendous achievement for Greece, which required three rescue programs to pull it back from the fiscal brink, and for the European Union to have not only survived but thrived in the aftermath of its currency’s existential threats.
By finding a substantial amount of new money for Kyiv without any new US financial contribution, Europe is showing it will stand by Ukraine and stand on its own two feet.
Rebecca Christie is IPQ’s Brussels columnist and senior fellow at Bruegel, the economic think tank.
