September 25, 2023

The Impact on the EU Budget of Ukraine as a Member State

European Union’s and Ukrainian flags outside the European Parliament in Strasbourg, 24 February 2023.
European Union’s and Ukrainian flags outside the European Parliament in Strasbourg, 24 February 2023.

A decision by the EU on whether to open accession negotiations with Ukraine is one of the hottest topics for the new political season. In this context, the likely cost of Ukraine’s membership for the EU budget will be high on the list of concerns. No estimates for this are forthcoming from the Commission. Instead, there are vague speculations in circulation of devastating consequences, like that all the new member states acceding since 2004, who today enjoy substantial net recipient positions (expenditures less contributions), would find themselves switched into becoming net payers.

The present author’s detailed research paper shows that this scarecrow scenario, for which there is no respectable reference, is completely unfounded. Some quantified estimates can inform the debate to the contrary.

A first formal hypothesis and conceptually simple approach are to assume that Ukraine were already today a member state, and current EU policies would determine Ukraine’s receipts and contributions. This can be estimated in two ways – first, by looking at how the budget currently treats the most relevant comparator member states, namely Ukraine’s two biggest neighbours, Poland and Romania. Second, and closely related, one can look at how the two major budget expenditure lines, for cohesion and agricultural policies, would be impacted by Ukraine. This requires bringing into the calculations key Ukrainian parameters, including GNI per capita, population, and agricultural land areas.

The result of these calculations is that Ukraine, in this formal hypothesis, could be a net beneficiary to the extent of €18 to 19 billion per year, implying – all other things being equal – an increase in budgetary contributions by member states of around 10%. This is of course a large sum of money, but if placed alongside the current net balance positions of member states, it would not push any of the newly acceding states since 2004 into a net payer position. On the contrary, their present net recipient positions would only marginally be worsened. Of the old member states, only Spain is a borderline case, changing from (small) net beneficiary to (small) net payer.

However, all other things may not remain equal in this deliberately static starting scenario, and further factors need to be brought into the assessment.

First is the time horizon for these costs to arise. If one takes as the most optimistic scenario currently being discussed, of accession in 2030, to this have to be added transitional measures that only start with accession. The most important of these for Ukraine would be the ten-year transition before the direct payments of agricultural subsidies (averaging today around €250 per hectare) are fully applied, as has been the case in all accessions from 2004 on. This takes the time horizon for full implementation into the 2040s, by which time many things may indeed change. For example, if Poland and Romania continue with economic growth rates of around 1.5% faster than the EU average over the last decade, there will be a major convergence of incomes per capita between member states at high levels, in which case budgetary room will have been created for new and poorer acceding states.

Second, and related, is that both the two main expenditure lines – for cohesion and agricultural policies – are limited by capping mechanisms that are typically subject to negotiations and revision when the budget is defined in the seven-year Multi-annual Financial Frameworks (currently 2021-27, with 2028-34 next, etc.). The cohesion policies are capped at a maximum share of GNI, and agricultural direct payments can be capped for very large farms. Both these capping mechanisms are candidates for ongoing reform, which the normal processes of negotiation within the EU are accustomed to handle. There is ample scope to avert the scarecrow scenarios.

Third, the biggest unknown of all is how the war will end and how the post-war recovery and reconstruction may proceed, with damages so far estimated by the World Bank to have reached $411 (€383) billion. Questions include how far other sources of finance, beyond the EU budget, will enter into the equation. The European Commission has proposed a major €50 billion Ukraine Facility for 2004 to 2007 (€12.5 billion per annum), which seems likely to be adopted by the Council and Parliament before the year-end. This ambitious Ukraine Facility invites matching contributions from the US and other G7 members, with the IMF and World Bank already pledging or preparing major contributions, as also the EIB and EBRD. There are also ideas for the US and the IMF, in addition to the EU, to deploy loan and investment guarantees to leverage in private capital, inspired in some degree by the Brady Bonds experience initiated in 1989 for Latin America; US Treasury collateral guarantees then mobilised $180 (€168) billion of private capital.

Also, there are the $300 (€280) billion of frozen Russian sovereign assets, waiting to be seized and used to fund reconstruction in Ukraine. The debate around the conventional immunity from seizure of such assets should in due course converge on the view that this “criminal sovereign” loses the case for immunity. The majority of these assets are held in the EU, and their seizure for reparations would ease the call for budgetary funding by the EU and others.

All questions of sustained major funding will naturally be conditional on Ukraine delivering sound accompanying policy reforms and satisfactory implementation of the EU’s proposed Ukraine Facility for 2024-27.

To conclude, there is no reason to fear that further enlargement would blow up the EU budget. The mechanisms for managing the cost of Ukraine’s accession are there, and there will be ample time to adjust them and prepare for their implementation by the time Ukraine becomes a member.

Download and read the policy paper: The Potential Impact of Ukrainian Accession on the EU’s Budget – and the Importance of Control Valves (PDF)

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