A firefighter removes rubbles at a factory destroyed by a Russian strike in Slovyansk, Ukraine, on Aug. 27.AMMAR AWAD/Reuters
With the war showing no sign of ending, the effort to launch a new Marshall Plan to rebuild Ukraine seems wildly optimistic.
The successful Ukrainian counteroffensive, which has taken back some 10,000 square kilometres of territory, has been met with savage retaliation. Russia is bombarding the country with cruise missiles and Iranian-made drones, wrecking infrastructure such as power plants. Ukrainian President Volodymyr Zelensky said the attacks had knocked out electricity to a third of the country; Ukraine needs 25,000 diesel generators to keep the lights on.
Will Ukraine exist in a year? Will it be partly or largely occupied by Russia, or will Russian forces be driven out of the country by the highly motivated Ukrainian military and its advanced, Western-supplied weapons.
Those questions are impossible to answer now, but the West is assuming Russian President Vladimir Putin’s losing streak will continue. The plans to rebuild Ukraine are taking shape. This morale-building exercise took another step Tuesday, in Berlin, when Germany, the current chair of the G7′s rotating presidency, hosted a conference dubbed the Recovery, Reconstruction and Modernisation of Ukraine.
“We do not know when this war will end, but end it will,” German Chancellor Olaf Scholz said in the event’s opening remarks. “We know that no two countries’ history are the same. But from our own historical experience, we also know that reconstruction is always possible and that it is never too soon to tackle the task.”
The G7 and the European Commission (EC), the executive arm of the European Union, are smart to start his process now, for it will be fraught with difficulties that could slow – even derail – the entire game plan.
Hundreds of billions of dollars will have to be raised to rebuild the shattered country, whose GDP is expected to contract by a third this year. The funding transmission method will have to be designed. Will the funds arrive as loans, grants or a mix of the two, and from where? Will the EU sell reconstruction bonds, as they sold pandemic recovery bonds? Will the US$300-billion in Russian Central Bank assets seized in the West help fund the reconstruction, as some countries advocate?
Some countries will be reluctant to provide their fair share of loans or grants as their economies barrel toward recession and their citizens are pounded by high inflation and rising interest rates. Already, election-bound Republicans in the United States are having doubts about the Biden administration’s apparent blank-cheque approach to funding Ukraine; they do not want Ukraine to become, in effect, the 51st state.
Projects will have to be assigned priority levels. Corruption controls will have to be put in place to ensure the funds are not siphoned off by criminals sensing a smorgasbord of easy money (Transparency International last year ranked Ukraine the second-most corrupt country in Europe, after Russia).
Crucially, political peace will have to be struck among the EU and the U.S., each of which will naturally want to design and dominate the reconstruction plan. If the result is destructive transatlantic infighting – entirely possible given the egos involved – the only loser would be Ukraine itself.
And all this will have to be done while Ukraine is fighting a war and struggling to keep its economy from outright collapse.
The bills keep coming relentlessly. According to the Kiel Institute for the World Economy, the EU, the U.S., Britain, Canada and other countries collectively committed €93-billion in weapons, loans and humanitarian aid to the government in Kyiv between the start of the war in February and early October.
But the government’s monthly budget shortfall of €4-billion is eating up a lot of that aid – forget any rebuilding – as output and tax revenues fall and expenditures rise. No surprise: war economies are ugly and painful.
The Ukraine reconstruction effort is inspired by the Marshall Plan (officially the European Recovery Program), which was launched by the U.S. government in 1948, three years after the end of the Second World War, when Europe still lay in ruins.
Named after then-Secretary of State George Marshall, it was designed by the Americans not only to rebuild European infrastructure, housing and factories, but to fortify its democracies and undermine the Soviet Union’s influence in Europe, where several countries, notably Italy, had powerful communist parties (in 1947, the Italian Communist Party had 2.3 million members and would take a fifth to a third of the vote in elections through the 1970s). The Marshall Plan spent about US$17-billion, or US$160-billion in today’s money.
The Ukrainian version will spend a lot more. In August, the World Bank, the EC and the Ukrainian government put the reconstruction bill at US$350-billion. As the war – and the destruction – intensifies, that figure could easily double. The Washington Post said the bill could reach US$1-trillion, more than six times what the Marshall Plan cost in inflation-adjusted dollars.
By rights, the EU should lead the funding and set the direction for the reconstruction effort. The war is on European soil and Ukraine wants to join the EU and NATO. But the EU cannot afford to pay for this massive effort on its own, all the more so since recession seems inevitable. For Marshall Plan 2.0 to work, the U.S. will have to be a major funder. If it is, it will want to play an important role in how the money is raised and spent. This is where the new Marshall Plan’s design could crack. He who pays calls the shots. If the EU wants to lead, it will have to pay up, big time.