Marshall Plan for Ukraine? Not only huge opportunities, but also serious risks

Can the European Union and its Member States help anyone other than themselves in the post-war reconstruction of Ukraine?

Ukraine's post-war reconstruction will be the largest reconstruction effort in Europe after the Second World War. So far it has been estimated by the World Bank at around €350 billion, but that was before the Russian airstrikes on key Ukrainian infrastructure. The European Union is positioning itself as the main sponsor of this effort, not least in view of the candidate status of Ukraine and other Eastern European countries. The Czech Republic also supports Ukraine's massive reconstruction and early membership.

European discourse frames Ukrainian reconstruction as a set of mutually beneficial win-win opportunities. The EU will commit itself to a kind of Marshall Plan for Ukraine. Massive investment - mainly in the form of soft loans, non-public grants - will support the transformation of the Ukrainian economy, which will enable the country to integrate sustainably into the EU's market structures. In return, the Ukrainian government will open the door to European companies, which will get the lion's share of the actual reconstruction, while Ukrainian - mineral and human - resources will satisfy the EU's hunt for its own green and digital sovereignty goals.

In effect, the Ukrainian government is expected to filter Western aid into investment incentives in the form of state contracts for Western companies and other entities.

But such a notion obscures the risks on both sides of this supposed win-win strategy. The financial capacity and political will on the part of the EU and the Member States is not infinite. The EU may not live up to its declared political and financial commitments at all. At the same time, Brussels and other Member States will remain tempted to exact painful economic and political reforms from Ukraine in the name of economic competitiveness, good governance or the fight against corruption. In the long term, the current euphoria may turn into the opposite. The political legitimacy of the whole process will be eroded in the eyes of a large number of Ukrainians as mere Western 'colonisation'. In the EU, on the other hand, the narrative of Kiev's ingratitude for the aid provided will prevail. If we want to avoid such a scenario, we should first of all openly acknowledge these risks and start talking about them.

A Marshall Plan for Ukraine?

The Marshall Plan metaphor has a number of flaws. The main one is that the resulting exaggerated international expectations turn into a justified sense of injustice of the Ukrainian population for not meeting them. Indeed, it is not hard to imagine that Ukraine is in for a repeat of the EU approach of 2013-2022, only on a larger scale. This period was not only marked by the first Russian aggression. It was also kicked off by the EU's dithering over a loan to Ukraine with tough restructuring conditions and the subsequent conclusion of an EU-Ukraine Association Agreement, which fell short of expectations. In the aftermath of the devastating Russian war, the EU is again committing itself to financial obligations that it may not meet. At the same time, it is demanding far-reaching reforms from Ukraine, in return for which it is offering an uncertain inflow of foreign direct investment and the very intangible promise of membership.

A broad international aid package worth hundreds of billions of euros is being prepared for Ukraine, the organisation of which is claimed by the EU. But between 2014 and 2022, it has provided only €17 billion to Ukraine, mostly in the form of macro-financial assistance (a soft loan to the country with an EU guarantee). The EU is acting in the same way in wartime, having committed €9 billion for the country's day-to-day running back in May, but only managing to implement €7.2 billion by the end of 2022. To this, of course, can be added aid directly from member states and other EU aid worth another €12.5 billion in this exceptional year. However, the EU's commitment to provide a further EUR 18 billion of macro-financial assistance for 2023 has almost remained a victim of the ongoing divisions between Member States. These are merely guaranteed loans that could plunge the country into a debt crisis. The inability to implement commitments worth billions in full and on time thus casts doubt on the Union's ability and willingness to make commitments for reconstruction aid that are orders of magnitude higher.

The EU normally compensates real aid with the promise of private investors. However, the post-association agreement, which has been in force since October 2017 and includes a trade and investment agreement, has fuelled scepticism. The painful reforms prescribed by this agreement, such as privatisation, liberalisation and opening up state procurement, have not led to the promised investment. Annual foreign investment inflows have continued to fall unevenly from a peak of 8 per cent of Ukraine's GDP in 2008 to just 3.8 per cent in 2021. These reforms are now being packaged into a kind of loan-driven Marshall Plan and candidate status. In effect, the Ukrainian government is expected to filter Western aid into investment incentives in the form of state contracts for Western companies and other entities. Such a seizure of control over the economic future may not be welcomed by domestic sectors of the economy or the companies that will not benefit from it.

Labour may be the biggest loser, however crucial it is to the success of the whole post-war effort. Not only Russian aggression, but also the radical pruning of the welfare state and the liberalisation of the labour market further weaken society and fuel migration. Instead of the intended attraction of foreign investors, in recent years Ukraine has already been more dependent on remittance inflows, i.e. financial transfers sent home by Ukrainian emigration. These have shot up to a pre-war 11 percent of GDP since 2014, the highest figure in Europe. Over 7.5 million war refugees abroad will boost that figure. Further liberalisation of labour and social rights will not attract this emigration back.

The colonising temptation of Czech aid

From the beginning of the war, the Czech Republic behaved in an exemplary manner. It was among the first to provide military aid and took in the most Ukrainian refugees per capita. During and after the EU Council Presidency, Prague has been pushing for maximum assistance to the country in all respects, in the spirit of the win-win strategy described above. However, this also entails the aforementioned risks and "colonisation" temptations.

Political and business elites are framing Ukraine's reconstruction as a great opportunity, while preparing for European competition to maximise profits from it. This framing is supported by the Ukrainian government in an effort to maintain European (post)war attention. Thus, according to Czech officials, it is reportedly "important that Czech entities, whether companies, universities or NGOs, take a maximum slice of the reconstruction pie that will be on the table." Prague, meanwhile, intends to throw only CZK 1.5 billion (EUR 120 million) on the table over the next three years, of which CZK 415 million a year will be spent on humanitarian aid and CZK 85 million on reconstruction efforts by companies.

The most concrete project so far has been presented by the Ministry of Defence in cooperation with the arms industry. It reveals the general issue of statistical counting of aid that may not even arrive in Ukraine: it intends to build joint clusters of the arms industry that will be located "in a secure base in the Czech Republic". However, he also points to the Czech thinking on who will cover the reconstruction financially and what the Ukrainian role will be in it. Czech-Ukrainian cooperation is to be financed by "international donors", including Scandinavian countries and the United States, while Czech companies will rely on the organised import of cheap Ukrainian technicians "for production". From the Czech point of view, therefore, this is clearly a profitable scheme - which is not necessarily true from the Ukrainian point of view.

Prague should therefore make sure that the benefits of European aid go first to Ukraine and then to the Czech Republic. However, the above-mentioned and other statements suggest that the interests of Czech companies will be defended. The war also did absolutely nothing to change the pre-war cry of Czech industry to import cheap Ukrainian workers. War migration alone has probably already increased the Czech labour force by up to 2.2 per cent in the future. But it is precisely this labour force that will be lacking in post-war Ukraine.

Laboratory Ukraine

For Ukraine, the EU and the Czech Republic, post-war reconstruction will present a series of challenges, not just a set of win-win opportunities. The biggest of these will be to guard against the EU's temptation to turn Ukraine into a laboratory for testing its geopolitical appetite.

The EU is likely to try to find all avenues to secure its commitments, including the legal expropriation of frozen Russian assets. Even so, it is unlikely to meet international expectations fully and on time because of its own economic problems and new crises. Moreover, European and other international donors have historically made their loans and grants conditional on various reforms, thereby indirectly gaining political control over the course of reconstruction. The often insensitive assessment of reforms as inconsistent was then used to justify the unconvincing economic recovery and the stalling of the accession process. If history repeats itself, support for local political forces, which de facto have no choice, may translate in the long term into a strengthening of nationalist tendencies and a turn against Brussels - but ultimately, indirectly, against Prague.

Public funds for the reconstruction of the Ukrainian economy and investment incentives will probably benefit mainly European companies, domestic subcontractors connected to them and perhaps even Ukrainian oligarchs. European investors may not arrive in Ukraine in the expected numbers, but investment dependence on them and export dependence on the EU will define the future direction of the Ukrainian economy. Initially, this may result in rapid growth in selected strategic sectors, but such investment also tends to be concentrated in the country's large cities and stable (western) regions, such as the promising IT services sector in Kiev. The most devastated and rural regions generally gain significantly less, or nothing at all, from the arrival of foreign capital. Ukraine will become extremely economically dependent on the EU, while emerging regional inequalities could fuel the aforementioned political polarisation.

Demographic decline is more likely to continue, as, apart from direct victims of war, a significant number of refugees tend not to return from abroad. Better living standards in the EU is one reason, but another reason may be the deterioration of social rights and working conditions as a result of possible pro-investment reforms in Ukraine. These may benefit the workforce in partly foreign-owned sectors and in large cities in the west of the country, where IDPs will remain. Another reason is that post-war construction of basic and critical infrastructure is unlikely to restore the war-irreversibly destroyed home of refugees - that is, pre-war neighbourhoods with their social relations. The reconstruction of the country and selected regions could therefore fall far short of expectations due to the lack of manpower.

The author is a researcher at the Institute of International Relations.

Translated using Deepl without proofreading