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European economic response to the Ukraine´s war: through NGEU or EU and national budgets?
Bruegel recently published an article exploring the question of whether the ongoing war in Ukraine calls for a new Next Generation EU programme (NGEU) to attenuate the economic consequences of the new crisis plaguing the EU’s economy. In its view a new NGEU package is not required at the moment, but this judgement may need to be revised if the economic consequences of the war become much more severe than currently foreseen.
- Like COVID-19, the war in Ukraine is an exogenous shock that affects all EU countries; however, the size of the economic shock seems much less severe than that caused by COVID-19, at least in the short term.
- The main economic consequences of the Ukraine war will likely be structural, with EU countries having to devote increased resources to energy security and defence. There is a wide range of estimates on the final amount of this new resources. For defense it will be required on an annual basis from 0.5% to 1% of EU GDP and from 0.1% to 0.2% of EU GDP during five to ten years for energy. These amounts will be likely finance through national budgets and therefore it will be crucial to have EU money in the game (i.e increasing the EU budget to expand the European Defence Fund) to ensure sufficient EU coordination and coherence in these two areas.
- The EU and its members must pursue two economic objectives.
- To stabilise their economies: According to the article, so far, the Ukraine war does not seem to justify stabilisation by the EU with an instrument like NGEU, but there is a clear case for helping countries particularly hit by the consequences of the war with a new SURE programme. The article calls also for the need to help stabilise Ukraine with an estimated €25 billion of issuance in EU war bonds, to help the Ukrainian government cover its budget deficit during the war.
- To avoid financial fragmentation between stronger and weaker euro-area countries: a possibility would be an ECB facility that permits the central bank to purchase assets from only one or a few specific euro-area countries that probably will need some conditionality.
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