The EU stumbles to an imperfect solution for funding Ukraine

By News Room Last updated Dec 7, 2025

Greetings and a happy second Sunday of Advent. For those in the Christian tradition, we wish you a peaceful Advent period — and for all our readers, we are doing our bit with a Sunday-only Free Lunch service until we break for Christmas. Tej is back in the saddle next weekend.

This week, the European Commission finally presented a formal proposal for its long-trailed “reparations loan” for Ukraine, tied to Russian central bank reserves blocked in the EU. It was promised by commission president Ursula von der Leyen more than two months ago, and promoted by German Chancellor Friedrich Merz in an important FT op-ed shortly afterwards. Belgium, where most of the blocked reserves sit in the securities depository Euroclear, has resisted it all the way.

What was published on Wednesday was the sort of tangled ball of legal intricacy that only the EU can produce. It tries to resolve two sets of tensions: getting money to Ukraine without anyone having to pay for it, and making it possible to take decisions on something that precedent suggests would need unanimous agreement but for which no such unanimity exists at present. The result is ugly, far from optimal — and might just about work.

The urgency should be clear: Ukraine’s money could run out in the first half of next year, and Russia and the US are trying to push it into a surrender — an aspect of which would be the expectation that Moscow regains access to its reserves (perhaps as much as €300bn across the west, of which about €210bn is in the EU). Given that Russia’s willingness and ability to undermine European democracies will depend on its success in trying to own Ukraine, it is no exaggeration to say that Europe’s future hangs in the balance.

The proposed solution is a complex piece of financial and legal engineering. Conceptually, it has three parts (legally, the proposal apparently stretches across 11 documents):

The EU lends money to Ukraine that it only has to return if and when Russia pays it reparations
The EU raises this money by forcing financial institutions to cheaply lend it cash that has accumulated because Russia cannot withdraw its deposits due to sanctions
EU law is changed to remove any risk that sanctions might be lifted or Russia might otherwise be able to claim its money back

(The “reparations loan” label should strictly only describe the first point but, in the debate now, it has come to mean the combination of the first two — including the special funding method.)

Why this complicated construction instead of just borrowing in markets so as to lend on to Kyiv? Because of an assumption that the EU itself has a money problem. This is from the commission’s proposed regulation:

The capacity of the Union and of its Member States to provide additional funding to Ukraine is currently limited and does not correspond to the magnitude of the needs. Mobilisation of additional significant resources by the Member States to be able to finance Ukraine would constitute an important economic challenge.

This is simply not true. The reparations loan, if it is passed, would amount to less than 1 per cent of annual EU GDP in additional financing. If this was funded through normal borrowing, it would increase the government debt-to-GDP ratio for the bloc from the current 82 per cent to 83 per cent. Markets would not even notice.

But this is where we are. The complex reparations plan is an effort to get out of the political quagmire caused by EU member states trying to pretend they are not having to put up the money for Ukraine’s survival — without actually forcing Russia to pay for the destruction it has caused. It may be the best we’ve got to work with. But we should still be clear about the shortcomings. Here they are.

EU taxpayers were always going to be on the hook. Unless and until you are willing to actually make Russia pay, of course EU taxpayers will ultimately back an EU loan (or grant) to Kyiv. So, too, in the reparations loan proposal. The money raised from banks holding Russian reserves — mostly Euroclear but, in a welcome development, all other EU banks with smaller holdings as well — will be owed back to them by the EU itself, with some guarantees from capitals or the next EU multiyear budget. In addition, the EU will reimburse member states — this is intended for Belgium — that find themselves losing arbitration claims by Moscow. Again, national guarantees may be raised, but the buck stops with the EU — and hence all member states. The same is true of the powers the proposal gives the EU to take up loans for liquidity reasons.

Perhaps this is why the EU is putting its taxpayers ahead of Ukraine’s reconstruction needs. As written, the regulation would require handing over any reparations money received from Russia to the EU until the loan is paid back in full. That may motivate the EU to call for reparations up to that amount — but, correspondingly, put it in the mood to compromise beyond that point. The result would be a Ukraine left in ruins even if at peace although everyone recognises the EU would then have to find more money. A realistic and morally justifiable scheme would subordinate the loan repayment to all other documented reconstruction needs, or at least prorate it with them.

More importantly, Russia is not actually being made to pay. The only thing that could, in fact, remove EU taxpayers’ liability is if Russia were forced to pay. The reparations loan proposal does not do this, despite its name. From the text of the regulation again:

The Reparations Loan is without prejudice to the claim of the Central Bank of Russia. That asset is not impacted by the measures provided under this proposal. The cash balances accumulating on the balance sheets of financial institutions as a result of the immobilisation do not belong to the Central Bank of Russia and do not constitute sovereign assets . . .

and:

As [a result] of various investments of its foreign reserves, the Russian Central Bank has a claim on certain financial institutions in the Union. Those respective financial institutions have a liability to repay the Russian Central Bank, where the prohibition of transfers to the Russian Central Bank currently prohibits those financial institutions from honouring that claim . . . That asset of the Russian Central Bank — and as such that liability of the financial institution to repay — will not be touched.

So to be clear, nobody is using Russia’s assets in any way. In particular, Russia’s assets are not being lent on to either the EU or Ukraine. Instead, EU banks’ cash — which would be used to honour a withdrawal claim by Russia if that wasn’t prohibited — is being forcibly lent at a zero interest margin to the EU.

At best, the new package of laws would let the EU keep Russia’s reserves blocked forever, which means the banks never need to honour a withdrawal claim and so the EU never has to return its loan from them. So far, the risk with this has been that sanctions are renewed by unanimity every six months, so a single capital — Budapest, for example — could ensure Moscow’s renewed access to the reserves, and unravel the entire construction. The new laws aim to change this. Brussels has found an article in the EU Treaties, which under serious economic disturbances (which it says Russia’s war and hybrid aggression are) permits it to take measures without unanimity. It proposes to use this to indefinitely block Russia’s reserves until a similar active decision to lift the block.

What could possibly go wrong? As the comments gathered by our news reporters show, the move to circumvent Hungary’s veto power on the sanctions is a very aggressive power grab. Its legal basis is likely to be challenged in court. What happens if it gets overturned? And, of course, the US and Russian presidents could still strike a deal over the heads of the Europeans — the recent “28 points” disposed of the assets at will — and put all the pressure the US can muster on the EU to play ball. What can be passed by a majority can be changed by a majority that gives in to US bullying.

Belgium is a little right but mostly wrong. The Belgian government has been vocal in its objection to the reparations loan — and has consistently advocated for normal EU borrowing instead. It has, until recently, drawn on two arguments: that Belgian institutions should not be the only ones forced to fund the reparations loan, and that other countries should share the financial risk the scheme exposes Belgium to. These are fair points, and the commission’s proposal addresses them as far as Belgium can legitimately demand.

But recently, members of Belgium’s government have made the unforgivable suggestion that Russia will not need to compensate Ukraine for all the destruction and suffering it has inflicted. More specifically, both the prime minister and the foreign minister have referred to the US’s so-called peace proposals and suggested the reparations loan, by tying up Moscow’s reserves (even though it doesn’t really, as explained above), could jeopardise efforts for peace. That, of course, moves the argument from Belgium’s special exposure to challenging the entire idea of a reparations loan or indeed the very principle of reparations. That is unjustifiable and detracts from Belgium’s case.

Instead, Merz is right to say in his FAZ comment article earlier this week that funding Ukraine at scale is a way to help end the conflict, not prolong it. It is well understood that Ukraine’s ability to hold off the Russian assault depends on its financing from friends. Less well understood, but equally true, is that sanctions are indeed working to weaken Russia’s fighting ability. Just this week, new research has been published arguing that Russia’s economy is smaller, inflation higher and the rise in inequality more severe than is commonly thought. The researchers conclude that:

Russia lacks non-inflationary options for financing its government deficit and is dealing with intense inflationary pressures.

In other words, actually making Russia pay — and incur a financial loss — would advance the peace, at speed and sustainably.

So there is a lot to criticise about this proposal. The main thing to recommend it is that it may work, and may get money to Ukraine fast. The very fact that the commission proposes to pass both the reparations loan and the indefinite block on reserves by qualified majorities means that if push comes to shove, both Belgium and Hungary are going to be overruled. That will focus minds in Brussels and Budapest on how much of a pain in the backside they want to be.

So the reparations loan is more likely than not to be passed. Other countries with blocked Russian reserves should now take part as well, to increase the available amount. The UK is reportedly preparing to do so. Japan, Canada and Switzerland must step up too. (The US is a lost cause.)

Of course, it could have been so much better. And there is, in fact, something the EU could do immediately to more quickly address the Belgian and Hungarian problems, really and not just ostensibly protect its own taxpayers, and leave open a possibility to make Russia pay, all while insulating itself from potential US pressure. That would be what I have called the “bad bank” approach (explained here). It would use regulatory powers to immediately segregate both liabilities and assets related to Russia’s reserves into separate banking entities, which Euroclear and the other banks would be required to dispose of in sales to a consortium of willing EU governments. The new entities would be merged into a bank holding only Moscow’s deposits and the associated cash, incorporated in a less squeamish jurisdiction than Belgium. The UK and other countries should explore the same approach, if only to protect their financial institutions.

The European Central Bank has the authority to order this to be done, on the grounds that it is risky for EU financial stability that these assets jeopardise a systemic financial institution as well as the public finances of a euro government (which Belgium has made abundantly clear they do). The reparations loan could then be made directly by the new bank, without going via the EU’s balance sheet. The future of Moscow’s claim, meanwhile, would be a matter for the national legislation in the jurisdiction hosting it.

This solution is compatible with the current effort, addresses some of its obstacles better and sends a much stronger signal of European resolve to both Moscow and Washington. The Belgian prime minister has even said he would be happy if someone would take assets and liabilities off Euroclear’s hands. What is the ECB waiting for?

The EU stumbles to an imperfect solution for funding Ukraine

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