The EU borrows for Ukraine. The interest will amount to EUR 3 billion per year

Taking out a debt of EUR 90 billion by the European Union to support Ukraine will mean that the countries will collectively pay interest of around EUR 3 billion every year. Taking into account that the EU's GDP is EUR 18 trillion, this will mean an increase in the EU deficit by 0.02%.

After many hours of negotiations, the leaders of the EU27 agreed on Friday morning to provide support to Ukraine for the next two years in the amount of EUR 90 billion. This will cover about two-thirds of the needs of the war-ravaged country, which will need support from the second quarter of next year.

The option of using Russia's frozen assets for this purpose has failed. Instead, the leaders decided to take out a joint debt from which three countries would be “excluded”: the Czech Republic, Slovakia and Hungary.

The loan taken out by the European Commission on the capital markets and secured by the EU budget will be transferred to Ukraine, which will repay it when it receives reparations from Russia. The conclusions of the summit state that until then, the assets of the Russian central bank will remain immobilized, and the EU reserves the right to use them to repay the loan.

Ukraine will also not have to pay interest on the loans. EU member states will do it for her. As senior officials in the European Commission told journalists on Friday, this will mean an annual cost for the Community of about EUR 3 billion, which, with the EU's GDP of EUR 18 trillion, will mean an increase in the deficit by 0.02%. The interest rate for individual countries will be set in proportion to gross national income (GNI).

The “exclusion” of the Czech Republic, Slovakia and Hungary will consist in the fact that they will not pay interest. Their share, totaling 3.75%. EU GNI, will be distributed proportionally between the 24 remaining countries.

An EU official, speaking on condition of anonymity, said the earliest EU countries would start paying the interest would be 2027, but it could also happen later.

To establish a loan for Ukraine secured by the EU budget, it is necessary to increase the so-called headroom. The word that has become very popular over the last 24 hours refers to the margin in the EU budget that is created when member states decide to increase the share of their contributions beyond the amount needed to cover expected expenses. The Czech Republic, Slovakia and Hungary agree to increase headroom.

This is a solution already tested by the Community during the pandemic, when a recovery fund of EUR 750 billion was established in response to the economic difficulties of Member States. In other words, headroom was increased to enable financing of the National Recovery Plans (KPO) from loans taken out by the EC on the markets.

The situation is similar with some of the support previously provided to Ukraine, e.g. right after the Russian invasion of Ukraine in 2022. Then, as a result of increasing headroom and taking out debt, Kiev received EUR 18 billion.

After the European Council's decision to take out another loan guaranteed by the EU budget, it was commented that the common debt was becoming a problem for the EU.

When asked why we don't call this loan Eurobonds, an EU official replied: “Define what Eurobonds are and then I'll tell you.”

The question remains for how long the EU will take out this loan. – We say that Ukraine will repay this loan when reparations are paid. Until then, we can “roll over” the debt. But at some point, we will have to ask ourselves whether we should continue extending this debt, repay it, or do something else – said the EC official.

From Brussels Magdalena Cedro (PAP)

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