Marshall's Postwar Logic Holds True in Ukraine Today

Op-ed in the Financial Times

October 22, 2014

Ukraine is ravaged by war, aggravating its economic and financial crisis. It needs major reforms but also substantial international assistance, not only credits but also ample grants. Its emergency calls for a Marshall Plan.

Now, as in 1947, the words of George Marshall, then US secretary of state, ring true: "It is logical that the United States should do whatever it is able to do to assist in the return of normal economic health to the world, without which there can be no political stability and no assured peace." But today the onus rests on the European Union.

If the European Union is serious with its recently ratified association agreement with Ukraine, it needs to show it now.

The National Bank of Ukraine forecasts that the country's economic output will plummet by 10 percent this year. Then the budget deficit will surge to 15 percent of gross domestic product, and the public debt to more than 100 percent of GDP next year. The Ukrainian currency has already been devalued by 60 percent, driving inflation to 19 percent. A classical devaluation-inflation cycle is near and can lead to a financial meltdown.

The need for a Marshall Plan was raised after the collapse of the Soviet Union, but then there was no war destruction, no military threat, and no particular need for a new western alliance. Today all these needs are present, presenting five good reasons for a Marshall Plan for Ukraine.

First of all, the cause of the economic disaster is the war the Kremlin launched against Ukraine on February 27, when the current government was appointed. Russian arms have blown up the power stations in Donbas, stopping the pumps in the coal mines, which have been flooded. In August and September Ukraine's coal production was halved and its steel production down by a third. On September 13 Arseniy Yatseniuk, the prime minister, assessed the war damage to physical infrastructure at $9 billion, and they have risen substantially. Donbas' humanitarian crisis calls for western humanitarian aid.

Second, like Europe after the Second World War, Ukraine needs to rebuild its state and economy. After its democratic breakthrough in February, the election of President Petro Poroshenko on May 25 and parliamentary elections this Sunday, Ukraine will be ready for this gigantic task. If the European Union is serious with its recently ratified association agreement with Ukraine, it needs to show it now.

Third, if the needed capital is provided as credits, Ukraine will not be financially sustainable. In April the International Monetary Fund (IMF) concluded a two-year standby agreement with a total international financial support of $33 billion for two years, of which the IMF itself will contribute $17 billion. But almost all this "aid" consists of credits that Ukraine will have to pay back. In its debt sustainability analysis in July, the IMF foresaw that Ukraine's public debt could rise to 134 percent of GDP in 2016 in a shock scenario, which was softer than the current reality. Fourth, the original Marshall Plan aimed at shielding the free world from the military and diversionary threats of the Soviet Union. Today once again Europe is facing such a serious security threat, now from Russia. Europe needs to stand up to this threat.

Finally, the West itself needs a new form of alliance. NATO is not enough, and no other alliance involving both the European Union and the United States exists. For years Vladimir Putin, the Russian president, has repeatedly pursued aggression involving gas, trade, cyber, information, and the military. Today the European Union, the United States, Canada, Japan, and other Western countries act bilaterally to support Ukraine. They would all benefit from more profound cooperation. The West will have to come together to stop Mr. Putin and they should do so now in Ukraine. Why encourage Mr. Putin to proceed to Moldova, Georgia, and the Balkans, to name but a few?

Ukraine needs all the foreign aid it can get, but it should be coordinated. Therefore, the Kiev government has formed a working group on a Marshall Plan for Ukraine, chaired by Volodymyr Groysman, the deputy prime minister.

The main difference from 1948 is that the European Union should take the lead. It has the necessary means. Andrius Kubilius, the former prime minister of Lithuania, has proposed that the European Union commit 3 percent of its €1 trillion budget for 2014–20—that is, € 30 billion—in grants to Ukraine.

The time to launch a Marshall Plan for Ukraine should be at a planned donor conference in December after the new Ukrainian parliament has opened and a new government formed.

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Anders Åslund Former Research Staff

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