Ukraine would be entitled to a massive €186bn of subsidies over seven years if it joins the EU

Ukraine would be entitled to a massive €186bn of subsidies over seven years if it joins the EU
/ bne IntelliNews
By Ben Aris in Berlin October 4, 2023

As Kyiv would be entitled to approximately €186bn of EU subsidies over seven years, that would cause a revolution in how Brussels’ budget is generated and force a deep reform on the way the EU works before Ukraine can be admitted.

“All member states will have to pay more to and receive less from the EU budget; many member states who are currently net receivers will become net contributors,” concluded the paper by the secretariat of the EU council, as cited by the Financial Times.

This is according to a leaked internal estimates report on the European Union's common budget, seen by the FT. A third of the EU’s entire budget already goes on agricultural subsidies, known as the Common Agricultural Policy (CAP).

As bne IntelliNews reported in September, Ukraine cannot join the EU unless the CAP is reformed, as the subsidies it would be entitled to could bankrupt the system under the current CAP terms. Also Ukraine’s unfettered access to the whole EU market would also flood Europe with extremely cheap agricultural products that could drive much of Western European agricultural concerns out of business, or at least require enormous subsidies for the rest of Europe’s agricultural producers. Just the agricultural subsidies for Ukraine under the CAP would cost €16bn a year, according to bne IntelliNews estimates.

The €186bn reported by the FT would be equivalent to payments of €26.4bn per year. Out of that amount under current rules applied to the expanded union, Ukraine would be eligible for €96.5bn from the EU's CAP over seven years, or €13.8bn, leading to a 20% reduction in farm subsidies for existing member states.

The paper makes clear that Ukraine’s impact on the EU’s agricultural subsidy regime would be the most significant. Ukraine would become the bloc’s largest CAP recipient, with 41.1mn hectares of utilised arable land, pushing France into second place and reducing payments for existing member recipients down by 20.3% per hectare of qualifying farmland.

Aside from Ukraine, adding the other eight prospective EU members from the Western Balkans and Moldova and Georgia would cost an additional €29.9bn in CAP payments.

In addition, Ukraine would qualify for €61bn from the EU's cohesion funds (€8.7bn a year), which aim to enhance infrastructure in less affluent member states. With the inclusion of nine new members, the study estimates that countries like the Czech Republic, Estonia, Lithuania, Slovenia, Cyprus and Malta would no longer be eligible for cohesion funding.

For comparison, currently the biggest recipient of EU subsidies is Poland, which receives €9bn a year from Brussels and has done so for more than a decade. And this week the EU has signed off on a €50bn support package for Ukraine to fund its efforts in the war with Russia, but spread over four years, or €12.5bn per year. This year, Ukraine’s Prime Minister Denys Shmyhal said that Kyiv is expecting a total of €18bn in macro and military aid from the EU.

So far, the US has sent Ukraine $43.9bn in military assistance and nearly $100bn in total, according to the Pentagon. Last year the EU also sent €18bn in support.

The estimates of the cost of admitting Ukraine to the EU – accession talks are due to start in the middle of December – are the first to be revealed by Brussels concerning the potential cost of allowing Ukraine, Moldova, Georgia and six western Balkan countries to join the club.

The expansion of the EU to include these nations would bring the total financial impact to €256.8bn on the existing budget framework, including a notable cut in farm subsidies, the FT reported.

The proposed changes could see many member states that currently are net beneficiaries of EU spending become net contributors. This expansion would also increase the current budget by 21%, to €1.47 trillion, which equates to approximately 1.4% of the combined gross national income of the 36 EU countries.

There has already been some muted talk of reforming the EU to accommodate new members, acknowledging the problem of soaring costs, without drilling into the details. French President Emmanuel Macron has already suggested a multi-speed Europe where the new members become “associate members” of the EU, but not actual members, which would cut off their access to subsidies under existing EU rules – a suggestion that was rapidly slated by Kyiv.

Another issue that has surfaced recently is changing the voting system in the EU from the current need for unanimity in all votes to a simple majority vote. Those states like Poland, Hungary and Slovakia that would go from net beneficiaries to net contributors are highly likely to veto Ukraine’s accession on the basis it will end their subsidies. This week, Hungarian Prime Minister Viktor Orban suggested cutting the EU’s support package in half from €50bn to €25bn.

The need to reform CAP has already been clear for several years and some reforms went into effect this year as part of the EU plans to reduce emissions in the fight against climate change; animal husbandry is a major source of methane emissions.

It is already clear that to accommodate the entry of nine new member states, substantial adjustments to the EU are required, including potential increased budget contributions from wealthier nations such as Germany, France and the Netherlands. The EU paper suggests the necessity of transitional periods and safeguarding measures to manage the impact.

The European Commission has not endorsed these estimates, says the EU, and the entitlements will be a key topic during the negotiations that are due to start at the end of this year.

The paper concludes: “[these] very significant challenges for the EU . . . will need to be thoroughly addressed also in order for this new enlargement to be at least accepted, if not supported, by our citizens.”