Europe must offer Ukraine a big enough financial package to deter the Kremlin
Oct 30th 2025
HISTORY TEACHES that wars begin when governments believe the price of aggression is cheap,” argued President Ronald Reagan in 1984. He oversaw a vast increase in America’s defence budget that the Soviet Union could try to counter only by wrecking its economy. By the end of the decade the “evil empire” was collapsing.
Today Europe is confronted by a similar external threat in the form of an aggressive Russia that is determined to destroy Ukraine and break the unity of NATO. To stop it, Ukraine needs to be supplied with enough money and materiel to defend itself, keep its economy afloat and impose a punishing cost on Russia. Ukraine’s backers also need to signal credibly that they will support the country for as long as it takes to make it clear to Vladimir Putin that he cannot win a long war. The difference now is that Europe will have to foot this bill almost entirely without America, which under President Donald Trump is walking away from an alliance that kept the peace in Europe for 70 years.
The task is daunting. We calculate that Ukraine will need approximately $389bn in cash and arms over the four years from 2026 to 2029 (for consistency we are using dollars and constant prices throughout), mainly from Europe. That is almost double the roughly $206bn that Europe has supplied since just before the war started in February 2022. Over the same period America gave about $133bn in cash and weapons. Put another way, the cost of supporting Ukraine without America to the remaining members of NATO will need to increase from about 0.2% of GDP to 0.4%. Whether Europe rises to this challenge will be a test of its aspirations to “strategic autonomy”, by which it means it can act in its own foreign-policy interests without depending on America (or China).
Ukraine’s government currently has a direct defence budget of about $65bn a year. It also spends another $73bn a year on all other government services and outlays, according to Dragon Capital, an investment firm in Kyiv. The government raises close to $90bn in revenues domestically, leaving it with an annual budget deficit of about $50bn. In addition it relies on donated weapons, such as American rockets and European air-defence systems, which are valued at some $40bn this year, according to data from the Ukrainian defence ministry shared with The Economist.
This has been enough for Ukraine to hold the line, but only just. Ukraine’s own spending on defence has been increasing by about 20% a year to stay at roughly two-thirds the value of Russia’s rising spending, though this comparison may flatter Ukraine. A senior Ukrainian official suggests Russia’s actual expenditure on the war may be more than double its official budget.
How much more Ukraine needs depends largely on the future structure of its defence force, says a government insider. The Economist has assumed that Ukraine’s total defence needs (including donated kit) will increase by 5% a year in real US dollar terms. We assume other government spending will remain flat, with one exception. Repairing Ukraine’s war-damaged infrastructure and starting to rebuild the country will cost $5bn a year, we reckon.
In addition, Europe will need to provide about $181bn-worth of weapons and ammunition to Ukraine. America, which had pledged or provided about $75bn-worth of kit under the Biden administration, has now turned off the taps (though it still gives crucial intelligence and communications support). There are other European programmes, but they are not big enough. For instance, Britain’s arms supplies are worth some $4bn a year, while Denmark and others are allocating $8bn between 2022 and 2028 to supply Ukraine with weapons made by its own industry.
Adding up Ukraine’s needs over the next four years, including donated arms, budget support and some reconstruction costs, comes to $389bn. If this were to be funded entirely by Europe, the European Union and its members would have to provide $328bn and Britain about $61bn. Funding would have to continue even if the war stopped, as Ukraine would need to replenish ammunition stocks and maintain a standing army to deter Mr Putin.
Digging deep
Where is this to come from? The EU has budgeted to provide $15bn by 2027. Non-European partners other than America will probably give Ukraine $2bn a year, as will domestic buyers of government bonds, who are encouraged by regulation and capital controls to hold them. The IMF is expected to provide about $10bn. Although the programme would be small, it “is the anchor that allows others to contribute”, says Kostiantyn Kucherenko of Dragon Capital, referring to how the fund’s economic oversight can provide confidence.
There are two initial pots of money the EU could use to fill the remaining gap. The first is its own budget. Although the current one has been tapped out, the European Commission wants to provide Ukraine with $117bn in the next seven-year cycle, starting in 2028. Doing so would need big savings elsewhere. A more realistic estimate is $30bn a year in 2028 and 2029.
The second pot is a so-called “reparations loan” that would be made using $163bn-worth of Russian state assets frozen in European (mostly Belgian) accounts. The recent conversion of Friedrich Merz, Germany’s chancellor, to this cause helped energise efforts to pursue it. The idea is for clearing houses to lend the money to the EU (through issuing special bonds), which then would pass the proceeds onto Ukraine. The catch for Russia is that the loans would be repayable only if it agreed to pay Ukraine reparations after the war. But Belgium fears the mooted national guarantees for the new EU bonds are not sufficient and could leave it on the hook. Its unexpectedly entrenched opposition has stalled the plan.
There is also considerable disagreement over what this $163bn can be spent on. Mr Merz says the new money must be used only to buy weapons, not to fill the hole in Ukraine’s budget. Ukrainian officials see that as unfeasible. But Mr Merz’s real intention may be to press other international donors, such as Japan or Canada, to fill the budget gap, and to prod Ukraine to raise more revenue or cut its spending.
A related debate is where money for weapons should be spent. European aid to Ukraine surged to $23bn from April to June this year, as America’s has declined. Much of the European cash has found its way to America regardless. Under a scheme known as the Prioritised Ukraine Requirements List, America sells weapons at cost price to Europeans, who send them on to Ukraine. Sending oodles of cash across the Atlantic is increasingly awkward at a time when Europe is trying to build up its own arms industries to wean itself off American weapons.
But there are some capabilities that only America can provide. The French-Italian SAMP/T air-defence system is not as good at shooting down ballistic missiles as America’s Patriot. Europe has yet to field its own equivalent of the HIMARS, which fires precision-guided rockets, or the Tomahawk cruise missile, which has a longer range than European missiles.
Europe is better placed to provide jets. On October 22nd Ukraine and Sweden signed a deal that could lead to Ukraine buying 100-150 Gripen fighter jets to rebuild its air force over many years. The Gripen is relatively cheap and especially well suited to Ukraine’s needs. If Ukraine follows through on the order, it would boost Sweden’s aerospace industry. Even France, which makes competing planes, would prefer this to it buying American ones.
Mark Rutte, NATO’s secretary-general, says that Europe is on track to produce 2m rounds of artillery ammunition annually by the end of the year. In some cases Europe might also funnel its money towards the production of American arms on European soil. Raytheon, which makes Patriot missiles, collaborates with MBDA Deutschland to produce the interceptors in Germany. Feeding Ukraine from that production line could serve as a happy compromise.
Ukraine insists it should have full control over where the money is spent: on its own industry, on European weapons, or, where needed, American ones. “We know better what needs to be covered with this money,” says Iryna Mudra, the deputy head of Ukraine’s presidential office. Officials say Ukraine’s own defence industries are efficient and can produce pioneering drone technologies at scale. But questions of corruption persist. One model being pursued is joint production in Europe using Ukrainian designs. “It’s a win-win,” says a Ukrainian official. “We get more capabilities. You get new capabilities.”
Dirigisme and defence
France, however, has been pushing for the EU to spend more in Europe. “The politics, the geopolitics and the economics of European defence for 80 years have been: ‘We have a US umbrella.’ This has a cost,” says Roland Lescure, France’s finance minister. “Let’s make sure that that umbrella, at least most of it, is made in Europe.” Others, notably in northern and central Europe, are comfortable buying from America or South Korea. “In practice it will be a mix,” says an EU official. “Ukraine needs Patriots and the like, but they also understand that it is easier for European politicians to write large cheques to Ukraine if some of that money helps bolster European defence capabilities.”
Those problems will probably be resolved through what the EU does best: compromise that leaves everyone a bit unhappy. Few doubt that the “reparations loan” will happen, Belgian resistance or not, because it is the only game in town to fund Ukraine in the coming year or two. When that runs out, the obvious solution would be joint European borrowing along the lines of the bloc’s €800bn post-pandemic recovery fund. Yet German officials fear that EU bonds would undermine fiscal discipline in Europe and would also be vulnerable to vetoes wielded by Russia-friendly leaders in the EU. “The main problem is not the Bundestag but [Hungary’s] Viktor Orban,” says one.
Still, the continent knows what must be done, and is finding the backbone to do it. “Europe now looks switched on, and takes the Russian threat seriously,” says Vladyslav Rashkovan, who represents Ukraine alongside 15 other countries on the IMF’s executive board. “This is now about Europe, not just Ukraine.”
Oct 30th 2025
HISTORY TEACHES that wars begin when governments believe the price of aggression is cheap,” argued President Ronald Reagan in 1984. He oversaw a vast increase in America’s defence budget that the Soviet Union could try to counter only by wrecking its economy. By the end of the decade the “evil empire” was collapsing.
Today Europe is confronted by a similar external threat in the form of an aggressive Russia that is determined to destroy Ukraine and break the unity of NATO. To stop it, Ukraine needs to be supplied with enough money and materiel to defend itself, keep its economy afloat and impose a punishing cost on Russia. Ukraine’s backers also need to signal credibly that they will support the country for as long as it takes to make it clear to Vladimir Putin that he cannot win a long war. The difference now is that Europe will have to foot this bill almost entirely without America, which under President Donald Trump is walking away from an alliance that kept the peace in Europe for 70 years.
The task is daunting. We calculate that Ukraine will need approximately $389bn in cash and arms over the four years from 2026 to 2029 (for consistency we are using dollars and constant prices throughout), mainly from Europe. That is almost double the roughly $206bn that Europe has supplied since just before the war started in February 2022. Over the same period America gave about $133bn in cash and weapons. Put another way, the cost of supporting Ukraine without America to the remaining members of NATO will need to increase from about 0.2% of GDP to 0.4%. Whether Europe rises to this challenge will be a test of its aspirations to “strategic autonomy”, by which it means it can act in its own foreign-policy interests without depending on America (or China).
Ukraine’s government currently has a direct defence budget of about $65bn a year. It also spends another $73bn a year on all other government services and outlays, according to Dragon Capital, an investment firm in Kyiv. The government raises close to $90bn in revenues domestically, leaving it with an annual budget deficit of about $50bn. In addition it relies on donated weapons, such as American rockets and European air-defence systems, which are valued at some $40bn this year, according to data from the Ukrainian defence ministry shared with The Economist.
This has been enough for Ukraine to hold the line, but only just. Ukraine’s own spending on defence has been increasing by about 20% a year to stay at roughly two-thirds the value of Russia’s rising spending, though this comparison may flatter Ukraine. A senior Ukrainian official suggests Russia’s actual expenditure on the war may be more than double its official budget.
How much more Ukraine needs depends largely on the future structure of its defence force, says a government insider. The Economist has assumed that Ukraine’s total defence needs (including donated kit) will increase by 5% a year in real US dollar terms. We assume other government spending will remain flat, with one exception. Repairing Ukraine’s war-damaged infrastructure and starting to rebuild the country will cost $5bn a year, we reckon.
In addition, Europe will need to provide about $181bn-worth of weapons and ammunition to Ukraine. America, which had pledged or provided about $75bn-worth of kit under the Biden administration, has now turned off the taps (though it still gives crucial intelligence and communications support). There are other European programmes, but they are not big enough. For instance, Britain’s arms supplies are worth some $4bn a year, while Denmark and others are allocating $8bn between 2022 and 2028 to supply Ukraine with weapons made by its own industry.
Adding up Ukraine’s needs over the next four years, including donated arms, budget support and some reconstruction costs, comes to $389bn. If this were to be funded entirely by Europe, the European Union and its members would have to provide $328bn and Britain about $61bn. Funding would have to continue even if the war stopped, as Ukraine would need to replenish ammunition stocks and maintain a standing army to deter Mr Putin.
Digging deep
Where is this to come from? The EU has budgeted to provide $15bn by 2027. Non-European partners other than America will probably give Ukraine $2bn a year, as will domestic buyers of government bonds, who are encouraged by regulation and capital controls to hold them. The IMF is expected to provide about $10bn. Although the programme would be small, it “is the anchor that allows others to contribute”, says Kostiantyn Kucherenko of Dragon Capital, referring to how the fund’s economic oversight can provide confidence.
There are two initial pots of money the EU could use to fill the remaining gap. The first is its own budget. Although the current one has been tapped out, the European Commission wants to provide Ukraine with $117bn in the next seven-year cycle, starting in 2028. Doing so would need big savings elsewhere. A more realistic estimate is $30bn a year in 2028 and 2029.
The second pot is a so-called “reparations loan” that would be made using $163bn-worth of Russian state assets frozen in European (mostly Belgian) accounts. The recent conversion of Friedrich Merz, Germany’s chancellor, to this cause helped energise efforts to pursue it. The idea is for clearing houses to lend the money to the EU (through issuing special bonds), which then would pass the proceeds onto Ukraine. The catch for Russia is that the loans would be repayable only if it agreed to pay Ukraine reparations after the war. But Belgium fears the mooted national guarantees for the new EU bonds are not sufficient and could leave it on the hook. Its unexpectedly entrenched opposition has stalled the plan.
There is also considerable disagreement over what this $163bn can be spent on. Mr Merz says the new money must be used only to buy weapons, not to fill the hole in Ukraine’s budget. Ukrainian officials see that as unfeasible. But Mr Merz’s real intention may be to press other international donors, such as Japan or Canada, to fill the budget gap, and to prod Ukraine to raise more revenue or cut its spending.
A related debate is where money for weapons should be spent. European aid to Ukraine surged to $23bn from April to June this year, as America’s has declined. Much of the European cash has found its way to America regardless. Under a scheme known as the Prioritised Ukraine Requirements List, America sells weapons at cost price to Europeans, who send them on to Ukraine. Sending oodles of cash across the Atlantic is increasingly awkward at a time when Europe is trying to build up its own arms industries to wean itself off American weapons.
But there are some capabilities that only America can provide. The French-Italian SAMP/T air-defence system is not as good at shooting down ballistic missiles as America’s Patriot. Europe has yet to field its own equivalent of the HIMARS, which fires precision-guided rockets, or the Tomahawk cruise missile, which has a longer range than European missiles.
Europe is better placed to provide jets. On October 22nd Ukraine and Sweden signed a deal that could lead to Ukraine buying 100-150 Gripen fighter jets to rebuild its air force over many years. The Gripen is relatively cheap and especially well suited to Ukraine’s needs. If Ukraine follows through on the order, it would boost Sweden’s aerospace industry. Even France, which makes competing planes, would prefer this to it buying American ones.
Mark Rutte, NATO’s secretary-general, says that Europe is on track to produce 2m rounds of artillery ammunition annually by the end of the year. In some cases Europe might also funnel its money towards the production of American arms on European soil. Raytheon, which makes Patriot missiles, collaborates with MBDA Deutschland to produce the interceptors in Germany. Feeding Ukraine from that production line could serve as a happy compromise.
Ukraine insists it should have full control over where the money is spent: on its own industry, on European weapons, or, where needed, American ones. “We know better what needs to be covered with this money,” says Iryna Mudra, the deputy head of Ukraine’s presidential office. Officials say Ukraine’s own defence industries are efficient and can produce pioneering drone technologies at scale. But questions of corruption persist. One model being pursued is joint production in Europe using Ukrainian designs. “It’s a win-win,” says a Ukrainian official. “We get more capabilities. You get new capabilities.”
Dirigisme and defence
France, however, has been pushing for the EU to spend more in Europe. “The politics, the geopolitics and the economics of European defence for 80 years have been: ‘We have a US umbrella.’ This has a cost,” says Roland Lescure, France’s finance minister. “Let’s make sure that that umbrella, at least most of it, is made in Europe.” Others, notably in northern and central Europe, are comfortable buying from America or South Korea. “In practice it will be a mix,” says an EU official. “Ukraine needs Patriots and the like, but they also understand that it is easier for European politicians to write large cheques to Ukraine if some of that money helps bolster European defence capabilities.”
Those problems will probably be resolved through what the EU does best: compromise that leaves everyone a bit unhappy. Few doubt that the “reparations loan” will happen, Belgian resistance or not, because it is the only game in town to fund Ukraine in the coming year or two. When that runs out, the obvious solution would be joint European borrowing along the lines of the bloc’s €800bn post-pandemic recovery fund. Yet German officials fear that EU bonds would undermine fiscal discipline in Europe and would also be vulnerable to vetoes wielded by Russia-friendly leaders in the EU. “The main problem is not the Bundestag but [Hungary’s] Viktor Orban,” says one.
Still, the continent knows what must be done, and is finding the backbone to do it. “Europe now looks switched on, and takes the Russian threat seriously,” says Vladyslav Rashkovan, who represents Ukraine alongside 15 other countries on the IMF’s executive board. “This is now about Europe, not just Ukraine.”
