EU member states mulling three options to circumvent Hungarian veto of Ukraine aid

The EU summit in mid-December was mainly remembered for the vote to open accession negotiations with Moldova and Ukraine, with the agreement of 26 member states, because Hungary's Prime Minister Viktor Orbán did not veto the decision but left the room after accepting Olaf Scholz's 'offer' to pop out for a coffee for the duration of the vote. However, the Hungarian PM refused to agree to the €50 billion in multi-year financial support for Kyiv, making Hungary the only EU Member State to veto at the Council meeting.

Sources familiar with the matter told the Financial Times that there are two plans to bypass Viktor Orban's veto and help Kyiv. Officials involved in talks said one model funded by debt has gained traction as the most practical way to provide support if Orbán refuses to drop his veto at a planned summit on 1 February.

This scheme would involve participating member states issuing guarantees to the EU budget, enabling the European Commission to borrow up to €20bn on capital markets for Kyiv next year, people briefed on the talks said. The precise terms are still under discussion and the final amount would be set according to Ukraine’s needs, they added.

The arrangement is similar to the structure used in 2020 when the commission provided up to €100bn in cheap financing to EU countries for short-term work-support schemes during the Covid pandemic.

Remarkably, this option would not require guarantees from all 27 EU member states, so the EU could bypass Hungary's veto by asking only the countries with the best credit ratings for support.

Some countries, including Germany and the Netherlands, would need parliamentary approval for national guarantees, and officials hope this process can be speeded up to provide assistance to Ukraine by March. If EU leaders endorse the plan on 1 February, it could prompt the International Monetary Fund (IMF) to release the next tranche of funding of around $900 million to Ukraine.

Although this alternative would provide financial support, it differs from the original proposal based on the EU budget, as it would not include grants but only loans. Member States could still decide to provide grants on their own.

Another back-up option under consideration involves rolling over the funding structure used this year, under which the EU provided €18bn in cheap loans to Ukraine, for a few months and up to a year. This alternative would require a qualified majority of countries to agree, i.e. two-thirds of the Member States - representing at least 55% of the EU population - would have to vote in favour.

officials in brussels have also outlined a third option to Portfolio, which could be implemented much more quickly than the other two.

Complicated but efficient and would bring benefits

According to this option, a special fund would be set up, with countries contributing on a voluntary basis and in several instalments to cover for a loan of €50 billion, with two conditions to be attached: 1) Ukraine would need to spend at least half of the money to purchase arms from European manufacturers, unless production capacity prevents this; 2) a part of this would also be a long-term loan from the EU to Ukraine. An important part of this proposal would be that the loan guarantee would be a portion of the Russian assets seized under sanctions and their proceeds.

Officials told us that this could be disbursed more quickly if the remaining 26 member states agree to the proposal, as was the case at the EU summit. But the difficulty is that it would take longer to work out the system, and there is a lack of clarity in international law on how to regulate such use of seized Russian assets. On the other hand, it has the advantage that EU Member States could use the arms purchase condition to shore up their own defence industries, so that it could also be economically beneficial.

However, Portfolio was told that only the broad outlines of the plans for the special special fund are available, it is still a plan C, and has not been discussed in substance by the member states.

According to our sources, the plan was raised by representatives of an EU country, and they believe that even Viktor Orbán could endorse it, because the Hungarian prime minister wanted a solution that would settle the Ukrainian subsidies outside the EU's common budget.

Another expectation is that, as the government has lured a number of arms manufacturers to Hungary, it will see the potential benefits of the system. They imagine that, although the Hungarian leadership is reluctant to supply arms to Ukraine, it cannot object to other member states buying combat equipment to replace older stockpiles that are sold to Ukraine.

EU officials have stressed to the Financial Times and to Portfolio too that the European Commission - and most member states - still favours approving the original aid package proposed in June but blocked by Hungary. This comprehensive four-year package includes, in addition to aid for Ukraine, an extra €4 billion for various priorities such as defence investment and migration-related spending.

Whatever the model chosen, the EU has assured Ukraine that it will receive the funding by March at the latest. European Commission spokesmen declined to comment on the ongoing negotiations and the proposals.

Cover photo: EU