On the hook: how Starmer made the UK liable for €21bn of EU "loans" to Ukraine

‘The Brexit Years Are Over’: Starmer’s Ukraine loan scheme makes UK taxpayers backstop the obligations of Italy and Spain et al in amounts of tens of billions of euro

By Bob Lyddon

ONE OF Keir Starmer’s final acts as Prime Minister was to commit the UK to participate in the EU’s €90 billion Ukraine Support Loan scheme [1]. This is part of Labour’s EU Re-set – another part not mentioned in their General Election manifesto. It reverses Brexit in tying the UK into all of the EU foreign policy, the EU budget (the Multiannual Financial Framework or MFF), EU law, and the jurisdiction of the European Court of Justice. 

The scheme will raise money on international markets, and all participating countries are liable for all of the resulting debts. Once again the UK has to worry about the ability of other participants to pay their shares, failing which the UK’s share escalates. Once a country has joined such a scheme, there is always a reason – legal or political – to bail the scheme out with more money. We voted for Brexit to stop doing that, but Labour have unilaterally reimposed it on us.

Loss of foreign policy autonomy

The UK was able in 2022 to support Ukraine in a manner it was unable to do in 2014 when UK foreign policy was subject to EU foreign policy [2]. We were not hamstrung by Angela Merkel’s priority of protecting Germany’s supply of cheap Russian gas. Now we re-enter that framework, in which the EU’s sanctions framework against Russia has multiple gaps, against which the UK will no longer be able to act unilaterally [3]. We will instead have to seek the agreement of EU member states for our own policy towards Ukraine, risking that, as in 2014, it will be watered down to the lowest common denominator amongst EU member states, Germany at that time being the lowest.

Loss of financial autonomy

The UK now loses its financial autonomy from the EU budget: the MFF. The new scheme is one – like the Next Generation EU Fund [4] – where the European Union borrows the funds on international markets under a ceiling established in the MFF, and then releases the funds for the scheme’s stated purpose. The MFF contains a built-in guarantee from the scheme’s backers – the member states – to the providers of funds, that the backers cannot permit a deficit to arise in the MFF. If there are payments due to investors out of the MFF but no receipts into the MFF from whoever the funds were originally released to, the backers have to pay the amount due to investors into the MFF to avoid its going into deficit.

Keir Starmer and Labour have now done exactly what the UK’s voters determined should not be done: to once again put the UK at risk of having to provide money to stop the MFF going into deficit, just as if the UK were still an EU member state.

Loss of legal autonomy

Whatever legal papers are signed will be subject to EU law and the exclusive jurisdiction of the European Court of Justice: UK voters determined that the UK should be released from EU law and the jurisdiction of the European Court of Justice. Keir Starmer and Labour have reversed the UK voters’ decision.

33% of the EU loan scheme is to be lent under Macro-Financial Assistance [5]

€30 billion of the €90 billion will be lent under the EU’s Macro-Financial Assistance, an existing fund for non-EU countries who are subject to a financial programme under the auspices of the International Monetary Fund [6]. This was already an EU fund at the time of the Brexit Referendum, and is therefore an arrangement that UK voters determined the UK should have nothing more to do with.

The arrangement has required two bendings of the rules previously assumed to limit the application of Macro-Financial Assistance:

1.         That the assistance must be provided as part of an overall package of support coordinated by the International Monetary Fund; and

2.         That the assistance must be in the form of loans on which the borrower has to pay interest and capital repayments on stated dates.

This bears out a criticism of the EU’s structure, that it can find a way to expand its powers to meet the needs of the moment.

66% of the EU loan scheme is for defence equipment

€60 billion of the €90 billion will be used for defence equipment. This entails the problem that this asset is perishable, and generates no revenue with which to pay back the debt that enabled it to be purchased. Normally such equipment is paid for out of general taxpayer funds or through issuance of national debt, rather than being hidden in a ‘fund’.

General terms of the scheme are not credible

The scheme has no unconditional obligation on the ultimate user of the assets – Ukraine - to pay interest or to make capital repayments on the debt that enabled the assets to be purchased. This ensures that the MFF will be put into a deficit position, and requires that the backers stand willing in advance to inject the funds needed to prevent that, rather than their reacting to an unexpected deficit caused by a party failing to come good on its financial obligations.

In this case Ukraine has no unconditional financial obligations regarding the scheme. This anomaly applies to the entire €90 billion, not just to the €60 billion for defence equipment. 

Ukraine is exempted from making any interest payments: these will have to be met by the scheme’s backers and until the scheme is paid off.

Ukraine’s obligation to repay the capital is conditional upon their receipt of reparations from Russia, and – it is hoped – the release of an amount held blocked in Belgian banks [7]. That money cannot be sequestered: it would require Russia’s agreement, which would only be forthcoming if they lost the war, agreed to pay reparations, and further agreed that these funds would be released as part of the reparations. The chances of all those things happening at all must be counted as below 10%, and the chance of them all happening within the next ten years must be counted as below 1%.

As a result all the interest on the €90 billion will have to be paid by the scheme’s backers for at least the next decade, and the scheme’s backers need to take note of the risk that the funding raised by the EU in its name from international markets will fall due for repayment and cannot be replaced before any money comes back from Ukraine in the form of reparations. This shortfall – in any amount up to and including the full €90 billion - could occur at the maturity date of the first round of funding for the scheme, or the second, or the third, and so on.

This last point creates a linkage between the UK’s finances and the EU MFF with no contractual end date. It is a permanent re-linkage of the UK back into the MFF.

The UK’s risk in participating in an EU fund

As stated above, all member states are responsible, on a joint-and-several-liability basis, for making sure that the MFF is in balance. Each one is responsible in law for the entire amount, albeit that the initial call for extra money – should the MFF go into deficit – would be parcelled out in percentages whereby each member state is asked to pay that portion of the call which reflects its own Gross National Income as a proportion of the EU’s total Gross National Income.

If any member state is unable to pay its share, then that member state’s Gross National Income is deducted back from EU’s Gross National Income, and the calculation is run again. A member state initially responsible for 15% of EU Gross National Income would now find itself responsible for over 15% of the call, because its own Gross National Income as the numerator is now divided by a smaller denominator - EU Gross National Income less the defaulting member state’s Gross National Income.

If 26 out of 27 member states default, the Gross National Income of each one is deducted back from EU Gross National Income in turn. The ultimate calculation involves only the 27th member state: its Gross National Income (GNI) is divided by itself, the product of which calculation is 100%. The 27th member state is the ‘last man standing’ who has to pay the entire call. This is the meaning of the phrase commonly used now to assuage debt markets as to the quality of the EU’s debts with its current 27 member states: ‘it all tracks back onto Germany’.

Three EU member states already decided not to participate in the Ukraine scheme

Hungary, Slovakia, and Czechia will not participate in the Ukraine scheme [8]. This means that the risk for participating member states as a percentage of the scheme’s size will at the outset be higher than their GNI as a fraction of EU GNI. This exemption depends on creative interpretations of the EU’s own rules: how can three member states step out of a scheme that runs through the MFF, for which all member states are liable under the treaty establishing the EU? Are these three countries EU member states or not? The fact that this is possible serves as proof of the inherent weakness of any legal contract to which the EU is a party: the EU possesses emergency powers over which it itself is the adjudicator. If the EU bends its own rules and states that the scheme is required in this form to protect the interests of the EU, even with three countries not participating, it knows it will have the backing of the European Court of Justice [9]. The member states have no protection against the EU overstepping limits on the powers that member states have transferred to the EU, if the EU considers it necessary in an emergency certified as such by itself. In this case the risks being taken by the residual 24 member states are increased, without votes in national parliaments or referenda.

What the UK’s share of any loss would be on a legal basis with and without the participation of these three member states

The aim here is to give a broad sizing. For that purpose we use figures for GDP rather than for GNI for our calculations, acknowledging the minor inconsistencies between the two measures. GDP is a measure more familiar to readers, and one that is easier to check. 

The UK’s 2025 GDP was €3.4 trillion. 

Firstly we must calculate the UK’s legal share of any extra claim necessitated by a deficit in the MFF, in the case that all 27 EU member states are participating in the scheme and that they all pay. We do this by first adding the UK’s GDP to the EU 2025 GDP of €17.8 trillion, in order to produce a reference figure of €21.2 trillion for the combined EU and UK GDP. The UK’s GDP is divided into that figure. The product of this calculation – which is 16% - is the portion of the loss on an EU scheme to be paid by the UK in the first instance, assuming that all 27 EU member states pay their shares. 

However, only 24 are participating in the Ukraine scheme, and their GDP figures need to be backed out of the reference figure of €21.2 trillion. The GDPs of Hungary (€214 billion), Czechia (€340 billion), and Slovakia (€135 billion) amount to €0.7 trillion [10].  The reference figure of €21.2 trillion must be reduced by this €0.7 trillion to €20.5 trillion. The UK’s GDP is divided into this new figure. The product is 16.6% - 0.6% more than if the three member states had participated.

The UK’s share would be 16% of the loss initially in any scheme in which all 27 EU member states were participating, but 16.6% in the Ukraine case due to the non-participation of three EU member states.

This is only the legal liability under the first call for funds. The UK’s share would rise further in line with the inability of participating member states to pay the calls made on them, under the operation of the ‘last man standing’ mechanism.

The idea that the UK’s share could be limited is false

UK politicians who support the UK’s participation in this scheme – as opposed to the UK’s other options of making direct loans to Ukraine, giving grants, or setting up a new variation of lend/lease [11] – will be quick to dismiss the contents of this paper on the contention that the UK will be able to negotiate carve-outs from the liability under this last point – that the UK’s share would rise if participating EU member states failed to pay their shares. 

The problem is that, once the UK is in such a scheme, the UK will have submitted to the scheme’s logic – to see it through to the bitter end even if others fall by the wayside. This is the ‘last man standing’ principle which is the basis of the MFF.

As happened in the case of the financial bailouts of Ireland and Portugal in 2011, the UK’s carve-out by dint of its not being in the Eurozone was dissolved in a crisis situation, with the agreement and cooperation of UK politicians and their advisers. The UK Prime Minister David Cameron stated in the House of Commons that the UK would not provide funds for any euro bailout [12]. Instead the UK permitted its guarantee to be used, through the MFF, for the EU to raise the funds.

One can see this sort of double-speak being repeated in the case of the Ukraine scheme – for example if the EU could not refinance the bonds it issues to finance the scheme. The argument will be brought, as it was before, that it is in the UK’s long-term strategic interests to ensure that neither the EU itself nor any of its associated institutions or schemes should default on their liabilities, and that the UK should therefore make a financial contribution – in guarantees or cash - even if it is not legally obliged to do so.

The customary follow-up to strengthen this argument would be mobilised: that not making a contribution would damage the credit standing of the UK itself if the UK was not seen to come good on its implicit liability to support an institution it was associated with.

If the UK attempted to defend a carve-out through legal avenues, the governing law would not be English law but EU law, and the forum of proceedings would not be the Courts of England and Wales. The case would be heard before the European Court of Justice and be subject to their exclusive jurisdiction. In other words the carve-out would have to be defended against the EU in a forum where the interests of the EU, as certified by itself, outrank the interests of other parties.

How much would the UK’s risk position be in practice under the Ukraine scheme, as opposed to legally?

The ability of other participating member states to come good on their legal obligations cannot be taken for granted. These member states include the ones that have received financial bailouts and have not yet paid back their bailout funds (although they have all been released from the bailout process as defined by the EU) [13].  It depends on their financial status, the most ready guide to which is the public credit rating of the bonds issued by them [14].

One should deduct from the reference figure of €20.5 trillion the GDPs of any of the 24 participating member states who have a credit rating falling below the level where a bond qualifies as a ‘safe asset’. This is the EU’s own measure of whether an obligation is reliable. Using the S&P Global ratings system this means backing out the GDP of any member state whose bonds are rated below AA-. The respective EU member states and their 2025 GDPs are:

We must deduct this total from the reference figure of €20.5 trillion, produce a new figure for the UK’s percentage, and apply it to the scheme’s size:

The UK should make provision in its own accounts for a loss of capital of €21.1 billion, as well as for 23.4% of the annual interest bill. The annual interest bill is based on the assumption that the EU can sell the bonds backing this scheme for an interest cost of 3.5% per annum, 0.40% above the 10-year yield on German government bonds on 28th July 2026 [16]. The annual interest bill would be €3.15 billion, and the UK should make provision for having to pay 23.4% of that, or €737 million per annum.

Further EU defence-related scheme

Starmer and Rachel Reeves intended to design the next EU fund, mooted at €150 billion in the EU’s investor presentation dated 23rd June 2026, and called the SAFE fund. This will be mobilised during the 2028-34 MFF. We can safely assume that the new Labour administration will go along with that.

Assuming that all member states participate in it, the UK’s risk percentage would revert to 16% in legal terms and be €24 billion on that basis (€150 billion x 16%).

Under the system of deducting back the GDPs of all member states whose credit ratings did not qualify their bonds as ‘safe assets’, though, the picture is similar to the Ukraine scheme, except that Czechia – with an AA rating – would be a participant and with bonds that rank as a ‘safe asset’.

With Czechia’s participation the UK’s percentage is slightly lower, but the scheme is significantly larger:

The UK should make provision in its own accounts for a loss of capital of €34.5 billion, but the situation regarding interest differs in that it is not yet clear whether the scheme itself will:

1.         make loans to participant countries for the equipment they buy; or

2.         buy the defence equipment itself and lease it to the participant countries; or 

3.         make loans to the seller of the equipment, for them to finance their sales to the user participant country, who pays for the equipment over time. 

Variants (2) and (3) have the statistical and reporting advantage that the payments by the user participant country would be commercial payments, not interest payments, thereby keeping the interest payments and the capital amount of the debt they ultimately relate to out of the calculations for the participant country’s national debt and debt servicing costs.

It will be difficult, though, for any participating country to limit its risk to either the value of the equipment it buys, or to the value of the equipment that suppliers in its country sell, when the scheme is being run through the EU legal entity and the MFF.

Pending clarification of these structural issues – and we doubt whether those issues can be resolved to the extent of limiting the UK’s exposure to 16% of the total - it would be prudent for the UK to factor into its figures 23.0% of the annual interest bill.

Again the assumption is that the bonds are sold by the EU at a yield of 3.5% per annum, resulting in an annual interest bill of €5.25 billion, of which the UK’s 23.0% share would be €1.2 billion.

There is no valid reason why this scheme – unlike the Ukraine one – should not be paid off over 10-15 years, amortizing the risk to the UK in the process. 

Combined risk from both the Ukraine Loan and SAFE schemes

The UK’s combined risk position on both schemes, for capital and interest, is as follows:

These are all obligations in a currency foreign to the UK and contain foreign exchange risk.

Conclusions

It was a prime reason for – and benefit of – Brexit that the UK no longer had to stand guarantor for the obligations of weaker EU member states, and that we need concern ourselves no longer with the levels of bad loans in Italian banks, or with the capacity of France to pass a budget through its parliament, or with the adherence of Greece to the terms of its bailout.

Starmer and Reeves have driven us right back into that morass, having promised in the Labour 2024 General Election manifesto to carry out a ‘Re-set’, not a permanent re-entanglement in the EU’s finances, and its foreign policy, and its legal jurisdiction.

The Brexit years are over, as Starmer said.

Bob Lyddon is an experienced management consultant in the euro, international banking, electronic payments and SWIFT. He has been a major contributor to Global Britain with regular reports about the financing mechanisms of the EU and Eurozone, starting with the eight ‘Brexit Papers’ issued shortly after the BrexitReferendum: https://globalbritain.co.uk/papers/

Photo courtesy of Ministry of Defence of Ukraine - Дети войны, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=89189750