There is an interesting debate going on in Western capitals over financial support for Ukraine. The possibility of political change, coupled with Russia’s decision to suspend disbursements on its $12 billion financial package, has created an opening for meaningful economic reforms and renewed ties with global financial bodies. There are compelling political arguments for the West to respond with a financing program that makes it economically viable for Ukraine to choose the EU Association Agreement that it rejected last year. But the economics make a deal hard to put together. For now, the ball is in Ukraine’s court—tensions remain high and Western aid will require at a minimum a technocratic and reform oriented government be put in place. But should that happen, here are five economic questions on the table. Read more »
Over the past year, Europe has enjoyed calm financial markets. At the core of the market’s comfort were two assumptions about policy. First, that the European governments would do just enough to keep the process of European integration moving forward. Second, that the ECB would, in the words of Mario Draghi, do “whatever it takes” to save the euro. The centerpiece of the ECB’s subsequent efforts was expanded liquidity (through long-term repurchase operations and easier collateral requirements for banks to access ECB liquidity) and a commitment to purchase government bonds to support countries return to market (the OMT program). Even many pessimists who fear that Europe is trapped on a unsustainable, low-growth trajectory remain optimistic that Europe will do what it takes to navigate the near term risks. It may be time to question that optimism.