Financial shocks and public debt: a comparative analysis of crisis solutions in the EU and Ukraine

Today’s global economy is marked by a high degree of interconnectivity among financial markets, rendering any country vulnerable to external and internal shocks. Neither Ukraine nor the Member States of the European Union (EU) are exceptions: their levels of public debt, approaches to crisis management, and specific financial policies can fluctuate significantly depending on circumstances. This becomes especially evident during crises: the 2008 global financial crisis, the sovereign debt crisis in the Eurozone, the COVID-19 pandemic, and, most recently, the full-scale war in Ukraine. Below is a comparative analysis of the crisis responses in the EU and in Ukraine, as well as an assessment of the prospects and challenges for Ukraine’s public finances in the context of wartime conditions.

1. The Genesis of Financial Shocks: A Global Context

Any financial shock can be described as a sudden and sharp change in economic or political conditions that destabilizes the financial system. The world has witnessed several powerful shocks in recent decades:

1. The Global Financial Crisis of 2008–2009. Triggered by the collapse of the subprime mortgage market in the United States, it quickly spread to international capital markets and led to a sharp drop in GDP in many countries. EU member states employed various anti-crisis measures—ranging from the nationalization of certain banks to large-scale financial injections into the private sector.
2. The Sovereign Debt Crisis in the Eurozone (2010–2013). This crisis mainly arose from budgetary imbalances in Greece, Italy, Spain, Portugal, and Ireland. The EU established financial support mechanisms (e.g., the European Stability Mechanism) and introduced austerity measures.
3. The COVID-19 Pandemic (2020–2021). It caused dramatic changes in economic activity, forcing governments to quickly expand public spending on healthcare and business support. As a result, the debt burden increased in most countries, including EU member states and Ukraine.

All these crises had significant consequences for Ukraine. However, the challenges intensified when Russia launched a full-scale invasion in February 2022. The war became a major shock to public finances and the economy at large, thereby making the issue of financial stability especially urgent.

2. Anti-Crisis Instruments in the EU: Between Joint and National Solutions

The European Union presents a unique combination of supranational and national governance. During periods of crisis, the role of shared financial mechanisms became more pronounced:

1. Recovery and Resilience Facility (RRF). Created in response to the economic impact of the COVID-19 pandemic, it provides funding for projects in “green” and digital transformation, enabling EU member states to borrow at lower rates.
2. European Stability Mechanism (ESM). This instrument is designed to provide financial support to eurozone countries in difficult circumstances. Its resources were used to assist Greece and other countries during the sovereign debt crisis.
3. Austerity Policies. In several EU countries (Greece, Spain, Portugal, Ireland), extremely strict measures were implemented after 2010, including reductions in public spending, tax increases, and the downsizing of public-sector staff. While these steps helped reduce budget deficits, they often slowed economic growth and sparked social unrest.

In addition to these supranational mechanisms, each EU member state has its own set of fiscal and monetary tools. For example, Germany has long pursued the so-called “black zero” (Schwarze Null) policy of balanced budgets, whereas France and Italy have been more inclined to allow a moderate deficit to stimulate economic growth. Such flexibility, however, is constrained by the Maastricht criteria and the Stability and Growth Pact, which regulate acceptable levels of public debt and budget deficits. During times of crisis, these restrictions have been partially relaxed to prevent catastrophic outcomes.

3. Financial Challenges for Ukraine: From Macroeconomic Stability to Wartime Realities

Ukraine faces a unique path to stabilizing its public finances, complicated by large-scale war. Prior to 2022, the main thrust of economic policy focused on banking-sector reforms and anti-corruption measures. Since the onset of the full-scale invasion, however, priorities have shifted toward a wartime economy.

1. Increased Government Expenditures on Defense and Security. Currently, the lion’s share of budgetary resources is allocated to the military, arms procurement, and related defense needs. This naturally increases the budget deficit and thus the need for external borrowing.
2. External Financial Assistance. International partners (including the U.S., the EU, the IMF, and the World Bank) have been providing grants and loans to Ukraine. Some of these programs are coordinated with EU initiatives aimed at supporting candidate countries for membership. However, an expanding credit portfolio also means growing public debt.
3. Domestic Market Challenges. Due to the destruction of infrastructure, logistics systems, and industrial facilities, Ukraine’s economy has lost a substantial portion of its GDP. This complicates tax collection efforts and forces the government to resort to monetary issuance by the National Bank of Ukraine (NBU) or to acquire new loans.

In response to these challenges, the NBU has introduced a set of measures: fixing the exchange rate, raising interest rates (at certain times), and imposing currency controls. On one hand, these steps have stabilized the financial system under extraordinary conditions; on the other, they have heightened dependence on external financing and may create hidden risks for the future.

4. A Comparative Analysis of Anti-Crisis Measures: Lessons for Ukraine

1. Use of Supranational Mechanisms. EU countries can rely on common funds and programs. Although Ukraine is not yet a member of the EU, the country is gradually integrating into European structures and can expect grants and credit options aimed at post-war recovery.
2. Fiscal Discipline vs. Economic Stimulus. The EU experience illustrates the difficulty of finding the “golden mean” between strict control of public spending and the need to support GDP growth. Ukraine will likely need a more flexible approach during its recovery phase: exercising spending discipline while simultaneously investing in infrastructure, technology, and human capital.
3. Social Consequences. Austerity policies in many European states led to social unrest. In Ukraine, where the war has already displaced large numbers of people and severely affected many families, social protection must be a priority to mitigate the risk of further destabilization.
4. Banking Reform and Regulation. EU anti-crisis measures included heightened capitalization requirements for banks. Ukraine began reforming its banking sector after 2015, but the war has significantly complicated the process. For reconstruction efforts to succeed, it is crucial that the banking system remains well-capitalized and reliable.

5. Strategies to Alleviate the Debt Burden: Possible Scenarios

1. Public Debt Restructuring. If the debt load becomes too large to service, the government may initiate negotiations to extend payment deadlines or reduce interest rates. However, excessive restructuring erodes investor confidence.
2. Boosting Export Potential and Attracting Investment. Post-war recovery, coupled with effective anti-corruption efforts, can become a catalyst for foreign investment in Ukraine. A high influx of capital would help service debts and foster GDP growth.
3. Fiscal Consolidation. Strict expenditure control, effective anti-corruption measures, and tax reform can reduce the budget deficit. However, the government must find a balance to avoid stagnation caused by excessively tight cuts.