In modern economic thought, there is an increasing trend to view public debt not merely as a burden on the budget but also as an investment instrument to stimulate economic growth. This perspective is particularly relevant in the context of the crisis triggered by the full-scale war in Ukraine, where there is an urgent need for rapid reconstruction, infrastructure modernization, and economic recovery. At the same time, examples from European countries demonstrate that a responsible approach to public borrowing can foster long-term economic growth and competitiveness.
- The Concept of Public Debt as an Investment
Traditionally, public debt has been perceived in fiscal analysis as a means to cover budget deficits. However, viewing debt solely as a “burden” has significant limitations. Notably, if borrowed funds are directed toward high-return projects—such as infrastructure development, education, healthcare, and innovation—then in the long run, a multiplier effect emerges: the economy generates additional revenue, tax receipts increase, and this allows the debt to be repaid without imposing an excessive burden on future generations.
History provides numerous examples of countries where public borrowing served as a catalyst for significant economic breakthroughs. After World War II, intensive governmental support in various European countries, together with the Marshall Plan in the United States, gave a crucial boost to the post-war rebuilding and modernization of national economies. The key to successfully transforming debt into an investment is the efficient use of resources, transparent financial management, and a well-conceived strategy for development.
- European Experience: Lessons in Overcoming Crises and Structural Challenges
2.1. The Marshall Plan and Post-War Reconstruction of Western Europe
A historical example of effectively merging debt financing with investment projects is the reconstruction of Western Europe after 1945. The Marshall Plan involved not only the provision of resources but also the establishment of mechanisms to oversee their proper use. Funds were allocated for the modernization of industry, infrastructure, and social services, laying the groundwork for sustainable economic growth and prosperity.
For Ukraine, the lesson is that even after large-scale destruction, it is possible to reach a new level of development if debt resources have a clear purpose and are backed by effective governance. Even substantial loans or aid packages will not deliver the expected results without institutional reforms and transparent methods of project implementation.
2.2. EU Structural Funds Policy
An important tool for fostering development in EU member states is the system of structural funds, partially formed from the common budget (i.e., funds contributed by the member states). These funds can be seen as a collective “debt burden” shared by the EU and are aimed at reducing economic disparities between different regions and countries, financing infrastructure, social, and innovation projects.
Although Ukraine is not an EU member, the experience of structural funds provides a valuable example of how borrowed or mobilized funds can be managed under rigorous oversight, with clearly defined conditions and efficiency indicators. The key factors here are transparency, reliable evaluations of the regional impact of projects, and the accumulation of scientific and technical expertise for implementing innovations.
2.3. The Role of the European Investment Bank (EIB)
The European Investment Bank (EIB) exemplifies how a united Europe employs debt mechanisms to carry out large-scale, long-term projects. Its mission is to support economic and social development through the provision of long-term financing at favorable interest rates. EIB loans usually target specific objectives: infrastructure, environmental protection, energy, digital transformation, and so forth.
For Ukraine, collaboration with the EIB and other international financial institutions opens the door to essential funding while also requiring transparent and efficient processes for project implementation. In this way, debt is not just an expenditure line in the budget but becomes a tool to achieve key strategic development priorities.
- Challenges and Opportunities for Ukraine in Wartime
Today, Ukraine is experiencing one of its most difficult tests since World War II: a large-scale armed conflict that is destroying infrastructure, eroding economic capacity, and increasing social strain. The need for external borrowing grows substantially to cover urgent social, economic, and defense expenditures.
In this context, the critical dilemma is how to prevent this debt from becoming an unsustainable burden on future generations. The solution lies in forging a debt strategy not just as a short-term survival measure but rather as a comprehensive approach aimed at modernizing the country and transforming its economy. Most importantly, we must recognize that both the size and the effectiveness of debt hinge on:
- Fiscal Discipline. Even under the harsh conditions of war, the government should rationalize expenses, prevent uncontrolled budget deficits, and ensure transparent financial reporting.
- Targeted Use of Funds. Borrowed capital should primarily be directed to infrastructure and innovation projects capable of generating long-term returns: rebuilding destroyed cities, reconstructing logistical networks, and creating a supportive environment for small and medium-sized businesses.
- International Support and Cooperation. Amid external aggression, Ukraine has a unique opportunity to attract aid from leading nations and international financial institutions. It is crucial to maintain open channels of dialogue, building confidence through reforms related to the rule of law and the fight against corruption.
- Scientifically Grounded Strategies for Effective Debt
Research in the fields of public finance and economic policy offers several frameworks that shed light on how the scale of public debt impacts economic development. One key concept is the “Golden Rule” of debt policy, which states that government borrowing is justified if it is invested in capital projects rather than used for current expenses. This implies:
- The state can finance substantial ventures through borrowing if they yield long-term positive effects on the economy (construction of rail or highway networks, modernization of the energy sector, or deployment of “green” technologies).
- If the resources fund only consumptive spending or excessive bureaucracy, the commitments eventually turn into a debt trap.
An additional critical insight is that an optimal debt structure must account for not only the total debt volume but also the maturity schedule, interest rates, and currency mix. Excessive dollarization or heavy reliance on foreign-currency-denominated debt can lead to instability, especially if those obligations are not sufficiently backed by robust reserves. Accordingly, Ukraine should seek not just to raise funding but to actively manage risks through prudent hedging mechanisms, a broader investor base, and a more robust domestic government securities market.
- Public Debt and the Social Contract: The Importance of Transparency and Accountability
In the context of post-war recovery, public oversight of state debt becomes even more vital. Many European countries have managed to broker a sort of “social contract” regarding debt, balancing governmental objectives with public expectations. In essence, citizens, businesses, non-governmental organizations, and state authorities recognize that part of future taxes will service the debt, but that is justified if present spending results in a higher quality of life, new jobs, and enhanced national defense.
To achieve this, it is essential to have:
- Transparent Budgeting Mechanisms. Regular publication of information on the volume of borrowed funds, interest rates, and their allocation.
- Accountability. Independent agencies (audit courts or specialized oversight committees) that scrutinize the efficient use of borrowed resources.
- Public Debate and Expert Consultation. Engagement of independent experts, economists, and civil society actors to evaluate debt strategies.
Government communication with citizens is particularly critical. In wartime, national defense is paramount, causing a heavier financial load on both citizens and businesses. Yet a clear explanation of how debt supports reconstruction can reinforce public confidence in governmental institutions and bolster broader efforts for recovery and reform.
- Prospects and Recommendations
Taking into account Ukraine’s current challenges, we can outline several crucial recommendations for shaping an effective debt policy:
- A Recovery Plan Aligned with European Practices
Develop a comprehensive recovery strategy, including specific infrastructure, defense, social, and innovation projects. Adhere to EU standards of transparency and accountability to facilitate access to international financing. - Strategic Partnerships with International Financial Institutions
Strengthen cooperation with the European Investment Bank, the European Bank for Reconstruction and Development, the World Bank, and the International Monetary Fund. Their expertise and resources can help secure funding and introduce advanced practices in project management and reform. - Diversification of Funding Sources and Development of the Domestic Market
Drawing resources from multiple sources (bilateral state loans, Eurobonds, domestic government securities) mitigates risk and interest-rate pressures. Fostering a vibrant domestic debt market also gives Ukrainian businesses and citizens the chance to take part in financing the nation’s reconstruction. - Targeted Funding for High-Value-Added Projects
Prioritize sectors where Ukraine holds a comparative advantage or can rapidly build one: agriculture with advanced processing, the IT sector, “green” energy, logistics, and goods transportation. These spheres have strong potential to boost GDP and create jobs. - Strengthening Institutional Capacity
Absent reforms in the judiciary, the fight against corruption, and better tax administration, any debt can become perilous. Building institutional capacity is paramount to ensure that borrowed funds are neither misappropriated nor wasted.
Amid a grueling war that inflicts massive economic harm, public debt emerges not only as an inevitable instrument for financial stabilization but also as a potentially effective investment in Ukraine’s future. European experience illustrates that debt obligations can drive structural reforms, foster infrastructure development, and modernize national economies—provided that transparency, accountability, and judicious allocation of resources are rigorously upheld.
The publication was prepared by Nataliia Ovcharova, PhD in Economics, Senior Lecturer at the Department of Accounting and Taxation. The information is a part of the project “EU experience in public debt management: conclusions for Ukraine in the war and post-war period” (101127602-EUEPDM-ERASMUS-JMO-2023-HEI-TCH-RSCH), which is implemented with the support of the Jean Monnet Erasmus+ program.
Funded by the European Union. Views and opinions expressed are however those of the authors only and do not necessarily reflect those of the European Union or the European Education and Culture Executive Agency (EACEA). Neither the European Union nor EACEA can be held responsible for them.