The Legal and Financial Implications of the New Ukraine Loan Scheme 

‘Common sense prevailed’, Italian Prime Minister Giorgia Meloni stated at the end of the European Council meeting held on the 18th December 2025 that extended over seventeen hours and required overnight negotiations for EU leaders to reach an agreement on a novel funding stream for Ukraine worth 90 billion euros.  

This contribution analyses the groundbreaking architecture of the new Ukraine loan scheme and its legal and financial ramifications.  

Ukraine is facing a period of acute financial strain, to the extent that, without additional support, it is expected to exhaust its resources by early 2026.  

In this context, the bridge loan from the EU represents a critical lifeline: by securing predictable and continuous financial assistance, it will ensure that Ukraine can maintain essential state functions and macroeconomic stability over the next two years.  

This circumstance will also strengthen Ukraine’s position in negotiating a peace settlement. In the meantime, it is worth noting that the EU has assumed an increased – and almost exclusive – responsibility for assisting Ukraine financially, which had reached 167 billion euros since 2022, based on the Kiel Institute’s calculations. 

An Alternative to the Merz Plan 

The initial proposal for the reparations loan, championed by German Chancellor Friedrich Merz and discussed in Brussels for months, envisaged a loan from Euroclear – the entity holding frozen Russian assets hosted in Belgium – to the European Union up to 210 billion euros, thus cashing those assets.  

The EU would have then extended a corresponding loan to Ukraine as an upfront payment against the reparations that the latter may claim under international law.  

This circumstance must be read in conjunction with two recent developments. The first such development is the Regulation of 12 December 2025, with which the Council has prohibited any transfers of the Central Bank of Russia’s assets immobilised in the EU. It has done so by relying on Article 122 TFEU, the emergency provision placed in the economic policy chapter of the Treaty. 

The second development is that the EU has recently signed the Council of Europe Convention establishing an International Claims Commission for Ukraine.  

The use of Russian assets to support Ukraine has long been on the agenda, and the EU is already deploying the proceeds deriving from Russian immobilized assets held in the Union for repaying debt incurred for Ukraine, as part of the G7-led Extraordinary Revenue Acceleration Loans.  

During last week’s negotiations, however, the reparations loan approach was abandoned as too risky from financial, legal, and geopolitical perspectives.  

Financially, Russia has brought legal action against Euroclear over seized assets, prompting Belgian Prime Minister De Wever to advance that EU Member States would need to provide ‘unlimited’ guarantees to absorb potential losses under a reparations loan mechanism.  

Moreover, as Colaert and Dermine explained, Euroclear plays a critical, system-wide role in the European financial system, as most trading across EU capital markets relies on its settlement infrastructure.  

Any disruption (or failure) of Euroclear could have risked paralysing Europe’s capital markets. Legally, the reparations loan also raised significant concerns under international law. 

Geopolitically, the timing is especially sensitive, as peace negotiations are at a delicate stage and EU initiatives perceived as escalatory risked provoking retaliatory measures by Russia. 

A More Cautious Solution 

Instead, the technical arrangement agreed in the document EUCO 26/25 endorsed a more cautious yet significant solution.  

The Union will borrow directly on the capital markets, relying on its ‘dormant’ borrowing capacity, and provide a limited recourse loan to Ukraine under Article 212 TFEU, by means of enhanced cooperation based on Article 20 TEU.  

The latter enables a group of at least nine Member States to pursue deeper integration within the EU legal framework when common action by all Member States is unattainable.  

Notably, this support will not be backed by all 27 Member States, as Hungary, the Czech Republic, and Slovakia have opted out.  

Nevertheless, the debt incurred will be guaranteed by the EU budget. Finally, Ukraine will repay the loan only after compensation through Russian reparations, while the EU would retain the ability to roll over the debt as needed.  

In the meantime, the Union has preserved the option of deploying immobilised Russian assets in the future, buying time for the development of a legally sound solution. 

The use of Article 212 TFEU as the ‘basic act’ authorizing EU debt is not unprecedented. During the last few years, this provision has been relied upon for several tools, such as the Macro-financial Assistance to Ukraine and the Ukraine Facility.  

Article 212 TFEU allows the Union to undertake economic, financial, and technical cooperation measures with third countries, including the provision of financial assistance.  

Historically, this article has underpinned EU financial assistance aimed at macroeconomic stabilisation of neighbouring countries, and structural reforms in pre-accession stages, or in post-conflict scenarios.  

It must be nonetheless noted that the use of such a provision to sustain a state under full-scale armed aggression is largely unprecedented. 

The legal-financial architecture agreed last week is innovative in permitting EU-level borrowing backed by a subset, rather than the entirety, of the Member States. Nevertheless, Member States unanimously agreed to amend Regulation (EU) 2020/2093 laying down the Multiannual Financial Framework (MFF) to allow the use of the budgetary headroom, an outcome achieved despite considerable political constraints.  

More specifically, an amendment introducing an additional subparagraph to Article 2(3) of the MFF Regulation was legally required to operationalise the new Ukraine loan scheme and mobilise the necessary appropriations under the budget beyond the ceilings of the MFF.  

However, because the new loan scheme will be established through enhanced cooperation, Hungary, the Czech Republic, and Slovakia ensured that they would not bear any financial liability arising from this arrangement.  

Indeed, based on Article 332 TFEU, ‘expenditure resulting from implementation of enhanced cooperation, (…), shall be borne by the participating Member States.’  

Given that these are loans extended to a country under armed aggression, it is plausible that a significant share of the funds will be used to sustain Ukraine’s defence effort. This also helps to explain the shift in the EU’s financial approach, which has moved closer to the logic underpinning Common Foreign and Security Policy spending, where the principle that ‘costs lie where they fall’ applies.  

The solution pursued strikes a balance between respect for the differing international positions of the Member States and the need to avoid stalling EU action. 

This ‘Differentiated’ Architecture  

This ‘differentiated’ architecture is legally possible thanks to Article 11 of Regulation 609/2014, on the making available of the own resources, titled ‘opt out adjustments.’  

The latter allows a Member State that does not take part in the financing of a specific Union action or policy to be entitled to an adjustment, thus calibrating financial burdens.  

This setting opens the door to new forms of financial differentiated integration, meaning that not all Member States participate in the financial liabilities arising from EU action (and debt).  

An alternative means of achieving a comparable form of financial differentiated integration, while overcoming the veto power that States have over the MFF, would have been for the participating Member States to provide on-demand ad hoc guarantees, indispensable for incurring additional common debt.  

Such an approach was followed under Regulation (EU) 2020/672 on the establishment of a European instrument for temporary support to mitigate unemployment risks in an emergency (SURE), since at the time of its introduction, the available budgetary headroom was insufficient to cover the liabilities associated with pandemic-related borrowing.  

However, reliance on national guarantees requires ratification procedures in national parliaments, a step that could have proven politically difficult. 

A comparable arrangement of financial differentiated integration was experienced during the Eurozone crisis, when a specific mechanism was established to ensure that non-euro Member States would be fully compensated for any financial burden arising from lending under the European Financial Stabilisation Mechanism (EFSM) in the event of non-payment by a beneficiary state. 

Although the EFSM borrowing was guaranteed by the EU budget headroom, the associated financial risks were effectively borne solely by euro area Member States. Similarly, Hungary, the Czech Republic, and Slovakia have secured a mechanism shielding them from financial liabilities linked to the additional loans granted to Ukraine. 

The approach agreed by the European Council on the new Ukraine loan scheme confirms the centrality of the EU budget in Union action and its constitutional significance.  

The convoluted, yet relevant legal-financial architecture conveys a strong (geo)political message. Although small, the mobilization of the budget reveals the willingness of the EU to act as a global geopolitical actor and sheds light on its international posture.  

As reflected in the Court of Justice’s rulings on the rule of law conditionality mechanism (C-156/21 and C-157/21), the Union budget serves as a key instrument through which the principle of solidarity is operationalised within EU policies.  

In this light, through the provision of financial assistance to Ukraine, the Union – and, ultimately, its taxpayers – are giving practical effect to that principle in support of both Ukraine and its citizens. 

Finally, this legal-financial solution points to innovative legal arrangements and illuminates largely uncharted paths of EU financial integration.  

It remains to be seen how this arrangement will be received by the financial markets and its implications for the EU’s debt and budget management.  

This article was originally published by EU Law Live