War-chest X-ray: how to finance Ukraine

0:28The Economist But more job data are rolling in all the time and one pattern is peaking out. Among firms that are adopting AI, hiring at the junior level is flattening. And I've always fancied being one of those people at the airport who pulls out a sheaf of passports and blasts through security with the most useful document. Sadly, I only have one. But today I've been given some pointers of which passports are the most powerful.

1:03But first...

1:15For the fourth year in a row now, Ukrainians are hunkering down for a winter of war. On the front lines, the mud of the autumn will freeze solid and disappear under snow. territorial gains will become even more improbable. This year, Russia has taken less than a percent of Ukrainian land. Away from the front lines, civilians can expect Russia to continue strikes on energy infrastructure. For many, the season will be very dark and very, very cold. When times are good, you stock up for winter. But in Ukraine, in many ways, the cupboard is bare. So this is another pivotal moment in the Ukraine war.

2:06That's because Ukraine faces a funding crunch, and the only body that can answer that for Ukraine is Europe, and it needs to step up. Why specifically is this a pivotal moment, do you think? Well, in terms of the negotiations, you can see that they've essentially gone nowhere, And the most obvious scenario now is the war rumbles on with the Kremlin putting more pressure on Ukraine through intensifying drone strikes on Ukraine's civilian infrastructure, including its energy systems. At the same time, Ukraine is running out of money. It's maxed out on debt. The level of American financing that has happened in the past is drying up.

2:49And Europe, therefore, confronts both a military obligation to help Ukraine and step up, but also, crucially, it has to put Ukraine on a stable financial footing. And remember, wars are won on the battlefield, but historically, they're also won through finances. who has the money to keep going for the longest. And it's been a while since we've turned away from the battlefield and towards Ukraine's finances. Give me a snapshot now. Where are they? So Ukraine has very heavy defense spending of its own. It also has a variety of civilian needs to run the economy. And it gets some military resources for free, essentially, that's gifted by the West.

3:32But when you add all of that up, basically, there is still an absolutely huge gap. We think the budget deficit of Ukraine, the standard borrowing that every government has, is running somewhere in the region of$50 billion a year. And we're now at the point where its debt level is very high and it's still running these huge deficits. And it still requires the gifting of military aid. And all of that, if you add it up, is something in the order of$100 billion a year of funding that Ukraine ultimately will rely on Europe to provide. And you said at the outset that leaves Ukraine really only with Europe as the last funder standing.

4:09That's right. And again, if it is to put Ukraine on a stable footing, needs to come up with something that lasts for years, so that the scenario of Ukraine being forced to fight the Russians for years is completely plausible rather than something that everyone is nervous about. And what we've seen is something that falls short of that kind of funding commitment. So over the last few weeks, there's been a very intensive debate in Brussels. I've just come back from doing a round of reporting there, in particular focused on how Europe can use the 140 billion euros of Russian reserve assets that sit inside the European Union mainly.

4:47Now, the disappointment around this debate is twofold. One is that no agreement has yet been reached in the European Union about how to do this, although it's likely that something is agreed before the end of the year. But secondly, the amounts of money being discussed are inadequate. We think, roughly speaking, if you were to finance Ukraine for four years into the future, providing clarity, confidence and certainty, you'd need about$400 billion. And the reserve money from Russia is obviously just a fraction of that, which leaves a huge question mark about how the rest would be filled. Although it would be inadequate, what would be the mechanism for getting access to it?

5:29Well, there's been a debate for a couple of years over this. And in fact, our own view and position on this at The Economist has changed. Our original view was that the capital value should not be touched because it might stretch the boundary of the law, but the interest could be gathered and given to Ukraine. The structures under discussion are complex legal mechanisms that really are a fig leaf for expropriation of Russian reserve assets. and our own line has now moved to the clear position that's appropriate. NATO and Ukraine are in effect under pressure or direct attack from Russia and the financial requirements Ukraine have mean that it's both legitimate and in fact necessary to take that Russian money.

6:18So that debate is happening within the EU and what we're seeing is the countries and institutions that originally objected to this gradually accepting that it's going to happen. So the European Central Bank was originally concerned about undermining confidence in the euro. Its position has changed. Germany was originally nervous about this. Its position has changed too. One of the holdouts, we believe, is Belgium. It does have objections. They're quite technical about the tail risks that Belgium could be exposed to because it does host the assets at the moment. But I think it's likely that those are ultimately resolved and brushed aside.

6:53The whole process does illustrate the enormous difficulty of reaching a consensus on something both technical and contentious in the European Union. And even during a war, it seems to take absolutely ages. We'll probably get there in the end. But if those funds were ultimately made available to Ukraine, though, how does it get spent? Is it just spent on the battlefield, on weaponry, on material? Well, first of all, given the burn rate of Ukraine is approaching$100 billion a year, the EU needs to do more than take the Russian assets. And we've argued they should be issuing common European debt to meet that roughly$400 billion funding requirement over four years.

7:34You then ask how they should spend it. There are two areas of contention. One is how much discretion Ukraine gets. Given the concerns over corruption and cronyism in Ukraine, it would seem appropriate that there is some governance oversight from the European Union or NATO on that. The second question is how much of the money is spent on American weapons, given that would appear to simply be writing a check to the very ally who is refusing now to support the war effort. And I think there the pragmatic compromise is likely to be in the short term purchases of American weapons, things like air defence systems that Europe is unable to produce itself.

8:10But over time, if we're talking about a three or four year horizon, the mix of the spending tilts towards weapons that are produced inside Europe or inside Ukraine itself. And the end state is a more self-sustained war effort. What about the other side of the ledger, though, instead of thinking just about helping Ukraine, about trying to limit Russia's effectiveness in this war? Well, one of the things that we're all aware of is the casualty rate for Russia is extraordinarily high relative to Ukraine. So the burden in terms of deaths and injuries for Russia is higher than it is for Ukraine. Actually, the financial burden is also almost certainly higher for Russia.

8:50It has higher defence spending and there's all sorts of hidden spending that Russia is doing. For example, its banks are believed to be making very large hidden loans to the defence industrial complex to keep the Kremlin war machine going. Now, the importance of this is if Europe and Ukraine can set a horizon of, say, four or five years where the war effort can be maintained and financed, over the same time period, some of the problems financially that Russia has at the moment will be exacerbated to the point that they could actually induce a crisis of some kind, whether it's a banking crisis, an inflation crisis, or perhaps that Russia is forced to try and borrow externally to finance the war.

9:34So that's what I mean when I talk about wars partly being won on the battlefield, but also partly being won through finances. Who has the financial muscle to sustain a fully mobilized war effort for multiple years into the future? And if we get this right, this apparent area of weakness for Europe and Ukraine can actually be turned into an area of relative strength. If indeed Europe has the stomach for it, right? This has been part of the discussion from the start. And we see this still with Belgium on the fence about releasing those frozen assets. Do you think Europe is up for this challenge?

10:10My view is ultimately this is going to happen because the alternative of Ukraine running out of money, losing the war and creating an enormous additional threat on Europe's border is a very catastrophic result for Europe. And despite the fact the sums of money we're talking about,$400 billion, seem enormous, relative to the huge resources of Europe, which is an enormous economic power. It's incredibly good value. It's a small share of defence spending. It would not put the collective budget of Europe under enormous strain. There is a question about the mechanism. And as I mentioned before, we think one of the obvious things for Europe to do now is to issue common European bonds for this extraordinary obligation that Europe really has.

11:00And that might be the answer to this. Again, there are still parts of the European scene who object to this Germany. The Northern Europeans are nervous about common debt. But it's probably ultimately the answer along with this effective expropriation of the Russian assets. Patrick, thanks very much for your time. Thanks for having me. Patrick and our colleagues have gone really deep on these questions for this week's edition of The Economist. Where to get money from, how it will be spent, how to make Europe stronger by spending it. Keep an eye out for our international section from tomorrow in our app.

11:45America's economy is a bit of a puzzle. Though growth is pretty healthy, job creation isn't. Companies are hiring far fewer workers than they were only months ago. Amid the lull, one question keeps coming up. Is AI coming for graduate careers? The question of whether AI is stealing people's jobs is one of the big questions in economics at the moment. Callum Williams is our senior economics writer. So at the macro level over the past year, the share of white-collar jobs in total employment, These are the jobs that are deemed most exposed to AI automation. That's remained stable. And there's been lots of other research that's been published.

12:26So one study that got a lot of attention in October by some people at Yale found no large shift in the kinds of jobs that people do since chat GPT came along in late 2022. But there are some studies that look at data at the company level. And this shows potentially that an interesting new pattern is emerging. And in particular, there's a new study from two doctoral students at Harvard, which has been getting a lot of attention. Okay, and what does that study show? Okay, so this is a very big study. It's looking at many millions of job postings and many thousands of vacancies and many thousands of firms.

13:02So it's got a big sample size of companies. You look at firms that are adopting AI and you look at firms that are not adopting AI. And the punchline is that you see a gap emerging at junior levels of employment where when a company adopts AI, it does appear to be the case that junior employment does seem to fall off somewhat. And in particular, what you're seeing is that the fall seems to come mainly from slow recruitment of these jobs rather than higher layoffs. And when you say junior employment, do you mean skill level or seniority? I guess it's mainly to do with age. So the study doesn't look at subjects exactly, but it does look at graduates.

13:46And one interesting thing it does, it looks at the kinds of universities that the people at these firms come from, and it separates universities into five tiers. And the interesting result is that what you could call mid-tier grads, so graduates who went to pretty good, but not the best universities, their employment prospects suffered the most. And I think what this suggests, so one interpretation of the results, is that it's precisely those mid-tier, fairly cognitive tasks. And those, of course, are exactly the tasks that AI is reasonably good at. It's those tasks that are being hit by AI. Callum, you told us some months ago on the show that AI wasn't coming for graduate jobs.

14:29Sounds like they actually are. So I'm sticking with my original interpretation. I think the important thing to remember is over the next few years and months, you're going to see lots of studies on this question. Some will say that people are losing jobs to AI and others will say they're not. I think it's going to be very hard to know which ones are ultimately correct. I think the thing that one should do if one is genuinely interested in this question is look at the macro data. Now, the macro data on graduates is clear. They're doing worse than they were, say, 10 years ago. But these trends of graduates doing worse have been going on for many years.

15:00This is not something that came along in 2022 or 2023 with ChatGPT. It's to do with the fact that some law firms aren't doing as well, some investment banks aren't doing as well. Those were the companies that tended to hire lots of grads. So yes, I do think that perhaps at the margin is having some impact, but fundamentally, when you're worried about grads, you shouldn't be worried about AI. Thank you for talking to me, Callum. Thanks, Rosie.

15:41Okay, Rosie, I have a question for you. What passport do you have? I've always quite fancied having a Turks and Caicos Islands passport, actually, but I'm afraid my answer is quite boring. I've got a British passport. What about you? Yeah, I also have a British one. That's not bad. According to a new assessment of passport power, the British passport ranks number eight. Michelle Hennessy is our graphic detail editor. We both have pretty powerful passports. I have to say, I do beat you, though, not that it's competition. I have an Irish passport. Around 2016, I, like a lot of Brits, suddenly got interested in my family history and managed to get an Irish passport through my grandparents.

16:20The Irish passport now ranks in the fifth tier. Both of us beat anyone with an American passport, which is not quite as attractive as it used to be. Okay, so explain to me this ranking business and the idea of passport power. Okay, so let me give you an example. On my honeymoon, my husband and I, we went to Bolivia. And when I arrived, I just gave over my British passport, went to the desk, they stamped my passport, and off I went. My husband, he has an American passport, and he also has Canadian and Italian, but he made the mistake of traveling on his American one. And when he arrived, we had to give over our full itinerary, we had to give bank statements.

17:00he went into the immigration room, he had to speak to officials and so on. So not that I'm being competitive about my honeymoon, but that's an example of my passport being a lot more powerful in this instance than his. So Henley & Partners, a consultancy, they actually quantify that and they measure how powerful a passport is based on how many countries it can get you into without a visa. Michelle, it's very clear from your it's not a competition that it is a competition. It's always a competition. Exactly. So which country tops the competition? Which country tops the ranking? Any guesses for number one?

17:37I mean, it's definitely not a British passport anymore. I know that. So the most powerful passport in the world is Singapore. So it has visa-free access to 193 countries. Asian countries actually dominate the top of this ranking now, which is interesting. South Korea is second. Japan is third. And that's changed quite a bit over the past few years. So back in 2014, my husband would have been a lot more smug because America was number one. America had the most powerful passport in the world. You and I, Rosie, would have definitely been smug in 2015 when Britain dethroned America as the world's most powerful passport.

18:12But both of those have obviously slid quite quickly down the ranking. I'm surprised to hear that the US passport, which I would always have seen as the most powerful one, has slid so much. Why has that gone down? So there's a lot of factors that go into this, right? Rich countries tend to have more powerful passports than poorer ones. War-torn or politically unstable countries also tend to have less powerful passports. Afghanistan is at the bottom of the list, followed by Syria and Iraq. But Henley also says that when rich countries tighten their travel rules, they also constrain their own citizens because others respond in kind.

18:49So if you just think about what's been happening in Britain, where you are, Rosie, and America, where I am, both countries have definitely taken a more insular turn over the past few years, right? They've tightened up their immigration and travel hauls. So these policies and how open a country is, that all plays into the ranking. And what other countries have been moving around then? I'm presuming Afghanistan's been at the bottom for a while, but have others been moving up? Yeah, so case in point, America, right, it has one of the strictest travel restrictions of any rich country in the world now.

19:18It only allows passport holders from 46 countries to enter without a visa. And a lot of these rich countries that are quite limited to tourists, so like Australia and Canada as well, they're seeing their passports either stagnate or drop down the rankings. Now, if you compare that with China, for example, China is often thought of as being very restricted, right? But China now allows visa-free access to way more countries than America does. The power of its own passport has increased dramatically over the past decade or so. And it's the big change in America that's the one that is headline grabbing here, I guess.

19:54How much does that actually affect how US citizens travel? Yeah, so look, America's passport is losing power. It's still very powerful, though. What I think is fascinating is that Henley told us that a lot of Americans are nevertheless trying to get an additional passport. Henley, they're the ones that put this ranking together. They advise people on how they can get extra residency or citizenship through investments. You've probably heard of like golden visas and golden passports, right? And they say that Americans now make up the bulk of their clients, more than the next four nationalities combined.

20:30Now, would someone like my husband with an American passport spend hundreds of thousands of dollars, if not millions of dollars, not that we have that kind of money, but would they spend that much money to have a slight edge in tourism? I don't think so. I think what you're seeing here is that Americans are perhaps more anxious about the direction that the country is going in or perhaps want to see opportunities outside of America. When we talk about passport power, we're also talking about what countries you have the right to live in and work in and the social benefits of those countries. So I think it says perhaps more about that than beating their wives through immigration on their honeymoon.

21:09Absolutely fascinating. Michelle, thank you so much. Thank you.

21:43Thank you. And I'll be back.