Is Europe Really A Good Option for Ukraine?

October 17, 2011
Anthony T. Salvia, Executive Directors, AIU

The recent Warsaw summit of the EU's Eastern Partnership, labeled a "diplomatic fiasco" by the Brussels-based EurAktiv news service, should prompt Kiev to reconsider its policies on “Europe.”

The 32 representatives of the EU and its member states condemned the lack of democracy, human rights and the rule of law in Belarus. They clearly expected their eastern partners—Ukraine, Armenia, Azerbaijan, Georgia and Moldova—to demonstrate solidarity with "Europe" against the regime in Minsk. Instead, they demonstrated solidarity with each other: all five of the ex-Soviet republics refused to sign the final communiqué.

The EU offered the eastern partners no incentive to go along with its democracy crusade. It held out no prospect of any of the ex-Soviet republics ever being invited to join the EU, although it did pay lip service to their "European aspiration...and European choice.” That’s as far as it would go.

In fact, the EU was hardly in a position to offer more. It is mired in a debt crisis in Greece and along the euro-zone's southern tier so severe that there is some question as to whether the EU can survive in its present form.

Ukraine received considerable attention at the Warsaw summit because of its inherent strategic importance, and because Kiev and Brussels are negotiating a landmark free trade arrangement (that stops well short of membership.)

Nevertheless, the Europeans took President Yanukovich to task for his prosecution of Yulia Timoshenko, which Brussels regards as politically inspired. The Deputy Prime Minister of Great Britain, Mr. Nicholas Clegg, accusing Kiev of "backsliding" on democracy, linked a free trade agreement with Kiev to "a guarantee that opponents of the [Ukrainian] government are not persecuted for their views." In other words, relent on Yulia, or no trade deal.

European Council President Herman van Rompuy took a different tack: after acknowledging that the Timoshenko prosecution is a "serious matter," van Rompuy said, according to the New York Times, that the EU "still expected to finalize the association talks with Ukraine by the end of the year." In other words, while we condemn the prosecution of Timoshenko, we will not let it stand in the way of further European integration.

My view is that van Rompuy's approach will prevail. Powerful forces in Brussels and Washington are keen to rope Ukraine into the West's hive of compliant states, not because of any affinity for Ukraine or Ukrainians, but just to make life difficult for Moscow. Any concern EU officials may have for Yulia and her fate will not be allowed to impede the encirclement of Russia. A free trade agreement with Ukraine would stymie Moscow's efforts to bring Kiev into its Customs Union; that would suit Brussels just fine (and Washington, even better.)

But what is good for Brussels (and Washington) is not necessarily good for Kiev. The Ukrainian authorities need to be clear about the price they are paying in rejecting membership of the Customs Union in favor of a free trade deal with “Europe.”

Some experts say “Europe” is teetering on the brink of fiscal collapse, and possible monetary dissolution. Time will tell. What is clear is that “Europe” even before the onset of the current crisis was, by design, a low growth affair. Over-regulated, over-taxed, and overly redistributionist, it had become what British journalist James Delingpole calls a “Communist-style economic dead zone in which all productive business and financial service industries have long since fled to the safety of the Far East.”

It’s not for nothing that European bloggers often refer to the EU as the EUSSR. Such a Europe is highly unlikely to serve as the locomotive for Ukraine’s economic transformation.

Kiev should give serious consideration to the advantages it could gain from joining the Customs Union with Russia, Belarus and Kazakhstan. These include:

Tariff-free access to a market of 200 million people with pent up demand for virtually everything;

Linguistic and cultural commonalities between Ukrainian business leaders and their counterparts throughout the CU-area;

Increased Foreign Direct Investment in Ukrainian plant and infrastructure as foreign firms establish physical presences within the Custom Union so as to avoid tariff discrimination (something not happening now and unlikely to occur in a free trade area).

Taking advantage of Russia’s relatively robust growth rate (4% compared to the EU’s 1.7%). In this regard, while all parts of Europe (except Albania) have sharply declining populations, Ukraine and Russia have surplus labor when measured against the size of their economies; Europe, by contrast, faces a serious labor constraint, which can only be overcome by mass foreign immigration, an option growing numbers of Europeans find unacceptable. Thus, there is a secular impediment to European economic expansion that is not present in Ukraine and Russia;

Pay domestic Russian rates for Russian gas. This will have many benefits, not least alleviating dire fiscal choices between raising rates on domestic users of gas and cutting pension costs by raising the retirement age.

The Ukrainian economy needs relief, and needs it now. Whereas the Customs Union goes into effect soon—in January 2012—the free trade arrangement with the European Union, if concluded by the end of December, would most likely be signed in the middle of 2012 just prior to the parliamentary elections. It would then take 18-24 months for the agreement to be ratified by the member states of the European Union.

If, however, the EU insists on a satisfactory resolution of the Timoshenko affair as a precondition for concluding the agreement, this would certainly delay its ratification and implementation even further.

Ukraine cannot wait that long. Deeper integration with an alarmingly troubled "Europe" may not be Ukraine's best option. Happily for Ukraine, it has other, more attractive options closer to home.