Sunday, November 23, 2014

Europe’s Precarious New Normal

LONDON – A decade ago, ten countries joined the European Union. Today, Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia are universally recognized as fully integrated European countries. The extraordinary political transitions set in motion by the fall of the Berlin Wall in 1989, together with the mundane and drawn-out EU accession process that followed, produced this new normal – one essentially free from the political and economic distortions of the Cold War.

Ukraine is now venturing down this path – without the promise of full accession. On this anniversary, with an era of geopolitical tension again descending on the European continent, it is worth reminding ourselves what the new normal has meant for the countries that joined the EU ten years ago – and what it could mean for Ukraine.

Europe’s “missing middle,” gouged out by the Iron Curtain, has been restored. Trade in the region has flourished, naturally gravitating toward the EU, the world’s largest market. Investment has flowed in the opposite direction, from capital-rich to capital-poor countries, as economic theory would predict.

Comparing Poland and Ukraine underscores the difference that EU membership has made. In 1989, Poland and Ukraine had approximately the same standard of living; today, Poles are three times richer. Poland’s income gap with Western Europe today is smaller than it has been at any point since the year 1500.

Given that the EU’s combined GDP is eight times larger than that of Russia, we should expect a path toward normality for Ukraine to mean that the EU would dominate the country’s foreign trade. But this does not imply a complete break with Russia, whose weight in Polish exports has tripled since 2004. Given their geographic proximity and industrial networks, the potential for trade between Russia and Ukraine is much greater.

But the new normal is about democracy and dignity as well. It is hard to imagine that what is currently happening to the social fabric in eastern Ukraine could happen in Poland.

EU accession has undoubtedly contributed to Poland’s exceptional institutional transformation. Like Ukraine, Poland suffered from widespread corruption in the years immediately following the collapse of communism. But today it ranks better than many old EU members on corruption indicators. The painstaking approximation of EU rules and regulation that helped Poland become a normal European country by the late 1990’s would offer Ukraine the prospect of taming its own demons of bribery, cronyism, and nepotism.

Moreover, Poland has benefited from access to massive EU funding, with more than €92 billion ($128 billion) pouring into the economy over the last ten years. Private-sector flows have been much larger throughout Central and Eastern Europe as well, owing to attractive conditions for foreign direct investment – much of it comprising long-term projects with associated benefits like knowledge transfer and the introduction of international best practices.

Establishing this kind of normality in Ukraine could unleash massive transformational forces. But this aspiration, as we all know, is now in serious jeopardy. And the price of its extinction could be high, not only for Ukraine, but also for the countries of Central and Eastern Europe.

For starters, with sanctions targeting Russia’s floundering economy, revived trade ties are becoming a source of vulnerability for these countries. Already, companies active in the Russian market are reporting problems finding funding, and cross-border investments are being postponed.

The impact goes beyond short-term trade and investment. Expensive quick fixes to increase energy security are crowding out other important priorities in Central and Eastern Europe, such as long-term investment in tertiary education and research, and much-needed improvements in dilapidated health-care systems. And the post-1989 “peace dividend,” which has helped create fiscal space, is evaporating, as countries in the region and beyond perceive a need to increase defense expenditures.

As Europe’s leaders mull over their next steps and consider how to respond, Ukrainians should consider carefully how much they would gain by moving down the path of economic and institutional reform toward European normality. At the same time, the countries of Central and Eastern Europe deserve the EU’s support in their efforts to reduce their vulnerabilities.

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    1. Commentedj. von Hettlingen

      Commemorating the tenth anniversary of ten - mostly - Eastern European states joing the EU in 2004, Mr. Erik Berglof wants to point out, "what the new normal has meant" for these countries, and "what it could mean for Ukraine". The "new normal" for them were investment, market economy, growth and prosperity. Yet it was a long way before they could bask in success.
      Berglof also says: "Ukraine is now venturing down this path – without the promise of full accession". It all depends on whether Ukraine will fulfil the requirements for a EU membership. Nevertheless with the signing of the association agreement in Brussels by Ukraine's interim government in March, which coincided with Putin's ceremony in Moscow of formally annexing Crimea, the people of Ukraine had shown their willingness to forge closer ties to the EU and their aspirations to live in a country governed by values, by democracy and the rule of law.
      Ukraine's "path" will not be different from Poland's and it will have to reduce its energy dependence on Russia and overcome the woes of bribery, cronyism, and nepotism - the first tremendous step for Ukraine to achieve its ultimate goal, as a full-fledged member. It is a country abundant with both natural and human resources. If Ukrainians are determined to go through this "transformational" process, their efforts will one day bear fruit.
      Does Europe need a "new normal" after Russia's annexation of Crimea and the political turmoil that unfolds in Eastern Ukraine, Mr. Berglof? Europe may no longer be the same after the dramatic events in recent months. What will happen to Ukraine is unpredictable. Likewise is the question, how shall we deal with Russia? Some people say the "new normal" will be to deal with current situations rather than lamenting what had taken place. Others ask, whether allowing the violation of international law and turning a blind eye to it, is now Europe's "new normal"?
      The best way to contain Russia is to impose real economic leverage. Yet it is a double-edged sword, that cuts both ways. Berglof is not alone, when he believes that "sanctions targeting Russia’s floundering economy", would have boomerang effect, if "revived trade ties are becoming a source of vulnerability" for Russia's trading partners in Europe. It explains why Putin feels confident, that he can get away with impunity.

    2. CommentedZsolt Hermann

      I don't think the comparison is fair or useful.
      For example Poland is a very homogeneous country since the Second World War, according to Wikipedia over 96% of the population consider themselves Polish, and over 88% consider themselves Roman Catholic according to a census in 2007.
      In this respect Ukraine is completely different, but even countries like Hungary, Slovakia have much more diverse ethnic, cultural, religious makeup.
      And of course there are many other factors making such comparisons unhelpful.
      Instead it is exactly where the EU did not deliver on its promise where it is failing Ukraine or other similar countries.
      Despite being called a "Union", the connections remained superficial, only on the market, financial levels, leaving the countries competing with each other, with many policies that are turning them against each other.
      If the EU was a true, integral union not only the Ukraine, but even countries like Russia would feel an automatic attraction, since in today's globally interconnected and interdependent system only mutually complementing cooperation can give sustainable prosperity and peace.
      A fully integrated, cooperating Europe could serve a template for other regions to follow, could show a way out of the deepening crisis.
      In this respect the EU has failed and is still failing, and this is why it is facing ever growing breakup threats, making the forthcoming elections highly unpredictable and potentially destructive regarding the future of the "Union".

    3. CommentedÖmer Aytaç

      Some other countries economies grew about the same in this period, without any subsidies, eg Turkey.. Being part of EU doesn't have much to do with it.. Not being part of eurozone but being able to export to the EU taxfree does. Being part of the customs union, having a large population (or market), some infrastructure, and an unlazy working class, and (relatively) little corruption will suffice. Ukraine lacks in all these areas and it doesn't have the gas or petrol to cover it up.

    4. CommentedVal Samonis

      RE: Poland has benefited from access to massive EU funding, with more than $128 billion pouring into the economy over the last ten years.

      PLUS (dirty 30s style) BEGGAR-THY-NEIGHBOR POLICIES (exports enhancing zloty debasement!) possible with no Euro.

      PL NO MODEL for others, esp. Ukraine! And that trick CANNOT be repeated: se ne vrati, as the Czechs say.

      Did I mention millions that emigrated so that Polish GDP falls on much smaller number of "capitas"?

      They will not return either: se ne vrati!

      Val Samonis
      Vilnius University