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The Ukrainian economy and the EU generosity

March 16, 2014

Published in ‘New Europe’ Print and Digital Editions

Ukrainian economyThe Ukrainian economy is in big mess; the country has shown zero percent growth for the last two years, while prospects for this year remains fragile. Unemployment is (officially) around 7.5 percent, and the Hryvnia, the national currency, is plummeting. Last January, the National Bank of Ukraine limited individuals’ purchases of foreign currency and also introduced other measures to support the currency, such as limitations of early loan repayments and investments abroad, but without great success. Ukraine used to be a big exporter of agricultural products, mostly grain; although it still has a great potential in this sector, its exports are crumbling due to the lack of modernization and low farm income. Industrial production fell by five percent in 2013, consumer confidence is low, and the government owes billions to its foreign creditors, including nearly $2 billion to Russia for gas.

There is a huge black market, with international estimates ranging between 30 and 100 percent. This fact, on one hand deprives the government from valuable tax resources, but on the other hand dampens the impact of the current crisis and leaves some hope that the economic decline is less than the official statistics suggest.

Finally, widespread corruption, (unusually high even by east-European standards), is a serious predicament to the attraction of foreign investment, a fact well reflected in the World Bank’s ranking of Ukraine in its 2013 Doing Business Report, where Ukraine ranked 137 out of 183 territories for foreign investment.

The bilateral trade relationship Ukraine- European Union is also relatively small at 38 billion euro in 2012; however, the European Union is Ukraine`s top trading partner, representing about a third of the country`s total trade, slightly more than with Russia. This might explain the reasons why the European Commission agreed on Tuesday to give nearly 500 million euro worth of trade benefits to Ukraine, which had been on the brink of default even before pro-Western unrest started in Kiev. This agreement is not without consequences for Europe. The Commission’s plans to remove duties on a wide range  products in order to support the Ukrainian economy could irritate Russia, and lead the latter to close its borders to Ukrainian imports or sue the EU to the World Trade Organization for unfair treatment of a trading partner.

More to this, this initial agreement between Ukraine and the EU is a first step towards a full trade agreement to be signed later this year, which would practically open the doors of the European markets to Ukrainian exports; depending on the speed of the approval process, tariff reductions could be effective as soon as next June. In return, Ukraine will also have to provide extra access to EU exports. Such agreements come at a moment when similar negotiations between Ukraine and Russian are put  on hold, sending a clear signal as to the geopolitical nature of the trade agreements.

But the European appetite for help to Ukraine doesn’t stop here. Brussels offered an even bigger aid package, totaling $ 15 billion, in loans and grants, to support the economy to get back to its feet. According to the Commission president Jose Manuel Barroso, the combined package could bring an overall support of at least 11 billion euros over the next couple of years, with the monies coming from the EU budget and EU-based international financial institutions. Such package is designed to assist “a committed, inclusive and reforms-oriented Ukrainian government,” and poses the condition of Ukraine signing a deal with the International Monetary Fund.

The European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), will be two of the institutions to be involved in the aid package for significant amounts.

All this seems extremely generous, while one cannot but be surprised by the speed of the decisions. Especially, when one compares them with the difficulties encountered and the lengthy discussions it took to make similar decisions for bailing-out the southern-European eurozone states. And while the situation is far from being resolved in the eurozone area, with unemployment rates around 30 percent in Greece and Spain, Brussels see no problem in finding 15 more billion euro to support a non-EU, non-euro member state. Of course it’s about geopolitics, but with a view to the coming elections of May, isn’t such decision an unexpected gift to the euro-skeptics around Europe?

http://www.neurope.eu/article/ukrainian-economy-and-eu-generosity

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