Why Ukraine should not expect financial help from the EU

Parliamentary elections in Ukraine on 26th October indicated that the country is on a Western path. But the euphoria many felt in Kiev after the end of Euromaidan protests may be replaced by hard realisation that not much has changed in Ukraine. The economy is in a dire place and is unlikely to improve any time soon. The International Monetary Fund (IMF) expects Ukraine’s GDP to drop by 6.5 percent this year, while the National Bank of Ukraine foresees 2014 contraction to be at 8.3 percent. Another issue is the energy sector. Ukraine is required to increase natural gas and heating tariffs respectively by 56 and 40 percent for consumers in 2014, and by 20 to 40 percent annually from 2015 to 2017. At the same time, as gas prices sharply increase, gas subsidies for Ukrainians will be completely suspended over the next two years.

The saviour for Ukraine is supposed to be the European Union. But due to its own endemic problems, the EU is unlikely to step up and offer any substantial help required to drag Ukraine out of the rut. Even the coveted EU Association Agreement can create further pitfalls for the Ukrainian economy in the short to medium term. The Free Trade Zone is expected to have a negative impact on the agricultural sector of Ukraine due to protective policies of the EU in this field. The prices of import goods would rise due to the abrogation of the 20% subsidy on exports and generally higher tariffs in the EU on imported goods.

ukraine_euIn public the EU continues to show solid support for President Poroshenko and the Ukrainian parliament. Both are united in the condemnation of Russia’s activities. However in private the EU must be realising that turning Ukraine around is going to take a lot more effort than first anticipated. It’s debatable whether Europe has the stomach to pursue this challenge. Endemic post-Soviet corruption and the power of oligarchs that run the Ukrainian economy lead some in Brussels to wonder whether their current support will reap any visible positive results in Ukraine. A quote from one top EU official speaking recently to Reuters summed it up by claiming that Brussels was “waking up” to a need to better defend its own interests.

The main issue for the EU is that its own woeful economy makes it impossible to write blank cheques to Ukraine. Recently, the European Union cut its growth forecasts for this year and next, citing a lack of internal investment and political tensions in Ukraine and the Middle East. Now that growth in Germany has also declined, the euro area is on the verge of tipping into its third recession in six years.

Figures for the euro-zone economy are demoralising by any measure. An already feeble and faltering recovery is stumbling. Output across the euro area was flat in the second quarter. And now the sanctions war with Russia is adding more woes to

Eurozone has a lot of its own prelims and will not be able and won't be willing to take a Ukrainian burden.
Eurozone has a lot of its own prelims and will not be able and won’t be willing to take a Ukrainian burden.

European exports. In August, Germany exported goods to the value of €2.3 billion to the Russian Federation, a decline of 26.3 percent compared to August 2013. To add salt to injury, European Commission’s quarterly report on the euro area economy predicted at the beginning of the year that unless there are serious economic reforms, living standards in the eurozone, relative to the US, will be lower in 2023 than they were in the mid-1960s.

Ultimately, the EU already has far too many problems to deal with without the additional burden of pro-actively resuscitating Ukraine. Another prevalent issue is the rising Eurosceptic sentiment across the bloc. As austerity continues to be the dominant economic plan for many bloc members, supplying Ukraine with bags of money would be political suicide. Doing so would add further ammunition to Eurosceptic MEPs, who currently take up around one-third of the European parliament.

It is impossible to blame Ukrainians for craving a better future. This may eventually come, but in the meantime the country should prepare for very hard times ahead. For the foreseeable future, the European Union will not be able to carry the weight of Ukrainian problems on its fragile shoulders.

Alexander Clackson is the founder of Global Political Insight, an international affairs think-tank based in London

Source Global Political Insight

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