Prospects of Economic Recovery

An economic recovery in 2016 is not only likely but has already started as noted in Chap. 8. By the end of2015 the bottom had been hit in the downturn of GDP and preliminary estimates for 2016 already point at modest but positive growth, certainly for later in the year. The upside drivers are there: even deep recessions hit bottom and this one probably has; devaluation stimulus to exports is never immediate but the conventional J-curve cannot be far from its turning point; macrostabilization while far from complete was broadly attained; and improvements in the business climate though partial give some added impetus. These all have a downside, particularly in the business climate: the credibility of the achievements in deregulation may erode as businesses, domestic and foreign, worry about reversals after the reformist minister of economy was pressured to resign; it is too soon to judge the reformist credentials of the new cabinet.

Prospects of Continued EU Integration

Membership prospects are not a central issue at this time; they are very distant and it will be impossible for many years to guess at a probable number. What matters far more now and in the medium term is the prospect of continued smooth implementation in and discussions and negotiations on the detailed and technical aspects of the AA and DCFTA. So far, the process, even if slow, has been progressing steadily; there are positive and negative factors that will determine the outcome.

The first positive indication is that it is no longer taboo to speak of potential EU membership, albeit in a vague distant future, which improves the tone of discussions immeasurably. At the least one can say Ukraine’s membership train has left the station, though the destination sign still merely says ‘AA-DCFTA’. Given the EU history of avoiding reversals—no better illustration exists than its refusal to allow a Greek exit from the Euro—there are good prospects that this train will move steadily towards integration. This is abetted by the persistence of the EC bureaucracy; those charged with the Ukraine case unquestionably consider their goal and benchmark of a good job to be completing negotiations successfully and not halting them. As stated in Chap. 13 there have not been any official statements from the EU side about problems requiring temporary suspension of talks such as those heard in the 1990s for Bulgaria, Romania, Lithuania and Slovakia.

In the near future, added encouragement should come from a rise in exports to the EU in parallel with the formal beginning of the preferential trade regime, which had been delayed till January 2016 as a nod to Russia. Since 2013 the value of these exports has fallen, albeit far less than those to Russia. Interestingly, news releases from the EC have emphasized not the fall in values, but that the share of the EU reached 35 %, indicative of the hopeful attitude in the EC.

On the negative side a number of factors can easily slow down or postpone the movement towards membership. The main one is on the Ukrainian side: a significant reversal of achievements or a political upheaval that would bring back a government that is non-reformist; and the continued inaction on corruption could eventually lead the EU to emulate the IMF and suspend discussions. The same could happen if the new government of April 2016 fails to accelerate reforms, particularly in the area of corruption. The second negative is a continued strategy by Russia to impede Ukraine’s turn towards Europe. The military activity in Crimea and the Donbas keeps the Ukrainian situation unsettled, and while the populace of Europe may give little significance to the existence of a conflict as an argument against membership, the EC and politicians of member states probably do put a lot of weight on this. The other weapon used in the effort to keep Ukraine away from the EU is the, by now, extensive blockage of Ukrainian exports to Russia. These are now far below any natural level and contribute to the weakness of the Ukrainian economy as well as to the concerns of Ukrainians in the South-East whose livelihood depended earlier on such exports.

On the European side, a potentially negative factor is the pressure of the huge refugee movements from Syria, diverting attention away from such countries like Ukraine. The attention of EC bureaucrats assigned to Ukraine is little affected by this, as the EC is more likely to add bureaucrats to deal with refugee problems than to reassign economists and legal specialist from the work with Ukraine. The real threat is the increase in political power of anti-immigration parties which are likely antienlargement as well. Should such a party achieve control of a parliament or a presidency in one of the larger countries of Europe, it may push for halting the discussions.

The worst-case scenario is that the conflict with Russia explodes into an open and extensive war; this might push European politicians to demand temporary suspension of negotiations with Ukraine. But as noted above, while settling the conflict is unlikely, for Russia maintaining a low-level ‘frozen’ conflict is sufficient, thus a full-fledged open war is not very likely.

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