Ukraine and Europe’s Deepening Crisis

September 21, 2011
Anthony Salvia

In a recent article in the Wall Street Journal, President Yanukovich declares: “Ukraine needs Europe. Just as important, Europe cannot afford to leave Ukraine behind. “ Indeed, “Ukraine’s future belongs in Europe.” He envisions Ukraine playing “a prosperous role in the European economy.”

The article is of a piece with a trend the American Institute in Ukraine has noted before — Ukraine’s drift towards a pro-Western orientation, the chief indicator of which is Kiev’s declared preference for the European Union over joining in a Customs Union with Belarus, Kazakhstan and Russia.

That is for Ukraine to decide, but is it wise of Kiev to pledge its troth to Brussels at a time when media outlets across Euroland are discussing which current members should be invited to leave — not which new members should be invited to join?

The air is full of talk of collapse and civil strife. The most optimistic scenario envisages a Japanese-style outcome — decades of stagflation, the result of an endless series of bailouts of Greece and possibly the four other insolvent EU members.

The aim of the bailouts is to save the euro project and to shield investors, i.e., the holders of Greek debt, from the consequences of their own imprudence. It is the lot of hard-pressed taxpayers from throughout Euroland — mainly Germany and other northern creditor nations — to supply the bailout money. These funds have nothing to do with fomenting growth, which in the EU has averaged a paltry 1.5% per annum since 2001, crisis or no crisis. This is why the matter of bailing out Greece is politically so highly charged across Europe. There is the widespread belief that the European project is being carried out to benefit the technocratic elite, and investors who think nothing of privatizing profits even as they socialize the risk.

The European project, as currently set up, has become so toxic politically that public support has shifted in both the creditor and the debtor states against it. In Britain, the most Eurosceptic of the largest EU member states, those who think continued EU membership a good idea has fallen to only 1/3 of the electorate. Moreover, opposition to the EU has spread from a wing of the Conservative party to large parts of the Labour party as well. In Germany, if Mrs. Merkel is to persuade the Bundestag to give further bailouts to Greece — to say nothing of establishing a fiscal union, which some are calling for — she will in all likelihood require the support of opposition Social Democratic Party members to make up for the likely defection of many of her own coalition partners.

Public opinion in the debtor nations — solidly pro-EU in the halcyon days when cash flooded in for infrastructure projects and the like with few strings attached — now chafes at onerous austerity requirements. A blogger from Greece recently told the Daily Telegraph of London that no one in Greece knows where the 340 billions euros Brussels doled out to Athens over the years have gone. He says Greeks now resent being made the scapegoats for the rapaciousness of the nation’s governing elite. He says:

“It was supposed that when we joined the EU we would benefit socially and politically and that we would learn how Western countries operate. Instead, our governments were given access to cheap loans, which were used to expand an already bloated civil service…Our government…carry on lying, cheating, stealing and tyrannizing.”

British journalist Janet Daley hit the nail on the head:

“Angela Merkel… cannot commit herself to endless bail-outs and the under-writing of infinite Mediterranean debt, just as the Greek government cannot deliver the EU’s austerity measures—because the people of both these countries do not wish it. The irresistible force has met the immovable object.”

Europe (i.e., technocratic, Brussels Europe) has learned the hard way, as British member of the European parliament Daniel Hannan has observed, that harmonization does not bring prosperity. You cannot spend your way to growth, you cannot borrow forever, and you cannot debase your currency without consequences. (The United States, incidentally, in now learning much the same lesson.) And, oh yes, Keynesian economics is a pig in a poke (кота в мешке).

What does all this mean for Ukraine? It is high time to get real. The key to prosperity is hard work, low taxes and a sound currency. Everything else is illusory.

Ukrainians should wake up to the fact that Brussels has no intention of having Ukraine as a member (which, in my view, is just as well). Should Brussels experience the best-case scenario — decades of Japanese-style stagflation — the EU’s no-growth, centrally planned economy will hardly be in a position to drag Ukraine into prosperity. This means even the limited objective of joining a free trade area with the EU is unlikely to do Ukraine much good.

Ukraine should reconsider its policy on joining the Customs Union with Belarus, Kazakhstan and Russia. The benefits are considerable: Ukraine would pay domestic Russian rates for Russian gas. That represents a huge potential boon to Ukrainian state finances and to ordinary Ukrainian consumers of energy. It would get Ukraine out from under onerous IMF demands that it reduce Naftogaz's vast operating deficit by raising the rates it charges to Ukrainian homes and businesses. Ukraine would gain unimpeded access to a market of some 200 million people that has had an average rate of economic growth of 7% per annum since 2001 (compared to 1.5% in the EU in the same period.) In short, joining the Customs Union would give a major boost to economic expansion and employment at a time of hardship for many Ukrainians.

The key to Ukraine’s future is not quick fixes or panaceas of foreign provenance. It is Ukraine’s successful cultivation of its own native resources. These include:

  • The maintenance of productive relations with all neighboring powers, although with a preferential option for Russia, which remains vital to Ukraine’s peace, prosperity and energy security.
  • Liberalization of the economy; this is the key to rooting out corruption and paving the way for increased Foreign Direct Investment.
  • The passage of reasonable laws on the ownership of agricultural land. Experts predict a doubling of Ukrainian GDP would ensue in short order, and the country’s emergence as the Saudi Arabia of agriculture quickly thereafter.
  • The cultivation of the nation’s spiritual heritage as this is vital to the nation’s moral regeneration.

I give much the same advice to the United States — a country no less in need of moral regeneration. Eschew utopian projects (the warfare/welfare state of Wilson and Roosevelt) and quick fixes (Keynesian economics) that prove illusory, adopt a realist foreign policy that strives for a pan-European entente that includes all of the former USSR, and restore the value of the national currency, among other measures. Happily, if the debate in the current U.S. presidential campaign is any indication, these ideas are making slow but steady headway.