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To EU Or Not To EU: Eastern Partnership Countries At The Crossroads

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  • To EU Or Not To EU: Eastern Partnership Countries At The Crossroads

    TO EU OR NOT TO EU: EASTERN PARTNERSHIP COUNTRIES AT THE CROSSROADS

    EconoMonitor
    Sept 13 2013

    Authors: Andris Strazds & Thomas Grennes · September 13th, 2013 ·

    In 2008 Poland and Sweden launched the European Union's Eastern
    Partnership initiative. Its aim was to provide a venue for discussions
    on trade and other issues with the former Soviet Union states of
    Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine with
    the prospects of concluding Free Trade Agreements, liberalizing
    visa regimes and embracing other forms of closer cooperation. In
    2011 Russia, Belarus and Kazakhstan came up with a rival idea of
    establishing the Eurasian Union and in 2012 established a Customs
    Union comprising these three countries. Russia has recently been
    pushing the Eastern Partnership countries other than Belarus to join
    the Customs Union. In August it introduced temporary extra checks
    on imports from Ukraine (Reuters). More recently imports of Moldovan
    wines and spirits have been banned by Russia (Nielsen). Armenia has
    apparently already given in to this pressure (The Moscow Times). Ahead
    of the Vilnius Summit at the end of November the Eastern Partnership
    countries face the fundamental choice whether to proceed on the path
    of deeper trade integration with the EU or join the Customs Union
    led by Russia (the options are mutually exclusive).

    To answer the question, which of the two roads offers the most
    promising prospects for the Eastern Partnership countries, it is first
    worth looking at the past experience of those countries in the Central,
    Eastern and Southern Europe that have chosen the path of integration
    with the European Union and are now members of the EU.

    Then this experience can be compared with the record of the current
    Eastern Partnership countries.

    Let's start with the new EU member states. With Romania and Bulgaria
    having joined in 2007 and Croatia being taken on board in July of this
    year there are 13 of them (the other 10 joined in 2004). We have looked
    at how successful these countries have been at closing the income gap
    with the richest EU member states. As the country for benchmarking we
    have selected Germany, a large and diversified high income economy. We
    have looked at how the PPP-adjusted GDP per capita has changed in
    the new EU member states relative to Germany from 1995 to 2012.

    1995 was the year when countries in Central and Eastern Europe had
    already left the shock of initial adjustment to a market economy
    behind them. Most of them started active integration efforts with
    the EU shortly thereafter, however, it took about a decade for
    these efforts to lead to actual membership. In addition, 1995-2012
    is a period for which comparable data are available from the World
    Bank for all of the countries included in our analysis. This sample
    period also includes the shock coming from the Great Recession and
    the subsequent debt problems of several EU countries.

    The convergence record of the 13 countries can be seen below:

    There are four countries (Cyprus, Malta, Slovenia and the Czech
    Republic) where the relative income levels were already relatively
    high in 1995 (58% of the level in Germany or higher). These countries
    have achieved relatively little convergence with Germany since then.

    However, all of the other nine countries, whose PPP-adjusted GDP per
    capita in 1995 were at 40% of the German level or below, have seen
    substantial convergence with Germany. Hungary, the relatively worst
    performer, has seen its income relative to Germany increase from 40%
    in 1995 to 52% in 2012, while Lithuania has improved from 28% in 1995
    to 58% in 2012.

    Let us now look at how the Eastern Partnership countries have fared
    relative to Germany during the same period of time (please note the
    change of scale on the vertical axis):

    All of these six countries in 1995 were poorer than the 13 EU member
    states analyzed above, but with the exception of Belarus and more
    lately Azerbaijan, they have failed to achieve much convergence with
    the German level of income. Moldova, the most extreme example, was
    at 7% of the level of Germany in terms of per capita GDP in 1995 and
    has improved just to 8% in 2012. From the convergence perspective we
    can clearly speak of a lost generation there. Armenia, Georgia and
    Ukraine have not performed much better.

    Let us now add Russia to the picture (please note again the change
    of scale):

    We can see that Russia, similarly to the nine current EU member states
    that started in 1995 at or below 40% of the German level of income,
    has also achieved substantial convergence with Germany. A detailed
    analysis of the reasons for Russia's rapid convergence is beyond
    the scope of this post, however, oil and gas export revenues have
    certainly played an important role in it. However, what is equally
    obvious from the above chart is that while Russia's convergence has
    been impressive, it has not helped pull Armenia, Georgia, Moldova and
    Ukraine along. Now these countries are facing the choice of whether
    to continue on the path of deeper integration with Russia or attempt
    closer integration with the EU instead. Armenia has already made up
    its mind, presumably because of other than economic considerations.

    Countries choose trading partners for many reasons, but based on
    income convergence, the choice in favour of the EU as the partner for
    deeper integration appears to be a no-brainer for Moldova, Georgia
    and Ukraine, despite potential short term shocks that it will entail.

    References

    Nielsen, Nikolaj, ~DRussia Bans Moldova Wine Ahead of EU Summit",
    EU Observer, 11 September 2013 http://euobserver.com/foreign/121388

    Reuters (2013), ~DRussia Tightens Customs Rules
    to Force Ukraine into Union", 15 August 2013
    http://www.reuters.com/article/2013/08/15/russia-ukraine-customs-idUSL6N0GG17S20130815

    The Moscow Times (2013), ~DArmenia Will
    Join Customs Union", 5 September 2013
    http://www.themoscowtimes.com/business/article/armenia-will-join-customs-union/485525.html

    See tables and graphs at
    http://www.economonitor.com/thoughtsacrossatlantic/2013/09/13/to-eu-or-not-to-eu/

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