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
Reuters (2013), ~DRussia Tightens Customs Rules
to Force Ukraine into Union”, 15 August 2013
The Moscow Times (2013), ~DArmenia Will
Join Customs Union”, 5 September 2013
See tables and graphs at
http://euobserver.com/foreign/121388
http://www.reuters.com/article/2013/08/15/russia-ukraine-customs-idUSL6N0GG17S20130815
http://www.themoscowtimes.com/business/article/armenia-will-join-customs-union/485525.html
http://www.economonitor.com/thoughtsacrossatlantic/2013/09/13/to-eu-or-not-to-eu/