European Union walks a tightrope with Ukraine and Greece
THE European Union stands at a crossroads. The shape it takes five years from now will be decided in the coming three to five months. Year after year, the EU has successfully muddled through its difficulties. However, now it has to deal with two crises: Greece and Ukraine. That may prove too much. Greece’s long-festering crisis has been mishandled by all parties from the outset.
However, Ukraine is different. It is a black-and-white case. Vladimir Putin’s Russia is the aggressor, and Ukraine in defending itself, is defending the values and principles on which the EU was built. Yet Europe treats Ukraine like another Greece. That is the wrong approach, and it is producing the wrong results. Putin is gaining ground in Ukraine, and Europe is so preoccupied with Greece that it hardly pays any attention.
Putin’s preferred outcome in Ukraine is to engineer a financial and political collapse that destabilises the country, and for which he can disclaim responsibility, rather than a military victory that leaves him in possession of, and responsible for, part of Ukraine. He has shown this by twice converting a military victory into a ceasefire.
The deterioration in Ukraine’s position between the two ceasefire agreements — Minsk I, negotiated last September, and Minsk II, completed in February — shows the extent of Putin’s success.
However, that success is temporary, and Ukraine is too valuable an ally for the EU to abandon. There is something fundamentally wrong with EU policy. How else could Putin’s Russia have outmanoeuvered Ukraine’s allies?
The trouble is that Europe has been drip-feeding Ukraine, just as it has Greece. As a result, Ukraine barely survives, while Putin has the first-mover advantage.
The deterioration of Ukraine’s situation is accelerating. The financial collapse of which I had been warning for months occurred in February, when the hryvnia’s value plummeted 50% in a few days, and the National Bank of Ukraine had to inject large amounts of money to rescue the banking system.
The climax was reached on February 25, when the central bank introduced import controls and raised interest rates to 30%. Since then, President Petro Poroshenko’s jawboning has brought the exchange rate back close to the level on which Ukraine’s 2015 budget was based. The improvement is precarious.
This temporary collapse has shaken public confidence and endangered the balance sheets of Ukrainian banks and companies that have hard-currency debts. It has also undermined the calculations on which Ukraine’s programs with the IMF are based.
However, EU states, facing their own fiscal constraints, have shown no willingness to consider additional bilateral aid. So Ukraine continues to teeter on the edge of the abyss.
At the same time, a radical reform programme within Ukraine is gaining momentum, and slowly becoming visible to the Ukrainian public and the European authorities. There is a stark contrast between the deteriorating external situation and the continuing progress in internal reforms. This gives the situation in Kiev an air of unreality.
One plausible scenario is that Putin achieves his optimal objective and Ukraine’s resistance crumbles. Europe would be flooded with refugees — 2m seems to be a realistic estimate. Many people expect that this would mark the beginning of Cold War II. The likelier outcome is that a victorious Putin would have many friends in Europe, and that the sanctions on Russia would be allowed to lapse.
That is the worst possible outcome for Europe, which would become even more divided, turning into a battleground for influence between Putin’s Russia and the US. The EU would cease to be a functioning political force in the world (especially if Greece also left the eurozone). A more likely scenario is Europe muddles through by drip-feeding Ukraine. Ukraine does not collapse, but the oligarchs reassert themselves and the new Ukraine begins to resemble the old Ukraine.
Putin would find this almost as satisfactory as a complete collapse. However, his victory would be less secure, as it would lead to a second Cold War that Russia would lose, just as the Soviet Union lost the first. Putin’s Russia needs oil at $100 a barrel and will start running out of currency reserves in two to three years.
The latest chapter in what I call the “Tragedy of the EU” is that the EU will lose the new Ukraine. The principles that Ukraine is defending — the very principles on which the EU is based — will be abandoned, and the EU will have to spend a lot more money on defending itself than it would need to spend helping the new Ukraine succeed.
There is a more hopeful scenario. The new Ukraine is determined to defend itself. Though Ukraine is no match for Russia’s military might, its allies could do “whatever it takes” to help, short of becoming involved in a direct military confrontation with Russia or violating the Minsk agreement. Doing so would not only help Ukraine; it would also help the EU to recapture the values and principles it seems to have lost. This is the scenario I advocate.
