The potential path towards a Ukraine 2.0

 

 

 

 

 

 

 

 

 

 

 

 

Professor Marek Belka is an expert on Eastern European economics and has served as the prime minister and finance minister of Poland. He is a former director of the International Monetary Fund's (IMF) European Department and former head of Poland’s central bank. He is currently vice president of the Progressive Alliance of Socialists and Democrats in the European Parliament.

Atradius recently welcomed Professor Belka as guest speaker at our annual senior management meeting in Warsaw, where he shared his views about “Ukraine 2.0”. While the outcome of the war in Ukraine is unknowable, allies, economists and politicians are already thinking about the country’s post-war economic future.

If Professor Belka is right, that includes the transition from an economy dominated by large industry to one founded on the entrepreneurship of its skilled and highly motivated young people. Professor Belka also believes Ukraine's future is in the EU, even if accession takes considerably longer than the two years favoured by figures within the Ukrainian government. Here, he tells us why.    

Q: How important is the EU’s June 2022 decision to grant Ukraine the status of a candidate for accession?

A: Some may think this is just a “window dressing” decision, but it isn´t. Of course, not much will happen regarding accession as long as the war goes on. But one day the war will stop. It could even stop soon. Currently those things are unpredictable.

The most important part is that the EU has taken responsibility for the future of Ukraine by granting candidate status. That is irreversible. 

Q: So have we seen a change of sentiment among EU states - towards strong support for Ukraine’s EU integration after the war?

A: France and Germany - and also other Western countries - have recently changed their attitude towards Russia. The war and the atrocities that have been committed have made it impossible to treat Russia in the same way as in the past. I also see it in the European Parliament - the sentiment towards Russia has totally changed. And, in particular, the sentiment of European elites has changed, and I think this will last.

The EU and its members have finally realised that the world is not a benign environment, and that we have competitors or rivals. Europeans have understood that, in the current environment, you have to abandon ideas of friendship and good will in the international system. This spurs cooperation within the EU and provides an argument for further expansion. Crises are the fuel of European integration. So far, every crisis has provided a new impetus to move forward. For example, think of the EU financial crisis and the Covid pandemic.

"Crises are the fuel of European integration."

Q: What is the current mood in Ukraine towards EU accession? Are preparations already happening, even while the war continues?

A: The war has changed the approach of both the Ukrainian elites and the people towards the EU. They want Ukraine to become an EU member, whatever it takes. Even Russian speaking Ukrainians want to turn away from Russia after all that has happened.

Regarding the transformation, the economy has proved to be resilient in those parts of the country not directly affected by the war. The grip of oligarchs has been dramatically weakened. It may be odd to say, but the war provides an opportunity for comprehensive political, economic and social change.

Q: What will any future negotiation and accession process look like?

A: As I said, an end to the war is the ultimate precondition.

The process may even take 10 years, and of course, it could still end up the “Turkish way”. But I don’t think so, because the situation with Ukraine is completely different. As I said before, the war has changed the attitude of Ukrainian elites and people towards the EU.

Any future negotiations between Ukraine and Brussels will encompass 30 chapters that cover every political, legal, economic and social aspect in order to comply with EU standards. Brussels bureaucracy is the most important part of EU integration. Many deride it as clumsy and overregulated but there is no integration without bureaucracy. Countries have self-interest, but the Brussels bureaucracy is fully pro-European and probably the most competent bureaucracy in the world. 

As long as a country wants EU membership, Brussels has great power to change its political, economic, social and legal systems. Ukraine is probably yet to fully understand what it is exposing itself to. There will be sweeteners (money) but the process of complying with EU standards will be painful for Ukraine more widely.

“Regarding the transformation, the economy has proved to be resilient in those parts of the country not directly affected by the war.”

Q: What interim measures or milestones might we see on the path to full membership?

A: Well, the integration of Ukraine had  already begun with the EU-Ukraine Association agreement, which has been fully effective since 2017. That contains a Free trade agreement.

The EU commission will certainly come up with various ideas for a smooth integration process. For Poland it took 10 years to adapt (to EU requirements). Will it be quicker for Ukraine? Maybe. I think it is in the best interest of both the EU and Ukraine to have the country solidly changed and integrated. Look at the example of Poland in the past: it was not only about subsidies and economic advantages, but also improvements to the political, social and legal systems that came with the integration of the EU acquis communautaire (the body of EU laws).

Q: Will post-war reconstruction - a huge task - pose a major obstacle to the EU-integration process?

A: Reconstruction will be a major issue. However, we should not just talk about basic reconstruction, but also about creating “Ukraine 2.0” and reshaping the country.

Whatever happens, Ukraine will remain an important producer of agricultural products. But the country's old economic model of relying on heavy industries (steel/coal) - the Donbass region is an example - will not work anymore. The large state-owned companies will most probably have no future.

The strengths of Ukraine lie somewhere else, and this can already be seen. Smaller businesses are more agile, and I already see many examples of younger entrepreneurs who have founded successful smaller businesses, in the service and high-tech/ICT sectors in particular.

The new Ukraine could economically rely on its main resource, which is young, skilled and talented people acting in a modern society.

“Reconstruction could involve building up the country into Ukraine 2.0.”

Q: What are the major preconditions for successfully building “Ukraine 2.0”, and for a smooth integration  into the EU?

A: First, the EU and foreign investors need a reliable government as a partner. They want to see an administration that knows what it wants and has control, and is willing to make decisions for the long-term. Political and legal stability plus the absence of war are key preconditions.

Secondly, money is needed. Of course, there will be subsidies and grants from the EU as a consequence of Ukraine's candidate status, but a problem could be the reluctance of private investors to invest. However, I am less concerned about the future money inflow. If there is a stop to the violence and progress on the path towards EU membership, capital will flow anyway. I think Ukraine is attractive enough for foreign investment, even depleted by the consequences of war. It has major assets. It is a big country with many young people, and many of them are well skilled in natural sciences and high-tech subjects. It is hungry for success and open to the world market. So I am less concerned about the future money inflow, compared to other things…

Q: What are they?

The coordination of investments and the diverging interests of the donors and parties involved. I see problems here. In the case of Ukraine, Europe should be the leading factor, but the US has a major say due to its current strong financial and military support. The US will have a strong interest in the future Ukrainian arms industry, and it seems that a large chunk of Ukrainian arable soil is in the hands of US companies. Turkey will be another large and influential player.

So there will be competition, which is fine per se, but I am afraid of a certain lack of coordination (in Ukraine's post-war development), and even chaos.

Other institutions like the World Bank will only play a minor role – they are too small and their influence is diluted by the divergent interests of members. The same goes for the G7, which lacks – in contrast to the EU – a bureaucracy to handle processes.

All in all, I see big challenges ahead, but they are challenges to be embraced, because to face them would mean a ceasefire was in place and the rebuilding of the country had finally started.

“I am afraid of a certain lack of coordination, even chaos.”  

Q: What EU reforms would be necessary to integrate such a large country? How would this shape the future structure and balance of power within the EU?

A: Economically, it will require major reform of the EU's Common Agricultural Policy. However, if the EU wants to remain an important global actor, it also needs to help to feed the global south. I could imagine that part of the money we currently pay to EU farmers could be used to buy Ukrainian agricultural products - to be sent to the south, free of charge. This would strengthen the EU’s influence in Africa.

Certainly, majority voting should be expanded to more policy fields. Of course changing the underlying treaties would be very difficult. Therefore, I expect that the tendency towards a Europe of many speeds (certain member states working more closely together in dedicated policy fields) would accelerate. It would be better to have all member states travelling in the same direction at the same speed, but this seems unlikely.

Regarding the balance of power within the EU…Politically, if Poland were to reconnect with the mainstream of EU thinking, Ukraine´s accession would increase its political weight within the EU. Within the so-called “Weimar triangle”, with France and Germany, Poland would definitely gain more influence. Perhaps more than anyone, Poland stands to gain by Ukraine's admission to the EU.       

Q: You mentioned the US – beside business interests in Ukraine, what else will keep it active in the country? Could the outcome of the 2024 presidential elections lead to a policy shift?

A: I think the US will remain committed to Ukraine regardless of the outcome of the 2024 elections. Why? Cynically, because the Americans will want to show the Chinese that it would not be easy to go into Taiwan. This is a major factor, next to the economic interests I have mentioned already.  

Profesor Belka acknowledges that it may take time to fulfil Ukraine’s ambition of EU membership, not least because of the reluctance of current EU members to accept Kyiv’s accelerated timetable for negotiations, and the problems inherent in granting membership to a global agricultural superpower. Nevertheless after the destruction and disruption of Russia’s war, many think that Ukraine’s eventual accession would be in everyone’s best interest, despite the challenges it would create.