Could European Ukraine collapse?

Could European Ukraine collapse?

And what Austria can do to save Ukraine

 

Alarmist titles are often dismissed to be simple this - alarmist claiming foreseeing a potential negative scenario to threaten Europe and to ask for public funds for vested interests whenever the case is often not justifying the crisis mode and excited call for public action.

As well when the mood is already negative why to add oil to fire when anyhow everybody happily bashes Ukraine and claims Ukraine is the cradle of corruption. Today in US, EU, Russia and in Ukraine the negative articles compete with even more negative assessment of the situation and all agree Ukraine is mega corrupt and the West has absolutely to condition further financing with Ukraine being finally fighting corruption and then all will be fine here.

 

But we are only in year 4 after Euromaidan. It is like 1993 in Poland and Central Europe or 1999 in Croatia or 2000 in Bulgaria or 2004 in Albania, Serbia and 2012 in Kosovo. Only 4 years and all of them under fire and under constant hackling from the former colonial master. Has Ukraine achieved enough? Fast enough? Shall we be satisfied? And can anybody compete with the requirements of the situation after 25 lost years of chaotic transition at the European periphery and the expectation of the population seeing EU level prosperity and governance just at their border with Poland and Romania. And every day in TV they see what is possible in the west in terms of prosperity or the amazing wealth Ukrainian oligarchy has accumulated. In the on average poorest country in Europe while the Forbes Ukraine ranking and the media and the now public disclosure requirement showing amazing wealth of the ruling class of Ukraine and the average salary now at 250 Euro it is understandable that nobody is satisfied with progress similar as nobody is in South Eastern Europe.

 

But there is no doubt that Ukraine today after 4 years of reforms is the least corrupt ever in since its independence. All major sectors of significant corruption, meaning stealing massively from the banking, energy, procurement and budget system have been closed and are now often more transparent than in many EU member states. Sure, the reform of the 5th major sector of the State-Owned Enterprises in Energy, Transport and Defense is undergoing and there is an issue but the ongoing privatization and the improved corporate governance has and is improving this sector as well and for sure it is better than ever in its history and the constant pressure of civil society and the internal community in the now most transparent Eastern European country with full information access is showing results.

 

Sure, there is still corruption in Ukraine but it is now on the level of other European periphery countries in transition. The rest is hard work, public control, EU competition law and strengthen of the judiciary independence and reform of tax, land and capital and further reducing informality, here as well there is major progress and promotion of digital and e-payment and constant public and civil activism. But there is no doubt that Ukraine is very comparable now today with Serbia, Albania and maybe some EU Member state should as well take a close look on what Ukraine has achieved. And this will be a constant struggle but one thing is sure. Ukraine is today much less corrupt than Russia today. And but far so. And this matters most as it wants to be a European country and no longer do things the Russian way like it been standard until February 2014. And expecting more is pushing the limits of the possible and realistic in just 4 years under fire.

 

 

Ukraine is moving and reforming significantly and it is moving in all sectors from transport, education, health, energy, investment, transparency and adoption of the DCFTA with the EU.

But the task is simple astonishing and so are the costs of these reforms and Ukraine needs significant more funding from the West to cover the cost of reforms and transition. The costs of achieving European standards, fighting Russian aggression and the legacy of the kleptocratic past is simple beyond the budget means of Ukraine.

 

This is clear for all decision maker in the West even when some ignore or underestimate the dimension but anyhow the facts are known and it will require similar amount like Poland possible multiplied by 2 in today’s terms. And via IMF, WB, EU, US and EIB and EBRD similar amounts like for Poland in the last 25 years can and will and have be made available for Ukraine as well. But somehow the idea has entered the head of all decision makers that Ukraine elite need to be blackmailed into compliance and it is no longer our ideas, values, market concepts and evident success in prosperity and freedom with will make the Ukrainian Rada adopt reforms in European direction but we have to buy each step of reform with IMF and EU funds and withhold them when Ukraine does not adopt the reforms required.

 

And so, Ukraine – European Ukraine – faces a potentially difficult year 2018 now after 4 years of war the scenario of not receiving further IMF and EU financing is a powerful leverage and the future of the whole European Ukraine project could depend on it. And it is interesting to discuss which conditions are crucial for Ukraine receiving financing and who decided which of these issues are crucial conditions sine qua non and which are waived under pressure and which important points are not included. And as these matter so much it is worth to discuss how such decision are made and who makes them and why and with which legitimacy and which interests are represented and which not and if there is no better way to ensure reform and success and financial stability of European Ukraine already under amazing challenges of war and expectation of its electorate and the sheer task of transformation of the last unreformed state of the European continent in the worst possible condition kept purposeful in such condition until 2014. And what Europe and Austria should do different in 2018 to receive better results in Ukraine and for Ukrainians and European taxpayers.

 

Privatization is the only one of the 4 central demands which is currently passing the Rada and will be a relative success in 2018. Smaller assets will be sold by online auctions and larger assets anyhow will take years to find an new owner, ETR has already discussed the Debt Equity Swap with the EIB to speed up privatization please see Agenda 18 at least this will be no hurdle for the IMF agreement. This will stimulate investment but will not be a significant game changer but is certainly positive, further reduce corruption and public control of the economy.

 

Ending the land sale moratorium for agriculture land – a very sad situation not well understood in the EU and by the IMF leadership – was simple waived during a high-level meeting with the IMF and Ukraine despite it being possible the biggest game changer of all given that this is the asset Ukraine has plenty and is famous for. And indeed, the Moratorium is the biggest infringement of property rights in Europe right now. It is not a system to protect small farmers but to exploit small land owners who got this land restituted after the end of communism and now can only lease with low income to larger farming conglomerates. It is an unheard injustice of epochal dimension and mixed up by EU and IMF policy makers with some farm land sales restrictions which we have as well in EU. It is nothing of that kind.

 

It is an adding to the historic injustice of the collectivization that the decision of returning land to small owners is not honored by the Ukrainian authorities now for more than a decade. And that some internationals consider the interdiction of land sales a good policy for SME farmers because it might raise the rental price or allow the land owner to sell their land and that current farmers would need raise their costs and so this astonishing interdiction of the right to private property is justified? And what about the land owners and what about European human and property rights standards and how many SME are really renting such lands and how many are in reality rented to large land holdings due to the lack of alternatives? Anyhow, as it seems this a holy cow of Ukrainian politics and all populist united on this and the mix of populism and the interest of large agro holdings are so powerful that the IMF has waived this requirement on request of the Ukrainian President and so it does not stand in the way of further international financing of Ukraine. The sad thing is that simple ending that moratorium would be a key and significant game change for Ukraine and bring in significant FDI and release a major investment round in Ukraine and this is very needed. But that road is closed and the IMF has waived that conditions. What a monumental mistake!

 

Reforming gas prices is another hurdle required to pass for Ukraine receiving more international financing and a key one and a difficult one. Ukraine has already reformed the energy market and the result was difficult for the private energy consumer. Truth being that the highly manipulated and subsidized economic system of Ukraine was a gigantic pyramid scheme based on a subsidized exchange rate the famous 8 to the 1 peg to the Hryvna/Dollar and massive subsidies in all consumer utilities especially energy. This was never sustainable and combined with the massive theft of the pre – 2014 Kleptocracy and the cost of the war after that have led to a major fiscal crisis which was solved with western help and a massive devaluation and reform of consumer utilities prices. It was a major success and very painful for the energy consumer who see now a much larger part of the available income taken by energy costs as wages have risen but and there is a social support system but this is a major issue for the distressed Ukrainian middle classes, the backbone of the Euromaidan.         

 

The exchange rate is now at 27 to 1 Hryvna to Dollar and energy prices still far from European end consumer prices but it is estimated that in Ukraine the percentage of energy costs to household income on average is almost 39%, in Poland it is 25%, and Germany – only 6%.  Now the requirement is to move them closer to market prices. This is in principal a very good idea but can you imagine what the Ukrainian energy consumers think about it. In Dollar terms – sadly still the reference currency and not the Euro here in European Ukraine most people earn about 250 to 300 $ per month and pension are about 70$ and hard to cover the energy bills closer to market level having risen significantly contrary to wages in Ukraine.

What that means now that global energy prices have risen again and Ukraine needs to import energy still despite major efforts for energy independence but we are only in year 4 and inflation still so high that the Central Bank had to raise the base rate to no less than 16% and the currency still slowly declining and the IMF making this a condition for financing and the political elite very sensitive on populist opposition opposing any rise. And so, the Ukrainian Government raises rages and pension leading to inflation which requires the central Bank to raise interest rates. So, raising energy prices most likely be done only in context of raising pension and state salaries, for sure leading to inflation and this has to led to higher interest making domestic financing for SME and consumers close to impossible which all effects on demand and economic growth already much lower than required and normal in post devaluation economies in transition countries.

 

And as this energy issue which touches very household and in a cold country like Ukraine with the heating season and the preparation for the heating season announced by the Prime Minister like a military campaign and everybody knows energy prices and a strong populist political tradition and energy being a kind of national item this is very complex. And in Ukrainian politics the rule is who first moves on energy price hikes is first out – meaning that the first to propose to cave in to IMF on that is the first to be blamed and the first to risk his or her political career.

 

Given the original sin of the Euromaidan having insisted on the pre-2010 constitution which in the spirit of the East and similar like the Russian Federation has a duopoly of power between a powerful Presidential Administration and the powerful Prime Minister competing for power. Instead of adopting a modern European Union constitution with a Government depending on a Parliament majority we have a triple constellation between President, Prime Minister and a fluctuating majority in a confident Parliament – there is no common political will needed for difficult reform decision but 3 or more conflicting and competing. It will not be easy to achieve energy market reform -  meaning simple considerable higher gas prices in a pre-election year. And the pain will get only harder when the Hryvna further slides and so imported energy will become more expensive. And it is possible that the continued threat of not supporting Ukraine financial and so telling the capital markets that Ukraine is not so secure under IMF and EU funding is resulting in a further decline of the Hryvna in itself turning the raising of gas prices even more urgent and for sure making it even harder for consumer and more toxic political and so we are in nice downward spiral – possible accelerating during the year.

 

And what about the famous Anti-Corruption Court? Yes, that is a very interesting challenge indeed and possible the highest profile and most politicized and for sure receiving most media attention and public scrutiny. And it is easy to remember and part of the narrative of Ukraine as mega corrupt nation, which we have discussed above as a fiction - but fits the past reality and todays perception. And it is so easily to claim and hard to prove or counter with facts.

 

Given that in Ukraine until February 2014 the elite consensus was in simple terms - steal as much and fast as you can. And that elites changed but do not disappear overnight and indeed as in all transitions the elite before is quite similar to the elite after the transition and elites are very much overlapping. There are many reason for this from family networks and key personalities and wealth kept abroad, but powerful families and business empires do not just disappear and their interest and claim to public position and power neither. And the new consensus of the new elite is certainly different but certainly nobody in any elite fancies to go in prison. The worst offenders and most obvious criminals have fled to Russia, mostly and who was just part of the establishment and profited from the opportunities and he or she was part of the regional elite or enjoying the spoils the system all will be very careful with handing power over the justice system to a real full and independent court. Clearly it should be done but which transition country has achieved it? Obvious it would be great but it is similar obvious that it is not easy to ask a Parliament to consent to a court which soon they might face and will be powerless to influence or avoid judgement day. Why to consent to such a proposition when it can be avoided or postponed or so much watered down to be less of a threat to very people who have to decide on the establishment of it.

 

This is as well not very popular in Albania now with the 2016 EU and US backed justice reform in place but still every step forwards are so hard to achieve and it took enormous public and direct pressure by US and EU top leadership and the US Ambassador going to the Albanian media basically every single day in prime time to force that through the parliament. And this was as well very controversial in Kosovo with EULEX and if the Kosovo elite would have had a choice and say, EULEX would not even have started in 2008 nor stayed 10 years and should leave as fast as possible nor would the new Court for War crimes have seen the light of the day. Similar can be said about Macedonia and Bosnia and imagine the EU insisting on similar reforms in Serbia. Interesting it is not doing that, and now let us discuss if this will be really happening in Ukraine.

 

Most likely not, at least not in the form the IMF and EU and all excited NGO and Civil society expect it because rarely political elites agree on sending themselves to the block – meaning as most of the elite was part of the wild times it is hard to imagine they will create a court so powerful as to really bring all case from the Anti-Corruption Agency prepared to meaningful justice. Sure, that would be good and great but will it really happen?

 

Look the effort is there and great if it works but given that each MP is a MP for a reason – in Ukraine and the west meaning representing a certain interest and voter group and election are coming up in March 2019 who likely is the great purgatory some dream of to happen before that crucial elections?

 

And yes, justice should be done but a lot of the criminals have escaped to Russia, some sit in EU member states and not in prison and for many it will be a long and painful process for many years and yes it will be good to clean up the pre-2014 past and show the seriousness of current reformers and set better standards for the future but and that is a big but and this matters, such a court will be not the breakthrough in economic terms.

 

The rule of law and issue with contract reinforcement will be still remain a daily hassle and to expect big economic gains and a breakthrough from such a court is not realistic and big recovery of asset is also good but hard to do so in real live as past 4 years have shown. In fact there is a big danger that this issue is getting, and it is already,  the red apple or magic symbol of Ukrainian reform and with it failing and stakes high -  the IMF support for Ukraine derailing and so the further fiscal crisis unavoidable with the Hryvna at 50 for the Dollar.

 

What that means again for consumers we have discussed already. And for the investment confidence, FDI and reputation of Ukraine and the whole European Ukraine project is as well clear. Collapse. And again, this can only have solved by the IMF and so with or without the court the IMF has to save Ukraine but then at a much lower Hryvna rate making live even harder here and migration to the EU the only valve for middle class anger jointly with another Maidan but then against the IMF and energy crisis and Russia telling the world see Ukraine is not working and European and West failed Ukraine. All not very great scenarios. Everybody might check and assess the probability.

 

What is ETR is finding remarkable is how easy the land market opening – a no brainer for a game changer in terms of FDI and an obvious human and massive property right violation - is waived and what symbolic value is given to anti-corruption court despite the major achievement on reducing future corruption.

 

What level of justice on past crimes a society finds correct and agrees upon is it really a concern for the IMF and the EU? It might be but is it one to hang it so high to threaten IMF support and risk collapse? Really does it matter so much and should the IMF not focus first and foremost on the fundamental and fiscal issue like FDI and the effect land market reform has on FDI and therefor the balance of payment which in fact is the most crucial parameter next to the exchange rate in economics. To waive the land market condition and to insist on the anti-corruption court on what kind of economics this is based? This is longer economics and finance but purely political and that is not what the IMF should do and as well as the lender of the last resort for Ukraine is anybody considering if that goes wrong what costs it will have and to what little fiscal effect if it finally works.

 

The next astonishing issue is tax reform and rates. Ukraine has 18% corporate and income tax and a dysfunctional tax system of reduced income tax for individual entrepreneurs and SME over ample space for tax evasion in massive scope. And with 18% corporate and income tax is far from competitive compare to Hungary with 9% and Bulgaria with 10% or Georgia with 15% but not taxing reinvested profit.

 

And taxes matter most in terms of business, investment, promotion and corruption. And this is less important than the Court? Sure, for the International Community and the Civil Society but in economic and fiscal reality it is the tax system that matters most. A flat, simple and fair tax system of 10% for all and everything would significantly improve FDI, investment and reduce corruption before it occurs in the Ukrainian economy. And it has worked very well in SEE but it is nowhere on agenda of Government or IMF for Ukraine. Here fiscal stability matters first and then the Court and later FDI but not in land and tax reforms is postponed because the various stakeholders could not agree.

 

Good we understand the IMF does not like tax competition and so has a veto on lower tax rates. Most elites have their assets parked in EU already and know how to avoid tax paying and so all is OK for them. But it is not OK for the economy. Tax reform and reducing it to 10% would be most simple and fastest manner back to competitiveness, FDI promotion and less corruption in taxation – a crucial issues see all SME surveys and for more revenues because of the reduction of tax evasion. But a combination of many and various interest is blocking progress on that since 3 years and there seems to be no light at the end of this tunnel.

 

If we are allowed to dream a Ukraine ending the land moratorium and introducing 10% in July 2018 would be a very successful investment location and the investing world would take a big breath and book their tickets. This would be the mega gamer changer but the IMF is not asking for it and the EU neither and the Ukrainian leaders see no great benefit but a lot of opposition domestic from the populist side and international from exact the IMF fighting unfair tax competition and a race to the bottom in tax rates and so despite common knowledge that 18% is too high in the region and that the moratorium cancelation would really trigger an investment and confidence boom both will not happen same as most like no energy price hike for the heating season of an election year and no anti-corruption court will happen as well. What else can have a similar effect?  Nothing but there are serious leverages for a better economic future as well to be achieved with joint  EU Ukrainian good will.

 

ETR has now already made hundreds of proposals on SME Policy, SEE Integration, EU accession of Ukraine, accelerating EU reforms by accepting supra-nationality faster in key regulatory sectors like competition, energy regulation and including Ukraine now in key EU programs like the EFSI and ESM. Please refer to all prior publications for details. In the Agenda 18 document we have already outlined what the EU and Ukraine can do in terms of accelerating supra-nationality. In this paper ETR wants to focus only on 3 major items which Austria can and should do for saving Ukraine from the collapse and which are in the means of Austria to do and in the Austrian national interest.

 

The first is the most simple and natural for Austria. Integrating Ukraine in the SEE structure which Austria has contributed to build and is supporting still today and this can be done fast, is very helpful and leads to a clearer European reference and regional cooperation network for Ukraine. So far so simple and ETR has written a lot about it and it will not save Ukraine alone but ensure what we call European Ukraine to have a stable European trajectory and it is excellent basis for second step which ETR has written in the article towards a peace conference in June 2018.

 

Such a European Peace Conference in June 2018 with the objective of securing the Potential EU Candidate Country for Ukraine and NATO MAP for Ukraine in exchange of de-escalation by reducing European sanctions against Russia sadly still not complying with Minsk and hardly ever planning to do so. All deals are ugly so is this one but if the price to buy the Pro Russian EU Member States into a EU and NATO future is exactly this lifting of sanctions, this is the right price to pay. Sure the best would be that Russia withdraws and we are all in a new peaceful world working together but that seems not on agenda. And first is to help Ukraine, Free and European Ukraine and not to punish Russia.

 

Such a deal is not easy and in fact Germany and the USA will oppose it so it has to be a master piece of Austrian diplomacy but why not try. It should be coupled with a NATO membership application of Austria and the EU Neutrals to show America we are united in NATO and we are not appeasing Russia but accepting the reality of the new Cold War 2.0 and care for Ukraine and want to secure and integrate and support free Ukraine on its way to EU. Here Germany will have to carry major part of the costs and with Brexit happening and 2% NATO target there is the need to convince Germany that the costs of Ukraine integration is not carried by Germany alone. Given such major complexities most likely nothing will change or improve the impasse and stalemate both on the Ukrainian Russian front as on the EU policy towards Ukraine and Russia. As most likely nothing will change, so sanctions will stay and Ukraine will not get the potential Candidate Country. And openly that alone will not save Ukraine from collapse anyhow but it would be the most powerful signal Europe could give but one.

 

The most powerful symbol of European integration is the Euro. And that is what Ukraine should do and with Austria’s help- unilateral introduce the Euro in Ukraine in 2018 with the help of the Austrian Central Bank. Sounds wild and fancy. But this is what Europe did in the Balkans after the wars- in fact Germany and Austria played a major role in allowing or not hindering Kosovo and Montenegro to first use the German Mark and then shift to the Euro. The ECB has complained ever since but facts are created and it works very well.

 

And it is a key reason why NATO Member Montenegro is now at close to 7000 $ GDP capita on par with EU Member Bulgaria and Kosovo is with 3,800 $ on par with Georgia and far above Ukraine with 2300$ GDP per capita. The investment security and trust and credibility in a global currency backed by ECB, Germany and France and 17 Trillion GDP and competent professionals cannot be matched by crisis countries post or still at war trying to issue their own currencies.

 

The temptation to start printing money is so high in crisis and war that no political elite ever could resist nor will. And for investors they have always a risk of their business plan, partners and markets and of the rule of law and corruption in transition countries and when the risk of devaluation is added it often requires such high returns that they can simple not be generated and so all boards red flag such countries whatever the potential.

 

Just imagine a board meeting in Vienna evaluating the 2006 decision to invest in Montenegro and Ukraine and see what happened to the investments a decade later. At least the asset is still there in Euro terms in Montenegro and cannot you say the same in Ukraine – where in the euphoria of the orange times and the great potential a lot was invested and just a few in tiny Montenegro or wild Kosovo but the firm fundament is the firm fundament.

 

Europe did the same for Bosnia post war and the German Mark lives on there as Convertible Mark, KM pegged to the Euro. Somehow nobody dared or bothered to change to the Euro possible because of pride or the ECB pressure but the effect of the peg meaning the stable exchange rate Mark to Euro is the same only the symbolism is not the same which is regrettable for Bosnia.

 

A similar policy was done in Macedonia and it is 60: 1 fix for the MKD. Serbia and Serbs were not so lucky, neither they wanted to attach their destiny to the Euro and there was a Serbian Dinar at par with MKD and now it is 2 to 1 meaning 120 Serbian Dinars for a Euro. Such halving of a currency in a decade has always as well political consequences and that is why the ultranationalist are now in power in Belgrade. That they turned out to be relative pro-European is not an irony but explained by geography because in reality there is no alternative for Serbia than the EU as it is surrounded by EU members or EU future members. And the Serb middle class dreams of working and living in Germany France or the US and Canada and not in Russia. That is only the refuge for Serbian oligarchs and mercenaries. So, election can only be won by a being seen as promising a European future while still playing to pro-Russian sentiments in culture, defense, history and religion. But it is hard to imagine that the victory of Alexander Vucic and his former mentor Mr. Nikolic would have been possible without this devaluation and the consequent crisis and purchasing power loss of the Serb Middle Class.

 

Anyhow what ETR wants to show with the Balkans example that all pro-European countries Pro Western and supported by the west got a new currency regime – wither the Mark or the Euro and a hard peg and all 4 have that until today and for a reason.

 

And the same should be done now for Ukraine. Sure, many arguments against such a measure will be around like Ukraine is too big, the Hryvna is stable at 34 now to the Euro and anyhow the EU and ECB does not want any of this and the devaluation brought back competitiveness. True all this is true but to a point. True Ukraine is big but it is producing only 100 $ Billon GDP and with the strong Euro now this is just 25 % of Austrian GDP in real today money terms. And the Hryvna is hopefully stable but what about the failure of reaching an agreement with the IMF this spring and summer? Where will be the Hryvna then? At 50 for the $ and 60 for the Euro? And there is a limit for price competitiveness to raise market share in EU and export. Already Ukrainian exporters in agriculture are full capacities. It needs as well quality high tech to sell and indeed already at 35 to the Euro Ukrainians goods and manufacturing are very competitive in EU and a much lower rate will only result in higher inflation and mass migration to EU because than salary is at 100 Euro per months and pension at 50 Euro or less.

 

The Euro in Euro would be first the powerful symbol of European future of Ukraine – irreversible and highly visible. The Ruble is now the currency of Crimea and occupied Donbas and the Euro – Ruble border will be as well the NATO defense line towards Russia in the new Cold War 2.0 which we in the West seriously did not want nor want to realize how seriously it is already reality but it is reality, and very much so in Ukraine and it is Ukraine defending Europe now and in the the future and we can and should do more and one thing we can do is the the Euro. Europe is and will be not a strong military force, the defense is and will be for Ukrainians with US backing and token European NATO support but Europe has the Euro and this will make all the difference. Not just as symbol but as a firm fundament of all future investment decision in Ukraine from the public and international side and from FDI and Ukrainian corporate and investors and SME side. Suddenly the currency devaluation risk is gone. And this matter a lot for all investment decision. There is clarity in the currency. The Ukrainian political elite will no longer be able to manipulate the currency as they have done recklessly before 2014 nor to devaluate their own out of the crisis which was necessary in 2015 but from now on will be longer available so all the painful structural reforms in labor, land and capital market have to made by the political system and that pressure is very much needed. There is no better discipline mechanism than a common currency and with it as well fiscal discipline, wage policy restraint and significant reduction in inflation will bring gradual lower interest rates and with it re-ignite the credit system and so the stimulate the private investments in Ukraine, a country which so much potential and much too little investment.

 

Introducing the Euro in Ukraine would than as well lead to the same demand in the Pro European periphery and both Georgia and Moldova should follow suit and Macedonia and Bosnia convert to the Euro – they are pegged anyhow. If Albania and Serbia will follow remains to be seen but they should. Croatia and Bulgaria and Romania should speed up full Eurozone Membership and then the decision of the 3 remaining non-Euro Visegrad Countries Hungary, Poland and Czech Republic remains to be seen. The optimal result would be to have only one currency east of the Ruble until the Scandinavia and the UK with Switzerland the only exception and the 3 EaP countries Belarus, Armenia and Azerbaijan and of course Turkey.

 

A common currency for the whole of CEE and SEE and Ukraine would accelerate economic integration and with it European integration and allow further European investment to be based on a firm fundament of the Euro and so every single Euro is based on a trustworthy basis and there is no doubt there needs to be massive infrastructure investment and budget supports to stabilize the region after 2014 and it is economically much more reasonable to make that in a common currency area. And as well from the political symbol. And never forget that the Euro was from start and core is and was a political project. Only few, if any economist were in favor and many are skeptical ever since. And all who might consider this a dangerous experiment it is certainly not more than integrating Greece in the Eurozone proper. And good some might say we won’t do that anymore as we learnt, so well the unilateral adoptions and usage of the Euro is something very much different to Eurozone membership which can only happen after EU membership and that is for later. And the need for financial aid and support for Ukraine at war and the whole European periphery is anyhow with or without the Euro significant and letting it fail not a real strategic option in the new Cold War 2.0 and once this is the assumption the Euro adoption is only the logical consequence. ETR has now written a lot on the Cold War 2.0 there is no need to repeat it. It is anyhow obvious for all who live not in beautiful illusions and na?ve trust of Russian ambitions which after 4 years some might have still but one might be curious on what facts or insights they are based. There is no Russian aggression, there is no doping in sports and Crimea was always Russian and trust that that was no intervention in Western election and so on. Anyhow the truth is now obvious. Russia will for sure try to make the Euro introduction in Ukraine impossible but that should be beyond their capabilities. The technicalities are now well tested and the economics sound. Together, just to answer the argument what the effect on the Euro would be - first it is anyhow rising to high against the Dollar and even if there might be some doubt on the capital market on such a measures Ukraine is just a 100 Billion $ GDP and all 9 SEE Countries have a GDP of about 200 Billion $ and as in a EU with 17 Trillion the idea that the Euro will be destabilized by Ukrainians using it is not valid. What would harm the whole of the European project is a failure of European Ukraine. A Collapse of the currency after a breakdown of IMF talks and similar alarmist scenarios and this would harm the EU, NATO and Western credibility and with it the Euro, not more people using it. On the contrary this would strengthen its global appeal and show the world that Europe is absolutely able to contribute to regional stability in the European periphery and not rely only on the USA but has its own powerful instruments to offer and not only for defense but as well to ensure prosperity similar like in Poland as well for Ukraine and the entire European periphery west of Russia and Turkey based on European instruments, norms and regulatory frameworks and a security order backed by a successful economy and a strong and powerful bond with the USA and Canada via NATO.

Sure, there are other scenarios the best one the IMF and EU support more and re-consider the priorities of conditioning towards economics and European Ukraine delivers more and allow turns out in harmony. The second is complete collapse but there will be mechanism to avoid that. The 3rd is the Moldavian Scenario and to a way as well the Georgia that Ukraine turns away from a concrete European future, takes some lessons from other oligarchic regimes in the region somewhere between Moldova and Georgia and devaluates towards a point it does not need the IMF and its conditions as Ukraine has significant expert and so foreign exchange and takes further massive middle class purchasing power losses as unavoidable into the political consideration and the Ukrainian patriotic- oligarchic but Pro European elite bets is future on the control of the power structures of police and justice and reduces the reform speed to ensure salary increases for the regime supporters and so stabilize power control like in Georgia or Moldova. Some say this is already happening since April 2016, some say since the EaP summit in Brussels in November 2017, some say it might happening soon. At the moment, the Ukrainian leadership still say something different that it is fully on a European reform trajectory and it wants to be a EU member and NATO as well. So, should we not take them serious and try to keep them on this course than to face a second and much bigger Moldova which has lost so much time and population in the swing between west and east. As well now with Visa Free travel for sure a lot of Ukrainian Middle Class will not take another halving of their available purchasing power slightly. These are well educated and pound and skilled people use to a reasonable life and contrary to the Balkans such hardship are unheard of for most people in their memory and now Europe is open for them with all promise of a better life. But a Moldavian scenario would result in significant migration there is no doubt similar like in the Balkans in the last decade. That is most likely anyhow part of the European trajectory of integrating European in the common European labor market but it should be done in a regulatory and reasonable manner over time and not in chaotic conditions as this would threaten Visa Liberalization and that is the most visible success for Ukraine and EU since 4 years and the one big achievement really buying the middle class of Ukraine into the reform project of the last 4 year and making all the reason they are proud to have it and the Russian still have to line up for European Schengen visas.

 

Austria can be the country helping Ukraine to float the Euro and for sure Lithuania would help and Estonia and Latvia would not stand idle. Slovakia might help as well. But it needs a strong economy, friendly to Ukraine and with leader’s friendly and in a trustful relation with the President of Ukraine and from a country with an economy strong enough and a vote in the ECB council to ensure at least passive noninterference of the ECB which by nature and mandate will not be pleased. Central Bankers are conservative and risk averse by nature and that is good so and they should be. But this is as well not about the independence of the ECB. It is not about interest rates or inflation or any political intervention it is about the strategic security of Europe at its exposed front with Russia and it is a political decision to help or not. And for the European taxpayer it is the much cheaper way to have a form fundament for the support for Ukraine than to watch it fail and pile up controllable costs in the process to little lasting effect. No doubt there will be an effect in the EU as much for the European funds sent to Ukraine will be parked in EU security soon again and the ongoing capital flight will continue. The only way to stop it is to have a currency with international backing and full trust of all investors Ukrainian and Internationals and International Financial Institutions and most of all Ukrainians and based on that re-need confidence there will the real turnaround starting with the growth figures needed to catch up with SEE and then CEE and making European accession possible. It needs a successful economy to convince Europe that Ukraine is ready and for that Ukraine needs the Euro, the faster the better.