Reformatting the European Integration Process: Opportunities and Risks for the Ukraine-EU Association. Conclusions and Proposals

December 03, 2018

The research arrived at the following main conclusions:

  1. The crisis processes in the development of European integration and the EU, which hit them in the second decade of the 21st century, were born by deeply enrooted internal factors closely linked with the objectively wave-like nature of socio-economic and technological development. They are not unique to the EU experience, as crises accompanied, from time to time, the development of the European integration process. The unambiguous multidimensional nature of the crisis processes and their complex nature should not be misleading: in fact, we are dealing with various aspects (facets) of a general crisis process in the development of European integration.
  2. The main primary sources of current crisis processes are significant contradictions and asymmetries in the mechanisms of the Euro area and the declared policy of the EMU completion. The mechanisms already implemented in the Euro area do not take into account the existing differences among member states regarding the level of economic development, the maturity of regulatory economic institutions and competitiveness potential. European integration is in urgent need of reshaping, which would breath-in new energy into it. However, nowadays, the EU in its Eurozone “core” have no single strategic vision of further development of the integration community mechanisms. The elaboration of such common vision is hampered by significant differences between member states, which are fundamental, and in some cases even conceptual.
  3. Advancing to higher stages of the EMU cannot take place outside the formation of a political union of states, which should ensure an appropriate level of unity in economic policy. However, the plans to build up a political superstructure over the EMU have largely failed, which has become an important pro-crisis factor. This problem has been complicated by important political changes on a global scale and in Europe, related to the revival of nationalism and protectionism, and the intensification of deglobalisation tendencies. The emphasis on the policy based national value systems and life principles based on national experience creates prerequisites for slowing down the process of European integration and even for disintegration trends as demonstrated by the UK’s exit from the EU.
  4. The severe migration crisis that hit Europe also aggravated problems within the EU, creating extraordinary tensions in social security systems within the EU, and together with Russian foreign policy efforts challenged the European security as a whole.
  5. The overlapping in time of the policies aimed at deepening and enlarging the European Union also contributed to the emergence of the crisis in the development of the EU, as it created an extraordinary burden on the entire system of institutions of the European integration bloc.
  6. The prospects for further evolution of the EU and the possibility of its advance on the path to positive development are endangered by a number of adverse long-term trends, including negative demographic processes in Europe and a tendency towards a relative reduction in the EU’s global weight due to the progressive strengthening of emerging market economies, especially Asian countries. These prospects will be adversely affected by the possible increased differences in the scientific and technological potential among EU member states and their ability to effectively seize the achievements of the Fourth Industrial Revolution, which can create new technological frontiers in Europe and substantially enhance the fragmentation of the European economic and technological space.
  7. Partial reforms implemented in recent years in the EU and the Euro area are incomplete and leave room for different trajectories in the future. In this case, established mechanisms and formats of interaction, which are not sufficiently flexible and diverse, have ceased to correspond to the realities of modern development and therefore do not work properly.
  8. None of the five scenarios proposed by the European Commission in March 2017 about further EU development do not look flawless: all contain certain risks. Politically, three of them seem to be rather realistic. These scenarios are named: “Those Who Want More Do More”, “Doing Less More Efficiently”, and “Doing Much More Together”. However, the first of them is rather risky and requires compliance with certain limits to avoid transformation of differing speeds into substantially differing integration structures. The scenario “Doing Much More Together”, to which the European Commission and the leaders of France and Germany adhere, is viable only in case of overcoming the public mistrust of supranational structures and a significant levelling-out of economic development for the majority of member countries. The results of this study, however, provide more arguments to support the “Doing Less More Efficiently” scenario, which appears to be the most acceptable in terms of the balance of interests of different participants of the European integration and, as a result, is the most viable among the mix of different scenarios.
  9. Important political impetus for a decision on the future format of European integration and the EU were acquired from different political statements of the recent period. Among them are the political priorities indicated by Jean-Claude Junker, President of the European Commission, in his 2018 “State of the Union” address. Another breaking pro-European initiative was put forward by Emmanuel Macron, President of France, in his speeches at the Sorbonne University (26 September 2017) and the European Parliament (17 April 2018). Finally, the leaders of France and Germany outlined a set of priorities in the Mezeberg Declaration dated 19 June 2018. However, the practical feasibility of implementing these approaches are not unquestionable. In particular, they do not take into account that the creation of an increasing number of new regulatory institutions at a community level does not guarantee improvements in their regulatory efficiency. They do not pay attention to the excessive complexity, and hence the vulnerability of the European regulatory system which requires a significant “unloading” of the European agenda to make it functionally more suitable for effective community regulation.
  10. There is a clear disruption between the range of assessments and proposals of the European Commission and some top European integration champions and the assessments made in discussions outside government offices, inter alia, those originating from independent scientific research. The latter predict a number of possible pessimistic scenarios for the EU integration process.
  11. The initial format of the EU’s EMU appeared to be incomplete and imbalanced. The complete integration of the monetary policy while maintaining a significant autonomy of the banking system and fiscal and budgetary spheres generated a serious structural distortion inside the Euro area regulatory system, which weakened its resilience to external shocks and caused its increased vulnerability to the effects of global instability. Theoretically, there are only two possible outcomes of this situation:(1) significant deepening of integration and the completion of a fully-fledged EMU; and (2) a controlled partial disintegration and a partial return of previously centralized monetary powers to nation states and the actual transformation of the role and functions of the common currency.
  12. The completion of the EMU, initiated in 2012 by the adoption of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, has become a complex process to comprise the Banking Union, the Fiscal Union of the member states and the introduction of an integrated economic policy framework with a single European system of macroeconomic regulation (“European Semester”). Subsequently, it received the fourth element – the Capital Markets Union, and together with the Banking Union, they are now officially referred to the Financial Union while the single European system of macroeconomic regulation makes the basis of the Economic Union.
  13. The process of EMU completion is contradictory because it strengthens the functions of macroeconomic regulation at the community level in the absence of the necessary political preconditions for this at the level of a nation state. It does not fully take into account the special political and ethno-cultural aspects of development, as well as the factor of significant technological complexity of the proposed regulatory mechanisms.
  14. The formation of the Banking Union is the least controversial issue enjoying the greatest support among all the EMU components: the further development of integration in the banking sector is an imperative not only for the countries of the Euro area but also for the whole of the EU. At the same time, the course targeted at accelerated formation of the Capital Markets Union appears unrealistic and even dangerous, as it proceeds from an overly optimistic assessment of the EU’s institutional capacity. This course should rather focus on a small number of priorities capable of facilitating longer-term structural changes in the EU financial markets. However, the most problematic issue is the formation of the Fiscal Union: Europe and the Euro area do not show signs of readiness for the introduction of a supranational fiscal institution (treasury).
  15. For Ukraine, the dramatic changes in the European integration system represent both new opportunities and new challenges. It is necessary to take into account the possibility of a conflict between new institutional formats and the Association Agreement between Ukraine and the EU both in formal and informal aspects. An intensive process of change in the EU mechanisms can lead to a progressive lagging of the content of the Agreement from the EU regulatory system caused by the situation where the pace of institutional change in the EU significantly exceeds the pace of institutional change in Ukraine.
  16. The main risks for Ukraine arising from reforming of the European integration process are related to possible fragmentation of the European space and, consequently, the emergence of difficult political dilemmas and additional costs, a restricted access to EU funds, aggravation of the migration problem, the possibility that Schengen regime will fall apart, as well as complicated security conditions through the erosion of EU support policies. Both the substantial deepening of the European integration process and possible disintegration phenomena will be a challenge for Ukraine, its process of socio-economic transformation and its interaction within the framework of the Association Agreement with the EU.
  17. In the process of adaptation to changes in the EU system, it is necessary to take into account both own experience of reforms based on adaptation to the EU norms, and similar experiences accumulated by the Central and East European countries that have already joined the European Union. They suggest that putting these objectives on the agenda, not having the sufficient preconditions, can create the risk of possible discrediting of the entire political course, the loss of public trust and the forced review of strategic priorities. It is necessary to exclude any mechanical transposition of European institutions to the Ukrainian system, and to create conditions for the progressive elevation of the level of civilisation of socio-economic and political processes within Ukraine based on imperatives inherent in national culture.

The results of this research made it possible to formulate the following policy recommendations regarding Ukraine’s European integration:

  • To make a joint study by Ukrainian and European experts of the issue of possible Ukraine’s accession (on association terms) to the mechanisms of the EU’s Banking Union, in order to find new solutions to make the Ukrainian banking system healthier.
  • To organise joint research by Ukrainian and European experts on the possibility of Ukraine’s accession to a number of financial instruments that have been introduced in various EMU sectors to promote investment and support implementation of national economic development programmes. This issue should be considered in a wider context of the need to reorient the mechanisms of providing the EU’s financial assistance to Ukraine – from the current emphasis on macroeconomic assistance to overcome the negative effects of economic inefficiency towards structural reforms designed to tackle the main causes of inefficient activities.
  • In cooperation with European partners, to investigate the opportunities for strengthening the EU-Ukraine interaction in the field of energy and climate policies. i.e. in the context of the European green energy policy. Special emphasis should be made on coordination in implementing higher carbon taxation and adapting EU best practices in funding climate policy and green energy, including the spread of modern financial institutions and market financial instruments serving this purpose.
  • Within the Association’s governing bodies, a working group should be established to deal with the issues of activation and diversification of the mechanisms for regulating international migration. The “brain drain” (migration of young people and highly qualified specialists from Ukraine to the EU) should be added to the Association’s agenda. There is a need to discuss the possibility of introducing compensatory mechanisms for the partial reimbursement of the budgetary expenditure in Ukraine for the education of those professionals who leave the territory of Ukraine for a long-term engagement abroad.
  • Association bodies should also take additional measures to enhance security cooperation in the context of new opportunities that arise from the new approaches within the EU Financial Perspectives for 2021-2027, focusing, first of all, on integrating the entire system of Ukraine’s defence capability into the European space.
  • Ukraine needs to create a permanently operating and powerful system of integrated scientific and analytical support relating to European development and European integration. This goal could be reached through the creation of a network of independent think tanks on these issues, or the creation of a consortium of leading think tanks engaged in the study of European integration issues, and inviting the representatives of high rank European research centres.
  • Ukrainian business should be invited to actively fund the relevant research on strategic issues of the country’s development and ways to optimize its place in Europe, in particular through the launch of a long-term Ukrainian research initiative on these issues that could be implemented via open competitive procedures.
  • It is necessary to strengthen the quality of mechanisms for shaping governmental decisions on European integration issues, paying particular attention to: the quality of web portals of the governing bodies related to European integration process; creation of a platform for public discussions over key issues of European integration; expanded involvement of independent think tanks with prolonged experience in political advisory activities for detailed decision drafting in the field of European integration policy.
  • It is extremely necessary to create in Ukraine a multi-level system of governance to manage the process of European integration. It should involve representatives of government structures, leading all-Ukrainian business unions and associations, non-governmental organisations (civil society) and various academic sectors (the National Academy of Sciences of Ukraine, universities, non-governmental research organisations), providing the basis for a functioning communication mechanism in preparing key decisions regarding the development of European integration.

Volodymyr Sidenko

Senior Research Fellow


Education:

  • Taras Shevchenko National University, Kyiv, Faculty of International Relations and International Law, Department of International Economic Relations (1977).
  • Doctor of Science in Economics (2000), member of the National Academy of Sciences of Ukraine (2006), author of over 200 scientific articles, including the articles published abroad (the United Kingdom, the USA, Germany, Russia, Hungary, etc.).

Work experience:

  • Research Associate, the Head of the Institute for Social and Economic Problems of Foreign Countries, the Academy of Sciences of Ukraine (1980–1992), Institute of World Economy and International Relations of NAS of Ukraine (1992–2000), Institute of Economic Forecasting of NAS of Ukraine (1992–2005), Institute of Economics and Forecasting of NAS of Ukraine (2005–2012).
  • Advisor on foreign policy to the President of Ukraine (1994–1995).
  • Director of economic programmes of the Razumkov Centre (2001–2004).

Spheres of activity: research on strategy and mechanism of foreign trade, structural transformations of economy, external aspects of economic growth, global economic regulation, international economic integration, international competitiveness, foreign investment, economic relations between Ukraine and the EU and regional groupings in the CIS.

 (044) 201-11-98

sidenko@razumkov.org.ua