Blog | October 24, 2017

The Integration Dilemma in the EU’s Eastern Partnership Region

BY: VALBONA ZENELI

In Europe, there is a clear understanding that unresolved ethnic and geopolitical conflicts are threats to regional stability. Stabilization of the European Eastern neighborhood has been a security imperative for the European Union (EU) for some time. A principal goal of the 2016’s EU Global Strategy and the revised European Neighborhood Policy is to invest in the resilience of Eastern Partnership (EaP) countries—Armenia, Azerbaijan, Belarus, Georgina, Moldova and Ukraine.

The EU’s primary objective in the EaP is to fund the development of democratic institutions, good governance and economic development. However, there exists a dilemma within the region when it comes to its economic integration with the EU, resulting in new divisions and dissent amongst states.

All EaP countries would like to take advantage of closer economic links with both the EU and Russia via the Eurasian Economic Union (EAEU). Politically and economically, the integration dilemma between the EU common market and the EAEU remains deeply divisive—the EU is the largest economic block in the world, while Russia’s regional focus appeals to some EaP nations.

According to IMF data, in 2016, the average income per capita in the region was 3,378 USD per year, which is only eight percent of the EU’s average per capita income. Moldova is the poorest country in the region with only 1,871 USD per capita, in 2016. When considering a weak regional recovery following the global economic crisis—which saw an average economic contraction of negative six percent in 2009 (with the exception of Azerbaijan)—hopes of catching up with the rest of Europe are fading.

In the current environment, Russia remains a significant player, exerting influence using economic, energy and political leverage. Understandably, the combination of internal vulnerabilities and external pressures creates a very challenging situation, where instability and lack of economic security support a cycle of weak governance, high levels of corruption, poverty and inequality, and weak economic development.

Competing Orbits

The difference in allegiances of the EaP nations is increasingly apparent. Georgia, Moldova and Ukraine are signatories to the Deep and Comprehensive Free Trade Agreement (DCFTA), bringing relations between these countries and the EU to new economic levels. Meanwhile, Armenia and Belarus have opted to join the Eurasian Economic Union (EAEU) in partnership with Russia, Kazakhstan and Kyrgyzstan (Azerbaijan remains neutral).

Countries are free to choose the trade agreement that best serve their trade and economic interests. In the case of the EaP region, it is important to look at the essential differences between the EU and the EAEU, their purpose, complexity and attractiveness.  

Informally formed in the 1990’s, by 2015, the EAEU has since grown into an established economic union. The EAEU’s mission mimics the EU’s in its intention to encourage economic integration through the elimination of tariff and non-tariff barriers. To date, it has proven ineffective, with statistics showing a six percent decrease in trade between EAEU partners in 2016.

In contrast, the EU continues to engage in trade with all nations in the region more frequently than the EAEU, excluding Belarus. The DCFTA has significantly increased trade between the EU and the three signatory countries. The EU is the largest trading partner for Moldova with 64 percent of its trade (40 percent for Ukraine and 32 percent for Georgia). Because all three countries together make up only one percent of the EU’s total trade, there remains scope for even greater growth. Most importantly, the DCFTA is not only about trade liberalization, but also serves to increase the competitiveness of domestic companies across the region, making them increasingly attractive to foreign investment. Currently, the entire EaP region attracts less than 0.5 percent of global FDI.

The EAEU’s four trillion USD common market consisting of 182 million consumers represents less than two percent of global GDP at the current exchange rate. Members of the EAEU are too different in terms of economic development and structure, and econometric calculations suggest that the EAEU causes more trade diversion than trade generation. Most importantly, the EAEU market is based on extractive industries and not on innovation and know-how, which raises important questions about future regional capacity and competitiveness. Arguably, while access is easier to the EAEU, a political agenda dominates the economic one.

Ultimately, the EAEU’s main objective is to negotiate comprehensive treaties with its largest economic partners—the EU and China. While no real progress can be achieved with the EU until its own current political crisis is resolved, there is ongoing dialogue to involve EAEU countries in China’s Belt and Road Initiative (BRI). However, China appears to be more interested in investing in those countries that have signed the DCFTA with the EU, owing to broader opportunities and easier access for Chinese products to the European market.

The Path Forward

Importantly, DCFTA requirements are meant to achieve a legal approximation to the acquis communautaire that would formalize technical standards for products and establish an EU-like regulatory environment. Certainly, in the short run, there are challenges associated with the implementation of DCFTA, including adjustment costs owing to industrial restructuring, loss of market share and structural reforms, as well as the growing need for infrastructure investments.

That notwithstanding, in the long run, the economic effects on the DCFTA countries—Georgia, Moldova and Ukraine—are likely to be positive due to regulatory framework convergence with the EU, which will help attract FDI—increase competitiveness, foster trade and productivity gains—allowing for income growth and better quality of life.

Although EU integration seems to be a distant prospect for the EaP countries, at a minimum, if they were to follow the DCFTA integration requirements now, they would be well on their way to modernizing their economies and becoming more competitive in regional and, perhaps, global markets.

Dr. Valbona Zeneli is the director of Black Sea Eurasia Program at the George C. Marshall European Center for Security Studies. 

The views expressed in this post reflect those of the author and not that of the EastWest Institute.