MAR 30, 2015
LONDON – The European Union stands at a crossroads. The shape it takes five years from now will be decided in the coming 3-5 months.
Year after year, the EU has successfully muddled through its difficulties. But now it has to deal with two sources of existential crisis: Greece and Ukraine. That may prove too much.
Greece’s long-festering crisis has been mishandled by all parties from the outset. Emotions now are running so high that muddling through is the only constructive alternative.
But 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 destabilizes 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. But 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 outmaneuvered Ukraine’s allies, which used to lead the free world?
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. He can choose between hybrid war and hybrid peace, and Ukraine and its allies are struggling to respond.
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. But the improvement is extremely 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 International Monetary Fund are based. The IMF’s Extended Fund Facility became insufficient even before it was approved.
But EU member 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 program within Ukraine is gaining momentum, and slowly becoming visible to both 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 Kyiv 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 – two million 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 United States. 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 that 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. But 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 2-3 years.
The latest chapter in what I call the “Tragedy of the European Union” 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 also a more hopeful scenario. The new Ukraine is still alive and determined to defend itself. Though Ukraine, on its own, is no match for Russia’s military might, its allies could decide to 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 that it seems to have lost. Needless to say, this is the scenario I advocate.