Europe's Ukrainian road to normality

Erik Berglöf LONDON – As Europe celebrates the 25th anniversary of the fall of the Berlin Wall, dark clouds are again descending on the continent. Just as there was nothing inevitable about the momentous changes that followed the end of the Cold War, the economic and political convergence in Europe to which we have since grown accustomed was not preordained. The impetus toward integration remains strong; but, especially since the 2008 global financial crisis, countervailing forces have emerged, threatening to undo much of the progress that has been made. Recalling what prompted the events of 1989 may help Europe find a way out of its current malaise. As Yegor Gaidar, Russia’s first post-Soviet prime minister, has convincingly shown in his compelling book Collapse of an Empire, it was the fall in oil prices that determined the timing of the collapse. But what set the stage was a combination of internal moral breakdown in the Soviet Union and the high costs of external military armament. Once again, we must redraw our mental maps to fit distorted historical landscapes. The “peace dividend” – lower defense expenditures and freer trade and investment – brought about by the end of the Cold War has now turned into a “geopolitical tax” – a loss to global welfare. In Europe’s search for a road back to normality, its leaders must look for new bargains where all parties stand to gain. Ironically, we might find this common ground in the very place from which the current tension in Europe emanates: Ukraine. Precisely because Ukraine is the source of conflict, it may also provide a foothold for efforts to change course. Just as in Soviet times, we will have to take incremental steps, restoring elements of normality and rebuilding confidence. One area on which to focus is the Ukrainian financial sector, where both Russian and Western European banks are highly exposed – and thus have a strong incentive to work together to maintain financial stability. Since June of this year, the affected banks and key authorities, together with the international financial institutions, have met in Kyiv under the Vienna Initiative framework (the next meeting is in two weeks). The banking system is in deep crisis, but at least there is a constructive dialogue involving the Russian banks present in the country. Common interests are also evident in the gas sector – a crucial item in the Ukrainian government’s budget and perhaps the main source of corruption in the country. All sides want greater energy security: Russia wants guaranteed demand, and Europe and Ukraine want stable prices and no supply disruptions. Last month’s agreement, brokered by the European Union, to resume supplies of Russian gas to Ukraine must now be followed by genuine reform of the sector, eventually involving an international operator of the network. A third area is trade. The deal negotiated between Russia, Ukraine, and the EU regarding the provisional application of the EU Association Agreement offered yet another opportunity to recognize joint interests. The agreement came into force on November 1, but it remains uncertain whether everyone will abide by it. If played right, ideologically less-charged trade negotiations could be an area where all parties can find common ground. Such positive-sum games did not bring an end to the Cold War, but they did offer opportunities to build trust and facilitate exchange. The international institutions once set up to encourage such confidence-building measures cannot play their role at the moment, but every effort must be made to ensure that, once geopolitics allows, their constructive capacity is restored. We need more integration, not less, to anchor our common future and encourage greater commonality of values. Erik Berglöf is Chief Economist of the European Bank for Reconstruction and Development. Copyright: Project Syndicate, 2014.

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Europe's Ukrainian road to normality