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Down the Path of Austerity

Ukraine, the EU and the IMF

by MARK WEISBROT

When Euromaidan protesters took to the streets in Kiev beginning last year, many were hoping to become part of Europe. The Europe they looked up to was one of material comforts and living standards far beyond the reach of most Ukrainians, whose average income is currently about the level of El Salvador. A Europe with a social market economy, advanced technology and public transportation, universal health care, adequate pensions and paid vacations that average five weeks. Or at least something like that, somewhere down the road.

If they are fortunate enough to avoid a civil war, Ukrainians may be in for an unpleasant surprise as their current and even soon-to-be elected leaders negotiate their economic future with their new, unelected European deciders. The Europe of their near and intermediate future may be more like that of Greece or Spain — but with less than a third of the per capita income, and with a fraction of those countries’ now shrunken social safety net, a lot more miserable.

The International Monetary Fund (IMF) has announced that one of the conditions of its lending (along with that of the EU and U.S.) will be fiscal austerity for the next two and a half years. The economy is already in recession, with the IMF now projecting a steep 5 percent decline in GDP for 2014. The big danger is that the fiscal tightening could become a moving target as the economy, and therefore tax revenues, shrink further and the government has to cut even more spending to meet the deficit goals. This is what happened in Greece, where an adjustment that the European authorities could have accomplished relatively easily and painlessly turned into a 6-year recession and nightmare that has cost Greece a quarter of its national income – and left 27.5 percent of the labor force out of work.

Unlikely? German Finance Minister Wolfgang Schaeuble told the press last month, with all the sensitivity of a Cliven Bundy or Los Angeles Clippers’ owner Donald Sterling, that Greece could serve as a model for Ukraine. This is like saying that the United States’ Great Depression could serve as a model for Ukraine.

But we don’t have to look to Greece or Spain to see the risks of signing on to a program of fiscal austerity and “reforms” run by the IMF and its European directors at this time. Ukraine has had its own experience not that long ago: in just 4 years from 1992-1996, Ukraine lost half of its GDP as the IMF and friends took the wrecking ball to both the Russian and Ukrainian economies . Ukraine’s economy didn’t start growing again until the 2000’s. For comparison, the worst years of the U.S. Great Depression (1929-1934) saw a real GDP loss of 36 percent.

And Ukraine is facing a number of downside risks that make austerity particularly dangerous at this moment. Ukraine’s exports are about 50 percent of GDP and half go to the EU and Russia, two economies that could underperform in the near future — Europe because of the prolonged, self-induced downturn that it is only weakly emerging from, and Russia because of possible further sanctions and conflict with the U.S. and its allies. If Russia decides to retaliate by cutting off energy exports to Ukraine (or Europe), this could also push Ukraine’s economy further into recession. Investment in Ukraine was very weak last year (about half its pre-Great Recession peak) and is likely to worsen further due to the potential for escalating civil conflict. There is also a lot of vulnerability in the banking system, exacerbated by the recent depreciation of the Ukrainian currency (because much borrowing has been in foreign currency). And the recent depreciation will raise inflation – currently at just 1.2 percent annually — even as the economy shrinks; as will the increase in energy prices that the IMF is demanding. Unfortunately, the Fund also wants the Central Bank to adopt an inflation-targeting regime, which could then contribute to deepening the recession.

Of course, some of the adjustments and reforms that the IMF and Europe want may be necessary or beneficial. Ukraine’s current account (mostly trade) deficit of 9.2 percent needs to come down. But the fastest way to do this – reducing imports by shrinking an economy that is already in recession – is too brutal and unfair, as well as risky. The IMF was right to endorse a more flexible exchange rate, which was implemented in February; and the highly energy-intensive economy, with large government subsidies to fossil fuels, also needs reform in this area.

But you can’t destroy an economy in order to save it, and the whole purpose of the European lending should be to cushion any adjustments and allow the economy and employment to grow and avoid a downward spiral. Unfortunately, as Schaeuble’s remarks (and IMF documents) indicate, these people all too often see crisis as an opportunity to remake the economy in the divine image that they worship,regardless of costs and consequences. And like the Portuguese colonialists in 16thcentury Brazil who wanted not only the land and labor but also the souls of the indigenous people whom they sought to convert to Christianity, neoliberal religion is part of the equation here. Nobody has apologized for the unnecessary destruction of Ukraine’s economy (or Russia’s for that matter) in the 1990s.

“F*** the EU,” said U.S. Assistant Secretary of State Victoria Nuland in February as she discussed with the U.S. Ambassador to Ukraine their plans to help midwife a new government in Ukraine. If the new government follows the IMF/EU program, many Ukrainians may be saying the same thing.

Mark Weisbrot is an economist and co-director of the Center for Economic and Policy Research. He is co-author, with Dean Baker, of Social Security: the Phony Crisis.

This essay originally appeared in Al Jazeera.