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Cross-posted from America AlJazeera

Kyiv may face disillusionment with Europe if it follows austerity prescriptions

IMF Trying To Start WW3 in Ukraine
(image by YouTube)

Euromaidan protesters took to Kyiv’s streets last year in the hopes of Ukraine’s becoming part of the European Union. The Europe they admired was one of material comforts and living standards far beyond the reach of most Ukrainians, whose average income is about the level of El Salvadorans’. The demonstrators wanted for themselves something approaching Europe’s prosperity — a market economy, advanced technology, quality public transportation, universal health care, adequate pensions and paid vacations that average five weeks.

Even more disconcerting, 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 of them go to the EU and Russia, both of whose economies could underperform in the near future — Europe’s because of the prolonged, self-induced downturn that it is only weakly emerging from and Russia’s 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 EU countries), Ukraine’s economy could slide 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. The country’s banking system is also vulnerable, weakened by the recent depreciation of the Ukrainian currency (because much of its borrowing has been in foreign currency). This depreciation will, in turn, 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 IMF wants Ukraine’s Central Bank to adopt an inflation-targeting regime, which could contribute to deepening the recession.

To be fair, 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 currency exchange rate, which was implemented in February; the country’s highly energy-intensive economy, with large government subsidies to fossil fuels, also needs reform.

But you can’t destroy an economy in order to save it. The whole purpose of European lending should be to cushion any adjustments and allow Ukraine’s economy and employment to grow and avoid a downward spiral. Unfortunately, as Schaeuble’s remarks (and IMF documents) indicate, EU and IMF leaders all too often see crisis as an opportunity to remake the economy in the divine image that they worship, regardless of costs and consequences. As with the Portuguese colonialists in 16th century 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 theology is playing a role here. Nobody has apologized for the unnecessary destruction of Ukraine’s economy (or Russia’s for that matter) in the 1990s.

“F— the EU,” U.S. Assistant Secretary of State Victoria Nuland said 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.