Scanning of EU macro-financial assistance to Moldova, Ukraine and Georgia: frontrunners and laggards, OP-ED

The European macro-financial assistance forms part of the few instruments of conditionality by which the European Union can stimulate reforms in the countries of its neighborhood. Of the eight countries in its neighborhood that benefit from such type of financing, Moldova, Ukraine and Georgia are implementing Association Agreements, while Armenia and Kyrgyzstan belong to Eurasian Economic Union. Usually, Brussels allocates the given category of financing only in situations of crisis and at the request of the third party. According to the official position of the EU, the existence of a credit arrangement with the International Monetary Fund (IMF) is an essential precondition for providing macro-financial assistance. This way, Brussels increases the capacity to reduce the risks for its investment component (loans). Thus, the EU openly uses the robust economic scanning and alerting mechanism in the case of macro-economic deviations operated by IMF.

Besides the requirements concerning sector reforms, the macro-financial assistance started to contain political preconditions related to the functioning of multiparty system or the rule of law. The introduction of political preconditions in EU’s approach varied. Georgia was the first country towards which the EU applied the concept of political precondition in 2013. Later, in 2014, the same principle was introduced in the macro-financial assistance decisions concerning Ukraine. In the case of Moldova, the political preconditions became a reality only starting with 2017. The political conditionality to which Moldova was subjected for providing macro-financial assistance was based not on a usual practice, as in the case of Georgia or Ukraine, but on the revision of mixed electoral system in 2017 summer (Council of the EU, June 13, 2017). Then, the European Parliament, the European Commission and the Council of the EU established a mechanism for monitoring the political preconditions and the way in which the Moldovan authorities were expected to respect the commitments made to the Venice Commission and other international partners (IPN, July 24, 2017).

Besides the political preconditions, to benefit from the EU’s macro-financial assistance the countries must also implement sectoral reforms. For now, Georgia is the only country with Association Agreement that received all the tranches of the macro-financial assistance agreed with EU in 2009-2017. The assistance for Ukraine was incomplete in the case of the third macro-financial assistance (2015-2018) because not all sectoral conditions were met, in particular the commitment on fighting corruption. Unlike Georgia and Ukraine, Moldova is the only country whose assistance was suspended owing to the violation of the political preconditions following the political crisis caused by the invalidation of the Chisinau early mayoral elections in June 2018 (IPN, July 9, 2018). The Moldovan case does not match the standard EU reactions in relation to the Associated states of the Eastern Partnership. It is for the first time that European officials and politicians objected to the political interference in the decisions taken by the Moldovan judiciary (IPN, July 2, 2018) and tied the resumption of the discussions on providing macro-financial assistance to the quality of democracy and, in particular, to the quality of the future parliamentary elections February 2019 (Free Europe, September 21, 2018).

Georgia – frontrunner, Ukraine – problematic, Moldova in suspense

The volume and frequency of the financial assistance allocated to the Associated states by EU fluctuated depending on domestic situation in Moldova, Ukraine and Georgia and on the geopolitical developments. The largest and most of the tranches were offered to Ukraine as of 2014. The about €2.5 billion allocated effectively to Ukraine was conditional on multiple motivations: i) difficulty of getting financing on external market; ii) budgetary payments crisis; iii) support for the reforms initiated under Association Agreement. An additional explanation of EU’s openness to the Ukrainian authorities residues in Ukraine’s systemic role for the geopolitics of the Eastern Partnership and its capacity to multiply reforms at regional level, including in Russia. For the European players that are more sensitive to the aggressive policy of the Kremlin, the financial support for Ukraine was an expression of the “soft power” with which the EU can contribute to developing and strengthening Ukraine and to maintaining the regional security balance before the ”hard power” of Russia. Nevertheless, the opposition of the internal forces to particular sector reforms, but most of all to the new anticorruption initiatives (new anticorruption organism, declaration of revenues, etc.), led to the blocking of the disbursement of €600 million from the third EU macro-financial assistance tranche with of value of €1.8 billion. For the first time, the political preconditions are explicitly specified in the EU’s decisions concerning Ukraine, starting with the second macro-financial assistance of 2014-2015 (Official Journal of the EU, April 15, 2014). But the European officials didn’t yet highlight the political conditionality in relation to the reforms undertaken by Kiev.

Georgia hasn’t yet seriously deviated from the agreement on the macro-financial assistance reached with the European institutions. So far, the EU hasn’t presented serious any serious objections as to the way in which the Georgian authorities fulfill their commitments. The first two agreements on macro-financial assistance resulted from the assistance promised by the EU at the Donors Conference held in Brussels after Russia’s military intervention in Georgia of 2008. Contrary to the Georgian territorial integrity principle and the commitments to stop the ceasefire, Russia started to modify the Georgian borders by recognizing the independence of the separatist Georgian regions - Abkhazia and South Ossetia. This unfavorable development inclined the EU towards increasing the solidarity with Georgia, including as regards the provided assistance. Unlike Ukraine and Moldova, the macro-financial assistance for Georgia has never been suspended or undisbursed. Effectively, the EU specified the political preconditions towards Tbilisi in its decision on the second macro-financial assistance allocated between 2015 and 2017 (Official Journal of the EU, August 12, 2013). Consequently, for the first time the practice of political conditions for macro-financial assistance is applied in relation to Georgia in 2013 already, one year before it was applied to Ukraine and four years before this was done in the case of Moldova.

Under the influence of a positive but superficial image of the Moldovan political class, the EU showed particular indulgence towards Moldova when it agreed the first portion of macro-financial assistance in 2010 (Official Journal of the EU, October 20, 2010). Except for the requirements concerning sector reforms, which were mainly economic in nature, the EU imposed no other conditions. Only in the summer of 2017, in the context of the amendment of the electoral legation in breach of the fundamental democratic principles, the largest part of Members of the European Parliament reached a consensus with the European Commission and the Council of the EU over the introduction of political pre-conditions. As for Georgia (2013) and Ukraine (2014), these conditions envisioned the respect for the multiparty system, the rule of law and human rights. Additionally, the pre-conditions included the beneficiary country’s commitment to strengthen the efficiency, transparency and accountability for the system of managing public finances. This component was introduced not accidentally, but as a result of suspicions that European funds can be stolen, which became more intense after the robbing of the banking system, revealed in 2014. The pro-transparency approach to the public finances applied to Moldova was later included in the most recent EU’s assistance agreements with Ukraine (€1bn) and Georgia (€45m) that were concluded in 2018. In line with Moldovan model of macro-financial assistance arrangement, the European External Action Service was also involved in the process of monitoring the sector conditions and political preconditions so as to assist the already involved European Commission.
 

Table: Scanning of EU macro-financial assistance (MFA) for Moldova, Ukraine and Georgia

	Moldova	Ukraine	Georgia
Number of macro-financial assistances (MFA)	2 (2010-2012; 2017-present)	4 (2014; 2014-2015; 2015-2018; 2018-present)	3 (2009-2010; 2015-2017; 2018-present)
Sum of disbursed macro-financial assistance	2010-2012: €90m 2017-present: €100m (postponed until after elections of February 2019)	- 2014: €600m - 2014-2015: €1bn - 2015-2018: €1.8bn (€600m of which wasn’t disbursed) - 2018-present: €1bn	- 2009-2010: €46m - 2015-2017: €46m - 2018-present: €45m
Number of suspensions	1	1	0
Reason for suspension	Political preconditions: invalidation of elections held in Chisinau municipality	Four sector conditions of the total 21, in  particular anticorruption reform	0
Undisbursed assistance	0	1 (€600m)	0
Inclusion of political preconditions	Starting with second MFA portion – 2017-present	Starting with second MFA portion – 2014-2015	Starting with second MFA portion –2015 - 2017

Source: Author’s compilation of European Commission’s data, www.ec.europa.eu
 

Two tendencies generated by Moldovan precedent

Both the negotiation of the second macro-financial assistance for Moldova and its postponement for the reason that the political preconditions weren’t met point to a significant development of this type of European financial instrument. On the one hand, the Moldovan authorities have had to accept the modification of the EU approach to the macro-financial assistance, noticed after the signing of the agreement with Georgia (2013). This way, the political pre-conditions that weren’t wanted by the Moldovan authorities materialized. On the other hand, the negative practices identified in Moldova (distrust in the management of public funds) apparently led to the toughening up of the conditions for providing macro-financial assistance for the other states situated in the European neighborhood. 

Moreover, the activation of the political preconditions in Moldova owing to the annulment of the results of the municipal elections of 2018 created a precedent that can serve as a source of inspiration for the EU and as an anti-example for the countries of the neighborhood that are interested in obtaining EU macro-financial assistance. In particular, the Moldovan precedent shaped two positive tendencies.

Firstly, it became evident that the non-observance of the political preconditions has unfavorable consequences for the national authorities. Thus, following the Moldovan example, the political opposition and civil society of Georgia, Ukraine and other countries of the European neighborhood can exert pressure on the EU and on their own governments. The second tendency is related to the increased attention devoted to the way in which the EU funds are used. As a result, a greater care for the European assistance can cumulatively improve the approach to the national public finances in general.

Instead of conclusion...

In comparison to Georgia, Moldova and Ukraine are more difficult cases of providing the European macro-financial assistance. Even if Ukraine hasn’t always received all the installments, this hasn’t been yet penalized for breaching the political pre-conditions as it was in Moldovan case.

Unaccustomed to EU’s principledness in relation to the political aspects of bilateral commitments, the government of Moldova through it own deeds (invalidation of elections in Chisinau) provoked the delay of macro-financial assistance in 2018. This political negligence affects the country’s image and leads to the postponement of reforms deriving from the Association Agreement, which can endanger the disbursement of macro-financial funds in general, if the current electoral conditions generate unfair parliamentary elections in 2019.  

The macro-financial assistance is a EU instrument of conditionality in relation to state with Association Agreements (among which is Moldova) that can be further improved. To a certain extent, this enables to equalize the game rules between the governments, disinterested in democratic commitments and, respectively, the opposition and civil society, whose participation in the democratic processes is paralyzed by the national governments.