Op-Ed
	For the time being, EU macro-financial assistance has been a useful mechanism for expanding European influence in the Eastern Neighborhood. But there are other geopolitical forces in the region, such as Russia, which can copy European instruments...
Dionis Cenuşa, Senior Contributor

Originally used as a tool to offset the budget deficit, EU macro-financial assistance has become a lever for real, but also beneficial, the influence of political will in the Eastern Neighborhood. So far, it has managed to prioritize, and sometimes even save, some reforms. The main considerations for that were the shortcomings of sectoral governance.

The European institutions practice close communication with alternative local actors, such as civil society, from which they obtain the necessary data on key areas of public affairs. However, in some cases, the EU takes its word for it, and in other cases, it is more willing to sanction. To ease its task, the EU is counting on other international actors, with whom external pressure is more effective. Obviously, no dose of European influence exceeds the limits of commitments voluntarily agreed by third countries. In other words, the EU institutions act on a political-diplomatic path but based on the contractual provisions, inserted in particular memoranda of understanding.

Within the Eastern Partnership, only Georgia, Moldova and Ukraine currently meet the eligibility criteria for European macro-financial assistance. Although Ukraine negotiated some arrangements with the EU back in 2002, Georgia received the first EU macro-financial assistance in 2009, followed by Moldova in 2010. Because of its size, loans accessed by Kyiv have more than 20 times the amounts offered to the other two countries. Although the sums directed to Georgia and Moldova were much lower, they also included grants. In dealing with these countries, the EU uses a robust sense of differentiation, which also characterizes Brussels's temptation to activate political conditionality alongside sectoral conditionality.

The evolution of macro-financial assistance in Georgia, Moldova and Ukraine

Each of the European aids marked a political beginning in the recipient country, generated by internal democratization or mobilization of efforts against the external danger, mainly represented by Russia. It is these two reasons that have underpinned the architecture of macro-financial assistance to Georgia, Moldova and Ukraine. Subsequently, this instrument became an additional pillar of the Association Agreements implementation platform.

In the case of Georgia, the EU started allocating macro-financial assistance to the International Donors' Conference (October 2008), held almost two months after the 2008 Russian-Georgian war. First assistance (2009-2010) was not accompanied by any condition, because it was of the non-refundable type. Second support was offered between 2015-2017 and included sectoral requirements for the first time. Simultaneously, Brussels was assessing commitments in close coordination with the Georgian authorities, and in some cases with the participation of international financial institutions. Therefore, stopping assistance was virtually impossible because the government was interested in providing positive reports. A similar principle of measuring results - based on accounts of the government in Tbilisi, in addition to IMF macro-financial data - maintains for the third macro-financial assistance - between 2017-2018. The most recent arrangement differs radically from the previous ones. On the one hand, it consists only of loans and is urgently implemented due to the Covid-19 pandemic. And on the other hand, for the first time in the history of EU-Georgia relations, assistance will have to explicitly contain the strict political precondition for securing democratic institutions (See Figure 1).

Figure 1. The EU macro-financial assistance to Georgia, fully allocated

Source: Author's compilation based on EU data

The initial macro-financial assistance to Moldova materialized after power was taken over by political forces considered pro-democratic in 2009. At the same time, they presented themselves as more pro-European than the Communist Party (2001-2009). Although the latter initiated the European agenda in Moldova, the Communists' reservations about NATO and some EU states (Romania), as well as the violence against protesters (April 2009), irreparably affected the credibility of their pro-European rhetoric. The first assistance package was granted in full (2010-2012), while the second agreed in 2017 stalled. The cancellation of the results of the elections in the country's capital in 2018 (IPN, September 2018) caused the suspension of assistance from the second package. Its restoration became possible only after the fall of the oligarchic regime in July 2019. The renewal of political power in autumn 2019 impelled the allocation of the first tranche by the EU in October 2019, immediately and without any severe conditioning. Due to slow government reforms of the government led by Ion Chicu (installed in November 2019), the EU transferred the second tranche only in July 2020. At the same time, the deadline for the third tranche (EUR 40 million) expired. The fulfillment of the political pre-condition becomes mandatory and monitored by the European side at the level of the European External Action Service. As in the case of Georgia, aid related to Covid-19 will include political precondition, heavily used previously, and six sectoral conditions in exchange for the second tranche - investigation of bank theft, harmonization of the Customs Code, justice reform (Superior Council of Magistracy), counteracting cigarette and alcohol smuggling, anti-corruption policies (National Integrity Authority) and improving the management of the health crisis. Also, the conduct of fair and free presidential elections in November 2020 would be a vital political precondition.

Figure 2. The EU macro-financial assistance to Moldova, fully allocated

Source: Author's compilation based on EU data

The first signs of European assistance emerged towards Ukraine - in 2002 - long before Georgia (2008) and Moldova (2009). The EU has repeatedly shown its readiness to loan in 2010. However, the activation of macro-financial assistance became imminent only after the multilateral crisis in which Ukraine slipped, after the collapse of Viktor Yanukovych's regime and the hybrid war launched by Russia. Therefore, in 2014-2015, the EU allocated loans of EUR 610 million, made up of money scheduled in 2002 and 2010, but missed by Ukrainian governments. The evaluation of the first assistance package was done in coordination with officials in Kyiv, but also with a significant share of the IMF's opinion. The second episode of assistance took shape almost immediately after the first one, due to the grave imbalances in budget payments. The transfer of loans took place rapidly in 2014, at a distance of 6 months from each other. The third package has an incomplete fulfillment. Just as in the case of the loan for Moldova (2017-2020), the third tranche did not reach Ukraine (2018), because the authorities did not fulfill in time the assumed conditions. Similar to the first two packages, the fourth one was received in full. The Covid-19 related macro-financial assistance provided to Ukraine is practically half of the total amount allocated by the EU to 10 countries from the southern and eastern neighbourhoods and the Western Balkans. Therefore, the list of sectoral conditions could be longer than the one set for Moldova (6 requirements).
 

Figure 3. The EU macro-financial assistance to Ukraine, fully allocated

Source: Author's compilation based on EU data

Particularities of EU assistance and conditionality

Upon careful examination of the legal arrangements negotiated by the EU, on the one hand, and Georgia, Moldova and Ukraine, on the other one, several peculiarities stand out in the provision of macro-financial assistance and the articulation of the principle of conditionality.

First, with the 2017 financial assistance to Moldova, the EU is setting a precedent that favors the use of strict political pre-condition for the beneficiaries of European macro-financial assistance. Political conditionality is mentioned vis-à-vis Georgia and Ukraine but was never actually activated and not even verified before the transfer of any of the tranches. It follows that the strict political pre-condition was effectively applied only to Moldova. The launch of urgent EU macro-financial assistance against the effects of the COVID-19 pandemic underlines the need for stricter political pre-condition.

The second aspect concerns the application of sectoral conditions. Compared to Georgia, they started with the second macro-financial assistance package, which consisted of both grants and credits (2015-2017). The EU introduced conditions for first assistance to Moldova (2010-2012), even though it provided only for non-reimbursable money. Sectoral conditions are also present at all stages of financial assistance to Ukraine. This could derive from the substantial size of the assistance and the interdependence with other loans provided by the IMF.

The third key feature is that the EU has demonstrated its willingness to provide financial assistance at the turning points experienced by the three countries. In Georgia and Ukraine, the disbursement of aid took place after Russia's military actions - the war of 2008 and the annexation of Crimea and the 2014 incitement of militarized separatism in Donbas, respectively. The post-electoral youth riots in April 2009, followed by the removal of the Communists from power, were the determining factors for the Moldovan case.

Another third important detail is the differentiated nature of EU assistance. Thus, the number of sectoral conditions in the case of Moldova reached 28 measures, while in Georgia the maximum included 11 actions (2017-2018), and in Ukraine - 21 actions (2015-2018). The phenomenon of the “captured state” in Moldova may be one of the reasons for the high number of conditions requested by the European side.

A fourth element is the application of sectoral conditions. As in the case of strict political pre-conditions, the EU called on Moldova to meet the sectoral requirements in the first tranche. This is not the case in assistance to Georgia and Ukraine, where the assessment of compliance with the conditions began with the second tranche. This denotes the EU's tenacity towards Moldova and its more relaxed approach towards the other two Eastern Partnership countries. The democratic slippage observed in Georgia (oligarchization of political power, selective justice) or Ukraine (bank fraud, selective justice against oligarchs) did not provoke the same level of adverse reactions from the EU as the situation in Moldova.

The peculiarities of EU macro-financial assistance channeled to the three countries highlight three significant trends. First, Georgia has a considerable degree of credibility, which is reflected in the low number of sectoral conditions required and the non-application of political conditionality. Second, Ukraine is the largest consumer of European aid, proving substantial structural vulnerabilities, but also an increased EU responsibility towards this particular eastern neighbor. Third, and last one, Moldova is the only country in the Eastern Partnership where the EU has genuinely practised political pre-conditions.

Table. EU macro-financial assistance to Georgia, Moldova and Ukraine

In lieu of conclusion…

The real "darlings" of the European conditionality test are Georgia and Ukraine, where sectoral conditions prevailed, instead of the political ones. At the same time, both the gross neglect of reforms by the political class and the increased dependence on external assistance have exposed Moldova to robust political conditionality on the part of the EU.

In any case, the European institutions want to universalise political conditionality. This has started with urgent assistance for the management of the Covid-19 pandemic that includes this principle. Moreover, the EU’s multiannual budget for 2021-2027 views the conditionality clause both for European internal and external needs.

For the time being, EU macro-financial assistance has been a useful mechanism for expanding European influence in the Eastern Neighborhood. But there are other geopolitical forces in the region, such as Russia, that can copy European instruments. The risk of autocratic credit lies in discouraging reforms, disengaging political elites from commitments to Brussels and energizing multi-vector foreign policy.

IPN publishes in the Op-Ed rubric opinion pieces submitted by authors not affiliated with our editorial board. The opinions expressed in these articles do not necessarily coincide with the opinions of our editorial board.