European Union vs. Ukraine

The 27 member states that make up the EU have adopted an internal single market with free movement of goods, services, capital, and labor. The EU, which is also a customs union, aims to bolster Europe's trade position and its political and economic weight in international affairs.

Despite great differences in per capita income among member states (from $28,000 to $109,000) and in national attitudes toward issues like inflation, debt, and foreign trade, the EU has achieved a high degree of coordination of monetary and fiscal policies. A common currency - the euro - circulates among 19 of the member states that make up the European Economic and Monetary Union (EMU). Eleven member states introduced the euro as their common currency on 1 January 1999 (Greece did so two years later). Since 2004, 13 states acceded to the EU. Of the 13, Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014), and Lithuania (2015) have adopted the euro; seven other member states - excluding Denmark, which has a formal opt-out - are required by EU treaties to adopt the common currency upon meeting fiscal and monetary convergence criteria.

The EU economy posted moderate GDP growth for 2014 through 2017, capping five years of sustained growth since the 2008-09 global economic crisis and the ensuing sovereign debt crisis in the euro zone in 2011. However, the bloc's recovery was uneven. Some EU member states (Czechia, Ireland, Malta, Romania, Sweden, and Spain) recorded strong growth, others (Italy) experienced modest expansion, and Greece finally ended its EU rescue program in August 2018. Overall, the EU's recovery was buoyed by lower commodities prices and accommodative monetary policy, which lowered interest rates and stimulated demand. The euro zone, which makes up about 70% of the total EU economy, performed well, achieving a growth rate not seen in a decade. In October 2017 the European Central Bank (ECB) announced it would extend its bond-buying program through September 2018, and possibly beyond that date, to keep the euro zone recovery on track. The ECB's efforts to spur more lending and investment through its asset-buying program, negative interest rates, and long-term loan refinancing programs have not yet raised inflation in line with the ECB's statutory target of just under 2%.

Despite its performance, high unemployment in some member states, high levels of public and private debt, muted productivity, an incomplete single market in services, and an aging population remain sources of potential drag on the EU's future growth. Moreover, the EU economy remains vulnerable to a slowdown of global trade and bouts of political and financial turmoil. In June 2016, the UK voted to withdraw from the EU, the first member country ever to attempt to secede. Continued uncertainty about the implications of the UK's exit from the EU (concluded January 2020) could hurt consumer and investor confidence and dampen EU growth, particularly if trade and cross-border investment significantly declines. Political disagreements between EU member states on reforms to fiscal and economic policy also may impair the EU's ability to bolster its crisis-prevention and resolution mechanisms. International investors' fears of a broad dissolution of the single currency area have largely dissipated, but these concerns could resurface if elected leaders implement policies that contravene euro-zone budget or banking rules. State interventions in ailing banks, including rescue of banks in Italy and resolution of banks in Spain, have eased financial vulnerabilities in the European banking sector even though some banks are struggling with low profitability and a large stock of bad loans, fragilities that could precipitate localized crises. Externally, the EU has continued to pursue comprehensive free trade agreements to expand EU external market share, particularly with Asian countries; EU and Japanese leaders reached a political-level agreement on a free trade agreement in July 2017, and agreement with Mexico in April 2018 on updates to an existing free trade agreement.

After Russia, the Ukrainian Republic was the most important economic component of the former Soviet Union, producing about four times the output of the next-ranking republic. Its fertile black soil accounted for more than one fourth of Soviet agricultural output, and its farms provided substantial quantities of meat, milk, grain, and vegetables to other republics. Likewise, its diversified heavy industry supplied unique equipment such as large diameter pipes and vertical drilling apparatus, and raw materials to industrial and mining sites in other regions of the former USSR.

Shortly after independence in August 1991, the Ukrainian Government liberalized most prices and erected a legal framework for privatization, but widespread resistance to reform within the government and the legislature soon stalled reform efforts and led to some backtracking. Output by 1999 had fallen to less than 40% of the 1991 level. Outside institutions - particularly the IMF encouraged Ukraine to quicken the pace and scope of reforms to foster economic growth. Ukrainian Government officials eliminated most tax and customs privileges in a March 2005 budget law, bringing more economic activity out of Ukraine's large shadow economy. From 2000 until mid-2008, Ukraine's economy was buoyant despite political turmoil between the prime minister and president. The economy contracted nearly 15% in 2009, among the worst economic performances in the world. In April 2010, Ukraine negotiated a price discount on Russian gas imports in exchange for extending Russia's lease on its naval base in Crimea.

Ukraine's oligarch-dominated economy grew slowly from 2010 to 2013 but remained behind peers in the region and among Europe's poorest. After former President YANUKOVYCH fled the country during the Revolution of Dignity, Ukraine's economy fell into crisis because of Russia's annexation of Crimea, military conflict in the eastern part of the country, and a trade war with Russia, resulting in a 17% decline in GDP, inflation at nearly 60%, and dwindling foreign currency reserves. The international community began efforts to stabilize the Ukrainian economy, including a March 2014 IMF assistance package of $17.5 billion, of which Ukraine has received four disbursements, most recently in April 2017, bringing the total disbursed as of that date to approximately $8.4 billion. Ukraine has made progress on reforms designed to make the country prosperous, democratic, and transparent, including creation of a national anti-corruption agency, overhaul of the banking sector, establishment of a transparent VAT refund system, and increased transparency in government procurement. But more improvements are needed, including fighting corruption, developing capital markets, improving the business environment to attract foreign investment, privatizing state-owned enterprises, and land reform. The fifth tranche of the IMF program, valued at $1.9 billion, was delayed in mid-2017 due to lack of progress on outstanding reforms, including adjustment of gas tariffs to import parity levels and adoption of legislation establishing an independent anti-corruption court.

Russia's occupation of Crimea in March 2014 and ongoing Russian aggression in eastern Ukraine have hurt economic growth. With the loss of a major portion of Ukraine's heavy industry in Donbas and ongoing violence, the economy contracted by 6.6% in 2014 and by 9.8% in 2015, but it returned to low growth in in 2016 and 2017, reaching 2.3% and 2.0%, respectively, as key reforms took hold. Ukraine also redirected trade activity towards the EU following the implementation of a bilateral Deep and Comprehensive Free Trade Agreement, displacing Russia as its largest trading partner. A prohibition on commercial trade with separatist-controlled territories in early 2017 has not impacted Ukraine's key industrial sectors as much as expected, largely because of favorable external conditions. Ukraine returned to international debt markets in September 2017, issuing a $3 billion sovereign bond.