A fiscal pandemic on the EU’s eastern border may eventually strike at the heart of Europe

The economic crisis in the European Union that was caused by the fallout from the COVID-19 pandemic has slowly started to subside after months of strict quarantines. This is in no small part due to the economic and financial support that private citizens and businesses received during this past winter’s lockdowns.

In parts of Eastern Europe, however, those that are outside of the EU – namely Ukraine, Belarus and Moldova; countries that were once a part of the Soviet Union – the COVID situation remains grim. The strain on their financial and economic institutions is reaching a breaking point.

Belarus, which regularly is in need of handouts, had to ask the Kremlin for help. Ukraine now finds itself in a position where few believe that the economy will survive the rest of the year without far more robust financial aid from Europe. This bleak picture for Ukraine comes at a time when, as of June 3, there were more than 2,500 new COVID cases in the country, according to official statistics. Those numbers would not seem particularly grave in a nation the size of Ukraine, but a large-scale vaccination campaign in a country of more than 40 million people has yet to get off the ground.

The Ukrainian government has been unable to reach an agreement with manufacturers to purchase batches of Western-made vaccines since the start of the year. At this point, the Ukrainian people are rapidly losing trust in the current government and are in no hurry to get vaccinated due to the lack of reliable medical insurance programs and the often shoddy capabilities of Ukraine’s antiquated, and largely unreformed, Soviet-style public healthcare system.

Since the launch of its modest inoculation campaign, which began on February 24, the Ukrainian authorities have fully vaccinated only 1.2 million people, numbers that pale in comparison to the US, Germany, and the UK where the vaccination rates in May easily topped 1 million per day. Nearly all European countries are now vaccinating people at a rate between 200,000 and 300,000 a day, a marked contrast to the EU’s lackluster start to its vaccination drive earlier this spring. 

The overall behavior of the Ukrainian government during the pandemic should raise questions, as should the high level of apathy towards COVID-19 among the general population. Moreover, the public should recognize that the government of Volodymyr Zelensky is getting away with a number of things.

It is no secret that Ukraine is a labor powerhouse, with an estimated three million migrant workers who seek jobs abroad every year. Very few Ukrainians, however, ever consider establishing a small business in the country – especially in the agricultural industry, one of Ukraine’s traditional economic strengths – due to rampant corruption and a lack of transparency in the sector.

Despite a promise by Zelensky to introduce an “investment nanny” – a specific official responsible for a particular investor – lawlessness, raiding, and corruption continue in the country. As a result, isolated cases of foreign investment remain few and far between – just as they have since the collapse of the Soviet Union nearly thirty years ago – and often end in failure. The case of the Belgian investor Tom Van Goey and his agricultural company GRANEX, who lost his farming business this year due to corruption and racketeering, is flagrant.

Ukraine has become a visceral demonstration of what happens when a former Communist, byzantine system of government remains utterly ineffective and inadequate. This has been on full display when Ukrainian officials made attempts to replace its post-Soviet system of protection and patronage policy with a mechanism of tax pressure. 

In May, Ukraine decided to legalize the desire to raise fees and taxes on large and medium-sized businesses. While European countries are boosting their post-COVID economies with massive infrastructure projects and aid to local businesses, Ukraine has decided to take advantage of the high demand for its exports on world markets and raise taxes on domestic producers.

Further complicated the precarious economic situation in the country is Ukraine’s toxic environment of corrupt officials and an opaque fiscal system will only lead to one thing – the squeezing of capital out of the country and the loss of tens of thousands of jobs.

Zelensky was elected in 2019 as an outsider, non-politician with a mandate to shake up Ukraine’s notoriously corrupt system of governance and economic policy. His ambition for reform may be sincere, but so far the implementation of his government’s policies have been far from perfect and very untimely. The key sectors of the economy that often depend on large town-forming enterprises that produce export-oriented goods and provide stable inflows of foreign currency revenues into the country, risk losing their competitiveness if the new taxes are introduced.  

Of course, tax reform could have become another signal that Kiev was making an effort to further bring Ukraine closer to a key EU standard for fiscal responsibility if it had not cost the people of the country hundreds of thousands of jobs. The authorities further infuriated the population after they failed to help either large or medium-sized businesses during the pandemic. 

These irresponsible moves have already attracted some attention. Some politicians in Europe have already started voicing their opinion on the matter saying they fear that Ukraine’s economic collapse, and a new wave of aggression from Russia, will create a new Syria on the EU’s eastern flank.

Credit: Alexandros Michailidis

Recently, an Italian representative from the European Parliament’s Committee on Development and Subcommittee on Tax Matters, Gianna Gancia, addressed a letter to the leadership of the Ukrainian government in which she stressed: “In general, it is regrettable that the government is seeking to increase revenues by increasing taxes as it emerges from the Coronavirus crisis.”

The letter seemed to express the opinion that Gancia, and most likely other Members of the European Parliament, are beginning to wonder whether the Ukrainian government had any substantive explanation for the timing and reasoning of its actions. Gancia pointing out that “unlike the governments of the United States, United Kingdom and members of the EU, Ukraine failed to allocate billions of dollars to support business, did not cover the salaries of people who were forced into quarantine and did not provide aid to the unemployed, students, and schoolchildren. Furthermore, the government does not have enough funds set aside for the purchase of vaccines since the vaccination campaign has not even fully started … Hence, major tax reforms raise big questions about their feasibility. This demonstrates an approach which does not provide for private business support or act within the spirit of entrepreneurship and social justice.”

Ukraine’s authorities must begin to understand that the prospect of joining the European Union and/or NATO is both a long-term goal and years, if not decades, away. It is vital then that the current, and any future Ukrainian government, focus on supporting large, medium and small businesses. This will undoubtedly bring about an economic windfall and, within 7-10 years, boost the economy considerably.

It will also benefit the country when Ukraine’s full integration with the West can become a reality.

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