Poland, Belarus & Ukraine Report: December 16, 2003

COLLAPSE OF EU CONSTITUTION TALKS COULD LEAD TO 'TWO-SPEED' UNION. A number of factors contributed to the collapse of the European Union's constitutional talks at the Brussels summit on 12-13 December.

Many put the blame on a lack of leadership from Italy, which currently holds the EU presidency, and the antics of the country's Prime Minister Silvio Berlusconi.

At the same time, the speed with which Germany and France announced they would forge ahead with integration in a "two-speed" Europe and their lukewarm interest in the talks suggest that they were prepared for failure. Poland's intransigence also played a major part.

Taking stock on 15 December, Reijo Kemppinen, a spokesman of European Commission President Romano Prodi, said it is "not useful" to blame any single member state. "It is clear that all member states bear collective responsibility for the failure," he said. "They should all now consider very seriously what is to be done next. It is clear that what we need is time for reflection and [the] rethinking of some of the issues."

Berlusconi's handling of the negotiations as the bloc's outgoing Italian presidency was roundly condemned as dismal. Many diplomats pointed to his questionable humor, lack of seriousness, and the shoddy way the talks were led at all levels.

On 12 December, he told EU colleagues that he would rather talk "women and football" than run talks on the constitution. The Italian prime minister made no secret of wanting to wrap up talks early to attend a football match in Tokyo on 14 December morning pitting the team he owns, A.C. Milan, against the Argentinian champions.

Apart from ill-conceived jokes, the Italians seemed unprepared when it came to the actual talks. For instance, one EU official said Italian diplomats did not even take notes at half of the 24 bilateral meetings held by Berlusconi

However, it is unlikely that better leadership would have changed the outcome. Diplomats say neither France nor Germany made great efforts to assist Berlusconi in his mediating efforts. Both appeared ready to accept failure. German Chancellor Gerhard Schroeder and French President Jacques Chirac were in fact said to have made the decision at a noon meeting on 13 December to end the summit prematurely.

Many observers suggest France is particularly disenchanted with enlargement, fearing it will irreparably damage the drive toward greater EU integration. In the months preceding the summit, the apparent rapprochement between Paris and Berlin was accompanied by repeated warnings to new member states that resistance to greater political integration could force the two countries to undertake closer cooperation outside EU structures.

That Germany and France may have planned for failure is suggested by the fact that they unveiled plans to forge ahead with a "core group" as soon as news broke that the summit had collapsed. The idea was apparently already discussed at a dinner on 12 December night involving Schroeder, Chirac, and Belgian Prime Minister Guy Verhofstadt.

Chirac said after the summit that a "pioneer group" of countries could act as the "engine" of further integration and set an example for others. Schroeder said a "core Europe" would be a "logical consequence" of the failure of the constitution talks.

Kemppinen today said European Commission President Prodi thinks closer cooperation among some countries might be a way out of the current crisis. "What is naturally clear and self-evident, as we have said, is that now we have to work very strongly in order to try to bring countries round the table and to see if and when these negotiations could be concluded," Kemppinen said. "The president, however, thinks that since we have seen in the past history of European construction moments that are divisive, moments that are very difficult and sensitive where a group of countries has shown the way [forward] for the others, it is quite possible that today we are facing a similar time and this reflection of a core group should be taken up very courageously."

The key question here is whether this closer group would be set up within the present treaty structure. The EU's Nice Treaty allows for "enhanced cooperation" if at least eight countries join. It expressly excludes core groups on defense.

Given that defense is one of the key concerns for France and Germany, there is considerable speculation that the "core group," although based on present EU legislation, might take its cooperation outside EU structures. Apart from the EU's six founding members (Germany, France, Italy, Belgium, the Netherlands, and Luxembourg), Greece and Hungary were also said to have expressed interest. It is likely that, if set up, the group would initially strive to implement some of the changes contained in the draft constitution.

In substantive terms, Poland may have contributed most to the failure of the summit. Warsaw appears to have misinterpreted the nature of the debate over voting strength, casting it as a power struggle between the larger and smaller countries.

However, EU officials say Germany was offered an increase of voting power under the existing Nice rules at the summit, but Berlin rejected the offer making it clear it was looking for voting reform to radically ease joint EU decision making. Diplomats say Germany had made one last effort on 13 December, suggesting that voting reform be introduced only in 2014. Poland rejected the offer. One official said there was a feeling Warsaw could have been angling for a financial "sweetener," but this time Germany's "checkbook remained in the pocket."

Schroeder was quick on 13 December to downplay suggestions of a rift with Poland, saying bilateral ties remain unaffected. Engaging Poland is a key German interest, and Poland's location and size would seem to guarantee it a certain influence even if it is to stay out of closer integration. Hungary, the Czech Republic, and Slovenia are also unlikely to be completely sidelined, being sufficiently close to the EU's core member states.

The summit collapse is likely to have a direct impact on future budget talks. The EU is due to start preparations for the 2007-13 budget cycle early next year. Germany, which already suffers from a serious budget deficit and is in the throes of implementing difficult structural reforms, has indicated it wants to cut costs. The present spat with Poland will contribute to Germany's unwillingness to bankroll new member states at desired levels.

At this stage, no one appears to know when and under what circumstances constitutional talks could be revived. Kemppinen said EU leaders will return to this question in the spring. "We all know it is probably very difficult to relaunch the negotiations immediately," he said. "The forthcoming Irish presidency has said that they will report on the state of play to the spring European Council [EU summit in March]. We also know that we're facing European Parliament elections, and elections in Spain. So, I think it would be -- at this stage -- not necessarily possible to conclude the negotiations during the Irish presidency [concluding in June]."

France, especially, has made it clear it is no hurry to attempt a constitutional solution. It has indicated negotiations should not be relaunched before late next year, if not later.

RFE/RL correspondent Ahto Lobjakas wrote this report.

IS BELARUS'S 2004 BUDGET DRAFT PRACTICAL? Belarusian President Alyaksandr Lukashenka's ambitious economic plans of 10 percent economic growth in 2004 and doubling living standards by 2006 probably represent the social contract he is going to offer to his electorate in exchange for granting him a third term in office. But how will he achieve his plans? The 2004 budget approved by the Chamber of Representatives does reflect economic policy priorities and at least gives an answer to the question what the official economic policy will be like in the short term. But the content of the document has immediately prompted a new discussion over the sustainability of the economic course underlining it.

The president insisted that the budget would be considered as an extraordinary law, which, according to the constitution, implied its speedy adoption and meant that no meaningful discussion could be carried out on the draft. The new budget foresees revenues at 13.2 trillion Belarusian rubles ($6.14 billion) and expenses at 13.9 trillion. The numbers are projected with the planned 10 percent growth in mind, and this gave rise to immediate questions about whether such revenue was possible without printing money. The budget deficit is set at 690 billion Belarusian rubles, or 1.5 percent of gross domestic product (GDP).

The budget is drafted with no National Bank loans to finance its deficit for the first time in recent history, which could be seen as a reasonable step directed toward fighting inflation. Unfortunately, the sources of deficit finances are not stipulated, the planned issue of treasury bills would cover only less than one-third of planned deficit (or 200 billion Belarusian rubles). The remaining 590 million is to be raised from unspecified "additional sources of revenues." The government pins its hopes on selling treasury bills to external creditors and, possibly, by raising income from privatization, but these revenues are far from being guaranteed.

The central and local budgets combined would account for almost half of GDP. Such a high degree of redistribution is not likely to give a boost to the real sector, which already suffers from a heavy tax burden. The only serious tax cut foreseen in the budget is lowering the value-added tax (VAT) from 20 percent to 18 percent and reducing the upper threshold for local dues collected by regional and local authorities from 5 percent to 4 percent. VAT has also been slapped on mobile telephone calls. This measure was particularly controversial and was immediately attacked in the media and even by the Communications Ministry, which fears that the new tax will hamper the development of mobile-telephone networks.

Meanwhile, several taxes have been raised, such as excise duties on alcohol and gasoline; a special tax to benefit the road and agriculture sector was also raised by 1 percent. The suggestion of introducing a special tax on "super-profitable businesses" (i.e., those with profitability exceeding 30 percent annually) was dropped at the last moment.

A dangerous tendency in the budget is the plan for relatively large spending on wages and social programs, which will account for almost a half of the budget's total volume. Administrative wage rises (the average monthly wage is planned at $170 by the end of 2004) have little to do with productivity growth and are effectively paid for by high and numerous taxes and other less civilized forms of revenue extraction from all possible sources. The U.S. dollar equivalent of the monthly average wage in Belarus has recently reached $135, up from $108 in January -- this rise was partly achieved thanks to the weakening dollar (in euro terms, the average monthly wage grew by just $6 during the same period) and, correspondingly, by its falling purchasing power. And if the downfall of the U.S. dollar does not continue indefinitely, the populist spending on wages may create a serious budget crisis in the near future. World Bank representatives specifically pointed out on 11 December that this spending has a negative impact on the financial stability and is "potentially implosive in various ways in the short-term." Indeed, Belarus has reached a level of redistribution comparable to West European welfare democracies but without a strong economy that can sustain gigantic social spending.

The greatest puzzle of the 2004 budget is whether the government will be able to fulfill its generous social obligations to the population without getting into the situation when one part of the population is forced to pay too much for the welfare of another. It should be noted that the budget was drafted without knowing the 2004 price for Russian natural gas, as negotiations with Gazprom on the issue may continue until 25 December. The calculations were made on the basis of the most optimistic scenario -- $50 for 1,000 cubic meters. President Lukashenka himself appeared on television and promised that utility bills would not rise by more than $4-$5 per month for an average family. But any increase in the gas price by Gazprom over $50 for 1,000 cubic meters would mean a failure to deliver this promise, and the budget will have to be amended (which may be done halfway through the year by presidential decree). Moreover, even in the current situation, the budget foresees that only 10 percent of the utility costs would be subsidized from the central budget (down from 50 percent in previous year). And just in November, the government quietly canceled its resolution according to which no family would have to pay more than 25 percent of its combined monthly income for housing services.

Furthermore, the 2004 budget incorporates for the first time ever the revenues and spending of the Fund for Social Protection of the Population, an institution responsible for most welfare payments and accounting for about 40 percent of the total budget. Unlike previous years, when the fund's revenues were spent exclusively on social programs, from now on the government receives discretionary powers over its finances. Observers fear that this would give rise to a temptation to restore the Soviet-era practice of financing the social sector according to the "residual principle" -- that is, spending on welfare the amount that remains after all other expenditures have been paid. At the same time, the discretionary budgets of several law enforcement agencies are not incorporated into the central budget and are thus fully protected, which may give an idea of the government's priorities for the coming year.

This report was written by Vital Silitski, a Minsk-based freelance researcher.

"[Ukraine's] problem is not the president but the oligarchs, and this is realized perfectly well by ordinary citizens.... Focusing on the slogan 'Down with Kuchma' and not proposing a program of cardinal social transformations is not just the Ukrainian opposition's tactical mistake that can be corrected. It is a distinctive trait of this opposition.... Enjoying considerable support of the electorate after the Ukraine Without Kuchma campaign [in 2000-2001]...the political opposition has remained under the leadership of oligarchs of the 'second echelon.' The lack of a position of the most likely [presidential] candidate from the opposition, Viktor Yushchenko, regarding the most acute social issues, and [his] actual rejection of a change of the political system -- that is, a move to a parliamentary republic -- fully meets the interests of politicians and businessmen who have been offended by the current authorities and are now desiring to recover lost positions through influencing a future government." -- Volodymyr Chemerys, a leader of the Ukraine Without Kuchma movement in 2000-2001, in an article published on the "Ukrayinska pravda" website on 15 December.