In
2011 Russia, Belarus and Kazakhstan came up with a rival idea of establishing the
Eurasian Union and in 2012 established a Customs Union comprising these three
countries. Russia has recently been pushing the Eastern Partnership countries
other than Belarus to join the Customs Union. In August it introduced temporary
extra checks on imports from Ukraine. More recently imports of Moldovan wines
and spirits have been banned by Russia. Armenia has apparently already given in
to this pressure. Ahead of the Vilnius Summit at the end of November the
Eastern Partnership countries face the fundamental choice of whether to proceed
on the path of deeper trade integration with the EU or join the Kremlin-led Customs
Union (the options are mutually exclusive).

To
answer the question, which of the two roads offers the most promising prospects
for the Eastern Partnership countries, it is first worth looking at the past experience
of those countries in the Central, Eastern and Southern Europe that have chosen
the path of integration with the European Union and are now members of the EU. Then
this experience can be compared with the record of the current Eastern
Partnership countries.

Let’s
start with the new EU member states. With Romania and Bulgaria having joined in
2007 and Croatia being taken on board in July of this year there are 13 of them
(the other 10 joined in 2004). We have looked at how successful these countries
have been at closing the income gap with the richest EU member states. As the
country for benchmarking we have selected Germany, a large and diversified high-
income economy. We have looked at how the purchasing power parity-adjusted gross
domestic product per capita has changed in the new EU member states relative to
Germany from 1995 to 2012.

1995
was the year when countries in Central and Eastern Europe had already left the
shock of initial adjustment to a market economy behind them. Most of them
started active integration efforts with the EU shortly thereafter, however, it
took about a decade for these efforts to lead to actual membership. In addition,
1995-2012 is a period for which comparable data are available from the World
Bank for all of the countries included in our analysis. This sample period also
includes the shock coming from the Great Recession and the subsequent debt
problems of several EU countries.

The convergence
record of the 13 countries can be seen below:

There
are four countries (Cyprus, Malta, Slovenia and the Czech Republic) where the
relative income levels were already relatively high in 1995 (58 percent of the
level in Germany or higher). These countries have achieved relatively little
convergence with Germany since then. However, all of the other nine countries,
whose PPP-adjusted GDP per capita in 1995 were at 40 percent of the German
level or below, have seen substantial convergence with Germany. Hungary, the
relatively worst performer, has seen its income relative to Germany increase
from 40 percent in 1995 to 52 percent in 2012, while Lithuania has improved
from 28 percent in 1995 to 58 percent in 2012.

Let
us now look at how the Eastern Partnership countries have fared relative to
Germany during the same period of time (please note the change of scale on the
vertical axis):

All
of these six countries in 1995 were poorer than the 13 EU member states
analyzed above, but with the exception of Belarus and more lately Azerbaijan,
they have failed to achieve much convergence with the German level of income.
Moldova, the most extreme example, was at 7 percent of the level of Germany in
terms of per capita GDP in 1995 and has improved just to 8 percent in 2012. From
the convergence perspective we can clearly speak of a lost generation there. Armenia,
Georgia and Ukraine have not performed much better.

Let
us now add Russia to the picture (please note again the change of scale): 

We
can see that Russia, similarly to the nine current EU member states that
started in 1995 at or below 40 percent of the German level of income, has also
achieved substantial convergence with Germany. A detailed analysis of the
reasons for Russia’s rapid convergence is beyond the scope of this post,
however, oil and gas export revenues have certainly played an important role in
it. However, what is equally obvious from the above chart is that while
Russia’s convergence has been impressive, it has not helped pull Armenia,
Georgia, Moldova and Ukraine along. Now these countries are facing the choice
of whether to continue on the path of deeper integration with Russia or attempt
closer integration with the EU instead. Armenia has already made up its mind,
presumably because of other than economic considerations. Countries choose
trading partners for many reasons, but based on income convergence, the choice
in favour of the EU as the partner for deeper integration appears to be a
no-brainer for Moldova, Georgia and Ukraine, despite potential short term
shocks that it will entail.

This article first appeared on
Roubini Global Economic’s EconoMonitor and is reproduced with permission.
Andris
Strazds is the chief economist in Latvia for Nordea Bank Finland plc.
Tom Grennes is a professor of economics at North Carolina
State University.