Reanimation package of reforms > News > Columns > Funding and impetus for reforms: what EU candidate status will give Ukraine 1

Funding and impetus for reforms: what EU candidate status will give Ukraine 1

Ukraine expects to receive the status of a candidate for EU membership in June this year, following the summit of EU leaders on June 23-24. On the fifth day of the war, February 28, the application for EU membership was jointly signed by President Volodymyr Zelensky, Prime Minister Denis Shmygal, and Verkhovna Rada Speaker Ruslan Stefanchuk.

After Ukraine completed the first part of the European Commission’s questionnaire in a record period of one week in the face of a full-scale attack by Russia, the Ukrainian side expects prompt decisions from the European community.

And this week, Ukraine announced the completion of the second part of the questionnaire to obtain candidate status.

What benefits can Ukraine gain from candidate status, and what steps will need to be taken before full accession to the EU?

The impetus for reforms

Granting EU candidate status is, above all, a political signal – the first step towards recognizing that a candidate country will one day become a member of the EU.

Currently, five countries have this status: Turkey (received status in 1999), Northern Macedonia (2005), Montenegro (2010), Serbia (2012), and Albania (2014). Bosnia and Herzegovina, and Kosovo have applied for membership and are considered potential candidates. Following the start of a full-scale Russian invasion of Ukraine, Georgia and Moldova also applied for membership.

Having received the status of a candidate, Ukraine will move from the umbrella of the neighborhood policy to the policy of enlargement.

The accession process begins after all EU member states unanimously support the decision to start negotiations on accession.

This is a purely political decision, the duration of which may vary from case to case.

For example, Montenegro began negotiations two years after receiving candidate status, while it took 15 years for Northern Macedonia.

Therefore, speaking about the timing of Ukraine’s accession to the EU, it is worth remembering the individuality of each case and not setting anyone’s experience as a model.

During the negotiations, the candidate country will need to bring its legislation in line with EU law and implement political, social, economic, judicial, and administrative reforms.

In fact, granting candidate status will be a powerful political impetus for the continuation of deep transformations in all areas and further integration of Ukraine into the EU common market.

Ukraine’s accelerated accession will require accelerated implementation of reforms. A clear goal in the form of membership will be an effective communication tool through which civil society will be able to push the authorities to carry out the necessary reforms.

Eventually, when the EU and the candidate country are satisfied with bringing all 35 policy areas (sections) in line with EU standards, negotiations will be completed, and the government will be able to sign an accession treaty. The country officially becomes a full member of the EU from the date specified in the accession treaty.

Economic benefits

Apart from the political aspect, the decision to grant the country the status of a candidate for EU membership will primarily affect the economy.

In the process of accession, the candidate country gains access to EU financial instruments that help better prepare for membership: reform and implement EU legislation.

EU financial instruments

Previously, when Central and Eastern Europe (CEE) countries were integrated into the EU, funding for these countries’ membership was provided through several programs and instruments: PHARE, PHARE CBC, ISPA, SAPARD, and CARDS. They were established, among other things, to improve public administration capacity and create an appropriate legal framework for EU membership.

Following Croatia’s accession, the EU introduced a single pre-accession instrument, the IPA, which the Western Balkans and Turkey have used since 2007.

Although IPA has a solid list of priorities (strengthening the rule of law and human rights, promoting a low-carbon economy, supporting cross-border cooperation), the program’s primary focus is to invest in the socio-economic sphere of candidate countries, not institution building.

The beneficiary countries are currently using the third generation of IPA, designed for 2021-2027.

It is available to candidate countries (Albania, Montenegro, Northern Macedonia, Serbia, and Turkey), potential candidates (Bosnia and Herzegovina, Kosovo), and Iceland. By gaining candidate status, Ukraine will be able to gain access to IPA III. For example, Iceland, which was not on the list of IPA I beneficiary countries (2007-2013), was able to gain access to the program in 2010, following the start of EU accession negotiations (however, then Iceland froze its membership application).

The total budget of the instrument for seven years is 14.1 billion euros. As for country-specific figures, from 2014-to 2020 (IPA II), Turkey, whose economy is four times larger than Ukraine’s, received 3.5 billion euros (about 600 million per year). Serbia (an economy three times smaller than Ukraine’s) received 1.5 billion euros over the same period (about 200 million a year).

Part of the IPA is the IPARD program, under which the EU provides financial and technical assistance to candidate countries for the development of rural areas and the sustainable agricultural sector, aligning their agricultural policies with the EU’s overall agricultural policy.

The program budget for 2021-2027 is more than 900 million euros. The program, together with individual contributions from the EU Member States and individuals, is expected to bring together more than € 2 billion in investment in rural areas of the Western Balkans and Turkey.

Finally, in addition to IPA, Ukraine can gain access to individual EU economic assistance programs and projects. Such a project was once the Berlin Process for the Western Balkans, the main purpose of which was to create a Common Regional Market for all six countries of the Western Balkans, similar to the EU common market. Although this ambitious goal has not been achieved, the project has become a driver of economic modernization and integration of the region.

Foreign direct investment

The experience of the accession of Central and Eastern European countries to the EU shows that in the pre-accession period the GDP of the candidate countries begins to grow at purchasing power parity.

Analysts at the New Europe Center have previously noted that this is not only due to access to EU funding instruments, but also due to increased foreign direct investment  in these countries.

Dynamics of Purchasing Power Parity (PPP) GDP in the CEE countries that joined the EU in the 2000s
Source: The World Bank

For obvious reasons, large inflows of investment occur as soon as or immediately after joining the European community: by then, newcomers are implementing the necessary reforms and harmonizing their legislation with EU standards, thus becoming a safe place to invest.

This is demonstrated by the experience of the CEE countries that joined the EU in the 2000s (the fifth and sixth enlargements of the European Union): such growth has taken place in Hungary, Poland, and the Czech Republic. We see points of investment growth in the years of accession (Poland, Slovakia – 2004), while in Bulgaria in the year of accession there was the largest inflow of investment in history (31.2% of GDP).

At the same time, the inflow of investment began in the CEE countries in the pre-accession period, when these countries were moving towards membership. Such growth points are in Poland and the Czech Republic.

Based on the experience of the CEE countries, the prospect of receiving investment after the negotiations may seem remote for Ukraine, which is in the early stages of integration and awaits candidate status. At the same time, the example of the Western Balkans, which currently have candidate status, demonstrates the growth of investment in the early stages of EU integration.

In addition, the European Union further stimulates investment in the region through specific programs.

Given the uniqueness of the case of Ukraine, which applied against the backdrop of ongoing hostilities, it is unlikely to expect an immediate influx of investment in our country after obtaining the status of a candidate for membership.

After all, in addition to the political signal of the beginning of large-scale transformations in the candidate countries for investors, security in the country of investment is also essential.

It is noteworthy that in the Czech Republic and Romania, points of significant investment growth were observed in the year of NATO accession (1999 and 2004), in Poland and Romania, investment growth occurred in the year after joining the Alliance (2000 and 2005, respectively).

Therefore, it can be predicted that Ukraine may become an attractive place for European investment after the end of the war.

At the same time, given the huge opportunities that will open up for investment (damaged infrastructure, destroyed cities, and towns, transport, digital transformation, etc.), the volume of these investments promises to be decent.

In addition, Ukraine will be able to receive long-term loans from the EU and assistance in the form of grants for education, culture, health care, and more. Since 2014, the EU has provided Ukraine with more than 17 billion euros in grants and loans to support reforms. After receiving the status of a candidate for EU membership, one can expect an increase in such revenues.

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Thus, gaining the status of a candidate for EU membership will bring a number of advantages for Ukraine.

First, this step will launch the formal procedure for Ukraine’s accession to the EU and comprehensive reforms in various areas.

Second, Ukraine will have access to EU financial instruments to support and develop candidate countries, such as the Instrument for Pre-Accession Assistance (IPA).

Third, Ukraine will become an attractive place for investment and will have access to loans and grants from EU member states.

Finally, the uniqueness of Ukraine’s case, which applied for entry into the midst of the war and will require significant financial resources to rebuild after its end, may involve a unique approach by the EU.

In addition to the traditional financial instruments mentioned above, the EU could develop an unprecedented comprehensive mechanism for Ukraine’s reconstruction, which in parallel would help Ukraine prepare for membership.

Marianna Fakhurdinova, analyst at the New Europe Center