By Paul Taylor
PARIS (Reuters) - The European Union's failure to conclude a landmark agreement with Ukraine this week raises questions about a policy designed to surround the bloc with a "ring of friends" that has done little so far to stabilize its neighborhood.
The fiasco at an Eastern Partnership summit in Vilnius has been blamed mostly on Ukrainian President Viktor Yanukovich's opaque post-Soviet governance, and on pressure from Russian President Vladimir Putin.
But some critics, including one of the architects of the European Neighborhood Policy, say EU efforts to export democracy and the market economy to countries on the bloc's eastern and southern fringes have long been hampered by an unrealistic balance between carrots and sticks.
Brussels set too high requirements for partners to adopt EU standards of business regulation, governance and human rights in return for too small financial and political rewards, says Michael Leigh, a senior adviser to the German Marshall Fund, a transatlantic think-tank.
Supporters of the policy remain convinced that it will ultimately succeed in drawing the EU's neighbors into its economic orbit provided Europeans have the strategic patience to ride out short-term disappointments.
Yanukovich pulled back from signing an EU association agreement on Thursday after Russia pulled trade and energy levers to dissuade the former Soviet republic, which is heavily dependent on Russian gas. Armenia dropped out in September after being subjected to similar threats.
Yanukovich told EU leaders they had not offered enough money to help Ukraine's economic transition and had interfered in its domestic affairs by making the release of jailed opposition leader Yulia Tymoshenko a condition for the deal.
"For the EU, the 'nyet' of Ukraine and Armenia, taken together with the situation in most Arab countries around the Mediterranean, mean the end of a 10-year effort to put into place a European Neighborhood Policy," Leigh, who was director-general for enlargement and neighbourhood policy at the European Commission until last year, told Reuters.
Current policy practitioners see things differently. German Chancellor Angela Merkel said in Vilnius the EU's offer to Ukraine remained on the table and the Europeans had to "drill through a think plank" and should set no deadline for a deal.
She rejected Yanukovich's suggestion that the EU, Russia and Ukraine should all get around a table and work out a strategy to help his country overcome its deep economic crisis.
"RING OF FRIENDS"
Former European Commission President Romano Prodi first floated the idea of building a special relationship with the EU's neighbors shortly before 10 central and east European countries joined the bloc in 2004.
In his vision, a "ring of friends" from Russia to Morocco would share "everything but institutions" with the EU.
Free trade and common rules in areas such as environmental protection, public procurement and investment security would give those countries the benefits of the EU's single market and make them attractive to foreign investors.
Through a network of association agreements, they would adopt large chunks of the EU's rulebook and build democratic, clean governance structures with technical help and limited financial assistance from Brussels.
"This was misconceived from the outset and I was one of the culprits," Leigh said. "Too closely modeled on the enlargement process but without the incentive of membership, the ENP provided too few benefits in exchange for political reforms which partner governments anyway had no intention of carrying out."
Without the magnetic pull of accession, the EU does not exert the same sway on partners with authoritarian rulers and entrenched economic elites that - often correctly - perceive EU policies as a threat to their positions.
Rival powers such as Russia, Saudi Arabia and Qatar wield chequebooks that dwarf EU aid, without attaching strings about democracy, judicial independence and fighting corruption.
"In retrospect, the EU made a number of serious mistakes. It was not necessary or appropriate to present Ukraine with an incredibly demanding Deep and Comprehensive Free Trade Agreement," Leigh said. He argues that Brussels should offer lighter trade pacts on less intrusive terms to start with.
Even supporters of the aborted deal acknowledge it would have entailed high initial compliance costs for Kiev, which is struggling to avoid default, while the economic benefits would accrue more gradually.
The initialing of association agreements with Georgia and Moldova in Vilnius was a meager consolation for EU leaders who had hoped for the big prize of drawing Ukraine, a strategically located potential market of 46 million, into its orbit.
The EU has been no more successful on its southern rim, 18 years after launching the so-called Barcelona process of Euro-Mediterranean cooperation.
European hopes that the 2011 Arab Spring uprisings that toppled veteran autocrats would bring forth democratic partners committed to transparency and better governance have largely run into the sand.
Tunisia, where the ruling Islamist Ennahda party has agreed in principle to hand over power, seems to offer the last chance of an EU-sponsored democratic transition.
Egypt, the most populous Arab nation, has reverted to military-dominated rule and remains in economic decay, kept just afloat by Gulf money, after the army toppled elected Islamist President Mohammed Mursi in July and cracked down hard on his Muslim Brotherhood.
Libya is in chaos with a weak government unable to assert its authority over rival militias. Algeria, Europe's number two gas supplier, dodged the Arab Spring and remains an opaque system with an ailing president who has barely been seen in public since he suffered a stroke in April. In Morroco, King Mohammed's cautious experiment in sharing some power with moderate Islamists has been gradually put into reverse.
Supporters of European Neighborhood Policy are undeterred by the setbacks and say the EU strategy continues to offer the only realistic path for countries that aspire to modernize and lift their populations out of poverty.
Ukraine will eventually take that road, they say, possibly as early as next year, but maybe only after Yanukovich goes.
Pawel Swieboda, head of the DemosEuropa think-tank in Warsaw, said central European countries achieved this transition in the 1990s by adopting EU standards that attracted foreign direct investment and brought huge productivity gains.
"For a country like Ukraine, you need a change in governance and it was a smart idea for the EU to try to lure them into an arrangement in which step-by-step the system would have to be reformed from the inside," said Swieboda, a former Polish negotiator on EU accession.
"You have to give it time and patience, forget about the end destination of the journey and start getting them moving."
(Additional reporting by Elizabeth Pineau and Yves Clarisse in Paris,; Andreas Rinke in Vilnius; Writing by Paul Taylor)