Economic Crisis: Effects on the Mediterranean The Role of the Euro-Mediterranean Relations Facing the Economic Crisis Sergio Alessandrini co-presidencies and a permanent Secretariat based s y Professor in Barcelona that is responsible for identifying and e University of Modena and Reggio Emilia promoting projects of regional and trans-national value K across different sectors. While maintaining the acquis of the Barcelona Process, the UfM offers more bal- Year 2008: Two Turning Points anced governance, increased visibility to its citizens and a commitment to tangible and trans-national proj- 9 0 0 The Euro-Mediterranean Partnership, founded in 1995, ects. 2 . d proceeded at a slow pace for a decade, with little real However, the most important innovation is in the new e M integrative efforts. The year 2008 will be marked as functionalist approach in the field of social and eco- a turning point. With the intensification of efforts from nomic development. The initiatives are more con- the European Union, the Partnership was re-launched centrated on joint projects that require specific invest- as the Union for the Mediterranean (UfM) at the ments rather than political goals. Paris Summit for the Mediterranean in July 2008, with A few months later, the American financial crisis grew 1 5 a new network of relations endorsed at the Marseille into a business crisis and led to a loss of confidence meeting of the Euro-Mediterranean Ministers of Foreign that crashed the stock markets worldwide. A con- Affairs in November. The renewed initiative is larger siderable number of banks and insurance companies and more pragmatic. failed in the following weeks. This was the second The Partnership now includes all 27 Member States turning point of the year. of the European Union, along with 11+1 partners on the southern shore of the Mediterranean: Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Mauritania,1 The Impact of the Global Crisis Syria, the Palestinian Authority, Tunisia, Turkey and Libya (Libya as an observer of the Partnership), as In front of the positive efforts of the EU, the economic well as five new coastal states of the northern Medit- and financial crisis brought negative consequences erranean (Albania, Croatia, Bosnia and Herzegovina, to the region. Montenegro and Monaco). The impact of the crisis has taken the form of: The increased number of partner countries adds more scope for the free trade zone project. But also the • A slowdown in global economic growth and a new approach gives new vitality to the partnership reduction of inflationary pressure, including a dec- and raises the political level of the strategic relation- line in the price of many commodities. ship between the EU and its Mediterranean neigh- • A decline in energy demand and lower oil and bours. gas prices globally. The major innovation includes the new institutional • A decline in foreign direct investment inflows. architecture that contributes to increasing the sense • A decline of worker remittances, in particular from of ownership and empowerment, with two rotating the Gulf. 1 Mauritania has been included in the Union for the Mediterranean although having its coast on the Atlantic and not on the Mediterranean because of its membership to the Maghreb Union. CHART 1 Real GDP Growth 9 8 7 6 5 4 3 2 1 s y e K 0 2005 2006 2007 2008 2009 2010 Egypt Lebanon Algeria Tunisia Jordan Syria Morocco South MED Source: World Economic Outlook (WEO) (April 2009), author calculations. 9 0 0 2 • A decline in total expenditure that has affected ately positive and recovery is expected in 2010, led . d e the financing of investments. by Morocco, Algeria and Tunisia, largely because of M • A decline in export demand and tourism in the the anti-cyclical policies in support of the domestic region. demand. • A sharp decline in financial markets. 2 For the Euro-Mediterranean region, the stakes are The resilience of the south 5 high, and in dealing with the global financial crisis, Mediterranean economies is due the national governments took initiatives and meas- to the same factors that limited ures to mitigate the negative consequences. A first assessment of the current policy responses includes their economic expansion during the adoption of national short-term measures to stim- the past decade ulate domestic demand, step up investment, ensure deposits in banking institutions and cut interest rates to stimulate the local markets. One can say that the From the forecast of the international institutions, it policy responses have, for the most part, concen- appears that two factors have impacted the econo- trated on domestic policy issues to the detriment of my of the MED partners: their reliance on external the specific international cooperation such as the flows, in particular, their trade linkages to the European Euro-Mediterranean Partnership. countries and other deeply affected high-income coun- Although the global crisis has left no country unaf- tries, and the degree of participation of foreign banks fected, its duration and intensity cannot be prede- in the domestic financial sector. termined. Compared with other regions, the south To a certain extent, one can see that the resilience Mediterranean economies continued to show more of the south Mediterranean economies is due to the sustainable growth in the face of rapidly changing same factors that limited their economic expansion external macroeconomic conditions (IMF, 2009). Only during the past decade. Excluding Morocco and at the end of 2008 did the output contract in line with Tunisia, exports or trade openness of these economies the global slowdown, while Morocco and Lebanon generally have low value added in terms of contribu- experienced an acceleration of growth. Overall, GDP tion to GDP. Hence, the share of Euro-Mediterranean growth in southern Mediterranean countries is expect- exports to the EU (European imports) remained broad- ed to decline sharply from 5.0% in 2008 to about ly stable between 4% and 5%, while import contin- 3.2% in 2009, when the contraction is expected to ued to increase near to 6%, expanding the trade be similar in the region. The projections are moder- deficit. On large measure, weak and unbalanced trade CHART 2 Share of EU Import from and EU Export to Euro-Mediterranean Countries 7% 6% 5% 4% 3% 2% 1% s y e 0% K 2004 2005 2006 2007 2008 EU Export to MED EU Import from MED Source: author calculations. 9 0 0 integration simply reflects the weak performance of isolated from the banking problems occurring in inter- 2 . d the preferential agreements. national markets. However, the rest of the economy e M Adding the role of foreign direct investment (FDI) of the southern partners is not immune to crisis; inflows in the region, their contribution has not been undoubtedly, their persistent structural weaknesses a source of economic growth to the same degree as may lead to negative consequences on jobs in the Central Europe or Southeast Asia. manufacturing sectors and on export activities that Moving to the domestic front, the most optimistic will face a stronger competition. 3 5 indicator is assured by total private investment, which One can see that part of the job redundancies have continued the positive performance of the past been absorbed by the informal sector, which is close- decade. This clearly indicates that there is little room ly connected to the formal sector in various ways for further deterioration. Therefore the realistic situ- through markets for goods and factors, but this does ation of the Euro-Mediterranean region points to a not help the chronic employment pressure and the resilient economy that resisted well the adverse exter- vulnerability of labour markets. nal shocks. Hence, the question is: how can the Mediterranean governments maintain growth and avoid job losses? How could the regional partnership support it? Structural Problems The issue is how the UfM can address the transfor- mation of their economic model and modify the struc- As analysed in a recent Economic and Social tural weaknesses behind it. Diversification of domes- Commission for Western Asia (ESCWA) report, tic production and export remains the priority issue, as although in the last decade investment activities have envisaged by several documents and recommenda- transformed production structures in the construc- tions.2 The quality of growth is the main concern. In tion, manufacturing, telecommunications, financial the past decades, economic growth has relied more and service sectors, their impact is limited and frag- on consumption growth than physical investment in ile (ESCWA, 2009). Indeed, reform measures taken the composition of domestic demand. This particular by the central banks increased the efficiency of the characteristic has to be redressed in the next expan- banking sector, and the proof is that they remained sion, since worker remittances and capital inflows, in 2 FEMISE. FEMISE Report on the Euro-Mediterranean Partnership 2007. 2008; FEMISE. The Euro-Mediterranean Partnership, 10 Years After Barcelona: Achievements and Perspectives. Report coordinated by Samir Radwan and Jean-Louis Reiffers, Marseilles: Institut de la Méditerranée, February 2005. Available at: www.femise.org/PDF/Femise_T2005gb.pdf;WORLD BANK. Export Diversification in Egypt, Lebanon, Jordan, Morocco and Tunisia, Volume II: Main Report, January 2007. the form of portfolio and FDIs, are factors that are North African economies continue to resist as the external to the region and are expected to become highest levels in the world. more uncertain over the near term. External support Facing these structural problems, the hardships posed should place more focus on domestic investments by the crisis are not entirely negative. Typically, major and diversification to non-oil exports, which progressed reforms take place in times of crisis and therefore the slowly and unevenly, depending upon the sector and economic slowdown gives the opportunity to rethink the country.