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THE ARAB WORLD

How Europe could ease the economic crisis around the Mediterranean

Summer 2010
The southern Mediterranean looks set to bear the long-term brunt of the economic downturn in Europe, says George Joffé. He sets out the problems now facing many Arab countries and examines the ways that EU countries could lend a helping hand
The global financial crisis has reverberated around the world, with its effects varying from region to region. China and south east Asia have seemingly weathered the crisis in robust health and elsewhere in the developing world the immediate effects appear much less critical than expected. But the economic depression that followed on from the financial crisis in 2009 has had more lasting effects, so that while China at least has seen little restraint in growth, Japan has been much more acutely affected, largely because domestic demand has not compensated for shrinking exports.

Middle Eastern and North African countries have followed this general pattern, but have also had to contend with a “prequel” to the global crisis for reasons that were largely unconnected with it. The result is that the impact of the global crisis on the southern Mediterranean has been surprisingly mild, considering the region’s dependence on European markets.

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Those countries most directly engaged in exports to Europe – North African countries have up to 80% of their trade with Europe – are most likely to be hit, with eastern Mediterranean and Gulf countries less so. And oil exporting states are, of course, likely to weather the depression far better, with the Gulf states and Libya even better off than, say, Algeria, Iraq and Iran.

The importance of the southern Mediterranean’s “prequel” crisis is that in the lead-up to the great meltdown of late 2008 when the global financial CRISIS began, the region, unlike the rest of the world, wasn’t completely unprepared.

The prequel crisis had begun in early 2008 with an explosion in consumer prices that led to rioting in Egypt, Tunisia, Algeria and Morocco. That rapid increase was in part caused by ballooning Chinese and Indian demand for commodity imports SUCH AS oil, minerals and foodstuffs. Because the IMF and the World Bank required that countries reduce consumer subsidies, higher food costs were quickly passed on to impoverished consumers, many of whom took to the streets in protest.

To tackle these developments, southern Mediterranean governments increased consumer subsidies, which took a toll on their foreign exchange reserves. Iran’s estimated $100bn foreign exchange reserves were run down to $11bn, and Morocco was forced to warn that it MIGHT have to stop subsidising consumer prices by the end of 2008. The explosion in oil prices also hit agricultural production costs hard, as did the sudden growth in the price of cereals earmarked for bio-fuel production. To top it all, Western speculators sensed that a global crisis was on the horizon and began to seek out investment alternatives in the southern Mediterranean, and so sent consumer prices skyward.

But the clouds hanging over the southern Mediterranean had a silver lining. When the global meltdown began, governments in the region were already in crisis mode. These governments were also helped by the fact that very few southern Mediterranean financial sectors so much as dabbled in the derivatives trading that burst the financial bubble in America and Europe. Only countries with active stock markets like the Gulf states – where volatility had been fuelled by oil income – experienced severe shock waves in the immediate aftermath of the crisis. All the Gulf countries with the notable exception of Dubai had sufficient financial reserves to cope. But elsewhere the sudden collapse in oil prices from $133 a barrel in July 2008 to $39 six months later didn’t bode well for future investment, particularly in Algeria. Sovereign wealth funds in the region declined 15% in value to $1.5 trillion.

The wider result was a collapse in direct private foreign investment across the southern Mediterranean, particularly in the Maghreb. The sovereign wealth funds in the Gulf region which had continued to invest in the Maghreb and not in the West – inflating the investment inflow from just under $10bn in 2003 to $61bn in 2007 – suddenly pulled in their horns to protect their own fiscal positions. Investment inflows in 2008 fell to only $40bn and declined further last year. Tourism revenues declined – by 9.5% in Egypt in the first half of 2009 – and remittances, a key component of capital inflows in non-oil Mediterranean economies, fell by 7.2% throughout the southern Mediterranean region.

The onset of the depression in Europe hit trade hard in the Mediterranean; with exports of manufactured goods and agricultural products bearing the brunt of the downturn. And the relative decline in oil prices since July 2008 meant that balance of payments deficits were lower than predicted, although balance of payments surpluses for oil producers surpassed expectations thanks to the recovery of oil prices in the second half of the year. Economic growth rates amongst oil imports in the southern Mediterranean grew by around 3%, compared with 6% the previous year. But by contrast, overall growth in non-oil countries was estimated at only 1.9% for the same period.

Even Turkey, which at first seemed particularly exposed to the European depression, is likely to recover in 2010. In November last year the OECD reported that Turkish “output is on track for a record year-on-year decline in 2009 of 6.5%. However, four quarters of negative growth ended with a strong rebound in the second quarter of 2009. After recovering more moderately in the rest of the year, GDP is projected to expand by 3.75% in 2010 and 4.5% in 2011.”

But this sunny outlook may not hold for much longer. If the economic depression in Europe deteriorates further, unemployment will cause at least some southern Mediterranean migrants now in the EU to return home. And as European demand remains depressed, the non-oil economies of the southern Mediterranean will see their trade balances slashed. Also, the inadequate investment inflows of the past decade are likely re-emerge as Gulf investors continue to shun the Mediterranean region, hindering opportunities for development.

Europe should act to alleviate the economic troubles of the southern Mediterranean. It might be too much to ask deficit burdened European countries like Spain, Portugal, Greece or Britain to extend a helping hand to their southern neighbours. But countries like France and Italy have, up until now, ducked the more severe effects of the recession and could offer some support once the terms of the offer were clear.

The European Commission can also play a role. The economic agreements in the European Neighbourhood Policy, the Euro-Mediterranean Partnership and the Union for the Mediterranean could form the basis for co-operation. The Commission’s role will be difficult until operational problems in the Union for the Mediterranean are ironed out. But the earlier policies that have been in place since 2007 should allow the EU to work with Mediterranean countries.

Given the importance of remittances to non-oil economies in the southern Mediterranean, the EU should resist the urge to place constraints on migration from the region, even if European unemployment worsens. Visa regimes like the Schengen visa system should be liberalised to facilitate the development of economic development opportunities. And the EU should accelerate negotiations on agricultural imports from the region, which will allow partner-states to exploit their comparative advantage in this area. European investors, whether nationally-based or at the European level, should be encouraged to expand long-term investment, particularly in infrastructure, to move the economies of the southern Mediterranean forward. The European Investment Bank could play a leading role in boosting investor confidence.

The onus is of course with southern Mediterranean countries to create the conditions in which such initiatives can flourish. This, after all, was the thinking behind the Euro-Mediterranean Partnership in the first place.



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The Summer 2010 issue of Europe's World looks at a number of policy areas where that lesson must be borne firmly in mind by today's decisionmakers. The global economic recession has laid bare a range of issues that need to be addressed very promptly before they develop further and become difficulties of a very different magnitude. It has also accentuated long-term trends to which Europe has so far failed to respond.

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IS THE WELFARE STATE
A LUXURY THAT EUROPEAN COUNTRIES CAN NO LONGER AFFORD?

 

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