international analysis and commentary

The eurozone crisis seen from the Southern Mediterranean

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Grand speeches of Euro-Mediterranean integration have long receded since the onset of the continent’s fiscal crisis, turned economic crisis, in 2009. However, many fail to notice a likely paradox: although the looming prospects of a eurozone crisis and the accompanying social impact of macroeconomic adjustment are shaking the institutional foundations upon which European cooperation is envisaged, they are in fact also consolidating the very idea of a unified Europe, especially overseas.

Today the Mediterranean region represents 8.6% of total EU external trade. Between 2009 and 2012 and despite the ongoing crisis the total value of trade between the EU and its Mediterranean partners rose more than 40%. At a country level, between 2009 and 2013 the total amount of trade between the EU and post Arab-Spring countries such as Tunisia, Egypt and Libya grew between 14% and 20%. In Algeria where the economic repercussions of the Arab Spring were less pronounced trade with the EU grew a staggering 68%. Now what do these numbers mean from a Mediterranean’s perspective? Economic cooperation with the EU has weathered the dual crisis of Europe’s sovereign debt bailouts and the economic ramifications of the post-Arab Spring transition proving that this relationship is more robust than what some may have thought in the past.

For countries south of the Mediterranean the merit of increased trade with Europe means either higher proceeds from exports (especially in the case of oil revenues) on one hand or higher levels of import tariffs on the other. As a result, despite the crisis trade with Europe remains a positive economic force for governments on the Southern shore. Although some fiscal shortsightedness on behalf of these governments may be skewing the view regarding the domestic impact of European trade agreements, trade relations between Europe and the Mediterranean are growing and will continue to do so in the near future.

Now, one may argue that Europe’s crisis is not a crisis of trade in goods and services but rather a fiscal crisis with adverse ramifications that can be seen more in investment activities, FDI and foreign aid. Consequently, if we take a look at the amount of FDI inflows into post-Arab Spring Mediterranean countries we can see a clear decline in the total amount of private European investment since 2009.

However, this is not necessarily related to Europe’s economic slump as much as it is related to the general economic slowdown experienced by the whole Middle East region after the Arab Spring. Due to widespread conflict in many countries, recurrent political unrest and high levels of political and economic uncertainty, private FDI inflows from European Union member states have organically declined and were expected to do so. The interesting phenomenon here is the influx of FDIs from other Arab countries, especially those in the Gulf.

From what history has shown us, the determinants of intra-Arab FDIs are more based on political criteria than on sound macroeconomic fundamentals. To many proponents of Europe’s engagement in the Mediterranean this has been seen as a counter-revolutionary force that challenges the credibility of the EU’s image as a supporter of democratic consolidation. Moreover, although increased Arab FDIs may have been activated more by political reasons than economic ones it has not been accompanied by any specific programs of political or economic conditionality rendering European support more costly and tedious to administer.

During a recent Arab ministerial summit, the government of Tunisia proposed an investment package of around €916 million to build power plants, roads and other infrastructure in the country. Many similar generous investment packages have been already financed by similar Arab summits and bilateral agreements. However, in as much as budgetary support and infrastructure financing has been administered through intra-Arab FDIs with low levels of institutionalized political commitment, it can be also be phased out as easily with low levels of political cost.

For Europe the story is different. From what we have seen recently, although European private investment inflows to countries of the Mediterranean has declined in recent years, but there has been a counter-trend: official aid and financing packages from both European Union agencies and governments in addition to strong EU backed support via international financial institutions (although delayed) has adequately compensated for the decline in traditional European private FDIs, if not even surpassed it.

In a country like Tunisia, official EU support totaled at €485 million between 2011 and 2013. This will be further extended after the recent pledge by President Francois Hollande to provide €500 million to Tunisia in loans and grants. These amounts of official funding far surpass the support that Tunisia has received before the Arab Spring and serve well to compensate for the decline in private investment from Europe.

Thus from the viewpoint of the Southern Mediterranean, European financial support that is administered through structured loans and assistance packages is another factor that strengthens the foundation for further political and economic collaboration in the future.

In the areas of trade and financial assistance the eurozone crisis has done little to weaken Euro-Med relations. What is needed now is a much more in-depth self-assessment of European engagement in the region to make sure that is more in line with the views and aspirations of the people – on both sides of the Mediterranean.