Time to build bridges over the Mediterranean

At the beginning of 2012, Europe faces two simultaneous crises. Alongside the continuing instability of the eurozone lies the risk that the Arab uprisings could implode if people’s economic aspirations remain unfulfilled. Inevitably, European Union leaders are focusing on the first of these crises, the future of the euro. But they would do well to recognise the interlink-ages between the two. The Mediterranean stands as a dividing line between a prosperous Europe and a poor North Africa at a time when deeper economic ties could provide part of the solution to both crises. 

A key part of the euro problem is the fear in capitals and financial markets that the EU is fracturing between a globally competitive North and an uncompetitive South. Whatever short or long-term fixes EU leaders agree, the states of southern Europe – Greece, Italy, Portugal and Spain – will struggle to achieve higher levels of competitiveness inside the strait-jacket of the eurozone. Leaving the euro, however, would pose enormous risks for everyone. So where might these countries look to create growth in the future?

Part of the answer clearly lies within the states themselves. But there is a limit to how quickly growth can be achieved by de-regulating labour markets, privatising state industries, reforming educational and welfare systems, and improving public administrations. Given the competitive advantages that northern EU states such as Germany and The Netherlands have built up over the past decade, Europe’s southern states are going to need something more.

An additional strategy would be to build North Africa into an extension of the European economic space. Southern EU states that are structurally uncompetitive could improve their competitive position by becoming gateways for EU trade and investment into North Africa, while drawing on low-cost manufacturing and agriculture from North Africa in return. 

Rapid growth

For example, internationally competitive Spanish, Italian and French agro-industries would benefit if they could integrate Moroccan and Tunisian agricultural exports into a longer chain of mutual economic benefit. Greece, Italy and Spain could also serve as the conduits for a more integrated North-South European infrastructure of transport and energy links. EU foreign direct investment into North Africa could help build these linkages.

The EU’s experience since the 1990s in integrating the new democracies of central Europe shows that, with imagination, self-interest can be served on both sides of past divides. Germany has benefited from its contiguity and open market with the economies of central and eastern Europe. If this dynamic could be repeated across the Mediterranean, even at a much lower level, the impact would be dramatic; one need only look at the rapid growth of US investment into Mexico after the creation of the North America Free Trade Area in 1994.

Catalyst for reform

This would be a significant break with the past. EU trade with the entire Mediterranean littoral, excluding Turkey, was a paltry 5 per cent of its total external trade in 2010. Trade with Turkey and its 79 million citizens alone was 3.6 per cent, while EU trade with Egypt and its 85 million citizens was less than a quarter of this total (0.8 per cent). One of the reasons for this has been that Turkey’s economic growth and political stability since the turbulent and inflation-ridden 1980s has allowed the expansion of an entrepreneurial class, often relatively modest in origin, which has grasped the opportunity to join the European economic space, and thus integrate into the global economy.

North African and Arab Mediterranean states are still struggling to diversify and expand their private sectors away from privilege and protectionism. As a result, EU investment has been drawn to other newly emerged markets. Stocks of European foreign direct investment in North Africa stood at €47 billion or 1.5 per cent of the EU-27’s total at the end of 2009, compared to Asia (12.7 per cent or €413 billion) and Central America including Mexico (9.1 per cent or €297 billion).

The risk now is that these figures could get worse, as political instability in North Africa creates new uncertainties and the economic slowdown in Europe depresses regional trade. For strategic, as well as economic reasons, the EU needs to think again about the longer-term potential of the Mediterranean as a regenerated production and trading zone. This is not just because a decline in economic growth rates across North Africa could evolve into a serious problem for Europe; the EU itself now needs to rethink ways to regenerate its own growth potential. Europe already faces competition from the very markets (Asian and Latin American) that appear to offer the best export-led solutions to the eurozone’s growth deficit. Over the longer-term, that competition from emerging markets, based on youthful and increasingly productive labour forces, will only worsen for the ageing and urbanised social market systems of the EU. 

The EU has not been idle in the face of Arab uprisings. In May 2011, the European Commission and European External Action Service set out a Partnership for Democracy and Shared Prosperity in the Southern Mediterranean. This includes initiatives to reduce or eliminate EU tariffs on some North African agricultural products; to promote industrial co-operation to improve regulatory co-operation to facilitate investment; and to explore new trans-Mediterranean transport and energy networks. The European Investment Bank is increasing its lending to the Mediterranean countries by a third in 2011-13, while the European Bank for Reconstruction and Development has extended its mandate to cover businesses in the region. 

Europe’s vulnerabilities

But the EU’s offers do not convey the idea of a shared approach to each side’s future economic success. They are still couched in the language of benign, but detached concern for poorer neighbours to the South. There is no sense of how the proposed initiatives will help address Europe’s strategic vulnerability from the loss of structural competitiveness by countries and regions in its own Mediterranean periphery.

The risk then is that these new EU initiatives, as with others before it such as the 1995 Barcelona Process and the 2008 Union for the Mediterranean, will fall prey to vested economic interests. In southern EU states, agricultural producers and parts of the textiles industry will contest a bold opening of markets. Companies in North Africa, which fear wholesale take-overs of their protected markets by EU companies, will raise their own obstacles.

Today, however, the context is different. When Spanish youth unemployment is on a par with joblessness in northern Morocco and when general unemployment rates in Spain, Greece and Portugal exceed those of most of North Africa (even if much employment in the region is informal, insecure and badly paid), joint alternatives need to be urgently pursued. With both Spain and Italy apparently heading for a recession in 2012, the urgency of finding longer-term responses to the crisis is evident. 

For the sake of its own security and prosperity, as well as that of its North African and other Arab neighbours, the EU needs to help the South of Europe look further South again, and treat the two crises that it currently faces as one.