In the wake of the Arab Spring the European Union (EU) is eager to foster closer relations with North Africa and the Middle East. Georg Zachmann,Mimi Tam and Lucia Granelli look at the EU’s current policy initiatives and assess which measures countries should undertake to help the economies of the Southern Mediterranean

Granelli, Lucia

Tam, Mimi

Zachmann, Georg

English

LSE Research Online

blogs.lse.ac.uk http://blogs.lse.ac.uk/europpblog/2012/06/20/how-wide-is-the-mediterranean/Cross-Mediterranean economic and political relationshipsmust be rebalanced to include all of Europe.Jun 20 2012In the wake of the Arab Spring the European Union (EU) is eager to foster closer relationswith North Africa and the Middle East. Georg Zachmann,Mimi Tam and Lucia Granelli lookat the EU’s current policy initiatives and assess which measures countries should undertaketo help the economies of the Southern Mediterranean.Europe and the Southern Mediterranean Countries (SMCs: Algeria, Egypt, Libya, Morocco,and Tunisia) are tied by a long history of economic and political relations. Up until the earlymiddle ages, the Mediterranean Sea played a crucial role in ensuring flows of information,people and goods between Europe and distant countries.In modern times, this has changed. The Mediterranean Sea turned into a natural barrierbetween the divergent economic and political developments on the northern and southernshores. Initiatives for strengthening the linkages (such as the Union for the Mediterranean)have often delivered disappointing results. The Bruegel Policy Contribution Eastern Europeanlessons for the southern Mediterranean looks at how to overcome the barriers currentlyacross the Mediterranean, and suggests the development of a Euro-Mediterranean EconomicArea by 2030. In the meantime, domestic reforms in the southern Mediterranean could beencouraged by:Providing much needed short term assistance;A mid-term quid-pro-quo framework that links successful reforms in the SMCs to astepwise opening of the European labor and product market;Anchoring the reforms to a shared long-term goal (a joint economic area by 2030).Moving towards such a vision requires a better understanding of the economic linkagesbetween Europe and the SMCs.In the Bruegel Policy Contribution How wide is the Mediterranean? we have attempted to quantify the degreeof integration between key European countries and the five SMCs (in terms of trade, investment flows,financial flows, migration, and aid). The aim is to identify key-patterns of interaction. For this purpose we haveconducted a comparative analysis by putting the economic relationship between the SMCs and Europeancountries in the context of their economic size and their geographical distance.Figure 1 – Distance according to total trade 2010Source: Bruegel based on UN Comtrade database (UN Statistics Division, 2011).Measuring relative distance through bilateral trade, as shown in Figure 1, works surprisingly well for allcountries. The ordering of ‘distances’ calculated from trade data is largely consistent with geographicdistances. This correspondence becomes weaker whenever foreign direct investment (FDI) is used tocalculate the proximity of exchanges. Some interesting cases have emerged from our research:France is one of the top two sources of FDI for all five SMCs.Italy has invested relatively more than France in Tunisia, Algeria and Egypt. In Libya, Italy is lessinvolved than one would expect from its historic and geographic linkages.Spanish FDIs are relatively large only in Libya and Morocco.The United Kingdom, the United States and Germany are not significantly investing in this region.Germany is even less active in Algeria and Egypt than the much more geographically remote US.Figure 2 – Distance according to foreign claims on the SMCs (March 2011)Source: Bruegel based on BIS Quarterly Review, September 2011Note: The graphs represent the breakdown of consolidated foreign claims on individual countries on anultimate risk basis by nationality of reporting banks. The total corresponds to the total of the 24 sourcecountries’ financial claims reported by BIS.Similar results can be obtained by looking at financial flows (Figure 2). Despite differences in the openness offinancial sectors in the SMCs, French banks by far hold the bulk of foreign claims in the whole region. AfterFrench banks, only Italian banks play a noteworthy role in Egypt. All other countries (UK, US, Germany andSpain) are under-represented relative to the size of their foreign financial sector claims.Figure 3 – Distance according to migration stocks, 2010Source: Bruegel based on Ratha and Shaw (2007) updated with additional data for 71 destination countriesas described in the World Bank Migration and Remittances Factbook 2011.By comparison, migration flows (shown in Figure 3) lie somewhat in the middle between trade and financial orinvestment exposures. They are shaped both by historical and geographical relations. For example, France isa very attractive destination for emigrants from Algeria, Morocco, and Tunisia; Italy for Moroccans andTunisians; while Spain only for Moroccans. Emigration of people from the SMCs to the US, UK and Germanyis again negligible relative to the overall number of immigrants in these countries.Europe and the SMCs are not homogeneous blocks even in terms of official development aid. On the onehand, the US and Germany provide significant aid, relative to their overall foreign aid portfolios, to Egypt andLibya; on the other hand, France and Spain are the main donors for Algeria, Morocco and Tunisia. Accordingto these figures, the UK continues to be virtually absent in the region.A strategic balancing of economic relationships could make the economic and political relationships betweenthe EU and individual SMCs more predictable and robust, which will be to the benefit of all partners. In termsof investment, trade, and financial and migration flows, France, Italy and Spain are ‘closer’ to Algeria, Moroccoand Tunisia than what geographic proximity alone would suggest. The advantage of this special relationshipfor the SMCs is that they have three important advocates in the EU.The flipside of this special relationship is that other countries – such as Germany and the UK – are relativelymore ‘distant’ from the SMCs in economic terms. This raises uncertainty. The concentration of FDI, externaltrade and external finance on a limited number of partners is a risky strategy because it makes these flowspartially conditional on the economic wellbeing of a limited number of partner countries.All three sides – the EU Mediterranean countries, the EU non-Mediterranean countries and the SMCs – couldgain from such a rebalancing of the economic relationship. But, to make this happen, all three sides wouldhave to move. The EU Mediterranean countries would have to support their northern EU partners in becomingactive in the region, for example by surrendering some of their privileged access. The non-Mediterranean EUcountries would have to increase their economic exposure in the SMCs, for example by enabling somecircular migration. And, finally, the SMCs should encourage economic activity on the part of nontraditionalpartners by lowering barriers for all partners, for example by making regulatory and decision-makingprocesses more transparent. Hence, diversifying investment in the SMCs, and financial and trade flows whilemaking labor freely mobile, to involve nontraditional European partners and cover more intensively non-western SMCs could be a good strategy for strengthening the relationships between the SMCs and the EU,and making the ties more resilient. While in relative terms this might involve a reduction in the importance ofsome individual EU partners in some SMCs, in absolute terms the link between all partners would bestrengthened.This article is a shortened version of the Bruegel Policy Contribution, How wide is the Mediterranean? Please read our comments policy before commenting.Note:  This article gives the views of the author, and not the position of EUROPP – European Politics andPolicy, nor of the London School of Economics.Shortened URL for this post: http://bit.ly/NeXm3D_______________________________About the AuthorsGeorg Zachmann - Bruegel Georg Zachmann joined Bruegel in September 2009. Prior to that he worked at the GermanMinistry of Finance and the German Institute for Economic Research in Berlin. Georg holds adoctoral degree of the Technical University Dresden as well as a diploma in economics fromHumboldt University Berlin.-Mimi Tam - BruegelMimi Tam is a Research Assistant at Bruegel, working on climate change and energy policy.She contributed to a Bruegel Blueprint on the EU Energy Transition. She obtained an MSc ofEconomics at the Barcelona Graduate School of Economics (UPF). Tam also holds a BA inComputer Science, with a minor in economic theory, from New York University. Prior topursuing her masters, Mimi spent a few years working for large consultancy firms (includingKPMG and Deloitte & Touche).-Lucia Granelli - Bruegel Lucia Granelli joined Bruegel in September 2010 as a Research Assistant. She holds aMaster of Science in Economics from Sapienza (Universita’ degli Studi di Roma) as well as aMaster of Arts in European Economics from the College of Europe. She is currently a Ph.D.student in Economics at the Economics School of Universite’ catholique de Louvain.Related posts:1. In the wake of the Arab Spring, the European Parliament must lead the way inpromoting democracy and economic and financial integration between the EU and the Mediterranean.(11.4)2. With no political union in Europe, the Euro crisis may be a ‘never ending game’ for deep-rootedeconomic reasons (6.1)3. The political and economic crisis in Europe has meant a step back for the EU’s major institutions.Solutions in 2012 must not come at the expense of democracy. (6)

Cross-Mediterranean economic and political relationships must be rebalanced to include all of Europe

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