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Mediterranean Policy ProgramSeries on the Region and the Economic Crisis Prepared in Partnership with Paralleli Euromediterranean Institute

(Turin)

Policy Brief
March 2012

Summary: In general, all of the countries of the Arab Spring have taken an economic hit, to some degree, from the consequences of the drastic reduction in production and foreign direct investment (FDI), the collapse of tourism, and the upward surge of international prices on raw materials. All the governments have intervened to dampen unrest stemming from the higher costs of food by increasing public wages and subsidies for food and fuel. Governments have broken with the old authoritarian regimes; they are now in an inevitable transition phase away from high youth unemployment, crony capitalism, an inefficient welfare state, and even food shortages. This policy brief examines the situations in Tunisia, Libya, and Egypt, among others.

Economic and Trade Relations between North Africa and the Leading Players in the Mediterranean Basin: What can be Expected after the Arab Spring
by Maria Rosaria Carli and Luca Forte*
Differences between the Arab Spring Countries Starting in early 2011, popular protests in the Middle Eastern and North African (MENA) countries led to the overthrow of regimes in Tunisia and Egypt, civil war in Libya, revolts in Bahrain, Syria, and Yemen, and protests in Algeria, Iraq, Jordan, Morocco, and Oman, as well as other protests scattered in other Middle East countries. All of these countries are in a period of transition that could lead to democracy after years under repressive regimes that ran inefficient economies. But at first glance, there is little in common in the major economic indicators of the countries involved in the Arab Spring. While all these countries had positive growth rates, the annual per capita GDP in each ranged from around $10,000 in Egypt, Algeria, and Tunisia to less than $5,000 in Morocco. This growth was jeopardized as a consequence of the revolts, as was to be expected; it could not be otherwise, considering that most of the economic resources of these countries are derived from the export of hydrocarbons, tourism, and foreign investments, sectors that are naturally hit by an unclear political situation. No country on the southern shore of the Mediterranean had help from the International Monetary Fund (IMF) prior to the Arab Spring. After the revolts began, however, many international institutions provided support to the economies of these countries, not only loans from the IMF, but also aid from the World Bank and assistance from the European Bank for Reconstruction and Development (EBRD) and European Investment Bank (EIB). This aid should help repair the damage caused by the decline in tourism and investment and the hemorrhaging of capital, which also compromised the levels of currency reserves.

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* Maria Rosaria Carli is senior researcher at the Institute for Studies on Mediterranean Societies of National Research Council (CNR-ISSM) and former director of the Institute for Research on the Mediterranean Economy of the Italian National Research Council. Luca Forte is head of the Mediterranean Economy and Territorial Statistics division at SRM (Economic Research Center for Southern Italy and the Mediterranean Area).

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Prior to the revolutions, many businesses were comfortable with payment terms of up to one year. Once civil unrest began, however, there were several knock-on effects on exporters and importers operating in the affected countries, as well as on the foreign banks that finance much of this trade activity. Trade flows in the region have suffered as credit has become less available and trade confirmation pricing has increased. Suppliers have now been demanding payments as early as possible. Most companies began asking their banks for guaranteed trade financing tools, such as letters of credit (L/Cs) and even confirmations, instead of using open account transactions. The response from the banks was to reduce their trade finance limits and monitor their exposures and returns very closely. In general, all of the countries in the region have been hit, to some degree, by the consequences of the drastic reduction in production and foreign direct investment (FDI), the collapse of tourism, and the upward surge of international prices on raw materials. All the governments have intervened to dampen unrest stemming from the higher costs of food by increasing public wages and subsidies for food and fuel. Governments have broken with the old authoritarian regimes; they are now in an inevitable transition phase away from high youth unemployment, crony capitalism, an inefficient welfare state, and even food shortages. Local Economic Scenarios Prior to the revolts, the overall economic situation of Tunisia could be considered quite solid, allowing the country to develop preferential trade relations with the European Union. The public debt, comfortably under control, represented a strength of the Tunisian economy. Annual GDP growth in 2010 was 3.7 percent, according to data from the World Bank. Remittances from emigrants (5.0 percent of the GDP in 2010) contributed to this growth, which was higher than its rate the previous year (3.1 percent). Nonetheless, despite the positive factors identified above, the rate of unemployment remains at 13 percent, and, worse still, affects mostly young university graduates. In addition, the severe deficiencies in governance and marked economic and social inequalities create a broad gap between rural and urban areas. Revolts broke out in Tunisia in December 2010, quickly forcing President Zine el Abidine Ben Ali, to leave the country. Over the course of the year, the Central Tunisian Bank, foreseeing a liquidity crisis, increased financing to support the bank sector. Then, in June 2011, it lowered the interest rate to 4 percent. The deficit of the balance of payments for the first half of 2011 was made up for by falling back on reserves of $3.1 billion. But the true problem is tourism, the main source of foreign currency, which generally reaches up to 8 percent of the GDP. The riots resulted in such a collapse that during the first half of 2011, this sector suffered a decline of 51 percent compared to the previous year. This had an inevitable impact on the GDP, the percentage variation of which is expected to be negative for 2011. The Libyan crisis and the resulting unstable situation on the border and massive migration of Libyan refugees to Tunisia also hit the Tunisian economy. After the European Union, Libya is Tunisias largest trade partner. Informal relations along the northern border between the two countries are also considerable, and numerous Tunisians work in Libya. The first signs of the Arab Spring could be seen in Libya in February 2011 and, after intensifying into open conflict, came to an end with the death of Colonel Gaddafi. Since the start of the Libyan uprising, thousands of Libyan families crossed the Libyan-Tunisian border. Despite the return of many of them after the death of Gaddafi, thousands of refugees remain in Tunisia. The macroeconomic indicators for Egypt before the Arab Spring were also positive. During the second half of 2010, the GDP was mainly sustained by the construction, tourism, and associated services sectors. It rose by 5.8 percent compared to the same period of the previous year, when a 7.16 percent increase over 2008 was recorded. And yet, in spite of this performance, unemployment peaked at 12 percent and double-digit inflation had eroded family incomes. These difficulties undoubtedly had an impact on the Egyptian riots that broke out in January 2011 and led to the resignation of President Hosni Mubarak. In Egypt, as in Tunisia and Libya, these riots had important effects on the countrys economy. During the revolts, production suffered a slowdown and, for a few weeks, banks did not function at full capacity. Egypt was also hit by serious problems in the

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tourist sector, which had supplied about 2 million Egyptians with work prior to the uprising. According to estimates from the World Tourism Organization (WTO), this sector represented 17 percent of the GDP. Proceeds from tourism during the spring of 2011 were half of proceeds from the previous year, thus contributing to 1.2 percent of the drop in GDP; at the same time, FDI also sank considerably. Faced with these problems, Egypt initiated a guarantee policy of minimum wages and subsidies. This inevitably led to an increase in public spending, thereby forcing the government to rely heavily on monetary reserves. Thus, at the end of June, currency reserves were reduced by 30 percent from their amount the previous December. Despite all of this, however, the second half of this year has shown a slow recovery, although not all risk factors have been swept away. Along with short-term indicators, these shifts can be compared to those of Tunisia and may be seen in all of the other regional countries oriented towards tourism, such as Morocco, Lebanon, and Jordan. Morocco was also the scene of various protest movements. These were not aimed at unsettling the political order, but asked for more intervention against corruption, greater popular participation, and increased accountability of state institutions, along with more systematic support of the less-affluent classes. King Mohammed VI has managed to satisfy a good number of these requests, but with serious consequences to the public accounts deficit. In fact, the primary expense subsidizing foodstuffs and energy is absorbing 5.5 percent of GDP, while an increase in public salaries (the minimum rose from $75 to $125) takes up approximately 20 percent. The situation is further strained by an increase in the prices of imported goods, especially energy products, on which Morocco is highly dependent. In spite of all this, the services sector tourism, transport, and trade which represents 55 percent of GDP, grew during 2011, although at more contained rates. Furthermore, agriculture has continued to contribute approximately 19 percent to the GDP. The economic system in Morocco is recovering, but possible future difficulties could come from Europe, whose crisis is resulting in a reduction of European demand. The EU is the chief market for Moroccan goods, as well as being a source of tourists, remittances, and investments, the latter of which comprises approximately 80 percent of FDI. Morocco also boasts specific agreements with Europe, which grant dutyfree access to its goods, making it the country that takes the most advantage of arrangements derived from its advanced status under the Neighbourhood Policy. Despite difficulties, economic interventions have managed to appease the uprisings in Morocco. However potential still exists for tension from the fact that a large part of the Moroccan population continues to live in extreme poverty. The growth forecast for the future does not appear to be sufficient to guarantee the level of public spending sustained to date and offer a concrete response to a growing labor supply. Trade Relations between Western Countries and Mediterranean Developing Countries1 It is important to offer a foreign trade framework for each of the Arab Spring countries and underline the strong relations between Mediterranean Developing Countries (MDC) and Western partners in order to forecast the evolution of trade relations between MDC and the chief Western countries. Such trade relations are closely linked to two critical interrelated and largely unknown factors: the trends of the economies of Western countries and the consequences of the Arab Spring on the institutional and economic frameworks of the MDC. The first element the persistent weakness of the economies of Western countries has a negative impact on the economic activity of the MDC, through the shrinking of financial flows, both in terms of Foreign Direct Investments (FDI) and remittances from immigrants, and the diminished capacity of Western countries to absorb exports coming from the MDC. The International Monetary Fund2 estimates an average growth of the GDP of EU countries at 1.6 percent for 2011, with only Germany rising above average, at 3.0 percent. The estimates for growth in the United States (1.8 percent) is slightly above that of Europe. A mild recession is expected in 2012 in the EU (GDP -0.5 percent), as a result of sovereign debt crisis, while in the United States GDP will keep an
In this paragraph, only the countries involved in a real regime change will be analyzed, in consideration of the greater variability here recorded in foreign trade dynamics. 2 IMF, World Economic Outlook Update January 2012
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even pace (1.8 percent). In terms of the trend of financial flows towards the MDC, the consequences are sizeable. During the most acute period of the financial crisis, FDI flows towards the countries in North Africa (Morocco, Algeria, Tunisia, Libya, and Egypt) dropped from $22 billion in 2007 to $15 billion in 2010, a decline of over 30 percent,3 and the continuing stagnation of the Western economies during 2011-2012 forecasts a further shrinkage of FDI. The flow of remittances was more regular, but still recorded a drop of almost 7 percent toward MENA countries in 2009, and the pace of growth forecasted for the next few years (about 5 percent) is far from that recorded during the years preceding the crisis (21.5 percent in 2007).4 More recent data show profound changes in trade exchanges between chief Western countries and Mediterranean countries in 2011, which shall be examined individually in order to try to understand the possible evolution. The analysis will first focus on the trade relations framework of each of the three countries investigated. Tunisia Tunisia has an economy largely open to international trade. Tunisias trade value in goods and services (import and export; Table 1) is $48.1 billion, more than 100 percent of the GDP. Its commercial deficit is surprisingly low, especially when one considers the limited export of energy
Table 1 - Sectors (Import + Export 2010) Billion Weight* dollars (percent) Total Products and Services 48.1 100.0 Agricultural raw materials 0.6 1.2 Precious stones 0.0 0.1 Manufactured goods 28.2 58.8 Services 9.6 20.0 Fuels 4.9 10.2 Primary commodities excluding fuels and 4.7 9.8 Agricultural raw materials Total trade balance
source: UNCTAD
UNCTAD statistics, July 2011 World Bank, 2011
5 The source of data concerning EU countries foreign trade in the first 11 months of 2011 is Eurostat

products, thanks to a surplus in the trade of services. The foreign trade in manufactured goods is responsible for almost 60 percent of the total (over $28 billion), while the contribution of services is smaller (20 percent: around $10 billion). There is a great deal of diversity in Tunisias foreign trade. Within the manufacturing sector (Table 2), the principal areas of trade are machinery and transportation ($10.5 billion) and textile/clothing ($7.5 billion). The deficit of the trade balance in manufactured goods is $4.5 billion.
Table 2 - Manufactured divisions (Import + Export 2010) Billion Weight* dollars (percent) Manufactured goods 28.2 100.0 Chemical products 4.0 14.1 Machinery and transport equipment 10.5 37.2 Iron and steel 1.4 5.0 Textile fibers, yarn, fabrics, and clothing 7.5 26.6 Other manufactured goods 4.8 17.1 Manufactured goods trade balance
source: UNCTAD

-4.5

-15.8

* weight on total trade in manufactured goods (percent)

France and Italy are Tunisias principal trading partners, followed far behind by Germany. China ranks eighth amongst Tunisias trade partners, with a trade value of $1.1 billion. In 2011 economic activity in Tunisia experienced limited standstills; IMF estimates a flat growth of GDP in 2011, thanks to a recovery in the second half of 2011, after the 2 percent drop recorded during the first six months. The trend in foreign trade in the first 11 months of 2011 compared to the same period of 2010 shows an irregular path, with a sustained rise in exports to its chief trade partners France (+17.8 percent), Italy (+8.6 percent), and Germany (+10.7 percent)5 and a reduction of exports to other countries with which it has less intense trade rela-

-2.9

-6.1

* weight on total trade in goods and services (percent)

3 4

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Table 3 - Trade Partners* (Import + Export 2010) France 9.0 Italy 7.5 Germany 3.6 Spain 1.9 Libya 1.7 U.K. 1.2 Algeria 1.2 China 1.1 Belgium 1.0
* merchandise trade in billion dollars source: UNCTAD

The machinery and transportation sector ranks first in Egypts foreign trade value ($14.1 billion), followed by the chemical products sector. The trade deficit in manufactured goods is $20.8 billion, almost 50 percent of foreign manufacturing trade.
Table 5 - Manufactured divisions (Import + Export 2010) Billion Weight* dollars (percent) Manufactured goods 42.7 100.0 Chemical products 9.8 23.0 Machinery and transport equipment 14.1 33.0 Iron and steel 4.2 9.9 Textile fibers, yarn, fabrics, and clothing 5.9 13.7 Other manufactured goods 8.7 20.3 Manufactured goods trade balance
source: UNCTAD

tions, such as Spain (-10.5 percent), the United Kingdom (-60.4 percent) and the United States (-3.6 percent).6 Egypt Egypts commercial trade income, $117.4 billion as of 2010, contributes around 50 percent of the GDP. Manufactured goods make up the greatest share of the countrys trade (36.4 percent; $42.7 billion), but the trade in services is also very significant (32.4 percent of the total), and vastly superior to those of Tunisia and Libya. The trade in energy products is valued at $14.7 billion, and there is an overall deficit of $15.8 billion.
Table 4 - Sectors (Import + Export 2010) Billion Weight* dollars (percent) Total Products and Services 117.4 100.0 Agricultural raw materials 2.5 2.1 Precious stones 1.1 0.9 Manufactured goods 42.7 36.4 Services 38.1 32.4 Fuels 14.7 12.5 Primary commodities excluding fuels 18.4 15.7 and agricultural raw materials Total trade balance
source: UNCTAD

-20.8

-48.6

* weight on total trade in manufactured goods (percent)

The United States ranks first amongst Egypts foreign trade partners, with $6.5 billion; following it are China ($5.3 billion), Italy ($5.2 billion), and Germany ($4.6 billion).
Table 6 - Trade Partners* (Import + Export 2010) United States 6.5 China 5.3 Italy 5.2 Germany 4.6 Saudi Arabia 3.7 Turkey 2.9 France 2.8 India 2.8 Spain 2.5
* merchandise trade in billion dollars source: UNCTAD

-15.8

-13.5

* weight on total trade in goods and services (percent)

6 Full-year 2011 data; the source of data concerning U.S. foreign trade is the U.S. Department of Commerce, Bureau of Census, Foreign Trade.

In 2011, production activities did not suffer notable interruptions (IMF forecasts an economic growth of +1.2 percent) and GDP is expected to rise by 1.8 percent in 20127. The trend of trade abroad was not hurt. In fact, Egypt
7

IMF, World Economic Outlook September 2011

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saw a sustained growth in exports to all of its chief Western partners, except the United States -9,2 percent): Italy (+36.3 percent), Germany (+76.3 percent), the United Kingdom (+26.5 percent), France (+30.7 percent), and Spain (+17.8 percent). This signifies the very limited impact of social protests on economic activity in the export-oriented manufacturing sectors. German interests in the North African region, although not as great as those in Eastern Europe, should not be underestimated. Egypt, for example, is one of the few Arab countries where German energy companies have been active for many decades, and RWE Dea activities in the oil sector could lead to further business in gas production and export. In addition, many companies (especially auto industries, such as BMW, Daimler, Leoni, and Drxlmeie) outsourced to Egypt over the last few years, taking advantage of lower wages and production costs. The same is true in Tunisia, where no fewer than 200 German industries are processing raw materials into semi-finished products for European markets. Thus, in the aftermath of the Arab Spring, German politicians and economic stakeholders are facing the difficulty of re-building personal connections with new political actors, while also clearly taking advantage of the opportunity to snatch market shares out of French and Italian hands. The speed with which they acted and the actions they took (for example, organizing the First Arab-German Finance and Investment Conference on November 17 in Frankfurt) show that German investors know what is at stake. Libya Libyas foreign commercial trade is dominated by its energy production, which comprises over 60 percent of the countrys trade ($46.7 billion of the $76.4 billion trade total); the trade incidence of manufactured goods is valued at onequarter of the total. The trade balance is strongly positive ($17 billion) thanks to oil exports. Within the manufacturing sector, machinery and transportation cover almost 50 percent of foreign trade in manufactured goods ($9.1 billion of $18.4 billion). The contributions of the other sectors are much lower. There is a high deficit in the trade balance in manufactured goods (-$15.6 billion), amounting to over 85 percent of foreign manufacturing trade.
Table 7 - Sectors (Import + Export 2010) Billion Weight* dollars (percent) Total Products and Services 76.5 100.0 Agricultural raw materials 0.2 0.2 Precious stones 0.4 0.5 Manufactured goods 18.4 24.0 Services 5.5 7.2 Fuels 46.7 61.0 Primary commodities excluding fuels 5.4 7.0 and agricultural raw materials Total trade balance
source: UNCTAD

17.0

22.2

* weight on total trade in goods and services (percent)

Italy is, by far, Libyas number one trade partner. Its trade with Libya (valued at $19.6 billion) is greater than that of France, China, and Germany combined, which rank second, third, and fourth, respectively, among Libyas trade partners. Libyas conditions in 2011 were more problematic than those in Tunisia and Egypt. Military operations in the field continued until late October, destroying a large part of the infrastructure and blocking economic activities in the country. Vast, high-quality oil reserves make it a strong exporter, but stymied production has resulted in the collapse of the countrys exports, made almost entirely of crude oil. Drops ranged from a loss of 35.3 percent in exports to Germany to 67.7 percent to Italy and even 77.2 percent to Spain in the first 11 months of 2011 compared
Table 8 - Manufactured divisions (Import + Export 2010) Billion Weight* dollars (percent) Manufactured goods 18.4 100.0 Chemical products 2.2 12.2 Machinery and transport equipment 9.1 49.5 Iron and steel 1.8 9.6 Textile fibers, yarn, fabrics, and clothing 1.2 6.7 Other manufactured goods 4.0 22.1 Manufactured goods trade balance
source: UNCTAD

-15.6

-85.2

* weight on total trade in manufactured goods ( percent)

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Table 9 - Trade Partners* (Import + Export 2010) Italy 19.6 France 6.9 China 6.0 Germany 5.9 Spain 4.8 Turkey 3.3 United States 2.2 Korea, Republic of 1.9 Tunisia 1.9
* merchandise trade in billion dollars source: UNCTAD

Table 10 Libyas foreign trade with chief Western Countries percentage variation: January-November 2011 on January-November 2010 Exp United States* Germany France Italy U.K. Spain
*full-year 2011 data

Imp -56.9 -66.5 -68.6 -78.6 -76.1 -64.1

TOT -66.5 -42.5 -44.1 -69.6 -69.3 -76.9

-69.5 -35.3 -55.9 -67.7 -66.5 -77.2

source: UNCTAD

to the same period in 2010. Libyan imports also suffered losses, sometimes even higher than exports in terms of percentages (between 64 and 79 percent), indicating the nearly complete cessation of production (see Table 10). Algeria, the other North African oil-exporting country, benefited from the decline in Libyan oil exports and the upward trend in oil prices (rising to over $110 per barrel in 2011, compared to approximately $80 in 20108). During the first 11 months of 2011, Algerian exports to Western countries almost all of which are composed of energy products recorded staggering growth rates compared to the same period in 2010. Between January and November 2011 exports to Germany tripled and export to U.K. (+129.1 percent), France (+85.3 percent) and Spain (+27.7 percent) grew considerably when compared to the same period in 2010, while the trend in export to the United States9 (+0.6 percent) and Italy (+5.2 percent), its main trade partners, was less intense. These dynamics may indicate the developments in trade relations between the MDC and Western partners in the short term; however, these relations will depend, in the medium and long terms on the political-institutional evolution of the MDC. They also will depend on the political and commercial strategies utilized by Western countries to occupy advantageous positions over new global players, as China and Turkey compete to meet the interests of the governments that will lead Tunisia, Egypt, and Libya after their transitions.
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The Role of Old International Players: The EU and the United States To understand the European strategy toward the Mediterranean Developing Countries, we need to start from the so-called Barcelona Process. This process provided for a series of democratic reforms aimed at creating a partnership, within which it would be possible to overcome conflicts arising in the Mediterranean region and foster the creation of a space of shared peace and prosperity. The Barcelona Process originally promoted the creation of a free-trade zone in the wider Mediterranean region, which would provide the basis for enhanced cultural dialogue, promotion of stability and security in the South, and flow of financial and technical aid. In the mid-1990s, the EU signed an agreement with its partners on the southern shores of the Mediterranean, beginning with Tunisia, outlining a project that would create an area of shared prosperity. Today, over 15 years later, many (undoubtedly ambitious) expectations have not yet been fully met, and the cooperation provided for by the Barcelona Declaration has been only fragmentarily achieved. Currently, EU policy toward the Mediterranean is conducted through the bilateral Action Plans of the European Neighborhood Policy (ENP) and the joint projects of the French-designed Union for the Mediterranean (UfM), both of which were born out of the Barcelona Process/EuroMediterranean Partnership (EMP). The Mediterranean partners collectively voiced their displeasure with both the EMP and ENP, with many Arab Mediterranean leaders choosing not to attend the 10th

ECB, Monthly Bulletin, January 2012 Full-Year 2011 data

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anniversary summit of the Barcelona Process in 2005. Thus the UfM came to be seen as a possibility for a new and improved version of the EMP with support from Mediterranean partners for a variety of the unions new features. Despite original speculative hopes that the UfM would indeed complement the bilateral approach of the ENP, the UfM has been routinely accused of remaining little more than a project that reflects French economic and political ambitions and concerns. The main objectives, regional integration and the creation of a free trade zone, have failed, and the integration tools implemented first by the neighborhood policy and later by the Union for the Mediterranean have clearly shown their limits. In the following years, the EU will strengthen its involvement in the region. As a matter of fact, according to a communication on the budget for the next financial framework 2014-2020 adopted by the European Commission, a total of 16.1 billion will be allocated for the future European Neighbourhood Instrument (ENI). If adopted, the new funding for the neighborhood policy would represent a rise of more than 40 percent, compared to the 11.4 billion under the current European Neighbourhood and Partnership Instrument (ENPI), which covers the current financial period 2007-2013. European Neighbourhood Policy Commissioner tefan Fle said that: The significant increase reflects our commitment to our neighborhood and its growing importance for the EU. Also, the EU recently launched a number of actions aimed at supporting the transition process, as part of the SPRING (Support for Partnership, Reform, and Inclusive Growth) program, to encourage a democratic transition, strengthen local institutions, and support growth, job creation, and secondary education. Further measures have recently started in Tunisia regarding support to the more depressed areas for fostering the creation of jobs and employment, in addition to improving access to micro-financing and promoting cultural exchange and the mobility of teachers and students. A specific measure is aimed at promoting a reform process to encourage Tunisians to take on greater responsibility and participate more actively in the public life of their country. The enlargement process moreover marginalized the Mediterranean from the core of EUs priorities for the benefit of the Eastern neighborhoods. As a consequence, there has

The enlargement process marginalized the Mediterranean from the core of EUs priorities for the benefit of the Eastern neighborhoods.
been a lack of business interest in southern Mediterranean and there was a very low levels of foreign direct investment in the region. The gravity of these limits has been further emphasized by the recent crisis. In light of the Tunisian and Egyptian revolutions in 2011 and the spread of the Arab Spring across the Middle East, the European Commission and the European Parliament have fundamentally called into question the effectiveness of current European Union (EU) policy toward the Mediterranean Arab states, the EUs southern neighborhood. Today, Europe should continue to strategically pursue the creation of a free-trade area and encourage further economic integration in the region. European Commission President Jos Manuel Barroso declared on March 3, 2011, It is our duty to say to the Arab people that we are on their side. From Brussels I want to say this particularly to the young Arabs that are now fighting for freedom and democracy: We are on your side. At the Deauville Summit in May 2011, the G8 countries already showed clear signs of support and promises of aid to those Mediterranean countries that embraced democratic values. In particular, support measures have been assured for economies in the transition towards democracy, including debt cancellation, investment facilitations, and trade agreements. The current European policy is based on the principle of more for more i.e. Europe is prepared to ensure more political and financial support to those countries that introduce more democracy and reform. More incisive actions are based not on the countrys size or circumstances, but on merit and commitment at local level. Moreover, in June 2011, the European Union offered a top-

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to-toe revamping of its neighborhood policy, linking aid and better trade to political and economic reforms. Lastly, in September 2011, the European Commission announced plans to kick off free trade talks with Egypt, Jordan, Morocco, and Tunisia in line with pledges to improve its ties with these countries, within the framework of the neighborhood policy. The EU should now strengthen its economic relations with the Southern Mediterranean Countries overcoming the main limiting factors. The first and most debated of these is undoubtedly the issue of the persisting protectionist measures in European trade, namely agriculture, due to the constraints posed by the EUs Common Agricultural Policy. Europe needs to liberalize its trade regime if it is to induce any form of economic development and promote democracy in its southern neighborhood. Removing nontariff barriers to further liberalize its trade regime and enhancing the backbone of the EMP with a serious institutional reform are of vital importance for the EU to fulfill this immediate duty. After the revolutions sort themselves out, the United States and the EU must incentivize the growth of existing regional trade agreements, or the creation of new ones. The U.S. government agrees with and supports this new European policy. Recently, in fact, U.S. President Barack Obama, reiterating the objective of the United States to promote a model of development based on liberalization and competition, said that: Its important to focus on trade, not just aid; on investment, not just assistance. In short, the United States shares the same goals as Europe, to promote further integration between the Arab Spring countries and the U.S. and EU, especially through the promotion of trade agreements. President Obama promised to work with the EU to facilitate more trade within the region, build on existing agreements to promote integration with U.S. and European markets, and open the door for those countries who adopt high standards of reform and trade liberalization to construct a regional trade arrangement. The New International Players: China and Turkey Recent troubles in Libya have revealed the hitherto concealed presence of over 3,000 Chinese people living in the country, employed by Chinese enterprises, whose evacuation has required the large-scale deployment of Chinese warships. Although hidden, this massive and increasing presence of China in the Mediterranean area had already been revealed in the construction industry and large infrastructure projects in North Africa. This presence is viewed with hostility by local populations, as has been demonstrated by the attacks and threats on the Chinese communities during the Arab Spring uprisings. But the growing Chinese presence in the North African markets, also arguably damaging to those of the European Union countries, becomes even more evident if we observe international trade and the large numbers of Chinese containers in the chief Mediterranean ports. Moreover, Chinas increasing role clearly emerged when it demonstrated strong resistance to the UN Security Council vote on Libya. Although it does not have a foreign policy specific to the Mediterranean, Beijing has confirmed that it does not wish to undermine the territorial integrity and national sovereignty of the Libyan state, despite the fact that there is proof that China sold arms to the Gaddafi regime and that it now wishes to take part in the rebuilding of the country. It was not until September that China finally decided to recognize the National Transitional Council, most likely a result of threats made by several Libyan oil companies stating they would suspend oil supplies to those countries that had abstained from voting on the UN resolution. Chinas need for energy is much too great to jeopardize its economic relations with oil and gas producing countries. Turkey too has had an active role in the Arab Spring, and it is becoming a concrete source of political support and socio-economic assistance. The Middle Eastern dimension has acquired more importance in Turkish foreign policy, and Ankara has been asserting its ambitions more openly and confidently in the region. Last September, Turkeys Prime Minister Recep Tayyip Erdoan, thanks to the support of a business delegation, ensured Turkeys support to, and trade with, Egypt, Tunisia, and Libya. Turkeys influence in the Middle East is more than evident. Turkey and Egypt have a Free Trade Agreement (FTA), but Exports to Egypt declined by almost 80 percent in the first eight months of 2011 compared to the same period in 2010. Turkeys exports to Tunisia experienced the highest increase amongst the three North African countries as Tunisian imports from Turkey surged to $76 million from $30 million in the first eight months of 2011. Following Russia, Libya is the second largest market for Turkish

Mediterranean Policy ProgramSeries on the Region and the Economic Crisis

Policy Brief
contractors abroad. Erdoans recent trip to North Africa also confirmed the cultural and historical relations between Turkey and the Arab world. Turkeys position in the area is also a function of how it has managed its relations, on several fronts, with other regional powers: Israel, Syria, Libya, Iran, as well as the Saudi-led Gulf Cooperation Council (GCC). Ankara has expressed its support for Palestinian Authoritys bid for statehood at the UN and has also expelled the Israeli ambassador. In Syria, Ankara has supported the popular uprisings by sustaining the internal opposition to the regime of Bashar al-Assad. In Libya, Ankara has expressed strong contradictions, initially supporting the Gaddafi regime while later passing over to the Transitional National Council. It has also focused on diplomacy on several occasions, with efforts to mediate conflicts between Afghanistan and Pakistan, Syria and Israel, and the joint action with Brazil on Irans nuclear power issue. Turkey has tried to take a different and more constructive stand regarding its neighbors with the zero problems with the neighbors policy. This policy offers territorial security by means of the peaceful settlement of disputes and putting aside current threat perceptions. But Ankaras policy is faced, for example, with a Syria on the brink of civil war, where dialogue is proving difficult despite the good personal relationship between Erdoan and al-Assad. The elimination of visas for citizens from Syria, Jordan, and Lebanon seems to confirm the prospect for a common market also including Tunisia, Morocco, Egypt, and Palestine, all of which already have free-trade agreements with Turkey. The Turkish economic model has been looked to as an example for the Southern Mediterranean area. The Turkish GDP grew by 8.2 percent in 2010 and 11 percent in the first half of 2011. Turkey has become one of the top 20 global economies in the world. However, this growth isobtainedthrough the largecontribution offoreign investment, anditscurrent account deficitdoubledin the first halfof 2011. The trade volume between Turkey and Italy has developed in recent years and reached to $16.7 billion in 2010, and the country has entered into a Free Trade Agreement (FTA) with Egypt while intensifying trade with Tunisia. The image of a Turkey trying to resolve its problems with neighboring countries was favorably received in the region. The Justice and Development Partys policy has built on the concept that Turkeys role in the region should not only be that of a bridge between the West and East but also that of a pivotal state. Turkey appears to not be defined by its military capabilities and geo-strategic/geo-political positions but instead by its democratic identity and economic power. However, Turkeys ambitions could be halted from within if its economy were to collapse and the conflict with the Kurdish separatists of the PKK escalates. This is an extremely delicate moment during which Turkey could lose the popularity it has achieved over the last few months. Turkish foreign policy seems to be increasingly that of a trading state seeking markets and economic benefits rather than that of an ideologically driven state seeking fundamental reorientation. The economic interests in the Middle East are very deep and Turkey has played a leading role. There was much uncertainty over European and U.S. actions in the Middle East at the outbreak of the Arab Spring, as was seen an ineffectiveness in their actions, but Turkey is without doubt the winner coming out of the Arab Spring. As some observers have remarked, the Arab Spring arrived perhaps a few years too soon for Ankara to obtain the full results of its leadership. Conclusions The Arab Springs events have proved to be an important testing ground for the United States, Europe, and Turkey, but especially for local governments. They have provided a historical moment for the realization of a regional cooperation, though to achieve long-term goals, the EU needs to shoulder the lions share of responsibilities. Today, local transitional governments are faced with difficult decisions. They are called on to tackle and balance conflicting interests, speedily improve the living standards of their people, ensure political and social stability, fight against favoritism and corruption, foster a more open economy, and guarantee a degree of welfare. In a report issued in June 2011, the Economist Intelligence Unit outlined three possible future scenarios for governments in the region. The most probable one (at 60 percent) features the affirmation of not fully democratic regime. At 20 percent each are the likelihood of a return to the status quo, with the survival of the current regimes; and a successful

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Mediterranean Policy ProgramSeries on the Region and the Economic Crisis

Policy Brief
transition to democracy, with a change of regime and the taking root of a representative democracy. Four months have been sufficient to reverse this forecast, following the elections in Tunisia and the death of Gaddafi, to mention only the two most significant events. Over the long term, the presence of a democracy could bring about considerable economic benefits and contribute to rapidly narrowing the gap with the worldwide average. In the medium and long term, the costs of the transition will start to drop, while the benefits resulting from democracy will begin to show their positive effects. The more optimistic scenarios foresee a growth of approximately 4 percent average for the MDC, which is nevertheless below the level forecast prior to the Arab Spring. This requires greater investments in the individual countries, with the risk, however, that they may soon be faced with heavy budget deficits. Meanwhile, the uprisings and riots have seriously damaged local economies, with very high social costs, to the point that countries that have experienced the Arab Spring have witnessed a worsening of their social and economic conditions. The negative impacts of the revolts on the societies and economies of these countries will continue to be felt for many years to come, except for the oil countries that will have a greater capacity for recovery. On the other hand, they will also have to face rising prices of foodstuffs. Nevertheless, there is still a certain degree of optimism. The more recent outlook is that when the domestic situation in the individual countries has stabilized, all of the economies will be able to start expanding again at very high rates. As already stated, the capacity by the West to provide financial aid and other forms of support to the Middle East and North Africa is undoubtedly a key opportunity to re-establish improved economic and financial as well as political and cultural relations with these countries on completely new grounds, such as political and economic cooperation. Unemployment and poverty remain the most important challenges facing Southern Mediterranean countries. The EU should chiefly focus on accommodating the developing countries interests in using trade liberalization as an engine for their sustainable development. In accordance with the Europe 2020 Strategy, there is generally agreement on the important role of trade policy in ensuring growth and prosperity. Western nations should link democratic development with access to Western markets, and promise to deliver the benefits of preferential trade access to the people of those nations that embrace democracy. The promotion and facilitation of a regional trade agreement should be at the forefront of any Western economic initiative about the Arab Spring. The EU cannot afford to continue ignoring the need to liberalize the barriers to trade with the newly democratizing Mediterranean. Perhaps the most obvious technical obstacle that has played a role in the failure of the EMP has been the current state of the EUs Common Agricultural Policy. Europe needs to seriously liberalize its trade regime if it is to induce any form of economic development and promote democracy in its southern neighborhood. Except for Libya, short term FDI has not been affected in countries transitioning politically from the Arab Spring. Economic relationships between the new governments and the West are yet undetermined. The results of last October and November elections favored moderate Islamic parties in Tunisia, Egypt, and Morocco, which made many Western nations question their future economic relations with the region. Nevertheless, such fears seem rather premature given that the future of economic relations between the MDC and its Western partners is currently in jeopardy. In fact, the West takes great risks by failing to provide the resources needed in the transition of the countries concerned. In Tunisia, after the victory of the moderate

The uprisings and riots have seriously damaged local economies, with very high social costs, to the point that countries that have experienced the Arab Spring have witnessed a worsening of their social and economic conditions.
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Mediterranean Policy ProgramSeries on the Region and the Economic Crisis

Policy Brief
Islamic party An-Nahda, its leader, Rachid Ghannouchi, wanted to quickly ensure economic and trade relations with international investors. Tunisia, as well as Morocco through the leading party PJD (Parti de la Justice et du Developpement), make specific reference to the policies presented by Turkish Prime Minister Erdoan. In Egypt, the anticipated victory of The Muslim Brotherhood and the surprising success of the Salafis of An-Nour caused worry amongst the international community. But, as in Tunisia and Morocco, it will be the policies of the future government to influence the countrys economic relations with the West. From this point of view, the policies of The Muslim Brotherhood as well as the most radical An-Nour may prove to be liberal in economic relations and open to international trade. References
About the Partners

ECB, Monthly Bulletin, October 2011 EIU, Spring Tide, Will the Arab Risings Yield Democracy, Dictatorship or Disorder? The Economist Intelligence Unit, 2011 Sabine Fischer,Erwan Lannon, The ENP Strategic Review: The EU and its Neighbourhood at a Crossroads, Analysis, May 2011 IMF, Middle East and North Africa: Economic Outlook and Key Challenges, September 2011 IMF, World Economic Outlook, October 2011 Intesa Sanpaolo, Short note: MENA, March 2011 Intesa Sanpaolo, Focus economia: Tunisia, October 2011 Intesa Sanpaolo, Focus economia: Egitto, October 2011 Intesa Sanpaolo, Focus economia: Marocco, October 2011 Nathalie Tocci, The European Union and the Arab Spring: A (Missed?) Opportunity to Revamp the European Neighbourhood Policy, Brief n. 2 Imed, June 2011 World Bank, Migration and Development Brief. Outlook for Remittance Flows 2011-2013, May 23, 2011. Franco Zallio, La Cina nel Mediterraneo: sviluppi recenti e nuove sfide, Paralleli, policy brief January 2011

The German Marshall Fund of the United States (GMF) is a non-partisan American public policy and grantmaking institution dedicated to promoting better understanding and cooperation between North America and Europe on transatlantic and global issues. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has seven offices in Europe: Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has smaller representations in Bratislava, Turin, and Stockholm. www.gmfus.org

Paralleli Euromediterranean Institutes mandate is to contribute to the creation of a Euro-Mediterranean area of freedom and of economic and social development. The institute acts at the local, national, and international level with the aim of meeting the needs of the North-West region of Italy concerning its relations with the other sides of the Mediterranean Sea. The activities of the Institute fall within the process of Euro-Mediterranean partnership initiated by the European Union with the 1995 Barcelona Process and currently undergoing a major relaunch through the Union for the Mediterranean, since July 2008. Paralleli intends to contribute to the reinforcement of political relations, economic cooperation, cultural exchange, and human flows between the European and the South-East Mediterranean countries. Its main objective is to promote dialogue at cultural, social, and political level between the societies of the Mediterranean countries, with the aim of encouraging and improving economic relations between them, with a particular focus on the dimension of sustainability and co-development. For this reason, the institute has decided: to involve civil society in the development of Euro-Mediterranean relations; to create and to support networking in the Mediterranean area; and to increase the value of research in order to suggest truly effective policies to local, national, and international actors. www.paralleli.org

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