Department of Political Studies - University of Catania
Jean Monnet Chair of European Comparative Politics
Jean Monnet Working Papers in Comparative and International Politics
Luiss University, Rome
The Euro-Mediterranean Free Trade Area and
its Impact on the Economies Involved
October 1998 - JMWP 16.98
(0) The Euro-Mediterranean Free Trade Area envisaged by the Barcellona Declaration of November 1995 should be accomplished by 2010, and is currently being organized through the new Euro-Mediterranean Association Agreements with partner countries. Up to now, treaties with Israel, Jordan, Morocco, the Palestinian Authority and Tunisia have been signed, and negotiations with other countries are well under way. Thus, it can be said that sufficient materials exist to give an accurate evaluation about the construction of the Euro-Mediterranean Free Trade Area (FTA).
The paper argues that although the FTA has been conceived without fully considering all of its consequences, and actually restricting free trade only to some products, it can encourage growth on both the shores of the Mediterranean, provided that the EU adequately participate to the funding of structural change in the South, and that partner countries agree to improve domestic policies and to integrate their economies reciprocally.
The structure of the FTA and its asymmetries are examined first, while policy implications for partner countries are looked at later. Finally, an analysis of possible future options is made.
The FTA and its asymmetries. The problem of agriculture
The first thing to bear in mind when analyzing the Euro-Med FTA is that it is somehow contradictory, as it puts clearly different economies on the same level. This double nature of the FTA appears in the Barcelona Declaration itself, where free trade is presented as a means for mutual development, but also as a possible risk for partner countries, to the point that structural aid from the EU is considered necessary. The general idea in the Barcelona Declaration is that competition is good, but that it cannot be extended to all sectors, nevertheless. On the one hand it says that "tariff and non-tariff barriers to trade in manifactured products will be progressively eliminated", while on the other hand it also says that "with due respect to the results achieved within the GATT negotiations, trade in agricultural products will be progressively liberalized through reciprocal preferential access among the partners". Thus, while liberalization in the industrial sector is faster than liberalization promoted at a global level by the WTO, liberalization in the agricultural sector is as slow as that carried out by the WTO itself. Therefore, there is a clear imbalance between the industrial sector and the agricultural sector, and this is the first asymmetry it can be found in the Euro-Mediterranean FTA.
Surely, this is also the most dangerous asymmetry of the FTA, because it might have very dangerous economic and political consequences in the future, including the unsuccess of the Partnership. Indeed, if a comparison is made with the old Mediterranean Policy enacted by the European Economic Community in the 70s, it is clear that the EU is repeating the errors of the past, as far as agriculture is concerned. In the 70s the EEC signed Cooperation Agreements with all the countries now involved in the Partnership, providing for free entrance of their industrial goods in the EEC and for preferential conditions in trade of agricultural products. Nonetheless, faced with competition of agricultural products from the Mediterranean countries, the EEC imposed restriction of imports not to change its Common Agricultural Policy (CAP), and partner countries were forced to reconvert production to high value-added and profitable products, not to lose revenue. Though, this has reduced the production of basic products for the internal market, such as wheat and foodstuffs, and the vast majority of farmers, unable to face international competition and to improve productivity, have left the countryside to move to the cities on the coasts, thus aggravating unemployment and creating confused urbanization, ecological degradation and international migrations. Moreover, the drive for the production of very expensive crops and fruits, which are very rich of water, has put water resources of exporting countries under strain, adding to the spread of desertification and salinization. In one word, the old Mediterranean Policy has created so many problems that the need has emerged to create a new policy: the Euro-Mediterranean Partnership.
Therefore, the question must be asked whether the Euro-Mediterranean FTA improves the old Mediterranean Policy for what concerns agriculture. The answer, unfortunately, is no. Cooperation in water management and in the development of new fertilizers is certainly positive, but as long as the main trading framework does not change, old problems are doomed to appear again in the future. Moreover, the existence of the CAP is in direct contrast with another provision of the Barcelona Declaration, namely the one saying that agricultural cooperation aims at promoting integrated rural development and at reducing food dependency (1). Unfortunately, you cannot improve food self sufficiency when you force a country to base most part of its agricultural production on foreign demand.
The point might be made that such a pessimistic stance is wrong, because if the framework of the Barcelona Declaration were unjust, Partner countries would have not signed it. Nonetheless, the fact must always be reminded that the Barcelona Declaration is almost identycal to the Commissions draft proposal, and if one compares the two version the impression arises that no real negotiation on the text was carried out. In other words, Partner countries might have agreed to the Declaration and to subsequent agreements just because they felt that no other option existed (2). If that is true, the present conditions of the FTA might reduce mutual confidence, rather than improve it, because it is clear that its structure has been designed so as not to affect the CAP, and maintain special privileges for European farmers (3).
Not considering the importance of agriculture and food dependancy would amount to forgetting all the problems generated by the old Mediterranean Policy, and repeating the errors of the past. Worst of all, it might produce the impression that the EU has embarked onto the Partnership just to continue to enjoy a special relation with the Mediterranean, now that the WTO forbids Preferential Trade Agreements (PTAs), unless they are included in a free trade area. Therefore, the issues at stake are too important to let the FTA depend on the CAP, and the EU must overhaul its agricultural policy as soon as possible. In fact, if the CAP could end around the year 2010, before new steps are taken in this direction by the WTO and in correspondance with the completion of the FTA, that would be a very important signal of cooperation for partner countries.
The new legislative framework: opportunities and setbacks
According to the new agreements, partner countries will have to adopt EU legislation about competition and certification, starting with articles 85 and 86 of the EC Treaty. Thus, European firms will have the advantage to move in a familiar environment, being accustomed to competition and to the acquis communautaire, while firms in partner countries will have to overhaul all their marketing strategies when dealing with Europe. This will certainly help Southern firms meet the requirements needed to face the world market, but the fact should also be considered that the short term consequences are going to be generally bad. Indeed, firms in the South will have to adjust very rapidly to the new situation, and they will have to redirect their production towards the European market if they want to benefit from the opportunities offered by the FTA. Moreover, government officials and politicians themselves will face many difficulties in remodeling administrative processes on European standards.
A possible risk here is that in order to profit most from liberalization and bypass the costs of adjustment, partner countries will start to offer special benefits to foreign investors, and to create free economic areas to let firms enjoy special tax benefits, thus offsetting the new constraints posed by antitrust legislation. Such areas already exist and are very active in Malta, Egypt, Jordan, Morocco, Syria and Tunisia. Nonetheless, tax-free companies often increase the development gap rather than reduce it, as they are separate from the rest of the economy and do not trigger any transfer of technology, thus widening the gap with the other sectors and increasing dependance on those imports which cannot be substituted by domestic firms. Moreover, the mixture between free trade and free economic zones might create a vicious circle, where foreign investors open up firms in the South just to benefit from lower wages and produce semifinished items, and to re-export them to Europe for further treatment. In this way, all the value-added is produced in Europe, and at the end of the day they are European firms, rather than Southern workers, to profit from it. In other words, the risk exists that free trade and the imposition of European legal standards create a drive for relocation, instead than for integration and cooperation. Southern governments might then be tempted to reap the short term benefits of dependence rather than work towards the attainment of long term complementarity with the European economy, and this might result in a new form of colonization.
Aid and the new scheme: structural funds or international contributions?
The introduction of European legal principles in the FTA has some connections with the issue of the role of the State in the economy, too. According to the new Agreements, State aid in partner countries will be prohibited whenever it endangers competition in Euro-Mediterranean trade. Albeit good for private initiative, this will leave partner countries without an effective means to fill the gap with the European economy. Moreover, it provides the EU Commission with a powerful instrument to block State subsidies in the South, and EU lobbies migth use it in the same way as they did during the former Mediterranean Policy, when they blocked agricultural imports, and textile imports with the Multi-Fiber Agreement (MFA). This is another asymmetry of the Euro-Med FTA and stems from a non-complete evaluation of the differences among the economies involved. Again, there is a contradiction between the ackowledgement of the fact that Southern countries need structural aid and the fact that governmental subsidies are prohibited. Unfortunately, differences between the EU and partner countries do exist: taking Tunisia as an example, it has been calculated that 58% of the GDP will be affected by liberalization (4), while another estimate indicates that about 2.000 firms will go bankrupt, 2.000 will face very difficult problems and only 2.000 will survive competition (5). Given this situation, it is clear that the phasing out of tariffs should be balanced by other transfers, and that State aid should at least be allowed to decrease progressively, rather than being ruled out instantly. Moreover, in terms of structural aid what really matters is not that partner countries stop aid to domestic firms, but rather that the quality of their intervention improve, linking their policies to a clear-cut commitment to liberalization.
After all the Euro-Mediterranean Association Agreements themselves include a very important provision according to which, until their coming into force, all State aid to domestic firms will be considered in the same way as aid given inside the EU on the basis of art. 92 (3) of the Maastricht Treaty, that is to say as aid to disadvantaged regions. This provision is extremely important, because it actually poses a legal parification between disadvantaged regions in the EU and Southern countries, thus implicitly recognizing that partner countries do need structural aid. Moreover, while State aid in the South is ruled out, the EU offers its own programme of structural adjustments. Therefore, it can be said that the EU is undertaking to substitute itself to partner countries in the financing of their development. Nonetheless, if one looks at how much the EU gives to each partner in average annually, that is to say about 98 MECU (6), the doubt arises that European aid is less than sufficient, and that coordinating European aid with aid of partner countries, in the framework of liberalization, would be a much sounder choice.
Without this type of coordination, partner countries may even delay the signature of Association Agreements to pass special spending programmes which would be otherwise incompatible with the new commitments. For example, Algeria recently announced a new investment plan of $22 billion in the period between 1998 and 2002 to develop its energy industries (7), and although foreign investors have been invited to contribute to a privatization programme worth $2.5 billion, the State will have a leading role in the plan. Such governmental intervention would have been probably prohibited under the new agreement with the EU, not to interfere with reciprocal exchanges. Hence, it is clear that in some cases an interest exists to lag behind with negotiations.
Therefore, some form of coordination in the administration of aid would make more resources available, and would be an effective example of cooperation inside the Partnership. Besides, harmonizing EU aid with partners interventions, would also reproduce the pattern followed by the EU in the allocation of structural funds, where aid to backward regions is coordinated jointly by both the Commission and national authorities.
The bilateral nature of EU aid and the need to reform it
When looking at the type of aid the EU offers to partner countries, the question should be asked whether it is really consistent with the aim of promoting South-South trade, and whether it helps cooperation among partner countries or not.
As it is widely known, 90% of the MEDA budget line is channelled to single countries, while only 10% is directed to regional programmes, of which the MED programmes represent an even smaller part. This is in close contradiction with the idea itself of multilaterality, and does not improve in any way the old Mediterranean Policy, under which partner countries jostled one against the other to take the bigger part of aid. To this extent, multilateral negotiations for aid programming would be the best, but this is impossible in the new framework, where the new bilateral Association Committees, which have replaced the old Cooperation Committees, are in charge of the administration of aid. The problem here is that aid might respond more to political pressures than to real economic needs and, worst of all, it might ignite competition and contrasts among partner countries, rather than encourage cooperation. For example, at the end of April the EU announced to present Egypt with more than $1 billion to prepare for free trade, at a stage when negotiations for the new agreement are still going on (8), thus possibly creating dissatisfaction in those countries, such as Tunisia and Morocco, which signed their agreements much earlier (in the case of Tunisia, the Association Agreement was signed even before the Barcelona Declaration).
Besides, special consideration must be given to aid contributions by EU member countries. The Barcelona Declaration includes a very important sentence, saying that European financial assistance "will be supplemented by EIB assistance [ ] and the bilateral financial contributions from the Member States" (emphasis added). That statement is crucial because it actually encompasses national contributions in the Partnerships framework, thus making the implicit point that some coordination for such contributions is necessary. Nonetheless, no framework has been created up to now for effective cooperation among EU Member States relating to international aid. On the contrary, single European countries still have their own budget for foreign aid, and considerable room exists here to compete with the Union in securing preferential advantages. Such overlap between the Partnership and single national policies could be detrimental for effective cooperation and, worst of all, it might tell partner countries that the Partnership is not really serious, as single States are still paramount.
Moreover, even if the contributions issue was settled, the problem of foreign debt would remain, as it is a mainly national matter. The Barcelona Declaration is rather vague about the debt issue, whereas it just says that "the partners acknowledge the difficulties that the question of the debt can create [ ]", and that "they agree, in view of the importance of their relations, to continue the dialogue in order to achieve progress in the competent fora". Thus, nothing really changes in the way of dealing with the debt issue, and single countries remain the real actors inside "competent fora", namely the Paris Club, which deals with States lendings. Consequently, partner countries are forced to bypass the Union if they want to negotiate their debt, and single Member States still retain a considerable bargaining power in the administration of their credits (9). Unfortunately, this confirms that the Barcelona framework is bilateral rather than multilateral, because every effort for development, even inside the Partnership, ultimately depends on the will of single member States. A very recent example for this is the visit which the Employment Minister of Morocco paid to France in May 1998, when he asked for a new reduction of the debt (10) and called on France to exert pressure on the Paris Club to give Morocco better conditions of payment (11).
Privatizations and public aid: a difficult relationship
Another aspect of the multifaceted aid problem is that in the new framework the need for privatizations in partner countries is taken for granted, although it should be asked whether the passage from the State to the private sector can be as fast as the end of State aid itself. In fact, nowhere in partner countries is the private sector poised to take up a leading role in the economy, and cooperation with the State is still paramount in key areas such as infrastructure. A proof for this is the fact that most of the aid directed to private firms in the MEDA programme itself is for Small and Medium Enterprises (SMEs), which, by definition, are not able to substitute themselves to the State for the financing of big projects. Again, the point here is not that States should control the economy, but that cooperation between the State and the private sector is still necessary, if development is to take off. Therefore, European aid should aim at improving the quality of State intervention, and not just to reduce it, even if this involves the loss of some advantages for European firms. After all infrastructural and regional projects are the hardest to design, realize and finance, and even the European Commission faces many difficulties with this kind of projects in the regional cooperation programs (12). Thus, present cooperation should help the private sector to substitute itself to the governments, beyond reducing State intervention in the economy. Indeed, even liberal Europe is extremely keen on structural funds and institutional aid when the encouragement of the private sector in backward regions is at stake.
The FTAs structure amid bilateralism and multilateralism
As a matter of fact, albeit the Partnership formally encourages South-South economic integration, it does very little to improve inter-governmental cooperation, and this is a dangerous flaw in the structure of the FTA. As many scholars put it, the new system is not really multilateral, rather it is bi-multilateral, whereas it is negotiated between a multilateral entity the EU- and single partner countries. This encourages fragmentation, and considering that trade among partner countries is a mere 5% of their total external trade, the unusual fact is going to happen that there will be a free trade area based on bilateral rather than multilateral exchanges, and where intense North-South exchanges are not matched by relevant South-South trade.
This also involves the so-called "hub-and-spoke" (13) problem, by which partner countries find it easier and more profitable to invest in the EU to access other Southern markets, rather than to invest directly in neighbouring countries. Again, the risk here is that of creating dependence rather than integration and complementarity. The Barcelona Declaration says that "regional cooperation on a voluntary basis, particularly with a view to developing trade between the partners themselves, is a key factor in promoting the creation of a free trade area". Nonetheless, the EU should take a bold stance in fostering South-South integration, and she could play a very active role in promoting agreements on rules of origins, drawing from her enormous experience about cross-border cooperation. Unfortunately, the new Agreements provide for common rules of origin only for the Maghreb countries, repeating what the old Cooperation Agreements of 1978 already said. As for the Mashraq, the possibility of common rules is envisaged only vaguely, and some problems exist in formulating them for Syria and Lebanon, in spite of their close economic ties. Only recently did the EU take a clearer stance about the Mashraq, suggesting that Israel let the Occupied Territories improve cross-border cooperation with Egypt, Jordan and Israel itself, in order to define common rules of origin and provide an export outlet for Palestinian goods (14).
Besides, the structure of the FTA does not encourage multilateral dialogue, while round-table discussions here would be the best option. In other words, the Euro-Mediterranean FTA is not a GATT-like forum, where liberalization is carried out through multilateral bargaining; rather, it requires an actor to take up the initiative and spur negotiation. The EU should cleary undertake this role, even if encouraging South-South cooperation might eventually reduce her power as the main trading partner.
Luckily enough, in spite of European lazyness at improving trade along the Southern shore, cooperation is stepping up among partner countries. Tunisia and Egypt opened talks for a free trade zone in September 1997 (15), while in November Morocco and Tunisia started a joint study to create a free trade zone by 2005 at the latest (16). On the 22nd of last April, Jordan and Tunisia signed a tax-free zone agreement to expand reciprocal trade and enhance cooperation in the same fields as those touched by their Agreements with the EU, while a similar agreement was reached by Jordan and Morocco last June (17). On their part, Lebanon and Egypt reached an agreement last May to progressively reduce custom duties between them in a period of five years, and to exchange agricultural surpluses (18).
Furthermore, many calls are being made in the Arab world by both businessmen and politicians to liberate inter-arab trade, and also to include Israel in Mediterranean exchanges, in spite of political problems. For example, some Egyptian businessmen have been trying to improve commercial ties with Israel since 1991 (19), while at the last session of the Arab Centre for Studies on Dry Areas and Arid Lands (ACSAD), hosted last May in Damascus, the Egyptian representative indicated the need to set up free-trade zones, to build common economic action (20). Even Libya, which is not a party to the Partnership, is being involved in the the drive for integration, to the point that the value of her exchanges with Tunisia has reached a level of about $500 million annually (21).
Nonetheless, the problem remains that such initiatives are unstable in nature, because they are bilateral and necessarily slow and difficult to set up, as the experiment of the Arab Maghreb Union has shown (22). Moreover, time is passing by, and the various treaties are being signed, ratified and enforced starting from different dates. Considering that the adjustment period provided for by the treaties is always 12 years long, the fact is clear that hardly will the FTA be completed in 2010, as envisaged by the Barcelona Declaration, as for examples negotiations with Syria started only last May, while Morocco already signed its Association Agreement at the end of 1995. Thus, even differences in the time of negotiations make it difficult to enact a regional process, and this shows that a multilateral negotiation from the outset would have maybe been better.
From this overall view of the structure of the Euro-Mediterranean FTA and its many problems, the conclusion can be drawn that both partner countries and the EU need to meet additional requirements to let free trade work smoothly and in their mutual interest. Therefore, the time has come to look at what steps partner countries should take to live up to the new scenario and take the most out of it. After that, the European approach and future perspectives for partner countries will be examined.
The revenue loss problem and the need for tax reforms
Following to free trade with Europe, partner countries will need to overhaul their fiscal systems, as free trade will hugely reduce their revenue, now mostly based on import duties. Several studies point out that, as far as State revenues are concerned, the first years of liberalization will be the most difficult to face (23). These difficulties are relatively easy to calculate, while assessing growth of GDP induced by improved trade with the EU is a much more difficult task. Therefore, as long as an improvement of the economic performance is waited for in the long run, attention must be focused on immediate losses. To this extent, it is crucial that partner countries continue in the process of tax reform they started in the 80s, switching from duties on imported goods to taxes based on widespread consumption, such as the Value Added Tax (VAT). Nonetheless, Syria and Lebanon still do not have the VAT, and this will have especially harsh consequences on Lebanon, which has to improve the efficiency of its tax system by a rough 60%, if it is to maintain the same revenue to GDP ratio during the transition period (24).
Moreover, trade diversion problems must be taken into account, too. If partner countries start importing more from the EU rather than from non-EU countries, to take advantage of the abolition of tariffs, taxable imports will decrease and State revenue will decline even more. Therefore, this is another point for the improvement of the VAT, which has a very large tax base (25).
Another important aspect to consider is that, differently from Europe, a considerable part of revenue of Southern budgets is made of non-tax revenue, that is to say profits from statal or parastatal firms, usually in the energy sector, or rents from the exploitation of natural resources. The FTA will certainly create a drive to privatize public enterprises albeit not the strategic ones, such as oil companies-, and this will be another cause of reduction of revenue. The need to restructure will then become even stronger where the State still plays a dominant role in the economy, namely in Algeria, Jordan and Syria, where revenues from public enterprises range between 50% and 60% of total revenue (26).
However, there are good grounds to think that tax reforms will have very positive consequences in the future, because they will induce a simpler functioning of the tax system, as well as more efficiency in the State sector of the economy. Further, the decline of State revenue will force partner countries to focus more on physical as well as human capital, and to protect the macroeconomic equilibrium, lest consumption of imported goods disturb the balance of payments and trigger inflation.
The investments problem and the need for domestic savings
Partner countries should also endeavour to follow sound monetary policies, as if they want to benefit from the FTA, they have to make every effort to finance investments through domestic savings more than through foreign capital. To this end, budget deficits should be reduced to spur private investments and consumption and to create the conditions to attract Foreign Direct Investments (FDIs) at a later stage.
The need to increase domestic savings and efficiency of investments before looking for foreign capitals is a new concept, exposed in a recent study by the IMF (27). The study noted that Total Factors Productivity (TFP) in Arab countries has remained at a very low level between 1971 and 1996, even during the oil boom of 1973 and 1979, when investments were heavily financed with external contributions. The experience of those years shows that efficiency of local investments and the improvement of domestic savings are more important than the quantity of investments in starting the cycle of growth, and that structural reforms in the national budget and in the banking system are necessary. Then, once the TFP and domestic saving take off, internal investments could be increased through FDIs, without risking to depend on the latter for future growth. In other words, partner countries should not repeat the error to rely mainly on FDIs to finance their growth, as they could find themselves alone as soon as economic conditions of foreign investors deteriorated. Rather, they should focus on investments productivity.
Moreover, the Asian crisis teaches that too much confidence in external capital flows undermines stability in case of shocks in production or demand, so that partner countries should definitely build a solid internal saving system for their own sake, also to create a safety net in case European investments declined for possible shocks.
The good governance issue
If global efficiency and investements have to rise, the judicial and administrative systems need improving, too, to increase confiance of both citizens and foreigners in the State system and to curb reliance on the informal sector. In fact, good governance is paramount to enlarge the tax base and to attract foreign investments, as well as to encourage self-confidence and entrepreneurial spirit in the private sector. To this extent, those countries must be praised which are undertaking efforts to restructure their legal systems. An example is Morocco, which recently created new trade courts in six cities, in the perspective of free trade with the EU (28).
However, as far as good governance and administrative efficiency is concerned, a special mention must be done for the MEDA Programme. Although total funds available under the plan might be considered insufficient to sustain effective adjustments, recourse to them has proven to be very difficult for partner countries. Indeed, the partners have shown a very bad performance in the allocation of funds, and although also the Commission is to blame for its delay in disbursements, partner countries undoubtedly need to improve procedures to make use of the programme, not to leave its resources unused.
The European approach to the FTA: three strategies for growth
As for the European Union, the fact is clear that the future of the Partnership actually lies in her approach to liberalization. As a matter of fact, the European attitude towards the FTA will give partner countries an important signal as to what Europe expects from free trade. If real and productive integration is sought on the part of the EU, partner countries will be encouraged to specialize in high tech ventures and in financial services, trying to effectively take part to the European cycle of production. Otherwise, the will slowly fit into a secondary position, based on unilateral dependence, restricted diversification of production and persisting separation from neighbouring countries.
In a very interesting study by an economist of the World Bank, Ishac Diwan, three main models are sketched for partner countries in relation to the the FTA: the Indonesia model, the Hong Kong model and the Singapore model (the study was written before the Asian crisis, nevertheless this does not impair the analysis) (29).
According to the Indonesia model, partner countries would concentrate on low wage and environment-intensive export activities in sectors such as cement or garments, needing unskilled labour and very limited investments.
In the Hong Kong model, attention would be given to semifinished products, using low wages to encourage exports to Europe. In this case, some capital endowement would be necessary and the banking system should integrate further with its European counterpart.
Thirdly comes the Singapore model, capital-intensive and based on large investments. In this model, partner countries would develop highly sophisticated products, and would considerably improve their capital markets, too. Possibly, the Hong Kong model might be a starting point to attain this stage later.
Interestingly enough, all of the three models require a free trade area to come into existance. This underlines that free trade is not positive in itself, as its outcomes can be varied, and also shows that its success greatly depends on aspects which are not directly connected with legal frameworks. For example, the Hong Kong and Singapore models require a very well phisycally interconnected environment, where products can be exchanged easily and swiftly to fit modern standards of production, while the Indonesia model does not require such a quality of connections. More generally, it must also be understood that each model is based on clear social underpinnings. For example, the Singapore model can thrive only if societies are open to telecommunication, advertising and information technologies, thus increasing the possibilities of exchanges and the quality of information sharing. Moreover, that model also requires deep integration with neighbouring countries and their respective industries, as well as clear political decisions to this end.
However, in spite of all these conditions it can be said that the model that partner countries will choose considerably depends on Europe. Diwans study correctly mentions that if free trade in the Mediterranean is not linked to special incentives to move towards more advanced types of economic activity, the Indonesia model will be the more likely outcome. Nevertheless, this would be the worst end for the FTA, for a number of reasons. First of all, pollution in the Mediterranean would achieve unbearable levels, as already now environmental degradation in the Basin is high, due to intensive urbanization especially on the Southern shore. Secondly, dependence on European demand would increase, and the partners would be exposed to the competition of China and India, which are much better suited to specialize in labour-intensive activities. Thirdly, the Asia crisis recently showed that the Indonesia model brings about unbearable social costs. Therefore, if Europe wants to make of the Mediterranean "an area of peace and stability", it is clear that a strategy of deeper integration of partner countries into the European economy is needed, and that the Hong Kong model could be a good starting point for that, provided that exchanges be based on industrial integration, rather than on the relocation of European firms to the South.
Still, one has to wonder which signals is Europe sending to the Southern shore, and what type of integration is envisaged at present. All in all, Europe is showing mixed feelings about the FTA. On the one hand, she presses for liberalization, but on the other she does not fully recognize that her support is necessary to make free trade sustainable in the longer term, through both increased structural aid and concessions for agricultural products.
A further element of uncertainty in the whole framework is the imminent introduction of the euro and the way Europe will manage it. If the EU limits itself to spread the euro in the area just as a new means of payment and with the aim of establishing new standards in international transactions, positive effects on partner countries will be very limited. Moreover, if partner countries decide to peg their currencies to the euro, the EU could face considerable problems in case of shocks of its demand for imports, as the partners might respond with competitive devaluations, thus treathening the stability of the Euro-Mediterranean agreements, or with increased migrations, thus menacing social stability in Europe.
Therefore, if Europe wants to use the euro as part of a development strategy for the Mediterranean, she will have to make responsible and assertive choices, showing to deserve the role of leadership the euro will give her and waging into the process of exporting stability. In economic terms this means that Europe should match the introduction of the euro with increased aid and macroeconomic cooperation with partner countries, also including balance of payments issues in the dialogue, to give the Partnership enough credibility to foster development and stability.
In the meanwhile liberalization is already under way, and partner countries are updating their legislative and financial systems to comply with the new agreements. In one word, they are giving up State aid to national firms and barriers to trade in order to benefit from the promised fruits of liberalization. Therefore, this is the right time for Europe to keep up to its promises.
Partner countries and the FTA:
a stepping stone for liberalization
The last important point must be considered that entering the arena of international trade is a growing necessity for each partner country, independently of free trade with Europe. Indeed, it is now clear the in the last twenty years the delay of the Mediterranean in liberalization has resulted in a reduction of the per capita GDP, and the need for a bold change is becoming stronger day by day (30). In this process, some uncertainty exists as to the role the Partnership can play.
Considering that trade with the EU counts for about 50% of total external trade for partner countries and that European trade with the Mediterranean is about only 10% of the total, it is clear that they would be partner countries to suffer most from worsening trading terms, and the FTA might produce social destabilization rather than encourage economic growth. Paradoxically enough, inequality in North-South exchanges shows that if partner countries want to fully benefit from the FTA, not only should they diversify and integrate their economies, but they should also diversify their trading partners outside the EU, lest the Mediterranean become a closed sea separated from the rest of the world. In other words, the FTA is a positive encouragement to start liberalizing both trade and economies in partner countries, but further liberalization towards non-EU countries is necessary to reduce the risks of dependance on the European demand.
Thus, partner countries undoubtedly have an interest in allowing liberalization to improve their economic system and although the FTA with Europe will be extremely important to this end, they might see it more as a starting point for growth and further liberalization, rather than as a dead end scenario. In any case, the IMF and the World Bank are making considerable efforts to link adjustment programmes in partner countries to liberalization, and there is an increasing awareness that lowering trade barriers also towards non-EU countries is paramount for growth (31). Partner countries will therefore have to diversify their economies even more, and in order to do this they will have to pursue liberalization aggressively, to acquire creditwhortness and attract FDIs to support their development plans. Moreover, they will also have an interest do deepen reciprocal integration, to increase trading advantages for investors and to improve cooperation in transport and other high value added sectors.
Still, the introduction of the euro will be a considerable drive to strengthen links with Europe. The euro will have a powerful impact on the area, because it will partly become a means of payment for South-South exchanges, while borrowing from the EU will be easier and more convenient- than before, as the introduction of the single currency will improve the liquidity of euro-denominated bonds and the efficiency of European capital markets, thus creating an incentive to shift from dollar-dominated capital markets to euro-dominated ones. Furthermore, if partner countries decided to link their exchange rates to the euro, they would automatically tie their monetary policy to the European Central Bank (ECB) and that might improve the flows of FDIs (32).
Thus, from a general standpoint diversification of trade relations with non-EU countries would be good, but from a regional point of view the introduction of the euro will renew and reassert the ties with Europe. One question summarizes the whole problem: should partner countries endeavour to diversify their links opening more to the rest of the world, or should they definitely focus on free-trade with Europe, trying to reap the best from the advancement of European integration? The question is a difficult one, as the answer is a strategic and long term decision. Surely, the euro will have a good discipline effect and will encourage the partners to improve their industrial policy, because dealing with Europe as a whole will make it easier to shift attention from one sector to another and to adjust to European standards. While reducing the gap with the EU, this will also result in a partial encouragement of exchanges also with the rest of the world.
Nonetheless, dependance on Europe will increase and as long as the Partnership does not develop into a fully operational and credible policy for cooperation, there will be considerable room for dissatisfaction and for the will to diversify economic relations. Therefore, if the EU shows that the Partnership is an essential element of its policy for the new millennium, increasing its budget and the level of macroeconomic dialogue, the partners will be encouraged to go on with reforms and to deepen the ties with Europe, but if the EU does not take a clear step in that direction, the partners will have no other choice than considerably diversify their patterns of trade.
The EU has always had some problems when dealing with the Mediterranean, and this area is somehow perceived as a problem still now, because it poses difficult questions to European policy makers: should we scratch the CAP? Are we giving enough aid? Is cooperation effective? Can we launch a credible development plan for such a big area? With no doubt, the Mediterranean will continue to pose such difficult questions to Europe in the future, as it did in the past. For many years, the Mediterranean Policy has been unable, and maybe unwilling, to give effective answers.
After Barcelona, the time for excuses and delays is over. It is up to Europe to decide whether she simply wants to limit instability or to promote real integration, through increased financial aid and technical cooperation. The Partnership is a dramatic opportunity to enlarge European export markets, and Europe should use it also to increase her efficiency in production through synergy and integration.
Moreover, while Europe has an implicit interest in securing stability in the Mediterranean, the interest of partner countries to tie their destiny to Europe should not be taken for granted. Indeed, partner countries need to liberalize their economies to integrate into global trade independently from the EU, and whether this effort will be beneficial for her, depends on Europe itself.
The next decade will be crucial for the Mediterranean, as the population of the Southern shore will enter a "transition period" during which people in working age will outnumber the rest of the population by two to one. This ten years period, which will start about the year 2000 for every partner country, will be a unique opportunity for growth, provided that all that workforce be employed effectively (33).
The Euro-Med FTA comes at the right time then, and the EU should allow it to improve steadily with further aid and concessions, as well as streghtening joint-ventures and private cooperation rather than expanding trade as such. Otherwise, a historic opportunity will be lost.
(0) I would like to thank Prof. Alejandro Lorca y Corrons, of the Universidad Autonoma de Madrid, for the very helpful notes and criticism he gave me about the first draft of this paper, which was presented at the Summer School.
(1) "[The EU and the Partners] agree to cooperate in modernizing and restructuring agriculture and in promoting integrated rural development. This cooperation will focus in particular on technical assistance and training, on support for policies implemented by the partners to diversify production, on the reduction of food dependency and on the promotion of environment-friendly agriculture".
(2) In my interview with Mr Khalid Alioua, the present Employment Minister of Morocco and Spokesman of the Government, he plainly told me that Morocco "had no choices. The Europeans said: take it or leave it...". See Minasi Nicola I rapporti tra lUnione Europea ed il Maghreb dalla Politica Mediterranea al Partenariato, tesi di laurea dellA.A. 1996-7, Luiss-Guido Carli, Rome, page 471.
(3) After all, the link among the CAP, the WTO and the FTA is rather clear. In its Agenda 2000 document the Commission states that new efforts to reform the CAP will be made only after the year 2000, which is the same year set by the WTO to start new rounds of tariffs reduction for agricultural products. Therefore, the EU has simply decided to postpone negotiations with partner countries after that year and this is why the single Euro-Mediterranean agreements say that new talks for agricultural liberalization will start only from the 1st of January 2000.
(4) See UTICA (Union Tunisienne de lIndustrie, du Commerce et de lArtisanat), Accord de libre échange Tunisie-Union Européenne. Impact sur lentreprise tunisienne, Tunis, November 1995, page 46.
(5) See Joffé, George, "Integration or Peripheral Dependence: The Dilemma Facing The South Mediterranean States", paper presented at the conference Cooperation and Security: Prospects after Barcelona, organized by the Mediterranean Academy of Diplomatic Studies, Malta, 22-23 March 1996, page 16.
(6) This calculation has been made dividing the funds allocated by the Cannes European Council of June 1995, that is to say 4.685 MECU, by the 12 partner countries which signed the Barcelona Declaration, and dividing again by the 4 years of the first MEDA Programme.
(7) See www.ArabicNews.com "Algeria intends to invest 22 billion dollars", 12 June 1998.
(8) See www.ArabicNews.com, "$1 billion from European Union to Egypt to prepare for free trade", 30 April 1998.
(9) See Susan, George, Rapporto per il CNEL sul debito estero dei Paesi del Bacino del Mediterraneo, September 1996, Rome, and the comment on this report by Karim Nashashibi, Senior Advisor, Middle Eastern Department, IMF. CNEL stands for Consiglio Nazionale per lEconomia ed il Lavoro (National Council for the Economy and Work). Requests for copies of the report and its comment can be addressed to CNEL, Viale Lubin 2, 00196 Rome, Italy.
(10) A first reduction was agreed on in 1997, when France and Spain both decided to cancel part of the Moroccan debt.
(11) See, Le Monde, "Le gouvernement marocaine souhaite une aide financière de Paris", 12 may 1998.
(12) See Commission Européenne, "Note dinformation mensuelle sur le Partenariat Euro-Méditerranéen Statistiques MEDA", n°28, June 1998. All the monthly information notes issued by the European Commission about ongoing events related to the Barcelona Process are available on-line at: www2.diplomacy.edu/Infobase2, which is the website of the Mediterranean Academy of Diplomatic Studies, Malta.
(13) In some cases, it is also called the "hub-and-wheel" problem.
(14) This possibility was envisaged last May by the deputy-president of the Commission Manuel Marín, in the wake of the decision to stop imports of Israeli goods produced in the Occupied Territories carrying counterfeited certificates of origin. The EU has never recognized the Israeli acquisition of the Occupied Territories after the 1967 war, and they are therefore excluded by the bilateral Association Agreement, which applies to pre-1967 borders only. See El Pais, "La UE elimina el trato preferencial a los productos de los asientamientos judíos", 14 May 1998.
(15) See www.ArabicNews.com, "Tunisia, Egypt and talks of trade zone", 8 September 1997.
(16) See www.ArabicNews.com, "Moroccan-Tunisian Free Trade Zone by 2005", 11 November 1997.
(17) See www.ArabicNews.com, "Jordan-Tunisia tax-free zone signed", 23 April 1998, www.ArabicNews.com, "High joint committee established between Jordan and Morocco", 16 June 1998, and www.ArabicNews.com, "Jordanian and Morocco sign cooperation agreement", 17 June 1998.
(18) See www.ArabicNews.com, "Lebanon-Egypt to remove custom duties between them", 22 May 1998.
(19) See Financial Times, "Egypt business leaders to boost Israeli links", 6 May 1998. However, the fact must be considered that economic cooperation with Israel is growing more and more difficult, and that other initiatives by the World Bank have been stopped due to problems with the Peace Process. See www.ArabicNews.com, "World Bank calls for conference without Israel", 31 October 1997, and "No Middle East-North Africa economic summit in 1998", 28 April 1998.
(20) See www.ArabicNews.com, "Damascus hosts ACSAD meeting", 13 May 1998.
(21) See www.ArabicNews.com, "Tunisian, Libyan businessmen agree on joint industrial projects", 3 June 1998.
(22) The Arab Maghreb Union is a regional organization made up by Algeria, Libya, Mauritania, Morocco and Tunisia. It was created in 1989 with the aim of building a unified market, among other objectives. Unfortunately the organization, albeit still in place, stopped its works very soon, due to contrasts between Algeria and Morocco about the Western Sahara issue.
(23) See Abed George, T. Trade Liberalization and Tax Reform in the Southern Mediterranean Region, IMF Working Paper, Washington D.C., April 1998 and Eken Sena, Hebling Thomas and Mazarei Adnan, Fiscal Policy and Growth in the Middle East and North Africa Region, IMF Working Paper, Washington D.C., August 1997. The earliest study to investigate about the consequences on the Euro-Mediterranean FTA on at least one partner has been the one by Rutherford Thomas, Rutström E.E. and Tarr David, Moroccos Free Trade Agreement with the European Community. A Quantitative Assessment, The World Bank, Working Paper of the Policy Research Department, Washington, D.C., September 1993.
(24) Abed George, Trade Liberalization , page 9.
(25) The consequences of free trade on State revenues presented in the above text are the easiest to identify, but many others exist. In particular, one indirect consequence is that competition might increase the demand of EU goods, made cheaper by liberalization, to the expense of domestic goods. In this case, if there is no VAT, the total tax revenue will decrease.
(26) The average ratio in the partner countries is 38.7%. See, Abed George, Trade Liberalization , page 23.
(27) See Bisat Amer, El-Arian Mohamed and Helbling Thomas, Growth, Investment and Saving in the Arab Economies, IMF Working Paper, Washington D.C., July 1997.
(28) See, www.ArabicNews.com, "Morocco: trade courts to consolidate rule of law", 8 june 1998.
(29) See, Diwan Ishac, How Can Lebanon Benefit from the Euro-Med Initiative?, Economic Development Institute, The World Bank, Washington, D.C., January 1997, first draft. Although the study is about Lebanon, the models refferred to in the above text are compatible with all partner countries.
(30) For a very good analysis of the new scenario facing partner countries, see Alonso-Gamo Patricia, Fennell Susan and Sakr Khaled, Adjusting to New Realities: MENA, The Uruguay Round, and the EU-Mediterranean Initiative, IMF Working Paper, Washington D.C., January 1997.
(31) An interesting example of talks for open trade between the Maghreb and the US, can be found in www.ArabicNews.com, "US official in Morocco for economic talks, discussion on MENA conference", 17 June 1998. The article is about the visit to Morocco of US State Departments senior official for global economic issues, Stuart Eizenstat, who also spoke about the US initiative "to launch a US-Maghreban Partnership".
(32) A general analysis of the consequences of the euro on partner countries can be found in Chauffour Jean-Pierre and Stemitsiotis Loukas, The Impact of the Euro on Mediterranean Partner Countries, Euro Paper n°24, European Commission, June 1998. Copies may be obtained by applying to: European Commission, Directorate General for Economic and Financial Affairs 200, rue de la Loi (BU1, 3/145) 1049 Brussels, Belgium.
(33) A comprehensive report about the transition period can be found in Courbage Youssef, "Nuovi scenari demografici mediterranei", Giovanni Agnelli Foundation, Turin, 1998 (Fondazione Giovanni Agnelli, via Giacosa 38, 10125 Torino). See also Il Corriere della Sera, "Mediterraneo, fine del boom demografico", 6 March 1998, and Il Sole 24 Ore, "Le vie del Mediterraneo allo sviluppo", 6 March 1998. Both the articles are about the presentation of the report at a conference held by the Agnelli Foundation on the 6th of March, 1998, in Turin.
ã Copyright 1998. Jean Monnet Chair of European Comparative Politics.
Nicola MINASI, University of Rome