The Euro-Mediterranean Partnership Ten Years On: Reassessing Readiness and Prospects, Statement by Saleh M. Nsouli, Director of IMF Offices in Europe, IMF

IMF News, June 23, 2006

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The Euro-Mediterranean Partnership Ten Years On: Reassessing Readiness and Prospects, Statement by Saleh M. Nsouli, Director of IMF Offices in Europe, IMF

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• Published: June 23, 2006

Objectives of the Euro‑Mediterranean Partnership (EMP)

• Launched in November 1995 (Barcelona Process) with broad goals beyond economics: political stability, strengthening cultural ties, and protecting the environment.
• Main economic objective: "the construction of a zone of shared prosperity."
• Barcelona Declaration intermediate economic/financial partnership elements:
  • the progressive establishment of a free‑trade area (covering "most trade") by 2010;
  • implementation of economic cooperation and concerted action in areas including fishing, energy, water, and agriculture;
  • a substantial increase in EU financial assistance: ECU 4.7 billion planned for 1995-1999 from Community budget funds, supplemented by EIB loans.
• Key instrument for development and integration: trade liberalization, supported by increased aid.

Preconditions for success (identified in 1996)

• Six preconditions required to maximize benefits from freer trade and to minimize adjustment costs:
  • Macroeconomic stability: low and stable inflation, sustainable public finances, and a viable balance of payments position.
  • Low reliance on trade taxes to reduce budgetary pressure from trade liberalization.
  • Low level of external debt to reduce perceived risk of balance of payments or debt crises.
  • High initial openness to trade to limit required structural adjustment.
  • A liberal regulatory framework to permit efficient resource reallocation.
  • A comprehensive social safety net to minimize transition costs and protect vulnerable groups.
• Conclusion in 1996: "considerable adjustment and reform efforts are needed in all [Euro‑Mediterranean partner] countries, although to varying degrees."

Where we are 10 years later — achievements

• Trade liberalization:
  • All but one Euro‑Mediterranean country signed association agreements with the EU providing for gradual elimination of industrial tariffs and removal of non‑tariff barriers.
  • Regional trade agreements: 2004 Agadir Agreement between Morocco, Tunisia, Jordan, and Egypt.
  • Progress in harmonizing customs procedures and rules for determination of origin.
• Financial support:
  • Significant increase in financial assistance from the EU compared with the initial Barcelona Declaration target; MEDA and MEDA II programs and increased EIB lending, including the 2002 FEMIP.
• Political integration:
  • Cyprus and Malta acceded to the EU; Turkey became an EU candidate.
• Macroeconomic improvements:
  • Improvements observed in inflation, fiscal balances, current account balances, real per capita GDP growth, and real effective exchange rate variability.
• Social indicators:
  • Life expectancy, infant mortality, and literacy improved in most countries.

Where we are 10 years later — shortcomings and key data points

• Failure to converge to EU living standards:
  • On average, GDP per capita adjusted for purchasing power parity has declined relative to the EU since 1995.
• Employment and labor markets:
  • Employment growth has not kept pace with labor force increases; unemployment, particularly youth unemployment, remains a serious problem.
• Limited Euro‑Mediterranean trade integration:
  • Slow signing and implementation of association agreements; long transition phases (typically 12 years); partial coverage of trade liberalization; scarcity of South‑South trade agreements.
  • With exceptions (Israel and Turkey), reduction in the EU's average applied tariffs has been similar for EMP countries and other countries since 1995.
  • Trade with the EU grew at about the same pace as trade with the rest of the world.
• Weak South‑South integration:
  • Little regional integration among Mediterranean partners; the hub‑and‑spoke character persists.
  • Agadir Agreement is a positive model but had yet to be ratified (as of the statement).
• Foreign direct investment:
  • Increase in inward FDI slower than hoped; inflows from the EU fluctuated and declined as a share of total EU outward FDI.
• Structural reforms:
  • Little progress on "behind the border" reforms; countries remain relatively inflexible and overregulated and need educational and labor market reforms.

• Table 3: Euro‑Mediterranean Association Agreements (as presented)
  • Algeria — Signed: April 22, 2002 — In force as from: In process of ratification
  • Egypt — Signed: June 25, 2001 — In force as from: June 1, 2004
  • Israel — Signed: November 20, 1995 — In force as from: June 1, 2000
  • Jordan — Signed: November 24, 1997 — In force as from: May 1, 2002
  • Lebanon — Signed: June 17, 2002
  • Morocco — Signed: February 26, 1996 — In force as from: March 1, 2000
  • Palestinian Authority — Signed: February 24, 1997 — In force as from: July 1, 1997
  • Syria — Initialed October 19, 2004 (signature awaiting a decision of the European Council)
  • Tunisia — Signed: July 17, 1995 — In force as from: March 1, 1998
  • Turkey — Signed: June 3, 1995 — In force as from: December 31, 1995 (customs union; original agreement dates back to 1964)

Why more progress was not made

• Four key explanatory factors:

1. Readiness gap: Some countries were not prepared to exploit rapid free trade due to unstable macroeconomic conditions, high external debt, heavy reliance on trade taxes, low initial openness, excessive regulation, and weak social safety nets. 2. Limited depth of integration under the EMP: no timetable for liberalizing agriculture or fisheries; services trade not initially included; no provisions for deeper integration such as free movement of labor. 3. Lack of incentives for structural reform: EMP offered the same ultimate goal to all countries without mechanisms to reward faster or deeper reform. 4. Adverse exogenous conditions: conflicts in some partner countries undermined macroeconomic stability and reform efforts.

How the European Neighbourhood Policy (NP) addresses identified problems

• Launched operationally in 2004 to complement the Barcelona Process.
• National action plans provide a bilateral mechanism to leverage accelerated structural reforms and offer rewards via closer integration into the EU single market.
• Adoption of common technical norms and standards, intellectual property rules, competition and consumer protection regulation can permit participation in parts of the EU internal market.
• "Positive conditionality": more integration offered in return for more market reform — addresses lack of reward mechanisms under the Barcelona Process.
• Potential of "deep free trade" (including services and regulatory alignment) to yield greater gains than tariff removal alone.
• Remaining limitation: unclear how to ensure satisfactory pace of South‑South integration; risk that hub‑and‑spoke pattern will persist if political/administrative energy shifts from EMP to NP.
• EU measures to encourage South‑South integration:
  • October 2005 European Council decision extended the system of cumulation of origin to Mediterranean countries, allowing processed goods in one or more countries to benefit from the same preferential access to the EU market as goods exported from the country of origin, provided the countries have a free trade agreement.

Outlook for the EMP and policy implications

• Readiness indicators are generally more favorable now than a decade earlier, raising potential net gains from freer trade and incentives to complete the free trade area envisioned in 1995.
• NP provides an additional mechanism (national action plans) to motivate domestic structural reforms; accelerated reforms would improve the ability to benefit from EU trade liberalization and deeper integration.
• Challenges and constraints:
  • Administrative and political challenges of conforming with parts of the EU's acquis communautaire are considerable, raising questions about the pace of progress.
  • If payoffs from reform appear distant and uncertain, incentives to implement difficult reforms now may be weakened.
  • Accession acted as a uniquely powerful leverage for reform in Eastern and Southern Europe; accession is not on offer under either the Barcelona Process or the NP, casting doubt on whether similar rapid transformations can be replicated in the Mediterranean region.
• Developments potentially increasing prospects:
  • November 2005 Council authorization to negotiate liberalization of services and investment with Mediterranean partners; negotiations launched with seven Mediterranean partners at the March trade ministers meeting in Marrakech.
  • Economic models suggest potential gains from services liberalization would be even greater than merchandise tariff removal.
  • 5 year work program (November 2005) calls for progressive liberalization in agriculture and fisheries — areas where goods trade remains most restrictive.
  • Agadir Agreement and other bilateral South‑South agreements provide hope for momentum, reinforced by the cumulation of origin decision and reaffirmation at the March 2006 Marrakech meeting.
• IMF role:
  • IMF supports macroeconomic stability, structural reform, trade liberalization, surveillance, technical assistance, and, where needed, balance of payments assistance through Fund‑supported programs.
  • Example initiatives: conference on trade facilitation in the Maghreb (Algiers, November 21, 2005) to promote intra‑regional economic integration; IMF contributions to implementing the European Neighbourhood Policy where requested.

Statement by Saleh M. Nsouli, Director, IMF Offices in Europe, International Monetary Fund — At Crans‑Montana Forum, Monaco — June 23, 2006.

References

• PRESS CENTER
• http://www.imf.org/external/np/speeches/2005/112105.htm
• http://www.imf.org/external/np/vc/2005/061505.htm
• https://www.imf.org/en/home