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The Euro-Mediterranean Partnership 10 Years On: Reassessing Readiness and Prospects
Abstracts from comments by Saleh M. Nsouli, Director of IMF Offices in Europe, International Monetary Fund (IMF)
Analysis by Réhab El-Bakry
When the Euro-Medi-terranean Partnership (EMP) was first introduced a decade ago this year, the IMF, a strong supporter of any initiative that will further facilitate international cooperation in trade as well as break down trade barriers, supported the creation of a partnership that binds the countries of the European Union and the countries of the Mediterranean. Launched in Barcelona in November 1995, the EMP was built on the EU cooperation and assistance to their Mediterranean neighbors with the aim of building a zone of shared prosperity. Saleh Nsouli’s comments on June 23, 2006, outline the achievements and challenges the EMP has faced over the past 10 years. They also addresses how the 2004 European Neighborhood Policy would further the partnership.
“[It] set out a number of elements as being involved in the creation of such a zone of shared prosperity: the acceleration of the pace of sustainable socioeconomic development; improvement of the living conditions of their populations, the increase in the employment level and the reduction in the development gap [in the] region; and the encouragement of regional cooperation and integration.”
To achieve this, the EMP set out several goals and objectives including the establishment of a regional free trade area linking the EU and its nine partner countries by 2010, expansion of economic cooperation and the increase of financial assistance to its partners. However, there were certain preconditions.
“We identified six preconditions associated with maximizing a country’s ability to reap the benefits arising from freer trade and/or minimizing the associated adjustment costs. First, macroeconomic stability... low and stable inflation, sustainable public finances, and a viable balance of payments positions... Second, a low reliance on trade taxes meant less pressure on the budget arising from trade liberalization, and less effort required to adjust the structure of revenues toward domestic taxes. Third, a low level of external debt... Fourth, a high initial level of openness to trade... Fifth, a liberal regulatory framework... Finally, a comprehensive social safety net [to] minimize transition costs and protect vulnerable groups.”
However, 10 years into the implementation of the EMP, the results have been mixed. On the positive side, progress was made on the trade liberalization front as more countries began to see that protectionism goes against the grain of today’s world economics. This is clearly indicated in the fact that all but one EMP member country signed association agreements with the EU to gradually eliminate industrial tariffs and trade barriers. At the same time, there was an increase in the financial support, mostly by the EU, to help support and upgrade industrial development of the region’s partners, while the social indicators for all EMP members have improved, including life expectancy, infant mortality and literacy. However, there have also been some unfulfilled goals.
“Overall, living standards in Euro-Mediterranean countries have failed to converge towards EU levels. Most of the partner countries’ GDP per capita adjusted for purchasing power parity has actually declined relative to the EU since 1995. Employment growth in the region has failed to keep pace with increases in the labor force. Euro-Mediterranean trade integration has been limited. It has taken a long time for some of the EMP countries to sign association agreements and set in motion the process of trade liberalization. The increase in inward foreign direct investment (FDI) has been slower than hoped.”
Progress has been slower than expected because of the inclusion of long transition periods to facilitate the liberalization policies that need to be introduced mostly because not all countries in the EMP were ready to implement the needed changes. Many still had unstable macroeconomic conditions, high external debt and relied on trade taxes for their budgets. Others had not even scratched the surface of introducing liberalization policies and faced serious domestic resistance to these policies. At the same time, the initial framework under which the EMP was created did not have a framework for partner countries to follow for the implementation of these policies. It even failed to set a timetable for compliance with the policies.
“There was no explicit mechanism... to motivate structural reform in partner countries. The EMP’s main economic goal, the establishment of a free trade area by 2010, was the same for all countries. There was no strong incentive in the partnership, even for countries that would have been able to move quickly or to achieve a greater degree of economic integration, to do so.”
However, it is hoped the implementation of the European Neighborhood Policy, which was first introduced in 2004, will remedy some of the hindrances that have slowed down the EMP. The policy is intended to complement rather than replace the EMP, creating bilateral leveraging processes for structural reforms as well as rewards, in the form of more integration with the EU, for partners that implement the needed changes most efficiently including the adoption of international norms and standards such as the application of intellectual property rights protection, free competition and consumer protection.
“[T]he relatively recent European Neighborhood Policy provides a new mechanism to leverage domestic structural reforms in Euro-Mediterranean countries. An acceleration of such reforms would put these countries in a better position to benefit from the trade liberalization and deeper economic integration that is now on offer from the EU. In November 2005 the [European] Council authorized negotiations with the EU’s Mediterranean partners on the liberalization of services and investment... Economic models suggest that the potential gains from services liberalization would be even greater than the removal of tariffs on merchandise imports. The integration goals (both via the Barcelona Process and the Neighborhood Policy) are now more ambitious, increasing the potential gains for partner countries, and there is an additional instrument, namely the national action plans under the Neighborhood Policy, to motivate domestic policy reforms.”
A full transcript of this speech is available on the web at http://www.imf.org/external/np/speeches/2006/062306.htm
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