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Summary of "How Wide is the Mediterranean?"

Core Content

This Policy Contribution by Georg Zachmann, Mimi Tam, and Lucia Granelli, published in May 2012, examines the economic relationships between the five Southern Mediterranean Countries (SMCs: Egypt, Libya, Algeria, Tunisia, and Morocco) and the five biggest EU economies (France, Germany, Italy, Spain, and the UK), as well as the United States. The goal is to assess the extent of economic integration and identify patterns of interaction that go beyond geographical proximity.

Main Findings

1. Economic Heterogeneity

• The economic relationships between the SMCs and the EU are highly heterogeneous.
• Algeria, Morocco, and Tunisia maintain strong economic ties with France, Italy, and Spain, especially in terms of investments, financial flows, and migration.
• The economic connection of Germany, the UK, and the US to the western SMCs is negligible.
• Germany and the US focus their development assistance on Egypt, while the other SMCs are not priorities for non-Mediterranean EU countries.

2. Economic Proximity vs. Geographical Proximity

• The Mediterranean is not a natural barrier to trade, as the trade patterns of the SMCs are not substantially biased toward trade with their neighbors.
• Geographical distance alone cannot explain the unbalanced economic relationship between the SMCs and a small number of European countries.
• The relative economic distance between countries is calculated using gravity models, which show that France, Italy, and Spain are closer to the SMCs than the UK, US, and Germany, even though the latter are geographically farther away.

3. Trade Patterns

• Trade flows between the SMCs and the EU are relatively low, with Egypt being the most distant from the EU countries analyzed.
• The business cycles of SMCs are not correlated, suggesting limited economic integration.
• Tunisia shows a high correlation with developed economies, possibly due to deeper integration or its smaller size.

4. Foreign Direct Investment (FDI)

• Morocco has seen a significant increase in EU FDI, from around 6% of GDP in 2000 to about 16% in 2009.
• France is one of the top two sources of FDI for all five SMCs, indicating a strong economic and political presence.
• Italy has a relatively strong FDI presence in Tunisia, Algeria, and Egypt, but is less involved in Libya than expected.
• Spain has some FDI exposure in Libya and Morocco, while the UK, US, and Germany have minimal FDI in the region.
• The US is less active in Algeria and Egypt than Germany, despite being more geographically distant.

5. Financial Flows

• French banks hold the largest share of foreign claims in the SMCs, especially in Algeria, Morocco, and Tunisia.
• Italian banks have a notable presence in Egypt.
• US banks have a significant share only in Algeria, while their role in other SMCs is minimal.
• Egypt has a highly volatile business cycle, which might be attributed to its weather-sensitive agriculture.
• The correlation between Egypt's business cycle and Germany's is unexpectedly strong, suggesting deeper economic ties than geographic distance would imply.

6. Migration Patterns

• The EU is the main destination for migrants from all SMCs, with France being the most attractive for Algerians, Moroccans, and Tunisians.
• Migration is heavily influenced by history, not just geography.
• Moroccans and Tunisians are more likely to migrate to Italy and Spain, respectively.
• Egyptians mainly migrate to Gulf countries (especially Saudi Arabia, Kuwait, UAE, and Qatar) and Libya, while Libyans have limited migration to other countries.
• Migration to the US, UK, and Germany is relatively small compared to the number of immigrants in these countries.

7. Official Development Assistance (ODA)

• Between 2003 and 2010, the five EU Mediterranean countries provided about $9 billion in ODA to the SMCs, which is 4% of their total aid.
• The US and Germany only provide significant ODA to Egypt and Libya, with the UK being almost absent.
• EU institutions are among the top donors to the SMCs, contributing $5 billion in ODA during the same period, or 6% of their aid budget.
• The EU institutions provide 50% more aid per capita to the SMCs than to other developing countries.

Key Implications

• The uneven economic relationships with a few EU countries expose the SMCs to shocks from those partners.
• Stronger economic ties with non-traditional EU partners could improve the SMCs' external economic relationships and make political ties with the EU more resilient.
• The EU's external policy is still driven by member states' interests, which may lead to inconsistent approaches to the SMCs.
• Diversifying the economic relationship between the SMCs and the EU could be a strategic move to ensure long-term stability and cooperation.

Conclusion

The study concludes that while the Mediterranean is not a natural barrier to trade, the economic relationship between the SMCs and the EU is asymmetrical, with France, Italy, and Spain playing a dominant role. This special relationship, though beneficial, poses risks due to over-reliance on a few partners. A rebalancing of economic ties with non-traditional EU partners could enhance the predictability and resilience of the EU-SMC relationship, benefiting all parties involved.