Business & Economy

EUROPE: Economic management under fire

04 December, 2017

 * How did the South Med policy-makers respond to demands for change? *

While French President Macron goes to Algeria on December 6 and the next EU Summit will take place on December 14 and 15, the Euro-Mediterranean Forum of Institutes of Economic Sciences (FEMISE) launched its 2017 Euro-Mediterranean report on the transition of the South Mediterranean economies.

During the special event held in Brussels to present the report, Thomas Lagoarde-Segot, professor at the French KEDGE Business School presented a report with Simon Neaime, Professor at American University of Beirut, about “Twin Deficits and the Sustainability of Macroeconomic Policies in Selected European and Mediterranean Partner Countries: Post Financial and Debt Crises”.

According to Lagoarde-Segot, “the 2008 financial crisis, the 2011 European debt crisis, and the subsequent triple dip worldwide recession have adversely affected the macroeconomic fundamentals in the Mediterranean region”.

This report analyses the transition experiences of Mediterranean countries in the wake of the Arab Spring. It assess the consequences of the uprisings, governments’ responses and their appropriateness. The analysis is multidimensional and comparative covering macroeconomic management, economic growth, social concerns as well as political development.

On the Northern rim, Eurozone periphery countries like Spain, Ireland, Portugal and Greece have implemented austerity policies under supervision of the troika (IMF, European Commission, European Central Bank). These programmes, which were implemented in a global recessionary environment, resulted in a collapse of aggregate demand, a surge in the unemployment rates, deflationary pressures and a sharp decrease in the provision of public goods in the affected countries.

Such trends have ultimately undermined the social contract and political stability in Europe, some good examples of which include Brexit and the independence referendum in Catalunya.

On the Southern rim, the deteriorating macroeconomic outlook was magnified by social and political unrest in the aftermath of the Arab revolutions, which have further contributed to the deterioration of regional growth prospects in a context of enhanced geopolitical instability.

This research endeavoured to study the ways to reduce macroeconomic imbalances (trade and fiscal deficits) and prescribes a new course for a better future in the Euro-Mediterranean region.

The main contribution of this study is to highlight the risks of existing asymmetric fiscal adjustment measures where the cost of macroeconomic adjustment is borne asymmetrically by poorer, debtor countries.

Indeed, we found fiscal consolidation episodes in surplus countries (such as Germany) have a detrimental impact on trade and fiscal deficits in the periphery countries (such as the Mediterranean countries)”, explained Lagoarde-Segot.

“We thus called for a better coordination of fiscal policy, both within the EMU and between the EMU and the Southern Mediterranean countries. For instance, a joint fiscal expansion in the core region, combined with sound policies in the periphery, could help reduce macroeconomic imbalances at a lower social cost. Another option would be to let the European Central Bank purchase project bonds issued by periphery governments in order to finance infrastructure development, environmental sustainability and social inclusion. Such strategies, however, would entail building relevant and robust international institutions. We thus called for a renewed and enhanced Euro-Mediterranean partnership.”