CAIRO: Europe will remain weak for another year or a year-and-half, says the European Commission's Heliodoro Temprano Arroyo, warning that Egypt and other southern Mediterranean countries will have to be prudent in managing their economies following a turbulent year “The situation remains difficult due to weaker than assumed euro area economies,” the head of the Neighborhood Countries and Macro-Financial Assistance said. He described the euro-crisis as it stands, “with an increased risk of a vicious spiral of fiscal tightening and economic surveillance.” With close economic relations between both sides of Mediterranean, the economic crisis in the north and the political upheavals of the south could translate to further bad news to the latter. Temprano Arroyo noted a dependency in the relations; 40 percent of European Union neighbors' trade is to the Eurozone, adding that 32 percent of Egypt's exports go to Europe. “I don't want to overly dramatize,” he said. “In 2009, GDP in euro area dropped by 4.9 percent, while now the worst is 1.5,” a figure no where close to the previous one. “Yet, neighboring economies managed to grow, so domestic polices do matter.” But now, Egypt, whose 2011 uprising and its lengthy, turbulent transition has had a negative impact on its economy, is in a vulnerable position. Temprano Arroyo cautioned that the risks were moving towards a more negative scenario. The majority of the incoming tourism for example, is European – 75 percent as he put it. The European Commission, which had received a request for financial support, was tentatively considering a program of €500 million for Egypt, in the form of “macro-financial assistance” (MFA) aimed at long-term economic development. How we got there In his presentation in Cairo this week, Temprano Arroyo particularly showcased the economic factors that he said had led to the Arab Spring, which include, education system weaknesses, vulnerability to food and energy prices, and disproportionate population dynamics to inefficient labor markets. He also highlighted the dominance of the public sector along with crowding of the private sector, low international and intraregional trade, weak public finance management, and socially non-inclusive growth models. He gave an example of women, saying that only one in four working-age women is employed in Egypt, an average unmatched internationally. Together with a rising 13 percent average unemployment rate, this meant that 85 percent of women were de-facto excluded from the labor market. “[Targeted] education tends to lead students to graduate to the public sector,” he said. Thus, it was unlikely that enough jobs would be created in the coming two years to absorb new entries to the market. “High demographic growth, high unemployment, [and] skill mismatches” led to the natural outcome of high emigration, he said. Non-targeted energy subsidies were another failure, he said, recommending a move to targeted systems of social transport, saving resources and helping the poor, “who don't have cars.” The compounding of these factors, he argued, further led to the deterioration of fiscal positions, due to the assuaging social pressures and the interruption of privatization programs. The so called Arab Spring, which started in Tunisia, then Egypt and Libya before expanding in the region, aimed at fixing both economic and political injustices. However, the pro-democracy uprisings are likely to delay to delay economic reforms in the short term. Temprano Arroyo argued that contrary to expectations, popular demand will slow down the structural reforms. For instance, the continuation of subsidy schemes and putting privatization on hold, would delay reforms, as the interim and new governments seem to lack the necessary strategic visions, he said. Meanwhile on the global level, the deterioration in financial markets led to an increase in the cost of borrowing from governments, which together with increases in debt, led to a rise in interest payments. On the macroeconomic outlook, he added, uncertainty dominates the scene due to fluid politics, with International Monetary Fund forecasting some recovery between 1.5 and 2 percent in 2012. Yet, the sovereign debt crisis in the north is projecting a bleak future for the financial markets, probably delaying the recovery and obliging some countries to seek IMF assistance. Joint outlook Temprano Arroyo, however, reminded the attendees that the situation was not entirely bleak, and gave an analogy of Spain after Fascist rule in the 1970s, which was reforming in the middle of the global oil crisis, but lay the ground for a modern transition that later performed much better economically. Picking up from Temprano Arroyo, Magda Kandil from the Egyptian Center for Economic Studies said that the south could benefit the Eurozone in crisis through broader integration across the Mediterranean. “Developments on both sides … are somewhat independent yet intertwined.” Her suggestion was that both regions, EU and MENA had the prospect of complementing each other to speed up recovery. “We need a wide vision for integration,” she said. The EU countries, she argued, cannot grow while there are still a lot of problems across the Mediterranean, especially with unsustainable demographics. External demand, for example, could supplement the weakness of domestic markets, she explained, “especially thinking beyond the traditional box … [and] capitalizing on a region having the youngest population in the world.” Kandil said that “maximizing the pie” could materialize by increasing the prospects for trade and boosting the environment to attract foreign direct investments, as the region already had limited resources. “There is prospect for growth in the private sector, but it's very much dependent on attracting investors.” Countries on both sides of the Mediterranean could identify sectors where cooperation is rewarding. The competitive advantage would be in abundant skills, inexpensive labor, the potential to maximize return on investment and to help economies transform. “We need transfer of knowledge from the north to the south … not because you like us, but for investment down the road,” she added, highlighting the advantages of the MENA region, which include one third of exports to the EU and the geographical proximity.
