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Direct Investments and Institutional Cooperation in the Euro-Mediterranean Region

Direct Investments and Institutional Cooperation in the Euro-Mediterranean Region

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Prospects for European direct investments in Mediterranean countries and for Euro-Mediterranean trade flows are favorable. However, private actors playing the key role in promoting Mediterranean economic integration, while political initiatives languish.
Prospects for European direct investments in Mediterranean countries and for Euro-Mediterranean trade flows are favorable. However, private actors playing the key role in promoting Mediterranean economic integration, while political initiatives languish.

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Published by: German Marshall Fund of the United States on Aug 11, 2010
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Summary
: Economic integra- tion and institutional coopera- tion in the Euro-Mediterraneanregion are following diverging paths. Notwithstanding  the
nancial and economic troubles of the euro area,prospects for European directinvestments in Mediterraneancountries and for Euro-Mediter-ranean trade
ows are favor-able. Institutional cooperation,by contrast, is disappointing due to the substantial impassein the Union for the Mediter-ranean (UfM). Today, traditionalpatterns are reversed, withprivate actors playing the keyrole in promoting Mediter-ranean economic integra- tion, while political initiativeslanguish.
Mediterranean Policy Program—Series on the Region and the Economic Crisis
Policy Brief 
Direct Investments andInstitutional Cooperation inthe Euro-Mediterranean Region
by Franco Zallio
1
1744 R Street NWWashington, DC 20009T 1 202 745 3950F 1 202 265 1662E info@gmfus.org
1
Franco Zallio is senior consultant to Paralleli, and has published extensively on issues related to the economics andinternational relations of the Mediterranean and the Middle East. The views presented in this paper are the personalviews of the author and not those of the institutions he represents or The German Marshall Fund of the United States.
2
ANIMA Investment Network, Investissements directs étrangers et partenariats vers les pays MED en 2009, 18 Mai2010, http://www.animaweb.org/etudes.php.
Prepared in Partnership with Paralleli (Turin) June 2010
Economic integration and institutionalcooperation in the Euro-Mediterra-nean region are following divergingtrends. On the one hand, the favor-able prospects of economic integra-tion promote Euro-Mediterraneancooperation. On the other hand, thereis growing disappointment in institu-tional cooperation, in particular theUnion for the Mediterranean (UfM).Foreign Direct Investment (FDI) inMediterranean countries has becomea key factor of economic integration.Its recent performance is describedin the next section, based on theannual report on FDI in Mediterra-nean countries just published by theANIMA Observatory.
2
In recent yearsattention has focused on new foreigninvestors, mainly the Gulf countriesand emerging Asian countries. Today,however, attention needs to be paidto a more traditional issue: the role of European investors. In fact, since 2007they have again become the majorinvestors in the region, a position they still maintain despite the negativeeffects of the international economiccrisis.
FDI in Mediterranean Countries
The global economic crisis has trig-gered a substantial decline in FDIinflow into Mediterranean countries:EUR 39.1 billion in 2008 and 32.3billion in 2009. This is much lowerthan the record figures of 2006 and2007 (EUR 65.2 and 60.0 billionrespectively), but nevertheless, in 2009FDI still amounted to four times its2003 level (EUR 7.6 billion). It shouldalso be noted that in 2009 the declinein FDI towards the Mediterranean (-17percent) was lower than the averagedecline registered in emerging coun-tries (-38 percent).As Graph 1 shows, in 2009 Europe wasthe main investor in Mediterraneancountries, a position that it tempo-rarily lost at the height of the oil boomin 2006 when Gulf countries’ FDIflows to the Mediterranean exceededthose from Europe. Due to the sharp
 
Mediterranean Policy Program—Series on the Region and the Economic Crisis
Policy Brief 
2
decline in FDI from the United States and the Gulf, in 2009the European share was particularly high: 54 percent of total FDI inflows to Mediterranean countries. We have toreturn to 2004 — when inflows were much less relevant— in order to find Europe in a similarly strong position asinvestor in Mediterranean countries.Between 2003 and 2009, European countries invested EUR103.7 billion in the Mediterranean, Gulf countries invested69.6 billion, and North American countries invested 45.1billion, of which 40.8 billion is from the United States.FDI inflows from other Mediterranean countries aresmaller: EUR 12.7 billion in 2003-2009, equivalent to only 5percent of total inflows. This share fell further to 2 percentin 2009. This is a very low level, which nevertheless parallelsthe equally low level of intra-regional trade and reflects thestill very limited economic integration between Mediterra-nean countries.The remaining EUR 25.1 billion is mostly composed of FDIinflows from emerging and developing countries. China— in contrast to its trade flows — does not currently play a dominant role among emerging countries. In 2003-2009it was only the 16th largest foreign investor, with EUR4 billion. The international economic crisis, which hasreduced FDI from other countries, has allowed China togain ground: in 2009 it became the 10th largest investor.Chinese investments in the Mediterranean are still lowerthan those of all major European and Gulf countries, andthe FDI from the United States. It should also be noted thatin 2003-2009 China was preceded by India (4.3 billion)— which has pursued more diversified investments in theMediterranean, from energy and steel to service outsourcing— and is followed closely by Russia (3.8 billion).
3
Ignoring for the time being FDI of emerging countries,whose total value still remains limited, it is useful tocompare European FDI with that of the United States andGulf countries. European FDI exhibits two major features:It has a smaller size and thus reflects a bigger pres-ence of small and medium enterprises and a strongerpropensity to partnerships, especially in the Maghreb.U.S. FDI is larger and is concentrated on fewer priority sectors, while FDI from the Gulf is even larger and ismuch less oriented towards engaging in joint ventureswith local investors.As Table 1 shows, European FDI is spread evenly across the whole region, in the Maghreb as well as inthe Mashreq and in the non-Arab countries (Israeland Turkey). Investments from the Gulf are, however,mainly concentrated in the Arab Near East (which has
3
Brazil has so far carried out few investments in the Mediterranean. Its role could, never- theless, increase thanks to the free trade agreements that MERCOSUR has implementedwith Israel, those that it is negotiating with Egypt and those that it is planning to negotiatewith other Mediterranean countries. For the role of new actors in the Mediterranean,see Rajan Menon and S. Enders Wimbush, “New Players in the Mediterranean,” GermanMarshall Fund of the United States -
Mediterranean Paper Series
, May 2010.
Graph 1 - FDI In
ow in EUR million
Source: ANIMA Observatory 
Since 2007 European investorshave become the major investorsin the Mediterranean region,a position they still maintaindespite the negative effects of theinternational economic crisis.
 
Mediterranean Policy Program—Series on the Region and the Economic Crisis
Policy Brief 
3
absorbed 61 percent of the total in 2003-2009) andTurkey. U.S. FDI is mainly concentrated in Israel andTurkey.
Table 1 - Origin of FDI in
ows into Mediterraneancountries in 2003-2009 (billions of EUR)The Impasse in Euro-Mediterranean InstitutionalCooperation
After a long pause following the winter 2008/09 war inGaza, the UfM, which was founded in 2008, had shownsome signs of recovery in early 2010, at least in terms of its operational mechanisms after the appointment of itsSecretary General, Ahmad Masadeh from Jordan. However,the formation of the Netanyahu government in March 2009and the reactions from Arab countries have once againbrought the UfM into a substantial impasse. An initial nega-tive sign was clear in April with the Euro-MediterraneanMinisterial conference on water, which failed to adopt acommon strategy following a terminological dispute on thedefinition of the Occupied Palestinian Territories. In May,fearing a possible boycott by Arab countries, the secondUfM Summit, previously scheduled for June 7-8, 2010, wasrescheduled for November. The decision was inevitablegiven the level of regional tensions, as later shown by theassault of the Israeli navy on ships carrying humanitarianaid to Gaza and the reactions it provoked. In this context,the prospects for a UfM relaunch are modest; even the newdeadline of November will be difficult to meet. Its evolutionwill mainly depend on the fundamentally external factorof the development of proximity talks between Israelis andPalestinians.From a political standpoint, the transition from the Euro-Mediterranean Partnership — a process that took placeunder the auspices of the EU and where the EuropeanCommission played a central role — tothe Union for the Mediterranean — anintergovernmental process that Mediter-ranean countries “co-own” — has renderedEuro-Mediterranean cooperation moredifficult. From an economic standpoint,this co-ownership should at least in theory facilitate the implementation of majorprojects within the UfM such as the Mediter-ranean solar energy plan, maritime and landhighways, reducing pollution in the Medi-terranean, and the Mediterranean BusinessDevelopment Initiative. However, as seen inthe case of the water strategy, it is illusory to isolate economics from politics. On thecontrary, the UfM political impasse is likely to affect large planned economic projects, which are strug-gling to go beyond programmatic conferences and feasi-bility studies.The difficulties underpinning the new UfM also affects apossible “macro-regional” approach to Euro-Mediterraneancooperation. The EU is in fact promoting a macro-regionalapproach in several areas, tested for the first time in theBaltic area (for which the EU adopted a macro-strategy in
FromEuropeGulf countriesUSA &CanadaMediterraneancountriesOthercountriesToMaghreb
27.315. 56.67.53.3
Mashreq
25.242.75.94.612.8
Non Arabcountries
51.211.432.60.59.0
Total
103. 769.645.112.725.1
Source: ANIMA Observatory 
From a political standpoint, the transition from the Euro-Mediterranean Partnership to theUnion for the Mediterranean hasrendered Euro-Mediterraneancooperation more dif 
cult.

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