Information & Training Seminar for Diplomats

28th September - 5th October, 1996

Papers

THE EURO-MEDITERRANEAN PARTNERSHiP: FREE TRADE AND ECONOMIC TRANSITION

Speech by Marc Pierini, European Commission

1. Introduction

The Euro-Mediterranean Partnership initiated by the Barcelona Declaration of 27 November 1995 is an ambitious and complex , multifaceted political project. Indeed, of its three baskets (political and security, economic and financial, cultural and human), the best known is the economic and financial basket.

Why is it so ?

First, because the economic, commercial and financial field was virtually the only one in which, since 1976, Europe and the Mediterranean countries had accumulated expertise,

Second, because most of the Southern neighbors of the Union are developing countries for which partnership with Europe is first and foremost an opportunity for accelerated progress.

Finally, because the Union's Heads of State and Government, even before the content of the Partnership had been completely agreed with Mediterranean countries, allocated to it a very substantial volume of finance.

Yet, it is not easy to understand why the Union and its 12 Mediterranean Partners have chosen two main avenues for implementing the economic basket of the Partnership introducing free trade and supporting economic transition processes.

These are the two elements are explained hereafter.

2. The economic and commercial context

It is commonplace to say that Euro-Mediterranean trade relations are more important from a Southern point of view than from a Northern point of view.

As a matter of fact, the 12 Partners represent a mere 8 % of EU world exports and 6 % of its world imports. Conversely, exports to the EU represent an average 50 % of the 12 Partners' world exports (and up to 2/3 for Maghreb countries and 3/4 for Malta) while imports from the EU represent 49 % of their world imports.

In other words, the European market is very important, if not vital for Mediterranean countries, while the Mediterranean market is relatively limited for the EU which, globally speaking, does have a strategic stake in it.

Hence a certain asymmetry in the negotiations towards Association Agreements: Southern countries are tempted to seek primarily trade advantages while the Union, which has no major trade interest at stake, is essentially seeking to ensure accelerated economic and social modernization of the Southern Partners.


3. The European Union's offer

With the exception of Cyprus and Malta -already associated with the EU and on the way to accession- and of Turkey -which has entered a customs union with the EU- , most Mediterranean Partners have entered Association Agreements with the EU or are in the process of negotiating or preparing such agreements.

What has the EU to offer to these countries ?

The EU aims at one single goal, i.e. to incorporate the economies of the countries concerned in a vast Euro-Mediterranean economic area encompassing the Union, EFTA countries, Eastern and Central European countries and the Mediterranean Partners.

This offer contains two complementary aspects:

-- the gradual introduction of industrial free-trade, i.e. the granting by the Mediterranean Partners of an asymmetrical free access as reciprocity for the free access which they already enjoy on the European market; and the largest possible liberalization of a 'cultural trade using as best as possible existing margin of progress;

-- the support to economic transition processes aimed at improving economic policies, at developing the private sector, at making European private investment more dynamic and at improving economic infrastructure.

The experience in recent decades has shown that introducing free-trade between neighboring countries could help in reinforcing economic ties through increased investments, transfers of know how and technology and through various forms of business cooperation.

4. Free-trade : miracle cure or major risk ?

What is the real impact of introducing free-trade is it a miracle cure or, to the contrary, a major risk of economic destabilization ?

The question is worth asking in a strait forward manner because there actually is, if one is not prudent, a risk of an adverse effect in cases where tariff dismantling in favour of industrial goods imported from the EU by Partner countries would be to quick or indiscriminate. It is precisely to counter this risk that Association Agreements include a stretching of tariff dismantling over time, exceptions and safeguard clauses.

However, we should refrain from considering the introduction of free-trade as the sole and essential goal of the Euro-Mediterranean Partnership. Free-trade, in economic terms, is much more of a tool than an objective. Its usefulness is first to constitute a powerful incentive to raising competitiveness levels in the region's economies. World experience demonstrates that, without the challenge of competitiveness, economies do not make progress.

The second virtue of free-trade is the signal of economic integration to the EU that it gives to private investors, both domestic and foreign: here too, it is a powerful incentive, in particular for what concerns processing operations. The example of the textile and garments sector is very eloquent in this respect.

The third virtue of free-trade will show when more agreements will be concluded between Mediterranean Partners themselves (today it is the case only between Israel and Turkey) allowing for better complementarily between their economies. The acceptation by the EU of cumulative origin would encourage this evolution.

Also, it is worth recalling here that the EU twins the tariff dismantling process with substantial support to accompanying economic measures, structural adjustment, economic transition measures, training, etc.. The countries concerned are thus not left facing the dry logic of free-trade, but are offered a well balanced package of accompanying measures.

In the end, the road to increased competitiveness for many Mediterranean countries, as well as their better participation in the world economy, is depending on their degree of openness to industrial imports from the EU. So is, in the medium term, their performance in terms of job creation and social progress. Naturally, a number of other measures are necessary to reach these goals: liberalization of capital movements, improvement in product quality, investment protection. Trade liberalization is closely linked to the process of economic transition.

5. Which kind of support to economic transition ?

Today, it is largely accepted that rapid and sustainable growth is facilitated by the development of an open and competitive market economy. This process of trade liberalization and competitiveness reinforcement is called "economic transition". It is precisely this process that the EU has offered to support, both technically and financially, in the Mediterranean Partners.

There is no "miracle cure" for economic transition, each country constituting a specific case. This is why, instead of a single "menu", the EU is offering a range of supporting measures including among others:

- reform of administrative and legislative frameworks, institution building;

- trade promotion, harmonization of norms;

- promotion of direct European investment;

- financial sector development, including central bank reform, commercial bank enhancement, development of financial markets; - development of business services through the creation of "business centres" specializing in advising companies;

- reinforced cooperation between European and Mediterranean businesses;

- support to privatization processes and to the introduction of private management norms; enhancement of economic infrastructures.

Operations of this type launched in 1995 and 1996 presently amount to some Ecu 900 million for the 12 Mediterranean Partners. An exhaustive inventory will be published soon.

Technical and financial support to economic transition activities is not the only form of cooperation offered by the EU. One should also take into account the creation of communication and collaboration networks between technical operators performing similar functions: banks, chambers of commerce, industrial federations, trade fairs, export promotion boards, energy operators, economic analysis centres, statistical institutes, etc.

Finally, one should mention the substantial provision of European know-how which has been accumulated in the EU building process : economic policy making, privatization, information society, maritime transports, etc.

6. Conclusion

When looking at the content of the Euro-Mediterranean Partnership, one should remember its global nature, both political, economic and cultural. These three dimensions are, in the concept which was adopted in Barcelona, not dissociable. In fact, they are mutually reinforcing. For example, the existence of a framework for discussing political and security issues between the Union and the Mediterranean Partners, both bilaterally and regionally, is a positive factor with regard to private European investment in the region.

It would therefore be erroneous to gauge the Euro-Mediterranean Partnership at its mere economic dimension, or even worse at its free-trade dimension.

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