The Mediterranean Sea is not a firm border: the flow of people, ideas, goods and money have made it a junction more than a barrier. With six million French citizens originally from the Maghreb, France's destiny is necessarily tied to this region. What is true for France is also true for other countries in Europe, like Spain with Morocco, or Italy with Tunisia and Libya. Southern Europe is tied to North Africa, for the better - cultural exchanges, services such as tourism, the care economy, industrial cooperation - but also for the worse, with European radical Islamism being rooted in the Maghreb.

Europe has not necessarily been able to comprehend the social transformations that gave rise to the Arab Spring uprisings a decade ago. This missed opportunity must not be repeated on the occasion of the health crisis and its economic consequences.

For many years, European countries have witnessed their sphere of influence shrink in North Africa. Other countries, particularly emerging economies, have found their place among the new economic elites and have developed strong partnerships competing with Europe. 

But the jury is still out. There is nothing definite about a stronger Turkish, Qatari, Chinese or Russian presence on the Mediterranean shores. Beyond Europe’s assets, we actually share a common history and destiny with Tunisia, Morocco and Algeria. 

This policy paper provides an in-depth overview of Morocco, Tunisia and Algeria, before the Covid-19 crisis and since. Institut Montaigne argues that Europeans should grant massive support to the Maghreb, particularly to Tunisia, without overly stringent trade-offs, in order to avoid a social and political shock that would threaten its fragile democratic structure.

Tunisia, the need for a new economic model

Tunisia is a remarkable political symbol in the Arab world, having succeeded its democratic transition. Its transparency indexes are on par with great emerging democracies, such as India or Brazil. But, once considered as one of the most competitive countries in Africa, Tunisia has seen its economic and financial situation deteriorate since the 2010s, falling to -7% growth in 2020. 

Tunisia is now characterized by an unexploited growth potential, a lack of productivity and a certain economic stagnation. The primary sector (nearly 13% of employment) is involved in national food security rather than in international trade. Tunisia has no natural resources. Its economy largely depends on exports linked to services (mainly tourism) and foreign investment flows (FDI), particularly in textiles and microelectronics. Despite a strong diversification of its economy and real assets such as low cost of labor combined with a relatively efficient training system, Tunisia is struggling to fully exploit its assets.

The country has a high unemployment rate - about 15% of the active labor force. Its rapid population growth (at an annual rate of about 1%) hinders the labor market’s absorption capacity resulting in high unemployment rates for 15-24 year olds and graduates (respectively about 35% and 30%). 

In order to calm social anger, the authorities have massively resorted to public employment, giving tenure to people on fixed-term contracts. They also hiked their civil service by recruiting in the poorest areas. By the end of 2016, Tunisia counted nearly 600,000 public jobs, up from just under 450,000 at the end of 2010. As of today, civil service wages represent about half of Tunisian public spending. Public employment is peaking at nearly 18% of the total - a world record. 

This economic model has been deeply shaken by the 2020 crisis and the "Great Lockdown". The Tunisian response has been coherent in terms of health but financially limited. For instance, the government provided two-thirds of a minimum wage to the poorest families, i.e. 140 euros.

With a total of about 2 points of GDP, the emergency stimulus package remains modest compared to the world average and to emerging countries (nearly 3.5 and 3 points of GDP respectively). 

Morocco, an effective but unequal growth model 

Morocco and Tunisia have some development characteristics in common: 

• An "open" growth model (with a pre-crisis openness rate nearing 90%) which is driven by tourism exports and consumption; 
• A considerable primary sector, which accounts for 12.5% of GDP and concerns a third of the active population. 

The Arab Spring and the resurgence of regional instability have largely benefited Morocco. The country is now about 20 places ahead of Tunisia in both Doing Business and Global Competitive Index. Tourist flows are salient indicators: Morocco has recorded significantly higher growth than Tunisia or even Egypt - where arrivals collapsed following the 2011 protests and the waves of attacks in 2015 and 2016.

Yet, deep inequalities remain. Morocco, like Tunisia, suffers from an important unemployment rate, mainly for the 15-24 year old (21.9%). Women's participation in the labor market (19.9% in 2020) is almost twice as low as the average for developing countries (45%). Their literacy level is about 20 points lower than men's. As a result, too many Moroccan women work in the informal sector. 

The main social indicators are lower than in the rest of the Maghreb countries. While Morocco struggles to reduce structural inequalities, the country has been able to quickly leverage a large number of financing tools to manage the crisis and support its population. Since the beginning of the Covid-19 crisis, Moroccan authorities have raised about $3 billion, around 3% of its GDP. But this amount is insufficient to curb the rapid increase in the debt ratio and the widening of current account deficits. 

Algeria, an oil-reliant economic growth 

The Algerian growth model is grounded in three pillars:

• Resources production and export, particularly fossil fuels which represents between 20% and 25% of GDP and more than 90% of national exports; 
• A small tertiary sector, especially pertaining to tourism and personal services; 
• A strong state presence in the economy. 

This growth model’s sustainability heavily depends on oil prices. However, since 2014, there has been a downward trend in oil revenues, which has a considerable impact on Algeria's GDP. 

The decline in oil revenues has led to a growing budget deficit over the past five years. In 2015, it reached -16% of GDP. Domestic public debt has continued to rise, reaching 46.3% of GDP in 2019. The double macroeconomic shock of 2020 has led to a contraction in the hydrocarbon sector (oil and gas production companies), a fall in consumption and a drop in investment. Algeria is therefore dealing with a financial crisis but also with a sociopolitical one. The social and political stability of Algeria has been secured since the late 1990s through its social spending.

Social spending in its broadest sense represents about 25% of GDP, i.e. 5 points more than the OECD average. A considerable amount. The system’s sustainability in Algeria hinges on a high price per barrel of oil. The oil price collapse in the beginning of 2020 thus jeopardizes this social transfers system - essential to the political stability of Algeria.

This social transfers policy countervails a very low employment rate, with one of the lowest participation rates in the world (42% on average). 

Algeria must therefore find other sources of financing to keep its system afloat. 

Before the Covid-19 pandemic, the Maghreb countries were the bearers of economic and social fragility. They have become acute as ever. To address them, this policy paper projects macroeconomic scenarios by which Institut Montaigne clearly and precisely assesses the financing needs of Tunisia, Morocco and Algeria. 

The Tunisian case

The IMF has provided an emergency financing package of about USD 753 million to Tunisia in April 2020. This loan will not be enough to cover the entire public financing requirements in 2021. An additional USD 1 billion could be available upon a commitment to structural reforms from the government commitment. 

According to the most optimistic scenarios, Tunisian financing needs could be between USD 3 and USD 5 billion, and between USD 5 and USD 9 billion in the pessimistic scenarios. Tunisia urgently needs to find additional funding.

The Moroccan case

Morocco’s government raised about USD 3 billion in December 2020. The IMF, early in 2021, noted that Morocco's debt appeared sustainable in the short term. 

The country must nevertheless finance a major medium-term investment plan: human capital development (e.g. structural deficiency pertaining to education), funding infrastructure and network industries (namely the road infrastructure network), energy transition and modernization of the social protection and health system. 

According to optimistic scenarios, Morocco's financing needs would be in the USD 3.5 billion to USD 6.5 billion range. Between USD 6 billion and USD 11 billion would be necessary according to pessimistic scenarios, if it does not receive assistance from international donors. 

The Algerian case

Algeria’s budget deficit is the largest of the three countries: it is expected to reach 13.5% of GDP in 2021. Algeria has however a relatively well-maintained gross public debt (46,3% of GDP in 2019). Rejecting multilateral support (notably from the IMF), public social transfers are readily funded by the Government's oil revenues. But the sustainability of this social system is closely tied to the highly volatile parameter of fossil fuel prices.

Reviving the Euro-Mediterranean partnership 

The diagnosis is clear: the Maghreb countries, Tunisia in particular, need to be financially supported throughout the health crisis. These countries’ economies as well as the regional stability are constrained. Europe must include the Maghreb states into its 750 billion euro recovery plan. By benefiting from the European borrowing capacity, Tunisia, Morocco and Algeria would acquire the liquidity necessary to the transformation of their development models. Only then will the crisis be an opportunity to achieve sustainable recovery. 

The Maghreb, a new strategic game-changer

The Maghreb is no longer the sole preserve of Europe. Great regional and global actors are eyeing on the region. Europe’s influence - and particularly France’s - is gradually waning. 

As the only democracy in the Arab world, and a close trade partner to Europe, Tunisia represents a strong political symbol. France remains a major partner of Tunisia: about 14% of Tunisian imports in 2019 (against 21% in 2009). But the analysis of direct investment flows shows the interest of other powers in Tunisia. 39% of FDI flows in 2019 came from the Gulf countries, including 11% from Qatar. Incidentally, Turkey is also well-established within the Tunisian market, especially in the public works and infrastructure sector. 

As a key commercial and financial platform, with an economy open to trade and a presence in the main economic and financial flows, Morocco is at the heart of regional and international interests. China has more and more stakes in the country, wherein the Chinese diaspora has become quite large on the Moroccan urban coast. China is peering at logistics facilities, notably in Tanger, and overall exports many manufactured goods and equipment to Morocco. China has also used "vaccine diplomacy" with Morocco during the Covid-19 crisis, sending masks, advanced testing of vaccines, massive distribution of Chinese vaccines, etc. China is well-positioned in terms of Moroccan imports: it represented 10% of the total in 2019, but is still behind Spain (15%) and France (12%). 

Fundamentally sovereignist, yet very open internationally through its commercial exchanges, Algeria is a paradox. Rich in fossil fuels and very careful in its choice of economic partners, Algeria is the North African country with the most diversified clients and suppliers. Russia and China have become important partners (17% of Algerian imports come from China in 2019). Once almost exclusively related to the defense sector, ties between Moscow and Algiers have recently expanded with the Covid-19 crisis to the health sector (the Russian vaccine recently rolled out in Algeria). 

Europe must be observant to the Maghreb’s current situation and find solutions, not only in financial terms, so as to contribute to the region’s stability. Such stability depends on the well-being of populations, rather than a sole support to the regimes.