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Benita Ferrero-Waldner

European Commissioner for External Relations and European Neighbourhood Policy

The EU, the Mediterranean and the Middle East: A Partnership for Reform

The German World Bank Forum “Middle East & Germany: Change & Opportunities”
Hamburg, 2 June 2006

Your Excellencies,

Ladies and Gentlemen,

It is a pleasure to be here at the 8th World Bank Forum. Let me thank our kind hosts for giving me this opportunity to talk to you today.

This Forum’s focus on “change and opportunities” in the Middle East is timely. The Mediterranean and Middle Eastern region is undergoing fundamental shifts - economically, politically and socially.

In an interconnected world, these developments have an impact on the European Union. Europe cannot be an “introspective bystander”. On the contrary, we are and must remain a key actor in the region; a political and economic partner who supports and manages change and who helps reap the opportunities that flow from it.

This is not just a political imperative, but a matter of self-interest. If Europe did not “export” stability, it would import “instability”. The European Union is neither an island nor a fortress.

Ladies and Gentlemen,

The economic challenges of the Middle East and the Southern Mediterranean have been analyzed at great length. There is no need for me to reiterate them in front of such a distinguished audience.

Suffice it to say that we are facing a delicate mixture of relatively slow economic growth and entrenched poverty, coupled with strong population growth and an instable political environment.

The question for policy makers is how to turn this vicious circle into a virtuous one? How can we tackle the root causes of economic hardship?

In some countries, one third of the population is 15 years old or younger. In the entire Mediterranean, 5 million people per year newly enter the labour market. How can we help them to build a better life and avoid that they fall prey to political radicalization?

Some progress has certainly been made in the region over the last years in improving macro-economic management and in opening to trade and investment from abroad. Still, the region has been losing market share in global trade and investment flows. In the age of ever faster globalization, that is all the more worrying.

There are, of course, a variety of economic reasons that explain this, including the fact that the trickle of FDI inflows is not decisively improving the technology-base and competitiveness.

But beyond that, there are even more fundamental issues at play:

First, there is largely insufficient investment in people. Weaknesses in the education systems affect the long-term competitiveness of the workforce.

Secondly, there is an obvious low education rate for women and a very low labour force participation rate for them. Such discrimination against half a country’s population is not only politically unacceptable. It also leaves a large social and economic potential untapped which is – mildly put – self-defeating.

Last but not least, the poor quality of governance in the region is a serious issue. The weak rule of law, undemocratic decision-making in major parts and serious human rights issues do not only affect the political rights of its citizens, but also these countries’ economic standing.

The UNDP’s Arab Human Development Reports summarize this situation very well. In short: the Middle East and Mediterranean regions suffer from three deficits:

  • A freedom deficit in political and civil liberties,
  • a knowledge deficit in terms of education and access to information,
  • and a gender deficit, as Arab women are clearly at a disadvantage in their societies.

I am of course painting a rather broad-brushed picture here. The region is very heterogeneous in terms of both economic and political performance.

Still, one common challenge is clear: The imperative of reform.

Only through structural reforms far beyond the economic realm can the Middle East and the Southern Mediterranean improve the lives of their citizens and become more stable partners on the international scene.

Therefore, the way out of the region’s current predicament will not only consist of purely economic recipes, although these are essential. It must encompass the social and political sphere as well.

Economic and political reforms are two sides of the same coin in the longer run. Without security and an open political climate, based on functioning institutions and the rule of law, there can be no market economy.

Vice versa, without a tangible economic perspective and fair access to opportunities, political progress will remain shaky, and the ground for ideological radicalization will stay fertile.

That is why Europe’s foreign policy is based on the holistic concept of “human security”. Humanity will not enjoy security without development; it will not enjoy development without security; but it will not enjoy either if we don’t tackle the “triple deficit” in freedom, knowledge and equality which I mentioned before.

Ladies and Gentlemen,

Economic globalization is not a simple option. It is a political reality. And it provides the region not just with a great challenge, but also with formidable opportunities. On balance, globalization is a catalyst of positive change. Opening up and managing globalization means to channel the forces of modernization. There is no such thing as an inevitable downward spiral.

To illustrate this, let me quote the English-Indian writer V.S. Naipaul. In 1975 he published a story of his encounters in India under the title “A wounded civilization”. It was the portrait of a society immured in a mythic vision of its past and partly traumatized by foreign conquest; a society unable to heave itself out of its poverty and underdevelopment. Three decades later, India is one of the fastest growing and best-connected economies in the world.

Parallels with the contemporary Arab world are easy to draw. I will not dwell on these. Let me just say that there are similar issues in the Middle East and the Mediterranean that need to be overcome:

The unfulfilled dreams of Arab societies after decolonisation; the traumas caused by authoritarian rulers – who often easily invoked the Middle East conflict to justify violating their own citizens’ freedoms; the strong – and wrong - perception of unequal treatment of Israel and the Palestinians; and last but not least the return to age-old interpretations of Islam that are hard to reconcile with modernization.

In short: We need to help the Arab world in overcoming its domestic problems and in regaining its self-confidence. Our policy is not about “imposing” change, but about supporting and fostering it.

Ladies and Gentlemen,

Let me sketch what the European Union is doing, in close cooperation with the World Bank; as the biggest donor in the region, the biggest trading partner of many countries, and as promoter of regional cooperation and a political “force of attraction”.

Generally, the EU is the biggest donor in the Middle East and the Mediterranean. All in all, we spend about 3.5 billion Euros a year on economic reforms and budget support, on human rights and institution-building. As of 2007, we will introduce an “EU reform bonus” of an additional 10% for those countries who perform well.

This aid is not just meant to stabilize economies and lay the groundwork for future of success on the world market. We place a particular emphasis on social reforms.

Investing in human capital is critical. We have set ourselves ambitious goals together with our partners in the region. Until 2015, we want to halve the illiteracy rate and make sure that all children – boys and girls alike – have access to school education. I am also working on strengthening our educational exchange programmes, with a particular focus on female students.

Secondly, trade liberalization between the EU and the region is a key element of economic and societal progress.

Since 1995, we have built up a network of bilateral Association Agreements with our Mediterranean Partners countries, which provide for free trade in industrial goods. We hope to expand that to free trade in services and agricultural products over the next few years.

In the same logic, we have also proposed a Free Trade Agreement to the Gulf Cooperation Council, whose countries not covered by the Neighbourhood Policy.

Since the delays on the GCC side are now behind us, I am still hopeful that such a liberalization agreement can be reached, also because it would entail regulatory and policy reforms in the Gulf states. This is important. Booming oil revenues should not diminish the willingness to undertake reforms and stick to prudent fiscal policies.

Free trade has benefited our partner societies as a whole. And the countries that are most successful in adapting to free trade are those that have put in place good domestic institutions. Vice versa, where weak institutions and arbitrary government acts occur, citizens have been deprived of its benefits.

Free trade is thus a key element of the Barcelona Process, to which all our Partners, from Morocco to Lebanon, signed up in 1995 and which we further strengthened last year. The Barcelona Process is a unique regional forum. It serves as a basis for meetings of Israelis, Palestinians and other Arab citizens. And it is a platform to discuss a wide range of issues of common interest – from trade to transport and energy networks, to common environmental issues.

In recent years we have expanded this cooperation and brought in civil society organizations and the Anna Lindh Foundation in Alexandria to encourage cultural exchanges. This is particularly important. We need to counter the risk of mutual incomprehension through an improved dialogue of civilizations. Such a dialogue is the best way to stop talk of a so-called clash of civilizations. It is also the basis for fruitful economic ties.

Ladies and Gentlemen,

The European Union has further deepened its cooperation with the Mediterranean and the Middle East through the new European Neighbourhood Policy launched in 2003.

The Neighbourhood Policy builds on our growing role as an anchor of stability and modernization, which is the logical geopolitical consequence of our successful EU enlargement of 2004.

As I said before, Europe cannot pull up the drawbridges in the age of globalization. On the contrary, we have been performing what some call “transformational diplomacy” for many years. And we continue to follow its underlying rationale of “security through economic and political transformation”.

The European Neighbourhood Policy is therefore, in essence, a reform policy. The aim is to use Europe’s economic clout, political expertise and “gravitational pull” to promote greater prosperity, stability and security in our neighbours to the south and east.

We achieve this by economic integration and through closer political relations and in particular by investing in good governance.

It is in our European interest that our neighbourhood is well-governed and prosperous. It is in our interest that conflicts in our vicinity are resolved and issues like migration, organised crime and terrorism are tackled more effectively.

Vice versa, is in our partners’ interest to have much needed EU support – both political and financial - while they are pushing through reforms. In short: The Neighbourhood Policy creates a “win-win” situation.

The ENP Action Plans, agreed bilaterally with our neighbours, include a clear set of commitments for reform in a wide range of areas, from basic human rights and freedoms, democracy and the rule of law, to economic, fiscal and sectoral reforms.

To boost economic reforms, we also offer our partners a “stake” in our internal market – which is the world’s largest with more than 450 million consumers. That is a critical tool of economic and political stabilization.

It also proves that the ENP is not about “exclusion” of new dividing lines between “ins” and “outs”. On the contrary, we want to expand the EU’s zone of prosperity – to our mutual benefit.

In fact, EU aid levels in the Middle East and the Mediterranean were comparable to our assistance to our Eastern European candidate countries over the period 1993-2003. And our trade preferences to the Middle East and the Mediterranean were more generous than those given to our prospective members.

We are now further refining our incentives for this good governance project. Our strategy for the Mediterranean and the Middle East in particular is not a “one-size-fits all” policy, but on the contrary a tailor-made, targeted approach.

But let me be clear: Despite all the advantages of our policy that are on offer to support reforms, the European Union and its international partners – including the World Bank and private businesses - can only accompany change – but cannot actually make it happen.

External support alone is not sufficient to trigger sustainable development. What is needed – in particular in this region – is a stronger domestic platform for reforms, both among leaders on whose responsibility we should call more strongly, and among the population at large. But again, this popular will for reforms can only be built through a vibrant civil society as a soundboard and – most fundamentally - through a democratic choice at the ballot box.

In this vein, our support for transformation is not about imposing specific models from the outside. “State building” is about sowing the seeds of change at the inside, not least through the “soft power” of persuasion of the international community. My distinguished predecessor as EU Commissioner, Lord Patten, called these the “weapons of mass attraction”. We should use them wisely.

Ladies and Gentlemen,

Let me give you two specific examples of how the EU, and in particular the European Commission are actively involved in the region: The Israeli-Palestinian relations and the situation in Iraq.

In the Middle East Peace Process, the EU plays an active role in the international Quartet, together with UN, the US and Russia. We are not only an important political interlocutor and mediator, but also the most important donor to the Palestinian Authority.

Europe’s aid is critical in building a viable and democratic Palestinian state that can peacefully live side-by-side with Israel. This two-state solution is the central goal of the international “road map” for peace.

Beyond our financial assistance, we have helped to organize and monitored the free and fair Palestinian elections earlier this year. This was a practical contribution to the democratization of the region.

However, we cannot work directly with the government that came to power after these elections, as long as it does not accept the basic principles of the Peace Process, advocates violence and does not recognize Israel’s right of existence.

At the same time, we do not want the Palestinian people to suffer from Hamas’ policy. The recent suspension of EU aid therefore only concerned funds paid to or via the Palestinian Authority. Vice versa, aid for humanitarian purposes continues, including for medical supplies and health services, payments for energy and fuel and for the education system.

To make sure that the Palestinian Authority has no influence on these funds, we have proposed a special funding mechanism to our partners, including the World Bank. We are now fine-tuning this mechanism, so that essential services can continue to be delivered and the maximum level of donor support is ensured.

I am still hopeful that Hamas will come out of the political isolation into which it has manoeuvred itself. In addition to being politically unacceptable, its hard-line positions are not a recipe for economic development either. It needs to deliver to the Palestinian people. But it can only do so, if it changes substantially.

Ladies and Gentlemen,

A second key area for the EU is the reconstruction of Iraq.

Europe was divided over the war in Iraq, but ever since, we have strongly supported the country’s reconstruction. A stable, democratic and economically viable Iraq is in the very interest of the European Union. That is why our commitment to help remains steadfast.

Since 2003 we have provided more than 500 million € in aid. Just last week I had the pleasure to announce a new assistance package of € 200 million for 2006.

Our assistance focuses on the provision of basic services and institution-building and the rule of law, with a particular focus on trade, customs, energy management and reconstruction of the banking sector.

In addition, the EU-Commission has asked EU states for a mandate to start negotiations on an EU-Iraq Trade and Cooperation Agreement. That would be the first contractual relationship ever between the EU and Iraq. It would not only lay a firm foundation for bilateral trade, but also help to strengthen the economic playing-field in the country, to the benefit of investors and the Iraqi people.

Ladies and Gentlemen,

In consequence, I see causes for optimism in the region, signs of progress both in terms of economic and political reforms. We should and must build on this progress, instead of believing fashionably, as some do, in a “clash of civilizations” which risks becoming a self-fulfilling prophecy.

Fostering good governance therefore remains vital: To help our neighbours stabilize their societies, and to tap the great economic potential of this region. That is what the European Union will continue to do, not least under its Neighbourhood Policy.

In doing so, we will continue to rely on Europe’s businesses, our natural partners. European exporters and investors are “ambassadors of change”, too, and I hope we can deepen our cooperation.

Ladies and Gentlemen,

Let me close with another reference to Asia’s recent history. In 1968, the Swedish social scientist Gunnar Myrdal wrote the “Asian Drama”, a three-volume book that analyses the reasons for Asia’s persistent poverty at the time. He thought that the tension between traditional and modern values and ideas was to be blamed for that.

But in 1993 the World Bank published “The Asian Miracle”, examining the miraculous recovery of these economies.

In this vein, I hope that the World Bank will soon be in a position to produce an “Arab Miracle” study.

Thank you.

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