European countries have suffered from the pandemic, but their southern and eastern neighbors are faring even worse—setting the stage for financial ruin, political instability, and a surge of refugees.
BY SINAN ULGEN,
For Europe, the internal economic shock created by the coronavirus is set to be compounded by an external security shock triggered by the economic collapse of its neighborhood. For many reasons, Europe’s southern and eastern neighbors remain highly vulnerable to such a disaster scenario.
These generally middle-income countries—including Turkey, Ukraine, Egypt, and Morocco—do not benefit from global initiatives like the debt relief programs led by the International Monetary Fund (IMF), which target less developed nations. Yet they lack the domestic resources to rebound effectively from the deep recession that awaits them. The rising risk aversion in global markets has constrained their debt-raising options. Their economic well-being has further been undermined by the coronavirus-related economic downturn, raising fears about economic dislocation and political instability.
Europe is now looking at the emergence of exactly the type of scenario of regional instability that it sought to preempt. A key recommendation of its 2016 Global Strategy was to improve the political and economic resilience of its regional partners.
But now the economic resilience of Europe’s neighbors is clearly at risk. A major revenue stream for many of Europe’s southern and eastern neighbors is tourism. In 2018, tourism revenues as a share of total exports of goods and services reached 41 percent in Jordan and 25 percent in Egypt, according to the United Nations World Tourism Organization.
In absolute numbers, Turkey’s tourism revenues including international transport were the highest at $37 billion, amounting to around 5 percent of GDP. This important revenue source is now set to evaporate as the virus takes its toll. The collapse of the tourism industry will also have significant repercussions for the sustainability of employment. For Jordan, Morocco, and Tunisia, tourism provided for around 7 percent of total employment, compared with the global median of 3.8 percent.
This critical gap in foreign exchange earnings comes at a time when these economies are also suffering from a global reversal of capital flows. Emerging-market capital inflows have dramatically declined in response to the rapid spread of the coronavirus, putting further pressure on capital accounts.
The Turkish lira, for instance, has depreciated by 7 percent in the last month alone against the U.S. dollar. Europe’s neighbors are set to endure even more hardship when it comes to trade imbalances as their exports are due to collapse. They will be among the most affected from the ongoing fall in consumer demand in Europe given their heavy reliance on the continental market. The European Union’s share of total exports stands at some 65 percent for Morocco, 50 percent for Turkey, and 43 percent for Ukraine.
The world is now witnessing the formation of a perfect storm on Europe’s borders. The combination of recessionary economics, balance of payments difficulties, and surging unemployment has created a formidable challenge that will jeopardize domestic social contracts.
Just like the current protests unfolding in Lebanon, governments will come under pressure by an ever larger group of unemployed and disenfranchised citizens. The ensuing political and economic instabilities would not only create the conditions for the rise of radicalization in these afflicted societies but also trigger new cross-border movements and refugee flows across the Mediterranean.
