In the last three years almost all economies around the world have been hit by three major consecutive shocks. The first was the COVID-19 pandemic which, from its onset in early 2020, brought international trade almost to a halt, and whose major consequences lasted until 2022; the second is Russia’s war on Ukraine which, since its outbreak on 24 February 2022, has greatly affected energy prices, increased the level of uncertainty and pushed major economies towards a condition of geopolitical polarization; the third is the sharp increase in the level of inflation in almost all major economies with long-lasting effects in almost all sectors across countries. These three shocks have significantly harmed the growth prospects of most economies worldwide, albeit with asymmetric effects: some areas and some countries have suffered more than others. This asymmetry is particularly evident among Med countries [1] . Euro Med economies, for instance, appear to have suffered more than other Med countries from the COVID-19 pandemic shock while some South Med countries have been more resilient in terms of growth dynamics. Egypt and Turkey, for examples, recorded positive growth rates in the year of the pandemic, 2020, in a context of deep recession. The recent increase in energy prices following the consequences of the war, and the acceleration of inflation, have also impacted more on Euro Med countries. Growth prospects in ¶{p. 70}the coming years appear to be quite asymmetric, with East Med and oil-exporting South Med countries being more resilient and well-positioned to perform better.

Yet despite these strong headwinds, real GDP growth in 2021 and 2022 was quite sustained and above expectations in almost all countries in the Med area. The resilience of consumption spending and significant government support in Euro Med countries have managed to back economic growth at least up until the second half of 2022. The fragile recovery, however, risks being short-lived because of the increase in the degree of uncertainty and in interest rates.

The outbreak of war in 2022 injected greater uncertainty not only into the economic system, but also into the international political framework: the world is increasingly polarized with very detrimental effects on international trade and on major economies’ geopolitical strategies. All of a sudden, the economic contraposition between Russia and the major Western economies has put unprecedented pressure on the price of strategic assets and resources with long-lasting effects.

International Western firms have been forced to relocate their businesses away not only from Russia but also from important markets such as China; at the same time, governments are rethinking their long-term strategies in terms of energy and access to international markets. As a result, the world risks being split into self-contained blocks with different technology standards, payment systems and prevailing currencies for international settlements. This uncertainty is a blow to investment which was already on a long-term downward path. Indeed, in the last two decades the share of investment on GDP has decreased in almost all Med Countries with unfavourable effects on the growth potential of the area. South Med countries, in particular, have experienced the biggest fall in the share of investments to GDP: in these economies, investments are expected to decrease from an average of 27.3 per cent of GDP in the decade 2000-2009 to about 22 per cent of GDP in 2027. The reduction in investment will jeopardize those governments’ policies aimed at reducing income inequalities and at steering the economy through the digital and energy transition.

After almost three decades of very low inflation and interest rates close to zero, in the last two years inflation has reached ¶{p. 71}significant levels in almost all economies worldwide, including Med countries. The increase in inflation has elicited a sharp increase in interest rates which will put further strain on the credit markets and on the fiscal space of most Mediterranean governments.

This particularly holds for the Med countries with a high level of debt/GDP ratios. Following the pandemic and the ensuing economic crisis, the large Euro Med governments have considerably increased public expenditure in an attempt to support their economies: government deficits have gone up and so has public debt. In Italy, for instance, public debt increased from 134 per cent of GDP in 2020 to 147 per cent in 2022. In a context of greater uncertainty and high interest rates it may become more difficult for these highly indebted countries to maintain debt on a sustainable path.

The war in Ukraine risks producing even greater long-run effects on Mediterranean countries than the COVID-19 pandemic [Mbah and Wasum 2022]. The recent increase in energy and food prices together with the slowdown in economic activity has put a strain on more fragile economies by increasing inequality and poverty almost everywhere. Countries with weak welfare and health systems have found it difficult to cushion the most vulnerable social groups from consecutive multiple shocks whose consequences are still evolving. Depending on the dynamics of geopolitical tensions, the effects of the war may seriously hurt the growth prospects of the whole Med area.

After studying the growth prospects of the Med area in section 1, this chapter will study the fiscal deficits and the dynamics of public debt in section 2. Section 3 examines the consequences on Med economies of inflation while section 4 analyses the effects of the crises on trade in the Mediterranean region. The final section provides some concluding remarks.

First the pandemic shock and then the Russia-Ukraine war have seriously harmed the GDP growth prospects of all Med countries. After the deep recession in 2020, almost all countries in the Med area have seen their recovery put at risk by the 2022 ¶{p. 72}war. Yet the impacts of the two crises have not been symmetric across the Mediterranean basin. Euro Med countries appear to have suffered more from both shocks, while East Med countries have been more resilient. South Med countries, instead, show very different growth trajectories not only because of differences in their economic structures but most of all because of the nature of the political instability they are experiencing.

Following the pandemic shock, the Euro Med countries witnessed a considerable fall in their GDP growth rate of almost 8 per cent on average (see fig. 1). Moreover, while East Med countries and South Med countries on average recovered all the loss in 2022, Euro Med countries still lag.

The Ukrainian war has delayed the recovery in the Euro Med countries by adding uncertainty and by massively increasing the cost of energy. South Med economies show a mixed reality. On the one hand, countries such as Libya, Syria and Lebanon, and to a lesser extent Tunisia and Palestine, suffer significantly due to the political instability and social unrest which have translated into deep recession; by contrast, in 2020 countries such as Turkey and Egypt recorded slower growth rates, and their recovery in 2021 and 2022 was significant despite the war (see fig. 2). Thanks ¶{p. 73}to its large endowment of fossil fuel energy resources, Algeria managed to rebound strongly in 2022 in the wake of the energy crisis ignited by the war, while Morocco saw its strong recovery in 2021 (almost 8 per cent) shrink in 2022 to a mere 0.77 per cent. Morocco’s recovery in 2021 was mainly sustained by the growth of the service sector, especially by tourism. However, like all other oil-importing countries in the region, such as Egypt and Tunisia, Morocco was badly hit by the increase in energy prices in the second half of 2022.