Yet a higher level of uncertainty and a lower appetite for risk are not the only cause of a low level of investment. Central Banks in major advanced economies, namely the Fed and the ECB, are implementing significant tightening monetary policies, with sharp increases in interest rates discouraging even more private investments and limiting the fiscal space and public investments of highly indebted countries, as are most of the Euro Med countries. At the same time, geopolitical tensions and increasing interest rates have strengthened the dollar and weakened the terms of trade of most South Med and East Med countries, making these economies less attractive for international investors.



In the wake of the crisis caused by the COVID-19 pandemic most governments have supported the economy by spending a substantial amount of resources and running very large deficits. In the Med area, for instance, the highest level of liquidity provision in 2020, as measured by the ratio of total financial support to GDP, was registered in Italy (35.3 per cent), followed by the liquidity support in France (15.2 per cent) [Capasso and Filoso 2022]. Since 2020 the unusual increase in government expenditure, coupled with the decrease in tax revenues, has considerably reduced governments’ fiscal space and increased concerns about debt sustainability in many countries.

According to the available data, in 2020 government deficits increased everywhere and are expected to remain high in the coming years. Table 2 shows the dynamics of governments’ structural budget balances which are cyclically adjusted for non-structural elements beyond the economic cycle [2] . In almost ¶{p. 80}all Med countries, 2020 represents a structural break, with the deficit jumping to significantly higher levels. Yet following the pandemic, Euro Med countries are those that have recorded the largest increase in government deficits. In Italy, for instance the deficit increased sixfold (from 0.9 in 2019 to 6 per cent of GDP in 2020) while in Greece a 3 per cent surplus in 2019 became a 2 per cent deficit in 2020. By contrast, South Med countries had run larger deficits even before 2020, which are not expected to shrink in the near future.

The larger deficits, coupled with a reduction in the rates of economic growth across countries, have increased concerns about government debt sustainability. This particularly holds for the Euro Med countries already exposed to the debt crisis in 2010. The latest data show that Greece, Italy, Portugal and Spain all display the highest debt/GDP ratio in the region (see fig. 5), and ¶{p. 81}the forecasts signal that such ratios are expected to remain high for the coming years. Apart from Lebanon, which is experiencing very difficult financial conditions with extremely high levels of debt/GDP ratio (according to the latest data Lebanon had a debt/GDP ratio of 150 per cent in 2020), South and East Med countries do not show the same level of vulnerability as Euro Med Countries. Yet given the increasing level of uncertainty, the global inflationary pressure and the increase in interest rates, countries issuing dollar-denominated debt may be put under strain by the depreciation of national currencies and by increased volatility in financial markets. South Med countries could thus be particularly hit by possible worsening of international monetary and financial markets.

The increase in the reference interest rates by the Central Banks will be swiftly transmitted to the credit markets with the effect of augmenting borrowing costs and tightening credit. The worsening of credit market conditions, in turn, will hit firms and investments as well as consumers. Given the already pronounced levels of income inequality within countries, which have been seriously exacerbated by the economic consequences of the COVID-19 pandemic, these forces may put further strain on more vulnerable households and increase political and social instability mainly in South Med countries. In this respect, some countries are at particular risk: Tunisia, Jordan, Libya, Syria, Lebanon may see their already fragile political and social equilibria compromised.

In a context of narrowing fiscal space, governments may also find it more difficult not only to implement policies supporting welfare and health systems, but also the transition towards renewable energies and a more sustainable development path.



After the COVID-19 pandemic and Russia’s war on Ukraine [Guenette, Kenworthy and Collette 2022], the rise of inflation can be considered the third global shock to have hit economies worldwide in the last three years. Both supply and demand push factors lie at the heart of the recent rise in the inflation rate.

The start of the lifting of COVID-19 restrictions in 2021 and the consequent end of forced closures of markets and the resumption ¶{p. 83}of trade in goods and services between countries has provided a major push to global demand. In turn, the sudden jump in global demand, outpacing a sluggish supply, has caused prices to increase through sectors and industries. Almost contemporaneously, the outbreak of war has caused the prices of fossil fuels and energy to increase discontinuously, with the effect of driving up transport and production costs, constituting a major supply shock on the price level. Hence a combination of supply and demand shocks lie at the heart of the persistent increase in inflation.

As clearly shown by figure 6, following the pandemic in 2020 the increase in the consumer price index has been quite significant in all areas of the Mediterranean. In relative terms, inflation has been more pronounced in the Euro Med countries, where actual deflation in 2020 turned into an average inflation rate of 8 per cent in 2022. In the East Med countries, the rise in inflation has also been quite pronounced, reaching more than 10 per cent on average in 2022. The sharp increase in inflation is a major shock since it comes after a long period of extremely low levels of price increases, to the extent that in some countries the price dynamic turned into deflation for long periods before the pandemic. This particularly holds for some industrialised countries, especially for the Euro area. Figure 6 confirms that in the last two decades the level of inflation has gradually decreased in the Euro Med area. This does not apply to South Med countries and East Med countries. The former have witnessed periods of relatively high inflation especially during the 2010-2012 government bond crisis. Of course, the average hides differences between countries within the areas concerned.

Within the South Med countries, a specific case is represented by Turkey. This country has a long history of very high rates of inflation which have reached unprecedented levels since the pandemic. In Turkey the rate of inflation in 2022 was above 70 per cent and, in any event, is expected to remain very high in 2023 (see tab. 3). A similar case of an economy with price growth out of control is Lebanon for which the latest available data in 2020 signal an inflation rate at around 80 per cent. Among the East Med countries Serbia and Montenegro have the highest levels of inflation (11.8 per cent and 12.8 per cent respectively in 2022).