Abstract

The Corona Virus pandemic has spread rapidly across the world. The COVID-19 pandemic has infected millions across the globe and almost stalled economic activity even as countries restrict movement to stop the spread of the virus (Dabrowski & Dominguez-Jimenez, 2020). As the toll on humans and health continues to grow, the damage afflicted on the economy is evident, representing the worlds largest economic shock to date. The COVID-19 has led to immediate, near-term, and long-term effects on the global economy. The global GDP was forecast to drop by 5.2% in 2020, based on the weights of the exchange rate in the market, making it the deepest recession the world has experienced in decades. This is despite the unique government efforts to counteract the downturn through monetary and fiscal policy support. In the long term, the deep recessions resulting from the pandemic will leave permanent scars through global supply and trade linkages fragmentation, human capital reduction through lost schooling and work, and reduced investment.

The pandemic and impending crisis call for immediate action to reverse COVID-19s effect on health and the economy, providing protection for vulnerable populations and offsetting a lasting recovery (IMF, 2020a). Developing countries and emerging markets already facing serious vulnerabilities need to address informality-triggered challenges, strengthen their public health systems, and deploy reforms to foster strong, sustainable growth after the health crisis. This paper looks into the effect of EU investment in the Middle East.

Running head: HOW THE CORONA VIRUS WILL AFFECT EUS INVESTMENT IN THE MIDDLE EAST 1

Introduction

The European Union (EU) is an economic and political partnership representing several sovereign countries that have come together to form unique cooperation. It resulted from an integration process that started post World War II, with six initial member states from countries in Western Europe, to promote interdependence and prevent the possibility of another war breaking out in Europe (OECD, 2018). The EU has 27 member states, with the majority being countries in Eastern and Central Europe. It promotes stability, peace, and economic prosperity across the European continent. Traditionally, EUs trade, foreign, and development aid policies focus on ten Southern and Eastern Mediterranean countries (SEMC) that make up its immediate neighbors. The SEMC countries include Tunisia, Morocco, Jordan, Egypt, Algeria, Israel, Libya, Lebanon, the Palestinian Authority, and Syria.

In recent decades, the EU has been a major development aid provider to the Middle East region. About 84 billion was invested in the region between 2007 and 2019, with major sources being Germany (21 billion), the European Commission (22 billion), and France (15 billion). The European Invest Bank (EIB) has also actively invested in the Middle East, funding regional projects worth 21 billion from 2007 to 2020; about 6 billion was categorized as an aid during the same period (OECD, 2020).

Generally, the EU is a cornerstone of prosperity and stability in Europe. However, it currently faces various internal and external challenges. EU leaders focus their attention and time on managing the COVID-19 pandemic and its economic effects (WTO, 2011). Other issues that the EU is currently facing include backsliding of democracy in some member states such as Hungary and Poland, managing relations with the United Kingdom (UK) after BREXIT in 2020, the presence of anti-EU (to some extent) and populist political parties across the block, challenges posed by China and Russia, and ongoing societal and political pressure related to migration. The EU is also dealing with various effects of the COVID-19 pandemic on its investments in the Middle East and other world regions. Most of these challenges may have implications for the future character and shape of the EU.

More cases of COVID-19 infections are confirmed worldwide as the number of COVID-19 vaccine doses administered also continues to increase. The crisis of COVID-19 extends beyond health to impact education, jobs, the environment, food security, and more. The pandemic began as a health crisis but has rapidly spread to become an economic crisis for many countries and unions worldwide (WTO, 2011). The pandemic continues to impact lives, and more funding is available to respond to ongoing and emerging needs. Development banks, governments, philanthropic organizations, multilateral and bilateral donors, and the private sector continue to contribute equipment, money, and expertise to combat the crisis. This paper focuses on how the coronavirus will affect the EUs investment in the Middle East.

Background of Trade Flows and Investment in the Middle East

Hydrocarbon exports have driven trade flows for the Middle East region for many years because it is home to the largest natural gas and oil reserves worldwide. Since the GFC, fuel exports share has decreased (The Economist, 2020). Although non-fuel exports in 2007 were below 25%, the figures increased in 2015. Fuel exports also contributed to a large share of exports in 2019. Oil price fluctuations affect the weight of fuel exports in the Middle East the most, with the 2014 oil price collapse contributing to the biggest fall. Due to the COVID-19 pandemic, it is only obvious that the prices declined further, affecting the exports. Fuel exports make up more than two-thirds of exports from the oil-exporting countries in the Middle East.

Non-fuel exports have also grown immensely from $38 billion in 2007 to $316 billion in 2019. 35% of all regional trade in 2019 was with countries in the Middle East (inter-regional trade increased from 30% in 2008). Greater economic integration in the Middle East region is a good sign, given the existing trade barrers and many frozen and hot conflicts (The Economist, 2020). Intra-regional trade and other economic unions have a better chance of growing if trade barriers can be removed and conflicts addressed. The EU is the Middle Easts second-largest trading partner despite a drop in its share of exports from this region post the GFC (the share in 2019 was the only one that rose above the 2008 figure). Most trade between the Middle East and the EU is with Spain and France. China increased its share of Middle East exports from 2% to 6%.

The EU remains a major trading partner of the Middle East region, receiving more than 15% of non-fuel exports. However, the Middle East also trades among its member countries, including North Africa, making it the greatest source of development for the MENA (the Middle East and Northern Africa) countries. The situation is different from an investment view (The Economist, 2020). Investment from other MENA countries to the Middle East is modest and dropped in the 2010s in absolute value and total market share. Even so, the EU is the largest investor in the Middle East. Foreign direct investment (FDI) from the EU to this region increased between 2009 and 2017 before gradually falling due to the COVID-19 effect.

The Impact of COVID-19 on the Middle East Region

The pandemic has caused an extra negative shock to the already fragile and stagnated macroeconomic scenario in the Middle East and Northern Africa (MENA) zone. Some effects include the effects of lockdown measures and the health crisis, dramatic declines in revenues from the tourism industry, temporary supply chains interruption, lower oil prices, and reduction in labor remittances (The Economist, 2020). According to the 2020 IMF forecast in October, GDP will drop in all Middle East countries except Egypt. Additionally, oil producers experienced oil prices collapse in 2020 due to the fall in global demand and the fragmentation of supplier coordination. Reduced GG revenues, the deep recession, and increased expenditure will further worsen debt-to-GDP levels...

…existing FTAs with partners in the Middle East region prepared for such a step. It should also strengthen inter-regional cooperation frameworks (within the UfM) in green energy, environment protection, research, education (providing scholarships, for example, to students in the Middle East), legal migration, and culture.

The COVID-19 pandemic may lead to a larger role for states and a move from market policies. If this happens, the EU will experience a hurdle in accommodating this change because it is currently focused on the single currency, the single market framework adopted during the economic liberalization (World Bank, 2020). Moreover, clashes within the EU could ensue from member states attempts to adopt more interventionist techniques, more so around taxation and fiscal policy, industrial policy, and labor markets and redistribution. The EU could easily drive collective change in such areas due to sufficiency in the consensus among its member states. However, the impending asymmetric impact of the economic crisis and political differences in Europe may lead to an uneven change in economic policy across the EU in response to the pandemic. The EU may be trapped in a suboptimal status quo with no way to change it, in turn, being unable to change towards a political economy focused on its member states that citizens may now demand. The EU may have to undergo reforms to accommodate an economic model based on a more interventionist strategy. Therefore, European leaders must cease to view the EU as a linear integration with irreversible policies or one that cannot change its course.

Strategic Policy Responses for Recovery

Investment recovery remains uncertain. However, the environment post-COVID pandemic will affect investor behaviors and investment policies. Governments adopt more protectionist policies and strategies to substitute imports and depend less on international value chains, such as Lebanon and Algeria (OECD, 2018). Barriers to entry and screening measures of importance in particular sectors may increase due to national security concerns. Even so, countries in the Middle East may experience an increase in emerging opportunities in sectors such as automotive other than oil and gas (OECD, 2020).

New sectoral prioritization and better targeting, rethinking business climate reforms and investment techniques, and enhanced investment facilitation via digitization may make up medium-term and long-term responses for recovery (World Bank, 2020). Companies will have to cope with disruptions in production and may reconsider existing business models and alter their supply chains. The government will have to manage the expectations of investors. With the expected growth in ICT and health sectors, knowledge-seeking FDI may become essential and relevant. Similarly, some companies will face challenges regarding investing in the energy industry because a drop in demand will affect the economies of oil-exporting countries in the Middle East that rely on EU FDI investment (OECD, 2020).

Conclusion

The COVID-19 pandemic continues to disrupt life and economic activity worldwide. World trade was forecast to drop by about 13% to 32% in 2020. The unprecedented nature of the health crisis and resulting uncertainty around its impact on the economy have been linked to the decline. It is expected that the slump will exceed the decline registered from the 2008-09 global financial crisis. The forecast of recovery in 2021 is also uncertain, with outcomes dependent on the duration of the pandemic and policy responses effectiveness. Governments have since taken various measures to protect the lives of their people from the health crisis. Declines in trade and output have consequentially affected businesses and households despite eminent human suffering due to COVID infections. The pandemic has immediate, short-term, medium-term, and long-term impacts on the EUs investment in the Middle East region.

The immediate recovery goal is to contain the pandemic and address the economic damage to people, businesses, and countries. Policymakers must also initiate the planning process for…