Published on Arab Voices

Unemployment: The Mediterranean effect

ImageHigh unemployment rates in the Middle East and North Africa (MENA) are well known. What is less well known is that high unemployment characterizes all Mediterranean countries. Using the most recent data in the World Development Indicators, countries with coastlines on the Mediterranean have an average unemployment rate of 12.5%.  Average unemployment among the European Mediterranean countries is 13.5% percent (of which, France, Italy, Greece, and Spain average 11%), while unemployment in the MENA Mediterranean averages 10.5%.  Youth unemployment rates are similarly large, the Med countries as a whole have an average unemployment rate of 26%, with European Med countries at 28% and MENA Med countries at 24%.

Within the European group, there is a lot of variation—the lowest unemployment rates belong to Slovenia (5.9) and Malta (6.9), the highest to Montenegro (30), Bosnia (24) and Serbia (17).  Within the MENA countries, the variation is somewhat more limited—Syria is lowest at 8% and Tunisia is highest at 14%.

Aside from the sea, a common feature of Mediterranean countries is that many have a currency tied to the Euro.  A fixed or semi-fixed exchange rate has the advantage of providing price stability, but it also has the danger of inadvertently getting overvalued, which hampers competitiveness, growth and ultimately jobs. 

Countries with undervalued currencies tend to have high growth and create jobs, while countries with overvalued currencies tend to have low growth and stagnating employment prospects. The intuition is that undervaluation raises competitiveness and supports the production of tradable goods. In addition, undervaluation raises the profits from serving foreign markets, thus encouraging local firms to begin exporting, develop new product lines for export, and find new markets.  These animal spirits and innovations are critical for growth and bring both more and better jobs. 

Many of the calls for Greece to exit the Euro reflect this phenomenon. Rebalancing economies on a fixed exchange rate is painful and could result in a long period of unemployment and slow growth while wages and price slowly adjust to do the rebalancing. Austan Goolsbee, Paul Krugman, and Sebastian Mallaby, among others, have recently noted that the best option for Greece may be exit to avoid a decade of agonizing adjustment.  While other Mediterranean countries have not hit the same wall as Greece, the main concern from overvaluation is the same. 

In contrast, as the Mediterranean countries struggle, Germany recently recorded its lowest jobless rate since 1991, an enviable 6.8%.  Unlike the Mediterranean countries, Germany has benefitted from a weak currency relative to its economy because of the Eurozone.  As a result, exports have surged, recording double-digit growth in 2010 and 2011. This export-led growth has generated new jobs, with unemployment falling in all but one month since June 2009.

Creating jobs is the biggest challenge facing the MENA region.  As is well recognized, private-sector led growth will be key.  A potential obstacle is the exchange rate. Stimulating investment, growth, and jobs in the export sector requires that countries do not price themselves out of global markets.


Caroline Freund

Dean of the UC San Diego School of Global Policy and Strategy

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