The EU’s neighbouring economies: managing policies in a challenging global environment

When the EU’s neighbours were still recovering from the impact of the deep global recession of 2009, the combination of a weak external environment and regional and domestic problems is again posing serious economic challenges to these countries. In particular, the prolongation of the sovereign debt crisis in the EU, with which many EU neighbours maintain close economic and financial links, continues to have negative spill-overs on them. At the same time, regional and local factors, including political uncertainty, continue to negatively affect economic performance. This is particularly the case for the Southern neighbours, where political transition in the Arab states proceeds at a very slow pace and with significant setbacks. The situation in the Southern neighbours is further complicated by the prolongation and intensification of the civil war in Syria. Domestic factors, be it the build-up of macroeconomic imbalances or political uncertainty, are also weighing down on economic growth in several Eastern neighbours. They are also being affected by the rapid slowdown of the Russian economy since the second half of 2012.

The paper describes the recent economic developments in the EU's neighbours both at a regional level and in a country-by-country analysis. It also includes two thematic chapters – the first one examines the exposure of the Southern and the Eastern neighbours to the EU economy and puts forward several policy recommendations, while the second one examines the potential role for development of Islamic Finance in the Mediterranean countries.