Implications of the introduction of the Euro for the Mediterranean countries

The Mediterranean peripheral countries cannot afford to be passive viewers of the fundamental changes that aretaking place in Europe after the introduction of the Euro. The new developments pose formidable challenges andopportunities. It will be argued that no single group of developing countries will be more affected by thesechanges than the Mediterranean countries given their geographical proximity to the region and their longhistorical record of extensive and large economic interactions (trade, finance, and migration). Thisarticle examines the implications of the introduction of the single currency in Europe on Mediterranean centralbank reserves and foreign external liabilities, trade and capital flow, and exchange rate policies. It is shownthat since most Mediterranean trade is with the EU, Mediterranean central banks will be necessitated to hold majorportions of their foreign exchange reserves in Euros. Also, a Mediterranean currency peg to the Euro, or to abasket of currencies where the Euro is allocated, will be important in reducing financial and trade transactioncosts. It will also be hypothesized that Mediterranean foreign debts will eventually have to be converted toEuros. Finally, parallels between this region and the U.S–Caribbean region will be drawn to reinforce theargument that trade and capital dependence will eventually lead to a pegging of the Mediterranean currencies tothe Euro. © 2003 Wiley Periodicals, Inc.