International financial integration remains a key objective of structural reform in the Mediterranean region.

Despite a global crisis the scale of which seems to call into question the policies arising from the Washington Consensus, international financial integration remains a key objective of structural reform in the Mediterranean region. 

However, recent studies show that, despite not really opening up their economies, the countries to the south of the Mediterranean are increasingly vulnerable to waves of ‘pure contagion’.

Unlike ‘fundamental contagion’ (a physical phenomenon arising from macroeconomic interdependence), ‘pure contagion’ reflects a cognitive shift among investors that brings about excessive synchronisation of low-volatility phases on the capital markets and a destabilisation o financial systems. In other words, it is the reaction of the markets to a deteriorating global climate that causes a psychologically, rather than an economically, driven crisis.

While ‘fundamental contagion’ can be contained by concrete measures to restrict interdependence (monitoring or taxing capital flows), such measures are not effective against ‘pure contagion’, which is largely dependent on psychological factors.

Nevertheless, while observing the discussions on restructuring global finance, we can suggest some specific ideas for the Mediterranean region. First, it seems essential to improve the quality of financial and extra-financial information distributed to investors. This would help to better align investment decisions with social and economic requirements, but it does indirectly raise the issue of training.

Moves to set up a Euro-Mediterranean area for management training therefore also have a role to play. Lastly, and more generally, it is perhaps time that we recognised the imperfect way in which markets allocate resources. We need to rethink the role of banks, governments and international institutions in
development financing.

Bibliography: Lagoarde-Segot, T., Lucey, B., 2009. Shift contagion vulnerability in the MENA stock
markets. The World Economy 32-10, 1478-1497.