"Drawing on the idea of the European Union (EU) representing a natural ‘anchor' for macroeconomic policy measures, this article assess the current and upcoming challenges in terms of growth and labour markets and the finance and growth nexus in the region. The structural problems concerning financial intermediation in the region turn out to be one of the major impediments for further economic development. From a political economy point of view, Mediterranean Partner Country (MPC) governments try to maximize short-run pay-offs in order to sustain political support and to trade these financial returns against a minimum of policy reform. The EU, on the other side of the bargaining table, tries to reap the benefits from policy reform, whereas its willingness to fund these compensation schemes can be assumed to be limited. Given these trade-off rationales on both sides of the Mediterranean Sea, both actors free-ride where possible which leads to suboptimal results. Therefore, this ostensible economic problem is analysed in its political economy context in order to suggest a macroeconomic co-operation scheme that explicitly takes into account political constraints and institutional deadlocks, hampering the development of a deeper economic co-operation within the Euro–Mediterranean Partnership (EMP) framework."

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