[EDITOR’S NOTE: The following column was written several weeks ago, before the situation in Egypt became marred in violence. Alexei Beyer has added an introduction to give the piece more context, given the seriousness of the current situation there.]
Egypt’s military, which in early July suspended the Islamist-backed constitution and removed president Mohamed Morsi from office, had no desire to govern Egypt – just to control where the country is headed. So far it hasn’t worked out the way it planned. A workable government has not been established and the country is facing the prospect of full-scale rebellion by the Muslim Brotherhood.
The next several weeks will be crucial not just for Egypt but for the entire Middle East. The Arab Spring, which raised hopes of democratization and openness in the Arab World two and a half years ago, is turning into a relentless slide toward civil war, sectarian strife, radicalization and chaos. Egypt is the most populous Arab country, with a strong military and pivotal strategic position. It has been an ally of the United States and the first Arab country to make peace with Israel. It is the linchpin of an increasingly troubled region; if the situation there deteriorates, the Middle East will likely face years of worsening turmoil.
Shooting protesters and fighting street battles with the Muslim Brotherhood may not be the best way to reestablish social peace. The longer bloodshed continues, the greater will be the damage to Egypt’s economy and investor confidence and, since poor economic performance has been at the root of popular discontent, the less chance there will be that the country will return to normalcy.
The Cairo stock market greeted the anti-government protests that began in late June and resulted in the ouster of the Muslim Brotherhood administration of President Mohammed Morsi with considerable enthusiasm. The EGX 30 index gained over 15% in just two weeks, rocketing 7% on July 4, the day after the Egyptian military stepped in to put an end to the stalemate between the government and protesters. While the danger of political turmoil endures, investors are willing to take a risk on the country’s future and Egyptian shares are remarkably cheap, especially in U.S. dollar terms.
As much as millions of Egyptians disliked living under the authoritarian rule of President Hosni Mubarak, it was the state of the economy that drove much of the popular discontent two years ago.
The economy nose-dived after the 2008 global financial crisis and had recovered only partially by 2011. Unemployment was running close to 10% overall, but the young people descended onto Tahrir Square in Cairo to protest faced even worse economic prospects. Many were educated and technically savvy, differing little from their counterparts in the West, but the sclerotic Egyptian economy simply couldn’t provide enough jobs. The youth unemployment rate stood at over 25%, and life prospects for the 58% of Egyptians who are under 25 years of age were not promising.
Bad to Worse
But since Mubarak was forced out, the economic situation has only become worse. The Islamist government was characterized by mismanagement. Unemployment has rocketed, surpassing 13% at last count. The situation for young people deteriorated further.
The Egyptian pound, which has been weakening since mid-2010, dropped sharply with the advent of the Morsi administration a year ago, losing more than 10% of its value since the start of 2013. Inflation, which was under control prior to the Arab Spring, measuring around 3%, took off. More recently, consumer prices have been rising at a double-digit rate, raising the specter of an inflationary spiral.
The weak Morsi government didn’t dare to boost taxes on its impoverished population, nor could it reduce costly fuel subsidies. Investors and tourists feared political instability. With the economy in shambles and no policy in place to tackle economic woes, it was no surprise that protests against the Islamist government intensified and that the decision by the Egyptian military to remove it enjoyed such strong support across the political and religious spectrum.