The EAC Monetary Union will be a success

As East Africa moves towards further monetary integration, many students of the current Euro zone crisis will wonder why this type of crisis can’t happen in East Africa. Their assertions are most likely wrong, but we all should heed their point. There are many lessons that the new Monetary Union can learn from the Eurozone but perhaps the most pertinent is to ensure the independence of the new Central Bank. Finding economists that would argue against the free movement of labor and capital can be a laborious exercise. Even Paul Krugman, regarded by some as the most prominent liberal macro-economist, has argued that “If there were an economist’s creed” it would include “I understand the Principle of Comparative Advantage and I [therefore] advocate Free Trade.” The East African Monetary Union will not only lower transaction costs, allowing for freer movement of labor and capital, but more importantly provides the opportunity to leverage the abilities of all five countries at the same time. The ability to ensure that products created across the markets can be traded at the same rate across the region is a businessman’s dream (unless they, of course, are speculators taking advantage of this lack of efficiency). Smaller countries such as Burundi and Rwanda, which have less to export, can benefit from economies of scale and better terms of trade opportunities. Increased efficiency will become a fundamental benefit of the monetary union. As the price differences between each country become clearer and more pronounced, business will have to become more competitive. Additionally, workers will become more productive as they have to compete across the region for the same currency.The architects of the Treaty of Maastricht, Helmut Kohl, Germany’s Chancellor, and François Mitterand, France’s President, believed that greater economic and political integration would ensure peace for Europe. Both had grown up during World War II and knew the devastation it had caused. It should be noted that both had a disdain for economist who they felt were secretive forces that worked behind the scenes to undermine political objectives. They were right on both their assertions. Instability is hard to maintain if nations are economically bound to one another. Once countries enter a monetary union, it is very difficult to untangle and can have long-last consequences such as deflation and bank runs. On the second assertion similarly they were right, Central Bankers can be a politician’s worst enemy if they choose to be. Federal Reserve Chairman Paul Volker’s determination to end stagflation effectively ended President Jimmy Carter’s chances of winning re-election and ushered in Ronald Reagan’s regime. It should be noted that Chairman Volker was a democrat like Carter.The primary reason the Euro zone failed can be argued to be that the terrible four as they were called, Greece, Portugal, Italy and Spain, never maintained the promise of the Maastricht treaty. The treaty stipulated strongly for specific frameworks for interest rates, deficit rates and exchange rates leading up to establishment of the Euro. The East African Central Bank will have to ensure that nations maintain the agreed monetary benchmarks. The Central Bank should be given independence and allowed to set rates irrelevant of outside pressure. With diverse economies that provide various exports and services, the Central Bank will have to consider the entire region as a whole. Even though Abenomics was adopted and has taken promising hold in Japan, the norm of Central Bank independence is most prominently being promoted by developing nation’s economists. Whether the choices are for ‘goal’ independence which will allow the Central Bank to set its own monetary policy, or ‘operational’ where the bank freely follows objectives set by Ministries of Finance, independence allows the Central Bank to maneuver primarily in the public interest and focus on price stability.The Federal Reserve of the United States has been allowed to control monetary policy for 50 ‘states’ that can issue their own debt, set fiscal policy, and relatively control trade. If the Bank, and its current Chairman Ben Bernanke, have shown us anything it is that it can work in the interest of the nation as a whole if it is given the opportunity. The East African Monetary Union will be a success because it has willing participants who understand the benefit derived from it. We should not be wary of our own population’s ability. The question is not if we will benefit from the Monetary Union, but by the degree we wish to unleash our economic promise. The author is an economist based in Washington DC.