Europe's sick 'PIGS' may dampen EAC's monetary union hopes

The European chapter of the global financial crisis was most felt in Portugal, Ireland, Greece and Spain and as the economies of these countries teetered on the brink of collapse, the financial press came up with an abbreviation for the four countries-‘PIGS’. What started as a financial crisis in the ‘Pigs’ soon became a sovereign crisis, a situation where their governments struggled to repay their debts. It led to a European growth crisis whose effects were moderately felt in East Africa in form of weak demand for the region’s exports. At that point, European economists determined that the Pigs were trapped in a ‘vicious cycle,’ a situation where their bad state would become worse and then worst; this cycle had to be broken or risk widening to suck in more countries. The European Union (EU), which is a larger and richer version of the East African Community (EAC), has a membership of 28 developed countries including the Pigs; Portugal, Ireland, Greece and Spain. In order to break the dangerous vicious-cycle, the EU, the European Central Bank (ECB) and International Monetary Fund (IMF) collectively nicknamed ‘Troika’ a Russian term meaning ‘set of three’ were called in to rescue the situation. The Troika was happy to step in and treat the Pigs to avoid a wide spread epidemic that would infect neighbours. But the help would also be accompanied by a stringent prescription of austerity measures. In essence, the Troika came in with a lending package which would be given to the Pigs on condition they accepted to undertake a set of structural reforms that would allow their economies to start growing again, generate wealth and capacity to repay their debts. Austerity measures There’s an unconcluded debate as to whether the Troika’s austerity measures were the right thing for the pigs to undertake at a time when their economies needed strong consumption to kick-start growth. Basically, austerity measures are about cutting public spending and increasing taxation as well as deprivation among the people. It’s like forced saving. Greeks hated the package and so did everyone else in the affected countries. However, where discipline is exercised, austerity measures can work; today, apart from Greece, all the other countries’ economies are on their way up. A good example is Ireland which throughout Europe is held out as an example for Greece to emulate. The Irish took the austerity pain, engaged with the troika and have worked their way out of crisis to become one of the fairly growing economies in the EU. Why did the troika’s austerity package succeed in Ireland but failed in Greece? It’s a matter of attitude. No country enjoys having things imposed on them and that’s mainly the feeling in Greece where Greeks voted against the latest austerity measures in a referendum last Sunday. Austerity is about forcing people to deprive themselves of certain luxuries in order to get through a crisis; 30 percent of the Irish people live in deprivation according to that country’s government statistics; that figure stands at almost 40 percent in Greece. Save for Greece, the PIGS acronym is almost dead because the other countries accepted deprivation to save their economies; last Sunday’s ‘no vote’ will only make matters worse for Greece which now risks being thrown out of the Euro-zone. EAC Monetary Union dream Honest economists are of the view that it’s highly unlikely that Greece will ever repay its international debts and after last Sunday’s vote; the choice now is between a messy default and an orderly debt relief operation for Greece. However, the more important aspect for a region like East Africa is to watch and learn about the likely challenges of managing a Monetary Union which is currently being pursued as the next level of regional integration. Although EU has 28 members, only 19 of them, including Greece are members of the Euro-zone which means these countries agreed to adopt the Euro as their common currency and sole legal tender; the other nine members use their own national currencies. Experts say that a monetary union is a bold decision whose success would require both the right economics and politics; fronting one aspect at the expense of the other could lead to serious consequences. All 19 members of the Euro area are advanced economies with very strong institutions; their model of a monetary union was the main example that EAC intended to use to develop its own union of five economies, Kenya, Tanzania, Uganda, Rwanda and Burundi. But there are now whispers that EAC partners’ hopes for a monetary union are likely to be dampened by developments in Euro area, especially if Greece’s troubles metamorphose into a fully blown Euro-zone crisis. People who understand these matters say that in simple terms, a monetary union is about countries ceding their sovereign powers in terms of say, an economy issuing its own currency and presiding over its own monetary policy. In terms of the EAC, it would mean all five partners have to place their faith in the credibility of a regional body, probably ‘the East African Central Bank’, which would act like the European Central Bank, to draw and supervise a single monetary policy for the region. The real challenge for East Africa would be in getting all members to cede their sovereignty over national monetary policies and allow being submissive to a new supra-regional body. In the Euro-zone for instance, countries are not allowed to have a deficit of above 3 percent of their budget; Greece’s budget deficit was more than four times out of order. Again, the Greek politics were played at the expense of economic prudence. Excessively populist public policies largely drove Greece into a debt canyon. The question for East Africa is how to tame members who exhibit fiscal indiscipline such as Greece? Who would be EAC’s version of Germany to act as a chief whip? What measures would be in place to bailout struggling members? In November 2013, EAC leaders signed a protocol laying the groundwork for a monetary union within ten years that would see them harmonize monetary and fiscal policies and establish a common central bank. A month after the signatures were appended, IMF chief, Christine Lagarde, warned that the road map to the East African monetary union was very ambitious and cautioned partner states not to rush urging them to learn from the mistakes of Europe and other monetary unions. “The EAC is lucky to have multiple lessons out there, the gaps and pitfalls of other monetary unions across the world that it can learn from,” said Lagarde. It’s therefore fair to say that the impending Euro-zone crisis emanating from Greece’s fiscal woes is a blessing in disguise from which East African strategists can pick priceless lessons as they plan to embark on the creation of the region’s monetary union. Discipline is an important element for any successful monetary union and Greece, according to a section of international commentators, should follow the rules of the Euro-zone to which it ceded its monetary policy sovereignty. But if Greece has to exit the Euro-zone, how it happens will also be a good lesson for EAC economies to imbibe.

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Europe's sick 'PIGS' may dampen EAC's monetary union hopes