REGIONAL INTEGRATION : What the Euro crisis means to E. Africa as an economic bloc

When the architects of the re-established East African Community (EAC) first got together to set the vision of our future, they had no better example than the EU. It was the perfect model to copy at the time, it was a monumental political and economic achievement to roll out a single currency in 16 countries with divergent economies.

When the architects of the re-established East African Community (EAC) first got together to set the vision of our future, they had no better example than the EU.

It was the perfect model to copy at the time, it was a monumental political and economic achievement to roll out a single currency in 16 countries with divergent economies.

Now the doom-mongers are smug with many of their worst predictions being exceeded in severity. When a regional trade bloc goes through the various steps of; preferential trade, free trade, customs union and the final step – monetary union they are opening themselves to risks beyond their control.

East Africa had a single currency from 1921-1969 and it worked well for a 48 years. However, after independence the countries weren’t able to keep the fiscal discipline required for a convergent currency.

Uganda ran up a huge deficit, Tanzania adopted Marxist economics and Kenya found itself unwilling to prop up the other nations. Within 2 years, Uganda was in economic crisis and Idi Amin came to power and we saw the gradual death of the economy for 16 years.

The main economic factor that linked East Africa, which was transport infrastructure gradually decayed.

It is logical to want an East African currency, but the recent problems faced by the Euro should warn us. In the run-up to adopting the Euro, the EU countries agreed a Growth and Stability pact, along with convergence criteria.

The basic rules were; no budget deficit of +3 percent, inflation of 3 percent or less and government debt of less that 60 percent of GDP. Most of the Euro countries failed to achieve this, even Germany has 68.9 percent.

France has 66.9 percent and Italy 104 percent of GDP compared to debt. The project should have been postponed but because of political pressure and pride they went ahead regardless.

Now the effects of this indulgence are dire, President Sarkozy even threatened to pull out of the Euro unless Germany fully backed the Greeks to cover their deficit. The political reasons for the Euro far outweighed the economic reasons, headline indicators like inflation and interest rates were given annual targets instead of 5-year cyclical targets.

Deficit projections were optimistic and based on assumed constant growth in a period where we saw 17 years of growth in the Eurozone.

Then we had this crisis, and suddenly the projections were more in focus, and when compounded over 20 years their deficit will grow as more pensions are paid.

The main problem with a regional currency is that individual countries cannot respond to monetary pressures within their borders, all measures have to be collective. A nation cannot devalue its currency, or raise interest rates as these are decided collectively.

In the old days they would print more money, but in Europe the governments are buying junk bonds from Greece to the same effect.

The Greek government writes an IOU, the European bank accepts the IOU even though they know they won’t pay, so it is like printing money.

All this has devalued the Euro by 20 percent in two months, it was $1.48 and now is hovering around $1.18 and is expected to slide to parity by Christmas.

All this will impact Rwanda in terms of the aid we receive, our exports, our imports, energy prices and our cost of living.

Most importantly it should warn us of the dangers that accompany the benefits of a single currency, and even if we do chose to adopt a single currency we should learn from their mistakes.

Firstly economics has to matter more than politics, Europe chose to ignore the signs of this crisis because they saw the political benefits first.

They ignored huge deficits, and now Germany with 69 percent deficit cannot order Spain with 40 percent deficit to cut spending without looking hypocritical. We have set a target of 2015 to roll out the new EA Shilling, we need to revise many policies we agreed to in that regard.

Ends

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