Experts caution against hurried monetary union

By Luke Anami

East African Community (EAC) States should not rush the signing of a monetary union if the eurozone experience is anything to go by, economic and monetary experts have warned.

A recent visit by the Financial Journal to Brussels, the headquarters of European Union (EU), reveals that goods and people should move freely across borders before a single currency system can take off.

Drawing from the European experience, experts are now cautioning that an effective monetary union — which is currently being negotiated by EAC member States — is hugely predicated on a working customs union as well as a functional common market.

"European Monetary Union (EMU) came almost 50 years after the European Union came into existence," Janis Emmanouilidis, a senior policy analyst at the European Policy Centre, a think tank in Brussels told Financial Journal .

"But it came after agreements on trade, internal market, and more others were put in place," he said.

While Europe has taken more than 40 years shaping its economic and monetary policies, the EAC has had a rushed creation of a customs union — which seeks to facilitate free movement of goods and people.

"It would be economic suicide to try and create a single currency for goods that were not able to move freely across the borders," Janis said in reference to the fact that Customs Union, which was formed in 2005, was not fully operational.

"The success of the East African monetary union will hinge on whether the customs union and common market are working or not," he said.

A High Level Task Force (HLTF) team of negotiators formed in January last year to negotiate articles that will form the East African Monetary Union (EAMU) has held six major meetings.

Already, five sessions have been convened in Tanzania, Burundi, Rwanda, and Kenya to chart the way forward for the monetary union with expectations that a deal should be reached in the first half of this year.

A recent report by Society for International Development (SID) showed that the value intra-EAC trade expanded from $2.2 billion to $4.1 billion between 2005 and 2010.

However, as a share of East Africa’s total trade, intra-regional trade declined slightly from 13 per cent in 2005 to 11 per cent in 2010, noted the report titled, State of East Africa Report 2012: Deepening Integration, Intensifying Challenges.

Global environment

The report attributed this pattern to poor infrastructure, emergence of non-tariff barriers, coupled with a harsh global environment, which meant that EAC did not reap the benefits integration.

"EAC will have to undergo similar processes the EU went in a move to achieve a monetary union," Janis noted.

"But first things first — the customs union must be effective and running as experience of the EU has shown."

Despite the all the preparations, of course it has not been smooth sailing for the European Union. In fact, EU governments are facing a crisis of monumental proportions — both economic and financial, but also social and democratic.

The worst hit countries so far are Greece, Portugal, Ireland and Spain. Janis blames the zone’s woes — the worst crisis to have ever affected Europe since the World War II — on lack of enforcement of the EU agreements and laws.

"The eurozone crisis exposed mistakes and flaws in the construction of a monetary union. We did not have an economic union as strong as the monetary union that we developed," Janis said.

"As a region, we had an insufficient, financial mechanism to check flaws in our systems. The result was a high debt, characterised by an increase in unemployment."

In the wake of the eurozone crisis, the EU established European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF) to provide funding to European countries in the financial red.

The two mechanisms, one backed by the EU budget, the other, an entity based on an inter-governmental agreement and able to issue directly on the financial markets are temporary instruments intended to act as safeguards until 2013.

Crippling as might have been, the eurozone crisis serves tasty lessons to EAC integration process. The architecture of a monetary union, in part finds its strength on a strong financial system to check price stability, exchange rates and inflation.

Strong economies

But there is also a more direct sacrifice that taxpayers of the integrating economies will have to bear.

"Within the framework of the EU, countries with strong economies such as Germany and France are key to helping to resolve the crisis in Greece and other countries in southern Europe. This basically implies that strong economies must be willing to assist the others," he said.

"I understand Kenya has a stronger economy compared to the rest," Janis, also an expert in institutional reform said.

"The question is whether she is willing to take economic responsibility within the EAC to ensure countries that perform poorly are assisted," he quipped, sentiments that Dr Adams Oloo — a member of a team of experts commissioned by the EAC to undertake a study on the formation of EAC Political Federation — agreed with.

"EAC is being modeled alongside the EU monetary union. The experience of the EU shows that countries with strong economies bailed out the weak ones," Oloo said.

"The question is whether Kenya is in a similar position to bail out EAC member States should a similar situation occur," Dr Oloo said.

The "State of East Africa report" says between 2000 and 2010, the size of East Africa’s economy grew in real terms from $32 billion to $79 billion.

Kenya’s share of the regional economy was the largest at 40 per cent, while Tanzania had 29 per cent in 2010.

East Africa’s economy grew at a rate of six per cent in 2010, with Rwanda having the fastest growth rate of 7.5 per cent. Kenya had a significant decrease in its growth rate in 2008 and 2009 (two per cent and three per cent) due to the consequences of the post-election violence that occurred in December 2007 and spilled over to the first few months of 2008.

"The reason the eurozone suffered a meltdown is because it did not create strong structures to withstand shocks brought about by a single currency," Dr Oloo said.

"Europe has been able to handle the crisis because they have a strong political federation in place, something EAC is lacking. That is why in our report we proposed that for a monetary union to work, we should put a political federation first in place."

"EU has created strong institutions such as the European Commission to specifically drive the EU integration agenda. While here, the EAC Secretariat operates as a tool of the Heads of State Summit," Oloo said.