In the wake of Eurozone crisis, is a common currency still viable for EA?

Sunday October 30 2011

Kenya, Uganda and Tanzania currencies. Initial efforts by the East African Community to reach a common position on rolling out a single currency for the region have run into hurdles. File

Kenya, Uganda and Tanzania currencies. Initial efforts by the East African Community to reach a common position on rolling out a single currency for the region have run into hurdles. File 


To the East African Community, the European Union has been like an elder sibling: The perfect role model to its regional integration campaign and the embodiment of what it hopes to achieve.

Last year, the EAC Council of Ministers turned to the European Central Bank to conduct a study on the establishment of a Monetary Union which involved designing a draft protocol.

Lately though, the EU is turning out to be a source of sobering lessons on the risks that could be visited upon the EAC member states by forming a monetary union.

The Eurozone is currently grappling with a debt crisis in some of its member countries that has sucked in the entire 27 member bloc.

As the crisis rages on, opinion is split over whether the EAC, which has set 2012 as the target for establishing a monetary union, and other African regional economic communities such as the Southern African Development Community interested in going down that road, should go ahead with their plans.

Prof Gilbert Khadiagala, head of the department of International Relations at the University of the Witwatersrand in Johannesburg, says that the EU’s woes should force a reconsideration of East Africa’s ‘politically-driven fast-track integration’ which has not been thought through.

“Politicians talk about common currency and monetary union without thinking clearly about how this will be achieved, so I think the EU crisis is a wake-up call to the bureaucrats and politicians who dream of fast-tracking,” Prof Khadiagala said.

He argues that regional integration at the moment, should focus more on trade expansion and infrastructure co-ordination rather than ‘the more dangerous phase of monetary and currency coordination’.

According to him, the existing arrangements for co-ordination of currencies by central banks to facilitate regional trade are enough. A common currency would make countries answerable to a central authority, usually the head of the regional central bank, who would be the custodian of monetary policy.
However, Prof Calestous Juma, an expert in international development at Harvard University in the US contends that it would be illogical to argue that a common currency would not work for East Africa simply because Europe is experiencing difficulties with its integration efforts.

“This is not to argue that East Africa will not have its own challenges.

In fact, the introduction of the Customs Union has initial teething problems many of which have been ironed out,” Prof Juma adds.

He insists that a common currency is workable in the EAC, since it would not be an entirely new concept.

“The region had a common currency before and so there is a historical basis for monetary integration provided it is accompanied by fiscal integration,” he says.

This is in reference to the original EAC, which was established in 1967 but was disbanded a decade later.

It is in that same period soon after independence that Prof Khadiagala sees circumstances that are somewhat similar to what is unfolding in the present.

“Like the 1960s experience where socialism was sweet on the lips of politicians, integration and common currency is sweet on the lips of bureaucrats and politicians who want to win a few public opinion points,” he says.

The politics aside, experts say that there is also a need for the region to fix the economics side of regional integration.

Yvette Babs, an analyst at the Standard Bank’s Africa Research Team, says the integration model that is already in place in East Africa, which includes the common market and the customs union should be consolidated.

In addition to this, she said, the different levels of development in the region should be addressed and member countries’ business cycles aligned, since these could undermine the successes of a common currency area.

“The ongoing crisis in Europe highlights the need for credible macro-economic convergence, particularly in fiscal policy,” Ms Babs explains.

In addition to a common fiscal policy, Prof Juma notes that a common market and common political aspirations are other elements of integration that a common currency presupposes.

“The EAC treaty has all these elements.

The other important elements include political will and popular support arising from projected gains from a larger market,” he said, adding that the region needs to learn from the Eurozone crisis, key amongst which is that a monetary union needs to be accompanied by a fiscal union.

Prof Juma reckons that the EAC needs to avoid enlarging hastily, and instead focus on deepening integration with the small number of countries it has, to not only make it feasible but also avoid the pitfalls of Europe.

With only five members, the EAC is a small fraction of its humongous role model. However, there has been talk of other countries in the region, such as Sudan and Southern Sudan, joining in.

When he launched a high level task force to negotiate the protocol for the establishment of a monetary union earlier in the year, then EAC secretary general Juma Mwapachu, argued that the introduction of a common currency will provide a stronger and more solid basis for investment and economic growth and enhance the operation of the EAC Common Market.

Other benefits touted under such an arrangement are improved trade flow and mitigating risks associated with an individual country’s profile.

In fact, Prof Juma is proposing the establishment of a school of regional integration in Africa, where staff would be trained on how to run affairs, a gap that he says currently exists.

“A school of regional integration would also offer a forum through which African countries can share their experiences rather than having to make decisions based on experiences in Europe that may not be relevant,” he adds.

As the EU works towards extricating itself from the crisis, the region will be keenly watching to see how the role model in whose footsteps it is walking, deals with the woes that it has been visited upon by the common currency.