Greece has found itself in deep crisis and is unable to make crucial decisions because its fortunes are tied to European Union’s currency — the euro.

In an interview with The EastAfrican’s Peter Munaita, Jared Osoro, the director of the Kenya Bankers Association’s centre for research on financial markets and policy says the EAC should tread carefully in pursuit of monetary union.

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What kind of crisis is Greece in?

To many people, the crisis in Greece is simply one of debt. In other words, Greece is facing a debt problem as manifested in its inability to meet obligations to official lenders be they bilateral or multilateral. 

To me, the inability to pay debt, and therefore default, is simply a signal of Greece’s problem. The actual problem is a deeply fragile economy whose performance since the global financial crisis has failed to gain traction in a manner that can enable the country to generate enough jobs for its labour force, meet its pension and other social obligations, and its financial sector — especially the banking industry — to resume its intermediation role for the economy’s recovery resumption.     

How did it get here?

It started as a financial crisis that affected many developed markets and had a contagious effect on emerging and to an extent developing markets that are in the frontier category.

In Europe, Greece was among the initial countries to show vulnerability — the others being Portugal, Ireland and Spain and collectively they were whimsically being referred to as PIGS, with Greece taking the G!

The respective governments were keen to help their financial systems because of their likely systemic effects. But this meant that they stretched their fiscal positions. In essence, a financial crisis in these economies — and especially Greece — metamorphosed into a sovereign crisis and then into a growth crisis. To different extents, but more pronounced in Greece, these economies were now in a vicious circle.

To break the cycle, the European Union, the European Central Bank (ECB) and the International Monetary Fund — what has been referred to as the Troika — was called in to the rescue. They came with a lending package, but of course with conditions of structural reforms on the part of Greece.

Was that the right thing to do?

The prescription of structure reform measures was in itself not a problem; it was arguably the right thing to do.

However, it entailed a prescription of austerity when the economy was weak and needed a stimulus like the one the US is just phasing out. Although some argue the US action wasn’t sufficient, the results were positive.

This lead to Greece’s further weakening, leading a frustrated electorate to elect a government that promised to reverse the austerity.  The regime’s populism, which disguised its incompetency insofar as the EU political economy dynamics has pushed the economy to the blink. 

At the centre of all this is the fact that Greece is a member of the euro so has no independent currency and therefore no monetary policy as a lever to push in support of any other measures to help the economy. It has to rely on the ECB, which now has pulled the rug from under the feet of Greece banks.       

What is its likely impact on East African economies?

The ramifications of the Greece debacle for East Africa will be determined by how the Eurozone will be affected if Greece exits euro.  Already banks in Greece have started taking hit, with the ECB decision to withdraw the emergency line leading to runs that have led to a banking holiday.

The consequences for the Eurozone and the rest of the EU will be felt from the inability of the banking system and the Greece government to meet its dues. Most probably, a mild form of the financial-sovereign-growth vicious cycle could be evident at some point in some weak EU members with exposure to Greece.

It doesn’t help that the Eurozone’s recovery is yet to gain traction as the ECB now is in a quantitative easing monetary policy programme — a non-conventional programme that simply tells you that the economy is not well and needs support.

With the EU being an important trade destination for East African economies, any negative developments there will have adverse implications for the region.    

The EAC is pursuing a monetary union. What lessons are there for this phase of integration?

The big lesson is that a monetary union is a bold economic decision and both the economics and the politics have to be right for it to succeed — if one is frontloaded at the expense of the other, the consequences can be dire. 

Furthermore, a monetary union simply means ceding some sovereign powers in terms of an economy issuing its own currency and conducting its own monetary policy.

That means one now puts faith in the credibility and ability of the supra-regional body — in this case the regional central bank to conduct monetary policy for the common good of the entire region. The region should therefore truly converge to avoid asymmetric shocks causing havoc in the entire region.