A Greek, an Irishman and a Portuguese go into a bar and order a drink. Who picks up the bill? A German. If you have not been following the unraveling of the Eurozone crisis that joke will mean nothing to you. But there are two reasons why East Africans should pay some attention to what’s going on in the Eurozone. Firstly, the crisis was cited as one of the reasons for our currencies misbehaving in the second half of 2011. Secondly, our East African governments are signing up to a Monetary Union protocol that is eventually supposed to lead us to a single currency in the East African Community.
Let’s take a historical step back. The European Union (EU) established the euro in Maastricht, Netherlands in 1992. To join the currency, member states had to qualify by meeting the terms of the treaty in terms of budget deficits, inflation, interest rates and other monetary requirements. The currency came into official existence on 1st January 1999. As countries joined the currency union, Spain, France and Italy now entered into a lower interest rate regime that fuelled a borrowing frenzy by both private sector companies and mortgage borrowers in the respective countries. Naturally, the higher appetite for debt led to a higher appetite for things imported and the current account deficit (exports versus imports) began to grow.
Meanwhile back at the German ranch, the Germans grew their exports steadily and ended up selling goods to their southern European counterparts thereby building up huge cash surpluses as well as positive trade balances. This is just one of the reasons why Germany was instrumental in the financial bailout packages that the European Union was forced to provide to the errant members of the Eurozone. The Greeks on the other hand used financial maneuverings to hide their actual borrowing statistics as it prepared to enter the Eurozone in 2001. By 2009, the total Greek private and public sector debt was an astonishing Euro 300 billion or 113% of GDP, which was almost twice the Eurozone limit of 60%. Furthermore, in 2010 EU auditors uncovered the financial shenanigans finding that the Greek budget deficit was at 13.6% of GDP and not the published 3.7% against a Eurozone limit of 3%. The Greek government was clearly spending far more than it was receiving as Greek civil servants had generous salaries and pensions (there was even a holiday bonus of one or two month’s salary) while there was massive tax evasion amongst the citizenry. There are several other macroeconomic factors that led to the Eurozone crisis and there is not enough space to cover them here. However what is of grave import is that fiscal mismanagement of one country (government spending more than it receives in taxes – Greece being a case in point!) can have a significant bearing on the overall performance of a single unit currency zone as it becomes difficult to get investors to buy government issued paper (used to plug in government budget deficits) if there is even a whiff of default from a member country. The offending country creates a “contagion”, a morbid fear that its cousins can also catch the “potential debt default flu”.
So at last month’s EAC Monetary Union summit in Arusha, Paul Collier, director of the Centre for the Study of African Economies at Oxford, said that economic imbalances among EAC member countries could create regional instability similar to the current crisis facing the Eurozone according to the Business Daily on February 27th, 2012. He warned the delegates who included regional finance ministers and central bank governors to tread with some caution saying that the Eurozone experience had shown that it is difficult to enforce spending limits among members of a monetary union such as the one proposed by the EAC. I am actually not sure what the whole excitement is around getting us to have a common currency when we are struggling with our very own budget deficit in Kenya. We the taxpayers are paying the brunt of a government that struggles to rope in more citizens into paying taxes that can help the government meet its spending targets. Our government constantly comes to the domestic (and lately the international) market to raise cash to plug the deficit. Add to that the fact that we have a trade imbalance caused by our rabid love for things imported and you see why we struggle to maintain our domestic currency and interest rates steady. Now throw in Uganda, Rwanda and Tanzania’s fiscal and monetary issues into the pot and you have a potential powder keg of social unrest across the whole EAC as citizens start to wonder why they are spending hundreds more shillings to purchase goods just because they have a single currency being affected by budget deficits and trade imbalances of one member country.
The Permanent Secretary in the Ministry of Finance, Joseph Kinyua summarized it succinctly at the Arusha summit: “A strong fiscal policy of the kind that would support a monetary union would require politicians to “bite the bullet” and guarantee independence of institutions such as the Central Bank.”
Judging from the last Parliamentary Committee report on the depreciating shilling, I doubt that politicians are anywhere near giving the Central Bank autonomy. That said, if the EAC shilling starts to tumble for whatever reason, the Kenyan Parliament will form yet another committee to investigate the depreciating EAC shilling. After four months of trying to understand fiscal and monetary policies of not one but four countries, it will likely come to the conclusion that there is NO conclusion citing the following reasons: 1: Hotels in Dar es Salaam and Mombasa were fully booked so they couldn’t write their report. 2: There was no beach in Uganda to write their report 3: They have requested the Speaker of the East African Legislative Council to form a committee to investigate the EAC shilling depreciation and they are waiting for that report. God help the EAC monetary union!