The Political Premise for a Monetary Union

What do Brian Cowen, Jose Socrates, George Papandreou and Silvio Berlusconi have in common? Before you ask, this is not one of those “what did the Irishman, the Portuguese, the Greek and the Italian do at a bar” kind of joke. In actual fact, the four gentlemen -of exactly those European extractions- all resigned as Prime Ministers between January and November 2011. The reasons for resigning were for the most part economic: government austerity measures that were leading to social unrest due to the unfolding Euro crisis following the global financial crisis of 2008. Yes, my dear aspiring presidential candidate from an East African state: you need to read this and weep. The Eurozone crisis left many political corpses in its wake and all because they were having to pay the political price for economic excesses undertaken by both public and private sectors in the common monetary union of the Euro.

If you can tear your eyes off your political ambitions for a minute, let me explain why. By the summer of 2008, a few months before the global financial crisis emerged, private bank lending in the core countries of Germany, France, Netherlands and Belgium to non-core Eurozone countries (Greece, Ireland, Italy, Portugal and Spain) had reached a peak of almost US$ 2.5 trillion. This was propelled by the low interest rate regime driven in large part by the stable economies of the core countries and the elimination of currency risk by having a unified currency. The access to international capital by the non-core countries (which by the way, did not have the same economically productive capacity of the core countries) fuelled private sector borrowing which was channeled to a large extent to the real estate sector rather than higher employment generating or revenue productive areas of their economies. Furthermore, public sector wage bills ballooned as there was now a point of comparison for wages in view of the fact that there was a common unit of currency measure, notwithstanding the fact that factors of economic production in the non-core countries such as manufacturing and the resultant exports were not growing at the same level as those of the core countries.

Following the global financial crisis in 2008 which originated in the United States and shook international capital markets across the globe, the European banks began to tighten credit which had by then become a very scarce resource and began to pull out of their positions in the non-core countries. Tightening credit hit most aspect of the European economies resulting in a recession which led to job cuts and reduced public and private sector spending. Meanwhile fiscal deficits in some of the Eurozone countries meant that governments had to introduce austerity measures to tame their runaway expenditure driven by huge public sector wage bills (something Kenyans can totally relate to as we witness the runaway expenditure related to salaries at both national and county levels). Some of the austerity measures introduced in Greece for example, were freezes in public sector hiring and reduction of salaries, reduction in social security payments, tax hikes and pension reforms.

The effect was felt immediately by citizens who engaged in violent protests and suicides in some extreme cases as the effect of a shrinking economy began to be felt at an individual level. In both France and Spain, the retirement age was raised to 67 to mitigate the effect of the public sector hiring freeze. In a nutshell, with Euro-citizens feeling the pinch in their pockets (except for the Germans who pretty much financed much of the bailout that followed) they voted with their stomachs and kicked out the governments that had started to put in the austerity measures.

The fact is that there can be no successful monetary union if there is no political union first. And many Euro-skeptics argue this very point that the political union should have come first. This would have enabled a unified position taken on economic matters such as a bigger push on manufacturing and agriculture in Rwanda and Burundi as key sources of revenue to balance out the future oil revenues from Uganda, Tanzania and Kenya’s recent oil finds. This for instance would drive a balanced revenue generating objective across the five members rather than one member being the key producer which generates strong capital inflows and the other four sitting back and being key spenders on the back of low interest rates and high foreign currency reserves generated by one member. It would also drive a unified fiscal objective that would enable a controlled expenditure plan.

But pushing for a monetary union without a political union is akin to a couple that marries without consummation of the marriage ever taking place: there is certainly no intention to have a productive outcome of that union. And lest we forget, it was our differing political ideologies that saw the initial East African Community fall apart in the first place. We can achieve the East African Community objectives without having to merge politically and monetarily by simply opening our borders and allowing free movement of labor and goods. After all, that is what we want isn’t it: Bigger markets for our goods and services and more opportunities for our citizens to get employment beyond our physical borders, right?

I worry whether the current 11th Parliament has the technical or even emotional capacity to challenge the government on the merits of this cockamamie plan to merge our currencies. The recent passing of some laws makes me doubt this view in its entirety. I then hope trust and pray that this will be put to a referendum and hope that the citizens of Kenya, at the very least, will see past the smoke and mirrors of this ill advised initiative. And perhaps, ten years later we will truly see the outcomes of the current Euro crisis and be in a better position to question our government of the day as to why they think they can beat the Europeans at this game.

  • http://admin Liz

    Developing economies….still got a long way to go….sigh