EAC’s currency dream could suffer Greek bug

http://www.observer.ug/index.php?option=com_content&view=article&id=8011:-eacs-currency-dream-could-suffer-greek-bug&catid=38:business&Itemid=68

Written by Devapriyo Das / The Observer

Wednesday, 07 April 2010 18:42

BERLIN – The current financial crisis in Greece has called the long-term viability of monetary unions into question. And East Africa’s proposed common currency is no exception. Last year, the East African Community (EAC) celebrated the tenth anniversary of economic cohesion of its five-member states – Kenya, Uganda, Tanzania, Rwanda and Burundi. In mid 2010, the region is expected to embark on a zero-tariff trading regime within its borders. A common currency appears a logical next step, with political leaders suggesting 2012 as the year in which it could happen. But the current troubles in Greece could be food for thought. FISCAL HARMONY Buoyed up by a strong Euro and the political power of the European Union (EU), Greece borrowed heavily on the financial markets. Meanwhile, its tax collection remained amongst the lowest in Europe even as its productivity declined. Today, the country is deeply mired in debt and faces a slow, painful recovery, as its European partners refuse to bail it out. “All regions looking to have a common currency have to study very carefully what is going on with the Euro”, observes Guillermo Nielsen, Argentina’s Ambassador to Germany. “One of the lessons we have to draw out of this Greek situation is the need to work closely in fiscal harmonization. If not, you run into trouble.” Speaking to The Observer at a meeting with foreign journalists at Germany’s Ministry for Economic Cooperation in Berlin, Nielsen said there are clear dangers for adopting a common currency in a monetary union whose members do not have strict controls over their macro-economic policies. Nielsen ought to know. As Finance Secretary of Argentina from 2002-05, he fought a bruising battle that helped steer his country out of bankruptcy and the worst socio-economic crisis in its history. “If you are going to work with a monetary union, all countries have to have more or less the same budget deficit, or budget support and more or less the same tax structure”, Nielsen cautioned, adding that, if achieved, this could be a “tremendous driver for stability, and stability in turn brings growth.” INDEBTED OR INTEGRATED? Already, the EAC is working towards common service delivery and efficient standards in revenue collection. Along with zero-tariff trade, reduced customs regulations are enabling faster flow of goods across regional borders. Greater cooperation between the region’s central banks, and harmonization of budgetary cycles by the Finance ministries of the member states is also proceeding well. However, there are great disparities in the size of its members’ economies, of their public spending and their budget deficits. Deeper integration also raises the prospect of small producers being squeezed out by large, well-funded regional businesses. Similar hopes and fears were raised about European integration and the Euro. Greece itself was admitted for political rather than economic reasons and has benefited enormously from the region’s common currency, the Euro. “Greece has the incredible advantage of being perceived by markets as a part of the Eurozone,” Nielsen remarks, and points out that, “the Euro has been helping Greece get into high levels of debt at very low interest.” Backed by the Euro, Greece got access to plenty of credit at very low rates of interest. No one thought it couldn’t pay back. Even worse, it has since emerged that the previous Greek administration lied and supplied false statistics about the true state of its finances when reporting back to its EU peers. Consequently, Greece’s debt stood at 113% of the value of goods and services it produced in 2009. Its indebtedness was further deepened by the financial crisis because, as Nielsen observed, “to avoid recession, governments have issued more debt.” DEVALUATION OR DEADLOCK? Now, Greece finds itself hampered by the very monetary union that has supported it for so long. “Since Greece is not free to state its own monetary policy, such as devaluation”, Nielsen remarks, “it bears a strong social reluctance to the economic adjustments implemented by the government”. Greece can still borrow from the money markets to finance growth and service old debts; but with its sovereign debt rating recently reduced, those loans will come with high interest. It cannot exit the Euro or the EU, as that would be political suicide. Usually, devaluation would help make a country’s exports cheaper and boost its competitiveness. Greece cannot do that precisely because it is in a common currency and is prohibited from devaluing unilaterally. It certainly cannot be bailed-out, as that is prohibited by the EU constitution. A bailout by the International Monetary Fund has not been ruled out. What it has to do, to maintain its debt-GDP ratio, is to widen its tax-collection net by 7.8%, curb public sector salaries and spending and reduce its budget deficit. Its announcements to that effect, have been met with widespread strikes and urban violence in the capital, Athens. While all this might seem like a worst-case scenario for East Africa, it is not easy to ignore either. Hits: 613