By Bettina Strickler
As Europe struggles with a currency created without fiscal centralization, East Africa is moving forward with its own planned currency union – apparently oblivious to the dangers this entails. While alignment of interests is generally a good thing, all good things come in moderation and with proper consideration of the costs and benefits. When it comes to currency unions, as long as giving up sovereignty extensively is not on the menu, formations of currency unions should not be either.
In September the high level task force that is negotiating the East African Community’s (EAC) monetary union protocol held its ninth meeting in Kigali urging all members to fast-track policy changes so that the protocol can be passed by the end of the year. While a majority of the East African establishment is in favor of fast-forwarding this huge operation, an increasing number of critical voices can be heard.
It made more sense to envision a monetary union in 1999, when a treaty established the East African Community than it does today. Back then the European Union (EU) was about to adopt the Euro and the lack of fiscal centralization was thought to be a non-issue; the problems that would ensue were initially thwarted by an economic boom in Southern Europe. So, naturally, when setting out on their unification journey, the East African leaders not only agreed on a customs union to be followed by a common market, but also envisioned a monetary union and, ultimately, a political federation.
In light of today’s developments in the Euro zone, increasing the pressure for monetary unification appears foolish. The EU clearly shows that monetary union cannot come before political and fiscal federation. Yes, there are economic benefits, such as lower costs and risks of business transaction across countries when merging currencies. But these benefits are only sustainable when the countries involved are willing to at least partly give up sovereignty, particularly in the area of fiscal policy.
The European Union should have become a United States of Europe; East Africa should become a United States of East Africa. The EU’s experience reveals the willingness to accept the benefits from a currency union without wanting to give up sovereignty. There are no signs that this should be any different in East Africa.
While the EU members had been establishing their ties for 50 years before launching a common currency, the newest version of the EAC has only 13 years of durability to show for itself. The fact that the first version of the EAC did not last longer than 10 years and collapsed in 1977 does not make for a great precedent either. The EAC is a loose conglomerate that is trying to find its way to unity.
Is the wish for closer relationships a good thing? Absolutely. Does it have to be achieved as fast as possible and through the handcuffs of a currency union? Absolutely not. Not only will this process take many years, it will also require full commitment. They can’t have their cake (the currency union) and eat it too (maintain sovereignty in all areas).
Currently the EAC countries have very different import-export mixes, making them vulnerable to changes in world goods prices to different degrees. Without strong fiscal centralization including a counter-cyclical mandate and no adjustment mechanisms such as inflation or devaluation, a currency union can have devastating effects on countries hit hard by an external shock.
The EU has brought peace and democracy to a continent with a tragic history. Awarding the EU with the Nobel Peace Prize is yet another recognition of this. However, recent events show the other side of the medal, namely, the potential for conflict that lies within unification if it is not done properly. Europeans have not lost their national identities and maintain a deep sense of economic autonomy. These divides are now surfacing in times of crisis. So yes, the EAC has the potential to advance peace and stability in the region. However, driving this too far can just as well convert the region into a powder keg.
The EAC should continue on its path of unification. This will bring stability to a region that has a huge growth potential. Working together to reduce the barriers that lie between them can make all members experience growth and prosperity. Like any relationship though, you want it to rest on a solid fundament and not to consist of rapidly build castles in the sky. Leaders and policy makers should scratch the currency union from their to-do list at least for now and focus instead on building the foundation.
Bettina Strickler is a second-year Master of International Affairs student. This article first appeared in the October 31, 2012 issue of Comuniqué.