The Crisis in Greece (Lessons for the EAC and UEMOA)

Screen Shot 2015-06-28 at 10.06.13 PM

An abandoned venue from the 2004 Athens Olympics. Source: Guardian.

Greece is on the brink of a financial disaster. Banks and the stock market are closed. Capital controls have been imposed. The country will hold a referendum on July 6th, which could decide whether Greeks keep the euro or go back to using drachmas.

There’s not been a shortage of analyses of Grexit. From adoration of its game theorist Finance Minister, Yanis Varoufakis; to this odd piece in the Journal that says “Greek Prime Minister Alexis Tsipras began leaning toward a risky referendum after creditors covered his proposed policies in red ink” (incidentally, marking papers in red can “damage students”). Barry Eichengreen blames the current crisis on political incompetence – on the part of both Greece and its eurozone creditors, with more blame on the latter. See here for a concise take on Greek fiscal history over the last four decades.

I hope folks at the EAC and UEMOA, the two entities most likely to realize monetary unions, are following the events in Greece closely. The big question on their minds should be: can there be a stable monetary union on the Continent without a fiscal and political union?

Lastly, regardless of how the next few days and the referendum play out, I hope Tsipras’ move will embolden leaders in the developing world to democratize their relationship with the IMF, the Bank, and other creditors. A reasonable democratic involvement in such matters would not just be an easy way to default and blame it on democracy. It would also incentivize creditors against lending money to governments like Greece’s. Obviously voters should not be allowed to decide whether or not they pay their debts (we know how that’d turn out), but they should be consulted before being saddled with crushing debt.

Advertisements

6 thoughts on “The Crisis in Greece (Lessons for the EAC and UEMOA)

  1. “…can there be a stable monetary union on the Continent without a fiscal and political union?” I think Europe’s last five years has told the planet emphatically: No.

    Love your last paragraph, completely agree.

    Like

  2. I enjoyed your commentary but for the most part it leaves out the elephant in the room: austerity, in all its failed, disproven, misery-inducing glory.

    Blame the IMF and old Europe for imposing a terrible, quantitatively failed policy.

    Like

  3. The East African Community is moving towards establishing a Monetary Union in East Africa. This started with the formation of the East African Community Monetary Affairs Committee (MAC). The establishment of the MAC brought about progress in key areas such as monetary policy coordination and harmonisation, payment systems development and integration and further deepening of the financial sector. This falls in line with the notion that if all countries in a region are identical and subject to the same shocks, then a currency union including all countries would be desirable for all. Entering a Monetary Union a country gives up its tool (National Monetary Policy) to respond to asymmetric shocks. Even if national monetary sovereignty is relinquished a country can still be able to withstand and adapt to asymmetric shocks through the existence of labour mobility, fiscal transfers, lower inflation and wage/price flexibility.

    Fiscal responses of the individual member countries will impact the effectiveness of the Monetary Union. Big spenders will benefit from the extra discipline afforded by the regional central bank while small spenders may be subject to the demands of the big spenders for monetary financing.

    The intent of forming a monetary union for East Africa is that economic integration will influence economic growth and development in East Africa. This in effect will reduce the costs and risks of transacting business across national boundaries of member countries. The existence of strong communication and transport links will greatly enhance the reduction of costs. The establishment of a Monetary Union will reduce the cost of dealing in different currencies while transacting business and reduce the risk of adverse foreign exchange movements in the region. This deepens East African economic integration and enhances the functions of the East African Common Market. The establishment of Monetary Union would help counteract perceived economic short-comings and influence the favourable negotiation of trading arrangements either globally (World Trade Organization) or bilaterally (European Union and the United States). All these good effects are dependent on the management of the regional currency. An ill managed currency which is subject to continued depreciation is not likely to give the member countries any clout on the world stage.
    So how does the implementation of the East African Monetary Union relate to the rest of Africa? There are several different regional currency unions in Africa. The West African CFA franc, which is the currency of eight countries from the West African region comprising of Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Sénégal and Togo. CFA is the French abbreviation for Communauté financière d’Afrique (Financial Community of Africa). The currency is issued by the Central Bank of the West African States, located in Dakar, Senegal, for the members of the West African Economic and Monetary Union.
    The West African Monetary Zone (WAMZ) is a group of five countries within the Economic Community of West African States (ECOWAS) that plan to introduce a common currency, the Eco, by the year 2015. The six member states include Ghana, Guinea, Liberia, Nigeria and Sierra Leone. WAMZ wishes to establish a viable currency to exceed or compete with the CFA franc. The eventual goal is for the CFA franc and Eco to merge, giving all of West and Central Africa a single, stable currency. What impedes the progress of this Monetary Union is that some of the ECOWAS countries are suffering from fiscal and monetary issues. Efforts to close the economic gap by printing more currency have further exacerbated inflation.
    The Central African CFA franc, is the currency of six countries from central Africa. They are Cameroon, Central African Republic, Chad, Republic of the Congo, Equatorial Guinea and Gabon. CFA which is also a French abbreviation meaning Coopération financière en Afrique centrale (Financial Cooperation in Central Africa). It is issued by the Bank of the Central African States, located in Yaoundé, Cameroon, for the members of the Economic and Monetary Community of Central Africa.
    Finally, the Common Monetary Area links several countries in southern Africa based on the South African Rand. The Common Monetary Area (CMA) connects South Africa, Lesotho, Namibia and Swaziland into a monetary union. It is allied to the Southern African Customs Union (SACU). Foreign exchange regulations and monetary policy throughout the CMA are affected by the South African Reserve Bank.
    The African Monetary Union has proposed the creation of an economic and monetary union for the countries of the African Union, administered by the African Central Bank. The goal of a common African currency has long been a pillar of African unity, a symbol of strength that its backers hope will emerge from efforts to integrate the continent. This is a process which started through the creation of the Abuja Treaty which produced the African Economic Community and translated into the creation of a single currency by 2023. The process will be characterized by the existence of major regional economic blocks, groups of countries whose economies are closely integrated. The African Union’s plans for increased integration encourage the development of regional unions as an intermediate step to full monetary union.

    Like

  4. Emmanuel’s post is invaluable for the information ti contains, but it fails to mention the main problem with the Eurozone and the EU when it comes to monetary matters: the European Central Bank isn’t one.

    This was pointed out as a major danger by critics when the Euro went on line. Without a European treasury supported by Europe wide taxes, the ECB was – and is – unable to address economic imbalances within the EU. It can only be a lender of last resort if it has the agreement of the EU Council and that is another way of saying that it won’t be. The result is apparent in the present crisis. The ECB has to go hat in hand to governments – i.e. the Germans – who have a substantial interest in passing the costs of the reckless lending of their banks to the reckless creditor banks in Greece. And the people of that country are left with really, really bad options because nobody thought things would ever come to this pass. Or, to be more exact, they simply waved their hands at the problems and hoped for the best.

    Given the greater instabilities in African economies, it would be folly of the first rank for the countries now contemplating monetary union to repeat Europe’s mistakes. If monetary union – which has all the probable benefits that Emmanuel points out – is to succeed in Africa, then the governments need to make much tougher decisions. Each union needs a central treasury and a real central bank, not just a clearing house like the “banks” that now exist. Conversely, they could go with a semi-monetary union like the Randzone, but with each country still in control of it’s monetary policy. But copying the Eurozone? Let’s hope the current European experience will put them off trying anything that stupid.

    Like

  5. I can recall in 2011 being asked, “What type of fiscal restructuring will be most effective in avoiding creating a situation similar to Latin America’s lost decade in Europe?”

    I championed a Sovereign Debt Program that included the “troika”. The set of solutions for the Hellenic Republic Debt Crisis entailed involving the European Financial Stability Facility (EFSF) based in Luxembourg and advised by the European Commission, European Central Bank and the International Monetary Fund.

    The EFSF was created in 2010 in order to lend and issue securities to troubled Euro Area Member States (EAMS). The EFSF’s mandate could be expanded to involvement in the private sector through programs designed to deal with troubled sovereign debt.

    I pressed that the EFSF could issue new debt guaranteed by the EAMS in exchange for Greek debt and that it should be done in conjunction of a debt relief program. The new debt issued by the EFSF would take in Greek Sovereign Debt in and give the holder new discounted marketable bonds. This is far better than taking a total loss on one’s holdings. This would also provide Greece with debt relief, shift Greece’s debt burden away from private creditors to the EFSF and the private creditor would receive new discounted marketable bonds.

    Another idea is to open a liquidity facility over certain period of time which would provide non-recourse term loans to holders of Greek debt with a 50%-60 haircut of the debt held by the creditor. One of the conditions would be that the holder must open a “special-purpose vehicle” domiciled in the Euro-Zone and sign a collateral agreement with the liquidity facility in order to receive the loans. This would enhance liquidity and marketability of the debt market. The program could be implemented independent of a debt relief program. But it is best used in conjunction of a debt relief program in order to ease pressure on markets.

    The basic set of ideas could be used for other EAMS whose debt is troubled and an example as to how the Public Sector and Private Sector can move together to improve financial markets and spur economic growth.

    Like

  6. The intent of forming a monetary union for East Africa is that economic integration will influence economic growth and development in East Africa. This in effect will reduce the costs and risks of transacting business across national boundaries of member countries. The existence of strong communication and transport links will greatly enhance the reduction of costs. The establishment of a Monetary Union will reduce the cost of dealing in different currencies while transacting business and reduce the risk of adverse foreign exchange movements in the region. This deepens East African economic integration and enhances the functions of the East African Common Market. The establishment of Monetary Union would help counteract perceived economic short-comings and influence the favourable negotiation of trading arrangements either globally (World Trade Organization) or bilaterally (European Union and the United States). All these good effects are dependent on the management of the regional currency. An ill managed currency which is subject to continued depreciation is not likely to give the member countries any clout on the world stage.

    So how does the implementation of the East African Monetary Union relate to the rest of Africa? There are several different regional currency unions in Africa. The West African CFA franc, which is the currency of eight countries from the West African region comprising of Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Sénégal and Togo. CFA is the French abbreviation for Communauté financière d’Afrique (Financial Community of Africa). The currency is issued by the Central Bank of the West African States, located in Dakar, Senegal, for the members of the West African Economic and Monetary Union.

    The West African Monetary Zone (WAMZ) is a group of five countries within the Economic Community of West African States (ECOWAS) that plan to introduce a common currency, the Eco, by the year 2015. The six member states include Ghana, Guinea, Liberia, Nigeria and Sierra Leone. WAMZ wishes to establish a viable currency to exceed or compete with the CFA franc. The eventual goal is for the CFA franc and Eco to merge, giving all of West and Central Africa a single, stable currency. What impedes the progress of this Monetary Union is that some of the ECOWAS countries are suffering from fiscal and monetary issues. Efforts to close the economic gap by printing more currency have further exacerbated inflation.
    The Central African CFA franc, is the currency of six countries from central Africa. They are Cameroon, Central African Republic, Chad, Republic of the Congo, Equatorial Guinea and Gabon. CFA which is also a French abbreviation meaning Coopération financière en Afrique centrale (Financial Cooperation in Central Africa). It is issued by the Bank of the Central African States, located in Yaoundé, Cameroon, for the members of the Economic and Monetary Community of Central Africa.
    Finally, the Common Monetary Area links several countries in southern Africa based on the South African Rand. The Common Monetary Area (CMA) connects South Africa, Lesotho, Namibia and Swaziland into a monetary union. It is allied to the Southern African Customs Union (SACU). Foreign exchange regulations and monetary policy throughout the CMA are affected by the South African Reserve Bank.

    The African Monetary Union has proposed the creation of an economic and monetary union for the countries of the African Union, administered by the African Central Bank. The goal of a common African currency has long been a pillar of African unity, a symbol of strength that its backers hope will emerge from efforts to integrate the continent. This is a process which started through the creation of the Abuja Treaty which produced the African Economic Community and translated into the creation of a single currency by 2023. The process will be characterized by the existence of major regional economic blocks, groups of countries whose economies are closely integrated. The African Union’s plans for increased integration encourage the development of regional unions as an intermediate step to full monetary union. – 1435

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s