{UAH} Pojim/WBK: Crisis in Greece and lessons for EAC - Comment

http://www.theeastafrican.co.ke/OpEd/comment/Crisis-in-Greece-and-lessons-for-EAC-/-/434750/2824980/-/fob3i1z/-/index.html

Crisis in Greece and lessons for EAC

In Summary

The Greece crisis has exposed the weaknesses of the Eurozone's structure, from which there are three key lessons for the EAC if it is to avoid similar crises in years to come.

• Monetary and fiscal union must go together
• Participatory decision making
• Debt must be controlled

On July 6, Greece gave a resounding no in a public referendum to the Eurozone bailout plan that had been the subject of weeks of negotiation. To many, this was not an unexpected result after several years of painful austerity and recession.

The wider ongoing Eurozone crisis directly affects East Africa because the EU is the region's largest trading partners and source of investment.

More than that, however, the Eurozone crisis and the ongoing Greek tragedy hold a number of lessons for Africa's trading blocs, particularly the East African Community (EAC).

In 2013, the respective presidents of the constituent countries of the EAC signed the Monetary Union Protocol, which set in motion the creation of an East African Monetary Union.

This mirrors the process that the EU went through over the course of the 1990s leading to the creation of the Eurozone. The Greece crisis has exposed the weaknesses of the Eurozone's structure, from which there are three key lessons for the EAC if it is to avoid similar crises in years to come.

Monetary and fiscal union must go together

The Eurozone is a peculiar economic experiment; a monetary and customs union with neither a fiscal union nor strong fiscal coordination. This peculiarity has been a major contributor to the Greece crisis, exacerbating fundamental imbalances in the EU.

The euro arrangement has meant that Greece cannot use a fundamental economic lever — the value of its currency — to alleviate economic pressure while the lack of a fiscal union means that fiscal transfers are not automatic stabilisers but painfully negotiated, heavily conditioned bailout packages.

If the EAC follows this path, crisis will almost be guaranteed. The various economies that make up the region have different strengths and weaknesses which will eventually cause monetary tension.

The EAC should thus create some form of fiscal union with structures for the co-ordination of fiscal policy in tandem with monetary policy in order to redress any imbalances.

A key aspect of this would be the creation of a structural adjustment fund or transfer mechanism that would avoid protracted Greece-like crises.

Participatory decision making

A key aspect of the Greece crisis that was a factor in the referendum is how little say the Greek people and government has had in deciding its economic policy.

Decision making in the Eurozone is dominated by its biggest economy, Germany. The EAC, much like the EU, has been driven by high level engagement at a presidential and ministerial level.

As the EAC grows in scope and influence, constituent populations must be involved more to ensure their buy-in.

‎Furthermore, each country must have an equal say in the decision making process — it cannot be dominated by the region's largest economies (Kenya and Tanzania).

As it is, the EAC has already had the tension of domination play out, with Tanzania often hesitating to implement protocols due to fears of inordinate benefits to Kenya. A perception of equity will need to be created for the monetary union plans to succeed.

Greece's problems are rooted in debt. With a debt to GDP ratio of 177 per cent, Greece cannot meet its obligations. The debt picture of the EAC is much more positive; Kenya has the highest debt to GDP ratio in the region, approximately 50 per cent.

While this does not pose an immediate threat, debt levels around the region have been steadily rising over the past several years, as the region invests heavily in development projects. In a monetary union, a debt crisis in one country affects all the countries —depressing regional growth and development. The EAC must establish structures that keep debt at a sustainable level.

The EAC is the most ambitious regional integration project on the African continent. Unlike the Eurozone, it has been careful and deliberate (some would argue too much so) in the pace and extent of integration.

It has the potential to create one of the largest and most dynamic economic zones in Africa, especially if the region fulfils expectations as the most exciting growth centre on the continent. However, the ambition of the EAC must be tempered by smart decision making and right structures and mechanisms.

The Greece crisis provides a perfect case study of the potential problems of regional integration. If the EAC learns from this crisis, it could forge a successful future and become a case study in how to pursue regional integration. If not, it will only be a matter of time before an East African economic crisis unfolds.

Eugene Ngumi is an associate consultant at Africa Practice, a leading pan-African advisory firm.

Crisis in Greece and lessons for EAC - Comment

http://www.theeastafrican.co.ke/OpEd/comment/Crisis-in-Greece-and-lessons-for-EAC-/-/434750/2824980/-/fob3i1z/-/index.html

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