Omodele Adigun
After four setbacks that seemingly threw it into comatose, the single currency project of the Economic Community of West African States (ECOWAS) has rebounded as its promoters are testing the waters to give it another kiss of life.
News outlets at the weekend were awash with the plan by the ECOWAS parliamentarians to adopt new strategy in making the single currency dream work. The new measure, according to the report, would examine the level of preparedness of each member state, discuss and determine the baseline macro-economic requirement and structural convergence for economic and monetary integration that will lead to actualization of a common currency for financial transactions and trade facilitation in the sub-region, just like the Euro zone.
But before plunging into the troubled waters of single currency adoption, it is incumbent on the ECOWAS to learn from the mistakes of the eurozone and its troubled currency-the Euro.
“While there are many factors contributing to Europe’s travails,” argues Nobel laureate, Joseph Stiglitz, an Economics Professor at Columbia University, in his book, The Price of Inequality,“there is one underlying mistake: the creation of the single currency, the euro. Or, more precisely, the creation of a single currency without establishing a set of institutions that enabled a region of Europe’s diversity to function effectively.”
Milton Ezrati, a columnist with an offshore online media, The National Interest, in his July 6, 2017 edition entitled The European Union Has a Currency Problem, explains why and how:
“The euro was supposed to help all who joined it. When it was introduced at the very end of the last century, the EU provided the world with white papers and policy briefings itemizing the common currency’s universal benefits. Politically, Europe, as a single entity with a single currency, could, they argued, at last stand as a peer to other powerful economies, such as the United States, Japan and China. The euro would also share the benefits of seigniorage(a government revenue from the manufacture of money) more equally throughout the union. Because business holds currency, issuing nations get the benefit of acquiring real goods and services in return for the paper that the sellers hold. But since business prefers to hold the currencies of larger, stronger economies, it is these countries that tend to get the greatest benefit. The euro, its creators argued, would give seigniorage advantages to the union as a whole and not just its strongest members.
“All, the EU argued further, would benefit from the increase in trade that would develop as people worried less over currency fluctuations. With little risk of a currency loss, interest rates would fall, giving especially smaller, weaker members the advantage of cheaper credit and encouraging more investment and economic development than would otherwise occur. Greater trade would also deepen economic integration, allow residents of the union to choose from a greater diversity of goods and services, and offer the more unified European economy greater resilience in the face of economic cycles, whether they had their origins internally or from abroad.
“It was a pretty picture, but it did not quite work as planned. Instead of giving all greater general advantages, the common currency, it is now clear, locked in distorting and inequitable currency mispricings. These began with the enthusiasm in the run up to the currency union. High hopes for countries such as Greece, Spain, Portugal, and, to a lesser extent, Italy, had bid up the prices of their individual national currencies. In time, reality would have adjusted such overpricing back to levels better suited to each economy’s fundamental strengths and weaknesses. But the euro froze them in place, making permanent what otherwise would have been a temporary pressure. At the same time, Germany, which, at the time, was still suffering from the economic difficulties of its reunification, joined the common currency with a weak deutsche mark, locking in a rate, International Monetary Fund (IMF) data suggests, some 6 per cent below levels consistent with German economic fundamentals.
“Right from the start, then, the currency union divided the Eurozone into two classes of economies. Greece, Spain Portugal, Italy, and others became the consumers. Because the euro had locked in their overpriced currencies, populations in these countries had the sense that they had more global purchasing power than their economic fundamentals could support and consumed accordingly. At the same time, the currency overpricing put producers in these countries at a competitive disadvantage. Germany, having locked in a cheap currency position, faced the opposite mix. It became the producer for all Europe even as its own consumers, feeling a little poorer than they otherwise might have, remained cautious. Because Germans in this situation had every incentive to sustain production, while others did not, they made more productive investments, improving their economic fundamentals and so widening the gap between economic reality and the euro’s expression of it. Updated IMF data suggests that by 2016, Germany’s relative pricing edge had doubled to 12 percent.”
In The Price of Inequality, the Nobel prize-winning economist states:
“A single currency entails a fixed exchange rate among the countries, and a single interest rate. Even if these are set to reflect the circumstances in the majority of member countries, given the economic diversity, there needs to be an array of institutions that can help those nations for which the policies are not well suited. Europe failed to create these institutions. Worse still, the structure of the eurozone built in certain ideas about what was required for economic success – for instance, that the central bank should focus on inflation, as opposed to the mandate of the Federal Reserve in the US, which incorporates unemployment, growth and stability. It was not simply that the eurozone was not structured to accommodate Europe’s economic diversity; it was that the structure of the eurozone, its rules and regulations, were not designed to promote growth, employment and stability.”
All these are instructive for ECOWAS ahead its parliamentary workshop in Abuja next month where a decision on the common currencyis expected to be taken.
According to the Communications Adviser to the Director General of the National Institute for Legislative and Democratic Studies (NILDS), Nwajei Kanayo, the workshop is expected to provide a forum for ECOWAS parliamentarians and other regional and international stakeholders and experts to examine the legal and institutional frameworks needed for a credible monetary union in ECOWAS and to identify legislative actions needed to promote a viable monetary union.
The single currency programme has suffered setbacks with four successive postponements in 2003, 2005, 2009 and 2015.