Yes, Dow Jones Industrial Average (DOW) is off 512 yesterday. We quickly revisited an old piece about what caused all the EU problems that precipitated the massive market turmoil. Currency union is not a smart idea, especially for Africa with trade shocks and mineral dependent.
We posted a blog last year and many people have written asking why I think what happened in Greece and EU could apply to Africa. Interestingly, I have attended African Union congress and made presentations supporting a single currency in Africa. My point has been that a single currency could open the fragmented African market to more global trade. I still think it is a fair idea, if the continent does it well. Even during my talk in the congress last year, I made it clear that the path I envisage to be the best way to implement this single currency is transitioning the regions into Knowledge Economic Communities where they will be atomic economic unit of nations connected with modern technologies and entwined by knowledge workers. In other words, Africa must develop its infrastructure and train its manpower to compete in this knowledge century.
It will benefit Africa if Ghana, Senegal and Nigeria share resources and establish joint technology clusters with university networks than using policy to force them to use one ECOWAS currency. Nigeria has never properly managed its budgets and its balance sheet is cyclical, being a nation with more than ¾ of its foreign earnings coming from hydrocarbons. Its population dominates the ECOWAS region. In any scenario, the trade shocks which are experienced in Nigeria will slowly affect the ECOWAS region under a Regional Economic Community. The scenario in Africa is just too risky; the biggest nations are the most irresponsible ones in terms of financial management. So, they will be the ones that need help; and that is a problem. In EU, they have the big nations, at least acting financially responsible . Germany is there, France is there; and with all the problems in PIIGS (Portugal, Italy, Ireland, Greece and Spain), there are strong partners watching. In Africa, the small must have to watch the big. And remember that South Africa’s debt profile is similar to Greece.
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In the short-run, there could be marginal welfare gain under a single currency in Africa. Even Rose’s idea that currency integration improves economic growth is debatable within Africa. The CFA zone has used a single currency for ages and yet remains one of the major under-traders in Africa. Banks collapse in Africa because of the incompetence of central banks to supervise them (I agree not only in Africa). The recent problems in Nigerian banking sector where trillions of naira was lost to bad loans would have affected the ECOWAS region badly. Why this problem remains solely a Nigeria problem is because the country has control over its monetary policy and can use it to solve this problem. Under one currency, it cannot work that way as they will lose autonomy over the currency. Those changes made by the Nigerian central bank to stabilize the banking sector would not have been possible. The pitfall of currency integration is very huge. The benefits come in cents, but the consequences in dollars.
I remain confident that Greece would not have gotten into this situation where its bonds have fallen and its ability to pay debts eroding, if it has not been part of the EU. Also, those cheap loans it got in the good old days would not have been possible in the first place without the EU membership. According to Bloomberg BusinessWeek, euro zone unemployment rate for Feb 2010 is at 10%- a record for the zone. One wonders where this single currency is leading the region.
As a young Lagos banker, I worked in one of the best managed banks in Africa-Diamond Bank Plc. I learnt something in banking before I moved to semiconductors; you need to watch your loan or debt profile constantly and continuously. African nations will not do that. They will continue to borrow until they bust. And when their central banks cannot work the magic, their sovereign debt will potentially destroy their national economies.
Learn something from me: If United States has been in a currency union with Mexico and Canada while losing control over the US dollar, their fate would have been similar to Greece’s. But with the control of the dollar, the US sovereign debt will dent them, but will not cripple them. They have control over the currency, and they will survive this skyrocketing debt with the right legislation. Two years ago when the global crude oil price crashed, Nigerian government devalued its currency from N118 (to USD) to N145 overnight to enable it meet its obligations to local debtors. An ECOWAS currency union would have made that oil crash a bigger trade shock for Nigeria.
In summary, there is a very fundamental tool every nation needs to take control of its destiny in this globalizing world. You need to be on top of your currency. It is no joke that the most important tool that enables China to compete is its currency and the person that manages it is the most vital person in the new China which has since overtaken Germany as world’s largest exporter. If they lose control of that currency, China will fail. I am thinking that globalization makes currency union a bad idea. You need speed to react and act which unions will deprive you. The barriers which currency integration wants to solve will dissolve as technology improves. In the near future, it will not matter what currency you have in your bank.
The fusion of economies by technology will break those barriers online through homogeneity in e-commerce. It would be a bad idea for Africa to pursue currency integration now; it makes no sense in the long-run. We need to stop it and focus on strengthening our infrastructure and manpower. You cannot build a union that depends on hydrocarbons and minerals when the world is running on knowledge. At least in Africa, we worry over bank’s loan/debt profiles; reversing that to sovereign debt will destroy our economies. And a single African currency under one supranational bank will guarantee sovereign debt crises in Africa.
Originally written April 2010