What went wrong with the euro: Lessons for Africa


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Before you adopt a common currency be sure you are dealing with one country not a group of countries with different monetary and fiscal capabilities.

Nwakego Eyisi is an economist who works as a consultant to multinational companies in Africa. She previously worked in the Central Bank of Nigeria’s Development Finance Department. She writes a regular blog on West African politics and economics for Euromoney Country Risk.
By Nwakego Eyisi

Before you adopt a common currency, be sure you are dealing with one country, not a group of countries with different monetary and fiscal capabilities.

Every country has fiscal (government) and monetary (central bank) authorities to make policy geared towards growth and development. There are also global forces to contend with, since we live in a globalised world. Policy in Brussels today can affect the value of the Chinese yuan or the South African rand.

For instance, the naira (the Nigerian currency) sold for N118 to $1 before the global recession of 2008. The recession caused capital flight as investors pulled their money out of Nigeria to support operations in the West. This caused the naira to plummet to around N150 to $1. In other words, the Nigerian economy was weaker and the naira depreciated accordingly.

The cedi (Ghana), rand and shilling (Kenya), to mention a few, also fell at the same time. Apart from foreign factors, the degree of movement of a nation’s currency also depends on policy and how strong or efficient the economy is. These African currencies declined by various degrees and some, such as the rand, appreciated due to flight from the dollar as a fall-out from US quantitative easing. Every economy and therefore currency adjusts differently in today’s boom-and-bust cycles.

Every economy has its unique strengths and weaknesses based on resources, management and policy. It is impossible to divorce an economy from its currency.

One size fits all?

This is the mistake the EU made when the euro was created. Europe got one currency with at least 10 different economies. It was more like a one-size-fits-all currency, when the reality on the ground was different.

Europe was awash with cheap money (euros) in the last decade when fundamentals in the different member states did not support it. Some (such as Germany) did a better job fiscally while others (Greece, Ireland) spent beyond their means.

Today you have a weak euro because fundamentals in the zone are weak. Germany is doing very well because it can sell its products cheaply abroad (due to a weak euro). However, if Germany had its own currency, it would be stronger to reflect the fundamentals of the German economy. That way, the country would find it harder to sell its products abroad because they would be more expensive, and the economy would become weaker.

Instead, Germany is trading with a rigged currency that thrives on the weakness of its neighbours. Such is the complexity of the euro.

Independence versus harmonization

There is no such thing as harmonizing monetary and fiscal policies when you have independent states. The concept is nonsense, it has no foundation in economic reality and the end result is chaos. Greece is in trouble while Portugal, Ireland and Spain will probably default in the near future. This is negatively affecting the global economy and the reason it cannot be fixed is that these countries cannot opt out of the euro.

It is good that the euro is unravelling at this time. Perhaps African countries can learn from Europe’s expensive mistaken common-currency experiment and think twice before adopting an ‘Afro’. A common market, not currency, benefits all.