Common monetary zones: How sustainable are they?

The economic instability within the Pigs, (Portugal, Italy, Greece and Spain) brought about by unsustainable debt burdens and poor economic competitiveness have left the Euro bloc economies battered and the Euro at its weakest levels, threatening the stability of the world financial systems.

The feared potential meltdown prompted the IMF to put in place a US$1 trillion fund to build firewalls to insulate the world economy from the unfolding debt crisis. The Euro has been in free fall despite the wide raft of measures aimed at stabilising the troubled economies.

Early last month, the Dow Jones wire reported that former French president Nicolas Sarkozy a weaker Euro was in fact good news as it would boost the competitiveness of (European) exporters. This did not cheer the markets, and fears are compounded by the recent election of Francois Hollande as French president, who many analysts see as being less committed to rigorous austerity measures to resolve Europe’s debt crisis.

In late April, Europe also witnessed the voluntary fall of the Dutch government, which has been an ardent critic of European countries failing to rein-in their deficits. The whole leadership led by then Prime Minister Mark Rutte quit after failing to agree on a plan to bring their own country’s deficit in line with EU rules.

The Dutch government’s collapse also raised the question whether  austerity policies that are causing trauma in countries such as Greece, Spain and Portugal can be enforced even in “core” European countries such as France — or the Netherlands, one of the few along with Germany that are still maintaining AAA credit ratings.

Analysts say that recent election results in Greece and France are in fact a backlash by voters against austerity measures, and the Euro’s weakness is due mainly to doubts on the political will and commitment to austerity regimes seen crucial to tackling the Euro zone debt crisis.     
But what does this all mean for Zimbabwe?

In the midst of the Euro crisis, Zimbabwe is currently considering and debating a number of post- multiple currency regimes, such as adopting official full dollarisation; introducing a Currency Board;  joining the Common Monetary Area (CMA); waiting for the proposed Sadc or African Union common currencies; or re-introducing the Zimbabwean dollar ?

In an interview with businessdigest, Graduate School of Business Economics analyst Professor Tony Hawkins said the whole idea of achieving  a common currency area was “a pie in the sky.” 

“If anything the rand is the currency for southern Africa at the moment. What makes it a challenge is getting convergence first on key variables such as inflation, debt levels, GDP growth targets and currency reserves,” said Hawkins. “What we learn from the Euro zone debt crisis is that it doesn’t work to have countries with differing levels of competitiveness sharing a common currency (exchange rate). In our case, South Africa, Angola and perhaps Botswana and Mauritius have very competitive economies, whilst the rest, especially Zimbabwe, are extremely weak.”

He said Zimbabwe needed some form of currency reforms sooner rather than later as it could not keep using the United States dollar until 2018, leaving the rand as the only viable option.

He however pointed out that using the rand would bring its own challenges.

“The rand maintains its stability through a system of very tight exchange controls and this may not be favourable to us as we have moved away from exchange controls,” he observed.

Prominent economic analyst Eric Bloch said the country needed substantial economic growth for at least three years before it becomes feasible for Zimbabwe to be accommodated in a common monetary area.

“Whilst we have been celebrating our current growth rates, we have been overlooking that these have been from a very low base. The growth rates we have been  having are meaningless if we put into context that we have 87% unemployment, 85% of the population is living below the poverty datum line and an estimated 56% living below the food datum line,” Bloch said.

Firstly, the economy needs to be substantially stable with sustained growth. He said other countries would not want Zimbabwe to be part of a monetary union with the kind of economic weaknesses that the country has.

Bloch also said Zimbabwe needed to resolve contradictions caused by being both a member of Comesa and Sadc, saying this complicates issues of imports and exports within the region.

“We will have to opt for one and this is likely to be Sadc as most of the countries in the rand monetary area are also Sadc countries. The South African currency will be the mainstay of the common monetary area given the size of South Africa’s economy,” Bloch said.

The common view is that Zimbabwe’s economy is still very weak and may not be ready to join a common monetary area. The developments in Europe seem to suggest that given the country’s huge external debt overhang, weak exports performance, and budgetary challenges, economic analysts doubt the country will be admitted easily, if at all, into a common monetary union.

However, Bloch thinks the problems in the Pigs would have occurred even if they were using their own currencies and not the Euro.

He argues that because these countries transact extensively with each other, the collapse would have happened because these countries have overspent, arguing that it is not the use of a common currency that has exposed the economies.  Zimbabwe needs to deal with a host of issues before joining a common monetary area. There is growing consensus that adopting the rand sooner rather than later is a more viable option for Zimbabwe at the moment.