Eurozone failure and lessons for SADC region

By Bheki Ngubeni

The Eurozone continues to exhibit all the signs of a deepening depression. Budget talks held a few days ago culminated in foreseen deadlock.

Britain, Germany and the majority of Scandinavian countries opted for a freeze in terms of real spending whereas the French and Polish amongst others preferred increased expenditure.

Reports say no realistic proposals to streamline spending were tabled subsequently leading to a dissolved meeting. The apparent Eurozone disharmony brings me to my point. Is the Southern African Development Community (SADC) equipped for a single regional currency?

The euro-zone’s micro variables are dysfunctional. The bloc is collapsing from within. At present Catalonia wants to break away from Spain, Scotland wants a national referendum on staying in the UK and Greece disagrees with Germany all the time following a precarious world war history between the two.

Against this background, what are the chances of SADC successfully implementing a similar regional convergence model if the perpetrators of the framework are falling short? SADC, in my opinion is not an Optimal Currency Area (OCA).

Pragmatically an OCA is an area in which an overall economic region is best served by having a single currency where imbalances in levels of economic activity/competiveness can be removed as a result of a free play of market forces, without the need for exchange rates.

An OCA will normally be characterised by a few distinct factors.

First, homogeneity and convergence in terms of economic structures. Secondly free movement of capital and labour. Thirdly, an acceptable political structure within and outside each member country’s parameters. A large centralised budget to give temporary help to uncompetitive areas is the final provision.

Let us scrutinise the political thinking required for such partnering to succeed keeping in mind how this resonates to the SADC situation. To begin with, a single currency is a political project.

It arguably encourages political unity and cooperation and as such forms the basis of bloc formations. Consolidating countries into a regional alliance would in theory breed increased productive efficiency and faster economic growth.

SADC has a massive political challenge altogether. Figure 1 is a separatist map denoting various “contrary” movements across the SADC divide. The drawing denotes a rhetoric map of Africa should the groups defect successfully.

The red markings represent their locations. More than 16 outfits are currently active with the M23 in Congo and Renamo in Mozambique making the loudest noises of late. In Tanzania the Uamsho Islamic separatist group wants out.

Barotseland royal household claims a unifying treaty that ensured Zambia was created in 1964 has been ignored. They too want out.

Mthwakazi Liberation Front in Zimbabwe argues regional economic imbalance. Some of the units are not necessarily after separation however the broad picture represents a number of unsettled positions which could amount to armed strife.

Were the region to amalgamate such imbalances over time may lead to worse political problems. It is not just the technical question SADC must answer. The contrasting political fundamentals within the region are not in sync with the pre-requisites of bloc framework objectives.

Technical factors mitigating against a single currency apart from loss of national sovereignty include loss of control over interest and exchange rate policies. SADC countries are at dissimilar stages of economic growth. A few are declining, the bulk is stationary and a minority are ascending according to recent economic data.

Following the above a centralised interest decision would affect a country’s economic activity and inflation in different ways. The collective transmission mechanism of monetary policy for Zimbabwe is not parallel to say South Africa’s stage of economic growth. Let me explain.

Interest rate policy  exists to manipulate spending, saving and investment behaviour of individuals and firms collectively. At present, Zimbabwe’s “demand-driven”  economic plan occasions for high interest rates so as to attract private equity and FDI.

Interest rates in Zimbabwe are misaligned from the regional interest rates levels due to the fact that we are at different levels of economic growth. The spread between lending and deposit rates for Namibia, Botswana and South Africa is said to be around 5%, compared to 20% for Zimbabwe.

A compromise to smooth out the disparity  would have to be reached. How that is achieved is another matter. In the case of exchange rates, SADC countries would lose the power to devalue and solve competiveness challenges unique to their situations.

The idea of comparative advantage still provides a good explanation of trade patterns and how they benefit less developed countries. Zambia profits handsomely from copper production.

They supply the precious metal  using fewer resources than most similar producers in the world. They  exports the product and acquire relatively “more” out of the sells owing to her currency rate.

The  thinking behind comparative advantage involves making use of whatever available economies of scale a country possesses to their  favour. A stronger SADC currency would nullify that advantage.

In the event of  exchange and interest rates being homogenised across the region Governments are only left with fiscal policy. What has been observed  suggests  blocs severely restrict independent fiscal behaviour through settings stringent conditions as enrolment criteria pacts.

Countries may be required to spend only a maximum of 3% of their GDP on public sector borrowing requirements or maximum national debt of 60% of their respective GDP. The impact inadvertently leads to limited independent fiscal powers.

The final point to make  concerns South Africa. Their role in any said union would warrant an entirely separate analysis. It’s evident  they would play a key role seeing as they would contribute he bulk of the budget.

The majority of the decision making would mean putting SA’s needs first creating an uneven playing field. It might not be immediately obvious but the imposing nature of Angela Merkel stands as proof of  domineering attitudes by chief contributors.

I made a point earlier  on about free movement of capital and labour. With reference to the later I doubt it is feasible at present or near future to allow SADC workers to move freely following recent xenophobic attacks .

If we are to be frank about it, the labour market trend would be one way traffic towards South Africa. This  in turn creates all sorts of undue pressure on individuals, communities and Governments to put it mildly.

Ultimately dissuading the reader against the SADC currency is not the desired effect. The aim is to encourage independent thought.

I could construe an equally weighted analysis and expand on the advantages of a single currency such as the stability and certainty that comes with fixed exchange rates or the avoidance of disruptive speculative measures or the needlessness of large foreign reserves to be held by member countries or price transparency leading to greater competitive pressure and the lot but I am not convinced the said advantages are significant enough or will be realised.

Are you convinced?

The argument for the SADC currency is not infallible in the sense that there is no standout unifying denominator that would hold the foundation together should disagreements of whatever nature arise.

The one size fits all  approach  will be particularly problematic as this region is prone to asymmetric  negative shocks such as the few mentioned here.The idea should be discarded along with the blueprints I had penned out in the event of an agreement being reached.

Bhekinkosi Ngubeni periodically writes on economic and development issues. You can email him at [email protected]