What the Eurozone Can Learn from Africa

Among the torrent of cliches about Greek dramas, tragedies and trojan horses that have filled the business pages in recent weeks, there has been no shortage of apokálypsis and huperballein. Neither apocalypse nor hyperbole are in short supply, for example, in Liam Halligan’s recent article in the Daily Telegraph, which argues that the euro may “collapse, just like every other currency union in the history of man”. However, even more nuanced commentators such as Samuel Brittan and George Soros, writing in the Financial Times, echo the refrain that the euro’s “unique” historical “experiment” may now “fail it’s first major test”.

Might a little economic history, I wonder, add some much-needed perspective? For as a single currency area, the euro is neither unique, nor experimental, nor a test. The Economic Community of West African States (ECOWAS) has since 1945 had a common currency among a variable group of 14-plus states in central and west Africa, despite widely varying economies, languages, and religions. The United States began expanding the ‘dollar zone’ back in the nineteenth century, with Puerto Rico joining in 1898, Panama in 1904, and Ecuador and El Salvador in the last decade. Nobody believes that the US would bail out these countries if they reneged on their sovereign debt obligations.

Perhaps a little reflection upon the experience of other currency zones, then, would deflate some of the present eurozone panic. While it is widely viewed as a potential ‘disaster’ for Greece to leave the single European currency, since the inception of the West African Economic and Monetary Union, 7 states have left the CFA franc, while others have joined. The departures were never disastrous, either for the countries that left, or those that remained. When Mali left the franc zone in 1962, they simply devalued and rejoined in 1967. There is no reason why Greece, the Mali of Europe, should refrain from doing likewise – as Harvard economist Martin Feldstein has recently suggested.

Similarly, the exit of a country from a currency union need not entail a ‘domino effect’, whereby somehow a Greek exit from the euro will lead Portugal, Spain, Ireland and Italy to be picked off one by one, until Germany is left alone carrying some new version of the Deutschmark. When Argentina finally broke its link to the dollar in 2002 this did not mean that Hong Kong, Saudi Arabia or even Lebanon had to do the same. It is true that a sovereign default would raise debt refinancing costs in other indebted states: yet the effect can usually be contained, for in the modern era indebted states use multilateral institutions such as the International Monetary Fund to keep others in line. Indeed it is precisely the eurozone’s unwillingness to contemplate calling in the Fund,  as Bruegel’s Pisani and Sapir have advocated, while failing to propose a credible European alternative, as Gros and Mayer suggest, that is sustaining the current panic.

Given this, why is the prospect of Greek departure from the euro seen in such a bleak light? Not, I think, because it represents an economic failure, but rather because it would expose the limits of political ambition, by revealing our unwillingness to make the relatively small loan guarantees needed to facilitate Greek adjustment. It would be an existential crisis for Greece, because it would mean drifting to the outer circle of a European project that has been central to its democratic and economic transition since 1981. It would be an saddening event for Brussels, because it would expose the limitations of the Zollverein model, according to which economic union will eventually force a closer political arrangement. So the Greeks risk proving the quip that Greeks are ‘Turks who think they are Italians’, while Europe risks losing faith in its ever-closer union.

The prospect that Europe faces is therefore not a breakup of the euro area. Rather it is that the countries of the eurozone drift along together, like the franc area of Africa, without ever leading to closer political ties.

Posted in: EU