Greece's stalled economy has met reactions from the financial markets, which are now hinting that the euro zone is under threat. Nonetheless, the real message is much broader: Unsustainable debt dynamics can undermine not only the euro, as a currency, but businesses as a whole, eventually leading to capital flight. But such is what is expected in a loose monetary union, without political unification. No doubt such types of weaknesses will materialise once the monetary union of West Africa is fully in place.
Not all members of the euro zone have been careful so far. The issues for the troubled zones: Portugal, Ireland, Italy, Greece and Spain (known to the financial markets, as the PIIGS) have been a serious matter of debate in the media. They had varying degrees of foreign - and bank credits - to finance their rapid expansions over the past decade and as is characterised by most financial crisis, in fall 2008, these bubbles collapsed. As custodian of their shared currency, the European Central Bank responded by quietly opening lifelines to each of the PIIGS, effectively buying government bonds through special credit windows. It was clear that, although Europe’s margin was fragile yet the zone was surviving on this life saving line of credit from the ECB until a few weeks ago, when it suddenly became apparent that Jean-Claude Trichet, president of the ECB, and his German backers were finally lining up to cut Greece off this life line. Perhaps they have become weary of supporting countries that do not, to their minds, try hard enough. As a result of this, investors started flying from Greek debt. So, because of the high risk, Greece's debt yields rose, and its banking system verged near collapse as investors and savers ran from the country. Yes! What is known as capital flight, is brewing.
This was what led to the Asian crisis in the 90’s. Capital Flight, they call it. If the International Monetary Fund (IMF) did not intervene, the Asians could really have suffered a lot. When the IMF intervened there, it cushioned the blow of the crisis and offered a form of international circuit breaker for them, since everything then looked very fragile. The idea was not to prevent necessary adjustments - for example, in the form of budget deficit reduction - but to spread those out over time, to restore confidence, and to serve as an external seal of approval on the various governments’ credibility.
The lesson to be learnt here is that, compared to the West African Monetary Union, these countries are well developed and able to manage their economic problems through some sort of fiscal austerity measures, which were suggested by the IMF. Greece is expected to follow suit. But the question in West Africa remains whether the countries involved in the union are able to implement these austerity policies often laid out by the IMF.
We will dilate more on this in the following issue. Keep reading!
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