The ECO – questions to ask and learning from the Euro
In recent times, we have been inundated with the news from Francophone West Africa that they are changing the West African CFA to a new currency named ECO that will be pegged to the Euro. What most people might be forgetting is the fact that for many years now, West African governments have been working on a common currency also called the ECO. When the announcement from the Ivory Coast leader came, Nigeria was notably silent about joining the currency. There were indications that Ghana might be joining. It is always good to look at similar events around the world and learn from the lessons. Let’s consider the Euro.
In 1991, 15 members of the EU agreed to the Maastricht treaty, which signalled the evolution of a single currency towards economy and monetary unification. There were strict criteria for joining, including inflation, interest rates and budget deficits target. On 1 January 1999, the euro was officially launched as an electronic currency with the European Central Bank setting interest rates across the Euro Area.
One of the frameworks for the Euro was the ratio of government debt to GDP. As a participating country, your Debt/GDP ratio must not exceed 60%. The average ratio of government debt to GDP in the Euro Area was 88% in 2011. Greece, Italy, Ireland and Portugal were the worst culprit with figures more than 100% of GDP in 2011. The situation in those four countries sent the Euro on a spiral and raised difficult questions.
The situation in Greece and Italy especially should warrant a devaluation of their currencies. But countries like Germany were doing pretty well and it would not be sensible to downgrade the currency of a strong economy. This brings the question of the viability of a unified currency.
Normally, when the Debt/GDP ratio is high, one would think the government is undergoing massive infrastructure projects. But it was not the case for Greece and Italy. Most of their borrowings went into social programmes without real returns.
The downturn of Greece and Italy’s economy around 2011/12 caused a lot of tension in countries with decent economic growths who wondered why they had to bear the burden of having the same currency with such countries. It almost looked like the Eurozone was going to crumble.
As we all know, the Euro survived. But till date, the region has not really stabilized back to the 60% Debt/GDP ratio. And since then, Britain initiated Brexit – a sore point seeing that they never joined the Euro currency and now want out totally.
Now let’s talk about the ECO (the one that has been on the table for many years). There are 10 criteria for joining. The criteria are inflation targets, fiscal deficits, Tax revenue should be equal to or greater than 20 percent of the GDP, etc. Not sure more than 2 countries in West Africa meet the conditions.
I believe that the criteria, if enforced in a peer review mechanism kind of way might force the governments to make good economic decisions. Looking at the Euro example, that has not been the case. It might just be lofty dreams. Eventually, the ‘any-howness’ and bad decisions rule.
If the Eurozone were strict about the conditions, the Euro would not exist today. Greece’s debt/GDP ratio is 181% as at 2018 whilst Italy’s is 134%. Average European debt/GDP is 80%. I see the same happening with the ECO unless a miracle happens. I leave the rest to real Economists.