Caricom’s dilatoriness and implementation deficits (well documented by Prof Norman Girvan) have dramatized grave impediments standing in the way of forging a single market and economy. There is, however, one recent instance, where its sloth, unintendedly, averted a disaster of huge proportions.
Readers would recall the shattering financial contagion in the region at the eruption of the global financial crisis and credit crunch in the last quarter of 2007. This led to the later collapse of the Trinidad and Tobago-based CLICO group and the unravelling of the Ponzi scheme operated by the Antigua and Barbuda-based Stanford group. These groups held billions of US dollars in financial liabilities across Caricom.
In the wake of this, there was a flurry of regional political gatherings and consultations among technicians and financial experts. There was a strong consensus then, which I shared, calling for among other things 1) a more proactive regional approach to the on-going global financial liberalization; and 2) the accelerated deepening of the integration of the Region’s financial system. Indeed I remember clearly a former regional Finance Minister privately pleading for a single Caricom currency.
While it was not then specified whether this would be in addition to existing national currencies, or whether it would replace them, this was considered a detail that could be addressed by the Region’s technicians. I am certain that this well-intentioned consensus derived from the widely perceived “success” of the Eurozone, and other striking advances in regional integration being pioneered by the European Union.
The rest is history
As the saying goes, the rest is history; nothing was done about the call for a common currency, especially as it was mis-perceived in 2010 that the financial crisis was abating. As we know, since then a serious crisis of the Eurozone has emerged, bringing into stark relief how incredibly difficult it is to promote a common currency as an integral feature of regional integration.
Several European economists are now predicting that the euro crisis could last 20 years! A careful reading of the EU’s experience with the Eurozone, however, reveals important lessons to be learnt. Let us examine a few:
The first lesson is that the convergence criteria used by the EU to gauge its capacity to forge a financial and monetary union are inadequate.
These criteria were adopted in the Region and for years the national authorities have been reporting to regional authorities such data as key prices (interest rates, exchange rates, wage rates, inflation rates), the state of internal and external balances (fiscal balance, credit balances, money supply and balance-of-payments) and growth.
These criteria, not only remain inadequate, but lack timeliness and dissemination to private economic agents who need them for decision-making.
The second lesson is that economic disparities in a regional grouping, (especially as regards income levels; social structure; production and consumption structures; external and intra-regional trading structures; employment levels and occupational structure; government and administrative structures; and, policy orientations), are fundamental determinants of the workability of a common currency.
The third lesson is creating a currency union, in the absence of a fiscal union, creates an unsustainable policy mix.
The clear inference of this is that an integrated budgetary framework, (involving agreed debt and deficit targets, and harmonized tax regimes) is a necessary foundation for the successful promotion of a common currency.
The fourth lesson is that a currency union is unsustainable without a single over-arching central bank. This ensures 1) the centralization of external reserves at the supranational level; 2) a ‘lender of last resort‘; and 3) a unified financial framework in the areas of financial coverage, instruments, regulation and supervision.
The fifth lesson is there needs to be an agreed integrated policy framework, with credible policy instruments. Here certain priorities stand out: 1) agreed targets for external and internal balances and the determination of macroeconomic stability; and 2) the management of economic cycles and shocks.
This lesson also requires recognition that policy-making at the national level is already entrenched and seeking to uproot this is futile. What is indeed desirable is for national policy- making to be grounded in regional realities so as not to place undue reliance on regional bodies for carrying the policy-making responsibilities of regional integration.
The sixth and final lesson I draw attention to here, is the need for a common broad-based regime of bottom-up approaches to building the Region through an inclusive, democratic and accountable framework. Without this, public participation will be constrained and the requisite political will to pursue the Caricom project will not be forthcoming.
If Caricom had proceeded towards a currency union without drawing fully on these lessons the integration movement could well have been irreversibly interrupted. However, after the euro experiences, we are now armed with the knowledge that 1) an integrated budgetary regime; 2) an integrated financial regime; 3) an integrated policy framework; and 4) a common integrated approach to democratic, transparent and accountable governance are all necessary accompaniments of deepened regional integration and a single market and economy.
The central economic importance of regional integration is to provide a platform for long-run global competitiveness and not to offer regional protection as an end in itself. In this sense a phased approach to financial and monetary union requires that it is constructed as an outcome rather than an instrument of integration.
In my best judgment Caricom is too weak, too fragile, too vulnerable to shocks, and too diverse in its economic structures and policy orientations for it to take on currency union at this stage.
This of course does not rule out sub-Caricom efforts in this direction by countries that are prepared to embark on this agenda, as the OECS states are now attempting.