Alfred Schipke, formerly of the IMF Western Hemisphere Division, said the Eastern Caribbean Currency and Economic Union, maybe the smallest of three economic and currency unions worldwide, bringing together eight small islands, whose total combined population is less than a million.
But he said it is an interesting microcosm of the Euro area and the challenges it faces following the global economic crisis of 2008.
Schipke has edited a new book on the Eastern Caribbean Currency and Economic Union and in an interview posted on the IMF website, said the member countries of the union – Antigua and Barbuda, Dominica, Grenada, St. Lucia, St. Vincent and the Grenadines, St. Kitts-Nevis, Montserrat and Anguilla – all have many similarities including the same colonial history.
“In terms of the benefits given the small size of these countries it allows these countries to take advantage of sustained economies. It also allows them to what we call diversify risk, one country gets hit by shock or hurricane then they can pool resources and deal with those shocks more effectively.
“But most importantly because of the size of the islands they can provide at the regional level, more cost effective public services (and) that’s the major benefit.”
He said what does matter is that if those countries speak with one voice they can have better representation at the global level.
“Interestingly enough the Eastern Caribbean Currency and economic Union is actually a microcosm of the European Economic and Monetary Union since it has been faced by rising fiscal deficit, unsustainable debt levels in a number of states, a lack of fiscal integration and challenges in the financial sector that are threatening the underpinnings of the union.
“Just like in the European Currency Union overcoming these challenges are particularly difficult in monetary unions,” he said, adding “sometimes you need a crisis to implement reforms.
“So there are opportunities and I think there is a general feeling in the region that further integration is needed to ensure the viability of the union, but in the European Union you would need to put political capital into the reforms.
Asked what would be some policy recommendations for long term growth in the region, Schipke said there is need for generating conditions for strong sustainable growth which he noted is paramount in the Eastern Caribbean.
“As a matter of fact, the Eastern Caribbean experience strong growth periods in the years after independence, but since the 1990’s prior to the financial crisis, growth slowed down significantly.
“Now that is in part explained by a number of shocks, the erosion of trade preferences that the countries benefitted from Europe, in terms of the trade shocks, higher oil prices and also a reduction in foreign aid.”
He said another issue is that tourism has been a major contributor to economic growth in the region and while “there is some potential for future growth in this particular area in other service areas”, the new growth model for the region will have to rely more on the private sector.
“In the past the role of the public sector was very dominant, but given the very high debt levels, the room for public participation will be more limited, so it has to be more private sectors driven.”
Schipke said unlike within the European Union, there is no opposition to a single currency within the Eastern Caribbean union.
“The common currency has never been questioned given the small size of these countries there is no alternative to that. In addition to that, the Eastern Caribbean had never had its own currency. It was either the British pound, it has had a currency board and it has served the region very well. It has relatively low rates of inflation and it is one of those currency broad arrangements that have success because it has lasted for a very very long time.
“Given that there is no questioning of the common currency that needs to be supplemented with other elements including a sound framework for the financial sector at the regional level … I don’t think there is any questioning that further coordination needs to take place.
“I think the question is more at what speed rather than whether?” he added.
Reprinted from Caribbean360