exchange rates, because of the interest rate differentials. the success and sustainability of the monetary union will depend at least partly on its credibility. crucial to its credibility will be fiscal discipline and this requires fiscal rules to prevent free riding by any individual partner state. in a monetary union, the costs of fiscal indiscipline by one member of the union are partly externalised to the other members. the possibility that the profligate sovereign borrower might be bailed out, directly or indirectly through higher inflation, by its partners, will drive up public borrowing costs for all members of the monetary union. the future of the monetary union itself could be thrown into doubt if the financial markets and public believe that a member with serious fiscal problems cannot solve these problems within the monetary union, essentially because the solution would be too deflationary, and hence opts to leave the monetary union. this is the concern which many commentators have expressed in relation to the current economic and fiscal problems of greece. to avoid these problems we must put in place binding, transparent fiscal rules covering fiscal deficits and public debt, which will operate both during the transition to monetary union and after the monetary union has been established. i trust that the principle of fiscal rules is generally understood and accepted within the east african community. however there are some who argue that these rules should be made less stringent – i. e. the fiscal deficit targets should be loosened – to allow for much higher public spending, on the grounds that there are large unmet demands for public investment within the east african community. unfortunately this misses the point. if the monetary union is to be successful, the targets for fiscal deficits and public borrowing must be tight enough to ensure that the partner states of the monetary union run fiscal policies which are sustainable, and are perceived to be sustainable by the markets, even in the face of adverse fiscal shocks, such as a cyclical downturn in the tax base or a cutback in donor aid. conclusion the 21st century global economy will present enormous opportunities for east africans to lift their economies to middle income status, raise living standards and eradicate mass poverty. we will be much better placed to take advantage of these opportunities and to face up to the challenges if we can achieve deep and meaningful integration of the east african economies. monetary union is an essential component of regional economic integration. establishing a monetary union in east africa will be difficult and will pose risks. it will require an enormous amount of work to reform institutions, change legislation

transacting business across the national boundaries of those countries which comprise the members of the monetary union. for example, monetary union removes the costs of having to transact in different currencies and the risk of adverse exchange rate movements for trade within east africa. monetary union will, therefore, deepen the integration of east african economies and, in doing so, enhance the benefits which can be derived from the east african common market. a well functioning common market in east africa will stimulate competition and help domestic firms to realise economies of scale, thereby raising productivity, which will strengthen our competitiveness on world markets and raise living standards. domestic firms, which have hitherto concentrated on their domestic markets, will be forced to extend their horizons to the regional market. a larger, more integrated, market will also be much more attractive for foreign investment and will help spur the advance of our economies towards “ emerging market ” status. the global economy is changing, at an ever increasing pace. the 21st century global economy will be characterised by the emergence of major regional economic blocks, groups of countries whose economies are closely integrated, alongside the largest economies such as those of china and the united states. multilateral relationships between states and regional economic blocks will play a key role in shaping the institutional rules which will affect the development of the global economy and the national economies within it, especially in multilateral institutions such as the world trade organisation and in international fora. the recent global economic crisis has vividly demonstrated the importance of multilateral solutions to economic problems which have a global dimension. small economies will find it very difficult to make their voice heard and ensure that their interests are taken into account when decisions which affect the global economy are made, unless they are prepared to join together and present a common front. this is a reality which the european union has recognised. it is even more essential for the east african countries, with far smaller economies than those of the european union, to conduct their economic relations with the rest of the world as a single, united entity. economic and monetary integration in the east african community will amplify the influence which individual east african countries can exert on the international scene. monetary union will send a powerful signal to the rest of the world that east africa is united with a single market. it will thus signal that east africa intends to be an important player in the global economy of the 21st century, and that each of the member states is prepared to put aside purely parochial interests to achieve this. the road