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The Eco: Western Africa pushes for monetary union

  • July 2014
  • -
  • MarketLine
  • -
  • 22 pages

Introduction

The Eurozone has attracted much criticism following the sovereign debt crisis and near collapse of some of its members. Despite these conditions, the concept of monetary union has not entirely been discredited: plans are afoot in West Africa to expand the existing currency union to include new members, which could see a new currency encompass a region of over 300 million people.

Features and benefits

* Helps to explain what a monetary union is and the impact it can have.
* Analysis of the CFA Franc region in Western Africa, assessing both its improvements and failings.
* Evaluates the suitability of the Economic Community of West African States as a currency zone, and how the Eco project is developing.
* Assesses the Eurozone as the world's largest monetary union, and whether any lessons can be applied to West Africa should they proceed.

Highlights

Currency Unions are where two or more member states share a common currency. In order to ascertain where such unions would be effective, theory suggests the "optimal currency area". Robert Mundell suggests there are four key criteria to optimal currency unions when adopting the regime.
The West African Economic and Monetary Union (WAEMU) have considered its currency, the CFA Franc, a qualified success so far. Another region within the Economic Community of West African States, the West African Monetary Zone (WAMZ), has proposed the Eco currency, and depending on its success, this could be extended across the entire ECOWAS region.
The Eco's promise is primarily down to the success of the WAEMU's Franc. It has provided a template for development among the member countries. Intra-zonal trade is some of the highest in Africa according to the IMF, a key component in promoting development.

Your key questions answered

* What is a currency union, and how can it be judged successful?
* What is the Eco?
* What can the Eco learn from the CFA Franc?
* What problems face the Eco's Introduction?
* Are there any lessons from the Eurozone for new monetary unions?

Table Of Contents

The Eco: Western Africa pushes for monetary union
OVERVIEW
Catalyst
Summary
CURRENCY UNIONS IN THEORY
Monetary unions share currency
Four key pillars of a successful monetary union
Economic and Monetary Union encourages further integration
THE ECO'S BACKGROUND
ECOWAS is dominated by Nigeria's economy
WAEMU is the template for Eco's expansion
The Eco will eventually consume the CFA Franc
The Eco's convergence criteria
BENEFITS OF THE ECO
Lower inflation for monetary union
Exchange rate stability
Convergence criteria help development
Promotion of intra-zonal trade
Could the Eco have political ramifications?
THREATS TO THE ECO
Eco is unlikely to be launched on time
The Eurozone crisis has damaged monetary union's credibility
The Eco project may require relinquishing of fiscal instruments
Lack of monetary policy can make economic management more difficult
Commitment to the union must be resolute
ECOWAS' obstructions to monetary union
Asymmetrical member economies
Labor mobility: hampered by language barriers and poor infrastructure
Nigeria: too big for the union?
Economic downsides of monetary union
Lower average growth rates compared to wider region
If the Franc is not guaranteed, foreign exchange instability would follow
Monetary union does not guarantee political stability
CONCLUSIONS
No to the Eco
APPENDIX
Definitions
Sources
Further Reading
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