Anchoring to the Euro (and grouped together)? The case of African countries

Abstract

The currencies of sixteen African countries, namely those belonging to the West African Economic and Monetary Union (WAEMU), to the Central African Economic and Monetary Community (CAEMC), Comoros and Cape Verde, have been pegged to the euro since the inception of the new European currency in 1999. This paper assesses whether the euro is an adequate anchor for those countries. The evaluation is based onthree key criteria borrowed from the optimal currency area (OCA) theory and the conclusion is that the euro is an appropriate currency for anchoring only in the case of Cape Verde. Since the members of WAEMU and of CAEMC are jointly pegged to the euro, the paper further assesses whether the grouping of countries in these two CFA monetary unions receives economic support. Based on the OCA criteria used to investigate the first issue, the conclusion is that the composition of CAEMC does notconform to basic requirements. In contrast, for a wide group of WAEMU countries there is room for sharing a common monetary policy.