Will the Euro Trigger More Monetary Unions in Africa?

The arrival of the euro widens the options for a common peg for African currencies but need not shift the balance of advantages in favor of adopting several common currency arrangements in Africa. Honohan and Lane analyze the prospects for greater monetary integration in Africa in the wake of the European Monetary Union. They argue that the structural characteristics of African economies are quite different from those of European economies, but that much can be gained from monetary cooperation - as an external agency of restraint and for promoting stability in the financial sector. But one should not expect too much from such arrangements. There is little evidence of contagious attacks on African currencies requiring the coordination of exchange rate policies. And economies of scale in the prudential regulation of financial systems could be achieved through international cooperation without the need for a common currency. The same is true of enhanced risk-pooling through the financial system. The European Monetary Union has only a marginal impact on the net benefits of monetary cooperation, but the euro would be a natural anchor for any African monetary union - especially if the United Kingdom and the sterling were to join the European Monetary Union. Indeed, the most likely route to new monetary cooperation in Africa is through a common peg to the euro. This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to explore the economics of small financial systems. This study was prepared in the UNU/WIDER project on EMU: Impact on Europe and the World, and was funded by the Yrjö Jahnsson Foundation and the Ministry for Foreign Affairs of Finland