Can a West African Currency Union Work?
The eurozone’s experience showed how unruly currency unions can be, and how important it is to continue experimenting and adapting. A currency union comprising the 15 members of the Economic Community of West African States will be no different – but that doesn't mean it can't work.
YAOUNDÉ – The 15 countries of the Economic Community of West African States have agreed to adopt, as of next year, a new shared currency, the “ECO.” But, as the eurozone’s experience has shown, currency unions can be unwieldy. Creating a successful one will require the ECOWAS countries to overcome serious challenges.
The work of the economist Robert Mundell suggests that an “optimum currency area” must satisfy four main conditions. The first is a large and integrated labor market that allows workers to move easily throughout the currency union to fill employment gaps. Price and wage flexibility, together with capital mobility, are also necessary to eliminate regional trade imbalances. These two conditions imply the need for a third: a centralized mechanism for fiscal transfers to countries that suffer as a result of labor and capital mobility. Lastly, participating countries should have similar business cycles, to avoid a shock in any one area.
The ECOWAS member states are well aware of these conditions, which guided the ECO’s six convergence criteria. Those criteria include a budget deficit below 3% of GDP; public debt of no more than 70% of GDP; inflation of 5% or less; and a stable exchange rate. Moreover, gross foreign-currency reserves must be large enough to provide at least three months of import cover, and the central-bank financing deficit must not exceed 10% of the previous year’s tax revenue.