West African Currency Unions: Rationale and Sustainability

Abstract

Drawing on the recent literature and experience of monetary integration in Europe, the paper examines the rationale for establishing regional currency unions in western Africa. Despite dramatic economic, political and historical differences between the two regions, the analysis indicates that monetary unification might well be benefi- cial for a number of the member states of the Economic Community of West African States (ECOWAS). The main reason is that the costs stemming from the loss of mone- tary autonomy are often more than offset by the gains originating in the (partial) separation of monetary and fiscal powers. However, large countries with relatively ambitious public expenditure objectives would not be attractive partners because they would be expected to pressure the common central bank, creating excessive inflation in the entire union. Hence, the desirability and sustainability of a currency union critically depends on fiscal discipline among its members. We also explore the vulnerability of regional monetary institutions to country-specific disturbances. Overall, the desirability of an ECOWAS monetary union requires a strong fiscal surveillance procedure both in the transition phase and after the establishment of the union. (JEL E58, E61, F42)