Anchoring to the Euro (and Grouped Together)? The Case of African Countries

This paper assesses the adequacy of the exchange rate regime of 16 African countries that are pegged to the euro since 1999. The evaluation is based on three key criteria borrowed from the optimal currency area literature. A first conclusion is that the peg to the euro has granted the 16 countries a good inflation performance. However, with the clear exception of Cape Verde, the peg is not supported by the other economic requirements, namely trade integration and synchronisation of business cycles. We also assess whether the US dollar would be a better currency to anchor. Since the results are ambiguous, pegging to the euro seems to be a better alternative as these countries benefit from established exchange rate cooperation agreements. Given that most of the countries in the sample are historically grouped together in the West African Economic and Monetary Union (WAEMU) or the Central African Economic and Monetary Community (CAEMC), the paper further assesses whether the grouping of countries in these two CFA monetary unions receives economic support. The conclusion is that the composition of CAEMC does not conform to basic requirements. In contrast, for a wide group of WAEMU countries there is room for sharing a common monetary policy.