Can the CFA Weather the Euro Storm? in a Worst-Case Scenario, the Battered 13-Year-Old Eurozone Could Break-Up, Creating Difficult Policy Options for the 14 Economies of Africa's Franc Zone Whose Currency, the CFA Franc, Is Pegged to the Euro. Is Africa's Franc Zone Braced to Weather the Storm in the Event of a Euro Break-Up?
Siddiqi, Moin, African Business
Continued efforts by European leaders at numerous summits in 2011 to restore confidence in Eurozone public finances have been viewed as largely ineffective. They attempted to inject fiscal discipline and make the European Financial Stability Facility (the EU's rescue fund) for troubled sovereigns, fully operational. The euro also recently plunged to its lowest level ($1.29) against the dollar in 18 months. London-based Lombard Street Research states predicts that "Europe's current approach to its crisis will fail."
A new set of stringent budgetary rules, to form a 'fiscal compact', may be hard to impose on Italy and Spain, which need to borrow a combined total of [euro]59obn in 2012 to refinance maturing debts. The new pact commits Eurozone members to 'structural' fiscal deficits of just 0.5% of GDP - compared to the previous target of 3% of GDP under the Stability and Growth Pact which failed to control rising deficits over years and where penalties were usually waived. The last summit in December 2031 did not specify the penalties for non-compliance. This vague accord may not be ratified by some national Parliaments (notably Greece) and might not be enough to keep the euro intact over 2012.
One major worry is that proposed caps on government borrowing would hinder economic activity and make it even harder for stricken EU members (Greece, Ireland, Portugal, Spain and Italy) to grow their way out of debt. The UK's Coutts Bank agrees: "Europe is now on a clear agenda of prolonged austerity," it says, warning of a deep recession - far more severe than the 0.4% output contraction, which the European Central Bank (ECB) considers a worst-case scenario.
The markets fear that credit rating agencies Standard & Poor's (S&P) or Moody's will downgrade either France or the Eurozone's credit rating, thereby pushing yields on government bonds above the sustainable 7-8% levels. S&P cited "continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial and fiscal convergence among Eurozone members." It also raised the probability of the Euro Area slipping into a recession this year - thus impacting global trade and leading to renewed credit crunches like in 2009.
The Eurozone was entirely a politically inspired project whose main goal was genuine economic and political union across the Eu ropean continent. The longer-term viability of the euro depends on fiscal consolidations and real political will by member states to finance each other when credit markets dry up. Finance is not the issue. As a bloc, the European Monetary Union (EMU) enjoys surpluses on balance of payments - in contrast with perennial external deficits in the US.
The Economist magazine believes that only the creation of 'full' fiscal union, where rich northern countries subsidise poorer southern economies or unlimited bond purchases by the ECB could satisfy sceptical investors. An ECB sovereign guarantee programme would calm the credit markets and provide breathing space for the Eurozone to implement structural reforms. Time is fast running out for the euro - with repercussions across the globe, not least in Francophone Africa.
The Euro-CFA franc peg
Worldwide, there are only four monetary unions: the Euro Area, the Eastern Caribbean Currency Union, the Central African Economic and Monetary Community (CEMAC, with Yaounde-based BEAC as its central bank) and the West African Economic and Monetary Union (WAEMU, with Dakar-based BCEAO as the central bank).
The main institutional characteristics of the African unions are (1) a fixed peg to the euro; (2) a convertibility guarantee by the French Treasury; and (3) a set of legal, institutional, and policy requirements designed to ensure the sustainability of the arrangement.
The CFA zones have had one of the longest experiences with a fixed exchange regime for a convertible unit and with regional integration, of any group of developing economies. …