What can Africa teach the eurozone?
- 4 October 2012
- From the section Africa
As European leaders battle to control the eurozone debt crisis, 14 sub-Saharan African countries could teach them how to maintain a disciplined and stable currency union.
Their single currency system, the CFA franc, keeps inflation low, retains investor confidence and in recent years has enjoyed rates of real economic growth that Europe can only dream about.
It has also weathered severe economic pressure - most member countries depend on price-volatile commodity exports and several are among the poorest on earth.
Parts of the bloc - which encompasses mostly former French colonies in West and Central Africa - have also endured violent political instability.
For several months early last year the banking and international payments system in Ivory Coast was paralysed by financial sanctions, after the incumbent head of state, Laurent Gbagbo refused to accept defeat in the November 2010 presidential election.
Guinea-Bissau and Mali have suffered coups and internal conflict; all the Sahelian members are struggling to recover from the aftermath of a devastating drought.
And yet, the credibility of the CFA franc union remains intact, in both political and economic terms - with projected economic growth this year of 4.6% for the Central African bloc and an impressive 6.4% in West Africa.
The CFA bloc functions with relatively harmonious coherence - and apparently without any need for political integration, to sustain its monetary discipline and financial stability.
Perhaps the strongest message it could give to Europe is the way CFA zone countries shield the rigorous management of the currency union from the influence of national politics and disputes between member states.
Political unity in West and Central Africa is probably weaker than in the eurozone. But the African franc zone governments mostly avoid public argument over regional economic policy.
Of course, just as in Europe, national interests clash in policy arguments - and tussles over power and big regional jobs.
There is rivalry too: While West Africa operates a shared stock market, in Central Africa, Cameroon and Gabon have launched rival exchanges.
Free from scrutiny
But most of the tough wrangling between governments takes place behind closed doors, in discreet negotiations and tightly managed summit meetings.
In their domestic pronouncements, African politicians almost never comment on the single currency or the economic management of fellow member governments.
The existence of the system and the way it functions is just treated as a fact of life.
This is not a luxury open to governments in Europe, where politics is more open, and subject to much more intense media coverage and domestic parliamentary pressure.
Even though most CFA zone governments are elected and nominally democratic, in reality African power still mainly flows from the top.
Presidents and prime ministers take the main economic decisions without much pressure or scrutiny from the public or the press.
It is not like that even for Europe's most powerful government leader.
Chancellor Angela Merkel is not entirely free to take her own decisions about what Germany should do to help save the euro.
Her room for manoeuvre is tightly constrained by her own voters, still haunted by fears of a return to the over-indebted hyper-inflationary 1930s.
No West or Central African leader has to cope with that sort of limit on their freedom of action.
This enables CFA zone governments to maintain a steady course, weathering severe stresses, such as the current rebel takeover of northern Mali or the 10 years of conflict and national partition in Ivory Coast - much the largest economy in the West African bloc and a key trade gateway for landlocked countries such as Mali and Burkina Faso.
With Ivorian transport links disrupted, trade patterns simply shifted, to divert trade flows through other outlets, such as Senegal, Ghana and Togo.
But there is more to the CFA zone's stability than this.
It has a vital not-so-secret asset: The CFA is pegged to the euro at a fixed rate of CFA 655.957 per euro, guaranteed by the French treasury.
This is an arrangement inherited from the post-colonial era, when most of France's former African colonies opted to stay in a monetary union pegged to the French franc.
And when, almost four decades later, France joined the euro, the CFA's fixed parity was transferred to the new single currency.
So the franc zone's strongest anchor of stability is in fact the euro.
Yet, the paradox is that it is precisely this that differentiates the CFA from the eurozone.
When EU governments fail to agree or misjudge the next step in managing the crisis, they are punished by the markets.
The single currency sinks against the dollar and sterling, while the borrowing costs of the weakest countries soar towards the unaffordable.
By contrast, the franc zone is protected by its fixed exchange rate link to the euro.
Disappointing economic numbers or a budget crisis in a member state cannot spark a plunge in the value of the currency.
If investors' confidence weakens, the external value of the CFA is held firm by that French-guaranteed peg.
This gives francophone African countries a monetary stability that eurozone member states do not enjoy.
But it has not all been smooth sailing.
By the early 1990s the link to a steadily rising French franc left the CFA heavily over-valued.
CFA zone exporters saw their competitiveness eroded, and imports were sucked in, undermining local farmers' ability to supply their own home markets.
Matters came to a head in January 1994 when, in close coordination with the IMF and France, the West and Central African zones staged their only devaluation - a 50% cut in the value of the CFA franc.
This drove up the cost of living for city dwellers consuming imported goods, but revived the competitiveness of local farmers.
Although painful at the time, the devaluation was the springboard for recovery and long term growth; the parity has not been adjusted since.
There have been other challenges, including a mismanagement scandal at the Paris offshoot of the central African central bank.
But broadly the system has proved resilient and has gradually reinforced financial integration, for example, through the creation of regional markets in government debt paper.
The fixed rate link also means that CFA francs and euros can be changed freely.
But this shield is not cost-free.
It comes with strict rules on borrowing and depositing counterpart funds. CFA countries are treaty-bound to a set of financial disciplines.
These are much tighter than the rules that have governed eurozone states.
Combined with the strong outside oversight of the IMF, the arrangement leaves franc zone members with much less freedom over economic policy than their eurozone counterparts.
Today in Europe there are suggestions that the euro can only survive if member states adopt a much deeper degree of economic and financial union - particularly in the cross-border regulation of banking.
Africa offers an example of what this can entail. The CFA franc blocs already operate regional systems of bank supervision, with regulatory commissions for West and for Central Africa.
They have also taken big steps towards harmonising business law and established a joint appeal court for business cases.
The collation of financial and economic statistics is largely harmonised too.
And these formal arrangements are also underpinned by cultural factors, as all but two of the 14 member states are former French colonies.
A close web of institutional and personal connections links members of the administrative elite across the region, with much common historical background, and shared educational and administrative traditions inherited from France.
Senior officials from different countries often have a common academic training, in France, or shared career experience at the IMF, World Bank or the regional central banks.
These factors help to explain how the CFA franc zone has managed to sustain a sense of common purpose and policy thinking.
Europe, with its varied languages and government administrative traditions, may find it hard to develop such a coherent shared outlook.