What Makes the CFA Franc Zone a Special Form of Monetary Integration ?

The CFA franc zone is the most notable example today of a regime change in which sovereign countries are united not only to use the same currency unit, but also to add value to that of another monetary unit in a fixed relationship. In some important respects, this zone differs from other monetary unions, including emerging unification of the European currencies, so the traditional criteria applied to identify the optimal monetary zones are not sufficient to assess its performance. It is indeed difficult by using only traditional criteria to argue that the African franc zone is a natural monetary area: the intraregional trade is quite limited, the structure of production varies across the different countries due to the massive shocks produced by the terms of trade in the past two decades, which had a different impact on the countries of the region and factors mobility does not seem to be sufficient to make up for these differences. The arguments in favour of specific provisions to transform the CFA franc zone is based on two grounds, the area combines the features of a monetary union and those of a zone with fixed exchange rates. Due to the fact that all African countries participating in the area have a very well developed trade with France and with other European countries, pegging their currencies to the French franc, now in euro, has contributed to the overall stability of their competitive positions. Given that the currency was issued by supranational central banks and that France experienced a relatively high stability of the price level throughout the 1980s, the countries of the CFA franc zone managed to achieve discipline and credibility in the implementation of their macroeconomic policies. In addition, the external guarantee mechanism credits, in the form of overdrafts to operations accounts with France, helped mitigate some of the effects of the deterioration of the positions of net foreign assets. Therefore, if the collective well-being depends primarily on price stability and growth, belonging to the area has obviously been beneficial to those countries. However, the collective well-being also depends on the balance of the external accounts, and if the nominal exchange rate can be modified to cushion the adverse shocks caused by the terms of trade without undermining the authorities credibility and financial stability, the net benefits of membership in the area are less obvious.