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Will the Euro create a bonanza for Africa?

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  • Cohen, Daniel
  • Kristensen, Nicolai
  • Verner, Dorte

Abstract

In considering how the euro will affect Sub-Saharan Africa, the authors examine the transmission channels through which the euro could affect economies in the region. They examine the risks and opportunities the euro presents for Sub-Saharan African countries. They especially examine the effects from the trade channel, through changes in European economic activity and the real exchange rate. Because of the relatively low income elasticity for primary commodities - which is what Sub-Saharan Africa mainly exports - an increase in activity in Europe is considered to have a marginal impact on Africa. Exchange rate regimes and geographical trade patterns point to large differences in exposure to changes in the real exchange rate. Capital flows to Sub-Saharan Africa can be affected through portfolio shifts or through changes in foreign direct investment. Changes in competitiveness in Europe are not expected to influence foreign direct investment, so the euro is not expected to affect foreign direct investment significantly. Portfolio diversification could increase greatly. But Sub-Saharan Africa is not expected to realize the increased potential from portfolio diversification because of its severely underdeveloped domestic capital markets. It is vitally important that Sub-Saharan African countries strengthen their financial integration into global markets. How the euro will affect such parts of the financial system as banks and debt and reserve management varies across countries. Generally the effect is expected to be limited.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2251.

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Date of creation: 30 Nov 1999
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Handle: RePEc:wbk:wbrwps:2251

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Keywords: Fiscal&Monetary Policy; Payment Systems&Infrastructure; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; Environmental Economics&Policies; Banks&Banking Reform; Fiscal&Monetary Policy; Macroeconomic Management; Economic Theory&Research;

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  1. Ng, Francis & Yeats, Alexander, 1997. "Open economies work better! did Africa's protectionist policies cause its marginalization in world trade?," World Development, Elsevier, Elsevier, vol. 25(6), pages 889-904, June.
  2. Levy Yeyati, Eduardo & Sturzenegger, Federico, 2000. "Implications of the euro for Latin America's financial and banking systems," Emerging Markets Review, Elsevier, Elsevier, vol. 1(1), pages 53-81, May.
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