Plans for monetary union among ECOWAS countries are driven by a strong desire to increase regional economic linkages and political solidarity. Since many countries in the region are small both in terms of population and GDP, regional integration is seen as a way of increasing economic clout and bargaining power on the global scene. Larger markets may allow economies of scale and gains from trade to be exploited and increase production efficiency. Monetary union may provide a visible symbol of the commitment to regional integration—over and above its purely economic benefits that derive from greater economic efficiency and lower transactions costs.
It is important to recognize, however, that currency union is neither necessary nor sufficient for the growth of regional trade—as evidenced by the strong ties among the North American Free Trade Agreement (NAFTA) countries, on the one hand, and the relatively low integration among WAEMU and especially CAEMC countries after 50 years of monetary union, on the other. Although there is some evidence that monetary union can expand trade and thus boost growth, it will be more crucial for growth for each ECOWAS country to “put its own house in order”—that is, put in place the appropriate macroeconomic discipline and structural policies.
In addition, the potential benefits of monetary union must be weighed against potential costs. A single monetary and exchange rate policy will not allow countries to make different adjustments when they face asymmetric terms of trade (and other) shocks. In particular, the necessary adjustment policies for Nigeria, an oil exporter, are likely to be opposite those for the oil importing countries of ECOWAS in the face of a change in the price of oil. In general, inadequate flexibility of exchange rate pegs can lead to large overvaluations, while adjustable pegs have a degree of inherent instability and lack of credibility. The non-WAEMU countries’ history with exchange rate pegs involved inefficiency and corruption associated with non-market allocation of foreign exchange at the official rate—a past that should not be repeated. Finally, while monetary union could aid as an “agency of restraint” promoting fiscal discipline, perversely, it could also encourage governments to allow fiscal positions to get out of hand.
Moreover, the institution building required to create a successful monetary union has costs—especially if it duplicates existing national bureaucracies—and takes time. The push for monetary integration must not be allowed to distract attention from more fundamental problems or to divert resources away from where they are most needed. Indeed, without fiscal discipline accompanied by wage/price flexibility and factor mobility in the economy, a currency union would not have the desired benefits and might not be sustainable.
Regional integration resulting in greater trade among ECOWAS countries may help increase efficiency of production. Trade among developing countries, in general, is likely to have fewer efficiency benefits than trade with developed countries, however, because the possibilities of exploiting complementarities are less. North-South trade opens the door to technology transfers necessary for development. In implementing regional integration, therefore, one must avoid the risks of trade diversion away from multilateral trade and toward intraregional trade. Regional integration should be seen as a steppingstone to the benefits of wider trade liberalization, rather than a way to increase protection of regional “infant industries.”
The design of a new central bank must be done carefully and this will require solving numerous technical and political problems. Regional surveillance must be made effective in limiting excessive deficits and in imposing sanctions against countries that violate the rules of the union. As in the EU, it will be important to prove that countries are ready and fully committed to proceed to monetary union, before rushing into it. A strong sense of regional solidarity will be an essential ingredient for getting through periods of stress.
Whether the institutional preparation for a non-WAEMU monetary union is justified by the expected benefits depends in part on how long this monetary union is expected to last, before being replaced by a full ECOWAS monetary union. In the meantime, exchange rate stability could be achieved instead by limiting fluctuations among the currencies of member countries or by a common peg to the euro or a basket of currencies, without creation of a full monetary union, while the “agency of restraint” could, in principle, be achieved by setting up other regional institutions that provide mutual surveillance and peer pressure. The creation of a looser form of monetary cooperation would be less costly, could be achieved sooner, and would allow some flexibility in response to asymmetric shocks.
Attempting a hasty and ill-prepared monetary union, instead of helping the cause of regional integration, could set it back if monetary union proved not to be a success. Two eventualities in particular need to be avoided. In one case, a new money is introduced but the regional central bank is unable to resist pressures for monetization. As a result, the new currency is associated with continued exchange rate depreciation against major international currencies and high inflation, producing a currency that no one wants to hold. For countries currently benefiting from monetary stability, this would be a step backward, tending to discredit the regional integration project. Investing in the institutional guarantees of central bank independence and sound fiscal policies would avoid this outcome. The second problematic case might involve a regional central bank that was successful in implementing financial discipline, but where some member countries asked to leave the monetary union on finding that they could not accept the constraints on monetary financing and export competitiveness. This would be less likely to occur in a case where monetary union members had already adapted to the constraints through an extended period of satisfying convergence criteria and they were benefiting from other aspects of regional integration which might be lost following withdrawal from monetary union. In either case of breakdown of the monetary union, regional solidarity and economic performance would have been harmed, not helped, by the monetary union.
The foregoing considerations suggest that the momentum in favor of monetary union should be channeled into the crucial first phase of enhanced mutual surveillance and emphasis on each country improving its macroeconomic and structural policies. Success in this endeavor would in and of itself help to increase exchange rate stability. In addition, there could be a coordinated attempt to narrow the fluctuation ranges of regional currencies, without creating a formal monetary union among non-WAEMU countries. At this point, a full ECOWAS monetary union, including both WAEMU and non-WAEMU countries, could be envisioned, and preparations begun. Given the expected time to achieve convergence and to design the necessary institutions, it seems doubtful that the ECOWAS monetary union planned for 2004 is feasible. Instead, it should await much fuller economic convergence and reinforced political solidarity within the region.