Multilateral Currency Unions in Africa and the Caribbean: Challenges of Monetary Subordination to an Outside Hegemon

This paper discusses the challenges of multilateral currency unions of developing countries facing monetary subordination to an outside hegemon because they lack a credible internal anchor for monetary stability. The focus is on the economic consequences for a monetary union of a decision to import monetary credibility by anchoring its external exchange rate to a dominant foreign currency and the political commitment needed to make this type of monetary relationship work. 

The paper looks at the experiences of the Central African Economic and Monetary Community, the West African Economic and Monetary Union (both linking their CFA franc to the euro), and the Eastern Caribbean Currency Union (linking its common currency to the US dollar). The main finding is that regional monetary integration combined with monetary subordination to an outside hegemon is generally more demanding because it must be embedded in an effective regional governance framework to sustain the cohesion and stability of the currency union, as well as a strong political commitment to underpin the fixed external parity to the foreign anchor currency. Some regions, therefore, look for ways to exchange this foreign-based monetary discipline for a new regime of monetary sovereignty. However, a multilateral currency union with an open economy wishing to adopt a free-floating external exchange rate must at least have a credible internal monetary anchor. 

Therefore, the choice in favour of monetary autonomy depends on the region’s ability to maintain strong economic fundamentals under a flexible exchange rate arrangement and on its political determination to maintain a stable common currency based on its internal strength.