With all the discussion about the sustainability of currency unions lately, I thought it would be appropriate to see how developments in the eurozone and elsewhere were impacting Africa. Although few people may realise it, there are no less than 14 West African economies sharing a common currency, the CFA franc, which is in turn pegged to the euro. In fact, their exchange rates have been pegged to a European currency (French franc prior to the euro) for over fifty years, during which time the CFA franc has only been devalued once. However, with fears arising over the future of the euro, legitimate questions have been raised about whether the currency of the West African Economic and Monetary Union (WAEMU) is also in danger of coming unravelled. Here I point to some basic reasons why I think it will be held:

• The prevailing economic situation in Africa is considerably stronger than at the time of the last devaluation (in 1994), with GDP growth rates forecast to recover fairly strongly from the downturn of 2009.

• Likewise, the current account balances of the WAEMU countries are much better than in 1994, when many countries were clearly suffering from the effects of an overvalued exchange rate.

• The nominal anchor provided by the peg to the euro has been such that inflation rates have remained at very low levels by African standards. The only countries on the sub-continent that can claim equally low rates of inflation are in Central Africa, where the local currency is also tied to the euro. While the WAEMU lacks many of the other features of an optimal currency area (OCA) – free flow of goods, labour mobility, and centralised fiscal authority – the benefit provided by price stability still outweighs the economic costs of adopting a ‘one size fits all’ monetary and exchange rate policy.

To this view, I would introduce two main caveats: First, the gain in competitiveness provided by the 1994 devaluation is slowly being eroded. The pace of economic reform has been slowing since 2004, and the resulting loss of competitiveness could increase pressure for another devaluation down the road. Second, consumer prices began to decouple from those in Europe owing to higher average food prices. To the extent that this trend feeds into higher labour costs, it could further hamper the region’s ability to offer low priced goods for export.