The CFA franc zone and the EMU

The prospective shift of the peg of the CFA franc from the French franc to the euro raises a number of questions. Will this change require simply a decision by the CFA franc countries themselves together with France, or will it involve the other members of the European Economic and Monetary Union (EMU)? What would be the likely economic impact of the EMU on the real effective exchange rate of the CFA franc and the external competitiveness of the CFA franc zone? This paper argues that, while the provisions of Article 109 of the Maastricht Treaty leave some room for interpretation, the potential free convertibility of CFA francs into euros guaranteed by France could be considered as a budgetary arrangement between the French treasury and the regional central banks of the CFA franc zone, and not as an exchange rate arrangement affecting all EMU countries. The shift in the link of the CFA franc will leave the CFA franc arrangements and operating features of the zone essentially unchanged. The current parity of the CFA franc could be considered as broadly in line with fundamentals. The potential economic consequences on the CFA franc countries could be positive over the longer term, given the general expectation that the creation of the EMU would likely result in a stable euro, low inflation and interest rates, and stronger-than-otherwise output growth in EMU countries. The main risk is a potential weakening of the external competitiveness of the CFA franc countries, arising from possible complications in the EMU process and the likelihood that the euro might be unduly strong and volatile. Fundamentally, the CFA franc zone would remain substantially more vulnerable to exogenous shocks than the EMU countries, given the zone.s high dependence on the production and export of several primary commodities, and the still limited intrazone trade.