The impact of the introduction of the euro on ACP countries and particularly on the CFA franc zone
Speech by Tommaso Padoa-Schioppa, Member of the Executive Board of the European Central Bank, at the Committee on Development and Co-operation on 27 October 1998 European Parliament, Brussels
I am both honoured and pleased to contribute to the proceedings of this Committee of the European Parliament. As you are aware the President of the ECB intends to appear regularly before the European Parliament in its plenary sessions or at the level of the Sub-Committee for Monetary Affairs. This is meant to be an important part of the communication policy of the ECB. Against this background, it seems also appropriate for Executive Board members to take part in the proceedings of European Parliament Committees when they deal, as it is the case today with the Development and Co-operation Committee, with matters that are relevant for the ECB. The introduction of the euro is the most momentous event in the international monetary system since the end (or perhaps since the creation) of the Bretton Woods system. The EU as a whole has developed trade and financial relations with 71 countries (the ACP -African, Caribbean and Pacific- countries) through the so-called Lomé Convention. Since the fourth Lomé Convention will expire in February 2000, the European Union and ACP countries started on 30 September 1998 negotiations regarding future arrangements. In addition, France has maintained a long-standing economic and monetary co-operation with 14 African countries and the Comoros (the CFA franc zone), which are members of the ACP group. Together with its African counterparts, France has expressed its intention to maintain the broad features of the existing arrangements with the CFA franc zone, by substituting the euro for the French franc from 1 January 1999. The international implications of the euro for non-EU countries having close links with the Community have recently attracted a great deal of attention. In addition to the Central and Eastern European countries and the Mediterranean countries, the potential impact on the African countries, which account for most of the ACP members (48 out of 71), has also been assessed. As regards specifically the CFA franc zone, it is also of interest to note that a Council Decision on a pegging of the CFA franc and the Comorian franc to the euro is currently under preparation. The ECB has been involved in this preparation and delivered an opinion in the context of a consultation procedure. In my remarks, I will focus, first, on the potential economic impact of the euro on ACP countries and particularly on the CFA franc zone. I will, then, turn to the preparation of a Council Decision concerning the CFA franc and the Comorian franc.
1. Economic impact of the euro on ACP and CFA franc zone countries
As a general remark, I will first note that the ACP countries, and particularly the African countries, are less affected by the current slowdown of the world economy. This is partly because the bulk of their trade is with the EU (especially France) and also because their exports have been less affected by the overall decline in commodity prices. Specifically, the CFA franc zone is forecast to grow at least 4.5% this year, while maintaining very low (by African standards) inflation rates: less than 5% in most of the 15 countries. The introduction of the euro will benefit the world economy if it contributes to higher growth in the euroland and to the maintenance of low inflation and interest rates. This, however, will also depend on efforts being made to reduce European unemployment through structural reforms. Also, the development of integrated, liquid and efficient markets in euro will facilitate access to international bond financing by non-euro governments and private entities. Economic developments in the euro area will affect ACP countries, and particularly the CFA franc zone, through three main channels: - first, an impact on growth, through existing trade linkages; - second, price and exchange rate stability through the use of the euro as a nominal anchor; - and, third, an improved access to international capital markets. As far as downside risks are concerned, the future exchange rate of the euro vis-à-vis the US dollar seems to be the main source of concern.
Impact on growth through trade linkages
A potential strengthening of economic growth in the euro area is bound to benefit its trading partners, like the ACP, through increased exports. In 1996, trade with the EU accounted for 51% of total external trade of the CFA franc zone countries and for 42% for the other 33 African ACP countries. By contrast, the share of the non-African ACP countries was much lower (around 10%). According to IMF estimates, a 1% increase in euro area GDP induces an increase of the CFA franc countries' exports and GDP of 0.6% and 0.2%, respectively. The other African ACP countries are also likely to benefit from similar positive trade linkages. However, the potential impact on non-African ACP countries is bound to be more subdued in view of their limited trade link.
Price and exchange rate stability through the euro peg
For CFA franc zone countries, shifting the peg form the French franc to the euro will contribute to stabilizing the nominal effective exchange rate of the area. This is due to the fact that the EU accounts for 51% of the external trade of the CFA franc zone, while the share of France is only 25%. In addition, the maintainance of price stability in the euro area will also enable the CFA franc zone to keep comparatively low inflation, with a positive impact on the real exchange rate and on external competitiveness. The benefits of nominal and real exchange rate stability will be the greater, the higher the stability of the euro vis-à-vis the US dollar. Moreover, in the longer run, the CFA franc zone countries, which mostly export primary commodities priced in US dollars, would benefit from a greater use of the euro for quoting prices on commodity markets.
Improved access to international capital markets
These positive growth and price effects will be supported by improved access of CFA franc zone countries to the European financial markets. Capital movements between the CFA franc zone and the entire euro area, and not only France, are expected to be liberalized after the pegging of the CFA franc to the euro. This, together with the ongoing trade liberalization within the CFA franc zone, should help the zone to reap the benefits from globalisation. However, this will take time and will also depend on the pursuit of sound macroeconomic policies and the strengthening of domestic financial systems. In the short run, given that in 10 out of the 15 CFA franc zone countries the US dollar and the Japanese yen account for the largest share of their long-term external debt, these countries might have an interest in increasing the share of the euro. This would be advisable in view of the exchange rate risk associated with the US dollar and yen denomination.
The euro's exchange rate vis-à-vis the dollar as main risk factor
The main risk of pegging to the euro would be the loss of external competitiveness that could arise form an appreciation of the euro against the US dollar. Price stability will be the primary objective of the ECB and, thus, an active management of the euro against other major currencies is not desirable. This does not mean that the ECB will not take account of the external value of the euro. Exchange rates will continue to be monitored informally by the three main economic and currency blocs, although in the context of new institutional arrangements to be devised. The introduction of the euro may in fact strengthen policy co-ordination between the US, Japan and Europe and contribute to exchange rate stability worldwide, as domestic economic policies in the three regions aim at internal stability. Of course, in the shorter-term, there may still be fluctuations in exchange rates, owing to differences in cyclical positions and associated policy responses. But, in the medium term, confidence in the ability and willingness of the ECB to achieve monetary stability and the overall strength of the Euroland will be the basis for a stable currency. This will benefit the CFA franc zone countries too. Let me now turn to the preparation of a Council Decision concerning exchange rate matters relating to the CFA franc and the Comorian franc.
2. Preparation of a EU Council Decision concerning exchange rate matters relating to the CFA franc and the Comorian franc
France's relations with the CFA franc countries and the Comoros are not dealt with specifically in the Maastricht Treaty unlike, for instance, the relations of France with its overseas territories. However, the Treaty provides for the possibility of monetary and foreign exchange arrangements with third countries, pursuant to Article 109 (3). In the first half of 1998, the members of the Monetary Committee discussed this matter. On the basis of these discussions and in accordance with Article 109 (3), the Commission presented on 1 July 1998 a recommendation for a EU Council Decision concerning exchange rate matters relating to the CFA franc and the Comorian franc. This recommendation allows France to maintain the basic features of the present agreement with the CFA franc zone, for two main economic reasons. First, the present guarantee of convertibility of the CFA franc against the French franc is based on a budgetary commitment from the French treasury without any involvement of the Banque de France. In Stage Three, the French treasury will guarantee an unlimited convertibility of the CFA franc into euro, without any monetary policy implication for the Banque de France or the ESCB. Second, the possible impact on monetary conditions in the euro area of the guarantee of convertibility of the CFA franc vis-à-vis the euro would be extremely limited, given the relative sizes of the euro area and the CFA franc zone. Having consulted the ECB on a first draft, the ECOFIN Council will consider a new text in one of its forthcoming meetings in November or in December of this year. In its opinion expressed on 22 September 1998, which has been published in the Official Journal of the European Communities, the ECB considered in particular that:
by authorising France to establish a fixed link between the CFA franc and the euro, neither the Community, nor the ECB will become party to this agreement. This implies that the primary objective of the Community's monetary policy, which is to maintain price stability, will not be compromised;
no obligation of the ESCB may be implied from neither the principle of convertibility of the CFA franc, nor from any modifications to the agreement;
the agreement does not set a precedent with respect to any arrangements that may be decided in the future;
the ECB should, along with the Commission and the future Economic and Financial Committee, be involved in the decisions taken by the parties to the agreement through prior notification or consultation. I cannot elaborate at this stage on the points requiring prior notification or consultation, since I do not wish to prejudge a EU Council decision that is not yet final.
On a more general note, let me state, by way of conclusion, that the ECB regards co-operation with non-European countries as a relevant part of its international responsibilities. We are therefore closely monitoring the negotiation and conclusion of exchange rate arrangements with third countries. We are convinced that the favourable economic fundamentals prevailing in the euro area make the introduction of the euro a stabilising factor for the world economy. The pursuit by the ECB of a policy ensuring price stability is the best contribution we can make to international co-operation in general and in our relations with the ACP countries in particular.