Currency Relations between the Global South and the Global North: The Case of the CFA France

Abstract

This paper critically examines currency relations between members of the European Union (EU) and members of the CFA franc zone. It demonstrates that these relations provide empirical support to the dependency theory given that the CFA franc monetary system is oriented towards serving the interests of members of the EU, specifically France. Members of the CFA franc zone on the other hand are compelled to live with perpetual structural deficits since they rely on France and the EU to set interest rates and determine the level of liquidity in CFA franc economies. This paper traces the genesis of the CFA franc from its creation as the currency of the French Colonies of Africa to the present currency hierarchy that is characterised by furtive operations accounts and cloak-and-dagger deals. It reviews arguments on both sides of the debate on the rationale of the CFA franc monetary system and demonstrates that it is ill-advised to credit the system with the low inflation and sustained growth of members of the CFA franc zone in the first decade after “independence”. It shows that the monetary system is a bulwark against intra-regional trade, and members of the zone are vulnerable to external shocks because they are unable to effectively formulate and coordinate fiscal policies to offset the shocks. However, it warns that although dispensing with the CFA franc would reduce dependence significantly, doing so in haste to satisfy the emotional urge for revenge would be counterproductive. The CFA franc countries must consider three things in order to decide whether they should dispense with the currency. First, the importance of a monetary union. Second, the rationale of pegging their exchange rates to an external reference or anchor currency. Third, whether the euro is the most suitable reference or anchor currency.