The CFA franc system may be on the way out

Established in 1945, the CFA franc is used in two African monetary zones, one for eight west African countries and the other for six mostly petro-states in central Africa. Since 1999, it has been pegged to the euro, giving the member states monetary stability while supporting trade with Europe.

In return, the members have to keep half of their foreign reserves in France, on which the French treasury pays 0.75 per cent interest.

A French official sits on the board of the regional central bank in both zones, and the currency is printed by France.

Here is more from David Pilling and Neil Munshi at the FT.  The French don’t like the optics it seems, and not all of the African nations benefit from losing the option of devaluing their currencies.  The nature of the replacement system, however, is not yet clear.

As an aside, occasionally you will meet people who claim this system costs the African nations hundreds of billions of dollars a year, through some kind of under-specified colonial imperialistic theft, combined with Junker fallacies I believe.  You can file that one under “Big Time Conspiracy Theories That Most Americans Are Hardly Aware Of.”  But I am, and it ain’t true: “…the current deal was actually profitable for the two African central banks because bank-to-bank credit is attracting a negative interest rate of -0.4%, but the central banks are receiving 0.75%.”

That said, if those nations are capable of running their own central banks, flexible exchange rates would indeed be an improvement.  Is this one more like public health or electricity?


Clearly, monetary unions are a bad idea.

'Is this one more like public health or electricity?'


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" Let’s say that those agents simply burned the money. This would not destroy any real capital for the economy; co-blogger Alex and I used to call this the “Junker fallacy” (recall the mistaken old view that early Germany did not grow because the Junkers bought land instead of investing in capital). "

Is the Junker fallacy true if the Federal government or the Fed burned up their entire stock of money? Clearly it is not the same as destroying real capital so that much is true but the sharp drop in the money supply would at some point affect the real economy I would imagine as government workers would stop spending. Is there more information on this supposed fallacy? A quick Google search only shows a Caplan blog that links back to here.

Now I see how hydro power plants are built in those countries. French companies such as Engie-Tractebel have no currency exchange risk while doing business over there. The French Development Agency (AfD) lends money to those countries, which then hires French companies. Aid money goes to friends.

Any disruption of this currency framework will change air travel, mining, infrastructure and the import of manufactured items from France. I need more popcorn!

At least they get electricity at the end. Contrast with the arsenal of the Egyptian military, a giant make-work project for US arms manufacturers, funded by US taxpayers, that produces nothing.

Would flexible exchange rates be an improvement? Or is it the (relative) stability of the CFA franc system that makes it work for these African nations? The CFA franc system is more like electricity than health care (i.e., O-ring). Cowen's stated preference for flexible exchange rates reflects his disapproval of the O-ring system. Do economists (such as Judy Shelton) who wish to return the U.S. to a fixed rate system (such as the gold standard) drawn to its relative stability or are they just misguided? Ms. Shelton suggested a Bretton Woods type conference to be held at Mar-a-Lago, which would give Trump the recognition in posterity (the "Mar-a-Lago system") Trump believes he richly deserves. By the way, Britain, though part of the European Union, does not use the Euro as its currency, instead using the pound sterling. It's a bit ironic that it's Britain that has chosen to leave the Union.

if those nations are capable of running their own central banks

Nations don't run central banks, individuals do. Similar to the individuals that decided to market a car called the Edsel, operate Pan-American Airways and helm the Exxon Valdez.

Multiple individuals connected through an exo-intelligence. While pretty simple compared to a modern car no one individual designed the Edsel and no one individual called all the shots at Pan-Air. But yeah, one person was at the helm of the Exxon Valdez. There exo-intelligence was crap, as the investigation revealed.

"That said, if those nations are capable of running their own central banks, flexible exchange rates would indeed be an improvement."

What is the performance between these countries and comparable countries not under this arrangement?

Guinea decided to opt out of the CFA system in 1960 and appears to do worse than Senegal or Ivory Coast, with double-digit inflation and chronic devaluations.

I don't understand TC's thinking here. "If those nations are capable of..." Which nations are incapable of this? Aren't all sufficiently large economies "capable" of this? The statement seems both vacuous and a CYA. It's not a question of capability (obviously), it's a question of likelihood: how likely are they to transform the current system - which is pretty stable and beneficial - to one which is "better"? I'd guess very unlikely, but hey, I'm way up above the peanut gallery on this topic. OTOH. These are some of the most corrupt nations, it doesn't require a PhD in Economics or Political Science to understand what is likely to happen here, does it?

"The French don’t like the optics it seems, and not all of the African nations benefit from losing the option of devaluing their currencies. "
This cliche about central banks being able to devalue their currency. This single error represents 250 years of absolute economic ignorance. Imagine mentioning this as an advantage to some African nation as an advantage of central banking. Mathematicians who here this nonsense are ready to haul the economist into war crime court.

Governments default, central banks can, at best, pretend for the simple minded. And pretending is part of the bogus expectations theory, a theory that drives mathematicians mad as it mis-used forfraud.

The Coinbase matching algorithm would work fine as a currency function. They would need to change a few parameters and some coding modules, then it is simply a cut n past of their existing trading system.

The central problem is foul central banking theory, it has never worked properly and works more improperly for nations without an alternative shadow banking system.

We cannot get way from the economists' fraud that central banks should hold an arbitrage moment for government. The old 'This time is different' fraud.

Good point, Mr. Simons. America' foreign policies under the mad buffoon have been crazy and criminal. I hope we learn our lesson and vote for a much better man (or woman) in 2020.

I hope Senate do the honorable thing and overthrow Trump.

Ha. I wouldn't count on Senate doing the honorable thing.

He is not a Senator.

Tyler's next book should be "Big Time Conspiracy Theories That Most Americans Are Hardly Aware Of." I would love to read that.

This seems like one of those issues of political economy that is so multifaceted and full of moving parts and variables I'm willing to say "I don't know". If this whole thing is junked tomorrow there would be winners and losers, but on net would it be a plus? My fear is that some of the less than responsible nations in Africa might immediately roll out the printing presses. I don't see France as gaining or losing much from this whole thing other than some type of "prestige" associated with nostalgia for their old empire. They and still trade and maintain a similar degree of economic integration.

Isn't it not that the *capital* is leaving but rather that the *consumption* is leaving? The corrupt officials are investing in foreign assets, and buying foreign goods, consumption that would otherwise have been more likely to happen locally.

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