Will the Euro Create a Bonanza for Africa?

Abstract

At this stage, it is difficult to conclude that the euro will have substantial macroeconomic impact on sub-Saharan Africa, unless launch of the euro becomes the tool of a major policy shift, such as the euroization of the continent - which is currently unlikely.

In considering how the euro will affect Sub-Saharan Africa, Cohen, Kristensen, and Verner examine the transmission channels through which the euro could affect economies in the region. They examine the risks and opportunities the euro presents for Sub-Saharan African countries.

They especially examine the effects from the trade channel, through changes in European economic activity and the real exchange rate. Because of the relatively low income elasticity for primary commodities - which is what Sub-Saharan Africa mainly exports - an increase in activity in Europe is considered to have a marginal impact on Africa.

Exchange rate regimes and geographical trade patterns point to large differences in exposure to changes in the real exchange rate.

Capital flows to Sub-Saharan Africa can be affected through portfolio shifts or through changes in foreign direct investment.

Changes in competitiveness in Europe are not expected to influence foreign direct investment, so the euro is not expected to affect foreign direct investment significantly.

Portfolio diversification could increase greatly. But Sub-Saharan Africa is not expected to realize the increased potential from portfolio diversification because of its severely underdeveloped domestic capital markets. It is vitally important that Sub-Saharan African countries strengthen their financial integration into global markets.

How the euro will affect such parts of the financial system as banks and debt and reserve management varies across countries. Generally the effect is expected to be limited.

This paper - a product of Poverty Reduction and Economic Management Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the Bank to study the effect of the euro on developing countries. The authors may be contacted at [e-mail] or [e-mail].