Will the Euro Create a Bonanza for Africa?

26 Pages Posted: 20 Apr 2016

See all articles by Daniel Cohen

Daniel Cohen

Ecole Normale Superieure (ENS) - Department and Laboratory of Applied and Theoretical Economics (DELTA); Centre for Economic Policy Research (CEPR)

Nicolai Kristensen

Aarhus School of Business

Dorte Verner

World Bank - Latin America and Caribbean Region

Multiple version iconThere are 2 versions of this paper

Date Written: November 1999

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 nkristensen@worldbank.org or dverner@worldbank.org.

Suggested Citation

Cohen, Daniel and Kristensen, Nicolai and Verner, Dorte, Will the Euro Create a Bonanza for Africa? (November 1999). World Bank Policy Research Working Paper No. 2251. Available at SSRN: https://ssrn.com/abstract=629187

Daniel Cohen

Ecole Normale Superieure (ENS) - Department and Laboratory of Applied and Theoretical Economics (DELTA) ( email )

48 boulevard Jourdan
75014 Paris
France
+33 1 4313 6208 (Phone)
+33 1 4424 3857 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Nicolai Kristensen

Aarhus School of Business ( email )

Haslegaardsvej 10
DK-8210 Aarhus, 8210
Denmark

Dorte Verner

World Bank - Latin America and Caribbean Region ( email )

1818 H Street NW
Washington, DC 20433
United States

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