The euro has recently fallen to reach parity with the dollar, leading to the risk of inflation and loss of attractiveness. These consequences will also have repercussions on the fourteen African countries which use the CFA franc as a currency, indexed directly to the euro. Decryption by economist Carl Grekou.

Since July 12, the euro has been worth around one dollar, and even briefly fell below this level the next day. An unprecedented depreciation since 2002, which is accompanied by inflation and loss of attractiveness for the area.

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But this situation does not only have consequences for countries whose currency is the euro. In Africa, the fourteen countries that use the CFA franc are also affected by the depreciation. The CFA franc is in fact directly indexed to the euro, at a fixed parity.

The countries of the CFA zone therefore bear the brunt of variations in the euro. All the consequences experienced by European countries are also suffered in this area. And the nature of the exchange rate regime makes the situation a little worse. The entire economy is based on maintaining the exchange rate, which creates enormous weakness in complicated times », describes Carl Grekou, economist at CEPII (Center for Prospective Studies and International Information) who worked in the area.

Significant risk of inflation

The first consequence relates to trade. Imports will become more expensive, especially when they are denominated in dollars as is the case with energy. For countries very dependent on these imports, depreciation is therefore accompanied by inflation.

Consumer prices will increase significantly, due to the lack of food self-sufficiency in the areadevelops the economist. For example, Ivory Coast imports a lot of basic foods like rice and oil. It could therefore be strongly impacted, unlike countries that are more autonomous in terms of agriculture and industry. The more self-sufficiency, the less inflation “.

The zone's central banks can do nothing other than scrupulously follow the ECB's policy. Carl Grekou, economist at CEPII

Inflation can worsen the overall economic situation of countries. “ If nothing is done to curb it, we can expect an increase in borrowing rates, therefore a recession and a drop in activity. “. The depreciation adds to the difficulties experienced by African countries as a result of the war in Ukraine. The economist also mentions the risk of a currency crisis, leading to a loss of value of the currency.

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“Profitability” for exports

On the export side, the consequences are a little different from those in the euro zone, which exports in its domestic currency. In Europe, the cheaper currency is accompanied by a gain in competitiveness, which African countries will not necessarily experience since they export very little in local currency, explains Carl Grekou. However, exports in dollars could bring them more than usual, creating a “ profitability effect “.

(Re)see: CFA franc: look back at the long history of the fight against a symbol of colonization

An increased debt?

For now, the risks associated with debt are secondary. Indeed, if the euro rises, as it is plausible that it will do, the long-term consequences will be limited. On the other hand, if it were to remain permanently at a low level, the debt denominated in dollars of African countries would increase in the same proportions as the depreciation of the exchange rate.

The situation could also have a marginal impact on tourism, as in Europe. According to Carl Grekou, “ for tourists from European countries there will be no difference. There may be a beneficial effect, particularly for American tourists. But tourist relationships are fairly fixed over time; an American tourist who was not planning to go to Togo or Senegal is not going to go there just because there is a depreciation “.

African central banks blocked

The ECB (European Central Bank) should be able to act on the situation by raising its interest rates soon: a meeting is planned for Thursday July 21. But in the CFA zone, central banks have little room for maneuver. “ Absolutely no decisions can be made by central banks. They can do nothing other than scrupulously follow the ECB's policy. Their policy must even be even more rigorous than the European bank, to maintain inflation lower than in the euro zone. “.

No African country has an autonomous monetary policy, they are all more or less subject to the movements of the euro. Carl Grekou, economist at CEPII

The depreciation of the euro thus revives debates on the CFA franc, which its critics describe as a colonial currency. Some propose to index the CFA franc to a broader basket of currencies, including in particular the dollar, to reduce the sole dependence on the euro and the Old Continent. They argue that trade does not only take place with the euro zone, and that the dollar remains the main safe haven on a global scale.

An opportunity for the local or regional economy?

Carl Grekou adds that the loss of value of the euro could be useful at the local level. “ We must take advantage of this to stimulate, to revive a local economy. This is what is being done in the euro zone, through reflection on the consequences of globalization and relocations “. He cites for example the fact of reducing the share of raw materials intended for export, and encouraging production for local destinations. The economist points out, however, that changes are more difficult to implement in Africa, where governments are subject to significant constraints, such as that of the exchange rate regime in the CFA zone.

The countries in this area could also turn more towards other trading partners, such as those in other African regions. “ Their purchasing power has decreased, so they could move towards countries where production is cheaper and transport costs lower. », underlines Carl Grekou. He thus refers to Morocco, one of West Africa's main partners on the continent, which is not affected by the single indexation to the euro. “ No African country has an autonomous monetary policy, they are all more or less subject to the movements of the euro », he nuances.

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