DP2304 | Will the Euro Create a Bonanza for Africa?

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This paper considers the impact of the Euro in Sub-Saharan Africa, looking at the transmission channels through which the Euro could affect the economies in the region and at the risks and opportunities for Sub-Saharan African countries. In particular, the paper looks into effects from the trade channel through changes in the European economic activity and real exchange rate. Because of a relatively low-income elasticity with respect to primary commodities, which is what Sub-Saharan Africa primarily exports, any increase in activity in Europe is deemed to have an inferior impact on Africa. Exchange rate regimes and geographical trade patterns points to large differences in the exposure to changes in the real exchange rate. Capital flows to Sub-Saharan Africa can be affected via changes in foreign direct investments (FDI) or via portfolio shifts. The former is not expected to be under much influence from changes in competitiveness in Europe, and therefore no significant effect on FDI is to be expected. Portfolio diversification can potentially increase by a large amount. Realization of the increased potential is not to be expected because of severely underdeveloped domestic capital markets, which underlines the necessity for Sub-Saharan African countries to strengthen their financial integration with global markets. Financial implications, such as affects on the banking system, and debt and reserve management, vary across countries but are in general expected to be of limited magnitude. Thus, at this stage it is difficult to conclude that the Euro will result in an important macroeconomic impact in Sub-Saharan Africa unless the launch of the Euro becomes a tool of a major policy shift, 'Euroization' of the continent, which is itself unlikely at the current stage.