Source: China Financial News Network
Editor's Note: Original title was "Europe's Negative Interest Rate Gives Birth to New African Currency"
In the 10 years since the international financial crisis, interest rates have gradually become a watershed between developed and developing economies. Interest rates in developed countries have generally fallen, and even zero interest rates have appeared. Interest rates and inflation in developing countries have remained high. Negative interest rates have further torn the global currency landscape and divided it into two camps.
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In 2019, central banks in more than 40 countries have cut interest rates and lowered their standards. But so far, nearly 10 countries and regions that have adopted negative interest rates are concentrated in developed countries such as Europe and Japan. However, inflation in emerging economies and developing countries has not dropped significantly, which may further increase the rate difference between the negative interest rates of developed countries and the interest rates of developing countries. In this context, Central and West African countries are compelled to issue a new fiat currency, ECO, this year to replace the West African and Central African francs, which have been used for nearly half a century and linked to the French franc and the euro.
After a century-long international financial crisis and the European debt crisis, developed countries such as the United States, Europe, and Japan have adopted rapid and substantial reductions in interest rates to zero interest rates, while adopting quantitative easing monetary policies to inject liquidity into the market to promote collapsed entities The economy realized V-shaped reversal and growth. When the marginal benefits of the unconventional monetary policy of zero interest rate and quantitative easing diminished, the economic recovery was still weak. The euro area, European countries, and Japan began to break the lower limit of zero interest rates, and adopted negative interest rates to stimulate economic growth. To prevent the exchange rate from rising and affecting exports to adopt negative interest rates.
The purpose of implementing a negative interest rate monetary policy in the Eurozone, including France, is to transmit the monetary policy to the interbank market and the national debt market, thereby reducing the real economy's interest rate level. The economy with the Community of Central African States is really affected by the negative spillover effects of the euro's negative interest rate monetary policy. In addition, the euro has strengthened cyclically against the US dollar after the financial crisis. This has weakened its own economy while also bundling with the French currency and implementing a fixed exchange rate. The economy of the West and Central African countries is even worse. Entering 2020, West and Central African countries will finally have their own currencies, ECO.
Over the past 45 years, the African Franc, as a currency mainly circulating in the African countries of the former French colonies, has been divided into two categories, West African Franc and Central African Franc. Although the exchange rates of the two are equal, they are not connected to each other, and they only circulate in the regions of West and Central African countries. The African franc has four pillars that support currency stability, thereby ensuring the stability of the financial system. The first is the centralized use of foreign exchange reserves, and 50% of the foreign exchange reserves are turned over to the French treasury; the second is linked to the euro and maintains a fixed exchange rate; the third is unlimited exchange with the euro; the fourth is the free flow of capital in the African franc area. Although these countries were independent of the French colonies for half a century, the economy, the military, and especially the currency were still affected by France.
The West African Franc and the Central African Franc are issued by the West African Central Bank and the Central African Central Bank. They are not affected by the member states and are linked to the French franc. After the euro was unified in France in 1999, the French and the Central African francs were fixed with the euro. The exchange rate system, due to the central bank's unified currency issuance, the advantage of a fixed exchange rate system with strong currencies is that the financial stability of these West and Central African countries linked to the euro area is relatively stable, which helps to attract foreign investment and can effectively reduce domestic currency. Inflation levels, but in West Africa, Nigeria and Central Africa, Congo, Angola and Sao Tome and Principe, inflation levels remain high, and the consumer price index (CPI) is in double digits.
Countries with different economic levels in the region have different levels of demand for interest rates. The disadvantages of adopting a link to the French currency in West and Central Africa are firstly that interest rates are not suitable for all West African Economic Community and Central African Economic Community countries. Second, the Euro, which is a strong currency, corresponds to a stronger economy, while West and Central Africa Most of the national economies are in the early stages of industrialization. The implementation of a strong currency not only weakens the competitiveness of West and Central African export products in the international market, but also strengthens the purchasing power of the strong currency, which in turn expands the import of goods. It further restrained the domestic industrialization process in these countries, and made the economic structure of West and Central African countries, which mainly rely on the export of one or two primary products such as oil, cocoa or cotton, more singular, their industrialization process blocked, their economic competitiveness weakened, and their domestic economies Insufficient growth momentum.
Especially after the international financial crisis in 2008, the euro experienced a cyclical appreciation against the US dollar, driving the currency appreciation of West and Central African countries, further restricting the export of these countries, weakening the export competitiveness of products, while increasing imports, further Limits the process of industrialization. After the euro area adopted negative interest rates, the trade deficit of West African countries became more prominent. At the same time, in order to stimulate economic growth, the RRR cut and interest rate reduction are further expanding the negative interest rate camp. The chief economist at Goldman Sachs recently predicted that if the US economy declines, the Fed may also adopt a negative interest rate monetary policy.
The launch of the new currency ECO will not fundamentally solve the dilemma faced by West Africa and the Central African Community. Its economy will still be tested, because ECO is still linked to the euro. Against the background of negative interest rates in the euro area, especially in the United States, When the negative interest rate is adopted and the euro area adopts a negative interest rate, the euro is still in the stage of cyclical appreciation against the US dollar, and ECO may still face the negative spillover effect from the negative interest rate of the euro. Although the West and Central African countries have not yet designated ECO as a digital currency, and have not adopted the blockchain plan, from the naming of this fiat currency, in order to adapt to the negative interest rate policy of the euro area, ECO may move towards digital currency. The adoption of blockchain technology is also not a future development direction. The adoption of a relatively independent fiat currency ECO will help promote the economic independence of West and Central African countries, enhance export competitiveness, promote industrialization, help strengthen the economic competitiveness of these countries, and help start with a unified currency. Promote the process of regional economic integration, and then the process of African integration.
From "African Franc" to ECO, a new currency journey on the African continent is about to begin. Throughout currency history, the fate of a new currency is like a new ship, depending on whether the mooring line is reliable or whether its captain is capable. Now, African currencies have untied the cable with the euro and are beginning to take control of their own destiny. The key now is to improve labor productivity and realize economic transformation. In the short term, fiscal expenditure must be strictly restricted. Many African countries have now responded to the "Belt and Road" initiative. It is optimistic that with the joint efforts of countries co-established along the "Belt and Road", the new currency of Africa will have a bright future.
(The author is a researcher at Chongyang Institute of Finance, Renmin University of China)