When you hear the term ‘Currency Union’ you probably think: Euro.
Most people would. It’s by far the most high profile and successful monetary union.
However what surprises many people is the fact that:
a) it’s not the only one currently in existence and;
b) it’s not the first one either.
In fact there are three other major currency unions in place today, all of which predate the Euro by decades.
The first currency union (in the way we would think of it today) was in Germany. Many of the small pre-unification states (that would go onto unify into the German Empire) shared currencies in the 18th and 19th centuries.
Currency unions have also existed at various periods of time in the last 150 years across a number of other European countries especially in places like France and Scandinavia.
Right now there are two major currency unions currently in existence, a number of small nations who formally use the currency of their larger neighbour and several more either proposed or actually actively being established.
The Franc that can be used across central and western Africa…
If you head to western or central Africa, chances are you’ll be paying for goods and services with some CFA francs. This currency is used in 14 countries who have a combined population of around 150 million people.
Now its can get a bit confusing with this currency. Technically there are two CFA Francs, the Western CFA Franc (XOF) and the Central CFA franc (XAF). These currencies whilst technically independent are used interchangeably, and can be pretty much exchanged at parity.
The CFA franc was originally introduced in 1945 by France as the Franc des colonies françaises d’Afrique (Franc of the French Colonies in Africa.) This was a colonial currency to be used in the colonies of France. After the countries who used it gained their independence, the currency was renamed ‘the Franc of the Financial Community of Africa’. It was originally pegged to the French Franc and after that currency was replaced, it became pegged to the Euro at 655.957 CFA franc to 1 Euro.
The Western CFA franc (XOF) is managed by a Central Bank in Dakar, Senegal. It’s constituent countries are: 🇧🇯 Benin, 🇧🇫 Burkina Faso, 🇬🇼 Guinea-Bissau, 🇨🇮 Ivory Coast, 🇲🇱 Mali, 🇳🇪 Niger, 🇸🇳 Senegal and 🇹🇬 Togo
The Central CFA franc (XAF)is managed by a Central Bank in Yaounde, Cameroon. Its constituent countries are: 🇨🇲 Cameroon, 🇨🇫 Central African Republic, 🇹🇩 Chad, 🇬🇶 Equatorial Guinea, 🇬🇦 Gabon and 🇨🇬 Republic of the Congo
Because the CFA franc is pegged to the euro, it has actually been a strong ansd stable currency. However this has had several negative side effects for its users, making exports expensive and imports cheap. The currency also still has fundamental financial links with France and the French Central Bank causing some difficulties for the African states when it comes to domestic economic policy making.
Plans are afoot in western Africa to replace the Western CFA Franc (XOF) with a new currency: the Eco (discussed later).
The currency that you can use on multiple island nations…
Just like the CFA Franc, the Eastern Caribbean Dollar (EC$) has also its roots in colonialism and European empires.
For the last couple of hundred years, many of the islands of the Caribbean have been in one form of currency union or another. There have been several Caribbean currencies, often managed from afar in European capitals.
The EC$ stems from the British West Indies dollar which was replaced in the 60’s. The EC$ was initially pegged to Sterling but in the 1970’s this was switched, with the currency now pegged to the US Dollar.
The EC$ is managed by the Eastern Caribbean Central Bank in Basseterre, St. Kitts. Its constituent countries are: 🇦🇮 Anguilla, 🇦🇬 Antigua and Barbuda, 🇩🇲 Dominica, 🇬🇩 Grenada, 🇲🇸 Montserrat, 🇰🇳 Saint Kitts and Nevis, 🇱🇨 Saint Lucia and 🇻🇨 Saint Vincent & the Grenadines. Together they have a combined population of around 700,000 people.
Did you know the Rand is not just used in South Africa…
South Africa forms part of the ‘Common Monetary Area’ which means it is in effect in a monetary union with 🇳🇦 Namibia, 🇱🇸 Lesotho and 🇸🇿 Eswatini.
Now this monetary union is slightly different to the previous two. Namibia, Lesotho and Eswatini all actually have their own currencies, the Namibian dollar, the Lesotho loti and the Swazi Lilangeni respectivley.
These currencies though are pegged at 1:1 with the South African rand and the rand is often used in their places domestically. (On a day to day level think using a Scottish £5 in England.)
The reasoning behind this all dates back to colonial South Africa. When the original South African Pound was introduced, it covered the whole geographical area of what is now these respective independent countries.
How currency is used across the Pacific…
What links 🇹🇻 Tuvalu, 🇰🇮 Kiribati and 🇳🇷 Nauru together?
Well despite the fact they are all beautiful independent island nations in the Pacific Ocean, they are all formal users of the Australian Dollar.
These island nations all have incredibly small populations, reaching around 150,000 combined. To administer their own currency would be a nightmare. Take Tuvalu, its population is just 11,000 people, that’s smaller than some places in England we still class as villages!
It simply makes good economic sense for these countries to formally use the strong currency of their biggest near neighbour- Australia.
Interestingly, in Kiribati and Tuvalu, they technically have their own currency and it’s possible to get Kiribati Dollar and Tuvalu Dollar coins— however they are 100% interchangeable and at a parity with the AUD. (Even more like Scottish money in England).
Currency unions of the future?
The Eco is the proposed name of a currency in Western Africa. It combines the countries that currently use the western CAF as well as a number of other english speaking western African countries that share borders. They make up the Economic Community of Western African States or ECOWAS.
The discussions are for a single currency that is pegged to the Euro. Initially, these countries planned to have the currency set up for around 2018, but this has now been pushed back.
The latest plans for the ECO now see it being implemented in 2028.
There is very much a strong domestic political will in all the respective member countries to see this currency union come to fruition.
The East African Shilling
Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda are all currently members of the East African Community.
The EAC in a stepping stone nowadays to becoming a federal political union: the East African Federation.
The East African Shilling is the proposed name of this new potential countries currency. Initially member states hoped that the union would be completed by 2023, however due to Covid, this timescale is expected to formally be pushed back in the coming months.
A new Gulf Central Bank would potentially be established in Saudi Arabia, however any movement on this currency has been stalled.
The Afro is the most ambitious undertaking of the proposed currency unions and is also the least likely to happen any time soon.
This currency union would see all member states of the African Union share a single currency under a single central bank.
At the moment though only a small handful of countries have formally signed onto the idea, so don’t expect any movement forward anytime soon.