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NATO, the Euro and African Currencies

Dr. Gary K. Busch - 6/22/2011

The Evanescence of NATO:

It has become clear, especially after the frank speech of Secretary Gates recently, that NATO has a "dim, if not dismal” future. The European partners of the US in NATO have not been paying their way and have reduced their military budgets by almost 15% in the last ten years.

They performed poorly in Iraq and, with the exception of the UK, performed even worse in Afghanistan. The current operations in Libya are incompletely funded and the putative NATO forces have run out of cash, armaments, missiles, intelligence-gathering equipment, etc. They are relying on the US to fund them and to replenish their stocks. The US, restrained or not by the War Powers Amendment which says the President must consult Congress after ninety days, is trying to reduce its annual military expenditures to cope with a massive national budget deficit and long-term debt. All parts of the US government are being restrained in their spending and cuts are universal.

The US population does not support NATO or the war in Libya. According to a Rasmussen report conducted on 12-13 June 2011 more than half of those polled wanted to US to leave NATO. The study showed “The United States spends approximately $2,500 per person on defence, while the other NATO nations spend $500 per person. Knowing this, 49% of voters think the United States should remove its troops from Western Europe and let the Europeans defend themselves”. [i] With the US having spent over $1.5 billion in the first six days of the European war in Libya, the US population do not believe President Obama when he “insists that NATO allies like Great Britain and France are now leading military operations in Libya, with the United States taking a back seat since the early weeks of the campaign. U.S. voters aren’t so sure: 38% believe the military operations in Libya are being handled primarily by U.S. allies like England and France, but 32% think the United States is primarily in charge.”[ii] Just 36% of voters now look positively on the Obama administration’s handling of the situation in Libya. Only 26% feel the United States should continue its military actions in Libya.

A more fundamental concern is the massive proliferation of US military bases across the world. The US operates over a thousand military bases around the world at a cost, not including Iraq and Afghanistan, over $102 billion a year. The US has 227 bases in Germany alone.[iii]
“It makes as much sense for the Pentagon to hold onto 227 military bases in Germany as it would for the post office to maintain a fleet of horses and buggies,” writes Gusterson[iv] The perilous chase to find a solution to the debt ceiling in the US will add pressure for the US to start closing hundreds of redundant bases, especially in Europe. Few Congressmen have constituencies in Europe who will object to the closing of these bases. The fact that the US is paying for 72% of the annual NATO expenditure has not escaped the bean-counters. There will be big cuts in US military spending in Europe and this will have the backing of a large proportion of the US voting public.

The European Sovereign Debt Crisis
It has become apparent since mid-2010 that Europe, both within the Eurozone and externally was suffering from a massive overhang of unrepayable debt. The credit agencies re-evaluated their assessments of the European economies and devalued the bond rating of several European states (particularly Spain, Greece, Ireland and Portugal in the Eurozone) and Iceland, Rumania and Hungary on the periphery.

The tide of rising governmental debts and the downgrading of European sovereign debt by the rating agencies led the Europeans to create mechanism to protect them from the effects of this alarm in the financial markets. On 9 May 2010, Europe's Finance Ministers approved a comprehensive rescue package aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF). It was worth almost a trillion dollars. This EFSF was triggered by the efforts of the IMF and the Eurozone to prop up the Greek economy. On 2 May 2010 they arranged a €110 billion loan for Greece; worth almost a trillion US dollars. This was followed by a €85 billion loan to Ireland in November 2010 and a €78 billion bail-out for Portugal in May 2011. Greece has received further assistance.

Much of this European sovereign debt is owed to European banks that hold their paper.

What is important is that Europe, particularly the Eurozone, is in serious financial difficulty, Moreover, the debts are held by the European Banks and the IMF. The IMF, by virtue of a mutual, if unenforceable agreement, has primary call on the assets with the Europeans so, in the event of a default, the European banks may have settled for absorbing heavy losses. There are few economists in the world who do not expect a Greek default soon as the social pressures of austerity destroy the fabric of Greek political and social institutions. Spanish youth, too, have been demonstrating against the vicissitudes of European-sponsored austerity in Spain and Spain, too, may have a difficult time getting its citizens to adapt to the straight-jacket of Euro cuts and interference with Spanish institutions.

The Germans, with the strongest economy in Europe, and the source of much of the bailout funds, has developed a ‘Plan B’ – the Northern Euro (‘Neuro’). That is, in the event of a Euro crisis Germany is suggesting that it may join with the Scandinavians states, Austria and Holland to establish the Neuro. Even the Czechs have applied to join. The most interesting aspect of this plan is that France will not be invited to join. It will have to stay with the Southern and Eastern Europeans in the diminished Eurozone. This plan has not been completed but it has serious support in Germany, outside the cadre of political Euro-politicians there.

The important point is that Europe, beset by debt and credit problems is even less likely to be able to pull its weight within the NATO alliance. If they can’t fund their current accounts as they stand, nor service their debt burdens, investment in military prepared ness is not very likely. The country which is most affected by this is France whose military overreach is becoming more apparent by the day. For domestic political reasons, and allegiance to French savage and barbaric traditions, French troops were sent into the Ivory Coast to attack and capture Gbagbo and to massacre thousands of unarmed Ivorian civilians. At the same time, France launched an air assault on Libya to try to effect regime change there as well. Unfortunately for the French the Libyans were not unarmed Africans going about their daily business, but a well-armed military willing to fight. Despite the participation of the British and a token assistance by four other countries (and initially the US) this battle is, so far, a stalemate. The French have run out of money. They are poorly prepared for a lengthy campaign and face severe financial pressures at home. This, and the relationship between France and its African neo-colonies, will have a dramatic impact on Africa’s currencies.

The CFA and African Currencies
A key factor in African currencies is the operation of the CFA franc (the Financial Community of Africa -Communauté financière d'Afrique – CFA franc). There are actually two separate CFA francs in circulation. The first is that of the West African Economic and Monetary Union (WAEMU). WAEMU represents seven francophone West African states (Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo) plus the lusophone Guinea-Bissau. This WAEMU was established by the Treaty of Dakar in 1994. The second is that of the Central African Economic and Monetary Community (CEMAC) which comprises six Central African countries (Cameroon, Central African Republic, Chad, Congo-Brazzaville, Equatorial Guinea and Gabon).

One of the primary problems in dealing with the CFA is that it is not within the purview or competence of African officials to regulate the value or changes in the CFA franc. This was the sole responsibility of the French Treasury officials, and now, the French officials seconded to the European Central Bank (ECB). This is a result of an incomplete decolonisation by France of its former colonies in Africa.[v]

The creation and maintenance of the French domination of the francophone African economies is the product of a long period of French colonialism and the learned dependence of the African states. For most of francophone Africa there are only limited powers allocated to their central banks. These are economies whose vulnerability to an increasingly globalised economy expands daily. There can be no trade policy without reference to currency; there can be no investment without reference to reserves. The African politicians and parties elected to promote growth, reform, changes in trade and fiscal policies are made irrelevant except with the consent of the French Treasury which rations their funds. There are many who object to the continuation of this system. President Abdoulaye Wade of Senegal has stated this very clearly “The African people’s money stacked in France must be returned to Africa in order to benefit the economies of the BCEAO member states. One cannot have billions and billions placed on foreign stock markets and at the same time say that one is poor, and then go beg for money....”[vi]

This system of dependence is a direct result of the colonial policies of the French Government. In the immediate post-war period after the signing of the Bretton Woods Agreement in July 1944 the French economy urgently needed to recover from the several disasters of the Second World War. To assist in this process it set up the first CFA amongst its African colonies to guarantee a captive market for its goods.

The principal decision which resulted from the Bretton Woods Agreement was the abandonment of the Gold Standard. In short, the new system gave a dominant place to the dollar. The other currencies saw their exchange rate indexed to the dollar. The reserves of the European central banks at that time consisted of currencies of dubious post-war value and gold which had been de-pegged from the fluctuations of the currency. For this reason France needed the currencies of its colonies to support its competitiveness with its American and British competitors. De Gaulle and his main economic advisor, Pierre Mendès France met with some African leaders and developed a Colonial Pact which would enshrine this is in a treaty (with both public and secret clauses).

“Following the devaluation of the French Franc, it was naturally expected that the currency which was also circulating in Francophone Africa would also be devalued. Instead, France decided to create a new currency for its African colonies on 26 December 1945... The newly created CFA was however not devalued but overvalued. In deciding to overvalue the new currency, the CFA zone economies were effectively excluded from the international market as their products became too expensive on the competitive global market.

There remained only one market for the CFA zone, and that was France their colonial master. This enabled Metropolitan France to appropriate to itself the raw materials needed for its post-War and young industries. The colonies were tied hand and foot to serve Metropolitan France as other markets closed their doors to their expensive products. Thus through the new CFA currency, France was able to economically re-colonise its African colonies that had earlier been cut off from Paris as a result of the War.”[vii]

Decolonization south of the Sahara did not happen as de Gaulle had intended. He had wanted to create a Franco-African Community that stopped short of total independence. But, when Sekou Toure's Guinea voted "no" in the 1958 referendum on that Community, the idea was effectively dead. Guinea was severely punished because of its decision and the French soon had to proceed towards allowing the independence of its colonies but at the price of a strict continuing control over their economies. They agreed at independence to be bound by the Pacte Colonial.

The key to all this was the agreement signed between France and its newly-liberated African colonies which locked these colonies into the economic and military embrace of France. This Colonial Pact not only created the institution of the CFA franc, it created a legal mechanism under which France obtained a special place in the political and economic life of its colonies.

The Pacte Colonial Agreement enshrined a special preference for France in the political, commercial and defence processes in the African countries. On defence it agreed two types of continuing contact. The first was the open agreement on military co-operation or Technical Military Aid (AMT) agreements, which weren’t legally binding, and could be suspended according to the circumstances. They covered education, training of servicemen and African security forces. The second type, secret and binding, were defence agreements supervised and implemented by the French Ministry of Defence, which served as a legal basis for French interventions. These agreements allowed France to have predeployed troops in Africa; in other words, French army units present permanently and by rotation in bases and military facilities in Africa; run entirely by the French.

According to Annex II of the Defence Agreement signed between the governments of the French Republic, the Republic of Ivory Coast, the Republic of Dahomey and the Republic of Niger on 24 April 1961, France has priority in the acquisition of those "raw materials classified as strategic.” In fact, according to article 2 of the agreement, "the French Republic regularly informs the Republic of Ivory Coast (and the other two) of the policy that it intends to follow concerning strategic raw materials and products, taking into account the general needs of defence, the evolution of resources and the situation of the world market.”

According to article 3, "the Republic of Ivory Coast (and the other two) informs the French Republic of the policy they intend to follow concerning strategic raw materials and products and the measures that they propose to take to implement this policy.” And to conclude, article 5: "Concerning these same products, the Republic of Ivory Coast (and the two others) for defence needs, reserve them in priority for sale to the French Republic, after having satisfied the needs of internal consumption, and they will import what they need in priority from it.” The reciprocity between the signatories was not a bargain between equals, but reflected the actual dominance of the colonial power that had, in the case of these countries, organised "independence" a few months previously (in August 1960).

In summary, the colonial pact maintained the French control over the economies of the African states; it took possession of their foreign currency reserves; it controlled the strategic raw materials of the country; it stationed troops in the country with the right of free passage; it demanded that all military equipment be acquired from France; it took over the training of the police and army; it required that French businesses be allowed to maintain monopoly enterprises in key areas (water, electricity, ports, transport, energy, etc.). France not only set limits on the imports of a range of items from outside the franc zone but also set minimum quantities of imports from France. These treaties are still in force and operational.

The WAEMU CFA franc is issued by the BCEAO (Banque Centrale des Etats de l’Afrique de l’Ouest). This currency was originally pegged at 100 CFA for each French franc but, after France joined the European Community’s Euro zone at a fixed rate of 6.65957 French francs to one Euro, the CFA rate to the Euro was fixed at CFA 665,957 to each Euro, maintaining the 100 to 1 ratio. It is important to note that it is the responsibility of the French Treasury to guarantee the convertibility of the CFA to the Euro.

The monetary policy governing such a diverse aggregation of countries is uncomplicated because it is, in fact, operated by the French Treasury, without reference to the central fiscal authorities of any of the WAEMU states. Under the terms of the agreement which set up these banks and the CFA the Central Bank of each African country is obliged to keep at least 65% of its foreign exchange reserves in an “operations account” held at the French Treasury, as well as another 20% to cover financial liabilities.

The CFA central banks also impose a cap on credit extended to each member country equivalent to 20% of that country’s public revenue in the preceding year. Even though the BCEAO has an overdraft facility with the French Treasury, the drawdowns on that overdraft facility are subject to the consent of the French Treasury. The final say is that of the French Treasury which has invested the foreign reserves of the African countries in its own name on the Paris Bourse.

The central banks of these 2 zones – the Central Bank of West African States (BCEAO) for WAEMU and the Bank of the Central African States (BEAC) for CEMAC – have supranational status. For each zone, the reserves of member states are pooled; members have no independent monetary policy and no possibility of undermining the central bank’s independence or monetising public deficits.

This fixed exchange rate regime draws its credibility from monetary agreements with France that, via the Treasury, guarantee the convertibility of the CFA franc and provide the central banks an overdraft facility (compte d’opération) to meet liquidity needs. As a counterparty to this guarantee, 50% of their reserves must be placed within the French Treasury in the compte d’opération. The reserves must amount at least to 20% of central bank short-term liabilities. If the reserves are below this level (or if the compte d’opération is in debit) for more than one quarter, the central banks must take corrective measures (interest rate increases, credit rationing, and seizure of foreign exchange available in the zone).

In short, more than 80% of the foreign reserves of these African countries are deposited in the “operations accounts” controlled by the French Treasury. The two CFA banks are African in name, but have no monetary policies of their own. The countries themselves do not know, nor are they told, how much of the pool of foreign reserves held by the French Treasury belongs to them as a group or individually. The earnings of the investment of these funds in the French Treasury pool are supposed to be added to the pool but no accounting is given to either the banks or the countries of the details of any such changes. The limited group of high officials in the French Treasury who have knowledge of the amounts in the “operations accounts”, where these funds are invested; whether there is a profit on these investments; are prohibited from disclosing any of this information to the CFA banks or the central banks of the African states.

For a decision to be valid at the BEAC, it must be unanimously approved by all the members of the administrative council. At the Comoros Central Bank or BCC, at least five of the eight administrators must approve a decision. At all times, no decision can be approved without the French. France is, therefore, in a position to block any major decisions taken by these banks. So if a decision favoured by the Comorian representatives at the BCC does not tally with French interests, the French administrators have the power to block it. The way these central banks function, therefore, legalise and perpetuate the direct intervention of France in the vertebral column of the CFA zone economies. Even to appoint the governor of the BEAC for instance, the candidacy is proposed by Gabon, but it must be approved by Paris which seeks to ensure that the governor is malleable and ready to dance to French tunes to the detriment of African economic interests.”[viii]

This makes it impossible for African members to regulate their own monetary policies. The most inefficient and wasteful countries are able to use the foreign reserves of the more prudent countries without any meaningful intervention by the wealthier and more successful countries.

The major problem with the CFA franc is that because of its pegging to a fixed rate to the Euro its value reflects the successes or failures of European monetary policies, not African realities. Now, in the wake of the global credit crunch there are more worrying changes. The principal worry is the state of the French economy and the pressures on the Euro to cope with the vast monetary and fiscal divergences among the 27 states and the impact of the sovereign debt crisis. The declining value of the African reserves, bound up in investments in a falling French stock market has diminished the ardour for French subsidies of development projects in such economic basket cases as Niger, Mali, Burkina Faso and others. France has shown itself unwilling to continue to finance the stationing in Africa of so many troops, including those wearing the blue berets of the United Nations.

If the Euro fails, breaks apart into two zones, or disappears in a mountain of defaults what happens to the francophone African states? Their money is tied up in the French Bourse, almost completely out of their control. They have no idea of their positions and are not confident that a decaying France will be able to financially maintain a par CFA which will be credible or reflect the value of African exports; the very nature of the original bargain. There are many African economists who are convinced that the French Treasury has been using their reserves as collateral on French long-term debt. If the Euro breaks up or declines dramatically, how will the Africans get their own money back?

The Move Towards Currency Unions
There have been moves to create an African currency union for a number of years. There are several types of currency union. There is the informal currency union, as in the South Pacific, where the Cook Islands, Niue and the Pitcairn Islands all use the New Zealand dollar as their currency and Kiribati. Nauru and Tuvalu use the Australian dollar. These smaller islands get the advantage of having a convertible currency without the additional expenses associated with this. A more formal union is the Southern Africa Customs Union (SACU) in which five nations (Lesotho, Namibia, South Africa and Swaziland) have formed a customs union and use the South African Rand as their common currency. The more formal types of union are those of the CFA franc where there is internal harmonisation managed by the French Treasury.

However, there are two additional initiatives which are very important. The Economic Community of West African States (ECOWAS) is developing its own monetary union. Currently, the states within ECOWAS use their own currencies but have pledged to introduce a common currency within their own grouping, the West African Monetary Zone –WAMZ. These states (Ghana, Guinea, Nigeria, Sierra Leone, the Gambia, Capo Verde and Liberia) hope to introduce a new common currency, the ECO, to rival the CFA franc and, eventually to merge the ECO and the CFA franc into a single monetary unit for the region. The pace of these developments is very slow.

The first step towards the economic integration of West Africa was the establishment of the Economic Community of West African States (ECOWAS) in 1975. Under the ECOWAS treaty, it was envisaged that the 16 member-nations would form a common market. Subsequently, the heads of state and government adopted the ECOWAS Monetary Cooperation Program (EMCP) IN 1987. Under the initiative, it was envisaged that all the countries would come together to form a single monetary unit by 2000, from the eight currencies in the sub-region, one of which is the CFA franc.

The idea of a common currency by 2015 was initiated by the West African Monetary Zone, comprising six countries within the ECOWAS, in 2000 to promote economic integration and trade in the sub-region. But the West African states planning to adopt the Eco currency have largely failed to meet self-set primary criteria of a single digit inflation rate and reduction in budget deficit for the introduction of the currency, as the overall compliance with macroeconomic convergence criteria deteriorated.

Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria and Chairman of the Committee of Governors of Central Banks of the WAMZ, indicated that most member countries are on course in meeting the convergence criteria target date of 2015. The West African Monetary Institute based in Accra, Ghana is developing the new currency with the eventual goal of merging the Eco with the CFA franc, to give all of West and Central Africa a single, stable currency.

The second major currency union to be close to formation is the East African Monetary Union, joining Tanzania, Uganda and Kenya. There used to be an East African Union and an East African Shilling which was interchangeable in all three countries (or four if you count unincorporated Zanzibar) Now these nations are trying to reconstitute the East African Community and install a common currency. This is becoming a drawn out and convoluted process and mixed in with a wider initiative in Southern Africa.

Plans to adopt a single currency for the 15-member Southern African Development Community (SADC) by 2018 could be overtaken by a much broader regional single currency and customs project that would include two other trade blocs, SADC, the Common Market for East and Southern Africa (COMESA) and the East African Community are in talks aimed at setting up a single monetary union and a free trade area by 2016. When the SADC monetary union plan was mooted, 2016 was initially set as the target for a monetary union and a single currency by 2018. Currently, SADC has launched a regional payment integration system which facilitates electronic settlements between banks within the region. The regional payment system is widely seen as a forerunner towards the single currency initiative.

In addition to the East Africans, Zimbabwe, Madagascar, Seychelles, Mauritius, the DRC, Swaziland, Malawi and Zambia are also in COMESA along with Burundi, Comoros, Djibouti, Egypt, Eritrea, Ethiopia, Libya, Rwanda, and Sudan are partners.

Whatever the example it is clear that Africa is seeking to create customs union, free trade areas, and common monetary unions. These will develop at whatever pace is possible, given the diversities of the various stages of economic growth. However, the development of a West African monetary union is fast approaching. As it grows there will be a concomitant demand from the nations locked in the CFA franc zone for a release from its constraints. The decline of the French economy and the approaching failure of the Euro are very likely to trigger a mass defection from the CFA franc. Then France will have to give some kind of proper accounting to its erstwhile partners about all the money it has been hoarding, supposedly for their benefit. That should certainly be amusing. Perhaps that is why the Germans did not invite them to the Neuro.



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[i] Rasmussen Reports June 14, 2011

[ii] Ibid

[iii] Hugh Gusterson, Bulletin of American Scientists 10 March 2009

[iv] Ibidc

[v] See “How France lives off Francophone Africa via the CFA franc, Mamadou Koulibaly, “New African” 1/08

[vi] “We Want Our Money”, Ruth Tete, “New African” 1/08

[vii] “The Euro is bad news for the CFA”, Ruth Nabakwe, “New African” 7/02

[viii] CFA, the devil is in the details”, Ruth Nabakwe, “New African” 7/02