IB Economics SL 4.4.5 Monetary union Question Bank

Study the extract and data below and answer the questions that follow.
Tedious journey towards West African single currency

(1) The Economic Community of West African States (ECOWAS) has continued to push for a monetary union. Those involved in pursuing increased economic integration strongly believe that a common currency for the West African Monetary Zone (WAMZ) would increase trade in the region, increase competition (particularly in commodity markets) and stimulate economic growth.

(2) The proposed currency, the eco, will be initially introduced in the 14 member countries of WAMZ* which include The Gambia, Ghana and Nigeria.

(3) The proposal has been postponed four times, largely because of unequal progress among member countries in meeting the requirements to establish a monetary union by 2020.

(4) The main requirements for membership of the monetary union are:
- the budget deficit of each member country should not exceed 3 % of its gross domestic product (GDP)
- the average annual inflation of each country should be below 10 %
- each country must have enough foreign currency reserves to buy a minimum of three months' worth of imports
- the public debt to GDP ratio of each country should not be more than 70 %
- each country's exchange rate should be stable.

(5) Meeting the requirements for all countries by 2020 will be difficult, given that member countries have different economies with their own challenges. Nigeria is the only country which has met all requirements so far.

(6) For the monetary union to succeed there must be honesty among member countries. In addition, member countries would have to double their efforts in strengthening fiscal performance through improving tax revenue collection and reducing government expenditure on public services.

(7) Although a single currency in the region is likely to promote trade, it will mean that individual member countries will lose control over their own monetary policy, creating conflicts of interests. Research shows that the balance of trade of Nigeria, an oil exporter, tends to move in the opposite direction to its neighbours, who are largely importers of oil. Nigeria would push for higher interest rates in periods of high oil prices. That would be disastrous for other WAMZ economies which would be desperate for lower rates. and www.economist.com, 3 October 2014]
* WAMZ: Ghana, Nigeria, Sierra Leone, The Gambia, Guinea, Liberia, Benin, Togo, Cote d'Ivoire, Niger, Mauritania, Senegal, Burkina Faso, and Mali.

Define the term monetary union indicated in bold in the text (paragraph (1)).