Fixed exchange rates force austerity when competitiveness declines

Evidence

A country that pegs its own currency to another currency cannot pursue an autonomous monetary policy. The latter must be aimed at maintaining the fixed parity, to the detriment of other economic priorities, such as increase in production and employment. The evolution of the parity of this currency vis-à-vis other currencies, in particular those of competing countries, will be dictated by that of the anchor currency. With a fixed exchange rate, the exchange rate cannot be used to cushion the impact of economic shocks or to improve the price competitiveness of local products. Therefore, in the case of a monetary union, the member countries whose competitiveness deteriorates cannot use the exchange rate to compensate for the decline in competitiveness. In this case, without budgetary support, they will have to compress domestic prices and domestic expenditure in order to compensate for the lack of exchange rate flexibility. This is called internal devaluation, more commonly known as ‘austerity’. — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 125 (#expands, via linked claim)

It is widely accepted that a fixed exchange rate regime tends to determine a low level of inflation. Conversely, a flexible exchange rate regime causes a bit more inflation, but promotes a greater stability in terms of economic activity: it has a cushioning function that makes it possible to react to shocks and significantly reduce the volatility of (changes in) production and employment, something which a fixed exchange rate doesn’t allow for. If a country wants to give priority to the stability of production and employment, then it has to adopt a flexible exchange rate regime. If, on the other hand, it chooses to favour a balance of payments equilibrium, or external balance, then a fixed exchange rate can help. The tragedy is that the countries of the franc zone not only give priority to the external balance over every other consideration, but they think that this goal consists solely in maintaining the fixed parity at all costs. The central banks of the CFA system, for example, do not seem interested in improving the price competitiveness of their member states’ economies. As a result, in the WAEMU area, all countries with the exception of the Ivory Coast have experienced a chronic trade deficit since their independence. — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 295 (#expands, via linked claim)

Categorization

• XREF: connects to: A fixed exchange rate regime forces member countries to resort to internal devaluation — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 125; Fixed exchange rates trade employment stability for external balance — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 295; Devaluation and revaluation simply shift the fixed CFA-euro parity — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 122 (+15 more)

Related

• A fixed exchange rate regime forces member countries to resort to internal devaluation (similarity 0.93)
• Fixed exchange rates trade employment stability for external balance (similarity 0.91)
• Devaluation and revaluation simply shift the fixed CFA-euro parity (similarity 0.87)
• Fixed and floating exchange rates operate by opposite logics (similarity 0.84)
• CFA ‘stability’ masks currency fluctuation against dollar and pound (similarity 0.83)
• Fixed exchange rate countries in sub-Saharan Africa grow 1-2 points slower (similarity 0.82)
• CFA franc parity changed only once since 1948 (similarity 0.82)
• Reformers demand flexible exchange rates and growth-oriented central bank policy (similarity 0.82)
• The CFA franc’s fixed peg forced colonies to absorb French devaluations helplessly (similarity 0.82)
• Franc-zone central banks must restrict domestic credit to defend the fixed euro parity (similarity 0.82)
• Euro appreciation deteriorates franc zone trade balances (similarity 0.81)
• CFA franc parity was frozen at 50 per French franc from 1958 to 1994 (similarity 0.81)
• Eurozone membership merged CFA extraction with neoliberal austerity, worsening African prospects. (similarity 0.81)
• The same strong euro that hurts France devastates African export competitiveness (similarity 0.81)
• The CFA franc’s parity was set without regard for local economic realities (similarity 0.81)

Broader Connections

• A fixed exchange rate regime forces member countries to resort to internal devaluation #expands (0.90) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 125
• Fixed exchange rates trade employment stability for external balance #expands (0.70) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 295
• France’s strong-franc policy worsened CFA countries’ competitiveness #qualifies (0.70)
• A single currency without fiscal federalism increases divergence between member states #expands (0.60) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 347
• Devaluation and revaluation simply shift the fixed CFA-euro parity #expands (0.50) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 122
• Fixed exchange rate countries in sub-Saharan Africa grow 1-2 points slower #expands (0.40) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 296
• The 1980s debt crisis triggered IMF demands for CFA devaluation #corroborates (0.40) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 205
• CFA critics demand flexible exchange rates, development-oriented central banks, and banking reform #responds-to (0.40) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 323