Fiscal Reform and Monetary Union in West Africa

are actually better off with pegging or euroization than with monetary union. For them, a
full membership might imply even worse results than pegging.

The results derived have important implications for the planned monetary union for
ECOWAS. Starting from an existing monetary union between WAEMU members, an
enlargement to comprise another six members should be implemented by 2004. Despite
convergence requirements and some common rules on fiscal policy, the two groups of
countries are still characterized by a considerable degree of divergence particularly in fiscal
policy. Especially the non-WAEMU members of ECOWAS are still characterized by high
inflation and large fiscal distortions. And although there are some nominal fiscal
convergence criteria they are not particularly binding, since there is no provision how to
treat countries that fail to fulfill them. Therefore it is important to analyze how a monetary
union without binding fiscal rules will influence fiscal policy. Proceeding with the planned
union without structural changes is likely to have strongly diverse effects on fiscal policy
which will further push countries apart. Instead of a convergence, a further divergence in
fiscal policies can be expected from a monetary union for West Africa.

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