One of the biggest challenges the monetary union which African Union plans to implement in the continent will be lack of flexibility to use monetary policies to drive economic agenda for respective member states. In other words, if a supranational bank which will become the central bank of the member states takes over, monetary policy tools cannot be deployed to fix some economic situations at member country level.
In other words, no matter what Liberia does, if Nigeria is having problems with its economy, ECO will have challenges and Liberia will struggle. Why? The economy of Nigeria is what will influence the performance of ECO in West Africa. Magically, the small Liberian economy which is not up to the economy of Eti Osa local government area in Lagos state will be under the shadows of the big brother named Nigeria. There will be welfare losses to these smaller countries but none can rattle Nigeria because they are very small. All of them will hope Nigeria gets all right, otherwise ECO will cause havoc in their economies.
In modern global economics, monetary policy instrument is extremely potent in trade. For heterogeneous markets like Africa where economies have divergent economic structures and architectures, it could be catastrophic to lump them together, depriving member states flexibility to normalize shocks.
For example, if Nigeria cannot devalue its currency to deal with deterioration in global crude oil pricing position, Nigerian citizens will experience welfare losses. As that happens in Nigeria, it will also affect smaller economies like Togo which are not directly affected by the oil shocks. Simply, if Africa integrates, Nigerian paralysis could affect neighboring smaller economies.
China is showing the power of that flexibility as it uses it currency tool to adjust for the impact of President Trump trade tariffs on Chinese goods. So, if U.S. raises tariff, China devalues its currency, partly offsetting the impact of that tariff. Provided that China has control of this tool, it can adjust for some basic impacts of tariff.
A yearlong U.S.-China trade war boiled over on Monday as Washington accused Beijing of manipulating its currency after China let the yuan drop to its lowest point in more than a decade.
The U.S. Treasury Department announced late on Monday that it had determined for the first time since 1994 that China was manipulating its currency, knocking the U.S. dollar .DXY sharply lower and sending gold prices XAU= to a six-year high.
Largely, a monetary union in Africa will take out that tool from member states. That could be extremely consequential for member states when their primary commodities (usually the main sources of foreign exchange earnings) are undergoing global pricing shocks.------
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