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Review of Architectural Flaws of the EMU: What Eurozone Crisis Lessons for the Proposed ‘Afrozone’?

Mogaji, Peter Kehinde (2015): Review of Architectural Flaws of the EMU: What Eurozone Crisis Lessons for the Proposed ‘Afrozone’?

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Abstract

There were evidence-prompted conclusions by many researches on the optimum currency area (OCA) theory that the European Monetary Union (EMU) is not an optimum currency area; and consequently, there were warnings about the dangers of a single monetary policy for the Eurozone because of the inability of the zone to fulfil the theoretical preconditions for an optimal currency area. The 2007 subprime crisis that transformed into global financial crisis ignited the Eurozone crisis of 2009 which substantially revealed some crucial flaws and inadequacies in the design of the Eurozone. This paper reviewed some literature on the original design of the European Monetary Union (EMU) and the post-financial crisis EMU (the Eurozone crisis), evaluated various debates on the sustainability of the EMU, identified the financial crisis-exposed defects in the design of Eurozone and well as the flaws inherent in the original optimum currency area (OCA) theory and its application to monetary integration, while making further efforts in highlighting lessons these have for the current monetary integration in the developing blocs of Africa and the proposed monetary integration of Africa. There has been the desire for the African Monetary Union which aims at the creation of a unified currency for the African continent. The 1991 Abuja treaty set out six stages in the process of achieving a monetary union and a single currency for Africa by 2028. The strategy for African monetary integration is based on progressive economic and monetary integration of African economic communities (ECOWAS, EAC, SADC etc) which are regarded as building blocks of Africa. This proposed African common currency is to be known as ‘afro’. This prompted this writer to tag the area that would eventually adopt this common currency as ‘Afrozone’ in this paper. Some of the major Eurozone design flaws identified in this paper as those exposed by the Eurozone crisis are: (i) the absence of effective economic governance mechanism; (ii) the retention of banking supervision and resolution at national levels; (iii) the lack of financial back-stops and crisis resolution mechanisms at the union level; and (iv) defects in the design of the Eurozone's common central bank. This paper highlights fifteen Eurozone crisis lessons for a complete and sustainable ‘Afrozone’ being proposed for the continent of Africa by 2028.

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