It is always intriguing to gain insight into the economic thinking guiding the chief stewards of Nigeria’s economy and how they envision its future—particularly in relation to the nation’s place among its African peers. On November 30, 2024, Mr. Yemi Cardoso, Governor of the Central Bank of Nigeria (CBN), and the Coordinating Minister of the Economy, Mr. Wale Edun, offered such insight during a closed-door meeting, one of those ‘technical’ sessions quietly sponsored by the African Union to bring together African financial experts.

The meeting, titled the “5th AU Extraordinary Session of the Specialised Technical Committee on Finance, Monetary Affairs, Economic Planning and Integration,” was held in Abuja and underscored the continued appeal of establishing an African monetary union among Africa’s technocratic elite. At this meeting, Mr. Cardoso explicitly called for “the establishment of an African Monetary Institute that will mark a significant milestone in Africa’s journey toward a common currency.” Mr. Edun echoed this stance, declaring Nigeria’s readiness to host the Institute, which would serve as a precursor to the African Central Bank.

Given the venue—Abuja—it’s plausible that the Nigerian officials were also paying homage to the 1991 Abuja Treaty, which established the African Economic Community and outlined six stages toward a unified monetary zone by 2028. In its early phases, this vision promotes regional economic cooperation and integration, possibly through regional monetary unions. The later stages anticipate the establishment of a central African bank and a single African currency, thereby completing the continent-wide economic and monetary union.

Considering Nigeria’s current economic climate—managed skillfully by Mr. Cardoso and Mr. Edun—it beggars’ belief as to why these men still believe that adopting a common currency, managed by an African central Bank remains the overarching solution to Africa’s complex financial issues. Given the mixed outcomes of existing monetary unions globally, one wonders why Africa’s financial technocratic elite, particularly within the AU and finance ministries, remain so committed to the idea.

In economic theory and history, the primary justification for currency unions has been that the adoption of a single currency by geographically proximate sovereign nations boosts trade among members and fosters low, stable inflation. These benefits are presumed to outweigh a major drawback: the inability of individual countries to tailor monetary policy to specific economic shocks. Theoretically and practically, a currency union isn’t inherently a crazy idea. Robert Mundell, the Nobel Prize-winning economist, laid the groundwork for the concept in his seminal paper, A Theory of Optimum Currency Areas. However, it is Mundell’s interpretation of the politics behind a national currency that remains most appealing to me.

Mundell, drawing on John Stuart Mill—who lamented that “so much of barbarism… still remains in the transactions of most civilized nations, that almost all independent nations choose to assert their nationality by having, to their own inconvenience and that of their neighbors, a peculiar currency of their own”—argued that:

“… In the real world, of course, currencies are mainly an expression of national sovereignty, so that actual currency reorganization would be feasible only if it were accompanied by profound political changes. The concept of an optimum currency area therefore has direct practical applicability only in areas where political organization is in a state of flux, such as in ex-colonial areas and in Western Europe…”

This strikes at the essence of what a national currency represents and, by extension, nationalism. For disparate regions to function as one nation, there must be a shared identity and culture binding them. A national currency effectively unifies diverse regions through high mobility of capital, land, and labor. Similarly, for a multinational currency union to succeed, these same forms of factor mobility must exist across member states. It would be silly for every global region to have its own currency, given the trade and mobility barriers this would create.

But does this imply the need for a “world currency”? Absolutely not. For any currency union to function effectively, several prerequisites must be in place. Both Mundell and his intellectual rival Paul Krugman argued this. Mundell emphasized that currency unions are viable primarily in politically fluid regions. Krugman, in his influential paper The Revenge of the Optimum Currency Area, used the United States as an example of a successful currency union, crediting its success to high labor mobility and robust fiscal integration.

Take fiscal integration, for example. When a U.S. state faces an economic shock that reduces its revenue, its welfare programs like unemployment benefits or Medicaid are unaffected due to automatic federal transfers. These safety nets would be unavailable if the state were sovereign. The federal government absorbs such shocks and can borrow cheaply due to national credibility—something a stand-alone state couldn’t manage. This highlights why fiscal and political union are critical for a currency union to work.

Outside the speculations of economic theory, currency unions are often politically motivated, designed to promote regional integration. Europe’s own journey proves this. After World War II, Jean Monnet—often dubbed the father of modern Europe—advocated for economic integration as a path to peace. In 1951, Monnet became the chief architect of the European coal and steel community, which was at the time the most significant step ever taken toward European integration. A series of treaties followed and the Maastrict treaty eventually fulfilled Monnet’s dream in the creation of the EU in 1992 and the corresponding monetary union which began the circulation the Euro currency in 2002.

It’s unclear how much Mundell influenced the architects of the Eurozone, but it was evident that the euro did not meet the optimal criteria for a currency area. In fairness, eurocrats were able to foresee the fiscal pitfalls that might torpedo the stability of the eurozone which was why the 1997 Stability and Growth Pact required low inflation (below 1.5%), budget deficits under 3% of GDP, and debt-to-GDP ratios under 60%. Yet, implementation faltered. Greece, for instance, joined in 2001 by misrepresenting its fiscal status, aided by Goldman Sachs.

The Eurozone and Greek debt crises have been widely dissected by economists and economic historians. Their root causes underscore why monetary unions flounder without fiscal or political unity. Greece’s access to cheap money, thanks to euro credibility, led to reckless borrowing. A fiscal union could have curbed this through oversight, which was what later spurred the 2012 Fiscal Stability Treaty—rejected only by the UK and Czech Republic. Indeed, past monetary unions without fiscal unions, such as the Latin American Monetary Union and the Scandinavian Monetary Union, eventually collapsed.

Linked to fiscal union is the need for an independent central bank that serves as lender of last resort. This central role cannot be overstated, as it directly influences government borrowing costs. Paul De Grauwe illustrates this point effectively in an article where he explains why, at the time, the Spanish government paid 200 basis points more on its ten-year bonds than the British government — despite Spain having lower debt and deficits.

If investors begin to fear that Spain may default on its debt, it could trigger a mass sell-off of Spanish bonds, thereby increasing interest rates. If such a trend continues, Spain could face a liquidity crisis and crucially, it cannot compel the Bank of Spain to purchase its debt. Although the European Central Bank (ECB) could intervene, Spain does not control the ECB and therefore cannot fully rely on it as a lender of last resort.

In stark contrast, the United Kingdom could instruct the Bank of England to purchase government debt in a similar crisis — as happened during the COVID-19 pandemic, when the Bank of England engaged in quantitative easing by printing money to buy long-dated government bonds. Although the ECB did adopt quantitative easing during the Eurozone crisis, it frequently faced opposition from the German Finance Ministry and the Bundesbank regarding proposals to purchase government debt on the secondary market. This resistance highlights the political limitations and risks of lacking a fully independent central bank that can act decisively as a lender of last resort.

Returning to the core question: do the benefits of a monetary union—boosted trade and inflation stability—outweigh its challenges? Simply put, no. Although the euro was intended to deepen EU integration, its anticipated trade effects were limited—likely because exchange rate fluctuations among the countries that adopted the euro were already minimal, and in some cases nonexistent, prior to the formation of the Economic and Monetary Union (EMU). While the Euro has certainly boosted trade among EU member states, the US and China still formed the largest trading partners for most EU countries. Although the euro has contributed to a more stable inflation record, Euro-area GDP has slowed from the robust ‘2% decade’ between 1999 and 2008 to more subdued levels. In fact, the EU’s Spring 2025 Economic Forecast projects moderate growth of 1.1% in 2025 and 1.5% in 2026.

The CFA franc zone, another monetary union is often cited as a success due to its low inflation. While the CFA franc zone has indeed experienced a period of low inflation among its member states, the maintenance of the fixed peg of the CFA franc to the euro — as rightly pointed out by Carla Coburger — has led to a sustained appreciation of the CFA franc. This is largely due to the euro’s appreciation against the US dollar by 40.7% between 2002 and 2020. As a result, exports from CFA franc countries have become more expensive and less competitive, particularly because these countries have increasingly traded with nations whose goods are denominated in US dollars, rather than with the eurozone or Francophone countries.

Crucially, the eurozone and the CFA franc zone differ significantly in structure and are subject to different types of economic shocks. The eurozone primarily exports high-value goods such as technology and manufactured products, whereas the CFA franc zone largely exports low-value, primary agricultural commodities. Take Côte d’Ivoire, for example, where cocoa is the main export. Its international price is set by global market forces, making it highly susceptible to price volatility. In the event of a poor harvest or a global supply glut, an independent monetary policy would allow the central bank to respond by loosening monetary conditions and devaluing the currency to support export competitiveness.

However, since Côte d’Ivoire has ceded its monetary policy to the European Central Bank (ECB), it lacks this flexibility and must instead rely on a slower and more painful process of fiscal adjustment — or fiscal devaluation — to regain competitiveness. The ECB, for its part, is limited in how much it can assist Côte d’Ivoire in such a scenario, as the eurozone economy is not exposed to the same kind of external shocks due to the nature of its export portfolio.

Nigeria’s experience is similar as you can imagine. Having an independent central bank and national currency provides significant advantages, particularly given Nigeria’s disproportionate exposure to global market shocks. Nigeria relies heavily on oil, which accounts for approximately 88.2% of total exports. Since oil prices are determined on the global market, any sharp decline—such as those experienced in 2014 and 2016— leads to substantial drops in government revenue.

However, with an independent central bank, Nigeria can respond to such external shocks by devaluing the naira, thereby making its exports more competitive and affordable for foreign buyers. This kind of monetary flexibility would not be possible within a currency union, where interest rates and monetary policy would be determined by a central authority like the African Central Bank (ACB), with limited regard for the specific needs of Nigeria’s economy. Mr. Cardoso, especially, should recognize the value of Nigeria’s monetary independence, given his impressive reform record at the CBN. In an effort to tackle Nigeria’s persistently high inflation, the Central Bank of Nigeria (CBN) under Cardoso has returned to orthodox monetary policies by aggressively raising interest rates since 2023. This tightening of monetary policy has helped boost both foreign direct investment (FDI) and foreign portfolio investment (FPI), which in turn has improved liquidity in the foreign exchange market—an essential step toward meeting the ever-growing demand for U.S. dollars. The persistent scarcity of dollars often leads to a depreciation of the naira.

Indeed, Nigeria’s external trade reached a record high of ₦138 trillion in 2024, driven primarily by exchange rate depreciation, according to data from the Nigerian Economic Summit Group (NESG). This depreciation largely resulted from Governor Cardoso’s decision to float the naira, allowing market forces to determine its true value. Given this, it is puzzling why the CBN Governor would advocate for a fixed exchange rate regime under a proposed African currency union.

Does Africa even meet the criteria for an optimum currency area? The answer is no. Intra-African trade remains low—one of the key reasons for the push behind the African Continental Free Trade Area (AfCFTA). Furthermore, factor mobility, especially labor mobility, is limited. Africans are more likely to migrate to countries outside the continent than within it. So, what then is driving these renewed calls for a currency union?

It’s important to recognize that any meaningful monetary union in Africa would necessitate a corresponding fiscal or political union. This would essentially be a revival of the crackpot dream of a “United States of Africa” once envisioned by Marcus Garvey and Kwame Nkrumah. It didn’t work then, and there’s no evidence to suggest it would ever succeed.

One can only hope these calls remain symbolic expressions of misguided pan-African financial aspirations, rather than serious policy pursuits. Nigeria must continue to safeguard the independence of its central bank and the autonomy of its monetary policy, ensuring it is never subordinated to the diktats of a hypothetical and potentially dysfunctional African Central Bank.