The viability of any economic integration plan depends upon its ability to ensure that the economic and financial policies defined by individual member countries of the union are consistent with those of the other members and guarantee sustained convergence of the members’ economic performance. This is especially true for a monetary union in which a common currency and common monetary policy exerts even more stringent constraints on national economic policies. In the West African Economic and Monetary Union (WAEMU),1 where the CFA franc is pegged to the euro and the autonomy of monetary policy and the ability to use the interest rate as an instrument are therefore limited, fiscal policies are of prime importance. They must be coordinated and be consistent with the maintenance of a fixed exchange rate over the medium term, even if they reflect differences in economic conditions over the short term. Lack of economic policy coordination can lead to negative externalities and therefore to policy changes in response to shocks that could jeopardize the common monetary policy.

The Role of Fiscal Policy