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Awaiting lessons from the euro-zone

Awaiting lessons from the euro-zone

The drive to establish a unified Gulf currency may be on hold as policy makers ‘wait and see’ what’s to come of the distressed euro.

May 17, 2010 5:28 by

The euro-zone crisis may have a chilling effect on the drive to establish a single GCC currency. With the euro at its lowest level for more than four years, GCC monetary union members Saudi Arabia, Kuwait, Qatar and Bahrain are eying the fallout from a distressed euro and budgetary imbalances that analysts say threaten an extended “freefall” of the 16 member currency.

Recognizing the need for a more unified monetary policy, in 2001 the GCC agreed to form an EU- style monetary union, with the tentative goal of unified currency by 2010. Squabbles and other delays rendered the date untenable, and analysts became increasingly less optimistic about the timely emergence of the unified Gulf currency. The UAE, the region’s second largest economy behind Saudi Arabia, in May last year opted out of the proposed monetary union agreement in May last year – after it was announced that Saudi Arabia would be the site of the GCC’s future central bank. The second country to bow out of the monetary union, the UAE’s departure came as a massive blow to the venture, causing some economists to sound the death knell for the whole enterprise. Oman withdrew participation in 2007, citing inability to meet deadlines in the eligibility criteria.

Remaining members Saudi Arabia, Kuwait, Qatar and Bahrain in March held the first meeting of the Monetary Council in March. Central bankers from the four participating nations launched a forerunner of the unified central bank, though they did not agree on a timeline for a single currency.

Currently, the currencies of three of the four nations remain pegged to the dollar. Only the Kuwaiti dinar is pegged to a basket of currencies. A weakening US dollar led many MENA region bankers to question the wisdom of remaining pegged; a unified GCC central bank would give the Arab states greater control over their own monetary policy, which is now effectively dictated by the federal reserve, according to Bahrain’s Finance Minister Sheikh Ahmad bin Mohammad al-Khalifa.

“Currency union gives us control of our monetary policy, which is de facto run by the Fed,” he said.

But GCC participants may proceed more cautiously in light of euro-zone developments, as they take a “wait and see” strategy to avoid the pitfalls that underpin the crisis in the European currency. For now, the unified GCC currency remains under consideration.

“We are watching as the euro goes through a crisis,” Bahrain’s Al- Khalifa said in a statement, quoted by Bloomberg. “What we need in the Gulf is a currency with sound fundamentals,” he added.

Skeptics of the common currency approach say that the “one-size-fits all monetary policy” is fraught with difficulties. Harvard economist Martin Feldstein, a staunch euro skeptic, argues against the European common currency, saying that different economic conditions within the member nations would make the single currency problematic and cause conflict within the euro zone.

Other skeptics, like Nobel-laureate economist Paul Krugman, argue that the single currency reduces flexibility of fiscal policy, something that can be dangerous in rough economic waters, when individualized monetary policy may be needed to address the unique conditions facing a country.

“When crisis strikes, governments need to be able to act. That’s what the architects of the euro forgot — and the rest of us need to remember,” Krugman wrote last month on in his popular New York Times column.

For now however, the architects behind the unified Gulf currency are biding their time, waiting for economic lessons to emerge from the beleaguered euro-zone.

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