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Rich Pickings

Regional Head of Research at Standard Chartered Bank, Marios Maratheftis discusses the eurozone, Greece and a common currency for the GCC.

July 16, 2012 4:16 by

So how about the GCC forming a common currency?

I don’t think it’s going to happen anytime soon. There is no firm date in mind. There is no institution in place. It didn’t work for Europe; I think for the GCC there are some peculiarities. The benefits of the common currency in the GCC are smaller than the benefits of common currency in Europe. And the cost of a common cur­rency in the GCC is also smaller than the cost of the common currency in Europe. So you have smaller benefits and smaller costs, so you don’t sacrifice that much in the GCC by introducing a common cur­rency, and you don’t gain anything in eco­nomic terms by introducing it. And I will explain why. The true ideas of two posi­tives, of the common currency in Europe, is that it would reduced transaction cost and uncertainty within the eurozone, and as a result they would promote intra regional trade and indeed it has encouraged intra re­gional trade within the eurozone economy. So you are trading in the same currency, no risk, you know what the price is, it en­courages intra regional trade. Now in the GCC this will not happen, because we all export oil and gas, which is priced in dol­lars anyway. So we are not going to start exporting oil and gas to each other because we have common currency. It doesn’t make any sense. So there is no intra regional trade gains to be made from a common currency, intra regional trading which is just five percent of total trade is going to remain negligible. As long as exports are dominated by oil and gas and hydro car­bons, there’s no intra regional trade gains. The other gain of the common currency is this irreversibility. It’s been made credible, so it stopped the competitive devaluation of the Greeks and Italians, so far. We haven’t had any of these in the GCC. We haven’t had any competitive devaluations, and, again, it’s not because we are different and more special, it’s simply because we ex­port hydro carbons and the local currency has nothing to do with our exports. So no benefits on the economic front. What is the cost of a common currency. You sacrifice your independent monetary policy. But we don’t have independent monetary policy because we are pegged to the dollar any­way. So we don’t really sacrifice that much and we don’t gain that much. It’s just an added complication that I think the region is better off without right now and the in­stitutional capacity for a common currency is not present in the GCC. Let’s not forget the Europeans were building institutions for 40 years before they introduced the euro and it is still lacking significantly on what is desired. We simply haven’t had enough time to build super national regional institutions in the GCC, so it would be pre­mature to expect a common currency real­izing anytime soon.

But the common market?

Again the common market for what, [the] exports are oil and gas. I think there is a theme of greater regional cooperation. This thing is indeed there. I think regional cooperation in the GCC will keep rising, but what I am saying is that common cur­rency is neither necessary nor sufficient. So you can have greater regional coopera­tion regarding common currency.

Are you talking of creating a common block where politics are the same?

I think we are heading in that direction any­way. I think we are pretty close to that. We don’t need common currency for that.


-By Ranvir Nayar

*First published on TRENDS

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