Single GCC currency

Available at: http://arabnews.com/opinion/editorial/article226032.ece

Think of a time when the US dollar is no longer the world’s reserve currency

Europeans will remember 2010 as the first real test of their 12-year-old single European currency, a test which many in the markets believe is likely to continue relentlessly well into the new year.

There are implications well beyond the euro zone, and not just for the international currency markets. How the euro manages to survive and the extent to which the European Central Bank and EU finance ministers are jointly prepared to enforce relatively simple fiscal discipline upon all member states, will very probably define how the project for a single GCC currency will advance.

2010, of course, was supposed to be the year that a single GCC currency would finally emerge after some 30 years of discussion. Now the project has been put back again, this time to 2015 and there are those who believe that even five years’ hence will still be too early.

This is not of itself actually a bad thing. There are lessons to be learned not just from the creation of the euro but how this so far unique experiment will weather the economic and financial storms in which it is currently sailing. Among the weaknesses exposed in the creation of the euro was its revolutionary rather than evolutionary nature. That a single EU currency was the logical outcome for the world’s wealthiest internal market of 501 million people with a customs union and free movement of capital and workers, was never in doubt. But it was always going to be a question of timing.

It remains a strong argument that the creation of the euro was premature and was driven more by political European federalist rather than purely economic considerations. The biggest bit of politicking was the immediate fudging on the fundamental rules on government debt to productivity ratios and fiscal imbalances. Founder-member Belgium, for instance, was well outside the debt ratio limit but was admitted because its figures were improving. The later joining of Greece should never have been permitted but by then the tough core rules had been diluted.

Given that the value of paper money no longer backed by gold stands or falls by the confidence people have in it, it was inevitable that the euro, despite having survived market cynicism at its introduction, would come under pressure at some point. That point indeed is now.

The lessons here for a GCC currency are clear. When such a single such currency does become a reality, its existence should first and foremost be inevitable in a purely economic sense, rather than a political wish. It should reflect a level of economic and financial integration among Gulf states that already exists, not some ambition that has yet to be fulfilled. For the moment, the troubles that have affected the euro will almost certainly leave many in the GCC unenthusiastic about replacing the existing six currencies with a single one.

That said, there is a sense in which, to a certain extent, the GCC already has a single currency. Most GCC currencies are already pegged to the US dollar, which means that they experienced unified movements in value. Ten Saudi riyals equals one Bahraini dinar equals 10 Qatari riyals equals ten UAE dirhams — more or less. It has been like that for years. For sure it can be argued that the US Fed thus enjoys undue influence over GCC finances. However, given that the GCC’s main exports, hydrocarbons, are priced in dollars, this is no bad thing. Were any currency to de-peg from the dollar, they would soar in value overnight and income (arriving in dollars) would plummet. So, in the meantime, our finance ministries should be learning some valuable lessons for the time when the US dollar is no longer the world’s reserve currency and the GCC possesses its own notes.

Regards
ZULKIFLI HASAN

With Professor Masudul Alam Choudhury and Professor Kabir Hasan