January 25, 2010Why GCC must use one coin?
‘Learn from EU flaws’
GCC countries have greater economic homogeneity than European Union (EU) and must seriously consider monetary union, says David Marsh, Chairman of London and Oxford Capital Markets.
The chairman was talking on the topic “The Araby: prospects for a hydrocarbon resource based currency” Sunday, analyzing the unification of the currencies in the Gulf countries.
He made comparisons between the economic disparities that exist between the EU countries and the Gulf countries. Saudi Arabia, he said, accounts for 43 percent of the total GDP of the GCC states, and has an economy twenty times the size of Bahrain’s.
The monetary expert then underlined the wide chasm of economic disparity in the EU by drawing a comparison between Germany, EU’s biggest economic power, and Malta, which is the smallest economy in the union. “Germany makes up 26 percent of the GDP of the 16 member states sharing Euro, and is 400 times the weight of Malta. Germany is 25 times the weight of the bottom four countries in the EU.”
“Yet, every Thursday, Malta’s Central Bank Governor goes to Frankfurt and meets his German counterpart. Malta has the same vote, when it comes to deciding EU’s economic policies, as Germany.”
Marsh began his lecture citing the reasons as to why GCC countries should go for a single currency. “The countries have high concentration of hydrocarbon reserves, large stocks of assets husbanded in the region, accounting for a fifth of the total reserves of the world values at $10 trillion.”
With most of the Gulf currencies still pegged to the dollar, the monetary expert added, “A monetary union will bring about a pegging against a basket of currencies, which will make the currency stronger.”
Among the key issues Marsh identified related to the unification of Gulf currencies were naming of the currency and deciding where the central bank would be.
He gave a quick rundown of how some currency names evolved and how currencies have shown a strong tendency to stick to their old names. He traced the etymology of Dinars and Dirhams to the Byzantine coins that date back more than two millennia called Diniarius.
Some of the probable names that have been thought of for the common Gulf currency, he noted, are Darrad, which is a sort of acronym of all the existing Gulf currencies.
“Khaleeji, Karram, which means generosity, GQ, which has a technocratic ring and Gulfo, like Euro, are some of the other names.”
Talking about the history of currencies, Marsh said that Greece has the longest currency tradition in the world, going all the way back to sixth century BC. He also breezed through some references in the Bible with monetary connotations.
“Islamic coinage began from the 7th century AD, with Islamic empire extending from Spain to Central Asia. The Arabs had two monetary systems in the Islamic empire, Byzantine metal in the West and Silver in Sassinad Iran.
“Caliph Abdal Malik adopted the Byzantine coinage, Dinarius, shorn off its Christian symbols.”
Returning to the current issues, Marsh said that Gulf countries have greater economic cooperation between them, with high concentration of trade with the West and Japan. “The states have started showing a keen interest in setting up the necessary infrastructure to create a Gulf monetary union. The technocrats and politicians have started giving it a serious thought.
“Some technical issues such as inflationary rates across the region have to be addressed. The treaty on GCC Monetary Union has been ratified by the states.”
Focusing on the role of gold, Marsh said that Euro is backed by gold with fiscal reserves of 9,400 tons of gold. “In comparison, Kuwait and Saudi Arabia have seven times as much foreign exchange as gold reserves.
Omani Central Bank has 11,400 times more foreign exchange than gold.” Marsh also highlighted the defects of a common currency “if you don’t set your home in order. European Union has hidden a lot of instability within. Competitiveness has fallen by 30 to 40 percent after currency unification.
“Governments in Europe didn’t understand what they were writing while deciding the monetary policies. Because European central banks are cutting interest rates due to the crisis there is not much problem. However, the worst is yet to come when the crisis eases and interest rates go up.
“There is a need for more fiscal solidarity in the European markets.” Marsh closed his lecture on the note that GCC countries must learn lessons from EU and adopt the positive ones and take the right measures to ensure a robust monetary union.
“There is enough economic well being here, and cultural and historical correspondence to forge a strong monetary union. A monetary union is a political and technocratic construct.”
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