A single currency for the Gulf countries has long been recognized as a logical development to boost economic development and interstate trade. Since it was agreed upon in 2008, dates for its introduction have come and gone. However, as the problems of the European Monetary Union have demonstrated so clearly, it is absolutely essential that a single currency be built upon solid and entirely workable terms. The euro’s troubles stem in large part from the fact that it was driven by political considerations, by enthusiasts for greater and faster political integration.
The legal framework of the euro lacked some key economic and financial realities. Two of the most crucial were the incredible failure to appreciate the dangers inherent in the cost of money being the same across 23 countries with starkly different levels of economic performance. Just as risky was the refusal of the architects of the single currency agreement to contemplate and provide for the exit of a country from the eurozone. The irony is that Europe already had a notional single currency in the form of the ECU, a basket of currency values, which was used by businesses and financial institutions for internal trade. The important thing about the ECU was that it had evolved in response to a clear need. However, the proponents of the euro made little secret of their belief that their plans were a revolution. Revolutions have a habit of eating their children, whereas much that has evolved out of necessity stands the test of time.
It is economic considerations that are driving the evolution of a single currency for the Gulf states. The economic power and international influence of our region will be enhanced significantly by monetary union. That influence will be the greater because the currency will have been built on sound economic and financial principles.
The decision on Sunday of Gulf Monetary Council members Bahrain, Kuwait, Qatar and Saudi Arabia to choose Riyadh as the location for their headquarters is entirely sensible and almost certainly means that the single currency’s central bank will also operate from the Kingdom. Since Saudi Arabia has not only the largest economy among Gulf Cooperation Council members, but is also the strongest economy in the Arab world, locating the central bank in Riyadh is entirely logical. The officials of the new central bank, who will of course be drawn from all member countries, will have a central location with outstanding communications and easy transport links.
It could be argued that in the “virtual” world of finance, the unified Gulf currency could also have had a “virtual” central bank. To an extent there is a point here, in that the trading in the new currency and its use by banks and financial institutions for lending and borrowing will largely be beyond the walls of the physical building. Indeed even money market operations to intervene to control the value of the currency may not necessarily come from a central point. Nevertheless, central banks are a special breed of financial institution which still rely on the prestige of a physical entity and the powerful presence of governors and their support teams at important international events such as the twice yearly gatherings of the International Monetary Fund and the World Bank.
Sunday’s meeting slated the new currency’s introduction for 2015. The date, however, is less important than ensuring that when it happens, it has been built robustly and that all the lessons from the eurozone’s troubles have been taken on board.