[OPE] Gulf Monetary Union: petro-powers to launch currency in latest threat to dollar hegemony

From: Gerald Levy <jerry_levy@verizon.net>
Date: Tue Jan 05 2010 - 06:07:15 EST

Home Finance EconomicsGulf petro-powers to launch currency in latest threat
to dollar hegemony
The Arab states of the Gulf region have agreed to launch a single currency
modelled on the euro, hoping to blaze a trail towards a pan-Arab monetary
union swelling to the ancient borders of the Ummayad Caliphate.

By Ambrose Evans-Pritchard
Published: 7:12PM GMT 15 Dec 2009
Comments 118 | Comment on this article
Link to this video “The Gulf monetary union pact has come into effect,” said
Kuwait’s finance minister, Mustafa al-Shamali, speaking at a Gulf
Co-operation Council (GCC) summit in Kuwait.
The move will give the hyper-rich club of oil exporters a petro-currency of
their own, greatly increasing their influence in the global exchange and
capital markets and potentially displacing the US dollar as the pricing
currency for oil contracts. Between them they amount to regional superpower
with a GDP of $1.2 trillion (£739bn), some 40pc of the world’s proven oil
reserves, and financial clout equal to that of China.

The Emirates are staying out for now – irked that the bank will be located
in Riyadh at the insistence of Saudi King Abdullah rather than in Abu Dhabi.
They are expected join later, along with Oman.
The Gulf states remain divided over the wisdom of anchoring their economies
to the US dollar. The Gulf currency – dubbed “Gulfo” – is likely to track a
global exchange basket and may ultimately float as a regional reserve
currency in its own right. “The US dollar has failed. We need to delink,”
said Nahed Taher, chief executive of Bahrain’s Gulf One Investment Bank.
The project is inspired by Europe’s monetary union, seen as a huge success
in the Arab world. But there are concerns that the region is trying to run
before it can walk.
Europe took 40 years to reach the point where it felt ready to launch a
currency. It began with the creation of the Iron & Steel Community in the
1950s, moving by steps towards a single market enforced by powerful
Commission and European Court. The EMU timetable was fixed at the Masstricht
in 1991 but it took another 11 for euro notes and coins to reach the
Khalid Bin Ahmad Al Kalifa, Bahrain’s foreign minister, told the FIKR Arab
Thought summit in Kuwait that the project would not work unless the Gulf
countries first break down basic barriers to trade and capital flows.
At the moment, trucks sit paralysed at border posts for days awaiting entry
clearance. Labour mobility between states is almost zero.
“The single currency should come last. We need to coordinate our economic
policies and build up common infrastructure as a first step,” he said.
Mohammed El-Enein, chair of the energy and industry committee in Egypt’s
parliament, said Europe’s example could help the Arab world achieve its
half-century dream of a unified currency, but the task requires discipline.
“We need exactly the same institutions as the EU has created. We need a
commission, a court, and a bank,” he said.
The last currency to trade in souks from Marakesh, to Baghdad and Mecca, was
the Ottomon Piaster, known as the “kurush”. It suffered chronic inflation as
the silver coinage was debased.
There is a logic to an Arab currency. The region speaks one language, has
the unifying creed of “Umma Wahida” or One Nation from the Koran, and has
not torn itself apart in savage wars – ever – in quite the way that Europe
has in living memory.
Yet hurdles are formidable even for the tight-knit group of Gulf states.
While the eurozone is a club of rough equals – with Germany, France, Italy,
and Spain each holding two votes on the ECB council – the Gulf currency will
be dominated by Saudi Arabia. The risk is that other countries will feel
like satellites. Monetary policy will inevitably be set for Riyadh’s needs.
Hans Redeker, currency chief at BNP Paraibas, said the Gulf states may have
romanticised Europe’s achievement and need to move with great care to avoid
making the same errors.
“The Greek crisis has exposed the weak foundations on which the euro is
built. The gap in competitiveness between core Europe and the periphery has
grown wider and wider. The obvious mistake was to launch EMU without a
central fiscal authority and political union, as the Bundesbank warned in
the 1990s,” he said.
“The euro was created for political reasons after the fall of the Berlin
Wall to lock Germany irrevocably into Europe. It was not done for economic
reasons,” he said.
Ben Simpfendorfer, Asia economist for RBS and an expert on the Middle East,
told the FIKR conference that the rise of China had paradoxically disrupted
the case for pan-Arab economic integration.
There was a natural fit ten years ago between rich oil state and low-wage
manufacturers in Egypt and Syria, but cheap exports from China have forced
poorer Arab states to retreat behind barriers to shelter their industries.
“The rationale for a single currency has become weaker,” he said.
The GCC also agreed to create a joint military strike force – akin to the EU’s
rapid reaction force – to tackle threats such as the incursion of Yemeni
Shiite rebels into Saudi territory earlier this year.
This is a major breakthrough after years of deadlock on defence cooperation.
The Sunni Gulf states are deeply concerned about the great power ambitions
of Shiite Iran and its quest for nuclear weapons, to the point where the
theme of a possible war between Iran and a Saudi-led constellation of states
has crept into the media debate.
They nevertheless repeated on Tuesday that “any military action against
 Iran” by Western powers would be unacceptable.

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