Abu Dhabi: A prominent economist has advised the UAE against de-pegging the dirham from the US dollar and moving to a basket of currencies instead.
"I certainly wouldn't advise moving off the dollar," said Professor Kenneth Rogoff, Professor of Public Policy and Economics at the Harvard University, after a lecture on Tuesday at the Majlis of General Shaikh Mohammad Bin Zayed Al Nahyan, Abu Dhabi Crown Prince and Deputy Supreme Commander of the UAE Armed Forces.
Referring to the proposed common currency of the Gulf Cooperation Council countries (UAE and Oman have opted out of it), Rogoff said: "Looking at Europe, they are not in a rush to have a common currency."
Shaikh Mohammad and other high-level dignitaries attended the Rogoff lecture titled "History of Financial Folly" as well as the post-lecture questions and answers.
The lecture covered the varieties of financial crises, covering 66 countries on five continents. Rogoff also touched upon government defaults, banking panics and inflationary spikes as well as financial combustions in emerging and established market nations.
Rogoff said the worst of the global financial crisis is over and the world currently is going through a healing process.
Legacy
"I don't think we are going to have a big meltdown. [However], a key legacy of a severe financial crisis is a huge build-up of government debt and I hope someday it's going to stabilise," he said, cautioning against a debt explosion.
Rogoff said the probability of a sovereign debt default by peripheral Eurozone countries like Greece and Portugal and some Eastern European countries remains high. However, the US and Germany are unlikely to default. "But I am not projecting that something like this is not going to happen. "There are many things in the world to be nervous about. We find that after a wave of international banking crises there's a wave of sovereign debt crises," said Rogoff.
He said the euro, which was created as an alternative currency to the US dollar, stands challenged due to many uncertainties in member countries.
The currency could sink further and achieve parity with the dollar or go lower still, depending on what actions the member countries take to salvage their currency, he said.
However, Rogoff said he doesn't think Germany is going to withdraw from the euro. "As long as Germany is in the game, other countries will stay," he said, adding that fiscal discipline by Greece and Portugal will set the momentum for other highly debt-exposed countries such as Spain, Ireland and Italy, to set their own houses in order.
He said the dollar is appeciating against other currencies because other countries are doing worse. However, five to 10 years from now the US will face problems due to its mounting debt.
"High inflation is a risk. There's a likelihood of the US raising taxes and having a slower rate of growth," Rogoff said.
