Single currency for right reasons

One of the most misunderstood and complicated economic issues is that of single currencies. The economics involved are mind boggling and the implementation and management are just as important as the idea itself.

The finances of the countries involved need to be brought into relative order with each other, before any such move can be made. After all the members need to practice monetary discipline to keep the currency stable by not acting independently of each other should they feel the need to do so. This raises question: Is it worth it then? The answer is yes it is, but not for the reasons people are suggesting.

The introduction of the euro is seen as an economic success by some and a disaster by others. The people who were for it are now able to point to the current exchange rate of about $1.37 (Dh5.02) for every euro and how more seriously the euro is becoming the new reserve currency after its initial dive. The Europeans have shown enough commitment to the euro especially in the current economic crisis to prove to markets that they will be faithful to their currency. In the G20 meeting last month President Barack Obama was practically asking them to abandon their rules and safeguards and use "quantitative easing" the way the US and the UK have done.

However, the euro's critics are pointing to the current economic situation because member countries like Greece have been unable to lower the value of the currency and make their exports more attractive. Or introduce large enough stimulus packages to reinvigorate their economies. But as long as the US continues to spend its way out of its problems, the euro will continue to strengthen making exports less attractive.

Therefore, the advantages and disadvantages are far less clear than either camp portrays and financial markets are so linked no country can run a wholly independent monetary policy. The euro then was more of an evolutionary step for the region rather than the introduction of something new. An honest assessment would say that the advantages and disadvantages may cancel out each other.

Little notice has been given to the role currencies are playing now in the financial crisis. Most of the coverage has been on topics people are more likely to understand like how large a rescue package a government will introduce. But there is no doubt that currencies are the next big battlefield. In the coming years much more attention will be given to them and whether they truly are a genuine store of value. The dollar has effectively been abandoned by the US government and the markets in the past months have done all they could to reduce their exposure to it. The euro member countries now have to consider quantitative easing not because they believe in it but to try and reduce the value of their currency relative to others.

Is it worth then to have a single currency for the GCC countries? The reason why the answer is overwhelmingly "yes" is because it could pave the way for much greater unity in the whole region.

Should the currency be a success, other countries will want to join it and as a group have far greater negotiating power.

The Gulf countries can try to have a smaller and simpler agenda than the Europeans and this could help them have a far more useful single currency. European countries had an agenda when creating the euro and it had more to do with economic weakness than with creating a stable currency and was pregnant with political ambitions at the same time.

Instead of making their companies innovate, the euro was used as an excuse to raise prices thereby increasing company profits. The much-trumpeted lower prices because of the transparency a single currency would create never materialised. Instead it did bring political unity closer.

The Gulf Central Bank is highly unlikely to have the same political and economic objective as the EU had when creating the euro. If it sticks to the main idea behind a single currency which is to foster greater economic cooperation then it could achieve far more. The Gulf countries can then concentrate on strengthening their economies, increase trade and become more attractive to foreign investors by demonstrating financial stability.

- Mohammad Fathi is an economist and independent consultant based in Vienna.