The sovereign debt problem is now affecting many countries in the euro-zone. Those affected are the PIIGS countries which include Portugal, Ireland, Italy, Greece and Spain. Spain is an interesting case. It has 39 million people, compared to 10.7 million for Greece, and is the fifth largest economy in Europe. It was doing very well until the end of 2007 when it had a budget surplus and one of the lowest government debt/GDP ratios among the European countries. Now it has one of the worst sovereign debt problems as a result of government borrowings after the collapse of its housing bubbles that were fueled by gigantic foreign capital inflows and the immigration of about 5 million workers from Latin America during a period of ten years.
One of the ramifications of the European fiscal problem is its impact on their unified currency, the euro. This currency has been declining against the dollar and is now expected to reach $1.25 after reaching $1.69 in April 2009. But is there a lesson we can learn from the euro zone sovereign debt problems and take it into account in forming the monetary union among the GCC countries? We all know that the 16 members of the European monetary union have a common bank (the ECB) and a joint monetary policy .The ECB manages the common interest rate for all its members and has has no part in fiscal polict. No country has the privilege to devaluate its own currency (which does not exist) to address its fiscal and trade imbalances. But the European counties do not have a common fiscal policy that can help bail out members. Germany and France said they will not help Greece or the other PIIGS members. Any member of the eurozone does not also receive help in managing its debt problem from a common fiscal authority because such authority does not exist. This is not the case in the United States where member states can receive help from the federal government. The United States is a political, monetary and fiscal union but the European Union is a monetray union only.
The GCC members are overwhelmed by establishing a common central bank and finding a location for this monetary authority. They are so occupied with issuing a common currency but paying no attention to common fiscal affairs. GCC countries can have sizable budget deficits like the PIIG countries and their government debt/GD ratio can also exceed 100%. The size of their debts can inundate their GDPs as well. Saudi Arabia suffered from this problem in the 1990s. We just witnessed the debt problem that almost took the Economic Miracle under water. If it has not been for the bailout from Abu Dhabi, Dubai would seriously have been challenged which could have had contagious consequences that go beyond Dubai. This UAE lesson and the lesson from the European sovereign debt problems should be taken seriously in advancing the monetary union among the GCC members. The dynamo effect can start in the European union or in the proposed GCC union. It can even start with a small country like Greece which has 2.9 percent of the eurozone economy and much smaller than Spain, or with Dubai which is also very small within the GCC economy and then spreads out.
There should be a common fiscal responsibility or common fiscal policy for the GCC monetary union. In other words, the proposed GCC union should be more of an economic union than a monetary union. This is not impossible to do for only six countries that can have very huge fiscal surpluses and deficit at times. This task is easier to do in GCC union than in the EU because the former is a political union in the first place while the later is not. Moreover, the EU has 27 members, which is too big to handle. The GCC has also the advantage of labor mobility which makes wages flexible, while the EU does not. Excluding working in Dubai and other GCC countries, Europeans do not like labor mobility. The United States' union has all those as advantages.
This common fiscal policy can have its own pan GCC tools. It could impose a GCC tax rate, in addition to the national tax rates. The GCC tax proceeds can be used to bail out GCC member states in case of fiscal emergencies. The GCC governments can also encourage the development of an active capital market that buys and sells common GCC securities as another stabilization source. If such a task is impossible to do, then these countries should have a loose monetary union as Saudi Arabia proposes so that members can at certain times follow their own monetary policy. You must be very serious to have a successful monetary union that lasts.
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Community Comments (1)
To further the discussion on the GCC common currency we believe that the common currency is not neccesity at this point of time. Lets talk of the inflation that is the main objective of the GCC monetary union as the monetary policy for GCC is dictated by federal reserve rather than the central bank governors of the respective countries of GCC. As we know GCC has faced inflationary pressures when the dollar has been too weak and deflationary pressures when the dollar has been too strong. It is the dollar peg that has come under the pressure in GCC as the region needed tighter monetary policy to curb the asset price inflation. Also the advantage of common currency between the monetary union is not there as all the currencies of the GCC members are already pegged to US dollar. Does monetary policy makes sense for the GCC members?
To further the discussion on the GCC common currency we...
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