Greece’s fiscal problems are coming back as Germany refused to be the first line of support for this southern European country. Germany contends that Greece has been too profligate and should tap the IMF’s resources first. What happened in Greece has emerged in Portugal which just suffered a down grade in its sovereign debt.
Greece’s fiscal problems have been compounded by its membership in the European Union (EU). The membership agreement forces one currency on all the members, and thus no country can devalue its currency relative to the euro. Greece could have devalued its currency if it has one of its own to help solve its problem. There have been restrictions on member-to-member borrowing. Greece cannot also leave the EU because that will create many problems for many years to come.
Having said all that, Greece’s and Portugal’s problems reveal a fiscal defect in the EU’s fiscal fabric. The EU members do not shoulder a common fiscal responsibility to each individual member. Dubai’s problems draw parallels for the GCC member countries. The GCC countries should draw lessons from Greece’s and Dubai’s problems before they form their union. In order not to encode the EU’s fiscal defect into the GCC’s proposed union, I suggest that the GCC countries consider the following proposal along with creating their joint central bank.
I suggest that the GCC countries establish the GCC Fiscal Stabilization Fund (GCCFSF) to be the right arm of the common fiscal authority that should stand side by side the common central bank to deal with the proposed union’s economic problems when they arise. While the details of the bylaws of the proposed GCCFSF can be hammered out over extended meetings and conferences, here are some guidelines for this proposed institution:
1. The GCCFSF may have a principal capital that is equal to about $100 billion which can be completed over five years.
2. Each member country may contribute to the principal capital an amount that is equivalent to its share in the GCC GDP. In this case, Saudi Arabia would contribute more than 40% of the total principal.
3. In case of emergency, Individual GCC member states can borrow from the Fund at reasonable rates no more than 20% of the principal for each member. It this amount is not sufficient the borrowing GCC country should tap the global market for additional credit.
4. The money borrowed from the Fund and the accrued interest should be returned to the Fund over a determined scheduled period.
5. The Fund should not invest more than 20% of its money in the GCC capital markets to avoid asset downgrading and risk-doubling at time of financial troubles.
6. Repeated offenders must borrow from the international capital markets.
7. I may have left important details that are obvious to insiders in that region. For example, UAE has seven emirates and there sould be some details on how those small emirates will be represented in the Fund. I leave such details to the insiders.
The GCC countries can afford to establish such a fund. There are only six of them relative to 16 or 27 in the EU. They are major oil exporters and have surpluses in their budget when oil prices sour. But they may encounter deficits if oil prices plummet. A common stabilization fund is needed.
The common fiscal authority can also set a common fiscal policy that acts as preventive measures to help the GCC governments avoid falling in the trap of resorting to the Fund for help. The preventive measures may be a set of fiscal criteria that the GCC governments should adhere to. These include the ratio of government budget deficit to GDP, the ratio of government debt to GDP, size of public sector relative to GDP etc.
If the GCC governments agree to share fiscal responsibilities, they will create a more stable and enduring Union than the EU. They will be emulated elsewhere.
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