19 March 2017
Economic and political unions like the European Union and Gulf Cooperation Council are born of necessity. Our contemporary world has reached unprecedented levels of interconnection. Financial, industrial and trading systems develop like vines. They explore opportunities to increase their resources. These systems struggle against restrictions so they can compete. To stay competitive in a global context, neighbouring countries and cultural groups seek partnerships. The payoffs are strength in numbers, growth and expanding trade into new territories. As unions go, how does the GCC compare to the EU, and what can be learned from the EU's economic fails?
Economic unions are not new. The EU developed partly from European monarchies in the 1800's. Alliances built between European royal families were based on common economic interests and marriages. Things did not always go smoothly. European history is littered with broken alliances and agreements, many of which led to wars. The great wars of the early 20th Century finally led to a stronger union based on the need for peace. The European Union developed from the European Coal and Steel Community formed in 1950. The Treaty of Rome enlarged the union in 1957. By 2017, it had grown to 28 member states, with 19 of them in the Eurozone.
The GCC union was formed much later, in 1981. Like the coal and steel industry in Europe, the Gulf states are united by their lucrative oil industry. Unlike the EU, the GCC hasn't expanded beyond its original six member states. It doesn't have a common currency or official centralised monetary policy. Theoretically, a unified currency offers many benefits. Its improves bargaining power of a nation and increases trade with rest of the world. Within the nation itself it reduces the currency exchange risks connected with pegged currencies. A real-life example was seen in 2016 when the USD strengthened. Oil prices felt the inflationary pressure. USD-denominated exports from GCC countries felt a hit from the exchange-rate barrier. The hit might not have been as hard if the GCC had its own common currency. A common currency simplifies transactions, making foreign direct investments easier. Other investments in markets like equities and bonds are also streamlined. This is because financial markets are more integrated through a common currency.
But as the EU illustrates, there are pitfalls to a common currency. The value of a currency is based on economic performance. So, those nations sharing a common currency need to perform consistently and competitively. This doesn't always happen. When some economies stay in the slow lane, others overtake. A two-speed economic union has frustrated the EU's growth ambitions. The larger, more efficient economies were forced to take on debt to bail out the smaller economies. The spirit of unity is wearing thin judging by the anti-EU political movements. Eurozone countries share a common central bank, but the ECB was slower than the US to start quantitative easing. The sovereign debt crisis could only have been avoidable if the ECB had acted as quickly as the Federal Reserve in 2009. One can only call this a fail.
The GCC countries are beginning to see divergence in their economic performances due to lower global oil prices. Growth in Saudi Arabia is expected to be much slower in the short term, at least until diversification starts showing benefits in 2020. The United Arab Emirates and Qatar are expected to be the fastest-growing GCC countries over the next three years. Their economies are still heavily invested in the energy industry, but new sectors like natural gas have opened up. Until Saudi Arabia catches up, the GCC's highway to growth has two lanes, fast and slow.
Other than economic fails and pitfalls, political risks are a major threat to any union. Brexit is a perfect example of this. Britain's unforeseen exit from the European Union may even trigger the breakup of the United Kingdom as we know it today. Scotland wants to remain in the EU and is planning another independence referendum. The upheaval and uncertainty has crushed the Pound Sterling, which is much weaker against its rivals.
The GCC can learn from the EU's economic fails. Timing is everything. Any moves towards a common currency and centralised monetary policy need to be made at a time when global growth is stable. Contingency plans that can be implemented fast and efficiently need to be in place. If the GCC follows the EU model, it would be the second-largest monetary union in the world. But a bigger ship takes twice as long to turn as a smaller one, and an economic union is a very big ship. To avoid the Titanic's fate, it's important to learn to avoid the economic glaciers.
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