GCC monetary union in tatters, UAE out

The Gulf Cooperation Council’s plan for a single currency fell into complete disarray today as the UAE signaled that it was pulling out of the project after being recently turned down as a site for the new central bank.

A statement from the UAE authorities wished the project well but said that the emirates will not be taking part, and will instead keep its dollar peg.

GCC disunity

Oman has already flagged its intension not to take part, while Kuwait has gone ahead and created its own currency basket, away from the dollar peg. In view of this considerable disunity it looks unlikely the remaining GCC states will go ahead with a single currency, still officially scheduled for 2010.

It is not clear why the UAE authorities have chosen to go it alone. There were ‘reservations’ expressed over the choice of Riyadh over Abu Dhabi as a location for the GCC Central Bank.

But this may also reflect a retreat into conservatism on the part of the UAE as a reaction to the still very much alive global financial crisis. Any further disruption to local financial markets might not be seen as worth the risk in the current economic climate.

The UAE could also have other motives for wanting to keep its US dollar clone, the dirham. The US dollar has strengthened recently making the emirates expensive for tourists from key European markets. But there is a school of thought that suggests the dollar is about to weaken which would restore global competitiveness.

It also has to be said that at the political and economic level it was never entirely clear how the single currency would function. Would one country dominate its operation, or would there be a more level playing field?

Dollar-pegs

There is also not a great deal of inter-GCC trade so the argument for a single currency is somewhat weaker than in Europe where markets are much more integrated. Besides with the dollar-pegs the region already has an effective single currency.

The argument that this leaves the Gulf open to an exaggerated boom-to-slump cycle from inappropriate US monetary policy has clearly not been persuasive enough to justify the loss of local sovereignty involved, and the decision having been made that is probably an end to the single currency project.