Gulf Monetary Union to Launch Currency - What Does It Mean?

After years of threats, four of six countries in the Gulf Cooperation Council (GCC) finally agreed to a monetary union with a single currency and central bank.

Saudi Arabia, Kuwait, Bahrain, and Qatar opted in. The UAE and Oman opted out of the agreement.

So what does it mean?

For Ambrose Evans-Pritchard's opinion, please consider Gulf petro-powers to launch currency in latest threat to dollar hegemony.

�The Gulf monetary union pact has come into effect,� said Kuwait�s finance minister, Mustafa al-Shamali, speaking at a Gulf Co-operation Council (GCC) summit in Kuwait.

The move will give the hyper-rich club of oil exporters a petro-currency of their own, greatly increasing their influence in the global exchange and capital markets and potentially displacing the US dollar as the pricing currency for oil contracts.

The Gulf states remain divided over the wisdom of anchoring their economies to the US dollar. The Gulf currency � dubbed �Gulfo� � is likely to track a global exchange basket and may ultimately float as a regional reserve currency in its own right. �The US dollar has failed. We need to delink,� said Nahed Taher, chief executive of Bahrain�s Gulf One Investment Bank.

Khalid Bin Ahmad Al Kalifa, Bahrain�s foreign minister, told the FIKR Arab Thought summit in Kuwait that the project would not work unless the Gulf countries first break down basic barriers to trade and capital flows.

At the moment, trucks sit paralysed at border posts for days awaiting entry clearance. Labour mobility between states is almost zero.

Yet hurdles are formidable even for the tight-knit group of Gulf states. While the eurozone is a club of rough equals � with Germany, France, Italy, and Spain each holding two votes on the ECB council � the Gulf currency will be dominated by Saudi Arabia. The risk is that other countries will feel like satellites. Monetary policy will inevitably be set for Riyadh�s needs.

Hans Redeker, currency chief at BNP Paraibas, said the Gulf states may have romanticised Europe�s achievement and need to move with great care to avoid making the same errors.

�The Greek crisis has exposed the weak foundations on which the euro is built. The gap in competitiveness between core Europe and the periphery has grown wider and wider. The obvious mistake was to launch EMU without a central fiscal authority and political union, as the Bundesbank warned in the 1990s,� he said.

�The euro was created for political reasons after the fall of the Berlin Wall to lock Germany irrevocably into Europe. It was not done for economic reasons,� he said.

The GCC also agreed to create a joint military strike force � akin to the EU�s rapid reaction force � to tackle threats such as the incursion of Yemeni Shiite rebels into Saudi territory earlier this year.

This is a major breakthrough after years of deadlock on defence cooperation.

The Sunni Gulf states are deeply concerned about the great power ambitions of Shiite Iran and its quest for nuclear weapons, to the point where the theme of a possible war between Iran and a Saudi-led constellation of states has crept into the media debate.

The Gulfo Threat?

Inquiring minds are asking if the Gulfo is a threat to dollar hegemony. First off, let's see if and when the monetary union actually gets off the ground, and with what currency when it does.

For the sake of argument, let's assume it gets off the ground right away, with the Gulfo, and let's further assume that the UAE and Oman quickly decide to opt in.

Will that end US dollar hegemony?

Let's answer that question with a question: Did the Euro end US dollar hegemony?

Here's a hint: The answer is the same.

This will finally put an end to speculation this is some major threat to the dollar. It will also put an end (hopefully), to the ridiculous notion that the US attacked Iraq because Iraq was about to price oil in Euros.

It will not matter one iota if they price crude in Gulfos given that currencies are fungible. Rest assured, US dollar hegemony will end, but it will not be on account of the Gulfo.

Military Significance

In terms of US policy, the military significance of the union is likely greater than the economic significance.

For starters, the Gulf Pact union will make US bullying of individual countries in the region that much harder. Moreover, the US sure will not like it, if those countries all tell the US to remove its bases (something I actually hope happens given that US bases destabilize the region).

Remember, the primary reason cited by Bin Laden for attacking the US on 911 was US troops were on sacred Arab soil.

Finally, the defense cooperation agreement takes on significance given various sabre rattling between the US and Iran, and Israel and Iran.

Consider this statement by Sheikh Mohammad al-Sabah, Kuwait's foreign minister, as reported by Al Jazeera in Gulf nations sign monetary pact: "We do not accept any military action against Iran. Any tension in the region will reflect on our situation. We have many problems already and we don't want any more"

I wholeheartedly endorse that statement. We do not need another war in the region.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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