Gulf Leaders Summit--Small Step toward Monetary Union

Yesterday we noted reasons to be skeptical of a single currency for several Latam currencies under Venezuela's leadership. We can be only slightly more optimistic about the near-term possibilities of a monetary union in the Gulf.

A Gulf leaders summit began today. Two political issues were on the opening agenda: support for Saudi Arabia over the Yemen rebels in a conflict that flared up since early November and encouraging Iran to comply with international rules, but urging the reliance on dialogue to resolve the problem.

Since earlier this decade, the Gulf Cooperation Council (Saudi Arabia, Kuwait, Oman, Bahrain, UAE and Qatar) have been discussing a monetary union. It would theoretically be modeled on EMU, with monetary union without political union. The only real step that appears to have been taken was to initiate a monetary council early next year, which would ostensibly would be the precursor to a common central bank.

There are several complications, however. First, Kuwait is the only country that broke ranks by pegging its currency to a basket of currencies rather than simply the dollar, like the other members. Second, Qatar pulled out in 2007. The UAE withdrew to protest the decision to locate the central bank in Saudi Arabia. Third, because the economies are so similar--hydrocarbon based--regional trade is minimal. This stands in stark contrast to Europe. Also in contrast to Europe, there is not much of a tradition of surrendering parts of sovereignty to some supra national institutions. GCC countries have only recently secured their independence and for the most part there has not been a transition from the founding families.

Whereas many observers are familiar with the Sunni-Shiite split, the recent events in Dubai and the negotiations over monetary union illustrate other elements of rivalry in the region. A monetary council may be useful step, but much work needs to be done and make monetary union a reality. It remains a long way off.