As Clare Dunkley explains in articles published in MEED last week and this, Mundell’s requirements include business cycle convergence, high levels of intra-regional trade, fiscal federalism and labour mobility.
The GCC satisfies many of the criteria. The six states probably have a higher level of economic compatibility than most euro nations. A customs union has been in place since the start of 2003. A top GCC official announced at the end of August that a GCC central bank could be established by mid-2006. This is, in business terms, little more than a heartbeat away, clearing the way for GCC currency union, as agreed by GCC heads of state almost three years ago, by 2010.
So is the GCC common currency now a shoo-in? Not if history teaches us anything. Take Europe. Napoleon Bonaparte tried to replace national currencies with the Ecu at the start of the 19th century as part of his dream of a united Europe dominated by France. The memory of this bold idea was the inspiration for Paris’ commitment to the euro, which some say is France’s greatest foreign policy triumph since 1814. The economic argument mattered, but was less important to public opinion than the political one.
So why did the Germans give up the mark, a legacy of the 20th century about which they were genuinely proud? The answer is obvious to anyone travelling from Berlin, once deep in the German Democratic Republic, via Bonn, the former capital of the federal republic, to Vienna, capital of Austria. Since German reunification, the entry of Austria into the EU and the launch of the euro, the effective unity of the German-speaking people of Europe is seamless. Politics again.
The second major example is equally compelling. Before 1861, the US did not have a national currency. Defeat of the south allowed the victorious north to impose the federal dollar at a rate that made imports expensive and exports, mainly of farm goods, cheap. Currency union devastated the southern economy for 70 years, promoted US industry and helped American food flood world markets. Driving US currency policy was a dream of continental and then global economic domination.
So the lesson is that without an overarching political motivation, currency union tends to be an idea enjoyed by economists such as Mundell but shunned by practical politicians. Which explains why Europhile UK Prime Minister Tony Blair has miserably failed even to put the euro question to the British electorate, fearful of loss of sovereignty, after more than seven years in power.
Is the political commitment in place in the GCC? The first test will be the formation of the central bank and the appointment of a governor. A Saudi with experience in the Saudi Arabian Monetary Agency should get the job and the new bank should be based in Riyadh. Logically, it should prioritise the interests of the Saudi economy, which accounts for more than half of GCC GDP.
Currency union will formalise the fact that the kingdom is Arabia’s superpower, giving Riyadh leverage over economic development in the rest of the GCC that it does not yet have. The kingdom, in turn, will have to accept that the interests of the smaller states must be taken into account when framing national economic policy. Students of Arabian history will recognise this represents a revolution in the politics of the peninsula.
I support closer GCC economic integration. A common currency is the logical culmination of this process. But the crucial factor is politics. The GCC is yet to throw up a seminal visionary like Thomas Jefferson in th