Given the crisis engulfing euro-zone nations, countries of the Gulf would be ill-advised to launch a similar single currency, a prominent US scholar has told the majlis of Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces. "I certainly wouldn't advise moving off the dollar by itself and could imagine a larger regional currency, which has been discussed, possibly pegged to a basket [of currencies] in that context," Kenneth Rogoff, a Harvard professor and former IMF chief economist, said in a lecture on Tuesday. The majlis, a traditional gathering to debate issues of the day, was held in Sheikh Mohammed's Bateen court in Abu Dhabi. It was attended by numerous sheikhs, ministers and government officials.
"Looking at Europe, I might not be in a rush to have a regional currency, having seen all the challenges," Prof Rogoff said. The UAE withdrew from the planned GCC currency union last year. Along with Oman's withdrawal two years earlier, the UAE's decision to opt out weakened the project and left Saudi Arabia, Kuwait, Qatar and Bahrain to see it through by themselves. All Gulf countries except Kuwait currently peg their currencies to the dollar. Kuwait removed its dollar peg three years ago, linking the dinar instead to a basket of global currencies.
Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, said this week the UAE had no plans to abandon its dollar peg and rejoin the effort to establish a currency union "until we see something solid and profitable". "We thought of the Gulf currency and we said - the UAE said - 'not yet', and I think they are right," Sheikh Mohammed told CNN. Prof Rogoff, a co-author of a history of financial crises called This Time Is Different: Eight Centuries of Financial Folly, said the current crisis had followed a normal trajectory and was almost over.
He called government budget cuts in Europe prudent and natural, a sharp contrast with recent calls for more spending to prevent a double-dip recession. Paul Krugman, a Nobel Prize-winning economist and author, this week warned that the world could be destined for depression if policymakers trimmed budgets too quickly. Leaders of the world's 20 largest economies pledged at meetings in Toronto last weekend to halve budget deficits by 2013. Many European jurisdictions, including the UK, Spain, Greece, Ireland and France, have already announced large cuts in government spending to reduce deficits.
"I believe in being conservative about it," Prof Rogoff said. "I don't think we're about to have a financial crisis. I don't think we're about to have a big meltdown, but I would want to be in the process of [reducing deficits to] at least have people see that someday it's going to stabilise." Digging out of crisis "may mean that countries have to raise taxes someday", he said. "You have to pay for it. You have to do something to account for the fact that you've been spending so much that your debt's so deep."
Despite Europe's belt-tightening, sovereign debt defaults were still likely in Greece and Portugal and possibly in countries in eastern Europe, Prof Rogoff said. As unsettling as it may be to see countries on the brink, he said, such distress had been routine in past crises. "Wherever you have a deep financial crisis, one of the things that does happen is you have sovereign debt crises," he said.