x Abu Dhabi, UAE Thursday 20 July 2017

Europe shows GCC pitfalls on currency

As the euro zone lurches from one crisis to the next, officials promoting a bold plan to create a similar monetary union in the Gulf have learnt some harsh lessons.

Gulf officials planning a common currency have yet to schedule a new timetable after the original deadline passed. Rich-Joseph Facun / The National
Gulf officials planning a common currency have yet to schedule a new timetable after the original deadline passed. Rich-Joseph Facun / The National

When GCC policymakers return from their summer holidays in Europe this month, they will have reflected with worry on the deepening turmoil gripping the continent.

For the failings exposed in the euro project provide a cautionary tale for officials in the region planning a similar monetary union for the GCC.

These plans have been inspired by the framework used to establish the EU and its currency. The European Central Bank has even provided technical support as part of the preparatory work for this region's project.

But the foundations of the European model now look shaky. It seems prudent for GCC officials to slow their plans while they learn the lessons from Europe.

The four GCC governments involved in the project - Saudi Arabia, Qatar, Kuwait and Bahrain - may now "tighten the rules" in light of the euro-zone crisis, rather than scrap the project altogether, said Dr Abdel Aluwaisheg, the GCC director general of international economic relations.

Officials have yet to schedule a new timetable for the introduction of the currency after this year's original deadline passed.

Dr Aluwaisheg was the first to lead a GCC delegation to Europe in 2002 to discuss how the region could put in place a timetable for action. Advice included how to adopt convergence and fiscal criteria, capping everything from a member nation's level of inflation to debt.

"As we found out from the Greek crisis, the monitoring and complexion of the criteria was not as iron-clad as we thought," he says.

"The first lesson to be learnt is that you have to make sure your data is comparable and everyone uses the same method and variables. The second lesson is to make sure the data is correct."

Several euro-zone nations fell into debt problems because the fiscal rules were not sufficiently robust. Greece, Portugal, Ireland, Italy and Spain racked up huge debts to finance budget deficits. Such a strategy proved unsustainable when the global financial crisis significantly raised the cost of plugging deficits. As a result, Greece, Portugal and Ireland required costly bailouts and markets remain worried about the fiscal health of Italy and Spain.

Fortunately, the economies of the Gulf are starting from a firmer footing, and no GCC state has ever defaulted on its sovereign debt. Stronger oil prices this year have helped to bolster the fiscal accounts of GCC governments.

But recent events have shown GCC states are susceptible to altering their budget plans. Unrest linked to the Arab Spring forced Saudi Arabia and Bahrain to breach their spending targets for this year. Saudi Arabia unveiled new expenditure increases of US$129 billion (Dh473.8bn).

Bahrain has added $860 million spending to cover an increase in salaries and pensions, widening its deficit to $3.1bn. The deficit is above the 3 per cent of GDP limit set by the Gulf monetary union project.

Another weakness of the euro-zone project to be starkly exposed by the debt saga is the absence of a common eurobond backed by all euro governments.

Although the 17 members of the euro zone share a common currency, they do not share a treasury. As a result, individual governments have been responsible for raising their own finance in international capital markets.

But recent bailouts of some troubled nations have created uncertainty among investors about whether individual bonds are backstopped by the entire euro zone.

Giulio Tremonti, the Italian economy minister, said last week the debt crisis would have been avoided if the euro zone had issued eurobonds to borrow collectively. The prospect of a eurobond has been firmly resisted by Germany and France, however, because it would raise their financing costs substantially.

GCC governments are at an earlier stage of building a debt capital market in the region. But the euro-zone crisis shows the limitation of launching a monetary union project without the ability to sell joint bonds, says Brad Bourland, the chief economist of Jadwa Investment in Saudi Arabia.

"There's certainly some lessons to be learnt for the GCC," he says. "I would think the GCC project will slow down while they think through how they can avoid the euro-zone situation happening here."

tarnold@thenational.ae