Review of monetary unions criteria and prospect of the GCC monetary union experience
Résumé
This paper shed light on the future of the GCC single currency project. It focuses especially on the most important economic properties characterizing the economies of the Gulf Cooperation Council (GCC), as well as, the important foreign economic shocks threatening the common destiny of the GCC countries. Among the six GCC countries, four have announced the establishment of a Gulf Monetary Council in 2010. Oman and United Arab Emirates withdraw from the negotiation process and may join later. We discuss the potential new single currency for the six GCC countries assuming that the monetary union will overcome the differences by the establishment of the new currency especially with shared geographic borders and demographic and cultural similarities as well as production structure resemblances between countries. Based on a thorough review of a large theoretical and empirical literature on the optimal monetary areas according to a set of economic criteria, we draw an analysis of the aspects of the GCC monetary union that should be enhanced over the medium and long run. This work highlights many controversies and inconsistencies about the set of criteria an optimum currency area should fill as well as a divergence on the economists’ assessment of the euro area as an important experience of a monetary union in the history. All these theoretical and empirical controversies indicate that there is “no one size that fits all” for the monetary unions. Hence, the differentiation between the monetary union project and any other exchange rate regime for the Gulf countries depends on their capacity to be insulated from the oil price volatility by the economic diversification and intensification of intra-trade linkages, and the avoidance of imported inflation under the adopted exchange rate policy.