Gulf Cooperation Council Countries - Essay Example

Introduction
If the currency is unified, there is not the ability to autonomously change the peg or exchange rates within each country, and this has proved to be a problem for the GCC countries. Specifically, Kuwait has pegged its currency to a basket, while Oman has indicated that it needs more time before it is ready to commit to the unified currency.
The problem is that the countries in the region do not have enough convergence to make a unified currency work.

The per capita incomes between the countries are wildly divergent, as are the debt levels. Plus, only two of the countries have met the threshold regarding inflation. When there are such different economic problems with each country, there is a need for an autonomous monetary policy that will allow each country the independence to use exchange rates to fix whatever is broken with their economies. Having a unified currency takes this autonomy away, taking a one-size-fits-all approach to every problem.

While the issue of the divergence in economies has been masked by the fact that all the countries in the union have the same economic basis, ie, oil, this is not going to last forever. Therefore the countries in the GCC have to align their member countries with similar economic policies that will be designed to bring the countries more in line with one another on the key economic factors that will make a unified currency work.

This is how the European Union has done it, in that they have a policy of not allowing countries that do not meet inflationary and deficit standards to join the union, knowing that these countries will bring down the value of the Euro for all other countries if they cannot get their financial house in order. Therefore, the countries that joined the European Union had to change their monetary policies to bring down their deficits and curb inflation if they wanted to be a part of the EU. The GCC will probably have to attempt a similar tact as this, however, since the GCC is still a long way from having enough convergence to have a unified currency, it will be a number of years before the GCC will be ready for this, even if the countries change their economic policy right now. Further, there are drawbacks and benefits to a unified currency, and this will be another section of the paper. Finally, there will be a conclusion and recommendations for the GCC.

What is a monetary unification?
Monetary unification is a common currency in a region. There are two conditions that economists believe are essential to having a common currency. Mundell (1961) believes that the perfect factor mobility within the region is essential for monetary unification, while McKinnon (1962) believes that the openness of the economy is the necessary condition for the adoption of a unified currency. If a region can achieve one or the other, preferably both, then that region would be considered to be an optimum currency area (OCA).