Preparations for monetary union

What can the GCC learn from the European experience of monetary union? Russell Krueger of the International Monetary Fund and Erwin Nierop from the European Central Bank offer an expert view.

This article summarises a joint presentation that the authors delivered at the GCC Currency Reform Conference held in June in Dubai.

At the time of the elaboration of this article, reports emerged in the media that the Governors of the GCC central banks and the Ministers of Finance of the GCC Member States had agreed on two draft legal instruments: a Monetary Union Agreement (MUA) and a Statute for a Gulf Monetary Council (GMC).

It was also reported that these drafts would be submitted to the GCC Heads of State for their approval during their yearly official summit, to be held in November 2008 in Muscat, Oman.

The legal instruments would then subsequently have to be ratified by the GCC Member States after completion of their respective national procedures in this respect.

The adoption of the MUA and the establishment of the GMC represent very positive developments for a number of reasons. Firstly, in addition to intentions already expressed by the GCC in the past, the adoption of the MUA will provide for a clear commitment at a political level with regard to the establishment of a monetary union.

Secondly, the MUA will no doubt elaborate the institutional framework for monetary union, so that all relevant parties (Member States, market participants, the public at large) may make themselves acquainted with the framework in which their monetary union and they themselves are supposed to operate.

Thirdly, the establishment of the GMC is expected to give a huge impetus to the technical preparations for monetary union.

Comparing the above developments with the European experience, the MUA of the European Union (EU) was the so-called Treaty of Maastricht, which was later merged into the Treaty on European Union.

The Treaty of Maastricht did not only detail the arrangements for Economic and Monetary Union (EMU), but it also contained a number of Protocols, which were an integral part of the Treaty, amongst which a Statute of the European Monetary Institute (EMI) and a Statute of the European Central Bank (ECB) and the European System of Central Banks (ESCB).

The EMI was the precursor of the ECB, mandated amongst other things to prepare for the EU's monetary union and, as such, the EMI could be compared with an architect firm designing the plans for monetary union.

However, established in 1994 and with a target date for the introduction of the EU's single currency, the euro, of January 1999 (at least for the scriptural euro, the physical banknotes and coins followed three years later in January 2002), the EMI acted partly also as a building company, erecting the technical infrastructure necessary to operate the monetary union.

Whilst the GCC's MUA and the Statute of the GMC are two important legal instruments, on the basis of the European experience and as also recognised in the communications emerging from the above Governors and Ministers meeting, there are at least three main areas which require further attention.

Firstly, assuming that the GMC will also (like the EMI for the ECB) be the precursor of a Gulf Central Bank (GCB), the Statute for the latter will have to be drafted.

Secondly, assuming that the GMC will have to conduct the technical preparations for monetary union, again like the EMI, it will have to identify the necessary actions (and communicate them to other parties whenever such parties will have to prepare themselves as well).

Thirdly, the arrangements for the changeover from the present currencies to the GCC's future single currency will have to be elaborated and communicated well in advance of the actual event to all relevant parties so that they can properly prepare themselves as well.

Each of these three topics will be further elaborated below, noting that the GCC's plans on the substance of its monetary union are not yet known and thus using the European experience as an example.

In this context, one comes back to what Erwin Nierop has already mentioned in ta previous interview: the EU may indeed serve as a useful example, but each region wishing to embark on monetary union will still have to reflect critically for itself as to which EU arrangements suit their specific needs and to what extent such provisions need to be tailored towards their own requirements.

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