Critical Evaluation of Currency Unification of GCC Countries The Essay

Critical Evaluation of Currency Unification of GCC Countries The Potential Impact On Member Countries - Essay Example 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 differing economic problems with each country, there is a need for an autonomous monetary policy that will allow each country to 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 eco nomic factors that will make a unified currency work. ... y 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. This paper will examine the factors that are necessary to have a currency union, as well as examine if the GCC countries meet the standard. There are certain hurdles that need to be faced in order for the currency unification to become a reality, and these will also be examined in greater detail. Further, there are drawbacks and benefit to 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 r egion 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.1 If a region can achieve one or the other, preferably both, then that region would be considered to be an optimum currency area (OCA). Monetary integration involves the â€Å"irrevocable fixing of exchange rates, full and complete convertibility of currencies, financial market integration, the complete liberalization of current transactions and a common monetary policy.†2 AlKhilifey & Alreshan (2009) state that a region with unified currency will display the following characteristics: First, the region will have a single currency. Second, the region will have a central bank that will set the monetary policy for the