Gulf states are turning to the European Central Bank (ECB) for help in planning for possible monetary union. The ECB will work with the Gulf Co-operation Council (GCC) on a blueprint for monetary union that is likely to draw lessons from the successful launch of the euro in 1999. The move significantly expands the seven year old ECB’s international activities.
“We have worked closely with the ECB on different occasions. We are now looking at implementation issues,” says Abdul Rahman Saif, an executive director at the Bahrain Monetary Authority. But the ECB is likely to steer clear of any political decisions associated with the Gulf move.
The Frankfurt-based institution acts as a central bank for 12 countries in continental Europe, although it draws on the resources of still-existing national central banks.
Since its creation, the ECB has sought to increase its international role, most recently by calling for greater influence at the International Monetary Fund in Washington. The Gulf initiative would build on previous ‘foreign policy’ initiatives that have included helping the Russian authorities on banking supervision issues. The ECB is advising Egyptian authorities, also on bank supervision.
A memorandum of understanding between the ECB and GCC is being prepared and is likely to be signed within a few weeks.
The GCC plans to introduce a single currency by 2010 in its six member states Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Work has started on setting convergence criteria”but many decisions have still to be taken, including the location of a new central bank. The memorandum with the ECB could result in options for monetary union in the Gulf being presented this year.
The ECB’s role in the Gulf could be significant in financial markets if it resulted in the euro playing a more prominent role in the region’s reserve policy. The euro is already considered an alternative to the dollar by some banking officials.