MEMU & Happy New Year!

The Middle East Monetary Union (MEMU) seems to be gaining traction. AFP reports from Muscat:

Oil-rich Gulf monarchies agreed on Tuesday on the final draft of an accord on a monetary union which they intend to launch next year, an official statement said.

Five members of the six-nation Gulf Cooperation Council have “adopted the monetary union accord, which includes the legal and organisational framework,” said the statement issued at the end of the annual GCC leaders summit in Muscat.

“It also adopted a system governing the monetary council,” the statement said.

The GCC groups Saudi Arabia, Kuwait, Qatar, Bahrain, the United Arab Emirates and Oman, which had previously announced it would not participate in the scheme.

GCC finance ministers meeting on Tuesday during the summit had drafted the final version of the monetary union accord which is intended to be implemented next year, followed by the launch of a single currency, a GCC official said.

and also

The accord provides for the creation of a monetary council ahead of establishing a GCC central bank which will be charged with issuing the future single currency and completing the technical steps of the monetary union.

The official did not provide a date for the launch of the single currency which was originally set for 2010 — a deadline that remains controversial among GCC members.

It’s going to be interesting to see whether or not this single currency unit actually emerges, but I would say the timing couldn’t be much better for The Middle East to do so. It’s obvious that several global currencies are under severe duress, with GBP and the USD taking lead roles. The JPY is not to bad a place to be in right and neither are the EUR and CHF. But one has to take into account that even the latter currencies are essentially backed by nothing, ‘fiat money’, and just as easy to print out of thin air as their English and American counterparts.

That is not to say of course that should The Middle East actually manage to introduce one single currency unit, that it wouldn’t be just another fiat currency either. And it probably will. However two points have to be noted regarding this.

Firstly, there seems to be chance that a new MEMU currency might actually be backed by gold. Gold plays a much more important role in The Gulf than it does in The West. Also there have been several initiatives in the past (see e.g. the Gold Dinar) for gold backed backed Islamic currencies. So I wouldn’t rule out the possibility that a future MEMU single currency might have (some) gold backing. Actually it would be a unique selling point for it, as no other currency in the world is currently backed by bullion (in a meaningful way).

Secondly and more importantly, one Gulf currency would obviously be backed by OIL as its member states are sitting on the biggest supplies of proven oil reserves in the world. For that reason alone a MEMU currency would probably be in immediate success. Especially if the Arabs then also manage to start pricing their oil in their own currency instead of the USD.  As I have written before, the long-term world energy outlook remains very worrisome and the bulk of the increase in future oil demand will have to be provided by OPEC.

Whatever it may be, this is going to be an opportunity to monitor very closely in 2009. Have a happy and prosperous New Year.