The GCC states will be well advised to learn from the mistakes of the Euro zone countries as they embark on the planned monetary union, a leading economist has said.
A monetary union without a fiscal union will not succeed, said Paul Donovan, managing director, global economics, UBS. Alternatively, at least the countries should have similar economies and growth patterns, he said. “The GCC monetary union, if it had happened 20 years ago, would have worked very well. As time has progressed, it is less likely to work now,” said the economist.
“The Gulf economies were very similar 20 years back. But in the last decade, Gulf countries have diversified and they are all going in different directions with emphasis on various sectors.
“The evolution of Gulf as an economic area has increased in its diversity and there are many positives to it. Now if you have an oil price fall or a tourism shock, that will affect the region in different ways,” said Donovan.
“If the governments in the region listen to the advice of economists, I think they should not be contemplating a single currency. However, increased economic cooperation is great with the diversification of economies,” he added.
Speaking on the opportunity for regional investors to buy distressed assets in the Euro zone, Donovan said there existed such chances, however investors have to be watchful.
“Though there is an interest, there is a lack of comprehension of what is going on in the Euro zone. It is extremely difficult to understand the different aspects of the crisis and until there is clarity, investors will be reluctant to commit,” he said.
“Also, as a consequence of the crisis, we will see more and more regulations of the financial markets in the Euro area. Some of these regulations might affect investors from this region. There may be restrictions on their ability to withdraw money,” he said.
He said the Euro Zone crisis could reduce investment flow from Europe to other parts of the world since Euro area investors may be asked to invest in the region more than they are at present.