Are they mad?

It what appears to be a vote of no confidence in the US dollar, the oil-rich Arab states have agreed to launch a single currency for the region based on the Euro model. Ambrose Evans-Pritchard reports:

The project is inspired by Europe’s monetary union, seen as a huge success in the Arab world.

Hmm, 'a huge success'? I presume we're glossing over the recent events in the Eurozone concerning Greece, Ireland and Austria; not to mention Spain.

A large part of the reason that the Euro is seen as a 'success', is that it celebrates its tenth anniversary this year, despite a lot of commentators not giving the Euro much of a chance of lasting 10 years at the time of its launch.

The Euro's survival is because it was fortunate enough to be launched at a time when Europe, together with the rest of the world, was about to enter a period of unprecedented prosperity. The good times would paper over the Euro's cracks.

The Euro's deeper problems stem from its fundamental weakness of a wide spread in economic performance and discipline amongst the member countries, which explains why the Eurozone member states are subjected to a number of rules. These rules require for everyone to exercise a high level of economic discipline. The problem is that there is little or no such discipline.

So we come to the PIIGS. This less than flattering acronym stands for Portugal, Ireland, Italy, Greece and Spain; five members of the Eurozone which are all in much deeper trouble than they are prepared to admit - particularly Greece who have consistently been less than honest about their deficit (Greece was admitted to EMU for political reasons before their economy had been reformed enough to fit with Euro requirements).

The true test, and measure of success, of the Euro was always going to be whether it would survive its first recession intact, but already the cracks are appearing:

So when will Europe’s leaders finally wake up? Everything cannot simply be swept under the carpet forever. One day or another the cracks which have been slowly appearing in the whole edifice will simply become gaping holes. We need sound analysis, we need a will to do something, and we need a plan of action. Simply saying the critics do not know what they are talking about no longer holds water.

It is a straitjacket, preventing those countries from having the flexibility to tackle the financial crisis leaving them with options that will lead to the inevitable 'riot phase', in this long politico-economic experiment known as EMU.

It is, therefore, far too early to see the Euro project as a success; it is essentially a flawed economic strategy based on a political project, as highlighted by Hans Redeker, currency chief at BNP Paraibasfor:

"The Greek crisis has exposed the weak foundations on which the euro is built. The gap in competitiveness between core Europe and the periphery has grown wider and wider. The obvious mistake was to launch EMU without a central fiscal authority and political union, as the Bundesbank warned in the 1990s,”.

Any currency needs political union in order to survive, as Helmut Kohl put it in 1993:

'[European] economic union will survive only if it is based on a political union'

Are the gulf states prepared to go that far? It would seem so:

“We need exactly the same institutions as the EU has created. We need a commission, a court, and a bank,” [Mohammed El-Enein] said.

There really is no end to this supranational nonsense.