Abstract

This paper evaluates the recent sovereign debt crisis faces by Greece. It highlights the causes of the crisis; implications of the crisis towards domestic as well as the international community, particularly the contagion effect to the European communities; and the policy responses that are still being debated and looked into by not only the Greek government but also other European countries. The paper briefly explains the flaws in the existing monetary system that has caused series of financial crises; and continues with brief discussion on the need for a global currency backed by a commodity. Finally, the paper looks into the benefits in introducing gold dinar as the desirable alternative money and highlight possible challenges before it can be well accepted to replace the existing monetary system.

Introduction

Europe’s debt crisis is a continuation of the global financial crisis and also the result of how Europe attempted to solve the global financial crisis that brought an end to a decade of prosperity and unrestricted debt. European attempts at defending itself against a deep recession, has now created a new crisis of unsustainable and un-serviceable sovereign debt¹. Much of this can be attributed to stimulus packages passed by European governments in order to halt the effects of the economic crisis, especially in preventing massive layoffs. Europe’s heavyweights spent massively on stimulation packages. However such attempts at defending themselves against a deep recession, has now created a sovereign[1] debt crisis.

Greece joined the Euro Zone when it was launched in 1999. By becoming member of the Euro Zone, Greece’s credit rating was considered the same as Europe’s heavy weights such as France and Germany as they were all now part of the same union. This gave Greece access to finance that it would otherwise not be privileged to and as a result a boom in the Greek’s economy took place. The Greece economy was one of the fastest growing in the Euro Zone between 1996 and 2006 (see Chart 1). In 2008, the country’s GDP growth rate stood at 3.7%, one of the highest among euro countries (see Table 1 below).

Chart 1: GDP Growth of Greece compared to the Euro Zone between 1996 and 2006

Table 1: Greece Real GDP Growth Compared to Selected Euro Countries

During the decade preceding the global financial crisis that started in fall 2008, Greece’s government borrowed heavily from abroad to fund substantial government budget and current account deficits. Between 2001, when Greece adopted the euro as its currency, and 2008, Greece’s reported budget deficits averaged 5% per year and current account deficits averaged 9% per year, compared to a Euro Zone average of 2% and average of 1% respectively. Greece funded these twin deficits by borrowing in international capital markets, leaving it with a chronically high external debt (gross: 168% and net: 82.5% of GDP in 2009) [see Table 2 below].

Table 2: Government debt and external debt at year-end 2009

Source: National Updates to the Stability and Growth Programme 2009/2010-2013, National Central Banks and CSO-Ireland

GREECE’S DEBT CRISIS: BACKGROUND

Until October 2009, it appeared that Greece had weathered the global financial crisis relatively well according to the official figures available at the time. Estimates pointed towards a contraction of less than 1% of GDP and public finances, while never strong, seemed relatively stable especially compared to the rapidly escalating deficits expected in countries with major bank bailouts and fiscal stimulus packages (such as the United States and United Kingdom).

However, since late 2009, investor confidence in the Greek government has been rattled mainly because of the political changes. In October 2009, the new socialist government, led by Prime Minister George Papandreou, revised the estimate of the government budget deficit for 2009, nearly doubling the existing estimate of 6.7% of GDP to 12.7% of GDP. This was shortly followed by rating downgrades of Greek bonds by the three major credit rating agencies.

Allegations that Greek governments had falsified statistics and attempted to obscure debt levels through complex financial instruments also contributed to a drop in investors’ confidence. In keeping with monetary union guidelines, Greece was said as had deliberately misreported the country’s official economic statistics. Greece paid Goldman Sachs hundreds of millions of dollars in fees from 2001 for arranging transactions that hid the actual level of borrowing. This enabled Greece to live beyond its means, while hiding its deficit from the EU.

Holders of Greek debt questioned if Greece would ever be able to pay off the €236 billion in government debt it really owed. Before the crisis, Greek 10-year bond yields were 10 to 40 basis points above German 10-year bonds. With the crisis, this spread increased to 400 basis points in January 2010. Despite increasing nervousness surrounding Greece’s economy, the Greek government was able to successfully sell €8 billion ($10.6 billion) in bonds at the end of January 2010, €5 billion ($6.7 billion) at the end of March 2010, and €1.56 billion ($2.07 billion) in mid-April 2010, albeit at high interest rates. However, Greece must borrow an additional €54 billion ($71.8 billion) to cover maturing debt and interest payments in 2010, and there were concerns about the government’s ability to do so.

CAUSES OF THE CRISIS

DOMESTIC FACTORS

High Government Spending and Weak Government Revenues

From 2000 – 2007, Greece was the fastest growing economy in the Euro Zone as capital flooded the country. Successive Greek governments went on spending sprees, creating in turn many public sector jobs, new pension plans and many other social benefits. The spending addiction included high-profile projects such as the 2004 Athens Olympics, which went well over budget.

Observers identify a large and inefficient public administration in Greece, costly pension and healthcare systems, tax evasion, and a general “absence of the will to maintain fiscal discipline” as major factors behind Greece’s deficit. In 2009, Greek government expenditures accounted for 50% of GDP. Successive Greek governments have taken steps to modernize and consolidate the public administration. However, observers continue to cite over-staffing and poor productivity in the public sector as an impediment to improved economic performance. An aging Greek population, the percentage of Greeks aged over 64 is expected to rise from 19% in 2007 to 32% in 2060, could place additional burdens on public spending and what is widely considered one of Europe’s most generous pension systems. Total Greek public pension payments are expected to increase from 11.5% of GDP in 2005 to 24% of GDP in 2050.

Weak revenue collection has also contributed to Greece’s budget deficits. Many economists identify tax evasion and Greece’s unrecorded economy as key factors behind the deficits. They argue that Greece must address these problems if it is to raise the revenues necessary to improve its fiscal position. Some studies have estimated the informal economy in Greece to represent between 25%-30% of GDP. Observers offer a variety of explanations for the prevalence of tax evasion in Greece, including high levels of taxation and a complex tax code, excessive regulation, and inefficiency in the public sector. Like his predecessor Constantine (Costas) Karamanlis, the new Prime Minister Papandreou has committed to crack down on tax and social security contribution evasion. Observers note, however, that past Greek governments have had, at best, mixed success seeing through similar initiatives.

Structural Policies and Declining International Competitiveness

Greek industry is suffering from declining international competitiveness. Economists cite high relative wages and low productivity as a primary factor. According to one study, wages in Greece have increased at a 5% annual rate since the country adopted the euro, about double the average rate in the Euro Zone as a whole. Over the same period, Greek exports to its major trading partners grew at 3.8% per year, only half the rate of those countries’ imports from other trading partners. Some observers argue that for Greece to boost its international competitiveness and reduce its current account deficit, it needs to increase its productivity, significantly cut wages, and increase savings. In the past, tourism and the shipping industry have been the Greek economy’s strongest sectors. The Papandreou government began to curb public sector wages and hoped to increase Greek exports through investment in areas where the country had a comparative advantage.

INTERNATIONAL FACTORS

High Indebtedness Due to Easy Access to Capital at Low Interest Rates

Greece’s adoption of the euro as its national currency in 2001 is seen by some as a contributing factor in Greece’s build-up of debt. With the currency bloc anchored by economic heavyweights Germany and France, and a common monetary policy conservatively managed by the European Central Bank (ECB), investors have tended to view the reliability of euro member countries with a heightened degree of confidence. The perceptions of stability conferred by euro membership allowed Greece, as well as other Euro Zone members, to borrow at a more favourable interest rate than would likely have been the case outside the European Union (EU), making it easier to finance the state budget and service existing debt. This benefit, however, may also have contributed to Greece’s current debt problems: observers argue that access to artificially cheap credit allowed Greece to accumulate high levels of debt. Critics assert that if the market had discouraged excess borrowing by making debt financing more expensive, Greece would have been forced to come to terms earlier with the need for austerity and reform.

Non-compliance with EU Rules

The lack of enforcement of the Stability and Growth Pact is also seen as a contributing factor to Greece’s high level of debt. In 1997, EU members adopted the Stability and Growth Pact, an agreement to enhance the surveillance and enforcement of the public finance rules set out in the 1992 Maastricht Treaty’s “convergence criteria” for Europen Monetary Union. The rules call for budget deficits not to exceed 3% of GDP and debt not to exceed 60% of GDP. The Pact clarified and sped up the excessive deficit procedure to be applied to member states that surpassed the deficit limit. If the member state is deemed to have insufficiently complied with the corrective measures recommended by the European Commission and the Council of the European Union during the excessive deficit procedure, the process may ultimately result in a fine of as much as 0.5% of GDP.

The European Commission initiated an excessive deficit procedure against Greece in 2004 when Greece reported an upward revision of its 2003 budget deficit figure to 3.2% of GDP. In its report, the Commission indicated that “the quality of public data is not satisfactory,” noting that the EU’s statistical office, Eurostat[2], had not certified or had unilaterally amended data provided by the National Statistical Service of Greece since 2000. Subsequent statistical revisions between 2004 and 2007 revealed that Greece had violated the 3% limit in every year since 2000, with its deficit topping out at 7.9% of GDP in 2004. The Commission also noted that Greece’s debt had been above 100% of GDP since before Greece joined the euro, and that the statistical revisions had pushed the debt number up as well.

IMPLICATIONS OF THE CRISIS

Internal

Greece inability to finance its debt is a major concern to its domestic and world economy. Its maturing debt which amounts to €54 billion in 2010 would need to be financed through additional borrowing from its neighboring countries. The big question is how Greece would be able to restructure its debt and formulate budget reduction in government spending for the coming years. Balance of payments showed huge deficits in its current account which was accumulated from the years of huge government expenditure and mismatch in government income. All this has caused the government to announced austerity steps. The reduction in government spending would have adverse effect on the economy.

First austerity measure announced was civil servants salary, freeze on bonuses, pension plans and stop recruiting new civil servants. On the income side, increased value added tax from 19% to 23%, increased taxes on tobacco, alcohol, fuel and luxury products. Reduction in salary of government servants would reduce the money supply locally and would bring down the income of individuals. This would lead to reduced spending by the masses. Increased value added taxes, luxury items, fuel, tobacco and liquor would also encourage people to spend less. The steps taken would of course in the short run, on paper, bring about increased income and reduced deficits, but in reality, the steps taken would reduce the money supply internally. If money does not move in the market, it would not result in increased government income as projected through increased value added tax, taxes on tobacco, liquor and luxury goods. Reduced income level would shift the demand curve to the left, therefore the demand of such tobacco, liquor and luxury items would also fall, and the increased taxes would not increase the government income.

Without local spending, the circulation of money would be restricted, people would hoard money and that would be the worst thing to happen to an economy. With restricted money circulation, businesses would have a hard time staying in business and failing which, would lead to higher unemployment rate. On the brighter side, reduction in income level would also bring down the prices of goods sold as an adjustment to the current income level. Reduced income would also hit the construction and property market. Without buyers and government spending, the property and construction companies would face difficulties to stay afloat. If they are not able to continue operations, then thousands may be unemployed, which add burden to the economy. High unemployment would lead to social problems such as increased crime rate and political instability.

Greece, with high debt and potential default, has rating agency downgraded the rating of government bonds to junk bonds. Given a junk bond status would simply mean higher borrowing cost to the government. Relatively the interest rate cost would then be passed on to financial institutions in Greece, thus increasing business cost. Businesses would continue to pass on the cost to consumer, ending with higher prices.

External

Globalization has in fact made the world so small and entwined; each and every country is dependent on one another for stability. Greece financial crisis has kept other countries on its toes and concerns on the policies Greece intends to implement. Self interest arises before the country in dire and implementations of policies would have to go well with its stakeholders. Greece borrows from its EU partners, with both Germany and France holding almost $90 billion Greek debt. Any potential default would have adverse effect on these countries and also other Greek debt holders.

By itself, the Greek economy represents just 3% of all the Euro GDP. But because financial markets tie economies together with debt, a financial crisis there has the potential to spread particularly because other Euro economies are exposed through the substantial investments of their financial institutions in Greece. French investors are the biggest, holding $54billion worth of Greek debt at the end of 2008 (IMF’s most recent figures) followed by German investors at $36 billion. Britain are more modest, but still very substantial, covering $12 billion worth of loans. Meanwhile, about one-third of Greek government debt is held by Greek investors.

Major financial institutions may adjust to the risk by adjusting their portfolio of assets using complex financial derivatives to shuffle risk elsewhere, and altering their holdings of debt and equity. By doing this, the bigger player would sell off their debt securities especially of the smaller and riskier countries (with high debt ratio and deficits) like Portugal, Ireland and Spain, in particular.

If the banks and the institutional investors pull out of Greece, they can spread financial instability elsewhere in the Euro Zone including Portugal, Ireland, Italy and Spain (which along with Greece have been nicknamed as “PIIGS”). The PIIGS have high public debt combination and unstable governments. These countries borrowed heavily during the credit bubble before the recent global financial crisis. Diagram 1 below illustrates the web of debt of these countries.

Diagram 1: The PIIGS’s External Debt Problem

Speculators are now eyeing on either one of the countries’ economy to fall soon. Revisions to the public debt figures have upset markets, while the deep spending cuts offered in sacrifice by the newly-elected PASOK[3] government have not calmed its stakeholders. The whole EU potentially, even the Euro project itself could suddenly be unstable. The dangers are sufficiently great that EU governments have started talking about restrictions and bans on some of the financial devices used by speculators.

Things were even worse because Greek government had traded in complex financial instruments that traded its future earnings through currency swaps and other complex financial instruments. Greek governments had successively, underwritten by prominent financial institutions including Goldman Sachs, used complex financial instruments to conceal the true level of Greece’s debt. For example, the government is alleged to have exchanged future revenues from Greece’s highways, airports, and lotteries for up-front cash payments from investors. Likewise, Greek government borrowed billions by trading currencies at favourable exchange rates. Because these transactions were technically considered currency swaps, not loans, they were not reported by the Greek government under EU accounting rules.

Under these loopholes, Greece has actually amassed huge borrowings which were unreported and may need to sell its national projects such as highways and airport to investors as collateral. Though the bailout has reduced some pressure on Greece for now, its cash flow from current account will not record surplus anytime soon. Unable to solve the current dilemma, Greece would again, based on our assumption, utilize complex financial instruments to gain cash from its future revenues through options, warrants, swaps, auction rate securities, and currency options, as well as structured notes on assets to sustain its debt payments.

POLICY RESPONSES IN ADDRESSING THE CRISIS

In addressing the crisis, there are three approaches that are being pursued by the Greek government i.e. domestic fiscal austerity measures, financial assistance from Euro Zone members and financial assistance from the IMF. As to whether these approaches would help turn Greece economy back on track is still questionable.

Domestic Policy Responses

Three separate packages under the fiscal austerity measures have since been unveiled by the current government aimed at bringing Greece’s government debt down from an estimated 13.6% of GDP in 2009 to below 3% by 2012. These measures involved huge amount of funds totalling approximately €16 billion ($21.6 billion) or 6.4% of GDP. The specific long term budgets established by the government are as follows:

Table 3: Long Term Target on Budget Deficit

The above targets are detailed in Greece’s Stability and Growth Programme which was approved by the EC in January 2010. This is the second austerity measures announced which among other things, include the aim to increase revenue from increase in value-added tax, corporate, personal and real estate tax. Meanwhile, on the expenditure side, most of the spending cuts involved civil service. However, some observers expressed their concerns over the mix of tax increases and sharp spending cuts that could lead to a higher unemployment and deepen the country’s recession. The two policy solutions involving the cutting of large government budget deficits (which requires contractionary fiscal policies) and simulating economy during cyclical economic downturn (which requires expansionary policies) are at odds with each other. There are also questions on how long the Greece government will be able to count on public support for contractionary measures in the face of sharp recession.

Besides, Greece government has proposed wide-ranging reforms to the pension and health care systems and also the country’s public administration. The government has also announced the measures to boost economic competitiveness by enhancing employment and economic growth, fostering increased in the private sector and support on research, technology and innovation. The new government pledged to reform pension institutions and to crack down on social security contribution evasion. Measures will include raising the retirement age from 61 to 63 (the statutory requirement age in Greece is 65) and calculation pension on the basis of lifetime contributions as opposed to the last five years of earnings. Similar effort will also goes to tighten public regulation and strengthen accountability in what is widely considered an inefficient Greek health system. In addition to that, the government plan to restructure public administration which include consolidation of local structures by reducing levels of local administrative (from five to three) and reducing municipalities (from 1,034 to 370) as well as reducing legal public entities formed by local authorities (from 6,000 to 2,000).

Some economists expressed concern over Greece’s drastic contractionary fiscal policies which they said would hinder economic growth over the medium term. In 2009, GDP contracted by 2% and is forecasted to contract by 2.5% in 2010 and 0.7% in 2011. The level of registered unemployment reached 10.6% in 2009, the highest level since March 2005. The level is expected to further increase in 2010. To counter this, the government hopes to attract new foreign investment and boost exports of goods and services. However, the challenges face by Greece in building a sustainable economic growth is quite considerable especially the statistic shows a decrease of 18% in exports in 2009 as Greek businesses have become increasing uncompetitive in domestic and international markets. Another challenge involves maintaining public and political support for the austerity and economic reform. PASOK came into office in October 2009 on a platform of “social protection” but the policies that the Prime Minister is pursuing i.e. cutting budget deficit, have required retreating from most of these campaign pledges. However, Prime Minister Papandreou appears to have maintained the support of the majority of Greeks.

Financial Assistance from other Euro Zone Members

The Greek government had requested financial assistance from the other Euro Zone members where the activation of the financial assistance mechanism was formulated by the Euro Zone leaders during series of meeting held between March and April 2010. The package is reported to be in the form of three-year deal (2010-2012) bilateral loans from Euro Zone member countries totalling €30 billion (approximately $40 billion). However, for the activation of the financial mechanism to be completed, the European Comission and ECB should give positive assessment of the Greek request and each of the Euro Zone members would need to approve the agreement, and this means that Euro Zone members would need to obtain their parliamentary votes.

Debate leading up to the Euro Zone pledge for financial assistance to Greece has been controversial mainly because the severe instability in Greek economy could have considerable consequences to the EU and especially the Euro Zone countries, The Greece crisis has so far weakened the euro’s foreign exchange value and if the conditions worsen, the crisis could even spread to the European bond markets and draw in countries such as Portugal, Ireland and Spain. Meanwhile, there is significant political element to the EU as the hope for euro becomes a reserve currency would require EU achievement in European integration and thus, EU must not allow Greece to default or abandon the euro. At the same time, the debate has been prolonged especially because most of the EU countries themselves are also experiencing financial problems. In addition, many of the countries are exasperated by the idea of rescuing a member country which in their perspectives has not exercised budget discipline, falsified past financial statistics and failed to modernize its economy.

Financial Assistance from the IMF

Greece has also requested financial assistance from the IMF which is expected to be worth €15 billion ($20 billion) this year. At the onset of the Greece crisis, many EU officials insisted that Euro Zone to take ownership of the issue as it is important for the Euro Zone to demonstrate its strength and credibility in tackling their own problems. Outside intervention such as IMF is viewed as a potential ‘humiliation’ for the Euro Zone. In late March 2010, however, the debate in Europe shifted, possible involvement by the IMF is now considered as a number of member countries came to favour a twin-track approach combining Euro Zone and IMF financial assistance. In the end, IMF involvement was reported as a key condition to the `safety net’ mechanism.

LESSONS LEARN AND A REAL GLOBAL CURRENCY AS THE WAY FORWARD

Discussions about what went wrong and lessons learnt from the collapse of a small market[4] in the US which threw the entire global system into a state of crisis has not yet end. The world is still observing how the US economy is surviving and as to whether the stimulus packages and economic policies undertaken by President Barack Obama would result in a miracle i.e. turnaround in the US economy. Once again, a series of debates and discussions among the economist and financial analysts on the present monetary system continues with the recent chaos facing Greece.

There is nothing new in terms of characteristics of the Greece crisis. All the characteristics have also been the characteristics of the previous crises facing other parts of the world. Some of the lessons learnt from the crisis that were derived by the economist among others are as follows:

1. The crisis has exposed the central weakness of the euro currency itself which is lack of unified fiscal policy. Its 16 member countries follow different spending and borrowing policies. They ignore the need to align their policies with an agreed sets of constraints;
2. Long overdue austerity plan by Greece. The EU’s political, strategic and economic benefits are desirable enough to force reforms on Greece. However, this was not done so;
3. Despite the new treaty that gave EU its first full time president and foreign minister, there is no single leader that is decisive and can call the shots;
4. The problem is too big for EU to handle in which they need to drag IMF in and thus, revealed that the EU is no different than the emerging and third world countries; and
5. Overspending nation like Greece is highly likely to face financial problems.

There have been continuous on-going discussion and debates on the measures to undertake in resolving Greece debt crisis. Paul Krugman[5] has argued that there are only two way forward. Either Greece comes out from the European Monetary Union or it stays in but bailing it out in that case becomes implausible due to various political forces. Meanwhile, some commentators had questioned as to why EU waited so long for a rescue plan. For more than eight months respected commentators have argued that Greece was a train without brakes, coming down the track at breakneck speed. Like Northern Rock, it needed to be dealt with to stop any threat of contagion. The contagion started because all EU countries have large debts and they have agreed on budgets for this year which increases those debts further. Thus, delaying the rescue plan only make things worse. In addition, there were also comments made by Germany’s Angela Merkel and the European Central Bank governor Jean-Claude Trichet, who were said to have continually blocked some policies that breached the moral hazard code. The idea of moral hazard, or the fear that a bailout will encourage profligacy in other nations, is another lesson unlearned.

A Single Global Currency

The outbreak of the global crisis emanating from the US, and the spill over to the entire world reflects the inherent vulnerabilities and the systemic risks in the existing monetary system. The world now acknowledges that there is an urgent need for a single global currency to address the flaws in the existing monetary system. A global currency or world currency, in the foreign exchange market and international finance, refers to a currency in which the vast majority of international transactions take place and which serves as the world’s primary reserve currency. The desirable of reforming the international monetary system is to create a global currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit based national currencies (Zhou Xiaochuan, 2009).

With the use of a global currency, there will be no more need for expensive currency exchanges or expensive hedges against currency fluctuations. There will be no more currency speculation and the risk of currency failures and balance of payment problems. Such a currency would therefore be more efficient as a mean of conveying true value, without consideration of the political winds of the day. Some of the reasons why the world needs a single global currency are due to the following benefits:

1. Eliminate the Balance of Payments/Current Account problems of all countries. Every country must cope with the problem of ensuring that international payments balance, because imbalances tend to cause fluctuations in currency values and currency risks. While often stated as a “trade” problem, the Balance of Payments or Current Account problem is only a problem caused by the existence of multiple currencies.
2. Eliminate the risk of currency failure, currency risk. Part of the built-in price of every currency is the risk that it will fail. Perhaps that’s the risk that the government will fall or that a primary industry sector will fail, or that a natural disaster will be hugely expensive. If such events are expected or even feared, the discount of that country’s currency will increase, i.e. the currency will be worth less. For the people within that country their savings may be exposed to complete loss.
3. Eliminate the uncertainty of changes in value due to exchange-caused fluctuations in currency value and the costs of hedging to protect against such fluctuations. Hundreds of billions of dollars are spent annually coping with exchange-caused fluctuations in currency values. Reports of corporations are corrected for changes in value, and all international economic reports need to be similarly adjusted. For economic transactions occurring over time, there are often costs of hedging to protect against such fluctuations.
4. Cause an increase in the value of assets for those countries currently afflicted with significant country risk. When currency risk is minimized the only obstacle to residents and foreigners investing in a country is the actual risk of the failure of the venture. For many countries where the currency risk is more than the expected annual return on the investment, investment is totally blocked. However, if the currency risk were to be eliminated, at least down to the level of low inflation of the single global currency, investments would be much more appealing. Several articles and books have shown how asset values began rising in Europe in direct relation to the increasing likelihood that the euro would actually be launched.
5. Eliminate the misalignment of currencies.There are many ways that countries compete with one another and one way is by adjusting the value of a country’s currency relative to others. Often this is done to increase exports. Direct and indirect manipulation of currencies for national advantage is not a fair tool of international trade.
6. Eliminate the need for countries or monetary unions to maintain international reserves of other currencies. Currently, each of the world’s currencies maintains reserves of other currencies in order to finance trade, but also to ensure trust in the value of the “reserving” currency. While a Single Global Currency will likely need some form of “backup” or “reserve” to ensure and protect the people’s all-important trust, such a backup or reserve will not include other currencies, by definition.

Gold as a Solution for a Stable and Just Global Monetary System

The current standard-money system is mainly a ‘fiat money’ system which has no intrinsic value as it is not explicitly backed by any commodity. Throughout history, no paper currency i.e. ‘fiat money’ has survived in its original form. Paper currencies are normally inflated away until they are worthless. On the other hand, gold has represented real money for several thousand years. Gold has at all times represented real wealth as well as being a medium of exchange.

Gold Dinar - The Islamic Currency

The word dinar refers to gold coins used as a medium of exchange by Muslims throughout the Islamic history until the fall of the Ottoman caliphate. Dirhams, which were silver coins, were also commonly circulated. However, the dinar and dirham were in circulation even before the advent of Islam but continued to be used by the Prophet SAW. With the spread of Islam, the dinar was minted in large quantities and gradually displaced the bezant gold coin as the major international currency, circulating throughout the Muslim world and the Christian Europe as well. (Ahameed Kameel, 2002).

When barter is replaced with the use of money as a medium of exchange, it becomes possible for one to leave the process of exchange incomplete by withholding the money obtained from the sale of commodity. As money obtained represents half an exchange transaction, the value of money related to itself in terms of present time as against future time becomes different. This is the basis of ‘time preference theory’. The deficiency of money a measure of value derives from this phenomenon; the value of money is unstable because its supply cannot be controlled in view of the holders’ power to withhold it from circulation. Unless we standardise our money and stabilize the value, no economy can be held in a wholesome state and nobody can rightly claim that money is ‘a standard value’ or the ‘real’ unit of account (Mahmud Abu Saud, 1976).

There have been acknowledgements around the world that gold would be a viable solution to the problems and woes of the fiat monetary system. For centuries, gold played the role of money and continued that role till the demise of Bretton Woods’s agreement in 1971. With the current global financial scene, which is plagued by financial instability, crises and chaos, a single global currency is seen as one possible solution in minimizing the exchange rate risk and enhancing regional economic and financial stability (Khaw, 2000). Several economist and leaders emphasized on the idea of gold as a mean of payments and would be a part of the international monetary system for the next coming century, providing a stable international unit of account. As an international gold standard promotes stable exchange rates, a steady monetary growth rates and increased trade resulting from the reduction in transaction costs associated with the elimination of foreign exchange risk (Judy Shelton, 1997).

Advantages and Challenges of Gold as the Global Currency

Some of the advantages of gold as the global currency are as follows:

1. Gold prices are indeed relatively stable compared to other commodity prices, exchange rate movement and the stock market index. Since gold is priced and revered globally, it is something that is always valued by people of all nations. Owing to its inherent value and its easy divisibility, gold is an excellent medium of exchange;
2. When countries unify their currencies, just like the Euro, the unique risks inherent in the individual currencies are diversified away. Only risks that are common to all the united currencies would remain. Hence, exchange rate risk would be totally eliminated among those countries. Manipulation of currencies and the impact towards one economy could be reduced because of the fact that gold does not inflate in value as it is a commodity, thus it has an intrinsic value;
3. By choosing gold as the most useful, most stable, and most efficient solution to the world’s currency woes, it will eliminate element of interest, create stability in the currency and monetary system, induce money supply growth (from new discoveries of gold) thus, eliminating the inflationary pressure in the economy; and
4. With today’s modern technology, ownership of gold can now be traded and exchanged and transferred instantly, legally and efficiently around the world by a click of the mouse. This completely avoids the usual charges that gold is “too heavy” and “too cumbersome” and “too antiquated of a relic” to be useful in the modern society.

However, there are possible challenges in introducing gold dinar as the global currency such as an institutional setback as the US dollars has been playing the international currency for a long time, there might be possible attempt to fail the system particularly those who have long-benefited from manipulation activities in the ‘fiat money’ system and there should be concerted efforts to boost public confidence on the new system.

CONCLUSIONS

The world has been confronted with a long-existing question of what kind of international currency that can secure global financial stability. The above question is far from being resolved as the financial crisis continues and become even more severe, demonstrating the inherent weaknesses in the existing monetary system. Meanwhile, most parts of the world has acknowledged the need for a single global currency to address the flaws in the existing system. With the use of a global currency, there would be no more currency speculation, risk of currency failures and balance of payment problems. Such a currency would therefore be more efficient as a means of conveying true value, without consideration of the political winds of the day. The gold monetary system, which was already been part of the international monetary system before the collapse of the Bretton Woods system in 1971, depletes the exchange rate risk and allows countries without even any international reserves to trade freely while at the same time reduces the speculative and arbitrage activities. In order to achieve this goal, Muslim countries should play substantial role in pioneering the idea of gold dinar system by reducing economic dependency on the non-Muslim countries especially the western world and thus, pressuring others to use the gold dinar system by making it the only acceptable mean of trade.

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