Worldwide euphoria has been generated by the Palestinian threat to "declare independence" in September 2011. Never mind that Palestine no longer has a legitimately elected parliament or president, thus no legitimate government. From Syria westward, the Arabs are governed by illegitimate regimes. Why not add one more?

Money, however, is a reality that no euphoria can survive. The money that circulates under the Palestinian Authority (PA) is the Israeli new shekel. The interest rates set monthly by the Bank of Israel dictate Palestinian financial policy. As long as this continues, Palestinian claims of "independence" will be a sham, a joke.

How much of a joke it will be was recently underlined by the quick collapse of a Palestinian publicity stunt. In March 2011, two clever dicks in Ramallah started an internet campaign calling on Palestinians to write "Free Palestine" on Israeli banknotes. The scheme collapsed within forty-eight hours when the Palestinian banks, none other, announced that they would refuse to honor the defaced currency. Why? Because they were concerned that Israeli banks would not honor it. As in many countries, it is a crime in Israel to write anything on banknotes. Whoever did write "Free Palestine" on the money in their pockets just made it worthless.

Consider also this: banks are constantly in need of new cash, and not merely because banknotes wear out and coins get lost. So one of the commodities that Israel supplies to Gaza, along with flour and toilet paper, is freshly printed shekel notes. Without them, Gaza's Hamas government would see economic life under its rule gradually becoming paralyzed. Israel has to supply its currency to Gaza and Hamas cannot refuse it.

Curiously, for the 2006 parliamentary elections Hamas adopted a platform that included a pledge to "mint Palestinian currency." But Hamas shelved that pledge when it formed a government after winning the elections; it has ignored it since seizing absolute power in Gaza in 2007.

It is amazing that amid all the buzz in the "international community" about whether Palestine is ready for independence, the question of a currency for Palestine has not been featured at all. Now that the head of the International Monetary Fund has been thrown into jail, the question is even less likely to be considered.

Apart from the occasional academic study, the only people who seem to have taken the problem seriously are a few officials in the Palestinian Monetary Authority (PMA). This is a body that most people have never heard of. It was set up as part of the Oslo Accords with the remit of authorizing and supervising banks under the PA. Should Palestine genuinely become independent, the PMA would have to be transformed into its central bank.

Last January, the PMA made a briefly noticed announcement that it was planning the creation of a Palestinian currency. So far as is known, however, Palestinian banknotes are not being printed secretly in preparation for a big surprise in September 2011. The only decision made was to choose a name: the Palestinian pound. That is, they wish to revive the currency of the British Mandate in Palestine. It is another manifestation of the fundamental Palestine aspiration of turning the clock back to a time when Israel did not exist.

Most Palestinians would doubtless embrace the Palestinian pound with the same enthusiasm as met the "Free Palestine" campaign. And they would not realize, until maybe too late, that they might be endangering not just some notes in their pockets but their whole financial existence.

At present, as determined also by the Oslo Accords, three currencies are legal tender under the Palestinian authority: the Israeli new shekel, the Jordanian dinar and the US dollar. With the revival of the Palestinian pound, it is to be expected that the PA, out of national pride, will declare this to be the only permitted currency and demand that all bank accounts be converted into it. Thereafter, all would depend on Palestinian financial probity, which is not a highly valued item. If the Palestinian pound collapsed in the manner of the Zimbabwean dollar, the savings of Palestinians could be wiped out.

Recall that after Hamas and Fatah signed a reconciliation agreement in April 2011, the Israeli finance minister briefly suspended the transfer to the PA of tax revenues collected on its behalf. The result was that the Palestinian government, which is the biggest employer by far under the PA, could not pay monthly salaries for May 2011. Had the Palestinian pound been in place, no problem: the Palestinians could just have printed lots more money. Of course, the exchange rate of their currency would then have plummeted against all others.

Israel's suspension of those transfers aroused the world. Less remembered today are much more serious and prolonged suspensions of Palestinian finance. After the Hamas won the Palestinian elections of 2006 and a Hamas-led government took over, not just Israel but also the US, Canada and the EU froze all funds to the PA. The resulting financial crisis forced the Hamas prime minister to resign in January 2007. Then a unity government briefly existed until June 2007, after which Hamas ruled Gaza but was suppressed in the West Bank. These developments enabled the donors to resume the supply of funds to the PA

The EU has also used the threat of suspending financial aid to pressure the PA to reduce an ever-growing number of public sector employees. Were the PA to be paying them with its own currency, however, the greater pressure would come from a Palestinian public eager for state jobs.

For many European political decision makers, the existence of any such problem has been obscured by the introduction of the euro a decade ago. If, say, the government of the Basque region of Spain were to declare unilateral independence, then independent Euskadi might face many obstacles, but a currency would not be one of them. It would obviously continue to use the euro as at present.

Indeed, this was the model adopted by the Kosovo government in its bid for independence in 2008. It had already adopted the German mark in 1999 and made the switch to the euro along with Germany. This was relatively easy, since the other countries in the area of Kosovo have either already adopted the euro, like its neighbour Montenegro, or aspire to do so in the future.

Palestine, however, is a long way from the euro zone and even further from the US. Consider its neighbors. The Israeli new shekel has fluctuated considerably against the euro and the US dollar, but it has been strengthening against both in recent years. On the other hand, the Jordanian dinar has gradually declined from about 1.6 euro a decade ago to 1.0 euro at present. The Egyptian pound has fallen by nearly two thirds against the euro in that time.

Obviously, the economies of all three countries are far from being in synch with the euro or with each other. In particular, if Egypt had been on the euro, it would have been forced to adopt the same drastic measures as Greece currently, precipitating an earlier collapse of the Mubarak regime. But even the pound sterling has fluctuated markedly against the euro, although only twenty miles separate the UK from France. The channel tunnel has not prevented that.

All this shows that the euro or dollar is a non-starter for Palestine, although the head of the PMA has floated the idea of pegging the Palestinian pound to one of them. Sooner or later, the pegging would come unstuck, probably with a big crash. There would also be rich pickings to be made by Palestinian insiders. Remember how George Soros reportedly made a billion dollars, betting on the collapse of the pegging of the pound sterling to the European Currency Unit (the predecessor of the euro). That pegging had survived a mere two years.

Likewise, even if Palestine adopted a neighboring currency, this would have various major consequences, depending on the choice made. Besides the fluctuations mentioned, the there are differences of GDP. The GDP of the Palestinian territories is currently about a quarter of that of Jordan; it is a mere thirtieth of that of either Israel or Egypt. Thus Palestine would have limited impact within a currency union with Jordan; it has none in its current union with Israel.

On the other hand, any replacement of the Israeli new shekel would disrupt many financial transactions that are currently easy. These include not just the disruptions that would occur if European countries reverted from the euro to national currencies. There would also be complications for the cosy arrangements that accompany EU donations to the PA.

At present, the EU contributes large amounts of money for Palestinian government salaries. The Palestinians spend a lot of that money on Israeli products, while Israelis spend a lot of their money on European ones. So Israel has a large trade surplus with Palestine and a large deficit with the EU, but everyone is happy except, maybe, some European taxpayers. Obviously, the use of the Israeli currency by Palestinians facilitates this cycle of payments.

All in all, the currency is a major issue for any kind of independent Palestine. So far, it has been ignored by the relevant political decision makers, whether locally or internationally. As long as that is the case, talk of Palestinian independence remains a bluff.

Related Topics:  Israel, Palestinian Authority  |  Malcolm Lowe receive the latest by email: subscribe to the free gatestone institute mailing list

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