Should Lebanon peg to the Euro?

Yesterday, Prof. David Cobham, visiting from the Heriot-Watt University in Edinburgh, gave a lecture at AUB on the question if Lebanon should peg to the euro instead of to the American dollar. It’s an interesting question especially now that the dollar is increasingly losing value against the euro.

Prof. Cobham’s answer was that Lebanon would be wise to start using the euro instead of the dollar to peg the Lebanese pound to. His arguments were quite compelling, namely that Lebanon is doing significantly more business with the Euro zone than with the United States, and calculations made by his team have shown that Lebanon could witness a 50% increase of trade if it were to switch the pegging currency.

Sounds like a no-brainer, right? It makes you wonder what the governor of the Central Bank, Riad Salameh, has been doing all these years! Well…I suppose it boils down to a matter of trust: who would you trust more, Salameh who has a proven track record in handling the Lebanese economy, or a visiting professor who applies some western-based theory on the Lebanese situation he’s hardly familiar with?

Interesting enough, in a recent interview, Salemeh was asked the question if Lebanon should switch to euros. His answer, in short: no, Lebanon has benefited much from the dollar. According to Salameh:

“The weakening of the dollar confers more competitiveness on the Lebanese economy, because we are dollarized. 77% of our transactions are in US dollars in the country. And all the costs of the country are related to the value of the dollar. So a weakening of the dollar makes all Lebanese sectors working with external markets more competitive.”

That would be true if Lebanon would be mostly exporting its good since the lower dollar would make the Lebanese goods cheaper. However, given the lack of natural resources and manufacturing facilities in Lebanon, it must import more than export. Knowing that most of our trade is with the Euro zone, this means Lebanon is importing in expensive euros while exporting in cheap dollars. Salameh’s answer, therefore, is difficult to comprehend.

Again, the question, slightly rephrased: who would you trust more, a governor who’s defending himself against having missed the boat or a renowned expert on international economics who’s taking a fresh look at Lebanon?