To hardened Eurosceptics, the Gulf Cooperation Council must look like a dark reflection of their worst Brussels nightmare. With lofty political aims, unelected and largely unaccountable leaders and a lack of transparency at almost every level, the GCC might not at first stand out as a poster boy for enlightened federalism. But since it was set up in 1981, the GCC countries of UAE, Saudi Arabia, Bahrain, Kuwait, Qatar and Oman have provided a model for peaceful resolution of differences and economic integration in a region noticeably lacking in good neighbours. Seven years ago, the six committed to have a single currency, the khaleeji, by 1 January 2010. But events has conspired to throw this into doubt. The problem can be summed up in a single word: inflation.

As part of the convergence phase, all six agreed to peg their currencies to the dollar, severely limiting their ability to control inflation through interest rates. But a plummeting dollar, rising prices for food, fuel and rent, as well as the usual supply problems associated with booming economies, have brought the system to near-breaking point. GCC nationals are suffering and there is the spectre of unrest. Just as the European Exchange Rate Mechanism found itself in difficulties, so economic conditions have caused a split in the GCC ranks. Oman has said it will not join in 2010; last May, Kuwait abandoned the peg for a basket of currencies, which is thought to comprise 80% dollar, reverting to its pre-2003 arrangement and reducing its exposure to the weakening US currency.

The comments of Alan Greenspan, former chairman of the US Federal Reserve, at a conference in Saudi Arabia in February about dollar pegs and inflation appeared to add petrol to the fire. However, John Sfakianakis, chief economist at the SABB, says the media misinterpreted Greenspan: “He wasn’t directing his comments to specific economies in the region. His statements were very carefully worded.” The pegs most under threat belong to the states with the highest inflation: Qatar and the UAE. Qatar’s prime minister, Hamad bin Jassim Al Thani, reckons the dollar peg accounts for 40% of his country’s inflation, which hit 13.7% at the end of last year. And with Saudi inflation at 7%, a 27-year high, even the GCC’s biggest economy is feeling the heat. Saudi has been keen to expand its non-oil exports, which have more than doubled since 2004 to over €15.8bn. Three of the top four markets for these goods are the UAE (1), Kuwait (3) and Qatar (4), but China, with its own dollar link, is number two. A stronger riyal would hurt this.

The Saudi central bank governor has, in recent weeks, underscored his country’s commitment to the peg and his opposition to floating the riyal. With years of pegging, it is also doubtful that his authority would have the necessary competence to follow an inflation-targeting policy. His comments have been echoed by his UAE counterpart.

But while central bankers have been defending the peg, the private sector has been voicing doubts. Ahmed Humaid Al Tayer, chairman of the Gulf’s biggest bank, Emirates NBD (and also the UAE’s minister of communications) said that a basket of currencies would let states tackle inflation and more accurately reflect the importance of European and Asian trading partners.

Europe is an important part of the equation. The EU is the GCC’s number one trading partner and the GCC is the EU’s sixth largest export market. Around 20% of the EU’s energy comes from the Gulf and while EU investment is limited, Europeans, especially Brits, have been pouring their money into Dubai real estate, at least. Meanwhile, GCC investors, both private and sovereign funds, have been pouring money into Europe and the US, and into dollar-sensitive companies such as EADS. Aside from inflation, administrative issues are endangering the 2010 deadline. “A daunting amount of practical work needs to be done on the preparations for a currency union,” says Tristan Cooper, senior analyst at Moody’s. “For example, agreeing on the location and functionality of a unified monetary authority, on the provision of cross-country comparable statistics, and an appropriate and enforceable set of entry criteria.”

Sfakianakis also talks of the need for more transparency and less uncertainty, and for specific steps, such as labour law unification, still needed to implement even the customs union, which began at the start of the year: “They need to get the support of the people and explain it to them.”

There is also the basic question of why the countries need a single currency. “There are a number of things going against the GCC single currency,” says Hala El-Ramly, associate professor at the American University in Cairo. “Their economies are not very diversified and there is not much intraregional trade. Before at least we had the certainty of a strong political commitment, but now we’re losing that. If the GCC countries are committed to unifying their currency anytime soon, they should either stick to the peg or whatever change they do to deal with inflation, they should do it together.”

Alternatives to revaluation include price subsidies, wage rises and controls on rents and prices, all of which have been tried to varying degrees by GCC nations in the last five years. The problem is these would be tricky to withdraw should energy prices fall.

And then there’s international politics. Venezuela and Iran have made an issue of switching oil contracts to euros and even supermodel Gisele Bündchen’s reported refusal to accept payment in dollars caused upset Stateside. Abandoning the dollar peg would put more pressure on the greenback.

Regional security may also be important. The EU was born out of a need to bury old enmities and face a common threat – the USSR. The GCC formed in the first year of the Iran-Iraq War, and while Iran’s nuclear ambitions and Iraq’s uncertain future may not be slowing GCC economic growth, they are a reminder of the dangers of being a wealthy individual in a rough area.

More reason not to offend Washington.