Part Two How the BRIC may work?
DOUGLAS RASBASH
In part one, the rational for BRICS and the BRIC (the supposed name of its currency) was discussed. While in part two we elaborate further the role of the BRIC, its risks and the effectiveness of the Euro as the last true global currency to be established. The common understanding is that BRICS is a counterforce to the USA and the Western Alliance is arguably misplaced. What BRICS may achieve is the promulgation of a long awaited and necessary reassessment of the global status quo. Overcoming the East v West and Global North v South characterization will be necessary for the body to carry out its crucial role of ‘steering’ the global economy in coming years and ensuring that tensions between West and East are mollified rather than magnified.
The five-nation bloc
The BRIC -assuming that is what the new currency is called – will be based on a basket of the currencies of the five-nation bloc: Brazilian Real, Russian Ruble, Indian Rupee, Chinese RMB Yuan and South Africa’s Rand. The BRIC is intended as an alternative currency for international trade and investment though a BRIC denominated global reserve. BRICS members will be able to draw in the reserve using special drawing rights as members of the IMF currently do. The BRIC is not intended to replace the national currencies of its members – because of the tenement of non-interference.
New trading currency
Recently the Russian Embassy in Kenya declared, “The BRICS countries are planning to introduce a new trading currency, which will be backed by gold. It is also thought that by leveraging blockchain technology, digital currencies and smart contracts, the currency could revolutionize the global financial system. Thanks to seamless cross-border payments, it could also promote trade and economic integration among the BRICS nations and beyond.
Challenges
There is no escaping the fact that a theoretical BRICS currency would face its own unique set of challenges, there are several potential obstacles to consider. Here are some key challenges and an assessment of their associated risks:
Economic Divergence: The BRICS countries have significant economic disparities in terms of size, growth rates, economic structures, and policy priorities. The risk lies in achieving economic convergence and harmonizing policies to support a shared currency. Without sufficient convergence, disparities could lead to economic imbalances, reduced competitiveness, and conflicts over fiscal and monetary policies.
Political Differences: The BRICS nations encompass a wide range of political systems and ideologies, including capitalist and communist models. The risk here is that political differences may hinder consensus-building and decision-making processes necessary for a unified currency. Conflicting policy objectives and governance structures could make it challenging to establish and maintain effective governance mechanisms.
Currency Stability and Reserves: A BRICS currency would require stability and adequate foreign exchange reserves to ensure confidence and resilience. The risk is that individual BRICS countries may have varying levels of currency stability, inflation rates, and foreign exchange reserves. Disparities could lead to volatility, external pressures, and difficulties in maintaining the value and credibility of the BRICS currency.
Institutional Framework: Establishing robust institutions for monetary policy, governance, and coordination is crucial for a successful currency union. The risk is that developing effective institutions, such as a central bank, regulatory bodies, and mechanisms for policy coordination, would require significant effort and coordination among BRICS nations. Differences in governance practices and capacities may pose challenges in establishing a trusted and efficient institutional framework.
Financial Integration and Market Development: A BRICS currency would require deep financial integration and well-developed financial markets within the member countries. The risk is that some BRICS countries may have less developed financial systems, weaker regulatory frameworks, and varying levels of market openness. Insufficient financial integration and market development could limit the effectiveness of a common currency and impede efficient cross-border transactions.
External Influences and Geopolitical Considerations: The BRICS countries operate within a complex geopolitical landscape. The risk is that external factors, such as global economic trends, trade conflicts, or geopolitical tensions, could impact the stability and performance of the BRICS currency. External pressures and interdependencies may introduce vulnerabilities that could affect the credibility and value of the currency. It’s important to note that the assessment of these risks is based on a hypothetical scenario, and the specific challenges and their risks would depend on the detailed design and implementation of a BRICS currency. Mitigating these risks would require effective coordination, robust economic policies, political consensus, and careful management of the currency union.
Euro challenging dollarisation
The Euro is case of a new currency that was expected to challenge dollarisation. Indeed, trade with EU countries is in Euro not US Dollars. The Euro is overseen by European Central Bank. The EU members are politically unified. Yet despite its profound institutionalization the Euro did not replace the dollar as the international currency of choice. The Bric – or whatever it will be called will not be supported by political coherent nations nor will not have the same level of institutionalization or replace BRICS members national currencies. The Euro, introduced in 1999 as the common currency of the Eurozone (a group of European Union member states), was indeed designed to provide an alternative to the US dollar and enhance economic integration among European countries. Its success can be evaluated based on several factors:
Euro successes
Reduction of Currency Risks: The Euro aimed to eliminate currency exchange costs, reduce transactional barriers, and mitigate currency risks within the Eurozone. It has largely succeeded in achieving these goals by providing a stable and widely accepted currency for member countries, promoting intra-Eurozone trade and investment.
Increase in Trade and Investment: The Euro has facilitated increased trade and investment among Eurozone countries by streamlining cross-border transactions. It has eliminated exchange rate fluctuations within the Eurozone, making trade and investment planning more predictable and efficient.
International Reserve Currency Status: The Euro has become one of the major international reserve currencies, providing an alternative to the US dollar. Central banks and international investors hold Euro-denominated assets as part of their reserve portfolios, which reflects confidence in the currency.
Strengthening Regional Influence: The Euro has strengthened the collective economic and political influence of Eurozone countries. It has given them a unified voice in global economic and financial affairs, providing a platform for coordinated decision-making and negotiating power in international forums.
Economic Stability and Convergence: The Eurozone project aimed to foster economic stability and convergence among member countries. While the Euro has contributed to enhanced economic integration, it has also exposed structural and economic divergences within the Eurozone. The global financial crisis of 2008 and subsequent sovereign debt crises highlighted the challenges of maintaining economic stability and convergence among diverse member countries.
Institutional Framework: The Eurozone established institutions such as the European Central Bank (ECB) to oversee monetary policy and promote financial stability. The ECB plays a crucial role in setting interest rates and implementing monetary policies for the Eurozone. However, the effectiveness and coordination of these institutions have been subjects of ongoing discussions and debates.
Euro challenges
It’s worth noting that the success of the Euro has not been without challenges. The Eurozone has faced issues such as economic disparities among member countries, sovereign debt crises, and debates over fiscal and monetary policy coordination. These challenges have prompted discussions on the need for further integration and reforms within the Eurozone.
In conclusion, the Euro has provided an alternative to the US dollar and achieved a level of success in terms of reducing currency risks, promoting trade, and enhancing the collective influence of Eurozone countries. However, ongoing challenges and debates persist, and the Eurozone continues to work towards addressing them to ensure the long-term stability and success of the common currency.