There Won't Be Any BRICS Common Currency. And It Is A Good Thing
BRICS rejects a common currency, advocating instead for trade in local currencies to ensure economic sovereignty. Learn why dedollarization doesn’t require a new currency.
Alea iacta est. From Kazan, the protagonists of the great BRICS+ summit drew the conclusions that many expected, especially regarding the new economic order, as well as the new or aspiring participants in multipolarism. On the new economic and financial order, the Kazan Declaration makes it very clear: «We support the NDB in continuously expanding local currency […] We welcome the use of local currencies in financial transactions between BRICS countries and their trading partners»1. Despite what many voices are wrongly repeating, there won't be any new common currency, and neither have any of the representatives announced that it is even a topic of the BRICS agenda. No back to the gold or Bretton Woods II.
Countless rumors have circulated and continue to be repeated even now after the fact: theories about a future common currency, a return to the Gold Standard, digital payment systems, or the creation of new financial institutions. Regardless of the details that only time will be able to define, the real idea that emerged clearly from the summit is the desire to establish a commercial network based on two constitutively founding elements: bilateral relations and the use of the respective national currencies2 as means of international payment. Many of the most important representatives of the respective states have shown that they want to take advantage of the days spent in Kazan to establish, promise, or strengthen reciprocal commercial relations3.
But let's take a look at what many of the supporters of a brand-new multipolar world have been expecting and still would hope, as long as it is admitted to interpret the wishes heard till today: the idea that to make de-dollarization happen, tackling the parasitic financialization of world economy as well, two ways are needed: on one side re-create an international BRICS currency alternative to the dollar; on the other hand establish (or rather "restore") a new common fixed-rated monetary system, perhaps gold-based, that is no less than come back to Bretton Woods. Both ways are nothing but illusory solutions for problems that don't even exist. Instead, they are paradoxically made up to offer false solutions, as usually the laws of subtle power teach.
Why a common currency would be useless and counterproductive
As regards the first point, the creation of a new BRICS currency, it should be noted, before even delving into technical analyses, that it was Putin himself, way long before Kazan, who refuted all the rumors on the issue: during the last Valdai Club conference he declared that he does not want to repeat the mistake of the euro4, which is, that of eradicating monetary sovereignty to entrust it to a supranational organization that is incompatible with the morphology and development needs of individual states. Furthermore, the other BRICS representatives confirmed that a common currency project is not on the agenda.5 The only exception comes from the Brazilian Lula (unavailable to attend in Kazan) who, it seemed, was the only one to speak of the "need" to fight the dollar through the creation of a new currency, an exception that as such confirms the rule.
A common currency would be counterproductive, if not, at best, useless, and this for two reasons: one of a realist nature, the other more technical. The first reason, the realist one, is given by the simple observation that de-dollarization is, literally, already occurring: international trade between the BRICS through their own national currencies has already surpassed the trade with dollars6. Practically, it was enough for the countries to reach a concert through simple bilateral agreements to surpass the most used currency in the world and confirm with the most realistic of demonstrations that there is no scientific or natural need to re-create a new currency, as if the currency-device were in itself a philosopher's stone, independently of the commercial and political relations that it, in fact, reveals.
Secondly, as described previously7, the problem for an international monetary system (IMS), to guarantee independence and political freedom to the respective states, does not consist in the simple presence of a precious resource, such as gold, or in the "strength" of a common currency (and the example of the euro is a clear confirmation of this). Instead, it consists of the relationship that is established between the three founding elements of any IMS: exchange rate regime, capital mobility, and monetary policy. An IMS is nothing other than a system of agreements and common rules agreed upon by the states that are part of it.
The exchange rate regime can be fixed or flexible. Fixed, if the states (or more realistically a hegemonic state) decide to set the exchange rate of their currencies at fixed values, among them or about a single currency as the main official foreign reserve. Historically, this last function has often been covered by gold (Gold Standard, GS) or the US dollar, pegged as well to the fixed rate with gold (Gold Exchange, GE). If one decides on flexible exchange rates, then it means that there is no single common currency, and the ones of each state are exchanged directly among them, leaving the market to gradually modify the monetary values according to the conditions of world trade.
Capital mobility is given by the degree of openness that states grant to foreign capital. In other words, if financial actors can invest their capital in other countries without severe taxation or disincentives, then the market is said to be open. Therefore, complete mobility is equivalent to a situation of full globalization. On the contrary, if a state discourages, blocks, or controls the entry of foreign capital, then it means that the IMS provides protectionist measures and states could potentially, in the most radical of situations, achieve autarky.
Finally, each state, through its own central bank (CB) uses the interest rate instrument to modify the money supply within its own country and, consequently the employment levels. This is the fundamental monetary policy that all states as such put into practice as the main instrument of political intervention.
The possible combinations among the three elements give rise to what is called the Monetary Trilemma: among open capital mobility, independence of monetary policy, and fixed exchange rates, it is possible to have only two options together at the same time, never three. For example, if the BRICS opted for an IMS with fixed rates + open capital mobility, then they could not achieve an independent monetary policy.
Now, let's assume that a BRICS-Currency is finally created. First of all, the common currency would establish, by its very nature, a fixed rate regime, because the interest rates on the money of all the individual countries will have to, in a fixed rate regime, all equalize at the same level, and consequently, also the respective domestic money supplies must follow the trend of the international rate, because the money supply, as a common currency, is given by its corresponding interest rate. In other words, to the extent that the currency is one, only one is its interest rate through which the CB can modify the supply and demand of money or conduct monetary policy. Therefore, for this reason alone, each country would lose monetary sovereignty and would have to suffer it from the decisions of the CB above all national treasuries. This is exactly what the Euro System does through the European Central Bank, which alone holds the command of the interest rate on the euro for all member countries.
But, to play devil's advocate, let's also assume that the BRICS-Currency maintains, no one knows how ownership of each country's interest rate. Even in this case, nothing would change, to the extent that the law of equilibrium of the foreign exchange market would still lead to everyone's interest rate being equalized to the level established by the fixed rate regime. If to make a second hypothesis, a state is in a situation of macroeconomic disequilibrium and is included in a fixed rate IMS, it could theoretically revive its economy through an expansionary monetary intervention. This corresponds, skipping the technical steps, to an increase in the supply of liquid money which gives rise to an increase in employment and therefore production. However, monetary expansion is equivalent, at an international level, to a depreciation of the currency, that is to say, the exchange rate changes, but this is not allowed in a fixed rate regime! Therefore, the government is forced to raise the interest rate to bring the exchange rate back to the established level, thus nullifying the previous monetary intervention. In a fixed exchange rate regime, therefore, national policies must be directed only to maintaining exchange rate stability, to the detriment of the effective demand for the national currency, thus sacrificing employment and national production on the altar of a conventional international "golden rate". This is how a certain type of IMS exhausts monetary sovereignty, becoming a true instrument of world government.
Historical evidence against the Gold Standard and Common Currency System
This is exactly what happened every time a fixed rate regime was adopted, whether through GS or during the Bretton Woods dollar era. In the first case, when the fixed exchange rate was guaranteed by parity with gold, all countries suffered the consequences of the so-called Great Depression, the first during the last quarter of the 19th century, the second starting from Black Thursday on October 24, 1929. In both cases, states had to face competitive races to accumulate gold so that their currencies could maintain exchange rate stability, but these measures caused enormous suffering to their respective populations in terms of unemployment and shortages of money.
The Bretton Woods system was a different case: immediately after the end of WWII, the United States took advantage of the war victory and its new global role to build an IMS that would allow them to govern the world economy with open hegemony, at least in the Western world. At Bretton Woods, it was decided to peg the currencies of all the member countries to a fixed rate with the dollar, while the latter remained tied to gold at a fixed rate of $35/ounce. That period is still known, especially to Europeans, as the era of the Thirty Glorious Years, because they were three decades of relatively prosperous growth for the countries that emerged from the disaster of WWII. However, the credit certainly does not go to Bretton Woods, but rather to the balance of power that at the time forced the Western bloc to compete, first of all in terms of economic growth, against the Soviet enemy. Indeed, the fixed exchange rate with the US dollar meant that the member states could not in any way modify their monetary policy, except with the permission of the boss in Washington, or, at least, through fiscal policies or even devaluation measures, which used to be effective but certainly not comparable to the capacity offered by the real means of public-economic intervention such as the interest rate/money supply intervention.
Furthermore, it was decisive, unlike the pre-WWII period, that the states returning from the world conflict were very reluctant to reopen the doors of international trade to financial globalization that had already brought entire regions to their knees due to speculation and financial attacks. In short, the period from 1944 to the end of the 1980s can be seen as a fairly successful combo of the monetary trilemma between fixed exchange rates and financial protectionism, together with other factors such as geopolitical bipolarism. But, as already anticipated, the consumerist and top-down granted well-being of post-WWII Europe should not be confused with a very fair system, freed from the control of hegemonic and colonizing actors. Even in the best of cases, in a non-globalized international arena, for example, the fixed exchange rate remains a control tool that limits the independence of governments to varying degrees.
Collateral observations
Today, it has no sense at all to talk about BRICS’ new currency which will bypass the dollarized trade, as long as from Kazan all rumors about it have been definitely shut. It should be remembered that all the main political and financial representatives, including the important member of the board of the Russian bank Sergei Glazyev8, as well as the deputy of the chamber of commerce of the BRICS organization Sameep Shastri9, had declared that their respective currencies are making the dollar obsolete, without there being any project of a common official foreign currency. This is not surprising if we take into account the fact that, since the world is the world, to create advantageous trade exchanges it is more than enough to stipulate agreements (better bilateral rather than multilateral) between the interested parties and to negotiate trade alliances that reduce the risk of any future turbulence. As, among other things, the Chinese have always done, who, in defiance of any "synodal" and "conciliarist" practice, to use the Vatican jargon, have understood the advantage of privileging bilateral relations, which are more direct, secure, and free, compared to cumbersome and stringent multilateral diplomacy.
Among other things, there are still rumors, although there are no official sources yet, of a so-called Unit that the BRICS would like to create as an international monetary unit useful for the compensation of trade relations between states. Some say it will be a real currency, others instead speak of an accounting unit. In any case, it would be the result of a division between a quantity of gold that would act as a physical monetary guarantee, in the amount of 40%, in addition to a 60% filled with a basket of mixed currencies.
Here the specter of gold is haunting Eurasia again, to paraphrase Marx. As explained above, there is no need to peg national currencies to another hybrid financial device which results in a stability of exchange rates that is just apparently advantageous for international trade, but lethal for the political sovereignty of states. Sometimes the desire to return to financial stability of exchange rates, such as to a single currency between countries, is justified by the desire to counterbalance the unregulated and parasitic financialization of the world economy. Finance has, undeniably, taken over the real economy and financial globalization is bringing entire countries to their knees through speculation on money.
True, absolutely, but the return to currencies based on material resources or fixed exchange rates can only worsen the situation instead of solving it. All the greatest speculations, such as the one made by Soros in the 90s against England and Italy, or even that of 1997-98 in Southeast Asia, were caused precisely by the dynamics set in motion by the system of fixed exchange rates or, in the case of Southeast Asia, strongly controlled exchange rates10 which caused great expectations on future exchange rates, manna from heaven for the sharks of finance. A currency in itself is certainly not enough, even if we were in flexible exchange rates, to combat the financialization of the economy. If anything, we should intervene, with the regulation of the financial economy.
It should also be noted that gold, being a scarce resource in nature, will never be able to follow the possible growth of international trade, which nowadays drastically exceeds any quantity, necessarily insufficient, of available gold. Not to mention the fact that the most gold-producing countries would be advantaged compared to those who have it in a smaller quantity, recreating hierarchies and power relations totally contradictory to the multipolarism that inspires the actors in play.
Finally, it should be specified that the creation of a payment system to facilitate flows through quantum finance, or interbank networks, has nothing to do with the IMS between currencies. In this sense, projects to facilitate payments between the countries involved are welcome, so that people can have easier access to their bank credit, as well as greater accounting fluidity in financial flows. But this is precisely a completely different topic. If multipolarity will be, it cannot go as far as possible from the errors of the three systems that have so far proven to be failures: gold, dollar, and euro.
Kazan Declaration, pp. 17-18.
M. Obstfeld, A.M. Taylor, International Monetary Relations: taking finance seriously, 2017, p.18.
 | A guest post by
|
Excellent article, it really debunks a lot of narratives about a topic that exists solely for clout. People should know that BRICS members have different macroeconomic orientations and creating a new currency from scratch isn’t that easy and it requires a lot of reserves in exchange and gold, not to mention public trust above all. I am currently writing an article on the BRICS Summit and will definitely use this as a source.
Well written and interesting!
But, in my opinions: 1) the supposed trilemma is questionable, one reason it actually about trade-offs, not absolute exclusions. While a full full blast of all three might create unsustainable tensions, in practice, in some ways or others, all three, or maybe even any, are probably not fully there anyways and partial measures or compromises allow for varying degrees of each. For example, countries can adopt managed exchange rate regimes (like crawling pegs or currency bands) that offer stability without being full fixed. Also, capital flow management, such as forms of capital controls, capital inhibitors, or macroprudential regulations, permit partial openness without sacrificing all monetary policy autonomy. Amongst other things.
And more importantly, 2) in my view the biggest threat to King Dollar is the same biggest threat to the highly globally extractive planetary financial-economic system in general: a wave of sudden -- not necessarily violent -- true and real political change in the so called developing nations