In the context of the 2023 BRICS meeting at the end of August, the subject of adopting a shared currency among the BRICS countries (Brazil, Russia, India, China, and South Africa) raises various questions regarding the future global geopolitical balance. In recent years, BRICS countries have pledged to invest more in their currencies as part of a broader effort to strengthen their economies and balance the hegemony of the US dollar. Therefore, a BRICS currency would be unique, symbolizing a novel alliance of emerging forces that collectively surpass not just the current reigning power, the United States, but also the entire G-7 weight in terms of GDP.
UNDERSTANDING THE PRINCIPLE OF THE BRICS CURRENCY
The 2023 BRICS summit, scheduled from August 22nd to 24th, has sparked debates about the potential for the BRICS countries to establish a unified currency. This concept stems from a straightforward observation: presently, 88% of global transactions occur in dollars, while the BRICS, collectively, account for 31% of the worldwide GDP, surpassing the combined GDP of the G7 nations (Germany, Canada, the United States, France, Italy, Japan, and the United Kingdom).
Note: These are currency pairs, each leg is represented, which is why the sum exceeds 100%.
This situation has various negative consequences for the BRICS countries. For starters, the United States controls its currency and hence has the ability to use the dollar as a sanctioning instrument. This has been seen in circumstances such as Russia’s sanctions, which included limits on dollar transactions, forcing the country to seek alternatives to the greenback.
This reliance on the dollar suggests that the BRICS countries are vulnerable to the United States monetary and fiscal policies.
On paper, the notion is simple: allow these countries to no longer rely on the United States for commercial exchanges.
RETURN TO THE GOLD STANDARD?
To further comprehend the concept of a gold-backed currency, let’s look at the many phases required in establishing this common currency.
Initially, the currency’s exchange rate would be fixed in relation to the weight of gold.
Countries that use this single currency would then acquire gold reserves to assure the currency’s convertibility based on each country’s gold holdings.
This action would assist in constraining the currency in circulation, linking it to the gold holdings of each country. Consequently, each state’s central bank could independently pursue its own monetary policy.
Source: World Gold Council
So, this would constitute a fundamental difference from the Euro, which, with the ECB, has a single monetary policy for all its adopting members, thereby influencing the budgetary policies of the member states.
CLEAR LIMITATIONS
In spite of an attractive narrative, there are several factors that make the prospect of immediate adoption unlikely.
The first barrier appears to be the huge disparity across the BRICS states. This is due to their differing political systems, which range from authoritarianism to democracy, as well as their disparate appetites for commodities.
China and India are important importers, whereas Brazil and Russia are major exporters. This would imply that importer countries would need to reinvest gold in order to turn it into the common currency for purchasing commodities, but exporter countries would accrue the common currency by selling their goods. This presents a long-term question about the currency’s convertibility.
The second point is the Chinese economy’s asymmetry in comparison to other members, with a GDP that is more than twice the sum of the other member states. This might lead to an association in which China becomes the dominating power, with other members reduced to satellite status.
Lastly, the volume of trade between BRICS remains relatively modest today (as shown in the table below). For comparison, intra-European Union exports were 360 billion in 2022.
Source: Silkroad Briefing, UN Comtrade 2021.
From a broader perspective, achieving widespread adoption would require gaining the trust of users who currently benefit from a liquid and standardized market due to the dollar, with its assured convertibility. Additionally, questions arise about the futures market that allows hedging on commodities, primarily traded in dollars.
CONCLUSION
The BRICS summit in Johannesburg will be particularly interesting to observe, given the current geopolitical context.
Although there appears to be a shared desire among member states to become less reliant on the dollar, the solution does not seem imminent.
China’s dominant position within the group could potentially lead the BRICS into a showdown between the two giants, the United States and China.
Note: This post is a translation of the Vers une devise BRICS? blog post.
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