Common Currency is never going to happen. I don’t know why some of you guys are so eager to give up your monetary policy and central bank to a group that includes a bunch of foreigners.
BIRCs Common Currency (CC) isn’t about retreading the same well documented mistakes of the Euro, it’s about creating a totally new and separate trade oriented currency that all BRICs members universally agree to accept for trade in goods and services. So you can use CC to buy Russian oil, Chinese manufactured goods and Indian call centres without needing to change currencies.
Such a currency will be profoundly beneficial to all members as it would allow central banks to fundamentally solve one of their biggest dilemmas of having to balance monetary policy to simultaneously satisfy a nations domestic inflationary concerns as well as foreign trade considerations.
With CC, you can have the best of both worlds where the domestic currency only need to worry about inflation, while the new CC Central Bank can worry about trade stability.
It’s not without its downsides of course. For example, you won’t be able to play currency depreciation games to gain export advantages anymore. And you can’t hold foreign profit’s hostage like India is doing with Russian oil revenues by giving them only useless rupees that no one else wants to accept.
Sure China and the rest can still launch a CC without India. But unfortunately optics and trust is a fundamentally element of finance and economics. And it’s terrible optics to launch a new BRICS CC without one of the headline 5. It will still probably be a success, but why give that such a bad handicap from the start?
Ultimately I am rather pessimistic about the prospects of a new CC. The reason is China’s rapid advancement.
A CC makes most sense when all the members are in a similar situation in terms of international trade. When all BRICS members are net exporters, it’s easy to set monetary policy for CC. But if some members are net exporters while others become net importers, well that complicates things as who does the CCCB ‘side with’ when it sets its overall monetary policy (which ultimately affects its exchange rates against national currencies)?
As China grows richer and its population pyramid shifts towards older and its trade mix changes to accommodate that new economic reality and the changing appetites of Chinese consumers, it’s trade policies and positioning may also need to be adjusted accordingly.
Additionally, as Chinese national comprehensive power grows ever greater and the gap in raw power between China and the rest of BRICS widen ever faster, China may well decide that it is no longer in a sharing mood. Make no mistake, the creation of a CC is ultimately a massive gift from China to the rest of the BRICS. That in exchange for their help now to assist and speed up de-dollarisation, that China will share with them the fruits of being the world reserve currency of choice in the future. That’s basically all the power and benefits of dollar hegemony with the costs shared, but ultimately overwhelmingly falling on China’s broadest shoulders.
If the rest of the BRICS keep dragging their feet and China endures the costs and pains of wrestling global reserve currency status from the USD all by itself, what’s then in it for China to share the fruits of that fight with the rest of the BRICS if they don’t turn up for the fight and only show after thinking to share in the spoils?
