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Hi, Yves. This is one of the few proposals I’ve seen on how to further the goal of reducing the use of the dollar in trade transactions among BRICS member states. Bangalee, a cryptocurrency blockchain guru, is not included in this, but I can add it for sexiness. This is effectively a bilateral trade scheme, but the use of an intermediate accounting currency is expected to lower transaction costs, as it did with the ECU. As this article shows, the ECU has come to be traded and even used as a central bank reserve. Private sector transactions, while not large, were apparently sufficient to provide pricing and were deemed reliable, but that didn’t happen right away. I spent the summer of 1984 (the ECU was launched in 1979) as a consultant in Citibank’s London treasury department, which included what was then the world’s largest foreign exchange exchange. ECU transactions were so minimal at the time that they were not even worth thinking about.
However, there is a fundamental contradiction here that is rarely recognized. The big slogan of BRICS is the strengthening of national sovereignty. The article points out that the ECU is currently seen as a stepping stone to a common currency, but any MMT advocate, observer of EU fiscal rules, or ECB watcher would say that BRICS would mean a significant loss of national sovereignty. Michael Hudson highlights a Bancor-type system as an alternative, which also involves a loss of national sovereignty. The big aim of the Bancor system is to enforce trade balance by penalizing both trade surplus and trade deficit countries. However, trade surplus countries are subject to harsher sanctions. Mercantilism has long been a very popular economic strategy, as it means accepting demand from trading partners. A country like China, which sees its surplus as the result of technological capabilities and investment, would almost certainly reject such a restrictive measure.
By Nicholas Schubitz, independent BRICS analyst. Business Live; Crosspost Info BRICS
Russian Deputy Foreign Minister Sergey Ryabkov said that when Russia takes over as BRICS chair in 2024, the countries should consider establishing a mutual payments system similar to the European Currency Unit (ECU), the forerunner of the euro.
He clarified that he was not proposing a common currency, but a unit of account for trade settlements that would reduce the costs associated with foreign currency exchange.
The ECU was a basket of currencies used as the unit of account of the European Community until it was replaced by the euro in 1999. Apart from its official role in the European Monetary Union, a private market in the ECU developed and it could be used for currency trading and to set the face value of financial instruments including bonds.
Unlike the euro, the ECU was simply an electronic unit of account and had no official coins or banknotes that could be used for cash transactions (although some commemorative tokens that could be used as legal tender were issued in Gibraltar).The ECU’s value was based on a weighted basket of European currencies, with the weights determined by the relative size of each member state’s economy.
The ECU attracted bond investors because ECU-denominated bonds offered better diversification than other European government bonds, which carry individual currency risk. The introduction of a similar system within the BRICS could similarly boost demand for BRICS securities.
Another benefit of the ECU is that it helped reduce currency risk for European businesses. Using a single currency for financial transactions allows businesses to avoid some of the costs and risks associated with currency exchange. This is beneficial for the BRICS because foreign exchange transaction costs can account for 3% to 5% of global trade.
Reducing costs associated with currency volatility (including the need to purchase derivatives contracts to hedge against currency fluctuations) could help facilitate trade between the BRICS. These advantages, coupled with the ability to denominated bonds in a diversified joint unit of account, make a BRICS currency based on the ECU an interesting proposition.
Trade balance
At the Bretton Woods Conference in 1944, British economist John Maynard Keynes proposed introducing a new currency to address imbalances in global trade relations. Though his proposal was ultimately rejected, the idea remains especially relevant today, as trade imbalances have emerged as a source of geopolitical tension.
Keynes proposed using a supranational unit of account (the bancor) within a multilateral payments system to settle international trade. Individuals would not hold or trade currency, but all international trade would be valued and settled in bancors, with penalties for surpluses and deficits to encourage trade balance.
The economist’s vision may have been somewhat extreme, prioritizing trade balance over all other considerations, but if some of the trade between the BRICS countries were conducted under such a system, it would clearly benefit the other BRICS countries, as it would encourage countries like China to buy more goods from countries with which they have a trade surplus.
This would certainly solve the problem that comes with South Africa being a BRICS member: it has a trade deficit with most of the BRICS countries, but a surplus with the West. In a Bancor system, if Saudi Arabia had a trade deficit with it because it was importing Saudi oil, Saudi Arabia would have an incentive to use that revenue to buy goods from South Africa to avoid penalties imposed by the clearing house.
Alternatively, adjusting the weighting of the BRICS currency basket would provide another way to address trade imbalances within the group. Weighting the basket based on the volume of exports in inter-BRICS trade could strengthen the currencies of BRICS countries that are running trade surpluses, improving the trade balance between each member state.
On the other hand, an equal-weighting method that ignores economic output and trade volumes would allow the use of the BRICS unit of account without affecting trade trends. This may be attractive to countries such as China and Russia, because their trade surpluses among the BRICS would not be affected by the use of a new currency. Smaller BRICS countries would also see clear benefits from increased demand for their own currencies.
The suggestion that the BRICS countries could adopt a system similar to that of the ECU is particularly interesting given that the ECU already had international status as a global reserve currency prior to the introduction of the euro, with central banks holding the currency among their foreign exchange reserves.
The implementation of a similar mechanism within BRICS would provide central banks with the opportunity to diversify their reserve holdings in the BRICS Reserve Currency (BRC), which is based on a basket of BRICS currencies and is more stable and attractive to central banks than any of the individual BRICS currencies, and would allow the New Development Bank to issue BRC-denominated bonds to finance development of infrastructure projects within member countries.
Due to balanced food and energy exports and imports within the BRICS countries and moderate trade relations among many member countries, correlations between the BRICS currencies are relatively low. Therefore, the BRICS unit of account (based on a weighted basket of BRICS currencies) is likely to be more stable than the ECU, which has concentrated geographic risk due to its exposure to Europe-European trade. The stability of the BRICS unit would be further supported by China’s exchange controls and Saudi Arabia’s dollar peg.
Improved trade efficiency, reduced currency risks and greater access to development finance would benefit the BRICS countries, and the introduction of a common unit of account similar to the ECU is an attractive prospect. The ability of such a currency to be used as an alternative global reserve currency is another advantage.
While trade imbalances between member states make a common unit more attractive than switching to trade denominated in national currencies, this key issue is unlikely to be resolved and it remains to be seen whether the EU can follow through on its ambitious proposals.
