Sylvain Perifel – Shanghai, 06/07/2013
Abstract – As the global systemic crisis currently reshapes the world deep and fast, the distressed global governance dating from the end of WW2 is no more adapted to today’s reality where the role of the United-States has been relativised. However such a governance in working order is essential to avoid major disputes between the main regional blocks. We argue that the ruins of the old system cannot be revived but that a new global governance urgently needs to be built. The hurdles of an opposition to this project, by the US in particular, could be overcome thanks to a strong cooperation between the BRICS and the eurozone leading to new common institutions for these two major actors, that may afterwards spread to the entire globe.
The Euro-BRICS concept has been introduced by Franck Biancheri and this article is inspired by the conclusions of a Euro-BRICS seminar organised by LEAP and the university MGIMO in Moscow in May 2013.
Today’s world has its structures inherited from 1945 when the United-States amounted to half of the global economy and had two thirds of the global gold reserves. Bretton Woods gave birth to the new international monetary system where the dollar was the sole pillar and was convertible to gold. The United Nations (UN) in New York was created to resolve conflicts between nations and maintain peace; the International Monetary Fund (IMF) in Washington was built to ensure monetary cooperation and financial stability; the North Atlantic Treaty Organisation (NATO)’s goal was a collective defence of western countries under the US army’s umbrella, etc. However, as we shall see, the international monetary system based on the dollar has become the main problem of the world and all these institutions are stuck and do not represent any more the reality of a world in which new powers have emerged and whose pillar is hurt by a major crisis. The question is whether these institutions can be reformed to fit the new world order, or whether a new system must be built; and, in the latter case, how to build this new system when interests of the different regions often diverge. As two important regions, namely the BRICS and the eurozone, have all to benefit from a new world order, we shall argue that a promising path for solving these issues is a strong cooperation between these two actors, leading to common institutions and monetary system. They are very legitimate to become the leaders of changes that could afterwards spread to the entire world.
Impossibility to reform the existing institutions
Useful as they may have been, the global institutions (UN, IMF, World Bank, World Health Organisation, etc.) are no longer able to tackle the problems they face. The divergences on issues like Syria between the US on the one hand, and Russia and China on the other, are so strong that the UN Security Council is paralysed and no action (in either direction) can be undertaken. The UN is further unable to legislate on the incredible use of drones by the US. The initiative in Libya has gone far beyond its mandate and has damaged UN’s credibility in the eyes of Russia and China in particular. The French move in Mali was before long not accompanied by blue helmets, and so on and so forth. In other words, the UN has become useless in today’s world. Similarly, the NATO has huge intern tensions and has not been involved in Libya, Mali or Syria, while many European countries distance themselves from the US amid divergences on the Israeli question or revelations that they were spied by their “ally”.
As to the IMF, while it has been brought to centre stage during the “euro crisis”, now its recommendations are no more followed (it advocated austerity when countries launched huge stimulus plans, and stimulus when they implemented austerity measures) and its role in Europe has become marginal as its participation to bailouts has fallen to one tenth.
Nobody has heard anymore of the World Bank, or of the World Health Organisation since its catastrophic management of the swine flu in 2009. We could multiply examples, the existing global institutions only reflect the older world and cannot act in the new world order which is emerging from the crisis.
One might have hoped that this is a temporary situation and that these institutions could be reformed in order to fill again their duties correctly. As time goes by however, divergences between nations increasingly show that this is not possible, as the US are ready to do whatever it takes to save their privileges, and the emerging nations do not accept any more to receive orders from the ex-boss. Concerning a reform of the UN for example, the required agreement of the permanent members of the UN security council is far beyond reach, no one wanting to question its own right of veto. Therefore new solutions are to be sought so as to avoid the severe consequences of a geopolitical dislocation.
The Euro-BRICS cooperation
The international institutions are in such a bad shape because they were conceived for a world in which the United-States were the sole pillar, whereas the global systemic crisis has changed this completely since it is primarily a crisis of the US. Remember that it all started from the US and that the second tsunami will come again from there as the policy of the Fed (in particular) leads directly to a new US crisis, for the situation is even worse than in 2008. While Europe or Asia or other regions can solve their problems internally without an unmanageable impact on the rest of the world, this is not the case of the US whose problems are exported and must be solved by the other countries: this is due in particular to the central role of the dollar, as we shall later see. This contagion of US problems to the whole world is today’s major global issue that has to be changed in order to restore some stability.
However, while the world is changing fast, the US do not want to lose their central place, which is conceivable since it gives them many privileges. But the divorce between the US and the rest of the world, including Europe, is getting wider as shown e.g. by tensions on the quantitative easing policies of the Fed or on the wide-ranging espionage of the US. Even the free-trade agreement currently negotiated between the European Union and the US is falling apart and will at best provide an empty shell.
The position of the US thus leads to many blockades when it comes to solving the current crisis, the main of which being the impossibility to discuss a reform of the international monetary system. But the crisis can be solved only if these issues are tackled, and the longer we wait the harder the next shock will be. Expressed in a different way, there is no time to lose: it is urgent to build new global institutions adapted to the new world order. Since the US seem to prefer the status quo ante and don’t show any will to adapt to the new world order (despite their arguable interest to do so), this means that it must be done without them at first.
But for such a project, which legitimacy can nations have without the US? The BRICS alone only represent emerging countries and therefore cannot claim to encompass the whole world’s interests. The European Union alone is too tied to the US via the United Kingdom: it is at least required to look at the eurozone instead of the European Union. But similarly, the eurozone only represents developed western countries and is not legitimate to defend the BRICS’s interests. However the union of the BRICS and the eurozone represent both developed and emerging countries, accounts for about 40% of the world economy and nearly half of the world population: new common institutions for governance in the eurozone and the BRICS would therefore be fully legitimate, if successful, to progressively be adopted by other countries (on a voluntary basis) so as to exit the old world order smoothly.
China for instance has already understood the weight of a Euro-BRICS partnership when it pushed for its rating agency Dagong to be authorised in Europe. Apart from a Euro- BRICS rating agency, other common developments could include a stability fund as a replacement of the IMF (and instead of the eurozone and the BRICS building both on their side their own stability fund), a currency to replace the dollar or local currencies in bilateral trade among the eurozone and the BRICS, and institutions to promote peace like a UN in working order would do.
Why would these two actors – the eurozone and the BRICS – cooperate? Europe sees that the future is on the BRICS’ side, not only for trade where markets are developing fast, but also for their growing influence in the world: the BRICS become an unavoidable global actor. The BRICS see that Europe is still the largest economy in the world, that it has many assets (in particular a powerful diplomacy and worldwide geopolitical influence) and an extraordinary experience in regional integration which is inspiring for a rapprochement of the BRICS countries, and finally that the eurozone has strong skills in common financial infrastructures and currency.
Both actors want to free themselves from the yoke of the US and wish to play a prominent role in the new world order. Besides the euro, the yuan is also called to be a major currency. Combined, these assets are unsurpassed in the world and a Euro-BRICS partnership ought to be a legitimate leader in the new world order.
The international monetary system
One of the domains where a close Euro-BRICS cooperation would certainly lead to major changes is exemplified by the reform of the international monetary system (IMS). Actually, the IMS is responsible in a large part of the current problems of the global economy as we argue now.
In 1944, the world agreed in Bretton Woods that all currencies are convertible in US dollars with a fixed exchange rate, and only the dollar is convertible to gold. The dollar hence became the only pillar of the monetary system. The prerequisite in this system was that the value of the dollar remained high in order to ensure its convertibility into gold. However the Vietnam war together with spendings for the “race for space”, in particular, made US deficits soar and increased too much the available quantity of dollars in the world: it thus turned out impossible to maintain the value of the dollar. In 1971 Nixon was forced to close the “gold window”, that is, the convertibility of the dollar into gold.
Since that time, a system of “floating rates” was progressively adopted and officialised in 1976 by the Jamaica agreements. This was the death of the IMS as it was transformed into an “international monetary jungle”: exchange rates are now only governed by the markets and float freely. Interestingly, with the consequences we know, this launched financial products (options, futures, etc.) in order to protect economic actors from the variation of exchange rates, which were at first tools for commerce, not for speculation.
Since the dollar remains the pillar of the system but its value is no longer guaranteed by gold, the global economy is now dependent on the variations of the dollar, which are numerous and large. This instability is the origin of many crises since 1971. Indeed, whereas almost no crises occurred between 1944 and 1971, in average one major crisis every 4 years happened since 1971: energy crises (1973, 1979); developing countries crisis and Mexican default (1982), etc. until more recently the Asian financial crisis (1997); the dot-com bubble (2001); and of course the subprimes crisis (2007), and now a currency war…
As early as in the 1960s Robert Triffin explained why the system could not work. Indeed, according to “Triffin dilemma”, the system relies on an absolute confidence into the US dollar; however the US must run a trade deficit in order to inject in the world a sufficient quantity of dollars for the (expending) global trade, and this deficit undermines the confidence in the dollar. Hence a national currency cannot stay long the international reference currency.
This intrinsic instability should of course be fixed if we are to learn from the current crisis and avoid another disaster in the future. This requires a thorough reform of the IMS. However, as we have seen, the US have shown that they do not want to lose the privileges given by the central role of their currency, as it enables them to live beyond their means (thanks to “free” imports and “free” credit) and to have a deep worldwide influence. That’s why one cannot hope anymore that the US will collaborate to a reform of this system.
That’s also why China is currently multiplying swap agreements, a pragmatic manner to avoid trading in dollar without waiting for a reform of the IMS: in some sense, it is already building its alternative monetary system. But such an isolated move is complicated and costly (using a specific trade currency with each partner) and does not encourage cooperation.
A robust solution would be for the eurozone and the BRICS, representing an annual trade volume of the order of one trillion dollars and growing fast, to create a common currency for trade between their nations. Of course this does not mean a single currency to replace all the national currencies in everyday life but instead, unlike the choice made with the euro by the eurozone, it will be used only for international trade. The easiest way to implement this currency would be a basket of the six currencies of the Euro-BRICS zone (euro, real, ruble, rupee, renminbi and rand), with a ponderation reflecting the weight of the trade of each country. Using the initials, a possible name for this new currency could be R5E or just RE. Ideally, a strong political will could furthermore support the idea of Keynes to promote collaboration instead of predation by preventing the countries from excessive trade deficits as well as surplus, which would lead to more “harmony” in global trade instead of a bitter struggle.
This major move by the Euro-BRICS would pave the way to a new international monetary system: this currency basket is indeed set to be extended to other currencies as other countries progressively want to use it for trade, which is very likely due to the importance of Europe and the BRICS in international trade. This way of proceeding has the immense advantage to enable a smooth exit from today’s stuck system.
This example of a partnership of the eurozone and the BRICS in order to lead the reform of the IMS by starting with their own common currency is the template that seems most appropriate for a smooth reform of the global governance: be they exemplary and innovative and the world will follow the immensely important and representative Euro- BRICS countries.
A first step in this promising Euro-BRICS partnership should be to organise a Euro- BRICS summit in order to agree on common interests and strategies ahead of each G20 summit. As the lessons of the global systemic crisis have not been learnt yet and a new shock is looming, a strong move of the Euro-BRICS to build a new global governance becomes urgent.