The euro versus new reserve currencies of BRICS and ASEAN

Emerging countries are actively working on an alternative to the current monetary system. Their fear is that the United States and Europe will increasingly use their existing currencies and reserve systems as a political weapon.

Composition by currency of central bank reserve assets:

  • United States. The US dollar USD was adopted after the ratification of the US Constitution. It was the “Mint Act” of April 2, 1792 which established the dollar as the main monetary unit. The dollar has been the world's primary reserve currency since the end of World War II. It represents 59.02% of the reserves of central banks around the world in the first quarter of 2023.
  • Economic and Monetary Union EMU. Created in 1999, the euro was introduced into the EMU, or eurozone, in eleven European countries. Today, there are 20 states that are part of this zone. This zone was to strengthen economic and political integration within the EU. It represents 19.8% of world reserves.
  • ASEAN, the Association of Southeast Asian Nations is an organization of ten Southeast Asian countries. It was founded in 1967 in Bangkok by five countries in the context of a Cold War. It was created to stimulate economic development in the region, promote peace and stability among member states and reduce prosperity gaps. According to its secretary general, there is no priority for a common currency, but the development of regional payment connectivity.
  • BRICS. In 2006, four countries decided to join together to form the BRIC group. South Africa joined this group in 2010. Six new countries will join BRICS from January 2024. BRICS was created to find ways to reform international financial institutions, such as the IMF and the World Bank, in order to enable emerging economies to be better heard and better represented. Russia and Brazil want to create a common currency. Today, the Chinese Yuan is the third largest reserve currency, but it only accounts for 2.58% of foreign exchange reserves.

The dollar and the euro in the global battle

In 2009, the share of the dollar in reserves was 62.1% and the share of the euro was at a record 27.7%. This distribution was that before the euro crisis, interest rates negative and the measures to stimulate the purchase of bonds by the European Central Bank. We notice that the dominance of the dollar is gradually eroding over time. But the euro, still in second place, lost 7.9%.

Could the battle for second place intensify with the arrival of new reserve currencies while the role of the dollar will remain the majority?

The euro is already paying the price for the war in Ukraine. The worst enemies of the euro will be fiscal non-solidarity in the euro zone, the gold standard, cryptocurrencies and digital currencies.

The new BRICS and ASEAN currency zones cannot be established as optimal currency zones (ZMO).

This will require a lot of time and money to fulfill the necessary conditions: perfect mobility of workers, sectoral diversification and budgetary and fiscal federalism, etc. According to R. Mundell, Nobel Prize winner in economics, to be “optimal” a monetary zone must be equipped with adjustment mechanisms to reduce the impact of asymmetric shocks. Such mechanisms are difficult to put into practice without strong budgetary solidarity.

Cryptocurrencies for developing and emerging countries

Developing countries are proving to be the countries most interested in cryptocurrencies. They prefer to use crypto to protect themselves against the inflation of their state currencies and the rise in interest rates which increases the cost of their debts (800 billion according to UNCTAD). For emerging countries, it is a way to circumvent the SWIFT network, mainly in cases of commercial relations with countries targeted by American or European economic sanctions.

Gold as a standard for new currencies ?

After World War II, the Allies met at Bretton Woods in July 1944 and established the dollar as the world's primary reserve currency. The pre-war gold standard is abandoned in favor of the exchange standard. It is no longer in relation to gold that the different currencies will be referenced, but in relation to the dollar. Only the US dollar is pegged to gold. The BRICS want to introduce gold as a standard for their new currency: according to the IMF World Gold Council, in 2023, China bought 39.8 tonnes, Russia 31.3 tonnes and India 2, 8 tons, etc.

A digital currency for the Eurozone, ASEAN and BRICS

The digital euro will actually be finalized towards the end of 2026 if the Council and Parliament adopt the favorable legislative framework.

For ASEAN, at the 43rd summit to be held on September 23, 2023, members will discuss the transformation of economies towards digital economies, following the signed agreement to promote regional payments connectivity and the use of currency transactions local (LCT). This is a further step in moving away from currencies such as the dollar or the euro.

For the BRICS, China and Russia have already started testing their digital currencies in 2020. The major idea is that only a digital unit of account for a group of countries like the BRICS, unlike a cryptocurrency, can help create an environment of sustainable financial stability and a solid monetary infrastructure. Potential investors in this currency could take advantage of BRICS members' abundance of natural resources, labor and durable goods, while the EU today lacks rare metals and relies on imports for its energy, etc.

It takes more than forty years to create a common currency

If the BRICS or ASEAN one day manages to have a common currency, it is unlikely that it will replace the dollar or the euro. This new currency would exist in addition to the current global monetary system and will mirror the euro.

The idea of ​​a common currency in debates in the EU has been present since the end of the 1960s. The Pierre Werner report recommended in 1970 a transfer of economic power to the EEC and the establishment of a common currency. All attempts failed until 1979 and the creation of the European Monetary System (EMS). In 1989, the Madrid European Council adopted the Delors report on an economic and monetary union in three phases. From 1990 to 1993, there was the end of exchange controls in the Union, the increase in resources intended to correct imbalances between European regions and the convergence of European economies. From 1994 to 1998, it was the establishment of the European Monetary Institute (EMI), the independence of national central banks and the reduction of national budget deficits. From 1999 to 2002, the euro was born.

The EU would have the time and means to achieve its energy independence and secure its supply of strategic metals. Continued European economic and financial integration will be key to increasing the international role of the euro in a potentially more divided global economy.