BRICS - Is A Common Currency Such A Good Idea?

The idea of creating a common currency for the BRICS nations has been brought up numerous times throughout the past year. With the establishment of new alternative financial institutes that are supposed to counterbalance the existing IMF and World Bank, this initiative may not seem as far-fetched and unrealistic as before. However is this really the only way to guarantee less dependency on the economic reign of the dollar and euro? 

In an interview with the Russia&India Report Oleg Sienko, Director General of UralVagonZavod Research and Production Corporation expressed his support for the creation of a common BRICS currency as a way to stimulate economic growth and further strengthen the ties between the five countries. His opinion is backed up by the belief that a common currency would “enable us to move away from the dependency on Western financial centers and the US dollar as the main international transaction and reserve currency”.

To put things into perspective a comparison with the most widely discussed monetary union would seem only appropriate. The Eurozone. According to the classifications a monetary and fiscal union is the last stage before complete economic integration - which inevitably implies the total harmonisation of the economic, monetary, fiscal and trade policy of all of the member states. However the on-going eurozone crisis has made many doubt the effectiveness of the union. Taking this into consideration it becomes clear that a large number of the problems in the eurozone stem directly from the fact that the while creating the monetary union, the European authorities failed to make provisions for the creation of a fiscal union. This in turn has made the disparities in the economic situation, social policies and the different governments’ generosity even more evident, thus inevitably leading to the much debated eurozone debt crisis and to contraversial talks of a possible Grexit.

A single currency implies that for such a reform to be made successful, it has to be accompanied by radical changes in the legislative and fiscal framework of all the member states. Furthermore it means that the respective countries can no longer use their isolated monetary policy to increase their competitiveness. This may pose a challenge for the BRICS who pride themselves on their competitive prices of natural resources, labour and production.

The establishment of an alternative financial architecture has become the slogan of the economic cooperation between the BRICS. However in my opinion a common currency is hardly a sustainable option, as it will only artificially homogenise the financial framework of the BRICS at surface level, which may cause more problems than it was initially aimed at solving.

Photograph courtesy of http://emergingequity.org