On January 19 the European Commission released a preliminary plan which is designed to reduce the European Union’s dependence on the US dollar. In addition, the plan signals an intention to protect European companies from Washington-imposed extraterritorial sanctions. As a long-term strategy, it states an intention to “considerably” increase the role of euro as an international currency.
European officials, who are in charge of financial transactions, emphasize that the sanctions and tariff strikes carried out by the Trump administration against potential allies in the past couple of years point to the still high level of Europe’s dependence on the financial system with the American dollar in the center. Washington’s policy «had an outright negative impact on the EU’s and member countries’ capacity to promote their foreign policy interests».
At present, the American currency accounts for more than four fifths of all exchange transactions worldwide. As a result,, if Washington needs to block any financial transactions, all it needs to do is to enter individuals, organizations or countries on the “black list”, which will be sent to all banks across the globe. For fear of losing the possibility of making payments in dollars, an overwhelming majority of companies and financial institutions have to follow instruction from US authorities.
On December 3, 2020 the Directorate General for External Policies of the European Parliament published a special report on orders from the Committee on International Trade which says that «US extraterritorial sanctions against Russia, Iran and Cuba affect the interests of EU countries and are legally groundless». Such measures, the report points out, run counter to WTO regulations, while the American secondary sanctions, which block access to the dollar-based financial system, are estimated by the authors of the document as «a serious challenge to the 27 Union countries».
For a major protection measure the report calls for «increasing the share of payments in euros or terminating cooperation with the US in some areas».Under the document published on January 19, the European Commission expects that a general plan approved in the summer last year to rescue the EU economy from the consequences of coronavirus pandemic, along with the supplementary programs of financial restoration as part of the 7-year budget, will become key to an early consolidation of the EU financial policy. This, in turn, will set the stage for strengthening the international role of the euro.
The “rescue plan” was approved in the amount of 750 billion euros, and, for the first time ever, the EU members agreed to issue a common debt to finance it. It is expected that emission of new bonds, both by individual EU members, and by the Community as a whole, will contribute to «a considerable expansion of liquidity on the EU capital markets» and will attract investors.
While the history of top world reserve currencies goes back several centuries, none of them has ever occupied such a domineering position as the US dollar nowadays. In our time, the only instance of a relatively fast change of reserve currency – from the British pound to the US dollar – took place as a result of two world wars.
Overall, experts are unanimous that a country or a community of countries that claim the role of reserve currency emitter, must possess a large-scale, growing and sustainable economy, a developed financial market, which offers potential investors huge liquidity volumes and a variety of reliable assets, and must guarantee freedom of capital movement. Finally, they must demonstrate readiness and capability to play a leading role in international relations, that is, to have a substantial military and geopolitical weight.
Europe is doing well in terms of nominal economic growth and given the low cost of financial transactions, since reception and dissemination of information is transparent by nature. Meanwhile, even the most ardent supporters of a stronger financial and economic influence of the EU acknowledge that at present «major financial hubs, London and New York, are located beyond the bounds of the EU, while the capital markets within the EU are too segmented», – RBK says.
The euro, despite its 20-year history, has yet to reach the “clear parameters” of a regional currency. On the one hand, by 2019 the euro had made a tangible contribution to the weakening of the positions of the US dollar in global economy. According to the European Commission, at that time already one fifth of global currency reserves was denominated in the single European currency, while «60 countries and territories tie their currencies to it, in one way or other». The euro has also done well on the promising market of “green” bonds, of which nearly half are denominated in the common European currency, according to The Financial Times.
In November last year the inter-bank payments system SWIFT reported that «the dollar for the first time since 2013 ceased to be the most used currency in global payments». In October the system indicated that the dollar accounted for 37,6% of transactions, while the euro — 37,8%. In March payments in dollars made up nearly 45%.Bloomberg says a drop in the dollar rate, and a decrease in dollar payments are the result of crises in trade, an economic slump which was triggered by the pandemic, and “political instability”.
On the other hand, according to The Financial Times, the share of euro in global gold and currency reserves reduced from 23% in 2009 to 20% in 2019. In addition, the euro is now vying for a top currency with both the dollar and the yuan. In nearly ten years, by the end of 2019, The Economist says, debt obligations denominated in yuan had outnumbered the British pound, the euro and the Japanese yen. But not the dollar.
For Europeans the number one “obstacle” is the geopolitical one. Despite all statements of late about the expediency of political consolidation, the EU is still far from transforming into an organization somewhat reminiscent of a confederation. Besides, the EU is unable to “exert political influence on other global economic hubs”, including the United States and China.
Judging by the published document, the European Commission hopes to maintain the pace of economic and financial integration which the EU acquired in the course of a joint struggle against the corona crisis. For the first time in history EU members have agreed on the emission of the Community’s common debt. As the USA and China move towards a “cold war” in the financial, commercial and technological spheres, the European currency and financial system as a whole may serve as a ‘safe haven’, a refuge for an ever growing number of countries and businesses which are striving to avoid losses in conducting payments and settlement transactions.
However, if it wants to compete with the dollar and yuan on the basis of parity, the EU ought to make a breakthrough in developing its own financial technology, which is, undoubtedly, one of the key features of authority and sovereignty. Many in Europe tend to interpret Washington’s policies under Trump as America’s bid for changing the global economic layout. And now, the idea of “nationalizing” vitally important technologies is gaining strength in all leader countries.
Europe is terribly behind the USA and China in the development of companies that offer services in managing social platforms, Internet commerce an finances. Bridging this technological gap in a few years is challenging, if not outright impossible. What is making the situation worse is the absence of a common European market of digital technologies and services. Given the situation, what could serve as an effective means of reducing this gap is “re-nationalization” of data – the major resource of the IT industry. In addition, the EU is trying to make the most of its position as a major market for IT giants, and de facto occupy the position of a trend setter in international regulation of their activities. In the future, this may come to signify “globalization” for “own” companies alone and administrative restrictions for “others”.
Echoing this are European Commission proposals concerning the launch of a digital euro under the patronage of the European Central Bank. According to a recent ECB report, the role of the dollar as an international payments currency may diminish considerably, if central banks agree on direct cross-border payments, through exchanging digital currencies.
At present, the European Central Bank is among the top three financial regulators that demonstrate considerable interest in developing block chain technology and introducing digital currencies. As for prospects for reducing dependence on the dollar, a matter of primary concern is the possibility of issuing the so-called Central Bank Digital Currency (CBDC). What is meant is virtual money, which is controlled by a national, or supra-national, as in the case of the ECB, central bank, and which does not exist in cash but only in the form of information recorded on computer memory chips.
The geopolitical consequences of the start of the emission of a digital euro may acquire fairly huge proportions. As soon as there appeared the first crypto currency – bitcoin, Washington sounded alarm that “America’s foes”, be it governments or non-governmental institutions, could succeed in setting up a financial network totally independent of the US dollar. In this case, the United States would lose a major instrument of non-military pressure, which it could use to influence its competitors and rivals.
Should countries or intergovernmental organizations begin to emit crypto currency, unilateral sanctions will become pointless. Just as a withdrawal of any nation, even as powerful as the USA, from multilateral agreements which hinge upon the threat of imposing sanctions, will make no sense either.
A digital euro undermines such a weighty instrument of US political pressure as the inter-bank payment system SWIFT because it guarantees instant payments without the dollar. 2020 reports said that the European Central Bank had created a working group to look into the possibility of establishing cooperation between national digital currency projects, with the participation of Canada, Japan, Sweden, Switzerland and Britain.
On the whole, the euro needs a “solid foundation” if it wants to successfully compete with the dollar and the yuan. The EU common budget should finally reach beyond the bounds of a fund that subsidizes member countries. It is also essential to balance the growth of the Eurozone in terms of its dependence on exports, “and on the corresponding export of capital”.
An agreement on the emission of Europe’s common debt “for the first time inspires hope of creating a substantial reserve of common European debt obligations”. But whether the decision to emit EU bonds will herald the formation of a supra-national ministry of finance is unclear. Until recently, discussions to this effect all but fueled differences in attitude between Eurozone governments.
Nevertheless, the corona crisis has given new impetus to political moods in favor of preserving and strengthening currency sovereignty. European politicians, interested in cementing the international role of the EU, have a good reason for their option in favor of financial and economic agenda. Europe’s dependence on the USA in military area is pervasive,, while in the economic and financial spheres Europe has been pursuing a more independent agenda in recent years. Now, the European Union seems to be nearing a point after which it may make new important steps in this direction.
From our partner International Affairs
Covid-19 and food crisis
COVID-19 has hit at a time when food crisis and malnutrition are on the rise. According to the most recent UN projections, the pandemic-induced economic slump would cause as many as 132 million people to be hungry. This would be in addition to the 690 million people going hungry now. At the same time, 135 million people suffer from acute food insecurity and in need of urgent humanitarian assistance. Although the pandemic’s transmission has slowed in certain countries and cases have decreased, COVID-19 has resurfaced or is spreading rapidly in others. This is still a global issue that needs a worldwide solution.
This epidemic threatens both lives and livelihoods. COVID-19 has had a wide-ranging and disruptive influence on the agriculture system. We fear a worldwide food crisis unless we act quickly, which may have long-term consequences for hundreds of millions of children and adults. This is mostly due to a lack of food availability — as wages decline, remittances decline, and in certain cases, food prices rise. Food insecurity is increasingly becoming a food production concern in nations that already have high levels of acute food insecurity.
Agriculture continues to serve a reliable and major part in world economy and stability, and it remains the primary source of food, income, and work for rural communities, even in the face of a pandemic. The impact of the COVID-19 pandemic on the agricultural system and sector has been wide-ranging, causing unprecedented uncertainty in global food supply chains, including potential bottlenecks in labor markets, input industries, agriculture production, food processing, transportation and logistics, as well as shifts in demand for food and food services.
The COVID-19 epidemic not only created a new sort of agricultural catastrophe, but it also occurred at a difficult moment for farmers. In most years during the last few years, global commodity output has exceeded demand, resulting in lower prices. In 2013, the Food and Agricultural Organization (FAO) predicted decreased global agricultural output growth due to limited agricultural land development, rising production costs, expanding resource restrictions, and increasing environmental concerns.
An expanding global population remains the main driver of demand growth, although the consumption patterns and projected trends vary across countries in line with their level of income and development. Average per capita food availability is projected to reach about 3,000 kcal and 85 g of protein per day by 2029. Due to the ongoing transition in global diets towards higher consumption of animal products, fats and other foods, the share of staples in the food basket is projected to decline by 2029 for all income groups. In particular, consumers in middle-income countries are expected to use their additional income to shift their diets away from staples towards higher value products. Meanwhile, environmental and health concerns in high-income countries are expected to support a transition from animal-based protein towards alternative sources of protein.
When people suffer from hunger or chronic undernourishment, it means that they are unable to meet their food requirements – consume enough calories to lead a normal, active life – over a prolonged period. This has long-term implications for their future, and continues to present a setback to global efforts to reach Zero Hunger. When people experience crisis-level, acute food insecurity, it means they have limited access to food in the short-term due to sporadic, sudden crises that may put their lives and livelihoods at risk.
However, if people facing crisis-level acute food insecurity get the assistance they need, they will not join the ranks of the hungry, and their situation will not become chronic
It is clear: although globally there is enough food for everyone, too many people are still suffering from hunger. Our food systems are failing, and the pandemic is making things worse.
How Bangladesh became Standout Star in South Asia Amidst Covid-19
Bangladesh, the shining model of development in South Asia, becomes everyone’s economic darling amidst Covid-19. The per capita income of Bangladesh in the fiscal year 2020-21 is higher than that of many neighbouring countries including India and Pakistan. Recently, Bangladesh has agreed to lend $200 million to debt-ridden Sri Lanka to bail out through currency swap. Bangladesh, once one of the most vulnerable economies, has now substantiated itself as the most successful economy of South Asia. How Bangladesh successfully managed Covid-19 and became top performing economy of South Asia?
In March 1971, Sheikh Mujibur Rahman declared their independence from richer and more powerful Pakistan. The country was born through war and famine. Shortly after the independence of Bangladesh, Henry Kissinger, then the U.S. national security advisor, derisively referred to the country as a “Basket Case of Misery.” But after fifty years, recently, Bangladesh’s Cabinet Secretary reported that per capita income has risen to $2,227. Pakistan’s per capita income, meanwhile, is $1,543. In 1971, Pakistan was 70% richer than Bangladesh; today, Bangladesh is 45% richer than Pakistan. Pakistani economist Abid Hasan, former World Bank Adviser, stated that “If Pakistan continues its dismal performance, it is in the realm of possibility that we could be seeking aid from Bangladesh in 2030,”. On the other hand, India, the economic superpower of South Asia, is also lagging behind Bangladesh in terms of per capita income worth of $1,947. This also elucidates that the economic decisions of Bangladesh are better than that of any other South Asian countries.
Bangladesh’s economic growth leans-on three pillars: exports competitiveness, social progress and fiscal prudence. Between 2011 and 2019, Bangladesh’s exports grew at 8.6% every year, compared to the world average of 0.4%. This godsend is substantially due to the country’s hard-hearted focus on products, such as apparel, in which it possesses a comparative advantage.
The variegated investment plans pursued by the Bangladesh government contributes to the escalation of the country’s per capita income. The government has attracted investments in education, health, connectivity and infrastructure both from home and abroad. As a long-term implication, investing in these sectors helped Bangladesh to facilitate space for businesses and created skilled manpower to run them swiftly. Meanwhile, the share of Bangladeshi women in the labor force has consistently grown, unlike in India and Pakistan, where it has decreased. And Bangladesh has maintained a public debt-to-GDP ratio between 30% and 40%. India and Pakistan will both emerge from the pandemic with public debt close to 90% of GDP.
Bangladesh’s economy and industry management strategy during Covid-19 is also worth mentioning here since the country till now has successfully protected its economy from impact of pandemic. At the outset of pandemic, lockdowns and restrictions hampered the country’s overall productivity for a while. To tackle the pandemic effect, Bangladesh introduced improvised monetary policy and fiscal stimuli to bring them under the safety net which lifted the situation from worsening. Government introduced stimulus package which is equivalent to 4.3 percent of total GDP and covers all necessary sectors such as industry, SMEs and agriculture. These packages are not only a one-time deal, new packages are also being announced in course of time. For instance, in January 2021, government announced two new packages for small and medium entrepreneurs and grass roots populations. Apart from economic interventions, the government also chose the path of targeted interventions. The government, after first wave, abandoned widespread lockdown and adopted the policy of targeted intervention which is found to be effective as it allows socio-economic activities to carry on under certain protocols and helps the industries to fight back against the pandemic effect.
Another pivotal key to success was the management of migrant labor force and keeping the domestic production active amidst the pandemic. According to KNOMAD report, amidst the Covid-19, Bangladesh’s remittance grew by 18.4 percent crossing 21 billion per annum inflow where many remittance dependent countries experienced negative growth rate. Because of the massive inflow of remittance, the Forex reserve of Bangladesh reached at 45.1 billion US dollar.
Bangladesh’s success in managing COVID19 and its economy has been reflected in a recent report “Bangladesh Development Update- Moving Forward: Connectivity and Logistics to strengthen Competitiveness,” published by World Bank. Bangladesh’s economy is showing nascent signs of recovery backed by a rebound in exports, strong remittance inflows, and the ongoing vaccination program. Through financial assistance to Sri Lanka and Covid relief aid to India, Bangladesh is showcasing its rise as an emerging superpower in South Asia. That is why Mihir Sharma, Director of Centre for Economy and Growth Programme at the Observer Research Foundation, wrote in an article at Bloomberg that, “Today, the country’s 160 million-plus people, packed into a fertile delta that’s more densely populated than the Vatican City, seem destined to be South Asia’s standout success”. Back in 2017, PwC (PricewaterhouseCoopers) report also predicted the same that Bangladesh will become the largest economy by 2030 and an economic powerhouse in South Asia. And this is how Bangladesh, a development paragon, offers lessons for the other struggling countries of world after 50 years of its independence.
Build Back Better World: An Alternative to the Belt and Road Initiative?
The G7 Summit is all the hype on the global diplomatic canvas. While the Biden-Putin talk is another awaited juncture of the Summit, the announcement of an initiative has wowed just as many whilst irked a few. The Group of Seven (G7) partners: the US, France, the UK, Canada, Italy, Japan, and Germany, launched a global infrastructure initiative to meet the colossal infrastructural needs of the low and middle-income countries. The Project – Build Back Better World (B3W) – is aimed to be a partnership between the most developed economies, namely the G7 members, to help narrow the estimated $40 trillion worth of infrastructure needed in the developing world. However, the project seems to be directed as a rival to China’s Belt and Road Initiative (BRI). Amidst sharp criticism posed against the People’s Republic during the Summit, the B3W initiative appears to be an alternative multi-lateral funding program to the BRI. Yet, the developing world is the least of the concerns for the optimistic model challenging the Asian giant.
While the B3W claims to be a highly cohesive initiative, the BRI has expanded beyond comprehension and would be extremely difficult to dethrone, even when some of the most lucrative economies of the world are joining heads to compete over the largely untapped potential of the region. Now let’s be fair and contest that neither the G7 nor China intends the welfare of the region over profiteering. However, China enjoys a headstart. The BRI was unveiled back in 2013 by president Xi Jinping. The initiative was projected as a transcontinental long-term policy and investment program aimed to consolidate infrastructural development and gear economic integration of the developing countries falling along the route of the historic Silk Road.
The highly sophisticated project is a long-envisioned dream of China’s Communist Party; operating on the premise of dominating the networks between the continents to establish unarguable sovereignty over the regional economic and policy decision-making. Referring to the official outline of the BRI issued by China’s National Development and Reform Commission (NDRC), the BRI drives to: “Promote the connectivity of Asian, European, and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road [Silk Road], set up all-dimensional, multi-tiered and composite connectivity networks and realize diversified, independent, balanced, and sustainable development in these countries”. The excerpt clearly amplifies the thought process and the main agenda of the BRI. On the other hand, the B3W simply stands as a superfluous rival to an already outgrowing program.
Initially known as One Belt One Road (OBOR), the BRI has since expanded in the infrastructural niche of the region, primarily including emerging markets like Pakistan, Bangladesh, and Sri Lanka. The standout feature of the BRI has been the mutually inclusive nature of the projects, that is, the BRI has been commandeering projects in many of the rival countries in the region yet the initiative manages to keep the projects running in parallel without any interference or impediment. With a loose hold on the governance whilst giving a free hand to the political and social realities of each specific country, the BRI program presents a perfect opportunity to jump the bandwagon and obtain funding for development projects without undergoing scrutiny and complications. With such attractive nature of the BRI, the program has significantly grown over the past decade, now hosting 71 countries as partners in the initiative. The BRI currently represents a third of the world’s GDP and approximately two-thirds of the world’s entire population.
Similar to BRI, the B3W aims to congregate cross-national and regional cooperation between the countries involved whilst facilitating the implementation of large-scale projects in the developing world. However, unlike China, the G7 has an array of problems that seem to override the overly optimistic assumption of B3W being the alternate stream to the BRI.
One major contention in the B3W model is the facile assumption that all 7 democracies have an identical policy with respect to China and would therefore react similarly to China’s policies and actions. While the perspective matches the objective of BRI to promote intergovernmental cooperation, the G7 economies are much more polar than the democracies partnered with China. It is rather simplistic to assume that the US and Japan would have a similar stance towards China’s policies, especially when the US has been in a tense trade war with China recently while Japan enjoyed a healthy economic relation with Xi’s regime. It would be a bold statement to conclude that the US and the UK would be more cohesively adjoined towards the B3W relative to the China-Pakistan cooperation towards the BRI. Even when we disregard the years-long partnership between the Asian duo, the newfound initiative would demand more out of the US than the rest of the countries since each country is aware of the tense relations and the underlying desperation that resulted in the B3W program to shape its way in the Summit.
Moreover, the B3W is timed in an era when Europe has seen its history being botched over the past year. Post-Brexit, Europe is exactly the polar opposite of the unified policy-making glorified in the B3W initiate. The European Union (EU), despite US reservations, recently signed an investment deal with China. A symbolic gesture against the role played by former US President Donald J. Trump to bolster the UK’s exit from the Union. As London tumbles into peril, it would rather join hands with China as opposed to the democrat-regime of the US to prevent isolation in the region. Despite US opposition, Germany – Europe’s largest economy – continues to place China as a key market for its Automobile industry. Such a divided partnership holds no threat to the BRI, especially when the partners are highly dependent on China’s market and couldn’t afford an affront to China’s long envisaged initiative.
Even if we assume a unified plan of action shared between the G7 countries, the B3W would fall short in attracting the key developing countries of the region. The main targets of the initiative would naturally be the most promising economies of Asia, namely India, Pakistan, or Bangladesh. However, the BRI has already encapsulated these countries: China-Pakistan Economic Corridor (CPEC) and Bangladesh-China-India-Myanmar Economic Corridor (BCIMEC) being two of the core 6 developmental corridors of BRI.
While both the participatory as well as the targeted democracies would be highly cautious in supporting the B3W over BRI, the newfound initiate lacks the basic tenets of a lasting project let alone standing rival to the likes of BRI. The B3W is aimed to be domestically funded through USAID, EXIM, and other similar programs. However, a project of such complex nature involves investments from diverse funding channels. The BRI, for example, tallies a total volume of roughly USD 4 to 8 trillion. However, the BRI is state-funded and therefore enjoys a variety of funding routes including BRI bond flotation. The B3W, however, simply falls short as up until recently, the large domestic firms and banks in the US have been pushed against by the Biden regime. An accurate example is the recent adjustment of the global corporate tax rate to a minimum of 15% to undercut the power of giants like Google and Amazon. Such strategies would make it impossible for the United States and its G7 counterparts to gain multiple channels of funding compared to the highly leveraged state-backed companies in China.
Furthermore, the B3W’s competitiveness dampens when conditionalities are brought into the picture. On paper, the B3W presents humane conditions including Human Rights preservation, Climate Change, Rule of Law, and Corruption prevention. In reality, however, the targeted countries are riddled with problems in all 4 categories. A straightforward question would be that why would the developing countries, already hard-pressed on funds, invest to improve on the 4 conditions posed by the B3W when they could easily continue to seek benefits from a no-strings-attached funding through BRI?
The B3W, despite being a highly lucrative and prosperous model, is idealistic if presented as a competition to the BRI. Simply because the G7, majorly the United States, elides the ground realities and averts its gaze from the labyrinth of complex relations shared with China. The only good that could be achieved is if the B3W manages to find its own unique identity in the region, separate from BRI in nature and not rivaling the scale of operation. While Biden has remained vocal to assuage the concerns regarding the B3W’s aim to target the trajectory of the BRI, the leaders have remained silent over the detailed operations of the model in the near future. For now, the B3W would await bipartisan approval in the United States as the remaining partners would develop their plan of action. Safe to say, for now, that the B3W won’t hold a candle to the BRI in the long-run but could create problems for the G7 members if it manages to irk China in the Short-run.
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