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EU wants less dependence on US dollar

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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

Economy

Passing the Test of the Covid Pandemic

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For love of domination we must substitute equality; for love of victory we must substitute justice; for brutality we must substitute intelligence; for competition we must substitute cooperation. We must learn to think of the human race as one family.– Bertrand Russell

The only thing that will redeem mankind is cooperation.– Bertrand Russell

The COVID pandemic delivered a blow to the world economy through multiple channels. The labour supply was adversely affected by record high mortality rates, which may also deliver longer-term effects. With respect to economic policy, rather than stimulating greater cooperation the pandemic resulted in additional restrictions and greater proclivity towards self-sufficiency and self-reliance. Another channel was the negative impact on travel and labour mobility, as well as services and small business development.

More generally, the Covid pandemic proved to be a major test for the national, regional and international systems of governance. The international system as well as regional institutions proved to be unprepared and ill-equipped to address the blows of the crisis. At the national level the economic system was tested with respect to the governance system, the resiliency of the health care system as well as the trust of the population in the policies of the authorities (in particular the receptiveness of the calls for vaccination).

In the sphere of international cooperation the shortcomings of the current framework are illustrated by the lack of common efforts across countries in developing and providing vaccines to the global community. A straight-forward and sensible solution in the context of the current crisis would have been to widen the possibilities for the population to get access to a greater array of vaccines – this would in turn raise the participation rate of the population in vaccination. Equally as sensible would be joint efforts across countries in working on more effective vaccines. Instead, there is the intensifying “vaccine protectionism” and efforts to undermine trust in the vaccines created in “competitor countries”.

There is also a lot more that the international community could do to provide assistance to the least-developed economies. In 2020, official development assistance (ODA) by member countries of the Development Assistance Committee (DAC) (comprises developed economies, including the EU and the United States) amounted to USD 161.2 billion, representing 0.32% of their combined GNI. Initial estimates indicate that within total ODA, DAC countries spent USD 12 billion in 2020 on COVID-19 related activities. As a result, ODA assistance in 2020 increased by 3.5% compared to 2019 and reached its highest level ever recorded. Such an increase, while important in view of the challenges faced by developed economies themselves, falls short of the rising needs of the least developed countries that were hard-hit by the sharp fall in FDI and remittance inflows due to the pandemic-induced restrictions. It has to be noted also, that ODA levels declined in 13 out of 30 members of DAC in 2020.

One of the key initiatives in the context of the assistance of the G20 countries to heavily-indebted developing economies was the provision of debt-relief to cope with the shock of the COVID pandemic. According to the OECD the total debt relief extended by advanced economies in 2020 amounted to USD 541 mn. At the same time, according to China’s Ministry of Finance, the Export-Import Bank of China as well as the China International Development Cooperation Agency have suspended debt service payments from 23 countries totalling more than USD 1.3 bn. Overall, the total debt relief provided by China to developing countries under the G20 framework reached USD 2.1 bn, which is the highest among the G20 members in terms of the size of the deferred funds.

Apart from ODA and debt relief there are also gaps in areas such as trade policy, most notably with respect to the lingering (and at times rising) protectionism affecting least-developed economies during the outbreak of the pandemic. The recent World Bank study of the implications of restrictive trade policies during the COVID crisis underscored that least-developed economies could be among the hardest hit. The response of the international community needs to be focused on improving developing countries’ market access, as well as the supplies from developed economies of medical equipment and technologies for national healthcare systems.

In the end, “enlightened self-interest” and “invisible hands” as guiding principles have not served the global community well. If the challenge of the current pandemic is ever to be decisively surmounted, it is going to be through a joint response. The hope is that this common effort will be transformational for the global community and will lead to emergence of new pathways and institutions for international cooperation. The changing “superstructure” of technological and material advances will necessitate an evolution in the “base” of human values. The effects of the current pandemic as well as the rising pile of other global imbalances and vulnerabilities are a reflection of the disconnect between the heights of the technical and material advances/ambition and the shaky foundation of the weakening values of international cooperation.

The important point to realize in the context of the current crisis is that it is not a one-off stumbling block on the road to greater prosperity in the future. There are just too many vulnerabilities and road-bumps along the current path that necessitate an outright rethink of the development itinerary. This relates in particular to risks such as cyber-security, inequality and environment/energy security. These fragilities are the opposite side of the advances made by the global community in areas such as computer-science, economic modernization and higher rates of industrialization in the developing world. Further ambitions along these important trajectories will increasingly call for ways to strengthen ethical standards and international cooperation.

From our partner RIAC

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Half a Decade On – Reflecting on Russia’s Unsung Successes

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In 2016, as the incoming World Bank lead economist for Russia, I started writing about Russian economic issues. It is now time to bid goodbye. As a professional analyst of the Russian economy over the last 5 years, I can summarize my experience in one sentence: things in Russia are never as bad as they seem, but they are never as good as they can be, either.

Just in the last 6 years, Russia has managed to attain remarkable macro-stability. Inflation, which was in double digits, is in now in manageable territory. The country is less reliant on oil and gas today than 5 years back. These are no small achievements. On the other hand, as I – and many others have written – sagging potential growth holds progress back. But these issues are well-known. In this final column, I would like to recognize three lesser-known Russian developmental successes that often fly under the radar screen.

First is Russia’s increase in life expectancy – from 65.3 years in 2000 to 72.7 years in 2018. This has been mostly due to a drop in the number of deaths caused by non-communicable diseases (i.e. diseases that are not infectious or contagious such as heart attacks and stroke) and external causes (such as road accidents and homicides). Mortality rates for both adults and particularly children have also been decreasing since the 2000s. Even more recently, infant mortality decreased by 36 percent from 2011 to 2017 and maternal mortality decreased by 49 percent in the same period. While the pandemic engulfs us all, it is worth taking a longer-term perspective to recognize legitimate improvements in Russia’s life expectancy.

Second is Russia’s progress in financial literacy. Russia is no stranger to financial crises. While governments anywhere and everywhere have the primary responsibility in preventing and managing them, an important factor that is only being recognized is the need for individuals to become more informed about making financial decisions.

As an early adopter, Russia has recognized the benefits of financial literacy, and made remarkable strides in increasing literacy across both adult populations and school children. This is thanks to both top-down efforts by the Ministry of Finance and Central Bank of Russia, and bottom-up ones, which have included tapping into schools, libraries, and other community platforms to reach a large and diverse segment of the population. Indeed, Russia was ranked the first among 132 countries in the Child & Youth Finance International Global Inclusion Awards in 2016. It also ranks in the top 10 of G-20 countries for financial literacy.

Third is Russia’s progress in improving its tax administration. The history of taxes in Russia hark back to medieval times, with Prince Oleg imposing the first known “tribute” on dependent tribes. Catherine the Great is known to have said “Taxes for a government are same as sails for a boat. They serve to bring her faster into a harbor without flipping over by their burden”.

Building on lessons learnt over centuries, Russia today is at the global forefront of tapping technology and real-time source data and has managed to shift from a culture of tax evasion to tax compliance. Tax non-compliance, notably in value-added taxes, for instance, has shrunk from double digits a few years ago to less than 1 percent today, with minimal human involvement. Russia’s success in modernization of its tax services is not as well known as it ought to be, but global interest is slowly but steadily growing.

Surely, these achievements are not the end of the road. When it comes to life expectancy, male life expectancy is behind female life expectancy by almost 10 years, and this gap needs to be shrunk. Financial literacy, consumer protection, and safeguards for privacy and data protection need to keep pace as cryptocurrencies and digital fraud become more commonplace. And gains in tax administration may be washed out without complementary tax policies. Yet, these unsung successes deserve more recognition, both within and outside Russia.

One of the more unusual analysis the World Bank undertook was to figure out how wealthy is Russia. We found that Russia’s wealth lies not in its abundant natural resources (as important as they are), or its physical infrastructure (as mighty as some of it may be). Rather, Russia’s wealth derives from the ingenuity and creativity of its people. Indeed, almost half of all Russia’s wealth derives from its human capital — the cumulative experience, knowledge, and skills of Russians. Only then is it followed by physical capital (about a third), and natural capital (about a fifth). Anecdotally too, I can reaffirm that to be the case. In my interactions with students in various universities and high schools, I have witnessed their keen engagement, their sharp and pointed questions, their sense of humor, and above all, a passion to improve their country. I am indeed privileged to have played a small role in this journey.

PS: There is one other area I would like to draw your attention to, and that is climate change. While the politics are what they are, the science and economics are undeniable. In Russia, in addition to federal initiatives, it is encouraging to see positive signs emerging from within Russian regions, such as Sakhalin and Murmansk, which are vying to become carbon-free zones. As I had written earlier, the one mistake not to make about Russia is to treat it as a single unit of analysis. Doing so would be like being unaware that a Matryoshka doll is not empty! Indeed, Russian regions may be at the forefront of addressing climate change and we might be in for a (pleasant) surprise – this space is therefore worth keeping on an eye on.

First appeared in the Russian language on Kommersant.ru via World Bank

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The Politico-Economic Crisis of Lebanon

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Dubbed as a failed state. The Middle Eastern country, also known as the ‘Lebanese Republic’, is already leading towards a humanitarian crisis. The country is witnessing the worst financial crisis since the 1975-90 civil war. The financial catastrophe has done most of the damage as the country currently stands as one of the top 10 worst economic disasters witnessed over the past 150 years. If the economists are put true to their word, it means that Lebanon rates as the most dismal economic crash since the 19th century. As the state of Lebanon undergoes a significant political shift since last year, the social and economic fissures are subsequently broadening. A fragile democracy (for namesake) and a constant disequilibrium in the parliamentary stratosphere, have led to an economic depression that is rapidly expanding as the country fails to adopt a unified political stance and adhere to corrective measures to hold the toppling economy from a collapse.

More than half of the Lebanese population has slumped below the poverty line as escalating inflation continues to reel the populace. The main cause underpinning such brutal inflation is the hyper-devaluation of the Lebanese pound. The currency was originally pegged at a fixed rate of 1500 Lebanese pounds to the US dollar. However, over the past three decades, the economic crunch has crippled the economic nucleus of Lebanon. According to World Bank estimates, the Lebanese pound has devalued by 95% and currently trades at 22000 Lebanese pounds to the US dollar in the black market – roughly 15 times above the official rate. The resultant inflation has driven the government to push the prices to unfathomable levels – even pushing necessities beyond the reach of an average citizen. The fact could be witnessed by the rapid increase in the price of bread – which was hiked by another 5% last month to value at 4000 Lebanese pounds per loaf.

The dire social crisis could be gauged by the fact that an average Lebanese family requires a spending worth five times the minimum wage mandated by the government just to afford basic food requirements. Most of the families can’t suffice to consume utilities such as medicine, gas, or electricity. Astounding research revealed that even hospitals dealing with the Covid outbreak are not afforded gas and electricity which has led to a hike in petroleum consumption due to heavy usage of generators. The resulting shortage of petroleum has driven rage across the country as businesses fail to thrive while multiple wings of the airports are rendered powerless. The recent World Bank report signified that the food prices have inflated by roughly 700% over the past two years – a swell of 50% in just under a month. The regional countries have shown concern as Lebanon is heading towards a health crisis with a strengthening Delta variant in the Middle East and no room for recovery.

The main cause of such a debilitating situation is primarily the rampant corruption in the echelons of the government followed by the instability that ensued last year. Following the catastrophic blast in Beirut’s port that claimed an estimated 200 lives, the government resigned in the aftermath of virulent protests across Lebanon. The political vacuum, however, further pushed the state into despair. The caretaker government, led by the former Prime Minister, Saad Hariri, failed to consolidate a government as ideological differences between the President and the Prime Minister continued to displace the essential debates of the country. The contention between President Michel Aon, a stout supporter of the Shite militant group Hezbollah, and Prime Minister Saad al-Hariri, a Sunni Centrist, caused the efforts to falter as the country continued to plunge into crisis without an elected government to handle the office.

Hariri drove the narrative that due to President’s strong ties with the Hezbollah, which is arguably supported by Iran, Lebanon has suffered a shuffle of power to entrust financial support to the militant group. The narrative caused institutions like IMF and the World Bank to hesitate in injecting desperately needed social stimulus into the country despite continual warnings of an impending humanitarian crisis by France and the United States. A political vacuum coupled with the destruction caused last year along with the prudence of global financial institutions to pivot the country have ultimately resulted in the chaos that describes the landscape of Lebanon today.

However, Hariri resigned last month after failing to form a government even after nine months. The resulting political thaw helped President Aon to appoint Najib Mikati, a lucrative businessman, and former prime minister, as an interim Prime Minister entrusted to form a mandated government in Lebanon.

With a renewed Cabinet support, something that Hariri rarely enjoyed, Mikati is expected to assuage the concerns of the IMF and support economic reforms with the help of states like France. The Paris conference, scheduled on 4th August, is now the focal point as Mikati plans to convince the French diplomats regarding his schemes to pull Lebanon out of the puddle. Prime Minister Mikati recently reflected on his aspirations: “I come from the world of business and finance and I will have a say in all finance-related decisions”. He further stated: “I don’t have a magic wand and can’t perform miracles … but I have studied the situation for a while and have international guarantees”. It is clear that Mikati envisages repairing the economy which is already long overdue.

Under the French plan aiding Mikati’s regime, he would need to enforce significant political reforms to gain international aid. The diplomats, however, envision a far graver reality. It is touted that the IMF would likely focus on two facets before granting any leverage to the Mikati-regime: political-social reforms and progress towards parliamentary elections. However, with grueling Covid cases springing into action, the road to recovery would probably be highly tensile. 

While Mikati doesn’t stem from any particular political bloc unlike his failed predecessors, he was elected primarily by the backing of Hezbollah. A question emerges: would Mikati be able to navigate through the interests of an organization subjected as a terrorist fraction by most of the Western world. An organization that arguably serves as the primary reason why Lebanon stands as one of the highly indebted countries in the world. An organization that could be the decisive factor of whether financial support flows to Lebanon or sanctions cripple the economy further similar to Iran. The question stands: would Mikati refuse the dictation of Hezbollah and what would be the consequences. The situation is highly complex and time is running out. If Mikati fails, much like his predecessors, then not only Lebanon but the proximate region would feel the tremors of a ‘Social Explosion’.

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