The Death of Money (20 page)

But instead of taking to the streets to protest the cuts, Mr. Krumins . . . bought
a tractor and began hauling wood to heating plants that needed fuel. Then, as Latvia’s
economy began to pull out of its nose-dive, he returned to architecture and today
employs 15 people—five more than he had before.

Even the IMF, which has generally counseled against the sharp government spending
cutbacks used in Baltic states, acknowledged the Baltics’ success in a 2013 speech
by its managing director, Christine Lagarde, in Riga:

While challenges remain today, you have pulled through. You have returned to strong
growth and reduced unemployment. . . . You have lowered budget deficits and kept government
debt ratios to some of the lowest in the European Union. You have become more competitive
in world markets through wage and price cuts. You have restored confidence and brought
down interest rates through good macroeconomic policies. We are here today to celebrate
your achievements.

The peg to the euro and, in the Estonian and Latvian cases, actual conversion to the
euro, have proved instrumental in the recovery and
growth stories in the BELLs. Anchoring a local currency to the euro, and ultimately
adopting it, removes exchange-rate uncertainty for trading partners, investors, and
lenders. The benefits of offering economic certainty were illustrated in a recent
Bloomberg
report:

Today, Estonia’s economy is the fastest-growing in the currency bloc, consumers and
businesses are paying lower interest rates, and business ties with Finland—a euro
member state and Estonia’s main trading partner—are tighter than ever. . . .

“The most important thing was that we ended all the speculation about a possible devaluation”
of the kroon, says Priit Perens, the chief executive officer of Swedbank AS, Estonia’s
biggest lender and a part of Stockholm-based Swedbank. . . . Fears that all the Baltic
countries would eventually devalue had hampered investor confidence for a long time.
Devaluation would have been ruinous, since Estonia’s banks had started lending in
euros before the country switched to the common currency. Paying off euro-denominated
loans in devalued kroon would have imposed a crushing burden on businesses and consumers.

Lithuania and Bulgaria constitute an experiment within an experiment since they have
not pursued fiscal consolidation as strenuously as Latvia and Estonia and, as a result,
have not recovered as robustly. But overall, the BELLs have implemented fiscal consolidation
and other reforms far more rigorously than have the GIIPS, and they are achieving
sustainable debt and deficit levels, trade surpluses, and improved credit ratings
as a reward.

If not a perfectly controlled experiment, the contrast between the BELLs’ and the
GIIPS’ policy choices is a powerful case study. The findings show that economic prudence
works and Keynesian-style stimulus fails. The results are not surprising, given Keynesianism’s
dismal track record over the decades and the lack of empirical support for its claims.
But the BELLs example is likely to resonate for decades among objective observers,
who look for empirical economic proof as opposed to classroom hypotheticals.

The cases of the BELLs and the GIIPS illustrate both the benefits of
fiscal consolidation (as practiced by the former) and the costs of delay and denial
(as practiced by the latter). The overriding lesson is that currency devaluation is
not a precondition to recovery but rather a hindrance. A strong, stable currency is
a magnet for investment and a catalyst for expanded trade. The essential ingredients
for rapid growth following a crisis are accountability, transparency, fiscal consolidation,
and an equitable distribution of sacrifices. The BELLs’ experience from 2008 to 2014
offers powerful lessons for Europe’s southern periphery as it continues to adjust
in the years ahead.

■
BRICS

While the BELLs were breaking new ground in demonstrating fiscal consolidation’s benefits,
the more powerful BRICS have unsettled conventional wisdom and cast doubt on the U.S.
dollar’s future as the world’s leading reserve currency.

When the BRICS leaders convened a finance ministers’ summit in September 2006 in New
York City, they showed every sign of evolving in line with O’Neill’s original prescription,
not so much as a coherent economic bloc but as a political force. The meetings evolved
into a formal leaders’ summit in Yekaterinburg, Russia, in June 2009, and the summits
have continued at the ministerial and leaders’ level. In 2010 the original BRIC group
of Brazil, Russia, India, and China invited South Africa to join its ranks, and the
acronym was changed to BRICS. In April 2011 South Africa attended its first BRICS
leaders’ summit as a full member in Sanya, China.

O’Neill has consistently downplayed the idea that South Africa should be among the
BRICS, because the size of its economy and population coupled with its unemployment
problem do not put it in the first rank of developing economies. This is true economically,
but ironically South Africa’s addition vindicates O’Neill’s original thesis that the
BRIC project was more political than economic. The other BRICS were located in eastern
Europe, Asia, and Latin America. The African continent was a conspicuous gap in the
alignment of the East and the South against the
West. South Africa, as the largest economy in Africa, filled that gap with its advanced
infrastructure and highly educated workers, despite its relatively small size.

The BRICS’ combined economic heft is undeniable. The members represent over 40 percent
of global population, 20 percent of global economic output, and 40 percent of total
foreign exchange reserves. The BRICS have emerged as a counterweight to the original
G7 of highly developed economies and a powerful caucus within the more inclusive G20.
However, the BRICS have not taken any measures to integrate their economies into a
free-trading area or EU-style currency union except on a limited bilateral basis.
The BRICS’ principal impact has been to weigh in on global governance and the future
of the international monetary system with one voice.

The BRICS leaders have begun to stake out radical new positions on five key issues:
IMF voting, UN voting, multilateral assistance, development assistance, and global
reserve composition. Their manifesto calls for nothing less than a rethinking or overturning
of the post–Second World War arrangements made at Bretton Woods and San Francisco
that led to the original forms of the IMF, World Bank, and the United Nations. The
BRICS insist that unless those institutions are reformed to be more inclusive of BRICS’
priorities, the BRICS will take concrete steps to create their own institutions to
perform their functions on a regional basis. The evolution of such institutions would
inevitably entail a diminution in the role of the institutions they were meant to
replace. It is unclear whether these proposals are a stalking horse to promote real
reform in the existing forums or whether there are concrete plans to proceed in the
direction announced. Perhaps both intentions are true. In any case, the BRICS are
unwilling to accept the international monetary and governance status quo.

Specifically, the BRICS have called for expansion of the UN Security Council permanent
members to include Brazil and India. Russia and China are already permanent members.
This would create a seven-member permanent membership with the BRICS holding four
seats—a slight majority. There would be no elimination of the U.S. veto in this scenario,
but the addition of a Brazilian or Indian veto would significantly increase BRICS
leverage in the behind-the-scenes negotiations that
precede formal Security Council votes. Inclusion of Brazil and India would increase
the occasions on which BRICS hold the rotating Security Council presidency. The Security
Council presidency gives the presiding nation the ability to set the agenda and affect
Security Council processes.

The BRICS, especially China, have also pushed for voting reform at the IMF. If population,
reserves, and economic output are the relevant criteria, then current voting power
in the IMF is skewed in western Europe’s favor and against the BRICS. The IMF leadership
recognizes this, and managing director Christine Lagarde has been outspoken in favor
of the needed voting reforms (called “voice” in IMF jargon), especially with regard
to China. The difficulty lies in getting countries such as Belgium and the Netherlands
to reduce their voice in favor of China. This process has dragged on for years. The
BRICS have played their cards astutely by conditioning BRICS’ pledges for badly needed
IMF lending facilities to progress on voting reform. The BRICS’ trump card in this
game is to launch an alternative multilateral reserve lending institution if the IMF
does not increase their voting power.

A blueprint for BRICS alternatives to the IMF and World Bank was a principal result
of their March 2013 summit in Durban, South Africa. At that summit’s conclusion, the
BRICS issued a communiqué, which stated in part:

We directed our Finance Ministers to examine the feasibility and viability of setting
up a New Development Bank for mobilising resources for infrastructure and . . . we
are satisfied that the establishment of a New Development Bank is feasible and viable.
We have agreed to establish the New Development Bank. . . .

We tasked our Finance Ministers and Central Bank Governors to explore the construction
of a financial safety net through the creation of a Contingent Reserve Arrangement
(CRA) amongst BRICS countries. . . . We are of the view that the establishment of
the CRA with an initial size of US$100 billion is feasible. . . .

We call for the reform of the International Financial Institutions to make them more
representative and to reflect the growing weight of BRICS. . . . We remain concerned
with the slow pace of the reform of the IMF.

The BRICS summit also specifically addressed the U.S. dollar’s role as the world’s
leading reserve currency, and its possible replacement by SDRs:

We support the reform and improvement of the international monetary system, with a
broad-based international reserve currency system providing stability and certainty.
We welcome the discussion about the role of the SDR in the existing international
monetary system including the composition of the SDR’s basket of currencies.

Finally, and so as to leave no doubt about the BRICS’ status as a political rather
than an economic project, the Durban summit devoted substantial time to topics such
as the crisis in Syria, a Palestinian state, Israeli settlements, Iranian nuclear
weapons development, the war in Afghanistan, instability in the Congo, and other purely
geopolitical issues.

The BRICS reaffirmed their commitment to their new multilateral lending facility at
their summit in St. Petersburg on September 5, 2013, held in conjunction with the
G20 Leaders Summit. At that summit, the BRICS agreed that their contributions to the
new fund would come 41 percent from China, 18 percent each from Russia, Brazil, and
India, and 5 percent from South Africa.

In a surprising coda to the revelations of U.S. spying on allies emerging from defector
Edward Snowden, Brazil announced plans in September 2013 to build
a twenty-thousand-mile undersea fiber optic cable network from Fortaleza, Brazil,
to Vladivostok, Russia, with links in Cape Town, South Africa, Chennai, India, and
Shantou, China, to be completed by 2015. This system is tantamount to a BRICS Internet
intended to be free from U.S. surveillance. The United States has long had excellent
capability in tapping into undersea cables, so the actual security of the new system
may be problematic. Nevertheless, the proprietary nature of this system could easily
be adapted to include a BRICS interbank payments system, which would facilitate the
use of any BRICS-sponsored alternatives to dollar payments.

In addition to the regular meetings of BRICS leaders, a large number of ancillary
and shadow institutions have sprung up around the BRICS, including the BRICS Think
Tanks Council, the BRICS Business Council, and a BRICS virtual secretariat, among
others. The BRICS are also
coordinating foreign policy through the BRICS foreign affairs ministers’ meetings
in conjunction with the annual UN General Assembly meeting in New York. These initiatives
have spawned a new international facilitator class: the “BRICS Sherpa” and their “Sous-Sherpas.”
These BRICS institutions form a formidable caucus in the midst of other multilateral
forums conducted by the IMF, UN, and G20.

Today the BRICS must be regarded as a powerful economic and political force, notwithstanding
a recent slowdown in growth rates in certain members, especially China. The global
BRICS footprint in terms of territory, population, output, natural resources, and
financial reserves is impossible to ignore. The world should anticipate a gradual
convergence between the BRICS’ vision for the future and the West’s legacy institutions,
now that the BRICS have found policies and processes that unite them.

This convergence has many facets, which can be condensed into a single theme: the
diminution in the dollar’s international role and a decline in the ability of the
United States and its closest allies to affect outcomes in major forums and in geopolitical
disputes. The BRICS may have had humble origins in O’Neill’s brief research paper,
but the group has taken on a life of its own.

■
The Shanghai Cooperation Organization

Wall Street analysts are not alone in identifying commonalities in emerging market
economies, as other regional groups have come to the fore in recent years. These linkages,
based upon regional proximity or community of interest, are beginning to challenge
the postwar arrangements of the leading Western economies. They include the Shanghai
Cooperation Organization (SCO) and the Gulf Cooperation Council (GCC). Once again,
these groupings share an inclination to reduce the U.S. dollar’s role as the leading
reserve currency. Their agendas go beyond the free-trade areas and common markets
found throughout the world and include strategic, military, natural resource, and
international monetary initiatives. Depending on how well these groups pursue their
agendas and
overcome internal rivalries, they stand to play a significant role in any reformation
or evolution of the international monetary system from its current configuration.