At least one proposal to emerge from the meeting of the leaders of Brazil, Russia, India, China and South Africa at last week’s Brics summit is unlikely to bear fruit. In a joint statement after the meeting in China, the nations announced a study “in joint currency co-operation”.
The idea is to set up an exchange rate mechanism (ERM) between the five countries, effectively bypassing the world’s reserve currency, the US dollar.
Economists are puzzled by the proposal. Asked how the mechanism would work, Michael Power, a strategist at Investec Asset Management, said: “It beats me.” In answer to the same question, Brait economist Colen Garrow said: “Not at all. I don’t think it will.”
Power, who supports moves to weaken the rand, said he understood the bloc’s frustrations. Brics members have suffered from low interest rate policies in advanced economies, which led investors to redirect funds to emerging markets. This has boosted Brics currencies, making exports less competitive.
The bloc sees a five-member ERM as a device to achieve more stability. But Power said: “Cutting out the dollar middleman may reduce costs but is unlikely to reduce volatility.” And he described any attempt to agree on cross-rates and essentially create a five-way fixed rate sub-group as “a non-starter too as three out of the five (South Africa, Brazil and India) run current account deficits”.