The new, new chaos
Europe and China talk up their currencies' expanded roles; RIP SDRM (again).
Welcome to the 48th edition of the Dispatch in the timeline in which mad and terrible stuff happens with increasing frequency.
It’s a few days since the US bombed Iran and no-one knows anything, once again. But whatever happens, it’s likely that the US’s action will look to most of the rest of the world like another demonstration of capriciousness — with untold ramifications. (Just one example we found: Kenya’s negotiations to resume tea exports to Iran have been put on hold.)
This edition looks at de-dollarization efforts, and Europe’s blocking of debt reforms while announcing new African initiatives; including something to… reduce debt. Meanwhile, we are writing on BRICS summit which takes place in a couple of weeks.
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China and Europe are both talking up their prospects as issuers of alternative currencies to the US dollar.
China’s central bank governor Pan Gongsheng said in Shanghai last week that a new currency order is coming and announced a handful of initiatives to “internationalise” the yuan - on China’s terms, which means a new digital yuan operations centre in Shanghai, the possibility of futures trading, and facilitating issuance of offshore bonds.
It’s often said that the yuan can’t take the place of the US dollar. That remains true! And even if China gave up capital controls and was prepared to run a current account deficit, it’s hard to see how any currency could re-create the specific structures of the dollar order. But that’s not what Beijing wants: it says it seeks a kind of multipolarity in reserve currencies. It particularly seems focused on how trade transactions are denominated. From The New York Times:
“China is not globalizing the renminbi in the Western sense, but regionalizing it — embedding the currency in trade, payments and state-to-state ties, particularly across the Global South,” said Dan Wang, a China economist in the Singapore office of the Eurasia Group.
In terms of the euro, Christine Lagarde last week made a call in the Financial Times to increase the Euro’s global currency status, bemoaning the fact that moves away from the US dollar were benefiting gold rather than any other currency. Her oped listed the familiar changes that are required; more debt issuance (Europe’s outstanding safe assets are equivalent to 50% of its GDP, while the equivalent US ratio is 100%), economic growth, advancing the single market, and the elusive capital markets union. She also pointed out that, citing research led by Barry Eichengreen in 2017, that Europe’s re-armament would enhance the Euro’s credibility.
The issue with many of the measures is political will among member states to cede domestic power. France is keen on more joint debt issuance; Germany not so much. The topic of the euro’s role will be discussed at an EU leaders’ summit later this week. Our 42nd edition had more on internationalizing the euro, from the economist Hélène Rey.
Sovereign debt reform efforts quashed, again
The Finance for Development conference (FfD4) takes place in Seville next week; it’s a big deal in the development world because it brings countries together to advance the Sustainable Development Goals, and is only held every six to 10 years. There was a months-long process to draft the outcomes document, which establishes objectives for the conference: this one is called the Compromiso de Sevilla. UN fora are one of the few places where all countries, including the least powerful, get a voice. Previous meetings resulted in the Monterrey Consensus, Doha Declaration and the Addis Ababa Action Agenda.
There is no global system or architecture for working out sovereign debt disputes. This means countries that are struggling to service debt generally avoid seeking a restructure – even at the cost of cutting back social welfare spending . A resolution mechanism was proposed by the IMF in 2002, but didn’t receive sufficient support. A sovereign debt architecture was agreed in the UNGA in 2015, but UK, US, Germany, Ireland & Israel vetoed it.”
The penultimate draft contained an aspiration to address this absence.
“... initiate an intergovernmental process at the United Nations, with a view to closing gaps in the debt architecture and exploring options to address debt sustainability, including but not limited to a multilateral sovereign debt mechanism.”
However after opposition from the European Union, Australia, Canada, Japan, New Zealand, Switzerland and the United Kingdom, this was watered down significantly to “make recommendations” for closing gaps, and to remove any mention of a mechanism:
“... initiate an intergovernmental process at the United Nations, with a view to make recommendations for closing gaps in the debt architecture and exploring options to address debt sustainability, including through holding a dialogue among Member States of the United Nations, the Paris Club, and other official creditors and debtors, along with the IMF and World Bank, other multilateral development banks, private creditors and other relevant actors.”
Debt advocacy groups were furious; Eurodad’s statement is here.
(The US, by the way, has pulled out of participating in the conference altogether.)
Mysterious Italian debt initiative and… migration
Just a few days after their bloc helped to water down the debt reform ambitions, European leaders talked up a tiny contribution to African development, along with some kind of debt miracle.
Ursula von der Leyen made a statement in Rome, together with Italy’s Giorgia Meloni, that the EU and Italy are spending EUR1.2bn on various African projects, including jointly funding an agriculture project; energy infrsatructure, and the EU granting EUR77mn to Angola related to the Lobito corridor; a complex and ambitious project (which we have written about before) to connect lithium and cobalt from landlocked DRC and Zambia to the port in Angola and, ultimately, to western countries.
Georgia Meloni spoke of some kind of debt initiative that she said would halve the debt of low-income countries in 10 years, and convert EUR235m of low income African countries’ debt into development funds. This was part of Italy’s “Mattei Plan” for Africa; named after the founder of state oil company Eni.
Meloni and von der Leyen spoke of the alliance between Europe’s Global Gateway and the Mattei Plan; and both of them alluded to the underlying rationale: migration.
“Our migration partnerships therefore cover not only migration in itself, but a wide range of issues related to economic development and most importantly the skilling and up-skilling of people. They are an important element of our comprehensive approach to managing migration[…] Our migration partnerships therefore cover not only migration in itself, but a wide range of issues related to economic development and most importantly the skilling and up-skilling of people. They are an important element of our comprehensive approach to managing migration.”
That’s all for this week!
Please check out our friend and sometime contributor Lara Merling’s excellent essay for The Break Down on real constraints creating the “finance gap”.