What is Dollar Dilemma in geoeconomics?

In the recent past there are several opinions expressed as regards to de-dollarization and the need for a new reserve currency. But saner counsel must prevail. Can the world get rid of the USD overnight? The point is there is no alternative for it. Here are some of my musings:

First and foremost, I must give credit to Ms. Janet Yellen who served as US Fed Chair during 2014-2018 and later US Treasury Secretary during 2021-2025, who steered both central banking and treasury operations the two vital faces of US geoeconomics power structure for several decades. Hence she has the expertise in the palm of her hand. Ostensibly, her comments are still relevant:

1. “We should expect over a time a gradually increased share of other assets in reserve holdings of countries, a natural desire to diversify. But the Dollar is far and away the dominant reserve asset”

2. “Virtually no meaningful workaround for most countries for using Dollar as a reserve currency” implying that it will not be easy for any country to devise a replacement for US Dollar

3 “Americans should anticipate a decline in the USD as the world's reserve currency over a period of time as countries seek to diversify away from the Dollar”.

Now let us assess the present situ.  Despite the fact there is a decline in using USD as reserve currency, still dollar stands tall at 57.80 % Euro at 10.83% whereas Yuan is a meagre 2.18%. As regards to trading currency nearly 54% of the global trade is invoiced in USD. Euro is in second place at 30%. Chinese Yuan accounts for just 4.60% only.

For an alternative reserve & trading currency to appear in the global scene there are few qualifying requirements:

a) The size of the domestic economy

b) Importance of the domestic economy vis-à-vis the global economy

c) Quantity & quality of the financial markets within domestic economy

d) The distinctive relation between “Wall Street & Main Street” put it the other way stock market and goods market

e) Convertibility of the local currency to the rest in the global market place

f) Use of local currency as a peg to rest of the global currencies

g) The degree of addiction to Dollar amongst the domestic population.

The foregoing illustrate that the Dollar Dilemma is here to stay. There are two riveting points:

One, China is reluctant to make Yuan as a Reserve Currency; she is okay with yuan being a trading & transaction currency

Two, nobody in the right sense of mind would allow US Dollar to fall in its value. Neither have they wished to see America go bankrupt.

The crux of the matter in geoeconomics is until such time BRICS common currency is unveiled the globe would continue to toil with this Dollar Dilemma!

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail: cosmicgems@gmail.com

Blog:   Business Strategist

 

 

 

Why EU should shift towards China?

Tariff war, unleashed by Trump administration is opening the eyes of Europe as a whole and EU in particular to move much closer to the Eastern superpower of China. I am not talking about politics. It is geoeconomics compulsions that force EU to be away from USA and to get nearer to China. Let me spill the beans:

Europe from time immemorial was confused with China, the ancient civilization in the easternmost part of the globe. The caravans traversing the Silk Road brought goodies to Europe but not much details about the state lying faraway. Today the globe is a village. Aftershock of Trump Tariff Mania had a sobering effect for Europe in general and EU in particular.

Right now EU is buying a lot from US and less from China. Trade volume is a barometer. EU-US trade is almost approaching the Trillion mark with 2023 figures notching USD 975 Billion. Even though trade surplus in goods favoured EU at USD 157 Billion a considerable deficit was overlaid in services sector resulting in a deficit of USD 109 Billion.

China, on the other hand remains biggest partner for EU in importation of goods while for Exports it slips down to the third. Yet, overall trade deficit in goods sector is colossal at Euro 292 Billion out of the total trade volume of Euro 739 Billion. No headway is seen in terms of services sector as China was intent in sourcing services in technology more from America than from EU countries.

China business strategy does not encourage the type of services that could be exported from EU to them. For example, China concentrates on priority sectors such as roads, railways, township development both in urban & rural areas rather than consumption areas such as luxury goods, vehicles and other paraphernalia where, for example German efficiency excels.

Besides there is asymmetrical relationship in terms of trade and investment flows. As an autocratic state China monitors the type of investments that are much suited for their kind of supervised envelopment than the ones promoting European culture of freedom, leisure & pleasure.

It does not mean that EU cannot work with China at all. It can and it should. A kind of give and take has to be brought in. This is more pertinent InTechnology sector. More partnership deals must be struck between these two giants in quantum computing, cloud computing, AI, space research and many other novel areas. The heart of the matter is trade & investment facilitation must be given priority status and EU should come out with innovative programs of connecting China’s vast areas both in her northern and western parts.

Unmistakably, China got trapped into a geoeconomics banana where bulk of her economic growth is located North-East to South- West shore of the China Sea. Succinctly put, EU is in an excellent position to help China diversify its development programs rural to urban centres throughout the country. Germany has done this in her post-war period. Try this business strategy so that EU is more welcome not only in China but in the entire Asian Continent as trading & investment partner vis-à-vis America!

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail: cosmicgems@gmail.com

Blog:   Business Strategist

 

 

Brexit, a geoeconomics post mortem

When Britain left European Union in 2021, she was not departing from a single market with a custom union but from a landmass of great business opportunity. Post mortem of Brexit in terms of geoeconomics indicates it was a colossal mistake. Details follow:

The pro-Brexit campaign was anchored on nothing other than sovereignty factor and harping upon the past glory of a nation that ruled the waves and that too in her realm the Sun never set. Hence, the British arrogance of second to none along with never to be dictated by outsiders, in this case the Brussels Bureaucracy. I do reminisce how Lord Canning played an outstanding role in shaping British policy towards Europe in general and with the Concert of Europe in particular.

But Brexit was a false construct based more upon the past glory bereft with any understanding of the way geoeconomics affects the island nation. Here is the rubbing: once as member of EU, England was paying a net £ 13 Billion as her contribution to the EU Secretariat. After Brexit, net loss encountered as non-EU nation is estimated as £ 27 Billion. Going alone, Britain lost a large chunk of £ 32 Billion in her GDP since 2021. In current terms GDP of £ 2.56 Trillion lends to GDP Per Capita of £ 37,371/-

Even though England negotiated a watered down free trade with EU, non-trade barriers had a big toll due mainly to cumbersome procedures applied by Brussels. This was too much for small & medium firms that exported their goods across the English Channel. There is silver lining, of course. While exports of goods moved in the southerly direction England had its handful in services sector such as insurance specifically marine, advertisement, and advisories, not to forget intermediation in arranging financial and other capital market deals.

Trade loss both ways i.e. import & export went down 15% in value terms that cannot be offset by actual and potential income generated by the services sector as a whole. This factor alone threw England off its balance when it comes to wielding geoeconomics power outside her shores. The sad part is, diversion of trading relationship with major economies outside Europe did not help much in uplifting the loss of status-ante. Australia and New Zealand were two key nations that were identified in the British Commonwealth. There again these two countries have brim-full of beneficial trading relationships in North & South Asian Region.

A large immigrant population on one hand and the rapidly aging white majority on the other robbed the productivity factor in a big way. In the absence of strict supervisory surveillance of Brussels Bureaucracy, British productivity overall nosedived in comparison with Germany for example. A safe estimate is about 3% drop from pre Brexit days to post Brexit period.

The good part possibly is that Britain is now more sovereign than under the EU Supervision. The riveting part is people in England are not happy with the state of affairs. Geoeconomics compulsions underpin England to be part of an extended family of nations. A recent survey found that if an option is given to Britain to re-enter EU more than 55/% of the Britons would vote aye!

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail: cosmicgems@gmail.com

Blog:   Business Strategist