The idea that still-poor Asia will help rescue the still-rich euro area is an awkward one. Asia remembers well that when in trouble in the late 1990s, it was ruthlessly advised to turn to the International Monetary Fund.
Yet now that European countries have pledged to contribute to the IMF so it can intervene in Europe – and made clear their desire for matching contributions from the rest of the world – it may happen. Asia has two reasons to offer such support: to protect itself from Europe, and to protect itself from the US.
In the short term, Asia would suffer from a worsening eurozone crisis because Europe is a large export market; and European banks are big players in Singapore and Hong Kong, as well as major providers of trade finance. In the medium term, financial turmoil in Europe would also deprive China and the rest of Asia from an important hedge against a depreciation of the US dollar. It would also complicate the transition to a multi-currency system.
But Asia does not trust Europe enough to invest much directly. The IMF, although still viewed with suspicion, is at least equipped with a governance system in which Asia has a voice. It may take a European crisis to reconcile Asia with the IMF. And ironically, we may well soon be hearing Asians lecturing Europe on the need to turn to the Fund. Continue reading »