Will Europe’s crisis reconcile Asia with the IMF?

There is something very awkward in the idea that still-poor Asia will help rescue the still-rich euro area. Asia remembers very well that when in trouble in the late 1990s, it was ruthlessly advised to turn to the International Monetary Fund.

Yet it may happen. Europe is bound by an extraordinary series of self-imposed constraints – no common taxation, no mutual guarantees, no monetary financing, to name the main ones – and European countries have now pledged to contribute to the IMF so that it can intervene in Europe. The desire for matching contributions from the rest of the world was unequivocally expressed by the European leaders on 9 December. The questions are: should Asia follow suit, and what would be the consequences?

Asia has two reasons to offer such support: to protect itself from Europe, and to protect itself from the US.

In the short term, the fallout in Asia of a further aggravation of the European crisis would be serious. This is partly because Europe is a large export market but also because European banks are big players in Singapore and Hong Kong, as well as major providers of trade finance. The IMF’s Spillover Report reckons that through these channels financial stress in Europe could seriously dent Asian growth.

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. Furthermore, before the outbreak of the crisis, the euro was a successful regional currency en route to becoming the second global currency. For those in Asia who believe that the world’s natural evolution is towards a multipolar global economy, it provided a natural building block for a multipolar currency system. Should it disappear, the transition to a multi-currency system would be lengthier and bumpier.

But Asia does not trust Europe enough to invest much directly, so it is likely to opt for the detour through Washington. The IMF is certainly still viewed with much suspicion in Asia, where its failings in Indonesia or Korea are vividly remembered. But at least it is equipped with a governance system in which Asia has a voice, and is bound to gain weight faster if it becomes a major contributor.

It may well 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.

A version of this column was also published in the Financial Times opinion section FT A-list.