The role of the Emerging Countries in Europe’s Debt Crisis

In its upcoming annual meeting, the IMF’s Managing Director Cristine Lagarde will reduce the growth expectations for the world’s largest economies following a dramatic collapse in consumer and business confidence and at the same time warn governments over hampering growth with too rapid spending cuts. The Eurozone’s financial crisis is a mess with banks hording cash and governments pushing for austerity and it does not appear to be remedied any time soon.

As The New York Times reports, no substantial progress towards solving the region’s debt crisis has been made during the two days meeting of European finance ministers, however the credibility of the European central bank remains intact and there is still some space for an accommodative monetary policy.

The forecasts for Emerging Asia are still bright: Changyong Rhee, the Chief Economist of the Asian Development Bank estimates a 7.8 percent growth in 2011 for Asia, excluding Japan. In comparison, the U.S. economy is forecast to expand only 1.6 percent this year and that of the Eurozone only 1.7 percent.

Most emerging countries have current account surpluses and especially the economic heavyweights China and Brazil are standing by to boost European investments. Their readiness to help is due to the effects a worsening of the European financial crisis could have on their increasingly resilient economies, with tumbling exports causing slowdowns in industrial production.

But instead of saving Europe, the emerging countries will more likely strengthen European markets by shifting parts of their foreign exchange reserves into European government bonds. It’s the Eurozone countries themselves that have to find a solution to their predominantly home-grown financial crisis that is politically acceptable and with which the markets can live.

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