In an unprecedented effort to counteract the spread of the financial crisis in Europe, its finance ministers have announced the establishment of the European Stabilization Mechanism, which can mobilize up to $1 trillion. Earlier, in 2009 in Asia, the finance ministers of the Association of Southeast Asian Nations Plus Three announced the multilateralization of the Chiang Mai Initiative and, in April 2010, the establishment of a surveillance unit, in effect laying the foundation for an Asian Monetary Fund.
Despite these important developments, however, thus far relatively little attention has been paid to the purpose, the potential, and the actual accomplishments of regional and/or subregional financial arrangements. Additionally, it is unclear whether these arrangements should complement, or serve as alternatives to, a global monetary institution like the International Monetary Fund.
The discussion of financial regionalism has often been confined to Asia, because this region’s massive accumulation of reserve assets may lead to the establishment of a regional institution on the scale of the IMF that could both compete with the Fund and offer an alternative to its regulatory role. Perhaps in acknowledgment of this, and as a sign of a shifting attitude, an IMF communiqué released on October 9, 2010, pointed out that it is important for the Fund “to cooperate . . . with regional financial arrangements.”
Against this backdrop, the present paper aims to provide basic elements to inform current discussions. However, though the paper focuses on the latest developments in Europe and Asia, and their implications for an “optimal” regional architecture, an exhaustive treatment of financial regionalism is beyond its scope.
The paper is organized as follows. The second section reviews the developments in the European crisis, the related policy response, and its implications for the European financial architecture; the third and fourth sections focus on the increasing use of bilateral swap lines in the recent financial crisis, the Chiang Mai Initiative’s multilateralization, and the potential for further economic integration in Asia; the fifth section looks into the issues of consistency between regional and global financial architectures; and finally, the sixth section points to the relevance of the increasing wave of financial regionalism for the United States, despite the fact that it is not playing an active part in the trend.