Way back in September of last year, Brazil, Russia, India and China – otherwise known as the BRICs – held a meeting. What was the meeting about? No, it wasn’t about world domination (or at least I don’t think it was). Instead, it was about how they – as a group of emerging, powerful nations – could give a helping hand to the struggling euro zone.
Unfortunately, not much progress was made at the meeting as the four nations didn’t quite agree to provide direct financial aid to the International Monetary Fund, which would eventually be tied into the EFSF and ESM programs.
Why have the BRICs been hesitant in providing financial aid to Europe? Don’t they care about the future of the economic recovery?
Yes, I’m sure the BRICs are worried about the future. After all, no one economy can stand on its own, and if the euro zone tanks, everyone – not just Europe – will suffer.
However, there are some huge obstacles that stand in the way of the BRICs contributing to the IMF.
First, there is the financial aspect of it. The truth is that providing funding for European nations is a very risky move and would most likely end up being a poor return on investment for the BRICs. Would you bet on a horse that has a broken leg AND gives you a terrible payout? Didn’t think so.
The second and probably more important issue is that of politics. The worst kept secret at the IMF is that emerging nations (like the BRICs) are resentful that the IMF, which was started by Western nations, has acted slowly and asked for stricter guidelines when handing out aid to countries like Russia, South Korea, and Mexico.
Why is it, they ask, that once European nations like Greece and Portugal come knocking on the IMF’s door, the fund has been quick to act and much more generous.
Furthermore, emerging nations also feel that the European powers have not been accommodating of their demands in terms of the structure of the IMF. They wanted more representation on the IMF’s Executive Board and quite possibly for the IMF chief to hail from the BRICs. Instead, Christine Largarde was chosen as the new IMF chief.
For these reasons, the BRICs have been slow to throw their wads of cash at the IMF for the benefit of European nations.
Still, it seems as if the BRICs are slowly turning a corner.
Since that meeting late last year, both Russia and Brazil have agreed to provide $10 billion in order to support the euro zone.
Meanwhile, China has continued play nice and appears to be stepping up to the plate. Aside from consistently buying up euro zone debt, there have been rumors that the world’s 2nd largest economy would provide direct financial aid to the IMF which will eventually funnel through to the EFSF.
Some speculate that China may provide as much as $132 billion, which would be more than double Japan’s recent contribution of $60 billion and represent the largest contribution of financial aid from a non-European country.
Now if you ask me, the number isn’t nearly as important as the action itself. The fact that China would be making a significant contribution would be a huge statement in itself. Not only would it be a sign of China recognizing the need to help Europe, but it may just open the floodgates for the rest of the BRICs to put aside their political differences and step up their game.
If this does happen, it may have the added effect of calming the markets as it would indicate that the world’s biggest powers recognize how important it is to just not sit idly by.
Of course, this won’t just happen overnight, but at the very least we’re starting to see some progress as the BRICs begin to ante up.