When the world's financial stabiliser crumbles...

THE ASIAN financial crisis is out of control. Doubters need only compare it with the Mexican financial crisis four years ago. Mexico's near-default destabilised markets for several weeks, because there was a risk that several big Wall Street houses would be seriously hit when they failed to collect on their Mexican bonds.

But the markets calmed down as soon as the Clinton administration and the International Monetary Fund guaranteed loans big enough to cover Wall Street's exposure. From that point on, market confidence was restored. There was never any question that Mexico might disobey Washington - Mexico set out to reform its economy in line with Washington's prescriptions. The crisis passed . . .

Now look at Asia. On Thursday, the Indonesian rupiah plunged from 8,400 to the dollar to 10,000, while the stock market dropped 12 per cent. In Jakarta, there was panic buying of food supplies and rumours of a coup, as uncertainty and paranoia about President Suharto, the 76-year-old former five-star general in power for 32 years, skyrocketed.

On Friday, the rupiah pulled out of its free fall, rebounding 21 per cent, after President Clinton spoke by phone to President Suharto and pressured him to implement the changes that the IMF says are needed to rebuild confidence in the economy. But wait: that's not how the system is supposed to work.

The IMF is supposed to be the shield behind which the US government calls the shots in international financial affairs. When news that the US president has rung an Asian leader to insist that he take the IMF's medicine makes headlines, you know that something is seriously wrong. The system for stabilising the international flow of funds has gone seriously off the rails.

The markets have sussed this. In place of the IMF's plan for bringing the Asian financial crisis to an end, many in the City now say there will be no stability in Asia - and no relief from the danger of Asia's crisis spreading to Western markets - until the Hong Kong dollar, a bulwark in the region because it remains pegged to the US dollar, collapses, and Peking devalues the yuan.

This scenario is probably popular because it is the most dramatic the City can dream up. It's a battle of wills. China versus the markets in one final Asian shootout. Dramatic predictions have the virtue of being easy to monitor.

Nevertheless, this prediction about how the Asian financial crisis will end is speculative in the extreme. No one really has a clue. The Asian crisis is already turning the region upside down politically. Korea's perennial opposition leader, Kim Dae Jung - a man Seoul's secret police once tried to assassinate - now sits in the Blue House, Korea's seat of executive power. Asian strongman President Suharto now looks like a feeble old man.

The more dangerous, if subtle, political crisis, however, is hitting closer to home. The system for stabilising the international financial system that has been in place since the Second World War could well be crumbling. The keystone to this system, the IMF, increasingly resembles a paper tiger. This is because the West enjoys less sway in the region than in any other part of the world. President Clinton's phone call to President Suharto suggests he knows the jig is up for the IMF. But if the IMF is losing its authority, no one has the least idea of what will happen next. No one has the least idea of who or what will successfully breathe confidence into the markets again. Investors hope that time will heal the wounds. But even if it does, the lesson is stark: confidence - the crucial magic ingredient of the financial system - may have spiralled beyond all international control.

IF SUCH a brave new world comes to pass, a lot of things will look different. One is Europe's single currency. In a world of a feeble IMF, European Monetary Union looks less like a dirigiste plot and more like a bulwark against chaos.

When Tony Blair delayed British entry into EMU last autumn, he looked clever. Now, with fierce, unpredictable economic winds blowing, Britain looks lonely.

The hope is that the Government will navigate between continental European economic sluggishness and uncontained American ruthlessness. But since the Asian financial crisis, the flip side of this vision has crept into view. There is a risk that instead of picking the best features of European and American capitalism for Britain, Mr Blair may get us stuck with the worst features of both worlds.

If the Asian crisis gets worse, the US can fall back on its wealth and massive domestic market. Continental Europe can fall back on its surviving collectivist institutions. And where might that leave Britain? Neither as rich and big as the US, nor as cohesive as France or Germany.

ANOTHER European institution that could soon look different is the European Bank for Reconstruction and Development. Conceived by the late Francois Mitterrand and his flawed one-man think-tank, Jacques Attali, the EBRD was meant to link West and post-communist East Europe as a counterweight to unchallenged American power. But the EBRD took it in the ear when Mr Attali took ludicrous advantage of his prerogatives as the EBRD's first president.

The Americans used his excesses to discredit the EBRD by planting true stories about him. To redeem French honour, Paris installed Jacques de Larosiere - who as a former IMF managing director was a safe pair of hands - as Mr Attali's successor. Mr De Larosiere turned the bank into a smallish lender of loans to the Russian and East European private sectors designed to spur the "post-communist entrepreneurial sector". On the eve of his resignation, De Larosiere is proclaiming mission accomplished.

But this is a joke. Mr De Larosiere staunched the flow of bad publicity but at the price of the bank's complete marginalisation. Perhaps now is the time to risk more bad publicity - to revive the original vision of a European development bank with the explicit policy of fostering trade links between the eastern and western halves of the continent.