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The man must be presumed innocent until proven guilty, and in any event, there is still some chance that the whole sordid affair turns out to have been a political set-up, in which case he might even emerge from this bizarre scandal with credit and sympathy.
Strauss-Kahn's lawyer has said he will plead not guilty at any trial, which could be as long as six months away [Reuters]
Yet it is about time Europe's ownership of the International Monetary Fund, and particularly France's apparently divine right to the top job, was brought to a close. If Mr Strauss-Kahn's nemesis in a New York hotel room loosens Europe's grip, then that may be no bad thing.
Whatever the truth of otherwise of the allegations, Mr Strauss-Kahn's spectacular fall from grace is widely seen as a near catastrophe both for the IMF and the delicate negotiations around further rescue packages for the stricken eurozone periphery. This it is definitively not. To the contrary, it might even bring about a rethink of the currently doomed strategy of throwing good money after bad.
By convention, the position of IMF managing director has always gone to a European. What's more, no fewer than four out of the 10 managing directors since the war have been French.
There's nothing wrong with that as such. France's Grande Ecoles have a long tradition of churning out impressively multi-lingual and well connected international policy makers of this sort. Few are better trained or suited to straddling the often conflicting demands of American, European and Asian governments.
As it happens, Mr Strauss-Kahn took a somewhat unorthodox route to the top, with spells at both Harvard and Stanford. But that in a sense made him even more appropriate for the role. A man of formidable intellect and political skill, he's managed to bring an unprecedented degree of international vision and authority to the job.
The financial crisis gave him his stage, and he took it. Under his watch, the IMF has been transformed from frequently mocked irrelevance to international crisis manager par excellence, with a trillion dollar balance sheet and a powerful voice in almost every aspect of the international debate.
Yet he has in a sense been almost too successful, and though it seems unlikely his demise will have any immediate effect on the European bailouts, it's plain enough that the whole process is in desperate need of fresh thinking. Mr Strauss-Kahn's departure provides that opportunity.
Not that Angela Merkel, the German Chancellor sees it that way. There is no vacancy yet, she rightly pointed out on Monday, but she also made clear that Europe won't be giving up its prerogative when there is one.
Now of course, Mr Strauss-Kahn was shortly expected to leave the IMF anyway to fight for the French presidency, which very probably he would have won. But the hot favourite to step effortlessly into his shoes was the current French finance minister Christine Lagarde. She would have continued in much the same vein.
She too would have bent the IMF to the apparently sole purpose of holding the European project together. I don't want to say that the European bailouts, which Mr Strauss-Kahn has so generously supported with IMF money and expertise (that's partly our money, by the way), were definitively the wrong approach. They may at least have bought Europe a little time. But they certainly don't seem to be succeeding as hoped. Bailing out Greece and Ireland failed to stop the contagion spreading to Portugal, while Greece has now returned, cap in hand, for even more.
There is, moreover, a quite obvious reason for this failure. An IMF rescue is normally conditional on devaluation to restore competitiveness, and or a sovereign restructuring to put debt back on a sustainable footing. The single currency prevents devaluation, while the shock to the European banking system of a restructuring is judged too big a risk to contemplate.
Far from solving the crisis, the bailouts have therefore virtually guaranteed a rolling series of periphery nation crises into the indefinite future. The German Chancellor believes this makes it vital that Europe maintains its grip on the top IMF job. If not Christine Lagarde, then maybe Axel Weber, the former Bundesbank chief.
Mmmm. In fact, Mr Straus-Kahn's ignominious end should be seen as a way of breaking with precedent and appointing a non-European capable of seeing things in a less partial light. The trouble with Christine Lagarde is the same as Mr Strauss-Kahn – she's part of the single currency establishment and she's determined that for now there will be neither debt restructuring nor exits.
The reasons for this intransigence are both understandable and well rehearsed. The European Central Bank holds a very considerable proportion of Greece's national debt as collateral against funding. Direct asset purchases have further increased the ECB's exposure.
If Greece were either to restructure, or leave the euro, these holdings would be correspondingly devalued and the ECB would be bust. The same goes for a number of European banks with large holdings of Greek sovereign debt, and indeed the Greek banking system as a whole and some of the country's main pension funds.
They've not been able to sell the debt for fear of crystalising the losses, which would destroy their capital, and thereby causing a Lehman style crisis of confidence in financial markets. So the policy has been to keep the distressed sovereigns afloat for long enough to allow these positions to be worked off in an orderly way.
Unfortunately for the policy makers, political support for further rescue packages is fast ebbing away. The process has therefore become as much a race against time – to buttress the system with fresh loans before angry voters call a halt – as playing for time.
Economic success in the eurozone core, with German economic output back above pre-crisis levels and France not far behind, has helped defuse political opposition to some degree, but it has brought with it a further headache – pressure from the Germans for rising interest rates. What's good for the core is very bad indeed for the depression engulfed periphery.
Only the Portugese bailout was formerly rubber stamped yesterday. Greece has to wait its turn. The price is going to be harsh - not just further fiscal austerity, but very likely some form of burden sharing too. This is most likely to take the form of maturity extension.
In the absence of such action, holders of the debt would be able to realise their capital without loss on maturity, leaving the costs of eventual restructuring to fall heavily on the IMF and the European Financial Stability Mechanism. It's all getting too intractable for words. There appears to be no workable solution that holds the whole thing together.
As the German Chancellor has said, the European view is that the IMF needs a European at the helm to look after Europe's interests and help the euro navigate its way through the storm. Mr Strauss-Kahn filled that role. He was a sort of cuckoo in the nest, crowding out all other concerns for the IMF.
Whatever Mr Strauss-Kahn's innocence or otherwise, it's now impossible for him credibly to carry on. Even if cleared, there's a history there which he'll find impossible to counter. A power vacuum has opened up, which may for the first time allow for the appointment of a non European, perhaps even someone from the developing world. It's unlikely they'll look as kindly on the begging bowl from already rich and privileged economies as Mr Strauss Kahn did.
Perhaps it's time for David Cameron to swallow his pride and support Gordon Brown's candidature. As a non member of the euro, the UK would make an interesting compromise choice. Only kidding.
Dominique Strauss-Kahn was the single currency's cuckoo in the IMF nest
It gives me no pleasure at all to jump up and down on Dominique Strauss-Kahn's grave. Nor should we yet presume him entirely dead.
As it happens, Mr Strauss-Kahn took a somewhat unorthodox route to the top, with spells at both Harvard and Stanford. Photo: AFP,
The man must be presumed innocent until proven guilty, and in any event, there is still some chance that the whole sordid affair turns out to have been a political set-up, in which case he might even emerge from this bizarre scandal with credit and sympathy.
Strauss-Kahn's lawyer has said he will plead not guilty at any trial, which could be as long as six months away [Reuters]
Yet it is about time Europe's ownership of the International Monetary Fund, and particularly France's apparently divine right to the top job, was brought to a close. If Mr Strauss-Kahn's nemesis in a New York hotel room loosens Europe's grip, then that may be no bad thing.
Whatever the truth of otherwise of the allegations, Mr Strauss-Kahn's spectacular fall from grace is widely seen as a near catastrophe both for the IMF and the delicate negotiations around further rescue packages for the stricken eurozone periphery. This it is definitively not. To the contrary, it might even bring about a rethink of the currently doomed strategy of throwing good money after bad.
By convention, the position of IMF managing director has always gone to a European. What's more, no fewer than four out of the 10 managing directors since the war have been French.
There's nothing wrong with that as such. France's Grande Ecoles have a long tradition of churning out impressively multi-lingual and well connected international policy makers of this sort. Few are better trained or suited to straddling the often conflicting demands of American, European and Asian governments.
As it happens, Mr Strauss-Kahn took a somewhat unorthodox route to the top, with spells at both Harvard and Stanford. But that in a sense made him even more appropriate for the role. A man of formidable intellect and political skill, he's managed to bring an unprecedented degree of international vision and authority to the job.
The financial crisis gave him his stage, and he took it. Under his watch, the IMF has been transformed from frequently mocked irrelevance to international crisis manager par excellence, with a trillion dollar balance sheet and a powerful voice in almost every aspect of the international debate.
Yet he has in a sense been almost too successful, and though it seems unlikely his demise will have any immediate effect on the European bailouts, it's plain enough that the whole process is in desperate need of fresh thinking. Mr Strauss-Kahn's departure provides that opportunity.
Not that Angela Merkel, the German Chancellor sees it that way. There is no vacancy yet, she rightly pointed out on Monday, but she also made clear that Europe won't be giving up its prerogative when there is one.
Now of course, Mr Strauss-Kahn was shortly expected to leave the IMF anyway to fight for the French presidency, which very probably he would have won. But the hot favourite to step effortlessly into his shoes was the current French finance minister Christine Lagarde. She would have continued in much the same vein.
She too would have bent the IMF to the apparently sole purpose of holding the European project together. I don't want to say that the European bailouts, which Mr Strauss-Kahn has so generously supported with IMF money and expertise (that's partly our money, by the way), were definitively the wrong approach. They may at least have bought Europe a little time. But they certainly don't seem to be succeeding as hoped. Bailing out Greece and Ireland failed to stop the contagion spreading to Portugal, while Greece has now returned, cap in hand, for even more.
There is, moreover, a quite obvious reason for this failure. An IMF rescue is normally conditional on devaluation to restore competitiveness, and or a sovereign restructuring to put debt back on a sustainable footing. The single currency prevents devaluation, while the shock to the European banking system of a restructuring is judged too big a risk to contemplate.
Far from solving the crisis, the bailouts have therefore virtually guaranteed a rolling series of periphery nation crises into the indefinite future. The German Chancellor believes this makes it vital that Europe maintains its grip on the top IMF job. If not Christine Lagarde, then maybe Axel Weber, the former Bundesbank chief.
Mmmm. In fact, Mr Straus-Kahn's ignominious end should be seen as a way of breaking with precedent and appointing a non-European capable of seeing things in a less partial light. The trouble with Christine Lagarde is the same as Mr Strauss-Kahn – she's part of the single currency establishment and she's determined that for now there will be neither debt restructuring nor exits.
The reasons for this intransigence are both understandable and well rehearsed. The European Central Bank holds a very considerable proportion of Greece's national debt as collateral against funding. Direct asset purchases have further increased the ECB's exposure.
If Greece were either to restructure, or leave the euro, these holdings would be correspondingly devalued and the ECB would be bust. The same goes for a number of European banks with large holdings of Greek sovereign debt, and indeed the Greek banking system as a whole and some of the country's main pension funds.
They've not been able to sell the debt for fear of crystalising the losses, which would destroy their capital, and thereby causing a Lehman style crisis of confidence in financial markets. So the policy has been to keep the distressed sovereigns afloat for long enough to allow these positions to be worked off in an orderly way.
Unfortunately for the policy makers, political support for further rescue packages is fast ebbing away. The process has therefore become as much a race against time – to buttress the system with fresh loans before angry voters call a halt – as playing for time.
Economic success in the eurozone core, with German economic output back above pre-crisis levels and France not far behind, has helped defuse political opposition to some degree, but it has brought with it a further headache – pressure from the Germans for rising interest rates. What's good for the core is very bad indeed for the depression engulfed periphery.
Only the Portugese bailout was formerly rubber stamped yesterday. Greece has to wait its turn. The price is going to be harsh - not just further fiscal austerity, but very likely some form of burden sharing too. This is most likely to take the form of maturity extension.
In the absence of such action, holders of the debt would be able to realise their capital without loss on maturity, leaving the costs of eventual restructuring to fall heavily on the IMF and the European Financial Stability Mechanism. It's all getting too intractable for words. There appears to be no workable solution that holds the whole thing together.
As the German Chancellor has said, the European view is that the IMF needs a European at the helm to look after Europe's interests and help the euro navigate its way through the storm. Mr Strauss-Kahn filled that role. He was a sort of cuckoo in the nest, crowding out all other concerns for the IMF.
Whatever Mr Strauss-Kahn's innocence or otherwise, it's now impossible for him credibly to carry on. Even if cleared, there's a history there which he'll find impossible to counter. A power vacuum has opened up, which may for the first time allow for the appointment of a non European, perhaps even someone from the developing world. It's unlikely they'll look as kindly on the begging bowl from already rich and privileged economies as Mr Strauss Kahn did.
Perhaps it's time for David Cameron to swallow his pride and support Gordon Brown's candidature. As a non member of the euro, the UK would make an interesting compromise choice. Only kidding.
Crisis is made up from two words: threat and opportunity in Chinese.
ReplyDeleteHope IMF crisis creates opportunities for capable Asians to shoulder more responsibilities.
High time and good time for Asian to head IMF now as the West has been dominating the posts for too long.
ReplyDelete