Dominique Strauss-Kahn, otherwise known as DSK, had flirted with the title of being the second most powerful man in the world after United States President Barack Obama in the aftermath of the 2008 Lehman Brothers demise. Such accolades will be scarce moving forward, however, with the now-former managing director of the International Monetary Fund arraigned on charges of rape in a New York court last month.
His supporters assert that his resignation is not an admission of guilt, but rather to shield the IMF from the fallout of the scandal while he clears his name from the ignominy, though his departure wil lstill have a profound impact on the organization.
After DSK took up the reins in 2007, the IMF had reverted to its heydays in the 1990s, an era when it played a critical role in managing the ‘de-sovietization’ of Eastern Europe and Central Asia, the reform wave in Latin America (despite the fiasco in Argentina) and the opening of capital markets —one of the pillars of what is nowadays called ‘globalization’.
By contrast the two predecessors of DSK are remembered most for their stolid management, their lack of vision and a dreary decade during which the IMF had been marginalized, demoralized and ignominiously downsized. But under DSK stewardship, the IMF confidently regained center stage in top policy circles and on finance markets. It engineered a rapid and effective response to the financial crisis, taking up monumental responsibilities when national governments were mostly scared or hapless to act. Billions of dollars were deployed over the main fronts opened by the freeze in credit markets worldwide to help central banks avoid a financial meltdown and economic collapse.
Nowhere was the IMF intervention more crucial than in the Eurozone. Despite stubborn denials by the European Union authorities and the European Central Bank (ECB) regarding member states’ need for IMF support —which in the view of haughty politicians in the ‘Old Continent’ was only intended for developing countries — Greece capitulated and negotiated a loan in exchange for austerity measures. DSK ensured that European public opinion, foremost in France, perceived that his institution and his personal involvement had saved Greece from a humiliating default. So with an eye to the primaries of the Socialist Party, which could have paved his way to the French Presidency, DSK used his role to strengthen his credentials as a competent economist and an effective decision maker. The successive IMF interventions in Ireland, and recently in Portugal, reinforced his standing; in fact before his arrest he was the frontrunner for the Elysée.
For the Greeks it was a stroke of luck to have at the helm of the IMF a figure with a keen interest in his future political career, and therefore a particular tendency to appease the left-leaning public opinion. The terms of the loans granted to Greece were relatively lax, hard questions were shoveled under the rug and the review of the progress to meet the targets of the stabilization plan lacked the steely determination displayed elsewhere. The plan was too lenient and in fact now Greece is asking for further support, which in any case is unlikely to prevent an eventual default, or a debt restructuring, as many politely call it.
Against this background the downfall of DSK came at a critical juncture. With Greece in need of further support, a benevolent attitude from the IMF was paramount in the strategy by the EU and the ECB to delay the hard choices on new governance in the currency union and reforms of the fiscal framework to share the burden of unsustainable sovereign debts in peripheral countries.
Worse for the Old Continent, emerging markets, primarily China, are less inclined to honor the unwritten agreement that the IMF managing director be European and the World Bank president an American. With their share of global GDP on par with that of developed economies, emerging markets feel they can field a candidate. If that were to happen, after the embarrassing epilogue of DSK’s tenure, the air on the Northern Mediterranean shores would be much chillier this summer.
FABIO SCACCIAVILLANI is chief economist at the Oman Investment Fund