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The arrest and subsequent resignation of former IMF chief Dominique Strauss-Kahn won’t just impact the Euro sovereign debt crisis, but the wider international monetary order as well.
Dominique Strauss-Kahn’s career, Eurozone bailouts, and the post-war regulatory order; all three have changed in the blink of
an eye. And while the
truth of allegations facing Strauss-Kahn may matter
in regards to the possibility of a political future in France, they won’t be influencing the future direction of the IMF, as
the global discussion has already chugged along to the question of who will replace Strauss-Kahn as
the organization’s head.
The timing of Strauss-Kahn’s fall from grace is not
ideal. His stewardship of
the organization was
widely
praised and his absence
will surely impact the
course of the European sovereign debt crisis, at least over
the short term. Most importantly, Strauss-Kahn was known as someone
who favoured extending
a second
bail-out package to Greece; a state that is beset with
yet another looming insolvency crisis. He was also
someone who had the connections and the personal gravitas to get things done. He could
make private
assurances to sceptical partners and was a large part of the reason why
the IMF has taken such
a proactive
Euro sovereign debt crisis. His removal will chip
away at any hard-earned investor
confidence that has
been regained in the
To give an impression
on how his arrest complicates matters:
This week he was
scheduled to meet
with
European finance ministers in Brussels to finalize a
$111 billion bailout
package for Portugal
and agree on
a new aid-for-austerity package for Greece.
After that, he was to fly
to Germany to lobby Chancellor Merkel
for a new bailout package for Athens. Obviously,
his arrest throws a
wrench into gears that
were busily
resolving Europe’s crisis
(or at the very least
buying it some more time). The resulting uncertainty will likely
cause the Euro to slide
and put more upward pressure on bond yields
in debt-compromised countries.
Perhaps owing to just
how critical this juncture
is for the European sovereign debt crisis,
the race to replace
Strauss-Kahn has gone from cold to red-hot in a remarkably short period
of time. As the list of countries
putting a candidate forward grows longer and longer,
it warrants mention that
this succession should be
observed with two important factors in mind. First,
the fact that time is of
the essence and a
European
candidate would be ideal
in the eyes of European leaders worried about
their own regional debt crisis.
Second, this succession could mark the end of a post-war deal that always had a European heading
up
the IMF and an American
at the helm of the World Bank. Leaders in the developing world have
been
clamouring for more representation at these once-ostensibly and increasingly-genuine
‘global’ institutions.
That a leader from the developing world will
head up the IMF is a certainty, it’s just a
question of whether
or not it’s going to be
this time or somewhere further down the road.
While it can certainly go either way, it’s more likely that we will get at least
one more European
heading
up the IMF, and that
person will likely end
up being the current
French Finance Minister Christine Lagarde.
The impending menace
of Greek debt restructuring and the suddenness of Strauss-Kahn’s fall from grace
make it so countries
like China would rather
see another European
chief than a hastily-appointed competitor
from the developing
world; a Brazilian or an Indian for example.
What is clear however is that whoever
Strauss-Kahn’s successor
is, they will have their
hands full with
rescuing theEuro zone
from fiscal rot and growing scepticism as well as ensuring that the IMF continues
its transition from the
West’s post-war financial tool to a truly global financial institution.
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