What Strauss-Kahn’s arrest means for the eurozone — and for France

May 16th, 2011

The surprise arrest last Saturday of the IMF managing director Dominique Strauss-Kahn at Kennedy airport in New York on sex charges could not have come at a worse time for international financial markets. Rather than dwell on innocence, guilt or the detail of the offences of the former French finance minister is alleged to have committed, I wanted to focus on three topics in this blog. These are:

  1. What does DSK’s arrest mean for European bailouts?
  2. What does his arrest mean for the next French presidential election?
  3. What does the reaction to his arrest tell us about different standards of morality in the US and Europe?

EU bailouts

Tacking European bailouts first, I personally suspect the absence of DSK from future talks is not going to be end of the road for the IMF’s central role in providing emergency funding to profligate or bankrupt European nations that have been frozen out by the international capital markets.

This view seems to be reinforced by news of the Washington-based fund’s first deputy managing director, John Lipsky, already stepping into DSK’s shoes. According to the New York Times, Lipsky “has been overseeing the logistics of the bailout of the Greek economy.” So he must be pretty well versed with what’s going on.

However the Financial Times is less convinced, especially since Lipsky has indicated he intends to step down in August. Its chief economics commentator Martin Wolf told BBC Radio 4’s Today programme that the IMF boss’s arrest “is an extraordinary disruption” which “throws the IMF into limbo”.

Meanwhile the Guardian cited Greek sources saying that DSK’s arrest has “unnerved” Greece, since it adds further uncertainty and already fraught situation.

Strauss-Kahn was supposed to be attending a critical meeting of eurozone finance ministers in Brussels today (Monday, May 16), where Greece’s spiralling debt will be the first item on the agenda. The Guardian quoted Louka Katseli, Greece’s minister of labour and social security, as saying:

“This adds uncertainty to the prospect of early resolution. The more uncertainty exists in terms of major institutions, the higher the cost for a country like Greece. What is needed are firm decisions [to ensure] financing for the next years.”

Strauss-Khan is seen as a europhile who favoured handing the Aegean nation further financial aid, albeit with strong conditions attached, to stave off economic collapse. According to the Daily Telegraph, his arrest has not only undermined these negotiations, it has also made PIIGS defaults more probable. (update: The Telegraph’s Jeremy Warner argues that Strauss-Kahn’s downfall a good thing, since it means the IMF’s flawed eurozone policies will be reconsidered).

And Jean Pisani-Ferry, director of the Bruegel economic think-tank, told Reuters, “The chances are the successor won’t be a European, and will want to rebalance the IMF’s priorities away from its massive commitment in Europe.”

The upcoming French elections

I suspect, however, that DSK’s arrest is going to have a much bigger impact on France – and French politics in particular – than it will on the IMF or the bailouts. Writing in the International Herald Tribune, Katherine Bennhold and Liz Alderman said:

“The incident threw Mr. Strauss-Kahn’s political party, the Socialists, into confusion and set the stage for a new political calculus that could allow the National Front, the far-right party led by its founder’s daughter, Marine Le Pen, to become a more dominant force during the election campaign.

The FT agreed saying that DSK’s arrest has thrown next year’s presidential race wide open, with one of the biggest fears that it will open the door to the far-right Front Nationale party, led by Marine Le Pen.

The socialists badly need to find a candidate with Mr Strauss-Kahn’s intellectual weight and centrist appeal … If one effect of the Strauss-Kahn affair is to enhance Ms Le Pen’s prospects at the expense of mainstream candidates, it will be a black day for democracy in France.

The morality question

But what does “l’affaire Strauss Kahn” tell us about difference in standards of morality, and attitudes to morality in the US and Europe?

According to some French commentators, the US reaction has been hypocritical. They say the scandal does not necessarily preclude DSK from high office (although much depends on the result of any trial). Such sources also make the point that France is much less puritanical than the US where the sexual misdeeds of its politicians.

Gilles Savary, a member of the European Parliament and a member of Strauss-Kahn’s Socialist Party, wrote on his blog that DSK’s arrest might be attributable to US-style hypocrisy. Savary wrote:

“Everyone knows that Dominique Strauss-Kahn is a libertine, and that he is distinguished from others by the fact that he doesn’t try and hide it. In puritanical American, infiltrated by rigorous Protestantism, financial misdeeds are far more tolerated than pleasures of the flesh.”

This blog post was first published on QFINANCE on May 16th 2011


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