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Strauss-Kahn Resigns as Arrest Rattles the Globe Strauss-Kahn Resigns as Arrest Rattles the Globe

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Homepage / ECONOMY

Strauss-Kahn Resigns as Arrest Rattles the Globe

The former IMF Chief’s disgrace could have economic reverberations worldwide

IMF chief Dominique Strauss-Kahn (right) appears for his arraignment in federal court on Monday in New York City. Strauss-Kahn is being held on charges of sexually attacking a maid at a Manhattan hotel.(Emmanuel Dunand-Pool/Getty Images)

photo of Michael Hirsh
May 19, 2011

Most Americans barely knew his name a week ago, and even in Washington, Dominique Strauss-Kahn, who resigned as managing director of the International Monetary Fund on Wednesday night, was a low-profile figure in social circles. But in the days since the man known around the world as “DSK” was arrested on sexual assault charges in Manhattan, the global ramifications of his disgrace keep growing, along with his infamy.

(RELATED: Strauss-Kahn indicted on sex assault charges.)

Guilty or innocent, the former IMF chief almost certainly won’t be returning to the international scene any time soon, and in his absence even subtle shifts in policy could end up having big consequences, possibly including a new economic downturn in Europe with impact across the world. The IMF itself, a major international institution, could end up changed forever. 


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Ironically, the arena least likely to be changed by Strauss-Kahn’s downfall may well be the one that is most being talked about: next year’s French presidential election. Although Strauss-Kahn had been polling well against incumbent President Nicolas Sarkozy as an undeclared candidate, there was talk in France that DSK might not have survived the rigors of an election campaign even if he hadn’t run into trouble in New York.

Apart from the African maid at the Sofitel hotel in New York, Strauss-Kahn to date has been publicly accused of sexual assault by only one other woman, Tristane Banon, a French journalist. But stories of DSK’s alleged aggressive behavior toward women have long been circulating in France. Even before his arrest, some of his wealthy backers in the financial community had suggested that his reputation was darker than that of previous womanizing French politicians, such as Francois Mitterrand or Valery Giscard d’Estaing. “This wasn’t the problem of a charismatic, powerful man attracting women. It was uglier,” according to one international financier who has been privy to those discussions.

The most immediate impact of DSK's absence from the scene could well be on the critical discussions he was mediating on the latest threat to the euro zone from the faltering economies of Greece, Portugal, and Ireland. Central to that deal was an agreement on debt relief between Germany and France, and DSK was known to have a good relationship with Chancellor Angela Merkel. With French Finance Minister Christine Lagarde—a leading candidate to replace Strauss-Kahn—stepping in to lead the discussions, the change in the IMF’s or France’s position won’t be dramatic. It was at Merkel’s insistence that the IMF became involved at all, eventually turning into a key player in the $350 billion bailout of Greece, Ireland, and Portugal a year ago.

Now those economies need a new wave of debt relief, and the question of how much and under what conditions—the politics of which DSK was a master—is being decided daily. One critical question is whether the debt should be “restructured,” or reduced, and if so on what terms, or should the euro zone countries simply provide another bailout. The day after his arrest, DSK had been expected at a meeting of euro zone finance ministers in Brussels. In private discussions, DSK had been pushing the stronger European banks to share the burden of a restructuring, according to the international financier, who would discuss the internal deliberations only on condition of anonymity. 

If those weaker economies founder, and some of their banks fail, Europe could be roiled by another crisis, which in turn will affect the world economy. Just as the headwinds of the euro crisis a year ago held back recovery in the United States and elsewhere, a second crisis could hurt the U.S. economy at a time when unemployment is still hovering at what, for President Obama, is a politically hazardous 9 percent going into an election year.

To be sure, it may well be that the Europeans agree to pretty much the same terms that DSK would have pushed. There isn’t a wide range of choices: German and French banks are deep into all three foundering economies, and Merkel and the other EU leaders know that contagion from a Greek collapse will have terrible consequences for their own national banks as well as possibly the euro currency itself.

But Strauss-Kahn had unusual stature in making the case that the IMF—and European countries—should give easier terms to Greece, Portugal, and Ireland in hopes of averting a greater catastrophe, such as another wave of banking failures.

“Anybody else would face the accusation that the Fund somehow is soft on Europeans in ways that it was never soft on Asians and Latin Americans in their crises,” says an international financial official who has long followed DSK’s career and the resolution of international financial crises going back to the 1980s. “DSK is perceived as having done a tremendous job ensuring that emerging markets caught in the financial crisis of 2008 could get quick new credit facilities. He was a bit of hero, and he had some good chits. Nobody was going to stand up against him. It gets very difficult for the next managing director. And in the medium term have this gap” of leadership.

Indeed, in the vacuum of leadership at the IMF—one that could linger for months—the future of the Fund itself could be decided. The European nations, consumed with their economic crisis, will want to follow tradition and quickly appoint another European head, according to the postwar Bretton Woods tradition by which Americans have run the World Bank and Europeans have been permitted to select the IMF managing director. 

But after the scandal that ousted Paul Wolfowitz as head of the World Bank in 2007, an insurrection against what Mohamed El-Erian of Pimco called a “feudal system” has been growing among emerging-market economies.

In line with the wishes of its new international partner, the Group of 20 nations, the IMF had already been shifting away from the old postwar system of leadership. Now those cries for change are likely to be louder, setting up a prolonged confrontation between Europe and emerging markets in which U.S. Treasury Secretary Timothy Geithner may have to play broker. Lobbying is already under way by candidates from China, Turkey, and other emerging countries. Strauss-Kahn is the third European head to depart before his term was up.

In some ways the Fund is losing its greatest champion at a time when its reputation has never been higher—at least outside of libertarians in the United States. “When Strauss-Kahn arrived in November 2007,” Kevin Muehring wrote in Institutional Investor magazine last September, “the Fund seemed to be fading into irrelevance: Developing countries didn't need its money, and the big industrial powers routinely ignored its advice. But using his economic instincts and political acumen, [DSK] moved quickly to restore the Fund to its role as a linchpin of international economic policy coordination and crisis management.”

But today the man who made the IMF a linchpin sits in a cell on Rikers Island, and the future of the global economy looks even more uncertain.

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