The Economics of Dominique Strauss-Kahn's Allegations

May 20, 2011Marketsby Raymond Tham

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The Economics of Dominique Strauss-Kahn's Allegations

20 May 2011.

No man is an island, entire of itself.
Every man is a piece of the continent, a part of the main.
If a clod be washed away by the sea,
Europe is the less, as well as if a promontory were,
as well as if a manor of thy friends or of thine own were.

– John Donne 

Unless you’ve been living under a rock for the past few days, you probably already know the tale of Dominique Strauss-Kahn (often referred to in the media as DSK), the now EX Managing Director of the IMF.

By now you would have also heard about the sordid details of what allegedly happened in a New York hotel room, or about DSK’s reputation and history as a womaniser, or even about how the whole incident was a conspiracy to undermine DSK’s presidential bid in France.

Here at EconomyWatch.com however, we only care about one thing – whether DSK’s scandal and subsequent resignation has had any impact on the global economy.

Judging by a quick survey of global response and statements, people are clearly divided over the influence of ONE man on an international organisation with ONE-HUNDRED AND EIGHTY SEVEN member countries that represents nearly the entire global population of 6.775 billion people.

On the one hand, many people, including the IMF itself, insist that despite the shocking allegations and the resignation of DSK, it is business as usual for both the institution as well as for the global economy.

“We are dealing with an institution, not with a particular person,” said Lucinda Creighton, the Irish Minister for European Affairs.

Amadeu Altafaj, spokesperson for the European Commission’s Committee for Economic Affairs added that, “We are quite confident that there will be continuity in operations and in decision-making in the IMF.”

However, DSK advocates have pointed to the impact that DSK has had in transforming the IMF.

Prior to DSK’s appointment as the Managing Director, many critics had labelled the IMF as an outdated institution that was in danger of becoming “irrelevant”. DSK is credited to have led the charge to introduce reforms within the IMF as well as creating a more proactive role for the IMF in the wake of the global financial crisis.

Economist Joseph Stiglitz lavished praise on DSK in a column (http://www.project-syndicate.org/commentary/stiglitz138/English) published just days before the alleged incident. In it, Stiglitz described DSK as a “sagacious leader” and declared that “a new IMF has gradually and cautiously emerged under the leadership of Dominique Strauss-Kahn”.

The Fear That Has Been Caused

The status of the new IMF now appears to be called into question. However, the more pressing concern should be DSK’s resignation would have any economic bearing to the world. 

Almost immediately after DSK’s arrest on 14 May 2011, reports began to spring up on the potential damage that the incident may cause, particularly in Europe.

According to Mohamed A. El-Erian, himself a potential candidate to replace DSK as Managing Director of the IMF,

“there are countries that are, and should be wondering about the impact that all this could have on them."
Greece is first among them.

Desperate to avoid a debt restructuring, Greece is heavily dependent on exceptional official assistance. Up to now, a DSK-led IMF has shown little hesitation in aligning itself with a controversial European approach that uses liquidity to address a solvency problem — essentially, piling new debt on top of Greece’s already excessive debt.

A possible DSK departure from the IMF would make the institution less enthusiastic for an approach that has already shown signs of slippage, ineffectiveness and overall fatigue.”

Concurrently, TIME magazine also published similar but contradicting articles that pondered the implications of the DSK scandal on two separate currencies.

Is There Really a Cause for Concern?

At this point, it is hard to tell whether these fears are justified or simply a kneejerk reaction to what undoubtedly was a huge shock to economic and financial observers.

Hours after DSK’s arrest, the general consensus in the news media was on how financial markets were bound to react negatively to the arrest.

Yet the end result proved to be contrary to popular opinion. According to Reuters, since the news of the scandal broke, there has been “little discernible impact” for asset prices and financial markets. In Europe, where most analysts believed that the greatest impact would occur, the stock markets were generally unmoved.

Gavan Nolan, director of credit research at Markit, corroborated the Reuters report.

 

“The news about Dominique Strauss-Kahn is dominating the headlines but having little impact on sentiment in the financial markets. Some have suggested that his potential removal as head of the IMF could derail bailouts for peripheral eurozone countries. But the sovereign market is outperforming today, suggesting that investors see the news as a non-issue.”

The Root of the Fear

Long-term concerns also appear to be based purely on who shall replace DSK rather than on whether DSK’s resignation would impact the economy.

European countries in particular have been adamant on a fellow European to replace DSK by citing the need for an IMF Managing Director who fully understands the current eurozone crisis.

 

This borders on regionalism. To imply that a non-European will not be able to address the “considerable problems of the euro”, as German Chancellor Angela Merkel puts it, is not only insulting to prominent economists from beyond Europe, but also detracts from the significant strides that emerging economies, particularly in Asia and Latin America, have made in enhancing their status in the global economy.

By the European logic, we should have replaced then IMF Managing Director Michel Camdessus with an Asian candidate during the 1997 Financial Crisis. In fact, why stop there? Whenever there’s a financial or economic crisis in any country, let’s just get someone from that country to become IMF Managing Director.

Of course a further argument for a European Managing Director would be to ensure continuity in policies. However, isn’t a meritocratic and transparent process more likely to do so, rather than simply basing it off one’s nationality?

While DSK’s contributions were indeed vital to both the IMF as well as various elements within the global economy, he is neither irreplaceable nor indispensible.

As economist Samvel Avagyan puts it, 

““At the IMF they don’t make individual decisions, decisions there are made in a collegial manner. The change in the leadership cannot bring about an IMF policy change.”

The true concern should not rest on whether DSK’s resignation will have any direct impact on the global economy, but rather on the indirect impact of how decision makers and politicians react in finding a new IMF Managing Director.

What are your concerns regarding Dominique Strauss-Kahn's allegations? Have your say below.

Raymond Tham

EconomyWatch.com

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