The arrest in New York of International Monetary Fund Managing Director Dominique Strauss-Kahn on sexual-assault charges (to which he is expected to plead not guilty) will probably end his career at the Washington-based organization. But what will it mean for the global economy and the IMF’s future?
The biggest short-term impact of Strauss-Kahn’s arrest will likely be felt in the euro zone. European finance ministers are meeting today to discuss what to do about Greece’s debt woes. Strauss-Kahn has been a key player in the often fractious attempts by Europe’s leaders to resolve the zone’s debt crisis, and his sudden absence will likely add more confusion to the debates over how to handle Greece. However, in my opinion, any uncertainty caused by Strauss-Kahn’s arrest will be minor in comparison with the dangerous divisions between the euro zone members themselves. There is absolutely no consensus among European governments over what is best forGreece, with some preferring to extend the existing bailout to the country, and others favoring some sort of delay to Greek bond maturities (a restructuring by another name). Perhaps Strauss-Kahn could have played an “honest broker” role between the factions, but the bigger issue facing the euro zone is whether or not its members can get on the same page on how to handle its continuing debt woes.
However, from where I sit, the arrest of the IMF’s chief raises more fundamental questions about that institution’s role in the global economy. Here’s what I mean:
I’ve been baffled over the past couple years by calls for the IMF to play a greater role in the international economy. Unhappy with the U.S. dollar-dominated global monetary system in place today, officials in China and Russia and some economists have called for the enhanced use of the IMF’s SDR as a global currency – the belief being that, backed by an impartial institution, it would be more stable than the greenback, which is governed by national policies crafted to a great degree by the Fed.
Such faith in the IMF has confused me, since the organization has a less than stellar history of global economic management itself. Many in Asia are still resentful for the IMF’s high-handed handling of the 1997 Asian financial crisis (which Koreans call the “IMF crisis”). That exposed the IMF as being just as vulnerable to ideological stubbornness and political motivations as any national government. The governance of the IMF will likely get only more complicated as it becomes more internationalized. Emerging economies have been clamoring for greater influence within the IMF in line with their growing economic clout, likely instilling the IMF with a whole new set of ideological and strategic preferences. In other words, I don’t understand why anyone thinks the IMF can be any more reliable a backbone for the global economy than the United States is today.
Now we have the Strauss-Kahn debacle. Though I don’t believe the IMF’s reputation will be tarnished by this incident nearly as much as its chief’s, the distasteful incident does highlight other doubts about the IMF’s capabilities. Yes, the IMF is not self-interested in the same way as a national government would be, but it is run by people just like those national governments, and people just as susceptible to exhibiting poor judgment on a disastrous scale. The fact that Strauss-Kahn may have tossed away his political career for a hotel maid doesn’t give me much confidence in his judgment on issues regarding the life and death of the global economy. Would you rather have Strauss-Kahn or Ben Bernanke making the key decisions that impact the global monetary system? Despite his own failings, I’d put my money on Bernanke.
So in the end, what the Strauss-Kahn scandal reinforces is that the IMF has a serious credibility problem that, in my opinion, will constrain its ability to be any more of a force in global economic management than it is today. And I don’t see how that credibility gap can be repaired. Human institutions will always suffer from human weaknesses.