Stephen King: The IMF should be looking further than the eurozone for its new head
Economic Outlook: Europe should be able to solve its crisis itself. After all, the creditors and debtors are all EU members
Monday 23 May 2011
To the British – and citizens of most nations – Dominique Strauss-Kahn was the head of the IMF. To the French, he was bigger than that. A successful finance minister, he hoped to become the next French president. While his alleged activities have made headlines all over the world, the Great Seducer's fall from grace has been an extraordinary shock for the people of France.
I know this for a fact. At the beginning of last week in Paris, I discovered that DSK – as he's known to the French – was the subject of every news bulletin and every conversation. His presence was so ubiquitous that I caught him staring at me as I answered a call of nature. Alongside other famous clientele, his photograph adorns the bathroom wall of Les Gourmets des Ternes, a restaurant in the 8th arrondissement.
Having now resigned from the IMF, the big question for DSK is whether he can prove his innocence. For the French – many of whom think he has been set up – the key issue is next year's election. Will Nicolas Sarkozy, a man deeply unpopular according to recent opinion polls, now be able to stage a remarkable recovery?
For us the question is whether the IMF will ever be the same. What needs to be done to re-establish its credibility? Even before DSK ended up on Rikers Island, the IMF had already been through a bit of a rough time. It lost a lot of credibility in Asia in the late 1990s. A staunch defender of free markets, the IMF appeared to step to one side as countries throughout Asia saw capital heading for the exit, a process that prompted a violent economic meltdown.
More recently, the IMF was slow to spot the enormity of the global financial crisis, partly because it couldn't cope with the idea of systemic financial failure (to be fair, DSK did open the IMF's eyes to the failures of free markets).
The IMF's biggest problem, however, is its leadership. Every managing director since it was established in 1945 has been a European man. To be more specific, there have been four Frenchmen, two Swedes, and one each from Germany, Spain, the Netherlands and mighty Belgium.
This unwritten rule has surely damaged the institution. Over the past seven decades, the world economic order has changed. The new economic superpowers include China, India and Brazil, but not Belgium. Yet, according to precedent, a Belgian has a better chance than an Indian of becoming the IMF's next head.
Even more remarkable is that the world's biggest international financial imbalances exist between a "big six": the US is the world's biggest borrower while the world's biggest lenders include China, Russia, Saudi Arabia, Germany and Japan. Yet only a German apparently has any chance of becoming the next IMF head.
European nations won't let go of their privileged position at the IMF without a fight. But it's a bit rich for the German Chancellor, Angela Merkel, to state that "...in the current situation, with serious problems with the euro and the IMF strongly involved, there is a lot in favour of a European candidate being put forward". While I can see her point, the argument doesn't hold water. Did Helmut Kohl demand that an Asian should lead the IMF during the 1997-98 crisis? Did Gerhard Schröder demand the services of a Latin American IMF managing director as the crisis spread to Brazil and Argentina? Of course not. The eurozone has problems but that is not a good enough reason to suggest that the next head of the IMF should be a European.
Given that all the talk in Europe at the moment is of default, restructuring and burden sharing, an IMF head with emerging market experience might be ideal. Europeans aren't familiar with sovereign crises but Latin Americans, Russians and Asians are. Who better to ask for advice than those who have been there, done that?
There's also the simple point that, while the eurozone crisis may be hitting the headlines on a daily basis, European policymakers really ought to be able to resolve the problem themselves. After all, the important creditors and debtors in this crisis are all members of the European Union and they are, collectively, rich enough not to require a bailout from the IMF or any other external institution. If anything, the IMF's involvement simply reveals that Europe's institutional arrangements are too weak to allow an effective resolution to be reached: the answer lies not with asking for IMF help but with the eurozone partners creating a stronger "act of union".
Maybe Christine Lagarde, the French finance minister and now the hot favourite to head off to Washington to replace DSK, will tell Europe to do exactly that. She might not be from the emerging world but at least her appointment would offer one welcome change: she is, after all, a woman.
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