Some Thoughts on the “DSK Affair”

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By Michael Liebig


All in all, Bill Clinton was a good American President. Yet, in 1998 President Clinton was almost impeached because he had an extramarital affair with a young woman, Monica Lewinsky, and had initially lied about it. All in all, Dominque Strauss-Kahn was a good, maybe a very good Managing Director of the International Monetary Fund (IMF). Yet, DSK – as he is often called – had to resign as IMF chief after being charged with sexually assaulting a room maid at a Sofitel hotel in Manhattan. DSK resigned on May 19, 2011, two days earlier US Treasury Secretary Timothy Geithner had publicly demanded his resignation.

I don’t know what really happened in that New York hotel room. DSK categorically denies the charges of sexual assault. Whatever happened, the “DSK affair” and its media orchestration by the US authorities appears rather strange.

According to the French polling agency CSA, 57% of the Frenchmen think that DSK was the victim of a plot. Do Frenchmen have a cranky disposition towards “conspiracy theories”? Well, political scientists know that conspiracy theories – opposite to conspiracy ideologies – often do have a base in reality. Most political action is intrinsically “conspiratorial”: Some political actors get together and jointly decide that something needs to be done. Not infrequently, some political actors “conspire” to get rid of another actor holding an important position. Also not infrequently, the orchestration of a “scandal” – exploiting the weaknesses of the targeted person – is the way to that end. On April 28, 2011, DSK met – off the record – with journalists of the French daily Liberation. After DSK’s arrest in New York, Liberation reported that DSK had then said he feared a sexual set-up which would be turned into scandal ruining his career. Already in 1999, DSK had to resign as French Economics Minister in the midst of accusations that he was involved in political corruption – two years later he was acquitted in court and rehabilitated.

Background to the “DSK Affair”

While it is presently impossible to determine whether DSK committed a crime or not, the question can be raised if there are conflicts of interests which could potentially constitute the background for a desire to politically neutralize DSK? Here, the following issues can be considered:

  1. The 2012 Presidential elections in France, for which DSK was a likely candidate of the Socialist Party – with good chances of defeating the incumbent Nicolas Sarkozy.
  2. The policy shift of the DSK-led IMF away from the neoliberal paradigm and its transformation into an institution reflecting the multipolar world system, i.e. the real weight of rising powers like China, India or Brazil.
  3. The debt crisis of the United States and the role of the IMF in that
  4. The role of the IMF vis-a-vis the debt crisis in the Eurozone’s southern rim: Greece, Portugal and potentially Spain.

I will focus on the last three issues. After DSK became the IMF’s Managing Director in 2007, he moved the IMF – gradually – away from the almost exclusive policy focus on financial deregulation, privatization of state assets, labor-market “flexibility” and fiscal austerity. These neoliberal “structural adjustments” were at the center of IMF policies in Latin America, Eastern Europe and Asia prior to DSK’s tenure at the IMF.

On May 5, 2011, Nobel prize-winning economist Joseph Stiglitz wrote an article, titled “The IMF’s Switch in Time”, noting: “It appears that a new IMF has gradually, and cautiously, emerged under the leadership of Dominique Strauss-Kahn… But an even more important change is the link that the IMF has finally drawn between inequality and instability… As Strauss-Kahn concluded in his speech to the Brookings Institution shortly before the Fund’s recent meeting: ‚Ultimately, employment and equity are building blocks of economic stability and prosperity, of political stability and peace. This goes to the heart of the IMF’s mandate. It must be placed at the heart of the policy agenda.‘ Strauss-Kahn is proving himself a sagacious leader of the IMF. We can only hope that governments and financial markets heed his words.” Two weeks after Stiglitz published these sentences, Strauss-Kahn was gone.

DSK had opened up the IMF towards the new rising powers of Asia and Latin America, increasing their weight in the IMF’s policy making by increasing their “quota” of voting rights and accepting their more state-dirigiste economic, monetary and trade policies. DSK has clearly foreseen the emergence of a multipolar world monetary system, transcending the role of US dollar as the world reserve currency. DSK promoted the expanded use of the IMF’s unit of account, “Special Drawing Rights” (SDR), based on a currency basket of US dollar (44%), euro (34%), yen (11%) and British Pound (11%); and he wanted the Chinese yuan to be included in the basket. Reportedly, DSK wanted the next IMF head to come from one of the emerging powers.

Washington has a Problem with the IMF

Little attention has been given to the fact, that the arrest of DSK coincided with the “technical default” of the United States when its public debt reached the debt ceiling of $14.294 trillion set by the US Congress. Since May 14, it’s only through accounting tricks that the US government can pay its soldiers, civil servants or private contractors. Of course, Congress will raise the debt ceiling further – it has done so 12 times since 1995. But, US public debt – the budget deficit in the current fiscal year is $1.5 trillion – is unsustainable. The world’s biggest military and political power is at the same time the No 1 debtor nation. Since more than two decades, a significant part of US public debt has been financed by foreigners – Japanese, Chinese, Arabs and Europeans.

On April 19, 2011, the rating agency Standard & Poors had downgraded the outlook on US public debt from “stable” to “negative”, meaning that the US government could loose its AAA credit rating in the next two years. As share of GDP, US public debt is comparable to that of Greece: roughly 10% of GDP. And, like Greece, the American government can no longer rely on financial markets for selling its debt titles – the American central bank has to step in. Sofar, the Federal Reserve has bought US Treasury bills worth more than $1000 billion – and it does so by printing money.

When the Greek debt crisis erupted full force in the first quarter 2010, the ensuing “rescue package” was put together by the European Union and the IMF. Interestingly, the DSK-led IMF adopted a more flexible and longer-term position than the EU with respect to the conditionalities of the Greek rescue package. Yet, Greece is under the “supervision” of the IMF (and the EU). And here we come to the neuralgic point: Something similar might happen to the USA.

Unthinkable? Given the condition of US state finances, its vast and protracted balance of payment and trade deficit (and the dim prospect of their improvement), America’s foreign creditors might demand IMF “supervision” over US public finances. In the past, whenever a country had such severe fiscal and current account problems, the IMF moved in. Thus, the USA would undergo a variation of the very IMF “treatment” that US governments had fully backed earlier in respect to indebted countries like Brazil, Russia, South Korea or Turkey, just to name a few. One needs little imagination to realize that coming under IMF “supervision” would mean a “worst case scenario” for the United States government and financial community. Preventing or at least delaying that, would be top priority for America.

I think the assumption is not farfetched that DSK was determined to reshape the IMF in a way that it would not recoil from “supervising” US state finances. The same goes for the assumption that other powers quietly backed him in that. Therefore, the United States‘ paramount interest would be to use all means at its disposal in order to preempt such a constellation.

DSK told Liberation that he intended intended to resign as IMF Managing Director later this year in order to run for the French Presidency. But DSK would have been in a very strong position to influence the decision who would succeed him as IMF head.

Time will tell whether the indicated policy/personality conflicts at the IMF are relevant and valid for understanding the possible background of the “DSK affair”.

The “Eurozone Crisis”

Fact is that over past weeks international media attention has been focused on the renewed “Eurozone crisis” – Portugal and Greece – and then of course the “DSK affair”itself, while the financial situation in the United States remained a secondary issue. On May 19, the chief economist of the ECB, Jürgen Stark, told the Frankfurter Allgemeine Zeitung: The media and political discussion on the latest “Greek crisis” was “launched in London and New York” by “certain circles there” pursuing “their own interests”. Indeed, a most remarkable statement for a central banker.

No doubt, the Greek debt crisis is a serious matter, but one should put things into perspective. One should consider the economic weight of Greece within the EU: 1,9% of total EU-GDP. (Portugal 1.4%, and Ireland 1.2%). The problems of these three countries – plus Spain – are rather obvious: Joining the Eurozone currency union meant plentiful and cheap credit available to private and public actors there. Some of that cheap credit was used productively, notably for hard and soft infrastructure projects. But much of it was spent unproductively, notably for real estate speculation, instead of technology investments; a mushrooming state bureaucracy (combined with rampant tax evasion); and in the case of Greece outsized military spending. Both the real estate bubbles and rising public debt became unsustainable. A correction was inevitable: Unpleasant, painful for the majority of the population, but no catastrophe as, for example, the earlier case of Turkey’s crisis and recovery has demonstrated. As the Eurozone “South” has lost the advantage of price-vectored competitiveness via currency devaluations, it must focus now on achieving technology-driven competitiveness. The renewal and expansion of the manufacturing base is key for Southern Europe together with new economic cooperation efforts towards Latin America, Middle Eastern and Asian countries.

I think one can safely assume that the “Northern” Eurozone countries with a strong manufacturing base and export performance will continue to back financially the “South” – including an orderly debt reduction. Sooner than later, the creditor banks will have to cancel a certain percentage of the outstanding debt by stretching maturities, reducing interest rates or partial write-offs. Such re-negotiations of sovereign debt are nothing spectacular and dramatic – the banks involved should have known the risks.

In a multipolar world in which the center of gravity is moving to Asia, the European Union simply cannot afford a zone of economic and possibly political instability on its Southern flank. The geo-economic and geopolitical realities dictate European cohesiveness – irrespective of unending frictions and brawls in EU politics of the day.

Watch the Chinese at the IMF

Turning back to the IMF and the “DSK affair”: The interim head of the IMF is the American John Lipsky. The next IMF Managing Director will either come from Europe or from an “emerging country”. Chancellor Merkel said Germany and the EU want a European, adding: “We know however that in the medium-term the emerging countries are entitled to have the post of the IMF head as well as the post of the head of the World Bank.” Whoever will be the next IMF Managing Director, he or she will face a very serious conflict of interest with the United States and the daunting task of the building a multipolar world monetary system.

DSK, the man who “re-invented” the IMF, is out. But we should not forget that, in March 2009, the head of the Chinese Central Bank, Zhou Xiaochuan, presented a comprehensive plan for new multipolar world monetary system – a plan that is very close to DSK’s ideas for the IMF. The “Zhou Plan” created an uproar, then the issue seemed to fade away. But the Chinese think and act in long-term. Sooner than later, the “Zhou Plan” will be back on the IMF’s agenda. Meanwhile, we can only hope, albeit with trepidation, that DSK will get a fair trial.

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