Is the Downfall of Dominique Strauss-Kahn Also the Downfall of the Euro?

A lot of ink has been spilled on the arrest of Dominique Strauss-Kahn for allegedly attempting to rape a chambermaid at his hotel.  What's a little surprising is how much of that ink has been spilled on the financial details of his trip: the $3,000 a night hotel room, the special show-up-and-fly-first class deal he apparently had with Air France.  Why does this seem to be the lead story?


I suspect it's because the World Bank and the IMF are the last bastions of the sort of privileges that used to be enjoyed more routinely by the upper middle class.  Decades ago, journalists and businessmen could count on flying first class cross country for business, or at least on international flights.  For most of us, those perks disappeared long ago; first class and business class fill up with frequent-flyer upgrades, not people who got their company to pay $2K for a ticket that could have cost $300.  What would have been the normal perks of the international professional class in 1985 now seem like they could only be the result of some sort of outrageous corruption

But there's a much more important story: what this means for the European financial crisis. The IMF is playing an important co-ordinating role in resolving the crisis, and Strauss-Kahn's political skills were a big part of that:

Mr Strauss-Kahn was respected by both Angela Merkel (whom he had planned to visit on the weekend when he was arraigned) and by George Papandreou, the Greek prime minister. He supported the view, also held by the European Central Bank, that a eurozone member should not rush into default. The eurozone clearly needed the IMF's technical competences in dealing with its sovereign debt crises - a set of skills largely absent in the European institutions. It also needed the IMF's co-financing. But the IMF's single most important influence in eurozone crisis resolution has been political. In a situation marked by a lack of political leadership, the IMF filled a vacuum.
Having a power-vacuum at the major multi-lateral institution charged with assisting its resolution will make things much more difficult.  There's a plausible argument to be made that the untimely death of 1920s fed chief Benjamin Strong left a weakness at the center of the Federal Reserve that considerably frustrated both domestic and international attempts to cope with the monetary collapse of the early 1930s.  Could this be a similar incident?

In part, that depends on whether DSK resigns, and who succeeds him.  But let's assume that eventually he does resign--it will be hard to conduct IMF business from a New York City jail, or even under house arrest, and it seems quite unlikely that the United States is going to let Strauss-Kahn out of its jurisdiction, given the historical difficulty we've had in extraditing criminals once they reach French soil.  The new head of the IMF will be walking into an incredibly difficult situation, with EU institutions cracking under the strain of the crisis, and member governments getting increasingly testy with each other.  The problems of the EU are historically unique, requiring finesse and considerable political capital, and the incoming executive won't have practically any time to get up to speed, much less build up the relationships and credibility that increasingly look as if they'll be necessary to see this through.

Of course, I don't think there's much likelihood of a resolution short of exiting the euro (a defacto default).  But if there's any hope for a less drastic solution, it just got a lot dimmer.  And of course even the drastic solution would be made considerably less catastrophic with timely and competent assistance from the Fund.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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