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Analysis: Europe misses Strauss-Kahn in its hour of need
May 30, 2011 / 5:56 AM / 6 years ago

Analysis: Europe misses Strauss-Kahn in its hour of need

PARIS (Reuters) - Europe may miss Dominique Strauss-Kahn’s leadership in its hour of need even more than will the International Monetary Fund and the French left.

<p>Former IMF chief Dominique Strauss-Kahn gestures during his bail hearing inside of the New York State Supreme Courthouse in New York May 19, 2011. REUTERS/Richard Drew/Pool</p>

The charismatic former French finance minister acted as a cool-headed crisis manager with influence in Athens, Berlin, Frankfurt and Brussels after the euro zone sovereign debt turmoil erupted in 2009.

He has also been a consistent and articulate advocate of closer European integration, centered on the euro currency area.

Strauss-Kahn went out on a limb to support the euro area as no previous IMF managing director had done, using his position to coax and occasionally scold reluctant European governments toward greater fiscal union.

His shock departure following charges of sexually assaulting a hotel maid in New York, which he denies, could hardly have come at a worse time for the European Union as it struggles with a deepening debt crisis and a spreading wave of angry nationalism.

“We are missing him terribly already,” said a senior EU official at the center of the financial fire-fighting. “Just look at the shambles this week over Greece.”

With a political vacuum at the top that will take weeks to fill, the global lender is showing signs of reverting to a more rule-bound, wary approach to continuing to help Athens, raising the risk of a disorderly Greek default that could have systemic consequences.

The Fund said last week it would not release the next slice of aid to keep Greece afloat, due in late June, unless the EU guarantees Athens’ entire funding needs for the next 12 months -- a potential show-stopper.

“If there were a strong political leader in place, this person might be able to steer the course and bridge the gap. But we see the institution has become more conservative and is playing things by the book and becoming risk-averse,” said Domenico Lombardi, a former member of the IMF executive board.

“Strauss-Kahn was willing to put his money where his mouth was, pre-committing IMF resources in an unprecedented way to support the euro area,” Lombardi, a senior fellow at the Brookings Institution in Washington, said in an interview.

“He didn’t hesitate to put his authority on the line with the IMF board.”

Meanwhile, some mainly U.S. and British analysts have argued it would be better if the next IMF chief came from outside the euro zone precisely to take a tougher, less indulgent approach to the debt crisis rather than throw more money at the problem.

The only declared candidate who fits that bill is Mexican central bank governor Agustin Carstens, and nominations for Strauss-Kahn’s successor close on June 10. The choice is due to be made by June 30 but it will take some time after that before the new leader takes office.

As things stand France’s current center-right finance minister, Christine Lagarde, is the overwhelming favorite, having secured the unanimous support of the EU and private indications of U.S. and Chinese backing, diplomats say.

She has strong management and communications skills but lacks her compatriot’s expertise in economics.

Strauss-Kahn repeatedly criticized Europe’s slow, piecemeal response to the debt crisis that began in Greece and has since spread to Ireland and Portugal, prompting bailouts that are increasingly unpopular in northern Europe.

The German-speaking Frenchman -- along with European Central Bank President Jean-Claude Trichet -- played a decisive role in persuading German Chancellor Angela Merkel after months of hesitation to back a financial rescue for Greece.

“Every day that is lost, the situation is going from bad to worse,” Strauss-Kahn said after the crucial meeting on April 28, 2010. “If we don’t fix it in Greece, it may have a lot of consequences on the EU.”

Despite German opposition, he campaigned for a bigger euro zone rescue fund that could be used more flexibly to help rescue countries in difficulty before they floundered.

He was not afraid to espouse bold federal-style solutions such as more centralized European economic policy setting, a single seat for the euro area in global forums such as the IMF, and a bigger common EU budget.

As finance minister at the turn of the century, Strauss-Kahn suggested to his German counterpart, Hans Eichel, pooling the French and German seats on the IMF board as a first step toward a single European seat, with the German taking first turn as their joint representative.

France’s foreign minister at the time, Hubert Vedrine, was reluctant, arguing it would put pressure on Paris to give up its veto-bearing permanent seat on the United Nations Security Council. Germany ultimately rejected the plan.

In private, Strauss-Kahn applauded the idea of issuing common euro zone bonds to reduce the borrowing costs of weaker states provided they stuck to tough deficit reduction targets.

“An international currency union can only survive if it has strong fiscal coordination mechanisms that deliver the key macroeconomic benefits of a fiscal union,” he told a Brussels think-tank conference last September.

“My main message is that the center must be given a greater role in national fiscal policies if EMU is to become a more effective -- and more resilient -- monetary union.”

“A larger central budget would make more financing available to tackle structural weaknesses in areas like infrastructure, R&D investment, and education, which would in turn boost growth in the euro area,” he said in the same speech.

Such views are unpopular among the main member governments, which want to clip Brussels’ wings and curb EU spending.

But Strauss-Kahn was convinced that Europe needed to make another leap as bold as monetary union toward fiscal federalism to make the euro work properly and avoid global irrelevance and perhaps the eventual collapse of the single currency.

Without his presence at the head of the IMF, or as president of France, the chances of such bold ideas being turned into action appear even more dim.

Editing by John Stonestreet

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