IMF’s Crisis-Management Challenge

The arrest of IMF chief Dominique Strauss-Kahn on charges of sexual assault has cast doubts over the future of the IMF and its role in the European debt crisis and the global economic recovery. The affair may have a significant impact on short-term EU/IMF negotiations, particularly talks over Greek debt, but it will not substantively affect the organization’s long-term reputation, says CFR’s Steven Dunaway. This is a personal crisis, not an institutional problem, says Dunaway, but it may weaken the ability of Europeans pushing for a continental replacement should Strauss-Kahn resign. Dunaway asserts that "in order to avoid concerns over favoritism, it might benefit the Europeans not to have one of their own in this position."

How large of a role has Strauss-Kahn played as the IMF chief over the past few years, particularly during the European debt crisis?

He has been a very important part of the IMF. The managing director is key in terms of being able to set the agenda for the fund in the areas in which he wants to have it involved. He’s done a tremendous job of raising the profile of the IMF, particularly in the context of the current economic and financial crises. He has projected the fund into the role it was intended to have in terms of trying to coordinate the activities of a number of countries in response to the crisis and, now, with the recovery of the world economy. He has also furthered efforts to change the governance at the fund in order to provide greater representation to emerging-market countries, which have become much more important in the global economy.

With respect to the current debt crisis in Europe, he has played an extremely important part. Given his background as a former finance minister in France, he is credited with having the authority to negotiate with various European leaders, helping them bridge gaps and forge critical agreements in the case of Greece, Ireland, and now Portugal. Given his stature, he has been able to push the IMF to a prominent role in the G20 process--which is a place it naturally should be. It’s the kind of thing the IMF was created for in the first place back in 1944.

In the event he steps down, how much of an impact will this have on the current EU/IMF proceedings (Guardian), particularly the negotiations regarding the Greek bailout and the other countries you’ve mentioned?

In the very short term, it should have a significant effect. He was on his way to Europe. He was supposed to meet with Chancellor Merkel in Germany to talk about the Portuguese program and the situation in Greece, which is becoming problematic again. Then, he was to go on and meet in Brussels with EU finance ministers. In his place, the IMF has decided to send one of the deputy managing directors, Nemat Shafik (DowJones). That puts the fund at a distinct disadvantage in these discussions. Shafik may be very talented, but because she’s been on the job less than a month, and her former position was as a senior official at the UK’s foreign aid agency, there are questions as to how familiar she may be with the problems in Europe and whether she will be able to handle the discussions. In the very short term, it puts the IMF at somewhat of a disadvantage vis-a-vis the EU. This disadvantage may be less in the case of Portugal--because that lending arrangement has already been forged--but may be more important for Greece. The IMF is currently discussing whether to provide additional financing to Athens and is negotiating the long-term issues with regard to its debt--whether some type of restructuring or reprofiling is going to be necessary.

Is it fair to say that Strauss-Kahn helped the negotiating process by forging close relationships with high-level politicians in many countries, particularly with the Greek bailout?

Traditionally, that has been the role of the managing director. The head of the IMF has access to leaders in countries that the staff, particularly in the bigger countries, do not have. When I was the IMF’s mission chief for China, we would be granted access to talk to the very senior leaders, for example Premier Wen Jiabao, when [Strauss-Kahn] and his predecessor would visit. The managing director plays a critical role in getting the organization’s message across for a particular country. In the context of the European debt crisis, Strauss-Kahn has played that role extremely effectively.

Where do you think this scandal leaves the reputation of the IMF?

I don’t think it will have an effect on the reputation of the institution itself. This is more of a personal problem and will have more of an impact on Strauss-Kahn himself. In the long term, it will probably create some difficulty for the Europeans, especially in the context of talking about a successor for Strauss-Kahn, should he decide to leave. There was the expectation that he was going to leave within the next couple of months to pursue the nomination of the Socialist party for the president of France. Traditionally, the head of the IMF has been European, and [Strauss-Kahn] is the second European managing director who may end up leaving the fund in some cloud of suspicion. Rodrigo de Rato also left under a bit of suspicion with respect to some of his personal relations.

There was a tacit understanding this old arrangement was going to end after Strauss-Kahn, where in the future the position would be filled on the basis of merit. However, at the end of the day, there is bound to be some type of political tradeoffs for such an important post. This might guarantee, in effect, that the next managing director will come from someplace outside Europe. There is a strong push coming from the emerging-market countries. There are a lot of very highly qualified people out there who would do very well and be very good for the institution.

How does that process work?

Member countries can make nominations for the post. The IMF’s executive board meets to discuss the nominations, and they may reduce the list of candidates down to a few and conduct interviews with those people. At the end of the process, it’s the executive board that decides. Behind the scenes, there are probably a lot of discussions between countries pushing particular candidates and, at the end of the day, it has historically been a consensus choice on who becomes the managing director.

Given what is going on in the world, specifically the European financial crisis, is it your sense that the IMF should have another European as managing director?

No. I don’t think that argument carries a lot of weight. During the Latin American debt crisis in the 1980-1990s, you could use that argument to say that a Latin American should have been the head of the IMF, but nobody raised it at the time. The same goes for the Asian financial crisis. The fact that there are problems in Europe, I don’t think that should be a governing factor in terms of determining the managing director’s country of origin. In fact, there has been some criticism of the IMF within the executive board in respect to some of its European programs. Some of the Latin American executive directors suggested that the fund was being much more generous in terms of the size of the programs and much more lenient in terms of the conditionality of the lending programs than it had been during the Latin American debt crisis. So to avoid concerns over favoritism, it might benefit the Europeans not to have one of their own in this position.