This post is about the economic and political significance of Dominic Strauss Kahn’s (DSK hereafter) arrest. It will say nothing about the merits or otherwise of the charges against Dominic Strauss Kahn, the IMF’s Managing Director. All cases of alleged sexual assault brought against high profile men place two equally important (yet often counter-opposed) demands upon the rest of us: The importance of respecting the anguish of the alleged victim (as well as of respecting her tussle against the spectre of terror that all women face when it comes to deciding to accuse a powerful man) and, at once, the obligation to respect the defendant’s presumption of innocence. In this spirit, the following lines will say nothing about the case but will concentrate on an important part of contemporary political economics.
Normally, the ‘elimination’ of an IMF Managing Director, of the President of the World Bank, even the President of the European Commission, would have no more than a passing effect on the relevant institution. I suspect that DSK’s demise will be different. It is not just that DSK was a heavyweight that pushed the IMF into a different mode of thinking (one that involved a more nuanced approach to the deeper causes of crises). Far more significant was the manner in which he seems to understand what makes the global economy tick.
To cut to the chase, I shall give one poignant example; one which transcends all anecdotes about the greater ‘leniency’ that DSK demonstrated during the EU-IMF Greek government negotiations over the terms of the massive Greek ‘bail-out’ loans. To make my point I shall quote him directly, rather than base my argument on hearsay.
Back in January (of 2011), DSK was being interviewed by a BBC Radio journalist in the context of a documentary on the history of the IMF.[1] Toward the end of the program, I heard the distinctive voice of DSK responding to a journalist’s question about how the global economy ought to be reconfigured in the aftermath of the 2008 Crisis. His astonishing answer was:
“Never in the past has an institution like the IMF been as necessary as it has been today… Keynes, sixty years ago, already foresaw what was needed; but it was too early. Now is the time to do it. And I think we are ready to do it!”
This was, in my estimation, a bombshell of a programmatic statement by the IMF’s Managing Director. What was he referring to? He was, of course, referring to Keynes’ powerfully put argument (in the context of the 1944 Bretton Woods conference) that a system of fixed exchange rates cannot survive for long without an automated mechanism that treats (a) systematic trade surpluses and (b) systematic trade deficits as the different sides of a problematic coin.
Keynes’ recommendation (which the USA turned down, through its representative at Bretton Woods, Harry Dexter White) was that, to deal with the systematic destabilising effect of deficits and surpluses, the world needed a mechanism which would rebalance it by transferring surpluses from the surplus to the deficit countries. In short, the world needed a Surplus Recycling Mechanism (SRM) – click here for an extensive (though academic) account of the arguments in favour of an SRM.
This was, quite naturally, a radical suggestion. The Unites States, as expected, rejected the proposal not because the New Dealers in power, at that time, did not recognise the importance of an SRM at a global level, but because they did not like the idea of the automaticity of recycling (which Keynes was proposing).[2]
As I have explained in some detail (see here for example) the poignancy of an SRM (and of its absence), I shall desist from repeating it here. Suffice to point out the political and economic significance of DSK’s endorsement of Keynes’ suggestion and, in particular, the determined statement that Keynes was ahead of his time but not, after the Crash of 2008, “Now is the time to do it. And I think we are ready to do it!”
If the reader requires a little more persuasion on the significance of that statement, consider this: Looking at things from a European perspective, DSK’s declaration means that, in his viewfinder, Germany is as much of a problem for the eurozone as Greece is. For if systematic surpluses have the capacity to undermine a common currency (or fixed exchange) area, then Germany’s developmental model is undermining the eurozone (just as much as Greece’s chronic deficits).
I think that DSK had a good point. But whether the reader agrees with me or not is not the issue. The issue is that DSK’s political death (the announcement of which may turn out to be premature) carries with it unprecedented significance both within the without Europe.
Within Europe, the prospect of a French President who believes strongly (and is prepared to back up his convictions with a formidable analytical panoply) that the eurozone cannot survive without a Surplus Recycling Mechanism (which channels German surpluses to the deficit countries in the form of productive investment) had the potential radically to alter the political and economic agenda of the continent. It would, in particular, offer an invigorating counterpoint to the current mental incapacity to come to terms with the deeper causes of the euro crisis and to, at long last, recognise that the debt crisis is a symptom, not the cause of the string of failures that threaten the eurozone’s very existence.
More broadly, the global debate about what to do with China’s increasing surpluses was also bound to take a different course depending on whether the IMF’s Managing Director believes, as DSK declared he does, in the importance of creating automated, supra-national mechanisms for recycling surpluses (as opposed to Tim Geithner’s insistence that global imbalances should be dealt with by nothing more than adjustments to the exchange rates.)
In short, DSK is one of the very rare officials heading an extremely powerful institution while holding views with a power, a verve and a freshness that is atypical of grey, number-crunching bureaucrats. His institutional and political passing may go unnoticed simply because his tenure at the IMF was shortlived and his French Presidency never materialised. However, I suspect strongly that he may well turn out the most significant French President we never had, as well as the most influential IMF Managing Director we nearly had.
[1] BBC Radio 4, Inside the IMF – Part Two, broadcast on 17th January 2011
[2] The United States proved that they did not reject the idea of surplus recycling by effecting the Marshall Plan (a fabulous example of massive surplus recycling) and by taking a myriad steps between 1947 and 1970 to recycle a large percentage of American surpluses in Europe and in Japan. What they did reject was the idea of a supra-national institution that would do the recycling outside Washington’s political control.
