The arrest of the International Monetary Fund's chief, Dominique Strauss-Kahn, adds a further layer of uncertainly to the volatile mess that is the Eurozone's debt crisis. Earlier this month, Portugal became the third country to accept a bailout by the so-called troika of lenders -- the EU, the European Central Bank, and the IMF -- to the tune of 78 billion euros. Analysts have increasingly been probing Spain's ability to weather the storm that is clobbering the rest of Europe. But a year into the harsh austerity regime imposed by its lenders and nowhere near returning to the international bond markets, Greece is the place where the aftershocks of the Strauss-Kahn scandal are likely to be felt most keenly.
In the long months of negotiations aimed at managing Greece's debt and avoiding a default that would have sent Lehman-like shockwaves throughout the world, Strauss-Kahn emerged as a towering figure. A socialist and former French finance minister with strong European connections, Strauss-Kahn pushed and prodded the Greek government to keep on with painful reforms, all the while cajoling European governments -- especially Germany -- to not turn their backs on Athens. His contribution was thought vital in hammering out a new $50 billion to $60 billion bailout for Greece in return for new cuts, widespread privatization, and other structural reforms. It will be a hard sell both for the Greek public and for northern European governments unwilling to bail out the bailout. Now, with the managing director of the IMF awaiting trial in Manhattan on sexual-assault charges, the fate of the new bailout seems even less clear.
Greece, after all, was his baby: The original Greek bailout was the largest the IMF had assembled to date, and it provided a chance for Strauss-Kahn to display his virtues as a crisis manager. It was a test that could have proved crucial to his candidacy for the French presidency in 2012. That candidacy, which until a few days ago looked so promising, now lies in ruins.
Given the IMF's checkered history and Greeks' visceral dislike of anything perceived as an organ of American imperialism, it is no surprise that Greece has not taken warmly to Strauss-Kahn. But lost in the din of the anti-IMF rhetoric is the fact that under his leadership, the IMF has been the more pragmatic lender of the troika. Its interest rates are lower than those offered by Greece's Eurozone partners, and it has consistently been quicker to realize the limits of the original agreement and to push for ways to ease the shock of Greece's fiscal retrenchment.
"He was someone with a clear stance in favor of Greece's bailout. He was a voice of reason. He even went to the German Parliament to speak in support of Greece," says Yannis Stournaras, director of the influential IOBE think tank and chief economic adviser to former Greece Prime Minister Konstantinos Simitis.
Greece showcases the 62-year-old Frenchman's efforts -- only half-realized -- to change the IMF. In his three and a half years at the helm, Strauss-Kahn succeeded in restoring the morale of the organization, crippled by its failure to warn of the world financial crisis, and propelled it to a central role both in tackling the effects of the economic cataclysm and in building the global regulatory architecture of the day after. He did this through a combination of his political stature and an economic philosophy that sought to free the Fund from the shackles of an overly strict adherence to the neoliberal faith. In particular, he tried to push issues of employment to the forefront of the IMF's thinking, and he understood that the free movement of capital is not such a wonderful thing when a country is under speculative attack.
A lot now will depend on who will replace him. Given that the acting director, the American technocrat John Lipsky, said on May 12 that he is resigning in August, the Fund will need to move fast. There is talk of emerging economies demanding an end to the outdated Western gentlemen's agreement according to which the top IMF job goes to a European (Brazil said so as recently as April). But German Chancellor Angela Merkel stated on Monday that the IMF should remain under European leadership.
If the bailout of Greece is extended, or if other European countries require aid from the IMF, these tensions -- between the West and the rest, or possibly between Europe and the rest -- will be exacerbated. "Were he to be replaced by someone from a non-European emerging country, there is no way they will be willing to lend such amounts to a European country richer than theirs," Stournaras explains, adding that the new chief needs to "be a realist, someone who understands what it will mean for a European country to go bankrupt." She or he will also need to be a political heavyweight, who can effectively manage friction between advanced and emerging economies, and a pragmatist, who will continue Strauss-Kahn's efforts to turn the Fund away from neoliberal orthodoxy.