Strauss-Kahn has Europe on his mind

By Alex Brummer, November 25, 2010

Dominique Strauss-Kahn, the suave managing director of the International Monetary Fund (IMF), finds himself at the vortex of the euroland crisis.

Until this spring it was inconceivable that the IMF would become involved in the developed economies of Western Europe except to conduct its annual check-up.

Most of its loans and advice in modern times has been reserved for Latin America, parts of Asia, Russia and Eastern Europe. However, the Greek crisis of May followed by the implosion of Ireland and the difficulties of Portugal - and potentially Spain - have propelled the Fund to centre stage in Europe for the first time since Britain went to the IMF for support in 1976.

This places Strauss-Kahn, with his ambitions to be France's next president, in a tricky position. He has to find ways of encouraging reform in the eurozone without damaging his socialist and pro-European credentials.

Strauss-Kahn, a former French finance minister who was born to Jewish parents in the Paris suburbs, has handled matters skillfully. The big question for the IMF chief, often simply known as "DSK", is the timing of his departure from the IMF to assume his candidacy for the 2012 presidential elections in which he already holds a strong polling lead over incumbent Nicholas Sarkozy,

Strauss- Kahn believes Europe has lost its appetite for economic growth

But he does not want to leave Washington with unfinished business. That is why he has taken such a strong interest in the rescue operations for Greece and Ireland.

The IMF is acting as the economic and financial enforcer in the three-way bail-outs involving the Fund, the European Central Bank and the European financial stability mechanism. As a neighbour, the UK is also offering bilateral assistance.

Strauss-Kahn fears that the current crises sweeping Europe's bond markets are in danger of undermining the 'social model' which was part of the European ideal. He believes that Europe has lost its appetite for economic growth and has ceded this ground to the faster growing nations of Asia and other emerging markets.

The result is that unemployment across Europe has become chronically high with particular difficulties for women, older workers and the young.

DSK blames the financial sector for much of Europe's woes. In a keynote speech in Frankfurt in the last week, the IMF chief noted that the financial sector focused "more on sophisticated innovation and less on being a true driver of economic growth." In his view, the global financial crisi brought these problems to a head.

Nowhere has this been more true than in Ireland. During the boom years the five sleepy Irish banks went on a lending spree. Anglo Irish, a small bank which did not come to the public markets until 1964, moved to the vortex of a boom in which bankers and property developers were left unrestrained by regulators and politicians. Sheep pastures were turned into housing estates and docklands sprung towers as if they were in lower Manhattan.

Not satisfied with funding their domestic housing and real estate boom, the Irish banks willingly entered the UK market too, among other things outbidding a wealthy Saudi prince for ownership of Claridges, the Berkeley and Connaught ultra-luxury hotels.

When Lehman Brothers collapsed in September 2008 the Irish authorities made a fundamental mistake. Instead of reorganising and recapitalising their banks, the government in Dublin decided it would guarantee their deposits.

In so doing it made itself responsible for tens of billions of euros of bad loans. It is the drip drip of rescues for Irish banks and their madcap, in some cases fraudulent, lending which left Britain's closest neighbour on the brink and at the mercy of international watchdogs.

Strauss-Kahn is adamant that until the European banks, including those of Ireland, take dramatic steps to reform themselves a full recovery will not be possible. Banks will need to have sufficient capital to support growth without incurring excessive risks. In addition, he wants to see governments deal 'decisively' with problem banks as well as better supervision and crisis resolution procedures.

There can be no doubt that the IMF will seek to impose these reforms as part of any rescue package.

But DSK has broader goals on his mind. The problems of Ireland, Greece and Portugal are just the symptoms of malfunctioning Europe. At the centre of the problem is the locomotive economy of Germany. It is content to accumulate surpluses from its resurgent export sector rather than encourage domestic demand contributing the imbalances across the whole euro area.

He also recognises something which the eurosceptics have argued since euroland was created more than a decade ago. Monetary union cannot take place without more fiscal union. Ireland is likely to learn this to its cost as the bigger European countries demand that it raises its low corporation tax levels. DSK makes the case for further tax harmonisation embracing VAT and energy (carbon taxes).

In calling for more cooperation and integration Strauss-Kahn is not just making an economic point as head of the IMF, but a political case too.

His remarks will go down well in France where he will begin his pursuit of the presidency in earnest.

Alex Brummer is City Editor of the Daily Mail

Last updated: 10:52am, May 18 2011