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Strauss-Kahn Arrest Drops ‘Bomb’ on French Politics; IMF Faces Leadership Vacuum

IMF Chief Dominique Strauss-Kahn was denied bail after a New York City hotel maid accused him of sexual assault. Gwen Ifill examines the potential fallout.

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    For more now on Dominique Strauss-Kahn and the fallout, we turn to Eswar Prasad, a former IMF official who's now at Cornell University. He's also a senior fellow at the Brookings Institution. And Sophie Meunier, a research scholar in the Woodrow Wilson School of Public Policy and International Affairs at Princeton, she also co-directs the European Union Program at Princeton.

    Eswar Prasad, how important is Dominique Strauss-Kahn in the — in the scheme of things globally?

  • ESWAR PRASAD, Cornell University:

    Dominique Strauss-Kahn is very important, because the International Monetary Fund, the institution that he headed — or still heads, has become very important.

    In fact, Dominique Strauss-Kahn was very important in making the IMF as important as it is today. Before the global financial crisis, when he took office in 2007, the IMF was sliding into irrelevance, because what the IMF is basically set up to do is to give money to countries that are in trouble. And, in 2007, the world economy was doing well.

    The financial crisis hit. The IMF became more relevant. And what Strauss-Kahn did was he had a strategy and a grand mission on making the IMF a central player in the world financial markets and making the IMF a much bigger institution. He did both.

    He very skillfully strategized, brought the big countries together, especially the G20 economies, which includes the U.S., the U.K. and the major emerging market economies.

    The IMF today is a $1 trillion institution. When he took it over, it was $250 billion. The IMF is at the center of all economic policy debates. So the IMF is very important. And as — and as the man at the top who sets the tone for the IMF, Strauss-Kahn really plays a very important role.


    Is it fair to say that he was central to these Eurozone bailouts we have been following for the past several years, including in Greece and in Ireland and in Portugal?


    No, much of the work on bailouts and the technical work at the fund, this is really done by the professional staff. And that work is going to continue irrespective of what happens to the leadership.

    But the leadership sets a tone. And many of these decisions have more than a technical element to them. For instance, the debt bailout program in Greece is not working very well. So the big question is whether to give Greece more money or not, under what terms and conditions to give it.

    And that is an executive decision that has to be taken by somebody at the head of the institution. And this is why Strauss-Kahn's presence was very important. There was a sense that, so long as he was at the helm of the IMF, the IMF wouldn't turn its back on Europe.


    Sophie Meunier, as important as his presence was on the world stage, domestically, in France, this has also had quite the big effect.

  • SOPHIE MEUNIER, Princeton University:


    The — the announcement of the Strauss-Kahn scandal had the effect of a bomb on French politics. You have to understand that Strauss-Kahn is a major figure in French domestic politics right now, and until two days ago was given as a shoo-in for winning the primary election in the Socialist Party which is going to take place this October and was given by opinion polls as the favorite to win the general French presidential election, which is going to happen in the spring next year, and defeat Nicolas Sarkozy.

    Strauss-Kahn has been a major figure in French politics for several decades now. He was initially an economics professor at the university, but was a pretty successful minister of the economy in the 1990s with an aura of professionalism and competence surrounding him.

    And he ran for the primary of the Socialist Party last time around, was defeated by Segolene Royal, who then went on to lose the election to Nicolas Sarkozy. But what happened is after Sarkozy came into power, he initiated the strategy of opening up his cabinet to the other side, transcending political boundaries, in a way co-opting his political opponents as well.

    And part of his strategy was to get rid of Dominique Strauss-Kahn by shipping him off to the IMF and, therefore, making them further away from French domestic politics.


    Well, if he shipped Dominique Strauss-Kahn off to the IMF to get him out of the way politically, did it work? Was Dominique Strauss-Kahn no longer popular or well-known in France?


    This strategy almost backfired. I mean, it worked in the sense that Strauss-Kahn would have been his most formidable opponent. And for several years, the Socialist Party has been quite in disarray.

    They have lost three consecutive presidential elections. And there was no sign of a leader emerging. But with Strauss-Kahn away, he actually acquired that stature of an international leader, you know, that — that gravitas. And, at the same time, by being away from the petty domestic politics, it made him — it made it more likely that he would be the favorite, because he had stayed away from all this.

    So, it almost backfired.


    Professor Prasad, Sophie Meunier just said it was like a bomb dropping domestically in France. Was there a bomb dropped on the markets as well in the wake of this arrest?


    The markets are very nervous, because the big issue right now and the meeting that Strauss-Kahn was going to attend was largely about the Greek bailouts.

    But it's really not about Greece anymore. The real reason why Greece needs to be held together is so that the problem doesn't infect the rest of Europe. And there are lots of very vulnerable economies in Europe. So markets are very concerned right now, because the reality is that Greece is going to need what is called a restructuring, which means that the private bondholders are going to have to take a loss.

    And once that becomes clear, the bondholder is going to get very nervous about the other countries in the Eurozone, which could precipitate a debt crisis. So, I think markets are waiting to see how this settles. And, of course, the big issue at the end of the day is who takes over from Strauss-Kahn. Right now, there is a leadership vacuum at the IMF.


    I was very interested in what Angela Merkel seemed to be hinting at in her remarks there. What was that about?


    So, typically, the history has been that the IMF appoints the person to the top position at the IMF. The number-two position goes to the U.S. And then there are three other deputy managing directors, as they're called.

    Now we have a very interesting scenario where the number-one person at the IMF is not functioning, and the number-two person, John Lipsky, appointed by the U.S. in fact announced a couple of weeks ago that he would leave office at the end of August. So, now the two top positions are in play.

    And there was just a general sense among the G20 economies when they met at their recent summits that it's now the turn of the emerging markets to have somebody at the top. Now, Europe is logically going to say to the U.S. and to other emerging-market questions, you want us to give up the top position, why don't you, the U.S., give up the second position?

    So, it's going to become a very complicated political battle.


    Very quickly.

    Let's talk about complicated political battles, Sophie Meunier, and walk us through what the state is now of the French presidential election. You said he was the shoo-in for the Socialist nomination. That is likely not to happen, unless he is completely exonerated. So, what — how do the other dominoes fall?


    Well, even if he's exonerated, it's going to be basically too late for him to get into the field.

    So, here's the story. The French presidential election is going to be in April. And it takes place in two rounds. The Socialist Party, which is the main opposition party, is going to hold a primary in October. With Strauss-Kahn gone, the Socialists are kind of in disarray right now, because they have not really made alternative plans.

    So, there's going to be a scramble between Francois Hollande, who seems to be the most logical choice to succeed Strauss-Kahn as the main contender, Martine Aubry, who is currently the head of the Socialist Party. We shouldn't forget Segolene Royal and maybe a couple others.

    It's interesting for Sarkozy, what it's going to do for him. You know, in the short term, this seems like heaven-sent, this Strauss-Kahn scandal, for him. The French have been entirely consumed by the story ever since it broke out on Sunday morning.

    And it's great for Sarkozy, because it provides welcome distraction from domestic policies and what seems to be failed policies, and also because it puts the Socialists in disarray. But, in the long term, or meaning in the perspective of the presidential election next spring, it's not so clear that he's really going to benefit from the scandal, first of all, because it might well be that there's going to be the emergence of a centrist candidate who is going to eat some votes away from Sarkozy.

    You know, the election is in two rounds. And it used to be that, in the first round, the French would vote with their heart, but, in the second round, they would vote with their heads. And that was shattered in 2002, when it turns out that they voted so much with their heart that they split their votes among all sorts of little candidates on the left, which facilitated the emergence of the National Front far right, Jean-Marie Le Pen, who made it to the second round.

    And this may happen again this year, where, this time, the Le Pen who might make to it the second round is actually Marine Le Pen, the daughter of the former candidate, with a more modern, you know, younger, more dynamic candidate.


    No matter — no matter how you describe this, it's something that came out of the blue for both the IMF and for French politics.

    Thank you both for helping us walk — understand it.


    Thank you, Gwen.



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