Strauss-Kahn’s misstep reveals flaws that go far beyond any one man

Who knew that in a year of skyrocketing deficits and plunging confidence in Eurozone financial leaders that the most fateful market downturn might well be a plummeting zipper?  Yet, the arrest of Dominique Strauss-Kahn on allegations of sexual assault in New York City has ramifications that extend far beyond his family and the fragile, too-tightly ...

554030_110516_Kahn2.jpg
554030_110516_Kahn2.jpg
NEW YORK, NY - MAY 16: International Monetary Fund chief Dominique Strauss-Kahn (R) appears for his arraignment in federal court May 16, 2011 in New York City. International Monetary Fund chief Dominique Strauss-Kahn was arraigned today and is being held without bail on charges of sexually attacking a maid at a Manhattan hotel. (Photo by Emmanuel Dunand-Pool/Getty Images)

Who knew that in a year of skyrocketing deficits and plunging confidence in Eurozone financial leaders that the most fateful market downturn might well be a plummeting zipper?  Yet, the arrest of Dominique Strauss-Kahn on allegations of sexual assault in New York City has ramifications that extend far beyond his family and the fragile, too-tightly and yet too-loosely aligned countries of the EU.

Who knew that in a year of skyrocketing deficits and plunging confidence in Eurozone financial leaders that the most fateful market downturn might well be a plummeting zipper?  Yet, the arrest of Dominique Strauss-Kahn on allegations of sexual assault in New York City has ramifications that extend far beyond his family and the fragile, too-tightly and yet too-loosely aligned countries of the EU.

Whether the charges against Strauss-Kahn are proven or not, it seems more than likely that his aspirations to challenge Nicolas Sarkozy for the French president are finished as is his tenure as Managing Director of the IMF.  This is not only a crushing embarrassment to a man whose career seemed in a period of ascendancy after his widely admired shepherding of the Euro-crisis thus far, but has already rattled markets concerned about his departure’s potential impact on current negotiations regarding Greece’s on-going Ouzo Crisis-a debt saga that has dragged on longer than a college production of the entire Oresteia in the original Greek.

The markets should be less concerned about the Strauss-Kahn mess than they are with a host of other factors associated with Europe’s financial debacle.  The IMF will continue to play much the role that it did under Strauss-Kahn with the effective leadership of new Acting Managing Director John Lipsky.  Lipsky is talented and experienced…although having announced his departure from his job last week, no one could be more surprised to find himself running the Fund for the last several months of his tenure with the institution. 

Insiders close to the European debt talks are far more concerned with the fact that Europeans seem more inclined to punt on truly addressing both Greece’s problems and the broader issues impacting the Eurozone, seeking another near-term fix that will only postpone the broader reckoning that must come sooner or later.  By providing more loans to Greece, while default is avoided so to is a central question: How to reconcile the fact that as one close observer put it “Europe has monetary union but not fiscal union…and that’s untenable.”  In addition, Greece, like Portugal, is seen as a firewall crisis, with the focus on managing them so that markets don’t become even more worried about contagion spreading to Spain…or beyond that to Italy and Belgium.  Yet, those who look at Spain see real concerns, not just in terms of the national debt burden but also in terms of a housing market that looks scarily like the one in the U.S. before the housing crisis here-lots of adjustable rate mortgages, a potential for a rapidly changing interest rate environment, and none of the banks full accounting for the write-offs to come.  Add to that the potential shock waves to a European banking system associated with a potential crisis in Spain or one of the other bigger at risk markets-especially to German and French banks holding hundreds of billions in debt-and the likelihood of recession in the peripheral countries of Europe for the next several years in the very best case and you have a formula for Europe being one of the sick men of the global economy for the foreseeable future.

That in turn suggests an atmosphere in Europe in which rising nationalism-visible from France to Germany to Finland to the UK to Austria and beyond-grows only more virulent whether driven by fear of immigrants or resentment in richer countries for having to continue to underwrite the profligacy of the struggling ones.  This is one of the reasons that in France, even prior to the Strauss-Kahn scandal, many were expecting a vigorous run by Martine Le Pen, the “princess” of the French far right.

The Strauss-Kahn affair also has the possibility for opening a can of worms within the IMF regarding the battle for his successor.  It was widely thought within the Fund that despite all the talk about giving emerging powers a shot at the Managing Director slot after Strauss-Kahn’s term was up that in all likelihood, the Europeans would retain the seat.  In fact, it seemed quite possible that the French would retain it with current French Minister of Economic Affairs, Finances and Industry Christine Lagarde actively campaigning for the job.  She is thought highly of and right now, she would still have to rank as a favorite to succeed Strauss-Kahn but the controversy surrounding his departure is likely to fuel discussion that perhaps now is the time for a non-European boss at the Fund.  Her biggest advantage in this regard is that there are few top candidates for the post from the emerging world with some of the names being bandied about falling more into the category of Washington insiders who happen to once have lived in emerging countries rather than the kind of legitimate change-of-perspective leaders sought by top officials in the BRICs and other emerging powers.

Finally though, it must be acknowledged that while the real impact of the Strauss-Kahn arrest on the Eurozone crisis may be only temporary and superficial, the precarious financial state of that continent as well as that of Japan and the U.S. plus the underlying political problems in all three of those regions plus rising fears of over-heating or inflation from Brazil to China plus the instability at the Fund at a crucial moment all suggest a world precariously close to another round of financial problems, the double dip many have feared (and those in the U.S. housing market are already experiencing.) 

A less noticed but no less ominous consequence of this is what I referred to in Congressional testimony in 2009 as “the great hollowing out.”  Essentially it is what happens when the cash-strapped stabilizing forces of the world turn inward and grow allergic to expensive overseas distractions.  Instability results and threats are less likely to be checked.  Many illustrations of this phenomenon at work exist today from situations like those in Syria, Yemen, Bahrain, and across Africa in which there is effectively no intervention to those in Afghanistan, Iraq and Libya where we see either a desire to dial down involvement or to conduct intervention on the cheap. 

The world is unraveling on multiple fronts and from Pakistan to Iran to North Korea serious problems are festering in which bad actors are increasingly counting on minimal push-back from distracted, financially weakened “Western” powers.

That’s hardly the result of the Strauss-Kahn incident.  But when markets feel the economic situation is so precarious that the misstep of an individual…no matter how egregious…could have a material impact on discussions with direct implications for the world’s largest economy, it speaks to just how precarious our times are.

David Rothkopf is visiting professor at Columbia University's School of International and Public Affairs and visiting scholar at the Carnegie Endowment for International Peace. His latest book is The Great Questions of Tomorrow. He has been a longtime contributor to Foreign Policy and was CEO and editor of the FP Group from 2012 to May 2017. Twitter: @djrothkopf
Tag: Law

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