What follows below is about the economic and political significance of the arrest of Dominique Strauss-Kahn (DSK hereafter), the Managing Director of the International Monetary Fund. It will say nothing about the merits (or lack thereof) of the charges against DSK. All cases of alleged sexual assault brought against high-profile men place two equally important (albeit often counterposed) demands upon the rest of us: the importance of respecting the anguish of the alleged victim (as well as of respecting her struggle with the specter of terror that all women face when it comes to deciding to accuse a powerful man) and the obligation to respect the defendant’s presumption of innocence. It is in this spirit that the following will say nothing about the case and concentrate on an important part of contemporary political economics.
Normally, the “elimination” of an IMF Managing Director would have no more than a passing effect on the institution. I suspect that DSK’s demise will be different. It is not just that DSK is a heavyweight who has pushed the IMF into a different mode of thinking (taking a more nuanced approach to the deeper causes of crises). Far more significant is 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 whose significance transcends all anecdotes about the greater “leniency” that DSK demonstrated during the EU-IMF-Greek government negotiations over the terms of the massive Greek “bailout” loans. To make my point I shall quote him directly, rather than base my argument on hearsay.
Back in January 2011, DSK was interviewed by a BBC Radio 4 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, coming from 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 two sides of the same problematic coin.
Keynes’ recommendation was that, to deal with the system-destabilizing effect of deficits and surpluses, the world needed a mechanism that would rebalance them 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 favor of an SRM).
This was, quite naturally, a radical suggestion. The Unites States, as expected, rejected the proposal — not, however, because the New Dealers in power at that time did not recognize 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 the function of an SRM (and consequences of its absence) in some detail elsewhere (see here for example), 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, his statement that Keynes was ahead of his time but is timely now 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: In the European context, 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 development model is undermining the eurozone just as much as Greece’s chronic deficits are.
I think that DSK has a good point. But whether the reader agrees with me 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 inside and outside Europe.
Within Europe, the prospect of a French President who believes strongly (and is prepared to back up his conviction 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) has the potential to radically alter the political and economic agenda of the continent. Such a presidency 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, recognize 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 is 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, supranational mechanisms for recycling surpluses (as opposed to Tim Geithner’s insistence that global imbalances be dealt with only by adjustments to the exchange rates).
In short, DSK is one of the very rare officials heading an extremely powerful institution while holding refreshing views atypical of grey, number-crunching bureaucrats. His political passing may go unnoticed simply because his tenure at the IMF has been short and his French Presidency is now unlikely to materialize. However, I suspect strongly that he may well turn out to be 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 it did not reject the idea of surplus recycling itself, by implementing the Marshall Plan (a fabulous example of massive surplus recycling) and taking myriad other steps between 1947 and 1970 to recycle a large percentage of American surpluses into Europe and Japan. What it did reject was the idea of a supranational institution that would do the recycling outside Washington’s political control.
Yanis Varoufakis is Professor of Economic Theory and Director of the Department of Political Economy in the Faculty of Economic Sciences of the University of Athens. Varoufakis’ books include: The Global Minotaur: The True Origins of the Financial Crisis and the Future of the World Economy (Zed Books, 2011); (with S. Hargreaves-Heap) Game Theory: A Critical Text (Routledge, 2004); Foundations of Economics: A Beginner’s Companion (Routledge, 1998); and Rational Conflict (Blackwell Publishers, 1991).
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