Finance for weenies

The arrest of IMF chief Dominique Strauss-Kahn at his $3000-a-night hotel for sexual assault (BTW, what makes a room with a bed worth $3000 a night? Maybe DSK thought bonking the maid was included in the tab) not only throws domestic French politics into a tizzy but also threatens the EU’s attempts to hold together its financial house of cards.

Strauss-Kahn’s sex scandal comes at a most inconvenient time. Imbalances in intra-EU trade, disastrous deregulation of the financial sector, cooking of books and the rickety structure of the eurozone have led to three collapsed economies (Greece, Ireland, Portugal) and threats to several more (Spain in particular). The remedy so far has been ‘extend and pretend’, by which German and French banks impose austerity on the impoverished and squeeze out interest payments as a form of permanent indentured servitude, just as the IMF used to do with Latin American and African countries. No matter if the debts are essentially unpayable if you can keep the indebted countries pouring their surplus into Frankfurt and Paris.

Without pretending to follow all the technical details, I gather that there are more intelligent solutions available just as the Latin American debt crisis eventually was resolved through extensive negotiations, Brady bonds and other inventive arrangements based on some more equitable sharing of the pain. However, that outcome required a willingness to recognize that the situation was unsustainable and the debtors’ credible threat of default to focus the mind. The process was also time-consuming and required political leadership rather than demagogic pandering.

These conditions are not present within the European project of the moment, so the fall of DSK is a major earth tremor for an already shaky edifice. It promises debilitating distraction at the IMF and political upheaval within a major player (France), just as the elites need to join hands and sing the proper tunes in unison to prop up the fantasy that All Will Be Well. It’s just the sort of unexpected and messy incident that can expose an underlying weakness and unleash a chain reaction.