the legacy of Dominique Strauss-Kahn

Yesterday FT editor Martin Wolf praised the competence and leadership of Dominique Strauss-Kahn. Today, in the Financial Times, Desmond Lachman writes that no-one should regret the departure of Strauss-Kahn, who is more likely to be remembered “as the man who put the IMF on the road to decline, by his misguided handling of the eurozone debt crisis”.

Mr Strauss-Kahn’s decision to treat the crisis as a matter of liquidity rather than solvency led the IMF to eschew any notion of debt restructuring, or exiting from the euro, as a solution to the periphery’s public sector and external imbalance problems. Rather, he opted for draconian fiscal tightening and radical structural reform as a cure-all for Greece, Ireland and Portugal.

Experience with such policies in Argentina in 1999-2001 and in Latvia in 2008-09 should have informed the IMF that, under the euro – the most fixed of exchange rate systems – such a policy was bound to produce the deepest of economic recessions. The fund should also have anticipated that deep recessions would erode those countries’ tax bases and undermine their political willingness to stay the course of adjustment. ….

One must hope that a new leader at the IMF’s helm might bring about a fundamental rethink of the fund’s economic programmes for the European periphery. For without such a rethink, the IMF is in danger of once again reducing itself to irrelevance in the global financial system.

Desmond Lachman, “Fund must turn away from DSK’s economic mistakes“, Financial Times, 19 May 2011.

Desmond Lachman (PhD Cambridge) is a resident fellow at the American Enterprise Institute (AEI). He worked from 1984 to 1996 at the International Monetary Fund (IMF), where he became deputy director of the Policy Development and Review Department and, according to his bio, was “active in staff formulation of IMF policies”.

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