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Strauss-Kahn’s Downfall Is Chance for IMF Renewal: Matthew Lynn

It couldn’t have come at a worse moment. A bailout of Portugal was being completed. Greece was tottering on the edge of a default. And where was the managing director of the International Monetary Fund, the man meant to be guiding the world economy through this chaos?

Dominique Strauss-Kahn was in a cell in New York’s Rikers Island jail, awaiting his next court hearing on charges of sexually assaulting and attempting to rape a hotel housekeeper.

The trial of Strauss-Kahn will finish his career and transform the race for the French presidency, for which he was the leading candidate in next year’s election. It may well determine the fate of Europe’s single currency. There is no guarantee that the next head of the IMF will support the euro with the same determination that Strauss-Kahn did.

Yet the most significant consequence of the scandal will be the effect it has on the IMF itself. It has become painfully obvious that giving the top job to a French, German or even British politician who happens to have some spare time on his hands is no longer good enough.

The IMF plays the most important role in the world economy right now. In the next decade, we will see multiple sovereign- debt crises stemming from the extravagance of the last decade. We may also witness the emergence of a new currency system. The IMF is the only body that can provide leadership on both fronts and that will require someone with different qualifications and ambitions. For this reason, it should select internal candidates and groom a new generation of leaders from within its own ranks.

Fair Trial

Strauss-Kahn does, of course, remain innocent until proven otherwise. He denies all charges and his lawyer says Strauss- Kahn will plead not guilty. He is entitled to a fair trial, and may yet emerge from this scandal as a free man. Still, it seems unlikely he will remain in office after the case is over, even if he is acquitted. The reality is that the IMF will need a new managing director. John Lipsky, who is filling in for Strauss- Kahn, is due to leave his post as deputy at the end of August.

Tradition states that a European gets the job. More often than not, it goes to someone French. Normally, they are former bankers, finance ministers or policy makers. There won’t be any shortage of candidates in that mold. Christine Lagarde, the French finance minister, has already been linked to the job. So has Axel Weber, the former Bundesbank chief. Former U.K. Prime Minister Gordon Brown would love to run the IMF, though it seems unlikely he will secure the support of the British government.

Possible Successors

No doubt we will be reading about the relative merits of Spanish central bankers and Swedish finance ministers fairly soon as the different campaigns get under way. Many of them would be perfectly good. Lagarde is smart and experienced, and has impressed plenty of people with her skill at helping put together the rescue packages for the euro. Weber demonstrated his independence and integrity at the Bundesbank.

The IMF now needs a new kind of leader. The top job should no longer be a consolation prize for someone who missed out on running the European Central Bank. It also shouldn’t be a stepping stone to the French presidency. Or an alternative to the golf course for defeated prime ministers. It should be the summit of a career, and not something you add to your resume on the way to something bigger.

There will never be a more important time to overhaul the IMF’s leadership culture.

The sovereign-debt crisis is just starting. Greece, Ireland and Portugal are only the tip of a very large iceberg. Far bigger countries face huge fiscal challenges in the next 10 years. The IMF will have to anticipate and prevent defaults from turning into a more general financial crisis.

Dollar in Decline

At the same time, the dollar’s role as a reserve currency is in long-term decline. With the rise of emerging economies, the U.S. can no longer maintain its position at the center of the financial system. At some point, a new reserve currency will be needed. It might be based on a basket of currencies or on gold. Perhaps it will be based on something no has even thought of yet. Whatever it is, the IMF will be pivotal to bringing it into being and stabilizing the global economy in the dangerous transition from one system to another.

To do that, the IMF needs to be allowed to develop its own leadership from within. Central banks aren’t run by former politicians or finance ministers parachuted into the role. Neither are big companies. They are led by men, and occasionally women, who have made their careers within those institutions. By the time they get the top job, they know the issues, and they know how they want to tackle them.

The IMF already has a talented pool of insiders. Whether the managing director comes from Europe doesn’t matter. What counts is whether he or she has the knowledge, expertise and vision to do the job.

Strauss-Kahn may well leave his post in disgrace. Yet if his downfall can establish the point that the IMF needs a different kind of leader, he will have done his colleagues in Washington an unexpected service.

(Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a book on the Greek debt crisis. The opinions expressed are his own.)

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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