Scandal Threatens European Influence at IMF

Will a European again head the powerful financial institution?

Dominique Strauss-Kahn resigned his position as managing director of the International Monetary Fund (IMF) on Thursday after he was arrested and detained on sexual assault charges in New York this week. His departure could upset the traditional balance of power within one of the world’s most powerful financial institutions where emerging countries are demanding a greater say.

Strauss-Kahn, a former French finance minister, enjoyed both the experience and the connections to head the IMF during a period of economic upheaval unprecedented in the organization’s history. He managed to prevent the Fund from losing influence to the more ad hoc convention of the world’s major economies in the G20. Rather as a result of Europe’s debt crises, the IMF arguably gained in power.

Because the IMF is heavily involved in the financial rescue operations of Greece, Ireland and Portugal, European politicians and central bankers argue that the Fund’s next managing director should once again be a European. The continent has traditionally claimed the position whereas an American always heads the World Bank.

French finance minister Christine Lagarde is considered the frontrunner. She has played a major role in the G20, especially as the group is chaired by France this year. Although Lagarde enjoys support from German chancellor Angela Merkel, former Bundesbank president Axel Weber may also be a contender.

Former Prime Minister Gordon Brown is reportedly campaigning for himself but it seems unlikely that Britain’s conservative government would endorse him. Italian central banker Mario Draghi is mentioned though he is more likely to succeed Jean-Claude Trichet as head of the European Central Bank.

Trichet, whose tenure at the ECB ends in October of this year, was mentioned as a possible candidate by Dutch central banker Nout Wellink on Wednesday because of his intimate knowledge of Europe’s financial predicament.

Because of Strauss-Kahn’s premature departure, it may be more difficult for the Europeans to maneuver one of their own into the managing directorship of the IMF this time around. The question of his succession coincides with a lingering frustration in emerging markets about the generosity and scale of the Fund’s recent rescue packages for eurozone member states. Similar operations in Latin America and East Asia during the 1980s and 1990s respectively typically came with far more stringent reform requirements for the receiving nations. Although countries as Brazil, China, India and Turkey acquired more power in the IMF last year, an Asian candidate may seem appropriate as the economic balance in the world is shifting.

Probably the most viable non-Western contender is former Turkish finance minister Kemal Derviş who shepherded his country through an IMF rescue operation in 2001 and administered the United Nations Development Program between 2005 and 2009. Derviş may not enjoy staunch support from the Turkish government however as he is a member of the leftist opposition.

Stanley Fischer, a renowned economist who was both vice president at the World Bank and deputy managing director of the IMF during the 1990s, may also be a contender. He currently governors the Bank of Israel but at 67, Fischer may be too old to head the IMF for the next five years.

Other possible candidates from developing nations include former South African finance minister Trevor Manuel, Mexico’s central bank governor Agustín Carstens and Montek Singh Ahluwalia, the deputy chairman of India’s planning commission.