Strauss-Kahn and the Fund

IMF boss was in India but had Europe on his mind

India has come a long way from the days when a visiting managing director of the International Monetary Fund (IMF) would, on the one hand, be greeted with hostile demonstrations from unions and other opposition parties, and, on the other, go away after sermonising his hosts. The IMF’s MD, Dominique Strauss-Kahn, neither faced angry crowds in New Delhi, during his visit last week, nor did he have to lecture his hosts on policy. On the contrary, he paid compliments to India’s macroeconomic authorities and commended them for their policies and their record of economic management in difficult times. He went beyond the call of duty when he endorsed the government’s views on capital inflows. Professional opinion in India is divided between those who see the appreciation of the rupee, as a consequence of inflows, as a problem and others who believe that India needs a larger buffer of foreign exchange reserves to manage an external contingency arising out of continued global uncertainty. Mr Strauss-Kahn followed Fund orthodoxy in rejecting the idea of a Tobin tax on capital inflows and urged India to press on with policies that would encourage more investment and create more jobs. All this is well taken.

However, it is very clear from Mr Strauss-Kahn’s comments on the global economy that even when he was in India, Europe weighed heavily on his mind, and not just because his political rival at home in France, Segolene Royal, has declared her candidature for the French presidency, upping the ante. Mr Strauss-Kahn has to decide, sooner rather than later, whether he wants to return to domestic politics or remain engaged with global economics. He has, without doubt, strengthened his European profile with last fortnight’s speech in Frankfurt where he, in fact, lectured Europe on what it must do, even as he paid excessive compliments to the European Central Bank for its handling of the mess in Europe. Mr Strauss-Kahn urged Europe to fix its financial sector, recapitalise its banks, deal decisively with problem banks, and ensure better supervision and better crisis resolution procedures. He spoke candidly about fiscal consolidation and the need to ensure growth is sustained and creates jobs. He went further to urge Europe to undertake labour market reforms, aimed at creating a “level playing field” for all European workers. He also urged Europe to adopt more liberal immigration policies to be able to address its demographic problem. Mr Strauss-Kahn advised his European colleagues to invest in education and innovation for Europe to be able to compete with the rest of the world. His advice to Germany to adopt policies that would reduce its current account surplus and increase its domestic consumption would be popular in that part of Europe that is currently stressed out. Comparing Mr Strauss-Kahn’s Frankfurt speech to the one last week in New Delhi shows how much the world has changed, and how much the thinking at the top in the Fund. Time now for the rest of the IMF to change too!