European Leaders Hanging from their own Petard

European leaders are hanging from their petard.  The aid package put together barely a year ago, and belatedly at that, is proving insufficient for Greece.  The Irish package is hardly six months old and is under review.  Portugal’s package is likely to receive endorsement by the euro zone finance ministers at the summit on Monday and Tuesday.  The euro finished near its lows before the weekend.  The technical tone is weak.

One man who wishes he could be in that room of haranguing European finance ministers is Strauss-Kahn.  As the managing director of the IMF, he planned to attend.  However, shortly after he boarded his flight that was to take him from NYC to Paris, he was dramatically escorted off the plane by police and subsequently arrested for allegedly sexually attacking a hotel maid. 

Strauss-Kahn was expected to have challenged French President Sarkozy in next year’s election.  This will throw French Socialist politics into disarray, well before Strauss-Kahn’s guilt or innocence can be ascertained. 

IMF politics are just as confusing.  John Lipsky, the number two man at the IMF, became acting director when Strauss-Kahn came to New York on personal business.   He apparently will be acting for a bit longer.  It is not clear for how long, but according to some reports, he had already made it clear he would step down from the IMF later this year. 

It seems only ironic, in hindsight, the German Chancellor Merkel had first suggested Bank of Italy Governor Draghi would make a fine head of the IMF.  It was a feint, and bought time to sort things out with her aid-critical coalition partner, the FDP.   Strauss-Kahn’s woes are unlikely to derail Draghi’s candidacy for ECB head. 

The problem is the lack strong alternative candidates.  More telling of ECB politics will be what Bini-Smaghi does.   Does he step down so that Italy would not have two ECB board seats and the French have none?  Does he stay on after Draghi presumably become the head as of November, completing his term and demonstrate the independence of the ECB? 

Nor will Strauss-Kahn’s problems impact the debate over Greece.  The next important event for Greece is the conclusion of the IMF/EU review of Greece’s progress next month not this week’s finance minister meeting.  After that review, finance ministers will the facts in hand and only then can make informed decisions.  It is also the only way to the give the process the kind of legitimacy that is politically necessary. 

   

The market seems to anticipate the results of the review.    Greece needs more aid if a restructuring (which is partial default) is to be avoided.    The IMF wants Greece to increase its modest privatization effort that had targeted 50 bln euros.  The IMF suggest this is about a fifth of the property that the Greek government owns.   In France, losing of Alsace-Lorraine was a terrible blow on the French psyche.  In the US there had been a long debate about who “lost” eastern Europe to the Soviets.   Will Greece debate who lost the Acropolis and the Parthenon? 

And as insurmountable as it may look now, the resolution of the Greece debt burden is going to be much easier than addressing the underlying problem of competitiveness.