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WORLD | 23-05-2020 09:45

Dominique Strauss-Kahn: ‘Argentina has the cards to renegotiate its debt’

French politician Dominique Strauss-Kahn, a former managing director of the International Monetary Fund, gives his view on Argentina’s debt restructuring talks, the Fund’s leadership and wealth taxes.

Once touted for the French Presidency, political heavyweight Dominique Strauss-Kahn walked the corridors of international finance as France’s finance minister and managing director of the International Monetary Fund.

His political ambitions were curtailed in 2011, when allegations of sexual assault and attempted rape, made by a hotel maid in the United States, led to his resignation as IMF managing director. The criminal charges would later be dismissed, but the incident ushered in months of other accusations and scandal.

Strauss-Kahn, a Socialist Party veteran and former lawmaker, today advises governments and politicians across the globe through his consulting firm Parnasse. In an interview with Perfil’s Jorge Fontevecchia this week, Strauss-Kahn discussed Argentina’s debt restructuring hopes, wealth taxes, the IMF and the coronavirus crisis.

 

Is the influence of the United States in the decisions of the International Monetary Fund decisive?

The IMF is a financial institution. Voting rights are proportional to each member’s quota, which in turn corresponds gross modo to their Gross Domestic Product. Thus, it is not surprising that the United States represents around 17 percent of the total. That percentage has been diminished as a result of the reforms I set in motion which have managed to increase considerably the participation of emerging countries, but the influence of the US remains strong. In particular as a consequence of a rule that goes back to the origin of the IMF that imposes an 85 percent majority for all major decisions, giving the US a de facto veto.

Under your management, the IMF attempted to promote the use of Special Drawing Rights (SDRs) as the main global reserve currency, replacing the US dollar. Why did you consider it so important to do so?

The objective was never to replace the US dollar. That still has bright days ahead of it as the main international currency. All the same, greater use of other currencies in both commercial interchange and financial transactions would give the International Money System a more balanced character than we know today.
There is indeed no reason why a single currency (even that of the biggest economy) should play such an important role, giving the country issuing it unjustified power. The SDRs, which could become a significant reserve instrument, therefore have an important role to play but it is also a perfect means for distributing liquidity in times of crisis on behalf of the countries needing it.

Was the concept that, by adding currencies from emerging market countries, such as the yuan, to the basket of currencies which the IMF manages, you would increase the stability of the global system? Was it a challenge to the dollar?

The introduction of the renminbi into the currency basket composing the SDRs until then – dollar, euro, sterling and yen – evidently moves in the right direction. A battle royal had to be fought to reach this but we incorporated it without jeopardising, for the moment, the supremacy of the dollar. That was a stabilising element for the system.

How do you evaluate the management of the current IMF managing director, Kristalina Georgieva?
Kristalina Georgieva has made a very promising début at the IMF helm in a particularly difficult context. Her origins, plus her time in the World Bank and the European Commission, have given her a sensitivity to development issues and experience in the terrain.

And how would you evaluate the management of her predecessor Christine Lagarde heading the European Central Bank?

Here again, the situation is particularly difficult. The ECB has reacted well in not yielding to the injunctions of the Karlsruhe constitutional court contesting its independence.

What recommendation would you give to Argentina’s Economy Minister, Martín Guzmán, in his negotiations with international private creditors?

It’s always bad form to give advice when nobody has asked for it! All the same it seems to me that Argentina has cards in its hands which should permit it to renegotiate its debt in good terms. I have every confidence in the authorities of your country to reach that.

And what recommendation would you give to the Argentine government regaring its relationship with the IMF?

Firstly, to be totally transparent. Mistrust, on both sides, has greatly obscured the relations between Argentina and the IMF in the past. It is normal for a country to negotiate with the IMF on an equal footing but always bearing in mind that the institution is there to help you and not to punish you, as Argentina has believed a bit too often in the past. The IMF is a doctor and you call it in when you’re sick without having it meddling in your affairs. The medicine it gives can be bitter like most treatments. It can sometimes seem very violent but only because the patient is very ill. Both sides need to know each other well for success – the IMF needs to understand Argentine reality well and Argentina needs to know how the IMF works.

Does the coronavirus crisis demand a general policy of debt forgiveness for less wealthy countries?

That would be my opinion. Poorer countries always have great difficulties paying their debts. When a sanitary crisis is added to that, it becomes practically impossible and, taking into account the ongoing global economic crisis, there is no other solution. As much for humanitarian as economic reasons, you have to go down that road if you want to avoid catastrophe. 

Could this really be the biggest economic depression in history, even worse than the one in 1929?

The worst is never certain. When the subprime crisis was upon us, the possibility of a crisis as violent as that of 1929 was also evoked. Finally, we found a way to avoid it, thanks in part to the IMF. 

The crisis facing us is harder to handle for several reasons. Firstly, it hits both supply and demand. We can hardly avoid the job consequences of a supply shock. That is the result of the confinement, which has been revealed to be indispensable from a sanitary viewpoint in numerous countries. With part of the workforce confined, production inevitably crashes. Some companies are going to reduce their staff while others will shut down. Those jobs are doubtless lost for a long time. That’s what happens with natural catastrophes but they generally do not affect more than a part of the economy. The demand shock evidently has several cumulative causes. The income of part of the population evaporates and some areas of consumption are judged not to be indispensable while others are rendered impossible by confinement, and, since “my expenses are your income,” demand sags even more. That is the very familiar cycle of recession. 

Furthermore, the crisis is rooted in the form which globalisation has taken in recent decades. In particular I am thinking of the chains of production locating the manufacture of different components in the four corners of the planet. The fragmentation of the globalisation which can result from this crisis poses a structural question which surpasses the cyclical supply and demand shocks. 

Is there a point at which lockdowns and quarantines will generate more deaths than the Covid-19 virus, due to the economic impact they generate? 

This economic setback risks plunging millions of people in the “emerging middle class” into extreme poverty and the more poverty, the more deaths. Emerging countries have younger populations but are also more fragile with more malnutrition while their sanitary conditions are even more difficult. 

Are we observing a new economic paradigm where liberalism has been replaced by a sort of new Keynesianism as countries spend aggressively and even the EU relaxes deficit and debt limitations? 

Each crisis – as was also the case with the subprimes – places into evidence the weaknesses of unbridled liberalism. The demand for a state is reborn and peoples turn to their public authorities to provide solutions. Unfortunately, once the crisis is over, “each man for himself” at either an individual or national level returns. That was the case in 2012- 2013. The regulation of market economies at national level and international cooperation is indispensable for guaranteeing stability by keeping private initiative within bounds. The current crisis, by reason of its very depth, might be the origin of a return to a more organised regulation. That’s the optimistic vision of the future.

The response to the last global crisis was to lower interest rates aggressively. This pushed up asset prices, and many believe it created bubbles and systemic risk. How much of this crisis is due to excessively loose monetary policy? 

The monetary response to the previous crisis was necessary. That is what avoided catastrophe but it was not without consequences. The excess liquidity then spilled was not subsequently reabsorbed. 

Let’s take the example of a fire, the firemen have to pour tons of water to put it out but they do not hesitate. But afterwards you have to mop it up. That was not done with that liquidity and the consequence has been in part the bubbles of which you speak and in part a sharp rise in inequality because that liquidity does not fall into every pocket. In any case monetary action has its limits and, as is the case with every natural catastrophe, budgetary support must be mobilised, even if insufficient in the face of the amplitude of the shock. You cannot sustain supply by only financing supply and sustaining demand while giving priority to the most fragile sectors of the population is indispensable. 

Could the printing of money by central banks around the world generate a general return of inflation? 

The risk exists but is modified by the fact that a bit of inflation will not do us any harm, although you have to be careful when saying that to Argentines. A bit of inflation is 2 or 3 percent, not double digits. But in any situation you have to choose the lesser evil. The biggest risk today, over and above the sanitary risk, is to see part of our productive machinery melt down. In the face of that, the risk of inflation at the global level is a lesser evil.

In the late 1980s you participated in the discussion on the solidarity tax on wealth in France. Today in Argentina a special tax on the 12,000 richest people is being discussed as a contribution to alleviate the coronavirus crisis. What do you think of wealth taxes? 

There are wealth taxes everywhere. US real estate taxation is pretty important while Japanese inheritance taxes are very high. From a theoretical viewpoint, several authors – for example, Maurice Allais, who won the 1988 Nobel Prize for Economics – have shown that a general wealth tax is economically more effective than income or sales taxation. It is generally a much more difficult tax to implement than the latter because of the difficulties in grasping that tax base but this is also the time to mop up excess liquidity. 

Thomas Piketty proposes a strong inheritance tax as a method to improve income and wealth inequality. Do you agree? 

Inheritance taxes are certainly one of the best methods of taxing fortunes. 

You were Minister of Industry and Commerce with François Mitterrand in the early 1990s. At the end of that decade, the other socialist government, that of Lionel Jospin, privatised public companies France Telecom and Air France, among many others. How did Socialism change prior to the fall of the Berlin Wall from that of the late 1990s and early 2000s? 

My socialism does not rest on collective ownership of the means of production. If in 1997, as the Economy and Finance minister of Lionel Jospin, I proposed privatising at least partially France Télécom, that’s because the survival of that enterprise was at stake since it needed to find capital which the state was incapable of providing.

 In other cases, such as national independence or temporary difficulties, I developed the idea that temporary nationalisations could be indispensable. The exhaustion of the traditional tools of social democracy, notably redistribution, has led us to redefine a new socialism. That rests on the correction of innate market inequalities at root instead of limiting ourselves to trying to correct them afterwards via redistribution. That leads to a society which permits each person to develop their talents independently of their social conditions at birth. That’s a new humanism which I think we need.

 

Jorge Fontevecchia

Jorge Fontevecchia

Cofundador de Editorial Perfil - CEO de Perfil Network.

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