16 May 2011

DSK’s difficulties will matter as Europe’s paymasters opt for increasingly harsh austerity

Dominique Strauss-Khan (Getty)My initial response to the alleged tawdry tabloid travails of Dominique Strauss-Kahn was that it probably did not matter in terms of the economy.

I’m now in Brussels, at the meeting DSK was due to attend and I’ve heard from Ministers and senior officials and I’ve reassessed my view.

DSK’s problems – and possible exit – have to be seen in the context of a striking change of tone within Europe about the myriad bailouts of the eurozone’s highly indebted periphery.

Austerity is in the ascendancy. It is best symbolised by the Finns and the Dutch.

Holland’s ultra fiscal conservative Finance Minister, Jan Kees de Jager, was the first person I heard from today. When asked about Greece possibly needing more bailout cash, he said that the way forward was “more reforms, more austerity programmes and more privatisation”.

The last point is particularly keenly felt. Yes, Greece has made some progress in cutting 4 per cent of its budget deficit in one year (cf 1.5ish per cent under Osborne’s plan). But that is against a target of over 7 per cent.

But part of Greece’s original bailout deal involved €50bn of privatisations, with first proceeds of this sell-off coming in this quarter. This hasn’t happened yet. It’s been delayed. So the issue of privatisations has becoming totemic of the idea that Greece isn’t doing enough. As one senior EU official told me about Greece: “There is more meat on the bone”.

Why does this matter? Well-placed sources have confirmed that in mid-June we have the trigger point for another potential crisis. The IMF is in Athens now, reporting on Greece’s progress against its various fiscal targets. The next disbursement of IMF cash is due then.

The problem is that worsening market sentiment means that it will be impossible for Greece to access the public bond markets, as was planned from Spring 2012. So there’s a funding gap, which could make it impossible for the IMF to sign off its next tranche of money. The only source of that money will be the EU. I think we are talking €20-30bn.

But, as you heard from our Dutch friend and from the ultra-austere Finns and increasingly vocal elements within Germany’s governing coalition, they want to get tough. They absolutely don’t buy into the idea that Greece is in the popularly-termed austerity death spiral. Greece’s Q1 GDP growth figure of 0.8 per cent (higher than UK) is pointed to.

So the answer for Greece may be more bilateral loans – from France and perhaps Germany – to cover the IMF shortfall. This stops short of the full scale debt restructuring, and enables the likes of the French Finance Minister to continue to deny the inevitability of some sort of default. It also means that the increasingly harsh rhetoric of hard-line hard euro-ites might be bypassed.

This is precisely the sort of delicate euro-financial-diplomacy deftly dealt with by DSK. It is being said here in Brussels that he reined in the fiscal hawkery of some arms of the IMF and encouraged these programmes to be slightly less harsh and mindful of the social impact on the people of Greece, Ireland and Portugal.

His acting replacement, John Lipsky, is likely to be less mindful of these factors. DSK is also what former IMF chief economist Simon Johnson refers to as Metternich with a Blackberry. His diplomatic manoeuvring greatly aided the original euro and Greek bailout agreed in the early hours in interminable Brussels meetings, just as Metternich elegantly stitched together post-Napoleon cross European powerful coalitions.

So, in short, if DSK falls, Greece loses an ally. The delicate patchwork of interests that has held together Europe’s nations, its donors and creditors, its PIGS and its paymasters, will lose some of its glue, at the very moment that this compact is being stretched. Clearly the impact on France’s domestic politics will be far greater. But the winds are changing in the eurozone.