The news that Dominique Strauss-Kahn, IMF chief and frontrunner in opinion polls for the upcoming French elections, was arrested on allegations of rape yesterday was a bombshell. Mr Strauss-Kahn is innocent until proven guilty, but whatever the outcome of his trial, it is likely this will be a game changer for French politics. It is unlikely, however, that this development will impact the future of the eurozone bailout packages.
Mr Strauss-Kahn was widely expected to announce his candidacy for the French presidency. According to opinion polls, Mr Strauss-Kahn would have easily won the Socialist Party nomination and very likely could have defeated the current president, Nicolas Sarkozy. The Socialist Party has demanded candidates for the primaries apply between June 28th and July 13th. It seems unlikely that the Mr Strauss-Kahn’s trial will be wrapped up by then, in which case he will not be able to run for president.
While this may well change the course of French politics, the short- and medium-term future of the eurozone bailout packages is not likely to be in question. Mr Strauss-Kahn was on his way to Berlin for a meeting with German chancellor Angela Merkel yesterday and then onward to Brussels for a meeting with the EU finance ministers. There are two big items on the agenda for this meeting in Brussels: a new bailout package for Greece and approval for a €78bn bailout package for Portugal. Yesterday’s arrest of Mr Strauss-Kahn is unlikely to significantly impact either of these. First, the IMF is not a one-man show, and another representative will be present in Mr Strauss-Kahn’s absence. Secondly, EU leaders seem committed to a new bailout package for Greece and a lending facility for Portugal. This is not affected by Mr Strauss-Kahn’s arrest. The lending facility for Portugal has largely already been agreed, and this scandal could at most delay agreement on a new bailout package for Greece. A short delay on a Greek bailout is fairly irrelevant; Greece does not need more funding until 2012, when it is currently expected to return to the markets.
The United States has historically prioritised leading the World Bank. If Mr Strauss-Kahn were to resign from his position at the helm of the IMF, therefore, it seems likely another European would be chosen to replace him. If this is the case, the medium-term outlook for the European bailout programmes would not change. I expect that European leaders will continue to support the bailout programmes until 2013, when the European Stability Mechanism (ESM) is implemented to allow for orderly debt restructuring.