Scandal forces French Finance Minister to quit

FRANCE'S GOVERNMENT is reeling from its worst crisis in two and a half years in office, after fraud allegations forced the resignation yesterday of Dominique Strauss-Kahn, the Finance Minister who was the architect of the country's economic recovery.

A cabinet heavyweight whose close relationship with the Prime Minister, Lionel Jospin, has been vital to the Socialist-led government's economic respectability, Mr Strauss-Kahn stepped down as the threat of formal charges against him in a fake payment scam began to appear inevitable. Mr Jospin appears to have acted quickly to make sure the affair was nipped in the bud before a fully fledged scandal dogged his government, which took office pledging a "clean hands" administration.

Protesting his innocence in the affair, in which he is accused of having been paid a pounds 60,000 consultancy fee by a students' insurance organisation for work he never did, Mr Strauss-Kahn said he was standing down the better to defend himself. "If I resign, I repeat it with force, it is not because I am guilty. I take this decision because I believe morality and a sense of responsibility make it inevitable," he told a news conference.

The Prime Minister's office said Christian Sautter, Secretary of State for the Budget, would take over Mr Strauss-Kahn's functions as Minister for Finance and Industry.

The stock exchange seemed to take the minister's replacement in their stride. Financial markets fell sharply in reaction to the resignation, but only briefly. Share prices went on to close at a record high.

While Mr Strauss-Kahn's stewardship of the economy was much admired, his departure was seen as a local difficulty with little impact on the euroland economy. "If this had happened before the euro, the French franc would have collapsed," said Philippe Gudin, an economist at Goldman Sachs in Paris.

The minister's downfall is a huge blow to Mr Jospin, who has staked much on a reputation for moral probity, and who now finds his government open to the same charges of mutual back-scratching with the world of finance that he has been happy to deal out to the right-wing opposition.

The combination of the minister's laid-back demeanour and liberal economics have been instrumental in reassuring French businessmen and the country's trading partners that if the 35-hour-week is one half of the Socialist programme, the other has been privatisation, budgetary rigour and the acceptance, if not the embrace, of global market forces.

As a result, Mr Strauss-Kahn has been credited for restoring France's currently buoyant economy, and his departure could now tilt the cabinet in a more conventional left-wing direction, a move unlikely to please international markets.

Speaking before the National Assembly, Mr Jospin backed his Finance Minister's work, which, he said, had been of "exceptional quality", and, while respecting his decision to resign, he said the presumption of innocence must be respected. "I hope we shall soon see him back among us," Mr Jospin said.

The resignation reveals again a chronic instability at the heart of French politics, caused by the inadequacy of rules governing party funding, the temptation for politicians to strike deals with business and the exclusive network of friends and contacts at the top of society that makes the whole process so simple.

The allegation against Mr Strauss-Kahn is that between 1994 and 1997 he used his influence to arrange a deal under which the left-wing-dominated students' insurance co- operative, the MNEF, then in deep financial difficulty, sold part of a holding company to the Compagnie Generale des Eaux, now renamed as the multinational Vivendi.

Mr Strauss-Kahn says his services were provided as a practising lawyer, and the payment of 603,000 francs was not excessive, an argument backed by the French law society.

But at the end of last week it was revealed that a former senior official at the MNEF, himself facing charges, had claimed Mr Strauss-Kahn's legal work had never been carried out, and that the letter commissioning him was forged and back-dated.

According to Liberation newspaper, police tests supported the charge, showing that the paper on which the letter was written was not commercially available in 1994, nor had the computer typescript been developed.

Commonly known by his initials DSK, Mr Strauss-Kahn, who is 50, faces an uncertain political future. Tipped as a favourite in mayoral elections in Paris in 2001, and named even as a possible future prime minister were Mr Jospin to win presidential elections the following year, the former minister now faces a lengthy legal process to clear his name.

THE SOCIALIST SOCIALITE

BEFORE HE became a minister "DSK", as Paris-Match refers to him, was better known as a socialite than a Socialist: his wife is Anne Sinclair, a television personality. A talented pianist, DSK has been seen playing the piano in a white tail suit. In office, he boldly demanded a renegotiation of the ground rules of the single currency, on France's terms. But his reputation soared as he turned into one of the euro's most persuasive advocates. He attempted to win Tony Blair over to monetary union by making him see how lonely life was outside the euro club.Even in Britain there was some mild regret at the departure of DSK, someone who was seen, according to one senior source, "as a serious guy, a man with clout and someone worth negotiating with". In Brussels, they concur. "He was," said one official, "a big player with a big brain - just rather arrogant."