Transcript of the October 2019 European Department Annual Meetings Press Briefing
October 18, 2019
Poul Thomsen, Director, European Department
Andreas Adriano, Senior Press Officer, Communications Department
MR. THOMSEN: Good morning to all of you. And thank you for coming to listen to me this morning. I'll make a brief introduction, and then as usual take your questions.
Since we met at the time of the Spring Meetings economic growth has slowed further. We see a slowdown across Europe, but in particular in advanced Europe, and within that group, in particular in Germany and Italy, two countries with very large manufacturing sectors and export sectors. The U.K. has also underperformed due to Brexit-related uncertainties. In this context, we have lowered our forecast for 2019, marginally, not significantly, for advanced Europe from 1.4 to 1.3 percent. Emerging Europe has also seen a slowdown, but is actually significantly less than we had expected, the slowdown in emerging Europe, and here we have therefore had to revise our forecast up a bit to 3.7 percent. So still relatively robust growth in emerging Europe.
Now what is driving that slowdown? It is still caused by external trade, reflecting continued trade tension and other factors, like Brexit. That said, there are signs of some incipient spillovers to domestic demand, notably to investment via confidence channels. On the other hand, domestic demand is still relatively robust reflecting still very strong labor markets; in many markets we have unemployment at or below pre-crisis level, and we still have relatively robust increases in wages. And credit growth remains strong on the back of the support of financial conditions.
So, on the basis of this somewhat mixed picture, how do we see the outlook for 2020? For advanced Europe, we expect a modest recovery in growth, modest, to 1.5 percent. For emerging markets, for emerging Europe we do have a slight slowdown to 3.1 percent, still respectable, that reflects really the assumption of a lax (phonetic) spillover from the slowdown in advanced Europe, and the fact that these countries have been growing quite strongly above potential, so there's a sort of a convergence towards potential.
Why are we projecting an upturn in emerging Europe? This reflects primarily, the IMF's global assumption of a recovery in global demand which obviously translate into a rebound in European export. In addition, as I said, labor markets are still strong, and we expect this to continue to underpin domestic demand, that together with the macroeconomic policies that continue to be supportive, not least monetary policy.
That's the explanation for our assumption of modest recovery in advanced Europe. Now, clearly, there are some risks to this forecast. The projected recovery is predicated on the assumption that we avoid a cliff-edge Brexit, and that there will be no further escalation of trade tension.
Recent developments give some hope regarding the ability to avoid a cliff-edge Brexit, but clearly we are still concerned about the risk of escalation of trade tension. I would say overall if you look at our forecast, risks are clearly on the downside. I want to put it differently, we are more likely next time around to have to revise downwards than upwards.
Now, what are the policy implications of this? As I said, we still have strong labor markets and with the recovery, we still expect output gaps in many countries to be either closed or to -- might have even been a bit above, but we still have positive output gaps, and we are in a situation where when it comes to fiscal policy we are advising that fiscal policy should remain focused on medium-term objectives. What does that mean? That means that countries with high debt and limited fiscal space for their fiscal policy next year, in 2020, should still be guided by medium-term objectives. It is still the time for those countries to undertake fiscal consolidation.
Countries with ample fiscal space, on the other hand, should undertake a measured fiscal expansion, use that fiscal space to take measures that boost long-term growth, infrastructure, enhancing human capital, increase labor participation. This is not obviously a cyclical argument, it's a long-term structural argument, and these are countries often with the current account surpluses, lots of current account surpluses. This will certainly also help bring down external imbalances.
Now, in view of the fact that the downside risks are significant, and in view of the fact that monetary policy -- I'll get to that too in a second -- is undoubtedly getting closer to the point where its effectiveness as a countercyclical tool might be limited, it is clearly critical that countries stand ready to deploy discretionary fiscal measures if downside risks materialize on a significant scale. So, policymakers should have plans in their drawers that would allow them to rapidly deploy high impact fiscal stimulus. It's critical that any discretionary fiscal relaxation, if it becomes needed, is implemented in the context of medium-term plans. Measures need to be well-focused and temporary and they should strengthen confidence in medium term fiscal targets. That's particularly important for countries with limited fiscal space if they are to avoid unsettling markets.
A short remark on monetary policy. On monetary policy, with inflation still stuck at low levels -- it has actually in advanced countries fallen a bit further -- we remain of the view that monetary policy should be accommodatively, we are supportive of the ECB's recent measures. As far as emerging Europe is concerned, we do think that they can hold on to the current monetary policy also for longer.
Now, we are, of course, aware of concerns about the risks associated with that monetary policy. Clearly, low-for-longer means that one needs to be increasingly vigilant about such risks. We do not see them at this stage. We still think that there might be, some risk, local risk if you want to put it like that. We think that macroprudential tools that are available are adequate to deal with such risks. But we do agree that these risks need to be kept under close monitoring.
Now, I think that's enough for the short-term policies. Key issue is again, despite the risk, despite the slowdown, we are not in a situation where we would recommend the deployment of discretionary fiscal measures at this stage.
Now, looking to the medium term. While we have a recovery in our forecast, looking to the medium and long term, this is clearly a lackluster recovery, no doubt about that. We have a growth of about one, one and a half percent. We are not looking to a return of the higher growth rate that we saw until 2018. That is not in our forecast. This really reflects longstanding issues we have discussed before aging demographics and low productivity.
And that, of course, points to the urgency of structural reforms. In this area, in particular in advanced Europe, performance continued to be disappointing. Here the new reforms are often country-specific, so I will not get into details. But clearly, the usual suspects, labor market reforms to increase flexibility in some countries, opening up closed professions in other countries, strengthening, modernizing their sovereignty framework, the list is long.
In emerging Europe, there clearly is also a need for structural reforms. Now, emerging Europe, this is the 30th anniversary of the beginning of the transition and a very successful transition. And here, the challenge is really to adopt what I would call second generation reforms. The low hanging fruits have been picked, the next generation reforms are often reforms of institutions to improve governance. It's more complicated but clearly also emerging Europe facing complex set of structural reform challenges ahead. I'm going to stop here, happy to take your questions.
QUESTIONER: Does the IMF have any number because of the impact of tariffs that the U.S. is implementing today to Europe because of the airbus case? And the probability of that trade escalation with Europe increasing in the next couple of months. And then, in the particular case of Spain, what's your recommendation since we are seeing again, social unrest and we are going into new elections. What would you recommend to the next government of Spain?
MR. THOMSEN: On the airbus case, of course, we need to separate it from other trade issues. This is a long running case. I think it's 15 years old. It is a case of something that's being inside the WTO framework. I think that the direct impact is limited. Now in this fragile situation with a slowdown, it's certainly something one would prefer to avoid. But I think that the key issue here is while it is separate from the other trade tensions, I think it's important that all parties are mindful that one needs to not to take actions that can escalate these trade tensions. So, I think policymakers should bear that in mind.
On Spain, let me just note that Spain has continued to perform better than Euro area partners, notably better. For a number of years, we have actually underestimated the strengths of the Spanish economy until recently, reflecting undoubtedly the reforms that were undertaken in the wake of the crisis. Spain has continued to do well despite some political uncertainties for a while. And we continue to think that Spain will -- it's not immune from the slowdown, if there is a slowdown -- but still Spain is one of the countries that have continued to perform better and I would expect that to continue.
As far as the agenda of a new government, I think it's critical that one safeguards the reforms that have been done. There is a need to build on them, on further build the labor market reforms. And I think on the fiscal, clearly Spain has benefitted significantly from having much fiscal space ten years ago. And the challenge is clearly to rebuild its fiscal space during the good years. These are still relatively good years so Spain should continue with the fiscal consolidation. It's clearly one of the countries I have in mind when I say that fiscal objectives should be guided by medium term objectives. In the case of Spain, the medium-term objective is to bring down debt.
QUESTIONER: A couple questions on Brexit. I know it’s early days yet, but after yesterday’s agreement or outline agreement between the EU and Great Britain, I wonder if you had any thoughts on the impact that might have on European economies and I suppose the UK economy as well.
MR. THOMSEN: So, as you know, we do not have the details of that agreement. I take note of the sort of the objective is to have something akin to a free trade agreement. We'll have to see the detail. But what I've seen so far is fundamentally in line with what are the assumptions about Brexit in our baseline. Our baseline does not have a hard Brexit, does not have a cliff edge Brexit. And from that point of view, certainly this agreement is good news that if it is supported it would avoid one of the key risks that I mentioned before. One of the key risks that I set sort of in part, an overall downside risk to our outlook. So, that would be good news if one could avoid that.
QUESTIONER: So, my question is regarding Ukraine. The IMF has changed the forecast for Ukrainian GDP growth in 2019 from 2.7 in April to 3.0 in the latest one economic outlook. Despite the elections here in the country and other reasons. So, what are the reasons for the revision in a positive way for Ukraine? And the second question is regarding the new program which is negotiated in Ukraine with IMF, could you please add some details? For example, an amount because the Ukrainian side said there is a program for the next three years, but no other details. Could you please provide details on this?
MR. THOMSEN: Sure. I'll be happy to do that.
QUESTIONER: Sir, just a question about the main key points for the EFF with the Ukraine. What I heard it was the importance of the independence of the National Bank because we got some issues here in the Ukraine; the question of the private bank. So could you give a little bit more detail. The question of the private bank, the biggest, the largest Ukraine bank which was given by the country according with the IMF recommendations.
MR. THOMSEN: Yeah, happy to give you details. On the first question, of why we have revised growth upwards a bit: growth has proven to be a bit more robust and we take that into account and revise our forecast. We do that the whole time. I think the important thing to keep in mind is that Ukraine has achieved a considerable measure of macroeconomic stability now in recent years.
I think the two programs, the EFF and the Stand-By Arrangement that followed, were quite successful in that regard. And I think that Ukraine is harvesting the benefit of that relatively good growth. Now, I say relatively in the circumstance, because from a long-term perspective, Ukraine needs to do better given the low level. Ukraine has much bigger scope for catchup than suggested by numbers like that and the challenge is clearly structural reforms to unlock -- and I'm not going to get into the whole heap of these issues -- but to undertake a broad set of structural reforms to increase productivity.
Now, that leads to the other question on a program and what's in the program. There is a program in place right now. It's a relatively short Stand-By Arrangement. It was intended as a bridging operation to have something in place; to help preserve the macro-economic gains that we have achieved until the elections were over and a new government could be formed. The new government has said that it's interested in continuing the relationship with the Fund, but in line with the fact that Ukraine's main problems are long-term structural, it wants a three-year EFF program and that's what we're discussing.
The amounts have not been discussed yet, so I cannot tell you anything on the amount. It has sincerely not been discussed yet. As far as the focus of this program is concerned, let me make two points. I started out by saying that Ukraine has achieved significant measure of macroeconomic stability. I think it's critical to preserve that. One of the key things is a tremendous change in the operation of the Central Bank; modernizing of the Central Bank; and, including its independence. And we think it's absolutely critical that it is preserved. Most regarding monetary policy, but not least also, regarding financial sector supervision. That leads to the issue of Privat. Here, I think, it's critical that the state continue its effort to try to limit the losses to the taxpayers from that resolution. So, that is clearly also an issue.
Now, the second set of issues, are indeed, the structural reforms. They're the longest, broadest structural reforms. Here there are a number of issues under discussion, land reforms among them. Issues, as you know, that have been particularly important are issues to tackle corruption and that is also still on the table. I think another issue that is important is the opening of the economy. There's a lot of monopolistic structures in the economy and that clearly is also something that is important. Here, we are in a dialogue with the government discussions, I think are going well with Ukraine and we intend to send a mission back out in a couple of weeks to continue to put the details on some of these reforms that I just mentioned.
QUESTIONER: Do you think that the Greece is on track to achieve the agreed goals and targets for the medium term?
MR. ADRIANO: Let me ask a couple of questions that came online. How do you assess the Hercules Plan for reducing the stock of non-performing loans from Greek banks? And according to the Fiscal Monitor, the Greek GDP will expand with a pace of 2.2 percent. The Greek Finance Ministry predicts 2.8 percent. Do you think that this forecast is far too optimistic?
MR. THOMSEN: Okay. Let's start with the questions regarding growth. In particular, the issue on the medium term. I think we have always said that Greece is in a difficult position. On growth, long-term growth, it's one of the countries with the lowest productivity growth in the Eurozone. And it has particularly adverse demographics, which is why we had potential growth, long-term growth assumption, I think below 1 percent, actually. I cannot remember the exact number, but it was low.
I think the key challenge is clearly to move Greece up, compared to other countries in terms of productivity. I think it is well-known what the issues are there as far as broader structural reforms are concerned, issues of opening up of the economy; of [opening up] closed professions; of goods and service markets in general. There is a reform agenda here that was only partially achieved during the program period. As I've said before, I think Greece did very well in terms of labor market reforms, but not in terms of these broader reforms and that is clearly the challenge facing Greece to do that.
Secondly, we have said that while Greece achieved a tremendous, an impressive fiscal consolidation, it has been achieved in a way highly growth-unfriendly, by compressing capital spending and by cutting other current spending to levels where, in our view, compromises the public sector's ability to provide basic services. And to allow a much more growth-friendly fiscal policy mix, we think that it's critical that Greece undertakes pension reform. Pensions are still very high and the deficits are huge in the pension system and are consuming scarce resources; and that Greece broadens its tax base. We are still in a situation where some 60% are exempt from, 50 or 60% are exempt from the personal income tax taxation. As I said before, Greece, in some ways, [is still] running, a pension system common in the rest of Europe, while they’re not doing the kind of middle-class taxation that is common to the rest of Europe.
These are challenges that need to be resolved. From that perspective, we have always been disappointed that the labor, that the pension reforms and the reforms to broaden the tax base were reversed when the program expired. I think that was a mistake that I hope can be rectified.
So, I think there is a whole sets of issues out there that Greece needs to address in order to get a long-term growth. I think that the new government is starting to do some of them. I know some of the plans that are here, for instance on privatization. I think it’s a good -- bottom line is that the program has given Greece a breathing space. It’s given Greece a considerable measure of macroeconomic and financial stability that will, together with a very favorable maturity structure of debt, means that Greece has the breathing space it needs to start gradually attacking these, doing these reforms that are needed for -- to achieve long-term growth. So, that was the long answer. The short answer: yes, Greece can achieve these ambitious growth target, but that assumes very ambitious, you know, structural reforms. Some of them are on the table. Some of them are not yet on the table.
Hercules, sorry, I forgot Hercules. Hercules is a program that’s being discussed for helping banks to reduce nonperforming loans. We have not seen all the details. I don’t think all the details are known yet. We agree that it’s a critical challenge facing the Greek Banking System to come up with a credible plan for reducing the exceptional high NPLs and improving the structure of capital, which is too much contained, too much depending on deferred tax assets. So, we agree with the need to have a plan to do so, but whether this plan does it, we just need to know the details, which we don’t.
QUESTIONER: As I came in, you were saying we would not recommend discretionary fiscal measures at this point. Just thinking about the UK, in that context, if we diffuse the No Deal Brexit Risk, would that recommendation apply to the UK as well, where the deficit is currently on track to be about two and a half, up to two and a half percent, this year, and the Chancellor is planning further capital spending, borrowing to spend on capital?
MR. THOMSEN: I would have to see the exact circumstances. certainly, the UK has fiscal space. If it’s exposed to a shock, and iS a big negative shock, it has the fiscal space to undertake a discretionary fiscal relaxation, if that is deemed desirable in the circumstances, but, you know, this is too abstract, at this stage. I need more information to judge what are the circumstances at the time.
QUESTIONER: Do you believe the U.S.-Ukraine crisis can impact the IMF support for the Ukraine, please?
MR. THOMSEN: We remain focused on what’s good for Ukraine. We have always done so. Once there is an agreement, I have no doubt that we will have full support from the International Community on that. I don’t see any impact.
QUESTIONER: A follow up question on the trade tensions between Europe and U.S., the European Commission have said, today, that there is no other terms that -- to respond to the American tariffs. You have just said that it’s important to, for all the parties, not to take actions that could escalate the conflict. Do you think, in that sense, that the European response is a bad -- goes in a bad direction?
MR. THOMSEN: So, I am not going to get into saying what should be done and what should not be done. This is inside the WTO, you were referring to, right? You were referring to the ongoing discussions, you know, also with Airbus and Boeing inside the WTO. I welcome that these are done in the context of the WTO. I just would say, to everybody involved, that’s important not to take measures, particularly in a situation where there are considerable, you know, trade tensions that goes beyond this set of issues, not to take measures that further aggravate the broader tensions. I am not going to comment on any individual decisions.
QUESTIONER: Just a couple of linked questions. One, I just wondered whether you think that, given the low level of, as you say, lackluster recovery in Europe, we’ve reached -- we’re reaching the end of the road for monetary policy as a means of stimulating activity, and I’d just like your comments on -- specifically on Italy, where bond yields have come down a lot. There’s been, you know, like all countries, it should have benefitted from monetary stimulus, and, yet, growth remains very, very low in Italy, and I just wondered why you thought Italy had not benefitted or seemed to benefit so little from the amount of monetary stimulus.
MR. THOMSEN: Your first question, can your repeat it?
MR. ELLIOT: Why, it was really -- well, see, the ECB has cut rates. They’re negative. Well, some of them are negative. It’s providing more quantitative easing, I just wondered whether you think, generally, we’ve reached or are reaching the end of the road for monetary policy in the eurozone, whether we’re, you know, pushing on a piece of string, there, or getting close to that.
MR. THOMSEN: Okay. I don’t think that we are at the point where the monetary policy is ineffective, but I think we all agree that it is getting to the point where its effectiveness as a countercyclical tool will become increasingly limited, which is, one of the reasons why I said that fiscal policymakers need to have their drawers in the, you know, the plans in the drawers, for how to react, if there is a shock, because, we have to realize that we are getting to a point where monetary policy is increasingly less effective. I don’t think we’re there now.
Yes, Italy has had very low growth. Italy has had very low growth for a number of decades. Actually, if you want to put it like that, Italy has a fundamental problem of low productivity, productivity improvements that falls short of its peers. There has, the last 20 years, been a gap in productivity, relative to (inaudible) has opened up, and I think that’s the key challenge, what to do about that.
While I think the issues are here also, we have talked about them many times. We think labor market reforms are clearly a part of it, opening up the economy. [Opening up] Closed professions are in -- is another part of it. Modernizing the insolvency regime and the public administration is part -- is also a part of it, and then, of course, Italy has a problem of fiscal -- of high debt, and it needs a plan, a credible plan, for how to deal with this over the medium term, and it’s critical that whatever it does in fiscal, in the short run, is anchored in a credible medium term plan, and I, you know, it’s -- so, clearly, the low growth in Italy is not a question of monetary policy. It’s a fundamental structural challenge.
QUESTIONER: Has IMF done, already done enough to ensure the sustainability of the Euro in terms of institutional reform and crisis fighting mechanisms, or does it need to go somewhat further down the path of fiscal union to ensure the long-term sustainability of the currency?
MR. THOMSEN: So this is an area where a lot has been achieved compared to 10 years ago on the eve of the Greek crisis. Now they have the fire brigade, if they have a crisis -- in terms of dealing with a crisis, they have the ESM, the ECB has the OMT. They have the tools for how to deal with a crisis. They have come a very long way with the establishment of the ESM. And clearly while not a complete banking union, there is progress.
Now in terms of medium-term objective, we have made very clear what we think should be done. We think that there is a case for account of fiscal capacity. We think there is a need for a complete banking union to put in place to pass insurance with a common backstop. We think there is a case for simplifying the fiscal rules. And, more recently, we have put out a paper that explains how we think one can get better integration of capital markets, build a capital market union. I think actually with this proposal, we have more or less completed our contributions to the discussion on where the European architecture needs to go in the long-term.
Clearly, the progress on these issues are, as we have seen recently in a discussion on fiscal policy in particular, it's very slow. You know the issues, perennial debate between those who are concerned about that risk sharing will entail more asset problems. The bottom line is that risk reduction and risk sharing has to go hand in hand. I think all of our proposals acknowledged that actually, and come up with proposals for how they can go hand in hand. And I hope that over time one would gradually converge to this. But clearly, The Euro Area is well away from putting in place all these institutional reforms, changing the architecture, the things are needed over the medium-term.
Fundamentally, these changes are needed in order to sort of reduce the welfare cost of operating a currency union that has a common monetary policy, that is not a political union, that doesn't have a common fiscal policy, and where countries are exposed to country specific shocks that cannot be mitigated to monetary policy. And the risk sharing will sort of help reduce the welfare cost of being in such a currency union.
But let me say that, I don't like you linking it to, I think you use the word, what is the sustainability. With or without, the Euro will survive, believe me, but clearly in the long run in order to enhance the welfare benefits of everybody, one needs these architectural reforms.
MR. ADRIANO: Okay. If there are no more questions we will wrap this briefing up.
Thank you very much for coming and have a good day.
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