Questions in the News
Responses to Questions About IMF Policies and Country Operations
Euro Area
Last Updated: April 26, 2007| Question: Does the IMF have any concerns regarding global imbalances stemming from the recent rise in the euro? What should be the response of the European Central Bank? |
| Answer:
MR. AHMED: The view that we have taken on the euro more broadly is that we think that on a multilateral real effective basis, the euro remains within a broad range of being fairly valued. The view that we have taken on the monetary policy in the euro area is that the stance the ECB has taken of a gradual withdrawal of stimulus is the right one and remains the right one, and we haven't changed our view on it.
April 26, 2007 Transcript of a Press Briefing by Masood Ahmed, Director, External Relations Department, IMF |
| Question:
On the ECB, your recommendation in the WEO report is to increase interest rates to 4 percent by summer and to continue increasing rates if the economy continues to be robust. If the forecast in the WEO of an increase in economic growth of 2.3 in 2007 and 2008 is achieved, are you saying that the ECB will need to increase above the 4-percent level? And also, in the euro zone, the euro recently hit at two-year high against the dollar, an all-time high against the yen. Do you see this development in the exchange rate as a break to economic growth in Europe, or is the internal growth robust enough to withstand the euro increase? |
| Answer:
MR. JOHNSON: There are very good internal dynamics within the euro zone supporting the European growth. Exchange rates move up and move down, as I said earlier, and with the euro currently at a reasonable level, the euro zone is roughly balanced in terms of its current account. So, there is something we would watch, but it is not an issue of concern right now. I think, also, inflation, while it merits considerable attention in the euro zone, is actually under control, and the current stance of the European Central Bank is something we're very comfortable with. I think that there is no room for complacency in the euro zone or in any of the other economies around the world. But, the current economic situation is favorable, and the current stated policies in terms of interest rates are completely reasonable. April 11, 2007 Transcript of the World Economic Outlook Press Conference |
| Question: The WEO report indicates that Europe has increased its productivity, but it also says that there is a big gap compared with the U.S. in productivity and labor utilization. Do you think Europe will be able to improve its growth without reforms to labor markets? |
| Answer:
MR. JOHNSON: We do think European labor markets could become more flexible and we are encouraged by steps taken in this direction. We think if you combine this with the current positive short-term conditions in Europe, there is a potentially favorable situation. We are also worried about pressures for protectionism in Europe. I would not underestimate these, and I think this requires more attention to making sure the people don't lose from the process of globalization. We are saying the people have to feel they participate and benefit more from globalization. And that will be consistent with boosting productivity growth and sustaining more rapid growth in Europe.
April 11, 2007 Transcript of the World Economic Outlook Press Conference |
| Question: What is the IMF's view on the decision of the European Central Bank (ECB) to raise interest rates by 25 basis points? |
| Answer:
This action was anticipated by the markets. The ECB's action is understandable, as headline inflation has risen above its own set 2 percent benchmark. However, the rise in inflation is on the back of higher energy prices and, in our view, underlying inflationary pressures remain contained. Therefore, while the case for a gradual withdrawal of monetary accommodation is building, it has not yet materialized.
December 1, 2005 Press Briefing by Thomas Dawson, Director of External Relations, IMF |
| Question: What are the IMFC's recommendations for the Euro area, given its poor outlook for growth? Since the oil price rise is the equivalent of a tax, should an accommodation be made in the near term on fiscal and monetary policy to assist the Euro area out of the bad trough? |
| Answer:
Even though there are issues of monetary and fiscal policy that are referred to in the communiqué, the emphasis at the September 24 IMFC meeting was on structural reform and the need to move faster and further on structural reforms to boost potential growth. We see no alternative, if Europe wants to increase its growth potential, than to apply its own measures that are in the Lisbon agenda and in the internal market proposals. Regarding fiscal and monetary policy, we do not see any monetary restrictions that are currently affecting growth in Europe. We believe that the European Central Bank should keep all its options open, but we have also said that there is no clear evidence that the monetary conditions are impeding growth in Europe. However, fiscal deficits are increasing in Europe and that is not increasing growth. Europe will face very soon regarding aging populations, the fact is that in the last few years the European budget has been increasing the deficit. What Europe has to do is to put forward a strategy for growth regarding structural reforms.
September 24, 2005 Press Briefing by Rodrigo de Rato, IMF Managing Director, and Gordon Brown, Chairman of the International Monetary and Financial Committee |
| Question: What does the IMF suggest Europe do to avoid a slowdown in economic growth? |
| Answer:
The Managing Director has said in his recent speeches that European countries have made substantial progress in terms of the reform program that they have developed for themselves over the last few years. He has said that we think that this is progress that should, first of all, be recognized but, second of all, should be built on. We think that the record of progress and reform in Europe is perhaps greater than many people seem to be giving it credit for at this point.
June 23, 2005 Press Briefing by Thomas Dawson, Director of External Relations, IMF: |
| Question: Given the need for more growth in Europe, what is your assessment of the reform of the Stability and Growth Pact? Is it a way of providing more leeway to governments to give much needed fiscal stimulus to the economy, or will it lead to a loss of fiscal discipline in Europe that could be counterproductive? |
| Answer:
The Stability and Growth Pact (SGP) has served Europe well. At a difficult time of very low growth in many countries, it has helped countries make important efforts to avoid an undesirable increase in public deficits. We will look at the reform of the SGP with great interest. But the need for Europe to maintain low deficits and increase primary surpluses will remain, because Europe is facing very important challenges related to its aging population. In that respect, debt reduction will have to remain a key feature of macroeconomic policy—even more in the future than it has been in the past. That should be the aim of any agreement between European governments. On the SGP, two elements should be stressed. First, the pact has to guarantee that all countries are treated in the same way, and that its requirements are transparent. Both governments and the public should know exactly what to expect from the pact. Second, there should be efforts to secure more homegrown ownership of policies. National parliaments, together with the European parliament, should provide systems of follow up of the pact and of the commitment of governments to abide by it.
April 14, 2005 Press Briefing by Rodrigo de Rato, Managing Director, IMF |
| Question: The IMF has stated that, at its current growth potential, Europe cannot afford its welfare state. How can Europe deal with this issues, given that there is no public support for reform? |
| Answer:
The lack of progress on growth in Europe is certainly an issue for IMF surveillance. We have revised the growth prospects for Europe down significantly. Indeed, we have been saying for quite a long time already that the potential growth of the European economy as a whole is low—certainly below 2 percent. European governments should face this fact, and find ways make that growth potential bigger. If one assumes that growth will continue below 2 percent in Europe, the challenges posed by aging population and generous health systems become extremely hard to deal with. Europe needs to increase its growth potential. There are many ways to achieve this, but reform of the labor market is a key one. I found it very positive that the heads of governments of Europe, in one of their meetings in February, agreed that Europe needs to improve working conditions, as well as address the impediments that prevent people from finding work and from working longer. Pension reform also has to be at the top of the agenda of governments, and budgets have to leave room for maneuver to face this challenge. Some countries are making important efforts in that direction, and important reforms, based on wide social debate, have already happened. There were important reforms of the pension systems in France and Spain in recent years, and of the labor market—including the public wage system, in Germany. The question of financing social policies in Europe is not only related to current circumstances, but also to the future challenges. Those are obvious in Europe, but they also apply to other countries, like the United States, and even to developing countries. Indeed, the challenge of aging populations is becoming a global challenge for all countries. But Europe is probably the area of the world that has the biggest challenge in that respect, and that has to be faced, and the population has to be aware of that.
April 14, 2005 Press Briefing by Rodrigo de Rato, Managing Director, IMF |
| Question: The World Economic Outlook suggests that the European Central Bank may need to cut interest rates. Do you have a trigger point of slowdown to warrant cutting interest rates? |
| Answer:
The primary problem in European growth is structural, and, therefore, reforms of the labor market, the product market, and the financial market are needed to increase the growth rate. With growth potential relatively low, it may not be necessary to offer a lot of monetary stimulus at the current levels. However, we think that the European Central Bank should retain all options going forward and, therefore, it makes sense to leave them all on the table and not take off one set of options off the table. We do not have a magic number in mind.
April 13, 2005 Press Briefing by Raghuram Rajan, Economic Counsellor and Director of the Research Department, IMF |
| Question: There is a perception among European policymakers that while structural reforms are important and need to be furthered, the real immediate problem is the global imbalances, and that is something that should be sorted out in the U.S. and in Asia, where Europe is more on the sidelines. What would you say to that? |
| Answer:
Structural reforms are immensely important in Europe in its own right, even putting aside the issue of global imbalances. Europe needs to increase its growth potential. Some of the fiscal problems that we see nowadays result, in general, from having a relatively low growth potential. So, it is important for that reason. A more flexible economy would help. It would also help with the looming problems such as aging populations. How to keep the elderly employed in appropriate professions going forward will require a more flexible economy. As to the question of whether Europe has a role to play in the resolution of global imbalances, both Europe and Japan could play a very valuable role in supporting growth as U.S. growth slows down. U.S. domestic demand will have to slow down in order for the global imbalance to rectify, and all of it cannot transfer immediately, if you will, to the emerging markets. So, some support has to be given through higher growth from Europe and Japan.
April 13, 2005 Press Briefing by Raghuram Rajan, Economic Counsellor and Director of the Research Department, IMF |
| Question: Today marks exactly five months since new countries joined the EU. I would like to know your opinion on what are the major challenges we are facing now, and what would be the effect of enlargement on the old EU. |
| Answer:
From our point of view, the enlargement of the European Union is very good news, not only for Europe but for the world. We see that such broad economic integration can provide a very useful tool for the Europeans to successfully face the globalization of markets. What is required is that newcomers speed up reforms and, to do that, reduce some of the macroeconomic imbalances, both in inflationary pressures, and, especially in some countries, the very strong increase in budget deficits. If they look at the path of other integrations of countries to the European Union, they could learn the lesson that increasing budget deficits in that process can be very dangerous for the competitiveness of those countries. So, we are following the budgetary situations very closely in the accession countries. We think that economic reform will give them a very important capacity to access the markets in Europe, and also to be able to compete worldwide.
September 30, 2004 Press Briefing by Rodrigo de Rato, Managing Director, IMF |
| Question: We always hear that Germany is overly dependent on external demand. What is the IMF's magic bullet to fire up domestic demand in the face of the aging populations and the concerns of the people who are nearing retirement? |
| Answer:
Magic bullets are rare. What you really need is a range of proposals, and I think Germany is undertaking some of them under Agenda 2010. The problem is, a number of factors are hitting at the same time. You have house prices falling, you have high unemployment, and you have the aging populations, all of which weigh heavily on consumption but also to some extent on investment. For example, in the construction sector, you have had a decline for quite some time, and that is again weighing on domestic demand. There is a need to continue some of these reforms, to increase labor market flexibility, but also to increase product market flexibility, and some of the reforms will impinge in the short run on consumption. We suspect that some of the pension reforms might have increased the desire to save and therefore reduced consumption. Now, in the longer run, however, some of these adverse effects will wane and I think Germany will resume growth. But, again, as in many situations, it is important to stay the course.
September 29, 2004 Press Briefing by Raghuram Rajan, Economic Counselor and Director of the Research Department, IMF |
| Question: Do you support the European Commission's idea of opening up the Stability and Growth Pact, and how would you modify it? |
| Answer:
A chapter in the World Economic Outlook this time focuses on some of the experiences with the Stability and Growth Pact. We support some of the ideas that have been proposed. We think it makes much more sense to focus on making greater adjustments in good times. Those give you the reserves to have counter-cyclical policies in bad times. Also, placing much more emphasis on medium-term sustainability, on structural balances, on lowering the debt levels to help maintain sustainability—those are very good and sensible ideas. And I think that having a more credible enforcement mechanism, thereby reserving the sanctions for absolutely flagrant breaches of the target levels, while showing flexibility for temporary breaches, especially if they're for reasons beyond a country's control, and finally having an independent panel which might assess fiscal sustainability and fiscal plans, would also be a good thing. These are all very sensible proposals. There is a tension between creating enough rules so as to have commitment, and creating enough flexibility so that rules don't become overly rigid and violated at every corner.
September 29, 2004 Press Briefing by Raghuram Rajan, Economic Counselor and Director of the Research Department, IMF |
| Question: How urgent do you see reform of the pension system in Europe? And what's your assessment of the experience in France, Italy, and Germany? |
| Answer:
"Urgent" is a good word because there is not that much time before the issue starts weighing, before the retirees start increasing in number. It then becomes politically harder because you have to spread some of the pain to people who have been assured a pretty good pension, so they will have the incentive to oppose it. We see pension reform as part of a package, which includes market and labor reforms. It can't be done in isolation. If you want to extend working lives, you also have to give the elderly more opportunity to work by increasing flexibility in the labor markets and by creating more opportunities there. We think that extending work lives, especially given that life expectancy is increasing, seems a better way to do it than cutting benefits, if you had the choice between those two, and it also has better short-term effects. It doesn't force a much higher level of saving, which might then impinge on economic growth.
September 29, 2004 Press Briefing by Raghuram Rajan, Economic Counselor and Director of the Research Department, IMF |
| Question: In the context of a recovery in Europe, and a situation where central banks throughout the world are moving to tightening policy, how long can the ECB wait before following the pattern of other banks? |
| Answer:
Inflationary pressures are not yet strong on both sides of the Atlantic. The Fund shares the view of those responsible for monetary policy in the U.S. and in Europe that there is a need for vigilance regarding the presence of inflationary pressures. In that respect, it is very important that the second round effects of the oil price increase of the last months is moderate, especially in relation to wages.
July 2, 2004 Press Briefing by Rodrigo de Rato, Managing Director, IMF |
| Question: What are the monetary and political prospects of the European Union (EU), in light of the seeming inability of EU members to uphold the Maastricht convergence criteria? |
| Answer:
The Fund published very recently a very good analysis of the euro area economy as a whole, highlighting the need for structural reform. In my last eight years as a European Finance Minister, I lived in the front row of the evolution of the Stability and Growth Pact (SGP); and I have to say that, in my opinion, the SGP has been very useful for the European economy. Without it, we would probably have seen a much worse deterioration of budgetary balances in Europe, given the fact that the European economy has been almost at a stop in the last two years. That said—I believed this before I became Managing Director of International Monetary Fund, and I continue to believe it—the priority of the European Union as a whole and of the euro area in particular is structural reform, to give the EU countries a much more dynamic growth capacity. The example of Japan is good in the sense that reforms have paid off, and have provided a much more stable ground for the future of the Japanese economy.
June 22, 2004 Press Briefing by Rodrigo de Rato, Managing Director, IMF |
| Question: The 2004 World Economic Outlook is saying that the euro zone is still in winter conditions. Are you optimistic that it will come out of that? What, in particular, needs to be done, especially with reference to Germany? |
| Answer:
The euro zone will, of course, come out. These are temporary conditions. Germany has done some of what it has to do, which is structural reform. It has reformed the pension system, and it has reformed the labor market system. While Agenda 2010 has gone some distance, there is still some distance left to go, and I think the more of that that is undertaken will be beneficial for Germany in the medium term. I do not think Europe is in any way mired forever in these conditions.
April 21, 2004 Press Conference by Raghuram Rajan, Economic Counsellor and Director of the Research Department, IMF |
| Question: Just about half of the euro zone countries are or will be in violation of the Stability and Growth Pact. Is something fundamentally wrong with the pact or with these countries, and what should be done about the pact? |
| Answer:
One should not dismiss the benefits of the pact. Part of the problem in many countries is that we have pro-cyclical policies rather than countercyclical policies. They tend to exacerbate cycles rather than reduce them. Part of the reason for the pact is to restrain such policies. I think it has been moderately successful in that. The problem is that it did not have as much of an effect in making countries fix their budgets in good times, which left them less prepared for the bad times—yet another example of the basic point that we are trying to make of building insurance in good times. That said, I think there is still room to recover the basic elements of the pact going forward. The discipline that it imposes is very beneficial, especially for some of the countries that are planning to accede into the EU and eventually into the euro mechanism. What needs to be done is to make it work a little better rather than abandon it totally. Some flexibility during the cycle by which certain strong structural measures are traded off for short-term flexibility might be the way to go. April 21, 2004 Press Conference by Raghuram Rajan, Economic Counsellor and Director of the Research Department, IMF |
| Question: Is the IMF worried by the fact that the Stability Pact could be derailed? Is the IMF still encouraging the EU countries to respect the Pact? |
| Answer:
Our position on how to deal with the fiscal issue was set out in the World Economic Outlook this fall and also in the Article IV report on the Euro area. On fiscal policies, our position is that a reasonable compromise between short- and medium-term policy trade-offs continues to argue for quality fiscal adjustments of at least 0.5 percent of GDP per annum in cyclically adjusted terms in countries with weak underlying budget positions and full play of the automatic fiscal stabilizers around the implied consolidation path. Any delays in the pace of fiscal consolidation must be accompanied by meaningful structural reform that strengthens the medium-term fiscal position, and fiscal consolidation of about one and one-half percent of GDP needs to be achieved on a cumulative basis over 2004 to 2006. Structural reforms do need to be stepped up in line with the EU's already articulated Lisbon strategy.
December 4, 2003 Press Briefing by Thomas Dawson, Director, External Relations Department, IMF |
| Question: Could you reflect on the prospects for success or failure of the European Monetary Union at this point, with France in flagrant violation of the Stability and Growth Pact, not seeming to care, and a country like Sweden with stellar European and economic credentials seeming not to want to be a part of it? |
| Answer:
The European Monetary Union is a bold and historic project. My expectation and assessment is that it will be successful, but we need time to sort everything out. Only a few years after its establishment, we cannot judge that it may not work or that it may not work well enough. There is a process by which people learn to live in a monetary union. As to the Stability and Growth Pact, I do not make a secret of my belief that Europeans should demonstrate the logic and the substance of this pact by implementing strong structural reforms. The pact is indispensable because a centralized monetary policy with decentralized fiscal policy is a difficult endeavor. The decentralized financial policy needs to have a framework for coordination and discipline.
September 19, 2003 Press Conference by Horst Köhler, Managing Director, IMF |
| Question: What do you think about the positions of France, Italy and Germany in connection with the proposal to reformulate the stability pact? |
| Answer:
The core problem is that in better times the big countries did not do their homework. The 3 percent threshold now is a problem because it coincides with low growth—almost stagnation—in Europe, as well as global imbalances. Frankly, when we negotiated the Maastricht treaty in 1991, we did not imagine this combination of circumstances. Europe should not only focus on the 3 percent. They should focus on structural reforms. They should demonstrate that through structural reforms the structural deficit is declining in their budget. They should let automatic stabilizers work even if this means going beyond the 3 percent in a consecutive year.
September 19, 2003 Press Conference by Horst Köhler, Managing Director, IMF |
| Question: The Fund in the World Economic Outlook again called on Italy to reform its pensions, in particular to raise the retirement age, and complained about too many one-off measures. Were you disappointed that the government approved another budget with several one-off measures, and has put back the raising of retirement age to 2008? |
| Answer:
There have been some remarkable reforms in the last years, including some related to the labor market and the pension system. It is not yet enough, but I see Italy, like France and Germany, in a new mood of recognition that these three big countries in the monetary union must lead through structural reforms and should not be at the lower end of this process. If this happens and there is now a new momentum, I am not pessimistic about Europe and Italy.
September 19, 2003 Press Conference by Horst Köhler, Managing Director, IMF |
| Question: Could you speak a little bit more in detail about the euro zone outlook, and what the possibilities are for structural reform? |
| Answer:
Concerning structural reforms, the biggest area is labor market inflexibility. There is a lot of discussion in Europe about the Stability and Growth Pact and its role in dealing with the downturn. There may be only a thin connection between being in a monetary union and the need for a pact to limit deficits. However, if Europe had not adopted the SGP, we would almost surely have seen one or two European countries—maybe more—knocking at the IMF's doorstep over the last decade, much as Britain did in the mid-1970s and France and Italy almost did in the early 1980s. But the SGP's interpretation and implementation need to be modified if Europe is to conquer the problems of the present century as well as it dealt with the problems of the past one. Countries, especially the large core countries, need stronger incentives to save in good times, so as to be ready for the downturns. That has been the fundamental problem with the operation of the SGP so far. There are also broader policy issues at play. In today's global capital markets, what the United States does with its deficits arguably has a much bigger impact on say, Germany, than what Ireland does with its deficits. In fact, if all the countries in Europe ran their deficits up to the Maastricht limit, they still would not be borrowing as much as the United States is right now.
September 18, 2003 Press Briefing by Kenneth Rogofff, Economic Counselor and Director of the Research Department, and David Robinson, Deputy Director of the Research Department, IMF |
| Question: What does the IMF think of the recent European Central Bank (ECB) rate cut? |
| Answer:
We welcome the action taken by the ECB, which is in line with what we have recommended, given what we see as both receding inflation prospects and a weaker economy.
December 5, 2002 Press briefing by Thomas Dawson, Director, External Relations Department, IMF |
| Question: What do you think constitutes a sound policy mix for euro land? What should be the stance of the European Central Bank (ECB)? Do you think there is a need to strictly adhere to the fiscal guidelines of the Growth and Stability Pact? |
| Answer:
Let me start with the ECB. The IMF thinks there should be a bias towards easing monetary policy, and that reflects our belief that the risks are tilted to the downside. That said, there is a question as to how Europe can grow more strongly going forward. Productivity growth was stronger in Europe than in the United States prior to 1995. However, it has weakened over the past seven years, because Europe has so far failed to fully exploit the technology revolution.
The ECB plays an important role, but there are limits to how much monetary policy can do on a sustained basis in combating long-term growth problems. To use an analogy, you can have a car with a weak engine, and you can make it run better by putting in better gasoline, but in the long term, you need to fix the engine if you want it to run better.
Turning to fiscal policy, we view the Growth and Stability Pact as having played—and continuing to play—a valuable role in controlling budget deficits in Europe. That said, we think the emphasis over the longer term should be on the structural balance rather than necessarily focusing on the nominal balance. That is what is really important.
Looking ahead, Europe must also address the problem of its aging population. Inflexible labor markets are preventing Europe from enjoying the benefits of technology. There is enormous potential for growth in Europe that needs to be unlocked. Maybe—not to put too fine a point on it—over the coming decade Europe needs to decide whether it is going to be a locomotive in the world economy or a caboose.
September 25, 2002 Press briefing on the World Economic Outlook, Kenneth Rogoff, Economic Counsellor and Director, Research Department, IMF |
| Question: What is the IMF's view on the recent debate in Europe on whether the 3 percent limit on budget deficits in the Growth and Stability Pact should be lived up to in the near future? |
| Answer:
The Growth and Stability Pact has performed a very positive role throughout much of Europe in stabilizing medium-term and long-term budget balances. Although Keynesian theorists would argue that stabilizing a budget in this way might hurt growth, the Growth and Stability Pact has had a positive effect on confidence, and has helped reduce interest rates. However, looking to the future, there may be scope for interpreting it more flexibly than has been the case until now.
April 18, 2002 Press conference on the April 2002 World Economic Outlook |
| Question: Your forecast sees euro zone growth follow that of the United States. Do you sense any independent economic pulse beating in the euro zone? |
| Answer:
Many have remarked that the global downturn we just experienced was unusual because it was synchronous. However, synchronicity of downturns between Europe, the United States, and the rest of the world is actually the norm rather than the exception— 1991 was the exception. So while Europe and the United States are not perfectly synchronized in terms of economic growth, there is a large measure of correlation. Some of this is due to trade links, and some of it is due to common shocks, including shocks stemming from oil prices, global technology, and similar monetary policies being followed simultaneously.
April 18, 2002 Press conference on the April 2002 World Economic Outlook |
| Question: Does the IMF view the European Central Bank's monetary stance as adequate under current circumstances? |
| Answer:
The current stance is broadly appropriate, because a) there are vulnerabilities and, b) credibility is fairly strong in Europe so that there no urgency in addressing inflation risks. Nevertheless, if the economies of Europe continue to grow robustly, as our forecast shows, certainly starting by the end of 2002 and 2003, the European Central Bank will almost certainly begin raising interest rates.
April 18, 2002 Press conference on the April 2002 World Economic Outlook |