Transcript

Transcript of the World Economic Outlook Press Conference
International Monetary Fund
Washington, DC, April 21, 2004

Participants (left-right): James Morsink, Chief, World Economic Studies Division, Research Department; Raghuram Rajan, Economic Counsellor and Director of the Research Department; David J. Robinson, Deputy Director, Research Department; and Graham Hacche, Deputy Director, External Relations Department

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MR. HACCHE: Good morning, and welcome to this press briefing on the IMF's latest April 2004 report on the World Economic Outlook. I am Graham Hacche, Deputy Director of the External Relations Department at the IMF.

Two places to my right is Raghuram Rajan, who joined the IMF last October as Economic Counselor and Director of the Research Department. This World Economic Outlook report was produced under his general direction.

To my immediate right is David Robinson, Deputy Director of the Research Department, who directs the World Economic Outlook project, and at the far end is James Morsink, Chief of the World Economic Studies Division.

Before turning to Mr. Rajan for his opening remarks, I should remind you that the report and the content of this briefing are under embargo until 11:00 this morning, Washington time. I will also remind you that tomorrow morning at this time, Acting Managing Director Anne Krueger will hold a press briefing here, previewing this weekend's ministerial meetings.

MR. RAJAN: Good morning. Thanks for being here on this lovely spring morning in Washington. The world economy also seems to be, by and large, in the springtime of recovery. The tentative buds that we saw six months ago are now blooming in many parts of the world. We have seen a strong rebound in world trade, a robust U.S. recovery, continued exceptional strong growth in emerging Asia, especially China, and the strongest showing for the Japanese economy that we have seen since 1996.

Given this improving environment, we have increased our forecast for global growth by about one-half percentage point to 4.6 percent for 2004 and 4.4 percent for 2005. This means that if all goes as expected, we are in for the best two year period in over a decade.

In industrial countries, the United States has led the way, with most forward indicators pointing upwards. We project growth for the entire year at 4.6 percent. Japan's recovery also shows remarkable strength, with strong external demand, notably from China, accompanied by rising investment and recently a pickup in consumption. We project that GDP will grow by 3.4 percent in 2004, again the highest since 1996.

The euro area, however, is still experiencing wintry conditions, with prospects much less favorable than in the other two main regions. Only a modest recovery of 1.7 percent in 2004 is projected.

Moving to emerging markets and developing countries, the growth momentum has been particularly strong in emerging Asia, where China's growth projected to be 8.5 percent in 2004 has been central. India, with 6.8 percent projected in 2004 and 7.4 percent in the year just over, is also booming. While growth in Latin America, notably in Brazil, remained weak in 2003, the recovery is expected to consolidate in 2004, underpinned by strengthening domestic demand and global growth.

The Middle East is projected to experience slightly slower GDP growth than 2003, some 4.1 percent. The CIS, Commonwealth of Independent States, grew strongly in 2003, underpinned by strong robust upturns in Russia and the Ukraine. Growth is projected to slow slightly to 6 percent in 2004.

In Central and Eastern Europe, growth is projected to pick up, but it is constrained by the relatively weak performance of the euro area and the need for fiscal consolidation in some countries.

Among the poorest countries, GDP growth in sub-Saharan Africa is expected to increase sharply in 2004 to 4 1/4 percent, based on a combination of improved macroeconomic fundamentals, higher commodity prices, more political stability, and better weather conditions.

Of course, in this rosy picture there remain risks to the short-term outlook. For instance, oil prices will affect global growth if they are sustained or increase further. Our ready reckoner suggests that for every US$5 per barrel increase above baseline that remains in place for one full year, global growth decreases by 0.3 percent.

Higher oil prices have reflected, in part, strong demand. Growth during the last year has been especially strong in China and in the United States and, if this is the cause for higher oil prices, it will not derail recovery. However, it is worrisome that supply conditions are not slack enough, especially if one major producer is withdrawn perhaps because of geopolitical conditions. I do not need to tell you that geopolitical uncertainties, by their very nature, are extremely hard to forecast.

In sum, while the overall outlook is reassuring, the one thing we can be sure of is that the unexpected will occur. Even if we do not have a crystal ball, we can at least be prepared. Expansionary policies have helped reduce the economic impact of the collapse of the asset bubble, the effects of 9-11 and SARS, but the policy options that helped us then have been used up, leaving the world with limited insurance against fresh downside shocks.

Second, global imbalances resulting, in part, from the use of these policy options has heightened the vulnerability of the world economy; and third, in the medium term, the growing integration of China and India into the world economy and eventually Africa, and the aging populations of the industrial countries will create both opportunities and challenges, which we have to prepare for.

In the short run, we advocate a rebuilding of policy options wherever possible and a focus on reducing vulnerabilities. In the medium term, it is important for economies to increase their flexibility for, after all, the ability to adapt to change is the best form of insurance. Specifically, given the strong growth, it is time for most monetary authorities to start preparing the ground for higher policy interest rates. Indeed, some have already started tightening.

On the fiscal side, the United States is not the only economy that needs to consolidate, but it is the most important. While expansionary fiscal policies in the United States have been helpful for both the United States and the world so far, as Chapter 2 of the World Economic Outlook points out, the faster fiscal consolidation is undertaken, the better it will be. Fiscal tightening will also help reduce global imbalances, which are a significant vulnerability at this point. Stronger budgetary health will also prepare the United States to meet the needs of the pension and medical costs of the baby boom generation.

Finally, economies have to become more flexible through structural reform. As Chapter 3 of the World Economic Outlook points out, a time of recovery like the present is a very good one to embark on these reforms. Reforms range from building stronger financial systems in Asia to creating greater labor market flexibility in Europe, to expanding health care in the United States; and these will help citizens the world over to see coming changes in the world as opportunities rather than threats. This will alleviate protectionist pressures, helping all of us secure a brighter future.

The world has emerged from the winter of recession. The message of this outlook is that, instead of dancing the spring and summer away, we should make provisions for the future. Being the ant is boring, but it is prudent economics. Thank you.

MR. HACCHE: Turning to questions, please wait for the microphone to come to you, and state your name and affiliation in the usual way. First, in the second row.

QUESTION: Yes, sir, good morning. In one of the boxes in the study, the IMF talks about the effect of U.S. interest rates in emerging markets. I would like to ask you specifically about Brazil. You classified our economic situation as consolidating, but not with a lot of optimism. I would like, if you could, to confirm or deny my impression, and if you can let us know what a raise in U.S. interest rates could signify to countries like Brazil and specific to Brazil.

MR. RAJAN: Well, let me first recharacterize the position on Brazil. We do think that Brazil is undertaking appropriate reforms, that it is on a solid recovery path. We expect growth next year to be high, at 3.5 percent, certainly above where it was last year, and what we think is that Brazil is doing all the right steps in order to make the economy solid and put in place the grounds for long-term sustainable growth. So, I wouldn't characterize it the way you did. We are fairly optimistic about Brazil.

That said, Brazil has significant public debt, and a lot of it is foreign exchange denominated. Some of it is very short term. It has been coming down in the last year or so, and Brazil has also been prefunding its requirements for the coming year. These are good steps that Brazil has taken to reduce vulnerabilities, but I wouldn't shy away from saying the vulnerabilities are there and, therefore, if there is a rise in interest rates, it will certainly have an impact on Brazil. Whether it will be a serious impact, it is hard to tell. My sense is that Brazil has at least laid the groundwork to be able to sustain that.

I think, in general, what we worried about is not increasing interest rates; rates will increase. The issue more is how fast it will increase and how much it will increase. If it will increase abruptly in a significant manner, then I think the effects on economies will be greater.

QUESTION: You are saying that the euro zone is still in winter conditions. Are you in any way optimistic that they will come out of that and what, in particular, needs to be done preferably with a reference to Germany?

MR. RAJAN: The euro zone will, of course, come out, and obviously these are temporary conditions. The things that Germany has to do, it 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 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; It will come out.

QUESTION: Do you think that India is reducing the fiscal deficit fast enough? Secondly, while the IMF always talks about 10 percent, in India the tendency is to take only the budgetary deficit of the central government and not the deficits of the state governments as well as the state-owned corporations. Where is the view on that?

MR. RAJAN: Clearly, the overall government deficit is important, and in India this is sizable. I think part of the problem in India is that we haven't seen the effects of this deficit so far, in part because private investment has been subdued. With the growth of the economy, especially the rapid growth over the last year and the expected growth going forward, we expect private investment will start showing up again in significant magnitude, at which point there will be a competition between the government and the private sector for funds which might push up interest rates more than desirable. This is why we have been harping on the deficit, and clearly it is the overall deficit that matters in this case.

QUESTION: You mentioned oil prices as short-term risks. How dangerous are rising oil prices for the world economy, and do you agree with the German G-7 delegation who wants to put this topic on the agenda of this weekend?

MR. RAJAN: Okay, the issue with oil prices is, first, to think about where the rise comes from. There are a variety of factors which are playing in, some of which are, first, greater demand, that the U.S. and China have been growing rapidly; and part of the pressure on oil prices, the upward pressure has been because of that. A second factor, however, has also been uncertainty that, because oil is produced in some of the most, shall we say, volatile regions of the world, there has been concern, especially given the news coming out from Iraq and the Middle East, that there could be supply disruptions.

To the extent that price increases are because of demand side pressures, we are a little less concerned because, ultimately, it is growth which is pulling oil prices up, and so to that extent the effect on growth is a little less of a concern. On the other hand, to the extent that it is supply concerns, which will push oil prices up, one has to be a little more worried, and there we see one particular source of concern, which is that, in the medium term or even in the short run, the amount of slack there on the supply side is relatively limited, so if there is one large producer, for example, who goes out for one reason or the other, we do not have slack in the supply for world oil to sustain that. That will cause serious disruptions. So, given the political uncertainties at this point, the geopolitical uncertainties, we are being cautious, shall we say, about oil.

Finally, I think OPEC has, by and large, been very supportive in the sense of increasing production when there have been shortfalls and been willing to sustain production when there is need, and so we are hopeful that this will continue and that if, in fact, there are spikes, OPEC will, to the extent that it can, increase production.

QUESTION: The report points in the case of Latin America, the report talks about civil unrest as one of the possible risks in implementing sound policies. Taking into consideration what we saw first in Argentina, then Bolivia, and then Ecuador, at this point are you worried about some countries or areas in the hemisphere that could have some signs of civil unrest due to the application of this policy?

And also you can comment on Mexico. Just say that the fact that some of the report, especially the fiscal and structural has not been progressed, that has been detained in some way private investment toward Mexico. I wonder if you can comment more on that.

MR. RAJAN: Let me take the question on civil unrest and then pass on the question on Mexico. The issue on civil unrest, clearly in the past year there have been some areas of civil unrest, and this goes back to the IMF's increasing concern that there has to be some amount of social spending in budgets which alleviates some of the concerns people have, especially when growth is less supportive.

The question is, can we find room in budgets, given that budgets are stretched, given that budgets almost invariably have significant chunks of entitlements? What the IMF has been trying to do is loosen up some of the entitlements in some of these countries' budgets so that some amount of spending can be directed toward social needs and alleviate some of these social pressures that arise. So, we are trying to find our way there.

That said, we are keeping an eye out. Can I point to any immediate source of concern? No. But we are on the watch. Let me turn to the question on Mexico.

MR. ROBINSON: Okay, just a couple of comments on Mexico. First, I should say that after three fairly poor years, Mexico is projected to do much better this year, and that has been helped by the U.S. recovery. It has also been helped by higher oil prices, and because of those higher oil prices they should meet their fiscal targets, we think, this year. But then there is the "but," and it comes back to what Mr. Rajan was saying; we need to be prepared for oil prices to perhaps fall in the future, and Mexico does have some way to go in consolidating the non-oil part of the deficit, in particular through moving forward with tax reforms, and so on, as you said. While Mexico's debt situation is not as serious as we see in some other parts of Latin America, it is a potential risk, and I think it is important to take advantage of these relatively good times that we have seen in Mexico to deal with that in a decisive fashion.

QUESTION: I would like you to be more specific about Argentina, particularly in the projections of growth that are going down in 2004 and 2005 to 4 percent. I would like to know why, and if you are considering the restructuring debt negotiation or not, what is the outlook for Argentina?

MR. RAJAN: Argentina has done certainly very well in rebounding from the crisis, and we are very happy that that has taken place. A lot of it has to do with extremely good policies on the fiscal side. They have adopted fiscal restraint in many ways and increased the amount of tax revenues that have been generated, and this has been a good thing. Where there has been less movement is on some of the necessary steps to revive the banking sector and the utility sector, and these difficulties are now starting to show up. As you know, there have been problems in energy in Argentina, and this is why we think that, once these are dealt with, it will eventually see growth. Also some of the high growth was, in part, because of rebound of the crisis, and some of that will also dissipate. These are potentially two reasons why the growth going forward may be less than what we have seen over the last year.

We are hopeful. The dialogue with the creditors is ongoing, and the atmosphere is thus far a good one, and we are hopeful that the negotiations carry on to the appropriate conclusion. If the debt is restructured and there is an amicable settlement, I think it will pave the way for Argentina to reenter global markets, and that would be a good thing again in helping Argentina to grow.

QUESTION: In your foreword, you make a great deal of emphasis on the risk of protectionist barriers, and you've got some quite strong words about the darkness of an eye for an eye. It is obviously an issue that you think is important. Given that, did you have any particular country in mind, and are you particularly concerned about the protectionist issues arising as a result of the U.S. election contest?

On the second point, there is not a great deal in the WEO in terms of geopolitical risks on the threat posed by terror. Could you comment on that as well.

MR. RAJAN: Let me start with protectionism. I do not think protectionism is really focused in any one country. I think the degree of protectionism in the United States is not any larger or the noises about it are not any larger than anywhere else in the developed world, and typically these noises tend to get louder in times of recession, in times when jobs are being lost because, after all, the foreigner is outside while your domestic citizens care tremendously about jobs.

The concern about the United States has more to do with its size and its historic championship of free trade. Because it has been such a strong force for free trade, when the U.S. turns, it is of much greater concern, and what we saw until very recently was a period of jobless growth, which I think accentuated the calls for protectionism. Also, I think there is a new phenomenon at work, which is that the service sector, thus far, has been immune from competition. With the advent of outsourcing, with technology allowing accountants in Bangladesh or India to compete with accountants here, a whole new sector has been exposed to competition that they never faced before. I think the problem that this has created is typically that sector used to be a champion of free trade, because they got the cheap goods but did not suffer the risks to their jobs, and now they are getting concerned. Surveys show that this whole sector has now become a little more worried, and this is why one fears that maybe some of the balances in favor of free trade are shifting, some of the power structures in favor of trade are shifting against it. That is why I think it is very important that we emphasize that there not be a shift, and I think that if there is a decent recovery with jobs, which I think we are in the process of seeing, some of the rhetoric will abate, and I am hopeful that it will not be a serious issue.

On terrorism, it is a concern; it is a concern. As I said in my opening remarks, the effects, where it will hit is hard to predict, and the effects on confidence are hard to predict. Thus far, we haven't seen much effect, direct effect of the Madrid attacks on confidence, but it is hard to remain confident that that will remain the case if something else hits in a different location. So, yes, we are worried about terrorism, which is why we are saying again and again that it is time to rebuild our insurance, to rebuild the buffers that we have so that if something happens, we have the opportunity to deal with it.

MR. ROBINSON: I just have one point, because I see a link between the two parts of your question as well, which is I think one concern about terrorism is the impact it has on trade and the fact that in a world of potential terrorist threats, it just means that moving goods across borders becomes that much more difficult. It takes that much longer and so on and so forth. While that is seemingly a small effect, over the long term it can have quite a significant effect on trade flows, and I think that is something to be concerned about.

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? I do not ask what should be done about the countries.

MR. RAJAN: Okay. First, I think 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, as you well know, for the pact is to restrain such policies, and I think it has been moderately successful in that.

The problem, however, is that to some extent 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 because I do think that 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. So I think that what needs to be done is to make it work a little better rather than abandoning it totally, and some flexibility during the cycle by which certain strong structural measures are traded off for short-term flexibility might be the way to go, and we have some suggestions on that that we can go into.

QUESTION: I would like to come back to the interest rates question. Could you elaborate the differential prospects of higher interest rates in the U.S. and Europe?

MR. RAJAN: The United States is certainly growing strongly. I think thus far there was a wait-and-watch attitude to see how the labor market would react. We had one indicator that labor markets looked good, the March payroll indicator came in very strongly, and so there is some hope that labor markets would go the way of all other indicators, which seem to be pointing upwards.

My sense is that at the very least we should be preparing the way in the United States for higher interest rates so that the markets are not surprised, and as we see stronger signs come in, eventually those rates will have to move up. So I think certainly the time is now for preparing the markets for higher interest rates.

In the euro area I think the issue is that, you know, things aren't looking that bright so far, and whatever the latest indicators are, they do not look particularly good, and in that sense if this continues, there might be room for a further rate cut by the ECB. However, I should also say that at this point I do not think there is going to be a huge amount of magic generated by a single rate cut. There are other issues in Europe as, for example, the need for structural reforms. So I think it will help, but it cannot be the sort of only thing that everybody pins their hopes on.

QUESTION: One question about my country, in the outlook you projected 2.9 percent deficit for this year, and while the European Commission and the OECD said we could go farther over the 3 percent Maastricht level. I would like to know whether this figure is related to any supplementary adjustment budget you are expected for this year or what else?

MR. RAJAN: I suspect the reason is we believe what countries say a little more, and that is really - we have sort of taken into account what has been promised, and that is why the number might be different, but let me ask David.

MR. ROBINSON: No, I think that is basically right. Our projection does assume a little bit more fiscal adjustment later in the year, as I think is allowed in Italy under a law that was recently passed if there is a slight overshoot, potentially slight overshoot in the fiscal position that further expenditure cuts can be made.

QUESTION: I have a question about the Japanese economy. Now the Japanese economic growth prospect is, as you say, more than expected. How sustainable do you think the Japanese economic growth will be? What policy do you recommend to make the growth sustainable for the future?

MR. RAJAN: What we see in Japan now is a rotation from first export-led growth to investment, and eventually we see signs of consumption picking up. So it is doing all the right sort of things, and that is why we believe that there may be greater strength in this recovery than the past. It is partly also because we see that there has been a fair amount of restructuring, both on the corporate side and on the banking side, which has helped Japan, and in terms of what to do to make this continue, clearly one important macroeconomic measure is to get rid of deflation, and therefore the policies in place should be continued until deflation is history.

But the other issue that is important is to continue with the microeconomic reforms, to continue with the restructuring of the banking sector, to continue with the restructuring of the financial sector. One of the concerns thus far is bank lending has not picked up, and, you know, when bank lending picks up, we will have a much better sense that things are underway.

QUESTION: I wanted to ask you about Russia and the EU. There is some debate about the issue of whether Russia is tending to win or lose due to the EU expansion. The Russians of course say they will be losing. Which opinion do you think is closer to the truth economically?

MR. RAJAN: Well, I think you are asking in some ways the traditional question of whether these free trade arrangements are trade diverting or trade creating. I do not know of a particular study which has actually examined that. There is always a theoretical possibility that it will be trade diverting rather than trade creating as a result of which Russia will lose out, but my sense is that there are tremendous opportunities for Russia today, so, you know, my conjecture, shall we say, is that it will not lose out. But I do not know of any study which necessarily examines this issue.

QUESTION: Coming back to laying the groundwork for future rate rises in the United States, what would you like Mr. Greenspan to say or to do that he is not already saying or doing at the moment?

MR. RAJAN: Well, I think they actually have been saying all the right things and moving in the right direction, removing to a greater extent the statement that they will remain accommodative for a considerable period. I think yesterday the statement that deflation was a thing of the past was again a step in the right direction. So I think the U.S. is preparing the ground. So I wouldn't say we have any complaints with the words that are coming out.

QUESTION: Another question on Italy. In the outlook you mentioned that some of the fiscal results have been reached through some one-off measures. Are you concerned that again the 2.9 percent will come again through additional measures or are you being given any reassurances that it will not?

More generally, on Italy and the euro zone, how much of the deterioration in public accounts is a function of slower growth? I am asking this because a lot of independent forecasters seem to have lower growth forecasts for the euro area than yourselves, which will mean probably that the public accounts number may turn out to be worse than what you predict here.

MR. RAJAN: Let me turn the question over to David.

MR. ROBINSON: Okay. Let me start with the specific question on the Italian budget. I think that we have seen substantial recourse to one-off measures in Italy. In 2003, I do not have the figures precisely in front of me, but we saw a tax amnesty which I think contributed something like 1 percent, 1 1/2 percent to revenues, and obviously that is going to continue in 2004, and that is one of the factors that helps. But in 2005 the revenues from that tax amnesty will truly be gone, and substantial further adjustment will be needed to sort of offset that effect. So that is on Italy.

In terms of the impact of slower growth on the euro area, one way to look at the impact is if you look at Table 1.4 in the WEO, you will see under the euro area the actual budget deficit, and you will see the structural budget deficit, and the structural budget deficit strips out the impact of lower growth, and again you will see actually the structural budget deficit declined in 2003, even though the overall deficit increased, and that was of course because growth in Europe was slow.

You are right that there are, as we say in the WEO, some downside risks to our projection for growth for Europe and consequently upside risks for the overall fiscal deficit. But we do say that we should allow the fiscal stabilizers in Europe to operate, and we focus much more on what is happening to the underlying deficit abstracting from the impact of short-term movements in growth.

QUESTION: The first question is about China. Some economists, including former IMF officials, have been critical of the Fund, saying that it has not been aggressive enough in forcing China and other Asian nations to move to a more flexible exchange rate. Is the Fund going to take more aggressive action? Is that something you are planning? If not, why not?

The second question is, in the WEO, the word "urgently" comes up with regard to fiscal consolidation for the U.S. What do you mean by that? Do you mean that measures should begin this year beyond just indication language? Are you saying rates should be raised within the next quarter? The tax cuts should be reversed? Can you be more specific about that?

MR. RAJAN: Okay. You use the word forcing. We do not force anybody, and especially if they do not borrow from us, we have very little ability to force.

I think what we have been saying repeatedly to the Asian economies is more flexibility would be in their own interest, and that is a strong reason to move, and increasingly you see that some of the exchange intervention is leaking into the domestic credit system. This is certainly a factor in China. And also, you know, in the longer run if they did revalue, the consumers would have a much better deal. It would put some lid on inflation. These are all good reasons for revaluing. Finally, if you have the prices right, the price of the exchange rate, that is part of the price system, you will make much better investment decisions, and in the long run that will be beneficial. These are all good reasons for a country to revalue or to adopt a more appropriate exchange rate in its own right.

That said, at this point, whether, in fact, the revaluing will completely cure China's problem I think is an open question. China, at this point, part of the problem that the authorities have been pointed to and which we are fully monitoring is the issue that investment is growing at a tremendous rate and is probably excessive in some areas, and putting the lid on this investment means putting the lid on some of the bank loans that are fueling this investment, and some of that will have to be done in ways that may not - the traditional ways of increasing interest rates may not work here because some of these decisions are not being made on the basis of profitability.

So I think the idea that if China adopts a more flexible exchange rate, it will solve all China's problems, I think is misguided. It will help, but also China has other issues with the financial system that it has to deal with separately, and those are an important part of what it has to do.

All that said, I think complete flexibility is a goal but convertibility at this point, which some people associate with flexibility, would be a mistake. China needs to deal with the problems in its financial system and clean them up before it moves to full convertibility.

On the issue of fiscal consolidation in the United States, what we think would be good is a credible medium-term plan to bring the U.S. fiscal house into order, which means that the projections that are in place, some of them need to be strengthened. The measures that are in place have to be strengthened. For example, what is going to happen on the AMT? What is going to happen with war expenses? How do we then find the revenues to pay for some of these shortfalls? So I think what we are looking for is not this year we are going to do X, Y, Z, but a credible plan of how the fiscal deficit is going to be brought into control in the medium term.

QUESTION: I have two more questions on monetary policy. The first one, if you see any problem for the ECB pronouncement of its policy on the persistent differential of inflation in Europe, particularly with countries like Spain with high inflation and growth and others like Germany with weak inflation and growth, and the United States, what did you see the neutral or the natural interest rates at the moment? Thank you.

MR. RAJAN: On the inflation differential, that clearly is an issue. Now, the question is what is causing what. Is the differential growth causing the differential inflation or is it vice versa? That is hard to say. I think there have been studies in this area which are trying to look at it.

To the extent that the causality is that we have differential inflation and therefore different interest rates in the EU zone, the hope is that there is convergence so that the one uniform monetary policy will be more effective. Otherwise if you have differences, then you have potentially different countries facing different real rates, and it becomes much harder to work with monetary policy, so that is the hope, that there is convergence, that this is a short-term phenomenon while countries are adjusting and are growing at differential rates and eventually it will converge.

On what the natural rate is for the United States, what I can say is that it is higher than where it is now. Where it is exactly I do not want to stick my neck out and say this is where it is.

MR. HACCHE: Apologies to those of you we did not manage to get to this time. I will remind you again of the 11:00 embargo, and thank you very much for coming.