Transcript

Washington, D.C.
Friday, April 17, 2015

Participants:
Poul Thomsen, Director, European Department
Mahmood Pradhan, Deputy Director, European Department
Phil Gerson, Deputy Director, European Department
Ángela Gaviria, Communications Department

MS. GAVIRIA: Good morning, everyone. Welcome to this press conference by the IMF on Europe. Let me introduce our speakers. Poul Thomsen at the center, Director of the European Department. To his left is Phil Gerson who is Deputy Director in the European Department. And to his right is Mahmood Pradhan who is also Deputy Director in the European Department. Poul will have some brief opening remarks and then they will take your questions.

MR. THOMSEN: Thank you, Angela. Good morning to you and thanks for coming. Before taking your questions, please let me provide some context by describing how we see developments in Europe.

Let me start in the western part of Europe, not least the euro area. Western Europe and particularly the euro area are going through a somewhat stronger recovery than we expected at the time when we met last during the Annual Meetings last October. The recovery is fairly broad-based with support from both domestic demand and net exports. Recent high-frequency data suggests that the momentum is being maintained.

The recovery reflects both favorable external developments as well as progress on policies. Lower oil prices and a weaker euro have stimulated activity and improved the trade balance. Clearly the ECB’s quantitative easing has improved financial conditions substantially by lowering interest rates, boosting asset prices, and supporting inflation expectation.

In our view the euro depreciation largely reflects diverging monetary policies and financial conditions among advanced economies, particularly between the euro area and the U.S. In view of this and as you will have seen in our WEO projections, we have marked up our forecasts. We now expect the euro area to grow by 1.5 percent this year. That’s up from the previous forecast of 1.3 percent in the Fall. Moreover, which I think is important, where we previously thought that downside risks were prevailing, we now think that risks are equally balanced. However, over the medium term, growth is expected to remain subdued. That reflects clearly a number of legacies from the crisis, including high unemployment, low inflation, impaired corporate and bank balance sheets -- well, let me mention those are the main ones.

To strengthen the recovery we clearly think that policymakers need to make progress on four complementary fronts. They need to be implemented together. This will generate synergies and make sure that policy actions are self-reinforcing.

First, monetary policy: We clearly think that the ECB should continue to do what it’s doing. We think that its efforts to deal with the risk of low inflation, in particular the open-ended nature of QE, is welcome. This will help the ECB meet its medium-term price stability.

Secondly, on the financial sector: Steps to accelerate the disposal of nonperforming loans would facilitate needed balance sheet repair and strengthen the monetary transmission mechanism. These steps include tougher supervisory treatment of nonperforming loans -- clearly there is an issue with nonperforming loans in banks in Europe -- improvements in the insolvency framework, and efforts to develop a market for distressed assets.

Third, turning to fiscal policy: Clearly fiscal policy is now largely neutral compared to a few years ago when it was a significant drag on growth and this is obviously very welcome, but there are important differences at national levels. We believe that countries with large deficits and debt should, of course, adhere to the Stability and Growth Pact to assure the credibility of the fiscal framework. All countries should adhere to the Stability and Growth Pact. We think that’s absolutely essential. Those who have flexibility within it should use it.

Finally, structural reforms: Structural reforms are obviously essential. I should say finally, and above all structural reforms. We all know structural reforms are key to boost medium-term growth, to strengthen the outlook compared to this subdued medium-term outlook that we have. It’s essential. But it’s not only essential for economic reasons because of the impact on potential growth, also for political reasons. It’s important to strengthen the political support inside what’s not a political union to support demand management policies. It’s important that countries that have structural issues deal with them thereby helping to strengthen the broad political support inside the union for an appropriate policy mix.

So overall there’s clearly much to be done. There’s much to be done on the European architecture. But I also think we need to recognize that Europe has come a very long way in recent years with the establishment of the Banking Union. It’s still not complete, but it’s an important step forward, the completion of the comprehensive assessment and the launch of the SSM.

A few remarks on Eastern Europe: The near-term outlook in Eastern Europe reflects again both domestic developments and a number of external shocks that are impacting countries differently across the region.

I would divide it into three groups: We have the Baltics and Central Eastern Europe where we project solid growth with improving labor market conditions on the strength of higher domestic investment helped by lower oil prices.

We have Southeastern Europe where we are expecting to see sluggish growth, reflecting slower-than-expected reconstruction after last year’s flood, less support from fiscal policy, and greater balance sheet challenges than elsewhere in the region.

And then finally, of course, we have the CIS region where we project recession this year, reflecting fallout from the conflict in Ukraine, ongoing macroeconomic adjustment, and, of course, in Russia’s case, lower oil prices and weakened confidence.

Risks to the outlook in Eastern Europe as elsewhere in Europe are in our view more balanced. Since October there are some upside risks. Lower oil prices might support demand more than we have thought. And it is possible that the recovery in Europe, particularly the impact of QE, could produce stronger and more sustained growth. There are also downsides, obviously, coming from the conflict in Ukraine and, of course, financial volatility from normalization of monetary policy, including in the U.S.

A couple of more remarks on Eastern Europe. Despite some progress, the repair of private sector balance sheets remains a challenge in many parts of the region. You will see from our Regional Economic Outlook, which is in the final stages of production and will come out soon, that this is an issue. This is holding back recovery of private investments, which contracted considerably in the aftermath of the financial crisis. To ensure more robust recovery, macroeconomic policies need to be mindful of efforts to reduce private sector indebtedness.

Fiscal consolidation, while needed in many countries in the region, should be gradual when possible in order not to derail the recovery. Monetary policies should remain accommodative, particularly in countries facing deflationary risk.

Let me also say that potential growth in the region is estimated to be half relative to experience before the crisis. This reflects, undoubtedly, that pre-crisis growth masked insufficient progress in structural reform. So to lift potential growth environment of much lower capital flows and aging population, it’s essential to improve productivity and competitiveness through structural reform. I think you’re familiar with the structural reforms we’re talking about -- labor market flexibility, privatizing inefficient state enterprises and improving governance. But clearly there is still quite a reform agenda that needs to be pursued in that part of the world in order to regain confidence and unlock further catchup gains in productivity with Western Europe.

So let me stop here and take the questions that you might have.

MS. GAVIRIA: Thank you, Poul. Please identify yourselves and your organizations. Let’s start here.

QUESTIONER: You didn’t mention Greece. I was wondering.

MR. THOMSEN: I thought you would all forget.

QUESTIONER: There are signals from the European sources, European Ministers, that no deal is expected in Riga next week. Mr. Shaeuble said again this morning and then we get very close to some repayments that the Greeks have to do, including to the IMF. I wonder what’s your assessment of when the Greeks will run out of money and what is the way out of this impasse?

MR. THOMSEN: If there are any other questions on Greece, let me take them and I will put them altogether.

QUESTIONER: Your forecast for Greece includes 2.5 percent. That seems supremely optimistic. I wonder how that feeds into European growth. And given the odds that there could be an accidental exit of Greece from the Eurozone and the IMF routinely does downside scenarios in its outlooks for both the global and regional economy, what is your downside outlook for the European economy with a Greek exit? I just didn’t want to get the whole speculative business because you guys speculate all the time and that’s just not appropriate.

QUESTIONER: The first payment deadline is May 5. Are you worried that Greece won’t make that payment, and what would you do if they don’t or if this is just a technical patch to sort of wring out last minute concessions?

QUESTIONER: What is the status of the negotiations? Do you expect to give them any money soon, and what do they have to do to receive the money from the IMF?

QUESTIONER: Do you think that Greece might need the new program? And what role, if any, could the IMF play in that? And do you envisage merging the old IMF program with a potential new one?

QUESTIONER: The new government in Greece claims that it wants to reform the pension system without cutting pensions. Is that possible for you? Do you agree?

QUESTIONER: How can the liquidity problem be addressed in the short term in Greece? Thank you.

QUESTIONER: Some people in Europe are starting to say that Greece could default, but that would remain in the Eurozone. Does the IMF think that could be a possibility?

MR. THOMSEN: So let me just say a few remarks on Greece and then try to answer some of the concrete questions. Clearly, the new government has been elected with a strong public mandate to change the program, no doubt about that, and no doubt that, of course, we fully accept this. As always, we will be flexible. We recognize that there are always various ways to achieve a program’s objectives. And so we are currently engaged in discussions with the new government on how to modify and adjust the program.

So on finding common grounds on how to do that, clearly this has to be done in a way that preserves the gains, the considerable gains that Greece has made so far. And in a way, looking forward, that is consistent with the program’s overarching objectives of ensuring fiscal sustainability, financial sector sustainability, and, of course, not least, putting the economy on a path of strong and robust growth with strong growth in employment.

These discussions are taking time, clearly they’re taking time. This is not entirely surprising. Any new government, not only in Greece, any new government needs time to translate broad objectives into concrete reform proposals. There are still open issues in several areas. And clearly there is quite a lot of work to be done in order for us to conclude the review of the program and take a proposal to the Board to release the next purchase. Technical discussions have taken place for three weeks before Easter. There was a break over Easter and they have resumed in Athens in the last few days. And part of these discussions in the context of the so-called Brussels group, will resume this weekend.

So I am encouraged by the fact that I think the process has improved recently, but there is undoubtedly a need for the negotiations to gain notably further momentum in the coming days and weeks for us to be able to conclude the review in a timely manner.

Riga. Nobody ever expected the review to be concluded by Riga. I think it’s a question of discussing the progress that has been made , and in view of this I think it’s important that we in the coming days make significant progress, that the process gain momentum.

Let me be very clear. To conclude the review with the Fund, we need a comprehensive package. We cannot conclude the review based on a few measures. It needs to be a comprehensive package and that will clearly take several weeks more of discussion to put that in place.

Liquidity. I do not have the granular information necessary to tell you -- you’re asking me about payments in the next coming weeks. We do not have the information, the detailed information, about the liquidity situation to have a view on that. What I know is that in June, July, and August, there is a significant increase in debt servicing payments over three months by a cumulative €10, €11 billion, and clearly it’s important that one reach agreement on a comprehensive program that could unlock disbursements before then.

So I think -- what else? On the forecast that we have in the WEO, I think we should have made clearer that we have simply not changed it. I mean that is clearly a forecast that is unrealistic and that will have to be revised downward somewhat, and we should have made clearer that we did not change it. And why did we not come up with another one? Because we are still at such a stage of the negotiations that I cannot tell you exactly what are the policies and, therefore, what is the growth forecast. It depends on targets for fiscal consolidation, for instance, that are under discussion. But we are not projecting that Greece is going to be one of the fastest growing countries in the euro area next year. We are not.

There was a question on the implications of Greece’s exiting the Eurozone. Let me be very clear, we do not expect this to happen as the Greek government has made very clear that it wants to stay and is going to take whatever action is needed to stay. This is clearly our baseline. I do think that it is speculative to discuss the implications. I mean clearly the implications for Greece would be very severe. There would be a high toll on the Greek economy. Clearly this would also be a major challenge to the Eurozone. It would have a potentially adverse effect on confidence that should certainly not be underestimated. The immediate risk of contagion to the Eurozone will, of course, depend on the policy response by European policymakers. As the Managing Director said the other day, Europe is in a stronger position than it was. Again, the longer term risks would clearly depend on the policy response on what would be done to preserve the cohesiveness of what would be done towards strengthening the move to political and fiscal union. Let me emphasize, one should not underestimate the risk of this.

We have a program that runs until March/April of next year. There is still what is about 16 billion euros or something like that, 16, 17 billion euros left in the program. And at this stage, there is no discussion on what should follow after this program. The government has said it wants to continue the relationship with us in the context of this program and this is what we are focusing on.

I don’t want to go too much into detail. There is a question on pension reform. We think that pension reforms are critical for Greece. It’s critical for Greece to tackle what is an unsustainable situation in the pension system. I repeat, we are not calling for an across-the-board cut in pensions. We have not done so and we continue not to do so. It’s somewhat of a straw man here that’s being created by some. The Fund has never asked for and will not ask for an across-the-board cut in pensions.

We cannot, on the other hand, guarantee that it will not mean that some of the higher-end pensions will not have to be reduced, but one would have to discuss these things and there are different ways of restoring the viability of the pension system, retirement age and other things. And nobody expects to solve this problem overnight. It’s a question of agreeing on medium term plans for gradually tackling this difficult issue.

I think I have said more than enough on Greece. Let’s turn to other countries so it doesn’t only become about Greece.

QUESTIONER: So on another spectrum, you’ve been quite critical, I’d say, in the last couple of months about the Portuguese government’s measures in the sense of some austerity relaxation and also regarding the predictions for growth starting next year. I’d ask you if anything has changed since then for better or worse. And also on these remarks, how do you see the recent announcement to cut down austerity significantly starting next year, namely with tax relaxation and wages. Thank you.

MR. THOMSEN: Okay, so let me start by saying that I think there is no doubt that Portugal implemented its program in a very determined and impressive manner, and it set out to achieve its objectives and above all return Portugal to a situation where it can borrow from markets at a low interest rate. That has been achieved and I don’t think there’s anybody who will challenge that the program has been successful, thanks to the government’s determined implementation of it. No doubt about that.

We think that the reform agenda is certainly by no means finished and I don’t think anybody in the government would say that it’s by no means finished. We think there is a need to continue to move ahead with structural reforms and we have said so. And I think it’s wrong to misinterpret that as a criticism of the government.

As far as future fiscal consolidation is concerned, I think that is just Portugal needs to stick to the targets that it set for itself and I am confident that it will do so.

QUESTIONER: But do you think it’s too soon?

MR. THOMSEN: Too soon to what?

QUESTIONER: For that relaxation of austerity.

MR. THOMSEN: I think that they need to stick to the targets that it has set for itself. Now, one needs to, of course, have a discussion of what’s possible within these targets, but I think Portugal needs to stick to the targets that it set for itself.

QUESTIONER: Spain seems to be the poster child of Europe right now in terms of growth. But in the next couple of years, this growth gets stuck in a way and I would like to know why is that happening? And then if you see any risks from the elections that are coming ahead. And then in terms of budget deficit, some of the regions still systemically don’t achieve those objectives. And do you think that the central government should be harder on these regions now that they have the opportunity and the ways of doing it. Thank you.

MR. THOMSEN: Let me ask Phil, who is covering Spain, to answer this.

MR. GERSON: Thanks very much. There were a few questions there and I’ll try to respond to all of them in one go.

It’s clear that confidence in Spain is quite high. Spain has accomplished a lot over the last couple of years and we shouldn’t forget that. The financial system is much stronger, there’s been considerable progress in bringing down the fiscal deficit, the economy is growing and employment is growing. So Spain has accomplished a lot.

At the same time, it’s clear that there are challenges going forward, the main one being the still very high rate of unemployment. And a frank dialogue on the issues that Spain confronts going forward is something that we should all welcome. We don’t see any sign that the rise of new parties, like Podemos or Ciudadanos is having any negative effect on confidence in Spain.

We do think the new government that emerges, whatever that government might be, needs to commit to continuing on the reform path, needs to commit to continuing to implement the reforms that have already been approved. And indeed, to move further down that path to continue to address some of these issues.

You asked also about the regional framework. There is a concern that in a federal system like Spain, where there’s a central government and also regional governments, and regional governments are responsible for a significant share of expenditure, there’s always a concern about making sure that you have a system that ensures that the entire public sector hit its deficit target. And so it will be important going forward to continue to reform that system to ensure greater oversight and greater assurance that the regional governments will hit their targets. There is also the matter of a more differentiated treatment of vertical and horizontal distribution of revenues. There are a number of issues there. This is a longstanding issue in Spain.

As an aside, I was the fiscal economist on Spain many years ago and this was an issue of debate. It continues to be one of debate. It’s complicated. There are multiple interests that need to be met and it’s another area where we think it’s important to make progress going forward.

So sort of to summarize where we are, I think Spain has done a lot. Spain’s made considerable progress, but there’s still important challenges ahead and it’ll be important for the next government, whichever party it winds up being, to continue down the path of consolidation and structural reform to make sure that the gains that have been made are both consolidated and built upon.

QUESTIONER: Is there anything where the IMF is saying, regarding the European programs, that we got it wrong and we should do something differently? And that there’s some discussions with European that the IMF would like to make more broader points and not so much details? Is there anything where it says we need ourselves a change regarding our European partners? Thanks.

MR. THOMSEN: So you’re talking about the troika program more generally.

QUESTIONER: (inaudible)

MR. THOMSEN: So we constantly assess and revalue our programs and our advice, and we constantly adjust these programs. It’s not something we sort of wake up after four years and do. Every review we adjust and we review these programs and correct them as we go along. So the programs have always in all countries had this continuous change as circumstances evolve and as we learn. So I think that is the main point.

I think in terms of the troika, the work with the three institutions, as they’re called these days, you know, I think it has served us all well. We all have brought three different perspectives, three different sets of expertise, and I think it has improved the overall product. It certainly has not made the process less difficult, but it has been good.

In terms of the sort of the content of the programs, I agree that one of the lessons is that we’ll need to simplify these programs; that we’ll need to have, if you want, fewer moving parts and focus on a few critical areas. I think that is a lesson that not least pertains to Greece -- we have already slimmed down the program significantly over time, particularly during the last year. And I would like to refocus it even further on a few critical measures. So I think this is a well-taken point.

But I’m not going to -- let’s not talk about Greece only. There’s much more things that we need to talk about.

QUESTIONER: You predicted that Macedonia will have 3.8 percent economic growth this year. Can you elaborate on what you base that?

MR. GERSON: Sure. I don’t have any specifics on the growth forecast for Macedonia, but I can talk a little bit about what we see as the main issues going forward. Macedonia has made a number of reforms to its business environment, which have helped considerably. What we haven’t seen flow from that as much as we might have expected and might have hoped is a flow of FDI, of foreign direct investment, into the economy to support further growth and growth of employment. So one of the things that we’re hoping to see in Macedonia is continued structural reform, continued measures to promote investment, to encourage domestic saving, and to expand the labor supply, to encourage participation in order to see that growth of employment and growth of domestic investment that Macedonia needs to continue growing.

QUESTIONER: First of all, on the ECB, what is your assessment of the effectiveness so far of the QE program? Obviously there’s been an exchange rate effect. I think some might say the jury’s still out on whether there’s been any increasing credit, if it’s promoting investment in any way.

And second of all, I apologize, I do have an additional question on Greece. Can you talk about the debt issue? Does there need to be some type of reconsideration, some type of reprofiling of Greece’s debt through discussion with its European partners?

MR. PRADHAN: I’ll take your first question. The assessment of QE so far. It’s just started, but all the impact of the effects you see so far are in the right direction. It’s not just the exchange rate, very large, significant changes in term premia on bond yields and a substantial increase in equity prices, which is what you would expect. It is too early to say and no one expected that QE at this point would unlock credit or revive credit growth, but the indications from bank lending surveys are that credit is picking up.

Now, on the broader issue of “is QE enough?” even in the narrow question of credit growth we still think that the Europeans need to do more to resolve fairly high NPLs -- non-performing loans -- in quite a few countries. And that would improve the transmission mechanism and the effectiveness of QE in delivering higher credit growth.

Finally, I think if you look at the objectives of QE, which is to try and meet its mandate of the inflation and price stability objective, close to 2 percent, we have seen a very significant change in inflation expectations from financial markets. Before QE there was a sort of trend decline in inflation expectations. QE has definitely managed to stem that decline and we see some rises at various maturities. Thank you.

QUESTIONER: About Southeastern Europe, why are they stuck? Why are they not growing faster now that there’s been a faster recovery in the euro core: Bulgaria, Romania, Serbia, Kosovo, Albania, etcetera? And what can they do to boost growth?

MR. THOMSEN: I think that’s a very good question. There are a number of issues. Some of them clearly suffer in particular from high indebtedness including in the private sector, which is weighing down on growth. I think fundamentally it’s a group of countries, not all of them, but many of them, where structural reforms, for a number of reasons, got stuck.

Clearly, in the Western Balkans there was a strong reform momentum after the war in the former Yugoslavia ended. I think it then sort of lost momentum, that was masked, though, by a period of high capital inflows before the crisis by the favorable external conditions, and in particular large capital inflows. And what we are seeing now after the crisis, where these flows have not returned, is, in some ways, unmasking what is a lack of structural reforms, loss of structural reform momentum that goes quite far back. And the structural reforms we’re talking about, I know you are familiar with. This is sort of a range, the usual suspects, if you want, including opening up the economy, liberalizing, privatizing. It’s a broad area, I think. But I do think that in some of the countries there has been a loss of reform momentum quite a while back, and that’s what we are seeing.

QUESTIONER: I just heard somebody in the hall say that the U.S. has had its swagger back for a little while and now Europe is getting it, too. But particularly with the Greece crisis on the edge and the inflation risks and the other risks that you enumerated, is it a little too early to say that the euro zone is out of the woods?

MR. THOMSEN: As I said, you know, we have revised up our forecast. It is quite a subdued medium-term forecast, which, to some extent, answers your question. There are clearly some legacies from the crisis that are weighing on the medium-term outlook for Europe.

In the shorter run, I do think that the risks are sort of equally balanced. There are some risks, the one that you mentioned, some downside risks, but it’s also possible that we are underestimating the positive impact of QE. It is possible that low oil prices will have more of an impact than we expected. I think we are relatively conservative on these factors. So I do think that in the shorter, nearer term, risks are equally balanced. But, as I say, there are clearly some crisis legacies that are weighing on the medium-term outlook that Europe needs to deal with.

Let me just answer the question on Greece that you asked about, the debt. You know that the framework is from November 2012. There are some targets in that framework and an undertaking for Europe to provide support if needed to achieve these targets, provided, of course, that the program is on track.

As long as we have had no discussion of policies alone, we have no agreement on what should be the fiscal targets, and as long as we don’t have any agreement on what should be the privatization targets, there’s no way I can tell you where we are going to be relative to this existing framework. The DSA will have to be reviewed, will have to be reestimated, and it will be reestimated, but we need to sort of -- we cannot put the cart in front of the horse yet. We need to sort of do the policy work first.

Thank you very much.

MS. GAVIRIA: Thank you. Thank you, Poul. So we wrap up here.

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