Transcript of a Press Conference on Europe
IMF News, October 10, 2014
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- Published: October 10, 2014
Overview
- Date and location: Washington, D.C., Friday, October 10, 2014.
- Participants: Poul Thomsen (Acting Director, European Department); Mahmood Pradhan, Phil Gerson, Aasim Husain, Jörg Decressin (Deputy Directors, European Department).
- Key framing: Western Europe has "turned the corner" since 2011–2012 but the recovery is weaker than expected; geopolitical tensions are beginning to affect Central, Eastern, and Southeastern Europe.
Euro area — growth forecasts and recent revisions
- Current assessment:
- Euro area growth expected to be 0.8 percent this year, down from 1.2 percent in the IMF spring forecast.
- Growth projected at 1.3 percent in 2015 and 1.7 percent in 2016 (conditional on recovery elsewhere as in the World Economic Outlook).
- Drivers of weaker-than-expected performance:
- Domestic demand recovering too slowly (with some exceptions).
- External demand disappointing.
- High-frequency and Q2 data point to stronger headwinds than anticipated.
Inflation outlook and risks
- Euro area inflation projection: 0.5 percent (almost a half percentage point lower than in April).
- Concerns:
- Declining indicators of inflationary expectations raise the risk of unanchored expectations and an extended period of very low inflation.
- Implications of prolonged low inflation include: harder public debt reduction, difficulty for households and firms to repair balance sheets, and impeded competitiveness adjustments.
- An extended period of high real interest rates would be detrimental.
Policy implications — monetary, fiscal, structural
- Monetary policy:
- IMF welcomes ECB measures to counter low inflation and support demand, and its willingness to take further action.
- Experience suggests it is hard to escape entrenched low-inflation dynamics once expectations shift downward.
- Fiscal policy:
- Aggregate fiscal stance in the euro area is "only slightly contractionary," a better balance between demand support and debt reduction.
- Recommendation: allow automatic stabilizers to operate in the event of further negative shocks to the revised baseline.
- Structural reforms:
- Need for broad-based reforms (product market, labor market, Services Directive implementation) to boost potential growth and address country-specific weaknesses.
- Structural reform progress helps build political support for accommodative monetary and fiscal policies.
- Examples of successful reform payoffs: Spain and Ireland.
Central, Eastern, and Southeastern Europe (CESEE)
- Regional forecast revision:
- Marked down 2014 growth to 1.2 percent from 1.8 percent in April.
- Largest markdowns: Russia and other CIS countries due to Russia-Ukraine tensions and related sanctions.
- Observed dynamics:
- Acceleration in Central European countries supported by stronger domestic demand.
- Key risks:
- Geopolitical tensions and sanctions affecting Russia, Ukraine, other CIS countries and the Baltics; potential confidence spillovers to broader Eastern and Western Europe.
- High regional reliance on energy imports implies vulnerability to price hikes or supply disruptions.
- Euro area developments can transmit lower imported inflation, weaker export demand, and reduced financing/investment flows.
- Ongoing need to repair private sector balance sheets and reduce high nonperforming loans (NPLs); risk of market volatility if global financial conditions tighten.
- Policy guidance:
- Reduce fiscal and external imbalances and strengthen policy framework credibility.
- Tackle NPLs, high private debt, and complete transition agendas to boost productivity and convergence potential.
Country-specific notes and priorities
- Germany:
- IMF concerned about recent data and slowdown; Q2 negative numbers followed by soft indicators.
- Portugal:
- Forecast trimmed for 2014 due to a weaker external environment and reduced external contribution; policy advice is to continue program policies, structural reforms, and gradual fiscal consolidation.
- Emphasis: stick to agreed fiscal path before considering tax cuts; constitutional court decisions may complicate target achievement.
- Greece:
- Market access has improved but remains fragile; IMF supports maintaining some program relationship or precautionary engagement while modalities are under discussion.
- No official notification received about cancellation of the IMF arrangement.
- IMF view: completing reviews requires understandings on future objectives, policies, and implementation frameworks.
- Spain:
- Cited as a "bright spot" due to effective bank recapitalization, labor reform, and fiscal improvements.
- Policy priorities to sustain recovery: wage moderation as part of a broader package including business environment reforms, training for unemployed, and tax changes to lower the cost of hiring low-wage/low-skilled workers.
- Slovenia:
- Priorities: clean up banking sector and corporate restructuring; solidify fiscal stance and reduce deficit/debt; proceed with privatizations (Parliament-approved list of 15 enterprises).
- Cyprus:
- Program developments stronger than expected: output contracting less than projected and fiscal performance better than anticipated.
- Remaining challenge: very high NPLs in the banking system.
- Ukraine:
- Government determined to stay with program; fiscal targets being met despite collection issues and higher security spending.
- Conflict and capital outflows increase uncertainty and financing needs; IMF calls on international partners to consider additional support.
- Debt reprofiling: "not under discussion" at that stage.
- Macedonia:
- Forecasts: growth of 3.4 percent this year and 3.6 percent next year.
- Recommended reforms: establish a fiscal anchor with deficit targets and rebuild fiscal buffers; improve business environment to capture productivity spillovers from FDI in special zones.
- Potential growth and hysteresis:
- Potential growth slowing due to higher unemployment and labor market detachment (hysteresis).
- Population aging in about five to ten years will place additional downward pressure on growth; underscores need for structural reforms to raise medium- and long-term potential.
Banking sector, AQR, and credit conditions
- Credit dynamics:
- Credit remains weak but recent data suggest the slowdown is moderating and may be at a bottom.
- Weak credit reflects both bank health constraints and weak aggregate demand.
- AQR and recapitalization:
- After the Asset Quality Review (AQR), banks short of capital will have a relatively short timeframe (about six to nine months, depending on results) to meet required capital levels.
- IMF expects this process and ECB measures to support improved credit conditions.
- ECB targeted measures, including TLTROs, provide favorable funding cost to banks to help meet credit demand.
- Capital raised:
- Banks have already raised a substantial amount of capital during the AQR process; IMF notes "in excess of 50 billion" raised in the prior nine months.
- Diverging views:
- National authorities may present more optimistic assessments than IMF/GFSR; definitive judgement awaits AQR outcomes and the speed at which banks can raise capital.
Investment initiatives and the EIB
- Discussion of President Juncker's 300 billion investment plan and the role of EIB:
- IMF supportive of infrastructure investment funds and public sector participation.
- EIB is already extending substantial credit within current capital but may have limited capacity, at current capital levels, to deliver the full scale envisioned for the plan without recapitalization or additional support.
IMF program processes and conditionality
- Reviews and program engagement:
- Reviews are both backward- and forward-looking; completion requires clear understandings on future objectives, policies, and implementation frameworks.
- Precautionary or evolving program relationships may be used where market access is improving but remains fragile.
Closing summary of policy prescriptions
- Near-term priorities:
- Monetary: active measures to counter low inflation; readiness to do more if needed.
- Fiscal: allow automatic stabilizers to operate under further negative shocks; maintain credible fiscal frameworks.
- Structural: vigorous pursuit of reforms (labor, product markets, Services Directive implementation) to raise potential growth and sustain political support for accommodative policies.
- Regional focus:
- CESEE: reduce fiscal/external imbalances, tackle NPLs and private debt, improve transparency and efficiency to unlock productivity and convergence.
Source: Transcript of a Press Conference on Europe, October 10, 2014.