European Department Press Briefing
IMF News, October 7, 2016
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- Published: October 7, 2016
Euro area outlook and near-term assessment
- Recovery is continuing after a strong start at the beginning of the year; projected growth is 1.7 percent in 2016.
- Short-term outlook: slightly upward revision compared to six months earlier.
- Medium-term outlook: described as "quite mediocre" with potential growth around 1.5 percent.
- Several important countries may still have unemployment above pre-crisis levels even 10 years down the road.
- Downside risks beyond the near term: increased political fragility (Brexit, the refugee crisis, etc.).
Policy implications for the Euro area
- Monetary policy
- The ECB is "doing the right thing" with accommodative monetary policy.
- There is space to do more if needed, but scope is limited; monetary policy is being overburdened.
- Fiscal policy
- Overall fiscal stance in the Euro area this year is slightly expansionary; next year it is set to be neutral.
- Recommendation: countries with fiscal space should use it; countries with high debt should consolidate more.
- Seven countries inside the Euro zone are set to have debt above 100 percent of GDP, significantly limiting fiscal space.
- Importance of preserving broad political support for ECB policy and implementing fiscal rules as envisioned.
- Example: Germany has fiscal space estimated at about 0.5 percent of GDP in the recently published staff report; IMF sees a case for using it particularly on infrastructure (limited spillover).
- Structural reforms
- Unemployment is primarily structural; key issue is boosting potential growth via structural reforms.
- Suggested reform priorities (country-specific): reduce the labor tax wedge and labor market duality; open up closed professions; further progress toward a single market in services, capital, energy and transport.
- Support for outcome-based benchmarks to incentivize structural reform.
- Banking sector repair
- Non-performing loans (NPLs) are a problem in a number of countries; banking profitability is weak and business models need improvement.
- Support for ECB high-level working groups; supervisors should set ambitious targets for reduction in NPLs “over time” with close monitoring and review.
- Concern that prolonged weak bank balance sheets and deleveraging could hamper credit provision and growth.
United Kingdom and Brexit
- Two scenarios were used before the Brexit vote: a "modest impact" and a "strong impact" scenario; current developments are largely in the modest impact scenario.
- Sterling declined sharply but no major negative market reactions occurred, aided by strong policy reactions from central banks and the Bank of England and fiscal readiness by the ministry of finance.
- IMF revised the UK growth forecast slightly upwards due to stronger Q2 data.
- Emphasis on resolving uncertainty around the longer-term handling of Brexit sooner rather than later.
Eastern Europe (outside the Euro area)
- Recovery described as nearly complete: output gaps closing and unemployment falling to pre-crisis levels.
- Growth has been supported by strong wage growth and accelerating credit growth.
- Key medium-term challenge: boost potential growth, estimated to be about half of what it was before the crisis.
- Causes: catch-up gains in the first 25 years of transition are fading; remaining gains require more fundamental institutional reforms.
- Risks: without higher potential growth, current growth rates may produce external imbalances.
- Macroeconomic policy mix: current monetary policy stance generally appropriate given low inflation and high external debt in some countries; more fiscal adjustment is desired in a number of countries.
- Structural reform focus: measures to increase investment and fundamental institutional reforms to continue convergence with Western Europe.
- IMF plans a Regional Economic Issues paper on "Convergence 2 issues" and a conference on the topic.
Greece: program discussions, DSA, and pensions
- IMF fully engaged; a team will go out soon to discuss a new program that will coincide with the second review of the ESM program.
- IMF can support a program based on a primary target of 1.5 [percent of GDP]; believes program previously discussed is adequate in that regard.
- Concerns remain about medium-term risks and whether agreed fundamental public sector reforms (notably pension reform) have been undertaken.
- Pension system deficits are described as more than 10 percent, 11 percent a year.
- Reforms agreed so far will yield 1 percent of GDP per year; IMF stresses need for further reforms (personal income tax modernization, unemployment compensation system, better-targeted social system) to justify more ambitious fiscal targets beyond the current ESM program.
- Debt sustainability: IMF believes Greece has a problem with debt sustainability and that debt relief is needed; debt relief does not necessarily mean haircuts and requires discussion with European partners.
- Data/staff work: a DSA is being prepared in the context of the Article IV; the Article IV mission will go to the Board in December and at that time the DSA will be released.
- Timing and duration: by the time IMF would go to the Board there will be about 18 months or so left of the ESM program; implications for the duration of a new Fund program remain to be discussed.
Ukraine: program progress and reforms
- Recent completion of a review indicates policies are on track and consistent with program objectives.
- Macroeconomic performance described as "very impressive" given headwinds; authorities met fiscal targets despite increased security-related spending.
- Major policy achievements: adoption and adherence to a flexible exchange rate policy; significant increases in energy prices.
- Outcomes: significant macroeconomic stabilization, stabilization in the financial system, and return of growth.
- Governance and anti-corruption: some concerns about the pace of governance and anti-corruption reforms; recent initiatives include requirements for senior officials to declare assets.
- Pension reform: an important program element; reform has been delayed previously. Increasing retirement ages for groups currently exempt from general retirement regimes is a likely starting point.
- Future: authorities need strong resolve to address corruption for international support to continue.
Moldova and Belarus
- Moldova: agreement on a number of policies formalized in a memorandum; program progression requires implementation of prior actions, particularly on financial sector governance; once prior actions are taken a Board date will be set.
- Belarus: a recent mission discussed a program and made very good progress; some outstanding issues remain and the mission will return when authorities are ready; no timing provided.
European banking sector and broader risks
- IMF concern: weaknesses in banks (NPLs, low profitability) weigh on growth and credit provision.
- Recommendation: regulators should set ambitious but realistic NPL reduction targets and enforce them; improve bank profitability and consider consolidation over the medium term.
- IMF view: no acute systemic risk identified in the near term from these banking-sector issues, but medium-term challenges require attention.
Turkey, Southeast Europe, and Croatia
- Turkey
- Political turmoil after the July coup attempt has largely had no impact on financial markets.
- Key vulnerabilities: high current account deficit and high external financing needs; importance of boosting savings and continuing structural reforms.
- An Article IV mission is scheduled to visit next week.
- Southeast Europe (Bosnia, Serbia)
- IMF programs with Serbia and Bosnia are in place and described as doing well; signs of stronger political willingness to pursue reforms.
- Programs focus on state enterprise governance, fiscal issues (including pension reforms), and other long-term structural reforms tied to EU membership aspirations.
- Croatia
- IMF comments mirror previous recommendations: focus on tackling fundamental problems and renewing reform momentum following recent political limbo.
Source: European Department Press Briefing, October 7, 2016, IMF Communications Department.