Transcript of European Department Press Briefing
IMF News, April 21, 2017
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- Published: April 21, 2017
Euro area: growth, inflation, fiscal and monetary stance
- Growth revised up to 1.7 percent; recovery is "gaining a bit of strength."
- Unemployment "is down to single digits" and "is mostly structural"; recoveries are divergent with uneven output gaps and fiscal space.
- Aggregate fiscal stance for the euro area described as "broadly appropriate" and "mildly expansionary."
- Recommendation: Countries with fiscal space should use it.
- Recommendation: Countries with high debt should consolidate to create fiscal buffers.
- Monetary policy: ECB's stance assessed as "appropriate."
- Concern: Pressure in some countries could prompt "premature tightening" of policy.
- Note: Countries close to full capacity may need "inflation above the target for a longer period."
- Financial sector:
- Ongoing need to repair bank balance sheets.
- Urgency to complete banking union.
- ECB guidance on non-performing loans is "an important step forward"; need a determined strategy to reduce persistent non-performing loans.
- Structural reforms:
- Unemployment largely structural => urgency of reforms to boost productivity.
- Potential growth remains "low, relatively low"; it will take many countries "quite a long time" to reduce unemployment to below pre-crisis levels.
- Risks:
- Short-term: "probably equally balanced" with potential upside if political uncertainties are clarified.
- Medium-term: "perhaps the downside risks dominating."
Eastern Europe (outside the CIS): cyclical position and policy mix
- Recovery "largely complete"; output gaps "are almost closed" and the outlook is positive.
- Labor markets: signs of overheating in some economies; unemployment has fallen to pre-crisis levels; strong wage growth in several economies.
- Inflation: "has picked up," mainly because of oil prices; "core inflation is still relatively subdued" despite wage increases.
- Key challenge: potential growth rates have "declined significantly" compared to pre-crisis (around half).
- Causes: price legacies, depletion of early "low-hanging fruits," weak institutions, investment gaps, unfavorable demographics.
- Policy implications:
- Several countries have fiscal policy "too loose" given cyclical strength -> need for tighter fiscal policy.
- Monetary policy: may need to "gradually withdraw monetary accommodation" if inflationary pressures accelerate; currently no "significant pressure on core inflation."
- Recommended policy mix: somewhat tighter fiscal policy to avoid overburdening monetary policy if inflation accelerates.
- Overriding priority: structural reforms to boost potential growth, strengthen institutions, improve public sector and infrastructure.
Russia and Turkey: diverging policy signals
- Russia: inflation "has declined to the central bank target" -> further easing of monetary policy can continue.
- Turkey: "need for tightening monetary policy" due to "strong inflationary pressures."
Greece: program discussions, targets, debt treatment, and medium-term outlook
- Status: Good progress in recent weeks on program policies; outstanding issues remain; IMF mission returning next week.
- Sequencing: discussions on policies precede discussion on debt; IMF will go to its Board only with a comprehensive plan credible on both policies and debt relief.
- 2016 primary surplus reported by Greek Statistical Authority: 3.9%
- Context: Greek budget for 2017 was based on an assumption that 2016 would be 1 percent of GDP; actual reported 3.9% is "well above" projections.
- IMF view: the movement needs understanding; extraordinary outperformance relative to expectations.
- IMF and ESM primary surplus targets:
- IMF projects reaching 3.5% of GDP in 2019; ESM target is 3.5% in 2018 (difference described as "inconsequential" for DSA).
- IMF preference: reach 3.5% "a bit slowly" given the state of the economy.
- Key question under discussion: "how long should it stay at 3.5%?" IMF view: "it should be a relatively short period."
- Recommended fiscal use of space:
- Use fiscal space to make budget more growth-friendly (more capital spending, well-targeted social benefits, lower excessively high tax rates) rather than sustain high primary surpluses to repay debt.
- Liquidity: Greece "would need support within the next couple of months" to make payments scheduled for July; urgency to conclude program discussions.
- IMF constraint: the Fund cannot disburse only to address a short-term liquidity hump; it requires a comprehensive program addressing medium-term issues.
- Debt relief and what IMF needs before disbursing:
- Eurogroup agreement last year set objectives: deliver gross financing need of 15 percent of GDP over the medium term and 20 percent over the very long run.
- Agreed that debt relief need not be approved and effective before end of ESM program.
- IMF requires:
- Agreement on the path to the primary surplus (duration at 3.5% and the landing point).
- More specificity on currently unspecified parts of the debt-relief menu.
- A broad understanding sufficient to present to the IMF Board that measures would restore debt sustainability given the current DSA.
- If policies and these debt issues are resolved, IMF will go to its Board with a new program.
- Medium- and long-term outlook:
- Potential for a rebound in output, but "many years" needed to restore unemployment and incomes to pre-crisis levels.
- Deep structural reforms remain necessary: opening and liberalizing the economy, further fiscal structural reforms beyond pensions and tax, and significant public sector modernization.
Ukraine: pension reform as program condition
- Pension reform has been part of the program from the start and has been delayed multiple times.
- The pension fund faces a severe deficit (described as "the second largest deficit in the world").
- Structural features: pensioner-to-contributor ratio "something like 1 to 1"; pensions are very low and have been eroded by inflation.
- IMF position:
- Increasing the effective retirement age is "critical" and is under discussion.
- Pension reform (including raising effective retirement age) is an important part of the next review and required for a credible plan.
Germany: current account surplus and rebalancing
- Germany's current account surplus described as "large" and "much, much above where it should be in the medium term."
- Longer-term justification: aging population supports some surplus, but equilibrium is lower than current levels.
- Policy recommendations:
- Use fiscal space to boost domestic demand.
- Expect wages and inflation in Germany to rise "above the European average" over a period, helping gradual rebalancing.
- Additional measures: liberalization and policies to retain more capital of exports domestically and boost investment attractiveness.
Bosnia and Croatia: program engagement and corporate restructuring
- Bosnia:
- Some prior actions for the current review have not been implemented, delaying review completion and potentially harming the economy.
- IMF will remain engaged with authorities and parliament to overcome obstacles and bring the program back on track.
- Croatia:
- Large company (Agrocorp) in difficulty; IMF has no mandate or information to opine on individual firms.
- IMF welcomes restructuring and will monitor given the firm's size and regional operations.
Quantitative easing (QE) and ECB policy horizon
- IMF view: core inflation in Europe "is still low" and "there is still clearly the case for ECB to continue the current accommodative monetary policy."
- No further specification on duration was provided beyond saying accommodative policy should continue.
Forecasting, past errors, and credibility issues
- Acknowledgement of forecasting errors over seven years of engagement with Greece:
- First five years: IMF "constantly overestimated the fiscal performance."
- Last one and a half years: IMF "have been wrong consistently on the other side" and underestimated the impact of capital controls in 2015 and 2016.
- Core issue: ability to reach short-term targets is not the only concern; maintaining targets over the medium term while achieving growth requires structural reforms and a growth-friendly fiscal reorientation.
Politics and macroeconomic risks
- Political uncertainty across Europe (e.g., French, UK, German, Italian elections) is a notable risk with potential tail-risk impacts.
- Clarification of political uncertainty could also unlock upside potential for growth.
- IMF avoids speculating on specific electoral outcomes; emphasis is on policy choices that support growth and reform.
Transcript of European Department Press Briefing, April 21, 2017.