Transcript of October 2020 European Department Press Briefing

October 21, 2020



Alfred Kammer, Director European Department

Meera Louis, Communications Officer IMF


MS. LOUIS: Good morning, everybody, and welcome to the European Regional briefing today. Thank you for joining us and we do hope that all your friends and family are staying safe during these times.

To start off, I would like to welcome our new European Director, Alfred Kammer. He will start with a few remarks, and then we will turn the floor over to you.

MR. KAMMER: Thank you for joining us today for this press briefing on the European outlook. The pandemic is exacting a heavy toll on Europe. More than 240,000 people have lost their lives. Millions have suffered the illness themselves. The loss of loved ones or major disruption in their work, their businesses, and their lives.

The economic impact of the pandemic has been enormous. Our latest regional economic outlook forecasts a 7 percent decline in Europe's GDP in 2020. The recovery from this crisis will be uneven and partial. While real GDP is projected to rebound by 4.7 percent in 2021, it would still be lower by 6.3 percent in 2021, relative to our pre-pandemic projections. This implies a GDP loss of almost €3 million. And much of this loss will not be recouped over the medium term.

An unprecedented policy response, both in swiftness and scale, prevented a more devastating outcome. To give just one example, we estimate that at least 54 million jobs have, at some stage, been supported by job retention schemes in Europe. This has kept many families and firms afloat. EU-wide policies also made a difference. But risk remains significant and are arising as the second wave of infections is intensifying. Given the considerable uncertainty, policy must stay resolutely supportive to sustain the recovery. Indeed, a decisive policy response by Europe protected incomes and productive capacity of the economy, so far.

Fiscal policy did the heavy lifting. We estimate that the average size of announced discretionary fiscal measures for 2020 was 6.2 percent of GDP for Europe's advanced economies, and 3.1 percent of GDP for its emerging economies. Their discretionary support came on top of Europe's powerful automatic stabilizers. A large share of the fiscal packages was used for job retention programs and liquidity support for firms. These programs were highly successful in limiting the extent of job destruction and prevented a cascading of bankruptcies and bank closures.

Monetary policy and macroprudential policies were essential in providing favorable funding conditions for all sectors of the economy. Policy rate cuts, asset purchases, easing of conditions under which banks can obtain liquidity, and lowering of bank capital and liquidity buffers helped ensure the flow of credit, especially to small and medium sized enterprises. And highly accommodative monetary policies by the European Central Bank and other reserve currency economies had a powerful, international spillover effect easing monetary conditions including in emerging Europe. IMF emergency financing supported six European countries. These policy interventions contributed to avoiding an even deeper recession, and long-lasting economic scars on the European economy.

For the European Union economies, we estimate that without the policy actions and a strong EU support, economic activity might have been an additional 3 to 4 percentage points of GDP lower in 2020. Policy makers need to do whatever it takes to contain the pandemic and its economic damage. And they should not withdraw support prematurely. We should not repeat the mistake of the global financial crisis. Over time, support should become more targeted and also more flexible to facilitate the reallocation of resources and the transformation of the economy. In particular, protecting peoples' health remains imperative including through international cooperation.

Income support and job retention programs should remain in place as the pandemic evolves and the economy starts to recover, the program should be adapted from protecting jobs toward supporting workers including through reskilling programs. For companies, policies now need to go beyond liquidity support and ensure that insolvent but viable firms can remain in business. Our report finds that in advanced economies, around one-third of the pandemic induced solvency shortfall could be addressed by announced policies such as wage subsidies, grants, or tax rebates. In emerging Europe, it is only around one-quarter. Thus policies need to be put in place that facilitate speedy debt restructuring in or outside of bankruptcy, or in some cases, make equity available to viable firms.

Long term inflation that is generally anchored around or below targets and sizable economic slack suggest that Central Banks should keep highly accommodative monetary policies in place. Macroprudential easing should be unwound only gradually. European banks entered the pandemic with strong capital and liquidity buffers and proved resilient to the unprecedented shock. Their resilience together with the strong policy response helped prevent a credit crunch. Our work suggests that absent new shocks, the average capital ratio of large EU banks should stay well above the minimum capital requirements. Still, nonperforming loans will rise, and policy makers will need to facilitate their efficient disposal. And banks will need to engage with shareholders in developing a credible strategy to raise capital over the medium term.

This is also the time to design reforms that boost productivity growth and policies that help transform the economy to reap the benefits of digitalization and mitigate climate change. Social systems can be improved and made more robust so that they can deal better with worker dislocation and retraining needs arising from automation and technological change. Policies including better targeting of fiscal support will also need to address the pernicious effects of the crisis and a likely sharp rise in inequality. The youth, women, and least educated have been disproportionately affected.

To conclude, without the exceptionally strong and multifaceted policy response, the recession in Europe would have been far worse. Strong policy support needs to be maintained because the pandemic is intensifying and the recovery is still nascent and fragile. Once fiscal resources are freed from temporary support of people and firms, they should be redeployed to public investment that will build a more resilient, smarter, greener, and more inclusive economy for tomorrow.

For the EU countries, the next generation EU instrument can play an important role in this regard. And preparation should start on plans to rebuild policy space which will need to begin once the recovery is in full swing. Together, these actions will help limit the scarring from this crisis and thereby strengthen the capacity to deal with the public and private debt burden.

Thank you very much.

MS. LOUIS: Thank you, Alfred.

And now we would like to open the floor up to you for questions. Please feel free to send us your questions via Webex. You can ask your question live, or you can also submit a question via our press enter. We have already seen a lot of questions, so, Alfred, I'll start with one of them.

We've got a question coming in from Catherine Bosley, from Bloomberg News. The question she has is how much of an economic impact is the second round of lockdowns, curfews, and other restrictions in Europe going to have?

MR. KAMMER: This is very difficult to predict, and there is lots of uncertainty on how the pandemic evolves, and, therefore, also how the response measures on the public health side and the economic impact will need to evolve, but what we know already is, with regard to the second wave, we have more information on the virus, we have better information on which measures work, and we also have a very strong support structure on the economic side in place.

So, when we forecasted, we assumed that the second wave will be dealt with, with social distancing measures, limited and partial containment measures, and so, the economic impact will be limited, much different than as part of the first wave, and because of that we actually increased our growth forecast from our end-June projections for 2021.

Having said this, of course, we have a downside risk, and the downside risk is if this second wave is intensifying and needs more elaborate restrictions, and if these materialize, then this would seriously impact on the growth in 2021, in particular.

MS. LOUIS: Thank you, Alfred. Catherine had a follow up, but she says, but can governments actually afford to go on spending, given the stretched financial situation in many countries?

MR. KAMMER: Put simply, governments cannot afford not to spend. The big success, so far, of this crisis was the swift and sizeable policy response. This prevented firms from going into bankruptcy. This prevented cascading of these bankruptcies and limiting impact on the banks. On the workers' side, again, the strong support kept workers and jobs together and incomes were provided to sustain this period. These measures need to stay in place.

There is no question about it because what we have achieved, so far, is limiting a much bigger drop in economic activity, and what we have as estimated, if this would not have taken output in 2020, it would have been three to four percentage points lower. They need to be staying in place because they preserve the structure of the economy, they're preventing what we call economic scarring, both on the structure, as well on people, as well on skills, and by doing that, and that's very important to understand, we are supporting the recovery of growth, and we are supporting protective capacity in the medium-term. Without that, that protective capacity would be damaged, and, therefore, it's so important to maintain this report.

Now, on the financing side, financing conditions in Europe are easing. The monetary policy of Central Banks has been highly accommodative. So, what we see is that European countries have access to financial markets at very low cost. And I should also add that the various facilities and instruments by the European Union also provide a strong support for countries to finance themselves throughout this crisis.

MS. LOUIS: Thank you, Alfred. We have another question from Maria Vasileou, from the Greek newspaper TA NEA. It's following along the same lines. She's asking: how long do you think it will take for the European economy to return to pre-COVID levels because, right now, we are seeing restrictive measures that are put in place, and more may be needed at a later stage? So, what priorities should Europe set in this process?

MR. KAMMER: This is, indeed, going to be a very long ascent in the recovery, and we estimate, for Europe, it will take until 2022-'23 for most countries to return to 2019 levels of GDP. So, that is a long return to where we were already in 2019. As I said, the key priority needs to be that we support lives and livelihoods, and, therefore, we need to keep the support policies in place throughout the second wave, until we have controlled the pandemic, and until we have fully entrenched the recovery, but, over time, of course, the nature of these support measures will and should change. We, right now, focus on maintaining the job and work links, so that employees can come quickly back and pick up their work.

The economy will change as part of the crisis, and the economy will change because we have major transformational trends going on, including on the digital side. So, over time, these programs need to be focused more on allowing workers to change jobs, and to find new jobs, that means more will need to be done on the unemployment side, the retraining side, the reskilling side, so to move workers to new jobs, to new capital, to new emerging sectors. And, also, when we think about the transformation in the economy, to make it digital and cleaner, these investments will need to be supported by a movement of resources.

MS. LOUIS: She also asks, is it going to be possible for European economies to return to a more sustainable fiscal path, after embarking on such an expansionary policy?

MR. KAMMER: What we see right now is, and that is, again, a very important point to make, the support measures are instrumental, in terms of medium-term growth and protecting the productive capacity of the economy. What we also need to recognize is the fiscal deficits are of a very special kind. They reflect, one, the decline in economic activity, which we are projecting to rebound, they are reflecting additional healthcare expenditures, which we would expect to be eliminated, and they reflect a massive amount of support for workers and for firms, which also will unwind themselves, when the crisis and the recovery has taken hold. So, we project that, also given the low-income environment, that debt levels, after this crisis, will start falling, over the medium-term as a percent of GDP.

That doesn't mean that nothing needs to be done. We have been advocating that countries should put in place plans for the medium-term, on how they will reestablish fiscal buffers, so that we are ready for another crisis, that we have fiscal room, in order to respond to any shocks to the economy. So, in addition to putting debt on a downward trajectory, we also need to build buffers, so that the economies, in the future, again, can respond to a crisis.

MS. LOUIS: On monetary policy -- the ECB has embarked on a very accommodative monetary policy stance. Are you concerned what's going to happen when the ECB's program ends?

MR. KAMMER: What saw, indeed, is a very highly accommodative stance of the ECB, and also other central banks in the region. When we are looking forward, we are seeing weak economic activity, we're seeing a long-lasting ascent toward the full protective potential, again, of the economy, and given this weakness of activity, we expect monetary policy in Europe to remain highly accommodative for the foreseeable future. There is no pressure on inflation, and, therefore, we expect monetary policy to stay accommodative for a long time. Having said that, the European countries have also access to lots of facilities by the E.U., in terms of dealing with financing needs, and what we have seen, so far, all countries have access to the markets and can obtain financing at low cost.

MS. LOUIS: Thank you. I'd like to shift to Spain right now. We have a question from Jose who's on Webex from El Economista. He's going to ask his question via Webex. Jose, please go ahead.

QUESTIONER: Thank you very much for taking the question. I would like to ask if in the projections in the WEO for Spain it's already included the second wave of infections that is going on right now. And then I would like to know how important it's that the European funds get disbursed in a timely manner for Spain under the current circumstances to make sure that there's a recovery coming in 2021?

MR. KAMMER: In all our projections for the European countries, including for Spain, we have included the economic impact of the second wave, including the economic response to the second wave. So that is included in our forecast already.

As I said, these forecasts are very uncertain. Depending, of course, on how the pandemic evolves, how the economic impact, therefore, will be and how programs are going to be adapted, but we have included that. Our assumption is that the second wave will be dealt with differently from the first wave. We've learned a lot about the virus. We learned a lot about how best to respond to the virus, and so we expect that local containment measures, social distancing will do a large part of dealing with the second wave. This may turn out to be very different, and of course, if this turns out very different, than the economic impact would be larger. Of course, we also have some upside risks - if a vaccine is in place and therapeutics are in place, we may see a quicker recovery then we actually expect.

Under the European Recovery Fund this is, indeed, a very substantial support instrument for the European Union countries. On average, the recovery funds will provide 3 percent of GDP in grants. We expect that the growth impact for countries on average will be between 0.75 percent. It could be higher, going up to 1.5 percent, depending on how these funds are being absorbed. So, this is an important additional instrument available in addition to national plans.

So, we are definitely suggesting that these funds should be made available as soon as possible. We are very confident this is going to happen. Having said this, however, Spain, like other European countries, have access to financial markets at very low financing costs. So, there is no financing constraints in moving forward with national recovery plans. And I know with Spain, that Spain is ready with a number of investment projects, and Spain certainly, as soon as these funds arrive will be able to move on fairly quickly.

With some other European countries, one of the issues is can these funds be absorbed efficiently and effectively and also quickly, and these preparations are in train, and this is the other part that countries are ready to actually then absorb these funds and undertake the public investments.

MS. LOUIS: Thank you. We also have another question coming in now from Trent Murray from CGTN Europe. Trent, please go ahead.

QUESTIONER: Thank you very much. The goal posts, as was said, are clearly shifting here quite quickly, particularly as additional lockdown measures are really being brought in daily. I just want to know, you said the impact of the second wave has been incorporated into your forecast, but have you been contacted by any European governments to ask for your help in modeling the economic impact for them specifically if there is second or third lockdowns in some of the countries?

MR. KAMMER: This is a very interesting question. Usually what we see as economists we deal with economic shocks and we know how to model them and this is the standard fair we have. In these circumstances, actually we rely very much on epidemiologists on how to model the pandemic, and how the virus response is going to evolve, and we are then building the bridge. So, our forecast in the WEO and in the REO we are using these models. And we are discussing, of course, our projections with our partners when we are making these forecasts, and we are sharing our models with them.

I should also say, despite all of the modeling, there's a lot of uncertainty with regard to these forecasts. The pandemic evolves. The response to the crisis evolves as we learn more, and as part of that, also the economic impact and our assessment of the economic impact will evolve.

MS. LOUIS: Thank you. Staying on Spain, I have a quick last question on Spain from El Pais, Luis Doncel. Can you help explain why Spanish GDP will be the most affected this year compared to other advanced economies in Europe?

MR. KAMMER: With regard to the effect on economies, it varies quite a bit across Europe, and the explanation is, one, how the virus actually has impacted the country, and that is very different from country to country. But it also then depends on the structure of the economy because certain sectors are more affected, hospitality sectors, services in general are more affected by the virus. And that explains why we see so much deviation in terms of the impact of the virus in Europe.

For Spain, what it means is Spain has a large tourism sector so that's a marker why the impact on economic growth is larger in Spain. Second, Spain has a lot of small and medium enterprises. That is another marker which increases the economic impact because these companies have more constraints than larger companies. And finally, Spain has a large number of temporary employment contracts, and so the impact on employment is larger in Spain than it is in other countries.

MS. LOUIS: Switching gears now to Portugal. We have a question that came in from LUSA Portuguese News Agency, Jorge Eusébio. He asked, comparing with the Portuguese government's forecasts, the IMF expects a worse outcome in terms of GDP for Portugal this year but a better one for next year. So, what is the base of your projections, and why are you more pessimistic for this year?

MR. KAMMER: Again, I should make the general disclaimer that there is a lot of uncertainty in these forecasts. Having said this, for Portugal, one of the assessments is how tourism is going to be affected because Portugal has a large tourism industry. It means there will be domestic effects. But Portugal is also very much affected by the travel restrictions and restriction in other countries. So, tourism is one of these sectors which we have been studying very closely on how it's going to be affected. And the second part with regard to Portugal, is developments in Spain, which affect economic developments in Portugal as well.

In our projections we assume a more gradual recovery than the Portuguese government for the second half, but then also we assume a stronger rebound in 2021. I would say these are marginal differences, sometimes they express themselves in larger differences in the numbers, but there's a lot of uncertainty with regard to all of the numbers which we are talking about.

MS. LOUIS: Thank you, Alfred. I see we have on Webex another question coming in from Bosnia and Herzegovina. He has a question on the Western Balkans. Izmir, please go ahead.

QUESTIONER: Thank you for taking my question. What is your current view on the Western Balkans, and what are your projections for this year and the next year, when it comes to the region, and especially because we have a huge rise of numbers, when it comes to Corona, and many restrictions are coming in? Thank you.

MR. KAMMER: Countries in the region have been dealing exceptionally well with regard to the first wave. They took measures quickly, and the first wave was really stemmed, and now, similar to what happens in the rest of Europe, the second wave is much more intense, in terms of infections, not in terms of mortality rates, yet. So, this will impact on the economic developments in the Western Balkan countries.

The other development, which is going to be important, is what is going to happen with tourism, travel restrictions, which will also have an impact on the region. What we see, so far, is that the policy response, in terms of supporting the economies in all of the countries, has been sizeable and undertaken very decisively, and that is also going to help, in terms of going through the second wave. And we're expecting, again, a recovery of economic activity in 2021.

MS. LOUIS: Thank you. I'm going to switch, now, to an online question. We've got one coming in from Ukraine, Yaroslav Dovgopol, from Ukrinform news agency. He asks, in the latest WEO, the IMF has improved the forecast for Ukraine's real GDP in 2020, from a contraction of 8.2 percent in June, to a contraction of 7.2 percent currently. So, what influenced this recalculation?

MR. KAMMER: This reflects a better outturn in the second quarter. We saw that retail trade and consumption were rebounding faster than we expected, and, therefore, we have upgraded our forecast from our June projections, but we should also be aware that the downside risks remain exceptionally large. We need to see how the second wave is going to develop, what the impact on the economy and on corporate balance sheets will be, and that is something which we are closely monitoring together with the Ukrainian government.

MS. LOUIS: Another follow up from Yaroslav. He asks about an update on the Standby Program for Ukraine. He said that the Ukraine government has asked repeatedly for us to send the next disbursement, perhaps by the end of this year. How do we assess the prospects for the next steps for the Standby Program?

MR. KAMMER: We started a Standby Arrangement of $5 billion with Ukraine in June, that is supporting macroeconomic stability, and it's also supporting the response to the Corona Crisis and a number of reforms to be undertaken, over this 18-month period. So we have been working very closely with the government over the last few months, in terms of implementing reforms, but also with regard to their commitments under the memorandum and achieving the objectives, which we have established in the program. We are working closely together with them, in terms of implementing and maintaining these commitments and this engagement is going to continue.

MS. LOUIS: Thank you so much, Alfred. With that, I'm afraid we are going to have to wrap up, but if you have any further questions, feel free to reach us bilaterally. Thank you, and I hope you have a good day. Take care.

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