Transcript of April 2021 European Department Press Briefing
IMF News, April 14, 2021
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- Published: April 14, 2021
Macroeconomic outlook and projections
- Europe’s GDP growth is projected to rebound by 4.5 and 3.9 percent this and next year, respectively.
- Europe’s output is expected to return to its 2019 level by 2022 but remain below the level projected before the pandemic (economic scarring).
- Permanent output losses for Europe are estimated at 1.5 percent (contrast: 12 percent during the global financial crisis).
- The recovery is forecast to strengthen if vaccines are widely available in Europe during 2021 and across Europe during 2022; timing and speed of rollout are key uncertainties.
- Pent-up demand from household savings accumulated during lockdowns could support recovery, but increases in precautionary savings are also expected; the net effect is uncertain.
Policy priorities and recommended shifts
- Number one priority: boost vaccine production and distribution, given Europe’s role as a hub for vaccine production and exports.
- Continue lifeline support while shifting policy focus:
- Labor market policies: keep lifelines open but gradually shift toward helping workers move to expanding sectors; increase targeting toward viable firms and strengthen firms’ solvency.
- Financial policies: enable banks to keep credit flowing while ensuring adequate provisioning for problem loans.
- Fiscal policy: play an increasing role as monetary policy becomes less effective with interest rates at their lowest.
- Recommended additional fiscal measures (Regional Economic Outlook Update for Europe):
- Transfers for households in need.
- Hiring subsidies to reintegrate the unemployed faster.
- Temporary tax incentives to bring forward private investment.
- Equity support schemes for viable firms.
- Fiscal support scenario: additional support set at 3 percent of GDP over 2021−'22 could lift GDP by about 2 percent by 2022; over the medium term, robust supply effects would cut the impact of scarring by more than half.
- Redeploy fiscal support to accelerate transformation through infrastructure investment in green and digital technologies; Next Generation EU plan cited as critical help.
Fiscal frameworks, consolidation, and debt dynamics
- Next Generation EU fund:
- Viewed as an important third-phase crisis response, targeted to countries most affected (tourism-dependent and lower-income).
- Grant component for some countries is more than 10 percent of GDP.
- Size of support currently seen as sufficient; timely development and implementation of national plans is crucial.
- Example: Spain has prefinanced some expenditures to start implementation.
- Stability and Growth Pact:
- Current rules are too complex, difficult to monitor and communicate, and allow substantial discretionary application.
- Recommendation: simplify rules, consider an expenditure growth rule with a debt anchor to improve monitoring, enforcement, and communication.
- Need to reassess guidance in light of higher debt levels post-pandemic and spending priorities during consolidation.
- Consolidation timing and approach:
- No fixed timing for consolidation phases; policies should adjust to pandemic evolution.
- Fiscal support needs to continue in 2021 and 2022 but be reoriented to support reallocation, solvency, and worker mobility.
- Passive unwinding of deficits will contribute to reduction in debt ratios, but active fiscal adjustment will be needed to rebuild buffers for future crises.
- Debt dynamics and Greece:
- Greek debt already above 200 percent of GDP.
- Higher debt servicing costs are projected to be lower than earlier projections due to lower inflation and low interest rates.
- Emphasis on growth to generate revenue and on establishing fiscal buffers; Greece’s situation is similar to other high-debt European countries.
Financial sector, corporate solvency, and moratoria
- Moratoria, guarantees, lifelines and income support have sheltered firms and households; phase-out will reveal true viability of companies.
- Banks must perform forward-looking assessments of corporate viability and provision for potential losses.
- Estimated enterprise equity gap for Europe: 2 to 3 percent of GDP.
- Public–private plans to close equity gaps underway in a number of governments.
- Banking systems entered the crisis relatively resilient; expected capital losses under baseline are relatively small, but close monitoring is required.
Labor markets and structural reforms (country examples)
- Spain:
- Hard hit by COVID; Next Generation EU funds (e.g., announced €70 billion) are important for green and digital investment and productivity-enhancing structural reform.
- Urgent reforms: address labor market duality, reduce reliance on temporary contracts, expand training and re-skilling, adjust education curricula to be more relevant for businesses, and focus on youth employment to avoid a jobless recovery.
- IMF notes unemployment may not return to pre-COVID levels until 2026 (WEO reference).
- Spain plans: €13 billion for promoting electric vehicles and €7 billion for home renovation and urban regeneration — IMF supports these green and modernization investments and emphasizes complementary policies such as carbon pricing.
- Portugal and moratoria:
- High proportions of credits in moratoria require careful unwinding; banks must assess viability and provision accordingly.
Financial stability and asset price risks
- Prolonged accommodative monetary policy is necessary to support the economy but raises financial stability risks.
- Signs of froth:
- Housing price-to-income ratios are very high in metropolitan areas of Germany, France, and The Netherlands.
- Credit spreads are exceptionally low.
- Risks include potential repricing if the pandemic persists, recovery underperforms, or interest rates rise faster than expected; these risks should be monitored closely.
Country notes and other observations
- Russia:
- Bank of Russia increased interest rates for the first time since 2018, citing faster-than-expected inflation; IMF expects inflation uptick to be temporary and not to materially affect growth forecast.
- IMF’s assessment of prior large fiscal and monetary support:
- The rapid and large-scale fiscal and monetary response in 2020 (and continuing in 2021) preserved firms and jobs and prevented cascading bankruptcies; this response materially limited permanent output losses relative to the global financial crisis.
Source: Transcript of April 14, 2021, European Department Press Briefing, IMF Communications Department.