December 6, 2021
PRESS OFFICER: Meera Louis
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Speakers:
Kristalina Georgieva, Managing Director, IMF
Alfred Kammer, Director European Department, IMF
Moderator: Alistair Thomson, Chief of Media Relations, IMF
Ms. GEORGIEVA: Good evening to all. Our apologies for the timing of this press conference moving. There was a good reason - we had a very engaged discussion with the Eurogroup as I presented our assessment of the economic outlook for the euro area, our policy advice. What is the main message? It's a good one.
The euro area economy is recovering rapidly - thanks to high vaccination levels, continued forceful policy support and increased consumer and business adaptation to the pandemic. Following a sharp contraction of six and a half percent in 2020, euro area output has rebounded strongly and is expected to exceed its pre-crisis level in the fourth quarter of 2021. This is a major achievement and a testament to effective policies. But, although the recovery is strong, it will likely be uneven across countries and sectors. This can increase inequality and disparities across and within countries. And even more significant, uncertainty remains exceptionally high and is largely related to the evolution and legacies of the pandemic. We are all familiar with the renewed concerns about newer and more transmissible COVID-19 variants. They highlight the continuing risk that the pandemic is posing to the recovery. At the same time, if we have faster than expected adjustment to Covid-19 and the acceleration of automation and digitalization in the wake of pandemic continues to progress, then we can see boost to productivity and potential growth.
A topic that is on everybody's mind - underlying inflation in the euro area is projected to remain weak despite the recent price increases. Higher inflation in 2021 has been largely driven by base effects from last year's low oil prices, which were amplified by dwindling reserves of natural gas and transitory factors such as the German V.A.T. expiration. We project inflation to decline through 2022 as these factors dissipate and to remain below the ECB's two percent target in the medium term. This is predicated, however, on limited second round effects from currently high inflation driven, given the persistence of aggregate labor market slack. In other words, are we going to see pressures through wages? But upside inflation risks have undoubtedly increased. And on that basis of where we are, what the outlook is? Let me walk you through the policy recommendations in support of the recovery.
Here, the overarching message is that policy agility and coordination remain key for the post-pandemic recovery. Policies have so far worked well together to dampen the effect of the pandemic on the real economy. Going forward, the sequencing and speed of policy normalization should carefully consider the interactions of these policies to continue supporting the recovery and limiting scarring. Starting from fiscal policy, it should remain supportive, but become increasingly targeted as the recovery continues. The accommodative fiscal stance embedded in the euro area countries 2022 budgets is consistent with supporting the recovery and limiting scarring. At the same time, as the recovery is taking hold, public expenditures should focus on supporting the most vulnerable and on high quality investment. Once the expansion is firm, countries will need to gradually rebuild fiscal buffers, and the timing of this will depend on individual country circumstances. What comes very handy is the next generation European Union (EU) package. It supports this fiscal transition. They play a significant role in the green and digital transitions. They can boost productivity growth and offset greater spending restraint, especially in high-debt countries. But using the edgy EU funds, well, is not the small task. Policymakers will have to navigate difficult tradeoffs. On one hand, there would be pressure to move fast and disburse in a timely manner. On another hand, it is important to ensure that the Next Generation EU Funds (NGEU) investments and reforms are of high quality and implemented in line with national recovery plans. EU fiscal rules should be reformed to reflect the post-pandemic reality. The application of the current fiscal rules would require unrealistically large and counter-productive adjustments by some high-debt countries.
Turning to monetary policy, the key challenge here, is to maintain clear and effective communication in the face of extraordinary uncertainty. As underlying inflation dynamics are expected to remain weak over the medium term, the European Central Bank (ECB) should look through transitory inflation pressures and maintain an accommodative monetary policy stance, and it will need to clarify soon how this could be achieved given the upcoming expiration of the pandemic emergency purchase program and the third round of the targeted longer term refinancing operations. We look forward to the ECB Governing Council's decision later this month. But should high inflation prove to be more durable than expected, the ECB is well equipped to adjust course and scale down both conventional and unconventional monetary policy support. The conclusion of the ECB Monetary Policy Strategy Review is proving to be timely. We welcome the symmetric two percent inflation target. The strengthened link between monetary and financial analysis and plans to enhance climate related monitoring disclosure and risks.
Moving to the financial sector. The good news is that the impact of the pandemic on banks and markets has so far been smaller than we initially feared. But vigilance remains crucial. The results of the July European Banking Authority (EBA) stress test indicate that European banks remain resilient even in an adverse macroeconomic scenario. But we need to remember that losses are normally realized with a lag after recession, and therefore banks need to maintain sizable safety buffers, while supervisors need to continue making sure that loss recognition is sufficiently forward-looking and provisioning levels are appropriate. A continued, gradual normalization of financial sector policies is appropriate. Normalizing overtime crisis related prudential accommodations for bank in accordance with pre-announced timelines. A tightening of macro-prudential stance is necessary to increase resilience in the face of stretched real-estate market valuations since some jurisdictions, especially those with elevated household debt. And we need a renewed push for completion of the banking union - it is crucial. So, we have further improvements in bank supervision and resolution to create a truly single market in banking, which ultimately would be underpinned by common the European deposit insurance. As for structural policies? And this is where the new generation EU comes so handy, supporting ambitious reforms for structural transformations, especially in the digital and the green area, to underpin these transitions. As the recovery solidifies, the focus on labor market policies needs to shift to facilitating labor reallocation toward expanding industries, while protecting the most vulnerable - those who may find it difficult to transition to new jobs or even enter the labor market. EU policies to address climate change are critical to accelerate the green transition. We cheer the Fit for 55 agenda. It is ambitious and it is also appropriately integrating carbon pricing, giving it much weight while protecting the most vulnerable households.
Let me finish with an area where Europe has been standing up, especially on the climate side. European leadership on global issues, it remains critical. In addition to leading on climate, it is important to continue engagement with major trading partners to address underlying sources of global trade tensions and the finalization of the proposed global corporate minimum income tax and importantly as one of the leading exporters of COVID 19 vaccines and a donor to COVAX, the EU should continue its efforts to press for vaccinating the world and to increasing global vaccine production, including diversifying it in parts of the world that have been lacking any capacity, like Africa. I cannot stress enough how much vaccine action on the back on vaccinations remains a key economic policy this year and next.
Let me conclude by saying that despite the renewed surge in COVID-19 cases in several countries, we are now in a much better place than we were last year - thanks to high vaccination levels and thanks to continued forceful policy support. Activity is normalizing fast and the extent of economic scarring, although it varies across sectors and countries, is projected to be significantly below the levels we anticipated a year ago. The key policy challenge is to sustain the recovery in the face of still elevated uncertainty and new headwinds to growth. And the collaboration and struck solidarity within the eurozone, more broadly in the EU, we can see the euro area building forward a better economy that is more resilient, more sustainable, more inclusive. If we started from a positive and we end on a positive note, thank you.
MODERATOR: Now for questions for those in the room, I'll ask you to raise your hands and use the microphones at each side of the room, please. And for those participating via Zoom, if you could use the virtual hand-raised function, then I'll be able to see that you're wanting to ask a question.
QUESTION: I have two questions concerning your proposal of the fiscal framework should be reformed. You suggest that a time bound transition arrangement would be desirable if the new rules are not in place when the general escape clause is activated. What are the main elements of this transitional arrangement? Second, do you think that the reference value of debt to GDP should increase to 100 percent? And a question on Greece. Greece is planning to pay back the last tranche of the IMF loan. So, in a few months, what will be the role of the IMF in Greece after this payment is done? Thank you.
Ms. GEORGIEVA: Thank you. Let me start by stressing that in terms of the. Review and revamp of the fiscal rules, we ideally would prefer that it is done expeditiously. And then in this case, there would be no need of transitional arrangements. But given the risk that the absence of a transitional arrangement may create, especially for countries with a higher level of debt, then they would find it counterproductive and very disruptive of the recovery if they were to then go back to the rules in 2023. We recommend thinking through and having in place an option of transitional arrangement. The clause of this transitional arrangement is to the final revision of the rules is the better. And what are the features that we see as very important? Number one, simplification. Number 2. implement ability. Number 3. Strong national ownership. We see a very important role for national fiscal councils and also for the European Fiscal Board. So, there is more upfront good guidance and it is owned by countries. And in this case, the commission would have to step forward only if there are significant deviations. We have not yet finalized our own analysis of what might be a good package, but we have identified one particular element, that is to make sure that the fiscal rules do not suffocate much needed investments, especially in the new climate economy. And at this point, what we recommend is a green investment fund at the EU level that would allow most efficient deployment of resources, both in terms of bringing down emissions and in terms of satisfying the domestic need for investments. On your question about the percentage our team is working on this, we are going to present a more detailed view. So, stay tuned. It will come. Mr Kammer, right here is nodding that it will come. It's his department is working on that.
On Greece. I'm delighted that Greece is doing so well. It is a great achievement of the country. So, paying the fund bank brings this symbolic closure of a difficult period for the Greek people and for the economy of Greece. Our role will continue on surveillance and policy advice. It will continue on providing services to Greece as the country finds them to be useful, and it will continue in drawing on Greek expertise, as well as on the support from Greece for the fund, at a time, when we recognize we do serve as a transmission line of experience in a very difficult time because, this is a crisis like no other and coming out of it is like no other. And, also, that we can be a transmission line of support from the countries that are doing better to those that are falling behind that are victims of this growing divergence we observe. So, as being Greek, you must be very proud of what Greece has achieved.
MODERATOR: Now we'll go to a question on Zoom.
QUESTION: Italy is no longer the country in the Euro Area with the slowest growth rate. The question is how long do you think it could last and will the change in the leadership of the country stop or slow this recovery?
Ms. GEORGIEVA: Congratulations to Italy for aiming and achieving this year higher than average growth rate - 5.8 percent is what we project for 2021 against five percent for the euro area. We do see the Italian government putting forward a very sound foundation for Italy's sustainable and robust growth. We look at the 2022 budget. It has the right proportion of reforms and investments. We look at the recovery plan of Italy. It is exactly the same. It has a very robust balance between reforms, especially structural reforms and investments, and we think that this is a medium-term strategy that is now embraced by the country and endorsed by the European Commission. We have one observation on the budget that it is projecting a reduction in income tax and am increase in spending, not investment spending, but overall social spending. Although this is good. The question would be, can it be sustained? So, in medium term, we hope to see those kind of decisions to be made in a comprehensive way and with the need to have that high growth. And I'm quite confident that the direction to travel is set. So, go Italy, go.
MODERATOR: We'll go to another online question.
QUESTION: Do you think that the ECB is doing the right thing in maintaining such a relaxed monetary policy? Shouldn't the ECB worry about inflation? And whart are the risks of the divergence between the economy policies of the Fed and the ECB? Thank you very much.
Ms. GEORGIEVA: Thank you very much for this question. It is one that has been discussed quite intensively just an hour ago in the Eurogroup meeting. We do see the ECB's stance as being appropriate. It is data driven, based on the transitory nature of factors that are pushing prices up in the eurozone supply chain disruptions, high energy prices and the fact that we have in the eurozone, some temporary changes like the V.A.T. in Germany. So, we do agree that the ECB should be looking through this transitory factors. And that it should continue with a supportive stance so as to support the recovery. It is very important to also look at the inflation expectations. They are kind of near two percent below, but near two percent. And that also tells us that inflation expectations remain well anchored. This being said, as I highlighted in my opening remarks, we are at a time of high uncertainty. ECB has to be watchful. It has to be vigilant and be prepared to make course adjustment, which ECB has all the capacity and instruments to do. And I am very confident that not only it would be identified in a timely manner, but that there would be clear communication on intentions of ECB.
With regard to the ECB and the Fed. Let me first do a small advertisement of a blog that our Chief Economist, Gita Gopinath and our Financial Counselor Tobias Adrian, just published on inflation and it makes three points. One: Heterogeneous conditions, we have very different inflation drivers in different places that require monetary policy to be responsive to country specific circumstances. Two: With a strong recovery in the US and a stronger force of inflationary movements, in other words, more pressure on prices in the US., the Fed is right to consider tapering asset purchases, and it is possible that we would see a move on the part of a rate increase sooner than we originally anticipated. That does not mean that the ECB should do the same because conditions in the US and conditions in the eurozone are different, and actually if you decide to look further to Japan. Japan is way under their inflation target. In other words, each country has to decide on monetary policy according to conditions in the country and to finish. And to finish. yes, it is very likely to see that the Fed and ECB are taking somewhat different. But that is the right thing to do because of different circumstances.
Thank you. Unless there are any more questions here in the room, we have one question that we received by email from somebody who was unable to join the live stream.
QUESTION: What is your view on the prospects for growth for the eurozone, considering the threat of the Omicron variant would be great?
Ms. GEORGIEVA: Obviously, there are a lot of unknowns in how exactly the Omicron variant is going to impact the recovery. What we have been cautioning for a long time is that still, it is the evolution of the pandemic and the arrival of new variants that presents the most significant threat to the recovery. With regard to the eurozone, let me stress that eurozone's performance is strong. Five percent growth rate projected for this year, 4.3 percent projected for next year, but the increase in infections is leading to some weakening of growth prospects for the fourth quarter, possibly for the first quarter of next year. And in these conditions comes January, when we will be presenting our updated projections. A modest revision downward of growth projections may be in the cards.
