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.