Transcript

Transcript of European Department April 2024 Press Briefing

April 19, 2024

INTERNATIONAL MONETARY FUND

EUR (EUROPEAN DEPARTMENT) PRESS BRIEFING:

ECONOMIC OUTLOOK IN EUROPE

(182946)

Washington, D.C.

Friday, April 19, 2024

PARTICIPANTS:

 ALFRED KAMMER

      Director, European Department

      International Monetary Fund

      HELGE BERGER

 Deputy Director, European Department

 International Monetary Fund

  OYA CELASUN

 Deputy Director, European Department

 International Monetary Fund

 CAMILA PEREZ

      Senior Communications Officer

      International Monetary Fund

*  *  *  *  *

P R O C E E D I N G S

(10:00 a.m.)

1. PÉREZ:  Hello everyone.  Thank you for joining today's press conference on the release of the European Economic Outlook.  My name is Camila Pérez.  I am a Communications Officer with the IMF.  Here we are with Alfred Kammer.  Alfred is the Director of the European Department.  We're also here with Oya Celasun and Helge Berger, both Deputy Directors at the European Department of the IMF.  Before we start, a reminder that the report on the European Outlook is available on imf.org.  We will get started with Alfred's opening remarks and then we'll take your questions.  Alfred?
2. KAMMER: Thank you.  Good morning and good afternoon to everybody in Europe.  I had some prepared opening remarks, such as try to summarize that.  First, not to forget we went through two historic crises with the pandemic and the energy security issue caused by Russia's invasion of Ukraine.  Policymakers did a remarkable job to end up where we are, but the population clearly is still in pain.  What we are now forecasting is a soft landing, but that is not guaranteed.  What we saw is a rapid disinflation over the last year and we are now forecasting a recovery in 2024, which gains speed in 2025.  I said it's not granted because a lot of things need to go right.  One of them is the labor market.  It needs to just be right to deliver the robustness and the wage growth in order to generate real income increases, purchasing power for the population to support the consumption-driven recovery this year.  If it's too much, we're getting too much inflation, and that would also intervene again on the monetary policy side. 

Next year, we are expecting an investment driven recovery.  We are expecting monetary policy to start on the policy rate side, ECB to undertake rate cuts starting from June on, 26 quarterly, 25 percentage points rate cuts, to end up in neutral in September 2025. For our Eastern European, Central and Southeastern European countries, we also see rate cuts ahead, but it will be more gradually in terms of what we are seeing in achieving the inflation target.  In the Euro area, we expect the inflation target to be reached in the first half and in CESEE countries, as we call them, only in 2026. 

Fiscal policy has been supporting this inflation effort over the last year through consolidation, mostly by cutting out energy packages, cost of living packages.  We now need to shift to a medium-term focus.  That means to ensure debt sustainability, build up fiscal buffers for future shocks, but also be ready to expand spending pressures, which we are estimating to reach 5.5 percent for advanced European economies annually by 2050 and 8.5 percent of GDP for CESEE -- for emerging European countries.  Those are large numbers.  Therefore, action needs to be taken on the fiscal side to accommodate these spending needs.  They're coming from climate, defense, pensions, higher interest rates. 

When we are now looking at the medium-term growth trajectory, that remains rather modest.  We looked at where Europe is currently, with regard to the global frontier on output and welfare.  When you're looking at the global frontier in terms of GDP per capita, in purchasing power terms, the leader is the U.S.  Europe is one third lower than the U.S.  That has not always been the case.  And when we are looking at the explanatory factors, where this is coming from, this comes mainly from lower productivity in Europe versus the U.S.  That means Europe needs to focus on productivity in order to close this gap to the U.S.  And productivity growth projected will face a lot of headwinds and is not able to close this gap in the forecast horizon.  Therefore, additional actions are required. 

And our recommendation to Europe is to focus on building out and deepening the single market.  Single market was a growth booster in the 90s.  There is much to do in terms of further integration.  It is not just capital markets and banking union, it is border infrastructure, where there's still frictions, labor mobility, portability of education certificates, a whole host of issues which can be done, in addition to what we are recommending on the domestic and national sites, on structural reforms.

 When we did a study and the bottom line was if we reduce those barriers in the single market by 10 percentage points, the boost to GDP will be 7 percent in terms of level.  That is a large number.  So this needs to be done and it needs to be done with urgency.  Deepening of the single market will also be a response to the more difficult geoeconomic environment because you are going to build resilience in this single market by deepening it and you're making the economy more robust.  And we had a big geoeconomic shock with Russia's invasion of Ukraine and the energy security issues arising in Europe.  Robustness, resilience is a necessary ingredient in going forward. 

What not to do?  Trade protectionism by all, subsidy wars by all, would lower global welfare.  The global machine in producing prosperity over the last decades was driven by trade, the free flow of goods, services, and capital.  If we stop that engine, it will be a disaster for the global populations.  So that is not the right way to go.  For Europe, in particular, if there are subsidies which are being suggested, they should be limited to market failures.  They should be temporary, targeted, and consistent.  And importantly, they need to be at the EU level and not at the national level, because that would be costly in terms of allocative efficiency. 

So, in a nutshell, this is our main policy advice for Europe.  Lots to do.  Europe has changed dramatically over the last decade.  So Europe can do it, but it requires a lot of political will in order to get there.  Thank you.

1. PÉREZ: Thanks, Alfred.  We will get started with questions in the room.  The gentleman in the third row, please.

     QUESTIONER:  Hi, thank you for doing this.  I just wanted a clarification and then a question.  The clarification is, if I get it well, you said that lowering the internal barriers in the single market by about 10 percent will make the GDP grow by 7 percent.  And the question is, in the outlook you mentioned that uncoordinated policy response to trade fragmentation could weaken the European single market.  That there are already subsidy measures imposed by EU countries that other EU members increased by over 50 percent by the onset of the crisis.  Could you elaborate this point, please? 

1. KAMMER: On the first question, to reconfirm, a ten percentage point cut in internal barriers will increase the level of GDP by 7 percent. This is quite a number. And one of the issues in the European market is that you cannot operate to scale and that's very different from the market in the U.S.  You need to basically have approaches to 27 individual markets, including on bankruptcy, et cetera.  So, that will create lots of improvements in productivity if these things are harmonized or barriers are being taken out. 

Our concern is with regard to subsidies, which have grown over the last few years in the EU at the national level, as they were allowed under the pandemic response function.  What you're seeing is that the larger and the richer European countries can undertake those subsidies, but overall, they are going to hurt Europe.  They are not only costly, but they are also affecting allocative efficiency because capital will go to these companies, capital will go to these sectors, and that leads to a suboptimal outcome in terms of output.  Therefore, our recommendation - eliminate barriers in the internal market.  Don't focus on subsidies.  And if subsidies, they should be at the EU level in order not to fray the single market.

1. PÉREZ: We're going to stay in the room.  I see some of you are online.  We'll get to you.  We're going to take a few more questions here.  Third row here, please. 

     QUESTIONER:  Larry Elliot of the Guardian, question about the U.K.  The U.K. government has cut taxes twice in the last six months and there's reports that it wants to cut taxes again before the election.  In the IMF's view, will these tax cuts have to be paid for by tax increases or spending cuts after the election?

1. PÉREZ: Thanks, Larry.  We're going to see if there any other questions on the U.K.?  The lady here on the second row, please.

     QUESTIONER:  Szu Chan from the Telegraph.  Our Prime Minister today has announced proposals to try to stem a rise in the number of people claiming sickness benefits.  Do you think the U.K. has a problem with economic inactivity and what should be done to help these people, particularly those suffering from mental health conditions?

1. PÉREZ:  One more question here.  The gentleman in the third row, please.

          QUESTIONER:  Alex Brummer from the Daily Mail.  This is again in the tax area.  The Managing Director, in her address earlier in the week or in her comments earlier in the week, referred to measures to increase productivity.  And I noticed that there was no reference at all to tax reductions in her comments.  And I just wondered if you felt there is a role for tax reductions in improving productivity and outcomes and growth.  And secondly, just going back to your comments about fragmentation subsidies, I just was wondering whether you felt it was possible for Europe and the U.K., if we include ourselves in the continent, which we are to, to resist the pressures which are coming from the United States, where all kinds of subsidies are being applied, chip production, climate change subsidies, a whole series of measures which seem to be anti-competitive, including new steel tariffs?

1. PÉREZ:  On the U.K.  Helge, do you want to talk to it?
2. BERGER:  Yeah, why don't I start with U.K.  So, on the disability issue -- so let me step back a moment and say just how important labor supply has been for growth in the U.K.  If you look back at the last 10 years, actually most of the growth momentum has come from population growth or, you know, an expanding labor force, including from immigration.  And so in that context, if you have an increase in inactivity rates, there's a concern also for growth.  And so, that's the way we look at this.  There are two elements to this.  One is the number of people that could be working.  The other element is productivity.  If people are ill but have to work, then they may be less productive than otherwise. 

So I think it is an area that deserves the attention of policymakers.  So we're happy that this is a focus point.  In terms of what needs to be done, we are going to look at this more closely during the Article IV, which you may know is coming to the U.K in May.  Certainly, one area to think about is the quality of healthcare that is being provided to people.  Another element may have to do with the way disability is supported.  We are taking note of these proposals and we look more into this going forward.  So, thanks for this question. 

I would have been disappointed if nobody had asked about tax cuts in the U.K.  As you know, we're following this closely.  The tax proposals that may come in the future, including in the fall budget, are a little bit out there for us.  So we would rather not speculate on their particular form or shape, but we will of course consider them and discuss them as we get closer.  The broader point is that there is an effort underway in the U.K. to provide fiscal consolidation, which we think is appropriate given the trajectory of public debt.  But there's also significant pressure in the medium-term on the budget, coming both from the expenses, side spending on health services, for example.  We already discussed this a little bit.  There's a need for infrastructure investment and so on.  And so with all these things on the table, there's a need to look for a fiscal space.  And I think we're going to have to look both at revenue measures and expenditure measures going forward.  Now, that third question, I sense was more of a larger perspective.

1. KAMMER:  Yeah, maybe second part first.  With regard to the subsidy raise, we document in the report that tit for tat subsidies and retaliation is welfare-reducing for both.  So we are strongly appealing to all stakeholders in the multilateral rules based system to maintain it because it has served us well.  There will always be frictions.  They should be resolved through cooperative solutions and through WTO.  So, I think that's important in order to continue getting the benefits from this globalized economy that we have.

When it comes to taxes, in the report, we have a variety of suggestions actually to make the tax system more efficient and more effective.  Moving away from labor taxes, which are a disincentive to work.  Moving more to wealth taxes and property taxes, where there is a lot of room in many countries, in order to generate more revenue.  Overall, what we see for Europe is, first, Europe has decided about a welfare state model that needs to be financed, and for that you need to have a solid tax base.  Second, we see further spending pressures coming up, and as I said for advanced European economies, by 2050, this will be annually 5.5 percent of GDP.  For that, again, you need to, in some of the countries, increase taxes.  Some other countries will be able to do some spending reprioritization. 

But overall, it will be a mix of both.  And when you're looking at the efficiency of tax system, much can be done in order to generate more revenue, including by eliminating loopholes, tax exemptions, et cetera.  So it doesn't need to be always an increase in tax rates.  That's probably a suggestion for Eastern European and Central European countries.  But for Western European countries, much rely in increasing demand effectiveness of the taxes.

1. PÉREZ:  I think we can go online to WebEx. Please go ahead.

          QUESTIONER:  Thank you for doing this. And my question: President of Russia Vladimir Putin has directed the government to ensure that Russia ascends into the top four largest economies globally by GDP at purchasing power parity before 2030.  Does the IMF expect Russia to achieve this goal?  Thank you.

1. PÉREZ: Thank you.  Do we have any other questions on Russia forecast now?
2. KAMMER: So what we have been forecasting for Russia is actually growth this year, and we also have seen quite strong growth last year, that was explained by economic activity has remained strong because oil export volumes remained while prices were high.  We saw a rebound in consumptions, labor markets are strong, and real wages have been increasing.  A large amount of that increase in GDP was actually explained by a boom in investment that reflected state-owned enterprises, including investments in security and defense related issues.  But also what we saw is an increase in investment for import substitution.  And finally, there is not much support from the fiscal side, but it was there as well.  Most of the fiscal support was lent to security and defense.  So that explains also the upgrade of our numbers for 2023 for Russia and the growth outlook for this year. 

This is a short-term projection we have in place.  When we are looking at the longer-term, we are seeing something continuing which started to happen for Russia in 2014.  And that was a fallback in potential growth, and that has hurt and is continuing to hurt Russia's convergence to European GDP levels.  We expect that technological diffusion will be more of an issue in the future, but there's lots of uncertainty on how that is developing.  But we are not seeing a pickup in potential growth rather than a decline in potential growth.  So when we are looking at our outlook, actually in per capita GDP terms, we see Russia in terms of ranking falling back rather than advancing.

1. PÉREZ: We're going to go back to the room.  Let's take the lady on the second floor, please.

     QUESTIONER:  My question is on Spain.  The IMF has said that the Spanish economy is in good shape, but also that the economic growth could be affected by aging population.  Brussels has just said that Spain is expected to have the biggest increase in spending on pensions. In order not to lose its economic boost. what would you recommend to tackle that, and to achieve that unemployment goes below 10 percent?

1. KAMMER: Indeed, the Spanish economy is in good shape and it weathered the crisis very well, including also with a robust labor market. And like all of the other economies, Spain -- all of the other economies in Europe, I should say, the major headwind is coming in future from a reduction -- sorry, from aging and a potential reduction in the workforce through demographics.  And that is an issue and a big headwind for Europe to take care of, not just for Spain. 

When we're looking at Spain, Spain did undertake a number of labor reforms which actually contributed to the success on the labor market.  Going forward, when we are looking at particular reforms, we need to be careful in order not to take back these successes.  For instance, in the discussion in reducing the work week, that is going to be important.  Overall, like in all countries, labor force participation is going to be key in order to address the workforce force depletion through aging, and immigration is another tool which is available to countries.  And on pension reforms, et cetera, again, an issue important for all of Europe that we need to have sound fiscal policies in place.  That means also parametric reforms on the pension side in order to make pensions sustainable in the future.

1. PÉREZ:  We're going to go with the lady on the third row, please

          QUESTIONER:  I just have two questions.  Just going back to your initial comments about your warning about use of subsidies, what do you say to European policymakers, given the very disappointing growth figures we saw even this week, particularly in the largest economy, Germany, when countries like the United States are plowing money into their own economies, like the Inflation Reduction Act?  I mean, how realistic is it to ask, you know, to expect Europe to improve when it's in -- when it is in this kind of tit for tat race?  And secondly, are you concerned about possible divergence when it comes to the ECB and the, in the U.S., the Fed changing interest rates over the next few months, and what kind of impact that might have?

1. KAMMER:  To your -- to your first question, we document in the report that tit for tat on trade or tit for tat on subsidies is going to be welfare detracting and that's not the way to go.  It may seem at the moment as the right policy response.  It isn't.  And when we are looking at Europe in particular, it's not just current growth rates and projected growth in productivity.  There's a large gap between the U.S. and Europe with regard to per capita GDP in purchasing power terms.  That needs to be fixed and that will not be fixed through any of such measures.  And for that, Europe needs to undertake structural reforms.  And for that we are suggesting that these reforms will be undertaken.  And one big leverage Europe has, and one big potential which is at its fingertips is deepening and further integration into the single market.  That's where you get a lot of bang for the buck in terms of reforms.

On your second question, when you're looking at ECB monetary policy, what we are expecting is a gradual reduction in the policy rates.  But clearly ECB needs to be ready to be tighter or potentially be looser than the path we have been suggesting, simply because there are lots of uncertainties still in the system.  We are still looking carefully at service inflation, which has been stuck in the euro area at 4 percent for the last five months.  That's going to be more persistent because nominal wages are going to feed into the service sector and demand is stronger still for services than it is for good.  So that's one risk which is there.  We have another upside risks through geo economic and political developments, including on the oil markets.  That could be an upside risk.  We have a downside risk if growth is weaker.  And you were pointing to another upside risk on the inflation side for Europe, and that is if the tightening path for the US is going to diverge from the baseline we have in there.  We did some simulations of what the impact on euro area inflation would be.  The impact is relatively small if you're thinking about a sustained divergence in the policy rate, but clearly there will be an impact.  What we are seeing is there's lots of uncertainty on the inflation going forward.  So our advice to the ECB is that ECB needs to remain data dependent.  It needs to take meeting by meeting decisions and be ready to adjust that policy cost which we have been plotted out in our REO.

1. PÉREZ: We're going to go to that side of the room.  The lady in red on the fourth row, please.

          QUESTIONER:   Thank you. In the report you issued today, you are giving us details on the Italy growth for 2026 and there is a huge revision downwards, 0.9 percent to 0.2 percent.  Can you explain this?  And also, if I can ask a second question.  The IMF has always been in favor of infrastructure projects as a means to boost growth.  I wonder if you have an idea and a comment to make on the project that the Italian government is planning, the bridge that it's planning to be built connecting Sicily to mainland Italy.

1. PÉREZ: I am getting two more questions online on Italy.  I'm going to read them out loud.  The IMF forecast Italy to grow at a modest pace of 0.7 percent this year and the next.  At the same time you asked for front loaded fiscal consolidation.  Where in particular do you think Italy should find the efficiencies in terms of cost cutting to achieve that target.  And do you think the 1.2 percent growth forecast by the government for 2025 is credible or too ambitious?  One last question. Can you give us a bit more details about what type of credible adjustment on the debt trajectory the IMF expects from Italy?
2. BERGER: Thank you for these.  Let's start with the questions on the outlook.  Just to bring everybody on the same page.  So what we're expecting, based on the newest baseline forecast, is growth that was about 0.9 last year, to reduce to 0.7 this year and 0.7 next.  And then growth declines, as you pointed out in 2026, to around a quarter of a percent.  Now behind this is an economy that is growing broadly in line with potential outputs.  Potential output is between 0.7, 0.8.  So that's in the background.  And the economy is there because we had a very strong recovery out of the double crisis in Europe.  We had COVID and the energy crisis affecting Italy, like all the other economies in the region.  So this is a solid performance coming out of the crisis.  Now, what you see moving these growth rates around potential has to do with large investment programs.  So it's fiscal policy that plays a large role.  The slowdown this year and next compared to last year is mostly the fact that the super bonus program -- you will be familiar, for everybody else, this is a tax credit for remodeling of houses -- is slowly withdrawing.  So that has a downward effect on growth. 

          At the same time, the Italian plans for the National Recovery and Resiliency Plan, that is the way European money, both in grants and loan form, is being spent, is only slowly picking up.  So that explains the slight revision down this year and next, and then in ‘26, what you have is the super bonus coming to an end, while the NRP money is there, but not as forceful.  And then you will see some more of this in 2027 when NRP is also withdrawing.  So I think the main upshot here is that there is policy dues, fluctuations around growth.  And I guess the good news around this is that it also suggests that policy can make a difference for growth.  So it's not cast in stone that we will see growth in 2026 fall, as we are currently projecting under current policies. 

          And there are two things that could help, among others.  One is you can make sure that domestic structural reforms that are in track, there are ongoing efforts in the justice reform, tax administration, other areas.  So an intensification of this reform momentum would certainly help.  And then the country obviously can think about a domestic succession program to the reforms that are currently tied to European support.  So there's a lot work to be done in terms of infrastructure, education reform.  And so, these kinds of efforts will ultimately make a difference if they're taken forward with greater momentum.  So that's roughly where we are on growth.  Now, you mentioned infrastructure projects.  So we usually, the Fund, we look at this at the very aggregate level.  So it's investment overall that we're interested in, including infrastructure.  So we're not really good at looking at individual projects.  But it's clear that for each individual project that is part of a public infrastructure initiative in any country, you want to look at the costs and the benefits.  You want only to do what is really beneficial on net.  You want to make sure that the project is handled with good governance so there's little public money wasted.  So these kind of principles would apply to Italy and any other country.  I think that's Italian growth.  That's it.  Well, we did Italian growth.

1. PÉREZ: I think we're going to go to the first row here.  The gentleman with the jacket.

          QUESTIONER:   I'm just wondering if you can talk a little bit about how much the inflation path between the US and the EU has already diverged, given the latest very strong data we've seen in the US, is it your expectation that probably the ECB is going to have to go first in terms of easing policy rates?  And then secondly on trade.  What a lot of countries are looking at right now is protecting themselves against what they see as China's excess capacity in key industries like electric vehicles and solar.  The US is looking at some things.  The European Union has an investigation going on and the EV sector into Chinese subsidies.  So what do you expect on that front?  Is there a danger here that we're sort of headed into a new trade war that could hurt growth?  Thanks.

1. KAMMER: On your first question, with regard to U.S. versus Europe and more broadly, but also euro area, there were always two very different inflation stories.  When you're looking at the US, you had much more of a demand driven element in the inflation.  And when you're looking at Europe and that spans the euro area and all European countries, including the UK, you had much more of an impact with regard to the energy price shock coming from Russia's invasion of Ukraine.  So two different inflation stories to begin with, and when we are looking at the disinflation taking place in Europe and in the euro area in particular, the number one disinflationary force last year was the rapid decline of the contribution of energy prices to inflation, the unwinding of supply change blockages, and last but not least, the monetary policy impact.  That's what we are seeing right now.  And when you're looking at the U.S., that demand element which was there, supported by the fiscal stance, is much stronger than whatever we saw in Europe. 

          Therefore, for us, it was always, it seemed to look the same, but the drivers were different.  And because of the drivers being different, that probably means a different disinflation effort and likely also a different, potentially a monetary policy stance.  So what we are expecting right now is there's still some uncertainty on the European side, especially on the part of the disinflation coming from the services side.  So it could be more persistent.  But if this works out as expected, then we are recommending for the ECB to start cutting rates in June, six quarterly 25 basis point cuts, to reach neutral in September ‘25.  But to be ready in terms of upside and downside risks to that forecast, and always look at totality of data.  And one data point is if US policy rates are staying higher than expected, higher than expected in our baseline, when we are looking at that impact of higher policy rates, that will have positive inflation impulse for Europe, it is not negligible, but it's small.  And you would expect that this is being dealt with when you look at the rate path on a meeting-by-meeting basis.  And it will be one of the many elements which the ECB will need to take into account.  But fundamentally that divergence, we do not expect to change this trajectory, which we have in the policy rate adjustment of the ECB.  And certainly, it doesn't impact on the starting date of the gradual reduction in policy rates. 

          With regard to trade.  So here we are a multilateral organization, and we have been preaching the benefits of this multilateral trade system.  And so, frictions between countries are always there.  And we are strongly recommending to all stakeholders to address that within that rules based international system, including through the WTO, and to have any actions on the trade side, on the subsidy side, be WTO consistent, because everybody will lose if we get into trade wars or into subsidy wars.  And especially with regard to Europe.  Europe is a very open economy.  It benefits very much from that system.  And when you're looking at the EU-China relationship, it is a very close one, with 9 percent of US exports, EU exports going to China, and Chinese sending 50 percent of their total exports to the EU.  So we advocate to talk, to cooperate, but clearly, all parties need to stick to the rules and then apply also the arbitration and the processes we have in place when there is a perception that these rules are being broken.

1. PÉREZ: We're running out of time.  We're going to try to get to all of your questions.  Let’s take the gentleman in the first row here, please.

          QUESTIONER:   Hi, I wonder what is the IMF perspective on the Ukraine debt level?  Does it have a capacity to service liabilities in the longer term?  And the second question, does Ukraine have a capacity to serve its debt in the longer term?  And what is your perspective on the risks that it will need restructuring its debt before the IMF and or other donors? 

1. PÉREZ: Let me see if there are any other questions on Ukraine.  Let's take the lady on the third row.

          QUESTIONER:   Good morning.  I have a question regarding Ukraine's external trade with the European Union.  We have just mentioned that trade protectionism may cause more bad rather than good, whereas the economy rules, they demand a freer trade.  And we are currently having a clash with the blockade of the borders.  And since after Russia's invasion of Ukraine, the EU has eased the rules for Ukraine to trade more openly.  But the trade is currently partly blocked due to the blockade.  And my question is, have you counted how it has affected the trade volumes in the EU over the last year?  And also has it somehow affected Europe's growth or maybe slower growth last year?

1. PÉREZ: I think we have more questions.  Let's take the gentleman.

          QUESTIONER: I also wanted to touch on Ukraine.  What does the Fund think about the new stricter EU import controls on certain agricultural products from Ukraine?  And secondly, in terms of seizing Russian state-owned assets, where does the Fund stand on that?  Some argue that the risks to financial stability are overblown.  So it would be good to get your view on that.  Thank you.

1. PÉREZ: Any other questions on Ukraine?
2. KAMMER: First question with regard to Ukraine's debt and its sustainability.  We have a Fund program in place which is very successfully implemented by the Ukrainian authorities.  As part of that, one of the objectives is to have debt in Ukraine sustainable on a forward-looking basis, that requires fiscal adjustment, that requires the continuation of concessional financing, and that also requires a debt restructuring of the official sector and of private commercial claims.  So the debt restructuring actually is not something which is a possibility.  It is part of the toolset in order to achieve sustainable debt in Ukraine under the program. 

          With regards to the impact of trade from Ukraine to the EU, I don't have any particularly good numbers.  But with regards to the other part, the restrictions which came up over the last few months in terms of imports into the EU from Ukraine, there we saw a response on the Ukrainian side.  It meant lower tax customs revenue and it also impacted on growth in Ukraine.  So there the effect was a negative one.  I should also say, of course, the opening of the borders and freeing up of trade between Ukraine and the EU overall had a much more positive impact than these restrictions were negative. 

          With regards to the seizure of Russia's assets, on this particular issue, our view is that is something for the relevant jurisdictions and courts to determine and to decide. From our side what is important, that whatever action is taken, that the implications of the functioning of the International Monetary System are being taken into account.  And our Managing Director recently emphasized that one needs to be wary of unintended consequences of these impacts.  So I think that remains important for us.  And again, this is the issue of a multilateral rules-based system and a well-functioning International Monetary and Financial system, which we all should be respectful for because it has delivered so many good things and prosperity over the last decades.

1. PÉREZ: We're running out of time.  I want to take the lady.

          QUESTIONER:   Thanks, Camilla.  This is from Koha News group in Kosovo.  It's a small country, but according to the IMF, it has had 3.3 percent growth in 2010 to 23 and it has inflation levels much lower than in 2022.  But this did not reflect in the ground, on the contrary.  So the prices are the same and the salaries are the same apart from the public sector.  And my question is, I mean, is 3.3 and this level of disinflation positive news, and how can it be explained as such to the people, to our audiences that did not feel it?  And very shortly, I mean, you were talking about labor market.  What we are facing now in Kosovo in these recent years is the number of working visas issued to our young, educated people from western countries.  So the brain drain is growing exponentially.  What would be your advice to Kosovo in order to stop this?  Because, I mean, we miss them anyway.  Thank you.

1. KAMMER: On your first question, it probably also warrants a very general answer.  And we don't want to be cold hearted when we say big success of policymakers, of dealing with these large shocks, the pandemic and the energy crisis in Europe, because that was a very painful exercise for the population.  And that pain still sticks, including through high inflation, what we are seeing is always the counterfactual that it could have been a lot worse than what we are seeing.  And so even when you are experiencing again a positive growth rates and when you are experiencing that inflation is declining, that pain still is there.  And it will take time for that positive growth to be registered by the population and also the decline of inflation to be registered, especially when nominal wages are adjusting and clawing up and increasing the real purchasing power. 

          Again, with regards to Kosovo in particular, what we saw during the pandemic years, the decline in the poverty rate stopped, but it now has continued again.  But again, whenever you look at these aggregates, it takes time for the population to register.  And even when we say that inflation is back to target, that means price levels are higher and that's what the population is seeing on a day-to-day basis.  And that's always a shocker.  And that remains, despite having not a particular economic effect.  Brain drain has been a big issue for the countries in the region.  And the advice there is one, education is key, and skills are key for the population in order to bring jobs and employment there.  So that is an important response.  And then the other part is the bottom line is you need to increase productivity; you need to increase growth in order to generate the incomes people are seeking.  And again, that means still hard structural reforms to undertake in many of the countries.  And those in the end will provide the incentives for workers to stay or for workers to come back.  There is no easy solution.  That's the bottom line.  And there is no quick solution in order to fix that brain drain.

1. PÉREZ: So two more questions because we have to wrap up, taking the gentleman in the fourth, fifth row and then I think we missed one part of the questions on Italy on debt trajectory.  So you can then tackle that one. 

          QUESTIONER:   Following the presidential elections in Turkey, Turkey has shifted to a more orthodox monetary policy under a new economic management.  What are your thoughts on this policy shift and Turkey's outlook?  And do you have confidence that this policy shifts will be durable?  And if I may add a second one, there are some economists thinking that there is a need for a new IMF program in Turkey.  Do you believe there is that need?  And are there talks with Turkish authorities on this?  Thank you. 

1. KAMMER: So what we saw in Turkey in mid-2023 was an absolute policy pivot.  And the new policies in place on the monetary side with a substantial tightening, but also on the fiscal side with fiscal consolidation, which has started including to accommodate the increased earthquake spending, is indeed a completely different policy setting.  We already see some achievements on this side.  And it's not only on the disinflation side that will take longer to materialize fully, but vulnerabilities to Turkey have been decreased because of this policy setting.  Now, I had a discussion with Minister Simsek yesterday and he pointed out that these reforms are in place.  This is a longer-term program and he and the central bank will execute that program.  And that program is expected to lower vulnerability further, to bring inflation down durably over time, and to also create that climate for investment to take place so that we have a shift in the growth pattern and the rebalancing of growth. 

          On your second question, first of all, we are very much supportive of the reform program in place, and that's also what we would be recommending to Turkey, what the economic team there is carrying out.  And no, there's no discussion on any IMF program supporting Turkey.

1. PÉREZ: Thank you.  I believe there were two parts of the questions that we didn't tackle on Italy and perhaps one on Germany.  From the lady on the third road, it was about slow growth in Germany.  Do you want to start with Germany first?
2. CELASUN: Sure.  I can talk a little bit about our forecast for Germany.  We still expect a modest and gradual recovery in Germany this year.  It's going to be driven by the recovery in real wages, which will help private consumption recover.  We have nonetheless trimmed our forecasts a little bit, both for this year and next.  What we have seen is that in the first quarter, business and consumer confidence was surprisingly weak.  We think that's because of the weak economic environment last year, which is weighed on public sentiment.  But as real wages continue to pick up, we expect private consumption to gather momentum as well.  And as we move into next year and 2026, the reduction in interest rates will also help lift investment.  But looking further ahead into the medium term, the aging of the population is expected to weigh on the growth of potential output.  So we are looking at pretty modest growth rates down the road.  Thanks.
3. PÉREZ: Two minutes for the debt trajectory in Italy.
4. BERGER: So Italy, as you know, is a country with high public debt.  It's currently at 137 percent and we think it will increase to 140 by the end of ‘25.  So fiscal adjustment is important and the advantage of doing it rather sooner than later is that you get relief on the debt service side because there's just less debt to service going forward and interest rates are high.  In addition, you will be rewarded by markets who see the credibility of the fiscal adjustment program manifest in actions where to start was your question.  I think on the top of the list are tax credits, many of which are not very efficient as a mean to help Italy down the road in terms of productivity.  The super bonus is one example.  There are others.  Other lower hanging fruits are loopholes in the tax base that can be closed that will bring revenue.  And finally, there's still a number of cost-of-living support programs in the system that can also be withdrawn rather fast.  That will help.  And we think fast action is indeed required.
5. PÉREZ: Thanks so much.  Thanks, Helge, Alfred, Oya.  Thank you all for joining.  I wish you have a good rest of your day, and thanks again for joining.

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