Transcript of European Department April 2024 Press Briefing
IMF News, April 19, 2024
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- Published: April 19, 2024
Outlook and Growth
- IMF forecasts a "soft landing" for Europe with a recovery in 2024 that gains speed in 2025, but stresses this outcome "is not guaranteed."
- Medium-term growth trajectory for Europe remains "rather modest" and constrained by lower productivity relative to the U.S.
- When comparing GDP per capita in purchasing power terms, "Europe is one third lower than the U.S."
- Projected structural spending pressures:
- "5.5 percent for advanced European economies annually by 2050"
- "8.5 percent of GDP for CESEE -- for emerging European countries"
Inflation and Monetary Policy
- Recent rapid disinflation over the last year documented; service inflation in the euro area "has been stuck ... at 4 percent for the last five months."
- IMF baseline for ECB policy:
- ECB to undertake rate cuts "starting from June"
- "six quarterly, 25 percentage points rate cuts, to end up in neutral in September 2025"
- For CESEE countries: rate cuts anticipated "but ... more gradually" and inflation target is expected to be reached "only in 2026."
- IMF advice to central banks: remain "data dependent", take "meeting by meeting decisions" and be ready to adjust to upside and downside risks (services inflation, oil/geo-political shocks, divergence with U.S. policy rates).
Fiscal Policy, Debt Sustainability, and Taxation
- Fiscal policy supported disinflation in the last year through consolidation largely by cutting energy and cost-of-living packages; shift now needed to a "medium-term focus" to ensure debt sustainability and build fiscal buffers.
- Recommendations on taxation and revenue:
- Move away from "labor taxes, which are a disincentive to work."
- Shift toward "wealth taxes and property taxes" where room exists.
- Improve "efficiency of tax system" by eliminating loopholes and tax exemptions.
- Fiscal adjustments will be a mix of revenue increases and expenditure reprioritization depending on country.
- Italy public debt:
- "currently at 137 percent and we think it will increase to 140 by the end of ‘25."
- Suggested fiscal consolidation priorities: reduce inefficient tax credits (example: "the super bonus"), close loopholes, withdraw remaining cost-of-living support programs "rather fast."
Single Market, Productivity, and Structural Reforms
- Deepening and further integration of the single market is a central IMF recommendation to boost productivity and resilience.
- Quantified impact from IMF study: "a ten percentage point cut in internal barriers will increase the level of GDP by 7 percent."
- Areas singled out for further integration: capital markets, banking union, border infrastructure, labor mobility, portability of education certificates.
- Emphasis on action with "urgency" and the political will required to implement reforms.
Trade, Subsidies, and Geoeconomic Risks
- IMF warns against "trade protectionism" and "subsidy wars" noting they would "lower global welfare."
- National-level subsidies that grew during pandemic responses risk harming allocative efficiency; IMF position:
- If subsidies are used, they should be "limited to market failures," "temporary, targeted, and consistent," and "at the EU level and not at the national level."
- Multilateral rules-based system and WTO adjudication urged to resolve frictions and avoid tit-for-tat measures.
Russia and Ukraine
- Russia:
- Short-term: IMF forecasts growth in 2024 following strong growth in 2023 driven by oil export volumes, consumption rebound, strong labor markets, rising real wages, and an investment boom (including defense and import-substitution investment).
- Long-term: IMF sees a "fallback in potential growth" continuing since 2014; in per capita GDP terms "we see Russia in terms of ranking falling back rather than advancing."
- Ukraine:
- IMF program in place; "one of the objectives is to have debt in Ukraine sustainable on a forward-looking basis" which will require fiscal adjustment, concessional financing, and "a debt restructuring of the official sector and of private commercial claims."
- IMF states debt restructuring is part of the toolset to achieve sustainability under the program.
- EU import restrictions on some Ukrainian goods over recent months "meant lower tax customs revenue and it also impacted on growth in Ukraine."
Country Notes and Specific Issues
- Germany:
- IMF expects a "modest and gradual recovery" driven by recovery in real wages supporting private consumption.
- Forecasts for Germany have been trimmed for this year and next due to weak business and consumer confidence.
- Aging population will weigh on potential output in the medium term.
- United Kingdom:
- Labor supply and economic inactivity are important for growth; IMF will examine these issues during the Article IV mission in May.
- On tax policy, IMF notes fiscal consolidation is appropriate given public debt trajectory; "a mix of revenue measures and expenditure measures" will be needed to create fiscal space.
- Italy:
- IMF baseline growth path presented by Berger:
- "growth that was about 0.9 last year, to reduce to 0.7 this year and 0.7 next."
- "growth declines ... in 2026, to around a quarter of a percent."
- Main near-term drivers: winding down of the "super bonus" for housing remodeling reduces growth; slow rollout of National Recovery and Resilience Plan (NRP) funds moderates investment.
- Policy levers to raise growth: accelerate domestic structural reforms (justice, tax administration), pursue infrastructure and education reforms, and improve public investment governance.
- Turkey:
- Noted a policy pivot in mid-2023 to a more orthodox stance: "substantial tightening" on monetary policy and fiscal consolidation, reducing vulnerabilities.
- IMF supportive of the reform program; "no ... discussion on any IMF program supporting Turkey."
- Kosovo:
- Noted recent aggregate figures cited by a questioner: "3.3 percent growth in 2010 to 23" and "inflation levels much lower than in 2022" (as described by the questioner).
- IMF comments: positive macro outcomes may not immediately be felt by the population because price levels remain higher; addressing brain drain requires improving education, skills, productivity, and undertaking structural reforms to raise incomes and incentives to stay.
Key Policy Recommendations (enumerated)
- For Europe broadly:
- Deepen and complete the single market (capital markets, banking union, border infrastructure, labor mobility, credential portability).
- Pursue national structural reforms to raise productivity.
- Avoid uncoordinated national subsidies; if used, restrict to temporary, targeted, market-failure cases and implement at the EU level.
- Maintain multilateral, rules-based trade and dispute resolution through WTO.
- For fiscal authorities:
- Shift from emergency consolidation to medium-term strategies to ensure debt sustainability and build buffers.
- Improve tax system efficiency: broaden base, close loopholes, consider less distortionary revenue sources (wealth/property taxes).
- Prioritize efficient public spending and accelerate cost-effective investment projects with strong governance.
Italic—Transcript of European Department April 19, 2024 press briefing, IMF Communications Department