Speech

Good afternoon and a warm welcome to all.

We are here today to share our economic assessment for the euro area.

I had an excellent discussion with the Eurogroup today chaired by President Donohoe, based on our concluding statement which has also been shared with you.

Here I would like to highlight a few of our key messages.

To set the stage, a brief word on the overall global backdrop:

Since our latest forecast in April there has been some easing of trade tensions, but trade policy uncertainty remains very high. Incoming data from the first half of the year confirm that trade policy uncertainty, together with geopolitical tensions, are slowing economic activity globally and in the euro area.

What do we now see as the main goals for economic policies in Europe in an increasingly complex global environment?

In a nutshell: the EU needs to move forward with coherent, effective policies to lift up potential growth and enhance resilience. It is also important to ensure new public spending priorities are met without risking fiscal sustainability. Inflation has come down to target, but there remains the need to safeguard price and financial stability at a time of exceptionally high uncertainty.

There is no room for delay. Policies in Europe’s largest trading partners are evolving rapidly, resetting the terms of global integration. If Europe doesn’t forge ahead with decisive EU-level actions, it runs the risk of declining relative to other advanced and major emerging market economies.

So, getting back to specifics on policies to boost growth and resilience: An important route through which potential growth can be strengthened is by deepening the integration of the EU single market.

Currently, as the Draghi and Letta reports emphasized, Europe’s production structure is dominated by small firms that fail to scale up and innovate less.

Why is this a problem? Because if dynamic firms don’t grow to scale, this holds back productivity growth. If barriers and constraints in the single market are eased to help firms scale up, this would unleash more dynamism and innovation in Europe and boost growth.

Our analysis accompanying our statement today indicates that key priorities include

• Reducing regulatory fragmentation—such as through a 28th corporate regime that establishes uniform regulations and legal rules crucial for the formation, operation and dissolution of firms —to increase predictability of doing business across borders, as well as legal certainty when firms are in financial distress;
• Advancing the Capital Market and Banking Unions to better channel savings into productive investment, including risky ventures—more of which are needed for productivity growth in the EU;
• Improving labor mobility via mutual recognition of qualifications; and
• Deepening energy market integration to ensure stable, affordable energy.

We estimate that these actions could raise the EU’s potential GDP by about 3 percent over 10 years. This is a sizable gain – and we see it as a downpayment for more gains to come in a more dynamic EU economy.

The digital euro also has an important role to play here. It can help improve cross-border payment system efficiency, reduce transaction costs, and complement the SIU and the single market more broadly.

EU public resources, in the current and the next EU budget, must be deployed more effectively to contribute to needed investment in shared priority areas—defense, research and energy security—which can help boost productivity and resilience.

A doubling of EU budget expenditures on EU public goods from 0.4 percent of EU gross national income to at least 0.9 percent would help close critical investment gaps.

An important observation: EU-level coordination and increased investment in these areas can help address shared challenges cost-effectively by avoiding duplicative national efforts. The size of the next EU budget should be increased to allow for these investments and should rely more on performance-linked disbursements to encourage national reforms to complement EU-level reforms.

Cost savings from more efficient EU-level spending are critical because they can also help ease fiscal tradeoffs at the national level. Many EU countries, especially those with high debt and limited fiscal space, face the difficult task of implementing significant fiscal adjustments while also managing rising spending pressures from aging populations, climate goals, energy security, and defense. In those countries, IMF staff recommends a further fiscal adjustment given expected spending pressures. And any savings by approaching some challenges jointly at the EU level will help.

Let me turn now to external policies. The EU, as a major trader, would benefit from its continued advocacy for a stable, rules-based global trading system. Further diversifying global partnerships and advancing new free trade agreements can help strengthen supply chain resilience and capture efficiency gains from trade.

The priorities I have outlined above are important for strengthening the medium-term outlook and boosting resilience, including fiscal sustainability. The bedrock of these efforts remains safeguarding price stability. 

We consider the current level of the ECB policy rate appropriate as it neither stimulates nor restrains the economy, paving the way for inflation to stay around target. 

But uncertainty is high. Depending on whether incoming information materially affects the inflation outlook, the policy path may need to be adjusted.

Let me conclude. The euro area economy has held up well in the face of large shocks, thanks in no small measure to effective policy actions at the EU and national levels. That same steadfastness will be needed to address the challenges ahead, otherwise Europe risks falling behind other large economies.

I look forward to your questions.