Transcript of European Department Press Briefing

April 21, 2017


Poul Thomsen

Director, European Department, IMF

Andreas Adriano

Senior Communications Officer, Communications Department, IMF

MR. ADRIANO: Thank you all for coming to this briefing of the European Department. With us today is the European Director, Poul Thomsen. He will make a few opening remarks and then we'll be happy to take your questions.

MR. THOMSEN: Good morning to all of you. Thanks for coming. Europe. Positive developments in both east and west with the recovery gaining momentum. But the medium term challenges, as you will hear, are much as we saw them when we last met. Let me start with the Euro area: the recovery is on the way. It's actually gaining a bit of strength. We revised growth up a bit to 1.7 percent. That is good news. In particular, since some of the downside risks we warned about actually materialized, not least Brexit, of course. So, that suggests good underlying momentum.

Unemployment is down to single digits. It is mostly structural at this stage. However, it is quite a divergent picture; divergent recoveries; uneven distribution of output gaps and fiscal space. Generally, the fiscal space is not where the output caps are and that points to some potential risks down the road.

So, what does all this imply for policies? On fiscal policy, we think that the aggregate stance for the euro area is broadly appropriate. It's mildly expansionary, and we think this is broadly appropriate at this point. Countries with fiscal space should use this space. Countries with high debt, should consolidate more to create the fiscal space and build buffers.

As far as monetary policy is concerned, we think the ECB's monetary stance is appropriate. Our concerns are that we see some pressure from some countries that would suggest what, in our view, would be a premature tightening of policies. I think it's important that countries that have little output gap, that are close to full capacity, understand that they might have to have inflation above the target for a longer period. So, again, we think the ECB's monetary stance is appropriate.

Financial sector: there has already been a lot of discussion of this here at the meetings. The repair of the balance sheets needs to continue. We need to continue to complete banking union. The ECB's latest guidance on non-performing loans is an important step forward and would be very much welcome and one needs to build on that to have a very determined strategy for reducing non-performing loans in the banking system where they persist.

Structural reforms: as I said, unemployment at this stage is mainly of a structural nature. Clearly, this points to the urgency of structural reforms. Potential growth is still low, relatively low. It would still take a number of countries quite a long time to reduce unemployment to below pre-crisis level. This underscores the urgency of structural reforms to boost productivity.

Risks: I think in the euro area, I see in the short-term I think they are probably equally balanced. In the medium term, perhaps the downside risks dominating. I think you are familiar with the issues. They have been discussed at length at meetings already. But in the short-term, I also see some potential upside if political uncertainties clarified and this underlying momentum that we're seeing right now were to be strengthened.

Turning to Eastern Europe, the recovery outside the CIS is largely complete. Output gaps are almost closed and the outlook is positive. We see signs of overheating in some labor markets. Unemployment rates have fallen to pre-crisis levels and you see strong wage growth in a number of economies. Inflation has picked up, but it's mainly because of oil prices and at this stage core inflation is still relatively subdued despite the increase in wages.

Key challenge here, as we discussed before, is that, in our view, potential growth rates have declined significantly compared to what they were before the crisis, around half. This might in part reflect some price legacies, but I also think it reflects the fact that in the first 25 years there were low-hanging fruits and it's going to be more and more difficult to produce rapid growth in productivity as these countries go forward. And that points to challenges of improving institutions and other issues relating to the investment gaps and I know in that part of the region, demographic trends remain quite unfavorable.

Policy implications: we think there's quite a few countries in the region where fiscal policy is too loose given the cyclical strengths of the economies and there's a need for tighter fiscal policy. We think that given inflationary pressures, there might be a need to gradually withdraw monetary accommodation, but at this stage, we are not seeing any significant pressure on core inflation. But these countries need to watch wages and the risks that this spills over into inflation.

I think generally, for many of these countries, we would like to have a policy mix with a bit of a tighter fiscal policy, so as not to overburden monetary policy if pressure on inflation start accelerating. Again, in line with what I said before, structural reforms, [it is the] overriding objective and overriding concern to boost potential growth and as I mentioned, particularly strengthening institutions and a better public sector and better infrastructure.

A Couple of points on Russia. In Russia, we do think that inflation has declined to the central bank target and we think that the easing of monetary policy can continue. Whereas in Turkey, we do see a need for tightening monetary policy given the strong inflationary pressures.

A couple of remarks on Greece. I know that you were going to ask me anyhow, so let's take it up front. On Greece, we have made a good progress in discussions with the authorities in recent weeks on program of policies. The are remain outstanding issues, but we think there's sufficient progress for us to send back the mission, so the mission's going back next week. And I hope with the momentum that we have seen in the last few weeks, that the mission will be successful and we're getting close to having a staff level agreement on policies.

As you know, Greece and its European partners have always agreed to sequence the discussion. First, have the discussion of policies and then only thereafter, discussions on debt. So, these discussions are only really getting underway soon. You know our view, we need a package that's credible, both in terms of the policies and in terms of the debt relief needed to restore debt sustainability. And we would only go to our board once we have such a comprehensive plan. I'm going to stop here and take your questions, thanks.

MR. ADRIANO: Thank you, Poul. Please identify yourself and keep your questions short because we don't have much time. Let's start with two or three questions on Greece, perhaps.

QUESTIONER: According to the Greek Statistical Authority, the primary surplus for 2016 is 3.9%, so how is this number going to affect your projections for the years '17 and '18 and for the period after the end of the program. And also, what is your answer to those who say that your numbers that were once again wrong.

QUESTIONER: Greece may face liquidity problems in July because the disbursement that is linked with the second review is pending. So, do you believe that if May 22nd would not be a fruitful Euro group, we will face severe problems? And given that Greece has already implemented whatever you wanted in taxation and pension reforms, would you be more helpful on this side to overcome this liquidity problem in July?

QUESTIONER: I have two questions actually. One is on the Greek banking sector. How do you think, do you consider it critical that it participates in the ECB’s QE, the quantity easing and how long do you think that in generalQE should continue in the Euro zone? And you just came from a meeting between Minister Tsakalotos and Madame Lagarde. And then, there's some -- you're having other bilaterals with European officials among others on Greece. Madam Lagarde said that the debt was discussed already and she has asked for logical primary surpluses. Can you please give us an indication of what you consider a logical primary surplus and when it's coming to force, roughly? Thank you.

QUESTIONER: Mr. Klaus Regling said that Greece might use ESM funding to repay IMF loans. Is this an attractive option for you?

MR. THOMSEN: Okay. Let me first start with the target. You are right that the numbers that came out this morning is not the number defined in the program. But, you're correct, it’s well above what we have been projecting, well above what anybody has been projecting. And I think that the budget that the authorities submitted to Parliament for 2017 at the end of 16, was based on the assumption that 16 would be 1 percent of GDP, and here we are a few months later, and I think it's 3.9%.

So, there clearly are some major movements here that needs to be understood, but no doubt that it was much more than we expected. The issue here, and let me forward the question on the primary target into this. We have been arguing for Greece to do pension and tax reforms, not because we think Greece needs more austerity, not because we think that we need higher primary surpluses, but we think that Greece needs some more growth-friendly policy mix.

But we have also accepted that Greece has a program with the ESM that has a target of 3.5% and we think that indeed with the policies we've been discussing, we think that Greece will reach 3.5%. We agree with that, we have it a year later than the ESM, we have it in '19, they have it in '18, the difference is inconsequential as far as the DSA [debt sustainability analysis] is concerned. But we think that if Greece wants to go to 3.5% as agreed with European Partners, we think it's better to do it a bit slowly, given the state of the economy.

And then the question is: how long should it stay at 3.5%, that is the issue that is under discussion, and it is no secret that we think that it should be a relatively short period. I'm not going to go into a discussion here of what that means, but it's clear to us that it's critical that Greece uses this fiscal space created by these good reform that are under discussions-pension reform and tax reform-that Greece uses this fiscal space not to run high primary surpluses for a long time to repay debt, but to restructure its budget and to become more growth-friendly. More capital spending, more well-targeted social benefits that are critical for the broader reform of the economy, lowering some excessively high tax rates, etc. So, that’s critical. Now, how long that period is going to be, it is still for discussion and that is getting underway.

On the question on the liquidity problems in Greece. Yes, Greece would need support within the next couple of months to be able to make a number of payments scheduled for July, and this is why it is urgent that we agree on a program that we conclude all these discussions because it's taking a toll on the Greek economy, no doubt about that.

So, there's an urgency to that. Now, the Fund can only support a program, as you know, if it's a comprehensive program that deals with medium-term issues. We do not have a facility, we do not have the ability to go in and disburse just to sort of get over a hump for a few months, without solving the more fundamental, underlying problem. We don’t do that.

So, can we only have a program if it promises to deal with the medium-term issues as we see them. On the question on QE [quantitative easing], you asked how long I thought QE should continue. And as I said before, core inflation in Europe is still low, there is still clearly the case for ECB to continue the current accommodative monetary policy. That’s all I have to say on that. On the last question, on using the ESM [European Stability Mechanism] to repay the IMF, I think that’s something that should be discussed. IMF money is expensive, it's more expensive than ESM money, so that’s certainly something that could help somewhat the DSA, but that needs to be discussed.

QUESTIONER: Sir, I actually have two questions on the Ukraine. Firstly, the Ukrainian Finance Minister here in Washington, told that the country will not get the new tranche without accepting – without providing the pension reform. Can you comment on that? And also can you just tell, is it the obligatory last condition to get the new tranche?

Secondly, and which is the more important. The question for the country is not providing the reform but increasing the retirement age. It was a very clear message from Mr. Lipton, just at the beginning of April. It was a statement involving Ukraine cannot afford to delay comprehensivepension reform much longer, including by raising the effective retirement age. It was the same statement by the IMF, Executive Board assessment. Can you just clearly confirm that the country has to increase the age, because before it was up to the country how to balance that, a budget of the pension fund?

MR. THOMSEN: I welcome that question. Pension reforms have been part of the program from the start, and it has been delayed a couple of times. Ukraine has a serious problem in its pension system, I think it's the second largest deficit in the world, in the pension fund. It's a complex problem. One the one hand, there are a very large number of pensioners, I think the number of pensioners to contributorsis something like 1 to 1, and pensions are very, very low. They have been eroded through inflation, and need to go up all the time. But that must go up hand in hand with parametric changes to the pension system that restore its financial viability.

And yes, an increase in the low retirement age is critical for that, in the effective retirement age. That is indeed something that is under discussion, and it will be important that the program, in the context of the next review, has a credible plan in place for how to deal with this over time. So, the answer is, yes, pension reform is an important part of the next review and an increase in the effective retirement age is a part of that.

QUESTIONER: Just a quick question about the German surplus, treade surplus which is very large globally. How much of a concern is it for the recovery in Europe that Germany is not, demand is subdued still and what can be done to retain more of the capital of exports in Germany. How can Germany be more attractive for investment?

MR. THOMSEN: The current account surplus is large. It is clear that a country like Germany should have in the long run somecurrent account surplus. It is an aging population and we agree with that. But the long term equilibrium is much lower than what we are seeing right now. The current account is much, much above where it should be in the medium term.

The policies we are recommending for Germany are to use the fiscal space that we think it has, and also the fact that Germany will go through a period where inflation and wages are likely to increase above the European averageit's inevitable with the common monetary policy and given the strength of the German economy. That will, of course, help the rebalancing, but it will be gradual. There's no doubt that inside a currency union, Germany does not have its own currency that could produce a quicker adjustment through a rapid appreciation. So, it will take longer. The adjustment is on the way but it will take time. So, the policies we are recommending will bring it down. Some of the other policies we are recommending to help boost domestic demand, the liberalizations in a domestic economy, will also help.

QUESTIONER: Thank you, so much. First of all, Bosnia is a troublemaker politically, economically speaking. It is deeply involved in the IMF but unfortunately cannot use money because of political problems. What is your message for Bosnia politicians and how long will the IMF be patient with Bosnia politiians. The second question is regarding Croatia a different story member of EU (inaudible) projection for the 2017-2018 but they have become a market. The biggest company is Agrocorp is now in a crisis, the nation's economy (inaudible). Thank you.

MR. THOMSEN: Starting with Bosnia, there are some issues right now. A number of the prior actions that were supposed to be implemented in the context of this current review have not been implemented, contrary to what was expected, and that will delay the completion of the review. That is, of course, not desirable and could have some negative implications for the economy. But we are where we are, and we will remain engaged in a discussion with the Bosnian authorities, and hope that these obstacles can be overcome as soon as possible and we get the program back on track.

We will remain engaged in parliament discussing these measures, discussed with the authorities, the responsible authorities, what can be done to overcome these obstacles and bring the program forward. We always remain engaged. There are sometimes obstacles then we work to overcome, and that's what we'll do in Bosnia as well.

On Croatia, you're right, this is a very large company for Croatia and regionally. We have no views on individual companies. We have neither mandate nor the information to do that. We welcome the start of restructuring process and we will certainly monitor this situation closely given its large size and regional operations. But this is something that is outside our direct mandate and responsability.

QUESTIONER: Thank you. I just wanted to ask a question about the whole region and politics. On Sunday, we have the first round of the French election. Madame Lagarde yesterday warned that should Madame Le Pen win and carry through on some of her promises, you would have major disorder. The UK this week, called a snap election. We have the German elections in the fall weighing on discussions regarding Greece. I was just wondering if you step back and look at the region now, how heavily is politics and political risk weighing on the economy there?

MR. THOMSEN: Certainly, there are some notable risks there and there are probably significant tail risks that might not have a large probability [of happening] but that could have a significant impact. I agree with that. It's not for me to speculate on any particular political outcomes. Let me just say that when we were sitting here last year we pointed to a number of downside risks that have materialized. Notwithstanding that fact, the recovery is actually gained momentum. So, yes there are these risks but there is clearly also the possibility that as the political situation in various European countries clarifies, there is more upside potential going forward.

QUESTIONER: Thank you. I actually want to follow up with my last colleague’s question about the general elections in UK. How do you think that will affect the Brexit process, that's my first question. My second question is about Turkey. You lowered the growth expectations for Turkey from 2.9 to 2.5 for this year and as Deputy Prime Minister (inaudible) said IMF will be mistaken again. Because in the last years, there was usually a significant difference between what IMF expected and what actually happened in terms of the growth rate. So, why do you think there is a significant discrepancy between IMF's expectations and the actual growth numbers. Thank you.

MR. THOMSEN: On the UK, I'm not going to speculate about elections and the link to Brexit. We think that it's important to, as soon as possible, resolve the uncertainties relating to Brexit and prevent it from weighing both on the UK and the European economies. We think this should be done in a way that reduces distortions and obstacles to trade. Trade is good mututally for the concerned countries. That's all we have to say at this date, everything else is speculation and I don't want to get into that.

I will have to admit, I am not familiar with the details here of our growth assumptions in the past so we'll have to get back to you on that and we are happy to have that discussion. I know that we revised it down a bit. On the one hand, we have some fiscal stimulus and we have some improvement in exports relating to the recent lira depreciation. But we also have some assumptions about political uncertainty weighing on other parts including tourism revenues. We're also still concerned about the elevated corporate debt continues to weigh in on the outlook. But I will have to come back to you on that.

QUESTIONER: Mr. Thomsen, I realized today that I know you more than seven years. With all due respect, every day we hear the same things, numbers, numbers, disagreements between the players of this drama. On May 9, as you know, you will celebrate with the government and the other lenders seven years of programs and memorandums. I'm sure you agree that seven years are too many. The people want to hear something else today from you. Can you tell us, for how many years this tragedy will continue.

QUESTIONER: Yesterday, Mr. Schaeuble was very critical of the IMF economists during his talk at Johns Hopkins University saying that the predictions of the Greek government had been far more realistic in the past two years. What is your response to Mr. Schaeuble?

QUESTIONER: (Inaudible) without something substantial (inaudible).

MR. THOMSEN: So, on the last question, perhaps I misunderstood you? We will not disburse before we have both agreement on policies and on a credible debt strategy. Perhaps I should spend a minute or two on clarifying what do we mean by a credible debt strategy. Let me start with what was agreed in the Euro group last year.

There was agreement at the Euro group last year, first on a framework that should be, one, an objective should be, to have a debt relief in place that would deliver a gross financing need of 15 percent of GDP over the medium term, and 20 percent over the very long run. That was agreed. Second, it was agreed that the debt relief did not need to be approved and come into effect before the end of the ESM program. Third, the Eurogroup specified a menu of items. Some of these, that they called the short term measures, were quantified and specified and actually have already are being implemented while some of them were rather broad and not specified.

What do we need before we can disburse, if that's your question, as far as debt is concerned? First, we obviously need to agree on what I said before it is still outstanding, mainly the path to the primary surplus. How long should Greece maintain 3.5 [% of GDP of surplus] and what is the landing point? That needs to be discussed. Second, we need to have more specificity about these unspecified part of the debt relief. Yes, we have said we do not need to calibrate the debt relief to the last decimal point at this stage because in any case, we will have to look at it at the end of the program based on the revised DSA at that time. But we still need to be able to go to our board and say, that given the DSA as it is today, we have a broad understanding on what kind of measures would restore debt sustainability. So, assuming that the mission agrees on policies, assuming we get these other two issues that I talked about here resolved, we will go to the board with a new program.

QUESTIONER: (inaudible).

MR. THOMSEN: You know, that's up to the Europeans and the ESM, my understanding is that they want this to go hand in hand with Fund approval of the program, but that's up to them. You should ask them.

MR. THOMSEN: On the issue of the targets and the estimations, the reality is that – we were reminded that we have been doing this for seven years -- the first five years we constantly were wrong on one side. We constantly overestimated the fiscal performance. And it is true that the last one and a half years, we have been wrong consistently on the other side. Clearly, we did not understand fully, neither didothers, but I think we were more wrong on assessing the impact of the capital controls in '15 and '16 on the economy. We were too conservative about it; no doubt about that. I think that is the main change.

Again, the issue is not whether Greece can reach a certain target, let's say 3.5%. I have no doubt that Greece has the ability -- it has showed us the ability -- to squeeze here and there to get to these targets. But it cannot do so while growing at the same time, without doing the kind of reforms that we want. That's the issue. The issue is not the targets and the credibility of the targets in the short run, but the credibility of targets being maintained over the medium-term while the economy is growing. That's the issue.

On the last question, with this program falling into place I think that you will see a rebound in output. You could have a very strong rebound in output from a low level. But it will take many years for Greece to bring unemployment back to a pre-crisis level; bring incomes back to pre-crisis level. It will take deep structural reforms -- many of which are not yet on the books -- that still lay ahead of us, not least the opening up of the economy, liberalization of the economy. It's an area where Greece still needs to do a lot. I also think that their fiscal structural reforms we talked about, pension reforms, tax reforms, are only a down payment. There is need for further significant structural reform in the public sector to enable the public sector to support the modernization of the economy at last. So this is a long-term project.

QUESTIONER: Yes. You mentioned politics earlier in the coming French election and in the Italian election, which you have not been mentioning, but are also coming. There are a number of parties that are at anti Euro that they may come to power. Is that a particular worry for you if these parties come to power for the desintegration of European -- you don't -- the political will to keep it together.

MR. THOMSEN: No, again, I shall not speculate on any particular political outcomes. Political uncertainty can be a problem. What I'm concerned about is that we have policies that are supportive of growth, so I think that is the real issue. Are we getting a government that is willing to tackle the problems that countries you mentioned face, deep structural problems limiting productivity and continued growth, frankly, fiscal adjustment in high-debt countries. I'm not going to go into speculating about any particular political outcomes.

MR. ADRIANO: Okay. Thank you very much. We need to wrap up because of the next briefing. Thanks for coming and have a good day.

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