Transcript of IMF Managing Director Press Briefing on the 2021 Euro Area Concluding Statement on Common Policies for Member Countries
IMF News, December 6, 2021
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- Published: December 6, 2021
Economic outlook and key statistics
- Euro area output contracted by six and a half percent in 2020 and has rebounded strongly; output is expected to exceed its pre-crisis level in the fourth quarter of 2021.
- Underlying inflation in the euro area is projected to remain weak despite recent price increases; higher inflation in 2021 has been largely driven by base effects from last year's low oil prices, dwindling reserves of natural gas, and transitory factors such as the German V.A.T. expiration.
- Inflation is projected to decline through 2022 as these factors dissipate and to remain below the ECB's two percent target in the medium term, predicated on limited second round effects given persistent aggregate labor market slack.
- Euro area growth projections cited:
- Five percent growth rate projected for this year (2021).
- 4.3 percent projected for next year (2022).
- Italy's projection: 5.8 percent is projected for 2021 against five percent for the euro area.
- The July European Banking Authority (EBA) stress test indicates that European banks remain resilient even in an adverse macroeconomic scenario.
Main risks and structural effects
- Continued high uncertainty related to the evolution and legacies of the pandemic, including renewed concerns about newer and more transmissible COVID-19 variants (Omicron referenced), which present the most significant threat to the recovery.
- The recovery is likely to be uneven across countries and sectors, which can increase inequality and disparities across and within countries.
- Upside inflation risks have increased; however, inflation expectations are described as "near two percent" and "well anchored."
- Potential positive structural effects: faster-than-expected adjustment to COVID-19 and acceleration of automation and digitalization could boost productivity and potential growth.
- Real-estate market valuations are described as "stretched" in some jurisdictions, especially those with elevated household debt, implying macroprudential tightening needs.
Policy recommendations — fiscal
- Fiscal policy should remain supportive but become increasingly targeted as the recovery continues.
- Public expenditures should focus on supporting the most vulnerable and on high quality investment as the recovery takes hold.
- Once the expansion is firm, countries will need to gradually rebuild fiscal buffers; timing depends on individual country circumstances.
- Next Generation EU (NGEU) package:
- Plays a significant role in the green and digital transitions.
- Can boost productivity growth and offset greater spending restraint, especially in high-debt countries.
- Policymakers must balance pressure to disburse quickly with ensuring investments and reforms are high quality and implemented in line with national recovery plans.
- EU fiscal rules should be reformed to reflect the post-pandemic reality; application of current fiscal rules would require unrealistically large and counter-productive adjustments by some high-debt countries.
- Transitional arrangement for fiscal rules (if new rules are not in place when the general escape clause is deactivated):
- Preferable to complete revision expeditiously, but recommend having a time-bound transitional arrangement to avoid disruptive adjustments.
- Key features emphasized: simplification; implementability; strong national ownership.
- Important roles for national fiscal councils and the European Fiscal Board; the European Commission to step in only for significant deviations.
- Recommendation to ensure fiscal rules do not "suffocate much needed investments" — specific suggestion: a green investment fund at the EU level for efficient deployment toward emissions reduction and domestic investment needs.
Policy recommendations — monetary
- The European Central Bank (ECB) should look through transitory inflation pressures and maintain an accommodative monetary policy stance, given underlying inflation dynamics expected to remain weak over the medium term.
- Clear and effective communication is essential amid extraordinary uncertainty, notably regarding the upcoming expiration of the pandemic emergency purchase program and the third round of targeted longer term refinancing operations.
- If high inflation proves more durable than expected, the ECB is deemed well equipped to adjust course and scale down both conventional and unconventional monetary policy support.
- The IMF welcomes the ECB Monetary Policy Strategy Review: the symmetric two percent inflation target, strengthened link between monetary and financial analysis, and plans to enhance climate related monitoring, disclosure, and risk analysis.
- A data-driven, country-specific approach to monetary policy is stressed; differences between the Federal Reserve, the ECB, and other central banks are expected and appropriate given heterogeneous conditions.
Policy recommendations — financial sector and banking union
- Vigilance remains crucial despite smaller-than-feared pandemic impact on banks and markets.
- Banks should maintain sizable safety buffers; supervisors should ensure loss recognition is forward-looking and provisioning is appropriate.
- Continued, gradual normalization of financial sector policies is appropriate, including normalizing crisis-related prudential accommodations according to pre-announced timelines.
- Macroprudential tightening is necessary in jurisdictions with stretched real-estate valuations and elevated household debt.
- Renewed push for completion of the banking union is deemed crucial:
- Further improvements in bank supervision and resolution to create a truly single market in banking.
- Ultimately underpinned by common European deposit insurance.
Structural policies, labor markets, and climate
- NGEU supports ambitious reforms for structural transformation, particularly digital and green transitions.
- As recovery solidifies, labor market policies should shift to facilitate labor reallocation toward expanding industries while protecting the most vulnerable who may struggle to transition or enter the labor market.
- EU climate policies are critical to accelerate the green transition; IMF "cheers" the Fit for 55 agenda, noting it appropriately integrates carbon pricing and includes measures to protect the most vulnerable households.
- European leadership on global issues (climate, trade tensions, global corporate minimum income tax) and on vaccine production and distribution (including support for COVAX and diversifying vaccine production to regions lacking capacity, like Africa) remains important.
IMF role and country mentions
- Greece:
- Greece planning to pay back the last tranche of the IMF loan; repayment brings symbolic closure of a difficult period.
- IMF role after repayment: continue surveillance and policy advice, continue to provide services as found useful by Greece, draw on Greek expertise and support, and serve as a transmission line of experience and support across countries.
- Italy:
- IMF projects 5.8 percent growth for Italy in 2021 vs five percent for the euro area.
- IMF views Italy's 2022 budget and recovery plan as having a sound foundation of reforms and investments, balanced between structural reforms and investments; notes an observation that the budget projects a reduction in income tax and an increase in overall social spending (not investment spending) and questions sustainability in the medium term.
Scenarios and near-term outlook
- Omicron variant: many unknowns; IMF cautions that new variants present the most significant threat to the recovery.
- Near-term growth impact: rising infections are leading to some weakening of growth prospects for the fourth quarter of 2021 and possibly the first quarter of 2022; IMF indicates that a modest downward revision of growth projections in the January update "may be in the cards."
- On the question of increasing the reference debt-to-GDP value to 100 percent: IMF staff are working on analysis and will present a more detailed view in due course.
Transcript of IMF Managing Director Press Briefing on the 2021 Euro Area Concluding Statement on Common Policies for Member Countries, December 6, 2021.