Opening Remarks at “Policymaking in Choppy Waters: Fostering Resilience in Central, Eastern, and Southeastern Europe”
IMF News, June 2, 2023
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- Published: June 2, 2023
Key observations on recent shocks and regional impact
- Since the last conference in 2019 the world has been hit by "shock, upon shock, upon shock": Covid; Russia’s war in Ukraine; a cost-of-living crisis; and accelerating impacts from climate change.
- The war in Ukraine:
- Has been "absolutely devastating" to peoples’ lives and the economy in Ukraine.
- Sparked an unprecedented gas crisis and food price inflation across the rest of the region, "especially impacting the most vulnerable."
- Has sped up geo-economic fragmentation and led to rising defense budgets and adjusted supply chains.
- Inflation and growth dynamics:
- "Headline inflation has been falling since late 2022, but it is still painfully high, and core inflation has yet to show clear signs of decline."
- Projection: "inflation will stay well above central bank targets past 2024."
- "Real GDP levels in 2024 are projected to be 3.5 percent lower than what we had expected at the beginning of 2020" (excluding Belarus, Russia, and Ukraine).
- This shortfall is characterized as "like taking €50 billion out of peoples’ pockets over these five years."
- Regional resilience: historical analogy to Dubrovnik (Ragusa) emphasizes open economy, prudent state finances, social services, and investment in education as sources of resilience.
Three main challenges identified
- Bringing down inflation while sustaining the recovery and laying foundations for future growth.
- Monetary policy: "countries with independent central banks will need to keep a tight policy stance—and possibly tighten further if inflation remains sticky."
- Fiscal policy: "staying prudent while protecting the vulnerable" and "Consolidation should be even more ambitious than currently planned in most of the region."
- Structural policies: invest in people (reskilling, subsidizing childcare) to expand the workforce and ease labor shortages; integrate Ukrainian refugees while supporting returns to Ukraine.
- Examples of integration measures:
- Poland and Estonia created online tools helping Ukrainians find jobs faster than previous refugee groups.
- Czech Republic is easing recognition of refugees’ professional qualifications.
- Language support highlighted as providing "strong returns" to host countries and as an investment in Ukraine's future.
- Energy security.
- Analogy: Ragusa’s 12-kilometer aqueduct as a precedent for major public infrastructure.
- Examples:
- Baltic Synchronization Project to connect Estonia, Latvia, and Lithuania to the EU electricity network.
- Projects to close remaining gas bottlenecks.
- Policy levers:
- Increase public and private investment in renewables.
- Adopt more ambitious emission reduction targets and more effective policies to meet them.
- "Carbon pricing is needed—it is the fastest, most efficient way to achieve climate goals."
- Standards and regulations also have a role; domestic actions plus EU climate policy support can accelerate the green transition.
- Seizing opportunities in a fragmented world.
- Risk: multinationals may keep production at home, making it harder for the region to integrate into global supply chains.
- Opportunity: some production may relocate closer to home (e.g., from Asia), creating prospects for the region.
- Policy enablers:
- Stay open to trade.
- Non-EU members: further align regulations and technological standards to draw investment and increase access to the EU market.
- Invest in transportation and digital infrastructure.
- Quantified simulation finding: "with improved connectivity and the same efficiency of public investment as EU-15 countries, the impact of these infrastructure investments on long-term output in this region could nearly double."
Policy recommendations and priorities
- Monetary:
- Maintain a tight policy stance where central banks are independent; consider further tightening if inflation remains sticky.
- Fiscal:
- Pursue more ambitious consolidation than currently planned in most of the region to:
- Reduce inflation,
- Lower debt service costs, and
- Bolster financial stability.
- Protect vulnerable populations during consolidation, following Ragusa’s example of social provisioning.
- Structural and labor market policies:
- Prioritize reskilling workers and subsidizing childcare to expand labor supply.
- Implement measures to integrate Ukrainian refugees (job-matching tools, recognition of qualifications, language support).
- Energy and climate:
- Scale up public and private investment in renewables.
- Adopt more ambitious emission reduction targets and effective policies to meet them.
- Implement carbon pricing as a central instrument; complement with standards and regulations.
- Invest in cross-border energy infrastructure (electricity synchronization, gas bottleneck elimination).
- Trade, investment, and connectivity:
- Remain open to trade to capture gains from shifting supply chains.
- Align regulations and technological standards to attract investment, especially for non-EU members.
- Increase public investment in transportation and digital infrastructure with improved efficiency to amplify long-term output gains.
IMF role and engagement
- The IMF provides:
- Policy advice and technical assistance, including public investment management.
- Financing for Kosovo, Moldova, Serbia, North Macedonia, and Ukraine.
- Resilience and Sustainability Trust funding for Kosovo to address longer-term climate challenges.
- The IMF emphasizes partnership to help the region navigate ongoing shocks and to support long-term resilience.
Closing message and long-term perspective
- The speaker draws inspiration from Dubrovnik’s historical choices: "think long-term and build it right."
- With "the right choices and the right execution," policymakers can leave a durable and successful legacy comparable to Dubrovnik’s historic achievements.
Opening Remarks at “Policymaking in Choppy Waters: Fostering Resilience in Central, Eastern, and Southeastern Europe”, Dubrovnik, Croatia, June 2, 2023