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Transcript of Press Conference by Managing Director Rodrigo de Rato with External Relations Director Thomas C. Dawson and Director of IMF Offices in Europe Saleh Nsouli
May 3, 2005
International Monetary Fund
Tuesday, May 3, 2005
Paris, France
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MR. DE RATO: Good morning. It's a pleasure to be back in Paris again at our offices for Europe, and as Mr. Dawson just told you, we've had a new manager, new director of the European Office, Mr. Nsouli, and that shows clearly the importance we give to the presence of the Fund in Europe and the relationship between the Fund and the European governments and institutions regarding our core mandate.
I had the pleasure and the honor of visiting President Chirac this morning. We had quite a long conversation about many issues, both European, domestic French, and also international and related to the works of the Fund regarding low-income countries, poverty reduction, development, trade, Africa, and also the situation of the world imbalances. So it was a very comprehensive conversation and I have to thank the President for its openness.
Let me just before we get into the questions make some remarks about the situation in Europe and also specifically in France.
The recovery has lost steam in the second half of last year and the main reasons were at that time sharper slowing of export growth in many European countries, and a more gradual firming of domestic demand than expected. In that respect, higher oil prices and subdued wage growth has held back consumption clearly.
The exchange rate has had effects, but we don't see as it playing a major role. In part, regarding to the euro area, it has buffered the effects of higher oil prices.
We see that the soft patch, if you want to call it that, will continue during the first quarter of 2005, both in Europe, but also in the United States, and its downside risks have increased in the world economy, as we had the chance to say it in the spring meetings.
But there are reasons to believe that the growth momentum could be recuperated in the second half of the year. That of course depends on some of the policies that we are advising countries to pursue in the near future.
In that respect also I would like to signal that inflationary pressures are well contained and inflation expectation is well anchored. And I want to recognize clearly that the credibility of the European Central Bank's monetary policy is strong, and in this setting the International Monetary Fund considers it premature to rule out interest rate cuts in Europe.
In that respect and coming to the European policy framework, the key to a lasting strengthening of growth in Europe, we don't have any doubt that it's based on structural reform. This is not something new, but we believe that it's clearly more and more true.
But what has not been said so often in Europe is that Europe has had reforms in the last few years and that those reforms have borne fruit, and more than is sometimes acknowledged for Europe. Let me put you an example. Europe's unemployment has held up unexpectedly well through the downturn of the last 2 years, and job destruction typical of past economic cycles has been averted this time.
Let me also give you another example, and I think this one has not been said very clearly. Over the past decade, employment growth in Europe has broadly matched the record of the United States. So Europe can have reforms, Europe has had reforms, and reforms in Europe do produce results. So the question is not that things are impossible, the question is that we have to continue in the same path. And fundamentally looking at this case that the past decade employment growth in Europe has broadly matched the record of the United States, fundamentally wage setting and labor market reforms over the past decade in Europe have been more job friendly and companies have hired more employees. But we have to continue because the number of people working in Europe and the amount of work that is done by every person who is working in Europe needs to be increased in the future.
Labor markets have become more robust and resilient. Unemployment rates and participation remain low. So that is the challenge of the European situation right now, to reduce or stop unemployment that still remains too high, and we believe that the labor reforms that were pursued at the Lisbon Agenda really shows us the way that Europe has to continue in the future.
Let me again insist that globalization doesn't necessarily mean the end of the European social model. Globalization is just a fact of the actual economic realities, but globalization and the welfare state are not inconsistent with one another, and in that respect, there are examples in Europe, in Northern Europe and Switzerland, that shows clearly that unemployment rates can be high in Europe, and I want to insist on that idea.
Continuing on Europe, let me just mention another important issue, which is budgetary policy. The European Council decision in March to reform the Stability and Growth Pact we see as a clear sign of consensus on a European fiscal framework, with member states continuing to be committed to fulfill the budgetary rules.
But going forward, we see that it's essential that the new framework of the pact delivers an application of the pact that is transparent and even-handed. So now implementation is going to be crucial and it's going to be crucial that that implementation is clearly explained, has transparent rules, and is applied in an evenhanded manner.
Also I want to underline that the basic principle of budgetary restraint in Europe not only remains essential, but is going to become more and more important. The most challenging questions of the aging population in Europe are still to come, and after 2010, most European countries are going to be facing very important challenges. So it's clear that budgets move close to balance or surplus at a stronger pace than up to now and that even in these economic situations, which are clearly better than the ones of 2 years ago, governments have to move to more rapid reduction of having deficits to be able to face the challenges of an aging population that are just around the corner.
In this respect, in the new rules of the pact, we see that the strengthening of national institutions, for example, independent national fiscal councils reporting directly to parliaments can invigorate the ownership of budgetary policy throughout Europe.
Just very briefly making a reference to France, although there is a small deceleration of the GDP this year, French growth continues to outperform the EU area as a whole. Domestic demand is holding up reasonably well. We see a weakening in foreign demand which is clearly explained by the fact that very important markets for the French economy in Europe like Germany and Italy are more weak than initially expected.
We see clearly a merit to continue labor reforms in France as to make the job performance and the rates of participation higher, especially among the young. And regarding the fiscal position, we see clearly that there has been important improvements in pension reform. We see the results of the partial reform of the health system as positive. And we see also the maintenance of the rule of zero growth of expenditures as positive. But we also see clearly that France has to increase its budget efforts in the years 2005 and 2006.
I don't want to take more time in this presentation statement, and I open to your questions. Thank you very much.
QUESTION: You mentioned a little bit about the Europe and the exchange rate. There has been some discussion recently about what impact the Chinese revaluation would have on the U.S. trade deficit, with some economists coming out and saying that it wouldn't have much of an impact at all because other Asian nations would move in and supply the goods to the U.S. that China does now.
What effect do you think a China revaluation would have both on the U.S. trade deficit and also on growth in the European Union?
MR. DE RATO: As you know, our approach to the global imbalances, and I have to say that global imbalances have increased in the past 6 months, our approach to global imbalances is more in the view that change of policies are needed not only in Asia, but also in the United States and Europe, and that one single change will probably have very limited effects.
So we really are of the opinion that it is necessary for the U.S. economy to increase in a very credible way its savings rates, and I just want to mention last week's statement by the U.S. monetary authorities in that regard. We see clearly that it is in the advantage of the United States to increase its budgetary restraint and to increase its domestic savings rates, and that will have a contribution to at the same rebalance the global economy.
We see that it is needed for Europe to have a more active role in world growth, and for Japan. And in that respect, we see that changes in Europe, as I just defined as positive, but needed to be strengthened and accelerated. And we see the recent announcement of the Japanese government to pursue its liberalization and privatization policy in the Postal Service as a positive one. In that context, we also see that more flexible exchange rate regime throughout Asia, and especially in China, is certainly to the advantage of the Chinese economy and will have also a contribution to readdress global imbalances.
But we believe that the approach to global imbalances has to be a comparative one because the actual change of policies of one of the actors will not be sufficient to readdress the situation.
QUESTION: The German economy has a big problem that is household consumption. It's very weak at the moment. The German government has started reforms of the labor market, of the social contributions. Is there a direct link between starting reforms and on the other hand having to suffer a downturn in private consumption? Or what is your analysis of the weakness of private consumption in Germany?
MR. DE RATO: To the contrary, I believe that the lack of confidence is based on the lack of reforms in previous times. So I think that reforms are going to show in Germany like elsewhere that the actual so-called European social model is possible but with more dynamic economies.
Certainly, labor reforms that will strengthen the capacity of people to be hired and labor reforms that will allow people to work more are essential. In that respect, not only labor markets, but certainly labor markets, but also competition rules on the opening of very protected areas of the economy to increase the chances of people finding more jobs, and making more efforts in those areas of the economy are going to be very important for the future, not only in Germany, but in the rest of Europe.
The question in Germany is to increase the growth potential of the German economy. The German economy is internationally very competitive as it's been shown by the very dynamic export-led growth. But what is needed now is to clearly give a sign of confidence in consumption and domestic markets that is related both to more labor possibilities and to more competition.
QUESTION: You said in your introduction that you had met with President Chirac and you talked about Africa. I'm wondering whether you mentioned the global tax that he has suggested to enhance ODA (overseas development assistance), and how do you at the IMF address this global tax? And how do you assess the overall situation in Africa regarding the economy?
MR. DE RATO: I had a long conversation about that with President Chirac. I just want to say a few things. First of all is that sub-Saharan Africa is experiencing an important growth pattern in recent years that shows that macroeconomic stability is given new chances of growth, at the same time that that growth is not sufficient to reduce the poverty situation in Africa. In that respect, a comprehensive policy is needed.
What do we mean by a comprehensive policy? First of all, to continue strengthening macroeconomic stability and reducing vulnerabilities, a substantial increase in aid not only in the quantity, but certainly growth in the quality of aid, making it more predictable and more efficient, and important opening of trade markets. In that respect, the Doha Round we believe is a very important step for Africa. And also the capacity of making Africa more integrated in the global economy. For instance, I'm going to be in Cotonou in a couple of weeks in a conference about cotton in Africa and the new realities of the cotton market, and I think that the African cotton producers have to at the same time realize the new prices in the world but also be benefited by the reduction of protectionism in developed countries in the cotton industry and cotton production.
And certainly in the strengthening of governance. Growth and unemployment need macroeconomic stability, need an increase of aid, but need the private sector flourishing in Africa. Without an increase in the role of the private sector in job creation and in growth in Africa, long-lasting growth effects will probably be very, very limited.
In that respect, governance, the fight against corruption, efficient administrations, efficient law systems, are essential. And we see a lot of encouraging efforts by actual African governments in that respect.
Just to finish, I just want to emphasize the importance of ownership by African governments of their own economic programs. It is essential that the strategy for the reduction of poverty in Africa is benefited by help, by aid, by increase in trade, but it's home grown and defined in a clear and strong ownership by national governments and national societies.
QUESTION: I would like you to comment on the current situation in Argentina if you would and ask whether the IMF is considering the possibility of granting a new loan to Argentina.
MR. DE RATO: As it concerns Argentina, let me say that there is nothing new in this situation. As compared to the comments that I made at the spring meeting of the IMF, there is a reference made to Argentina, which was agreed to in the communique about Argentina. Argentina in fact was a part of the consensus that appeared in the communique.
Nothing has changed in the interim. We have had talks with the Argentine government regarding the Article IV consultations, which will be upcoming in the next few months. As far as the future is concerned, we cooperate with the Argentine government depending on what it wants to propose, but there is really nothing new at the present time on that score.
Also concerning Argentina is the fact that pushing the government to work with a 25 percent holdout will be one of the conditions for the IMF to enter into an agreement. The IMFC said clearly that Argentina had made a substantial effort and the solution to the problem of arrears with private creditors was important in order to give Argentina a good prospect for future growth, and this was part of a realistic strategy on the part of the Argentine government as concerns the holdouts, as they are called in English.
This was a statement that was made with the consensus of all the representatives of the IMF countries, and I don't have anything further to add in this respect.
QUESTION: You didn't say anything about the talks you've just held with Jacques Chirac. Could you give us some insight as to what was said, in particular about the IMF's position on the global tax?
MR. DE RATO: As concerns development, I've already said some of my views in my reply from the Africa representative of Parliament. But let me say that the World Bank and the IMF have made public our analysis regarding the need for substantial additional assistance, ODA that is, in order to achieve the Millennium Development Goals, the MDGs.
In this respect, the various international plans which would make it possible to scale-up resources are interesting. We have studied them from the technical standpoint with our economists, and all these initiatives present some technical difficulties, but they can be overcome.
However, what is essential is to have the political will to reach an agreement on any of them. That is the element. Moreover, when we talk about fresh resources, we must be talking about additionality. What I'm saying is that it has to be a true scaling-up of resources and there has to be a political will to reach an agreement in which institutions such as the IMF can be of assistance in order to support that political decision.
Now, any of these alternatives present technical difficulties which have to be overcome, but what is essential is the political decision to have incremental resources. Moreover, one mustn't lose sight of the fact that whatever may be the final decision, this will take time as far as implementation is concerned, which is to say that in the next year or two if we do want a scaling-up of resources, this will have to come directly via budget.
QUESTION: You said that global imbalances have gotten worse over the last 6 months.
MR. DE RATO: I haven't said a lot. I said it got worse.
QUESTION: Not a lot worse then?
MR. DE RATO: No. I haven't said a lot.
QUESTION: In that context, how do you still rate the risk of a serious decline of the dollar in order to resolve some of these imbalances?
Secondly, given your remarks on China, do you not regard a Chinese revaluation as being as urgent as issue as the U.S. administration seems to find it?
MR. DE RATO: Well, first of all, I'm not going to make predictions on the evolution of currencies.
And the second question is that the global imbalances, that is, the difference between savings and investment in the world, and the difference between the rates of growth have increased, not decreased. And the influence of high oil prices have been sustained and even increased in some moments so that that is why we are stressing that the downside risks have not been reduced but have increased.
The reduction of global imbalances in our opinion will be more efficiently addressed if certain systemic countries, big economies, do change some of their policies to address those imbalances. There is an increased and sustained increase in the rates of domestic savings in the United States and that will be not only important for the world economy, but it will be very important for the move or maneuver of macroeconomic policy in the U.S. and for the challenges regarding Social Security and heavy expenditures in the U.S.
Second, that Europe increases its growth potential, and that is not only important to increase the contribution of Europe to world growth, but it's essentially for Europe challenges regarding the aging populations problem, the same regarding Japan, and certainly a movement towards exchange flexibility in Asia.
The question is that what is needed is for Asian countries that are playing a more and more important role in the world economy to have more flexible exchange rate systems. Why? Because that will allow them to pursue a more nationally owned monetary policy and antiinflationary policies, and also because it will allow them to absorb external shocks in a more efficient way. That's how we have been seeing the issue since last year, and we see more and more merit in our analysis as time goes by. At the same time, we see that the doubts and risks are increasing.
QUESTION: In respect to Argentina, did you meet Minister Lavagna here in Paris to discuss the issue of the debt?
MR. DE RATO: Well, it's not on the agenda, but it is possible because I will be spending time with many ministers at OECD for a 2-hour period. I don't have a specific appointment, but it's not to be ruled out.
QUESTION: You raised the problem of aging in Europe and the budget challenge that this will give rise to. Do you think it would be a good policy to lower taxes in Europe?
MR. DE RATO: Well, in respect to fiscal policy, it is essential to move towards the reduction of deficits and to generate surpluses. This is of the essence in order to have the wherewithal to address this tremendous challenge of population aging.
Now, tax policy is very important as a component of growth, and growth in turn has a clear impact on the possibility of increasing revenues, of bringing in additional revenues. Now, the design of taxes with simple taxes and a very wide tax base is an effective, efficient policy. But in any event, what is essential for Europe is to step up its ability to address this tremendous challenge of population aging and, hence, the fiscal deficit must absolutely be reduced.
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