Transcript of a Conference Call on the 2009 Article IV Consultation with the Euro Area
July 31, 2009With Marek Belka, Director of the IMF’s European Department, and Wim Fonteyne, Senior Economist in the European Department
Thursday, July 30, 2009
Ms. GAVIRIA: Hello, everyone. I’m Ángela Gaviria, with the External Relations Department of the IMF. Welcome to this conference call on the 2009 Article IV Consultation with the Euro Area. Let me now introduce our lead speaker, Marek Belka, the Director of the European Department of the IMF. Also here with me is Wim Fonteyne who is Senior Economist in the European Department. Marek Belka will make some opening remarks and then they will be happy to take your questions.
MR. BELKA: Thank you. Good morning and good afternoon. We have just completed our annual assessment of the Euro Area economy. Let me offer some remarks before we get to your questions.
First, despite tentative signs of improvement, the Euro Area economy remains in recession and the outlook is uncertain. We expect the decline in activity to moderate during this year and give way to a modest recovery starting in the first half of 2010. However, the recovery is expected to be slow. The path to recovery is complicated by continuing stress in the financial system, adverse feedback loops between the financial system and the real economy, soft demand associated with fragile confidence and structural rigidities.
What policies are needed in this context? Monetary policy needs to remain accommodative, fiscal policy should remain supportive in 2010, but confidence in long-term fiscal soundness must be preserved. What we need most is proactive policies related to the banking sector. A coordinated and proactive approach is what we need. It comprises a comprehensive review of the financial positions of banks followed by action to recapitalize or restructure weak banks.
The crisis has been a major challenge to the European Union's single financial market and to its financial stability framework. In this light, we commend the comprehensive efforts that the E.U. has embarked on to reform this framework based on the recommendations of the de Larosière Group. We strongly recommend that these reforms be completed on the current ambitious timescale.
The crisis has raised the importance of structural reforms to improve the economy's growth potential and its adaptability in a rapidly changing world. These reform efforts need to be intensified, building on existing initiatives such as the Services Directive and the Lisbon Agenda. The key challenge is to facilitate the reallocation of resources to future-oriented activities and sectors. Notably, policies need to ensure that people who lose their jobs stay attached to the labor market and acquire the skills that will help them prosper in new jobs. That's it for the introductory remarks.
QUESTIONER: Two quick questions. You predict a modest recovery for the Euro Zone in 2010. You've been maintaining forecasts at minus 0.3 percent growth. Is this suggesting that you're getting slightly more optimistic for next year? The second question: perhaps you could say a bit more on what needs to be done at the European level on banks?
MR. BELKA: I don't have really much to add to our forecasts concerning the development of business activity this year and in 2010. As to the banks, much has been done, but let's just get straight to the most debated and potentially contentious issue, which is the famous or infamous bank stress tests, because I expect that you would be mostly interested in this.
I think that what is now being initiated and done under the auspices of CEBS is a good step, a step in the right direction, and we commend it. But the question is whether this is sufficient, whether this addresses the main issue, which is to have a good picture of the financial position of banks, of individual financial institutions. And our answer is that it's not sufficient. So more needs to be done, and as a matter of fact, in many countries it is being done.
The second issue is whether the results of this exercise should be made public. Obviously, you know that there are different views. Some countries are staunchly against it, some countries have nothing against it or are even proceeding in this direction. Our view is the following: we are not talking about results of stress tests being public. This is not really the end in itself, but what is really at stake is rebuilding confidence and no matter how imperfect the American exercise for some people might seem, it helped rebuild confidence. So this is a very suggestive argument for the Europeans, which we are raising with them, that if you want to rebuild confidence, this is the way to proceed.
QUESTIONER: Overall your feeling is that European banks and European regulators have lagged a little bit and there are more write-downs and things to do here than have been done elsewhere, notably in the U.S.?
MR. BELKA: I don't think that you should simply compare. This is not a race, really, and there is a somewhat different approach to how the losses are estimated. There is some difference in the methodology used to estimate losses. You will find information on this in our documents in one of the boxes. So I would stop short of saying whether we are proceeding too fast or fast enough or too slow. This is not a race.
QUESTIONER: I'm just wondering how you see the Euro Zone economic recovery in comparison with the U.K. and the U.S. Do you see it recovering at a similar pace?
MR. BELKA: I think that what is most important for the pace of recovery in the Euro Zone is how decisive policies toward revitalizing the banking sector are. As we all know, European economies are bank based and so much depends on the health of the banking sector. The more is done to clean the banks, so to say, to enable them to perform their intermediation functions best, the more robust the recovery will be.
The second thing which is also quite important for Europe and for European economies, the slightly longer-term prospects, we see that the pace of recovery depends very much on the growth potential and that is why we ascribe such an importance to structural reforms that could improve the European economies' growth potential. Here we look carefully at how the crisis could impair the potential growth of the economies. So that is why our view would be look at bank-related policies, look at structural policies, because these two will determine the pace of recovery on the European Continent.
QUESTIONER: Two questions. Firstly, if I understand correctly you published an Article IV Consultation in the beginning of June. Can you explain what's different in what you've put out today? Secondly, just picking up on the point about potential growth, have you got new estimates now of Euro Zone potential growth?
MR. BELKA: No, not really. The reason why we have this question-and-answer session now and not in June is just technical. It has nothing to do with changed forecasts.
MS. GAVIRIA: Let me explain. It was the concluding statement at the end of the mission that was published in June. Now we're publishing the staff report and PIN and that's why we're doing this now. Is that clear?
QUESTIONER: And the second question on potential growth? Whether you have new estimates of Euro Zone potential growth rates.
MR. BELKA: Not really. We are working on this and we all know how generally imperfect is the methodology to establish the value of the growth potential, not only in Europe but generally. We are working on this. We do not have new estimates.
QUESTIONER: This is about deflation. You mentioned the risks of deflation again in your report. Do you think the risks of deflation have subsided recently or are they still real?
MR. BELKA: In our discussion with European institutions, especially with the ECB, we have raised this issue and there was a slight disagreement between us, or at least a difference in accent. We heard from the ECB mainly that the risk of deflation in the European economy is minimal. We share this view, but we add that we shouldn't discount fully a situation in which nominal rigidities can break down if the slump continues, if the situation on the labor market gets worse for a longer time. We basically shared the view that the danger of deflation is really minimal, but we should be vigilant and we shouldn't completely exclude this possibility. But we do not see deflation as imminent in Europe.
QUESTIONER: You just said that deflation risk is not imminent. Do you have an idea when it could happen if it happens? This is my first question. The second question is on the stress tests for banks. Do you recommend that it should be public for the national tests and the aggregate tests that the CEBS is leading at the European level? I have a third question, because you say that the stimulus plans should continue in 2010 and that there might be more to protect investments. What is your opinion about the national loan considered in France to finance strategic investments? Do you think that is going in a good direction even if it's going to weigh on public finances?
MR. BELKA: As to deflation, I don't think we should engage in speculation. We simply do not expect deflation to be the case in the European economy. On stress tests, I think what is needed is to disclose the situation of the financial position of banks. But let me reiterate. It's not disclosing for disclosing's sake. It will not be productive if we just made it public and leave it like this. What is important, what is much more important, is to follow this by action to recapitalize and restructure banks that need restructuring. So what we are pleading for is comprehensive action on banks, something that will first help rebuild confidence, and then be followed by concrete actions.
As to the fiscal stimulus, our view on this is the following: 2010 will be the year in which the impact of automatic stabilizers will be much stronger in the European economy than this year, and all in all the impact of fiscal policies, discretionary policies, and automatic stabilizers will have a sizable tangible impact on business activity in European economies. We add to this that we should be prepared to do more if the recovery is not visible. However, this has to be underpinned by longer-term actions preserving fiscal sustainability. The problem is that if we divorce shorter-term actions from longer-term fiscal sustainability, this can have, especially in the European context, a negative impact on the effectiveness of the fiscal policy. What we concentrate on in our discussions with the Europeans and in our documents is also the quality of fiscal measures. And here we certainly favor those measures that have higher multiplier values, and infrastructure projects are among those, so you can draw the conclusion from this.
MR. FONTEYNE: As far as the French program is concerned, we will come out with a report on France very soon.
QUESTIONER: I was just wondering if there is anything specific that you are looking at in terms of policy measures in Germany. You spoke about a coordinated approach to fixing the banks and the idea of these stress tests. What can Germany do to help this process?
MR. BELKA: This is a very general and open question and many things come to my mind. Obviously, one thing is what Germany is doing or is discussing to do in terms of separating impaired assets from the banks. This is still being discussed, I understand, and it's probably not something that we are discussing in detail in our report. Another issue, the most recent issue that made waves in the media, and a very serious issue, is the constitutional amendment that was passed in Germany concerning the fiscal framework. This is another piece of legislation and an important fiscal measure that we are discussing among ourselves.
On this latter point, I must say that the constitutional amendment goes in the right direction, in the direction of strengthening the long-term fiscal framework. And it’s a good example of strengthening fiscal sustainability in the longer term. There is a discussion of whether it provides for necessary flexibility. The problem is that the amendment concerns the structural deficit, which in itself assumes the working of automatic stabilizers. Also, it provides for an emergency clause in an extraordinary situation and a diversion from the rule can be accepted. The problem is how the Germans will solve implementation issues because a structural deficit is a well-defined concept, but to estimate it in practice is not without problems. So we have to solve these issues and it remains to be seen how this legislation will work in practice. All in all, however, this is a step in the right direction and we look at it with interest and we commend it. But there are many issues concerning the German policies. I see your question as an open one.
QUESTIONER: Specifically on the banks, is there anything more you would say on what they should be doing?
MR. BELKA: We have the same recommendation for Germany as for the whole Euro Area. What we are highlighting is the necessity to have a comprehensive review of the financial position of banks and to make it a basis for concrete action, to recapitalize and restructure if necessary. So this recommendation is valid for Germany as well as the whole European economy. I have nothing to add to this.
QUESTIONER: On your advice to the European Central Bank you seem to be saying it's doing a fine job and monetary policy in the Euro Zone should remain accommodative. Then you say in the staff report that the ECB should weigh up whether it should cut policy rates further. Is that your basic message? And what do you mean by saying if things deteriorate it might need to consider a more forceful signal on rates? Could you elaborate on that, please?
MR. BELKA: What we are saying, and this is not a difference of opinion between us and the ECB, is that the current policy rate is not treated as a floor. But we add to this that if there is room to reduce the policy rate, it has to be exploited as soon as possible. At the same time, we admit that further reductions of the policy rate could have a limited impact on the actual stance of monetary policy in the Euro Area as other instruments, quantitative easing, have driven down rates to the level comparable or even lower to what they are in the U.K. and in the U.S. So we do not make it the thrust of our recommendation. The interest rate policy has played its role so far. If there is room, let's exploit it as soon as possible. But we understand that further reductions could impair the functioning of the interbank market. And other instruments have basically done the job that could have been done by further reductions of interest rates.
QUESTIONER: Could I just follow-up on that? You think that if the ECB has room, it should move as far as possible. But what's your view? What's the IMF's view? Does it have room?
MR. BELKA: We don't think that this is the main issue. We do not push too much on this because the market rates are already where they should be.
MS. GAVIRIA: Thank you all for participating.