Transcript of a Press Conference on the October 2009 Regional Economic Outlook for Europe
October 3, 2009With Marek Belka, Director of the European Department; Ajai Chopra, Deputy Director; Anne-Marie Gulde-Wolf, Senior Advisor; and Luc Everaert, Assistant Director in the European Department.
Istanbul, Turkey, October 3, 2009
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MS. GAVIRIA: Good day, everyone. I am Ángela Gaviria with the External Relations Department of the IMF, and this is the press briefing on the October 2009 Regional Economic Outlook for Europe.
Let me introduce the speakers.
At the center of the table, we have Marek Belka, who is the Director of the European Department. To my right is Ajai Chopra, Deputy Director in the same Department. To Marek Belka's right is Anne-Marie Gulde, Senior Advisor. And at the end of the table to the right is Luc Everaert, Assistant Director and head of the team that produces the Regional Economic Outlook.
Marek Belka will have some opening remarks to start, and then we will be happy to take your questions.
MR. BELKA: Thank you very much.
We are not going to overload you with too many numbers and too many slides. What is more important here is the background for these slides and for the whole story unfolded in both world and regional economic outlooks.
Let's start with encouraging news: The recession in Europe is coming to an end, it seems. Our forecast for both 2009 and 2010 has been revised upwards by about .5 percent, which is a refreshing contrast to the downward revisions that we were making in the past few months. The driving forces of this rebound are improved confidence, a pick up in foreign trade, and massive support from monetary and fiscal policies.
In emerging Europe, according to our forecast, the contraction on average this year will be deeper, but the rebound also will be stronger next year.
The picture in emerging Europe, however, is much more diverse. What is common to the Region is that the shocks were broadly uniform, and that the recovery, in most of these countries, will depend heavily on the robustness and sustainability of the recovery in Western Europe, but almost everything else is different. The starting point, the conditions, and the shape in which they entered the crisis was very differentiated: different currency regimes and varying degree of imbalances accumulated in the run-up to crisis.
Just look at the household balance sheets and the currency mismatches. This is one of the most important factors that differentiates these countries.
But also, size, dependence on foreign markets as against domestic markets, all this differentiates the countries of the Region.
So, growth is around the corner, but the recovery will be slow, and likely, also, fragile. Why?
The pick-up in trade could turn out to be shortlived, demand from Asia will not be powerful enough to substitute for the pre-crisis appetite for imports from U.S. consumers. Thus,continuation of the recovery rests squarely on the shoulders of European consumers and investors.
The financial system is still fragile, credit is scarce, the future of capital inflows to emerging Europe is uncertain. And here, we mean both the availability of capital and also the cost of capital.
Most important probably is that the crisis has damaged Europe's productive potential, the decline in capital investment, rising and possible protracted unemployment, overdependence on capital inflows, these all weigh on the productive capacity of Europe.
Several countries will have to rethink their, let's say, business model. The key question is about the sources of future growth in at least some European countries, both East and West. Some of the countries to mention in this respect are the Baltic states, Bulgaria, but also Spain, Ireland. Many European countries have to do a lot to restore their international competitiveness, so this will put the upper limit on the scope of the upswing.
Against this background, policy still remains crucial. What is needed most?
Banking sector: We need a more resolute approach to assessing the balance sheet risks faced by banks and to take action to recapitalize or restructure viable institutions and resolve others if necessary. In this context, you will most certainly ask about our opinion or our comment to the recently released stress test results coordinated by CEPS.
These stress tests have been very helpful. I hope that the very fact that the stress tests were conducted and some results released will help rebuild confidence in the European banks. But what is needed is follow-up, and I understand that this is the business of national authorities, and here determination and resolve are necessary.
With respect to emerging Europe, adequate cross-border funding is key, which requires, among others, proper coordination between financial institutions in both home and host countries.
Macroeconomic policies: Fiscal policy nees to continue planned stimuli, and let automatic stabilizers work where there is room for this, but sustainability concerns are mounting. By the end of 2010, fiscal support in Europe will have contributed to an accumulated fiscal deficit of about 16 percent of GDP in advanced Europe and 10 percent of GDP in emerging Europe.
However, the picture is highly differentiated. You see on the left-hand side of the slide the situation in some European countries, which is self-explanatory.
On the right-hand side, this is--well, to a certain extent, some kind of a theoretical exercise. We just show how big the primary balance, the primary surplus in many countries, should be to achieve 60 percent public debt in relation to the GDP. We don't want to say that this something immediately attainable, but this shows you how remote some of these countries are from what the European Union itself calls fiscal sustainability.
And on top of this, we have to remind you about the rapidly aging population and the costs of it, and also about the contingent liabilities from financial sector support, about 25 percent of GDP in advanced Europe.
Well, in some countries, need for fiscal adjustment is a must. Also, remember that policy options in emerging European countries, in some emerging European countries, are highly limited. And here, I mean the countries that have currency broad arrangements, but also in the case of floaters, so to say, the fiscal space is limited and, in fact, our programs had to increase this fiscal space.
Monetary policy needs to support the recovery, but policymakers must also prepare to exit once conditions normalize and the upswing is firm. What is key here is clear communication of central bank strategy and their underlying growth assumptions. This will help anchor expectations and preserve confidence in the upswing.
Structural policy: To repair damage to potential growth, it is necessary to strengthen, accelerate what is the efforts in structural policies. Our call to labor and product markets reform is almost a platitude, but in the current situation, the necessity of strong action in this respect and the potential payoff for reforms is higher than ever. Also, it is time to remind these countries about the necessity of pension and health reforms. No matter how difficult it seems to touch on them in the current circumstances, the necessity is more urgent than ever.
In sum, policy work has just started. There is no room for complacency. The sustainability of the revival as we see it depends very much on the proper course of policy actions. It is time to clean the banks, it is time to devise--properly devise but not start implementing--exit from extraordinary macroeconomic measures, and it is the time for structural reform.
Thank you very much.
MS. GAVIRIA: Thank you, Marek.
We are ready for your questions now. Yes, the gentleman right here--yes.
Can you identify yourself, please, and your organization.
QUESTION: Hi, Steve Shifferes, BBC News.
I just want to ask a bit more detail about the problems in the banking system, both in terms of the lack of credit flowing still to companies and the policy measures that have been introduced to alleviate the situation.
I wonder if you could give us more differentiated views of the responses of--in particular, the advanced countries, and which examples you think have worked well and which haven't.
I mean, the IMF said yesterday there were problems with the political will to kind of carry out, essentially, cleaning up the banking system and getting rid of toxic assets. Now, different countries have taken very different stances. Ireland has put everything in one big bank and so forth and Germany has it.
So, I am just wondering if you are able to comment on individual countries and which have been more effective--which projects are more effective where, in your view, there are still problems that remain, that the toxic asset problem hasn't been conquered.
And the second part of that is, how is this reflected or what differences are there, in fact in the situations in the banking sector within different big European countries, for example, between Germany and the UK in terms of how viable their banks now are.
MR. BELKA: Well, this is a question that begs for a lecture or maybe a series of lectures, so you should forgive us when we concentrate on certain issues. I think that the recently published results of stress tests capture some of our concerns, but also some woes that we sometimes express about the policy actions in the banking sectors of Europe.
I would ask Luc Everaert to specifically elaborate on this.
MR. EVERAERT: This obviously is a vast subject. I would just quickly respond that there are two sets of policy measures out there that have not yet been fully effective.
One is the provision of recapitalization and the incentives for recapitalization of the banking system. We now have the stress tests, national authorities are going to follow up, so we hope that these measures will now become more effective. You have seen that, in some countries, they have been taken up more than in other countries. You have also seen that, in a number of countries, that all the banks are now starting to raise finance from the private sector which I think is a good sign, and this is probably the result of some of the actions taken by the authorities.
The question on impaired assets, I think it is too soon to judge what works. It is a very difficult problem, and we have, in the history of financial crises, very few examples of sort of quick and successful resolution of impaired assets from institutions that are staying alive.
So, I think that the models that Ireland and Germany have chosen, for example, have adapted to their circumstances, but we still need to see how effective they will be.
Aside from that, I think banking systems that need more work are those, of course, in countries that have seen deflation of asset bubbles. We know the examples of the UK, Ireland, and we can add Spain to that, but there are also longstanding structural issues. We know for example that in Germany there are regional banks that also need to be restructured with some sense of urgency.
I will leave it at that. Thank you very much.
MS. GAVIRIA: Yes, let's see, the gentleman right here in the front, please.
QUESTION: Federico Fubini [ph.] [inaudible], Italy.
I have a question on your forecast. You improved your forecast for many European countries, but not all of them. I think two remain out, which is the UK, if I remember correctly, and Italy.
I was wondering why you decided to improve on some but not others, your GDP forecast for 2009 and also 2010.
MR. CHOPRA: Well, I think firstly on the UK, you say that we revised it down, I think we need to be clear over here about which year we are talking about. There was a very slight downward revision for 2009 and the reason for the downward revision in 2009 for the UK was that the second quarter number turned out to be a bit worse than what we had expected, so that obviously has an implication for the rest of the year, but I would point out that our numbers for the second half of the year for the UK in 2009 were somewhat better than our July REO update, but you know, this does not get reflected in the annual number.
I would also point out that, for 2010, we have revised upward our forecast for the UK by more than .5 percent, but we still see a very subdued recovery for the UK.
Now, in Italy, I would say its growth problems go well beyond the current recession, and this stems from, essentially, low-growth potential, and this has been exacerbated by the global crisis, and this obviously then affects the specific forecasts.
So, basically, what we see in Italy is that productivity has declined over the last decade and this has resulted in stagnating incomes, and also a widening competitiveness gap which leads to fairly anemic growth. So, again, it comes back to the issues that Mr. Belka mentioned earlier about having to be much more forceful in addressing the structural impediments in a country such as Italy.
MS. GAVIRIA: The gentleman right there. The microphone is there.
QUESTION: Hi, it is Claudio Fermipiaz [ph.] from Spain.
Do you have an estimated [off microphone] of the stimulus package in Europe, country-by-country, or what is the bank that you prefer and why?
And second, based on the recovery is [inaudible] in the rest of the Euro Zone except Ireland. Considering the rebound in exports and labor productivity, don't you consider that maybe you are being too much pessimistic about Spain?
MR. BELKA: Well, the efficiency of fiscal stimulus goes to Luc, but let me just repeat what was said about Italy.
Spain was one of those countries singled out by me that faced a challenge of rather fundamental restructuring and the crisis impaired the potential growth of this country probably disproportionately more than most European countries, for sure in advanced Europe, which weighs then on the potential--on the robustness of rebound.
MR. EVERAERT: On the effectiveness of fiscal policy, I think our overall assessment for Europe is that it certainly has helped to prevent a downward spiral in the economies, and therefore it has been broadly effective.
One should also add that automatic stabilizers through the social safety nets are very important in Europe and I think the measures that we have seen have been effective are those that support peoples' incomes and also give them job support, and now I think our preference is that we would like to see the programs for infrastructure development that have been put in place to be implemented forcefully. So, that will support the recovery over time.
But I would like to add one of the key issues on this fiscal problem: a lot of the temporary measures need to be reversed and need to be reversible; otherwise, we will run into fiscal sustainability problems again.
MR. CHOPRA: Let me elaborate a little bit more on the question of Spain's growth potential and why we take such a cautious view of the recovery in Spain. I would say that there are three particular reasons in this case.
The first is, competitiveness needs to improve. Essentially, Spain's economy cannot maintain a very large external deficit indefinitely. The economy has already begun to adjust. It has very high unemployment, and this is forcing wage moderation, but I think what we know from a number of other examples is this sort of adjustment takes a very long time for large economies with big internal markets. I think if we look at the experience of Germany after the reunification boom and the number of years that it took for it--through wage moderation--to rebuild competitiveness, that gives you an indication of some of what lies ahead for Spain.
The second reason that we are cautious is that the fiscal deficit in Spain needs to be corrected, and this will of course dampen economic activity in the short run, but I would emphasize that this fiscal retrenchment is going to be essentially to support sustainable growth over the long run.
The third point, as I said, was rigidities, and here it is the labor market in Spain that is not functioning as well as it should with most of the adjustment taking place through layoffs, that means through volumes rather than through prices, which is the wage moderation that I mentioned earlier.
So, we expect unemployment in Spain to remain quite high for some time, and this in turn will create difficulties for the financial sector. It also makes it more difficult on the fiscal side. So, all these things are related. So, we expect some fairly tight conditions to prevail in Spain for some time.
MS. GAVIRIA: Very good.
The gentleman in the gray suit here, please.
QUESTION: [Inaudible] News Agency, Belarus.
What do you think about perspectives of the Belarusian economy after standby program we will close in April of next year?
And second question, what are the prospects of establishing creation of reserve currencies, for instance, those based on the Russian ruble?
MR. BELKA: Once again, the second question?
QUESTION: What are the prospects of establishing creation of reserve currencies, for instance, those based on the Russian ruble?
MR. BELKA: Well, Belarusian economy was hit hard by the crisis, too, although it seemed to be insulated from the outside--from the impact of the outside world, and one of the channels of the impact of the crisis was its trade openness and the results of the economic slump in Russia.
Belarus is a specific case. The country has been growing fast, but the factor that was largely underestimated, especially in the country, was the extent of subsidies that the country was enjoying from neighboring Russia, especially in the oil sector, and the extent of these subsidies was really formidable, going to 13 percent of GDP per year in certain periods. This is going to end, and the country has to reflect on the economic system, whether the current one is going to be sustainable, is going to bring such impressive results as in the past.
The country fell into financing problems, we provided a loan, macroeconomic policies were modified, and we assessed that the program was broadly on track. We are quite satisfied with it, but what is certainly needed in the way forward is much deeper structural reforms for the country.
We are not analyzing the proposal that you have just mentioned; so please, I will not comment on this.
MS. GAVIRIA: The second row here, please.
QUESTION: Yes, I'm Sakiria Shebani [ph.] from [inaudible], Kosovo.
Mr. Belka mentioned before that emerging countries must improve their macroeconomics policies, especially in the southeast Europe countries, because even before crisis their economies had low growth.
What will be the IMF’s role to help those countries recover now, because it's hard for those countries to fulfill the condition that the IMF can--
MS. BELKA: Well, Kosovo is a special case. It's our newest member. It's a new country. It's an economy that is still sort of finding its place in the European economy.
We are providing a lot of assistance. Our missions help to coordinate economic policies. We are working together with the World Bank, which is key in this case, because the country has to undergo structural reforms and basically build up its productive capacity.
We are supporting the nascent economy of Kosovo, and we'll support in the forums that are needed that the authorities of Kosovo will ask us to come up with.
MS. GAVIRIA: Okay. Let's take one more here, and then one over there.
QUESTION: Alexandro Mele [ph.] with [inaudible].
A number of countries, including the U.K. and Italy, have adopted some forms of tax amnesties for the repatriation of capital.
In the past, the Fund has been very critical of these sort of measures. I was wondering about your assessment of the present initiatives, if you think they are justified by the economic emergency. What's your assessment of that?
MS. BELKA: Well, I don't think we have a special view on this. I mean I must say that as a former policy maker, I would be of the following view. The more frequent are such attempts, the less efficient they are.
So, if you resort to such measures very rarely in truly exceptional circumstances, then it might be confidence building; otherwise, I'm skeptical.
MS. GAVIRIA: [Off mike.] Here in this [inaudible].
QUESTION: [Off mike.] Barry [inaudible], freelance correspondent in Washington.
I'd like to ask about the Baltic States, those countries that are choosing deflation instead of floating their currencies.
What are the principal challenges that worry you most when you look at the prospects for policy sustainability?
MR. BELKA: Okay. Before I give the floor to Anne-Marie Gulde, let me underline one thing: It's obvious that we capture the three countries under one label--Baltic States. The same as we all do with emerging Europe or Central and Eastern Europe, and I tried to underscore in my introductory remarks how diverse, how differentiated, is the region. You wouldn’t believe how differentiated even this micro region of Baltic States is.
The three small states, each and everyone, all are in distinctively different positions.
But let me ask Anne-Marie to elaborate on this.
MS. GULDE-WOLF: Yes. Thank you. As you know, the three Baltic States all have currency boards or currency board like arrangements--fixed exchange rates.
These arrangements provided stability in the course of the economic transition. At the same time, when capital inflows started with EU accession, they contributed to the buildup of very high imbalances.
We find ourselves now in a situation that these countries face formidable adjustment needs.
So, very clearly the issue of the currency regime is at the forefront of what policies should do.
We face a dilemma here. These regimes are very much accepted. They are very much still seen as the policy anchors. There is a high degree of ownership.
At the same time, as you mentioned in your question, the currency regime does increase the challenges of adjustment. First of all, the issue of competitiveness in the absence of exchange rate adjustment, all adjustment will have to come through deflation, wage adjustment, and higher fiscal adjustments. As we know from all other European countries, these are very formidable challenges.
I would say so that these are flexible economies and they have been built on flexible structures from from independence onwards, and we see some of these flexibilities already at work.
We have seen wage adjustments in all of the countries. We have seen very rapid current account adjustments to the extent that all of them now do have current account surpluses.
So, we see at this stage really the fiscal challenges as one of the key issues that will determine whether or not this adjustment model can actually succeed.
As Mr. Belka said, there's differences between the different Baltic countries. We see that with GDP decline in the same magnitude, we do have different fiscal challenges at this stage, with revenues in Estonia holding up significantly better than in others and very clearly especially in Latvia where we have a program, the achievability of the fiscal targets will, in the end, determine as to whether the strategy that has been chosen by the authorities can be successful.
MS. GAVIRIA: Thank you, Anne-Marie. The lady here, second row.
QUESTION: [Inaudible], Poland. Mr. Belka, you have said that there are some countries in Europe which should rethink their business model. Do you think Poland is one of them?
And the second question is what we should do to grow more quickly. Perhaps that tax amnesty will be the solution?
MS. BELKA: Answering to your first question is no. Compared to many other European countries, I think what we sort of somehow frivolously call a business model of a country is relatively correct for Poland.
Poland avoided excessive dependency of capital inflows, or foreign capital inflows; has a broad industrial base. It's a diverse economy with a solid growth potential, which does not mean that there are no weaknesses and policy issues to be addressed.
On the second question, the answer is also no. I wouldn't recommend, by no means, a tax amnesty. It is simply not important and not necessary.
Tax amnesty is a sign of despair. We do not have a situation in Poland that we need to despair.
MS. GAVIRIA: Very good. We'll take two more questions and then we'll wrap up. Here, the left, please.
QUESTION: Hi. Belinka Benya [ph.] from Poligono, Spain.
I would ask you about the fiscal deficits. I see in the books that you account for more than 12 percent of fiscal deficit for Spain, Ireland, and United Kingdom.
I would like to know if you have taken into account the new fiscal proposal for the next year, the new budgets in these three countries.
And in the other hand, I would like to know your opinion about raising taxes as a tool for refrain fiscal deficits in the next years. Thank you.
MR. CHOPRA: I think the answer to your question, since you mentioned three countries, is a bit differentiated.
For the U.K. and Ireland, in our forecasts, we have taken into account current plans as per the budgets that were released and the various measures that are planned.
In the case of Spain, the latest package came out after we had put together these numbers. So, you know, although we would see the baseline fiscal outturn for 2009 to be perhaps a little bit better than what we had over here, we would still expect the deficit in 2009 to be in the double-digit range.
Now I should emphasize in the case of Spain that, you know, we very much welcome the government start at defining an exit strategy on the fiscal side.
And I think given the magnitude of the problem in Spain, we believe that it will require a combination of expenditure cuts and some revenue increases in order to strengthen the fiscal balance and put debt on a firmly downward path.
Within this, I think the international experience shows that expenditure-based consolidations are much more durable.
Within that balance and also given the fragile state of the economy right now, we would place more emphasis on expenditure cuts to avoid pinching off a fragile recovery.
But, as I said, given the magnitude of the problem, it will require effort on both sides.
I would also emphasize that in the case of Spain, any fiscal measure in our view will need to be complemented with labor market reforms, because that's what is going to be required to create a favorable environment for job creation, and this will then reduce the pressure on unemployment benefits in the fiscal accounts and benefit the budget.
Let me make one additional point on this. Spain has a serious long-term fiscal sustainability problem linked with aging, so this is irrespective of the current deficit numbers.
So, although the current focus is very much on the short-term steps to reduce the deficit and those are very important, it's going to be important to also to have a big public debate on the longer-term measures that will need to be taken to improve the sustainability of the fiscal accounts.
MS. GAVIRIA: Very good. One final question. I think we're going to go there.
QUESTION: Selcuk Gokoluk, Reuters. My question is on Turkey.
September inflation came lower than expected, and the central bank is again expected to cut interest rates. This means real interest rates in Turkey will be near zero percent. This is unknown territory here.
What implications will this have on the Turkish economy and do you think there's more room for monetary easing in Turkey?
MS. BELKA: Before I ask Ajai Chopra to add to and elaborate on this question, let me first say that the Turkish economy, was badly hit in the crisis, is rebounding in an impressive way.
And we expect Turkey to have a positive growth of over three percent next year. This is not common in our region.
The main problem for Turkey is to put its fiscal position on a solid footing, to stabilize and to eventually start reducing the public debt ratio to GDP.
For to make the recovery more robust, it is important to reduce the extent of crowding out of public borrowing needs over the private sector.
These are the main, let's say, the framework in which we are thinking about a Turkish economy.
The banking sector is in good shape. It has weathered the crisis pretty well. The fact that lira is solid gives the room for a loosening of monetary policy.
I do not see a big problem if real interest rates go down. This is not unique for Turkey, although it's maybe unique for Turkey itself, but compared to other countries in Europe, you are not in a situation different from others.
MR. CHOPRA: I think that all that I would add to the points that have already been made is to just say that, Turkey has cut its policy interest rates perhaps more than any other country over the last year. It's reduced it by 950 basis points since November 2008 and it's now at 7.25 percent.
And we do feel that this aggressive monetary policy response was indeed necessary in the presence of a very sluggish economy and also given that the transmission mechanism through the credit channel was impaired.
So, we are supportive of the stance that the central bank of Turkey has taken.
Now looking forward, I should say that we do not comment on month to month monetary policy decisions, but all I would say is that we see the accommodative monetary stance as appropriate for now.
We think in the future this stance will obviously need to take into account the degree of fiscal consolidation that will take place in the economy, and this is a point that Mr. Belka mentioned; and also obviously that the Central Bank of Turkey will need to be vigilant about the prospects of inflation so that it's consistent with its meeting its inflation target.
MS. GAVIRIA: Well, thank you, Ajai, and thank you to all the speakers and to all of you for participating. We end this press conference here.