IMF European Department Press Briefing | Washington D.C., October 9, 2015
MR. ADRIANO: Good morning. Thank you all for coming to this Press Briefing of the IMF’s European Department. With us today, is Poul Thomsen, Director; Jörg Decressin, and Philip Gerson Deputy Directors, European Department. Mr. Thomsen will have some opening remarks and then we’ll ready for your questions. Poul?
MR. THOMSEN: Yes. Good morning and thank you for joining us this morning. Let me start by giving you a few remarks to provide some context and then we’ll be happy to take your questions.
Let me start in Western Europe, and take care of the Euro Zone. In broad terms the outlook for the Euro Zone has not — our outlook for the Euro Zone has not changed very much. We are still seeing a gradual recovery, helped by lower energy prices, and favorable financial conditions. We are seeing a somewhat stronger domestic demand than previously. On the other hand, export growth is a bit weaker, so overall in line with this we have maintained our real forecast for the Euro Area unchanged at 1.5 percent, and with a small increase next year to 1.6 percent.
So, no major change, no change compared to how we saw the situation back in June. Now, as far as risks are concerned to this forecast, there has been a change, and whereas we briefly saw risks as being equally balanced we now see downside risks as prevailing, and that reflect the factors that have been discussed at these annual meetings, risks coming from China, from primary commodities, and from normalization of monetary policy in the U.S. So while these factors have not yet made us change the outlook for Europe, then clearly we are watching and they impart on the projections a downside risk.
Looking beyond 2016 and 2017, looking to the medium term, the outlook remains subdued, it is the factors that we talked about before, including crisis legacies, weak demand, high debt, high unemployment, low productivity.
These factors combined with slow progress and structural reforms underlines this subdued outlook for the Euro Zone that is in our baseline. What does this implies for policy recommendations?
– Monetary policy: the ECB I think is doing the right things, and should continue with QE and continue to stand ready to extend QE if inflation fails to pick up, or if financial conditions tighten.
– Fiscal policy: countries with fiscal space should use it while clearly adhering to the Stability and Growth Pact (SGP), countries with limited fiscal space and countries that see a windfall and high debt, should use the interest rate windfall associated with QE to reduce debt.
– As far as the financial sector is concerned, we are continuing to call for a more aggressive approach to deal with nonperforming loans (NPLs), to strengthen balance sheet, to support lending, and to repair the transition mechanism.
Finally, but not least important, is structural reforms. There is clearly the downside risks underscore more than ever the need to move forcefully on structural reforms. The issues are familiar: labor market reform, product and service market reforms, and insolvency reforms to help boost productivity and long-term growth.
Let me briefly then turn to the Eastern part of Europe, to Eastern and Central Europe. Domestic demand in many countries has remained robust, even on the recent period of increased market volatility. In fact, countries in the region, have generally done better than other emerging markets around the world. And we have raised our forecast for many of them.
However, for the CIS, Western Balkans, excluding Serbia and the Baltics, we have revised the forecast down a bit for them — and for Russia and Ukraine we are forecasting recession, although I would say in both cases, we see a sign of the situation, the economic situation, stabilizing.
Here in this region too, risks are tilted to the downside, it is of course again the same factors at play. The transmission channels are obviously different reflecting the region’s well-known dependence on external financing, and therefore the attendant vulnerability to market volatilities.
As to policy recommendations, it’s a bit more difficult to generalize because it is a region that is heterogeneous, and perhaps getting increasingly heterogeneous, so just a few general observations. Macroeconomic policies need to be mindful of the ongoing efforts to deleverage in the private sector, and need to be consistent with the impact of this deleveraging effect. And the deleveraging could be helped by generally a more comprehensive approach for banks to write off or restructure impaired assets and improvement in the insolvency framework.
On fiscal policy where consolidation is needed, generally in these countries there is need to cut subsidies and refine entitlement programs while protecting investment. On monetary policy, it depends on the exchange rate regime, countries with fixed exchange rates obviously have limited scope while countries with flexible exchange rate should prepare to use this flexibility as a shock absorber, while using macro prudential policies to contain excessive risks.
Here, too, of course, structural reforms are key, again, there’s nothing new in our message, again, the vulnerabilities are coming from the external environment, and I would add, the clear evidence that adverse demographic dynamics is weighing on the outlook. This underscores, heightens the urgency of focusing on these structural reform to improve the business environment, increasing labor market flexibility, and privatizing what is still in some countries a large number of state-owned enterprises.
Before I finish and take your questions, let me add a few remarks on migration in Western Europe. Of course, the influx of refugees constitute a humanitarian crisis in Europe, and Europe needs to respond to this humanitarian crisis, in particular in Syria. In the short term this will undoubtedly impose some fiscal cost on recipient countries. The scale of these costs will vary from country to country. The evidence suggest overwhelmingly that that cost will be manageable and not least in the longer-term, provided that there are strong policies to facilitate the rapid absorption of immigrants into the labor market.
The key issues here are issues that are familiar in Europe also: increased labor market flexibility, less constraints than housing markets, opening up of product and service markets. All items that are, again, familiar from the European debate but, again, are particularly important to be overcome in order to facilitate an early absorption of this inflow of refugees.
I am going to stop here we’ll be happy to take your questions, and my colleagues will help me. Thank you.
MR. ADRIANO: Thank you, Poul. Please identify yourself and your affiliation if asking questions.
QUESTIONER: I have a question on the ongoing talks surrounding the Greek debt restructuring. I was just wondered in the light of comments from Eurogroup President [Jeroen] Dijsselbloem and debt servicing caps at 15 percent per year, if you thought that that was good enough, or whether the EU Member States should be going further in terms of lengthening these maturities and reducing interest rates? Thank you.
MR. THOMSEN: Are there any other questions on Greece? Let’s get them.
QUESTIONER: I would like to know your assessment on the different situations compared to the previous Annual Meetings, where Greece was a star. And now did you see this crisis coming or moving to the emerging markets? If you expect Greece coming to the forefront, if your participation — the IMF participation is not completed? Thank you.
MR. ADRIANO: Anybody else on Greece? Okay.
MR. THOMSEN: Okay. Let me start with debt, the situation here is very much as we saw it back in the — I think it was early July when we published an update to our debt sustainability. There is absolutely no difference in the way we look at it, and we think that Greek debt which was set to peak at more than 200 percent of GDP has become highly unsustainable. We think that Greece cannot deal with the debt without debt relief. Clearly Greece needs as part of this to undertake some strong reforms, as the Managing Director said yesterday there are two legs to this: strong reforms in Greece, and a strong and credible package from European partners on debt relief.
But clearly, just one component of this alone will not do it. Greece cannot deal with its debt just through reforms and adjustment, and clearly debt relief would only be provided by the Europeans, if there are such reform efforts.
Now, on the exact details of the debt relief, that discussion has not started yet, I have seen statements by various European officials, and we have not yet started that discussion, so I cannot really comment on any details that our European partners might have in mind.
On your question on the framework, we have said before that we think there is a case for moving from the framework that was agreed back in 2012 I think it was, that focused on the stock of debt to a framework that focuses on gross financing needs.
What we expect targets should be, we will have to discuss. What the time horizon for these targets should be, we would have to discuss. But there is no doubt in our mind that we would be looking, if Europe wants to go the route of providing debt relief by lengthening the grace period, lengthening of repayment period, we are looking at significant lengthening of grace period, and significant lengthening of repayment period, compared to where we are now. But that discussion will only get under way in the coming weeks and months.
On Greece, your question was, if I paraphrase, what to expect, whether Greece is going to be back in the headlines. That was your question. We are — with the ESM program that was approved in August I think Greece took a first important step at bringing its program back on track towards having a program that’s consistent with its medium term objectives. Some of the key issues still lie ahead, not least pension reforms and other structural reforms in the fiscal area. That discussion is getting underway. But I am welcoming the assurances that the government has given that it understands that it needs to tackle these issues and are open to discuss this in the coming weeks.
We are, let me underscore, the Fund is ready to resume support for Greece to have a new program for Greece provided that the two legs that the Managing Director referred to are there. Strong, upfront structural reforms by Greece and strong and convincing debt relief so that we have a comprehensive program that is credible and consistent over the medium term.
QUESTIONER: Still on Greece, the French minister of finance has said today that he had no doubts that the IMF will eventually join the bailouts. Can the IMF really run the risk of not joining the Europeans and staying on the sidelines?
MR. THOMSON: Any other questions on Greece?
MR. ADRIANO: From the people that just joined us?
MR. THOMSON: Okay. I can just repeat what I just said. We stand ready to continue to support Greece. We need a program that’s credible. A credible program means that the government needs to specify structural reforms in a number of important areas, and we need a program that’s credible as far as the support in the form of debt relief is concerned. With such a credible program we are ready to resume support.
QUESTIONER: Could I just ask you, given the deepening crisis in some emerging economies, particularly Brazil, for example, and current account problems that are developing in the emerging world is it sustainable for Germany to maintain its current account surplus of 8% of GDP? Or Holland, 10% of GDP? I mean, are these countries really pulling their weight in terms of getting the economy to reactivating the economy which is in danger? Could be very similar to the world economy if secular stagnation?
MR. THOMSON: Related questions? On Germany let me remind you that we are encouraging Germany to use the fiscal space that it has. At the same time, we are calling for structural reforms in Germany that would also help over the medium term. The opening up of professions and we recommend a number of measures to boost labor participation also. So Germany has an agenda of structural reforms that it should adopt. I do think we have recommendations that would help reduce these imbalances.
QUESTIONER: Would it not be a good idea for the IMF to suggest an objective to bring down that current account surplus for those countries?
MR. THOMSON: Well, our policy recommendations will do so, but we are also mindful of the fact that even Germany has limited fiscal space. So I think we are pushing as much as we can inside the existing framework.
QUESTIONER: I just wanted to get your reaction to what’s happened recently regarding Spain’s budget. Obviously, the commission came out and said an opinion would be released only for that to be shelved for what seems to be political reasons and pressure from the outside. There were comments from various ministers about the facts. The commission’s opinion was not accurate and they should be more lenient. Are you worried that the Stability and Growth Pact (SGP) is again being politicized, and the independence of the commission it at stake here?
MR. THOMSON: I will ask my colleague, Phil Gerson, to answer that question.
MR. GERSON: I’ll just respond to the Spain specific parts. There’s been significant progress in Spain, obviously, in bringing down the fiscal deficit over time. The debt ratio’s still 100% of GDP. It was 100% last year. We’re projecting, despite strong growth, 100% next year. There’s been substantial progress in reducing the deficit, but in structural terms we actually expect only a limited reduction in the deficit this year. So Spain clearly needs to bring its deficit down over time, and to continue doing that in order to put the debt ratio firmly on a downward path.
The target is 2.8% of GDP for the deficit next year. The commitment is to get the deficit below 3% of GDP. Those are commitments that Spain has made to its European partners in the context of the SGP. They’re also consistent with this objective of putting the debt ratio on a firmly downward path over time. So we think the deficit ratios that have been set out are appropriate. We also think given where we are in terms of a growth forecast, where we see growth next year moderating to about 2.5% on an annual basis that it’s likely that they are going to be additional measures required to achieve that deficit target.
QUESTIONER: I would like to ask you specifically about Serbia because we have an arrangement with the IMF, three years long. We are in the first year. Our fiscal results are very, very good. The budget deficit is a lot under the target. So is there a possibility to talk with the IMF about lifting wages and pensions up because our government is taking about it, but we don’t have your approval? And where do we find the money if we go up with the wages? Thank you.
MR. DECRESSIN: The program with Serbia’s off to a good start. The country has climbed out of a recession. It’s recording positive growth in 2015 notwithstanding some significant fiscal adjustment. If you look ahead, the country faces two key challenges. One is to get to a much higher growth rate than right now over the medium term. The second challenge is to reduce, still relatively high, government deficits and especially government debt.
To contribute to address these challenges, we have said that for 2015 the revenue overperformance that has come with a better growth should be saved so as to bring down the government debt. Now, as we are moving into 2016, and let’s say the revenue overperformance continues and growth even strengthens relative to where it is in 2015, then one should ask oneself the question: What kind of policy would serve the country best in terms of achieving the two objectives? More growth and less vulnerabilities from the government deficit and the debt. We will have a discussion about that with the government as we move closer to the end of the year.
QUESTIONER: I have a question about divergence in monetary policy between the United States and the euro zone. I’m just wondering what risks you see that this might pose to or specifically the uncertainty about when the Fed will lift off rates. What risks that poses to policy from the perspective of the ECB and Eurozone growth in general? Thank you.
MR. DECRESSIN: Our scenario is that the Fed will lift off when the growth picture of the United States strengthens. If the growth picture of the United States strengthens, solidifies, then this is, essentially, good news for the EU area. Already now, among the major regions in the world it’s exports to the United States that are growing particularly dynamically.
This being a good news story then for Europe. It shouldn’t, you know, leave us worried about risk. Of course, there are risks for some countries in Europe, especially those that are in the east and have a significant amount of debt denominated in U.S. dollars. But in these countries policies have generally improved a lot over the last few years, and so we also think that these risk are contained. But the important thing here is to keep in mind that a liftoff is most likely to happen when the growth picture in the U.S. looks better which is good for the world.
QUESTIONER: Recently our [Italian] government has announced that they are planning to eliminate the so called EMO tax which is the tax on the primary home of people. What is your comment on this measure? Do you think it’s a good idea? Because the EU is saying that actually they should cap taxes on the job, not on homes.
MR. DECRESSIN: There’s still a significant amount of fiscal adjustment over the medium term that needs to take place in Italy, and public debt of Italy is also high. Addressing this challenge will require a number of expenditure and revenue measures. In our view, a modern real estate property tax, in general, is something good to have.
QUESTIONER: Coming back to Spain, you didn’t mention in your introductory remarks the risk coming from emerging markets, only China. I would like to know if you see the risk of a kind of contagion of this deceleration in Latin America especially where the Spanish economy has strong links to these economies? If you see a kind of contagion for the Spanish banks, especially, and for the Spanish economy in general? Thank you.
MR. GERSON: This is a question that came up, I think, in the GFSR [Global Financial Stability Report] press briefing as well. It’s true that the systemic banks in Spain, the two largest banks in particular, have significant activities in Latin America, particularly in Brazil, and that they’ve been a source of substantial profits for them over the last several years. If we see a continued slowdown in Brazil it’s natural to expect that that’s going to have an impact on profitability for those banks.
At the same time, the banks are well-capitalized and well-provisioned, and so we think the impact would be entirely manageable for them. So yes, a continued slowdown in Brazil would have an impact on profitability of Spanish banks, but we don’t see any impact going beyond that.
MR. ADRIANO: Thank you. We have no questions? Yes, please.
QUESTIONER: I would like to go back to Serbia. We’re actually a little bit late with the structural reforms. I’m wondering what is actually the dealbreaker? Because we also had the arrangement with the IMF which was not performed well, so we sort of gave up before. So what would be the deal breaker if we are late with the structural reforms? And if we go through elections, as it is announced in our country, will that be bad for structural reforms or not? Thank you.
MR. DECRESSIN: We’re trying to achieve stronger medium term growth in the contents of our program with Serbia. There’s a variety of structural reforms that can lead to that objective. We have focused on reform of state owned enterprise privatization, streamlining of business regulation. These are important reforms that need to take place. But I would not want to speculate on any deal breakers or something like this.
We are looking always at a package, and then we are asking ourselves, does the package of reforms that lies in front of us achieve the medium term growth objective? As well as the objective of more fiscal consolidation and reducing the high level of public debt?
QUESTIONER: Will that slow down the reform?
MR. DECRESSIN: We are happy to work with any government that is trying to do something to lift growth over the medium term and adjust the public finances. We are open-minded.
MR. ADRIANO: On that topic I would like to take a question online. We are being webcast. It’s a question coming from Portugal from Lusa News Agency. Does the IMF think that a minority government resulted from Sunday’s Portuguese general election can put the Portuguese fiscal consolidation at risk?
MR. DECRESSIN: With respect to Portugal we are engaged with a PPM, a post-program monitoring. We look forward to continuing our engagement with any new government that is being formed. The challenges in Portugal we see are that public deficit and the debt need to be reduced further, and measures will have to be taken to that effect. But we should also not forget that growth in Portugal has already been relatively low before the crisis, and there is a challenge now to raise these growth perspectives over the medium term. There we’re emphasizing that there needs to be more corporate deleveraging, clean up of bank balance sheets, further work to improve competitiveness for a more flexible labor market, and then the fiscal adjustment and reduction in public debt over the medium term.
MR. ADRIANO: Thank you very much, this concludes this press briefing.
POUL THOMSEN, Director, European Department
PHILIP GERSON, Deputy Director, European Department
JÖRG DECRESSIN, Deputy Director, European Department
ANDREAS ADRIANO, Senior Communications Officer, Communications Department
Compliments of the International Monetary Fund IMF