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Transcript of April 2021 European Department Press Briefing

April 14, 2021



Meera Louis, Communications Officer, Communications Department

Alfred Kammer, Director, European Department


MS. LOUIS: Good morning and welcome to today's European Press Conference and good afternoon to everybody watching from Europe. Thank you for joining us today. We will begin with a short statement by Alfred and after that, we will take your questions. Please feel free to send us your questions via Webex or via the press center. And also, just a quick note in case you encounter any difficulties with reaching us during the press conference, we've sent you several links via YouTube et cetera. So, feel free to switch to that in case you encounter any difficulties. With that, we'll begin with Alfred, over to you.

MR. KAMMER: Thanks, Meera. Good morning, good afternoon. One year into the pandemic, Europe finds itself at another turning point. Although new waves of infection are hitting the continent, safe and effective vaccines are now available, bringing the pandemic's end within sight. Despite a halting start, vaccines are expected to become widely available in Europe this year and next. Accordingly, we project the economic recovery to strengthen and Europe's GDP growth to rebound by 4.5 and 3.9 percent this and next year, respectively. This will return Europe's output to its 2019 level by 2022 but leave it below the level that we had projected before the pandemic. This gap, which we project to persist over the medium term, is what we call economic scarring and reflects losses of education, investment, and research and development during the crisis.

The number one priority is to boost vaccine production. This is critical not only for Europe but also the world because Europe is a hub for vaccine production and exports. At the same time, policymakers need to continue supporting the economic recovery. The faster the recovery, the less scarring experienced by people and businesses. But the nature of support will need to shift. Labor market policies should keep lifelines open but gradually shift towards helping workers move to expanding sectors and they should become more targeted towards viable firms and focus on strengthening firms' solvency. Financial policies should continue enabling banks to keep credit flowing, while ensuring adequate provisioning for problem loans. And fiscal policy needs to play an increasing role where monetary policy—with interest rates at their lowest—becomes less effective in boosting output.

In our Regional Economic Outlook Update for Europe, we analyze the impact of additional fiscal measures to support such a shift in policies. These measures could include transfers for households in need, hiring subsidies to reintegrate the unemployed faster, temporary tax incentives to bring forward private investment, and equity support schemes for viable firms. This additional support—set at 3 percent of GDP over 2021−'22 could lift GDP by about 2 percent by 2022. Over the medium term, their robust supply effects would cut the impact of scarring by more than half.

Fiscal support should also be redeployed to accelerate the transformation of the economy, including through infrastructure investment in green and digital technologies. The Next Generation EU plan offers critical help.

In short, with hard work on vaccine production and distribution, adequate support for lives and livelihoods, and innovative policies to combat economic scarring, Europe can stage a V-shaped recovery that is fairer, greener, smarter, and more resilient.

MS. LOUIS: Alfred, to begin with, we've got two questions that have come in that are very similar. One is what is the Fund's view of the next generation EU recovery plan and do you think it's going to work? Also, in the same vain, we have another question is the IMF concerned about the slow launch of the EU recovery fund and whether the package, the $750 billion package is going to be enough?

MR. KAMMER: The next generation EU fund is an important part of the crisis response. It's targeted towards those countries which are affected most by the crisis, especially those which were tourism dependent and also those which have lower income. So, it gives a boost to these countries. But more importantly, it is also going to help transform economies in green and in digital and it will be an important element in order to increase productivity and potential growth through enhanced structural reforms. So, we see this as part of the third phase of the crisis response to put the European economy on a sound medium term footing. We still believe that the size of the support at this stage looks sufficient. It is a sizeable contribution to national budget for a number of countries, just the grant component is more than 10 percent of GDP. And clearly what countries are focusing on now is who are the recipient of these funds [is] to develop national plans in order to spend this money wisely and to get this boost in productivity and growth from these plans. We still see that if these plans are implemented in the next few months, that will be a good timing, so any delays have not been overly large so far.

At the same time, we see a country like Spain has started to implement their plans under the Next Generation EU by prefinancing some of these expenditures they are going to undertake. The point here is, it takes time to actually develop a complex investment plan, complex plans under the NGEU. And that time was by many countries well spent to get these policies right which they want to pursue and to spend that money to make a difference in medium term growth rates.

MS. LOUIS: Following up on that, we have a very similar question referring to the stability and growth pact. The EU has recently said that they are considering changing rules to its budget rules and those changes would encourage investment and treat debt in a realistic way? What changes would you suggest to reach these goals and yet keep investors confident that ballooning EU debt will be paid back? And just a follow up on that, should individual EU governments do more in terms of the national fiscal stimulus this year and the next to support their economies and if so, which EU countries could do with a bigger fiscal boost?

MR. KAMMER: So maybe I'll start with the second question first. When we're looking at the fiscal response plan, Next Generation EU is really third phase. The first phase was the speedy and large-scale response on the fiscal and on the monetary side which we saw in 2020 and which is continuing in 2021. This was a very large expansion of budget deficits, a very large expansion of central bank balance sheets. Very different in terms of the size and in terms of the reaction from the global financial crisis. And in our view, this first part actually has delivered. Because when we are looking at what happened to the economies, they stayed intact. We did not see a cascading of bankruptcies of corporates, we did not see widespread unemployment. The lifelines kept these economies intact. And we saw the success of these polices in the third quarter last year when after the severe lockdowns we had in the second quarter, the economies bounced back. And when we're looking at the recovery, we are also expecting that because of these policies, the economies will rebound quickly.

Second part of this is when we are estimating the permanent output losses from this crisis. Because of this policy response, we are expecting these losses to be very different from the global financial crisis. At this stage, we are expecting permanent output losses for Europe of 1.5 percent which is very different from the 12 percent we saw in the global financial crisis. Again, testament to the success of these policies. Second point to make here is this fiscal support has been adjusted over time. When we came together in October last year, from then to now the fiscal deficits were for advanced Europe adjusted by an additional 2 percent in terms of fiscal support. So, what we see as the pandemic evolved, fiscal support actually has changed, has increased and also is changing in nature.

And that brings me to an important point and that's the next phase we are going to see which we have been rather adamant to focus on. And that is when we are getting out of this immediate phase of the pandemic, when we are getting out of containment and the lockdown part of economy, at that point a restructuring of the economy is going to take place. When measures are going to be withdrawn, we want to also see capital move in the economy. We want to see that viable companies are thriving. Those which are not thriving need to be taken out of the system quickly. At the same time, workers need to be helped to be relocated from expanding sectors or from liquidated enterprises to those which do thrive. And it's that part where we are arguing very strongly to put emphasis on -- in the next phase of the fiscal policies. And we believe that if we get this right, growth will be sustained and could be higher and the rebound is much more secure than it currently may appear. And at the same time, the medium-term scarring could be more than halved. That is our projection. So, very important to get that part of the fiscal stimulus right. And, of course, the countries who are more affected will need to do more. And that is what we have seen in the crisis, so far. Fiscal policy was very agile, and countries have been adjusting, depending on the circumstances and as the crisis has evolved.

On the second question, on the stability and growth pact, what we have been seeing is that the current rules are too complex, that they are, therefore, difficult to monitor. They are difficult to communicate. So, to the outside world, it's not clear which country actually is in compliance and which is not. And because of the complexity, there has been much more discretionary room, in terms of application of these rules.

So, what we have been seeing, including in a 2015 paper, is that these rules need to be simplified. That makes them easier to monitor. That makes them easier to enforce. That makes them easier to communicate. And people will better understand what the rules mean, in terms of compliance. And we have been arguing for considering moving to an expenditure growth rule with a debt anchor that is different from the current rule set, but clearly to keep them simple. We will need to have another look at those recommendations because, we went through a major pandemic, debt levels are higher. We need to take that into account. And at the same time, there are priorities, in terms of spending, which also need to be reflected when one especially looks at the consolidation phase.

QUESTIONER: I would have a question on that matter of fiscal consolidation. When do you expect that it will take place, or as soon as the recovery starts, will have some time to adjust after the pandemic? And what are your expectations regarding that? And another small question regarding an issue that has been central here, in Portugal, and in some other countries, but Portugal has a huge proportion of credits in moratoria. How do you see that phenomenon? And what effects can it have for the Portuguese and the economies that are the most affected by this, by this kind of support measure during the pandemic?

MR. KAMMER: Okay, on your first question, we actually never put a timing on any of the phases of the pandemic. We expected all, initially, that the summer would be a gamechanger, last year, in terms of the pandemic. It wasn't. We were hit by a second phase in the fall and in the winter, and now we are going through a third phase. And what we -- what we are seeing is in -- economic policies need to adjust to how the pandemic evolves, and therefore, we still have lifeline support in place, in many countries, because lifelines are important during the containment and the lockdown part. But, yes, we have a game changer because with so many effective vaccines available, and vaccines will be essential in controlling and ending this pandemic, we are actually predicting that this rebound is going to happen in the second part of the year. But again, it depends on are we going to rollout vaccines in time? What's the speed? The earlier the better because economic cost of lockdown and containment measures is large. At this stage, what we are forecasting is in Europe, our forecast is based on the expectation that vaccination will be widespread in the second half of the year and across Europe during 2022. If this were to change again, it would change phasing of the pandemic. But the next stage, in terms of the restructuring of the economy, we don't know how long that is going to take. What we know is that fiscal support will need to continue in 2021 and '22.

On your second part, that is the crucial part because the economy was protected with moratoria, with guarantees, with lifelines, with income support, until now, and over time, now, countries are going to phase out these measures. Some will be phased out naturally because there is no further demand for them. When you think about job retention schemes, they are there, if needed. If they are no longer used, they are fading out, over time. With moratoria, they will also be taken away, in countries, over the next period. What is important there is that banks are starting to see through what the real situation is, in companies. And what that also means is a forward-looking exercise, to see which companies are going to be viable after the pandemic is over, assessing their business plans. And banks will need to start after assessing this, to start provisioning against potential losses from that. That will be an important part. Having said that, we have estimated, so far, the equity gap for enterprises, in Europe, to be 2 to 3 percent of GDP. We see a number of governments having already plans in place, in order to close this equity gap, together with the private sector. So, that will be an important part of all of this. And we have seen that the banking systems came into the crisis in a very resilient way, and the capital losses, which are expected under our baseline, are relatively small. So, this should actually be a good starting point for the next phase, but clearly, we need to watch this carefully.

QUESTIONER: I was just wondering if you were taking [inaudible] of what European households are likely to do with this savings pool that they've been forced to build up during the lockdowns. I've seen estimates of anything north of half a trillion to almost a trillion euros. I mean, what part does that play in your expectations, as far as the strength of the recovery is likely to be?

MR. KAMMER: Yeah. So, this is a very -- a difficult question to answer. I mean, we have experience from previous crisis, that usually after a crisis there is some pent-up demand, and that is going to help, in terms of supporting the recovery effort. But we also will usually see an increase in precautionary savings, after every crisis, and that is the same in Europe as it is in the U.S. This crisis is different because many spending decisions by consumers were not taken because it could not be spent because theaters were closed, because restaurants were closed, because people could not travel. So, there is an expectation that some of these, the pent-up demand, in particular in these sectors, could come back more quickly, but there's a lot of uncertainty on how that is going to unwind and how much it's going to support the recovery. I think that's also why we are saying the next phase is critical, in order to get this recovery part right, in order to also prevent medium-term scarring. And the government should be ready to provide aggregate demand support, when and if needed.

QUESTIONER: I would like to address a country specific question and come back to Greek debt sustainability. Greek debt is already above 200 percent of the GDP. The economy are good measures that have been taken in order to address the COVID crisis and required new lending and based on so far new state guarantees. So, details are, to some extent, burdened the financing needs of the country. So, my question is are you worried about the dynamic of the Greek debt, and do you think that Greece should return to plenary primary surpluses as soon as possible? Thank you very much.

MR. KAMMER: Greece is not different from many of the countries in Europe in that respect or the other high debt countries in Europe. When we are looking at the consolidation phase, clearly, we have higher debt levels than we had before. But we should also have in mind, one, much of the higher budget deficits will unwind automatically, and the unwinding will not take additional effort. That is one plus of dealing with the higher debt levels.

The second one is, and that's something we have been stressing during this crisis, growth will generate revenue, and the higher the growth rates, the easier it will be to deal with higher debt levels. And that's why we emphasize that we need to minimize the permanent output loses, the economic scaring, and that's why this is so important also for the debt consolidation phase.

Third point. The debt servicing cost of this higher debt, actually lower in our projections than the initial projection we had in 2018 because our expectation is that inflation will stay lower and interest rates will stay low. It's another plus in terms of dealing with the consolidation phase. But this is not going to be enough, so there will also need to be an active effort in terms of fiscal adjustment. Why is that so? It's not just good enough that for many countries that the debt levels are coming down in a passive way, but we know that future crises are going to happen. And for a future crisis to react as forcefully as we did in this crisis, it means that we need to have fiscal buffers in place. And Europe has not been very good at establishing fiscal buffers in the post-crisis periods in the past, and I think that is something one needs to have one's eye on, and one needs to reinforce that these buffers needs to be established.

MS. LOUIS: We have two questions that have come in and I'm going to group them together, because both of them are regarding Spain. One is specifically about the recovery plan for Spain, and the other is for the Spanish unemployment. So, the first one is: The Spanish government has just announced its recovery plan to invest €70 billion from the European fund. This plan is presented as the milestone to the modernization of the Spanish economy. What structural reforms are the most urgent to be implemented now? And the second one is what exactly is needed for Spain's economy to avoid a jobless recovery? He says according to the WEO, Spain will not be able to go back to pre-COVID and unemployment levels at least until 2026. So, what exactly needs to be done here?

MR. KAMMER: So, one of the issues is that Spain was particularly hit hard by the COVID crisis, and the next generation EU fund, which you mentioned in your question, will be an important part of the crisis response. So that will be investment in a greener technology, this will be investment in more digitalization. And that will help reestablish growth in Spain. In addition to that, Spain will need to undertake structural reform again in order to increase productivity. There needs to be a special focus on the youth and also on a job rich recovery unemployment rates have been high before the crisis. They have dampened the impact on unemployment because of the lifelines. But unemployment is likely to increase. It hurt the youth, women, and the low-skilled, most of the group that we need to be watching out for.

In terms of structural reforms, one of the big issues for Spain and for the job market is the duality of the labor market. That means that many of the young are in temporary contracts. And what happens when they're in temporary contracts, you're not getting the education, the training, the skilling, in order to actually move into higher brackets and different jobs which needs to be tackled in Spain. And that would help on the labor market. That would help on inequality issues. And that will also be growth-enhancing. So, it needs to be the training, the re-skilling. It also means curriculum for education needs to be adjusted. They need to be more relevant for businesses. So, there's a whole set of reforms which would help Spain address the unemployment part, address some of the inequality parts, and help in terms of putting it on a strong trajectory for growth in the medium term.

MS. LOUIS: Staying on Spain, we have one other question, the Spanish government is spending 13 billion of the next generation EU funds promoting electric vehicles and 7 billion in home renovation and urban regeneration. How does the IMF rate this decision and do you see this as a potential to handle economic growth?

MR. KAMMER: I think there are dual objectives and they are actually pointing in the same direction. Addressing climate change is of paramount importance; and addressing it forcefully through government policy can be growth-enhancing. And I think that's what you're seeing in terms of the public investments which are being undertaken which are necessary to meet climate goals, but also tend to modernize the economy and make it ready for the future. I would add one more point. What we need in general in terms of being successful on climate change, introducing, more generally, carbon pricing. That will be a game changer because it will change the incentive structure of businesses more widely. And that needs to be an added part of the public investments we see into the green economy. On the electrification side, on renewable energy, on the issue of making buildings more energy efficient, but we are fully supporting these plans of the Spanish government.

QUESTIONER: Last month, the Bank of Russia increased interest rates for the first time since 2018, and said the facts are rightly that inflation accelerated faster than expected. I just would like to hear your view on the decision and what, in your opinion, would be the consensus for the Russian forecast?

MR. KAMMER: What we see in Russia, in general, is excellent economic stewardship maintaining macro stability, and also having addressed the crisis with a forceful response on the fiscal and on the monetary side. On the tick up in inflation, we believe these are temporary factors. They should actually fade out and would not expect debt to have much impact on our growth forecast.

MR. LOUIS: We have another question have you spotted signs of asset bubbles forming, for example stocks, due to an excessively loose fiscal and monetary policy globally, but mostly in Europe?

MR. KAMMER: What we see, of course, we have been advocating [for] very accommodative monetary policies and those are necessary in order to support the economy during the crisis and support growth, number one priority. And it's also clear that then we are running accommodative monetary policy for a long time, financial stability risks are building up, but we still believe that these can be handled, and these are of second order compared to the first order priority of supporting the economy. When you look at the numbers, they are higher than pre-pandemic levels. When you look at housing market, especially in some of the metropolitan areas of Germany, France, and The Netherlands, price range ratios, price income ratios are extremely high, so it looks very frothy. When you look at credit spreads, they are exceptionally low right now although we know that there will be bankruptcies coming down the road, so there's some indications which we need to watch and there is a risk that we may see a repricing if the pandemic takes longer, if the recovery is not going to work out as we expect, if interest rates are increasing more rapidly than is being forecast. So, these risks need to be monitored very closely but they are part of the crisis response, and the first priority is to maintain accommodative monitoring policy to sustain the recovery.

MS. LOUIS: Thank you, Alfred, and I think with that, we will wrap up. I don't see any more questions, so thank you so much for joining us today. If you have any further questions, please feel free to reach out to us. You can find a report on our website or we can answer any questions further bilaterally. And with that, again thank you very much and stay safe. 

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