Transcript

European Department Press Briefing

October 7, 2016

Participants:

Poul Thomsen, Director, European Department

Andreas Adriano, Senior Press Officer, Communications Department

MR. ADRIANO: Good morning, and welcome to this press briefing of the IMF’s European Department. Director Poul Thomsen will make some opening remarks and then we’ll be happy to take your questions.

MR. THOMSEN: Good morning, everybody, and thanks for coming. I am going to explain to you that for Europe actually we are revising growth forecast up even for the Euro area although slightly. And the main challenge is really of a medium-term nature.

Let me start with the Euro area. The recovery is continuing after a strong start at the beginning of the year. We are now projecting growth to be 1.7 percent in 2016. That's a slightly upward revision compared to when we were together six months ago. However, the medium-term forecast is indeed quite mediocre. We have potential growth around 1.5 percent. With that we have several important countries that even 10 years down the road will still have unemployment above pre-crisis levels, which is clearly unsatisfactory.

The reasons for the subdued outlook I think are well-understood by now, there are some long-term challenges, demographic challenges, low productivity, like in other advanced countries and there are, secondly, a number of crisis legacies. There is high structural unemployment. There is high debt, and non‑performing loans in the banking sectors.

So the picture is nuanced. The recovery is on track. The short-term outlook is indeed slightly better than when we were together six months ago, but clearly the political uncertainty in the sense of fragility has increased, Brexit, the refugee crisis, et cetera. So there clearly are downside risks that are dominating if we look beyond the near term.

What are the policy implications? For one, monetary policy, we continue to think that the ECB is doing the right thing with the accommodative monetary policy. We see that there is space to do more if needed, but clearly the scope for doing more on monetary policy is limited. Clearly, monetary policy is being overburdened.

Two, fiscal policy. The overall fiscal stance in the Euro area this year is slightly expansionary. Next year it's set to be neutral. We think this is appropriate given where we are in the cycle. As I said, the recovery is broadly proceeding as expected.

But we do think that the distribution could be better, we think that some countries with fiscal space should use that space. And we think a number of countries with high debt should consolidate more than currently is the case.

We still have seven countries inside the Euro zone that are set to have debt above 100 percent of GDP which, of course, significantly limits fiscal space. I think it's important to preserve broad, political support inside the Euro zone not least for the policy of the ECB. I think it's critical that the fiscal rules are implemented as envisioned and that fiscal adjustment is not delayed during times like now when the recovery is on track.

Countries without fiscal space, as we have said before, can also improve the growth outlook by improving the composition of their budget to promote a stronger potential growth. We continue to support the so-called Juncker Initiative and the plans in this regard for an extension and enlargement are welcome.

Third, structural reforms. Unemployment in the Euro area is primarily structural and the key issue is structural reforms to boost potential growth. There are good examples of how structural reforms really have a good payoff in the Euro zone, but there are clearly also signs of adjustment fatigue and a lost reform momentum in recent years.

In that regard, we are supporting talking about policy efforts to develop outcome-based benchmarks to incentivize structural reform and I think this is some work we want to encourage. As far as the priorities, I shall not comment on the structural reforms. They are very country-specific as you know. To reduce the labor tax wedge and the labor market duality; to open up closed professions; to proceed with a single market, covering a single market in services, capital, energy and transport. But as I said, this really varies from country to country.

Fourth, we need the repair of the banking sector's balance sheets to continue. We have the problem of non-performing loans, as you know, in a number of countries. We welcome the work that is going on inside the ECB in this regard with the high level working groups. We think it's critical that the supervisor sets ambitious targets for reduction in NPLs over time, over time. It should not be something excessively pro-cyclical. This has to be over time, but there needs to be ambitious targets and there needs to be follow up with close monitoring and review.

There are some other issues that my colleagues in MCM have discussed with you. I shall not go into them. Clearly, the European banks have an issue with profitability and need to improve their business model but this has been discussed at length by my colleagues so I'll just mention it. It's a very important issue.

So let me sum up for the Euro area. Where are we? Cyclical recovery on track. Monetary policy appropriate. Fiscal policy overall appropriate with some need to redistribute, so countries who have space should use it, while all the countries with high debt should consolidate more.

There's a lot of talk about Germany. We think that Germany has some fiscal space and should use it. We have about 0.5 percent of GDP in our recently published staff report and we see a case for using it particularly on infrastructure. And this will help, will have a positive spillover, but it is a limited spillover.

The problem with the low growth in the Euro zone is mainly a structural one, that requires structural reforms in the individual countries and we should not believe that just to get Germany to do more is going to solve the Euro zone's growth problem. It is mainly a structural problem that requires structural reforms.

One more issue before I turn to Eastern Europe outside the Euro zone. The UK, Brexit, this is a new and unexpected development since we last met. While sterling obviously has declined sharply, there have been no major negative market reactions in part because of a very strong and appropriate policy reaction by central banks, by the Bank of England, but also announcements by the ministry of finance to stand ready with an appropriate fiscal policy response if needed.

As to GDP, we had two scenarios before the Brexit vote, a modest impact and a strong impact. We are largely in the modest impact scenario. Actually, we have revised slightly upwards our UK growth forecast because essentially of developments in Q2 data that came out a lot stronger than we had before. But we are largely in the modest impact scenario and that's of course very good news. The main issues are, as you know, in the longer term how is this going to be handled? And it's absolutely critical that the uncertainty in this regard is settled sooner rather than later.

Let me turn to Eastern Europe. Despite the sort of mediocre growth globally, the recovery in Eastern Europe is nearly complete. Output gaps are closing and unemployment is falling to pre-crisis levels. And that is obviously good news. It's on the back of strong wage growth and accelerating credit growth and this is much welcome. The key challenge facing Eastern Europe is also of a medium-term nature. It is to boost potential growth.

We estimate that potential growth is about half of what it was before the crisis. To some extent, it is not surprising, in the sense that the first 25 years [of transition] clearly provided some easy catch-up gains in productivity, some low-hanging fruits, and it was always in the cards that the next 25 years, if you want, would be a bit more difficult. It's a more difficult reform, more fundamental and institutional reforms, and this is the scaly part of the challenge.

There are also some crisis legacies, that weigh on growth but so it's a mix of issues. The key challenge in Eastern Europe is to overcome these things that are weighing on potential growth and get potential growth back up. Without that increase in potential growth, Eastern Europe will not be able to continue the current growth rates without experiencing external imbalances.

So that's the challenge. In terms of the macroeconomic policy mix, with inflation still low but a number of countries with a high [external] debt, we think that generally the current monetary policy stance in Eastern Europe is appropriate, but we would like to see more fiscal adjustment in a number of these countries than actually is taking place.

Now when we talk about Eastern Europe, I find it more and more difficult because in some ways the group is getting more and more heterogeneous. There are some countries that are doing very well and the other countries that are doing not so well. So the challenges they face are difficult to sort of generalize in a broad presentation like this.

Broader structural reforms, of course, are critical: measures to increase investment. And I think here the key challenge is what I alluded to before, fundamental institutional reforms that are needed to allow Eastern Europe to sort of continue to converge apace with Western Europe. This is an issue that we are going to spend a lot of resources on in the coming months. Our next Regional Economic Issues paper will deal with this, shall we call it Convergence 2 issues and we plan to arrange a conference that some of you might want to attend later on this.

I'm going to stop here and take any questions. I deliberately didn't talk about Greece because I know you have a lot of questions on Greece so just not even given up on starting that.

MR. ADRIANO: So maybe we can start with a round of questions on Greece. Why don't we start here?

QUESTIONER: When do you expect your DSA on Greece, to present it to the public? What are the middle and long term requirements that you are encompassing in your analysis? If I may, a more specific question on the pension reform that was included in the Article IV. Please help us understand what amount of pension reform you expect to see from Greece in order for the IMF to participate in a new program? Thank you.

QUESTIONER: Just to follow up on the question about pension reform. Because recently you just raise, again, the question about further reductions in current pensions. When the recent reform was agreed the IMF was there. I mean, you gave you consent on what has been implemented so far, so why are you raising this issue again? Thank you.

QUESTIONER: So the ESM program for Greece is expiring in August 2018. I would like to know if IMF will participate with a new program. This program will follow the expiration date of the ESM program or will go further?

QUESTIONER: Mr. Thomsen, there are reports in the European press and in the Greece press that you sent a letter to Madame Lagarde and you are saying to them, you are proposing, actually, for the IMF to leave the Greek program. If it’s correct? Also, there is information around that you got a promotion and that you are leaving the European Department. Thank you very much.

MR. THOMSEN: Well, let me start on the last one. I have no clue what you are referring to. While I should not comment on internal discussions, I can tell you that they are not conducted by sending letters to each other. That’s for sure.

So on Greece, the IMF is fully engaged. There is a request for us to engage in discussions on a new program. A team will go out soon, in a week or two to do so. That program will coincide with the discussion of the second review of the ESM program, and we certainly hope that we will be able to have a timely conclusion on these discussions.

Let me just say, there is a strong and full agreement inside this institution on what should be the main component of a Greek program. We have said already that we can support a program that is based on a primary target of 1.5 [percent of GDP]. We have said that we think that the program that was discussed before is adequate in that regard.

We have also said, and the Article IV mission was quite explicit about that, that we think there are some significant concerns about whether it is, about risks. That, in part, reflects the fact that we think that some of the fundamental reforms in the public sector have still not been undertaken, like pension reforms. There are deficits in the pension system of more than 10 percent, 11 percent a year.

The reforms that have been agreed will yield 1 percent of GDP per year. So what we are saying is that the other important reforms, like personal income tax reform -- where Greece exempts an exceptionally large share of households, something like 60 percent. In Europe it’s much less, something like 6, 7, 8 percent from taxation.

What we are concerned about is whether Greece will be able to modernize its public sector. It urgently needs a better social system to target the vulnerable. It needs an unemployment compensation system in order to be able to modernize. So what we are saying is, that it might be that you can, with this measures, reach the 1.5 [percent of GDP], but over the long run there are some things that you have not made plans for yet, like the unemployment compensation, like a good welfare system. That can only be done if you really tackle your problems in the pension system.

Now, we can support a program that’s based on 1.5 [percent of GDP]. If Greece and its European partners want to agree on a program with a more ambitious fiscal target, we need to see how it adds up. We do not think that the program that’s sitting on the table is consistent with more ambitious targets, and I’m not talking about targets for next year and the following year, but sort of over the medium term, beyond the current ESM program. If you want to have a DSA for a while that has a higher target than 1.5, we want to see the reforms that justify such a target.

I hope that is clear. There is a DSA that’s being prepared now in the context of the Article IV, and once the Article IV will go to the Board in December and the paper is released, at that time the DSA will be released.

As far as the duration of a new program. You are right that by the time that we would go to the Board I think there will be 18 months or so left of a new ESM program. We have not discussed what this implies for the duration of a new Fund program. That will still have to be discussed.

Any other issues on Greece, let’s raise them now so we can move on.

QUESTIONER: So contrary to what the IMF said yesterday that the debt is not the problem for Greece. It’s not -- Wolfgang Schauble, debt is not a problem for Greece and it’s not going to be a problem for the next decade. That also that this discussion is misleading. How this constant disagreement helps Greece?

MR. THOMSEN: Let me just say that we do think that Greece has a problem with debt sustainability. We think that there is a need for debt relief and that we need to discuss with our European partners what that debt relief will entail. We have said before that does not necessarily mean haircuts, the other way of doing it. We have not changed our mind on this. This discussion we will have in the coming months.

Okay. Let’s move beyond Greece.

QUESTIONER: Good afternoon or morning. I have a question regarding the conditions for Ukraine to receive the next transfer from IMF. If it will increase the level of fighting corruption. Are you satisfied with the efforts the Ukrainian side is doing, and where, actually, are the Ukraine and the IMF now with urgency to receive the next tranche? Thank you.

QUESTIONER: I have a similar question because I’m also from Ukraine. It’s about Ukraine and the budget. I know that is being approved by the IMF and do you have any suggestions or comments for the budget of Ukraine? Thank you.

QUESTIONER: The IMF recently reported the second review on Ukraine and the crucial issue in that document was a pension reform. What is the pension system, on your mind, is closed to Ukraine considering other existing systems in other countries and what pension ages it can require for men and women?

MODERATOR: Is that on Ukraine?

MR. THOMSEN: Okay. Let’s talk about Ukraine. We, as you rightly said, completed a review recently on Ukraine. Ukraine is one of our largest programs, and completing reviews signals that policies are on track and consistent with the objective of the program. What does it mean?

We think, that if we look at the macroeconomic performance of Ukraine it has been very impressive. I would say it’s been impressive, given the headwinds, given the circumstances, they have met the fiscal targets. They’ve taken significant fiscal adjustment despite a significant increase in security-related spending.

They have, very importantly, overcome a number of, should we call it, taboos, that have in the past derailed economic programs. They have adopted and adhered to a flexible exchange rate policy. That was a major problem in the past. And they have increased significantly energy prices which has, clearly, a macroeconomic dimension in Ukraine. As a result of that, we have seen a significant macroeconomic stabilization, stabilization in the financial system, and growth is returning to Ukraine.

On structural reforms we have had some important progress. We have at some point expressed some concern, as you know, about the pace of reforms aimed at improving governance and reducing corruption. There have been a number of initiatives in this regard included in the current program in the review including a requirement for senior officials to declare assets that I think are welcome in this regard.

Looking forward, this is clearly a key challenge facing the Ukrainian authorities. They need, really, to mobilize a strong resolve to deal with these corruption problems. I think this is the key challenge going forward. My understanding is that the authorities are aware of the importance of that for Ukraine and for the international communities’ willingness to continue to provide support for Ukraine on this very large scale that, indeed, is taking place.

On the pension reforms, pension reform is a very important part of the program. It is something that has been delayed a couple of times, as you know. It’s clearly a challenging reform, not least in the current environment. There is an agreement to get them underway. That will be discussed in the context of this review that is coming up. I’m not going to go too much into details.

But clearly, an increase in the retirement age is a very important part of this, and I think we’ll need to start with an increase in the retirement age of a number of groups that are exempt at the moment from the general retirement, that have special privileges on the retirement age. Some of these privileges are very generous and I think we’ll need to start there. These are discussions that are just getting underway, so I don’t think it’s appropriate for me to get more into this.

QUESTIONER: I just wanted to go back to your comments on the fiscal space and the use thereof in the Euro Area. This debate has been going on for a while now and the countries that have fiscal space show absolutely no willingness to be using it in any significant way. So if that's the case and monetary policy is less willing than before or able than before to support growth in the immediate term, then this is a completely sterile debate that we're in. In your view how do we move beyond that into where someone is doing something about growth?

MR. THOMSEN: So I think what we are proposing is sort of a concerted approach. I do not agree that nothing is happening. Germany has relaxed somewhat, but there clearly is more fiscal space. There's no doubt about it and we think they should use it. I think that there's no way around focusing on the sort of the medium-term challenges. It's, above all, about structural reforms, dealing with the impediments to growth, structural impediments, and doing this more forcefully.

It's also a question of demand and that's why we are pushing on the fiscal space and that is important, but there’s not just one dimension of this issue. I repeat, it's critically important that some countries with very high debt take advantage of the current cyclical position to continue the fiscal consolidation. That too is critical, to be able to create the buffers needed to deal with shocks down the road.

The fact is, the currency union is not a political union. We need to remind ourselves of that. What it means is that economically we are in a situation where we know the output gaps are largely not where the fiscal space is. So it is important that countries that have limited fiscal space take advantage of the recovery to build the buffers that they will need down the road.

QUESTIONER: I want to ask you about negotiations with Belarus. Is it possible to start it this year?

MR. THOMSEN: Any other questions on Belarus? Okay. We have had a mission there recently to discuss a program and it has made very good progress. There are still some outstanding issues and the mission will return to Minsk when they authorities are ready to discuss these issues. I cannot tell you more about timing, I wouldn't know.

QUESTIONER: Let me then ask you a question about the budget of Ukraine, the (inaudible) budget. It depends -- or next tranche depends on this?

MR. THOMSEN: What is the question about the Ukrainian budget?

QUESTIONER: It was said now we know that the Ukrainian budget, whether it's been approved by IMF, project of this budget. And do you do you have any suggestions of (inaudible) of this? Because we are all waiting for a decision.

MR. THOMSEN: We have some program targets for the budget. I have nothing here on the details of the budget for next year. We'll be happy to answer any questions bilaterally, but I have no information on this yet.

QUESTIONER: I'm from Moldova and I would like to ask you about the memorandum that our government hopes very much that the IMF Board will approve this month in Washington. The Moldovan delegation says that it has come here with all of its homework done, including a list of reforms. So by approving this memorandum the International Monetary Fund will give a good signal to the European Union and the World Bank to resume financial assistance for Moldova. So in your opinion what are the chances that this memorandum will be approved?

MR. THOMSEN: So there is indeed an agreement on a number of policies that we think could form the basis of a program with Moldova, and it is formalized in a memorandum. To take it forward we need implementation of a number of what we call prior actions, particularly relating to the financial sector. As you know the problem has mainly been on financial sector governance. And once these actions are taken we will set a Board date and go ahead.

QUESTIONER: I would like to ask you two questions. One of them is about the European banking sector and the other one is about Turkey's economy. So in the Global Financial Stability Report it was said that 25 percent of banks in developed countries, especially in Europe, were going to remain weak and continue to face challenges. So I would like to ask you how concerned are you about a banking crisis starting from Europe. And my other question is about still banks, do you think the regulations on banks limit the money stop line and therefore the nominal growth in Europe, also lowering the inflation.

And my question about Turkey is I know that you lowered your growth expectations for this year and next year, but I would like to ask you to assess the developments after the coup attempt that happened last July.

MR. THOMSEN: Okay, thanks. On the European banking system and the question about limitations on growth, clearly one of the issues that weighs on growth from our perspective is the weaknesses in the banking system. The NPLs is an issue in some countries. The issue of low profitability and the implications this has for capital and the ability to provide lending going forward. So we do think that the repairs of the balance sheets are, or should, be a very important part of the policy mix going forward.

On the question of the 25 percent and the details, you should talk to my colleagues in MCM on that. As I said before, we think that it is important that, one, there is a forceful policy by the regulator who set ambitious but realistic targets for reduction in NPLs and sort of enforce them. One concern one could have is that without this we would indeed be in the situation where banks for a long time would be sort of struggling to repair their balance sheets and to a deleveraging process that hampers the ability to provide sufficient credit. So we do think that this is one challenge.

And the second one is of course what I said about improving the profitability. There are a number of issues there. Consolidation of the system: I don't see any acute problem; I don't see any acute risks from that set of issues. These are sort of challenges that need to be dealt with over the medium-term.

Turkey. The political turmoil as you know has largely had no impacts on financial markets. So we are sending a mission out, I think it's next week, to have the annual Article IV Consultation. I just talked with them recently to get them ready. And the challenges are the familiar ones, about how to boost savings. Turkey has a very high current account deficit, it has a very high external financing need, that it needs to roll over, which of course raises some vulnerabilities once there is a normalization of monetary policy. That's some of the challenges. I think it's important that one continues with the structural reforms to deal with this savings problem. I think the issues here are quite well understood and from what I hear I think that the political turmoil you're referring to has not changed the willingness and understanding to tackle these problems. So as I say, a mission will go out next and we shall see.

QUESTIONER: Can you talk a little bit about Southeast of Europe please, especially Bosnia (inaudible) is so complicated country, political system is unbelievable, you know. That is a big obstacle for everything in Bosnia, especially the economy and growth. And also unemployment is unbelievably high. But foreign debt is really low. How do you explain that? What do you think about the situation in Bosnia? Any chance that Bosnia can do better? And the second question is about Serbia, similar question.

MR. THOMSEN: Second question is?

QUESTIONER: Serbia. Thank you.

MR. THOMSEN: So we have now programs with both Serbia and Bosnia. I should say programs that are doing well. As you know, we have had programs in the past, not least with Serbia, where we have had false starts and ran off track pretty early on. So, in both countries, I see a stronger political will to deal with the reforms. I understand the complexity of the political situation, but these reform programs are on track. They are all an essential part of the journey towards membership of the European Union, which I think we all agree it’s critically important for these countries. These are programs that deal with fundamental structural problems that will take time. You know, state enterprises, governance reforms, long-term issues in the fiscal sector, like pension reforms. All I have to say about that at this stage is that I am encouraged that I start seeing a stronger political willingness in these countries to tackle these problems. And so I think that's good news.

QUESTIONER: While in the region can you talk a little bit about Croatia? After a few months of some kind of limbo, Croatia will finally have a new government. It seems so. So what would be the IMF recommendations for the new government, which measures to take? Thank you.

MR. THOMSEN: I am not entirely on top of what are the current discussions in Croatia, in your country. I think for Croatia, the same comments I had before apply, I was there three or four months ago and there too I think that there is a greater willingness to tackle some of the fundamental problems. Now the political turmoil sort of put a pulse on reforms, but, you know, I have no comments really on what are the short-term issues. I would not know.

MODERATOR: Okay, thank you very much. We have to wrap up because there is another press briefing coming in. Thank you very much.

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