Transcript

Transcript of the MD's Press Conference on the Euro Area Article IV Consultation

June 16, 2023

Speakers:

Kristalina Georgieva, IMF Managing Director

Alfred Kammer, Director IMF European Department

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Kristalina Georgieva: Good morning to everybody. Thank you for being here. Bright and early. My gratitude to Pascal Donohoe for chairing a very good discussion yesterday on our Article IV concluding statement. And let me go straight to the key messages from the statement:

First, yesterday, as you know, the euro area celebrated 25 years. And it was very fitting that our core message was the EU area has shown remarkable resilience in the aftermath of Russia's invasion of Ukraine, in the face of the largest trade loss in decades, a testament to the decisive policy actions of European leaders to secure gas supplies and to cushion firms and households against the impact of high energy prices. While the economy slipped into a mild technical recession in early 2023. We expect economic activity to pick up later in the year gradually, and to finish the year in positive growth territory. Current assessment is 0.8% growth this year and 1.4% next year. Stay tuned in July, we are going to come up with our updated projections, we don't expect much of a difference in those projections.

Inflation has started to decline from historically high levels, but still well above target. And uncertainty remains elevated with risk skewed to the downside for growth and to the upside for inflation. Therefore, our top priority in the near term and the months and years right ahead of us is to keep bringing inflation down to target which we expect would happen only sometime in 2025 while preserving financial stability. So how do we go about it? Monetary policy should continue to tighten and then remain in restrictive territory for some time, until inflation expectations are firmly anchored in inflation target. We welcome yesterday's decision of ECB to tighten. We also welcome the communication that surrounded this decision.

Second, in the current economic environment, fiscal policy needs to stay tight over 2023-2024. Why? To reduce overall demand, push inflation down and put pressure on interest rates to go down. So, we can lower risks for financial stability and of course, put the sound foundation for growth. Talking about financial stability. The banking system in Eurozone is sound on the aggregate. But of course, tightening of financial conditions can expose vulnerabilities. And this is why we emphasize the role of supervisors to assess banks’ exposure to interest rates, to liquidity and credit risks, including those that are related to real estate. We are very much aligned with the discussion that took place yesterday and will continue today, that financial stability in the euro area requires strengthening its financial architecture, implement Basel III, make meaningful progress on banking Capital Markets Union. And actually, we had a very substantive discussion on the Capital Markets Union. Why success there is also linked to success in building the banking union further. Swift advancement of the discussions around the EU economic governance reforms to anchor fiscal policy as quickly as possible, so that in 2025 budgets are on sound foundation is something we strongly support.

And let me finish with something that has worried us for some time: weak growth projected over the next years. The only way we can correct that is through decisive actions on structural reforms to create the conditions for faster growth in the future. And in that context, I want to very warmly welcome the EU being a first mover on artificial intelligence with the Artificial Intelligence Act, to bring regulation so you can capture the benefits, but manage also the risks of technology we all rely on.

The EU continues to be a leader on greening. Our advice is “Yes, please do it”, but be careful that subsidies and other instruments are aligned with the single market, that you don't undermine what has worked for European people so well, for so many years. We also talk a little bit about the implementation of recovery and resilience plans, they are in that same spirit of boosting productivity and growth, so important! Overall, they want to finish where I started. Resilient euro area, but very uncertain times. And the more leaders can do together to charter a path for faster growth, the better.

Bloomberg: Managing Director, two questions, the first one on the ECB policy, you say that the ECB should continue tightening and it seems very likely in the words of Madame Lagarde that there will be another hike in July. But would you consider that another hike in September is necessary? And secondly, in the context of the fiscal rules review, do you think that it's it makes economically sense to have debt reduction benchmark around 1% as Germany has proposed or is this a procyclical proposal?

Kristalina Georgieva: Thank you very much for these two questions. On the monetary policy stance, our recommendation is for tightening bias, we have to make sure that inflation is firmly on a down downward trend and reaches target. What that means, is that policy has to be data driven so ECB will continue to monitor very closely developments and take decisions from that point of view.

On your second question, we support the Commission's proposal. We welcome the fact that discussions are now moving into negotiating territory. We think that the Commission’s proposal is going to help with a more countercyclical stance. So, we support the direction that they outlined in this proposal, obviously negotiations are now to start, and we hope they will advance swiftly, so there is a sound framework to bring debt down in the EU in a way that, as I said, this countercyclical not procyclical.

Politico: Two questions, if I may. The first is on your staff projections. I want to ask about the discrepancy between the figures you give, especially for 2024 and the Commission’s estimates. Second question is on Tunisia, and if you consider the European pressures to release the funds ahead of the government implemented reforms are something that is undue? Or if the EU should go ahead before the IMF releases its funds?

Kristalina Georgieva: On our projections, actually, the trend is very similar. In 2003, growth under 1% and then in 2024 a modest acceleration. As I said, we are going to have updated projections in July and at that point, we will see what data tells us, but based on what we what we are observing now, we don't expect a significant change. We are talking about a time of exceptional uncertainty. And in that context, we make projections that we have to ascertain periodically. You know, it's like this last year, it's like we are walking in in fog. So, what do you do when you walk in fog you very carefully put one foot in front of the other and you do course correction, if you have to. But again, not these are not big, big differences. In terms of trends, we are very much aligned. And by the way that came very clearly yesterday from the Eurogroup discussion.

On Tunisia, we have been working very closely with the Tunisian authorities for quite some time, we have made significant progress on agreeing on a program. This program has to be owned by the country. Tunisia is in a better position today, because tourism picked up, that applies to all contact intensive industries countries. In other words, to tourism countries are doing quite well they were hitting 2020. They are now benefiting from everybody's desire to travel. In other words, the pressure is not as dramatic as we feared it may be. Europe has a strong tradition of engaging in supporting Tunisia. We are very grateful for that actually, we welcome the fact that European leaders have taken that proactive approach to support Tunisia. And we are very much aligned that for Tunisia, it would be great to implement reforms that make the economy stronger, and prospects for the people of Tunisia brighter. And on the key components of reforms, we have no differences. It is on the details how reforms can be pursued that we are still having some work to do. And just to make it very clear for the for the IMF, our aspiration is to support a dynamic economy and one that is fair, where poor people are not paying for subsidies to rich people how exactly to do that, I'm sure we will agree.

FT: The European Commission will surely be introducing legislation on the digital Euro decision later this year by the ECB. I just wondered, broadly speaking, it looks like the Euro zone will be one of the frontrunners, at least in Europe, some of the Western economies in terms of a digital currency. Do you see the benefits of this outweigh the potential risks of disruption to the banking system of such a project? And my second unrelated question relates to bills introduced in the Senate this week, to do with confiscation of Russian sovereign assets. I wonder if you could talk about how the IMF assesses the risk to the global financial system, the risks that could stem from such a course of action, whether you see risks in pursuing that sort of thing.

Managing Director: On digital Euro, it is very timely for the EU to engage on this subject. Why? Because what we see is over 115 countries today are engaged at different stages in pursuing CBDCs. We have the strongest demand for technical assistance coming from countries interested in that subject. We know that some of these advances are quite significant. Well, of course, the first to cross the finish line was Bahamas with the Sand dollar. But more interesting is how far the piloting of the digital Yuan has gone. We, the latest data we had was that the pilot covers 118 million participants. So the EU is right, not to fall behind from these developments. You're putting an important question. In the EU, mobilization of finances done primarily through the banking system. Yesterday, we discussed that it is important for the EU to move more proactively in building the Capital Market Union. So, they can be a higher contribution to making financial assets work harder through capital markets. And in that sense, with banks providing the bulk of financing, of course, it is very important that the EU is very cautious and careful on how the development of the digital euro is going to be carried forward. I actually appreciate the fact that a lot of attention is paid to that. And in that sense, the timeline that is being defined is one that allows for engagement with the banks and making sure that that is no disruption in the way banks contribute to growth into the wellbeing of a few. So, to sum that up, our sense is that this is a very deliberate and careful approach that is being taken. I mean, reality is the EU cannot stay out of what is happening in the rest of the world, good thing that they are embracing this journey.

To your second question. You know that this is a discussion that takes place in many countries, and it has to be very carefully pursued. From the perspective of the IMF we want to see a thoughtful assessment of risks, but these are sovereign decisions. It's not for us. But of course, our job is to make sure that that you walk into a decision and the implementation of this decision with your eyes wide open.

Der Spiegel: The German government yesterday has voted in favor of a state aid of 10 billion euros for a chip factory in Germany. Are we now in a subsidies race?

Kristalina Georgieva: I'm going to ask my colleague to answer this particular question. More broadly on your question, what we recognize is that we are at a time when accelerating the green transition is absolutely critical. We are behind! We have a target to cut emissions between 25 and 50% between now and 2030, we are nowhere near reaching that target. So, when countries concentrate on how they can push for accelerated transition, and use subsidies in that context, we do not see that as an immediate problem if it is implemented carefully and if there are clear guardrails to avoid a subsidy war, that would in the end lead to more protectionism. And we know the consequences of it: slower growth, more insecurity. We have been warning about the risks of fragmentation that can bring global GDP significantly down, if done poorly. I don't know whether you have seen this research: Trade fragmentation can cost the world economy somewhere between 0.2 percent and 7percent. 7 percent is $7 trillion. This is like wiping out Japan and Germany combined from the global economy. And the difference between 0.2 and 7, is how we approach this question of security of supplies and accelerating the green transition thoughtfully and carefully, or with a great deal of ignorance to the consequences. And now I'm sorry, I'm giving you this bigger story. And now to the 10 billion. Mr. Alfred Kammer.

Alfred Kammer: Just to emphasize when it comes to subsidies in this context. When we are looking at supply chains and securing supply chain, the issue is really one of global diversification in order to ensure that they're not necessary on onshoring them. The second point, I think, is going to be very important, and Kristalina already emphasized that in the context of another question, that we need to preserve the European single market, because larger countries will have more firepower in terms of providing subsidies. But that should not infringe on the European single market, which is a unique and very important achievement in the European Union.

Kristalina Georgieva: And in the world of instantaneous access to information. I just saw what you're referring to. I'm sorry, I wasn't initially aware, and I would finish where Alfred was, that we have to be always very careful. What we do is it strengthening supply chains, which we now know, require more attention, or it is leading is leading to a risk of creating a damage on the functioning of the European single market. Do this assessment carefully.