Transcript of April 2023 European Department Press Briefing

April 14, 2023

PARTICIPANTS:

CAMILA PEREZ, Senior Communications Officer, International Monetary Fund

ALFRED KAMMER, Director, European Department, International Monetary Fund

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MS. PEREZ: Welcome to today’s press conference on the European Economic
Outlook. My name is Camila Perez. I’m a senior communications officer with
the media relations division at the IMF, and I’m here with Mr. Alfred
Kammer, the Director of the European Department at the IMF. We’re going to
get started with Alfred’s opening remarks, and then we’re going to take the
questions both from the floor and online. Please raise your hands and wait
to be called. Same for colleagues joining us online, send us your questions
via WebEx and we will be reading those. And with that, Alfred, the floor is
yours.

MR. KAMMER: Thank you, Camila. So, welcome to this press conference on the
outlook for Europe. Big message, Europe avoided an all-out recession this
winter and showed resilience. But it is facing a triple challenge, defeat
inflation, sustained recovery, and safeguard financial stability.

Inflation remains stubbornly high. It is in double digits in most emerging
European economies and some advanced economies. Energy prices have fallen,
but prices of other household expenses are still increasing at a fast pace.

Meanwhile, economic activity has decelerated sharply as inflation lowered
households’ purchasing power, growth slowed in key trading partners, and
monetary policy tightening started to bite.

And in recent weeks, banking sector and broader financial stability have
been tested, which casts a further shadow over Europe’s near-term economic
growth prospects.

Europe’s outlook is one of slow growth and sticky inflation:

• In advanced European economies, economic growth is forecast to fall from
  3.6 percent in 2022 to 0.7 percent this year, before some pick-up to 1.4
  percent next year.

• In emerging European economies excluding Russia, Ukraine, Belarus and
  Türkiye, growth should drop from 4.4 to 1.1. percent this year, and then
  rise to 3.0 percent in 2024.

• Headline inflation is projected to decline thanks to lower energy prices
  and easing supply chain bottlenecks—we project it at about 5.6 percent on
  average in advanced Europe this year, and 11.7 percent in emerging European
  economies. But core inflation will still be above central bank targets by
  end-2024. Many European economies run close to full capacity and labor
  markets remain tight, which will set the stage for some recovery in real
  wages.

Things could easily get more complicated, as discussed in more detail in
our new Regional Economic Outlook, which will be released on April 28.
Tight labor markets, a resurgence of energy prices, or increasing
geo-political fragmentation could bring both lower growth and higher
inflation. Failure to contain financial stability risks could lead to
crisis and lower growth.

So what should policymakers do?

Policies will need to work in concert to defeat inflation while
safeguarding financial stability and sustaining the recovery.

Central banks should maintain tight monetary policy until core inflation is
unambiguously on a path back to inflation targets. The course of policy
rates should be tailored to changing financial conditions.

Further increases in policy rates are required in the euro area. Central
banks in emerging European economies should stand ready to tighten further
where real interest rates are low, labor markets are tight, and inflation
is not projected to return to target sustainably over the monetary policy
horizon.

For most countries, governments should pursue more ambitious fiscal
consolidation than is currently planned. This is needed both to place
inflation firmly on a path to target and to replenish depleted fiscal
space, particularly because shocks have become more prevalent.

Fiscal consolidation would also enable central banks to meet their
objectives at lower interest rates; this would lower public debt service
costs, and also support financial stability.

A good starting point would be for governments to save the recent windfall
gains from energy price declines and higher tax revenues. Targeting any
remaining energy relief measures to the vulnerable, eliminating all
untargeted measures, and raising carbon prices would also support fiscal
adjustment.

Maintaining financial stability will require close monitoring, strong
supervision, contingency planning, and prompt corrective action when
needed.

Capital and liquidity buffers across European banks are generally
comfortable, and further increases in required capital buffers are under
way in many countries. But there should be no complacency: recent banking
events in the U.S. and Europe have shown that perceptions and funding
conditions can change quickly.

Supervisors should continue to take stock of the implications of higher
interest rates on financial institutions’ balance sheets, and stress test
them. The prudential standards envisaged in Basel III should be implemented
without delay relative to the original timetable. Any measures to support
indebted households should be strictly targeted to lower incomes and allow
policy rate changes to be passed onto lending rates. Banks should fully
reflect associated risks in their balance sheets.

In the European Union, financial stability could be bolstered further by
extending the reach of resolution tools to smaller banks, ratifying the
European Stability Mechanism’s amended treaty to provide a financial
backstop to the Single Resolution Fund, and agreeing on common insurance of
bank deposits.

Finally, structural reforms should prioritize supporting medium-term
growth. To ease labor market tensions, policymakers need to help people
join or stay in the labor market by enhancing labor force participation and
workers’ job transitions. And we need investments to lift Europe’s
productive capacity and speed up the green transition. Many other reforms
are needed to boost lackluster productivity. Priorities vary across
countries.

It will take resolute, broad, and carefully crafted actions for European
policymakers to address the triple challenges they face and simultaneously
defeat inflation, sustain the recovery, and safeguard financial stability.

MS. PEREZ: Thanks, Alfred. We can now go to your questions in the room. I
think we’re going to start with EFE. Thank you.

QUESTIONER: Hi. Thank you. I would like to ask a question about Spain. This
year is one of the countries that is growing the most in Europe, but for
the next year, the forecast have dropped significantly. Could you explain
why? And I would like to have a comment also, a more general comment. With
a growth of 0.88 in the Euro Zone, and the biggest countries like Germany
really struggling, is Europe really far from a recession?

MR. KAMMER: So, let me first start with your general European question.
First of all, we should recognize that coming out of the pandemic Europe
had a very strong exit. And that was a clearly a reflection of the strong
policy response during the pandemic. And we see that in very high growth
numbers in 2022. And as you know, we have upgraded them over time.

What we are seeing now in 2023 is really the effects of the Russian
invasion of Ukraine. That provided a huge shock to the European economies
in terms of increasing and pushing up energy prices and inflation, which
required more monetary tightening, lowered the purchasing power of people,
increased the cost of production. And we are seeing these effects carried
out in 2023. And that’s again, across all of Europe.

We see differences in countries depending on how much they depended on the
energy price, the energy from Russia, and how much they were affected by
the energy prices. That explains some of the variation. But I should also
say again, when it comes to policymakers they stepped up after the Russian
invasion of Ukraine with packages which were addressing the problem.

And the biggest problem we saw last year was a big concern that a Russian
gas shut off could bring the European economy to a halt in the winter. It
did not happen. And that would have been a big recession in Europe. And it
did not happen because policymakers increased supply, worked on reducing
demand. And I should say for once, there was luck because we also had a
mild winter. So, that was really avoiding the big recession.

And what we are seeing in 2023 now is the effects of all of this. But we
also see during the year recovery taking place. And that is going to
manifest itself more in 2024.

Now, with regard to Spain, in terms of our forecast, Spain’s growth, as you
said in 2022, was very strong. And we upgraded that the outcome was 0.3
percentage points higher than we had expected. And that momentum is going
to carry over into 2023. And therefore, we upgraded our forecast for 2023
by 0.4 percentage points. We have a downgrade for 2024 of 0.4, and that
expects the relate response to the monetary tightening and also to tighter
financial conditions coming from some of the banking episodes we have.

But overall, I should stress that taken together, ’23 and ’24 in Spain of
what we see canceled itself right out. So, Spain is in a rather good
position, I would say.

MS. PEREZ: Thanks, Alfred. We’re going to go with the second row.

QUESTIONER: Good morning. Thank you for doing this. I’m from Il Sole,
Italy. I was wondering if you could elaborate a bit more on the
advisability of ratifying the ESM that looks like an asset to Italy? Thank
you.

MR. KAMMER: The ESM treaty, amended treaty, ratification is part of the
European Union’s agenda of completing the banking union; and what it would
provide is a backstop to the single resolution fund; and, I think, that’s
an important architectural element in terms of completing that element of
the banking union, and it will benefit all countries involved.

Other elements which are currently for discussion is to find agreement on a
common deposit insurance, and also to find, at least, cost resolution
options for smaller banks. So, that is a package of three EMS treaty
completion. Now, I meant is one of them, all three are important to
complete the banking union.

And to why is it important to complete the banking union because these
measures are important to improve financial stability across the union.
They will also allow for households and corporates to have more access to
bank credit across and, hopefully, over time also at similar, at cost; and,
therefore, are going to benefit growth, and that it will also make it
easier in terms of monetary policy making in the European Union and this,
particular, by the ECP because it will improve monetary transmission in the
Union. I should add commercial authority. Other elements of the Union
should also be completed, and one of them is the CMU, which we have been
advocating as well; and, again, that will help in terms of deepen capital
markets, and it will help in terms of medium-term growth and increasing
productivity.

MS. PEREZ: Thanks. We’re going to go with Bloomberg.

QUESTIONER: Thanks. Phil Aldrick of Bloomberg, and thanks for doing this. I
just want to know a little about the U.K. after the disastrous mini budget
last year, has the U.K. rebuilt its reputation here? What’s the impression
of the delegation this week? And on Europe, on the deposit insurance.
There’s been discussions in general about raising the level of deposit
insurance, possibly. Is that something that the Europe should consider as
well given the financial stability concerns?

MR. KAMMER: tzhank you. On your first question, the answer is
unequivocally, yes. When you’re looking at market reaction to the autumn
statement and the spring statement, we see now that gilt rates and mortgage
rates have reversed their increases, and you will also see that the pound
is stronger than it was pre-mini budget crisis. And then, so, the answer to
your question is yes.

What we see in the spring statement, again, is an acknowledgement of, or an
alignment with medium-term fiscal sustainability, an alignment with the
broad objective of achieving the inflation target; and those are excellent
elements which we have been indicating are needed for the U.K. And when
we’re looking at other elements of the spring statement in terms of
improving labor force participation, and also in terms of providing
incentives for business investments, those elements are very important and
they should set also the stage for future policy making because what we
need in the U.K., as we need in all across Europe, we need to boost
productivity. We need to step up reforms to ensure medium-term growth, and
we need to undertake a huge transformation as part of the green transition
that we are envisioning.

So, more is needed, and I would say that it is not just applying to the
U.K. but across Europe focusing on the labor force, upscaling labor,
improving training with active labor market policies; but, also then, when
you’re looking at the green transition for the European Union, they
estimated that the green transition will require investments of $4 trillion
euros. Three quarters of that needs to come from the private sector, and
that means we need a massive amount of private sector investment, and the
private sector needs to be part of that as well.

With regard to the deposit insurance. At this stage, we have advocated a
common deposit insurance across Europe. So that is our recommendation; and,
of course, policy makers need to look at the lessons learned from market
turbulences and all of the elements of reform that are in the pipeline need
to be assessed in light of that and see what we’re learning from these
episodes, including on deposit insurance.

MS. PEREZ: let’s go to F.A.Z

QUESTIONER: Thank you for doing this. F.A.Z, German newspaper. Why is
Germany performing so poorly, and is it more to only with energy prices,
dependency on energy prices because we don’t see substantial growth since
five years or most in Germany; and is Germany the new patient of the
European Union?

MR. KAMMER: No, it is not. When you’re looking at the growth pattern in
Germany, it is very similar to other European countries. Again, Germany had
a strong exit from the pandemic. It experienced weaker growth than we
expected in the fourth quarter of 2022; and Germany is one of the countries
most affected by the economic effects of the Russian invasion of Ukraine
because of its dependence on Russian energy; and that played out already in
the fourth quarter, and when we’re looking at our forecast for 2023, that
slowdown and that momentum of the slowdown has carried over into ’23 and
that’s why we see the downgrade with regard to Germany.

I should also say that we are positively surprised about the resilience of
economic activity in the first quarter; and when you’re looking at our
forecast, you will see that throughout the year, we’re actually forecasting
an increase in GDP of 0.2 percent, and then, of course, in 2024, we will be
in positive territory again.

So, the German economy has been affected more than other European
economies. The policy response was strong and appropriate. We’re expecting
growth to resume during the year, but it is, of course, going to be
challenging, and challenging will be something which applies to Germany as
well as to many of the European countries. We will need to step up over
time, public investment, which has been lacking over the last few decades,
and that public investment is needed for the energy transition for
maintaining and building up infrastructure; and that is going to be an
important part of any policy going forward because that’s going to ensure
productivity and medium-term grow, and that applies to Germany as well.

MS. PEREZ: Thanks, Alfred. We’re going to go with first row. Microphone,
please, first row? Thank you.

QUESTIONER: Thank you very much. Jorge Valero with Bloomberg as well. A
question on the comment you made that some governments need to push more
ambitious fiscal consolidation. So, what governments do you have in mind
when it comes to Europe; and, also, in that context, the Commission is, the
European Commission, is going to propose in the coming days, the coming
weeks, a review of the fiscal rules. So, do you think that this review is
considered more adjusted fiscal pass for members’ stage or this would be
like some common benchmark, like some countries are calling for?

MR. KAMMER: So, our call on the fiscal consolidation actually comes in two
parts. The first one is, with regard to achieving the inflation objective.
And we have been saying that fiscal policy across Europe needs to be
aligned with the tightening of monetary policy. And that means for Europe
also that across Europe, more consolidation right now would be better in
terms of helping on the inflation front — so that’s a recommendation to
virtually all governments in Europe –- and that would help actually
allowing the ECB less of a rate hike that would help them on having less of
an impact on debt service, and that would help in containing financial
stress which is coming through interest hikes. So that’s a recommendation
to virtually all of the countries in Europe. The fiscal stance is neutral
to mildly consolidating across, but again, if more could be done, that
would help.

And what is the more that can be done? There’s some easy gains. Energy
prices are low. That means that some of these energy packages, cost of
living packages can be phased out. Second, in many countries they’re still
untargeted, and that means to make them more targeted makes them more
efficient, less costly, and put more — less pressure on aggregate demand.
And what we’ve also seen is that we have some windfall tax revenue gains
because inflation is higher. Those savings should be saved, and that will
also help on the fiscal stance. So that’s number one.

The second issue is with regard to medium-term consolidation. And I should
say that, with regard to medium-term consolidation, our advice for most of
the countries is actually, again, to do more. But in particular, to the
high-debt countries in Europe. And here we’re going back to the story we
had already last year before the crisis, the war on Ukraine. We need fiscal
consolidation in the medium-term in Europe to create buffers so that when
the next shock is hitting Europe, the fiscal policy can be used,
governments can be -– respond. And what we have seen in both crisis
episodes with the pandemic and the Russian invasion of war, that response
was essentially to prevent a much worse counterfactual outcome.

With regard to your question on the European Fiscal Framework, we very much
agree with the proposal which was made by the Commission. This is a
proposal which is based on a risk-based approach, and a country-specific
approach. It looks at the medium-term sustainability, and it moves to an
expenditure-based rule. Those are recommendations we have been meeting and
we are happy to see that incorporated in the Commission’s proposal.

For us it’s important that there is a differentiated approach between the
countries because the situations are very different, and so they need
different fiscal adjustment. That’s very important within the current
framework to emphasize. What we would have wished is one, to have a
countercyclical fiscal capacity in there, and that would provide
macroeconomic stabilization during shock times, and that helps maintaining
growth; and also, to have a facility in there to help with the public
common goods like a climate fund which could operate across the European
Union. Those are not proposals which have been incorporated. And we would
also have wished strengthening of -– or the creation of a European Fiscal
Forum in order to have that kind of agency fully empowered at the Union
level, which we see already at the national levels.

Now, there’s still discussions going on, on the fiscal rules. For us it’s
important that these discussions are bringing -– are being brought to
closure soon so that these rules can be brought to fruition and can be
implemented soon, and so that we don’t have a prolonged period of situation
where we are staying with the existing rules which we know are in need of
being upgraded.

MS. PEREZ: Thanks, Alfred. Alex Brummer?

QUESTIONER: Alex Brummer, The Daily Mail. The U.K. has -– is, in the latest
forecasts, is at the bottom of the advanced country and the G7 and the
European Advanced Countries growth league. I wonder why it’s in that
position? And there’s a view in the U.K. that the IMF is consistently
underestimated the growth possibilities in the U.K., and I just wondered if
you could answer that?

MR. KAMMER: First, again, what we see in the U.K. is a growth pattern over
the last few years, it’s just very similar of what we’re seeing in the rest
of Europe. We had super high growth rates in 2021 and very strong growth in
2022 exiting from the pandemic, and we now see a sharp slowdown in ’23 and
a recovery in ’24. So, this growth pattern is the same across all of the
countries in Europe and the same in the U.K.

Why do we see in the U.K. quite a sharp slowdown next year? One — and that
is an issue which is, to some extent, I already address with Germany — the
energy price shock is hitting the U.K. particularly hard because a large
part of household budgets are spent on gas energy, and that therefore
lowers purchasing power and real incomes, so that is an effect which is
much more pronounced in the U.K. Second, what we also see is that we have
employment, which is still below pre-pandemic levels, reflecting still
continuing sickness and scarring from the pandemic. And, of course, we also
saw that the Bank of England was raising rates quickly and appropriately,
and we are seeing the impact of a tighter monetary policy on overall
demand. So that leads to a situation where the growth slowdown in the U.K.
is larger than what we see in some of the neighboring countries.

With regard to the growth forecasts, we are making a best effort to take
all of the facts into account, checking our assumptions across and making a
best effort in terms of our forecasts. It’s very difficult during the last
two years to be very accurate with forecasts. First with the pandemic we
had to assess how the –- how things would evolve with vaccines and the
virus. And now, with regard to the shock brought by the war, it’s very
difficult sometimes to understand what –- how prices rises percolate
through the economy and are effecting economic agents, and both shocks are
overlaying.

So, when I’m looking at the forecast, I would not in general get too
excited about point one here, point one there. We are in a situation where
we are still working under a lot of uncertainty. And I should also say, we
usually are being accused of being overestimating and too positive on
growth. Again, we are making a best effort always to come up with an
objective and accurate forecast for all countries.

MS. PEREZ: Thanks, Alfred. The gentlemen in the first row.

QUESTIONER: Yeah, hello, good morning. Russian News Agency, so question is
about energy. In March [inaudible], stated that China Zero COVID policy was
a relief for Europe as it led to cheap [LNG] flows from China to Europe so
the affordable energy became a rescue for you. As we are approaching next
winter, do you see risks that Europe could face LNG deficits that can
impact the economy, and the second part, it’s also about energy related to
oil and price cap on Russian oil and Russian oil refineries. What impact
does it have to European economies now, and how can it impact European
economy in future. The EU is still buying Russian energy, including 40
percent of Russian diesel. Thank you.

MR. KAMMER: So with regard to your first question, winter of ’23-24,
there’s still some, clearly some risks with regard to the energy security,
but mostly on the pricing side of going through the next winter, but I
would say that the risks are much, much lower than we had before because
what happened in the winter ’22-23, first, because of the very strong
policy response by European policymakers, supply substituting for Russian
gas delivery was up. The system was more integrated in Europe. Demand was
reduced, and what we saw is quite a substantial increase in — sorry —
quite a relative higher storage level of gas coming out of that winter, and
with the highest storage level of gas coming out of that winter, that also
puts less pressure on the market in order to replenish the reserves during
the summer, which have been used in the winter. Last year, clearly, energy
purchases were helped by the continued lockdown in China at that point in
time, and clearly, this year there is a risk if the rebound in China is
larger than we expect, that this would put price pressures on refurbishing
that storage, but we are not expecting the same kind of war as we had for
the winter of ’23-24, that we had for the window of ’22-23 because Europe
is just in a much better situation of having diversified its gas production
and also gas imports, but also in terms of having reduced demand.

With regard to the Russian oil, most of the oil has been substituted
through other imports, and we would not expect a serious disruption coming
from that side for the European economies.

MS. PEREZ: Thanks. Sorry, we are running out of time, so I’m going to take
the question from our fellow from Ukraine.

QUESTIONER: Ukraine News Agency here. How would you assess the economic
dependence between Russia and Europe today? How it has changed for past
year and what your outlook for this year? It’s new question about not only
the oil and not only the gas, maybe finance, maybe agriculture, maybe other
areas.

MR. KAMMER: With regard to dependence of Europe on Russia, that was mostly
dependence with regard to energy imports and mostly on the gas side, and
gas imports dependent on Russia has fallen quite significantly from 40
percent before the war to ten percent now, so much less dependence on gas,
and that is a reflection of alternative supplies and energy, in particular,
coming into Europe, and the same is applicable on the oil side, where
Russian oil and oil products are being substituted through other import
channels. With regard to your other question, that was referring to which
economy?

QUESTIONER:[inaudible] not only this, not only on oil, maybe some others,
maybe finance, maybe fertilizer.

MR. KAMMER: So, in general, with regards to the financial linkages, they
have been very limited, and they have been reduced further, so there is
also less interconnectedness on that side. I think you are pointing to
fertilizer and food and grain, and I think that’s a particularly important
point and that is an important point for the globe. The discussion, again,
is on the export of Ukrainian grain to continue now. This is an important
point, not only for Ukraine, but that is an important issue for global food
security, and we certainly hope that an agreement can be found, and these
grain exports can continue.

MS. PEREZ: Thanks, Alfred. I’m sorry. We ran out of time. Thanks so much
for joining the press conference. Thank you so much, Alfred, and have a
good day, all.

MR. KAMMER: Thank you.

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