Source: International Monetary Fund
October 24, 2024
Speakers:
Alfred Kammer, Director, European Department, IMF
Helge Berger, Deputy Director, European Department, IMF
Oya Celasun, Deputy Director, European Department, IMF
Moderator:
Camila Perez, Senior Communications Officer, IMF
MS. PEREZ: Hi everyone, thanks so much for joining today’s press conference on the release of the European Economic Outlook. My name is Camila Perez. I’m a Communications Officer here at the IMF. And we’re here with Alfred Kammer, Director of the European Department. We’re also here with two of his Deputies, Oya Celasun and Helge Berger. We’re going to get started with some opening remarks from Mr. Kammer, and then we’re going to go to the floor and online to take your questions. Alfred?
MR: KAMMER: Welcome to this press conference on the Economic Outlook for Europe.
Headline inflation has come within reach in targets in advanced European economies, but progress remains uneven in Central, Eastern and Southeastern European countries. CESEE as we call it. A moderate recovery is underway. This reflects that financial conditions are still tight, as the easing cycle will take time to take effect. Importantly, the rebound also reflects a high level of uncertainty that keeps consumers and investors cautious.
Our main message today is that Europe’s recovery is falling short of its full potential. And more importantly, the medium-term outlook is no better. Europe has fallen behind, and I will come to this theme back later, but let’s briefly look at our near-term outlook first.
Our baseline foresees a modest increase in growth for 2024 and 2025. On inflation, we expect the ECB to sustainably reach its target by mid-‘25. For most CESEE countries, it will take a year longer until 2026. So for this to materialize, Europe needs a safe pair of hands. Central banks should pursue a smooth loosening path in advanced economies, and they need to be more careful and ease more cautiously in several CESEE countries, as real wages may outpace productivity growth there. We also recommend tightening the fiscal stance across most of Europe. We are expecting a recovery, but deficits are too large to stabilize public debt.
The good news is that the EU has agreed on a fiscal rules framework addressing sustainability concerns while allowing for investment in green transitions and infrastructure. And now we need to follow through. But the urgency for policy action is even more acute when it comes to the medium-term, and that’s really what our report is focusing on. Europe has an underwhelming potential growth rate, and when we are looking at the medium-term, that is not changing.
Compared to the U.S., income per capita is a stunning 30 percent lower and the gap has remained unchanged for two decades. And I should say at the turn of the century that gap did not exist. Low productivity in CESEE and a low capital stock, are the main reasons.
Our report identifies three factors holding Europe back. First, Europe markets are too fragmented to provide the needed scale for firms to grow. Second, Europe has no shortage of savings, but its capital markets fail to provide to boost young and productive firms. In addition, Europe is missing skilled labor where it is needed. A deeper, more integrated Single Market can resolve most of these issues. This means removing the barriers that still prevent goods, services, capital, and labor to flow freely between countries.
We estimate existing barriers in Europe’s Single Market to be equivalent to an ad-valorem tariff of 44 percent for manufacturing, between U.S. states it is 15 percent, and that tariff equivalent is 110 percent for services between EU countries. These are staggering numbers that illustrate how much income Europe leaves on the table.
While private investment is key, there is also a need for public investment. For example, on infrastructure, connectivity, nd in addition, deepening and broadening, the Single Market could support a faster growing and more resilient Europe.
New Member states joining the EU in 2004 saw that GDP per capita increase by more than 30 percent in the 15 years after EU accession, helped by strong reforms and market access. And the larger Single Market also helped old member countries. So Europe can close the gap with the global frontier if it builds on its most important asset. And I have been emphasizing that in the past and I continue to emphasize that. And that is the EU’s Single Market.
So, what are some of the immediate steps which we are outlining? Open energy, telecommunications, and financial services sectors. This will bring more private sector investment, dynamism, and innovation. Advance the capital markets union. This will funnel savings to the most productive firms and startups, make a real effort to ease administrative barriers to firms entering markets, especially in the service sector, and improve infrastructure, institutions and governance in CESEE countries.
So, in conclusion, Europe has the means to lift growth to its full potential. This is completely under Europe’s control, and it needs to be done. Thank you.
MS. PEREZ: Thanks so much, Alfred. We’re going to get started with some questions in the room. I see there are some colleagues online. We will get to you. But we’re going to take the first question. The gentleman in the second row. Thank you.
Question: Thank you so much. In the recent World Economic Outlook, the IMF predicted a slightly better growth for Europe in this year and worse dynamics in 2025, especially for emerging and developing economies. You already described some factors which are driving this process.
But I have a question regarding the particular issue. This is Russia’s war in Ukraine. How does this factor affect the dynamics in Europe now? And secondly, the IMF significantly marked down the projection for Ukraine, at the same time saying Ukraine’s economy remains resilient despite the war. Could you elaborate, please, on the exact reasons for these negative expectations? What could be done more to improve the situation in Ukraine? Thank you.
MR: KAMMER: So let me start first with the general impact of Russia’s war in Ukraine on the European outlook. When you’re seeing the growth trajectory, it hasn’t changed very much over the last year. And the main reason why Europe is doing poorly is really the large Russian induced energy price shock Europe is going through. So we are seeing this year, coming out of this crisis, moderate recovery. It’s driven mostly by consumption, as real wages are strengthening. And we are expecting then next year that we will have a handoff to investment demand when policy rates, interest rates, are going to come down.
So very much when you’re looking at some of the more detailed pictures, Germany very much affected because of the energy price shock, still because of its energy intensive manufacturing. That’s a direct impact of the Russian war. If you’re looking at the tightening cycle of the ECB, that had to be harsher simply because inflation was higher. That’s a result of Russia’s war in Ukraine.
So that is the general trajectory we are on. But we also have revised down growth for 2025. And what we’re seeing is a bit of moderation in the recovery we have been projecting. And again, it’s a result of the uncertainty created as part of the environment and Russia’s war in Ukraine. That’s an uncertainty for consumers, which are wondering what is going to happen with energy prices and with the future. That is an uncertainty on the investor side, on wondering what is happening in the medium-term. And these headwinds are going to stay with Europe for the time being. So that is the direct impact we are seeing that Russia’s war on Ukraine has still implications for Europe’s economic developments.
On your second point, with regard to the growth in Ukraine. Growth numbers this year have been brutally affected by the bombing of the energy infrastructure in Ukraine, and that dampens growth and also the outlook. And in addition, of course, like for all of Europe, this creates uncertainty in Ukraine, and it has a dampening effect on aggregate demand. And when you’re looking at our projections for 2025, we also have downgraded those for Ukraine. And that is a reflection that Russia’s war in Ukraine is going to continue. We had assumed that it would stop earlier. It doesn’t. And those are, again, additional costs for the Ukrainian economy.
On Ukraine. The economic team has been doing and is still doing a marvelous job in terms of, one, maintaining macrostability. Two, supporting the economy to get growth going and supporting enterprises to operate this environment, protect vulnerable people suffering from the war. And three, preparing the fundamentals for hopefully a reconstruction that will come soon and the medium-term path to EU accession.
MS. PEREZ: Thanks so much, Alfred. We’re going to go with the lady on the third road, please.
Question: Thank you. My question is related with — Spain has one of the best growth prospects in Europe. What recommendations do you have to ensure that this good momentum continues when the European funds end? And I would also like to know if you have any advice for the housing problem that the country is facing, which has provoked numerous protests by citizens who cannot buy a house due to speculation and high prices. Thank you.
MR: KAMMER: Spain had indeed a very strong growth performance. That was a result of what we saw on the tourism front, very much still, to some extent, a Pandemic implication. Spain, finally, we saw also, because of lower interest rates and more confidence, a pickup in investment that has been supporting growth. And when we are looking at the supply side, we see the large employment increases have been supported also by immigration. So those were growth drivers we saw in Spain. They will moderate a bit in 2025, but they still will carry on. And of course, implementation of the Next Generation EU will not only have short-term positive impacts but also impacts on the medium-term growth projections for Spain.
I think when it comes to our policy recommendation for Spain, when you’re looking at the growth performance right now, it was labor intensive, so it was driven by an increase in employment. In future, what we need to see is a growth performance, which is driven by an increase in productivity. And when I mentioned the word productivity and you asked me a question on any country in Europe, that’s the key word. Productivity is an issue in every single member country in Europe. And that needs to be the focus of strong policy reforms. Those are reforms domestically and the structural reforms we have been talking about in our Article IVs.
But importantly, these are reforms which need to be carried out EU-wide in order to get the productivity increases we need from the Single Market, from companies and firms to be able to grow to scale, go to the global technology frontier and produce and to see a very dynamic business sector. That’s an issue for Spain, but this is an issue for all other countries, and Europe can help there. This is not a national action per se, but this is an action at the European level. But it requires will at the national level to go for European reforms.
MS. PEREZ: Thank you so much. We’re going to go to the middle of the room. The lady in the third row, please.
QUESTION: Hello, two questions, if I may, on different topics. You mentioned the importance of integrating Europe’s capital markets. In this context, how important is it for Europe to have bigger banks? Would you welcome the potential merger of UniCredit and Commerzbank? And if capital markets are very important, should the German government drop its objection to this potential bank tie-up? Have you also communicated a message to the German government? And on a completely different topic, you’ve warned about the need for advanced economies to carry out fiscal consolidation and to reduce their borrowing after many years of emergency spending. The UK Chancellor, Rachel Reeves, today has said that she will change her measure of her debt target to one which promotes investment. Would you welcome this kind of step, given your worries about the fiscal overhangs from the Pandemic?
MR: KAMMER: Thank you. Yeah, maybe I’ll start with your first question on the capital markets union and the banking union. Critically important for Europe. When we see drilling down why we have that productivity gap. One is companies cannot grow to scale. The second problem is lack of business dynamism. And lack of business dynamism stands for we have startups in Europe as we have in the U.S., but they are not getting the same kind of chance in terms of funding. Because as a startup you need equity financing, especially when you’re in the tech sector and you produce intangibles, you cannot provide that as collateral to banks. You need venture capital. And when you’re looking at venture capital, Europe versus the U.S., it’s four times as high in the U.S. than it’s in Europe. So startups in Europe start with a big handicap. And therefore, banking union and the capital markets union are essentially for those startups to grow and be productive, create employment, and push up GDP per capita.
And yes, as part of the operating to scale for European economies, that they’re not just national players in 27 national countries, but Pan-European players as the U.S. companies are. You need also larger Pan-European banks. And that means we see that one way of doing this is through merger and consolidations. So this is part of helping creating scale in the banking system. And therefore, these mergers and these mergers are welcome. And yes, that has been our recommendation that these mergers should take place now.n individual merger transactions we are not commenting, but our advice is very clear: that the general direction is clear – mergers are needed.
MS. PEREZ: Thanks.
MR: KAMMER: On the UK?
MR. BERGER: Sure, thanks. I would have been disappointed if there had been no question on the UK. Always popular.
Let’s start with some good news. You have seen that our growth numbers for this year went up 1.1 percent instead of 0.7. Next year at 1.5. So that’s the trajectory, upward looking, against which we discuss fiscal policy.
So if you allow me to step back before coming to the fiscal framework on the debt question, we recognize that the government very helpfully is committed to reduce the debt level in percent of GDP over the next five years, or at least to stabilize it. So that’s very welcome. It’s in line with longstanding recommendations from our UK team. Now, this is going to require a notable fiscal effort. As you know, the deficit levels are high. There are spending pressures waiting to be tackled in the healthcare system and social care. We also have very high public investment needs. There’s transport. There’s housing. There’s climate. So all of this needs to be put within one umbrella going forward.
The team has always maintained that this can be done in different ways, including prioritizing spending or increasing fiscal revenues. It’s deliberate, or in the middle, and not an end. You know, your governments will have to see what is best suited to the situation at hand. We’re looking forward to the autumn budget, which will give us clarity on how all of this will hang together.
Now, in this context, of course, it’s very important to operate within a fiscal framework that’s well understood. We have told many countries, not just the UK, in the past that we like well-organized and explained fiscal frameworks. They help to anchor the policy of the budget over the medium-term. Can help ensure that public debt indeed goes in a direction we wanted to go. Now, in order to facilitate growth, which is part of any such endeavor of reducing public debt, public investment is important. So you need to find a way to protect this as you define your fiscal framework. Now, in this context, we’ll have to see how this new proposal is, you know, really laid out in detail. Again, we will learn more when we have the budget, and it’s good to look all of this together in one go.
MS. PEREZ: Thanks so much. We’re going to go online. I see Anton has raised his hand. Go ahead, Anton, please.
QUESTION: Thank you for doing this. As the IMF recently raised its 2024 growth forecast for Russia from 3.2% to 3.6%, what factors contributed to this upward revision despite the ongoing geopolitical tensions and economic sanctions? How are the existing and potential future sanctions on Russia affecting its long-term economic stability? Are there areas of the Russian economy showing resilience despite these sanctions? Thank you very much.
MS. PEREZ: I believe we have other questions on Russia. online. Please go ahead.
QUESTION: Good day, everyone. I have a question about the 2025 outlook for Russian’s economy. Since compared to the April outlook, the outlook was downgraded from 1.8 to 1.3 of GDP. And I want to ask, can you elaborate what impacted this forecast and including the fact that Russian Central Bank is close to increasing the key rate to 20-21 percent from 19 percent. How critical the risks for the Russian economy are now? And can you elaborate on its future from this perspective?
MS. PEREZ: Thank you. I think in the room, gentlemen in the first row, please.
QUESTION: Hello. Good afternoon. I wanted to follow up on a monetary policy question. So to what extent does this tightening monetary policy by Russian Central Bank will impact Russian economy and will it be effective for fighting inflation from your point of view? And the second question from my side, why did the IMF adjust the projections for Russian debt level for 2024 and 2025 downwards in comparison with April’s economic outlook? Thank you.
MS. PEREZ: Thanks so much.
MR. KAMMER: Okay, so quite a number of questions. To the 2024 upgrade that was mostly mechanical, reflecting data outturns for the first half, and they have been reflected in our forecast. What we are seeing right now in the Russian economy, that it is pushing against capacity constraint. So we have a positive output gap, or you could put it differently – the Russian economy is overheating. What we are expecting for next year is simply also the impact that going over your supply capacity, you cannot maintain for very long. So we see an impact on moving into more normal territory there. And of course, that is supported by a tight monetary policy by the Central Bank of Russia. A tight monetary policy, in order to bring down inflation, slows down aggregate demand, and in 2025 will have these effects on GDP. That’s why we are seeing the slowdown in 2025.
Now, with regard to the longer-term outlook for Russia, as we have been saying before, the medium term looks dim, potential growth has been reduced. That is a result of less technology transfers, less ability to finance. That will impact the productive capacity of the Russian economy in the medium-term, and that will stop the convergence towards Western European per capita GDP levels, which Russia was on more than ten years ago. And this is an effect of the sanctioned regime, which is in place. With regard to the debt levels. I think that is a simple reflection of that the nominal GDP has been revised up, and therefore, debt to GDP ratios are coming down.
MS. PEREZ: Thanks so much. We’re going to go with the gentleman in the fourth row, gray shirt, please. Thank you.
QUESTION: Thank you. Once again, we are talking about tariffs. And in your report you highlight the risks of EU tariffs on Chinese EV cars. But is it so much more important for Europe to keep its trade free than to protect strategic sector of its industry? Thank you very much.
MS. CELASUN: Thank you very much. On that question. You’re right. Europe is very open to trade, has benefited greatly over the decades from trading with other nations. So as it responds to growing tensions around the world and fragmentation, it has to keep in mind the fact that it is benefiting. So we would indeed urge all countries, including Europe, to look for cooperative solutions, which are always the first best. When approaching, for example, the issue of subsidies in other countries for countries to come together, come out clean on what they are subsidizing and how much, and then find cooperative ways of reducing them.
Tariffs rarely help to solve the problem. They essentially make countries imposing tariffs less competitive, they raise costs, and they trigger retaliation, which would be something to take very seriously for any country that benefits greatly from trade.
MS. PEREZ: Thanks so much. We’re going to stay in this side of the room. The gentleman on the third row, white shirt, please.
QUESTION: Thank you. Hello. I had a question on the German economy outlook, which is still, which growth prospects are still very low. I was wondering if the IMF is fearing an effect of this low growth on a shift to political. I mean, on the political side, which would be a rise up the far right, for example, ahead of the next election, federal election next year. Thank you.
MS. CELASUN: Thank you. As you know, we don’t comment on elections. What we do is to engage with governments, to give them policy advice to strengthen growth and to make growth resilient over time. And on that, our advice hasn’t changed for quite some time. Germany is facing a sharp downturn in its working age population. Quite a sharp decline coming in the next five years. Productivity trends have been very weak. The remedies are to boost labor supply, help women have full time jobs with better childcare, elder care, reducing the marginal tax rates of second earners, and take a host of productivity enhancing reforms. Public investment should be higher in Germany. It’s among the countries with the lowest public investment rates among advanced economies. The other areas we have highlighted are the high level of red tape. Administrative burdens need to be reduced, which would help productivity as well. And Germany should be a champion of the single market, including for the capital markets union, to help its promising companies have better prospects for reaching scale and growing. Thank you.
MS. PEREZ: We’re going to take the lady in the middle of the room in the fourth row with the light jacket, please.
QUESTION: Thank you. My question is about the Turkish economy. Türkiye has significantly tightened its policy stance over the past year. How do you see the country’s current state of economy? And also what is the IMF’s approach to the potential timing of easing these policies?
MR. KAMMER: We, as you know, have been very favorably impressed by the policy pivot since last year in Türkiye. And what we see are two main results. One is the vulnerability to a crisis. Risk has been greatly reduced over this time. And second, inflation is now on a downward trajectory. And those are two huge achievements in this policy pivot that took place. When it comes to our policy advice, what is important now is the fight against inflation has not been won yet. That means that a tight monetary policy will need to be maintained, and it would be premature to reduce the restrictiveness on the monetary policy side. What we also continue to advise is a focus on incomes policies.
One of the problems in Türkiye and nexus to inflation was minimum wage increases which were based on backward looking inflation developments. We need to have these minimum wage agreements which are now, once a year, done in a forward-looking way in order to avoid the second round effect of these measures.
And finally, we could use more fiscal adjustment. Fiscal adjustment would help on the inflationary side and of course it always enhances the credibility of the adjustment effort. But overall, I should say to the economic team working in Türkiye, a job well done, that a job needs to continue, and these policies need to be sustained. This is a painful period to go through for the population of Türkiye and is a tough period for our policymakers, but it’s necessary toward crisis risk and bring inflation down.
MS. PEREZ: We’re running out of time. We’re going to try to get in a few more questions. Let’s go with the lady in the first row. Yellow jacket, please.
QUESTION: I was wondering, since the IMF is once again flagging Italy for its high debt, if it’s a fair conclusion that you do not agree with Fitch, who is saying that Italy’s fiscal credibility has recently increased, does the promotion of its outlook? And therefore, what is your suggestion for the debt reduction?
MS. PEREZ: Let’s see if there are any other questions on Italy. The gentleman on the third row. On this side. Over here. Yeah, third row here. Thank you.
QUESTION: Thank you. The outlook quotes the recent proposal by Mario Draghi to reform the EU. What are the most urgent reforms that you encourage Europe to undertake, based on that report?
MR. BERGER: So, on Italy, that’s indeed good news. If you look at the debt ratio and percent of GDP, it has come down notably since its peak in 2020. So, and I, everybody, including financial markets, will do well to recognize this, but it’s also true that the same debt ratio is still very high. And we think it’s going to end up this year around 130 — sorry, end of last year it was 134 percent. And you know, if you follow our baseline for the forecast going forward, we see it increasing slightly over the next five years or so. There’s still a fiscal task ahead for the government and we understand the government is ready to approach this. We think deficits are still higher than they should be.
We welcome, therefore, the expected adjustment that the European Commission and the Italian government have agreed on over time. I think the key for countries like Italy and others that have relatively high debt levels still is to be a bit more ambitious than just gradually reducing deficits. So we would encourage the government to look for ways of achieving this in a growth friendly way and at the same time. And that will help both credit rating agencies and the country itself. There are a lot of structural reforms the country can conduct that would help us sort of raise growth overall, which makes the fiscal situation also more promising.
MS. PEREZ: Thank you. We’re going to —
MR. KAMMER: Sorry, on the Draghi report quickly. Pretty much the same focus that we have in our REO on productivity and innovation. And the solution to that problem on enhancing productivity is the single market. So we need to get rid of the barriers in the single market. That’s Draghi, that’s us. That’s uniformly accepted policy recommendation. That’s where we need to make progress. Second point to make is Draghi identified an investment gap of 4.5 percent of GDP in order to move Europe up. That is mostly private investment. That private investment needs to come because of good investment opportunities, because capital is allocated efficiently. That needs capital market and banking union. So all of these reforms to be undertaken are enabler for the private sector then to make these investments in order to fill that investment gap. Mostly private sector, some part public investment.
MS. PEREZ: Thanks so much. We’re going to go with the lady on the second room in. Sorry, second row here in the middle of the room.
QUESTION: Hi, another one for the UK because of course we are your greatest fans. Just a clarification on the debt rule. On principle, is it right that the UK should be borrowing to invest given the debt trajectory that you yourselves outline in the fiscal monitor? And if I may, your colleague Era Dabla-Norris was sitting where you are, Alfred, yesterday and she said when it comes to tax rises, it’s important to build trust among populations that taxes collected are well spent. Our finance minister has indicated she does want to raise taxes in her budget next week and concentrate those tax rises on wealthy people and businesses. Is that fair? And can any economy tax its way to prosperity?
MS. PEREZ: Shall we see if there are any other questions on the UK? The gentleman.
QUESTION: Thank you. Just again, following up on UK sort of debt rules, do you have any particular view about what an appropriate measure is to target for a debt rule? Whether something like public sector net financial liabilities is a good measure, or whether sort of government should be focusing more on, say, general government debt, which is to know what the IMF mostly forecasts.
MR. BERGER: Thank you for this quick lightning round at the very end. I think it’s good public finance principles to accept the fact that it can at times be helpful for governments to borrow when it comes to financing investment. hat is a general principle that applies to many countries. The question is, what kind of public investment is being done? The question is, what do we expect, reasonably, credibly, this investment to do for growth going forward? And then, of course, any forward looking government will take into account these longer term effects of such investment. So this is something we would expect any fiscal framework for any country to consider as it is designed and implemented and or adjusted.
Taxation is highly relevant on the same high level of fiscal principles to finance ongoing spending in any country. If the government is supplying service to its citizens, you know, there are many governments do supply, then this needs to be financed and then, you know, taxes are part of fiscal revenues that will facilitate this. And that is what in the end supports and increases welfare of a country’s citizens. As to the treatment of assets, you know, these differ across countries. They come in different form, from railways to intangibles. And this is something that needs to be looked at very carefully in any of these circumstances, specifically in general, since assets come with revenue streams that can be uncertain. A certain degree of conservatism when looking at this is helpful. How all of these general principles apply to the UK, or any other country, is a matter of detail. In the case of the UK, let’s all stay tuned. Wait for the budget, wait for the details of the new fiscal rule, and we analyze this and we’ll take it from there.
MS. PEREZ: I’m afraid we’re going to have to wrap up, but please, your questions, send them to me and my colleagues in the media team, we’ll make sure we will get back to you. Just a reminder that the report has been released and it is available on IMF.org. Thanks very much everybody for joining. Apologies we couldn’t get to all of your questions. Please do reach out to us and thanks for colleagues joining online.
MR. KAMMER: Thank you.
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