Via IMF (Den Internationale Valutafond)

Transcript: Euro Area Press Conference

November 30, 2020


Kristalina Georgieva, IMF Managing Director

Alfred Kammer, IMF European Director

Speakers: Gerry Rice, IMF Communications Director

Opening Remarks:

Ms. Georgieva: Our task today is to share with you the assessment of the
economic outlook of the euro area together with our policy advice. I just
came out of the Eurogroup meeting where we had a very good discussion and
one in which we probably found ourselves to be in agreement. But in terms
of the analysis of where we are and the degree of uncertainty we face and
in terms of policy recommendations. First, what I shared is the IMF
assessment of the economic impact of the pandemic and the measures Euro
group policymakers have taken to combat a tremendous negative hit on their
economies. We see now a beginning of a recovery, the green shoots of
recovery. They came in the third quarter after a very sharp contraction in
the first half of the year. But economic activity still remains well below
pre-crisis levels, and as you all are very well aware, a new wave of
infections is affecting negatively the momentum of this recovery. And what
we see is headline inflation descending into negative territory, for the
first time since 2016.

In this environment, there are two pieces of good news. One is the swift
response of policymakers and their ability to mobilize for collective
action, the new generation EU Fund is a very bright example and to the fact
that vaccines are on the horizon, we’re not there yet. But this is a
finally right in the end of a very long tunnel. In that context of the
policy issues, we are focused on with ministers of the eurozone, are first
fiscal and monetary policy, second, financial sector, third, structural
reforms. On the fiscal policy side, we recognize how much has been done
already. But we caution of an expectation that the job may be now behind

We are urging governments not to withdraw fiscal support prematurely,
and we very strongly support the next generation EU fund, as well as
progress that has been made on the EU budget.

Of course, they would work only if they’re implemented properly and
proper implementation, especially for the next generation EU Fund means
three things. One, high quality projects. Two, not to substitute
domestic financing with funding coming from the recovery fund, but to
complement it, and three, very importantly, to make sure that the
funding is an incentive for reforms rather than a substitute for them,
and of course, for many of you who have been following discussions
around a more permanent capacity in the EU, if this fund works well,
this is a topic that will come back on the agenda.

Something the Fund has been recommending for.

We are cautious that while there is some positive news on the outlook
related to vaccines, there is also a great degree of uncertainty. And in
that environment, there could be a downside scenario for which augmentation
of existing EU level support may be necessary. Turning to monetary policy,
I bear witness how decisively ECB stepped up. Both actions, justifiably so,
have been essential to put a floor under the euro zone economy. We support
the ECB Governing Council commitment to recalibrate its policy instruments
at its December meeting and if downside risks materialize of course, we
pray they don’t, but if they do, the ECB would need to further ramp up
support via existing and possibly new policy instruments.

The strategy review that has been undertaken could not have been more
timely. Why? Because we do expect on the other side of this crisis to see a
very substantial transformation in the economy. And in that context, the
monetary policy framework also needs to change. And formally codifying the
ECB Governing Council’s recent emphasis on the symmetry of the inflation
target aim around the specific point target would have significant
benefits. Moving to the financial sector, recent measures have supported
credit growth and prevented widespread insolvencies.

Good news. But unwinding them would require a careful balancing act. It is
always easier to put support measures in place than it is to withdraw them.
In that sense, banks refraining from paying dividends and other supportive
financial sector measures should be maintained until we see the recovery
well underway and if it stalls a more targeted borrower support should be
kept available. Banks remain resilient. This is one of the benefits of
action after the global financial crisis. But, the depth of this crisis,
the severity of the shock means that a significant deterioration in asset
quality could constrain lending capacity, requiring a gradual rebuilding of
capital and liquidity buffers. And one thing that I want to stress very
strongly is that now is a good moment to advance financial sector
architecture reforms, close gaps in the crisis management framework,
especially important to make progress in completing the banking union. Many
of you have been following up on this issue. You know how important it is
to be done. Finalize the European stability mechanism treaty reform, and
enhance the powers of the single resolution board, as well as advance the
Capital Markets Union. So – get this job done now is what we very strongly

Let me finish with structural policies. There, the tricky part is how to
strike the right balance between supporting firms and facilitating
structural transformation. The unprecedented scale and persistence of the
crisis argues for carefully expanding services support for firms because
the recovery is underway, policies will need to shift toward supporting
firms for the post-pandemic era, while facilitating the exit of unviable
companies. We want to see green, we want to see digital (growth). And we
want to do a support in a way that is primarily focused on workers and in
particular all young people stepping into the labor force from job
retention schemes that have been great for the eurozone up to now, there
has to be a transition to measures to help unemployed workers to find jobs
in expanding firms. And one thing that our team zeroes on strongly is a
fundamental rethink of labor market policies to adapt to what the world is
going to look like in structural terms on the other side of this crisis.
One thing that we know from experience in pandemics is that after a
pandemic, inequality goes up, that has to be front and center for
policymakers not to allow that to happen. Neither in territorial terms nor
within segments of society. And in that respect, Europe has made progress
on gender equality. And in that respect, not to lose this progress as we
are now wrestling with this crisis.

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Let me conclude by saying very simply that what has been done is
unprecedented. The scale and the speed of support and the fact that it has
been done in a coordinated manner deserves praise. But we need to recognize
that there is plenty still to do and especially, to do for the future
competitiveness and vibrancy of euro zone economies. Thank you very much
and thank you for your patience.

Question: You just joined a meeting of the euro area finance ministers.
What was your message, especially to countries with high debt, both in
terms of sovereign debt, but also in the form of bad loans, while at
the same time they need to keep spending to support their economies?

Ms. Georgieva: My main message was that in an unprecedented crisis, the
euro zone has acted swiftly and decisively, way beyond the expectations we
had in the very early days of the crisis. And, as a result, we have averted
a collapse of the economy, massive bankruptcies, and massive unemployment.
The recovery looks promising because of measures that are taken and because
we have an expectation of vaccines to boost the outlook. But we are still
in a high degree of uncertainty and we are in a place where still the moto
has to be pray for the best, prepare for the worst. And that, in the case
of the euro zone, clearly is related to how to handle this loss of momentum
in the recovery that the new surge in infections has brought. You are right
to be concerned about the countries that have high debt levels. Everybody
is seeing an increase in debt. But for countries that stepped into the
crisis already under a heavier burden of debt, the situation is
particularly difficult.

There are three factors that are easing this burden and can be deployed
even more.

First, the accommodative policies of the European Central Bank and, as I
mentioned in my opening, the ECB, if needed, can do more. Second, the
impressive stepping up of collective action. The solidarity Europe is
bringing with the €1.8 trillion recovery package, the combination of a new
budget for the next seven years, and the new generation EU Fund, which
rightly consists not only of grants and loans and rightly aims to not only
soften the impact of the crisis, but, most importantly, to boost growth
prospects, because we know that countries under debt are in much better
place in the medium term to consolidate this debt if they enjoy robust
growth. And last, but not least, there are elements in the financial
support of countries that are not yet tapped into, like the European
Stability Mechanism’s precautionary credit lines. They are there but they
have not been used. Obviously, this is yet another buffer for these

Ultimately, 2021 is going to be a transformative year. And the question is
transformative to what? Hopefully, it would be to a green, digital, and
fair economy in the European Union and in the euro zone.

Question: Given COVID-19 pandemic’s effects on the euro zone economy so
far, what main policy challenges does the IMF see for the euro zone in
2021 and beyond? And as the number of nonperforming loans (NPL) is
likely to rise as a result of the pandemic, is there a rising
likelihood of a financial banking economic crisis in the foreseeable

Ms. Georgieva: The most pressing issue countries will face is to shift from
lifelines to policies that support the recovery. Quite rightly in the very
first months of the crisis, support was provided to everyone, to firms that
are doing well and those that may be doing more poorly, to those with good
prospects and those with less clear prospects. Moving from those lifelines
to more targeted support is going to be a very important responsibility of
policymakers and, as you can imagine, they will be faced with lots of
pressures and lobbying and they need to zero in very clearly on the policy
objectives that are coming from this crisis, more competitive with more
vibrant economies.

So how this transition would be done, given that for example, the retention
schemes have been successful to prevent a collapse of employment. How to
move forward from those schemes gradually to a job transition would require
determined and well-informed action. And, as I mentioned in my opening, how
is this done, with very careful attention to prevent increase of
inequality. We know that after the global financial crisis, the positive
was a strong, resilient banking sector. But, on the other side, we have
seen in many countries an increase in inequality. And, most importantly, an
increase in inequality of opportunities. Now is the time for resilience to
be built in Europe, with more concentrationn and resilience of people,
they’re educated, they’re healthy, there is a certain vibrant social
protection for them. Also resilience of our planet, taking climate action
on top of resilient financial systems.

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Obviously, you’re right to ask, we do see concerns about nonperforming
loans going up. First, there has to be a comprehensive strategy to tackle
bad loans, and that includes credible NPL reduction plans, strengthening
insolvency regimes, they are better in some places than in others, and out
of court debt restructuring. National asset management companies, they can
help deepen distressed debt markets, especially if they’re linked in a
network. And that was one of the recommendations we have made during
today’s meeting.

Question: Is the current EU recovery instrument of 750 billion euros
enough? Or will new fiscal measures be needed next year to underpin the
way out of the crisis?

Ms. Georgieva: Let’s remember that the 750 billion is part of a bigger
package. We need to also remember the 1.1 billion for the seven-year EU
budget that would also be deployed to support the recovery.

750 billion is quite significant. I would concentrate most on the quality
of how this money is being used. If the money is used for high quality
investments that help Europe transition to a low carbon, climate resilient
digital economy of the future, if it is used to boost research capabilities
and the role research play in the competitiveness of Europe, if they don’t
substitute for domestic financing, but add to it, and, above all, if they
are coupled with commitments to reforms, this can be truly transformative.
And, before anything else, the still existing ripples need to be sorted out
so the deployment can happen fast enough. The quality of the plans with
which countries approach this money is going to be absolutely essential. It
is a chance to make a difference. If we have to stay optimistic, we can
also see a way out of this 750 billion to grow in a new way in which fiscal
capacity at the collective level is being established, which has been on
the agenda. This will only happen if we do a good job this time around with
the $750 billion.

Question: What exactly do you think a severe downside scenario would
look like? There’s a reference to the augmentation of defenses in the
context of fiscal policy. I was wondering if that was in addition to
the ESM credit lines? Are we possibly going back to the kinds of
funding packages that we saw in the crisis? And in a related question
on the ECB, if the banking channel did get blocked, should the ECB
consider providing direct support? How can an institution like that
reach small or medium-sized enterprises that are having the biggest
difficulty keeping going in the hospitality sector?

Ms. Georgieva: The downside scenario that can be quite dramatic would be no
durable exit from the health crisis in 2021. If vaccines for some reason
don’t deliver, we are faced with a third wave of infections, that is going
to be very difficult everywhere, including in the euro zone. Now, let me
say that we have confidence in the use of vaccines and, in fact, our
baseline scenario from the October World Economic Outlook in which we
expect 5.2 percent growth in the euro zone was based on vaccines available
by mid-2021 and for the world, vaccines deployed everywhere by end-2022.
There is a very good chance that this would materialize, and it may
materialize a little faster in some places.

But if it doesn’t because it hasn’t happened yet, we cannot afford the
luxury of assuming it would work perfectly once vaccines become available.
If it doesn’t happen, then we may be faced with a situation in which more
needs to be done. And this is the good news about Europe. Europe does have
lots of buffers. You mentioned the precautionary credit lines, which are
not tapped, they are there. The ECB has been very prudent in making sure
there is ample liquidity at very low costs so governments can finance
themselves. And if there is a pressing point for more creativity around how
to support an economy, that will come into place. As for the ECB, one of
points that our team brought in the discussion was should conditions become
worse, more direct support for nonfinancial institutions, and obviously
this needs to be worked out.

Mr. Kammer: If the financial transmission channels are affected in a severe
downside scenario, we wanted to stress that there are other instruments
available. Not just the ECB, but it could be other European institutions
creating a special purpose vehicle, which could directly lend to viable
enterprises—thinking something along the lines like the U.S. Main Street
lending program. But, of course, we would need to make sure under these
circumstances, that there are safeguards in place so that the lending goes
to viable enterprises. So that was the idea: severe downside scenario, more
instruments available if needed.

Question: Is there a possibility of a second stimulus, because the
message here in Europe is that they want to focus on implementation of
the first package? So, I would like to know, what was your reaction
when you gave this message to the euro zone finance ministers? And
secondly, I wanted to ask you about Italy and Spain, whether you are
concerned about the sustainability of their public debt, given that
they are two of the countries with the highest public debt and they are
also the two countries most hard hit by the pandemic.

Ms. Georgieva: The first priority for the European Union is put the €750
billion to work. And before even that is done, the remaining hurdles around
the package that are very familiar with the EU budget, the next generation
recovery fund, and some of the requirements of some member states that this
is fully and entirely in place. We do agree that focusing on the 750
billion, making sure that there are good recovery plans, that countries
come up with a strong focus on recovery, but that it is also
transformative. And that addresses the structural issues that I mentioned
in my opening remarks. That these plans are in place and that the
implementation capacity is strong because only then countries will see the
benefits of growth that ultimately will take them out of the legacy of this
crisis. There will be scarring and it can only be addressed if you are
honest about what are the impacts of which sectors, which segments of our
society, and how this impact can be best mitigated.

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For Italy and Spain, they came into this crisis with high levels of debt.
For Spain, it has gone up now and is headed to 120 percent of GDP. Italy is
also wrestling with the big debt pressure. But this is happening at a time
of record low interest rates and it is happening at a time when because of
the stimulus that is going to be directed to lift up growth in these
economies, there is a chance for these countries to get on a different
growth trajectory. And our advice to policymakers is take this chance to
move to a more dynamic, competitive place, and I have no intention to
pretend this is going to be simple and easy. But it is a moment in which
this capacity to borrow cheaply, to retain a high level of debt with less
burden on the budget and to have grants in combination of grants and
concessional loans, deployed for a green public investment can bring
economies up to higher growth. We are actually are very pleased Europe is
doing it together, because what we calculated is that a green investment
push, if countries do that together brings much higher growth benefits, the
multiplier is higher. And this is what Europe is doing. But obviously, I
wouldn’t be the IMF if I don’t say there would be a time when debt
sustainability has to be the main focus of attention. But it is not right
now. We are not yet in a place where we can look at this health crisis in
the rearview mirror. Only then can we zero in on how we deal with debt
sustainability, how we deal with budgets. And the best strategy is if we
can create more dynamic economies and higher growth rates.

Question: What do you see is happening with this accumulated debt? Who
is going to pay the bill? And if there was a suggestion by Italy,
unofficially, of course, for a relief of pandemic debt, should this
proposal be on the table given these exceptional times?

Ms. Georgieva: The problems countries face with debt is multilayered. There
are government liabilities, there are companies with high levels of debt,
and there are consumers that may be faced with higher levels of debt. So,
what we are seeing is in all three dimensions, this crisis has created more
pressures, but especially on governments. Why? Because we asked for
something that has never been asked before—for producers not to produce and
for consumers not to consume. Obviously, putting a floor under the economy
does require governments to step up with fiscal measures and it does
require the European Central Bank and in the rest of Europe national
central banks to come up with highly accommodative policies. Debts don’t
disappear even when there are very low costs, even when services are at
exceptionally low rates. That’s something that has to be dealt with and
preferably in a prudent manner rather kick the can down to the next
generation. And the way to do that is always based on the basis of growth
that allows incomes to go up so that national companies and individuals can
have a higher debt servicing capacity. And this is why we so much welcome
the Next Generation EU—the decisiveness to inject more capacity to
reinvigorate growth in the euro zone and in Europe. Of course, easy to say
and much harder to do. But imagine what it would be if Europe very
decisively invested in the knowledge economy, in the digital economy, and
in the real economy that generates well-paying jobs, and it generates
growth, it is a double win for the next generations. It prevents the next
big crisis from hitting the climate crisis and it generates capacity to
serve that. I saw the comment made in Italy about the ECB coming up with
debt forgiveness and this is not in the mandate of the ECB and it would
require and EU treaty change. You are familiar with the complexities of
this process.

At this point of time, ECB is doing the right thing, which is to make the
capacity to borrow highly affordable to everyone, to Italy, to Greece, to
Spain, to Portugal, to everyone. And we have seen governments being able to
do that at a very low cost. So, the concentration in the EU ought to be on
competitiveness and productivity. In 2019, in the pre-crisis year, as the
incoming Managing Director of the IMF, in my first speech I talked about
synchronized slowdown, low productivity, anemic growth, growing
inequalities, and a looming climate crisis. None of this has gone away. Now
we have a chance to use the resources we are injecting in our economies to
address these problems that we had before. And shame on us if we don’t do
it. And then we can get on a sound financial footing.

IMF Communications Department


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