Via IMF (Den Internationale Valutafond)

Transcript of October 2020 European Department Press Briefing

October 21, 2020



Alfred Kammer, Director European Department

Meera Louis, Communications Officer IMF


MS. LOUIS: Good morning, everybody, and welcome to the European Regional
briefing today. Thank you for joining us and we do hope that all your
friends and family are staying safe during these times.

To start off, I would like to welcome our new European Director, Alfred
Kammer. He will start with a few remarks, and then we will turn the floor
over to you.

MR. KAMMER: Thank you for joining us today for this press briefing on the
European outlook. The pandemic is exacting a heavy toll on Europe. More
than 240,000 people have lost their lives. Millions have suffered the
illness themselves. The loss of loved ones or major disruption in their
work, their businesses, and their lives.

The economic impact of the pandemic has been enormous. Our latest regional
economic outlook forecasts a 7 percent decline in Europe’s GDP in 2020. The
recovery from this crisis will be uneven and partial. While real GDP is
projected to rebound by 4.7 percent in 2021, it would still be lower by 6.3
percent in 2021, relative to our pre-pandemic projections. This implies a
GDP loss of almost €3 million. And much of this loss will not be recouped
over the medium term.

An unprecedented policy response, both in swiftness and scale, prevented a
more devastating outcome. To give just one example, we estimate that at
least 54 million jobs have, at some stage, been supported by job retention
schemes in Europe. This has kept many families and firms afloat. EU-wide
policies also made a difference. But risk remains significant and are
arising as the second wave of infections is intensifying. Given the
considerable uncertainty, policy must stay resolutely supportive to sustain
the recovery. Indeed, a decisive policy response by Europe protected
incomes and productive capacity of the economy, so far.

Fiscal policy did the heavy lifting. We estimate that the average size of
announced discretionary fiscal measures for 2020 was 6.2 percent of GDP for
Europe’s advanced economies, and 3.1 percent of GDP for its emerging
economies. Their discretionary support came on top of Europe’s powerful
automatic stabilizers. A large share of the fiscal packages was used for
job retention programs and liquidity support for firms. These programs were
highly successful in limiting the extent of job destruction and prevented a
cascading of bankruptcies and bank closures.

Monetary policy and macroprudential policies were essential in providing
favorable funding conditions for all sectors of the economy. Policy rate
cuts, asset purchases, easing of conditions under which banks can obtain
liquidity, and lowering of bank capital and liquidity buffers helped ensure
the flow of credit, especially to small and medium sized enterprises. And
highly accommodative monetary policies by the European Central Bank and
other reserve currency economies had a powerful, international spillover
effect easing monetary conditions including in emerging Europe. IMF
emergency financing supported six European countries. These policy
interventions contributed to avoiding an even deeper recession, and
long-lasting economic scars on the European economy.

For the European Union economies, we estimate that without the policy
actions and a strong EU support, economic activity might have been an
additional 3 to 4 percentage points of GDP lower in 2020. Policy makers
need to do whatever it takes to contain the pandemic and its economic
damage. And they should not withdraw support prematurely. We should not
repeat the mistake of the global financial crisis. Over time, support
should become more targeted and also more flexible to facilitate the
reallocation of resources and the transformation of the economy. In
particular, protecting peoples’ health remains imperative including through
international cooperation.

Income support and job retention programs should remain in place as the
pandemic evolves and the economy starts to recover, the program should be
adapted from protecting jobs toward supporting workers including through
reskilling programs. For companies, policies now need to go beyond
liquidity support and ensure that insolvent but viable firms can remain in
business. Our report finds that in advanced economies, around one-third of
the pandemic induced solvency shortfall could be addressed by announced
policies such as wage subsidies, grants, or tax rebates. In emerging
Europe, it is only around one-quarter. Thus policies need to be put in
place that facilitate speedy debt restructuring in or outside of
bankruptcy, or in some cases, make equity available to viable firms.

Long term inflation that is generally anchored around or below targets and
sizable economic slack suggest that Central Banks should keep highly
accommodative monetary policies in place. Macroprudential easing should be
unwound only gradually. European banks entered the pandemic with strong
capital and liquidity buffers and proved resilient to the unprecedented
shock. Their resilience together with the strong policy response helped
prevent a credit crunch. Our work suggests that absent new shocks, the
average capital ratio of large EU banks should stay well above the minimum
capital requirements. Still, nonperforming loans will rise, and policy
makers will need to facilitate their efficient disposal. And banks will
need to engage with shareholders in developing a credible strategy to raise
capital over the medium term.

This is also the time to design reforms that boost productivity growth and
policies that help transform the economy to reap the benefits of
digitalization and mitigate climate change. Social systems can be improved
and made more robust so that they can deal better with worker dislocation
and retraining needs arising from automation and technological change.
Policies including better targeting of fiscal support will also need to
address the pernicious effects of the crisis and a likely sharp rise in
inequality. The youth, women, and least educated have been
disproportionately affected.

To conclude, without the exceptionally strong and multifaceted policy
response, the recession in Europe would have been far worse. Strong policy
support needs to be maintained because the pandemic is intensifying and the
recovery is still nascent and fragile. Once fiscal resources are freed from
temporary support of people and firms, they should be redeployed to public
investment that will build a more resilient, smarter, greener, and more
inclusive economy for tomorrow.

For the EU countries, the next generation EU instrument can play an
important role in this regard. And preparation should start on plans to
rebuild policy space which will need to begin once the recovery is in full
swing. Together, these actions will help limit the scarring from this
crisis and thereby strengthen the capacity to deal with the public and
private debt burden.

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Thank you very much.

MS. LOUIS: Thank you, Alfred.

And now we would like to open the floor up to you for questions. Please
feel free to send us your questions via Webex. You can ask your question
live, or you can also submit a question via our press enter. We have
already seen a lot of questions, so, Alfred, I’ll start with one of them.

We’ve got a question coming in from Catherine Bosley, from Bloomberg News. The question she has is how much of an economic
impact is the second round of lockdowns, curfews, and other restrictions in
Europe going to have?

MR. KAMMER: This is very difficult to predict, and there is lots of
uncertainty on how the pandemic evolves, and, therefore, also how the
response measures on the public health side and the economic impact will
need to evolve, but what we know already is, with regard to the second
wave, we have more information on the virus, we have better information on
which measures work, and we also have a very strong support structure on
the economic side in place.

So, when we forecasted, we assumed that the second wave will be dealt with,
with social distancing measures, limited and partial containment measures,
and so, the economic impact will be limited, much different than as part of
the first wave, and because of that we actually increased our growth
forecast from our end-June projections for 2021.

Having said this, of course, we have a downside risk, and the downside risk
is if this second wave is intensifying and needs more elaborate
restrictions, and if these materialize, then this would seriously impact on
the growth in 2021, in particular.

MS. LOUIS: Thank you, Alfred. Catherine had a follow up, but she says, but
can governments actually afford to go on spending, given the stretched
financial situation in many countries?

MR. KAMMER: Put simply, governments cannot afford not to spend. The big
success, so far, of this crisis was the swift and sizeable policy response.
This prevented firms from going into bankruptcy. This prevented cascading
of these bankruptcies and limiting impact on the banks. On the workers’
side, again, the strong support kept workers and jobs together and incomes
were provided to sustain this period. These measures need to stay in place.

There is no question about it because what we have achieved, so far, is
limiting a much bigger drop in economic activity, and what we have as
estimated, if this would not have taken output in 2020, it would have been
three to four percentage points lower. They need to be staying in place
because they preserve the structure of the economy, they’re preventing what
we call economic scarring, both on the structure, as well on people, as
well on skills, and by doing that, and that’s very important to understand,
we are supporting the recovery of growth, and we are supporting protective
capacity in the medium-term. Without that, that protective capacity would
be damaged, and, therefore, it’s so important to maintain this report.

Now, on the financing side, financing conditions in Europe are easing. The
monetary policy of Central Banks has been highly accommodative. So, what we
see is that European countries have access to financial markets at very low
cost. And I should also add that the various facilities and instruments by
the European Union also provide a strong support for countries to finance
themselves throughout this crisis.

MS. LOUIS: Thank you, Alfred. We have another question from Maria Vasileou,
from the Greek newspaper TA NEA. It’s following along the same
lines. She’s asking: how long do you think it will take for the European
economy to return to pre-COVID levels because, right now, we are seeing
restrictive measures that are put in place, and more may be needed at a
later stage? So, what priorities should Europe set in this process?

MR. KAMMER: This is, indeed, going to be a very long ascent in the
recovery, and we estimate, for Europe, it will take until 2022-’23 for most
countries to return to 2019 levels of GDP. So, that is a long return to
where we were already in 2019. As I said, the key priority needs to be that
we support lives and livelihoods, and, therefore, we need to keep the
support policies in place throughout the second wave, until we have
controlled the pandemic, and until we have fully entrenched the recovery,
but, over time, of course, the nature of these support measures will and
should change. We, right now, focus on maintaining the job and work links,
so that employees can come quickly back and pick up their work.

The economy will change as part of the crisis, and the economy will change
because we have major transformational trends going on, including on the
digital side. So, over time, these programs need to be focused more on
allowing workers to change jobs, and to find new jobs, that means more will
need to be done on the unemployment side, the retraining side, the
reskilling side, so to move workers to new jobs, to new capital, to new
emerging sectors. And, also, when we think about the transformation in the
economy, to make it digital and cleaner, these investments will need to be
supported by a movement of resources.

MS. LOUIS: She also asks, is it going to be possible for European economies
to return to a more sustainable fiscal path, after embarking on such an
expansionary policy?

MR. KAMMER: What we see right now is, and that is, again, a very important
point to make, the support measures are instrumental, in terms of
medium-term growth and protecting the productive capacity of the economy.
What we also need to recognize is the fiscal deficits are of a very special
kind. They reflect, one, the decline in economic activity, which we are
projecting to rebound, they are reflecting additional healthcare
expenditures, which we would expect to be eliminated, and they reflect a
massive amount of support for workers and for firms, which also will unwind
themselves, when the crisis and the recovery has taken hold. So, we project
that, also given the low-income environment, that debt levels, after this
crisis, will start falling, over the medium-term as a percent of GDP.

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That doesn’t mean that nothing needs to be done. We have been advocating
that countries should put in place plans for the medium-term, on how they
will reestablish fiscal buffers, so that we are ready for another crisis,
that we have fiscal room, in order to respond to any shocks to the economy.
So, in addition to putting debt on a downward trajectory, we also need to
build buffers, so that the economies, in the future, again, can respond to
a crisis.

MS. LOUIS: On monetary policy — the ECB has embarked on a very
accommodative monetary policy stance. Are you concerned what’s going to
happen when the ECB’s program ends?

MR. KAMMER: What saw, indeed, is a very highly accommodative stance of the
ECB, and also other central banks in the region. When we are looking
forward, we are seeing weak economic activity, we’re seeing a long-lasting
ascent toward the full protective potential, again, of the economy, and
given this weakness of activity, we expect monetary policy in Europe to
remain highly accommodative for the foreseeable future. There is no
pressure on inflation, and, therefore, we expect monetary policy to stay
accommodative for a long time. Having said that, the European countries
have also access to lots of facilities by the E.U., in terms of dealing
with financing needs, and what we have seen, so far, all countries have
access to the markets and can obtain financing at low cost.

MS. LOUIS: Thank you. I’d like to shift to Spain right now. We have a
question from Jose who’s on Webex from El Economista. He’s going
to ask his question via Webex. Jose, please go ahead.

QUESTIONER: Thank you very much for taking the question. I would like to
ask if in the projections in the WEO for Spain it’s already included the
second wave of infections that is going on right now. And then I would like
to know how important it’s that the European funds get disbursed in a
timely manner for Spain under the current circumstances to make sure that
there’s a recovery coming in 2021?

MR. KAMMER: In all our projections for the European countries, including
for Spain, we have included the economic impact of the second wave,
including the economic response to the second wave. So that is included in
our forecast already.

As I said, these forecasts are very uncertain. Depending, of course, on how
the pandemic evolves, how the economic impact, therefore, will be and how
programs are going to be adapted, but we have included that. Our assumption
is that the second wave will be dealt with differently from the first wave.
We’ve learned a lot about the virus. We learned a lot about how best to
respond to the virus, and so we expect that local containment measures,
social distancing will do a large part of dealing with the second wave.
This may turn out to be very different, and of course, if this turns out
very different, than the economic impact would be larger. Of course, we
also have some upside risks – if a vaccine is in place and therapeutics are
in place, we may see a quicker recovery then we actually expect.

Under the European Recovery Fund this is, indeed, a very substantial
support instrument for the European Union countries. On average, the
recovery funds will provide 3 percent of GDP in grants. We expect that the
growth impact for countries on average will be between 0.75 percent. It
could be higher, going up to 1.5 percent, depending on how these funds are
being absorbed. So, this is an important additional instrument available in
addition to national plans.

So, we are definitely suggesting that these funds should be made available
as soon as possible. We are very confident this is going to happen. Having
said this, however, Spain, like other European countries, have access to
financial markets at very low financing costs. So, there is no financing
constraints in moving forward with national recovery plans. And I know with
Spain, that Spain is ready with a number of investment projects, and Spain
certainly, as soon as these funds arrive will be able to move on fairly

With some other European countries, one of the issues is can these funds be
absorbed efficiently and effectively and also quickly, and these
preparations are in train, and this is the other part that countries are
ready to actually then absorb these funds and undertake the public

MS. LOUIS: Thank you. We also have another question coming in now from
Trent Murray from CGTN Europe. Trent, please go ahead.

QUESTIONER: Thank you very much. The goal posts, as was said, are clearly
shifting here quite quickly, particularly as additional lockdown measures
are really being brought in daily. I just want to know, you said the impact
of the second wave has been incorporated into your forecast, but have you
been contacted by any European governments to ask for your help in modeling
the economic impact for them specifically if there is second or third
lockdowns in some of the countries?

MR. KAMMER: This is a very interesting question. Usually what we see as
economists we deal with economic shocks and we know how to model them and
this is the standard fair we have. In these circumstances, actually we rely
very much on epidemiologists on how to model the pandemic, and how the
virus response is going to evolve, and we are then building the bridge. So,
our forecast in the WEO and in the REO we are using these models. And we
are discussing, of course, our projections with our partners when we are
making these forecasts, and we are sharing our models with them.

I should also say, despite all of the modeling, there’s a lot of
uncertainty with regard to these forecasts. The pandemic evolves. The
response to the crisis evolves as we learn more, and as part of that, also
the economic impact and our assessment of the economic impact will evolve.

MS. LOUIS: Thank you. Staying on Spain, I have a quick last question on
Spain from El Pais, Luis Doncel. Can you help explain why Spanish
GDP will be the most affected this year compared to other advanced
economies in Europe?

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MR. KAMMER: With regard to the effect on economies, it varies quite a bit
across Europe, and the explanation is, one, how the virus actually has
impacted the country, and that is very different from country to country.
But it also then depends on the structure of the economy because certain
sectors are more affected, hospitality sectors, services in general are
more affected by the virus. And that explains why we see so much deviation
in terms of the impact of the virus in Europe.

For Spain, what it means is Spain has a large tourism sector so that’s a
marker why the impact on economic growth is larger in Spain. Second, Spain
has a lot of small and medium enterprises. That is another marker which
increases the economic impact because these companies have more constraints
than larger companies. And finally, Spain has a large number of temporary
employment contracts, and so the impact on employment is larger in Spain
than it is in other countries.

MS. LOUIS: Switching gears now to Portugal. We have a question that came in
from LUSA Portuguese News Agency, Jorge Eusébio. He asked,
comparing with the Portuguese government’s forecasts, the IMF expects a
worse outcome in terms of GDP for Portugal this year but a better one for
next year. So, what is the base of your projections, and why are you more
pessimistic for this year?

MR. KAMMER: Again, I should make the general disclaimer that there is a lot
of uncertainty in these forecasts. Having said this, for Portugal, one of
the assessments is how tourism is going to be affected because Portugal has
a large tourism industry. It means there will be domestic effects. But
Portugal is also very much affected by the travel restrictions and
restriction in other countries. So, tourism is one of these sectors which
we have been studying very closely on how it’s going to be affected. And
the second part with regard to Portugal, is developments in Spain, which
affect economic developments in Portugal as well.

In our projections we assume a more gradual recovery than the Portuguese
government for the second half, but then also we assume a stronger rebound
in 2021. I would say these are marginal differences, sometimes they express
themselves in larger differences in the numbers, but there’s a lot of
uncertainty with regard to all of the numbers which we are talking about.

MS. LOUIS: Thank you, Alfred. I see we have on Webex another question
coming in from Bosnia and Herzegovina. He has a question on the Western
Balkans. Izmir, please go ahead.

QUESTIONER: Thank you for taking my question. What is your current view on
the Western Balkans, and what are your projections for this year and the
next year, when it comes to the region, and especially because we have a
huge rise of numbers, when it comes to Corona, and many restrictions are
coming in? Thank you.

MR. KAMMER: Countries in the region have been dealing exceptionally well
with regard to the first wave. They took measures quickly, and the first
wave was really stemmed, and now, similar to what happens in the rest of
Europe, the second wave is much more intense, in terms of infections, not
in terms of mortality rates, yet. So, this will impact on the economic
developments in the Western Balkan countries.

The other development, which is going to be important, is what is going to
happen with tourism, travel restrictions, which will also have an impact on
the region. What we see, so far, is that the policy response, in terms of
supporting the economies in all of the countries, has been sizeable and
undertaken very decisively, and that is also going to help, in terms of
going through the second wave. And we’re expecting, again, a recovery of
economic activity in 2021.

MS. LOUIS: Thank you. I’m going to switch, now, to an online question.
We’ve got one coming in from Ukraine, Yaroslav Dovgopol, from Ukrinform news agency. He asks, in the latest WEO, the IMF has
improved the forecast for Ukraine’s real GDP in 2020, from a contraction of
8.2 percent in June, to a contraction of 7.2 percent currently. So, what
influenced this recalculation?

MR. KAMMER: This reflects a better outturn in the second quarter. We saw
that retail trade and consumption were rebounding faster than we expected,
and, therefore, we have upgraded our forecast from our June projections,
but we should also be aware that the downside risks remain exceptionally
large. We need to see how the second wave is going to develop, what the
impact on the economy and on corporate balance sheets will be, and that is
something which we are closely monitoring together with the Ukrainian

MS. LOUIS: Another follow up from Yaroslav. He asks about an update on the
Standby Program for Ukraine. He said that the Ukraine government has asked
repeatedly for us to send the next disbursement, perhaps by the end of this
year. How do we assess the prospects for the next steps for the Standby

MR. KAMMER: We started a Standby Arrangement of $5 billion with Ukraine in
June, that is supporting macroeconomic stability, and it’s also supporting
the response to the Corona Crisis and a number of reforms to be undertaken,
over this 18-month period. So we have been working very closely with the
government over the last few months, in terms of implementing reforms, but
also with regard to their commitments under the memorandum and achieving
the objectives, which we have established in the program. We are working
closely together with them, in terms of implementing and maintaining these
commitments and this engagement is going to continue.

MS. LOUIS: Thank you so much, Alfred. With that, I’m afraid we are going to
have to wrap up, but if you have any further questions, feel free to reach
us bilaterally. Thank you, and I hope you have a good day. Take care.

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