Georgieva (Imf): «EU governments need to buckle up and adjust their deficits»

Kristalina Georgieva, managing director of the International Monetary Fund, has givern an joint interview to Corriere della Sera, El Mundo, Handelsblatt and Les Echos. We publish a full transcript, edited for clarity and conciseness.

The global economy is growing – but not as fast as it used to. Is this the new normal?
«The world economy has gone through three consecutive shocks. We had Covid, we had the war in Ukraine and then inflation and the cost of living crisis. In that context, the global economy actually has demonstrated remarkable resilience. We were very concerned about a second recession after 2020, now we are projecting 3% of growth this year and 2.9 % next year. But we are of course concerned that growth is projected to be slow in both the near-term and the medium-term. We are way below the 3.8% average of the previous two decades».

What are the reasons?
«We are witnessing the economic consequences of geopolitical tensions that not only have a direct impact on global supply chains, and on trade as an engine for growth. Such an uncertain environment is making it harder for investors to have confidence».

Will the war in the Middle East deal another blow to the global economy?
«Economically, the most significant impact is at the epicenter of the conflict. In Gaza, the destruction is massive. The West Bank is impacted as well because of restrictions to economic activities. Israel is sustaining prudent fiscal and monetary policy, but 8 % of the labor force is now in the army. Workers from Gaza and West Bank are now not coming, and tourism has practically come to a halt. Growth in Israel is inevitably going to be affected. On a global level, the war has not yet translated into a measurable impact. The spike of energy prices immediately after the war has retreated. However, if the war goes on for a long time or even escalates, there will be a tangible impact».

Does Europe specifically have a growth problem?
«Unlike the US, which has recovered to its pre-pandemic trend, the Eurozone is still 2% below its pre-pandemic trend, and growth is very modest. There are two very significant reasons. One is the fact that the war in Ukraine has been affecting the European economy much more severely, especially through the energy channel. The second reason is the demographic challenge in Europe, which is manifesting itself through very tight labor markets. Europe needs determination to pursue structural reforms in order to re-energize growth».

Germany is the only major economy that is in a recession. Is Europe losing its economic powerhouse?
«While Europe was hit hard by the energy crisis because of the war in Ukraine, Germany was hit even harder because of its dependence on Russian gas and its energy-intensive manufacturing economy. Germany needs to make investments in infrastructure, in the green economy, in skills and people. Like the rest of Europe, it has an aging society. And these are not trivial investments, especially when we know that what is next is adjusting to the world of artificial intelligence».

Do you think that France, Italy, Spain are performing sufficiently well with their fiscal stance?
«These three countries have seen their debt-to-GDP ratios jump significantly. Their fiscal response to Covid was appropriately very strong, but it led to increasing debt and deficit levels. So now they truly have to buckle up and go for fiscal adjustments. For advanced Europe as a whole, we recommend more significant fiscal adjustments. This year, we expect a 0.3 percent fiscal tightening. Next year it would go to 0.85 percent».

Can you be more specific about France, Italy and Spain?
«Conditions are somewhat different. For Italy, the problem is compounded by the slowing of growth as a result of withdrawal of policy support measures. So the revenues are not strong enough and they make the adjustment harder. We think that what is now in the budget for Italy should be strengthened: the fiscal adjustment Italy is taking is not going to work fast enough to bring deficits and debt levels down. France is in a better position because growth there is more accommodating for fiscal adjustment. But again, we believe that 2024 has to be a turning page for France in terms of tightening. Spain benefited from a big rebound of services and tourism. They’re projecting a 0.3% adjustment. And we actually think that this is okay as long as Spain does not renew the policy support measures that are expected to expire at the end of this year. So it is tough time for fiscal authorities. And when you have to do this tightening, when the public pressure for more help is quite strong, it is tough to do. But it is necessary because we simply don’t know what is around the corner, what is the next shock. We have to build up the buffers for when we might be hit again».

The Fund forecasts slower inflation rates next year. Are we nearing the point where central banks could trim interest rates?
«We are seeing a decline in global inflation from the peak of 11.6% in the second quarter of 2022. For 2023, we forecast a rate of 6.9% and 5.8% in 2024. But, it doesn’t mean the world has solved the problem of price instability. So we urge central banks to watch the data carefully before acting. One thing is clear: inflation is not the same everywhere. There is still a big divergence among countries. So authorities have to calibrate their actions to what concretely is happening in front of them. Central banks are mindful that a premature withdrawal from the fight against inflation could be quite dangerous. During 2024, there will be still some inflation pressure that needs to be brought down».

How important it is for you to have a deal on fiscal governance in the EU?
«Europe has until the end of the year to find a solution. I was a EU commissioner myself, for seven years, I know there is a tradition to take negotiations to the 11th hour. But, please, let’s get this done! At the IMF, we look at the Commission’s proposal quite favorably, because it provides rules but also some flexibility on how these rules are being applied. It does help countries to strengthen their fiscal stance, both in terms of deficit and debt levels. And at the moment we are at today, it is so very important that countries take this to heart. I believe that while there are still differences, European governments will come to a rational outcome, because Europe cannot afford the luxury of not having a modernization of its the fiscal rules, and falling back to where we were before».

Some countries basically support the commission’s idea. On the other hand, Germany and others want to see an anchor on the deficit trending towards 1% year by year. Do you have a preference between those two views?
«Well, we were quite favorable to the commission’s proposal. We thought that it was well calibrated to bring sufficient predictability on actions to be undertaken, but without the straitjacket that may affect growth rather than support it. At the same time, we do have some sympathy for concerns that unless there is clarity, there may be too much deviation from a fiscal path that keeps economies healthy. The German economy has been a good anchor by pursuing fiscal discipline that keeps the cost of borrowing very low and that translates into benefits for the rest of the eurozone. But we genuinely believe that some flexibility has to be in place. Europe has to get much more energized on competitiveness and growth opportunities. I actually would say that the fiscal rules are very important, but even more important is completing the banking union and moving forward on the Capital Markets Union. It’s just impossible for Europe to retain its global position if it doesn’t make better use of its financial assets».

Will populism grow in the next european elections because of the economic situation in the Eurozone?
«About the forthcoming European elections, I do hope that there would be much more attention not necessarily in trying to shout louder, but being much more forceful on getting this voice of goodness, if I may call it so, to be heard more. The shocks we have lived through have created tremendous anxiety. The world is changing very rapidly, but policymakers may not be moving as quickly as they should. Reforms that are necessary are not being pursued with the speed and strength we need. Of course, it is not easy because those very reforms sometimes create a backlash».

Are you concerned about the economic program of Agentina’s president elect Javier Milei?
«We have had already discussions with president elect Milei and they were constructive discussions, quite sober, recognizing that there is a very difficult job to be done. He has communicated a sense of urgency and that is a sense that we share. So stay tuned. We will have more to say after we meet and have discussions on what is the plan. The country needs an ambitious plan for reforms. This is this has been our message to Argentina for quite some time and it continues to be the same».

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