More than two years ago, seeking to revive a moribund economy, the European Central Bank (ECB) embarked on a new monetary policy measure: charging interest on excess liquidity that banks held at the central bank. The move complemented a series of other easing measures aimed at bringing inflation back to the ECB’s price stability objective of below, but close to, two percent over the medium term. Continue reading “The ECB’s Negative Rate Policy Has Been Effective but Faces Limits” »
All eyes are on Greece, as the parties involved continue to strive for a lasting deal, spurring vigorous debate and some sharp criticisms, including of the IMF.
In this context, I thought some reflections on the main critiques could help clarify some key points of contention as well as shine a light on a possible way forward.
The main critiques, as I see them, fall under the following four categories:
- The 2010 program only served to raise debt and demanded excessive fiscal adjustment.
- The financing to Greece was used to repay foreign banks.
- Growth-killing structural reforms, together with fiscal austerity, have led to an economic depression.
- Creditors have learned nothing and keep repeating the same mistakes.
Banks are struggling to overhaul the way they do business given new realities and new regulations adopted in the aftermath of the global financial crisis. While banks are generally stronger—they have more capital—they are less profitable, as measured by the return on equity. There are a number of reasons behind this, including: anemic net income at banks, particularly in the euro area; higher levels of equity; and banks taking fewer risks.
If they cannot change their business models, there is a risk that banks will not be able to provide enough credit to help the economy grow and recover.
The recovery continues, but it remains weak, indeed a bit weaker than we forecast in April.
We have revised our forecast for world growth in 2014 from 3.7 percent in April to 3.4 percent today. This headline number makes things look worse than they really are. To a large extent, it reflects something that has already happened, namely the large negative US growth rate in the first quarter. But it is not all due to that. It also reflects a number of small downward revisions, both in advanced and in emerging economies.
The overall story remains largely the same as before:
Advanced economies are still confronted with high levels of public and private debt, which act as brakes on the recovery. These brakes are coming off, but at different rates across countries.
Emerging markets are slowing down from pre-crisis growth rates. They have to address some of their underlying structural problems, and take on structural reforms. At the same time, they have to deal with the implications of monetary policy normalization in the US.
Let me take you on the usual tour of the world.
Economic growth across Europe is slowly picking up, which is good news. But the recovery is still modest and measures to boost economic growth and create jobs are important.
Western Europe: picking up the pace
The recovery projected last October for the euro area has solidified. This is reflected in our revised forecasts—e.g., the 2014 forecast for the euro area is up from 1 percent last October to 1.2 percent now, with important upgrades in countries like Spain. These revisions reflect the stronger data flow on the back of past policy actions, the revival of investor confidence, and the waning drag from fiscal consolidation. The positive impact on program countries is palpable—improving economies, lower spreads, and evidence of market access. We’ve also seen a welcome pick-up in growth in the UK (almost 3 percent is expected for 2014).
Speaking to the pain and anger of the Irish people at the toll the economic adjustment has taken on their daily lives, the IMF’s mission chief Ajai Chopra was clear during a press conference today in Dublin: the end goals is to protect the poor and most vulnerable people in society while restarting the economy. The IMF along with the European Central Bank and the European Commission were in the emerald isle for the regular quarterly review of the government’s economic program.
To successfully unwind the extraordinary policy measures taken in response to the crisis, we need more than just a good sense of the state of the economic recovery and the degree of financial stability. We also need to know to what extent the global economy currently is influenced by those supportive policy measures. Marek Belka, Director of the IMF's European Department and a former Prime Minister of Poland, discusses whether or not it is safe yet to change tack.