Transcript: IMF Managing Directors Press Conference on the Annual Economic Assessment of the Euro Area

Speakers:

Kristalina Georgieva, IMF Managing Director

Oya Celasun, IMF Deputy Director, European Department

Moderator:

Pierre Mejlak, IMF Chief of Media and Social Outreach, Communications Department

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MR. MEJLAK: Good afternoon, everyone, and welcome to those joining us online. I'm Pierre Mejlak of the IMF's Communications Department. We are here today to present our Annual Economic Assessment of the Euro Area, which has just been presented to the Eurogroup.

With us today, we have Managing Director Kristalina Georgeva and Oya Celasun, Deputy Director of the European Department at the IMF. We'll open with some remarks by the Managing Director, and then we'll turn to you for your questions.

MD over to you.

MS. GEORGIEVA: Thank you for being so resilient. You're here. We recognize that the euro area economy, like the rest of the world, is facing a more challenging environment. The latest shock from the war in the Middle East and the associated rise in energy prices have weakened the outlook and added to the structural headwinds Europe already faced, including population aging and subdued productivity growth.

As a result, we have revised growth down and inflation up already in April. Since then, disruptions have proven more persistent than we assumed. Inflation has risen noticeably, and consumer confidence has plummeted. That led to further downward revisions for growth and upward revisions for inflation.

On growth, we now project 0.9 percent in 2026 and 1.2 percent in 2027. This leads us to a cumulative downward revision of around 0.7 percentage points. For the headline inflation, we project 2.8 percent in 2026 and 2.3 percent in 2027. This is a cumulative revision of 1.2 percent to the price levels, relative to pre-war risks, which are tilted to the downside. We all recognize that uncertainty around the direction of the Middle East war is very high. If we have a more persistent energy shock, if geopolitical tensions flare up, if financial conditions tighten, that would further hold growth down. Higher energy prices would also keep inflation elevated.

So that is the background, and what it means for the euro area is a very difficult balancing act. In the near term, the priority is to keep inflation expectations firmly anchored while cushioning the impact of the shock on households and firms within available fiscal space. And we know it is a tight envelope. Monetary policy will need to remain focused on ensuring that the energy shock does not lead to broader or more persistent inflationary pressures. Clear forward-looking communication by the ECB, as they have done today and will continue to do in the future, I am sure, is absolutely essential in this uncertain environment. Fiscal policy should provide support primarily through existing safety net programs. If additional measures are needed, they should be temporary, well-targeted to protect vulnerable households while preserving price signals and maintaining fiscal discipline.

Over the medium term, fiscal adjustment will be necessary, especially in high-debt countries, to create space for long-term spending needs and to preserve sustainability. And at the same time, it is critical not to lose momentum on the structural agenda. And we had a very interesting and engaged discussion on strengthening energy security, accelerating the transition to renewables, and reducing exposure to external supply disruptions. They were urgent before they became even more urgent today. For Europe, the very best way to protect itself and its people is with a strong economy. And for that, completing the single market, deepening capital markets, and supporting innovation are absolutely paramount to lift up productivity and strengthen Europe's resilience.

And finally, we have to have trust in financial stability. Preserving financial stability is so important. So far so good. The financial system has held up well. But vulnerabilities, particularly those related to non-bank financial institutions, call for continued close monitoring and strong supervision.

So, just to conclude, the euro area has held well in a very difficult time, remarkably resilient to multiple shocks over the last years. And it is critical that the euro area doesn't waste this crisis, make the best out of it, by building a strong economy for Europe.

Thank you very much.

MR. MEJLAK: Thank you, Managing Director. Let's turn now to your questions. Kindly introduce yourself and your outlet. If possible, stick to one question so we can take as many as we can. The gentleman in the white shirt.

QUESTIONER: Hi, good to see you, Managing Director. I had two questions. So, first of all, on the growth forecast, the cutoff date for the growth forecast was end of May, but the data for the first part of the year came in June. Considering this and the fact that the situation is far from being resolved, do you have an idea of how much the, I mean, growth could come down and continue worsening?

And secondly, in regards to the measures for the energy crisis, as you said, the report said that this will be targeted and now a broad-based relief. So, in light of this, I would like your comment on the expanded escape clause that the Commission just proposed covering now, also energy, green energy, on top of what was approved for the defense spending. Thank you.

MS. GEORGIEVA: We are going to present our updated Global Outlook, and of course, we will include an update on the euro area in early July. But I can say that already in April, we have put in front of our membership three scenarios, a reference scenario, an adverse scenario, and one that could be really, I mean like not very good, bad, and terrible. The not very good is already in the rear-view mirror. Our reference scenario is no more the valid point. But we are not yet moving deeply into the adverse scenario.

And why is that so? Because when we look at energy prices at inflation, and at financial conditions, yes, energy prices are up, but not as high as we would project in our adverse -- even in our adverse scenario. Inflation expectation, inflation is up and it requires action. But inflation expectations remain anchored and financial conditions slightly tightened, but not yet a lot. Could that change? Yes. And if we get -- and these are the three things to watch: commodity prices, inflation expectations, and financial conditions. If we are in a prolonged period of disruption in oil and gas supplies, it would get worse. And in our worst-case scenario, we can see the world economy slipping into recession.

So far, the two large economies, U.S. and China, are holding quite well. That keeps the global growth average not very much further away from our reference scenarios. So, if the euro area that is more vulnerable to the energy shock, we are downgrading more for global growth. If we take a snapshot today, it is not going to be a very bad snapshot. Could that change? I repeat myself. Watch these three things: commodity prices, inflation expectations, and financial conditions. We see inflation in the United States up. How would that impact decision-making in U.S.? We will see, you know, at some point. Access to finance remains relatively fluid. Would that change?

To sum it up, the most difficult problem this shock creates is uncertainty. And it puts decision makers in a very difficult position.

To your second question, the Commission has done the best they can to put a tight clause that one expects countries to use what they have already obtained as an escape clause, and only in an exceptional circumstance to actually dip into the new flexibility.  So, they have 1.5 percent. Use this. Only at an exceptional circumstances, you can tap into the 0.3 that is being agreed. What is our message? Be very careful.

To follow up from your previous question, we simply don't know how long this supply disruption would go, how far it would hit economies. So don't make decisions based on the hope that it would be over soon. Make decisions based on cautious approach that requires preserving fiscal space you have for other priorities. And please, please, please, for those that are with high deficit, high debt, be very careful not to spend money you don't have.

You want to say -- Oya is actually the guru of this.

MS. CELASUN: Nothing to add. I think we covered it. Thank you.

MR.MEJLAK: Let's go to another question. The lady here.

QUESTIONER: Well, Madam Georgieva, thank you so much. You're here in the capacity of the IMF, but of course, you know Brussels very well, and you know the Commission very well. The negotiations around the next European budget have now quite literally started. I wonder how do you, what would you advise, knowing how the machine works very well, this budget should look like? There's also been conversations that this is the time to perhaps put aside money that usually goes to cohesion, agriculture, and actually deploy the big money into energy, very much to what you just alluded to, defense. And then, you've also said you see a case for joint European money on joint European projects. Is that something that you would reiterate as these talks now get underway? Thank you so much.

MS. GEORGIEVA: Thank you. It is absolutely paramount for Europe to recognize that the world is a tougher place and to be competitive, to be strong, Europe has to use its resources first and foremost for European countries' competitiveness for economic security -- for energy security.

We strongly recommend that first, Europe is ambitious about the size of the MFF. As a former budget commissioner, I know it is a bloody fight, but it is a fight worth going for. So, my advice is do the right thing for Europe.

Two, we strongly recommend that there is sufficient space for common European objectives, that at this point of time, national governments would benefit from bringing the cost of energy down for the whole of Europe, even if cost of energy in their own countries is relatively low, because it would, all other things equal, it would make Europe stronger. On defense, if we fragment defense spending, the impact on the value for money is not going to be very good. We need procurement that is done jointly, that is open to companies big and small across Europe. And that of course, is best done through the European budget.

And three, yes, we are in favor of Europe using its collective strength to continue to go to markets, to mobilize money for its competitiveness and defense, and also to bring to markets what clearly is of interest. More opportunities for euro-denominated lending.

MS. CELASUN: So, again, nothing much to add. But we've repeatedly looked at investments required for common objectives, and you find that when you do it jointly, because you take into account cross-border spillovers, because you don't create redundancy, you save money. As the Managing Director said, you get a better value for money.

MS. GEORGIEVA: We actually have a -- we were sharing with the ministers in our energy security analysis, if funded through the MFF, funded jointly, energy investment would bring 7 percent saving to Europe. When you are short of money, don't waste it. Well, don't waste money in any case, but especially when you're short of money.

MR. MEJLAK: Colleagues, do we have another question? One last question? If not, any final words from your end, Managing Director, before we wrap up?

MS. GEORGIEVA: Yes, I do. To the media, actively engage in these discussions. It is a crucial decision point for Europe, and you would do well to encourage courage and perseverance. So continue asking the right questions and bring Europe up, because we are all Europeans. We all need it. Yep.

MR. MEJLAK: Thank you very much, Managing Director.

Thank you, colleagues, for joining us today. Apologies once again for the delay. Any other questions you might have, you can always reach out to us with an email at [email protected].

I wish you all a good evening. Thank you again.