The full repayment of the IMF loans, which could come even within the next month, marks the end of a traumatic era for Greece. In an interview with Naftemporiki, Alfred Kammer, the director of the European Department at the IMF, points out 4 key lessons from the management of the debt crisis and explains how the future IMF-Greece relationship will be shaped. He shares the IMF estimates for the prospects of Greek GDP growth and debt sustainability and he identifies the main risks for Greek and European economy.
The IMF expects the Greek economy to grow by 4.2% this year with Greece exceeding its 2019 pre-Covid output level. However Alfred Kammer warns that the uncertain evolution of Omicron and possible future new variants is a key downside risk to growth.
Another serious challenge is the high energy cost and inflation. He stresses that governments should address it through targeted and temporary measures that support vulnerable groups.
Despite the high vaccination rates, the pandemic is still testing Europe's resilience. The Omicron variant has spread rapidly forcing governments to reinstate restrictive measures. How big of a threat is it for the European and Greek economy?
The recent surges in Covid-19 cases across Europe, driven first by the more transmissible Delta variant and then the Omicron variant, has led to renewed mobility restrictions across several countries in Europe. This has come on top of elevated energy prices and continued supply disruptions, adding further headwinds to economic activity. While the economic recovery remains strong, growth in the near term will be slower than we previously expected. This results in a downward revision of euro area 2022 growth to 3.9 percent from 4.3 percent in our October WEO forecast. At the same time, the positive developments on vaccines and therapeutics, improving sentiment, and continued adaptation mean that the medium-term growth outlook for the euro area has further strengthened. Indeed, while there is great heterogeneity across countries, euro area output is projected to slightly exceed its pre-pandemic path in 2025.
For Greece, we expect the disruption from the spreading of the Omicron variant to be concentrated in the early part of this year. Assuming its impact fades before the start of the tourism season and factoring in the Covid-19 relief measures adopted by the government, we expect solid growth in 2022 at 4.2 percent, with Greece exceeding its 2019 pre-Covid output level. Nonetheless, the uncertain evolution of Omicron and possible future new variants is a key downside risk to growth and ongoing efforts to reduce the level of nonperforming exposures in the banking sector.
The pandemic is not the only challenge for Europeans. The energy crisis and high inflation also puts pressure on households and companies. How long do you think it will last and how should governments react?
Inflation accelerated in 2021, largely due to base effects from last year’s low oil prices, and transitory factors such as the reversal of Germany VAT cut and supply-demand imbalances. Inflation will be higher in 2022 than we expected, as energy prices remain elevated and supply-side constraints persist for longer. But inflation is still expected to decline afterwards as these factors abate.
Higher energy prices are hurting. Governments can explore different avenues to support vulnerable groups through targeted and temporary measures, as also outlined in the European Commission toolbox to tackle high energy prices. In crafting them, it will be important not to undermine efforts to attain the EU’s green goals and also to strengthen the resilience of the European energy market via a synchronized switch from fossil fuels to renewables.
High inflation also poses a challenge for the ECB. What should we expect in the monetary front? Do you see a rate increase coming sooner than initially anticipated?
The uncertainty surrounding inflation remains high, especially given unpredictable pandemic dynamics and their possible impact on economic activity. Our baseline projections suggest that, as some of the transitory factors dissipate in 2022 and 2023, inflation will remain below the ECB inflation target over the medium term. Accordingly, the ECB should look through the current transitory inflation pressures and maintain an accommodative monetary policy stance. Clear and effective communication will be critical to ensure that inflation expectations remain well anchored.
Risks to inflation are clearly tilted to the upside as persistent supply-side disruptions and elevated energy prices could result in large second round effects and significant inflation overshooting. If such risks were to materialize, the ECB is well equipped to respond by scaling down monetary policy support, via tapering asset purchases and raising key policy rates.
Eurozone finance ministers recently had their first debates on how to change fiscal rules for years to come. What direction should the reform of the Stability and Growth Pact take? Does Eurozone need central fiscal capacity?
The current fiscal framework has helped limit debt accumulation relative to a situation without rules. However, the rules are too complex, making them difficult to communicate, monitor, comply with, and enforce. Moreover, in light of the rise in debt ratios during the pandemic, the application of the current rules would require unrealistically large—and counterproductive—adjustments by some high-debt countries.
The EU fiscal framework should be reformed to make it more efficient and better at preventing debt distress, while allowing for macroeconomic stabilization during downturns. We expect to publish our proposal in the first half of 2022, based on the following principles:
- Fiscal sustainability should be maintained as the central objective, through a focus on public debt as the anchor.
- Fiscal institutional reforms, including further strengthening of national fiscal councils and the European Fiscal Board, can play an important role in improving ownership and compliance with the rules.
- To help countries meet investment needs associated with the common EU climate goals, a climate investment fund at the EU level could be established.
The euro area would also benefit from a common stabilization capacity; this is long-standing IMF recommendation. Such a capacity would enhance countries’ ability to use countercyclical polices and reduce the burden on monetary policy.
What risks do you see for the Greek debt in the medium term?
In our last report, we concluded that Greece’s public debt remains sustainable over the next decade and this assessment was robust to a variety of downside risk scenarios. The official and highly concessional nature of Greece’s debt, the anticipated gradual return to primary government surpluses, the government’s large cash buffer, its active liability management exercises, and ongoing Europe-wide economic and financial support packages all mitigate refinancing risks over the medium term. The picture is uncertain over the very long term, in particular whether interest rates will remain sufficiently low once official financing is being replaced with market funding.
Greece plans to fully repay the IMF loans. Looking back at Greece-IMF relationship, what do you think was the important thing that was achieved since the debt crisis and what was the biggest mistake? What would the full repayment of the loans mean for the country's future relationship with the IMF?
While the 2010–18 crisis was traumatic, Greece remained in the eurozone and emerged with solid growth, falling unemployment, and investors taking another look at the country amid improved fiscal management and some momentum with cleaning up the banking sector. In terms of what went right and what went wrong during the programs, let me draw four general lessons based on the various rigorous evaluations of the IMF’s assistance in the euro area. First, political stability and equitable burden sharing are essential to build domestic reform ownership. Second, realism is needed about how much can be delivered in a short span of time. Third, credible commitments of debt relief are a prerequisite for program success in circumstances like those that were faced by Greece. And finally, in the context of the euro zone, it is essential to establish strong collaboration with the various European institutions, regulators, and supervisors. Now in terms of the last part of your question, indeed, the Greek authorities have expressed their intention to fully repay the IMF once they receive a waiver from European partners. This would mark an important milestone in the relationship between Greece and the IMF and, practically speaking, it would terminate our “Post Financing Assessment” of the Greek economy. Instead, our surveillance relationship with Greece would become identical to that in other eurozone countries, which is already largely the case. In addition, we would remain engaged in the discussions between the Greek authorities and the European institutions within the context of their enhanced surveillance framework.
