Energy crisis: The IMF’s advice to Greece – What it “sees” for Europe – Economic Post
Russia’s invasion of Ukraine has completely changed the positive picture and optimistic outlook for the European economy, with the Russian invasion of 2022, the European Department of the International Monetary Fund said in a press conference in Washington on the sidelines of the Annual Meeting of. International Monetary Fund and her World Bank.
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Alfred Kammer, Director of the Department, and Meera Louis, IMF Communications Officer underlined that the war in Ukraine is taking a growing toll on Europe’s economies. “Natural gas flows from Russia to Europe have fallen by more than 80% compared to 2021. As a result, energy prices have soared and are expected to soon return to their pre-war levels. This terms-of-trade shock increased the cost of goods and led to a cost-of-living crisis. In response to higher and more persistent inflation, central banks have acted strongly and financial conditions have tightened.”
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The question about Greece
Asked about the situation in Greece, and what the IMF proposes to deal with high energy prices, Mr. Kamer replied: “I think our advice to Greece is similar to the advice we give to other European countries. Indeed, taking broad-based measures on prices, caps, tax cuts is not the way to go. Instead, we support targeted, if possible, one-off targeted transfers to address the increased cost of living. They should be temporary and this is very important for countries that have limited fiscal space or that need to reduce debt over time.”
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IMF estimates
The IMF assessed that under these circumstances the European outlook has darkened, with growth slowing and inflation remaining at a high level:
- GDP growth in advanced Europe is forecast to slow from 3.2% in 2022 to 0.6%
- In emerging European economies, growth is also forecast to fall sharply, from 4.3% by 2022 to 1.7% by 2023—a downward revision of 1 percentage point.
- Inflation will begin to decline steadily next year, but will remain significantly above the central bank’s targets. They forecast headline inflation at around 6% percent in advanced European economies and 12%.
- Risks to growth are to the downside and risks to inflation are to the upside, as seen in the new Regional Economic Outlook, published on Monday 24 October.
Difficult choices
In today’s environment, European policy makers face serious dilemmas and tough policy choices. They need to reduce inflation while helping vulnerable households and viable businesses deal with the energy crisis. Policymakers must also remain nimble and ready to adjust policies depending on incoming news.
Central banks should continue to raise policy rates for now, including in the euro area. And a tighter monetary policy is likely to be implemented in 2023, unless the showing of economic activity reduces the meaningful medium-term inflation outlook. As economic conditions tighten, financial stability risks are re-emerging. Regulators should closely monitor vulnerabilities, for example by stress testing banks’ exposure to weakening household and product balance sheets.
Fiscal policy is on two axes
In terms of fiscal policy, the IMF has two main messages.
- First, fiscal tightening should proceed in 2023. Why? Because you have to work with monetary policy to fight inflation and governments have to rebuild the fiscal space that has been depleted by the COVID crisis.
- Second, fiscal policy must also continue to address the cost-of-living crisis, but it must do so more effectively.
Government measures
The IMF also reports that in many European countries, governments have taken steps to limit the spread of higher energy prices to households and businesses to limit their economic and social costs.
However, such measures must be temporary and should be made more targeted to ensure that their fiscal costs remain manageable and — crucially — to ensure that energy prices raise lower consumption.
European governments can also be much more effective in supporting products. Energy security is a problem. It is best tackled together, with the aim of ensuring a level playing field in the ‘single market’.
The good example”
IMF department head Alfred Kamer said a good example of a well-targeted measure is supporting low- and middle-income households through one-off discounts on their bills.
A less efficient alternative would be a higher price for higher levels of energy consumption.
“Although such an approach does not fully target the vulnerable, it is not a better option than large price caps,” he stressed, adding that helping only those most in need was crucial because broad support would show higher inflation which the European Central Bank is trying to tame with aggressive interest rate hikes and complicate efforts to keep public finances healthy.