Keynote address by Kristalina Georgieva, IMF Managing Director, at the Annual EU Budget Conference 2024
My remarks [today] will be about the importance of budgetary cohesion in Europe, about the efficiency of joint spending to solve joint problems. I want to reflect on how Europe can come together to provide essential, common public goods.
My remarks will have three parts. First, some reflections on the global environment, a tough place for trading nations. Second, some words on Next Generation EU, noting its successes so far and reflecting on initial lessons. And then, to conclude, a brief outline of my thoughts on the way forward.
By Kristalina Georgieva
The global environment. When we stare out at the horizon, what do we see? I see a hint of sunshine. But I also see a dull grey sky and some dark clouds.
Let me start with the sunshine. After a global burst of inflation to levels many people have never seen in their lifetimes, it looks like the ECB’s tight monetary policy is doing its work.
This is something I need to say carefully because it’s not over yet. But, yes, it looks promising: inflation is down from its disturbingly high peaks and no deep recessions in Europe.
Never forget though, that the last mile can be the hardest. No longer will the major central banks be marching in lockstep, as they did during the recent rate-hiking cycle. No. From now on, each currency zone will have to chart its own path. An interest rate divergence looms, and maybe some exchange rate movements too.
We save the champagne for later. Next, the grey skies. Two problems:
Problem one; Growth. Our World Economic Outlook shows the global economy converging back to a rather weak trend rate of growth. Yes, the US economy still looks like it’s firing on all cylinders, but that is unlikely to last. In China, real-estate issues weigh on the outlook. In Europe, productivity growth lags behind, reflecting much less private investment in new technologies than in the United States. This is why we say it is vital to pursue structural reforms and scale-up innovation and investment. Europe needs faster productivity growth, and that means reforms – including transformational ones in the energy and digital arenas, and the completion of the single market.
Problem two; Debt. After two massive shocks – the pandemic and the energy supply shock caused by Russia’s invasion of Ukraine – many countries are shouldering very heavy public debt burdens. This is why we say many countries must now pursue judicious, well-articulated medium-term fiscal consolidation to rebuild buffers – appropriately tailored to country specifics, of course.
Low growth, high debt. Not a great place from which to begin a big push to develop clean energy supply and fight climate change. But let us be clear: if we do not win the fight against climate change, all of humanity together, we will all suffer.
Dark clouds. Truly, we know how to be our own worst enemies. I am speaking of geopolitics. Does humankind march forward with a united front? Far from it.
Instead, we live in a period of tensions, where bilateral fights and transactional approaches threaten the rules-based world order that has served us so well since the end of the Second World War.
My job as head of the IMF is to defend and promote a well-functioning, rules-based, and integrated global economy – in which trade and capital flows are the transmission lines of prosperity. For five years I have done so, and, mark my words – I will continue to do it in my second term.
We at the IMF are worried about the bilateral trade fights, the gaming of the rules, the raising of trade barriers, the economic coercion. They are harmful to global growth and hurt our capacity to solve global problems. We do not make national policy, and certainly not national security policy. What we do is we take the vital signs of our members’ economies and quantify the costs and the benefits of the choices our members make. We hold up a mirror.
And my goodness. Right now, the reflection in the mirror is not pretty.
One example. IMF research shows that since Russia’s invasion of Ukraine, trade growth between countries in politically distant blocs has slowed by 2.4 percentage points more than trade among those that are closely aligned. This will have costs.
The policy message is clear. Global economic policymaking needs a calm voice, a cool mind, a steady temperament.
As I will argue, the world needs a strong and cohesive Europe. To defend the rules-based order. To show the world how much is gained by working together. To lead by example.
Let me go to Part II.
The European Union. Twenty-seven sovereign states in a marriage like no other. A vast body of shared law. A commitment to democracy. A clear separation of power into national competences and central competences. Four freedoms – the freedom of movement of goods, services, people, capital. A single market that, no matter how imperfect, actually works, helping bring ever-greater prosperity to almost 450 million people. Convergence. A union of hope.
Four further things to note:
One, Europe is a trading power. Relative to GDP, the EU exports and imports a lot. More trade openness than the United States. In some EU countries, much more. As such, one can get knocked around by events abroad. To handle this, Europe needs to be strong.
Two, much of Europe’s strength derives from its cohesion. Since the Schumann Declaration of May 1950 proposing the European Coal and Steel Community, 22 countries have been welcomed into the union. Today, 20 EU member states share a common currency. After the dollar, the euro is the world’s Number Two reserve currency. Not bad for only 25 years!
Three, the EU budget sits at the heart of European cohesion. For decades, the Multiannual Financial Framework – the MFF – has channeled a steady supply of fuel into Europe’s convergence engine. I think of the structural and cohesion funds and all the good they have done for “the country I know best.” And for the rest.
Four, when we think of fiscal policy, we cannot forget that the EU is not one country. No, unlike the other two superpowers, the EU has 27 national debt stocks. There is no mandate to build a “United States of Europe.” That is the democratic will of the people.
Nonetheless, in the early months of 2020, as a new virus hit us with no regard for borders, something new was born.
I refer, of course, to Next Generation EU.
If you ask me, July 2020 will go down in history as a time of profound European cohesion. Finding a solution that could reasonably be deemed consistent with the Treaties, leaders came together to craft a powerful European response to a common and grave problem.
Basically, NGEU represented a major expansion of the EU budget, financed by common borrowing, with disbursements running until the end of 2026.
This was unprecedented. Up to 800 billion euros in bond-financed EU support to national budgets. Not only to recover from the pandemic, but to help finance digitalization and the Green Deal and help incentivize much-needed structural reforms to lift potential growth. To send a deliberate signal of solidarity, including solidarity with the tourist economies of Southern Europe so hard-hit by the pandemic, as well as the less-wealthy member states.
To show financial markets that the EU stands together as one. Remember, just the announcement of NGEU had a powerful calming effect on financial markets. The top credit rating. Debt management. A risk-management framework. A chief risk officer – in fact, I see her here today!
On the expenditure side, I am delighted that NGEU has taken forward lessons from the times when I was responsible for the EU budget. Back then, we introduced a framework for a budget focused on results, to add coherence in three areas:
What to spend on – a focus on areas where the EU budget could have maximum added value. Cross-border infrastructure and humanitarian aid, to mention just two.
How to spend – not just grants, but private sector co-investment.
How to communicate – transforming the EU budget from something boring into something with a story.
I am very happy to see that many aspects of the budget-for-results strategy live on. NGEU has built on it by taking a direct performance-based approach, where disbursements to national budgets are made entirely based on actual milestones and targets achieved. X number of new wind turbines. Y number of new solar farms. Z number of new internet connections. And, perhaps most importantly of all, difficult but necessary structural reforms, incentivized by real money. And it is working. Lessons learned, lessons implemented.
So far so good. So: what comes next?
It may not be as dramatic as a pandemic, but the challenges the EU faces going forward also shout out for a concerted response. In a time of geopolitical and economic uncertainties, policy choices will matter deeply. And these choices, in turn, will fundamentally shape the next MFF. In a time of higher interest rates and squeezed budgets, we still need to find ways to provide critical common public goods, and to do so cost-effectively.
One of the clearest cases for doing more together can be made in the areas of climate and energy security.
As a new IMF paper which comes out at the end of the month will show, Europe’s climate and energy security objectives are fully complementary. For those of you looking for a good read, please watch out for a paper called “The Energy Security Gains from Strengthening Europe’s Climate Action.”
As the recent gas supply shock showed, as long as Europe is dependent on imported fossil fuels, it will remain vulnerable. In just one year – 2022 – the EU’s fossil-fuel import bill doubled, to over 5 percent of GDP. Greening Europe’s energy supply is the best solution for energy security. No one can shut off the wind or the sun!
We know, however, that the size of the additional investments needed to get from here to there – to net zero emissions by 2050 and to an energy-secure Europe – will be huge. Ensuring that this transition happens in the face of countless other fiscal pressures requires an intelligent approach.
Let’s think of the facts.
The cost of abating one ton of CO2 emissions today varies widely across countries and sectors. In some sectors, even if you could throw a ton of money at the problem, you might not change the result much due to supply constraints or the absence of alternative technologies.
It becomes vital to do what you can, wherever you can, as cost-effectively as possible. This involves figuring out where you get the biggest bang for your buck in terms of reducing emissions. I see this as an area where, absolutely, there is a case for a strong, coordinated, centralized EU role.
Once again, the EU needs to come together – with a focus on helping to surge public and private investments to the most cost-effective and impactful areas.
There is an equally clear case for the EU to play a stronger role in areas where there are coordination failures, externalities, risks to the single market. I am thinking of the need to ensure that cross-border investment in electricity grids happens. I am thinking about the need to promote R&D in new “clean tech” for hard-to-abate sectors. I am thinking how important it is to do so without bending the state-aid rules and distorting the single market.
All of these efforts would also go a long way towards achieving the EU’s energy security goals. Win-win.
I will close with one simple, clear request and I will say it loudly.
Please put in place a new Multiannual Financial Framework that is commensurate to the huge challenges that lie ahead. I ask you all: please do not just do what may be popular at home, do what is right for Europe!
Europe is stronger together, Europe is richer together, Europe matters more together.
IMF Communications Department
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