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"We will overcome the crisis, but it’s going to be hard"

The head of the International Monetary Fund praises Germany's response to coronavirus crisis. But she warns: a return to containment might be necessary at any time.

Kristalina Georgieva, head of the International Monetary Fund, says that now is the time to spend as much as is needed. "But keep the receipts – make sure resources are used efficiently and effectively to help those most in need." In fighting Corona virus, Germany has done a good job so far, 66-year-old Georgieva says in an interview with the German financial daily Handelsblatt.

Read the whole interview:

Ms Georgieva, 33 Million Americans have lost their jobs, Europe is facing the deepest contraction since the great depression: Can we at least say that the worst is behind us?
It is a crisis like no other. In our April forecast, we projected that the world economy will shrink by 3 percent this year, with partial recovery in 2021. Incoming economic data for many countries are below our already pessimistic assessment for 2020. And with no immediate medical solutions, more adverse scenarios might unfortunately materialize for some economies.

What is the reason for that?
The crisis is complex because health and economic factors are intertwined. To fight the health crisis, countries had to bring economic life to a standstill. Now, countries that have seen infection rates declining are gradually starting to get their economies back on track. But the reopening is not synchronized across all countries or sectors. And it is very likely that we might have to adjust as this reopening takes place. The process is subject to the behavior of a novel, and still in many ways unknown, virus. The uncertainty remains great and it clouds economic projections.

Which hurts the economy…
Investors, companies and consumers will remain cautious. We expect the recovery of the global economy to begin before the end of the year. We projected growth of 5.8 percent next year, but, again, recovery will be partial and there is tremendous uncertainty.

Germany started the process of reopening. What would you advise?
During the period of easing, governments must keep a close eye on epidemiological trends. You must use data points to establish, first, is there enough capacity in the health system to treat the sick? Second, are there enough tests available, can chains of infection be traced? Third, are the protective measures sufficient, are there enough disinfectants, enough masks? A return to containment measures might be necessary at any time. Regarding the easing of restrictions, it is right to think in terms of a "roadmap" rather than a "calendar".

This is a pretty bleak assessment. What is giving you hope these days?
We will overcome the crisis, I am sure. But we must be realistic – it’s going to be hard. Governments and central banks around the world have responded to this unprecedented crisis with unprecedented determination, and that gives me confidence. The measures they have adopted to support the economy match the scale of the crisis: governments have provided 8.7 trillion dollars in fiscal support so far, and central banks have intervened in a forceful manner.

As bad as the figures from the US labor market are, without the $2 trillion stabilization program and support from the Federal Reserve, we would see a much worse situation: a deeper recession, severe scarring of the economy and possibly a very negative impact on the social fabric.

Pandemics are global crises and require global cooperation. Unfortunately, there is little evidence of this.
I see it differently. The international community came together on a number of issues, and here I want to praise Europe. Last week, the EU brought together public and private donors to advance the development and distribution of a vaccine. The target of nine billion dollars was almost reached at the first attempt.

The international community – spurred by the IMF and World Bank also agreed on an official bilateral debt moratorium. It relieves the poorest countries of 12 billion dollars in debt payments, which they can now use for their health systems and to protect their citizens. That too gives me hope, and can I give you another reason?

Of course…
A crisis, as bad as it may be, is always an opportunity as well. We can accelerate a transition to e-learning, e-government, more telecommuting. We can also accelerate the transition to a green economy, because we will need to provide huge fiscal stimulus packages and we can take advantage of this to achieve a greener, more-climate resilient future. We can also address the problems of infrastructure gaps and growing social inequality. These are opportunities not to be missed.

The EU would already be glad if it survived the crisis unharmed. Could the euro fall victim to the pandemic?
The euro is here to stay and, so far, the eurozone has managed to stabilize. And I have full confidence in the EU's political leaders to overcome any difficulties. I am convinced that we are at a point in history where Europe, with its culture of solidarity, has a very important role to play in the world.

As the country with the strongest economy, Germany bears a special responsibility. Is the Federal Government doing enough to keep Europe together?
Let me pay tribute to Germany for the decisiveness of its actions . It stepped up quickly and has made good use of its fiscal space. The smaller the damage to the German economy, the better for the rest of Europe and the world. At the same time, Germany has recognized that it is important to help those countries in Europe that have been hit even harder by the pandemic. This is commendable.

Can Germany do even more? Certainly. But I would also like to stress that this crisis confirms an old piece of wisdom: When times are good, you have to build buffers for bad times. Just as the virus hits people with pre-existing conditions the hardest, so the economic shock hits weaker economies the hardest. One of the most important lessons of the crisis is that states need to build resilient economies.

That sounds almost as if you are declaring the "black zero" to be the model for the rest of the world.
Countries are different, and their starting positions differ. But having fiscal buffers helps mitigate crises. We live in a more shock-prone world, shocks are becoming more frequent and severe. Those who don't like this pandemic for sure will not like what climate change has in the making for us.  We therefore need more resilient economies.

Where is a country like Italy, the sick man of Europe, going to get the strength for this? What would you recommend the Italian government to do to build more resilience more buffers.
In the midst of the crisis is not the time to hold back financial resources. I have said before: Now is the time to spend as much as is needed but keep the receipts – make sure resources are used efficiently and effectively to help those most in need.

And after that?
Once the crisis is over, each country must review its medium-term financial planning. Government deficits and debt levels will be higher. But fortunately, interest rates are expected remain low for a long time, so the debt will remain affordable. This does not mean, of course, that we can afford to remain at that high debt level for a long time. We must reduce the debt burden in a responsible manner.

Are individual euro countries threatening to collapse under their debt burden?
For the first time in history, governments have had to deliberately stifle economic activity. Financial aid to companies and private individuals is the only way to avoid deep scars to the economy. The European Union has suspended the Stability and Growth Pact’s fiscal rules , and it was important to do so. But when the recovery begins, we must be prepared to reduce the deficit and gradually return to sustainable debt levels.

Does Europe need Corona bonds, common bonds to finance reconstruction?
In our view it is prudent to consider all the options that could help to mitigate the consequences of the crisis. Corona bonds are a possible instrument, although not the only one. It is for the European leadership to decide on what is the way to go. I find that there is clearly unity among European leaders, they are in this together. The agreement around the Pandemic Crisis Support is a good example of this unity of purpose among leaders.

What about wealth taxes?
When the crisis is behind us, there will have to be adjustments in fiscal policy. My colleagues here at the IMF have looked at what has happened in the past after epidemics. Their sad conclusion is that inequality has increased in all the epidemics that happened in this century – SARS, MERS, Ebola, Zika. The so-called Gini coefficient, a statistical measure of inequality, increases by an average of 1.5 percent after epidemics. Unemployment among the low-skilled, i.e., those who are most at risk, rises by five percent. In this massive crisis, we cannot afford to be blind to these risks. We must think about measures to prevent an increase in inequality. Otherwise, we will not return to sustainable growth.

What measures do you have in mind?
The broad goal must be to prevent long-term damage to the livelihoods of the least advantaged in society. In practice, this means providing access to sick leave, unemployment benefits, and health benefits that help the poorer segments of societies, the ones who don’t have savings to draw from and live hand-to-mouth. Also, creating new transfer programs, boosting public work programs, provide financial assistance to help companies sustain employment. Progressive tax measures can also be part of the policy mix. These measures are particularly important in countries, or regions, with higher degrees of informality, and where social protection is insufficient. 

In the end, could monetary devaluation be the only way out of the debt spiral in Europe? Are we heading for the monetization of public debt?
That is not possible in Europe. The European Central Bank is forbidden from financing governments directly and has a strong mandate and commitment to maintaining low inflation.

The ECB does not plug any budget holes. But it buys government bonds on the market and pumps huge sums of money into the financial system. Doesn't this create inflationary pressure?
The crisis is not only shrinking macroeconomic supply, but also demand. We don't expect rising prices to be a high risk in advanced countries and so far we have seen very low inflation. In poorer countries it is different: here we see the risk that central banks will be pressured by governments to print money, which means inflationary pressure. There could be serious shortages of goods. That is why it is so important that we support these countries with debt relief and liquidity assistance.

Central banks have become the main actors of the crisis. Last week, the German supreme court found the ECB overstepped its mandate. Do you worry about the independence of the ECB?
This matter is under legal review and so it is not appropriate for me to comment. But I am confident the ECB will find a way to do what is needed within its mandate, while making sure its actions are transmitted to all parts of the economy and all jurisdictions.

The German Foreign Ministry warns that the next phase of the pandemic will primarily affect the countries of the global South. What economic risks do you see for emerging and developing countries?
In March we experienced very worrisome capital flight. 100 billion dollars were withdrawn from emerging markets. Fortunately, the major central banks, especially the Federal Reserve in the US, quickly recognized the danger and opened swap lines for emerging markets whose economic fundamentals are stable, and took other steps to boost liquidity more generally. This has calmed the markets somewhat. At the IMF we are particularly concerned about countries that are already economically weaker. 

Since the outbreak of the pandemic, 50 countries have received IMF financial support. 
Nigeria, for example, has received the largest emergency financing that we have given to any African country, 3.4 billion dollars. With this kind of support, we are helping the people and, also, preventing negative consequences for the global economy. I am proud that we were able to react so quickly – despite the constraints imposed by our staff working from home. You know, the IMF was created precisely for this purpose, for times like these: to help the world withstand a major crisis.

The IMF trying to save half the world. Do you have enough money to do that?
Fortunately, we are coming into this crisis in a strong financial position. We have four times greater lending capacity today than we had prior to the global financial crisis of 2008: a trillion dollars in total versus 250 billion dollars at that time. In addition, IMF members recently decided to double access to our emergency financing, so as to meet anticipated demand of about 100 billion dollars. All in all, we still have about 800 billion dollars in reserve. And I have full confidence that our membership will support us if that should become necessary. After all, we are the institution at the center of the global safety net.

Does the IMF need to reassess its view of economic systems? Is the much-criticized welfare state superior to laissez-faire capitalism?
The moral of the crisis is: social security systems matter. When they are well calibrated, they help tremendously. In Germany, we can see that short-time work is making an important contribution to cushioning the effects of the crisis. It is important that countries in which social safety nets are fragmented or simply do not exist build them for the future. The IMF will help. Under my predecessor Christine Lagarde, the IMF devoted more attention to social issues. That has now become even more important. With its social market economy tradition, Europe is a role model. I would like to say to the Europeans: We need you, the world needs you!

German Chancellor Angela Merkel is getting a lot of praise internationally, and especially in the USA, where she is being contrasted to President Trump. How do you see Merkel’s role in the response to the crisis?
Chancellor Merkel and the German government – at various levels – deserve praise for quick and decisive actions. Thanks to widespread testing and an excellent public health system, Germany has managed to keep its case fatality rate far below other large European countries, and its hospitals have not been overwhelmed. Indeed, it has even been able to take on patients from other countries, which is admirable.

Economic nationalism is on the rise worldwide. Are we entering an era of de-globalization?
There will certainly be shifts in food security and the supply of medical equipment. But I hope that the world will continue to be committed to open markets and counter the risk of us all retreating behind our borders. World trade will change, but we must not lose it. Otherwise, costs will rise, incomes will fall and it will be the poorest countries and the poorest people within individual countries who will suffer most.

Ms Georgieva, thank you for the interview.

More: How Kristalina Georgieva became one of the most important managers during coronavirus crisis (German)