As the world grapples with crises like COVID-19 and the war in Ukraine, European leaders are increasingly aware that the continent must do more to prepare for future shocks.
The IMF believes that Europe must stay together despite fragmentation within the single EU market to avoid a financial crisis.
IMF Managing Director Kristalina Georgieva spoke to Euronews about the importance of maintaining a strong and competitive EU market by removing red tape, enhancing administrative efficiency, and fostering research and development to compete globally.
Euronews: So you've met with German Chancellor Olaf Scholz in this visit. What are the biggest challenges facing Germany and the EU for the next decade?
Georgieva: The most important task for the UN and for Germany is to strive for more competitiveness in a rapidly changing world and a world that is getting more fragmented. What does it mean for the EU? Stick together and make your best competitive advantage in the single market, working more effectively.
We know that Europe has plans for more competitiveness, and it is concentrating on things that we at the IMF have been recognising as very important for Europe.
Remove red tape, less bureaucracy, higher administrative efficiency. Get research and development to translate faster into businesses that compete here and globally. And very important: capital markets unit, banking unit, single market that works on all cylinders.
Euronews: So what can European countries in the single market be doing to avoid another financial crisis?
Georgieva: What we have seen since the global financial crisis is a remarkable investment in the strength of the banking sector. And despite the fact that the world was hit by COVID, Russia's invasion of Ukraine, and more wars surrounding Europe, the banking sector is holding strong. What does that mean? It means, don't take it for granted. Continue to watch it carefully.
We actually do, from the fund, stress tests of the banking sector and then concentrate on the new areas of risk. One is non-banking financial institutions. They have grown to about half of the financial assets that are moving in the world and yet they're not regulated the way the banking sector is. So watch it, make sure that there is no surprise coming from there.
And two: recognise that the enormous power of technological transformation that is lifting up productivity is also a major financial risk. If we are to be trading in a world where artificial intelligence moves faster than we can ever move, what does that mean for financial stability and how to make sure that we are, again, not surprised?
I also think that Europe has been really good in looking at the climate-related financial stability risks and is setting a very good example for other parts of the world to follow.
Euronews: Do you think Europe has a perception crisis with recessions?
Georgieva: That's a very good question. One thing that Europeans, and I put myself, in that category, do is that we are very understated. You ask a European, 'how you are doing'. Usually, the answer would be something like 'not too bad'. You can ask an American how you are doing. 'It's great. Fantastic'. It is important for Europe to stand tall on its achievements.
One massively well-performed task was to free itself from dependency on Russian oil and gas. It has been done remarkably well. Europe can be proud of it. Europe can be proud of the attention it pays to the big challenges of today and tomorrow: climate, demography, technology and a critical one, fairness in society. So Europe can be can can think of itself in better terms.
But also, Europe should be careful not to be complacent. The world is moving very rapidly. If you look at United States, productivity there is higher than in Europe. The overall performance of the economy is better. If you look at Asia, they are a much bigger engine of growth than Europe is. And this is why attention to European competitiveness is so important.
Right now, Europe is rightly focused on the immediate task in hand: bringing inflation down. Big success so far. But don't lose sight of of data if you need to calibrate appropriately. Take steps in the future.
And very important for Europe, reignite growth. If growth remains as anaemic as it is now, it would be hard for Europe to achieve the objectives that people here aspire for a digital green economy that benefits people and opens opportunities for businesses.
***Euronews: And you touched on fragmentation in your first answer, so what can we do about the fragmentation in Europe to ensure that it will stay competitive? ***
Georgieva: We have been paying very close attention to the trends we are observing in terms of trade and industrial policy. They have accelerated quite a lot. In the last 18 months, there have been some 4,000 industrial policy measures that have been distorting trade. And regrettably, about 60% come from the EU and the United States. So we have the appetite to pick up industrial policy.
Obviously, Europe has to be careful not to let itself be exposed to measures others are taking. And at the same time, the European economies are open economies, they benefit from trading with the rest of the world.
And in that sense, Europe as a voice for reforming the World Trade Organisation, sustaining the engine of growth that trade has been for so many decades is done. And it is in the interest of Europe.
Concretely, what I see as a very important job for Europe is to very carefully differentiate between the industrial policy measures that are going to accelerate Europe's transformation, the green transition, and the digital transition, and do it with less distortion for Europe's engagement with the rest of the world.
And what are some measures that may be more counterproductive, they may bring more negativity. At the fund, we did number crunching. How high is the cost of trade distortions?
Well, it can be anywhere between 0.2% and 7% of global GDP over the next years. Choices we make would define where we fall in this range. Clearly, that is an understandable trend for national security and for the security of supply chains to take measures that were not on the table 15 years ago.
But how do you shape your policy? What example you set for others would define how costly fragmentation is.
Euronews: The Volkswagen workers' cuts here in Germany are a worrying trend and signs that the country is becoming deindustrialised. What can be done in Europe to move away from this trend?
Georgieva: Well, the three things that matter for Europe to remain competitive are: one, accelerate the transformation of your economies. It is paramount that R&D (research and development) is not fragmented in Europe. It can provide an impulse for the European economy to step into the sectors that are of today and of the future.
Two: demography. Europe is ageing. And if you want to have the labour force for today's and tomorrow's industries, then Europe needs to think about the best way to achieve it.
There are still places where women are not fully integrated into the labour force, including here in Germany. We know that there is a very healthy debate around migration. Well, obviously, if you have a big shortage of labour, you have to think of regulating the migration flow.
And three: it is very, very important for Europe to look outside and measure itself against the most dynamic places on the planet. Don't take your place in the world for granted. There are other dynamic places aligned with them. I think of ASEAN, I actually think of the Gulf countries. So think of those that can help you achieve this dynamism that Europe obviously needs to be competitive.
Euronews: With the German election coming up next year, what impact does a rise on the far right have for have on economies?
Georgieva: What we have seen is not a European phenomenon, it's a global phenomenon. And we need to honestly assess why is this happening. And it is happening for two reasons.
One, during the golden age of globalisation, the world has been a bit complacent about who wins and who loses. Yes, the world benefited tremendously, we have 1.5 billion people lifted out of poverty.
The standard of living has gone up. However, communities that were left out where jobs disappeared as a result of a more integrated economy have not been attended to enough, neither here nor in the United States nor in other advanced economies. So, if we are to correct this, it has to be done with the strength of economic policies that provide fairer opportunities to everyone.
When I think about Europe more specifically, the engine of the European economy ought to work a bit harder. And I'm going back to my point. Europe needs to grow faster. It needs more dynamism because then there is excitement. There are opportunities. So, capital markets, union banking, union removing red tape, reducing administrative burden, and unleashing the potential of Europe.
Euronews: As you start your second term as managing director, what is one instance that you are proud of that you've achieved over the past five years? And what is perhaps a lesson that you have learned?
Georgieva: The biggest achievement of the fund over the last five years has been the rapid and sizable action we have taken in response to the shocks we have experienced.
We have injected $1 trillion (€914bn) in liquidity and reserves. $650 billion (€595bn) through a special drawing rights allocation, which does not increase debt but increases reserves and liquidity in our members. We have set new records in the number of countries we serve, over a hundred, since COVID hit.
What is the most important lesson I learned? We live in a more shock-prone world. Countries with strong fundamentals, sound policies, good institutions, rule of law. They withstand these shocks better.
So as I think of my second term, my main goal is to help our members build resilience, capture the opportunities of this tremendous technological transformation we live through, but also manage the risks that come with artificial intelligence that come with this rapid change we live in.
Euronews: Do you also have an assessment of the direction taken by Ursula Von der Leyen regarding the new European Commission?
Georgieva: The importance of the new Commission and how it leads Europe cannot be overstated because we are in this very rapidly changing world. Europe has to move much faster so as not to fall behind.
I think the attention that has been given first and foremost to European competitiveness and to more dynamic development to more and better quality growth in Europe is exactly the right one.
Von der Leyen will live, as we all will, through surprises. We don't know what the next shock around the corner will be. But I think that focus on European strength, on completing the single market and on giving the Europeans a sense of confidence. Europe is wonderful.
The European people have very good values and they can lead the world in a way. I am sure President Von der Leyen would pour her heart and bring her Commission to ensure that this happens. I wish them all the very best. As a former Commissioner, from my heart, the very best of luck to the commission.
Euronews: Following on from that, do you think that the EU should follow Draghi's report?
Georgieva: I think the EU will, of course, reflect on the report, and there will be implementation discussions. Europe has to take action to strengthen its competitiveness. Just look at what is happening right now.
The US outperforms Europe in terms of productivity. The US has already exceeded its pre-COVID trajectory. And when you look at the reasons for that, some are just location.
They have energy security, which Europe is building to achieve through investment in the Green Deal. The second reason is innovation in the United States, which moves much faster from idea to a company, to dominance in the world. Europe has to do more to catch up in that regard.
And when I look at the European attitudes, I think Europeans have to believe more in themselves And speaking of being clear, we are a force and we are a force for good, more self-confidence.
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