Following an event hosted at Georgetown University by the BMW Center for German and European Studies, the Georgetown Journal of International Affairs sat down with Jose Viñals, the Financial Counselor and Director of the Monetary and Capital Markets Department at the International Monetary Fund, to discuss the supranational organization’s view on the world economy moving into 2015.
GJIA: What risks and challenges do you anticipate for the global economic recovery this year?
JV: I see three main risks and challenges. The first is dealing with the impact of asynchronous monetary policies. It is uncertain how these policies will play out and what effect they will have on emerging markets that will continue to be affected by the drop in oil prices. If interest rates are higher in the United States, and if the dollar continues to strengthen, there are a number of consequences for the rest of the world. Growth, for example, should be positively impacted, as other countries will benefit from an expanding U.S. economy and an increase in American imports. Yet at the same time, a stronger U.S. dollar and higher interest rates may be a challenge for emerging markets that have high debts, especially if those debts are denominated in dollars and not sufficiently hedged. A second challenge has to do with growth in Europe and Japan. If there is no good news coming from these regions concerning their growth and rates of inflation, the risk of recession or possibly deflation increases. That’s neither good for these economies nor for the rest of the world because of potentially rippling confidence effects. Third and finally, geopolitical and political uncertainty in Ukraine, the Middle East, and now Europe is a threat to the global economic recovery. All of these predicaments need to be resolved wisely in order to avoid further affecting confidence in the global economy.
GJIA: Given the fragmented nature of the European Union, how effective do you think the recently announced European Central Bank (ECB) quantitative easing program will be?
JV: The monetary policy actions by the ECB are essential to fight the risk of deflation, re-anchor inflation, and realign inflationary expectations in Europe with the mandate of the ECB. However, these measures need to be complemented by actions taken on the part of national governments. Moving forward, European countries will need structural reforms to increase the growth potential of their economies and new fiscal policies, in particular investment in infrastructure, to help stimulate demand in the short term and supply in the long term. So while the recently enacted monetary policy is necessary to the financial stability of Europe, it will not by itself restart growth in the region.
GJIA: Abenomics hasn't been as successful thus far as many had hoped. What should Japan do in order to move toward sustainable growth and financial stability in the future?
JV: There are three key tools that the Japanese government has at its disposal to improve the economy: monetary policy, fiscal policy, and structural reforms. The Japanese have already heavily invested in monetary policy but monetary policy alone cannot be enough. They are currently in the process of implementing new fiscal policies, and they have not yet enacted significant structural reforms, perhaps the most important stimulus for their economy. The IMF hopes that with the new political situation in Japan, structural reforms will be on the table. All three economic engines must be functioning in order to get the plane of growth to fly at the right speed.
GJIA: What implications might declining growth rates in China have for the global economy?
JV: Let me say first that the growth rate in China is now much more consistent with our estimates of a sustainable growth path. The country’s growth rates in the past few decades of about nine or ten percent are no longer sustainable. In our view, it’s better to grow steadily around potential than to grow very quickly at unsustainable rates and risk a sharp slowdown down the road. China, which is re-balancing internally, should continue with its process of reforms in its real economy and financial system. These actions will put China’s economic prospects and future financial stability on an even more solid footing and will help increase its growth potential. That’s key for China, and China is key for the world.
GJIA: With the extraordinary volatility of oil prices over the past few months, what are your predictions for the energy sector in 2015?
JV: As of today, futures markets seem to imply that oil prices will rebound from present levels toward the $60 to $70 price range. While that may be true, it is also possible that sometime in the future there may be news that alters the future course of oil prices. For now, all that we know with certainty is that oil prices have dropped to low levels. It is uncertain how long they will stay there, but the longer they do, the more important the "oil dividend" will become for the global economy.
Jose Viñals is the Financial Counselor and Director of the Monetary and Capital Markets Department at the International Monetary Fund. Previously, he was the Deputy Governor of the Central Bank of Spain. He has also served as Chairman of the European Central Bank International Relations Committee, and Chairman of Spain’s Deposit Guarantee Funds. In addition, he has been a member of the Bank for International Settlements (BIS) Committee on the Global Financial System, the European Central Bank Monetary Policy Committee, and the high-level group appointed by the President of the European Commission to examine economic challenges in the European Union. He was also a member of the European Union Economic and Financial Committee and a Board Member of the Spanish Securities Authority, the Comisión Nacional del Mercado de Valores.
Mr. Viñals was interviewed by Elaine Li and Jacob Haberman on 28 January 2015 in Washington D.C. This interview has been edited for length and clarity.