Keynote SPEECH by Fabio Panetta, Member of the Executive Board of the ECB, at the 50th anniversary of the Associazione Italiana per l’Analisi Finanziaria (by videoconference) |
Introduction
I would like to start by thanking the Italian Association for Financial Analysts (Associazione Italiana per l’Analisi Finanziaria, AIAF) for inviting me to speak on the occasion of its 50th anniversary.[1] Promoting high standards in financial analysis is vitally important for guaranteeing the development and the integrity of markets, to ensure they can serve the real economy. The work performed by the AIAF over the past 50 years in the fields of research, training and reporting and its strong ties with financial operators and savers have helped bring Italian standards in line with international best practice.
The AIAF’s ability to keep pace with innovation is clearly reflected in its commitment to sustainable finance, the subject of my speech today.
In recent years, addressing climate change and the transition to a sustainable development model more broadly have become increasingly important. Under the responsible financing approach, companies still aim to create value while taking into account principles such as fair compensation for employees, respect for ethical and social values and environmental protection. Sustainable finance – also known as responsible finance – incorporates environmental, social and governance (ESG) principles into the decision-making processes of financial operators. It represents an important change designed to ensure the financial system is used for the benefit of our collective well-being; in doing so, it has become a vital tool for addressing climate-related risks, which have become increasingly prominent due to the emergence of irreversible damage to the environment (such as the impact on biodiversity and temperature levels).
In my speech today, I will consider the debate on sustainable development and climate-related risks in the light of the shock caused by the coronavirus (COVID-19) pandemic. I will then examine what can be done to strengthen the impact of responsible finance on the economic system and the ECB’s role in tackling climate-related risks.
Sustainable development and climate-related risks in the time of the pandemic
The challenge to find a sustainable development path which meets the needs of present generations without compromising the well-being of future generations is not new. The German economist Hans Carl von Carlowitz was already thinking about how resources could be used sustainably as early as the 18th century.[2]
But it was not until the 1970s and the publication of The Limits to Growth[3] report that the sustainability of the growth model gained prominence as an item on European and international policy agendas.
Initial analyses of sustainability focused on the risk of non-renewable natural resources being depleted. This focus has gradually widened to include the extent to which our natural systems can cope with the effects of climate change.
The idea that well-being must take into account factors such as equity – within and across generations – and sustainability was brought to the fore in the 2030 Agenda for Sustainable Development, launched by the United Nations in 2015. In the same year, the Paris Agreement[4] recognised the need to speed up the economy’s reduction of CO2 emissions and to protect the environment for the benefit of both current and future generations.
In recent months the pandemic shock has caused global economic, social and environmental vulnerabilities to resurface, exacerbating them even further and increasing the risk of greater income inequality and a widening of the wealth gap. The pandemic has also emphasised the urgent need to address the problems that are affecting people’s well-being.
The UN estimates that the number of people living in poverty worldwide will increase by between 40 and 60 million as a result of the pandemic, undoing the progress made in recent years.[5] We may also see an increase in gender and generational discrimination owing to the severe impact the pandemic is having on women and young people.
Low-income countries are not the only ones affected by these problems. The pandemic could also bring about an increase in poverty[6], social exclusion, inequality and challenges to achieving universal energy access in advanced economies, many of which were already a long way from reaching the 2030 Agenda[7] goals before the crisis struck (Chart 1).

Chart 1
Distances of OECD countries from 2030 Agenda goals

Notes: The chart provides the distribution of the distances (expressed in standard units) of OECD countries from the 17 goals. The blue diamonds show the median distance for OECD countries. Box boundaries show the first and third quartiles of the distribution of countries’ performances, and the whiskers show the 10th and 90th percentiles. See here for detailed metadata.

These worrying developments, which undermine the foundations of inclusive growth, are accompanied by environmental issues, in particular climate change. Natural disasters that occurred in 2018 caused more than 20,000 deaths worldwide and deprived 29 million people of livelihoods, resulting in damages estimated at USD 23 billion. Together with 2016, 2020 was the warmest year on record. Climate scenarios predict that global temperatures will continue to rise over the course of the 21st century, resulting in more frequent and more intense extreme natural events, with negative implications for ecosystems and public health.
Economic activity is both a cause and a victim of climate change.
It is a cause for example due to the use of fossil fuels for energy: three-quarters of greenhouse gas emissions are generated from fossil fuel combustion. Climate change has also had an impact on human activities: rising average temperatures, with pronounced fluctuations, affect all sectors, particularly those more susceptible to natural events, such as agriculture. Frequent and intense heatwaves and hydrogeological phenomena can have significant economic consequences, while gradually rising sea levels threaten coastal communities throughout the world.
It is clear that we need to ensure the sustainability of our development model, starting by gradually moving away from the use of fossil fuels.
In recent months, the steps taken to limit the consequences of the pandemic have temporarily slowed the rise in emissions. According to NASA, between February and May 2020 atmospheric CO2 concentrations fell compared to pre-crisis levels to a level consistent with the achievement of the targets set by the Paris Agreement.[8]
But this will only be a temporary improvement unless climate policy changes course, particularly if there is not an adequate carbon pricing system that penalises emissions.[9] The challenge facing us now is how to support general well-being while keeping emissions at levels that comply with the Paris Agreement.
Monetary and fiscal authorities are responding by introducing decisive policies designed to revive development. But we cannot just limit our efforts to returning things to how they were before. We must seize this opportunity to modernise our economy, reduce social and environmental vulnerabilities and bring about change that makes development sustainable.
The contribution of responsible finance
In the financial world, interest in sustainable growth has long been limited to a small group of specialist operators.[10] But things have changed in recent years.
The Paris Agreement explicitly recognised the vital role of the financial system in promoting responsible development.
Since 2015 ESG investment funds have increased the total assets they manage by over 170%. Between January and October 2020, this category of funds in Europe saw net inflows of more than €150 billion, nearly 80% more than in the same period the previous year.[11] According to market operators, this trend is set to continue.[12]

Chart 2
Euro area: assets of global ESG funds by asset class (left) and distribution of holdings across euro area sectors (right)USD billions (left); percentage (right)

Notes: The pie chart on the right is based on a sample of 1,076 ESG funds domiciled in the euro area, comprising 554 equity funds, 262 bond funds and 216 mixed funds. Mixed funds are classified as equity or bond funds if the respective share of equity or bond investments exceeds 50%. ICPFs: insurance corporations and pension funds; IFs: investment funds.Sources: Bloomberg Finance L.P. and ECB report (left); Bloomberg Finance L.P., Refinitiv, ECB securities holdings statistics per sector and ECB calculations (right).

This change of pace primarily reflects the impetus coming from the authorities at global level. I have already mentioned the UN’s 2030 Agenda and the Paris Agreement. But awareness of social and environmental issues among young people, who are less inclined than the generations before them to separate consumption and investment decisions from sustainability-related issues, has also had an impact.[13]
According to the UN, implementing the 2030 Agenda will require total investment of between USD 5 to 7 trillion per year.[14] The European Commission has also estimated that in order for the EU to meet its 2030 climate target, new investment of up to €260 billion per year will be required over the next decade.[15]
Whether investment programmes of this scale can be implemented will largely depend on the cost and availability of financial resources. The lower cost of capital compared with traditional investments – also referred to as the green premium – could encourage the launch of new sustainable projects. However, empirical analyses show that this premium would be small at best.[16] It is therefore unrealistic to imagine that the huge volume of investment needed to ensure sustainable development can take place without the involvement of the public sector, for example in order to raise the price of coal by strengthening the emissions trading system[17] or to support research and development of alternative energy sources.[18]
In order to boost the contribution made by sustainable finance, the financial instruments offered to investors must be trustworthy and easy to understand. Lenders also need to be able to assess whether investment projects are consistent with their own financial and non-financial objectives.
There needs to be detailed information about whether investments meet sustainability criteria. At the moment, the data available are scarce and of poor quality – for example, the ESG ratings of individual companies produced by a range of analysts are based on different methods and are poorly correlated (Chart 3).[19] Here too, public sector involvement, in particular effective regulation, is necessary.
The European Union is leading the way internationally in terms of regulating sustainable finance. But further progress would be welcome, also in view of the launch of the European Green Deal[20] and the European Commission’s soon-to-be-published renewed sustainable finance strategy.
The review of the Non-Financial Reporting Directive could result in significant progress being made[21] by expanding the range of companies subject to sustainability reporting requirements, establishing common assessment criteria and ensuring an appropriate degree of data granularity. Empirical evidence indicates that disclosure makes firms pay closer attention to sustainability without worsening their performance.[22]

Chart 3
Correlation of environmental scoring performance by Bloomberg and Refinitiv

Notes: The Bloomberg and Refinitiv environmental scores give values between 0 and 100, whereby a higher value indicates a better performance in terms of environmental variables. Sources: Bloomberg, Refinitiv EIKON and ECB own reports.

There is a need for the definitive launch of the classification system (or taxonomy) of sustainable activities[23], planned for 2022. The use of this tool by analysts, banks and companies will require further steps, such as approving delegated acts and establishing guidelines.
The new regulatory framework will need to offset investors’ information requirements against the need to avoid overly complex and burdensome transparency obligations for issuers, particularly small and medium-sized ones.[24]
Lastly, the development of sustainable finance requires global cooperation, also considering that around 90% of the global emissions are produced outside Europe. Coordination is necessary in order to adopt a common set of rules and practices for taxonomies and non-financial reporting criteria, and to establish procedures to prevent opportunistic behaviour and regulatory arbitrage. This year’s G20 presidency provides Italy with a unique opportunity to put these issues at the top of the international agenda.[25]
What is the ECB’s role?
In recent months the ECB has launched a reflection process to identify policies through which it can contribute to the climate transition in full accordance with its mandate under EU law.[26]
Article 127 of the Treaty on the Functioning of the EU states that the primary objective of the ECB is to maintain price stability. The Treaty also states that, as a secondary aim, the ECB shall support the achievement of the EU’s objectives. And Article 3 of the Treaty includes sustainable development among these objectives.
The monetary policy stance has at best only a negligible impact on environmental risks. This is due to both its very different time horizon compared with climate change[27] and the fact that it cannot target individual sectors. However, the economic and monetary analysis that underpins the monetary policy stance should also take into account the shocks caused by climate change to both conjunctural and structural developments.[28]
The ECB can contribute to environmental policies in the implementation of monetary policy – what we refer to as the operational framework. We have already taken steps in this direction, for example by including sustainable finance instruments – the sustainability-linked bonds – among the collateral that can be used in refinancing operations.[29] In addition, to ensure that it remains financially sound, the ECB has to protect its balance sheet from the financial risks caused by climate change that are not correctly priced by the markets.[30] By performing its own analysis of these risks on the basis of rigorous methodologies, the ECB can contribute to the accurate valuation of these climate-related risks and promote awareness among investors, thereby helping to combat climate change. These issues are currently being considered as part of our monetary policy strategy review.
But it is not just monetary policy that is affected. Climate change has an impact on the overall stability of the financial system. The most vulnerable intermediaries are those that operate with long time horizons and are exposed to the consequences of extreme events, such as insurance companies. We are currently defining models that could be used to measure the systemic risks caused by climate change, including through specific stress analyses.
ECB Banking Supervision – the ECB’s supervisory arm – has also recently published its expectations on how banks should manage climate and environmental risks in their balance sheets. Looking ahead, this could then influence banks’ capital and public disclosure, increasing awareness among intermediaries and investors of these risks.[31]
Lastly, the ECB is actively involved in European and international initiatives aimed at improving information on the environmental impact of companies and intermediaries.
Conclusion
Advanced economies have long been characterised by a high level of savings and insufficient investment. Productivity growth is subdued, while interest rates and inflation are at historically low levels.
The pandemic shock has squeezed the spending capacity of households and businesses and caused widespread uncertainty, accentuating these trends. Exiting the crisis will require prolonged support from economic policies – both monetary and fiscal – and a significant increase in productive investment.
Sustainable investment projects can play a crucial role in helping to reabsorb excess savings and raise growth potential, while also setting out a growth path that reduces social vulnerabilities and counteracts climate and other environmental risks.
The recovery and resilience plans that European countries are being asked to prepare so that they can access the Next Generation EU funds are an opportunity to relaunch growth, steering it to a sustainable path.
If used wisely – to increase human capital, to invest in technology and to protect the environment – these funds can help us transition from a crisis with dramatic implications to an opportunity for progress. We need to be bold and forward-looking in seizing this opportunity and do so in a timely manner.
Responsible finance can play an important role in reconciling development with environmental, ethical and social values. The next European strategy on sustainable finance provides an opportunity to align financial flows with these values.
The ECB has started to reflect on how it can contribute to responsible development. A central bank that is responsive to the needs of citizens – both now and in the future – has a duty to be mindful of the demands of sustainable development in order to ensure stability in all its forms: first and foremost monetary stability, but financial, environmental and social stability too.
Compliments of the European Central Bank.
The post Speech | Sustainable finance: transforming finance to finance the transformation first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

A new US president taking office represents an opportunity to reset transatlantic relations. Find out what the EU is offering to work together on.
On 20 January, the day of Biden’s inauguration, MEPs debated the political situation in the US. They also welcomed the new president as an opportunity for Europe to strengthen EU-US ties and tackle common challenges and threats to the democratic system.
Europe and America have traditionally always been allies, but under Donald Trump the US has been acting more unilaterally, withdrawing from treaties and international organisations.
With Joe Biden taking over the reins from 20 January, the EU sees it as an opportunity to relaunch cooperation.
On 2 December 2020, the European Commission put forward a proposal for a new transatlantic agenda allowing the partners to work together on a variety of issues. The Council also reaffirmed the importance of the partnership in its conclusions on 7 December. Parliament is also looking forward to closer cooperation. On 7 November, Parliament President David Sassoli tweeted: “The world needs a strong relationship between Europe and the US – especially in these difficult times. We look forward to working together to fight Covid-19, climate change, and address rising inequality.”
Both the US and the EU have much to gain from closer ties, but many challenges and differences remain.
Coronavirus
Although Covid-19 poses a global threat, Trump still opted to withdraw the US from the World Health Organization. The EU and the US could join forces on funding the development and distribution of vaccines, test and treatment as well as working on prevention, preparedness and response.
Climate change
Together the EU and the US could push for ambitious agreements at this year’s UN Summits on Climate and Biodiversity, cooperate on developing green technologies and jointly design a global regulatory framework for sustainable finance.
Technology, trade and standards
From genetically modified food to beef treated with hormones, the EU and the US have had their share of trade disputes. However, both have much to gain from removing barriers. In 2018 Trump imposed tariffs on steel and aluminium, which led to the EU to impose tariffs on American products. Biden coming in as president is another chance for constructive talks.
The EU and the US could also collaborate on reforming the World Trade Organisation, protecting critical technologies and deciding new regulations and standards. The US is currently blocking the dispute resolution mechanisms established under the organisation.
The Commission has also offered cooperation on challenges linked to digitalisation, such as fair taxation and market distortions. As a lot of leading digital companies are American, the issue of how to tax them could be sensitive.
Foreign affairs
The EU and the US also share a commitment to promoting democracy and human rights. Together they could work on strengthening the multilateral system. However, in some cases they disagree on the best way to proceed.
They both face the challenge of finding the best way to deal with China. Under Trump the US has been a lot more confrontational, while the EU focussed more on diplomacy. In December 2020 EU negotiators agreed a Comprehensive Agreement on Investment with China. The deal is currently being scrutinised by the Parliament. Its consent is needed for it to enter into force. The new American leadership represents an opportunity to coordinate their approaches more and better.
Iran is another topic on which the EU and the US have taken different approaches. Both the US and the EU were involved with the Iran nuclear agreement to avoid the country being able to pursue a nuclear weapon until Trump withdrew the US from it in 2018. The start of a new US president could be an occasion for a common approach.
The post New US president: how EU-US relations could improve first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today the Commission is proposing additional safeguards and requirements for international travellers into the EU. New coronavirus variants and the volatile health situation worldwide call for further action to ensure that any travel to the EU takes place safely. To reflect the latest scientific advice, the Commission is also proposing updated criteria taking into account the testing rate, testing positivity and detection of variants of concern when deciding on the application of restrictions on non-essential travel to the EU to a specific non-EU country.  
Additional safeguards on travel from outside the EU 

Member States should introduce additional measures to ensure that travel into the EU takes place safely. This concerns those travelling to the EU for essential reasons, EU citizens and long-term residents as well as their family members, and those travelling from countries for which the non-essential travel restriction was lifted: 

Mandatory testing before departure: Member States should require travellers to have undertaken a negative COVID-19 PCR (polymerase chain reaction) test before departure, and submit a proof of such a negative test. The test should be taken at the earliest 72 hours before departure; EU citizens, residents and their family members should have the possibility to take the test after arrival. Mandatory testing can be combined with a requirement of self-isolation, quarantine and contact tracing as well as additional testing as needed for a period of up to 14 days, provided that the Member State imposes the same requirements on its own nationals when travelling from the same non-EU country. Exceptions could be decided for some categories of essential travellers if such requirements would impede the very purpose of the travel. In particular, transport and cross-border workers should be exempted from the requirement to present a negative PCR test and may only be requested to present a negative Rapid Antigen Test on arrival. There are also specific rules for aircrew.   

Stricter measures to address virus variants of concern: For trips originating from countries where a variant of concern of the virus has been detected, Member States should systematically impose safety measures such as self-isolation, quarantine and contact tracing for a period of up to 14 days. In particular, travellers should be required to quarantine and take additional tests upon or after arrival.  

Common European Passenger Locator Form: Member States should require those entering the EU to submit a Passenger Locator Form in accordance with applicable data protection requirements. A common European Passenger Locator Form should be developed for this purpose.  

Updated criteria 

When considering whether to lift restrictions on non-essential travel to the EU from a non-EU country, the Council should consider the case notification rate, the testing rate, the test positivity rate, as well as the incidence of variants of concern. The following criteria should apply, reflecting the most recent scientific advice: 

14-day cumulative COVID-19 case notification rate (i.e. total number of newly notified COVID-19 cases per 100 000 population in the previous 14 days at regional level) not higher than 25; 

Testing rate (i.e. number of tests for COVID-19 infection per 100 000 population carried in the previous seven days) superior to 300; 

Test positivity rate (i.e. percentage of positive tests among all tests for COVID-19 infection carried out in the previous seven days) not higher than 4%; 

Nature of the virus present in the country, in particular whether variants of concern of the virus have been detected.

Member States should also continue to take account of the reciprocity granted to EU countries.  
In addition to these updates on travel from outside the EU, the Commission is also presenting today a proposal to update the Council Recommendation coordinating measures affecting free movement within the EU.  
Next steps 

It is now for the Council to consider this proposal. A first discussion is scheduled in the Council’s integrated political crisis response (IPCR) meeting taking place this afternoon. Once the proposal is adopted, it will be for Member States to implement the additional safeguards it sets out and review the list of non-EU countries from where restrictions should be lifted in light of the updated criteria. The Council should continue reviewing the list of countries exempted from the travel restriction every 2 weeks, and update it where relevant.  
Background
A temporary restriction on non-essential travel to the EU is currently in place from many non-EU countries. The Council regularly reviews, and where relevant updates, the list of countries from where travel is possible, based on the evaluation of the health situation. The Council last updated that list on 17 December 2020. 
This restriction covers non-essential travel only. Those who have an essential reason to come to Europe should continue be able to do so, subject to the safeguards outlined in the proposal. That includes categories of travellers listed in Annex II of the Council Recommendation. EU citizens and long-term residents as well as their family members should also be allowed to enter the EU. Today’s proposal does not change the categories of travellers exempted from the restriction.  
To assist Member States in consistently applying the restriction, the Commission issued on 28 October 2020 guidance on categories of persons considered to be essential travellers and therefore exempted from restrictions. 
On 19 January, ahead of the meeting of European leaders on a coordinated response to the coronavirus crisis, the Commission set out a number of actions needed to step up the fight against the pandemic.  
At their videoconference meeting of 21 January 2021, EU Heads of State or Government acknowledged that the Council may need to review its recommendations on non-essential travels into the EU in light of the risks posed by the new virus variants. Following the meeting, President Ursula von der Leyen announced that the Commission would propose additional safety measures for essential travel from outside the EU.   
Today’s proposal updates the Council recommendation on the temporary restrictions on non-essential travel into the EU. 
The latest information on the rules applying to entry from non-EU countries as communicated by Member States are available on the Re-open EU website.  
Compliments of the European Commission.
The post Coronavirus: EU Commission proposes additional safeguards on travel from outside the EU and updated criteria for applying travel restrictions first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Governor Lael Brainard at the Inaugural Mike McCracken Lecture on Full Employment Sponsored by the Canadian Association for Business Economics (via webcast) |
I want to thank the Canadian Association for Business Economics for inviting me to join you today, particularly president Bonnie Lemcke and past president Armine Yalnizyan. It is a pleasure to be here with Carolyn Wilkins.
I am honored to deliver the inaugural Mike McCracken Lecture on Full Employment.1 Widely known for his critical contributions in bringing computer modeling to Canadian economic forecasting, Mike McCracken is perhaps best known for his tireless advocacy that “lower unemployment remains the most important goal for the economy,” which is particularly resonant for me, along with his emphasis on thinking critically and expansively about full employment.2 A similar theme was highlighted by community and labor representatives as well as educators at our Fed Listens events, and it is now reflected in the Federal Reserve’s new monetary policy framework.3
Lifting the lives of working people is at the heart of economic policymaking. The deep and disparate damage caused by the pandemic, coming just over a decade after the financial crisis, underscores the vital importance of full employment, particularly for low- and moderate-income workers and those facing systemic challenges in the labor market.
Monetary Policy Framework
Two years ago, the Federal Reserve began an in-depth review of its monetary policy framework.4 The design of our review process incorporated features from the Bank of Canada’s quinquennial renewal of its inflation-control framework agreement, such as input from stakeholders and the focused research undertaken by staff members, academics, and outside experts.
Our review was prompted by changes in key long-run features of the economy: The recognition that price inflation is much less sensitive to labor market tightness than historically—that is, a flat Phillips curve; that the equilibrium interest rate is much lower than in the past; and that trend underlying inflation has moved somewhat below 2 percent. These developments reduce the amount we can cut interest rates to buffer the economy, weaken inflation expectations, and could lead to worse employment and inflation outcomes over time if not addressed.
In response, we have made changes to monetary policy that can be expected to support fuller and broader-based employment than in earlier recoveries, improving opportunities for workers who have faced structural challenges in the labor market.5 Whereas our previous strategy had been to minimize deviations from maximum employment in either direction, monetary policy will now seek to eliminate shortfalls from maximum employment. In other words, the new framework calls for policy to address employment when it falls short of its maximum level, whereas the previous framework called for policy to react when employment was judged to be too high as well as too low. The new monetary policy framework also eliminates the previous reference to a numerical estimate of the longer-run normal unemployment rate and instead defines the maximum level of employment as a broad-based and inclusive goal for which a wide range of indicators are relevant.
Additional changes address the persistence of below-target inflation and the decline in the equilibrium interest rate. Research and experience indicate that persistent low equilibrium interest rates increase the frequency and duration of periods when the policy rate is pinned close to zero, unemployment is elevated, and inflation is below target.6 As a result, actual inflation and inflation expectations will tend to be biased below the 2 percent target, further eroding policy space and exacerbating the effects of the lower bound, risking a downward spiral for actual and expected inflation. From the time of the Federal Open Market Committee’s (FOMC) announcement of a 2 percent inflation objective in January 2012 through the most recent data in November, monthly readings of 12-month personal consumption expenditure (PCE) inflation have averaged 1.4 percent and have been below 2 percent in 95 out of the 107 months.
To address the downward bias, the new framework adopts a flexible average inflation-targeting strategy (FAIT) that seeks to achieve inflation that averages 2 percent over time in order to ensure longer-term inflation expectations are well anchored at 2 percent. Under a FAIT strategy, appropriate monetary policy aims to achieve inflation moderately above 2 percent for some time to make up for shortfalls during a period when it has been running persistently below 2 percent.7
These changes could have a beneficial effect on the robustness of employment as well as the economy’s potential growth rate. In current circumstances, where a strong labor market can be sustained without the emergence of high inflation, the conventional practice of reducing policy accommodation preemptively when unemployment nears its estimated longer-run normal rate is likely to lead to an unwarranted loss of opportunity for many workers.8 For instance, the labor market healing that took place after the unemployment rate reached the 5 percent median Summary of Economic Projections estimate of the longer-run normal unemployment rate, from the fourth quarter of 2015 until the fourth quarter of 2019, included the entry of a further 3-1/2 million prime-age Americans into the labor force, a movement of nearly 1 million people out of long-term unemployment, and opportunities for 2 million involuntary part-time workers to secure full-time jobs.9 The gains in employment may have come sooner and been greater if the new monetary policy framework had been in place throughout the previous recovery.
The new policy approach, by avoiding the need to tighten preemptively, could support labor market conditions that help to reduce persistent disparities. This could, in turn, boost activity and increase potential growth by drawing individuals from groups facing structural challenges into more productive employment.10 Research and experience suggest the groups that face the greatest structural challenges in the labor market are likely to be the first to experience layoffs during downturns and the last to experience employment gains during recoveries.11 At the October 2019 Fed Listens event, Amanda Cage, who now heads the National Fund for Workforce Solutions, observed, “What we see is huge disparities in what unemployment looks like for neighborhoods.”12 She highlighted the challenges facing those communities where unemployment remains at or above 15 percent even when unemployment falls below 4 percent at the national level.
Recent research indicates that additional labor market tightening is especially beneficial to disadvantaged groups when it occurs in already tight labor markets, compared with earlier in the labor market cycle.13 For example, the gap between the Black and White unemployment rates fell to an all-time low of 2 percentage points in August 2019—well below its average of 6.3 percentage points.14
Outlook and Policy
Late last year, the Committee integrated the framework changes into its monetary policy. The September 2020 FOMC statement adopted outcome-based forward guidance for the policy rate tied to shortfalls from maximum employment and 2 percent average inflation, and the December 2020 FOMC statement adopted outcome-based forward guidance for asset purchases. Our monetary policy approach should support a stronger, broader-based recovery from the deep and disparate damage of COVID-19.
The guidance indicates that the Committee expects the policy rate to remain at the lower bound until employment has reached levels consistent with the Committee’s assessments of maximum employment, and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. The forward guidance reflects the important lesson that, with a significantly smaller scope to cut the policy rate than in past recessions, the Committee can provide needed accommodation by making forward commitments on the policy rate that are credible to the public.15 The outcome-based forward guidance communicates how the policy rate will react to the evolution of inflation and employment. It makes clear that the timing of liftoff will depend on realized progress toward maximum employment and 2 percent average inflation.
The FOMC statement notes that monetary policy will remain accommodative after liftoff in order to achieve “inflation moderately above 2 percent for some time so that inflation averages 2 percent over time.”16 Even after economic conditions warrant liftoff, changes in the policy rate are likely to be only gradual to support the inflation makeup strategy and maximum employment.
Market expectations appear to have adjusted in response to the changes in the FOMC’s approach. The Survey of Market Participants conducted by the Federal Reserve Bank of New York indicates a shift in expectations following the release of the new monetary policy framework.17 The median expected rate of unemployment at the time of liftoff moved down from 4.5 percent in the July survey, before the release of the framework, to 4.0 percent in the September and subsequent surveys, following the release of the new framework. Similarly, the median level of 12-month PCE inflation anticipated at the time of liftoff rose from 2 percent in the July survey to 2.3 percent in the September survey and beyond, following the introduction of FAIT.18
The forward guidance adopted in December expands the goals of the asset purchases beyond market functioning by establishing qualitative outcome-based criteria tied to realized progress on our employment and inflation goals. This approach integrates the forward guidance on the policy rate and on asset purchases, rather than establishing distinct criteria. The December guidance clarifies that the pandemic asset purchases will continue at least at the current pace until substantial further progress is made on our employment and inflation goals. In assessing substantial further progress, I will be looking for sustained improvements in realized and expected inflation and will examine a range of indicators to assess shortfalls from maximum employment.
If we look ahead, effective vaccines and additional fiscal support are important positive developments, but the near-term outlook is challenging due to the resurgence of the pandemic, and the economy remains far from our goals. The most recent spending indicators point to a considerable loss of momentum late in the fourth quarter. Sales of consumer durable goods—such as furniture, electronics, and appliances—declined in November, after surging since the spring.19 The rise in cases in November and the associated social distancing resulted in a decline in already low services consumption, with sales at restaurants and bars falling by 4 percent, the largest drop since April. Continued social distancing over the cold winter months is likely to generate a significant drag for spending on services that require personal contact. Additionally, state and local income and sales tax and gaming and energy-related revenues remain depressed, and the most recent payrolls report indicates that state and local governments are having difficulty sustaining employment levels as the virus persists.
Inflation remains very low; core PCE inflation ran at 1.4 percent over the 12 months ending in November. Even though some of the survey-based measures of inflation expectations have picked up recently, they still remain close to the lower end of their historical ranges. Market-based measures of inflation compensation have also picked up. While disentangling inflation expectations from liquidity and term premiums is imprecise, staff models attribute a significant portion of the movement in inflation compensation to an increase in expectations, bringing them up from the lows seen in March but still below their historical averages. Inflation may temporarily rise to or above 2 percent on a 12-month basis in a few months when the low March and April price readings from last year fall out of the 12-month calculation, but it will be important to see sustained improvement to meet our average inflation goal.
The COVID-19 pandemic is exacerbating disparities, and employment remains far from our goals. Last Friday’s payroll report highlighted the effects of the resurgence of the virus, with the first overall decline in payrolls since April and a stark 498,000 decline in leisure and hospitality jobs. Overall, payroll employment is still nearly 10 million jobs below its February level. If we adjust the 6.7 percent headline unemployment rate for the decline in participation since February and the Bureau of Labor Statistics estimate of misclassification, the unemployment rate would be 10 percent, similar to the peak following the Global Financial Crisis.
The damage from COVID-19 is concentrated among already challenged groups. Federal Reserve staff analysis indicates that unemployment is likely above 20 percent for workers in the bottom wage quartile, while it has fallen below 5 percent for the top wage quartile.20 Black and Hispanic unemployment stood at 9.9 percent and 9.3 percent, respectively, in December, while White unemployment was 6.0 percent. Labor force participation for prime-age workers has declined, particularly for parents of school-aged children, where the declines have been greater for women than for men, and greater for Black and Hispanic mothers than for White mothers.
The K-shaped recovery remains highly uneven, with certain sectors and groups experiencing substantial hardship. All told, real gross domestic product likely declined by about 2-1/2 percent in 2020, with the damage concentrated disproportionately among some groups of workers and sectors as well as smaller businesses. Fortunately, fiscal support looks set to resume playing a vital role in the form of stimulus payments and extended unemployment benefits, particularly for the cash-constrained households that make up a significant fraction of the population. The additional Paycheck Protection Program financing will be a vital support for the many hard-hit small businesses facing continued revenue shortfalls and declining cash balances.
The damage would have been much greater in the absence of substantial fiscal and monetary support. The unprecedented scale and composition of fiscal support made a vital difference in replacing lost income and supporting demand in the middle of last year and is expected to do so again in the months ahead. The unprecedented speed and breadth of the monetary policy response through an expanded set of tools is supporting lower borrowing costs along the yield curve for households and businesses as well as better inflation and employment outcomes.
The outlook will depend on the path of the virus and vaccinations. While the number of new cases is high and rising, the distribution of multiple effective vaccines is under way.21 Spending on in-person services is likely to return to pre-pandemic levels only as conditions around the virus improve substantially. Most forecasts predict a significant rebound in aggregate spending this year. And there is some risk to the upside if the efficient delivery of vaccines across many jurisdictions ultimately results in a globally synchronized expansion.
We are strongly committed to achieving our maximum-employment and average-inflation goals. It is too early to say how long it will take. The Committee has stated clearly that it needs to see substantial further progress toward our goals before adjusting purchases. The economy is far away from our goals in terms of both employment and inflation, and even under an optimistic outlook, it will take time to achieve substantial further progress. Given my baseline outlook, I expect that the current pace of purchases will remain appropriate for quite some time. Of course, the outlook is highly uncertain, and forecasts are subject to revisions—a key reason why our forward guidance is outcome based and tied to realized progress on our goals.
The recovery thus far has been uneven, and the path ahead is uncertain. We remain far from our goals, with core PCE inflation only at 1.4 percent and payroll employment nearly 10 million below its pre-pandemic level. The Committee’s forward guidance will help keep borrowing costs low along the yield curve for households and businesses, improve inflation outcomes, and enable the labor market to heal, leading to a broader-based and stronger recovery. The strong support from monetary policy, together with fiscal stimulus, should turn the K-shaped recovery into a broad-based and inclusive recovery that delivers full employment, as Mike McCracken would have wished. Thank you.
Compliments of the U.S. Federal Reserve.
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460,000 counterfeit euro banknotes withdrawn from circulation in 2020, a historically low level in proportion to banknotes in circulation
About two thirds of the total were €20 and €50 banknotes
Euro banknotes continue to be a trusted and safe means of payment
All euro banknotes can be verified using the “feel, look and tilt” method

Some 460,000 counterfeit euro banknotes were withdrawn from circulation in 2020 (220,000 in the second half of the year), a decrease of 17.7% when compared with 2019. €20 and €50 notes continued to be the most counterfeited banknotes, jointly accounting for about two thirds of the total. 94.5% of counterfeits were found in euro area countries, while 2.8% were found in non-euro area EU Member States and 2.7% in other parts of the world.
The likelihood of receiving a counterfeit is very small, as the number of counterfeits remains very low compared to the over 25 billion euro banknotes in circulation. In 2020, 17 counterfeits were detected per 1 million genuine banknotes in circulation, a historically low level (see the chart below).
Low-quality reproductions are continuously withdrawn from circulation. All are easy to detect as they have no security features, or only very poor imitations of them. Ever since the first series of euro banknotes was issued, the Eurosystem – i.e. the European Central Bank (ECB) and the 19 national central banks of the euro area – has encouraged people to be vigilant when receiving banknotes. You can check your notes by using the simple “feel, look and tilt” method described in the dedicated section of the ECB’s website and on the websites of the national central banks. The Eurosystem also helps professional cash handlers ensure that banknote-handling and processing machines can reliably identify counterfeits and withdraw them from circulation.
Using counterfeits for payments is a criminal offence that may lead to prosecution.  If you receive a suspect banknote, compare it directly with one you know to be genuine. If your suspicions are confirmed please contact the police or – depending on national practice – your national central bank or your own retail or commercial bank. The Eurosystem supports law enforcement agencies in their fight against currency counterfeiting.
The Eurosystem has a duty to safeguard the integrity of euro banknotes and to continue improving banknote technology. The second series of banknotes – the Europa series – is even more secure and is helping to maintain public trust in the currency.
Number of counterfeits detected annually per 1 million genuine notes in circulation

Half-yearly figures:

Period
H2 2017
H1 2018
H2 2018
H1 2019
H2 2019
H1 2020
H2 2020

Number of counterfeits
363,000
301,000
262,000
251,000
308,000
240,000
220,000

Breakdown by denomination in 2020:

Denomination
€5
€10
€20
€50
€100
€200
€500

Percentage of total
2.3%
16.0%
36.3%
30.9%
10.3%
3.0%
1.2%

Contact:

Esther Tejedor, | e: Esther.Tejedor@ecb.europa.eu | tel.: +49 69 1344 95596

Compliments of the European Central Bank.
The post Euro banknote counterfeiting at historically low level in 2020 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Shorter-term inflation expectations largely unchanged; longer-term inflation expectations unchanged at 1.7%
Opposing revisions to real GDP growth outlook, with near-term forecasts revised down but stronger rebound envisaged thereafter
Unemployment rate expectations revised down across all horizons

Respondents to the European Central Bank (ECB) Survey of Professional Forecasters (SPF) for the first quarter of 2021 reported point forecasts for annual HICP inflation averaging 0.9%, 1.3% and 1.5% for 2021, 2022 and 2023 respectively. These were unchanged for both 2021 and 2022. Average longer-term inflation expectations (which, like all other longer-term expectations in this round of the SPF, refer to 2025) remained at 1.7%.
The expectations of SPF respondents for euro area real GDP growth averaged 4.4%, 3.7% and 1.9% for 2021, 2022 and 2023 respectively. These figures represent revisions from the previous round amounting to -0.9 percentage points for 2021 and +1.1 percentage points for 2022. Average longer-term expectations for real GDP growth were unchanged at 1.4%.
Average unemployment rate expectations stood at 8.9%, 8.3% and 7.8% for 2021, 2022 and 2023 respectively. These represent downward revisions of 0.2 and 0.1 percentage points for 2021 and 2022. Expectations for the unemployment rate in the longer term were revised down 0.2 percentage points to 7.4%.

Table: Results of the ECB Survey of Professional Forecasters for the first quarter of 2021

(annual percentage changes, unless otherwise indicated)

Survey horizon
2021
2022
2023
Longer term (1)

HICP inflation
 
 
 
 

Q1 2021 SPF
0.9
1.3
1.5
1.7

Previous SPF (Q4 2020)
0.9
1.3
–
1.7

HICP inflation excluding energy, food, alcohol and tobacco
 
 
 

Q1 2021 SPF
0.8
1.1
1.3
1.5

Previous SPF (Q4 2020)
0.8
1.1
–
1.5

Real GDP growth
 
 
 

Q1 2021 SPF
4.4
3.7
1.9
1.4

Previous SPF (Q4 2020)
5.3
2.6
–
1.4

Unemployment rate (2)
 
 
 

Q1 2021 SPF
8.9
8.3
7.8
7.4

Previous SPF (Q4 2020)
9.1
8.4
–
7.6

1) Longer-term expectations refer to 2025.
2) As a percentage of the labour force.

Contact:

Stefan Ruhkamp | e: stefan.ruhkamp@ecb.europa.eu | tel.: +49 69 1344 5057).

Compliments of the ECB.
The post Results of the ECB Survey of Professional Forecasters in the first quarter of 2021 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Criterion to judge if a country’s tax system is fair or not needs to be widened
Countries should not be removed from the blacklist if they only make symbolic tweaks
A 0% tax rate policy should automatically lead to being placed on the blacklist
List has to be formalised through a legally binding instrument by end 2021

MEPs adopted a resolution pushing for the system used to draw up the EU list of tax havens to be changed, as it is currently “confusing and ineffective”.
The EU’s list of tax havens, set up in 2017, has had a “positive impact” so far but has failed to “live up to its full potential, [with] jurisdictions currently on the list covering less than 2% of worldwide tax revenue losses”, MEPs said. The resolution, adopted in plenary on Thursday by 587 votes in favour, 50 against and 46 abstentions, calls the current system “confusing and ineffective”. It rounds up the debate held on Wednesday evening with the Council Presidency and the Commission.
MEPs propose changes that would make the process of listing or delisting a country more transparent, consistent and impartial. Criteria should be added to ensure that more countries are considered a tax haven and to prevent countries from being removed from the blacklist too hastily, they say. EU member states should also be screened to see if they display any characteristics of a tax haven, and those falling foul should be regarded as tax havens too (PARA 9).
Quote
After the vote, the Chair of the Subcommittee on Tax Matters, Paul Tang (S&D, NL) said:“By calling the EU list of tax havens “confusing and inefficient”, the Parliament tells it like it is. While the list can be a good tool, member states forgot something when composing it: actual tax havens. The truth is, the list is not getting better, it’s getting worse. Guernsey, the Bahamas and now the Cayman Islands are only some of the well-known tax havens that member states have taken off the list. In refusing to properly address tax avoidance, national governments are failing their citizens to the tune of over €140 billion. Especially in the current context, this is unacceptable.
That is why the parliament strongly condemns the recent delisting of the Cayman Islands and calls for more transparency and stricter listing criteria. However, if we focus on others, we also need to look ourselves in the mirror. The picture is not pretty. EU countries are responsible for 36% of tax havens.
Widen the scope
Parliament says that the criterion for judging if a country’s tax system is fair or not needs to be widened to include more practices and not only preferential tax rates. The fact that the Cayman Islands has just been removed from the black list, while running a 0% tax rate policy, is proof enough of this, MEPs say. Among other measures proposed, the resolution therefore says that all jurisdictions with a 0% corporate tax rate or with no taxes on companies’ profits should be automatically placed on the blacklist.
Tougher requirements
Being removed from the blacklist should not be the result of only token tweaks to that jurisdiction’s tax system, MEPs say, arguing that for example the Cayman Islands and Bermuda were delisted after “very minimal” changes and “weak enforcement measures”. The resolution therefore calls for screening criteria to be more stringent.
Fairness and transparency
All third countries need to be treated and screened fairly using the same criteria, MEPs say, stressing that the current list indicates that this is not the case. The lack of transparency with which it is drawn up and updated adds to these misgivings. They call for the process of establishing the list to be formalised through a legally binding instrument by the end of 2021 and question whether an informal body such as the Code of Conduct Group is able or suitable to update the blacklist.
Contact:

John Schranz, Press Officer | john.schranz@europarl.europa.eu  | econ-press@europarl.europa.eu | fisc-press@europarl.europa.eu

Compliments of the European Parliament.
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‘Always on’ culture leads to increased risk of depression, anxiety and burnout
EU law to define minimum requirements for remote working
No repercussions for workers who exercise their ‘right to disconnect’

Parliament calls for an EU law that grants workers the right to digitally disconnect from work without facing negative repercussions.
In their legislative initiative that passed with 472 votes in favour, 126 against and 83 abstentions, MEPs call on the Commission to propose a law that enables those who work digitally to disconnect outside their working hours. It should also establish minimum requirements for remote working and clarify working conditions, hours and rest periods.
The increase in digital resources being used for work purposes has resulted in an ‘always on’ culture, which has a negative impact on the work-life balance of employees, MEPs say. Although working from home has been instrumental in helping safeguard employment and business during the COVID-19 crisis, the combination of long working hours and higher demands also leads to more cases of anxiety, depression, burnout and other mental and physical health issues.
MEPs consider the right to disconnect a fundamental right that allows workers to refrain from engaging in work-related tasks – such as phone calls, emails and other digital communication – outside working hours. This includes holidays and other forms of leave. Member states are encouraged to take all necessary measures to allow workers to exercise this right, including via collective agreements between social partners. They should ensure that workers will not be subjected to discrimination, criticism, dismissal, or other adverse actions by employers.
“We cannot abandon millions of European workers who are exhausted by the pressure to be always ‘on’ and overly long working hours. Now is the moment to stand by their side and give them what they deserve: the right to disconnect. This is vital for our mental and physical health. It is time to update worker’s rights so that they correspond to the new realities of the digital age”, rapporteur Alex Agius Saliba (S&D, MT) said after the vote.
Background
Since the outbreak of the COVID-19 pandemic, working from home has increased by almost 30%. This figure is expected to remain high or even increase. Research by Eurofound shows that people who work regularly from home are more than twice as likely to surpass the maximum of 48 working hours per week, compared to those working on their employer’s premises. Almost 30% of those working from home report working in their free time every day or several times a week, compared to less than 5% of office workers.
Contact:

Ingelise De Boer, Press Officer | ingelise.deboer@europarl.europa.eu  | empl-press@europarl.europa.eu

Compliments of the European Parliament.
The post ‘Right to disconnect’ should be an EU-wide fundamental right, MEPs say first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Christine Lagarde, President of the ECB and Luis de Guindos, Vice-President of the ECB | Frankfurt am Main, 21 January 2021 |
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Executive Vice-President, Mr Dombrovskis.
The start of vaccination campaigns across the euro area is an important milestone in the resolution of the ongoing health crisis. Nonetheless, the pandemic continues to pose serious risks to public health and to the euro area and global economies. The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity. Activity in the manufacturing sector continues to hold up well, but services sector activity is being severely curbed, albeit to a lesser degree than during the first wave of the pandemic in early 2020. Output is likely to have contracted in the fourth quarter of 2020 and the intensification of the pandemic poses some downside risks to the short-term economic outlook. Inflation remains very low in the context of weak demand and significant slack in labour and product markets. Overall, the incoming data confirm our previous baseline assessment of a pronounced near-term impact of the pandemic on the economy and a protracted weakness in inflation.
In this environment ample monetary stimulus remains essential to preserve favourable financing conditions over the pandemic period for all sectors of the economy. By helping to reduce uncertainty and bolster confidence, this will encourage consumer spending and business investment, underpinning economic activity and safeguarding medium-term price stability. Meanwhile, uncertainty remains high, including relating to the dynamics of the pandemic and the speed of vaccination campaigns. We will also continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook. We continue to stand ready to adjust all of our instruments, as appropriate, to ensure that inflation moves towards our aim in a sustained manner, in line with our commitment to symmetry.
Against this background, we decided to reconfirm our very accommodative monetary policy stance.
First, the Governing Council decided to keep the key ECB interest rates unchanged. We expect them to remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 per cent within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
Second, we will continue our purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,850 billion. We will conduct net asset purchases under the PEPP until at least the end of March 2022 and, in any case, until the Governing Council judges that the coronavirus crisis phase is over.
The purchases under the PEPP will be conducted to preserve favourable financing conditions over the pandemic period. We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy. If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.
We will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
Third, net purchases under our asset purchase programme (APP) will continue at a monthly pace of €20 billion. We continue to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB interest rates.
We also intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Finally, we will continue to provide ample liquidity through our refinancing operations. In particular, our third series of targeted longer-term refinancing operations (TLTRO III) remains an attractive source of funding for banks, supporting bank lending to firms and households.
Let me now explain our assessment in greater detail, starting with the economic analysis. Following a sharp contraction in the first half of 2020, euro area real GDP rebounded strongly and rose by 12.4 per cent, quarter on quarter, in the third quarter, although remaining well below pre-pandemic levels. Incoming economic data, surveys and high-frequency indicators suggest that the resurgence of the pandemic and the associated intensification of containment measures have likely led to a decline in activity in the fourth quarter of 2020 and are also expected to weigh on activity in the first quarter of this year. In sum, this is broadly in line with the latest baseline of the December 2020 macroeconomic projections.
Economic developments continue to be uneven across sectors, with the services sector being more adversely affected by the new restrictions on social interaction and mobility than the industrial sector. Although fiscal policy measures are continuing to support households and firms, consumers remain cautious in the light of the pandemic and its impact on employment and earnings. Moreover, weaker corporate balance sheets and uncertainty about the economic outlook are still weighing on business investment.
Looking ahead, the roll-out of vaccines, which started in late December, allows for greater confidence in the resolution of the health crisis. However, it will take time until widespread immunity is achieved, and further adverse developments related to the pandemic cannot be ruled out. Over the medium term, the recovery of the euro area economy should be supported by favourable financing conditions, an expansionary fiscal stance and a recovery in demand as containment measures are lifted and uncertainty recedes.
Overall, the risks surrounding the euro area growth outlook remain tilted to the downside but less pronounced. The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging, but the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.
Euro area annual inflation remained unchanged at -0.3 per cent in December. On the basis of current energy price dynamics, headline inflation is likely to increase in the coming months, also supported by the end of the temporary VAT reduction in Germany. However, underlying price pressures are expected to remain subdued owing to weak demand, notably in the tourism and travel-related sectors, as well as to low wage pressures and the appreciation of the euro exchange rate. Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term. Survey-based measures and market-based indicators of longer-term inflation expectations remain at low levels, although market-based indicators of inflation expectations have increased slightly.
Turning to the monetary analysis, the annual growth rate of broad money (M3) increased to 11.0 per cent in November 2020, from 10.5 per cent in October, reflecting a continued increase in deposit holdings. Strong money growth continued to be supported by the ongoing asset purchases by the Eurosystem, which remain the largest source of money creation. In the context of a still heightened preference for liquidity in the money-holding sector and a low opportunity cost of holding the most liquid forms of money, the narrow monetary aggregate M1 has remained the main contributor to broad money growth.
Developments in loans to the private sector were characterised by moderate lending to non-financial corporations and resilient lending to households. The monthly lending flow to non-financial corporations remained very modest in November, continuing the pattern observed since the end of the summer. At the same time, the annual growth rate remained broadly unchanged, at 6.9 per cent, still reflecting the very strong increase in lending in the first half of the year. The annual growth rate of loans to households remained broadly stable at 3.1 per cent in November, amid a sizeable positive monthly flow.
The new bank lending survey for the fourth quarter of 2020 reports a tightening of credit standards on loans to firms. This tightening was mainly driven by heightened risk perceptions among banks, in a context of continued uncertainty about the economic recovery and concerns about borrower creditworthiness. Surveyed banks also reported a fall in loan demand from firms in the fourth quarter. The survey also indicated a further increase in net demand from households for loans for house purchase in the fourth quarter, even though credit standards continued to tighten.
Overall, our policy measures, together with the measures adopted by national governments and other European institutions, remain essential to support bank lending conditions and access to financing, in particular for those most affected by the pandemic.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is necessary to support economic activity and the robust convergence of inflation to levels that are below, but close to, 2 per cent over the medium term.
Regarding fiscal policies, an ambitious and coordinated fiscal stance remains critical, in view of the sharp contraction in the euro area economy. To this end, continued support from national fiscal policies is warranted given weak demand from firms and households relating to the worsening of the pandemic and the intensification of containment measures. At the same time, fiscal measures taken in response to the pandemic emergency should, as much as possible, remain targeted and temporary in nature. The three safety nets endorsed by the European Council for workers, businesses and governments provide important funding support.
The Governing Council recognises the key role of the Next Generation EU package and stresses the importance of it becoming operational without delay. It calls on Member States to accelerate the ratification process, to finalise their recovery and resilience plans promptly and to deploy the funds for productive public spending, accompanied by productivity-enhancing structural policies. This would allow the Next Generation EU programme to contribute to a faster, stronger and more uniform recovery and would increase economic resilience and the growth potential of Member States’ economies, thereby supporting the effectiveness of monetary policy in the euro area. Such structural policies are particularly important in addressing long-standing structural and institutional weaknesses and in accelerating the green and digital transitions.
We are now ready to take your questions.
Compliments of the European Central Bank.
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Credit standards tightened for loans to enterprises and households
Firms’ demand for loans continued to decline, while demand for housing loans increased
Government guarantees on loans to firms supported bank lending conditions

Credit standards – i.e. banks’ internal guidelines or loan approval criteria – tightened across all loan categories, namely loans to enterprises, loans to households for house purchase and consumer credit and other lending to households in the fourth quarter of 2020, according to the January 2021 bank lending survey (BLS). The net percentage of banks reporting a tightening of credit standards for loans or credit lines to firms (net percentage of banks at 25%, see Chart 1) was somewhat higher than in the previous round. Credit standards for loans to households also tightened (a net percentage of 7% for loans to households for house purchase and 3% for consumer credit and other lending to households), but at a slower pace than in the previous quarters of 2020. Banks referred to the deterioration of the general economic outlook, increased credit risk of borrowers and a lower risk tolerance as relevant factors for the tightening of their credit standards for loans to firms and households. In the first quarter of 2021, banks expect credit standards to continue to tighten for loans to firms and households.
Banks’ overall terms and conditions – i.e. the actual terms and conditions agreed in loan contracts –tightened in the fourth quarter of 2020 for new loans to enterprises, with more stringent collateral requirements and wider loan margins, especially for riskier loans. For loans to households for house purchase, banks’ overall terms and conditions also tightened in the fourth quarter of 2020.
Firms’ demand for loans or drawing of credit lines declined further in net terms in the fourth quarter of 2020, with a larger percentage of banks indicating a decline than an increase in firms’ loan demand. Demand for inventories and working capital continued to contribute to an increase in demand, although its positive contribution was lower than in the first half of 2020. This might be explained by the precautionary liquidity buffers built up in previous quarters. Demand for loans for fixed investment declined for the fourth consecutive quarter (see Chart 2). Net demand for housing loans continued to increase in the fourth quarter of 2020, reflecting a catching-up in demand after the first lockdown period in the second quarter. For consumer credit and other lending to households a net percentage of banks reported a decline in demand, following a moderate increase in the previous quarter. Net demand for housing loans and consumer credit was supported by the low general level of interest rates, while lower consumer confidence continued to dampen demand. In the first quarter of 2021, banks expect net demand for loans to firms and for consumer credit to increase, while net demand for housing loans is expected to decline.
Euro area banks indicated that regulatory or supervisory action continued to strengthen banks’ capital position and had a strong easing impact on their funding conditions in 2020. Banks also reported that supervisory or regulatory action continued to have a net tightening impact on their credit standards across all loan categories.
Euro area banks reported that non-performing loans (NPLs) had a tightening impact on credit standards and on terms and conditions for loans to enterprises and consumer credit in the second half of 2020 (and a broadly neutral impact for housing loans). Risk perceptions and risk aversion were the main drivers of the tightening impact of NPL ratios.
Looking at a sectoral breakdown, respondent banks indicated a net tightening of credit standards for loans to enterprises across all main sectors of economic activities in the second half of 2020. The net tightening was most pronounced for loans to firms in the commercial real estate and the wholesale and retail trade sectors.
Banks reported that coronavirus (COVID-19)-related government guarantees supported credit standards and helped keep terms and conditions for loans to firms more favourable in 2020. Banks also indicated a very strong net increase in demand for loans or credit lines with government guarantees in the first half of 2020, while the net increase in the second half was moderate, reflecting reduced liquidity needs.
The euro area bank lending survey, which is conducted four times a year, was developed by the Eurosystem in order to improve its understanding of banks’ lending behaviour in the euro area. The results reported in the January 2021 survey relate to changes observed in the fourth quarter of 2020 and expected changes in the first quarter of 2021, unless otherwise indicated. The January 2021 survey round was conducted between 4 and 29 December 2020. A total of 143 banks were surveyed in this round, with a response rate of 100%.
For media queries, please contact Silvia Margiocco tel.: +49 69 1344 6619.

Chart 1
Changes in credit standards for loans or credit lines to enterprises and contributing factors(net percentages of banks reporting a tightening of credit standards and contributing factors)

Source: ECB (BLS).Notes: Net percentages are defined as the difference between the sum of the percentages of banks responding “tightened considerably” and “tightened somewhat” and the sum of the percentages of banks responding “eased somewhat” and “eased considerably”.

Chart 2
Changes in demand for loans or credit lines to enterprises and contributing factors(net percentages of banks reporting an increase in demand and contributing factors)

Source: ECB (BLS).Notes: Net percentages for the questions on demand for loans are defined as the difference between the sum of the percentages of banks responding “increased considerably” and “increased somewhat” and the sum of the percentages of banks responding “decreased somewhat” and “decreased considerably”.
Compliments of the ECB.

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