Keynote speech by Christine Lagarde, President of the ECB, at the ECB Forum on Central Banking | Frankfurt am Main, 11 November 2020 |
Let me begin by welcoming all of you to this year’s ECB Forum on Central Banking. Regrettably, we cannot be together in Sintra this time, but I trust that this virtual environment will be no less conducive to challenging ideas and productive debate.
The purpose of this year’s conference is to examine the challenges facing central banking in a shifting world. We will be discussing many of the long-term trends monetary policy has to contend with, including shifting patterns of globalisation, climate change and a lower natural interest rate.
Actually, the largest shift central banks are facing today may well turn out to be the pandemic itself. As John Kenneth Galbraith said, “the enemy of the conventional wisdom is not ideas, but the march of events”. And the events we are seeing today are momentous.
The coronavirus (COVID-19) has produced a highly unusual recession and is likely to give rise to a similarly unsteady recovery. Today I would like to talk about how the ECB’s monetary policy has responded to this unique environment, and how we can best contribute to supporting the economy going forward.
A highly unusual recession
The deliberate shutdown of the economy triggered by the COVID-19 pandemic has produced a highly unusual recession. Most importantly, it has infiltrated and crippled sectors that are normally less sensitive to the economic cycle. In a regular recession, manufacturing and construction are typically hit harder by the cyclical downturn, while services are more resilient. But during the lockdown in the spring, we saw the reverse.
Compare our experience in the first half of this year with the first six months following the Lehman crash. After Lehman, manufacturing contributed 2.8 percentage points to the recession and services contributed 1.7 percentage points. But this year, the loss was 9.8 percentage points for services and much less, 3.2 percentage points, for manufacturing.
This has three important implications.
First, research finds that the recovery from a services-led recession tends to be slower than from a durable goods-led recession, as services create less pent-up demand than consumer goods.[1] For example, people are unlikely to take twice as many holidays abroad next year to compensate for their lack of foreign travel this year.
Second, as services are more labour-intensive, services-led recessions have an outsized effect on jobs. Five million people in the euro area lost their jobs in the first half of this year. Of those, almost half worked in retail and wholesale trade, accommodation and food services, and transportation, despite these activities representing less than one-fifth of output. In the six months after Lehman, the worst affected sector – industry – suffered only 900,000 job losses.
And third, these job losses hurt socio-economic groups unevenly. In the first half of 2020, the labour force contracted by almost 7% for people with low skills – who typically also have lower incomes – while it fell by 5.4% for those with medium skills and rose by 3.3% for those with high skills. This is double the loss of low-skilled jobs we saw in the six months after Lehman.
In addition to their social impact, job losses for people with lower incomes present a particular threat to the economy, because around half of those at the bottom of the income scale face liquidity constraints and therefore consume more of their income.[2] The labour-intensity of the worst-hit sectors also heightens the risk of hysteresis and “scarring” in the labour market.
While job retention schemes have played a key role in mitigating these risks, they could not eliminate them entirely. Even though many workers quickly returned to regular employment once restrictions were lifted, a large number of people who lost their jobs in the spring left the labour force and stopped looking for work, with 3.2 million workers classified as “discouraged”. This is so far different from the post-Lehman period, when the drop in employment was matched by a rise in unemployment.
And young people have been particularly affected, seeing disproportionate lay-offs and delayed entry into the labour market. Research finds that this can have a variety of long-lasting effects, including lower earnings ten to fifteen years later, and worse future health conditions.[3]
So, from the outset, this unusual recession has posed exceptionally high risks. That is why an exceptional policy response has been required. And what has defined this policy response, in Europe in particular, is the policy mix.
Learning the lessons of the last decade, there has been a renewed consensus that the composition of policies matters for overcoming the crisis. More than ever before, macroeconomic, supervisory and regulatory authorities have dovetailed and made each other’s efforts more powerful.
Policy responses to the pandemic
What has this meant for monetary policy? There are two main ways in which we have adapted the ECB’s policy to the pandemic: via the design of our tools and via the transmission of our monetary policy.
First of all, we have responded to the unique features of the recession by designing a set of tools specifically tailored to the nature of the shock, including recalibrating our targeted longer-term refinancing operations (TLTROs), expanding eligible collateral, and launching a new €1.35 trillion pandemic emergency purchase programme (PEPP). The PEPP in particular has the dual function of stabilising financial markets and contributing to easing the overall monetary policy stance, thereby helping to offset the downward impact of the pandemic on the projected path of inflation.
The stabilisation function of the PEPP is ensured by its flexibility, which is crucial given the unpredictable course of the pandemic and its uneven impact across economies. In this context, the PEPP’s flexibility allows us to react in a targeted way and counter fragmentation risks. This was key in reversing the tightening of financing conditions that we saw in the early days of the crisis.
In parallel, the stance function of the PEPP gives us the scope to counter the pandemic-driven shock to the path of inflation – a path that has also been greatly influenced by the specific characteristics of this recession. Not only has inflation fallen into negative territory, but we have already seen services inflation, which is normally the more stable part of the price index, drop to historic lows.
But the PEPP, together with the other measures we have taken this year, has provided crucial support to the inflation path and prevented a much larger disinflationary shock.[4] And its impact has been amplified by interactions with other policies. For instance, the combined effect of the ECB’s monetary and supervisory measures is estimated to have saved more than one million jobs.[5]
At the same time, the nature of the pandemic also affects the transmission of monetary policy. Normally, an easing of financing conditions boosts demand by encouraging firms to borrow and invest, and households to bring forward future income and consume more. In turbulent times, monetary policy interventions also eliminate excess risk pricing from the market.
But when interest rates are already low and private demand is constrained by design – as is the case today – the transmission from financing conditions to private spending might be attenuated. This is especially true when firms and households face very high levels of uncertainty, leading to higher precautionary saving and postponed investment.[6] In these circumstances, it is crucial that monetary policy ensures favourable financing conditions for the whole economy: private and public sectors alike. Indeed, these are the times when fiscal policy has the greatest impact, for at least two reasons.
First, fiscal policy can respond in a more targeted way to the parts of the economy affected by health restrictions. Research shows that, while monetary policy can increase overall activity in this environment, it cannot support the specific sectors that would be most welfare-enhancing. Fiscal policies, on the other hand, can directly respond where help is most needed.[7]
We have seen the efficacy of such targeting in the euro area this year. The ECB’s Consumer Expectations Survey shows that households with lower income have seen a greater reduction in the hours they work, but they have also received a higher share of government support. As a result, while compensation of employees fell by more than 7% in the second quarter, household disposable income fell by only 3%[8], because government transfers compensated for the loss of income.
Second, fiscal policy can break “paradox of thrift” dynamics in the private sector when uncertainty is present. Public expenditure accounts for around 50% of total spending in the euro area and can therefore act as a coordination device for the other 50%. Our consumer survey demonstrates this: people who consider government support to be more adequate display less precautionary behaviour. And in this way, by brightening economic prospects for firms and households, fiscal policy can help reinvigorate monetary transmission through the private sector.
The risk of an unsteady recovery
But regrettably the economic recovery from the pandemic emergency could well be bumpy. We are seeing a strong resurgence of the virus and this has introduced a new dynamic. While the latest news on a vaccine looks encouraging, we could still face recurring cycles of accelerating viral spread and tightening restrictions until widespread immunity is achieved.
So the recovery may not be linear, but rather unsteady, stop-start and contingent on the pace of vaccine roll-out. In the interim, output in the services sector may struggle to fully recover.
Indeed, services were already showing a declining trend before the latest round of restrictions: the services PMI fell from 54.7 in July to 46.9 in October. And while manufacturing has so far remained relatively resilient, there is a risk of the recovery in manufacturing also slowing once order backlogs are run down and industrial output becomes better aligned with demand.
In this situation, the key challenge for policymakers will be to bridge the gap until vaccination is well advanced and the recovery can build its own momentum. The strength of the rebound in the third quarter suggests that the initial policy response was effective and the capacity of the economy to recover is still in place. But it will require very careful policy management to ensure that this remains the case.
Above all, we must ensure that this exceptional downturn remains just that – exceptional – and does not turn into a more conventional recession that feeds on itself. Even if this second wave of the virus proves to be less intense than the first, it poses no less danger to the economy.
In particular, if the public no longer sees the pandemic as a one-off event, we could see more lasting changes in behaviour than during the first wave. Households could become more fearful about the future and increase their precautionary saving. Firms that have survived up to now by increasing borrowing could decide that remaining open no longer makes business sense. This could trigger a “firm exit multiplier”, where the closure of businesses faced with health restrictions cuts demand for complementary businesses, in turn causing those firms to reduce their output.[9]
If that were to happen, the recession could percolate through the economy to sectors not directly affected by the pandemic – and potentially trigger a feedback loop between the real economy and the financial sector. Banks might start tightening credit standards in the belief that corporate creditworthiness is deteriorating, leading to firms becoming less willing or able to borrow funds, credit growth slowing and banks’ risk perceptions rising further. The ECB’s bank lending survey is already signalling a possible tightening in the months to come. We are also seeing indications that small and medium-sized firms are expecting their access to finance to deteriorate.
A continued, powerful and targeted policy response is therefore vital to protect the economy, at least until the health emergency passes. Concerns about “zombification” or impeding creative destruction are misplaced, especially if a vaccine is now in sight. Remember that lockdowns are a non-economic shock that affects productive and unproductive firms indiscriminately. Policies that protect viable businesses until activity can return to normal will help our productive capacity, not harm it.
The right policy mix is essential.
Fiscal policy has to remain at the centre of the stabilisation effort – the draft budgetary plans suggest that fiscal support next year will be significant and broadly similar to this year, and the Next Generation EU package should become operational without delay. Supervisory authorities are working to ensure that banks can continue to support the recovery by readying them for a potential deterioration in asset quality.[10] And structural policies have to be stepped up so that policy support can accompany the wide-ranging changes that the pandemic will bring, such as an accelerating spread of digitalisation and a renewed focus on climate issues.[11]
The outlook for monetary policy
So what is the role of monetary policy in this response?
It is clear that downside risks to the economy have increased. The impact of the pandemic is now likely to continue to weigh on economic activity well into 2021. Moreover, demand weakness and economic slack are weighing on inflation, which is expected to remain in negative territory for longer than previously thought. This is partially due to temporary factors, but the fall in measures of underlying inflation also appears to be connected to the weakening of activity. And developments in the exchange rate may have a negative impact on the path of inflation.
Continued policy support is therefore necessary to achieve our inflation aim. But we should also consider how best to provide that support.
The unusual nature of the recession and the unsteadiness of the recovery make assessing the inflation path harder than in normal times. Shifts in consumption baskets caused by supply-side restrictions are creating significant noise in the inflation data.[12] And the stop-start nature of the recovery means the short-term path of inflation is surrounded by considerable uncertainty.
In these conditions, it is vital that monetary policy underpins inflation dynamics by supporting demand and preventing second-round effects, where the negative pandemic shock to inflation feeds into wage and price-setting and becomes persistent. To that end, the best contribution monetary policy can make is to ensure favourable financing conditions for the whole economy. Two considerations are important here.
First, while fiscal policy is active in supporting the economy, monetary policy has to minimise any “crowding-out” effects that might create negative spillovers for households and firms. Otherwise, increasing fiscal interventions could put upward pressure on market interest rates and crowd out private investors, with a detrimental effect on private demand.
Second, monetary policy has to continue supporting the banking sector to secure policy transmission and prevent adverse feedback loops from emerging. Firms are still dependent on new flows of credit. And those that have borrowed heavily so far need certainty that refinancing will remain available on attractive terms in order to avoid excessive deleveraging.
In other words, when thinking about favourable financing conditions, what matters is not only the level of financing conditions but the duration of policy support, too. All sectors of the economy need to have confidence that financing conditions will remain exceptionally favourable for as long as needed – especially as the economic impact of the pandemic will now extend well into next year.
Currently, all conditions are in place for both the public and private sectors to take the necessary measures. The GDP-weighted sovereign yield curve is in negative territory up to the ten-year maturity. Nearly all euro area countries have negative yields up to the five-year maturity. Bank lending rates are close to their historic lows: around 1.5% for corporates and 1.4% for mortgages. And our forward guidance on our asset purchase programmes and interest rates provides clarity on the future path of interest rates.
But it is important to ensure that financing conditions remain favourable. This is why the Governing Council announced last month that we will recalibrate our instruments, as appropriate, to respond to the unfolding situation. The Council is unanimous in its commitment to ensure that financing conditions remain favourable to support economic activity and counteract the negative impact of the pandemic on the projected inflation path.
In the weeks to come we will have more information on which to base our decision about this recalibration, including more evidence on the success of the new lockdown measures in containing the virus, a new set of macroeconomic projections and more clarity on fiscal plans and the prospects for vaccine roll-outs.
While all options are on the table, the PEPP and TLTROs have proven their effectiveness in the current environment and can be dynamically adjusted to react to how the pandemic evolves. They are therefore likely to remain the main tools for adjusting our monetary policy.
Looking beyond our next policy meeting, our ongoing strategy review gives us an opportunity to reflect on the best combination of tools to deliver financing conditions at the appropriate level, how those tools should be implemented, and what features our toolkit needs to have to deliver on such a strategy.
Conclusion
Let me conclude.
The pandemic has produced an unusual recession and will likely generate an unsteady recovery. All policy areas in Europe have responded promptly and decisively. The European policy mix has proven that when different authorities work together – within their respective mandates – countries can successfully absorb the pandemic shock.
The second wave of COVID-19 presents new challenges and risks, but the blueprint for managing it is the same. The ECB was there for the first wave and we will be there for the second wave. We are, and we continue to be, totally committed to supporting the people of Europe.
In pursuit of our mandate, we will continue to deliver the financing conditions necessary to protect the economy from the impact of the pandemic. This is the precondition for stabilising aggregate demand and securing the return of inflation to our aim.
Compliments of the ECB.
The post ECB | Speech by Chrstine Lagarde: Monetary policy in a pandemic emergency first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Remarks by Vitor Gaspar at ECB Forum on Central Banking 2020 | November 12 |
1.  Introduction
It is such a pleasure to participate in the ECB Forum on Central Banking and discuss the paper by Evi Papa on Fiscal Rules and Macroeconomic Stabilization in the Euro Area. The paper reviews relevant theoretical and empirical literature and, at the end, examines the Next Generation EU program. The paper is well-written, and it covers a vast landscape. If offers much to learn and to think about.
In my discussion, I will focus on policy. I will argue that it is useful to adopt a broad perspective that considers politics, finance and fiscal policy as fundamentally inter-twined. Interactions between monetary and fiscal policy are better understood in such broad context. I will move on to give a very quick overview of the evolution of ideas and perspectives about macroeconomics that impacted monetary unification in Europe. I will give examples of how experience forced re-thinking. I will go on documenting recent fiscal policy developments, prospects and risks. Finally, I will comment on Next Generation EU. In doing so, I will make a strong case for public investment in smart and green technologies. I will identify implementation challenges and highlight the importance of public infrastructure governance, transparency and accountability.
2. Politics, Financial Integration and Fiscal Policy
Milton Friedman argued we are subject to the tyranny of the status quo. “Only a crisis – real or perceived – produces real change.”[1] Interestingly, much earlier, Jean Monnet articulated a similar thought, specifically aimed at European integration: “Europe will be made in crises. It will become the sum of the responses to those crises.”[2] Coming even closer to the theme of this session fiscal crises have provoked political revolutions. That was the case for England in 1688 and for France and the US in 1789. Fiscal crises have often changed the distribution of political power within multilayered government structures. The political relevance of fiscal crises is emphasized by Thomas Sargent in many contributions.[3]
In the 1990s, when the launch of the euro area was being prepared, the dominant framework to think about macroeconomic policies had a Real Business Cycle (RBC) core, complemented with elements inspired by Keynesian macroeconomics. The framework was labelled New Keynesian[4] or New Neoclassical Synthesis[5]. Goodfriend and King (2001) put the framework to work as it applied to policymaking in the euro area. They presented their work at the first ECB central banking conference. For my purposes I want to emphasize the following: first, monetary policy should focus on maintaining price stability. By keeping to a stable price level path, monetary policy is also neutral policy.  That is, it keeps economic activity in line with potential output or, in other words, it keeps the output gap at zero. Second, with complete and perfectly integrated financial markets, a small open economy can get full insurance, against idiosyncratic shocks, at fair terms. Third, given that monetary policy would smooth the business cycle, in response to demand disturbances, for the euro area and financial markets would provide insurance against idiosyncratic risks, fiscal policy should focus making sure that public finances support resilient, smart, sustainable and inclusive growth.
The Delors Report (1989) had already pointed to important qualifications. Specifically, while it noted that “markets can exert a disciplinary influence on profligate governments,” it warned than market discipline was subject to important limitations: “Rather than leading to a gradual adaptation of borrowing costs, market views of the creditworthiness of official borrowers tend to change abruptly and result in the closure of access to market financing. Market forces might either be too slow and weak or too sudden and disruptive.”[6] The Report concluded that binding rules were necessary. Such rules would favor financial stability.   Independence of monetary policy, in turn, called for the exclusion of direct central bank financing by Treasuries. Such constraints were reflected in the Maastricht Treaty and lie at the roots of European fiscal rules.
Figure 1Euro Area Spreads (10-year bonds, Jan. 1995–Oct. 2020)
Sources: Thomson Reuters Datastream, Bloomberg, Haver Analytics, Global Financial Data and International Financial StatisticsNotes: Spreads are against Germany.
3. Debt, Deficits and Public Finance Risks
Prior to the pandemic, public debt in the Euro Area was declining at an average of 1.7 percentage points of GDP per year over 2016-19. In 2020, this ratio will jump by an unprecedented amount – 17 percentage points – to 101 percent of GDP. This is illustrated in Figure 2.
Figure 2Euro Area Public Debt and Fiscal Balance (2016–2025, in percent of GDP)

Public Debt
Overall balance

Sources: IMF Fiscal Monitor and WEO.

As shown in Figure 3, the major increase in the primary deficit and the sharp contraction in economic activity are the main drivers of this jump up in debt. The IMF baseline scenario, based on information at end-September 2020, considered that after such exceptional development, the public debt to GDP in the Euro Area would resume its downward trajectory, albeit at a slower pace than before. This downward path is explained by negative interest-growth differentials and gradual reduction in the primary deficit.

Figure 3Euro Area Public Debt and Fiscal Balance (2016–2025, in percent GDP)

Sources: IMF Fiscal Monitor, WEO, and IMF staff calculations.

Figure 4 illustrates a number of important points. First, monetary policy matters a lot for fiscal policy. The figure gives two examples. July 26, 2012, “whatever it takes” and March 18, 2020, the announcement of the PEPP. In both cases the response of bond yields – and yield differentials – was quick and sizeable. Second, the divergence in bond yields in the period of the fiscal crises in the euro area was associated with persistent divergence in fiscal policies and economic results. Financing conditions also diverged for private corporations based in different member states. Clearly the single financial market fragmented under stress. Fiscal policy was strongly pro-cyclical in the countries hit by sharply rising sovereign yields, so their economies suffered a double blow from higher borrowing costs and fiscal contraction. This leads to the final point: the performance of the euro area member states from the start of the GFC is far from stellar. The best performers delivered over the period on par with the US. The laggards fell way behind. These phenomena created political challenges within and between countries. Divergences will likely persist and may even increase with COVID 19.

Figure 4Euro Area Spreads (10-year bonds, Jan. 2008–Oct. 2020)

Sources: Thomson Reuters Datastream, Bloomberg, Haver Analytics, Global Financial Data and International Financial Statistics.Notes: Spreads are against Germany.

High public debt levels are not the most immediate risk in the Euro Area. Policymakers should not withdraw fiscal support prematurely, as highlighted by Alfred Kammer, in his recent press, briefing during the IMF Annual Meetings (https://www.imf.org/en/News/Articles/2020/10/21/tr102120-transcript-of-october-2020-european-department-press-briefing), the (policy) mistakes made in the aftermath of the GFC should be avoided. Of course, in the world of Goodfriend and King (2001) this would not be a problem because monetary policy would offset the effects on aggregate demand of withdrawing of fiscal support.
Euro Area policy patterns in the aftermath of the GFC, and their intimate relation with financial market conditions, can be illustrated with the cases of Italy and Spain. Figure 5 shows both of these countries tightened their fiscal stance (as measured by changes in the cyclically adjusted primary balance, as a ratio to potential output) in the middle of economic recessions.

Figure 5Fiscal Stance and Output Gap

Sources: IMF Fiscal Monitor, WEO, and staff estimates.Notes: Output gap as percent of potential GDP. Cyclically adjusted primary balance, in percent of potential GDP.

As I mentioned, the procyclicality of fiscal policy coincided with fragmentation in financial markets. One of its manifestations, illustrated in Figure 6, was a rapid widening of sovereign debt spreads. Vicious cycles involving increasingly costly access to finance and reduced space to confront the recession ensued. It is important to note that, more generally, fiscal policy was pro-cyclical in many other countries, in the euro area, including Germany itself.

Figure 6Fiscal Stance and 10-year Bond Spreads

Sources: Thomson Reuters Datastream, Bloomberg, Haver Analytics, Global Financial Data, International Financial Statistics, CEPR, WEO, and IMF staff estimates.Notes: Spreads are averaged by month and reported in the chart using monthly frequency. Spreads are against Germany. Cyclically adjusted primary balance, in percent of potential in fiscal year GDP, and is annual frequency.

Turning back to the present, I have presented above the debt and deficit projections under the IMF’s baseline scenario.  But the WEO also considers alternative scenarios. It discusses possible risks. Unfortunately, some risks have already materialized. On the upside, growth has overperformed expectations in the third quarter of 2020. But recent weeks have been associated with a second wave of COVID 19 in Europe. Partial lockdowns have been adopted in many places.  Government fiscal responses to support livelihoods will result in substantial further increases in deficits and debts. Economic activity and employment will also be adversely affected.
The medium-term horizon is thus subject to particularly acute uncertainties.
4. The Case for Public Investment and the Next Generation EU
The October 2020 Fiscal Monitor (FM) makes the case for public investment. The relevant macroeconomic context includes very low interest rates, high precautionary savings, weak private investment and a gradual erosion of the public capital stock over time.
But the novel argument in the FM relates to uncertainty. The FM shows that investment multipliers are particularly high when macroeconomic uncertainty is elevated—as it is now.

Figure 7Uncertainty Indices

Sources: Barrero and Bloom (2020)Notes: Data are from the World Uncertainty Index’s website’s World Pandemic Uncertainty Index (WPUI) which measures discussions about pandemics at the global and country level in the Economist Intelligence Unit (see Ahir, Bloom and Furceri, 2020). Monthly values for Economic Policy Uncertainty (EPU) index from www.policyuncertainty.com. See Baker, Bloom, and Davis (2016) for details of EPU index construction.

Public investment can also support the transformation of our economies going forward. Investment in health and education, in digital and green infrastructure can connect people, improve economy-wide productivity, and improve resilience to climate change and future pandemics.
Overall, fiscal policy can provide a bridge to smart, resilient, green, and inclusive growth. Interestingly, the literature reviewed by Pappa (2020) is much less favorable.
Why is that? COVID 19 is associated with very large macroeconomic uncertainty captured in the FM by the dispersion of economic forecasts. Altig et al. (2020) and Barrero and Bloom (2020) present a wide variety of measures of uncertainty. Figure 7 reproduces two of their examples: uncertainty about COVID 19 and uncertainty about economic policy. They show that uncertainty is elevated for a wide variety of uncertainty metrics. Furthermore, COVID 19 will be enduring for a while which means that the traditional concerns with time-to-build are less relevant than usual.
The new evidence in the FM shows that during times of high uncertainty the multiplier associated to public investment is four times larger than in the “baseline”. This happens because public investment can buttress private investors’ confidence and induce them to invest. That is so, in part, because it signals the government’s commitment to sustainable growth. Public investment projects can also stimulate private investment more directly. For example, investments in digital communications, electrification, or transportation infrastructure create new private investment opportunities directly through the creation of opportunities for value-added goods and / or services.
But good governance of public investment is crucial. The Next Generation EU identifies important priorities (e.g. green investment). But implementation is crucial.
The FM finds that the cost of an individual project can increase by as much as 10 to 15 percentage points just because it is undertaken in a period of heightened public investment effort. Cost increases tend to be higher and project delays longer if projects are approved and undertaken in these periods. Fast increases in public investment are also associated with increased vulnerabilities to corruption. More generally, improving the governance of project selection and management is important, because there is scope to improve the efficiency of infrastructure on average.  All these themes are covered in a book on infrastructure governance (“Well Spent”) recently published by the IMF.[7]

Figure 8Fiscal Multipliers

Sources: IMF staff estimates.Notes: Panel 1: two-year ahead fiscal multipliers of public investment. Panel 2: semi-elasticity of private investment to public investment. **stands for statistically significant coefficient at two standard deviations confidence interval.
Author:

Vitor Gaspar, Director of the Fiscal Affairs Department of the International Monetary Fund

Contact:

Ting Yan, Press Officer | MEDIA@IMF.ORG

Compliments of the IMF.
The post “Central Banks in a Shifting World” – Discussion of Evi Papa’s Fiscal Rules, Policy and Macroeconomic Stabilization in the Euro Area first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Securities and Markets Authority (ESMA), the EU securities markets regulator, today publishes its first annual report on the use by National Competent Authorities (NCAs) of sanctions under the Alternative Investment Fund Managers Directive (AIFMD).
The report published today contains an overview of the applicable legal framework and information on the penalties and measures imposed by NCAs from 1 January 2018 to 31 December 2018 and from 1 January 2019 to 31 December 2019.
The number of NCAs issuing sanctions increased between the reporting periods, from 14 in 2018 to 17 in 2019. Whilst the number of financial penalties decreased substantially, the total amount imposed doubled to €9m in 2019 due to high cumulative sanctions issued by two NCAs.
A small number of NCAs are responsible for a majority of sanctions, and in general the numbers on a national level appear low. In order to understand the possible reasons behind the uneven use of the sanctioning tool among Member States, ESMA organised a one-day workshop on 16 July 2020 for NCAs’ staff working in supervision and enforcement teams on the topic of sanctions in UCITS and AIFs.
Next steps
ESMA continues its work to foster supervisory convergence in the application of the AIFMD and will issue separate reports on an annual basis for future reporting periods.
Compliments of the European Securities and Markets Authority (ESMA).
The post ESMA publishes first report on use of sanctions under the AIFMD first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The free movement of capital is a key long-standing objective of the European Union. It is one of the pillars of the Single Market, along with the free movement of people, goods and services. Despite the Commission’s efforts to achieve the ambitious goal of building a capital markets union (CMU), results are still to come, according to a report presented by the European Court of Auditors (ECA) today.
In the EU, businesses traditionally largely rely on banks for financing their activities. To provide an alternative funding source for start-ups and small and medium-sized enterprises (SMEs) and to mobilise private capital, the Commission has been making efforts since 2015 to supplement the Banking Union with a CMU. The CMU is also intended to remove cross-border barriers to investment within the EU more generally.
“The Capital Markets Union is an unfinished agenda, and much work remains to be done,” said Rimantas Šadžius, the Member of the European Court of Auditors responsible for the report. “The Commission’s measures to diversify the financing options of SMEs and efforts to develop local capital markets within the CMU have had no catalytic effect so far. In our opinion, increasing the role of private risk-sharing through capital markets remains an ambitious and urgent priority. This would bring about not only a more stable and crisis-resilient EU financial system, but also one which is better equipped to boost growth, especially when traditional bank funding is not easily available or when it fails.”
The auditors found that although some progress had been made, the expectations which had been raised were too high, and could not realistically have been achieved with the measures introduced in connection with the CMU. Up to now, most of the legislative acts related to the CMU have either not yet been implemented or have been implemented only recently. In particular, many of the key actions in the Commission’s CMU action plan that have not yet been initiated can only be undertaken by the Member States themselves, or with their full support. Many of the measures that the Commission was able to take within its remit were non-binding, or were narrow in scope. These measures were not successful in bringing about substantial progress in achieving the CMU.
According to the auditors, the measures to diversify financing sources for businesses were too weak to stimulate and catalyse a structural shift towards more market funding in the EU. For example, the auditors note that access to public markets for SMEs has so far not been significantly improved or become cheaper. They also note that the Commission could have done more to promote financial literacy among SMEs and would-be investors. Furthermore, securitisation legislation – which could have worked as an indirect financing instrument for SMEs – was a positive step, but has not yet had the expected impact of facilitating financing, and nor has it helped banks to increase their lending capacity.
There are clear geographical discrepancies between Member States in the capitalisation, liquidity and depth of their local capital markets. Member States in the west and the north tend to have deeper capital markets and self-reinforcing capital hubs, while Member States in the east and the south are lagging behind. The auditors found that the Commission had not developed a comprehensive and clear EU strategy for overcoming these differences. They found that the Commission had made use of its coordinating role under the European Semester process to promote the development and integration of local capital markets and provided support to some Member States. However, it did not recommend to all Member States with less-developed capital markets that they implement relevant structural reforms.
The auditors also observed that the CMU action plan had not led to a breakthrough in the main barriers impeding cross-border capital flows. These barriers often emanate from national laws, such as those in the fields of insolvency and withholding tax, or from a lack of financial education. The progress on tackling the barriers was limited, partially due to a lack of support from the Member States.
Another issue with the CMU action plan was that objectives were vaguely formulated. Priorities were only established late in the process. And where targets existed, they tended not to be measurable. The auditors also noted that progress had not been regularly and consistently followed up. They recommended that the Commission should considerably reinforce the monitoring framework.
The auditors provide a number of other recommendations to the Commission to improve the effectiveness of the CMU project; these include carrying out well-targeted actions to further facilitate SMEs’ access to capital markets, and measures to address fragmentation and key cross-border barriers to investment. The auditors also invite the Council to consider how to take further the Commission’s proposal to address the asymmetric tax treatment of equity and debt detrimental to the development of CMU.
Background information
The audit work was completed prior to the outbreak of COVID-19, and therefore this report does not take into account any policy developments or other changes that occurred in response to the pandemic.
On related matters, the ECA has published reports on the European Semester, the EU Investment Hub,  innovation in SMEs and the EU interventions for venture capital.
The purpose of this press release is to convey the main messages of the European Court of Auditors’ special reports. The full report is on eca.europa.eu.
Contact:

Claudia Spiti | claudia.spiti[at]eca.europa.eu

Compliments of the European Court of Auditors. 
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Today, the European Commission is taking the first steps towards building the European Health Union announced by President von der Leyen in her State of the Union address. The Commission is putting forward a set of proposals to strengthen the EU’s health security framework, and to reinforce the crisis preparedness and response role of key EU agencies. In order to step up the fight against the COVID-19 pandemic and future health emergencies, more coordination at EU level is needed. Drawing lessons from the current crisis, today’s proposals will ensure stronger preparedness and response during the current and future health crises.
President of the European Commission, Ursula von der Leyen stated: “Our aim is to protect the health of all European citizens. The coronavirus pandemic has highlighted the need for more coordination in the EU, more resilient health systems, and better preparation for future crises. We are changing the way we address cross-border health threats. Today, we start building a European Health Union, to protect citizens with high quality care in a crisis, and equip the Union and its Member States to prevent and manage health emergencies that affect the whole of Europe.”
Vice-President for Promoting the European Way of Life, Margaritis Schinas, said: “Today, we are taking a big, meaningful step towards a genuine EU Health Union. We are strengthening our common crisis management to prepare and respond to serious cross border threats to health. Our EU agencies need to be equipped with stronger mandates to better protect EU citizens. To fight the COVID-19 pandemic and future health emergencies, more coordination with more efficient tools at EU level is the only way forward.”
Stella Kyriakides, Commissioner for Health and Food safety said: “Health is more than ever an essential concern for our citizens. In times of crisis, citizens rightfully expect the EU to take a more active role. Today we are reinforcing the foundations for a more secure, better-prepared and more resilient EU in the area of health. This will be a significant change for the capacity to respond collectively. The European Health Union is all about preparing for and facing up to common health threats together, as a Union. We need to do this in order to meet the expectations of our citizens.”
Today’s proposals focus on revamping the existing legal framework for serious cross border threats to health, as well as reinforcing the crisis preparedness and response role of key EU agencies, namely the European Centre for Disease Prevention and Control (ECDC) and the European Medicines Agency (EMA).
A stronger EU health security framework
To create a more robust mandate for coordination by the Commission and EU agencies, the Commission is today proposing a new Regulation on serious cross-border threats to health. The new framework will:

Strengthen preparedness: EU health crisis and pandemic preparedness plan and recommendations will be developed for the adoption of plans at national levels, coupled with comprehensive and transparent frameworks for reporting and auditing. The preparation of national plans would be supported by the European Centre for Disease Prevention and Control and other EU agencies. The plans would be audited and stress tested by the Commission and EU agencies.

Reinforce surveillance: A strengthened, integrated surveillance system will be created at EU level, using artificial intelligence and other advanced technological means.

Improve data reporting: Member States will be required to step up their reporting of health systems indicators (e.g. hospital beds availability, specialised treatment and intensive care capacity, number of medically trained staff etc.).
The declaration of an EU emergency situation would trigger increased coordination and allow for the development, stockpiling and procurement of crisis relevant products.

Stronger and more operational EU Agencies
The European Centre for Disease Control and Prevention and the European Medicines Agency have been at the forefront of the EU’s work to address COVID-19 since the outbreak of the pandemic. However, COVID-19 has shown that both agencies need to be reinforced and equipped with stronger mandates to better protect EU citizens and address cross border health threats.
The ECDC’s mandate will be reinforced so that it may support the Commission and Member States in the following areas:

epidemiological surveillance via integrated systems enabling real-time surveillance
preparedness and response planning, reporting and auditing
provision of non-binding recommendations and options for risk management
capacity to mobilise and deploy EU Health Task Force to assist local response in Member States
building a network of EU reference laboratories and a network for substances of human origin

The European Medicines Agency’s mandate will be reinforced so that it can facilitate a coordinated Union-level response to health crises by:

monitoring and mitigating the risk of shortages of critical medicines and medical devices
providing scientific advice on medicines which may have the potential to treat, prevent or diagnose the diseases causing those crises
coordinating studies to monitor the effectiveness and safety of vaccines
coordinating clinical trials.

The Commission is also today setting out the main elements of the future Health Emergency Response Authority (HERA), to be proposed by the end of 2021. Such a structure would be an important new element to support a better EU level response to cross-border health threats.
Compliments of the European Commission.
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Today, the European Commission approved a fourth contract with pharmaceutical companies BioNTech and Pfizer, which provides for the initial purchase of 200 million doses on behalf of all EU Member States, plus an option to request up to a further 100 million doses, to be supplied once a vaccine has proven to be safe and effective against COVID-19. Member States can decide to donate the vaccine to lower and middle-income countries or to re-direct it to other European countries.
Today’s contract with the BioNTech-Pfizer alliance builds upon the broad portfolio of vaccines to be produced in Europe, including the already signed a contracts with AstraZeneca, Sanofi-GSK and Janssen Pharmaceutica NV, and the concluded successful exploratory talks with CureVac and Moderna. This diversified vaccines portfolio will ensure Europe is well prepared for vaccination, once the vaccines have been proven to be safe and effective.
President of the European Commission, Ursula von der Leyen, said:  “In the wake of Monday’s promising announcement by BioNTech and Pfizer on the prospects for their vaccine, I’m very happy to announce today’s agreement with the European company BioNTech and Pfizer to purchase 300 million doses of the vaccine. With this fourth contract we are now consolidating an extremely solid vaccine candidate portfolio, most of them in advanced trials phase. Once authorised, they will be quickly deployed and bring us closer to a sustainable solution of the pandemic.”
Stella Kyriakides, Commissioner for Health and Food Safety, said: “A safe and effective vaccine is the only lasting exit strategy from the pandemic, and is at the centre of our European Vaccine Strategy. Today’s agreement follows the encouraging first indications from the clinical trial results and is further evidence of our commitment to putting more Europe in the area of health. It is a very telling example of what the EU can achieve when working together, as a Union, and a case in point of what a future European Health Union will be able to deliver.”
BioNTech is a German company working with US-based Pfizer to develop a new vaccine based on messenger RNA (mRNA). mRNA plays a fundamental role in  biology, transferring instructions from DNA to cells’ protein making machinery. In an mRNA vaccine, these instructions make harmless fragments of the virus which the human body uses to build an immune response to prevent or fight disease.
The Commission has taken a decision to support this vaccine based on a sound scientific assessment, the technology used, the companies’ experience in vaccine development and their production capacity to supply the whole of the EU.
Background
The European Commission presented on 17 June a European strategy to accelerate the development, manufacturing and deployment of effective and safe vaccines against COVID-19. In return for the right to buy a specified number of vaccine doses in a given timeframe, the Commission finances part of the upfront costs faced by vaccines producers in the form of Advance Purchase Agreements. Funding provided is considered as a down-payment on the vaccines that will actually be purchased by Member States.
Since the high cost and high failure rate make investing in a COVID-19 vaccine a high-risk decision for vaccine developers, these agreements will therefore allow investments to be made that otherwise might not happen.
Once vaccines have been proven to be safe and effective and have been granted market authorisation by the European Medicines Agency, they need to be quickly distributed and deployed across Europe. On 15 October, the Commission set out the key steps that Member States need to take to be fully prepared, which includes the development of national vaccination strategies. The Commission is putting in place a common reporting framework and a platform to monitor the effectiveness of national vaccine strategies.
The European Commission is also committed to ensuring that everyone who needs a vaccine gets it, anywhere in the world and not only at home. No one will be safe until everyone is safe. This is why it has raised almost €16 billion since 4 May 2020 under the Coronavirus Global Response, the global action for universal access to tests, treatments and vaccines against coronavirus and for the global recovery and has confirmed its interest to participate in the COVAX Facility for equitable access to affordable COVID-19 vaccines everywhere. As part of a Team Europe effort, the Commission announced is contributing with €400 million in guarantees to support COVAX and its objectives in the context of the Coronavirus Global Response.
Compliments of the European Commission.
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The European Commission has informed Amazon of its preliminary view that it has breached EU antitrust rules by distorting competition in online retail markets. The Commission takes issue with Amazon systematically relying on non-public business data of independent sellers who sell on its marketplace, to the benefit of Amazon’s own retail business, which directly competes with those third party sellers.
The Commission also opened a second formal antitrust investigation into the possible preferential treatment of Amazon’s own retail offers and those of marketplace sellers that use Amazon’s logistics and delivery services.
Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “We must ensure that dual role platforms with market power, such as Amazon, do not distort competition.  Data on the activity of third party sellers should not be used to the benefit of Amazon when it acts as a competitor to these sellers. The conditions of competition on the Amazon platform must also be fair.  Its rules should not artificially favour Amazon’s own retail offers or advantage the offers of retailers using Amazon’s logistics and delivery services. With e-commerce booming, and Amazon being the leading e-commerce platform, a fair and undistorted access to consumers online is important for all sellers.”
Statement of Objections on Amazon’s use of marketplace seller data
Amazon has a dual role as a platform: (i) it provides a marketplace where independent sellers can sell products directly to consumers; and (ii) it sells products as a retailer on the same marketplace, in competition with those sellers.
As a marketplace service provider, Amazon has access to non-public business data of third party sellers such as the number of ordered and shipped units of products, the sellers’ revenues on the marketplace, the number of visits to sellers’ offers, data relating to shipping, to sellers’ past performance, and other consumer claims on products, including the activated guarantees.
The Commission’s preliminary findings show that very large quantities of non-public seller data are available to employees of Amazon’s retail business and flow directly into the automated systems of that business, which aggregate these data and use them to calibrate Amazon’s retail offers and strategic business decisions to the detriment of the other marketplace sellers. For example, it allows Amazon to focus its offers in the best-selling products across product categories and to adjust its offers in view of non-public data of competing sellers.
The Commission’s preliminary view, outlined in its Statement of Objections, is that the use of non-public marketplace seller data allows Amazon to avoid the normal risks of retail competition and to leverage its dominance in the market for the provision of marketplace services in France and Germany- the biggest markets for Amazon in the EU. If confirmed, this would infringe Article 102 of the Treaty on the Functioning of the European Union (TFEU) that prohibits the abuse of a dominant market position.
The sending of a Statement of Objections does not prejudge the outcome of an investigation.
Investigation into Amazon practices regarding its “Buy Box” and Prime label
In addition, the Commission opened a second antitrust investigation into Amazon’s business practices that might artificially favour its own retail offers and offers of marketplace sellers that use Amazon’s logistics and delivery services (the so-called “fulfilment by Amazon or FBA sellers”).
In particular, the Commission will investigate whether the criteria that Amazon sets to select the winner of the “Buy Box” and to enable sellers to offer products to Prime users, under Amazon’s Prime loyalty programme, lead to preferential treatment of Amazon’s retail business or of the sellers that use Amazon’s logistics and delivery services.
The “Buy Box” is displayed prominently on Amazon’s websites and allows customers to add items from a specific retailer directly into their shopping carts. Winning the “Buy Box” (i.e. being chosen as the offer that features in this box) is crucial to marketplace sellers as the Buy Box prominently shows the offer of one single seller for a chosen product on Amazon’s marketplaces, and generates the vast majority of all sales. The other aspect of the investigation focusses on the possibility for marketplace sellers to effectively reach Prime users. Reaching these consumers is important to sellers because the number of Prime users is continuously growing and because they tend to generate more sales on Amazon’s marketplaces than non-Prime users.
If proven, the practice under investigation may breach Article 102 of the Treaty on the Functioning of the European Union (TFEU) that prohibits the abuse of a dominant market position.
The Commission will now carry out its in-depth investigation as a matter of priority. The opening of a formal investigation does not prejudge its outcome.
Background and procedure
Article 102 of the TFEU prohibits the abuse of a dominant position. The implementation of these provisions is defined in the Antitrust Regulation (Council Regulation No 1/2003), which can also be applied by the national competition authorities.
The Commission opened the in-depth investigation into Amazon’s use of marketplace seller data on 17 July 2019.
A Statement of Objections is a formal step in Commission investigations into suspected violations of EU antitrust rules. The Commission informs the parties concerned in writing of the objections raised against them. The addressees can examine the documents in the Commission’s investigation file, reply in writing and request an oral hearing to present their comments on the case before representatives of the Commission and national competition authorities. Sending a Statement of Objections and opening of a formal antitrust investigation does not prejudge the outcome of the investigations.
More information on the investigation is available on the Commission’s competition website, in the public case register under case number AT.40462.
The Commission has informed Amazon and the competition authorities of the Member States that it has opened a second in-depth investigation into Amazon’s business practices.
This investigation will cover the European Economic Area, with the exception of Italy. The Italian Competition Authority started to investigate partially similar concerns last year, with a particular focus on the Italian market. The Commission will continue the close cooperation with the Italian Competition Authority throughout the investigation.
More information on the investigation will be available on the Commission’s competition website, in the public case register under case number AT.40703.
There is no legal deadlines for bringing an antitrust investigation to an end. The duration of an antitrust investigation depends on a number of factors, including the complexity of the case, the extent to which the undertakings concerned cooperate with the Commission and the exercise of the rights of defence.
Compliments of the European Commission.
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Statement by President von der Leyen on 10 November, 2020 |
“A safe and effective vaccine is our best chance to beat coronavirus and return to our normal lives.
In the past months, the European Commission has been working tirelessly to secure doses of potential vaccines.
And tomorrow we authorise a contract for up to 300 million doses of the vaccine developed by German company BioNTech and Pfizer. This is the most promising vaccine so far.
Once this vaccine becomes available, our plan is to deploy it quickly, everywhere in Europe. This will be the fourth contract with a pharmaceutical company to buy vaccines. And more will come. Because we need to have a broad portfolio of vaccines based on different technologies.
We have already started working with Member States to prepare national vaccination campaigns.
We are almost there. In the meantime, let us be prudent, and stay safe.”
Compliments of the European Commission.
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Full discussion available as a PDF |
This discussion paper considers regulatory and supervisory issues relating to outsourcing and third-party relationships. It will facilitate a discussion on current regulatory and supervisory approaches to the management of outsourcing and third-party risks.
Financial institutions have relied on outsourcing and other third-party relationships for decades. However, in recent years, the extent and nature of interactions with a broad and diverse ecosystem of third parties has evolved, particularly in the area of technology. The financial sector’s recent response to COVID-19 highlights the benefits as well as the challenges of managing the risks of financial institutions’ interactions with third parties. The pandemic may have also accelerated the trend towards greater reliance on certain third-party technologies.
The discussion paper identifies a number of issues and challenges. For instance, financial institutions have to ensure that their contractual agreements with third parties grant to them, as well as to supervisory and resolution authorities, appropriate rights to access, audit and obtain information from third parties. These rights can be challenging to negotiate and exercise, particularly in a multi-jurisdictional context. The management of sub-contractors and supply chains is another challenge that was highlighted in the context of financial institutions’ response to COVID-19.
There is a common concern about the possibility of systemic risk arising from concentration in the provision of some outsourced and third-party services to financial institutions. These risks may become higher as the number of financial institutions receiving critical services from a given third party increases. Where there is no appropriate mitigant in place, a major disruption, outage or failure at one of these third parties could create a single point of failure with potential adverse consequences for financial stability and/or the safety and soundness of multiple financial institutions. Given the cross-border nature of this dependency, supervisory authorities and third parties could particularly benefit from enhanced dialogue on this issue.
Responses to the public consultation should be sent to fsb@fsb.org by 8 January 2021 with “Outsourcing and third-party relationships”. Consultation responses will help facilitate a discussion on current regulatory and supervisory approaches to the management of outsourcing and third-party risks. Consultation responses will be published on the FSB’s website unless respondents expressly request otherwise.
Compliments of the Financial Stability Board.
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