Article by Atif Mian in the IMF’s Finance & Development Magazine |  Nature requires balance—between predator and prey in the jungle, between the push and pull of planets in orbit, and so on. The economic system is no different; it requires long-term balance between what people earn and what they spend. Loss of this balance has led to a massive debt supercycle that threatens the global economy. Breaking that cycle is one of the most pressing challenges of the 21st century.
The debt supercycle is the product of an ever-increasing buildup of borrowing by consumers and governments. For example, total debt was about 140 percent of GDP between 1960 and 1980 in the United States, but has since more than doubled—to 300 percent of GDP. The same trend holds true globally. In fact, not even the Great Recession of 2008—which in many ways was a result of the excesses of borrowing—could put a dent in debt’s relentless upward march. It would be a mistake to think that 2008 reflected merely some unfortunate policy misstep. The buildup in debt that led to the 2008 crisis stemmed from deep structural imbalances in the economy. Those imbalances persist, as do the dangers associated with them.
Behind the imbalances
There are two main forces behind the rise of imbalances that have generated the debt supercycle: the saving glut of the rich and the global saving glut. The saving glut of the rich is a consequence of rising inequality. The share of disposable income going to the very rich (top 1 percent) has been steadily rising since 1980. Since the rich also tend to save a much higher fraction of their disposable income, rising inequality has led to a large surplus of savings accumulated by the very rich. The global saving glut is driven by a group of countries, including China, that essentially mimic the saving glut of the rich phenomenon. These countries have been earning a larger share of global income and also save at a much higher rate through various government institutions, such as central banks and sovereign wealth funds. The combined consequence of these two imbalances is a rise in financial surpluses, which have financed the global debt supercycle.
The financial sector plays an important intermediation role: it takes financial surpluses from rich individuals and countries and lends them to various segments of the economy. A well-functioning financial sector would channel the financial surpluses toward productive investments, such as building and maintaining infrastructure and developing technology. Any debt resulting from such productive lending would naturally be sustainable, because returns from investment would pay it off. Unfortunately, a key feature of the debt supercycle is its failure to finance productive investment. For example, even though total debt as a share of GDP has more than doubled, real investment as a share of GDP has remained stagnant, or even fallen over the past four decades.
Nature requires balance—between predator and prey in the jungle, between the push and pull of planets in orbit, and so on. The economic system is no different; it requires long-term balance between what people earn and what they spend. Loss of this balance has led to a massive debt supercycle that threatens the global economy. Breaking that cycle is one of the most pressing challenges of the 21st century.
The debt supercycle is the product of an ever-increasing buildup of borrowing by consumers and governments. For example, total debt was about 140 percent of GDP between 1960 and 1980 in the United States, but has since more than doubled—to 300 percent of GDP. The same trend holds true globally. In fact, not even the Great Recession of 2008—which in many ways was a result of the excesses of borrowing—could put a dent in debt’s relentless upward march. It would be a mistake to think that 2008 reflected merely some unfortunate policy misstep. The buildup in debt that led to the 2008 crisis stemmed from deep structural imbalances in the economy. Those imbalances persist, as do the dangers associated with them.
Behind the imbalances
There are two main forces behind the rise of imbalances that have generated the debt supercycle: the saving glut of the rich and the global saving glut. The saving glut of the rich is a consequence of rising inequality. The share of disposable income going to the very rich (top 1 percent) has been steadily rising since 1980. Since the rich also tend to save a much higher fraction of their disposable income, rising inequality has led to a large surplus of savings accumulated by the very rich. The global saving glut is driven by a group of countries, including China, that essentially mimic the saving glut of the rich phenomenon. These countries have been earning a larger share of global income and also save at a much higher rate through various government institutions, such as central banks and sovereign wealth funds. The combined consequence of these two imbalances is a rise in financial surpluses, which have financed the global debt supercycle.
The financial sector plays an important intermediation role: it takes financial surpluses from rich individuals and countries and lends them to various segments of the economy. A well-functioning financial sector would channel the financial surpluses toward productive investments, such as building and maintaining infrastructure and developing technology. Any debt resulting from such productive lending would naturally be sustainable, because returns from investment would pay it off. Unfortunately, a key feature of the debt supercycle is its failure to finance productive investment. For example, even though total debt as a share of GDP has more than doubled, real investment as a share of GDP has remained stagnant, or even fallen over the past four decades.
Instead of financing investment, the debt supercycle has mostly financed unproductive consumption by households and governments. Whether debt finances consumption or investment does not pose a problem in the short term, because both contribute toward aggregate demand in the same way. However, debt-financed consumption, or “indebted demand,” has different implications in the long run when indebted consumers repay their lenders. Borrowers can repay their debt only by cutting consumption, which puts a drag on aggregate demand, since savers are less inclined to spend the paid-back funds on consumption.
Pushing rates down
Indebted demand thus pulls down aggregate demand in the long run. The economy attempts to compensate for this downward pressure by pushing interest rates down as well. Lower rates help ease the debt-service burden for borrowers and push aggregate demand back up. Consequently, the rise of the debt supercycle is associated with a persistent fall in long-term interest rates as well. For example, the 10-year US real interest rate has declined from about 7 percent in the early 1980s to zero or even negative values in recent years. One unfortunate implication of the fall in long-term rates is that asset valuations tend to rise, which further worsens inequality.
In short, rising imbalances traceable to the very rich and certain countries have generated a global debt supercycle that largely finances unproductive indebted demand. This significant characteristic of the debt supercycle pushes long-term interest rates down, which only further exacerbates rising wealth inequality. An equally troubling aspect of the debt supercycle is that real investment has not gone up despite the large decline in interest rates and abundant financial surpluses. Debt supercycles reflect problems on the demand side, with rising inequality and the saving glut of the rich, and problems on the supply side, with a highly restrictive investment response despite extremely low interest rates and abundant financing.
World economy’s vulnerabilities
What dangers does the debt supercycle pose to the world economy? An economy that relies on a constant supply of new debt to generate demand is always susceptible to disruptions in financial markets, which can trigger serious slowdowns. This is what happened in 2008 with household debt. Since then, the economy has relied more on government debt to generate demand. Governments in advanced economies can often borrow at a rate lower than their rate of growth, which makes it easier for them to sustain the debt supercycle and keep the economy afloat. But dependence on continuous government borrowing is politically risky because it relies on continued financial market stability. Recent rate hikes in many countries demonstrate that this reliance cannot be taken for granted.
Ultimately the economy needs to find a way to rebalance and reverse the debt supercycle. This calls for structural changes so that growth is more equitable, which would naturally reduce the scope for imbalances. There is also a natural role for tax policy to rebalance the economy. For example, taxing wealth beyond a certain threshold can promote more spending by the very wealthy. This in turn would reduce the saving glut of the rich that finances the unproductive debt cycle. Finally, supply-side reforms, such as removing restrictions on new construction, promoting competition, and boosting public investment, can help expand investment opportunities so that debt can fund productive investment rather than unproductive indebted demand.
Governments around the world have been responding to the ills of the debt supercycle with traditional fiscal and monetary tools. However, as is well known, these tools are designed only to address temporary cyclical problems, not structural problems such as long-term imbalances. For example, looser monetary policy may help boost demand in the short term by enabling borrowers to borrow a little more. But ultimately such indebted demand will pull the economy back down again. We have at best been kicking the proverbial can down the road, and at worst further impeding eventual resolution of the debt supercycle.
 
Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.
 
For more information, please contact the author:
> Atif Mian, Professor of Economics, Public Policy, and Finance, Princeton University
 
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The European Commission was instrumental in brokering important outcomes at the 13th ministerial meeting of the World Trade Organization (MC13) that ended Friday in Abu Dhabi. After a week of intense engagement, EU negotiators secured important agreements on e-commerce, new rules to improve global services trade, environmental cooperation, and strengthening the position of developing countries in the global trading system.
However, over the past months, the EU had worked for ambitious results to revitalise the WTO at a time of rising geopolitical tensions, including a comprehensive agreement on global fisheries subsidies, agriculture reform, and meaningful progress on dispute settlement. The EU regrets that, despite willingness by a large majority of WTO members, it was not possible to find compromises on these issues.
E-COMMERCE REMAINS DUTY FREE
WTO Members agreed to renew the “e-commerce moratorium” until MC14, maintaining duty free trade in online services, including apps, games and software, as well as digitally transmitted content such as music, video, and other digital files. The EU invested considerable time and political effort to build a coalition in favour of this extension, which will help the growth of an already booming global trade in digital services. The e-commerce moratorium has been in place since 1998 and is crucial for businesses – notably SMEs – and consumers around the world, enabling them to engage in electronic commerce and to access electronic services more cheaply and easily. It is also key for businesses in developing countries to expand globally. Digital trade already accounts for close to a quarter of global trade and will only continue to grow in importance. The EU will continue to develop efforts at the WTO towards creating a more inclusive, predictable, and rules-based global trading system that is fit for the digital economy, including seeking a long-term solution for customs duties on electronic transmissions.
BOOST FOR GLOBAL TRADE IN SERVICES
The EU welcomed the entry into force of new rules to facilitate and simplify trade in services. Businesses will now enjoy clear, predictable and effective authorisation procedures in more than 71 markets. The EU was at the forefront of this initiative, which will support economic growth for us and our partners in the largest and fastest growing sector of today’s economy.
SUPPORTING DEVELOPMENT 
The EU played a leading role in delivering outcomes that will integrate developing countries more firmly into the global trading system.  123 WTO Members finalised a deal to facilitate investment and support development. This new Agreement on Investment Facilitation for Development (IFD) aims to harness the economic potential of foreign direct investment to boost development in poorer countries. The next step will be to incorporate this agreement into the WTO rulebook. The accession of two new members – Timor Leste and Comoros – to the WTO this week, highlights the value countries around the world still place on a shared global rules base for trade and investment. Ministers also adopted a decision to help least developed countries as they graduate to a higher level of development.  Beyond supporting least developed members, WTO members took a step towards improving clear and effective implementation of special and differential treatment for all developing countries in the key areas of standards for market access.
ENVIRONMENT & SUSTAINABILITY
Important progress was made at MC13 on the contribution of trade to environmental sustainability, taking forward work on tackling plastics pollution, phasing out fossil fuels and promoting the circular economy, among others.
The Coalition of Trade Ministers on Climate met under the co-leadership of the European Commission to discuss policies on driving decarbonisation. Ministers from 61 countries also adopted voluntary trade-related actions to tackle the climate crisis.
NO DEAL ON GLOBAL FISHERIES SUBSIDIES
The EU deeply regrets that a handful of WTO members blocked a comprehensive agreement on global fisheries subsidies. A deal was on the table to build on the outcome reached at the 12th Ministerial Conference, and fulfil the mandate set by the UN Sustainable Development Goal 14.6 to ban harmful fisheries subsidies worldwide.
The EU worked with partners from across the development spectrum to find common ground for a robust deal to expand the rules to prohibit subsidies that contribute to overcapacity and overfishing.
INDUSTRIAL POLICY
We regret that there was no agreement at MC13 to launch deliberations on key trade challenges (Trade and Industrial Policy, policy space for industrialisation, Trade and environment) despite such a deal being supported by the EU and a majority of other delegations. The blockage of this future-oriented agenda by a small number of countries is a setback that weakens the role of the WTO as a key forum to address contemporary challenges.
Further international cooperation will continue to be necessary to address these issues, and the EU will maintain its leadership role in this respect.
NO AGREEMENT ON AGRICULTURE
Despite the constructive and pragmatic engagement of the EU and other Members to find compromises towards an agreement, the WTO Members could not agree on advancing agriculture reform at MC13. The divergences across the membership were too large to be solved. This failure is unfortunately to the detriment of the most vulnerable countries who count most on the multilateral trading system.
DISPUTE SETTLEMENT REFORM
AT MC13, WTO members recognised the progress made – and reaffirmed their commitment to finding agreement to restore – a fully functioning dispute settlement system by the end of 2024. The EU has consistently called on the WTO membership to make headway on reforming the dispute settlement system, which is critical to the WTO’s overall legitimacy and to stopping the erosion of trade rules. It is also vital in providing stability for companies to invest and export.  However,  a solution still needs to be found on a reformed appeal system.
SOLIDARITY WITH UKRAINE 
Trade ministers from around the world expressed support for Ukraine at a Solidarity Event,  hosted by the EU in the margins of the Ministerial Conference. The event marked the two years since the start of the full-scale war of aggression by Russia against Ukraine. Remembering the victims of the war, WTO Members in attendance reaffirmed their continued support for Ukraine as they called for the end of the war.

 
 
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It is my great pleasure to report to you ahead of your first meeting under the Brazilian G20 Presidency. Tax policy and tax administration efforts can help to move the dial in the fight against extreme poverty and hunger, while addressing rising inequality and closing the funding gaps on the Sustainable Development Goals (SDGs). Thanks to the leadership of the G20, stronger international tax cooperation in recent year has delivered significant additional revenues and other important benefits for governments around the world.
• Since the G20 led global efforts to crack down on bank secrecy in 2009, EUR 126 billion in additional tax revenues have been assessed or collected among the members of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum).
• The BEPS Project has successfully addressed various tax planning strategies used by multinational enterprises (MNEs) that exploit gaps and mismatches in tax rules to avoid paying tax. The OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) continues to implement the 15 BEPS Actions to tackle tax avoidance, improve the coherence of international tax rules, ensure a more transparent tax environment and address the tax challenges arising from the digitalisation of the economy.
• The implementation of the Inclusive Framework’s landmark Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (Two-Pillar Solution), agreed on 8 October 2021, is well advanced. The Pillar Two global minimum tax, which represents the most significant globally coordinated effort to address profit shifting ever agreed, is already being (or will be implemented) by over 35 jurisdictions taking effect in 2024. It will substantially reduce low-taxed profit globally by about 80% (from an estimated 36% of all profit globally to about 7%). Moreover, the Inclusive Framework is now working towards finalising the text of the Multilateral Convention to
Implement Amount A of Pillar One (MLC) by the end of March with a view to holding a signing ceremony by the end of June 2024. Amount A is set to allocate taxing rights on around USD 200 billion profit per year and raise USD 17-32 billion by reallocating taxing rights from investment hubs to market jurisdictions.
Since you last met in October 2023, two new countries have joined the Inclusive Framework, bringing its total membership to 145 countries and jurisdictions1 and three new countries have joined the Global Forum, bringing its total membership to 171 countries and jurisdictions – demonstrating the international community’s ongoing commitment to supporting these bodies as important platforms for international tax cooperation.
 
You can read the full report here.
 
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G20 merchandise trade growth flattens while services trade rises moderately in Q4 2023.
After several quarters of decline, G20 merchandise trade growth flattened in value terms in Q4 2023, as measured in current US dollars (Figure 1 and 2). There was little change in exports and imports compared to Q3 2023, as a robust recovery in East Asia was counterbalanced by a slowdown in Europe and North America. Export growth stagnated in the United States, with lower sales of automobiles being offset by higher sales of industrial supplies. In the European Union, exports were down by 0.6% driven by a decline in chemical products, while imports were down by 1.8%. Conversely, merchandise trade growth was strong in East Asia. China recorded a 0.6% increase in exports, in part driven by high tech products such as mobile phones, and a 3.9% increase in imports due to mechanical and electrical products. Exports increased in Japan and surged in Korea due to strong automobile sales and a recovery of the Korean semiconductor business. Higher sales of primary commodities fuelled export growth in Australia, Indonesia, and Brazil.
On the services side, preliminary estimates[1] point to moderate growth for the G20 in Q4 2023 compared to the previous quarter, as measured in current US dollars (Figure 1 and 2). Exports and imports are estimated to have grown by 1.6% and 1.3% in Q4 2023, respectively, following the 0.9% decrease in exports and 0.2% increase in imports in Q3. Exports rose by 2.5% in the United States reflecting higher receipts from most services, while imports expanded by 2.0% due to higher travel and transport expenditures. In Germany, exports grew by 1.6%, reflecting higher revenues from business and computer services, and imports rose by 2.0%, in part driven by higher travel expenditure abroad. Conversely, services exports fell markedly in France (minus 3.8%) and the United Kingdom (minus 6.2%), with imports also decreasing moderately in both countries. Soaring receipts for intellectual property services boosted export growth in Japan. Services exports also rose markedly in Korea and China, reflecting a widespread recovery across most service categories.
G20 merchandise trade contracted in value terms in 2023 as a whole, with exports and imports decreasing by 3.3% and 5.5%, respectively. Conversely, preliminary estimates suggest that G20 services trade continued to expand in 2023, with export and import growing at around 7.3% and 10.5% respectively.
 
You can read the news release in full here.
 
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The Commission welcomes the Council’s adoption of a 13th package of sanctions against Russia. Two years since Russia brutally invaded Ukraine, EU’s support for Ukraine and its people remains as strong as ever. Europe is united and determined to continue defending its values and founding principles.
This package focuses on further limiting Russia’s access to military technologies, such as for drones, and on listing additional companies and individuals involved in Russia’s war effort. With this new package the number of individual listings has reached over 2000, dealing a huge blow to those who enable Russia’s illegal war against Ukraine.
Yet, there is no room for complacency. Full implementation of the sanctions is crucial, to deny Moscow the revenue, goods and technology it needs to feed its war. The Commission will continue supporting Member States to ensure effective enforcement of the measures, as well as working closely with third countries to tackle circumvention attempts.
The 13th package has these key elements:
ADDITIONAL LISTINGS 
This is an unprecedented package of 194 individual designations, including 106 individuals and 88 entities. With it, the EU exceeds the threshold of 2000 listings.  In particular:

Targeting Russia’s military and defence sector: the new listings include more than 140 companies and individuals from the Russian military-industrial complex, which among other things manufacture missiles, drones, anti-aircraft missile system, military vehicles, high-tech components for weapons, and other military equipment.
Sending a strong signal against Russia’s war effort partners: the new listings target 10 Russian companies and individuals involved in the shipping of Democratic People’s Republic of Korea (DPRK) armaments to Russia. They also target the Defence Minister of the DPRK, as well as several Belarusian companies and individuals providing support to the Russian armed forces.
Fighting circumvention: the new listings include a Russian logistics company and its director involved in parallel imports of prohibited goods to Russia, and a third Russian actor involved in another procurement scheme.
Strengthening EU action against Russia’s temporary occupation and illegal annexation of areas of Ukraine: the new listings include six judges and 10 officials in the occupied territories of Ukraine.
Sanctioning violations of children rights: The new listings also include 15 individuals and 2 entities involved in the forced transfer and in the deportation and the military indoctrination of Ukrainian children, including in Belarus.

TRADE MEASURES
This package further deepens our actions to stop Russia from acquiring Western sensitive technologies for Russian military. Unmanned aerial vehicles, or drones, have been central to Russia’s war against Ukraine. This package thus specifically lists companies procuring Russia with key drone components and introduces some sectoral sanctions to close loopholes and make drone warfare more complicated.
BaSed on hard evidence from various sources, supported by trade and customs data, the package adds 27 Russian and third country companies to the list of entities associated to Russia’s military-industrial complex (Annex IV of Regulation 833/2014). The EU will impose export restrictions towards these companies regarding dual-use goods and technology, as well as goods and technology which might contribute to the technological enhancement of Russia’s defence and security sector. The package adds:

17 Russian companies which are involved in the development, production and supply of electronic components, particularly used in connection with drone production.
Four companies registered in China and one each registered in Kazakhstan, India, Serbia, Thailand, Sri Lanka, and Türkiye, also trading in the area of electronic components, including of EU-origin.

In addition, the package expands the list of advanced technology items that may contribute to Russia’s military and technological enhancement or to the development of its defence and security sector. It adds components used for the development and production of drones, such as electric transformers, static converters and inductors found inter alia in drones, as well as aluminium capacitors, which have military applications, such as in missiles and drones and in communication systems for aircrafts and vessels.  This will further weaken Russia’s military capabilities.
MEASURES TO FOSTER INTERNATIONAL COOPERATION
The new package adds the United Kingdom to the list of partner countries for the iron and steel imports. These partner countries apply a set of restrictive measures on imports of iron and steel and a set of import control measures that are substantially equivalent to those in the EU Regulation (EU) No 833/2014.
Background
Two years after Russia’s full-scale invasion of Ukraine, Europe is united and determined to continue defending its values and founding principles. The EU stands firmly with Ukraine and its people, and will continue to strongly support Ukraine’s economy, society, armed forces, and future reconstruction, for as long as it takes until Ukraine prevails.
To drain the Russian war machine of its revenue sources and key goods and technology, the EU has adopted 13 sanctions packages against Russia so far. Sanctions have significantly impacted Russia’s foreign revenues. EU sanctions have also ruptured Russia’s supply chains and limited its access to western technologies in important industrial sectors. Sanctions will deepen their effects over time.
As Russia tries to find ways around our sanctions, the Commission constantly evaluates the effectiveness of the measures in place, assessing how they are applied, detecting and addressing any potential loopholes. The focus now is on enforcement, in particular against circumvention of EU sanctions via third countries.
EU Sanctions Envoy David O’Sullivan continues his outreach to key third countries to combat circumvention. This is already delivering tangible results. Systems are being put in place in some countries for monitoring, controlling, and blocking re-exports. Working with like-minded partners, we have also agreed a list of Common High Priority sanctioned goods to which businesses should apply particular due diligence and which third countries must not re-export to Russia. We have recently extended by five items. In addition, within the EU, we have also drawn up a list of sanctioned goods that are economically critical and on which businesses and third countries should be especially vigilant.
 
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Blog post by Ulrich Bindseil, Piero Cipollone and Jürgen Schaaf | On 18 October 2023 the ECB’s Governing Council outlined the scope and key features of a digital euro. The ECB also decided to proceed with the “preparation phase” of the digital euro project. The actual decision on whether to issue a digital euro will be taken at a later stage, but not before the legal framework is in place and all functional features have been specified.
Based on the specifications for a digital euro put forward by the ECB and the European Commission, we can expect the digital euro’s features to include pan-European reach, legal tender status and a high level of privacy. A digital euro would combine all the features of a modern digital payment solution. It would fill the gap left by the absence of a European electronic payment solution that is available and accepted free of charge throughout Europe, thereby strengthening the monetary sovereignty and resilience of the currency union.
To preserve the economic function of commercial banks, individual digital euro holdings would be limited. Merchants would be able to receive and process digital euro, but would not be able to hold them at all ‒ protecting the corporate deposit base of the banking system. Moreover, digital euro holdings would not accrue interest. Users would be able to seamlessly link their digital euro account to a payment account with their bank, enabling a “reverse waterfall” mechanism. This eliminates the need to pre-fund the digital euro account for online payments, as any shortfall would be covered instantly from the linked commercial bank account, provided it has sufficient funds available.
Addressing concerns about bank disintermediation
From the outset, questions concerning the risk to bank funding were at the centre of discussions about central bank digital currencies (CBDCs). In theory, CBDCs could affect financial institutions, as depositors might choose to move money from bank deposits to the central bank. This could reduce the ability of the traditional banking system to provide credit. However, central banks have analysed this issue and devised ways of tackling such risks upfront. In the case of a digital euro, the combination of the reverse waterfall, a holding limit and no remuneration would strongly reduce incentives to keep large amounts of money in a digital euro wallet. Users would rely on digital euro as a means of payment rather than use it for investment, particularly in view of the tendency of money holders to consolidate their liquidity pool. Moreover, banks could always offer higher remuneration to retain deposits.
But despite the explicit inclusion of mitigation measures in CBDC design, banking associations, bank-sponsored think tanks and scholars have continued to publish studies emphasising the risks associated with eliminating financial intermediaries from transactions ‒ known as bank disintermediation ‒ through the potential issuance of CBDCs in general and of a digital euro in particular.
Given the persistence of such criticism, it is worth taking a closer look at the arguments.
Some critics say that in an acute economy-wide banking crisis, a digital euro could accelerate bank runs, which could exacerbate the crisis.However, this is not very plausible for the following reasons:

Since a limit would be applied to digital euro holdings, the ability of customers to withdraw unlimited amounts of cash would pose much more of a threat to banks. Indeed, the disadvantage of holding cash as a short-term store of value because of safety concerns would become less important in a crisis of such magnitude.
Even in severe banking crises, many banks are still considered safe (also because central banks act as a system-wide lender of last resort). For example, during the great financial crisis in 2008 as well as in the recent crisis that hit US regional banks, safe banks continued to benefit from inflows.
In recent decades bank runs have not generally been triggered by large numbers of retail customers withdrawing small deposits, but by incidents in the wholesale market or the withdrawal of very large individual amounts above the thresholds covered by deposit guarantee schemes.

Other critics say that the attractiveness of safe central bank money could lead to banks losing deposits as a source of refinancing in the long term. This could put a strain on lending to companies and private households. According to the Association of German Banks, substantial quantities of central bank money could be withdrawn from the banking system, which would restrict the ability of commercial banks to refinance against customer deposits. However, the combination of a holding limit, no remuneration, the reverse waterfall and the absence of corporate holdings of digital euro would mean that overall levels of digital euro holdings would remain rather low.
Comprehensive analysis must include banknotes
What matters most for banks is the total amount of central bank money in circulation. Focusing on digital euro alone ignores banknotes in circulation. This is misleading, as the way they both affect the financial accounts of the economy is identical. Banks experienced elevated demand for euro banknotes during periods of financial stress and low interest rates, but didn’t raise this as an issue at the time. Between 2007 and 2021 euro banknotes in circulation increased from €628 billion to €1,572 billion, which far exceeds the amount expected to be issued in the form of digital euro.
The declining use of banknotes for daily transactions will also eventually reduce the structural demand for banknotes. The point of having a “store of value” is that it should be spent, only not immediately. In addition, the usefulness of a store of value relies on the ease with which money can ultimately be spent. Therefore, the decline in the use of banknotes also risks reducing their attractiveness as a store of value in the long term.
Indeed, in 2023 the value of euro banknotes in circulation declined for the first time in nominal terms since 2002, by around €5 billion. Even though only 20% of the demand for banknotes can be attributed to domestic payments- and this trend reversal is probably mainly a reflection of higher interest rates – the digitalisation of payments is also a factor.
Digitalisation in general is likely to lead to lower real growth in central bank money in circulation, or even to a decline. From this perspective, the persistent complaints regarding future volumes of digital euro in studies sponsored by the banking system are not looking at the right variable (which is central bank money in circulation) and are outdated (since they ignore the digital euro blueprint).
Conclusion
As the ECB advances its work on developing a digital euro, it will continue to refine design choices, address potential risks and optimise benefits. The ECB has presented innovative design features that would limit the circulation of digital euro while offering benefits to users. The concerns regarding bank funding have been taken seriously by proposing holding limits, access constraints, no remuneration and the reverse waterfall. The holding limits would be calibrated based on a comprehensive analysis considering all relevant factors.
In terms of the interaction between central bank money and commercial bank funding, what really matters is the total volume of central bank money in circulation. Amid the declining use of banknotes, it is likely that nominal growth in banknotes in circulation will diminish or even turn negative. This could lead to a scenario in which there is a decline of central bank money in circulation relative to GDP.
Moreover, new players might pose a greater risk to bank funding than CBDCs. Stablecoins, e-money institutions and other narrow bank constructs, some sponsored by big tech companies with huge customer bases, do not care about the role of banks in the economy. Non-banks have no obvious incentive to limit the use of their stablecoins or the services they offer, and the use of stablecoins could become significant.
Banks are barking up the wrong tree when they rely on studies that overlook the outlined design features of a digital euro. In doing so, they ignore the many other challenges they need to address to ensure stable funding through deposits. Banks need to offer attractive products and services that incentivise customers to hold their deposits with them instead of migrating to new and powerful private competitors.
 
Authors:
> Piero Cipollone, Member of the Executive Board, ECB
> Ulrich Bindseil, Director General – Market Infrastructure & Payments, ECB
> Jürgen Schaaf, Adviser – Market Infrastructure & Payments, ECB
 
Compliments of the European Central Bank.
 The post ECB | Digital euro: Debunking banks’ fears about losing deposits first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Preface by Debora Revoltella, Director of the Economics Department |  The digital and green transitions, combined with a growing roll-back of globalisation, are pushing the European economy to transform to be more sustainable, resilient,  productive, and competitive. Now is the time to accelerate efforts to achieve those aims. After the severe economic shocks caused by the COVID-19 pandemic and the energy crisis, growth has slowed, and the economy risks falling into recession. However, unlike previous crisis periods, investment has remained surprisingly strong. This has been thanks to a combination of factors, including the high level of policy support with a strong focus on public investment, and the health of businesses, which enabled them to withstand the shocks comparatively well. Moreover, this period has seen some advances in the transformation of the European economy, despite the strains. Public investment remained resilient, and businesses have been investing in digitalisation, energy efficiency and reinforcing their supply chains.
Conditions for investment are rapidly deteriorating, however. Higher interest rates are coinciding with a reduction in fiscal space and a winding down of fiscal support for the overall economy. The financial buffers that have helped companies to keep investing, despite weakening growth and rising rates, are gradually being depleted. In this context, there are risks ahead for both public and private investment.
At the same time, effectively transforming the European economy will require huge levels of investment. Europe faces the challenges of digitalisation, ageing, the emerging  trend of deglobalisation and cutting its reliance on fossil fuels. Competitiveness is the leitmotif that brings these elements together. Staying competitive will depend on the  ability of firms to progressively increase productivity and successfully sell their goods and services in the global marketplace, ultimately improving living standards in a sustainable way. Competitiveness also depends on firms’ ability to drive change and adapt to it through innovation, which must be supported by the availability of skilled  employees, infrastructure, adequate finance and a conducive regulatory environment. In Europe, a well-oiled single market is also vital for enabling innovation. Fully removing internal barriers, increasing competition and taking advantage of economies of scale could smooth the reallocation of resources required for transformation and further improve efficiency, productivity and, ultimately, competitiveness.
To meet its climate goals and remain competitive, Europe needs to invest heavily in research and development (R&D), skills, infrastructure and the adoption of green, digital and more productive technologies. And despite the resilience of investment in recent years, funding to support these aims remains insufficient. In terms of productive  investment (a measure that excludes housing), Europe lost pace after the global financial crisis, falling behind the United States. The gap between the European Union and the United States is still some 1.5 percentage points of gross domestic product (GDP), largely driven by lower investment in machinery, equipment and innovation. Europe’s position in other important areas, such as R&D spending and the issuance of patents, is threatened, especially by China. And Europe faces the added challenge of ending its dependence on imported fossil fuels, with electricity prices projected to remain elevated for more than a decade before renewable energies start to push them down.
The investment to address these needs must be made by the private sector, for the most part. But that will not happen at sufficient speed and scale unless the public sector acts to create enabling conditions and to support investment in a catalytic way. As global competition accelerates, Europe must focus on the essentials: enhancing innovation and ensuring that innovative and highly productive firms have the resources and conditions they need to grow. These firms require a competitive environment that is open to change and disruptive innovation, as well as access to the sizeable and level playing field offered by the EU single market, which will allow them to reap economies of scale. They also need more suitable financial resources, such as equity or quasi-equity instruments, to be able to scale up their operations.
In the context of growing geopolitical risks and deglobalisation, there is also a need for more investment in the diversification and resilience of supply chains. The EU economy benefits from its openness to trade, while the EU single market offers strategic opportunities to diversify supplies among EU members.
However, Europe needs targeted strategies to further enhance its resilience against supply disruptions, particularly for raw materials that are critical to the green transition. Europe’s aim to reduce emissions by 55% by 2030 represents a still greater challenge for the economy, but it also brings many opportunities. From innovating green  technologies to deploying them, Europe’s climate ambitions are reflected in increasingly clear incentives and the emergence of market-leading players.
Improving the availability of skills – by investing in education and training and by facilitating workers’ ability to move – is also critical for the economy to transform and improve its competitiveness. The single market is a huge asset, but Europe has not yet fully realised its potential to facilitate the efficient allocation of capital and other resources and to help European firms grow into global champions.
This edition of the European Investment Bank’s annual Investment Report focuses on the European economy’s effort to transform and become more competitive, and to remain at the global technological frontier. The analysis it presents is supported the annual EIB Investment Survey of 12 000 European firms, the latest edition of which also included a special module on manufacturing firms covered by the EU Emissions Trading System. This report is divided into two parts. The first provides an assessment of the
macroeconomic and financial environment in the European Union. It discusses trends and developments in investment, focusing on government and corporate investment. The second part looks at the structural challenges of promoting innovation and digitalisation, and addressing climate change.
 
You can read the full report here.
 
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The Internal Market and Environment committees adopted on Wednesday their position on the rules on how firms can validate their environmental marketing claims.

The so-called green claims directive complements the already-approved EU ban on greenwashing. It defines what kind of information companies have to provide to justify their environmental marketing claims in the future. It also creates a framework and deadlines for checking evidence and approving claims, and specifies what happens to companies who break the law.
Verification system and penalties
MEPs agreed with the Commission that companies should submit any future environmental marketing claims for approval before using them. The claims would be assessed by accredited verifiers within 30 days, according to adopted text. Companies who break the rules may be excluded from procurements, lose their revenues and face a fine of at least at 4% of their annual turnover.
The Commission should draw up a list of less complex claims and products that could benefit from faster or simpler verification, MEPs say. It should also decide whether green claims about products containing hazardous substances should remain possible. MEPs also agreed that micro enterprises should be excluded from the new obligations and SMEs should get one extra year before applying the rules.
Carbon offsetting and comparative claims
MEPs confirmed the recent EU ban on green claims based solely on the so-called carbon offsetting schemes. They now specify that companies could still mention offsetting schemes if they have already reduced their emissions as much as possible and use these schemes for residual emissions only. The carbon credits of the schemes must be certified, as established under the Carbon Removals Certification Framework.
Special rules would also apply to comparative claims (i.e. ads comparing two different goods), including if the two products are made by the same producer. Among other provisions, companies should demonstrate they have used the same methods to compare relevant aspects of the products. Also, claims that products have been improved cannot be based on data that are more than five years old.
Quote
Parliament’s rapporteur Andrus Ansip (Renew, EE) for the Internal Market Committee said: “Studies show that 50% of companies’ environmental claims are misleading. Consumers and entrepreneurs deserve transparency, legal clarity and equal conditions of competition. Traders are willing to pay for it, but not more than they gain from it. I am pleased that the solution proposed by the committees is balanced, brings more clarity to consumers and at the same time is, in many cases, less burdensome for businesses than the solution originally proposed by the Commission.”
Parliament’s rapporteur Cyrus Engerer (S&D, MT) for the Environment Committee said: “It is time to put an end to greenwashing. Our agreement on this text ends the proliferation of deceitful green claims which have tricked consumers for far too long. It also ensures that businesses have the right tools to embrace genuine sustainability practices. European consumers want to make environmental and sustainable choices and all those offering products or services must guarantee that their green claims are scientifically verified.”
Next steps
The draft report was adopted with 85 votes to 2 and 14 abstentions. It will now be put to a vote at an upcoming plenary session and will constitute Parliament’s position at first reading (most likely in March). The file will be followed up by the new Parliament after the European elections on 6-9 June.
 

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