By Piero Cipollone, Member of the Executive Board of the ECB, at the Committee on Economic and Monetary Affairs of the European Parliament | Brussels, 14 February 2024

Thank you for the opportunity to speak before the Committee today. As I emphasised during my confirmation hearing, I am committed to actively pursuing the dialogue with the European Parliament on a digital euro.
This year marks the 25th anniversary of the euro and our monetary union. It is up to us to ensure both remain fit for the digital age. The Single Currency Package[1] will help us achieve just that: first, by ensuring cash remains widely accessible and accepted; and second, by complementing cash with a digital option for paying with central bank money.
A digital euro would be a European means of payment which could be used free of charge, for any digital payment, anywhere in the euro area. Together with cash, a digital euro would preserve European citizens’ freedom to use a public means of payment.
Yet, we are at risk of taking this freedom for granted. In my previous role, I received countless letters from mayors of communities – in mountainous regions for instance – who expressed concerns about increasingly long distances to the nearest ATM.
Cash and a digital euro have the same objective: ensuring that everyone, regardless of their income, can pay in any situation of daily life. This is a fundamental right. And it should be protected in the same way in all parts of the euro area.
This is a timely moment to discuss a digital euro. As co-legislators, you are currently debating the European Commission’s legislative proposal, while the Eurosystem initiated the digital euro preparation phase last November.[2]
Your legislative deliberations frame our technical work, and they will continue to do so. The Eurosystem stands ready to provide technical input to European co-legislators as needed. Let me assure you that the ECB’s Governing Council will not take any decision about the issuance of a digital euro until the legislative act has been adopted. This constitutes the framework within which the digital euro will be established as legal tender. We will of course remain fully accountable at all times and will keep you continuously and closely informed about the Eurosystem’s progress towards a digital euro, not just at this stage but also after the legislative deliberations have concluded.
Let me now update you on four key issues that are central to our preparation phase: i) search for possible providers to develop a digital euro platform and infrastructure; ii) preparing the digital euro rulebook; iii) ensuring the stability of the financial system; and iv) last but not least, offering a higher level of privacy when making digital payments.
Searching for possible providers to develop a digital euro platform and infrastructure
At the beginning of this year, we started the selection process to find possible providers who could potentially develop a digital euro platform and infrastructure.[3]
Let me be clear: we are not launching any of the development work now. Instead, we want to establish framework agreements that could be used in the coming years to develop the relevant components if the decision to launch the digital euro is taken.[4] We need to be prepared for such an event. Our readiness would be compromised if we started searching for possible suppliers only after that decision is made. However, we are not tying our hands in any way by sourcing potential suppliers now. The agreements will be sufficiently flexible to accommodate the legislative deliberations or technological advances. And if we were to take the decision not to launch a digital euro, we would not sign any contracts.
Closer engagement with external providers will provide us with insights into the technological options available and the choices to be made. This is particularly crucial for components that are not yet on the market, such as the offline digital euro functionality.
To strengthen our autonomy, resilience and security, a digital euro would rely on a European infrastructure. Accordingly, only legal entities with registered offices in the EU and controlled by such entities or EU nationals[5] will be eligible to participate in the procurement process.[6]
At this stage, we have issued calls for applications to establish framework agreements with potential providers of digital euro components and related services.
We will publish the outcome of the subsequent public tender process on our website.
Preparing the digital euro rulebook
There is currently no single European digital means of payment that is universally accepted across the entire euro area. This forces Europeans – consumers, merchants and banks – to rely on ever more expensive international card solutions for daily payment activities. Fees applied by international card schemes almost doubled between 2016 and 2021 in the EU.[7] And even these international card solutions cannot be used everywhere.
A digital euro would remedy this situation, breaking Europe’s long-held dependency and fostering competition. To this end, everyone in the euro area should be able to make or receive payments in digital euro, irrespective of their intermediary or country of origin – as is currently the case for cash.
This is why we need a digital euro rulebook. We are working on a draft rulebook together with representatives of consumers, retailers and intermediaries.[8] We have recently published a report on our progress in this area.[9]
The rulebook will define a single set of rules, standards and procedures for the digital euro that will ensure its harmonious implementation. This will guarantee, for example, that someone from Finland will be able to pay with digital euro as easily and in the same way in Lisbon as they can back home in Helsinki.
A digital euro would thus provide an alternative infrastructure for all day-to-day payments, which could be used by payment service providers and schemes, such as the European Payments Initiative, Bizum or Bancomat, to roll out instant payment-based solutions across the euro area. This would reduce our dependence on non-European players while fostering competition among European players.
By analogy: the digital euro infrastructure could be seen as a common European railway, on which different companies can operate their own trains and compete for customers without needing to deploy their own private tracks, as is the case with today’s payment system. In addition, private payment service providers could launch new and innovative products or extend their scope beyond existing use cases and domestic markets. This would be a marked improvement on the current situation.
Ensuring the stability of the financial system
There is a growing public preference for digital payments.[10] But central bank money is, for now, only available in physical form – cash. So, if we do not offer a digital euro, we run the risk that central bank money could be crowded out of payments.
Our objective is to preserve the role and share of central bank money in payments, not to displace private money. As clearly stated in the European Commission’s legislative proposal, preserving the role of central bank money should not come at the expense of other objectives, such as protecting monetary policy transmission or financial stability. And we are in any case bound by these objectives, which are at the heart of the ECB’s mandate.
That is why we have included safeguards in the design of a digital euro.
First, as is the case for euro banknotes, digital euro holdings would not be remunerated and hence would not compete with savings deposits.[11] And banks could always offer higher remuneration to retain deposits. This would benefit savers and could in fact increase the deposit base, supporting bank lending.[12]
Second, there will be limits on the amount of digital euro that can be held by individuals. And while businesses and public sector organisations could receive and process payments in digital euro, they could not hold any.[13]
Third, users could pay with digital euro online without prefunding their wallets, by seamlessly linking their digital euro account to a payment account with their bank. This would offer them the convenience of being able to make and receive online payments, even above their digital euro funds and the holding limit.[14] However, if people want to use the offline functionality, they would need to prefund their offline wallet. Just like today with people having to withdraw banknotes in order to use cash.
These features show that a digital euro is being designed as a means of payment and not as a form of investment. And it will preserve the role of intermediaries, contrary to alternative solutions offered by technology firms, which will have no such safeguards.[15]
We have just started to develop the analytical framework and models that would be used to determine the holding limit. This limit will be set to preserve financial stability, having considered the impact on different bank business models and on monetary policy transmission and implementation.
This is a Eurosystem-wide endeavour, and we will engage with banks and other market participants to properly set out the necessary assumptions and define the analytical methodology. We will share our findings with you and the general public. Let me assure you that financial stability considerations are central to our thinking as they underpin our ability to pursue our price stability mandate.
Offering a higher level of privacy in digital payments
Let me now turn to one of the most important design features of a digital euro, namely privacy. We welcome the high standard of privacy and data protection provided for under the proposed regulation. Ultimately, this is for the European co-legislators to decide.
On our side, we are determined to not only protect but enhance privacy in payments.
First, we already provide cash, the payment instrument that offers the highest level of privacy. We are determined to continue to do so, as demonstrated by our ongoing efforts to produce the third series of euro banknotes.[16] We will continue to do everything in our power to ensure people can continue to have the option to pay with it. They value this option, and we are committed to maintaining it for them.[17]
Second, a digital euro will be usable offline. Paying offline in digital euro would be similar to using cash. Just like cash payments, it would require physical proximity and offer cash-like privacy: personal transaction details would only be known to the payer and the payee.
Third, a digital euro would allow people to make online payments with very high standards of privacy, higher in fact than what commercial solutions currently offer. The Eurosystem would not be able to identify people based on the payments they make.[18] We would only see a minimal set of pseudonymised data necessary to fulfil Eurosystem tasks, such as settlement.[19] And digital euro users would retain control over how their data is used by payment service providers,[20] who would have access to customer data to prevent illicit activities, such as money laundering or terrorist financing,[21] and also to fulfil their contractual obligations towards customers, while having to respect all applicable privacy protection regulations, such as the General Data Protection Regulation. In its Opinion on the digital euro, the ECB also suggests considering the possibility of offering increased privacy for certain low-risk, low-amount payments in digital euro in online mode.[22]
Fourth, we would implement state-of-the-art security and privacy-preserving measures to ensure privacy protection. And we will deploy strong governance safeguards. Independent data protection authorities will oversee compliance with EU data protection rules and regulations, which are the strongest privacy and security laws in the world. And provisions in the proposed regulation envisage data protection authorities being consulted at an early stage.[23]
Conclusion
Let me conclude.
The digital euro is a common European project.
First and foremost, it is about preserving everyone’s freedom to use a public means of payment anywhere in the euro area, even as payments go digital. And it is crucial to strengthen our collective resilience and autonomy in a more fragile global environment.
That is why it is so important to set an ambitious pace. But money is trust. The digital euro will need broad support. We are therefore committed to supporting your work as co-legislator. And we are engaging with all stakeholders.
In this spirit, I will continue to be available in order to engage with you throughout the preparation phase and beyond. Together, we can build the euro’s digital future.
Thank you.
 
Compliments of the European Central Bank

____________________________________________

In June 2023 the European Commission put forward two proposals to ensure that citizens and businesses can continue to access and pay with euro banknotes and coins across the euro area, and to set out a framework for a possible new digital form of the euro that the European Central Bank may issue in the future, as a complement to cash. See Proposal for a Regulation of the European Parliament and of the Council on the legal tender of euro banknotes and coins, European Commission, COM(2023) 364 final, 28 June 2023; and Proposal for a Regulation of the European Parliament and of the Council on the establishment of the digital euro, European Commission, COM(2023) 369 final, 28 June 2023.
For more information, see the letter from Piero Cipollone to Irene Tinagli, Chair of the Committee on Economic and Monetary Affairs of the European Parliament, on the “Update on work of digital euro Rulebook Development Group and start of selection procedure for potential digital euro providers” of 3 January 2024.
For more information, see ECB (2024), “Calls for applications for digital euro component providers”, MIP News, 3 January; and the letter from Piero Cipollone to Irene Tinagli, op. cit.
The resulting framework agreements could be used to develop the following digital euro components: i) alias lookup; ii) secure exchange of payment information; iii) fraud and risk management; iv) offline component; and v) a digital euro app and related software development kit. These framework agreements would include only part of the scope of the digital euro service to be offered, as other elements, such as the settlement component, would be sourced in parallel within the Eurosystem.
An ‘EU National’ means any legal entity with registered offices in an EU member state or any natural person that has the nationality of an EU member state.
The eligibility criteria that apply to applicants also apply to sub-contractors.
From 0.08% to 0.15% per transaction, see the Scheme Fee Study by CMSPI and Zephyre in 2020.
The Eurosystem established a Rulebook Development Group for the digital euro scheme to obtain input from the financial industry, consumers and merchants. The Group consists of 22 public and private sector experts with experience in finance and payments. See ECB (2023) “Members of the Rulebook Development Group”, 15 February. Over the past ten months, this group has been preparing a draft digital euro rulebook and will continue its work this year.
See ECB (2024), “Update on the work of the digital euro scheme’s Rulebook Development Group”, 3 January; and the letter from Piero Cipollone to Irene Tinagli, op. cit.
ECB (2022), Study on the payment attitudes of consumers in the euro area (SPACE), December.
See ECB (2023), “A stocktake on the digital euro”, 18 October, which presents the findings of the investigation phase of the digital euro project and is the basis for the work during the preparation phase. See also “Opinion of the European Central Bank of 31 October 2023 on the digital euro (CON/2023/34)”.
See David Andolfatto, Assessing the Impact of Central Bank Digital Currency on Private Banks, The Economic Journal, Volume 131, Issue 634, February 2021, Pages 525–540. The paper finds that the introduction of a central bank digital currency has no detrimental effect on bank lending activity and may, in some circumstances, even serve to promote it. Competitive pressure leads to a higher deposit rate which reduces profit but expands deposit funding through greater financial inclusion and desired saving.
The payments received by businesses and public sector organisations would be transferred immediately to their commercial bank account. Any payments they make would be funded instantly from their commercial bank account.
The waterfall functionality would allow users to make or receive payments in digital euro above the holding limit by linking a digital euro account to a commercial bank account. When receiving a payment, this would allow automated conversion of retail central bank digital currency in excess of a holding threshold into a bank deposit held in a linked commercial bank account chosen by the end user. Similarly, a reverse waterfall would ensure that end users can make a payment even if the amount exceeds their current digital euro funds. Additional liquidity would be pulled from the linked commercial bank account and the transaction would be completed in digital euro at its full value.
The counterfactual to a digital euro is not a benign status quo. In the absence of a digital euro, the emergence of potentially dominant private operators in the digital payments market could have a strong impact on the financial sector. This is a real possibility, as demonstrated by PayPal’s recent decision to launch its own US dollar-denominated stablecoin for use in digital payments. Private providers of payment services, including PayPal, have no incentive to limit the take-up of their stablecoins or the range of services they offer. Quite the opposite: their objective is to expand their customer base and gain market share. See Panetta, F. (2023), “Shaping Europe’s digital future: the path towards a digital euro”, introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 4 September.
See ECB (2023), “ECB selects “European culture” and “Rivers and birds” as possible themes for future euro banknotes”, press release, 30 November.
While use of and preferences for cash payments are on a declining trend, the importance of cash remains high. Overall, 60% of the euro area population considered having the option to pay with cash to be very or fairly important. See ECB (2022), “Study on the payment attitudes of consumers in the euro area (SPACE)”, December. The Eurosystem cash strategy aims to ensure that cash remains widely available and accepted as both a means of payment and a store of value.
Together with technology experts, the ECB is considering all state-of-the-art security and privacy measures that could be suitable for a mass retail payment product such as a digital euro. Pseudonymisation, clear segregation of data, hashing and other cryptographic techniques would ensure that the Eurosystem would not be able to identify individuals making or receiving payments in digital euro. End users’ payment data would be pseudonymised so that they could not be directly identified and the Eurosystem could not link any of the data it processes to an identified end user. See also ECB (2023), op. cit. (footnote 7).
The design of the online digital euro would provide more privacy than current digital payment solutions in terms of the data visible to the central infrastructure provider for payment processing. In its role as digital euro infrastructure provider, the Eurosystem would not be able to identify the individuals behind digital euro transactions. Only PSPs would know the correspondence between end user actual identity and payments data processed by the central infrastructure provider. This is unprecedented in the area of electronic retail payments and would offer greater personal data protection compared with current payment solutions, which concentrate a large amount of payments data in the hands of infrastructure and scheme services providers, allowing them to connect it to end users.
This would include an opt-in rather than an opt-out for allowing payment service providers to process a user’s personal data for commercial purposes or to provide additional services. The digital euro scheme would ensure that users would be able to make an informed decision and would not be forced to allow use of their personal data (beyond what is necessary for compliance with legal requirements) in order to make full use of basic digital euro services. See ECB (2023), “A stocktake on the digital euro”, 18 October, section 6.2.
See Panetta, F. (2022), “A digital euro that serves the needs of the public: striking the right balance”, introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 30 March; and ECB (2022), “Digital euro – Privacy options”, presentation to the Eurogroup, 4 April.
See “Opinion of the European Central Bank of 31 October 2023 on the digital euro (CON/2023/34)”.
See Article 5(2) on Applicable law and Article 32(2) on General fraud detection and prevention mechanism, Proposal for a Regulation of the European Parliament and of the Council on the establishment of the digital euro, European Commission, COM(2023) 369 final, 28 June 2023.

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Blog post by Diana Gomes and Anamaria Piloiu | The Eurosystem has accepted Scope as a new rating agency alongside Fitch, Moody’s, S&P and DBRS. This has a number of implications, including a wider range of credit opinions and expertise being considered for monetary policy purposes.
Credit rating agencies are private companies which assess the creditworthiness of issuers of financial instruments – be they governments, commercial banks or corporates. Many investors in the financial markets rely on rating agencies because it would be too costly for them to evaluate the credit risk of each issuer or debt instrument themselves. Central banks also use these ratings in their regular activities. That is why the recent acceptance of a fifth rating agency ­– Scope Ratings – has important implication for the Eurosystem and financial markets.
The ECB and the national central banks of the euro area use the rating information provided by these agencies during the implementation of monetary policy operations, either via the provision of loans to banks or via the direct purchase of assets in the financial market. For instance, the Eurosystem grants loans only against adequate collateral, which must be credit-rated. The credit risk information provided by ratings is important to mitigate financial risks to the ECB and the national central banks of the Eurosystem. The Eurosystem adheres to prudent and transparent standards and therefore only accepts high-quality assets in its monetary policy operations. Concretely, this means that the assets which the Eurosystem accepts as collateral or for purchases must meet minimum credit quality requirements and comply with specific eligibility conditions. To be eligible as collateral, assets need to have at least a BBB- (or the equivalent in another rating schema) from at least one accepted rating agency. In lending operations, the rating also affects how much money a commercial bank can borrow using an asset as collateral. The lower the rating, the higher the so-called haircut applied by the Eurosystem. Until recently only four rating agencies – Fitch Ratings, Moody’s, S&P Global Ratings and DBRS Morningstar – were accepted by the ECB. Chart 1 shows the share of financial assets rated by these four agencies.

Chart 1
Historical evolution of the use of credit rating agencies for monetary policy purposes

EUR billions (main axis) and percentages (secondary axis)

Sources: Eurosystem collateral database and authors calculations

The acceptance of Scope Ratings is a milestone for the Eurosystem. It offers a more diversified set of credit opinions, and therefore improves the ability to adapt and respond to evolving market dynamics. The addition of a new rating agency also broadens the pool of eligible collateral assets when the newcomer provides credit assessments of assets and issuers that are not rated by the other accepted agencies. Banks can then further diversify their collateral pools for central bank lending, which ultimately makes the implementation of monetary policy smoother.
The recognition of the fifth rating agency is also a milestone for the rating provider market. New players mean more competition, which is good for issuers as they can choose from a greater variety of agencies. Investors, too, benefit from a wider range of expertise, but also from greater transparency resulting from the Eurosystem’s efforts and requirements related to improving disclosures around ratings, processes and methodologies.
The Eurosystem conducts its own due diligence
Precisely because these ratings are so important, the Eurosystem conducts its own due diligence and does not mechanistically rely on them. To do so, the Eurosystem closely studies rating methodologies, rating reports and other relevant publications to fully understand how the rating decisions are made. This gives the Eurosystem a nuanced understanding of the information contained in credit ratings, for example by allowing it to disentangle qualitative judgment in rating decisions. This means that, in certain circumstances, the Eurosystem may deviate from the rating agencies’ opinions and apply discretionary measures such as country waivers. The most recent example was the acceptance of Greek sovereign debt instruments as collateral and for bond purchases in certain asset purchase programmes during the period when the associated sovereign rating was below the minimum acceptable rating threshold.
To be able to conduct its own due diligence, the Eurosystem accepts only credit rating agencies that are registered with the European Securities and Markets Authority (ESMA) and comply with the relevant acceptance criteria. The criteria cover crucial aspects such as rating disclosure, transparency and rating quality. For instance, credit rating agencies have to demonstrate a broad rating coverage across Europe and across asset classes. More specifically, a rating agency must demonstrate historical (at least three years) and current rating coverage for several asset classes, of at least: (i) 10% of eligible euro area assets; (ii) 20% of the nominal amount of eligible euro area assets; (iii) in two-thirds of the euro area countries. This rating coverage requirement is needed to ensure the Eurosystem’s risk protection and the efficient execution of its monetary policy framework. At the same time, this may help stimulate competition at the European level and support the integration of fragmented EU capital markets into a larger-scale EU capital market union, as more companies can benefit from a rating which allows them to potentially access the financial markets for funding.
The Eurosystem has consistently been open to additional credit rating agencies and engaged with external stakeholders such as smaller rating agencies, members of the European Parliament or ESMA. Of course, a number of ESMA-registered agencies – currently 29 – have specific focuses on certain assets or jurisdictions, which makes it difficult for them to comply with the Eurosystem rating coverage requirements and acceptance criteria. Importantly, the acceptance of a credit rating agency by the Eurosystem does not imply an endorsement of its ratings. It should also not be regarded as an assessment by the Eurosystem of the intrinsic quality of the rating agency. Instead, the acceptance is merely an acknowledgment that the rating agency complies with the Eurosystem’s needs for conducting its own scrutiny effectively.
Accepting Scope Ratings marks a milestone which fosters competition, transparency and the diversification of credit opinions in the credit rating agency industry, which benefits not only the Eurosystem, but also issuers and investors.
The views expressed in each article are those of the authors and do not necessarily represent the views of the European Central Bank and the Eurosystem.
 
For more information, please contact the authors:
> Diana Gomes, Senior Financial Risk Expert, ECB
> Anamaria Piloiu, Senior Financial Risk Expert, ECB
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On Tuesday, Parliament and Council negotiators reached a provisional deal on the Net-Zero industry Act to bolster EU production in technologies needed for decarbonisation.

The “Net-Zero industry Act” sets a target for Europe to produce 40% of its annual deployment needs in net-zero technologies by 2030, based on National Energy and Climate Plans (NECPs) and to capture 15% of the global market value for these technologies.
During negotiations, MEPs secured an approach based on a single list of technologies to be supported, including inter alia all renewable technologies, nuclear, industrial decarbonisation, grid, energy storage technologies, and biotech. The law will simplify the permitting process, setting maximum timelines for projects to be authorised depending on their scope and output.
The agreement provides for the creation of “Net-Zero Acceleration Valleys” initiatives, speeding up the permitting process by delegating parts of the environmental assessment evidence collection to member states.
Sustainability and resilience criteria
National support schemes aiming to speed up the deployment of technologies among households and consumers (e.g. solar panels, heat pumps) will have to take into account sustainability and resilience criteria, the text says. Public procurement procedures and auctions to deploy renewable energy sources should also meet such criteria, albeit under conditions to be defined by the Commission, and for a minimum of 30% of the volume auctioned per year in the member state, or alternatively for a maximum of six Gigawatt auctioned per year and per country.
A supply will be considered as not resilient when the proportion of a specific net-zero technology originating in a non-EU country accounts for more than 50% of the supply of that specific net-zero technology within the Union.
The legislation will encourage funding from national Emission Trading System (ETS) revenues and for most strategic projects through the Strategic Technologies for Europe Platform (STEP), and it is a step towards a European Sovereignty fund, MEPs say.
Quote
“This deal is good news for European industry and sets the tune for the next term. To achieve all our economic, climate and energy ambitions we need industry in Europe. This Act is the first step to making our market fit for this purpose”, said lead MEP Christian Ehler (EPP, DE).
Next steps
The informal agreement now needs the approval of both Parliament and Council in order to become law. The Industry, Research and Energy Committee will hold a vote on the file during a forthcoming meeting.
Background
A considerable amount of clean energy technology is needed to support reaching Europe’s 2030 and 2050 climate targets. Europe largely imports these technologies, and many non-EU countries have stepped up their efforts to expand their clean energy.
 

Compliments of the European Parliament.
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The Commission has today published a detailed impact assessment on possible pathways to reach the agreed goal of making the European Union climate neutral by 2050. Based on this impact assessment, the Commission recommends a 90% net greenhouse gas emissions reduction by 2040 compared to 1990 levels, launching a discussion with all stakeholders; a legislative proposal will be made by the next Commission, after the European elections, and agreed with the European Parliament and Member States as required under the EU Climate Law. This recommendation is in line with the advice of the European Scientific Advisory Board on Climate Change (ESABCC) and the EU’s commitments under the Paris Agreement.
Today’s communication also sets out a number of enabling policy conditions which are necessary to achieve the 90% target. They include the full implementation of the agreed 2030 framework, ensuring the competitiveness of the European industry, a greater focus on a just transition that leaves no one behind, a level playing field with international partners, and a strategic dialogue on the post-2030 framework, including with industry and the agricultural sector. The outcome of COP28 in Dubai shows that the rest of the world is moving in the same direction. The EU has been leading the way on international climate action, and should stay the course, creating opportunities for European industry to thrive in new global markets for clean technology.
Predictability and sustainability for our economy and society
Setting a 2040 climate target will help European industry, investors, citizens and governments to make decisions in this decade that will keep the EU on track to meet its climate neutrality objective in 2050. It will send important signals on how to invest and plan effectively for the longer term, minimising the risks of stranded assets. With this forward-planning, it is possible to shape a prosperous, competitive and fair society, to decarbonise EU industry and energy systems, and to ensure that Europe is a prime destination for investment, with stable future-proof jobs.
It will also boost Europe’s resilience against future crises, and notably strengthen the EU’s energy independence from fossil fuel imports, which accounted for over 4% of GDP in 2022 as we faced the consequences of Russia’s war of aggression against Ukraine. The costs and human impacts of climate change are increasingly large, and visible. In the last five years alone, climate-related economic damage in Europe is estimated at €170 billion euros. The Commission’s impact assessment finds that, even by conservative estimates, higher global warming as a result of inaction could lower the EU’s GDP by about 7% by the end of the century.
Establishing the conditions for achieving the recommended target
Achieving a 90% emissions reduction by 2040 will require a number of enabling conditions to be met. The starting point is the full implementation of the existing legislation to reduce emissions by at least 55% by 2030. The ongoing update of the draft National Energy and Climate Plans (NECPs) is a key element in monitoring progress and the Commission is engaging with Member States, industry and social partners to facilitate the necessary action.
The Green Deal now needs to become an industrial decarbonisation deal that builds on existing industrial strengths, like wind power, hydropower, and electrolysers, and continues to increase domestic manufacturing capacity in growth sectors like batteries, electric vehicles, heat pumps, solar PV, CCU/CCS, biogas and biomethane, and the circular economy. Carbon pricing and access to finance are also critical for the delivery of emission reduction targets by European industry. The Commission will set up a dedicated taskforce to develop a global approach to carbon pricing and carbon markets. Europe will also need to mobilise the right mix of private and public sector investment to make our economy both sustainable and competitive. A European approach on finance will be needed in the coming years, in close cooperation with Member States.
Fairness, solidarity and social policies need to remain at the core of the transition. Climate action has to bring benefits to everybody in our societies, and climate policies need to take into account those who are most vulnerable, or face the greatest challenges to adapt. The Social Climate Fund and Just Transition Fund are examples of such policies which will already help citizens, regions, businesses and workers in this decade.
Finally, open dialogue with all stakeholders is a crucial precondition to delivering the clean transition. The Commission has already established formal dialogues with industry and agricultural stakeholders, and the coming months of political debate in Europe are an important opportunity to secure public engagement on the next steps and policy choices. Structured dialogue with social partners should be strengthened to ensure their contribution, focusing on employment, mobility, job quality, investments in reskilling and upskilling. This ongoing outreach will help the next Commission to table legislative proposals for the post-2030 policy framework which will deliver the 2040 target in a fair and cost-efficient manner. The pace of decarbonisation will depend on the availability of technologies that deliver carbon-free solutions, and also on an efficient use of resources in a circular economy.
The energy sector is projected to achieve full decarbonisation shortly after 2040, based on all zero and low carbon energy solutions, including renewables, nuclear, energy efficiency, storage, CCS, CCU, carbon removals, geothermal and hydro. The Industrial Alliance on Small Modular Reactors, launched today, is the latest initiative to enhance industrial competitiveness and ensure a strong EU supply chain and a skilled workforce. An important benefit of these efforts is a lower dependence on fossil fuels thanks to an 80% fall in their consumption for energy from 2021 to 2040. The post-2030 policy framework will be an opportunity to develop these policies further and complement them with social and industrial policies to ensure a smooth transition away from fossil fuels.
The transport sector is expected to decarbonise through a combination of technological solutions and carbon pricing. With the right policies and support, the agriculture sector can also play a role in the transition, while ensuring sufficient food production in Europe, securing fair incomes and providing other vital services such as enhancing the capacity of soils and forests to store more carbon. A holistic dialogue with the broader food industry, also beyond the farm gate, is crucial to success in this area and to the development of sustainable practices and business models.
The EU will continue to develop the right framework conditions to attract investment and production. A successful climate transition should go hand-in-hand with strengthened industrial competitiveness, especially in clean tech sectors. A future enabling framework for industry decarbonisation should build on the existing European Green Deal Industrial Plan. Public investment should be well targeted with the right mix of grants, loans, equity, guarantees, advisory services and other public support. Carbon pricing should continue to play an important role in incentivising investments in clean technologies and generating revenues to spend on climate action and social support for the transition.
Achieving the 90% recommended target will require both emissions reductions and carbon removals. It will require deployment of carbon capture and storage technologies, as well as the use of captured carbon in industry. The EU’s Industrial Carbon Management strategy will support the development of CO2 supply chains and the required CO2 transport infrastructure. Carbon capture should be targeted to hard-to-abate sectors where alternatives are less economically viable. Carbon removals will also be needed to generate negative emissions after 2050.
Background
A historically high acceleration in climate disruption in 2023, saw global warming reaching 1.48°C above pre-industrial levels, and ocean temperatures and Antarctic Ocean ice loss breaking records by a wide margin. Surface air temperature has risen even more sharply in Europe, with the latest five-year average at 2.2°C above the pre-industrial era. Wildfires, flooding, droughts and heatwaves are all projected to increase, and reducing emissions and enhancing adaptation action is the only way to avoid the worst outcomes of climate change and protect lives, health, the economy and ecosystems.
The European Climate Law, which entered into force in July 2021, enshrines in legislation the EU’s commitment to reach climate neutrality by 2050 and the intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. The EU has since adopted a legislative package known as ‘Fit for 55′ which will enable the 2030 targets to be delivered. The Climate Law also requires the European Commission to propose a climate target for 2040 within six months of the first Global Stocktake of the Paris Agreement, which took place in December 2023. Once the 2040 climate target is adopted, under the next Commission, that target will form the basis for the EU’s new Nationally Determined Contribution under the Paris Agreement, which needs to be communicated to the UNFCCC in 2025.
Setting a 2040 climate target will not only bring clear economic benefits from lower risks of extreme weather events and their related losses, it also comes with several co-benefits including improved air quality and associated health benefits, a reduced dependence on imported fossil fuels, and benefits to biodiversity. Climate change is causing more frequent and severe extreme weather events, that lead to significant and growing social impacts and economic damages. These economic losses far outweigh the cost of climate action.
 
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Special European Council, 1 February 2024
EU leaders greenlit additional funding for the multiannual financial framework 2021-2027 and discussed support for Ukraine.
They also discussed the situation in the Middle East and agriculture, and paid tribute to former European Commission President Jacques Delors, who passed away on 27 December 2023.

European Council conclusions, 1 February 2024
Remarks by President Charles Michel at the press conference of the special meeting of the European Council

Main results
Mid-term revision of EU long-term budget 2021-2027
As a follow-up to their meeting in December, EU leaders discussed the mid-term revision of the multiannual financial framework (MFF) 2021-2027. In this context, the leaders agreed to greenlight additional funding for a limited number of priority areas through a mix of new and existing funds.

€64.6 billion
additional funding in the MFF 2021-2027

The additional funding covers support for Ukraine, migration and the external dimension, the strategic technologies for Europe platform (STEP), Next Generation EU interest payments, special instruments, new own resources and elements that reduce the impact on national budgets.
Of the total amount, €33 billion are loans and €10.6 billion are redeployments from existing funding. The extra funding should be distributed as follows:

€50 billion for the Ukraine Facility (€17 billion in grants and €33 billion in loans)
€2 billion for migration and border management
€7.6 billion for the neighbourhood and the world
€1.5 billion for the European Defence Fund under the new STEP instrument
€2 billion for the flexibility instrument
€1.5 billion for the solidarity and emergency aid reserve

Next, the Council of the EU and the European Parliament need to adopt the mid-term revision.
In parallel, they will adopt the Ukraine Facility and the STEP.

Mid-term revision of the EU long-term budget 2021-2027 (background information)
Timeline – Mid-term revision of the EU long-term budget 2021-2027 (background information)

Ukraine Facility
To provide stable and predictable financing to Ukraine, the leaders agreed to set up the Ukraine Facility for the years 2024-2027. It is a new EU instrument to help the country in its recovery, reconstruction and modernisation on its path towards EU accession.
Of the total €50 billion available, €33 billion are in loans, and €17 billion are in grants (under a new thematic instrument, known as the Ukraine Reserve).
To ensure Ukraine’s ownership of its recovery and reconstruction, the Ukrainian government needs to prepare a plan that sets out a reform and investment agenda. To obtain the funding, Ukraine must also uphold and respect:

democratic mechanisms, including a multi-party parliamentary system
the rule of law
human rights, including the rights of persons belonging to minorities

In addition, the Commission and Ukraine need to protect the EU’s financial interests, particularly by countering fraud, corruption and conflicts of interest.
The Council will play a key role in the governance of the Ukraine Facility and the European Council will hold a debate every year on the implementation of the facility, on the basis of a Commission report. If necessary, in two years’ time the European Council will invite the Commission to make a proposal for a review in the context of the next MFF.
Migration and the external dimension
To support member states and tackle urgent challenges related to migration and border management, the leaders agreed to reinforce the budget by €2 billion. They also invited the Commission and member states to further explore the possibility of using cohesion funds to address migration challenges.
In the context of extraordinary geopolitical tensions, the leaders also greenlit €7.6 billion to underpin priorities for the EU’s neighbourhood and the world. The funding should help to:

maintain effective migration cooperation outside the EU
support Syrian refugees in Türkiye and the broader region
support the Western Balkans, the Southern neighbourhood and Africa
ensure enough funding for the EU’s neighbourhood, development and international cooperation instrument (NDICI)

EU migration and asylum policy (background information)
EU enlargement policy (background information)

Strategic technologies for Europe platform (STEP)
To ensure the EU’s strategic sovereignty and help make the European Union more competitive, the leaders agreed to set up a new platform for strategic technologies for Europe (STEP).
To finance STEP-related priorities, the platform will make use of existing funding. This will help scale up support and investment opportunities for critical technologies that are relevant for the green and digital transitions,
To boost defence investment capacity, leaders also agreed to allocate an additional €1.5 billion to the European Defence Fund under the STEP.

European defence industry procurement (background information)

Next Generation EU interest payments
To cover additional costs and fulfil the EU’s legal obligation related to NGEU interest payments, leaders agreed on a cascade mechanism.
If financing for the interest payments cannot be found within the existing EU budget, a new instrument that goes beyond the maximum amounts for the current MFF can be introduced.
As part of the annual budgetary procedure, the Council will assess whether the financing solutions for the NGEU interest payments, including the new instrument and the application of a backstop, are appropriate, before adopting its position.
In this context, the ceiling for the global amount of another instrument – the flexibility instrument – will be increased by €2 billion. The flexibility instrument can be used to finance actions that cannot be funded via other budget sources.

A recovery plan for Europe (background information)
Financing the EU budget (background information)

Solidarity and emergency aid reserve
To tackle emergency situations such as natural disasters and humanitarian crises in the EU and worldwide, EU leaders agreed to increase funding by €1.5 billion. They also agreed to split the funding into two separate instruments:

approximately €1 billion per year for the European solidarity reserve, to respond to emergency situations in Europe
approximately €500 million per year for the emergency aid reserve for rapid responses to specific emergency situations in the EU and worldwide

The annual amounts not used in either of the instruments can be made available to the flexibility instrument the following year.
New own resources
EU leaders underlined that work will continue on new own resources. Any proceeds of the new own resources introduced after 2023 will be used to make early repayments on Next Generation EU borrowing.
National budgets
To reduce the impact on national budgets, leaders agreed that €10.6 billion from existing EU funding will help finance the priorities identified in the mid-term revision. This amount will be redistributed from existing programmes and instruments, including:

the neighbourhood, development and international cooperation instrument (NDICI)
the instrument for pre-accession assistance (IPA)
Horizon Europe
the Brexit adjustment reserve
the European globalisation adjustment fund
CAP and cohesion funds
the EU4Health programme

Support for Ukraine
The leaders reaffirmed the EU’s steadfast support for Ukraine. The EU will continue to support Ukraine and its people for as long as it takes, including through political, financial, humanitarian, military and diplomatic means.
The leaders stressed the importance of providing predictable and sustainable military support to Ukraine, notably through:

the European Peace Facility
the EU military assistance mission
direct bilateral support from EU member states

In this context, they invited the Council to reach an agreement by early March on increasing the financial ceiling of the European Peace Facility. They also called on member states to accelerate efforts to deliver ammunition to Ukraine.
The leaders will continue the discussions on security and defence in Ukraine, as well as Europe’s need to further strengthen its own defence readiness, at the next European Council meeting on 21 and 22 March 2024.
The European Council also welcomed the agreement to use financial revenues stemming from frozen Russian assets for Ukraine’s reconstruction, which allows the High Representative and the Commission to prepare the next steps.

EU solidarity with Ukraine (background information)
European Peace Facility (background information)

Middle East
The leaders held a debate on the situation in the Middle East.

Statement of the members of the European Council on the situation in the Middle East (press release, 15 October 2023)
European Council, 26 and 27 October 2023
European Council, 14 and 15 December 2023

Agriculture
EU leaders discussed challenges in the agricultural sector, including concerns raised by farmers.
Stressing the essential role of the common agricultural policy leaders called on the Council and the Commission to take work forward as necessary. The European Council will keep the situation under review.

Common agricultural policy (background information)

 
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The Council and the European Parliament today reached a provisional agreement on the directive on multiple-vote share structures for companies seeking admission to trading of their shares on an SME growth market. The directive aims at encouraging company owners, especially owners of SMEs, to list the shares of their company for the first time on an SME growth market using multiple-vote share structures, so that they can retain sufficient control of their company after listing; moreover, the Directive protects the rights of newly entering shareholders by introducing safeguards.
The provisional agreement extends the scope of the directive to include more markets than just SME growth markets, defines the safeguards necessary for investors entering a multiple-vote share structure and establishes the necessary transparency rules for this kind of undertaking.
‘SMEs are the backbone of the European Economy and need good access to financial markets to grow, progress and create jobs. The multiple-vote share structure Directive will widen the portfolio of financial options available to them, making access to markets easier, safer and adapted to their business model. At the same time, it will make EU capital markets more attractive and competitive’.
Paul Van Tigchelt, Belgian Deputy Prime Minister and Minister for Justice and the North Sea
Encouraging SME listing
The Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) allowed for the creation of ‘SME growth markets’, a trading venue facilitating access to capital for SMEs. However, many entrepreneurs do not list their companies on these markets for fear of losing control due to the entry of new shareholders. One instrument to prevent this is the multiple-vote share structure, which enables controlling shareholders (i.e. company founders) to have more votes per share than new investors.
Currently, some Member States allow multiple-vote share structures, while in others they are prohibited. The Directive aims to reduce inequalities for companies seeking to raise funds on SME growth markets by creating minimum harmonisation in the Single Market that removes obstacles to SME growth markets access generated by regulatory barriers.
At the same time, the proposed Directive protects the rights of shareholders with fewer votes per share by introducing safeguards on issues such as how key decisions are taken at general meetings.
Main elements of the agreement
Scope
The provisional agreement extends the scope of the Directive to include, besides SME growth markets, any other Multilateral Trading Facility that allows the admission to trading of SME shares. A possible future extension of the scope to regulated markets could be included in the review clause.
Safeguards
The co-legislators have agreed on either a maximum voting ratio (this is the value of the votes per share that existing shareholders may hold compared to entering shareholders) being set, leaving its value to Member States’ discretion, or a restriction for (most) qualified majority decisions by the general meeting. Other safeguards remain optional.
Transparency
To help investors make the right decisions, the agreement provides for the disclosure of the annual financial statements at the time of admission to trading and, thereafter, only when such information has not previously been published or has changed since its last publication.
The co-legislators have also agreed to give a mandate to the European Securities and Markets Authority for developing regulatory technical standards on the most appropriate way of marking such shares.
Next steps
The provisional agreement reached with the European Parliament now needs to be endorsed and formally adopted by both institutions.
Background
The proposal was adopted by the Commission on 7 December 2022. On 19 April, the Council adopted its negotiating mandate for negotiations with the European Parliament, with a view to reaching an agreement at first reading.
The proposed Directive is part of the Listing Act package, a set of measures to make public capital markets more attractive to EU companies and to facilitate access to capital for small and medium-sized companies.

Commission’s proposal
Negotiating mandate

 
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WASHINGTON – On January 30 and 31, the Office of the United States Trade Representative and the European Union Directorate-General for Trade (DG Trade) hosted a two-day stakeholder event to solicit views on how to promote a more integrated and resilient Transatlantic Green Marketplace. The event brought together representatives from the U.S. and EU stakeholder communities to engage in a series of thematic stakeholder-led discussions that focused on identifying opportunities for transatlantic collaboration to promote the transition to a more sustainable and climate-neutral economy on both sides of the Atlantic.
The U.S. Trade Representative, Ambassador Katherine Tai, provided pre-recorded remarks and Executive Vice-President of the European Commission Valdis Dombrovskis provided opening remarks followed by Assistant U.S. Trade Representative Sushan Demirjian and Director Rupert Schlegelmilch of DG TRADE. The speakers framed the event by discussing the importance of stakeholder input in identifying trade priorities.  More than three hundred stakeholders from businesses, civil society, labor unions and academia participated in the event.
The two-day event opened with a workshop focused on the “Promotion of Good Quality Jobs for a Successful, Just and Inclusive Green Economy,” organized by USTR, the Department of Labor, and DG Trade and Employment. Labor and business stakeholders engaged in a productive discussion on issues related to the green transition and how we can create good-paying jobs as part of our climate policy and investments. The event was moderated by representatives from the International Labor Organization.  Stakeholders spoke about the importance of social dialogue and workers having a seat at the table to engage on environmental issues that directly impact them.
USTR looks forward to sustained stakeholder engagement as we continue work under the Transatlantic Initiative for Sustainable Trade workstream.
 
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SECRETARY BLINKEN:  Well, good morning, everyone.  It is wonderful to have our friends and colleagues from the EU here in Washington for our Trade and Technology Council number five.
Let me just say at the outset, in the challenge of these times it is particularly valuable and appreciated by the United States to have in the EU a partner of first resort, not last resort.  And if we look at the many challenges that we’re working on closely together, we know that we reinforce each other, and that makes a big difference.  We, obviously, have a partnership that’s built on commonly shared values, shared interests, and an extraordinary and thriving transatlantic economy.
Let me just say briefly about the TTC itself, I found in my experience – and I think I can speak as well for Gina and Katherine – that this has been an indispensable tool for transatlantic economic cooperation.  And we’ve seen tremendous progress over the last couple of years: aligning technology standards, building resilience in our supply chains, stopping the evasion of Russian sanctions and export controls, and countering some of the non-market practices of the PRC, as well as engaging on – against economic coercion.
This session today will hopefully – and I know – build on the progress that we’ve made in the previous TTCs.  We’ll be focusing on economic security, on emerging technology, and on locking in achievements in the run-up to what will be really the capstone TTC in Belgium later this year.
For economic security, I think there’s a common recognition that we must continue to de-risk our economies, to diversify further our supply chains, to focus on common threats – including authoritarian governments that may misuse technology.  And this is maybe one of the greatest shared challenges we face and concerns that our citizens have, because it’s something that affects them every single day in their lives.
We also have work to do – but I think also opportunity – in together looking at how we can help shape some of the norms, the standards, the rules by which emerging technology are used, again, things that shape the lives of our citizens every single day.  We’ve already made – but we can build on – joint progress on artificial intelligence.  I think there’s a real opportunity to jointly develop responsible rules of the road for AI and other emerging technologies.  And then continuing to use the TTC as an avenue to be able to forge ahead on critical issues and managing risks of other cutting-edge technologies.
So there’s a lot to cover today, as there always is.  Margrethe, let me give the floor to you, and then we can actually get down to work.  And we may even get down to lunch after that.  (Laughter.)
MS VESTAGER:  Yeah.  Without sharing food, you will get nowhere.
Well, first and foremost, thank you very much for hosting us in these exquisite rooms.  This is – it’s an honor for us to be here.  And I just want to basically mirror what you just said, because the Trade and Technology Council has become absolutely key to our geopolitical agenda.  It’s constructive; it is committed; it produces results.  And I think it’s for – I’ve learned a lot from this, and I hope also for the future a lot of learnings can be taken to continue deepening the relationship.
The setup that we have – not only between us getting to know one another, trust one another, but also for the teams to get to know each other in full – I think that cannot be overestimated.  That was what made us so efficient in the sanctions against Russia.  Everybody had met each other.  They knew the phone numbers, the mail addresses, the values, what they wanted to put into real life.
And building on that, what we have done on semiconductors, which is essential for our economies but also essential for geopolitical balances; how we from very early days agreed on the approach to artificial intelligence with an optimistic view for the innovation, while being cautious for the risks; and now I think also moving ahead to see how can we embark on a quantum travel together.  So still a lot to do to give real muscle to our mutual considerations of economic security.
I think this has shown that when we praise the transatlantic relationship, it’s not just for the speeches – it’s also real life.  And once again proven that if you want to deliver to your own citizens, you need to have a common solution.  I think it is amazing what we are achieving of amazing results to the benefit of citizens.  I think we see that with stakeholders, every one of us just this morning – Gina and I was with stakeholders of the semiconductor industry.  And they come, they share with us, and I think there is a great deal of appreciation of this investment on both sides.
So thank you very much for this, and looking very much forward for the meeting today.
SECRETARY BLINKEN:  Margrethe, thank you so much.  And again, Thierry, Valdis, welcome, welcome, welcome.  Thanks, everyone.
 
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Major emerging markets have shown resilience to global rate gyrations, but more challenging times could be ahead.
Global interest rates in recent months have gone on a rollercoaster, especially those on longer-term government bonds. Yields on 10-year US Treasuries are climbing again after pulling back from a 16-year high of 5 percent in October. Interest rate moves in other advanced economies had been equally prodigious.
Emerging market economies, however, saw much milder rate moves. We take a longer-term perspective on this in our latest Global Financial Stability Report, demonstrating that the average sensitivity to US interest rates of 10-year sovereign yield of Latin American and Asian emerging markets declined by two-thirds and two-fifths, respectively, during the current monetary policy tightening cycle compared with the taper tantrum in 2013.
While the lower sensitivity is in part due to the divergence in monetary policy between advanced economies’ and emerging markets’ central banks over the past two years, it nonetheless challenges findings in the economic literature that show large spillovers from advanced economies’ interest rates to emerging markets. In particular, major emerging markets have been more insulated from global interest rate volatility than would be expected based on historical experience, especially in Asia.

There are other signs of resilience in major emerging markets during this period of volatility. Exchange rates, stock prices, and sovereign spreads fluctuated in a modest range. More remarkably, foreign investors did not leave their bond markets, in contrast to past episodes when large outflows ensued after surges in global interest rate volatility, including as recently as 2022.
This resilience was not just good luck. Many emerging markets have spent years improving policy frameworks to mitigate external pressures. They have built additional currency reserves over the last two decades. Many countries have refined exchange-rate arrangements and moved towards exchange-rate flexibility. Significant foreign exchange swings have contributed to macroeconomic stability in many cases. The structure of public debt has also become more resilient, and both domestic savers and domestic investors have become more confident investing in local-currency assets, reducing reliance on foreign capital.
Perhaps most importantly, and closely aligned with IMF advice, major emerging markets have enhanced central bank independence, improved policy frameworks, and gained progressively more credibility. We would also argue that central banks in these countries have gained additional credibility since the onset of the pandemic by tightening monetary policy in a timely manner and bringing inflation toward target as a result.
During the post-pandemic era, many central banks hiked interest rates earlier than counterparts in advanced economies—on average, emerging markets added 780 basis points to monetary policy rates compared to an increase of 400 basis points for advanced economies. The wider interest differentials for those emerging markets that hiked rates created buffers for emerging markets that kept external pressures at bay. In addition, the rise in prices of commodities during the pandemic also helped the external positions of commodity-producing emerging markets.
Global financial conditions too have remained quite benign during the current global monetary policy tightening cycle, especially last year. This contrasts with previous hiking episodes in advanced economies, which were accompanied by a much more pronounced tightening of global financial conditions.
Looking ahead
Despite reaping rewards from years of building buffers and pursuing proactive policies, policymakers in major emerging markets need to stay vigilant with an eye on the challenges inherent in the “last mile” of disinflation and rising economic and financial fragmentation. Three challenges stand out:

Interest rate differentials are narrowing as some emerging markets are anticipated by investors to cut rates faster than advanced economies, which could entice capital to leave emerging market assets in favor of assets in advanced economies;
Quantitative tightening by major advanced economies continues to withdraw liquidity from financial markets, which could additionally weigh on emerging market capital flows;
Global interest rates remain volatile, as investors—reacting to central banks emphasizing data-dependency—have grown more attentive to surprises in economic data. Perilous for emerging markets are market projections that central banks in advanced economies will materially cut rates this year. Should this prove wrong, investors may once again reprice in higher-for-longer rates, weighing on risky asset prices, including emerging market stocks and bonds.

A slowdown in emerging markets, as projected by the latest World Economic Outlook update, operates not only through traditional trade channels, but also through financial channels. This is particularly relevant now, as more borrowers globally are defaulting on loans, in turn weakening banks’ balance sheets. Emerging market bank loan losses are sensitive to weak economic growth, as we showed in a chapter of the October Global Financial Stability Report.
Frontier emerging markets—developing economies with small-but-investable financial markets—and lower-income countries face greater challenges, the primary one being the lack of external financing. Borrowing costs are still high enough to effectively prohibit these economies from obtaining new financing or rolling over existing debt with foreign investors.
High financing costs reflect the risks associated with emerging market assets. Indeed, the dollar returns on these assets have lagged similar advanced economies’ assets during this high-rate environment. For instance, emerging market bonds for high-yield, or lower-rated, issuers have returned about zero percent on net over the past four years, while US high-yield bonds have provided 10 percent. So-called private credit loans provided by nonbanks to lower-rated US companies have returned even more. The sizable differences in returns may not bode well for emerging markets’ external financing prospects as foreign investors with mandates that allow for investments across asset classes can find more-profitable alternative assets in advanced economies.

While these challenges for emerging market and frontier economies require close attention by policymakers, there are also many opportunities. Emerging markets continue to see significantly higher expected growth rates than advanced economies; capital flows to stock and bond markets remain strong; and policy frameworks are improving in many countries. Hence the resilience of major emerging markets that has been important for global investors since the pandemic may continue.
Vigilant policies
Emerging markets should continue to build on the policy credibility they have gained and be vigilant. Facing elevated global interest rate volatility, their central banks should continue to commit to inflation targeting, while remaining data dependent in their inflation objectives.
Keeping monetary policy focused on price stability also means using the full spate of macroeconomic tools to fend off external pressures, with the IMF’s Integrated Policy Framework providing guidance on the use of currency intervention and macroprudential measures.
Frontier economies and low-income countries could strengthen engagement with creditors—including through multilateral cooperation—and rebuild financial buffers to regain access to global capital. In the bigger picture, countries with credible medium-term fiscal plans and monetary policy frameworks will be better positioned to navigate periods of global interest rate volatility.
 
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