Today, the European Union and the United States held the fifth meeting of the EU-US Trade and Technology Council (TTC) in Washington, D.C. The meeting allowed ministers to take stock of the progress of the TTC’s work and to provide political steer on key priorities for the next TTC Ministerial meeting, which will take place in Belgium in spring.
The TTC is the main forum for close cooperation on transatlantic trade and technology issues. It was co-chaired by European Commission Executive Vice-President Margrethe Vestager, European Commission Executive Vice-President Valdis Dombrovskis, US Secretary of State Antony Blinken, US Secretary of Commerce Gina Raimondo, and US Trade Representative Katherine Tai, joined by European Commissioner Thierry Breton.
Participants showed a strong, shared desire to continue to increase bilateral trade and investment, co-operate on economic security and emerging technologies and to advance joint interests in the digital environment. In the margins of this TTC meeting, both sides agreed to continue to explore ways to facilitate trade in goods and technologies that are vital for the green transition, including by strengthening the cooperation on conformity assessment. The EU and the US have also committed to make tangible progress on digital trade tools to reduce the red tape for companies across the Atlantic and to strengthen our approaches to investment screening, export controls, outbound investment, and dual-use innovation.
Following their commitment at the last TTC Ministerial, the EU and the US welcomed the International Guiding Principles on Artificial Intelligence (AI) and the voluntary Code of Conduct for AI developers adopted in the G7 and agreed to continue cooperating on international AI governance. Both parties also welcomed the industry roadmap on 6G which sets out guiding principles and next steps to develop this critical technology. They also took stock of progress in supporting secure connectivity around the globe, notably for 5G networks and undersea cables.
The EU and the US are also intensifying their coordination on the availability of critical raw materials crucial for semiconductor production, having activated the joint TTC early warning mechanism for semiconductor supply chain disruptions, following China’s announced controls on gallium and germanium. They continued to exchange information on public support for the investments taking place under the respective EU and US Chips Acts. A roundtable on the semiconductor supply chain took place in the margins of the TTC, focusing on developments and potential cooperation in the legacy semiconductor supply chains. Finally, the EU and the US discussed a report mapping EU and US approaches to digital identity, currently open for comments.
At a stakeholder meeting on Crafting the Transatlantic Green Marketplace, which takes place on 31 January, stakeholders will present their views and proposals on how to make transatlantic supply chains stronger, more sustainable and more resilient. A series of workshops will take place to boost the transatlantic green marketplace and to promote good quality jobs for the green transition, as well as workshops on the solar supply chain, permanent magnets and investment screening.
Both sides agreed that the next TTC Ministerial meeting will take place in spring in Belgium, hosted by the Belgian Presidency of the Council.
Background
European Commission President Ursula von der Leyen and US President Joe Biden launched the EU-US TTC at the EU-US Summit in Brussels in June 2021. The TTC serves as a forum for the EU and the US to discuss and coordinate on key trade and technology issues, and to deepen transatlantic cooperation on issues of joint interest.
The inaugural meeting of the TTC took place in Pittsburgh on 29 September 2021. Following this meeting, 10 working groups were set up covering issues such as technology standards, artificial intelligence, semiconductors, export controls and global trade challenges. This was followed by a second summit in Paris on 16 May 2022, a third summit in College Park, Maryland, in December 2022, and a fourth in Luleå, Sweden in May 2023.
The EU and the US remain key geopolitical and trading partners. EU-US bilateral trade has reached historic levels, with over €1.5 trillion in 2022, including over €100 billion of digital trade.
 
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The financial disruptions during the coronavirus pandemic and Russia’s invasion of Ukraine have once again underscored the importance of euro liquidity lines. The market tensions triggered by these crises squeezed euro liquidity in a significant number of non-euro area countries. In response, the ECB extended euro liquidity lines to the relevant central banks, thus enabling them to alleviate the funding strains on their domestic financial institutions. Providing euro liquidity to non-euro area countries shields the transmission of monetary policy in the euro area and minimises the risks of adverse feedback loops, making the euro area more resilient.
We recently adjusted our framework for the provision of euro liquidity through the ECB’s swap and repo operations to make these instruments as effective and agile as possible.[1] The framework retains the fundamental elements already in place, and integrates the existing repo facilities into a unified permanent framework called the Eurosystem repo facility for central banks (EUREP). These changes came into effect on 16 January 2024.
The changes to the framework reflect three key lessons from recent experiences. First, that the risks of negative effects on monetary policy transmission increase in the event of disorderly market conditions outside the euro area. Second, that the ECB must be able to react quickly to rapidly unfolding events. And third, that the mere existence of a liquidity line pre-empts financial tensions from materialising. The revised framework gives those countries with close economic and financial links to the euro area either standing or fixed-term renewable access to our liquidity lines in normal times. It also expands access to a broader set of countries in times of crisis or a heightened risk of crisis. At the same time, the role of liquidity lines as a “backstop” is reinforced with appropriate surcharges on lending rates. These surcharges help preserve incentives for non-euro area banks to first try to borrow from the private market before resorting to liquidity lines. They also limit the scope for unintended adverse side effects such as excessive foreign borrowing in euro.
Strong demand for euro liquidity lines during recent crises
Amid financial market tensions during the initial phase of the pandemic, the ECB received a first wave of requests for liquidity lines within a relatively short period of time around March 2020. A second wave of requests reached the ECB after the Russian invasion of Ukraine in February 2022. While most of these requests originated from non-euro area EU countries and EU candidate and potential candidate countries, several inquiries for euro liquidity also came from other European countries and other regions of the world (Chart 1).

Chart 1
Number of requests for ECB liquidity lines by region

Source: ECB
Notes: Requests include inquiries under the main framework and EUREP. The blue shaded area signals the onset of the pandemic, the grey shaded area the start of Russia’s invasion of Ukraine.

As part of our response to these requests we set up a temporary repo facility, EUREP, which provided an additional precautionary backstop for central banks of countries that were not eligible under the then prevailing ECB framework, as we described in more detail in 2020. We subsequently prolonged the facility in response to Russia’s war in Ukraine and the resulting market tensions.
As the severe financial market tensions and high degree of uncertainty and contagion risk presented a clear monetary policy case, the Governing Council accommodated many of these requests. The ECB offered non-euro area central banks either swaps or repos, the latter under either the main framework or EUREP. With the choice of instrument, we took into account the need to protect the ECB’s balance sheet against financial risks. We only granted swaps in cases where those risks were limited or where it was useful for the ECB to have reciprocal access to the currency issued by the foreign central bank in question.

Chart 2
Usage of euro liquidity lines
(Outstanding amounts in euro millions as at end of day15 January 2024)
Source: ECB.
Note: Outstanding amounts refer to the aggregate daily amount of euro-denominated liquidity provided across all central bank liquidity lines.

While use of the facilities has remained sporadic and for small amounts (Chart 2), this should not be taken as a sign that they are not needed. As the recent crises have shown, the mere existence of precautionary liquidity arrangements can have a calming effect. Empirical evidence suggests that the ECB’s liquidity lines have been effective in reducing financial pressures on euro funding markets.[2]
Our review of the existing framework confirmed that liquidity lines granted to non-euro area central banks are monetary policy instruments. They help to prevent impairments in the monetary policy transmission arising from heightened foreign euro demand or disruptions in cross-border wholesale funding. By providing euro liquidity, they also help the ECB fulfil its price stability objective, which remains the primary motivation for granting liquidity lines.
In addition, liquidity lines prevent euro liquidity shortages from morphing into financial stability risks. They provide a backstop source for borrowing in euro, which limits the scope for upward pressure on euro money market rates and removes the incentives for fire sales of euro-denominated securities by foreign investors.[3]
Finally, the ECB’s liquidity lines also have benefits for the pursuit of price stability by fostering the international use of the euro in global financial and commercial transactions. They enhance the transmission of monetary policy on a more structural basis, too, since a clear framework for liquidity lines signals the ECB’s willingness to provide a backstop if a crisis were to materialise.[4]
The new framework continues to acknowledge the risk that liquidity lines may affect incentives in ways that are undesirable from a euro area monetary policy perspective. In particular, if access to euro liquidity is perceived as easy, this may encourage unhedged currency exposures in the country receiving euro liquidity and heighten financial euroisation. It may also lower incentives for monetary authorities to maintain foreign exchange reserve safeguards and keep prudent financial regulations in place. This, in turn, could lead to more frequent crisis episodes in recipient countries.
This is why the new ECB framework maintains the features established to address these risks. First, liquidity lines are regularly reviewed and can be terminated if such risks were detected. Second, most of the temporary lines are established via repo agreements for which the non-euro area central bank needs to pledge high-quality euro-denominated collateral to ensure that the lines do not substitute prudent foreign reserve management. Third, the operational parameters of a euro liquidity line are set in a way that encourages a return to market-based arrangements. They foresee, among other things, a backstop rate at which euro liquidity is provided, which is close to the rate at which the ECB provides euro liquidity to its domestic counterparties. Such pricing encourages reliance on market funding since the use of the liquidity lines may be expensive. Our liquidity lines provide only short-term funding with a maximum tenor of a few months to ensure that they only address temporary liquidity needs. This encourages the return to market-based arrangements as soon as possible. Fourth, the pricing can be adjusted to discourage borrowing when it is not consistent with our monetary policy stance.
As before, liquidity lines must not be used for foreign exchange interventions but are meant as a means for foreign central banks to provide euro liquidity to their domestic financial institutions.
We continue to decide on liquidity lines, and the choice between swaps and repos, based on several factors: the requesting country’s systemic relevance, its economic, financial or institutional interconnectedness with the euro area, the strength of fundamentals and creditworthiness as well as any reciprocal need for foreign currency.[5]
Our case-by-case approach remains unchanged. The Governing Council assesses all requests individually, taking into account the monetary policy rationale and risks entailed.
What has changed?
The crisis experiences have shown the importance of an agile and flexible framework which the Governing Council can activate quickly in response to different kinds of shocks.
As before, the ECB can still extend swap and repo lines. What is new, however, is that all repo lines are now brought together in a permanent EUREP facility. This abolishes the distinction between the main framework and EUREP.
In normal times, only shocks in countries with sufficiently tight financial and economic links to the euro area have the potential to impair monetary policy transmission.
Indicators of such links are the size of a country’s economy, its level of euroisation and the financial and economic interconnectedness, including institutional linkages such as EU membership. To put this in perspective, the countries with a standing euro swap line account for 23.8% of global economic activity and 34.5% of the euro area’s total external trade.
In times of crisis, risks of adverse feedback loops increase. Typically, this happens through deteriorating investor sentiment vis-à-vis risky assets, an increased sensitivity to pre-existing vulnerabilities, or a destabilising repricing of euro area securities triggered by fire sales abroad.[6] This can impinge on euro area financial markets and, by impairing monetary policy transmission, on price stability.
This is why, building on the experience with the ad hoc EUREP facility during the pandemic and Russia’s war in Ukraine, the new framework provides for access conditions to be broadened in times of crisis or when there is a heightened risk of a crisis materialising. This is when contagion and asset fire sales may have particularly strong adverse effects on euro area financing conditions, leading to deeper monetary policy implications.
Hence, in normal times, liquidity lines can only be extended if an economy is of systemic relevance to the euro area. But in times of crisis, liquidity lines can also be extended to countries that have limited individual systemic relevance. That may be the case if, amid disorderly market conditions, such smaller countries could together adversely affect monetary policy transmission. In view of heightened regional risks associated with the ongoing Russian war against Ukraine and the conflict in the Middle East, we have applied this feature of the new framework to prolong the repo lines of several non-EU European countries until 31 January 2025.
The new streamlined framework also harmonises pricing and our risk control, in particular with regard to collateral eligibility requirements for repo lines. This will improve the efficiency of our decision-making.
Finally, we have also updated our communication policy. We will now disclose the full set of liquidity lines granted under the new framework as of 29 January 2024. The liquidity lines currently in place include eight swap arrangements with countries of major systemic relevance. Most of them take the form of reciprocal arrangements which also give the ECB access to the respective foreign currency. In addition, we have granted seven repo arrangements under EUREP.
Overall, the revised framework makes improvements in several areas, while maintaining its key features. These are summarised in Table 1 below.
Table 1

Maintained features

Liquidity lines as monetary policy tools
Backstop pricing
Maximum, short-term tenors of drawings
Not to be used for foreign exchange interventions
Case-by-case assessment on the basis of eligibility criteria

Adjusted features

All repos offered under EUREP, which is now permanent
Streamlined and simplified eligibility criteria
Broadened access in times of crisis or a heightened risk thereof
Harmonised pricing and risk control framework
Disclosure of all extended lines

Conclusion
ECB President Christine Lagarde has said recently that the world is going through “an age of shifts and breaks” in which it faces an unprecedented series of shocks.[7] Central banks play a crucial stabilising role in this situation, and euro liquidity lines are an important part of the ECB’s toolkit to protect monetary policy transmission and strengthen resilience against crises. We are confident that our new framework will live up to the challenges of international liquidity provision in an increasingly volatile world in which central banks need to contribute to stability in line with their mandates.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

 
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Increasing impact of climate crisis on economy and financial system drives need for more action
ECB reaffirms commitment to ongoing climate actions and will review them regularly
Three focus areas to guide work for 2024 and 2025: implications of green transition, physical impact of climate change, and nature-related risks for the economy and financial system

The European Central Bank (ECB) has decided to expand its work on climate change, identifying three focus areas that will guide its activities in 2024 and 2025:

the impact and risks of the transition to a green economy, especially the associated transition costs and investment needs;
the increasing physical impact of climate change, and how measures to adapt to a hotter world affect the economy;
the risks stemming from nature loss and degradation, how they interact with climate-related risks and how they could affect the ECB’s work through their impact on the economy and financial system.

“A hotter climate and the degradation of natural capital are forcing change in our economy and financial system. We must understand and keep up with this change to continue to fulfil our mandate”, said ECB President Christine Lagarde. “By broadening and intensifying our efforts we can better understand the implications of these changes and, in doing so, help to underpin stability and support the green transition of the economy and the financial system.”
To this end, the following concrete measures have been agreed.

On the transition to a green economy, the ECB will intensify its work on the effects of transition funding, green investment needs, transition plans and how the green transition affects aspects of our economy such as labour, productivity and growth. The results will also inform the ECB’s macro modelling framework. Furthermore, the ECB will explore, within its mandate, the case for further changes to its monetary policy instruments and portfolios in view of this transition.
On the increasing physical impact of climate change, the ECB will deepen its analysis of the impact of extreme weather events on inflation and the financial system, and how this can be integrated into climate scenarios and macroeconomic projections. It will also assess the potential impact of adaptation, or lack thereof, to climate change on the economy and financial sector, including related investment needs and the insurance protection gap.
On nature loss and degradation, the ECB will analyse the close link with climate change, and the associated economic and financial implications. It will also further explore the role of ecosystems for the economy and the financial system.
With regard to its own operations, the ECB will launch its eighth Environmental Management Programme to support achieving its 2030 carbon reduction targets. Together with the entire Eurosystem, its work will include eco-design principles for the future euro banknote series and incorporate environmental footprint considerations into the design of a digital euro that is currently in the preparation phase.

The decision to step up efforts in these areas follows the ECB’s stocktake of its climate actions since launching its 2022 climate agenda, and an adjustment of its work plan in the light of the changing environment and improvements in data availability and methodologies.
The work planned for these focus areas will complement the ECB’s current climate-related actions in its ongoing tasks, including monetary policy and banking supervision. The ECB will improve its climate-related indicators, risk monitoring and disclosures, and continue to contribute to the development of climate-related policies in European and international fora. Looking ahead, the ECB remains committed to regularly reviewing these actions to ensure they are fit for purpose and contribute to fulfilling its mandate.
A comprehensive overview of the planned work programme for 2024 and 2025 is available in the Annex and more information can be found on the ECB’s website.
Notes

The ECB needs to account for the effects of climate change in the conduct of its tasks within its mandate. Additionally, without prejudice to its price stability objective, the ECB must support the general economic policies in the European Union, with a view to contributing to a high level of protection of and improvement in the quality of the environment. This includes the goals of the European Climate Law. Under Article 11 of the Treaty on the Functioning of the European Union, the ECB is also required to integrate environmental protection requirements into the definition and implementation of its policies and activities.
The ECB introduced climate change considerations into its monetary policy framework following its strategy review in 2021.

 
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Policy focus must shift to repairing public finances and improving medium-term growth prospects.
The clouds are beginning to part. The global economy begins the final descent toward a soft landing, with inflation declining steadily and growth holding up. But the pace of expansion remains slow, and turbulence may lie ahead.
Global activity proved resilient in the second half of last year, as demand and supply factors supported major economies. On the demand side, stronger private and government spending sustained activity, despite tight monetary conditions. On the supply side, increased labor force participation, mended supply chains and cheaper energy and commodity prices helped, despite renewed geopolitical uncertainties.
This resilience will carry over. Global growth under our baseline forecast will steady at 3.1 percent this year, a 0.2 percentage point upgrade from our October projections, before edging up to 3.2 percent next year.
Important divergences remain. We expect slower growth in the United States, where tight monetary policy is still working through the economy, and in China, where weaker consumption and investment continue to weigh on activity. In the euro area, meanwhile, activity is expected to rebound slightly after a challenging 2023, when high energy prices and tight monetary policy restricted demand. Many other economies continue to show great resilience, with growth accelerating in Brazil, India, and Southeast Asia’s major economies.
Inflation continues to ease. Excluding Argentina, global headline inflation will decline to 4.9 percent this year, down 0.4 percentage point from our October projection (also excluding Argentina). Core inflation, excluding volatile food and energy prices, is also trending lower. For advanced economies, headline and core inflation will average around 2.6 percent this year, close to central banks’ inflation targets.

With the improved outlook, risks have moderated and are balanced. On the upside:

Disinflation could happen faster than anticipated, especially if labor market tightness eases further and short-term inflation expectations continue to decline, allowing central banks to ease sooner.

Fiscal consolidation measures that governments have announced for 2024-25 may be delayed as many countries face rising calls for increased public spending in what is the biggest global election year in history. This could boost economic activity, but also spur inflation and increase the prospect of disruption later.

Looking further ahead, rapid improvement in Artificial Intelligence could boost investment and spur rapid productivity growth, albeit one with significant challenges for workers.

On the downside:

New commodity and supply disruptions could occur, following renewed geopolitical tensions, especially in the Middle East. Shipping costs between Asia and Europe have increased markedly, as Red Sea attacks reroute cargoes around Africa. While disruptions remain limited so far, the situation remains volatile.

Core inflation could prove more persistent. The price of goods remains historically elevated relative to that of services. The adjustment could take the form of more persistent services—and overall—inflation. Wage developments, particularly in the euro area, where negotiated wages are still on the rise, could add to price pressures.

Markets appear excessively optimistic about the prospects for early rate cuts. Should investors re-assess their view, long-term interest rates would increase, putting renewed pressure on governments to implement more rapid fiscal consolidation that could weigh on economic growth.

Policy challenges
With inflation receding and growth remaining steady, it is now time to take stock and look ahead. Our analysis shows that a substantial share of recent disinflation occurred via a decline in commodity and energy prices, rather than through a contraction of economic activity.
Since monetary tightening typically works by depressing economic activity, a relevant question is what role, if any, has monetary policy played? The answer is that it worked through two additional channels. First, the rapid pace of tightening helped convince people and companies that high inflation would not be allowed to take hold. This prevented inflation expectations from persistently rising, helped dampen wage growth, and reduced the risk of a wage-price spiral. Second, the unusually synchronized nature of the tightening lowered world energy demand, directly reducing headline inflation.

 
But uncertainties remain and central banks now face two-sided risks. They must avoid premature easing that would undo many hard-earned credibility gains and lead to a rebound in inflation. But signs of strain are growing in interest rate-sensitive sectors, such as construction, and loan activity has declined markedly. It will be equally important to pivot toward monetary normalization in time, as several emerging markets where inflation is well on the way down have started doing so already. Not doing so would jeopardize growth and risk inflation falling below target.
My sense is that the United States, where inflation appears more demand-driven, needs to focus on risks in the first category, while the euro area, where the surge in energy prices has played a disproportionate role, needs to manage more the second risk. In both cases, staying on the path toward a soft landing may not be easy.
The biggest challenge ahead of us is to tackle elevated fiscal risks. Most countries came out of the pandemic and energy crisis with higher public debt levels and borrowing costs. Bringing down public debt and deficits will give space to deal with future shocks.

Remaining fiscal measures introduced to offset high energy prices should be phased out right away, as the energy crisis is behind us. But more is needed. The danger is two-fold. The most pressing risk is that countries do too little. Fiscal fragilities will build up until the risk of a fiscal crisis forces sudden and disruptive adjustments, at great cost. The other risk, already relevant for some countries, is to do too much, too soon, in the hope of convincing markets of ones’ fiscal rectitude. This could endanger growth prospects. It would also make it much harder to address imminent fiscal challenges such as the climate transition.
What to do then? The answer is to implement a steady fiscal consolidation, with a non-trivial first installment. Promises of future adjustment alone will not do. This first installment should be combined with an improved and well-enforced fiscal framework, so future consolidation efforts are both sizable and credible. As monetary policy starts to ease and growth resumes, it should become easier to do more. The opportunity should not be wasted.
Emerging markets have been very resilient, with stronger-than-expected growth and stable external balances, partly due to improved monetary and fiscal frameworks. Yet divergence in policy between countries may spur capital outflows and currency volatility. This calls for stronger buffers, in line with our Integrated Policy Framework.
Beyond fiscal consolidation, the focus should return to medium-term growth. We project global growth of 3.2 percent next year, still well below the historical average. A faster pace is needed to address the world’s many structural challenges: the climate transition, sustainable development, and raising living standards.
Reforms that ease the most binding constraints to economic activity, such as governance, business regulation and external sector reform, can help unleash latent productivity gains, our research shows. Stronger growth could also come from limiting geoeconomic fragmentation by, for instance, removing the trade barriers that are impeding trade flows between different geopolitical blocs, including in low-carbon technology products that are crucially needed by emerging and developing countries.

Instead, we should strive to keep our economies more interconnected. Only by doing so can we work together on shared priorities. Multilateral cooperation remains the best approach to address global challenges. Progress toward that, such as the recent 50 percent increase of the Fund’s permanent resources, is welcome.

 
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Today the Council adopted its negotiating mandate for talks with the European Parliament on a proposal to phase out the use of dental amalgam and prohibit the manufacturing, import and export of a number of mercury-added products, including certain lamps. The proposal addresses the residual remaining uses of mercury in products in the EU, with a view to establishing a mercury-free Europe.
The negotiating mandate, which was agreed at Coreper level, sets out the Council’s position for the start of negotiations (‘trilogues’) with the Parliament to shape the final text of the legislation.
While current rules already forbid the use of dental amalgam for treating teeth in children under 15 years old and pregnant or breastfeeding women, the amendments extend the prohibition to everybody in the EU. The Council maintained the Commission’s proposed date for the total phase-out in the EU, 1 January 2025, except when the use of dental amalgam is deemed strictly necessary by the dental practitioner to address specific medical needs of the patient. However, it introduced a two-year derogation for those member states where low-income individuals would otherwise be socio-economically disproportionally affected by a phase-out date of 1 January 2025. Those member states will have to well justify their use of the derogation and notify the Commission of the measures they intend to implement to achieve the phase-out by 1 January 2027.
While the Council maintained the prohibition to export dental amalgam from 1 January 2025 as proposed by the Commission, it agreed to ban the manufacturing and import in the EU from 1 January 2027.
Six additional mercury-containing lamps would be made subject to a manufacturing, import and export ban as from 1 January 2026 and 1 January 2028, depending on the type of lamps.
Next steps
The Council is now ready to start negotiations with the European Parliament to agree on the final shape of the amendments. Once a provisional agreement has been reached, the final text will need to be formally adopted by both institutions.
Background
The EU mercury regulation is one of the key EU instruments transposing the Minamata Convention, an international treaty signed in 2013 to protect human health and the environment from the adverse effects of mercury. The 2017 regulation covers the full-life cycle of mercury, from primary mining to waste disposal, contributing to the ultimate EU objective to limit and phase out the use, manufacturing and export of mercury and mercury-added products over time, as spelled out in the EU strategy on mercury.
In July 2023, the Commission proposed a targeted revision of the regulation to address the remaining use of mercury in the EU in line with the EU’s zero pollution ambition. The proposed amendments call for complete ban on the use, manufacture and export of dental amalgam for dental treatment and certain types of mercury-added lamps.

Commission proposal on the revision of the Mercury Regulation
Minamata convention on mercury (official website)

 
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The misalignment with the EU climate transition pathway can lead to material financial, legal and reputational risks for banks. It is therefore crucial for banks to identify, measure and − most importantly − manage transition risks, just as they do for any other material risk writes Frank Elderson, member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB.

Eight years ago in Paris, global leaders reached a landmark agreement, committing to limit the global temperature increase to below the calamitous threshold of two degrees Celsius. Alarmingly, the latest scientific evidence[1] indicates that we are currently on a global heating path of 3°C.[2] Through the risk-based lens of a banking supervisor, this is seriously concerning – the longer we wait to transform our economy, the more disruptive the transition and the greater the risks that will materialise on banks’ balance sheets.[3] It is therefore crucial for banks to identify, measure and − most importantly − manage transition risks, just as they do for any other material risk.
How transition risks affect banks
In the European Union, the Paris Agreement has been transposed into the binding European Climate Law, which requires carbon neutrality by 2050. The commitment to reduce emissions by 55% by 2030 is further reinforced by the EU’s “Fit for 55” strategy. As the economy transitions towards meeting these goals, industries need to adjust how they operate. And since most companies in the EU with high-emitting production facilities rely on bank financing, this also has a significant impact on banks’ balance sheets. For instance, various studies suggest that phasing out fossil fuels to meet the Paris Agreement may very well leave about 80% of fossil fuel assets stranded in the absence of a timely transition[4], which will lead to financial losses for banks that are exposed to companies with those assets. Think about higher CO2 prices for high-emitting steel and cement producers under the reformed EU Emissions Trading System, or the ban on the sale of new petrol and diesel cars from 2035. Companies that do not adjust to these policies and fail to reduce their carbon footprint in a timely manner will face higher risks over time. Hence, misalignment with the EU transition pathway can lead to material financial, legal and reputational risks for banks[5].
To be clear: it is not for us supervisors to tell banks who they should or should not lend to. However, we will continue insisting that banks actively manage the risks as the economy decarbonises. And banks cannot do this without being able to accurately identify transition risks and how they evolve over time.
So how, exactly, can banks do that?
Quantifying transition risks is crucial
The first step is acknowledging the materiality of the risks. Over 80% of euro area banks have already concluded that transition risks have a material impact on their strategies and risk profiles. As a second step, it is crucial to measure transition risks in a forward-looking manner. This is, admittedly, the Achilles’ heel of the exercise considering the relatively carbon-intensive starting point of most economies and the continuous evolution of emission reduction policies. But while quantifying the risks is challenging, it is far from impossible.
To demonstrate how this quantification can be done, today the ECB is publishing a report on “Risks from misalignment of banks’ financing with the EU climate objectives”, where we quantify the most pronounced transition risks in the credit portfolio of the banking sector. We do this through “alignment assessment”, a methodology that is already being developed by banks and regulatory and supervisory authorities. It measures transition risks by comparing the projected production volumes in key economic sectors with the required rate of change to meet given climate objectives. It is a forward-looking assessment that covers a five-year horizon by considering the carbon impact of the production plans of companies in those key sectors. The assessment can be repeated over time, making it possible to measure whether a company is transitioning towards low-carbon production and to what degree the pace of transition is consistent with EU climate policies. The methodology currently includes economic sectors with the most pronounced transition risks that account for 70% of global CO2 emissions.
Key findings from the ECB’s quantification of transition risks
Our analysis of 95 banks covering 75% of euro area loans shows that currently banks’ credit portfolios are substantially misaligned with the goals of the Paris Agreement, leading to elevated transition risks for roughly 90% of these banks. The analysis shows that transition risks largely stem from exposures to companies in the energy sector that are lagging behind in phasing out high-carbon production processes and are late in rolling out renewable energy production.

Chart 1
Net alignment of euro area banks with and without net-zero 2050 commitment

Breakdown by bank, exposure volume and commitment to net zero by 2050
(net alignment in percentages, exposure in EUR billions)

Source: Risks from misalignment of banks’ financing with the EU climate objectives – Assessment of the alignment of the European banking sector, January 2024.

Additionally, 70% of these banks could face elevated litigation risks as they are publicly committed to the Paris Agreement, but their credit portfolio is still measurably misaligned with it[6].It is therefore vital that these banks do more work with their counterparties to ensure the companies they finance do not prevent them from living up to their net-zero commitment. This is more relevant than ever, considering that climate litigation has skyrocketed in recent years. Globally, some 560 new cases have been filed since 2021 and increasingly also targeted at corporates and banks.[7]
Transition planning – the foundation of a transition pathway
Banks are thus significantly exposed to transition risks and generate over 60% of their interest income from counterparties in carbon-intensive sectors.[8] The best thing banks can do is putting in place Paris-aligned transition plans. By this, I mean realistic, transparent, and credible transition plans that banks can and actually do implement in a timely manner. They should include concrete intermediate milestones from now until 2050 and develop key performance indicators that allow their management bodies to monitor and act upon any risks arising from possible misalignment with their transition path.
Banks can leverage on the alignment assessment methodology outlined in our report to advance their transition planning capabilities. Exchanging good practice among regulators, supervisors and the banking industry is essential in mastering the mammoth task of making banks transition risk proof. That is why we published the good practices that we observed in both the climate stress test[9] and the thematic review[10]. For instance, some frontrunner banks have already started to use transition planning tools, including alignment assessment, to measure risks in their credit portfolio stemming from the transition towards a decarbonised economy. Other banks have already started managing transition risks through active client engagement, and by offering transition finance products. These encouraging examples show that while it may be challenging, it is far from impossible.
Transition planning must become a cornerstone of standard risk management, as it is only a matter of time before transition plans become mandatory. In fact, the revised Capital Requirements Directive (CRD VI) includes a new legal requirement for banks to prepare prudential plans to address climate-related and environmental (C&E) risks arising from the process of adjustment towards climate neutrality by 2050. The latest revisions to the Capital Requirements Directive (CRD VI) mandate supervisors to check these plans and assess banks’ progress in addressing their C&E risks. Supervisors are also empowered to require banks to reduce their exposure to these risks and to reinforce targets, measures and actions included in their plans.
Moreover, banks that fall within the scope of European Banking Authority’s Implementing Technical Standards on Pillar 3 disclosures on environmental, social and governance risks will have to disclose the Paris alignment of their credit portfolios by the end of 2024 at the latest. Banks can therefore make use of the methodology set out in our report to meet this disclosure requirement.
Conclusion
The economy needs stable banks particularly as it goes through the green transition. It is in turn crucial for banks to identify and measure the risks arising from the transition towards a decarbonised economy. As ECB Banking Supervision we will continue to play our role in spurring banks to manage the inevitable risks materialising from the transition, just as they would for any other risk. This will ensure the banking system remains resilient and sound in our net‑zero future.

United Nations Environment Programme (2023), Emissions Gap Report 2023: Broken Record – Temperatures hit new highs, yet world fails to cut emissions (again).
Intergovernmental Panel on Climate Change (2023), Climate Change 2023 Synthesis Report – Summary for Policymakers, March.
Emambakhsh, T. et al. (2023), “The Road to Paris: stress testing the transition towards a net-zero economy”, Occasional Paper Series, No 328, ECB, September.
See, for example: Bos, K. and Gupta, J. (2019), “Stranded assets and stranded resources: Implications for climate change mitigation and global sustainable development”, Energy Research & Social Science, Vol. 56, October; Semieniuk, G. et al. (2022), “Stranded fossil-fuel assets translate to major losses for investors in advanced economies”, Nature Climate Change, Vol. 12, pp. 532-538; Welsby, D., Price, J., Pye, S. and Ekins, P. (2021), “Unextractable fossil fuels in a 1.5°C world”, Nature, Vol. 597, pp. 230-234; and Yen-Heng, H.C., Landry, E. and Reilly, J.M. (2023), “An Economy-Wide Framework For Assessing The Stranded Assets Of Energy Production Sector Under Climate Policies”, Climate Change Economics, Vol. 14, No 1.
See, for example: Elderson, F. (2023), “Come hell or high water: addressing the risks of climate and environment-related litigation for the banking sector”, speech at ECB Legal Conference, 4 September; and Network for Greening the Financial System (2023), Climate-related litigation: recent trends and developments, 1 September.
See Chart 1 showing that banks with the highest exposure volume also have a net-zero commitment.
  Financial Times (2024), “ING faces threat of legal action from climate group behind Shell case”, 19 January; Elderson, F. (2023), op cit.
ECB Banking Supervision (2022), 2022 climate risk stress test, July.
ECB Banking Supervision (2022), ECB report on good practices for climate stress testing, December.
ECB Banking Supervision (2022), Good practices for climate-related and environmental risk management – Observations from the 2022 thematic review, November.

 
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The Commission adopted five initiatives to strengthen the EU’s economic security at a time of growing geopolitical tensions and profound technological shifts. The package aims to enhance the EU’s economic security while upholding the openness of trade, investment, and research for the EU’s economy, in line with the June 2023 European Economic Security Strategy.
Today’s proposals are part of a broader three-pillar approach to EU economic security by promoting the EU’s competitiveness, protecting against risks and partnering with the broadest possible range of countries to advance shared economic security interests.
The initiatives adopted today aim at:

further strengthening the protection of EU security and public order by proposing improved screening of foreign investment into the EU;
stimulating discussions and action for more European coordination in the area of export controls, in full respect of existing multilateral regimes and Member States’ prerogatives;
consulting Member States and stakeholders to identify potential risks stemming from outbound investments in a narrow set of technologies;
promoting further discussions on how to better support research and development involving technologies with dual-use potential;
proposing that the Council recommends measures aimed at enhancing research security at national and sector level.

Future EU actions will continue to be informed by the on-going risk assessments and by strategic coordination with Member States to reach a shared understanding of the risks that Europe faces and of the appropriate actions.
Legislative proposal to strengthen foreign investment screening
Foreign investments into the EU benefit the European economy. However, certain foreign investments may present risks to the EU’s security and public order. The Commission has reviewed over 1,200 foreign direct investment (FDI) transactions notified by Member States over the past 3 years under the existing FDI Screening Regulation. Building on this experience and extensive evaluation of the functioning of the current regulation, today’s proposal addresses existing shortcomings and improves the efficiency of the system by:

ensuring that all Member States have a screening mechanism in place, with better harmonised national rules;
identifying minimum sectoral scope where all Member States must screen foreign investments;
extending EU screening to investments by EU investors that are ultimately controlled by individuals or businesses from a non-EU country.

Monitoring and assessment of outbound investment risks
The EU is one of the biggest foreign investors in the world and recognises the importance of open global markets. It also acknowledges the growing concerns regarding outbound investments in a narrow set of advanced technologies that could enhance military and intelligence capacities of actors who may use these capabilities against the EU or to undermine international peace and security.
This is currently neither monitored nor controlled at EU or Member State level. The Commission’s White Paper on Outbound Investments is therefore proposing a step-by-step analysis of outbound investments to understand potential risks linked to them. This analysis will include a three-month stakeholder consultation and a 12-month monitoring and assessment of outbound investments at national level, which will contribute to a joint risk assessment report. Based on the outcome of the risk assessment, the Commission will determine, together with Member States, if and which policy response is warranted.
More effective EU control of dual-use goods exports
Today’s increasingly challenging geopolitical context requires action at EU level to improve the coordination of export controls on items with both civil and defence uses – such as advanced electronics, toxins, nuclear or missile technology – so that they are not used to undermine security and human rights. Today’s White Paper on Export Controls proposes both short and medium-term actions, in full respect of the existing rules at EU and multilateral level. The Commission proposes to introduce uniform EU controls on those items that were not adopted by the multilateral export control regimes due to the blockage by certain members. This would avoid a patchwork of national approaches.
The White Paper also provides for a senior level forum for political coordination and announces a Commission Recommendation in Summer 2024 for an improved coordination of National Control lists prior to the planned adoption of national controls. The evaluation of the EU Dual-Use Regulation is advanced to 2025.
Options to support research and development in technologies with dual-use potential
With a White Paper on options for enhancing support of research and development (R&D) of technologies with dual-use potential, the Commission launches a public consultation. Announced by President von der Leyen in November 2023, the White Paper contributes to the ‘promote’ dimension of the European Economic Security Strategy, aiming at maintaining a competitive edge in critical and emerging technologies with the potential to be used for both civil and defence purposes.
The White Paper reviews current relevant EU funding programmes in the face of existing and emerging geopolitical challenges and assesses whether this support is adequate for technologies with dual-use potential. It then outlines three options for the way forward: (1) going further based on the current set-up, (2) removing the exclusive focus on civil applications in selected parts of the successor programme to Horizon Europe, and (3) creating a dedicated instrument with a specific focus on R&D with dual-use potential. Public authorities, civil society, industry, and academia can have their say in an open public consultation and inform the Commission’s next steps until 30 April 2024.
Enhance research security across the EU
In today’s complex geopolitical context, the openness and borderless cooperation in the research and innovation sector may be exploited and turned into vulnerabilities. Results of international research and innovation cooperation can be used for military purposes in third countries, or in violation of fundamental values. Higher education and research institutions can fall victim to malign influence by authoritarian states.
Against this background, the Commission presents a proposal for a Council Recommendation to provide more clarity, guidance and support to Member States and the research and innovation sector at large. EU action is required to ensure consistency across Europe and to avoid a patchwork of measures. By joining forces at all levels and across the Union we can mitigate the risks to research security and ensure that international research and innovation cooperation is both open and safe. The overall approach follows the principle ‘as open as possible, as closed as necessary’ as regards international research cooperation.
Background
On 20 June 2023, the European Commission and the High Representative published a Joint Communication on a European Economic Security Strategy, to minimise the risks in the context of increased geopolitical tensions and accelerated technological shifts, while preserving maximum levels of economic openness and dynamism. It provides a framework for assessing and addressing – in a proportionate, precise and targeted way – risks to EU economic security, while ensuring that the EU remains one of the most open and attractive destinations for business and investment.
The strategy identified four risk categories to be addressed as a matter of priority: supply chains; physical and cyber-security of critical infrastructure; technology security and technology leakage; weaponisation of economic dependencies or economic coercion.
To address these risks, the Strategy is structured around three pillars:

Promoting the EU’s competitiveness and growth, strengthening the Single Market, supporting a strong and resilient economy, and strengthening the EU’s scientific, technological and industrial bases.
Protecting the EU’s economic security through a range of policies and tools, including targeted new instruments where needed.
Partnering and further strengthening cooperation with countries worldwide who share our concerns and those with which we have common economic security interests.

 
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Workers will be better represented in EU-based multinational companies thanks to new rules for the so-called European Works Councils (EWCs). These Councils ensure that employees are involved in decisions related to transnational issues, like re-structurings. They help workers anticipate and manage changes in the world of work, including labour shortages and new technologies. Around 1,000 EWCs currently represent nearly 11.3 million European employees. While these Councils represent more than half of the eligible workforce, this is still less than a third of the estimated almost 4,000 eligible companies. 
The Commission has proposed the following changes to how European Works Councils work:

Giving employees equal rights to request the creation of a new EWC: exemptions will be removed, potentially allowing 5.4 million additional workers in 320 multinational companies to request the establishment of such a Council.
Ensuring that workers in multinational companies are consulted in a timely and meaningful way on issues which concern them
Making sure EWCs have the necessary resources to do their work
Putting in place terms for a gender-balanced EWC 

The proposed measures will improve transnational information and consultation, companies’ strategic decision-making, and mutual trust between management and workers. They are anticipated to come at a minimal cost for companies, with no negative impact expected on their competitiveness.
 
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Today, the Council formally adopted a regulation to modernise and simplify the structure of fees paid to the European Medicines Agency. The new rules will ensure both adequate funding for the EMA and sufficient support for national competent authorities to undertake their scientific evaluation tasks.
 
“During the last years, the European Medicines Agency and the national competent authorities have worked hard and ceaselessly to ensure safe vaccines and medicines for all EU citizens throughout the COVID-19 pandemic and in its aftermath. The new regulation and the new fee system will further support their operations and tasks.”
Frank Vandenbroucke, Belgian Deputy Prime Minister and Minister for Social Affairs and Public Health
Cost-based fees and sustainable EMA operations
The new regulation:

establishes the transition from a flat-rate to a cost-based fee system
ensures the sustainability of the European regulatory network formed by the EMA and national competent authorities, providing a sound financial basis to support their operations
makes the system more flexible and adaptable to future needs, including provisions on updating fees or adapting fees to changing circumstances
simplifies the existing legislation and merges the content of the two current regulations for pharmacovigilance and non-pharmacovigilance fees into one single legal instrument

Background and next steps
On 13 December 2022, the Commission published a proposal for a regulation revising the existing EMA fee system. After establishing their respective positions, the Council of the European Union and the European Parliament launched negotiations on 5 September and reached a provisional agreement on the final shape of the regulation by the end of the month.
The regulation will now be signed and published in the Official Journal of the EU. It will enter into force on the first day following publication and become applicable on 1 January 2025, repealing the two previous regulations on the EMA fee system.
 
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