It was a presentation by Laura Papi, Deputy Director, European Department, IMF given at the Budapest Economic Forum on October 17th 2023.Good morning to all of you. Thank you for the introduction. It is a pleasure to be here today and for the first time at the Budapest Economic Forum. I am honored to have been invited to speak.
Today, I will discuss the outlook for Europe and how we see the risks. Inflation, implications of the geoeconomic fragmentation, and the green transition will be particular areas of focus. I will discuss key policies for securing low inflation and forging a path of higher long-term growth.
Progress has been made in taming inflation and the likelihood of a soft landing has increased, both globally and in Europe.
But downside risks are significant. Policymakers face the risk of persistent and more volatile inflation. We now live in a more shock prone world. And the longstanding slowdown in productivity growth, the geoeconomic fragmentation and the challenges of the green transition cast doubt on whether European economies can return to the pre-pandemic growth trajectory.
These competing challenges and a highly uncertain outlook will test policymakers in Europe.
These themes are pertinent to Hungary, which is facing a difficult macroeconomic environment, with still-high inflation and the longest recession since the mid-1990s.
Let me start with the European Outlook.
Outlook and Near-term challenges
At first glance, the European economy seems to be approaching a relatively benign moment.
The IMF’s baseline forecast anticipates a continued moderation of inflation in Europe and—contrary to initial expectations of recession—modest growth in 2023 and a slight recovery in 2024. We expect that for Europe as a whole 2023 growth will be 1.3 % (2,7 in 2022), picking up to 1.5% next year. Advanced economies are expected to go from 0.7 % to 1.2%, while Emerging European Economies are expected to have a sharper recovery from about 1 to about 3 %.
Aided by easing commodity prices and supply constraints, monetary tightening has cooled headline inflation, providing support to real wages. In most EU countries, the tightening cycle has peaked, with the prospect of an approaching soft landing as growth this year slows but remains in positive territory.
However, there are divergencies across European countries: energy-intensive and manufacturing-oriented economies, such as Germany and Hungary, are performing less well.
And downside risks continue to prevail everywhere.
Headline inflation is falling, but is not expected to return to target until 2025 in many countries, for some even 2026.  Core inflation has been persistently high in many European economies, especially in services. Nominal wages are growing rapidly, outpacing inflation in some economies, especially in Eastern Europe.
As the pandemic and Russia’s war in Ukraine hit European economies, in only 2 years prices increased by 25 percent, as much as over the 5 years following the global financial crisis. In Hungary, inflation reached 25 percent at end- 2022, and prices have increased by 41 percent cumulatively from end-2020 to August 2023. This rapid and massive price shock eroded workers’ purchasing power and left a large real wage gap.
Hence, some wage catch up is reasonable and to be expected. However, we have some concerns.
We have decomposed wage growth into inflation expectations and wage catch up in green, the unemployment gap in red, productivity growth in yellow, and in gray other, that is wage growth in excess of what is to be expected from the factors I just mentioned, which as you can see is growing especially in Central, Eastern, and South-Eastern Europe, CESEE.
The risk is that wage pressures could translate into additional inflation pressures, especially where wage setting is backward-looking, as is the case in many European emerging markets, and hence harm competitiveness.
New IMF research, in our recent World Economic Outlook, also shows that near-term inflation may play a greater role in setting long-term inflation expectations than previously thought. Near-term expectations, in turn, are influenced to a large extent by backward-looking agents, particularly in emerging market economies where such agents are more prevalent. There is also evidence that the pass-through from inflation expectations to inflation tends to be higher when inflation is high.
The strength of the labor market is fundamentally good news.
Vacancy to unemployment ratios stand at record highs and unemployment rates at record lows in most of Europe.
But all of this means additional upward nominal wage pressures are likely and the possibility of a wage-price spiral exists.
Let me be clear: we don’t see wage-price spirals likely in advanced European economies, but the risk in Eastern Europe is not negligible.
Another driver of high inflation has been firms’ profits.
In many countries, in the last couple of years, firms have passed on more than the increase in input prices to consumers. In CESEE too we saw an increase in profits, which have started to fall. Going forward, this is positive in the sense that firms could absorb some wage increases by lower profits. But there is no guarantee that this will continue. In sum, all of these forces put together suggest that we may be experiencing a period of especially sticky price and wage pressures.
Besides the more cyclical factors that I have just discussed, there are some additional risk factors for inflation, which are more structural in nature.
Take geoeconomic fragmentation. We have already experienced big shocks from fragmentation, especially Russia’s war in Ukraine. We could see additional commodity price spikes that feed through to core inflation. More generally greater fragmentation brings more trade restrictions and disruptions of supply chains, continuing to generate negative supply shocks, which will be inflationary.
The pre-pandemic view was that central banks could generally ignore supply shocks as these were believed to be mostly transient. But, the pandemic and war in Ukraine have highlighted how supply shocks can have broad and persistent inflation effects.
Medium-term challenges
Let me turn to the medium- and long-term challenges.
Europe’s medium-term growth prospects have been declining for some time.
Since the 2008 global financial crisis, per capita growth has fallen and we expect growth to remain weak over the medium term.
The pandemic and the energy crisis have resulted in significant scarring to the level of output. And this comes at a time when countries also grapple with the structural shifts from fragmentation, climate and technological change, and demographic pressures.
Fragmentation is a particularly potent economic challenge. The increasing trade restrictions and reconfiguration of supply chains, besides raising production costs, can further dampen Europe’s weak productivity growth.
The economic costs of fragmentation are likely to be substantial. While estimates vary, greater international trade restrictions could reduce global economic output by up to 7 percent over the long term, or some $7 trillion in today’s dollars—equivalent to the combined size of the French and German economies. If technological decoupling is added to the mix, some countries could see losses of up to 12 percent of GDP. And looking just at commodities trade, the IMF estimates that segmentation in the trade of these critical inputs could erase 2 percent from global GDP and up to 3.5 percent from that of emerging Europe.
While reshoring or near-shoring some aspects of production may also present some opportunities to some countries, these are only available if cost competitiveness is preserved, especially on wages.
But let me be clear: economic fragmentation is a negative sum game for the world as a whole.
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Climate change is another major challenge. European countries, like other parts of the globe, are experiencing rapid temperature rises and greater frequency of natural disasters, underscoring the urgency of transitioning to a greener and more climate resilient economy. The green transition holds the promise of being an engine of growth accompanied by greater sustainability and resilience and is one of the key imperatives of our times.
In the short term, though, this may entail significant adjustment costs and benefits spread unevenly across countries, firms, and people. The effects on prices and growth could be uncertain in the short to medium term, depending on how well managed and orderly the adjustment.
Take the auto sector, so important for several countries in Europe including Hungary. IMF research shows that the transition to electric vehicles is already negatively affecting employment in sectors and regions focused on internal combustion engine vehicle production. We are likely to see disruptions in the extensive regional value chains that have been built around supplying the auto industry, which employs 7 percent of the European workforce. This highlights the need to facilitate the relocation of factors of production across sectors.  This transition will have implications for employment, investment, and public policy as countries have to reorient worker training and investment, including in new infrastructure.
Finally, Europe confronts labor supply constraints due to demographics, and capital stocks in emerging Europe are still low.
Policies
I realize that I have laid out a sobering list of near- and long-term challenges. So, what to do about all this?
First, it is critical not to loosen policies prematurely in response to what may be temporary declines in inflation.
In a recent IMF paper, we have looked at 100 inflation shocks and we have seen that in many cases, policies were eased too soon, and inflation reaccelerated: here are some examples of premature celebrations, but there are many more.
Fund research also shows that countries that resolved inflation episodes experienced lower growth in the short term, but not over the medium term.
Naturally, the level and duration of tightness in the monetary policy stance should be calibrated to country specific conditions. This may mean that some central banks keep rates at current levels for some time while others may have to raise them further. While many emerging economies started raising policy rates already in 2021 and by substantial amounts, real rates have remained below the neutral level in some countries. Hungary has now one of the highest real policy rate in Europe.
Given the high cost of erring on the side of monetary policy being too loose, the empirical case for a less contractionary stance should be compelling. Monetary policy should remain restrictive until there is clear evidence of a substantial improvement in the core inflation forecast; a reduction of upward inflation risks which hinges mainly on labor market developments; and the absence of upward movements in inflation expectations. These conditions have not been met in most countries.
The key message is that fighting inflation is difficult in the short-term but pays off later, while delaying the day of reckoning ultimately requires a higher sacrifice in future growth and employment.
In emerging markets, in particular, bringing down inflation once it gets sticky can be very costly and high inflation creates competitiveness problems that EMs can ill afford. Short-term pain for long-term gain.
Second and turning to fiscal policy, our strong recommendation is that all countries step up their efforts to rebuild fiscal buffers while protecting the vulnerable. This means consolidation, starting now and especially in high-debt and high deficit countries. By reducing deficits, fiscal consolidation will complement monetary policy in the fight against inflation. Importantly, it will re-build fiscal space for future shocks and for productivity-enhancing investments, including in green infrastructure, and to face the critical transitions that we are experiencing.
In many emerging economies, there is significant room to mobilize resources and to achieve greater expenditure efficiency through better targeting and better spending prioritization. In many countries, there are opportunities to eliminate tax leakages, exemptions, and inefficiencies. IMF research shows that the potential for revenue mobilization by increasing tax efficiency in emerging European economies is as high as 2 percent of GDP, on average. Many countries still have costly and counter-productive energy subsidies, which run counter to the green transition and reduce energy security, which need to be eliminated. Support can be given in a targeted way at a fraction of the current cost. And with high yields globally, governments should be even more rigorous in their prioritization of public spending and not leave money on the table on the tax front.
Third, structural policies remain crucial for achieving strong, sustainable,  and more evenly distributed growth. With greater prevalence of supply shocks, constrained policy space, and big transitions under way requiring large reallocation of factors of production, policies that can stimulate the supply side and facilitate the necessary adjustments have to take center stage.
Country needs vary and reforms need to be tailored to the specific institutions and initial conditions, but there are some common priorities.

Removing barriers that stand in the way of economic innovation and business dynamism. A strengthened business environment with policies that encourage investment and R&D spending will enhance productivity and competitiveness.
Measures to improve worker training and skills, as well as active labor market policies, will be particularly important to facilitate the green and digital transitions without generating employment losses and to meet the needs of the new economy.
Boosting labor participation will help counter demographic trends and can relieve the tightness in labor markets, and help ease inflation pressures.

In emerging European economies, the need to get structural policies right is particularly important given the urgency of reaccelerating income convergence. To attract inward investment countries should ensure business-friendly environments by strengthening public governance, enhancing skills and infrastructure. In addition, investing in human capital to align education, health, and social protection outcomes with those of advanced economies can help stem the excess flow of emigration.
To address geoeconomic fragmentation, some countries have introduced industrial policies to encourage the establishment of critical industries or to produce key inputs at home citing national security or just reshoring. Industrial policies have a role to play in addressing market failures and externalities, such as in the provision of critical infrastructure or in supporting basic research, an under-provisioned public good by the private sector. But they need to be deployed only narrowly and with care. Costly subsidy races and the use of distortionary tariffs must be avoided, and policies should be coordinated at the multilateral level to avoid beggar-thy-neighbor outcomes.
For the EU, focusing on completing the single market—completing the single services market, the banking union, and the capital markets union—is absolutely vital. Green subsidies should maintain the integrity of the EU’s Single Market and follow a common EU approach. Together with the implementation of the Recovery and Resilience Plans, there reforms are critical to boost the EU’s productivity and competitiveness.
Energy importers should continue to seek to diversify suppliers to avoid the consequences of overdependence on a single source.
International collaboration on climate change, including a global carbon price floor, will reduce emissions and complement domestic policies. The recently published IMF fiscal monitor proposes a practical mix of policies that are feasible and would achieve the climate goals, including also feebates, green subsidies, and regulation standards, combined with transfers to vulnerable workers.
Conclusion
I realize that these challenges, and the proposed solutions, seem daunting. But every journey starts with a single step.
The policies that governments put in place today have important implications for the trajectory of inflation, competitiveness, and growth in the future.
The good news is that tackling inflation now will strengthen resilience and help to buttress competitiveness in the long term.
As inflation is brought under control and fiscal space is rebuilt, European policymakers will be able to seize the opportunities posed by big transitions rather than being a casualty of these structural shifts.
Structural policies that help boost supply, including those at the EU level, ultimately will be the only way of boosting growth and will also alleviate some of the structural inflation pressures.
And all this in turn will play an important role in raising regional growth and in helping emerging economies like Hungary to converge with Europe’s advanced economies.
The IMF remains deeply committed to the region and will continue to support our member countries to foster macroeconomic stability and higher living standards.
Thank you.
 
To reach the slides of the presentation, click here.
 
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The European Commission analysed over 420 foreign direct investments (FDI) into the EU over the past year, according to the Annual Report on FDI Screening released today. In addition, EU Member States blocked 560 requests for exports of dual use goods over the same period. This level of activity demonstrates a clear commitment by the European Commission and Member States to safeguarding European security and public order in times of increased geopolitical tensions.
The number of EU Member States with a screening mechanism has grown from 11 to 21 since the EU’s FDI screening regulation came into force, with more on the way.
As regards dual-use goods (goods which can be used for civil or military purposes), Member States reviewed 38,500 export applications in 2021 for goods worth €45.5 billion. Member States blocked exports on account of security risks in 560 cases, worth a total of €7 billion.
FDI Screening
The third Annual Report on FDI screening shows that the use of the screening mechanism continued to grow in 2022. Its key findings are:

The Commission rapidly completed the assessment of FDI transactions notified by Member States: 87% were assessed in just 15 calendar days, thus ensuring no delays to authorisations by Member States.
The EU mechanism does not restrict the EU’s openness to FDI: of the more than 420 cases screened in 2022, less than 3% led to the Commission issuing an opinion.
The top six sources of FDI into the EU in 2022 were the US, UK, China, Japan, the Cayman Islands and Canada.
Most cases concerned manufacturing (59%), covering a diverse set of industries including energy, aerospace, defence, semiconductors, health, data processing and storage, communication, transport and cybersecurity.

The EU FDI Screening Regulation entered into full application in October 2020. The cooperation mechanism created by the Regulation enables Member States and the Commission to exchange on FDI quickly and efficiently. It has allowed for the prevention of investments posing security or public order risks without restricting the overall flow of foreign investment into the EU. Since the creation of the cooperation mechanism, the Commission has screened more than 1100 foreign direct investments.
The Economic Security Strategy published in July 2023 highlights the need to build a shared understanding of risks to the EU’s economic security and to make better use of existing tools. Against this backdrop, the European Commission is completing an evaluation of the FDI Screening Regulation and a revised Regulation will be proposed before the end of the 2023.
Export Controls
This statistical update on the implementation of the Export Controls Regulation published today by the European Commission complements the 2022 Annual Export Control Report. It provides2021 licensing data collected using a methodology developed on a voluntary basis with Member States, under the previous Dual-Use export control regulation[1]. The update closes a data gap, as the forthcoming 2023 Annual Export Control Report will include 2022 licensing data collected following an updated methodology, in line with the requirement for enhanced transparency under the current Dual-Use export control Regulation (EU) 821/2021.
Background
EU Member States which operate FDI screening regimes are required to notify foreign direct investments to the other Member States and to the European Commission if these investments risk affecting security or public order in more than one Member State or have an impact on strategic projects or programmes of interest to the whole EU. The Commission then analyses the notified investments and where there are concerns, the Commission or other Member States can share them with the notifying Member State, which then takes these into account when deciding on the investment.
 
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The Governing Council of the European Central Bank (ECB) decided yesterday to move to the next phase of the digital euro project: the preparation phase.
This decision follows the completion of the investigation phase launched by the Eurosystem in October 2021 to explore possible design and distribution models for a digital euro. Based on the findings from this phase, detailed in a report published today, the ECB has designed a digital euro that would be widely accessible to citizens and businesses through distribution by supervised intermediaries, such as banks.
The design envisages the digital euro as a digital form of cash that could be used for all digital payments throughout the euro area. It would be widely accessible, free for basic use and available both online and offline. It would offer the highest level of privacy and allow users to settle payments instantly in central bank money. It could be used from person to person, at the point of sale, in e-commerce and in government transactions. No digital payment instrument offers all these features. The digital euro would fill that gap.
The next phase of the digital euro project – the preparation phase – will start on 1 November 2023 and will initially last two years. It will involve finalising the digital euro rulebook and selecting providers that could develop a digital euro platform and infrastructure. It will also include testing and experimentation to develop a digital euro that meets both the Eurosystem’s requirements and user needs, for example in terms of user experience, privacy, financial inclusion and environmental footprint. The ECB will continue to engage with the public and all stakeholders during this phase. After two years, the Governing Council will decide whether to move to the next stage of preparations, to pave the way for the possible future issuance and roll-out of a digital euro.
The launch of the preparation phase is not a decision on whether to issue a digital euro. That decision will only be considered by the Governing Council once the European Union’s legislative process has been completed. The ECB will take into account any adjustments to the design of the digital euro that may become necessary as a result of the legislative deliberations.
“We need to prepare our currency for the future,” said Christine Lagarde, President of the ECB. “We envisage a digital euro as a digital form of cash that can be used for all digital payments, free of charge, and that meets the highest privacy standards. It would coexist alongside physical cash, which will always be available, leaving no one behind.”
The digital euro would make data protection a priority. The Eurosystem would not be able to see users’ personal data or link payment information to individuals. The digital euro would also achieve a cash-like level of privacy for offline payments.
The digital euro would promote resilience, competition and innovation in the European payments sector. It would ensure that there is a pan-European payment solution for the euro area under European governance. It would rely on its own infrastructure, thereby strengthening resilience. And it would provide a platform on which European supervised intermediaries could build pan-European services for their customers, increasing efficiency, reducing costs and fostering innovation.
“As people increasingly choose to pay digitally, we should be ready to issue a digital euro alongside cash,” said Fabio Panetta, ECB Executive Board member and Chair of the High-Level Task Force on a digital euro. “A digital euro would increase the efficiency of European payments and contribute to Europe’s strategic autonomy.”
Digital euro distribution
Users could access digital euro services via their payment service provider’s proprietary app and online interface, or via a digital euro app provided by the Eurosystem. People without access to a bank account or digital devices would also be able to pay with digital euro, for example by using a card provided by a public body such as a post office. Users would also be able to exchange digital euro for cash or vice versa at cash machines.
The Eurosystem envisions a digital euro that would be free for basic use for individuals. A compensation model between intermediaries and merchants would ensure that there are incentives for intermediaries to distribute digital euro, as is the case for other electronic payment instruments, and that there are adequate safeguards against excessive service charges for merchants. The Eurosystem would bear its own costs, including those related to scheme management and settlement processing.
Transparency and close cooperation with stakeholders remain key pillars of the project. The Eurosystem has benefited greatly from feedback from European decision-makers, market participants and potential users, and will continue to engage actively with a wide range of stakeholders. We will also continue to cooperate closely with EU legislators.
 
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The European Commission is carrying out unannounced antitrust inspections at the premises of companies active in the construction chemicals sector in several Member States.
The Commission has concerns that the inspected companies may have violated EU antitrust rules that prohibit cartels and restrictive business practices (Article 101 of the Treaty on the Functioning of the European Union).
The construction chemicals concerned by the inspection are chemical additives for cement and chemical admixtures for concrete and mortar. These are ingredients that are added to cement, concrete and mortar to modify and improve their properties and provide them with specific qualities.
The Commission officials were accompanied by their counterparts from the relevant national competition authorities of the Member States where the inspections were carried out. Today’s inspections were conducted in coordination with the UK Competition and Markets Authority and the Turkish Competition Authority. The Commission has also been in contact with the United States Department of Justice, Antitrust Division.
Unannounced inspections are a preliminary investigatory step into suspected anticompetitive practices. The fact that the Commission carries out such inspections does not mean that the companies are guilty of anti-competitive behaviour nor does it prejudge the outcome of the investigation itself.
The Commission respects the rights of defence, in particular the right of companies to be heard in antitrust proceedings.
There is no legal deadline to complete inquiries into anticompetitive conduct. Their duration depends on a number of factors, including the complexity of each case, the extent to which the undertakings concerned co-operate with the Commission and the exercise of the rights of defence.
Under the Commission’s leniency programme companies that have been involved in a secret cartel may be granted immunity from fines or significant reductions in fines in return for reporting the conduct and cooperating with the Commission throughout its investigation. Individuals and companies can report cartel or other anti-competitive behaviour on an anonymous basis through the Commission’s whistle-blower tool. Further information on the Commission’s leniency programme and whistle-blower tool is available on DG Competition’s website.

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Once a year the ECB publishes a report presenting an overview of developments in the use of the euro by non-euro area residents. The international role of the euro is primarily supported by a deeper and more complete Economic and Monetary Union (EMU), including advancing the capital markets union, in the context of the pursuit of sound economic policies in the euro area. The Eurosystem supports these policies and emphasises the need for further efforts to complete EMU.
Foreword by Christine Lagarde, President, ECB:
Despite a succession of new shocks, the international role of the euro remained resilient in 2022. This was a year that saw the onset of Russia’s war in Ukraine, a rise in economic sanctions and a substantial increase in geopolitical risks – all with potential repercussions for the international monetary system. However, the share of the euro across various indicators of international currency use continued to average close to 20%. The euro remained the second most important currency globally.
This resilience was noteworthy in a context of rising inflationary pressures worldwide – in part owing to war-related energy and food price increases – which led to tighter monetary policies across major economies and higher interest rates on the main international currencies.
But there are developments ahead to monitor for the euro as an international currency. This year’s report discusses the future of the international monetary system following Russia’s invasion of Ukraine, reviewing the available evidence. So far, the data do not show substantial changes in the use of international currencies. However, they do suggest that international currency status should not be taken for granted.
This new landscape increases the onus on European policymakers to create the conditions for the euro to thrive. Its international role is primarily supported by a deeper and more complete Economic and Monetary Union (EMU), including advancing the capital markets union, in the context of the pursuit of sound economic policies in the euro area. The Eurosystem supports these policies and emphasises the need for further efforts to complete EMU. Further European economic and financial integration will be pivotal in increasing the resilience of the international role of the euro in a potentially more fragmented world economy.
The ECB will continue to monitor developments and publish information on the international role of the euro on a regular basis.
Christine Lagarde, President
1 Main findings
This 22nd annual review of the international role of the euro presents an overview of developments in the use of the euro by non-euro area residents. The report covers developments in 2022. This was a year that saw the onset of Russia’s war in Ukraine and a substantial increase in geopolitical risks with potential repercussions for the international monetary system. Rising inflationary pressures globally – in part coming from war-related energy and food price increases – and tighter monetary policies in major economies led to higher interest rates on the main international currencies.
Against this challenging background, a composite index of the international role of the euro remained resilient over the review period (Chart 1). Adjusting for exchange rate valuation effects, the index increased by around 1.3 percentage points. At current exchange rates, it remained largely unchanged. The share of the euro across various indicators of international currency use averaged close to 20%. The euro remained the second most important currency in the international monetary system (Chart 2).

Chart 1
The international role of the euro was resilient in 2022

Composite index of the international role of the euro
(percentages; at current and constant Q4 2022 exchange rates; four-quarter moving averages)

Sources: Bank for International Settlements (BIS), International Monetary Fund (IMF), CLS Bank International, Ilzetzki, Reinhart and Rogoff (2019) and ECB calculations.
Notes: Arithmetic average of the shares of the euro at constant (current) exchange rates in stocks of international bonds, loans by banks outside the euro area to borrowers outside the euro area, deposits with banks outside the euro area from creditors outside the euro area, global foreign exchange settlements, global foreign exchange reserves and global exchange rate regimes. The estimates for the share of the euro in global exchange rate regimes are based on IMF data for the period post-2010; pre-2010 shares were estimated using data from Ilzetzki, E., Reinhart, C. and Rogoff, K. (2019), “Exchange Arrangements Entering the 21st Century: which anchor will hold?”, Quarterly Journal of Economics, Vol. 134, Issue 2, May, pp. 599-646. The latest observation is for the fourth quarter of 2022.

Chart 2
The euro remained the second most important currency in the international monetary system

Snapshot of the international monetary system
(percentages)

Sources: BIS, IMF, Society for Worldwide Interbank Financial Telecommunication (SWIFT) and ECB calculations.
Notes: The latest data for foreign exchange reserves, international debt and international loans are for the fourth quarter of 2022. SWIFT data are for December 2022. Foreign exchange turnover data are as at April 2022. *Since transactions in foreign exchange markets always involve two currencies, shares add up to 200%.

The share of the euro in global official holdings of foreign exchange reserves increased in 2022 by 0.5 percentage points to 20.5%, when measured at constant exchange rates (Table 1). The share of the US dollar declined by more than 2 percentage points, while the share of the renminbi was substantially unchanged. Box 1 examines whether the renminbi could play a stronger role as an international reserve currency despite China’s lack of full financial account openness. A strong dollar and large changes in the price of bonds issued by major economies encouraged official reserve managers to manage their portfolios actively in 2022. Net official purchases of assets denominated in currencies other than the US dollar increased, offsetting valuation effects arising from the dollar’s appreciation – which mechanically raised the share of the US dollar in official reserve portfolios at current exchange rates. Whether inflation developments influenced the decisions of official foreign exchange reserve investors is unclear, as shown by the poor correlation between changes in the share of major currencies in global foreign exchange reserves and inflation rates in the issuing economies. Box 3 discusses how these developments are not exceptional and reflect conventional reserve management strategies by central banks. Interest rates are another factor which can influence the management of reserve portfolios. While interest rates in the euro area returned to positive territory, they remained lower than in other major economies, which could have discouraged rebalancing to euro-denominated assets. Box 2 shows that interest rate differentials are important determinants in the active rebalancing of the government debt portfolios of a sample of US mutual fund managers, much as they influence investment decisions of official reserve managers.[1] Finally, heightened geopolitical risks might have played a role in the investment decisions of official reserve managers in some countries. Special Feature A shows that the accumulation of gold as an official reserve asset was especially strong in countries that are geopolitically close to China and Russia. This may be because such countries are looking to reduce their exposure to the risk of financial sanctions. Higher inflation globally might confound these developments, however, insofar as gold is traditionally seen as a hedge against inflationary risks.
Other indicators of the international role of the euro tracked in this report also point to a noteworthy resilience in the attractiveness of the euro (Table 1). The share of the euro in the outstanding stock of international debt securities increased by more than 1 percentage point to 22.0% in 2022 compared with the previous year, when measured at constant exchange rates. The shares of the euro in the outstanding stocks of international loans and international deposits rose by around 2.4 and 1.5 percentage points, respectively, in 2022. The share of the euro in foreign exchange settlements also increased by almost 3 percentage points to around 38%, when measured at constant exchange rates, over the review period. However, the latest BIS Triennial Survey points to a decline in the share of the euro in global foreign exchange turnover of around 1.8 percentage points since 2019, to 30.5%, owing to the relatively stronger growth of trading in other currencies, such as the US dollar and the renminbi. Box 4 shows that the City of London remained the main venue for foreign exchange trading in euro and that the United Kingdom’s importance for international financial activities in euro did not change materially after Brexit, albeit with a few exceptions. The international role of the euro in foreign currency bond issuance, including the issuance of international green bonds, was substantially stable. Finally, the share of the euro in the invoicing of extra-euro area imports and exports did not change significantly. The impact of Russia’s war in Ukraine on the international role of the euro was particularly visible in the form of a temporary surge in net shipments of euro cash outside the euro area, presumably for precautionary reasons (Box 5). This reversed in the second half of 2022 on the back of higher interest rates and opportunity costs of holding cash (Section 2.5).
As stressed in last year’s edition of this report, the European Union’s economic and financial resilience to the current geopolitical challenges underlines the strength of the international role of the euro. The international role of the euro is primarily supported by a deeper and more complete Economic and Monetary Union (EMU), including advancing the capital markets union, in the context of the pursuit of sound economic policies in the euro area. The Eurosystem supports these policies and emphasises the need for further efforts to complete EMU.
This year’s report includes three special features. The first special feature sheds light on the debate surrounding the future of the international monetary system following Russia’s invasion of Ukraine, reviewing the available evidence. Shortly after the invasion, several packages of sanctions were imposed on Russia, including the freezing of nearly half of the Russian central bank’s foreign exchange reserves and the exclusion of several Russian banks from SWIFT, the dominant financial messaging system for cross-border payments. Some observers noted that these sanctions may encourage countries that are not fully aligned with the United States geopolitically to cut their exposures to the currencies of sanctioning countries, while others were more sceptical and pointed to challenges in moving away from the major international currencies. The special feature shows that evidence of a potential fragmentation of the international monetary system since Russia’s invasion is so far mainly restricted to announcements and specific cases and is not indicative of broader trends. Anecdotal evidence, including official statements, points to the intention of some countries to develop the use of alternatives to the sanctioned currencies, such as the renminbi, the rouble and the Indian rupee, for the invoicing of international trade – notably in commodities. There is also evidence that Russia has been using the Chinese renminbi to a significantly greater extent for international invoicing and cross-border payments in the past few months. However, on the whole, the available data do not show substantial changes in the use of international currencies. One noteworthy development is evidence of diversification into gold by countries that are geopolitically close to China and Russia, perhaps in an attempt to reduce their risk of exposure to sanctions.
The second special feature aims to give a broader perspective to ongoing discussions on the future of the international monetary system and reviews the evidence – both old and new – on how one leading international currency is replaced by another. The conventional historical narrative is that inertia in international currency use is substantial – it takes a long time for a challenger currency to replace the incumbent unit as the presence of network externalities gives rise to lock-in effects. However, one interesting exception is the invoicing of trade by countries neighbouring the euro area, where the euro overtook the US dollar in the space of a few years, i.e. between 1999 – the year of the euro’s creation – and 2019. Two competing hypotheses may explain these developments: a trade shock – in which stronger trade links with the euro area tilted invoicing towards the euro – and an exchange rate volatility shock – in which growing use of the euro as an exchange rate anchor spilled over to invoicing. New evidence from ECB staff research gives support to the first hypothesis, finding that a trade shock is a key determinant of the stronger role of the euro for invoicing international trade in countries neighbouring the euro area. In countries where trade links with the euro area increased, the shock accounts for almost 40% (on average) of the rise in the share of exports invoiced in euro between 1999 and 2019. By contrast, the impact of greater exchange rate stability against the euro is found to be statistically insignificant. Moreover, the estimates point to significant cross-country effects – the fact that countries’ invoicing currency choices are not just impacted by their own trade patterns and exchange rate volatilities, but also by those of their trade partners and competitors. These findings have implications for policy. They suggest that in response to the pandemic shock and the war in Ukraine, the reshoring or “friendshoring” of production chains could lead to stronger regional trade, notably on the European continent and, in turn, to a stronger role of the euro for invoicing international trade, with the caveat that such a reversal in global economic integration would bring other economic costs.
The third special feature looks at the role of international currencies in global finance. It provides insights into determinants of currency choice in cross-border bank lending, including bilateral distance, measures of linkages to the issuer countries through finance, trade and the use of vehicle currencies for trade invoicing. The special feature pinpoints several new facts. It highlights the centrality of the City of London for euro-denominated loans, albeit with tentative signs of adverse Brexit effects. It shows that offshore financial centres play a pivotal role in the international network of cross-border loans denominated in US dollars, which largely reflects lending to non-bank financial intermediaries (such as investment banks, finance companies, mutual funds, pension funds and insurance companies) in the Cayman Islands. Moreover, empirical estimates suggest that euro-denominated loans are driven by gravity effects, pointing to a stronger role of the euro in the immediate vicinity of the euro area, in contrast to US dollar loans which have a more global outreach. Finally, there is evidence that complementarity effects between trade invoicing and bank lending decisions – which are predicted to be significant according to recent theoretical models of international currency use – are stronger for the euro than for the US dollar.

Table 1
The international role of the euro from different perspectives

Summary of data in this report

Sources: BIS, CLS Bank International, Dealogic, IMF, national sources and ECB calculations.
Notes: An increase in the euro nominal effective exchange rate indicates an appreciation of the euro. For foreign exchange trading, currency shares add up to 200% because transactions always involve two currencies.

Box 1
Internationalisation of the renminbi and capital account openness
Prepared by Barry Eichengreen (UC Berkeley), Camille Macaire (Banque de France), Arnaud Mehl, Eric Monnet (Paris School of Economics) and Alain Naef (Banque de France)
Why doesn’t the currency of the second largest economy in the world play a more consequential reserve currency role? The share of the Chinese renminbi in global reserve portfolios, at about 3%, pales in comparison with those of the US dollar (about 60%) and the euro (about 20%).[2] What explains the difference?
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2 Key developments
2.1 Use of the euro as an international reserve and investment currency
The share of the euro in global official holdings of foreign exchange reserves increased in 2022 when measured at constant exchange rates. At the end of 2022, official investors held about €11.4 trillion (USD 12.0 trillion) in foreign exchange reserves. Total foreign exchange reserves declined by more than 7 percentage points, when measured at current exchange rates, compared with the previous year (Table 1). The share of the euro in global official holdings of foreign exchange reserves increased by 0.5 percentage points to 20.5% in 2022 when measured at constant exchange rates (Chart 3). By contrast, the share of the euro remained broadly stable, declining by about 0.1 percentage points, when measured at current exchange rates (Chart 5). Overall, in the past seven years the share of the euro in global official holdings of foreign exchange reserves has remained within a relatively narrow range.

Chart 3
The share of the euro in global official holdings of foreign exchange reserves increased in 2022

Shares of the euro, US dollar and other currencies in global official holdings of foreign exchange reserves
(percentages; at constant Q4 2022 exchange rates)

Sources: IMF and ECB calculations.
Note: The latest observation is for the fourth quarter of 2022.

Interest rates and fixed-income yields on highly-rated euro area government bonds turned positive in 2022, although they remained lower than in other major economies. Interest rate differentials with other major advanced economies widened over the course of 2022, except with Japan. For instance, euro area long-term interest rates remained lower by around 200 basis points compared with the United States and about 150 basis points compared with the United Kingdom, which could have discouraged rebalancing to euro-denominated assets (Chart 4). Box 2 shows how interest rate differentials are important determinants of active rebalancing for US mutual fund managers across currencies within their portfolios of government debt securities,[3] which is consistent with evidence from the literature for official reserve managers.[4]

Chart 4
Average interest rates in the euro area in positive territory but lower than in several advanced economies in 2022

Five-year and one-month interest rate in the major economies in 2022
(percentages)

Sources: Refinitiv Datastream, BIS, S&P Global and ECB calculations.
Note: The five-year government yield for the euro area is calculated as a debt-weighted average of five-year euro area yields of sovereigns with a Standard & Poor’s credit rating of at least AA.

A strong dollar and rising policy interest rates encouraged official reserve managers to manage their portfolios actively in 2022, to a large extent offsetting the valuation effects arising from exchange rate and bond price movements. In 2022 the share of the US dollar – the major global reserve currency – remained stable at around 58.4%, when measured at current exchange rates, although it declined by about 2.2 percentage points at constant exchange rates. Reserve managers sold an estimated USD 293 billion of US dollar assets in the review period. Net purchases of currencies other than the US dollar largely offset the impact of valuation effects stemming from the US dollar’s appreciation – which mechanically raises the share of the US dollar in official reserve portfolios. Net purchases of euro-denominated reserves by official investors reached an estimated €50 billion (USD 53 billion) in the review period.[5] Not only did the share of the euro increase at constant exchange rates but also the share of currencies other than the euro and the US dollar – by about 1.7 percentage points in the review period (Chart 3). In particular, the share of official reserve assets denominated in Japanese yen and pound sterling both increased by 0.5 percentage points, while the share of other major reserve currencies remained broadly stable (Chart 5). These developments are not exceptional and reflect conventional reserve management strategies by central banks. During periods of strong dollar appreciation reserve managers tend to stabilise the composition of their portfolios by selling dollar assets and purchasing assets in other major currencies, such as the euro (Box 3). In addition, foreign exchange interventions aiming at stabilising the exchange rate of the domestic currency against the US dollar or limiting its volatility become more likely when the US dollar appreciates, particularly in emerging markets, explaining net sales of US dollar-denominated reserve assets. According to a regular survey conducted by the investment bank UBS, rising interest rates in the US and inflation represented one of the main concerns for the investment of foreign exchange reserves.[6] The extent to which current inflation developments influenced the decisions of official foreign exchange reserve investors is not entirely clear as shown by the limited correlation between changes in the share of major currencies in global foreign exchange reserves and inflation rates in the issuing economies in 2022 (Chart 6).

Chart 5
Official reserve managers tried to manage their portfolios actively to offset the effects of a strong US dollar

Change in the share of selected currencies in global official holdings of foreign exchange reserves
(percentage points; at current and constant Q4 2022 exchange rates)

Sources: IMF and ECB calculations.

Chart 6
Inflation developments are uncorrelated with changes in the currency composition of foreign exchange reserves

Correlation between changes in the share of selected currencies in global official holdings of foreign exchange reserves and inflation in 2022
(x-axis: annual percentage changes in consumer price indices in 2022; y-axis: percentage point changes in currency shares of foreign exchange reserves, at constant exchange rates)

Sources: IMF and ECB calculations.
Note: The latest observation of the foreign exchange reserve data is for the fourth quarter of 2022.

Box 2
Investment funds and search for yield within the sovereign debt market of highly-rated issuers
Prepared by Tamar den Besten, Marco Graziano[7] and Maurizio Michael Habib
To what extent do investors reallocate their portfolios of safe assets across major currencies in search for higher returns? In previous years, survey evidence suggested that relatively low yields in euro area fixed-income markets might have been a factor in moderating the global appeal of the euro as a reserve and investment currency.[8] The empirical evidence presented in this box indicates that investors tend to reallocate their portfolio of safe assets in response to changes in yields across major currencies.
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Box 3
Valuation effects and rebalancing of official foreign exchange reserves
Prepared by Tamar den Besten, Massimo Ferrari Minesso and Maurizio Michael Habib
Movements in the exchange rates of major reserve currencies as well as in the market prices of securities held by central banks may have a significant impact on the currency composition of official foreign exchange reserves, when measured at current exchange rates. For instance, a broad US dollar appreciation, as was the case in 2022, mechanically increases the share of the US dollar, as other currencies lose value against that currency. Similarly, if yields increase, the market value of bonds falls, leading to a stronger decline in the value of reserve assets denominated in currencies experiencing the largest decreases in bond prices. These developments, as noted by Chinn et al. (2022)[9], confound active reserve management strategies through changes in the value of the underlying assets. This box reviews the evidence of the importance of these valuation effects for the adjustment of currency portfolios by reserve managers against the background of large fluctuations in exchange rates and bond prices seen in the past year.
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2.2 The euro in global foreign exchange markets
The euro remained the second most actively traded currency in global foreign exchange markets after the US dollar. The share of the euro in global foreign exchange settlements increased slightly in 2022, according to data from the CLS system, standing at almost 38% in the fourth quarter of 2022 (Chart 7, panel a) – an increase of almost 3 percentage points from the previous year when measured at constant exchange rates.[10] By contrast, the share of the US dollar decreased by more than 6 percentage points, although the US dollar remained the leading currency in global foreign exchange settlements – being involved in almost 90% of all settlements in the fourth quarter of 2022.[11] Volumes of euro settlements increased by over 20% in the fourth quarter of 2022 compared with the previous year, consistent with trends in the past few years (Chart 7, panel b).
The latest evidence from the Triennial Central Bank Survey of foreign exchange and over-the-counter (OTC) derivatives markets, conducted by the BIS in April 2022, showed that the share of the euro decreased by 1.8 percentage points compared with the previous survey conducted in 2019 (Chart 8, panel a).[12] Global foreign exchange turnover increased by 14% compared with 2019, reaching USD 7.5 trillion. Overall, the US dollar remained the most used currency, being on one side of almost 90% of total OTC transactions, a share that is broadly stable compared with earlier surveys. Meanwhile, the euro was used in 31% of all trades, thereby remaining the second most actively traded currency.[13] Volumes of OTC trade in euro increased by USD 167 billion (or about 8%) relative to 2019, compared with even stronger increases for the US dollar and the Chinese renminbi of USD 830 billion (or about 14%) and USD 241 billion (or about 85%) respectively. The Chinese renminbi thus exhibited the largest increase in market share since the 2019 survey, being on one side of 7% of all trades in 2022 (up from 4% in 2019) to become the fifth most traded currency. The Japanese yen and pound sterling were on one side of 17% and 13% of all trades respectively, largely unchanged compared with the previous survey. Global foreign exchange trading activity involving the euro is concentrated in the United Kingdom, which accounts for more than 42% of total trading, as well as in the United States, the euro area, Hong Kong SAR, Singapore and Switzerland (Chart 8, panel b). Relative to the 2019 survey, euro foreign exchange (FX) trading activity in the United Kingdom contracted by 6 percentage points, standing close to the level prevailing at the time of the 2016 Brexit referendum.

Chart 7
The euro remained the second most important currency in global foreign exchange settlements

Sources: ECB calculations based on CLS Bank International data.
Note: As two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%. The latest observation is for the fourth quarter of 2022.

Chart 8
The share of the euro in global OTC transactions decreased slightly in the latest BIS Triennial Survey compared with the previous survey

Sources: BIS and ECB calculations.
Notes: As two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%. Adjusted for local and cross-border inter-dealer double-counting (i.e. on a “net-net” basis). The data on geographical locations include spot transactions, outright forwards, foreign exchange swaps, currency swaps, options and other products. They are adjusted for local inter-dealer double-counting (i.e. on a net-gross basis) and may differ slightly from national survey data owing to differences in aggregation procedures and rounding. The BIS uses several criteria to determine the location of a foreign exchange transaction, notably the location of the initiating sales desk.

2.3 Use of the euro in international debt and loan markets
2.3.1 The euro in international debt markets
The share of the euro in the stock of international debt securities increased in 2022.[14] When measured at constant exchange rates, the share of the euro in the stock of international debt securities stood at 22%, increasing by 1.2 percentage points in the review period. The share of the euro remains about 8 percentage points lower than its peak in the mid-2000s. By contrast, the share of the US dollar declined by about 1.2 percentage points, although it remains the leading currency in the international debt security markets, accounting for more than 65% of the global stock (Chart 9 and Table A4).

Chart 9
The share of the euro in the stock of international debt securities increased in 2022

Currency composition of outstanding international debt securities
(percentages; at constant Q4 2022 exchange rates)

Sources: BIS and ECB calculations.
Notes: Narrow measure. The latest observation is for the fourth quarter of 2022.

Granular data on international issuance of foreign currency-denominated bonds suggest that the volume of international bond issuance decreased markedly in 2022.[15] In 2022 the total volume of foreign currency-denominated bond issuance contracted by more than USD 700 billion, corresponding to a decline of 30% in relative terms over the review period. This decline occurred amid market concerns about the economic outlook, tighter financial conditions in advanced economies and geopolitical fragmentation risks (Special Feature A). In particular, the issuance of euro-denominated bonds decreased by about 30% in 2022 compared with the previous year, standing at €377 billion (USD 397 billion). However, the share of the euro in foreign currency-denominated bond issuance remained stable, at around 25% (Chart 10, panel a). Issuance of US dollar-denominated bonds (USD 930 billion in 2022) fell more markedly, by around 36% year on year, reducing the share of the dollar in international bond issuance by 5 percentage points.[16] Despite these developments, the US dollar remains by far the leading currency for international issuance of foreign currency-denominated bonds, accounting for more than 57% of total issuance in the review period (Chart 10, panel b). Notably, the share of currencies other than the US dollar and the euro increased to around 17%.

Chart 10
The share of the euro in international issuance of foreign currency-denominatedbonds remained stable in 2022

Sources: Dealogic and ECB calculations.
Note: The latest observation is for end-2022.

The retrenchment in euro-denominated international bond issuance was mainly driven by lower issuance in the United Kingdom, the United States and emerging markets. Issuance of euro-denominated international bonds contracted by 72% among emerging market economies in 2022 and by more than 40% in the United States, the United Kingdom and Japan (Chart 11, panel b). At the same time, in non-euro area EU Member States and other advanced economies, issuance of euro-denominated bonds increased by 6 and 8 percentage points respectively. Issuance of US dollar-denominated bonds in emerging market economies declined by 55% (Chart 11, panel a).[17] The retrenchment might have arisen from higher interest rates and financing costs in advanced economies, combined with heightened volatility in bond markets. This might have in turn dampened demand for foreign currency-denominated debt issued by emerging market economies. The impact of Brexit on the role of the City of London as a centre for the intermediation of foreign currency-denominated funding might also explain the lower issuance of euro and US dollar-denominated debt in the United Kingdom (Box 4).

Chart 11
Issuance of euro and US dollar-denominated bonds declined in emerging market economies in 2022

Sources: Dealogic and ECB calculations.
Note: The latest observation is for end-2022.

International issuance of green bonds also decreased substantially in the review period.[18] In absolute terms, the amount of international green bonds issued in major currencies contracted by about USD 41 billion (Chart 12, panel a). Issuance of green bonds denominated in euro decreased by €11 billion (USD 12 billion) for a total issuance of about €34 billion (USD 36 billion) in 2022. US dollar-denominated issuance also fell from USD 80 billion to USD 59 billion. In relative terms, the shares of euro and US dollar-denominated green bonds remained stable, with the two currencies accounting for about 31% and 51% of total issuance respectively.

Chart 12
International green bond issuance retrenched in 2022, although the share of the euro in total issuance remained stable

Sources: Dealogic and ECB calculations.
Notes: Annual totals are based on the aggregation of individual deals. The latest observation is for end-2022.

2.3.2 The euro in international loan and deposit markets
The share of the euro in the outstanding stock of international loans continued to increase in 2022. Euro-denominated international loans increased by about 2.4 percentage points in the review period, when measured at constant exchange rates (Chart 13 and Table A6).[19] The share of the euro in 2022, at around 19%, is close to its historical peak of about 20% seen in 2005. By contrast, the share of the US dollar in international loan markets continued to decline, although the US dollar remains the leading currency in international loan markets by a large margin, accounting for about 53% of total loans. Geographical distance or complementarities with trade invoicing patterns tend to affect demand for euro-denominated and, to a lesser extent, dollar-denominated international loans (Special Feature C).

Chart 13
The share of the euro in outstanding international loans remained close to historical peaks

Currency composition of outstanding amounts of international loans
(percentages; at constant Q4 2022 exchange rates)

Sources: BIS and ECB calculations.
Notes: The latest observation is for the fourth quarter of 2022. International loans are defined as loans by banks outside the currency area to borrowers outside the currency area.

The share of outstanding international deposits denominated in euro continued to increase in 2022. The share of the euro rose by about 1.5 percentage points over the review period, when measured at constant exchange rates, standing at almost 18% (Chart 14 and Table A7).[20] By contrast, the share of US dollar-denominated deposits declined by about 1.4 percentage points in 2022 as investors reduced holdings of dollar-denominated deposits accumulated as liquid balances during the pandemic.[21] However, despite a marginal decline in 2022, the share of US dollar-denominated international deposits remained close to pre-pandemic levels, at around 52% of total international deposits.

Chart 14
The share of the euro in outstanding international deposits increased further in 2022

Currency composition of outstanding amounts of international deposits
(percentages; at constant Q4 2022 exchange rates)

Sources: BIS and ECB calculations.
Notes: The latest observation is for the fourth quarter of 2022. International deposits are defined as deposits with banks outside the currency area from creditors outside the currency area.

Box 4
Impact of Brexit on the international role of the euro
Prepared by Matthias Rau-Goehring
This box presents an early assessment of the changing role of the City of London for euro-denominated financial activities since Brexit.[22] Since its introduction in 1999, the City of London has been the leading financial centre for the international use of the euro in several market segments.[23] The decision of the United Kingdom in June 2016 to leave the EU was therefore seen as the portent of a potential change in the central role of the City of London for global financial markets.[24] This event was particularly relevant for euro financial activities that benefit from a harmonisation of rules and standards with the EU, such as trading in foreign exchange and OTC derivatives and banking services.[25] Data on these activities thus far, however, show no major shifts in the importance of the City of London for euro-denominated financial market segments, with some exceptions.[26]
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2.4 Use of the euro as an invoicing currency
The share of the euro as an invoicing or settlement currency for extra-euro area trade, in particular services exports, remained broadly stable in 2022. Extra-euro area exports of goods invoiced in euro declined by half a percentage point in 2022 to around 59%, while the share of extra-euro area imports of goods invoiced in euro also dropped by half a percentage point to below 52% (Chart 15, panel a and Table A8). However, such changes remain marginal and, from a long-term perspective, the role of the euro as an invoicing currency for trade in goods remains by and large unchanged. Almost 58% of extra-euro area services exports were invoiced in euro in 2022, down from around 60% in the previous year. The share of exports of services invoiced in euro, similar to the euro-invoiced share of exports of goods, also reached a historical low, continuing the downward trend seen since 2018. Likewise, just below 53% of extra-euro area imports of services were invoiced in euro in 2022, down by about 0.3 percentage points compared with the previous year (Chart 15, panel b).

Chart 15
The share of euro as an invoicing currency of extra-euro area trade in goods and services was broadly stable in 2022

Sources: National central banks and ECB calculations.
Note: The computation of the euro area aggregate is based on the latest observation reported by each Member State.

2.5 Use of euro banknotes outside the euro area
Cumulative shipments of euro banknotes to destinations outside the euro area decreased to a ten-year low in 2022. The value of net registered shipments of euro banknotes to destinations outside the euro area declined by about 11% over the review period, the largest year-on-year decline since the launch of the euro (see Chart 16).

Chart 16
Net extra-euro area shipments of euro banknotes saw an unprecedented decline in 2022

Net monthly shipments of euro banknotes to destinations outside the euro area
(EUR billions; adjusted for seasonal effects)

Source: Eurosystem.
Notes: Net shipments are euro banknotes sent to destinations outside the euro area minus euro banknotes received from outside the euro area. The latest observation is for December 2022.

However, developments in shipments of euro banknotes outside the euro area differed markedly between the first half and second half of 2022. In the first half of the year, the value of net registered shipments of euro banknotes to destinations outside the euro area increased by around 8%. This surge in demand for euro cash was likely caused by the outbreak of Russia’s war in Ukraine which spurred precautionary demand for euro banknotes in a number of central and eastern European countries outside the euro area neighbouring Ukraine (Box 5 on the impact of Russia’s war in Ukraine on foreign demand for euro cash).
In the second half of 2022, net shipments of euro banknotes to destinations outside the euro area decreased markedly as a result of two factors. First, the beginning of monetary policy normalisation by the ECB led to an associated rise in opportunity costs of holding cash and may have encouraged decreases in cash holdings. In anticipation of the increase in ECB policy rates in July 2022, net shipments decreased by around 4% month-on-month – an unprecedented deceleration – followed by significant banknote purchases in the subsequent months. Second, geopolitical developments likely reduced sales of euro banknotes to eastern European countries outside the EU significantly. These countries accounted for 15% of total sales in 2022, compared with almost 30% in 2021 (Chart 17, panel a).

Chart 17
In 2022 euro banknotes were mainly exported to and imported from countries neighbouring the euro area

Source: ECB calculations based on data from international banknote wholesalers.
Note: The data are for 2022.

Box 5
The impact of war: extreme demand for euro cash in the wake of Russia’s invasion of Ukraine
Prepared by Elisabeth Beckmann and Alejandro Zamora-Pérez
Proximity to war boosts foreign and domestic demand for euro cash
Geopolitical conflicts can have a significant impact on the demand for euro cash outside the euro area, as illustrated by Russia’s invasion of Ukraine in February 2022. Chart A, panel a, compares the deviation of demand for euro banknotes from historical averages, both from non-euro area countries (blue line) and from countries within the euro area (dotted grey lines) between January 2021 and May 2022 – immediately after demand returned to near-average levels. In the months before the invasion, foreign demand for euro cash remained below its historical average. However, it rose far above its historical average just after the invasion (in March 2022), to an extent greater than in most euro area countries in that period. This suggests that precautionary motives were a determinant of demand for euro cash from non-euro area countries, mainly driven by high-value denominations (€100 and €200) which are mostly used for store-of-value purposes.[27]
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3 Special features
A Geopolitical fragmentation risks and international currencies
By Tamar den Besten, Paola Di Casola, Maurizio Michael Habib
Shortly after Russia invaded Ukraine, several packages of unprecedented sanctions were imposed on Russia, including the freezing of nearly half of the Russian central bank’s foreign exchange reserves and the exclusion of a number of Russian banks from SWIFT, the dominant financial messaging system used to facilitate cross-border payments. Several observers noted that these sanctions may have far-reaching consequences for the role of the currencies of the sanctioning countries – including the US dollar and the euro – in the international monetary and financial system. According to these observers, countries that are not fully aligned geopolitically with the United States might reduce their exposures to the currencies of sanctioning countries going forward. However, other observers have been more cautious and pointed to challenges involved in diversifying from the major international currencies. This special feature sheds light on this debate by reviewing the available evidence on the effects of geopolitical fragmentation risks on the use of international currencies. It shows that evidence of potential fragmentation in the international monetary system since Russia’s invasion has so far been mainly restricted to announcements and specific cases rather than pointing to broader trends. Anecdotal evidence, including official statements, points to intentions of some countries to develop the use of alternatives to major traditional currencies, such as the Chinese renminbi, the Russian rouble or the Indian rupee for invoicing international trade. There is also evidence that Russia has been using the Chinese renminbi to a significantly greater extent for international invoicing and cross-border payments in the past few months. However, the available data do not show substantial changes in the use of international currencies as yet. One exception is evidence of increased accumulation of gold as an alternative reserve asset, possibly driven by countries geopolitically closer to China and Russia.
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B How is a leading international currency replaced by another? Old versus new evidence
By A. Mehl, M. Mlikota (University of Pennsylvania) and I. Van Robays
This special feature reviews the evidence – both old and new – on how a leading international currency is replaced by another. The conventional historical narrative is that inertia in international currency use is substantial – it takes a long time for a challenger currency to replace the incumbent owing to the existence of network externalities that give rise to lock-in effects. The US dollar remains the leading currency for global trade and finance today, despite the decline in the United States’ share of global output and trade, which testifies to the importance of inertia. However, one interesting exception is the currency invoicing of trade of countries neighbouring the euro area between 1999 – the year of the euro’s creation – and 2019, when the share of the euro increased by more than 20 percentage points on average, at the expense of the US dollar.
Two competing hypotheses may explain these developments: a trade shock – where stronger trade links with the euro area tilt invoicing towards the euro – and an exchange rate volatility shock – where growing use of the euro as an exchange rate anchor spills over to invoicing. Recent evidence from ECB staff research empirically tests the relative importance of these two shocks. The estimates give support to the view that a trade shock is a key determinant of the stronger role of the euro for invoicing international trade in countries neighbouring the euro area. In those countries where trade links with the euro area increased, the shock explains on average almost 40% of the rise in the share of exports invoiced in euro between 1999 and 2019. By contrast, the impact of greater exchange rate stability against the euro is statistically insignificant. Countries’ invoicing currency choices are not just impacted by their own trade patterns and exchange rate volatilities but also by those of their trade partners and competitors. These effects operate mainly via bilateral trade linkages rather than strategic complementarities in export price setting, which underscores the relevance of changes to input-output linkages as determinants of invoicing currency patterns.
These findings have implications for policy. They suggest that, in response to the pandemic shock and the war in Ukraine, reshoring or friendshoring of production chains could lead to stronger regional trade, notably on the European continent. That in turn could strengthen the future role of the euro for the invoicing of international trade.
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C Determinants of currency choice in cross-border bank loans
By Lorenz Emter, Peter McQuade, Swapan Kumar Pradhan (BIS)[28] and Martin Schmitz
Dominant currencies confer important economic, financial and strategic advantages on the issuer, so it is important to understand why some currencies have a more prominent international role than others. This special feature provides insights into various potential determinants of currency choice in cross-border bank lending, such as bilateral distance, measures of financial and trade linkages to issuer countries of major currencies, and invoicing currency patterns. Cross-border bank lending in US dollars, and particularly in euro, is highly concentrated in a small number of countries. The United Kingdom is central in the international network of loans denominated in euro, although there are tentative signs that this role has diminished for lending to non-banks since Brexit, with such loans now possibly booked by newly-established US (or euro area) subsidiaries. Offshore financial centres are pivotal for US dollar loans, reflecting, in particular, lending to non-bank financial intermediaries in the Cayman Islands, possibly as a result of regulatory and tax optimisation strategies of large multinationals and high net worth individuals. An empirical analysis suggests that euro-denominated loans face the “tyranny of distance”, in line with predictions of standard models of trade, as captured by a variety of variables, in contrast to US dollar loans. Complementarities between trade invoicing and bank lending are found for both the euro and the US dollar. Overall, the analysis suggests that the euro tends to be more of a regional currency, while use of the US dollar in cross-border bank lending is global.
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The Global recovery remains slow, with growing regional divergences and little margin for policy error
The baseline forecast is for global growth to slow from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024, well below the historical (2000–19) average of 3.8 percent. Advanced economies are expected to slow from 2.6 percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024 as policy tightening starts to bite. Emerging market and developing economies are projected to have a modest decline in growth from 4.1 percent in 2022 to 4.0 percent in both 2023 and 2024. Global inflation is forecast to decline steadily, from 8.7 percent in 2022 to 6.9 percent in 2023 and 5.8 percent in 2024, due to tighter monetary policy aided by lower international commodity prices. Core inflation is generally projected to decline more gradually, and inflation is not expected to return to target until 2025 in most cases.
Monetary policy actions and frameworks are key at the current juncture to keep inflation expectations anchored. Chapter 2 documents recent trends in inflation expectations at near- and medium-term horizons and across agents. It emphasizes the complementary role of monetary policy frameworks, including communication strategies, in helping achieve disinflation at a lower cost to output through managing agents’ inflation expectations. Given increasing concerns about geoeconomic fragmentation, Chapter 3 assesses how disruptions to global trade in commodities can affect commodity prices, economic activity, and the green energy transition.
Executive Summary:
The global recovery from the COVID-19 pandemic and Russia’s invasion of Ukraine remains slow and uneven. Despite economic resilience earlier this year, with a reopening rebound and progress in reducing inflation from last year’s peaks, it is too soon to take comfort. Economic activity still falls short of its prepandemic path, especially in emerging market and developing economies, and there are widening divergences among regions. Several forces are holding back the recovery. Some reflect the long-term consequences of the pandemic, the war in Ukraine, and increasing geoeconomic fragmentation. Others are more cyclical in nature, including the effects of monetary policy tightening necessary to reduce inflation, withdrawal of fiscal support amid high debt, and extreme weather events.
Global growth is forecast to slow from 3.5 percent in 2022 to 3.0 percent in 2023 and 2.9 percent in 2024. The projections remain below the historical (2000–19)
average of 3.8 percent, and the forecast for 2024 is down by 0.1 percentage point from the July 2023 Update to the World Economic Outlook. For advanced economies, the expected slowdown is from 2.6 percent in 2022 to 1.5 percent in 2023 and 1.4 percent in 2024, amid stronger-than-expected US momentum but
weaker-than-expected growth in the euro area. Emerging market and developing economies are projected to have growth modestly decline, from 4.1 percent in 2022
to 4.0 percent in both 2023 and 2024, with a downward revision of 0.1 percentage point in 2024, reflecting the property sector crisis in China.
Forecasts for global growth over the medium term, at 3.1 percent, are at their lowest in decades, and prospects for countries to catch up to higher living standards are weak. Global inflation is forecast to decline steadily, from 8.7 percent in 2022 to 6.9 percent in 2023 and 5.8 percent in 2024. But the forecasts for 2023 and 2024 are revised up by 0.1 percentage point and 0.6 percentage point, respectively, and inflation is not expected to return to target until 2025 in most cases.
Risks to the outlook are more balanced than they were six months ago, on account of the resolution of US debt ceiling tensions and Swiss and US authorities’ having acted decisively to contain financial turbulence. The likelihood of a hard landing has receded, but the balance of risks to global growth remains tilted to the downside. China’s property sector crisis could deepen, with global spillovers, particularly for commodity exporters. Elsewhere, as Chapter 2 explains, near-term inflation expectations have risen and could contribute—along with tight labor markets––to core inflation pressures persisting and requiring higher policy rates than expected. More climate and geopolitical shocks could cause additional food and energy price spikes. As Chapter 3 explains, intensifying geoeconomic fragmentation could constrain the flow of commodities across markets, causing additional price volatility and complicating the green transition. Amid rising debtservice costs, more than half of low-income developing countries are in or at high risk of debt distress. There is little margin for error on the policy front.
Central banks need to restore price stability while using policy tools to relieve potential financial stress when needed. As Chapter 2 explains, effective monetary policy frameworks and communication are vital for anchoring expectations and minimizing the output costs of disinflation. Fiscal policymakers should rebuild budgetary room for maneuver and withdraw untargeted measures while protecting the vulnerable. Reforms to reduce structural impediments to growth––by, among other things, encouraging labor market participation—would smooth the decline of inflation to target and facilitate debt reduction. Faster and more efficient multilateral coordination is needed on debt resolution to avoid debt distress. Cooperation is needed as well to mitigate the effects of climate change and speed the green transition, including (as Chapter 3 explains) by ensuring steady cross-border flows of the necessary minerals

Full Report

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The OECD/G20 Inclusive Framework on BEPS has concluded negotiations on a multilateral instrument that will protect the right of developing countries to ensure multinational enterprises pay a minimum level of tax on a broad range of cross-border intra-group payments, including for services. The Multilateral Convention to Facilitate the Implementation of the Pillar Two Subject to Tax Rule, which is now open for signature, is an integral part of the Two‐Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy and represents a major step forward in concluding the work under Pillar Two.The Subject to Tax Rule will enable developing countries to tax certain intra-group payments, in instances where these payments are subject to a nominal corporate income tax rate below 9%. It allows source jurisdictions – those in which covered income arises – to impose a tax where they otherwise would be unable to do so under the provisions of tax treaties.
This new multilateral instrument, delivered in the Inclusive Framework Outcome Statement on the Two-Pillar Solution in July 2023, will allow countries to efficiently implement the STTR in existing bilateral tax treaties. More than 70 developing Inclusive Framework members are entitled to request inclusion of the STTR in their treaties with Inclusive Framework Members that apply corporate income tax rates below 9% to covered payments.
“Adoption of this new multilateral instrument builds on the Outcome Statement delivered in July towards full implementation of the global tax reform, and reflects how productively and positively the international community is working together to deliver solutions for developing countries,” OECD Secretary-General Mathias Cormann said. “Importantly, the Subject to Tax Rule sets out a comprehensive provision to ensure that developing countries are able to ‘tax back’ in instances where payments sourced in their jurisdiction are not taxed at a minimum rate in a partner jurisdiction. The opening of the multilateral instrument for signature marks further progress towards the implementation of the Pillar Two minimum tax, as well as a major further step to stabilise our international tax system and to make it fairer and work better.”
The multilateral instrument was developed over the past year, via negotiations involving all the jurisdictions of the Inclusive Framework including OECD member countries, G20 countries and other developed and developing jurisdictions.
The OECD will be the depositary of the multilateral instrument and will support governments in the process of its signature and ratification. The OECD is also preparing a comprehensive action plan to support the swift and co-ordinated implementation of Pillar Two, with additional support and technical assistance to enhance capacity for implementation by developing countries.
The text of the Convention, along with an explanatory statement, is available at:  https://www.oecd.org/tax/beps/multilateral-convention-to-facilitate-the-implementation-of-the-pillar-two-subject-to-tax-rule.htm.
Detailed commentary explaining the purpose and operation of the subject to tax rule can be found in the Report on the subject to tax rule, which includes the model subject to tax rule: https://www.oecd.org/tax/tax-challenges-arising-from-the-digitalisation-of-the-economy-subject-to-tax-rule-pillar-two-9afd6856-en.htm.
 
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Expectations increasingly drive inflation dynamics. Improvements in monetary policy frameworks can better inform people’s inflation expectations and thereby help reduce inflation at lower output cost.

By Silvia Albrizio, John Bluedorn

Inflation around the world reached multi-decade highs last year. While headline inflation is coming down steadily, core measures―which exclude food and energy―are proving stickier in many economies and wage growth has picked up.
Expectations about future inflation play a key role in driving inflation, as those views influence decisions about consumption and investment which can affect price and wages today. How best to inform people’s views on inflation became an even more crucial consideration as the surge in prices fueled concern that inflation could become entrenched.
In an analytical chapter of the latest World Economic Outlook, we examine how expectations affect inflation and the scope for monetary policy to influence these expectations to achieve a ‘soft landing,’ that is, a scenario where a central bank guides inflation back to its target without causing a deep downturn in growth and employment.
Larger role for inflation expectations
Surveys of professional forecasters have shown that expectations for inflation over the next 12 months—near-term expectations—started a steady rise in 2021 in advanced and emerging market economies alike, then accelerated last year as actual price increases gained momentum. Expectations for inflation five years into the future, however, remained stable, with average levels broadly anchored around central bank targets.

More recently, near-term inflation expectations appear to have turned the corner and begun to shift onto a gradual downward path. Beyond the world of professional forecasters, we see similar patterns of inflation expectations by companies, individuals, and financial-market investors, on average.
Movements in near-term expectations are economically important for inflation dynamics. According to our new statistical analysis, after the inflationary shocks in 2021 and early 2022 started unwinding late last year, inflation has been increasingly explained by near-term expectations.
For the average advanced economy, they now represent the primary driver of inflation dynamics. For the average emerging market economy, expectations have grown in importance, but past inflation remains more relevant, suggesting that people may be more backward-looking in these economies. This could reflect in part the historically higher and more volatile inflationary experience in many of these economies.

In fact, we find that inflation in advanced economies typically rises by about 0.8 percentage points for each 1 percentage point rise in near-term expectations while the pass-though is only 0.4 percentage points in emerging market economies.
One factor that could account for this difference is the share of backward-looking versus forward-looking learners across economy groups. When information on inflation prospects is scarce and central bank communications are unclear or lack credibility, people tend to form their views about future price changes based on their current or past inflation experiences—they are more backward-looking learners. By contrast, those who are more forward-looking form their expectations from a broader array of information that could be relevant to future economic conditions, including central bank actions and communications—they are more forward-looking learners.
Policy implications of differences in learning
These differences have important consequences for central banks. As shown in simulations from a new model that allows for differences in learning and expectations formation, policy tightening has less of a dampening effect on near-term inflation expectations and inflation when a greater share of people in the economy are backward-looking learners.

That’s because people more focused on the past do not internalize the fact that interest rate increases today will slow inflation as they weigh on demand in the economy. Therefore, a higher share of backward-looking learners means that the central bank must tighten more to get the same decrease in inflation. In other words, reductions in inflation expectations and inflation come at a higher cost to output when there is a higher share of backward-looking learners.
Enhancing policy effectiveness
Central banks can encourage expectations to be more forward-looking through improvements in the independence, transparency, and credibility of monetary policy and by communicating more clearly and effectively. Such changes help people understand the central bank’s policy actions and their economic effects, boosting the share of forward-looking learners in the economy.
Simulations from the new model show how improvements in monetary policy frameworks and communications can help lower the output costs needed to reduce inflation and inflation expectations, making it more likely the central bank can achieve a soft landing.
One way central banks can improve their communications is by simple and repeated messaging about their objectives and actions that is tailored to the relevant audiences.
However, improving monetary policy frameworks and crafting new tailored communication strategies to help improve inflation dynamics can take time or be difficult to implement. Such interventions are complementary to more traditional monetary policy tightening actions, which will remain key to bringing inflation back to target in a timely manner.
— This blog is based on Chapter 2 of the October 2023 World Economic Outlook, “Managing Expectations: Inflation and Monetary Policy.” The authors of the report are Silvia Albrizio (co-lead), John Bluedorn (co-lead), Allan Dizioli, Christoffer Koch, and Philippe Wingender, with support from Yaniv Cohen, Pedro Simon, and Isaac Warren.

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The Commission welcomes today’s adoption of two final pillars of its ‘Fit for 55′ legislative package for delivering the EU’s 2030 climate targets. Ahead of the crucial COP28 UN Climate Conference, and next year’s European elections, this complete package of legislation shows that Europe is delivering on its promises made to citizens and international partners to lead the way on climate action and shape the green transition for the benefit of citizens and industries.
Commission President Ursula von der Leyen said: “The European Green Deal is delivering the change we need to reduce CO² emissions. It does so while keeping the interests of our citizens in mind, and providing opportunities for our European industry. The legislation to reduce our greenhouse gas emissions by at least 55% by 2030 is now in place, and I am very happy that we are even on track to overshoot this ambition. This is an important sign to Europe and to our global partners that the green transition is possible, that Europe is delivering on its promises.”
With the adoption today of the revised Renewable Energy Directive and the ReFuelEU Aviation Regulation, the EU now has legally binding climate targets covering all key sectors of the economy. The overall package includes emissions reduction targets across a broad range of sectors, a target to boost natural carbon sinks, and an updated emissions trading system to cap emissions, put a price on pollution and generate investments in the green transition, and social support for citizens and small businesses. To ensure a level playing field for European companies, the Carbon Border Adjustment Mechanism ensures that imported goods pay an equivalent carbon price on targeted sectors. The EU now has updated targets on renewable energy and energy efficiency, and will phase out new polluting vehicles by 2035, while boosting charging infrastructure and the use of alternative fuels in road transport, shipping and aviation.
The ‘Fit for 55’ package was tabled in July 2021 to respond to the requirements in the EU Climate Law to reduce Europe’s net greenhouse gas emissions by at least 55% by 2030. It was updated when the Commission proposed increased ambition on renewable energy and energy efficiency in the REPowerEU plan to respond to Russia’s invasion of Ukraine and boost Europe’s energy security. The final legislative package is expected to reduce EU net greenhouse gas emissions by 57% by 2030. While this legislative package is a central part of the European Green Deal, work continues on other pending legislative files and proposals, and on the implementation of legislation in the Member States. The Energy Taxation Directive, an integral part of the Fit for 55 Package, remains to be completed, and the Commission urges Member States to conclude negotiations as soon as possible.
Cutting carbon, pricing emissions, investing in people
Carbon pricing and an annual emissions cap ensure that polluters pay, and that Member States generate revenues which they can invest in the green transition. The revised EU emissions trading system gradually extends carbon pricing to new sectors of the economy to support their emissions reductions, in particular transport and heating fuels, and shipping.
With this reform, Member States will now spend 100% of their emissions trading revenues on climate and energy-related projects and the social dimension of the transition. The newly-created Social Climate Fund will dedicate 65 billion euros from the EU budget, and over 86 billion euros in total to support the most vulnerable citizens and small businesses with the green transition.
The new Carbon Border Adjustment Mechanism will ensure that imported products will also pay a carbon price at the border in the sectors covered. This is a valuable tool for promoting global emissions reductions and leveraging the EU market to pursue our global climate goals. In combination with the EU Emissions Trading System, it reduces the risk of ‘carbon leakage’, whereby companies would move their production out of Europe to countries with less strict environmental standards.
Boosting renewables and saving energy
The agreement on the revised Renewable Energy Directive sets the EU’s binding renewable energy target for 2030 at a minimum of 42.5%, up from the current 32% target. In practice, this would almost double the existing share of renewable energy in the EU. It is also agreed that Europe will aim to reach 45% of renewables in the EU energy mix by 2030.
On the Energy Efficiency Directive, negotiators agreed to a new EU-level target to improve energy efficiency by 11.7% by 2030. Member States will have to make annual savings of an average of 1.49% from 2024 to 2030. The public sector will lead the way, with a 1.9% annual savings target. The agreement also includes the first ever EU definition of energy poverty. Member States will now have to implement energy efficiency improvements as a priority among people affected by energy poverty.
Investing in clean transport
The revised CO2 standards regulation will ensure that all new cars and vans registered in Europe will be zero-emission by 2035. As an intermediary step towards zero emissions, average emissions of new cars will have to come down by 55% by 2030, and new vans by 50% by 2030.
The new Regulation for the deployment of alternative fuels infrastructure (AFIR) sets mandatory deployment targets for electric recharging and hydrogen refuelling infrastructure along European roads. In this way, the publicly accessible recharging infrastructure for cars and vans grows at the same speed as the electric vehicle fleet.
ReFuelEU Aviation sets out EU-wide harmonised rules for the promotion of sustainable aviation fuels (SAF), with an increasing minimum share of SAF required to be blended with kerosene by aviation fuel suppliers and supplied to EU airports. The FuelEU Maritime Regulation will promote the uptake of renewable and low-carbon fuels through the establishment of a target for gradual reductions for the annual average GHG intensity of the energy used onboard by ships.
Next steps
The implementation of the ‘Fit for 55’ legislation is now starting in the Member States. The National Energy and Climate Plans (NECPs) currently being finalised by Member States will need to integrate this new legislation and demonstrate how the 2030 climate and energy targets will be met at national level.
As announced by President von der Leyen in her annual State of the European Union speech, the Commission will be engaging in a series of dialogues with citizens and industry on the implementation of the European Green Deal legislation, under the guidance of Executive Vice-President Maros Šefčovič. In addition to climate legislation, development and implementation continues of the other, complementary, pillars of the European Green Deal. The European Parliament and the Council are currently negotiating several energy, circular economy, pollution and nature-related laws, with the Commission providing intensive support to make sure all these are agreed in the coming months.
Background
The European Green Deal, presented by the Commission on 11 December 2019, set out a new growth strategy for Europe. It aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy with zero net greenhouse gas emissions by 2050 and with economic growth decoupled from resource use.
The European Climate Law enshrines in binding legislation the EU’s commitment to climate neutrality and the intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. The EU’s commitment to reduce its net greenhouse gas emissions by at least 55% by 2030 was communicated to the UN Climate Convention in December 2020 as the EU’s contribution to meeting the goals of the Paris Agreement. As a result of the EU’s existing climate and energy legislation, the EU’s greenhouse gas emissions have already fallen by 30% compared to 1990, while the EU economy has grown by around 60% in the same period, decoupling growth from emissions.
For More Information
Questions and Answers – Strengthening and expanding EU Emissions Trading with a dedicated Social Climate Fund
Questions and Answers – Increasing the ambition of the EU’s Effort Sharing Regulation and boosting natural carbon sinks
Questions and Answers – Making our energy system fit for our climate targets
Questions and Answers – Sustainable transport, infrastructure and fuels
Questions and Answers – Carbon Border Adjustment Mechanism
Factsheet
 
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Today, EU member states’ representatives reached an agreement on the final component of a common European asylum and migration policy. At a meeting of the Council’s permanent representatives committee, member states sealed their negotiating mandate on a regulation on crisis situations, including sentimentalization of migration, and force majeure in the field of migration and asylum. This position will form the basis of negotiations between the Council presidency and the European Parliament.
The new law establishes the framework that would allow member states to address situations of crisis in the field of asylum and migration by adjusting certain rules, for instance concerning the registration of asylum applications or the asylum border procedure. These countries would also be able to request solidarity and support measures from the EU and its member states.
Exceptional measures in crisis situations
In a situation of crisis or force majeure, member states may be authorised to apply specific rules concerning the asylum and the return procedure. In this sense, among other measures, registration of applications for international protection may be completed no later than four weeks after they are made, easing the burden on overstrained national administrations.
Solidarity with countries facing a crisis situation
A member state that is facing a crisis situation may request solidarity contributions from other EU countries. These contributions can take the form of:

the relocation of asylum seekers or beneficiaries of international protection from the member state in a crisis situation to contributing member states
responsibility offsets, i.e. the supporting member state would take over the responsibility to examine asylum claims with a view to relief the member state that finds itself in a crisis situation
financial contributions or alternative solidarity measures

These exceptional measures and this solidarity support require the authorisation from the Council in accordance with the principles of necessity and proportionality and in full compliance with fundamental rights of third-country nationals and stateless persons.
Background and next steps
The regulation addressing crisis situation and force majeure in the field of migration and asylum is part of the New Pact on Migration and Asylum proposed by the Commission on 23 September 2020. The pact consists of a set of proposals to reform EU migration and asylum rules. Other landmark proposals in addition to the crisis regulation include the asylum and migration management regulation and the asylum procedure regulation.

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

 
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