Countries around the world are examining whether they should offer central bank money to the public not only as banknotes and coins, but also in digital form.
The fact that the majority of central banks around the world have already started exploring the possibility of launching a state-owned digital currency comes as a response to the increased adoption of digital, contactless payments, cryptocurrencies and e-commerce, further accelerated by  Covid-19, b and also due to the possibilities offered by these digital currencies as a more flexible monetary tool compared to the existing non-digital currency.
Privacy, the protection of personal data and security are amongst the most important requirements, which impact the core design choices to be taken, as well as expected citizens’ trust and acceptance.
1. What is a central bank digital currency?
Money can mainly exist in two forms[1]: central bank money and private money.
Money created by central banks is central bank money, and cash is currently the only kind of central bank money available to the public. In fact, cash is a physical token in the form of coins and banknotes that represent value. Just holding the token means that one legally possesses it. Transfers can be executed by exchanging it between two people, without the necessity to have a third party (as a bank) to validate the transaction. Cash must be accepted if offered in payment within a jurisdiction (concept defining the “legal tender status”[2]).
Private money is created by commercial banks[3] when receiving cash in deposit and reusing it by granting loans. This money appears in the bank account, and it can be used to pay by using a various set of instruments such as debit or credit cards. Money, then, can be withdrawn in the form of cash, back to its original form of central bank money. The relationship between holders and commercial banks is based on the trust that money will be held safely and with acceptable risks. Nowadays, there is no payment instrument apart from cash that has legal tender status.
A central bank digital currency (CBDC) is a digital form of public money issued by a central bank. Essentially, a CBDC system consists of individuals and companies having access to a digital currency put at their disposal for transactions and savings accounts by their home country’s central bank. A distinction can be made between retail CBDC, available to citizens and companies, and wholesale CBDC, only available to financial actors. In this TechDispatch, we will mainly refer to the retail CBDC.
In other words, CBDC consists of a digital representation of coins and banknotes in the form of digital tokens. It is an electronic file that embodies a specific value with a reference to its owner attached to it. By just changing that reference, the value is transferred and a payment is made. CBDC is usually presented by central banks as a complement to cash, equipped with similar features (notably, having regard to the legal tender status), but adapted to some functional needs and to the ‘digital’ nature referred to above.
The key aspect of CBDC that differentiate it from any other means of electronic payment is its legal tender status. In other words, a CBDC must be accepted if offered in payment within a jurisdiction, while any other electronic means of payments can be refused.
Both physical and digital tokens are issued directly by central banks. This aspect – added to the legal tender status – is the main difference between CBDC on the one hand and, on the other hand, private money and the almost 22.000[4] different cryptocurrencies (including around 9000 top stablecoins[5]) issued by private actors existing in the last years, as of the latest developments in distributed ledger technology (DLT) and cryptography.
The actual digital payment landscape is driven by commercial banks and transfers are made using only private money. Moreover, customers have a claim to withdraw their money in the form of cash only to the commercial bank where this money is deposited. For this reason, risks related to the solvency of the bank where the person has deposited cash are present and the trust between holders and banks is a key element for the functioning of the whole system.
With CBDC, the situation will be more similar to cash. In fact, due to the legal tender status of the CBDC, the parties involved in the transaction will have a direct claim to the central bank issuing the CBDC, even in scenarios where transactions remain intermediated by commercial banks. In other words, in case of bankruptcy, the sum owned by a holder in a private bank in form of CBDC will not be lost. For this reason, solvency risk is very low. This change in the payment mechanisms has been considered by some authors as a change in the “soul” of the payment system[6], allowing a safer and more solid financial system to grow under this perspective. At the same time, the decrease in bank deposits due to CBDC calls for a limitation (and possibly a threshold per-citizen on the maximum amount of CBDC individuals can hold) to avoid a lack of deposits at banks, and, consequently, a lack of investments by banks via (decreased) deposited money. Under this viewpoint, CBDC presents risks to the financial system that need to be addressed.
Overall, the decision to issue a CBDC is not only a technical, but also, if not mainly, a political choice, which might have an important impact on the economy, as well as on the rights and freedoms of citizens and on society as a whole.
1.2. What is the possible design of CBDC?
The design and implementation of CBDC requires technical and organisational choices. The specific design choices are not pure technological elements but have profound implication in the underlying economic paradigm and in many other policy-related issues, including privacy of payments.  The most important design choices concern: 1) the underlying architecture; 2) the centralization level; and 3) the access modality.
 
Figure 1 – Different layers of design choices to be taken in the process of implementing a CBDC

1) The architecture relates to the operational roles of the central bank and private institutions in transaction management. A direct, indirect or hybrid approach is considered. An indirect CBDC is very similar to the actual payment system, where commercial banks manage transactions backed by central bank money. In this case, the central bank keeps no record of transactions and individuals only have claim against commercial banks. Instead, in a direct CBDC architecture, accounts are managed directly by the central bank that is the only institution handling payments. This scenario is a fundamental shift from  today’s payment system and could entail a dramatic increase of the operations of the central bank. Finally, hybrid models can be considered. Here, individuals hold money in the central bank, but the payment chain continues to be managed by commercial banks. Some of the possible benefits of this solution include easier portability of a CBDC account from one commercial bank to another, reducing impacts of technical faults or bankruptcy on individuals.
Figure 2 – Data flows in the diverse configuration of the architecture of a CBDC
 
2) The centralisation level of the CBDC transaction management is another important design choice. The CBDC can be based on a conventional centrally-controlled database or a novel DLT. Both technologies often store data in physically separate locations. The main difference lies in how data is updated. In conventional databases, data is stored over one or multiple physical nodes under the control of one authoritative entity, usually the controlling bank, that validates transactions. In DLT solutions, the ledger is jointly managed by different entities in a decentralised manner and without a single authoritative entity. Blockchain is a possible distributed ledger technology where new entries are first bundled into “blocks” and then sequentially linked to each other, forming a chain. Because each block incorporates a cryptographic coded summary of the previous one[7], the blockchain is hard to be tampered with.  Consequently, each update of the ledger has to be harmonised amongst the nodes of all entities. The resulting reduced speed of operation can limit direct CBDC to small jurisdictions. On the other hand, DLTs can be more easily used in indirect CBDC architecture, as the number of transactions to be managed by the central bank is limited, since  most of the overall payments will be handled by commercial banks.
3) The access modality relates to how and to whom the banks should give access to tokens to end-users (‘citizens’). A first option is to follow the conventional bank account model and tie ownership to a proven identity. A “bearer-based”, also referred as “token-based” options is also a possible access modality. Here, the holder needs to demonstrate knowledge of a certain information, like a private key (or digital signature).
An important aspect connected to the access modality is indeed also the offline usability of a CBDC. While online transactions can be made through websites and apps, offline payments could be made through smart cards, mobile devices and payment terminals that are pre-funded with an amount of digital tokens deducted from the balance that a user has online (in her/his bank account) before they are used offline. The trusted device would contain the current balance and adjust it upon payment by the user made via contact or contactless modalities (for instance, NFC capabilities[8] or Bluetooth). Offline functionality (with peer-to-peer validation of transactions) avoids the sharing of transaction details with parties other than the payer and payee, enabling the CBDC to become an equivalent to cash.
Programmability[9] of  CBDC is also an important design choice. Programmable payments are different from programmable money. Programmable money consists of a CBDC with built-in rules, imposing restrictions on the usage of that money. With this feature, a government could also define a positive or negative interest rate to incentivise or disincentive the use of money for the purchase of a particular good; limit its use to a certain category of services; set an expiry date.
Programmable payments enable automatic transfers of money when pre-determined conditions are met. For example, a person can instruct their bank account to send a certain amount of money at the end of every month to another account. In a machine-to-machine payment scenario, payments can be automated and money can be sent when a parcel is checked as delivered at a certain store room. At the same time, CBDC could be used as payments programmed as automatic transfers by a State actor (e.g. for welfare payments).
While programmability of money needs to be wired in the core design features of a CBDC, and it is something that has been rarely natively implemented in the current payment system, the case for programmable payments is different. We can already program our payments throughout bank accounts. In a similar way, in case of CBDC, the programmability of money would be provided, as value-added services, by financial institutions to their customers (notably businesses and citizens), on top of the CBDC infrastructure[10].
The different design choices described so far can result in very different user experiences. For example, in case of a decentralised, indirect, account-based solution, the users might indeed not feel major changes from the actual payment means in terms of user experience (exception made for the possible cap per-user).
In the opposite scenario of a centralised, direct, token-based solution a major change in payment experiences will be faced by users that will have to differentiate their expenditure between a CBDC wallet and the classic payment instruments offered by commercial banks.
1.3. Why issuing a CBDC?
Technology solutions and design choices are triggered by the main rationale for developing CBDCs pursued at political level. Reinforcement of monetary sovereignty, strategic autonomy and monetary policy implementation are the most relevant ones. The CBDC development can be also seen as a response to the broader trend of the creation of new form of private money by private actors that bypass the existing bank-based payment systems.
Besides, CBDCs can be designed with other important functions[11]. First of all, to stimulate competition and innovation in payments, removing barriers and avoiding closed payment systems created by platforms (e.g. the attempt of Meta of deploying its crypto-token, called “Diem”). Second, to foster financial inclusion, rendering the process easier for people that currently do not have a bank account. Third, to improve cross-border retail payments. While the European Union is reducing barriers[12], domestic payment systems are often not interoperable between countries all over the world. The current system architecture tends to be slow, expensive and difficult to automate. Moreover, risks related to money laundering, tax evasion and terrorist financing are typically high while the CBDC features of identifiability of the end-user and traceability of their transactions can render this tool more effective to prevent ML/FT, as well as frauds. Cross-border CBDCs, where one or more systems automatically handle cross-border payments between multiple domestic CBDCs, could significantly improve cross-border financial transactions.[13]
Finally, an additional argument in favour of central bank money is that it is of superior quality than other form of money created by commercial banks because it does not depend on the solvency of a private issuer. This however could have a profound adverse impact on the current banking system. In fact, the availability of such safe asset might encourage savers to withdraw their bank deposit and move the funds to their digital currency wallet or accounts at the central bank, causing a major disruption of the liquidity present in commercial banks.
For these reasons, as highlighted above, limits might be imposed by the central bank issuing the CBDC in form of caps/ceilings to account holders, where only a limited amount of digital currency can be owned by each person. Diversely, with a “tiering approach” no hard limit exists, but holdings above certain threshold would be dissuaded by fees or negative interest rate. The hard limit might coexist with the “tiering” (that is, money above a certain threshold would receive a negative interest rate, and there however will be a maximum threshold for all CBDC, including the one with negative interest rate). At the same time, doubts have been expressed on the added-value of CBDCs compared to existing retail solutions for payments[14].
To conclude, a CBDC is a policy project based on complex technical and organisational design choices that are strictly interconnected with the policy aims pursued by central banks/state actors. In any case, regardless of the specific policy objectives pursued via the CBDC project, a complex and robust regulatory framework needs to be adopted in order to tackle many challenges, including privacy and data protection.
2. What are the privacy and data protection issues?
Depending on the technical design choices made for a CBDC, different privacy and data protection challenges might emerge. A recent survey of the European Central Bank (ECB) showed that privacy is amongst the most compelling issues for European citizens. If implemented without proper security protocols and an adequate architecture, privacy and security issues of a CBDC could have a major impact due to the scale of such projects. Much would also depend on the policy objectives and use-cases of the CBDC. So, it is key to wire data protection and privacy requirements within the core concept of a CBDC and to maintain a data protection impact assessment over time to be able to take the necessary measures. At the same time, a clear specification of the policy objectives and use-cases, as well as of the possible interplay with other aspects and digital policy initiatives, is key.
2.1. Privacy and data protection issues in payments can be exacerbated by certain design choices
Design choices have strong impacts on the way privacy is ensured, managed and preserved.
On the one hand an account-based CBDC solution may require verified identities for all account holders to map each individual to one identifier across the entire payment system for both the functioning and security/compliance reasons, representing challenges in terms of privacy and data protection. On the other hand, whilst a token-based approach can in principle offer a more universal access and better data protection, there are downsides such as the risk of losing money if end users fail to keep their key secure.
Moreover, some design choices in the underlying technological infrastructure might exacerbate the privacy and data protection issues that already exist in the current digital payment landscape. For example, the unlawful use of transactional data for creditworthiness assessment and abusive marketing initiatives can become even easier according to the level of data accessibility agreed to each actor in the payment process (and facilitated, as possibility for user’s profiling, by the single and persistent CBDC user-identifier).
The technological choices of a new CBDC project potentially impact all citizens living in the jurisdiction of a central bank, resulting in large-scale processing operations with high risks for rights and freedoms of data subjects. For this reason, privacy and data protection requirements should be wired within the regulatory framework and in the core technological decisions on the design of the project, and all decisions regarding features, configurations and risk-acceptance should be duly evaluated and documented. A data protection impact assessment needs to be conducted and maintained in time and over different phases of the CBDC project[15].
From the very beginning, the CBDC design research and development process should be built with a clear data protection by design and by default approach. Retrofitting a CBDC due to a wrong design choice, if ever possible, in addition to the economic costs, would result in higher direct and indirect costs and further uncertainties that can lead to a loss of acceptance of the project itself by citizens and companies.
Complexities would emerge in case distributed ledger technologies are involved in the development of a CBDC, especially for what concerns data minimization and storage limitation principles due to the add-only and ever-growing nature of a blockchain.
Moreover, the design of a CBDC entails privacy and data protection risks with regard to cross-border payments. Payment operations must comply with domestic rules, and despite international standards, there can be significant differences in the implementation and controversial cross-border interplays. This will likely further complicate the implementation and design of cross-border CBDCs due to incompatibilities including among privacy, data protection and anti-money laundering (AML) rules.
These potential issues could be remedied through proper design, as well as multilateral coordination, to align technical, regulatory and supervisory frameworks. Standardization and harmonization efforts, translating into consistent privacy and transparency standards could also be implemented ensuring interoperability across jurisdictions and over time[16].
2.2. Privacy in payments risks to be diminished
Nowadays, cash is the only form of money exchanged in an anonymous way – under certain threshold[17] – that operates within regulated domains. Due to the increased adoption of digital means of payments and reduced use of cash as a means of payment[18], cash may be marginalised in few years. In fact, anonymity can be ensured for payments in cash, which can be exchanged between two peers without a third party that validate the transaction.  On the other hand, the private digital payment solutions available in the market enable an increasing data exploitation, leading to a reduction of anonymous payments. Anonymity under a certain threshold can become a clear unique feature for the token- based CBDC solution (which is a bearer-instrument like banknotes), differentiating it from all the other private digital payment methods used by citizens. This would be a unique opportunity for citizens, as secure, stable and anonymous cashless payments are inexistant currently.
Offline solutions (e.g. the token-based CBDC that would have offline transaction capability) can potentially offer the most in terms of privacy and data protection, since only minimal processing operations are required to realize the transaction. Moreover, offline payments are processed locally without the need of any third party to validate the transaction. Offline payments are also a secure back-up in cases of major internet outages. The token-based CBDC that would have offline transaction capability could become functionally equivalent to cash or an endorsed check.
Due to the digital nature of CBDC, it is inherently more transparent. Fully anonymous CBDC solutions might be difficult to reconcile with the need to hinder illegal activities such as drug trafficking, money laundering and terrorism financing that rely on anonymous cash transactions or alternative remittance systems. Here, the legislator can define the correct balance and the necessary use-cases, which could be implemented through advanced pseudonymisation techniques mixed with other privacy enhancing technologies[19].
Finally, a proper solution for identifying and allowing access and use of offline digital tokens shall be defined. Account-based identification can lead to identifying and potentially tracking of all end-user’s transactions and profiling thereof (see section 2.5), while an offline token-based CBDC system would enable anonymous payments.
2.3. The resulting interference of the adoption and use of CBDC on people’s private life might not fulfil the requirements of necessity and proportionality
Any design choices resulting in an interference with people’s private life should be proven necessary for the social need or policy objective pursued by the CBDC project.
In addition, each design option needs to be considered under the necessity and proportionality principle in order to determine if alternative technologies and processes could deliver safer options.
In particular, risks for individuals might emerge when privacy and data protection need to be balanced with other values and rights to be protected. As of any other means of payments, CBDCs need to be developed in compliance with other applicable laws and regulations in a sector that results to be one of the most regulated in the data processing landscape. For example, as is the case for non-CBDC use, anti-money laundering, anti-terrorism financing and anti-tax evasion laws require specific processing of personal data. The particular design and features of a CBDC can result in a specific risk profile in the anti-money laundering and anti-terrorism financing context, different from the one existing for other means of payments and cash. For this reason, these aspects should also be addressed in a forward-looking manner before the launch of any CBDC project[20].
Moreover, the privacy impact needs to be assessed carefully in order to find the right balance with specific and competing interests in CBDC as usability and auditability.
Depending on the chosen technical solution, for instance a fully centralized CBDC with clear and persistent user identification and full transparency on all online transactions of a user, the risk of generalized surveillance might emerge (see section 2.5).
2.4. Roles and responsibilities are complex to identify
According to the specific design choices adopted by the central bank, diverse actors within the payment ecosystem could process personal data (see Figure 2). Recognising data protection roles is of outmost importance for a correct application of obligations and responsibilities under the applicable data protection law. The decentralised governance and the multiplicity of actors involved in the processing of data could lead to difficulties if a DLT-based architecture is implemented. Albeit difficult, the identification of the data controller(s) is the first element necessary to distribute data protection responsibilities across the payment chain. For example, the relationship between central banks and the financial intermediaries is essential to determine who will have to notify a possible personal data breach or whom data subjects should contact to exercise their right to information, access or to withdraw their consent.
2.5. Systemic risks of profiling and surveillance are present
As already reported in our TechDispatch #2/2021 on card-based payments, tracking payments of a person can describe the consumers’ life in great detail, understanding people’s online and offline spending habits. The amount of personal information that actors involved in transactions’ management learn about each individual when a payment system operates is significant. This generates a systemic risk of profiling and surveillance by the parties operating the payment system. Specifically, in the CBDC domain, this risk is connected to design choices. For example, a design that does not allow central banks to process personal data or that implements strict data minimisation might avoid or reduce the risks for privacy involved in the current payment systems. On the contrary, a configuration that permits the central bank to identify and store personal information of the payments or where merchants[21] can collect and link payment data to customer profiles might amplify these risks compared to the currently existing payment methods.
Furthermore, issuing a CBDC increases the central bank’s – and by extension other public authorities’ – possibility to access financial information directly linked to an identity, entailing the risk of systemic public surveillance. In any event, whether repurposed in the future, transmitted to another public authority or leaked by accident, such a huge data collection presents a general risk of mass surveillance and unintended use.
For these reasons, privacy enhancing technologies, including advanced pseudonymisation techniques and zero-knowledge proof, should be used in order to limit information shared between transaction partners to the minimum necessary to prove that the payment has been made successfully.
Moreover, defining and imposing by law specific personal data retention period in relation to each the purpose of the data processing is a key requirement, also to reduce risks in case of data breaches or unlawful access to the CBDC technological infrastructure.
2.6. Data concentration can increase security risks
Until recently, little work has been done publicly in the cybersecurity and central banking world to actually understand the risks which are specific to CBDC[22]. Similarly to other means of payment, security is a key component of a CBDC. Security is also key to build the necessary trust that citizens need to have in order to be comfortable in adopting and using CBDC. Access credentials are needed for accessing and transferring funds. The most significant risk, credential’s theft or loss, is common to most of the other means of payment. In fact, credentials’ theft and loss could result in compromising accounts and data. Modern attack techniques such as social engineering, side-channel attacks and malware could be used to extract credentials from a CBDC user’s device. The impact of such an attack can be disruptive, with some mitigation if the architecture is implemented to process low amounts of digital currency.
‘Data concentration’ is also an important security risk to consider. In fact, if payment data of all citizens were concentrated in the database of a central bank, this would generate incentives for cyberattacks and a high systemic risk of individual or generalised surveillance in case of data breaches or, more in general, of unlawful access, as well as for denial-of-service attacks jeopardising the possibility to carry out payments, in particular in case of “direct” approach.
On the other hand, where a distributed ledger technology is adopted (and data storage occurs on device), “double-spending”[23] attacks need to be adequately minimised, especially in the offline, bearer-based configuration of a CBDC. Those consists in a form of counterfeiting where the CBDC is spent multiple times illegitimately.
Quantum computing might ultimately impact all financial services as it could compromise major data encryption methodologies and cryptographic primitives used for protecting access, confidentiality and integrity of data stored and transmitted and the need for possible post-quantum cryptography should be taken into account during technology design[24].
Lastly, fragmented efforts to build CBDCs at national level are likely to result in cybersecurity risks stemming from difficulties in ensuring interoperability, notably in a cross-border dimension. Central banks have been focused so far on domestic uses of CBDC, with too little thought for cross-border regulation, interoperability and standard-setting.  The multi-jurisdictional transfer of personal and transaction data may increase the scale, scope, and speed of data breaches.
In order to correctly handle the security risks, a technical governance should be integral part of a CBDC system in order to monitor new developments and anticipate risks. Adopting open-source models may help foster transparency, innovation and trust.
Security concerns in the CBDC infrastructure, whose relevant requirements and expectations are high, may turn into severe consequences among stakeholders and a significant loss of trust from users, with the consequent dismissal as a widely-used means of payment, thus resulting in the failure of the project.
3. Recommended readings
– European Parliament, The digital euro: policy implications and perspectives, January 2022 – https://www.europarl.europa.eu/thinktank/en/document/IPOL_STU(2022)703337
– Banca d’Italia, A digital euro: a contribution to the discussion on technical design choices, July 2021
– R. Auer, R. Bohme, The technology of retail central bank digital currency, BIS Quarterly Review, March 2020
– Digital Euro Association, Ahead of the digital euro, August 2022
– Raskin et. al., Digital currencies, decentralized ledgers, and the future of central banking, National Bureau of Economic Research, 2016
– Institute and Faculty of Actuaries, Understanding Central Bank Digital Currencies (CBDC), March 2019
– International Monetary Fund, F&D Series, The Money Revolution – Crypto, CBDCs, and the future of finance, September 2022
– Atlantic Council, Missing key: the challenge of cybersecurity and central bank digital currency, June 2022 – available at https://www.atlanticcouncil.org/in-depth-research-reports/report/missing-key/
– Bank of International Settlement, Central bank digital currencies: system design and interoperability, 2021 – available at  https://www.bis.org/publ/othp42_system_design.pdf
All links cited and listed have been lastly accessed on the 10th March 2023.

Authors:

Stefano LEUCCI
Massimo ATTORESI
Xabier LAREO

Compliments of the European Data Protection Security (EDPS) TechDispatch
Footnotes:
[1] To know more about money, currency and value see European Central Bank, What is money?, 2017 – https://www.ecb.europa.eu/ecb/educational/explainers/tell-me-more/html/what_is_money.en.html
[2] “Legal tender” status is a key attribute of currency: it entitles a debtor to discharge monetary obligations by tendering currency to the creditor – International Monetary Fund, Legal Aspects of Central Bank Digital Currency: Central Bank and Monetary Law Considerations, WP/20/254, pag. 8.
[3] Hereinafter, referred also as private banks and financial intermediaries. For more information, please see Investopedia, How Banking Works, Types of Banks, and How To Choose the Best Bank for You, accessed on November 2022 – https://www.investopedia.com/terms/b/bank.asp
[4] Source: https://www.forbes.com/advisor/investing/cryptocurrency/different-types…
[5] CoinMarketCap – https://coinmarketcap.com/view/stablecoin/ (accessed in October 2023).
[6] VoxEU CEPR, Central bank digital currency: the battle for the soul of the financial system, 2021 – https://cepr.org/voxeu/columns/central-bank-digital-currency-battle-sou…
[7] For more information on blockchain technologies, see https://www.oreilly.com/library/view/mastering-bitcoin/9781491902639/ch07.html
[8] For more information about NFC protocol, see Wikipedia – https://en.wikipedia.org/wiki/Near-field_communication (accessed in October 2022).
[9] For more information about programmable money, see Federal Reserve, FED Notes, What is programmable money?, June 2021, available at https://www.federalreserve.gov/…/what-is-programmable-money-20210623.html
[10]  For more information about programmability of money and payment, see P. G. Sandner, The Digital Programmable Euro, Libra and CBDC: Implications for European Banks, Conference: EBA Policy Research Workshop: New technologies in the banking sector – impacts, risks, and opportunities, 2020.
[11] Bank for International Settlements, BIS Papers No 125, Gaining momentum – Results of the 2021 BIS survey on central bank digital currencies, by Anneke Kosse and Ilaria Mattei, May 2022
[12] For more information about the work of the European Union on Intra-EU cross-border payments please see European Commission, Frequently asked questions: Intra-EU cross-border payments, February 2019, available at https://ec.europa.eu/commission/presscorner/detail/sv/MEMO_19_1170
[13] The need for intermediaries would be reduced or eliminated by allowing banks to directly hold foreign CBDCs;  and correspondent banking would be sped up through automated or integrated compliance and validity checks on an interoperable digital platform; both leading to reduced latency and fees for end users. – https://www.atlanticcouncil.org/…/Privacy_in_cross-border_digital_currency-_A_transatlantic_approach__-.pdf
[14] See, among others, the Analysis by the Danish Central Bank, New types of digital money, 23 June 2002, at page 28: “At present, and with the associated costs and possible risks, it is not clear how retail CBDCs will create significant added value relative to the existing solutions in Denmark.” The Study is available at: https://www.nationalbanken.dk/…/06/ANALYSIS_no 208_New types of digital money.pdf
[15] For a more extensive explanation on data protection impact assessment in the EU, see Article 29 Data Protection Working Party, Guidelines on Data Protection Impact Assessment (DPIA) and determining whether processing is “likely to result in a high risk” for the purposes of Regulation 2016/679, as last Revised and Adopted on 4 October 2017.
[16] For more information about privacy issues in cross-border payments see Atlantic Council – Geoeconomics Center, Privacy in Cross-border Digital Currency – A Transatlantic Approach, 2022 – available at https://www.atlanticcouncil.org/…/Privacy_in_cross-border_digital_currency-_A_transatlantic_approach__-.pdf
[17]  Different sectorial legislation have already balanced the privacy of payees against other competing values. In fact, the anti-money laundering directive prohibit credit and financial institutions from keeping anonymous accounts or anonymous passbook, defining also thresholds of amounts where to apply due diligence processes. For more information, see Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
[18] For more information, see European Central Bank – Study on the payment attitudes of consumers in the euro area (SPACE) – 2022.
[19] For more information, see World Economic Forum, The Next Generation of Data-Sharing in Financial Services: Using Privacy Enhancing Techniques to Unlock New Value, September 2019 and Future of Financial Intelligence Sharing (FFIS), Innovation and discussion paper: case studies of the use of privacy preserving analysis to tackle financial crime, January 2021
[20] Financial Action Task Force (FATF), Updated guidance for a risk-based approach, Virtual assets and virtual asset service providers, 2021
[21] A merchant represents a person or company that sells goods or services – for more info, please see Stax Payments, Explained Simply: What is a Merchant Services Provider?, available at https://staxpayments.com/blog/merchant-services-provider/
[22] For more information, see Atlantic Council, Missing key: the challenge of cybersecurity and central bank digital currency, June 2022 – available at https://www.atlanticcouncil.org/in-depth-research-reports/report/missing-key/
[23] Sveriges Riksbank, On the possibility of a cash-like CBDC, February 2021 – https://www.riksbank.se/globalassets/media/rapporter/staff-memo/engelska/2021/on-the-possibility-of-a-cash-like-cbdc.pdf
[24] Many banks around the world are already developing and testing post-quantum security capabilities. On this, see Bank for International Settlements, BIS Innovation Hub announces new projects and expands cyber security and green finance experiments, June 2022 – https://www.bis.org/press/p220617.htm  and Finextra, Banque de France tests ‘post quantum’ security tech, September 2022 – https://www.finextra.com/newsarticle/41018/banque-de-france-tests-post-quantum-security-tech

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The EU Commission welcomes the political agreement reached between the European Parliament and the Council to boost the number of publicly accessible electric recharging and hydrogen refuelling stations in particular across the European Union’s main transport corridors and hubs. This is a landmark agreement that will enable the transition to zero-emission transport and contribute to our target of reducing net greenhouse gas emissions by at least 55% by 2030.
The new Regulation for the deployment of alternative fuels infrastructure (AFIR) sets mandatory deployment targets for electric recharging and hydrogen refuelling infrastructure for the road sector, for shore-side electricity supply in maritime and inland waterway ports, and for electricity supply to stationary aircraft. By making a minimum of recharging and refuelling infrastructure available across the EU the regulation will end consumer concerns about the difficulty to recharge or refuel a vehicle. AFIR also paves the way for a user-friendly recharging and refuelling experience, with full price transparency, common minimum payment options and coherent customer information across the EU.
Infrastructure for road transport, shipping, and aviation
The new AFIR rules will ensure sufficient and user-friendly alternative fuels infrastructure for road, shipping and aviation. This will enable the use of zero-emission road vehicles, in particular electric and hydrogen light- and heavy-duty vehicles, as well as electricity supply to moored vessels and stationary aircraft. Specifically, the following main deployment targets will have to be met in 2025 or 2030:

Recharging infrastructure for cars and vans has to grow at the same pace as vehicle uptake. To that end, for each registered battery-electric car in a given Member State, a power output of 1.3 kW must be provided by publicly accessible recharging infrastructure. In addition, every 60 km along the trans-European transport (TEN-T) network, fast recharging stations of at least 150 kW need to be installed from 2025 onwards.

Recharging stations dedicated to heavy-duty vehicles with a minimum output of 350 kW need to be deployed every 60 km along the TEN-T core network, and every 100 km on the larger TEN-T comprehensive network from 2025 onwards, with complete network coverage to be achieved by 2030. In addition, recharging stations must be installed at safe and secure parking areas for overnight recharging as well as in urban nodes for delivery vehicles.

Hydrogen refuelling infrastructure that can serve both cars and lorries must be deployed from 2030 onwards in all urban nodes and every 200 km along the TEN-T core network, ensuring a sufficiently dense network to allow hydrogen vehicles to travel across the EU.

Maritime ports that see at least 50 port calls by large passenger vessels, or 100 port calls by container vessels, must provide shore-side electricity for such vessels by 2030. This will not only help reduce the carbon footprint of maritime transport, but also significantly reduce local air pollution in port areas.

Airports must provide electricity to stationary aircraft at all contact stands (gates) by 2025, and at all remote stands (outfield positions) by 2030.

Operators of electric recharging and hydrogen refueling stations must ensure full price transparency, offer a common ad hoc payment method such as debit or credit card, and make relevant data, such as that on location, available through electronic means, thereby ensuring the customer is fully informed.

Next steps
The political agreement reached this week must now be formally adopted. Once this process is completed by the European Parliament and the Council, the new rules will be published in the Official Journal of the European Union and enter into force after a transitional period of 6 months.
Background
The European Green Deal is the EU’s long-term growth strategy to make the EU climate-neutral by 2050. To reach this target, the EU must reduce its emissions by at least 55% by 2030, compared to 1990 levels. This week’s agreement is another important step in the adoption of the Commission’s ‘Fit for 55’ legislative package to deliver the European Green Deal. It follows other recent deals, most recently on sustainable fuels for shipping.
Compliments of the European Commission.
The post European Green Deal: ambitious new law agreed to deploy sufficient alternative fuels infrastructure first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

More than €1.1 billion in finance to be mobilised in sustainable projects, supported by €150 million in InvestEU guarantees

Under the InvestEU programme, the European Bank for Reconstruction and Development (EBRD) and European Commission work together to help various EU countries in reaching their full green potential
New investments to boost green and sustainable projects in the municipal, transport and energy sectors
Funds to benefit Bulgaria, Croatia, Czechia, Estonia, Greece, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia

On Friday, 24 March 2023, the InvestEU Investment Committee has approved guarantees worth up to around €150 million in the form of framework agreements for the first EBRD operations, which are to follow. This is part of the InvestEU guarantee agreement worth up to €450 million between the European Commission and the EBRD.
The European Bank for Reconstruction and Development (EBRD), backed by the InvestEU programme, will mobilise more than €1.1 billion in financing through direct investments or financial intermediaries to help the EU countries where the EBRD operates to reach their full green potential. It will support investment projects to improve sustainability and minimise environmental impact.
The new financing will boost green and sustainable investments in the municipal, transport and energy sectors to address environmental challenges.
It will also contribute to the EBRD’s successful Green Cities programme, which is active in more than 50 urban areas to help accelerate their green transition. It will help recovery from the COVID-19 pandemic, address infrastructure gaps and improve the competitiveness and socio-economic convergence of these EU countries.
Furthermore, financial institutions in these countries will be able to provide loans to finance investments in sustainable transport, energy efficiency, renewable energy and residential buildings. This will contribute to energy savings and CO2 emission reduction in buildings and the transport sector.
Finally, with InvestEU backing, the EBRD will also support green investments in a broad range of industrial and infrastructure projects. These will focus on private companies facing rising costs of newer technologies, higher perceived risks and a lack of available financing.
Projects which are expected to be funded in this context include energy and resource efficiency in industries and commerce, the circular economy and recycling initiatives, green buildings, sustainable food products, renewable energy, energy storage and grids, water and wastewater, and low-carbon and urban transport.
Executive Vice-President for an Economy that Works for People, Valdis Dombrovskis, said:  “I welcome these first EBRD framework agreements, backed by InvestEU guarantees, that will support EU countries in central and eastern Europe and Greece to unlock their full potential for green growth and environmental sustainability. They will support green investments in the municipal, energy and transport sectors, boost competitiveness and help to increase socio-economic convergence. InvestEU plays a crucial role in leveraging investment across the EU and promoting a sustainable, inclusive and resilient economy. The EBRD is our important and reliable partner for achieving these priorities.”
Commissioner for the Economy, Paolo Gentiloni, said: “InvestEU is supporting investment across the EU that will help us to deliver on our common priorities. And no priority is more pressing than building a greener, more sustainable Europe. The approval of these guarantees shows the benefits of having the EBRD as an InvestEU implementing partner. Together, we can continue to ensure that InvestEU will contribute to making crucial investment projects a reality and help to deliver the green transition.”
EBRD President, Odile Renaud-Basso, said: “I am very pleased that our partnership with the European Commission will unlock more sustainable and green investments across the EU. The EBRD will leverage its private-sector and policy expertise to contribute to a swift transition to a green future in the EU countries where we invest – in particular across the municipal, industrial and SME sectors of their economies.”
Background
The European Commission and the EBRD signed an InvestEU guarantee agreement in December 2022, which is worth up to €450 million. The agreement will unlock EBRD finance of up to €2.1 billion for investments in sustainable infrastructure, the green economy and digitalisation, as well as innovation and research in the EU.
In addition, under the InvestEU programme, the EBRD and the European Commission signed an agreement in February 2023 for up to €60 million in advisory support for infrastructure, digitalisation and innovative investment projects in EU countries where the EBRD operates, namely Bulgaria, Croatia, the Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic and Slovenia.
The InvestEU programme will provide the EU with crucial long-term funding by leveraging substantial private and public funds in support of a sustainable recovery. It will also help mobilise private investments for the EU’s policy priorities, such as the European Green Deal and the digital transition. The programme consists of three components: the InvestEU Fund, the InvestEU Advisory Hub, and the InvestEU Portal. The InvestEU Fund will be implemented through financial partners who will invest in projects using the EU budget guarantee of €26.2 billion. The entire budgetary guarantee will back the investment projects of the implementing partners, increase their risk-bearing capacity and thus mobilise at least €372 billion in additional investment.
Compliments of the European Commission.
The post Investment Committee paves way for first InvestEU projects by EBRD to support green mobility and energy first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Big ships to gradually reduce greenhouse gas (GHG) emissions
Containerships and passenger ships at major EU ports to use on shore power supply as of 2030
Ships fuel mix to have at least 2% of specific renewable fuels as of 2034

EU Parliament and Council reached a deal on cleaner maritime fuels, asking to cut ship emissions by 2% as of 2025 and by 80% as of 2050, to help the EU become climate neutral.
A provisional agreement reached on early Thursday morning between the European Parliament and Council negotiators sets up a fuel standard for ships to steer the EU maritime sector towards the uptake of renewable and low-carbon fuels and decarbonisation.
Cutting maritime emissions
During the talks, MEPs succeeded in ensuring that ships will have to gradually reduce greenhouse gas (GHG) emissions by cutting the amount of GHG in the energy they use (below 2020 level of 91.16 grams of CO2 per MJ) by 2% as of 2025, 6% as of 2030, 14,5% as of 2035, 31% as of 2040, 62% as of 2045 and 80% as of 2050. This would apply to ships above a gross tonnage of 5000, which are in principle responsible for 90% of CO2 emissions, and to all energy used on board in or between EU ports, as well as to 50% of energy used on voyages where the departure or arrival port is outside of the EU or in EU outermost regions.
MEPs also ensured that the Commission will review the rules by 2028 to decide whether to extend emission-cutting requirements to smaller ships or to increase the share of the energy used by ships coming from non-EU countries.
Thanks to MEPs, the deal gives more credits, as an incentive, in the form of offsetting emissions to those ship owners who use renewable fuels of non-biological origin (RFNBO) from 2025 to 2034. The deal also set a 2% renewable fuels usage target as of 2034 if the Commission reports that in 2031 RFNBO amount to less than 1% in fuel mix.
Plugging ships to on shore power supply
According to the preliminary agreement, containerships and passenger ships will be obliged to use on-shore power supply for all electricity needs while moored at the quayside in major EU ports as of 2030. It will also apply to the rest of EU ports as of 2035, if these ports have an on-shore power supply. This should significantly reduce air pollution in ports.
Certain exemptions, such as staying at port for less than two hours, using own zero-emission technology or making a port call due to unforeseen circumstances or emergencies, will apply.
Quotes
EP rapporteur Jörgen Warborn (EPP, SE) said: “This agreement sets out by far the world’s most ambitious path to maritime decarbonisation. No other global power has drafted such a comprehensive framework to tackle maritime emissions. This is truly ground-breaking.”
“This regulation will force others to move too. Europe will do its fair share, but European citizens and companies should not foot the bill for the entire world’s climate efforts.”
“We guarantee the sector long-term rules and predictability, so that they dare to invest. Shipping companies and ports can focus their resources on delivering the greatest climate benefits and the most value for money. This protects the jobs of seafarers, dockworkers and workers in the export industry, and sets an example for other countries to follow.”
Next steps
The informal deal on sustainable maritime fuels rules still needs to be approved by the Council Committee of Permanent Representatives and Parliament’s Transport and Tourism Committee, and then the Parliament and Council as a whole.
Background information
Transport was responsible for about a quarter of the EU’s total CO2 emissions in 2019, of which 14% came from water navigation, according to European Environment Agency. New rules on alternative fuel infrastructure and maritime fuel are part of the “Fit for 55 in 2030 package”, which is the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels in line with the European Climate Law.
Contact:

Gediminas Vilkas, Press Officer | gediminas.vilkas@europarl.europa.eu

Compliments of the European Council, Council of the European Union.
The post Fit for 55: deal on new EU rules for cleaner maritime fuels first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Prenotification plans, continuity programs, automatic renewals, free-to-pay conversions. They’re all variations on the negative option theme. Under the right circumstances, those marketing methods can be convenient for consumers. But as decades of FTC law enforcement makes clear, when negative options are tainted with untruths, half-truths, and hidden strings, the impact on consumers can be, well, negative. That’s why the FTC is asking for public comment on proposed amendments to its Negative Option Rule designed to combat unfairness and deception.

When the FTC takes a closer look at existing rules, it keeps an eye out for changes in the marketplace that suggest an update may be due. The Negative Option Rule is a good example of that. First, thanks to the burgeoning doorstep economy, consumers can buy just about anything – meals, clothes, household supplies, etc. – on a periodic schedule. However, the current Negative Option Rule applies only to prenotification plans, an older (and frankly, fading) business model. Under a prenotification plan, members of, say, a record club (remember record clubs?) get a notice in advance that the company intends to send them a certain album. If members don’t want that album, they have a limited time to return a postcard (remember postcards?). If they miss the deadline, they’re stuck with the album – and the bill. Given the narrow scope of the existing Negative Option Rule, the time seems right for a rethink.
A second reason why the FTC is asking for your feedback about proposed changes to the Rule is because problematic negative option practices continue to inflict consumer injury. Consumers tell us they’ve been being billed for stuff they never agreed to buy in the first place. Or they’ve made multiple cancellation attempts and yet products keeps coming at ‘em like clockwork. Others recount inconvenient hoops that companies make them jump through to cancel.
Because of the limited applicability of the Negative Option Rule, our approach to date has been to bring individual cases alleging violations of the FTC Act or – if applicable – the Telemarketing Sales Rule, the Restore Online Shoppers’ Confidence Act (ROSCA), and other laws. But the volume of complaints suggests that case-by-case enforcement may not protect consumers sufficiently.
So in 2019 the FTC published an Advance Notice of Proposed Rulemaking. Based on the comments we received, in 2021 the Commission issued an Enforcement Policy Statement Regarding Negative Option Marketing. The latest step is the just-announced proposal to amend the Rule. You’ll want to read the Federal Register Notice for details, but the FTC has a fact sheet with some highlights. And here is a summary of three of the proposals that are on the table:

Requiring companies to spell out the details of the deal. “They signed me up, but never told me what was involved!” It’s a common theme when consumers file reports about misleading negative option offers. To address that information deficit, the proposed amendment would require sellers to give people important information before getting their billing information: 1) that consumers’ payments will be recurring, if applicable, 2) the deadline for stopping charges, 3) what consumers will have to pay, 4) the date the charge will be submitted for payment, and 5) information about how consumers can cancel.

Ensuring companies get consumers’ express informed consent. “Why am I getting all this unwanted stuff and who said these people could bill my credit card?!” We hear that a lot from consumers, suggesting that additional provisions may be necessary to protect them from illegal practices. The proposed amendment is consistent with ROSCA’s “express informed consent” requirement, while providing more guidance for businesses on how to comply.

Requiring companies to implement click-to-cancel. “How the $%#& do I cancel?!” Online marketers have that frictionless enrollment thing down pat. But when consumers want to cancel, some of those same companies set up obstacle courses designed for frustration and failure. Two practices challenged in recent FTC cases illustrate this. One company required people to call a phone number to cancel and then left them on hold for ages. Another company ignored cancellation requests unless consumers sent them to one hard-to-find email address authorized to accept cancellations. The proposed amendment would require companies to make it easy to cancel and one way to further that goal is to mandate that businesses must let people cancel using the same method they used to enroll – in other words, click-to-cancel.

The FTC envisions that proposed changes would apply to all forms of negative option marketing and in all media. The proposed amendments also address other issues of interest to businesses and consumers: the use of “saves” (additional offers made before cancellation to keep the customer signed up), reminders and confirmations, penalties for violations, and the impact on existing state laws, to name just a few.
Another proposed change would change the name from the Negative Option Rule to the Rule Concerning Recurring Subscriptions and Other Negative Option Plans. It may seem like a small revision, but it would signal that “negative option” applies much more broadly than to your dad’s record club.
At this stage, the proposal is just that – a possible approach about which we would like your feedback. Once the Notice is published in the Federal Register, you can save a step by filing a public comment online.
Compliments of the Federal Trade Commission.
The post FTC | Negative reinforcement? FTC proposes amending Negative Option Rule to include click-to-cancel and other protections first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at a panel on “Global shocks, policy spillovers and geo-strategic risks: how to coordinate policies” at The ECB and its Watchers XXIII Conference | Frankfurt am Main, 22 March 2023 |
We are still going through a sequence of global shocks that are disrupting economies around the world. In just three years we have seen a pandemic, severe supply chain disruptions, a war, an energy crisis and now tensions in banking markets.
The resulting swings in activity and prices have presented policymakers with the challenge of identifying turning points in their underlying dynamics at a time of disruption in the economy and the financial sector. Inevitably, we need to navigate between the risk of underreacting – which could prolong the inflationary effects of these shocks – and that of overreacting, which could turn volatility into instability.
There are no simple solutions to these complex problems.
We need to adapt our policies to the overlapping effects of the shocks, to geopolitical developments, to the risk of financial amplification and to spillovers from other jurisdictions.
Three principles can help guide our monetary policy decisions in this context.
First, given the prevailing uncertainty and the ground we have already covered in tightening our policy, we must remain fully data-dependent and avoid pre-committing to any specific policy path. We should be guided by our reaction function, taking stock of inflation developments, underlying inflation dynamics and the strength of monetary policy transmission, also given the possible risks for the medium term outlook stemming from both the real economy and the financial sector.[1] This way we can ensure that we calibrate our measures in the light of the incoming information.[2]
Second, we need to monitor the effects of our measures and the way our different instruments interact with each other. In particular, we should continuously assess the combined effect of raising rates and reducing the size of our balance sheet.[3] The experience of other jurisdictions suggests that abrupt adjustments could make it more difficult for investors to adapt to evolving market conditions.
We need to maintain our disinflationary stance until we see convincing signs that inflation is returning to our target, in line with the “separation principle”: delivering the appropriate policy stance should not come at the cost of impairing its transmission.
And third: given the global nature of the shocks we are facing, we need to consider how they are transmitted across markets and economies as well as the potential spillovers from policies adopted abroad. But we should remain focused on our primary mandate of ensuring price stability in the euro area, without being overly conditioned by other jurisdictions.[4]
I will start by illustrating the global shocks and the uncertainty they create. I will then turn to the policy response to these shocks and their spillovers across jurisdictions. And I will outline what this means for our monetary policy in the current environment.
Global shocks and uncertainty
Over the past three years we have faced considerable uncertainty from both domestic and global shocks, complicating the policy diagnosis and increasing the risks of either underreacting or overreacting.
Global shocks, their pass-through and their unwinding
A major source of uncertainty surrounding both inflation and economic activity relates to the pass-through of global shocks and their unwinding. For example, the unprecedented sequence of domestic and global shocks makes it difficult to distinguish supply-demand imbalances triggered by the pandemic and the energy crisis from persistent, self-sustained inflationary dynamics.
Pandemic-related shocks
The reopening of the economy after the pandemic gave a sudden boost to demand (Chart 1) at a time when supply disruptions had not yet been resolved, leading to persistent bottlenecks. Firms reacted by building up inventories and hoarding labour, fuelling inflationary pressures. As a result, both demand and supply contributed to inflation in 2022.

Chart 1
Evolution of real GDP and private consumption in the euro area and the United States

(index: Q4 2019 = 100)

Sources: Eurostat, FRED and ECB staff calculations.
Note: NPISH stands for “non-profit institutions serving households”.

The boost to activity from the reopening is now fading. Supply bottlenecks have largely faded out[5] (Chart 2) and firms are starting to run down their inventories (Chart 3). This should dampen price pressures.

Chart 2
Easing of supply chain bottlenecks

(diffusion indices)

Sources: S&P Global, Markit and ECB staff calculations.
Notes: The Global Supply Shortage Index measures how many selected items have been in short supply against their long-run average for each month. The long-run average refers to value 1 of the index. The shaded area refers to the 5th-95th percentile range across 20 items (e.g. chemicals, electrical items, packaging, steel and textiles). The latest observations are for February 2023.

Chart 3
Inventory-to-GDP ratio and related survey indicators in the euro area

(standard deviation from historical (1999-2019) mean)

Sources: Eurostat (inventory investment-to-GDP ratio), S&P Global (PMI stocks of purchases and finished goods), European Commission (adequacy of stocks) and ECB calculations.
Note: The latest observations are for the fourth quarter of 2022 for the inventory investment-to-GDP ratio and the first quarter of 2023 for PMI stocks and adequacy of stocks.

The energy crisis
The energy crisis has had similar effects.[6] The sharp increase in wholesale energy and commodity prices has raised not only energy and food inflation but also – indirectly – core goods and services inflation (Chart 4).

Chart 4
Contributions of energy-sensitive components to goods and services inflation in the euro area

(annual percentage changes and percentage point contributions)

Sources: Eurostat and ECB staff calculations.
Notes: The term “energy-sensitive component” reflects items with a share of energy in direct costs above the average share of energy across services items (panel a) and non-energy industrial goods (NEIG) items (panel b). The latest observations are for February 2023.

These effects are starting to be reabsorbed. Lower energy and commodity prices have translated into lower energy inflation (Chart 5). And they should eventually pass through to food and core inflation – consistent with the easing in pipeline price pressures (Chart 6). This is compressing medium-term consumer inflation expectations[7], and might temper catch-up wage demands. But how quickly these effects will be reflected in the inflation data is uncertain. And concerns about inflation persistence[8] make projecting core inflation particularly challenging.

Chart 5
Headline inflation and components in the euro area and the United States

(annual percentage changes and percentage point contributions)

Sources: Eurostat, US Bureau of Labor Statistics and ECB calculations.
Note: The latest observations are for February 2023.

Chart 6
Pipeline pressures and input/output prices

(panel a): annual percentage changes; panel b): diffusion index)

Sources: panel a): Eurostat and Refinitiv and Hamburg Institute of International Economics (HWWI), panel b): Markit.
Notes: Panel a): For Brent crude oil in euro, the monthly value represents the average of the data available (working days up to the day of the update). The latest observations are for 15 March 2023 for Brent crude oil in euro, February 2023 for euro area farm gate prices and international food commodity prices and January 2023 for the other items. Panel b): The latest observations are for February 2023.

The risk of inflation becoming entrenched
The unwinding of inflationary pressures has triggered concerns about the risk of second-round effects in the form of a de-anchoring of inflation expectations or a wage-price spiral, especially in view of the tight labour market conditions in advanced economies (Chart 7).[9]

Chart 7
Labour markets are still tight

(panel a): percent; panel b): annual percentage changes)

Sources: OECD, Haver and ECB calculations.
Notes: Panel a): the OECD aggregate for the vacancy ratio is based on the United States, United Kingdom, Japan, South Korea, euro area (excluding Italy), Canada, Sweden, Switzerland, Poland, Romania, Czech Republic, and Hungary. The dashed lines refer to long-term averages (2010-2019). The latest observations are for the third quarter of 2022 for the vacancy ratio and the fourth quarter of 2022 for the unemployment rate. Panel b): wage growth series are not harmonised, so comparability across country data is limited. Wages refer to average hourly wages for the United States and Canada and to average weekly regular earnings (excluding bonuses) for the United Kingdom. For the euro area and Japan, wage data track negotiated and scheduled wages respectively. The long-term average refers to 2010-2019. The latest observations are for February 2023 for the United States and Canada, January 2023 for Japan and the United Kingdom and December 2022 for the euro area.

In the euro area, medium-term inflation expectations remain anchored at our target. This reflects the ECB’s clear commitment to stamp out inflation. As President Lagarde stated this morning, “the public can be certain about one thing: we will deliver price stability, and bringing inflation back to 2% over the medium term is non-negotiable.”[10]
Robust wage growth over the next three years is also consistent with our projections, which indicate that inflation will gradually fall to around 3% by the end of 2023 and around 2% by the middle of 2025.
The risk is rather that wage and price-setting dynamics could make high inflation stickier and eventually feed into inflation expectations. Wages are still accelerating, and we cannot rule out a scenario in which stronger and persistent wage increases take hold. This risk needs to be closely monitored.
Opportunistic behaviour by firms could also delay the fall in core inflation. In fact, unit profits contributed to more than half of domestic price pressures in the last quarter of 2022 (Chart 8).[11] In some industries, profits are increasing strongly (Chart 9) and retail prices are rising rapidly, in spite of the fact that wholesale prices have been decreasing for some time. This suggests that some producers have been exploiting the uncertainty created by high and volatile inflation[12] and supply-demand mismatches[13] to increase their margins, raising prices beyond what was necessary to absorb cost increases. We should monitor the risk that a profit-price spiral could make core inflation stickier.

Chart 8
GDP deflator at market prices

(annual percentage changes; percentage point contributions)

Sources: Eurostat and ECB calculations.
Note: The latest observations are for the fourth quarter of 2022.

Chart 9
Sectoral wage and profit developments

(left-hand panel: percentage change from Q4 2019 to Q4 2022; right-hand panel: gross operating surplus over real value added, level)

Sources: Eurostat and ECB calculations.
Notes: Wages refer to compensation of employees, and profits to gross operating surplus. Income for self-employed people is included in wages. The latest observations are for the fourth quarter of 2022.

Looking ahead, a normalisation of profits would help bring down core inflation and reduce the risk of second-round effects, as wage demands could be accommodated without leading to an increase in prices in response.
Global supply-demand mismatches
Uncertainty about global supply and demand conditions is still high – and is now exacerbated by the financial tensions that have recently emerged.
Demand is showing signs of weakness in both the United States and the euro area.[14]
In China, the end of zero-COVID policies has been followed by a downturn and then a rebound, which could still be slowed down by headwinds emanating from the property market. The reopening will have an ambiguous overall effect on global inflation: it could dampen prices in sectors where China is a net exporter – such as goods – and increase prices in sectors where it is a net importer, such as commodities.[15]

The global policy response and its spillovers
A second source of uncertainty relates to the global policy responses to the shocks, and the spillovers from these responses.
We have already seen clear examples of these spillovers. For instance, the outsized fiscal stimulus implemented in the United States in response to the pandemic boosted the demand for durable goods (Chart 10) but led to a negative supply shock in other countries.[16] In the euro area, this supply shock contributed to pushing up inflation and hit the economy at an early stage of its recovery.[17]

Chart 10
Individual consumption – durables and services

(panel a): index: Q1 2018 = 100; panel b): January 2018 = 100)

Sources: ECB and Federal Reserve System.
Notes: Dotted lines denote the linear trend (from the first quarter of 2018 to the fourth quarter of 2019). Durables and services for the euro area are approximated using a bottom-up aggregation of available country-level data.

We are now facing a simultaneous and rapid global tightening of financing conditions (Charts 11), which is creating financial and policy spillovers (Chart 12). For example, monetary tightening in the United States is also resulting in tighter financing conditions[18] in other jurisdictions, including the euro area.[19] This adds to the risk of overtightening if central banks do not factor in the feedback loops they create.[20]

Chart 11
Global tightening of financing conditions

(panel a): standardised indices; panel b): percentages of countries)

Sources: Panel a) Refinitiv Datastream and ECB staff calculations; Panel b): Haver and ECB staff calculations.
Notes: Panel a): Country-level indices are aggregated as a weighted average using GDP purchasing power parity percentage shares. An increase reflects loosening financial conditions. A decrease reflects tightening financial conditions. The latest observations are for 17 March 2023.
Panel b): The global “inflation surges” index shows the share of countries which, at time t, are experiencing contemporaneously (1) year-on-year inflation that is higher than the time t-1 and (2) year-on-year inflation that is above a certain threshold. In this case, the threshold is given by the average of the year-on-year inflation in the post-Volcker period, from the first quarter of 1984 to the fourth quarter of 2022. The global “rate hikes synchronisation” index is constructed using BIS data on policy rates set by central banks and shows the share of countries that are tightening at time t. Both the indices cover 30 countries across advanced economies and emerging market economies. Global recessions are periods with (1) an annual world GDP per capita that is negative or close to zero, and (2) a high share of countries in a technical recession. The latest observations are for the fourth quarter of 2022.

Chart 12
Global component in yields

(correlation coefficients)

Sources: Datastream and Haver Analytics.
Notes: The sample consists of ten advanced economies (Australia, Canada, Denmark, euro area, Japan, New Zealand, Sweden, Switzerland, United Kingdom and United States). The bilateral correlation coefficients are averaged across these countries and time periods. The term premia and expectations components are the average of estimates from three models (dynamic Nelson-Siegel, rotated dynamic Nelson-Siegel and dynamic Svensson-Soderlind). The latest observations are for 9 March 2023.

In the euro area, the effects of monetary tightening are already visible, although they are only expected to fully materialise in the coming months due to the usual lag in the transmission of monetary policy. The monetary aggregates M1 and M3 are slowing down rapidly. In real terms their growth rates are in negative territory and at historic lows, below the levels of 2008 and 2011 (Chart 13).[21] Bank credit is also decelerating rapidly (Chart 14). As a result, it is declining as a share of GDP – faster, in fact, than in previous tightening episodes – and markets expect it to decline significantly further this year (Chart 15). These developments are largely related to our policy normalisation. But the size and the speed of the adjustment indicate that the transmission of our monetary policy to the economy may have become stronger.

Chart 13
Growth of monetary aggregates M1 and M3 in the euro area and the United States

(annual growth rates, percentages)

Sources: Panel a): ECB (BSI); panel b): ECB (BSI and ICP).
Notes: Solid lines show the annual growth rates of the index of notional stocks, i.e. a measure of flows normalised by outstanding amounts in the previous month. With this method, valuation changes and reclassifications are excluded from the computation of annual growth rates, and thus jumps in the annual growth series are avoided. Dotted lines show the annual growth rates of outstanding amounts. This method avoids the risk of distortion in the ratio of the money stock over price index that is implicit in the calculation of the real rates. In panel b), M3 and M1 are deflated by the HICP index. The latest observations are for January 2023.

Chart 14
Credit growth in the euro area

(three-month annualised percentage changes, seasonally adjusted)

Source: ECB (BSI).
Notes: In panel a), MFI loans are adjusted for sales, securitisation and cash pooling activities. In panel b), MFI loans are adjusted for sales and securitisation. The latest observations are for January 2023.

Chart 15
Bank loans to the non-financial private sector in the euro area

(percentages of GDP)

Sources: ECB (BSI, MNA), Refinitiv (I/B/E/S), ECB projections, individual banks’ financial statements and ECB calculations.
Notes: The orange marker shows the median forecast for year-end 2023, and the whiskers represent values within one standard deviation around the median (10th and 90th percentiles), as reported by market analysts and sourced through I/B/E/S. The distribution is weighted by realised loan volume for each bank as of year-end 2022 and based on an underlying sample of 143 forecasts covering 44 banks, submitted between 20 January and 10 March 2023. In each quarter, GDP is calculated by multiplying quarterly, seasonally adjusted flows by four; the figure for 2023 is based on the March 2023 ECB staff macroeconomic projections for the euro area. The latest observations are for the fourth quarter of 2022 for BSI and MNA, while market expectations refer to the fourth quarter of 2023.

The global tightening may also be amplified by the recent financial tensions in global banking markets. Aside from their impact on confidence, these tensions will make banks more sensitive to deposit outflows, inducing them to transfer the rate hikes more rapidly – and to a greater extent – to their customers on both sides of the balance sheet. For a while, banks may also become more prudent about lending and decide to retain cash as a precautionary measure. In the euro area, our bank lending survey[22] was already pointing to a tightening of lending standards for firms and households before the recent tensions, and this tightening may aggravate the drop in credit growth in the coming months.
In addition, major central banks have been simultaneously raising rates and reducing the supply of liquidity through quantitative tightening policies. This could make the policy adjustment bumpier. There is no reliable experience we can draw on to examine the combined effects of rate hikes and quantitative tightening. It is hard to assess how a contraction of the balance sheet of the central bank affects financial markets – especially if it happens in conjunction with an abrupt increase in interest rates.[23] The liability-driven investment crisis in the United Kingdom and the crisis of Silicon Valley Bank in the United States suggest that sudden adjustments may have an impact on the transmission of monetary policy and even give rise to severe financial tensions.[24]
In the current context, weakening growth prospects and heightened uncertainty may lead investors to move from risky assets to risk-free assets. And when the supply of liquidity is contracting quickly, this may spur a “dash for cash”, reinforcing the effects of the sharp increase in policy rates and exacerbating financial vulnerabilities. In fact, in the United States, high quality liquid assets are unusually offering higher returns than risky assets (Chart 16) at a time when liquidity is being withdrawn from the system.

Chart 16
Inverse price/earnings ratio, six-month risk-free rate and excess reserves in the euro area and the United States

(left-hand scale: percentage points, right-hand scale: EUR trillions)

Sources: Panel a): Refinitiv and ECB calculations; panel b): Refinitiv, Federal Reserve, and ECB calculations.
Notes: The inverse price/earnings ratio is a gauge of the earnings yield of holding stocks, shown here in comparison to risk-free rates. In panel a), excess liquidity is calculated as banks’ current account and deposit facility holdings minus their minimum reserve requirements. In panel b), excess reserves are calculated as reserves of depository institutions minus required reserves (the latter are set to zero in 2020). The latest observations in panel a) are 13 March 2023 for financial market data and 8 March 2023 for excess liquidity. The latest observations in panel b) are 13 March 2023 for financial market data and January 2023 (monthly data) for excess reserves.

As available liquidity shrinks, both in aggregate and for most banks, the supply of lending could also contract rapidly. Estimates by ECB staff suggest that banks with lower excess liquidity are more likely to reduce their supply of credit in response to policy rate hikes, and the increase in their lending rates is likely to be larger (Chart 17).

Chart 17
Response of loan supply and lending rates to a policy rate hike by level of excess liquidity

(percentage points of supply-driven loan growth (panel a) and change in lending rates (panel b) over three months for each percentage point increase in the deposit facility rate; size of bubbles equal to volumes of loans to firms)

Sources: Panel a): ECB (AnaCredit, iBSI, MOPDB) and ECB calculations; panel b): ECB (AnaCredit, iBSI, iMIR, MOPDB) and ECB calculations.
Notes: Supply-driven loan growth at the bank level is identified applying the methodology of Mary Amiti and David Weinstein to the euro area credit register (see Amiti, M. and Weinstein, D. (2018), “How Much Do Idiosyncratic Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data”, Journal of Political Economy, Vol. 126, No 2, pp. 525-587. The chart reports coefficients from regressions of the supply-driven loan growth (panel a) and bank-level changes in new lending rates to firms (panel b) three months ahead on the level of excess liquidity interacted with the change in the deposit facility rate over the same period, distinguishing between observations before and after December 2021 and with the excess liquidity-over-assets ratio between the levels indicated on the x-axis. The specification includes bank and country time fixed effects and controls for bank assets. The size of the bubbles measures the outstanding amounts of loans to firms for banks belonging to each category. The latest observations are for November 2022.

Implications for the ECB’s monetary policy
So how should monetary policy operate in an environment characterised by high uncertainty, strong spillovers and financial vulnerabilities?
Adapting to the current environment
First, monetary policy must remain fully adaptable to changing developments, given the prevailing uncertainty, the lags with which it operates and the risk of sudden financial tensions. This requires a data-dependent approach that does not prejudge future policy decisions and that reflects the risks on both sides.
Second, our tightening must be calibrated prudently. This is because it is already having a strong impact on financing conditions and because we want to avoid undesirable financial volatility. And this prudent approach holds truer still as our policy rates move more firmly into restrictive territory, inflationary forces ease and the risks to the inflation outlook become balanced. At times like this, abrupt policy moves are not necessary.[25]
Third, in order to avoid financial tensions which could hamper our disinflationary policies, we should rely on our policy rate as the key instrument to steer our stance and we should be measured and predictable in the normalisation of our balance sheet. We should continuously monitor investors’ exposure to interest rate risk and liquidity risk and carefully analyse the impact that the decline in liquidity may have on the supply of credit.
We must stand ready to intervene in a timely manner to counter possible market dysfunctions. We have the instruments to adjust the provision of liquidity and ease collateral conditions as necessary, in line with what we have done during the pandemic. And we need to remain committed to our three lines of defence against financial fragmentation within the euro area.[26]
Finally, all policymakers should be tackling inflation on all fronts. It is not a task for central bankers alone. Thanks to public intervention, we had an unusual recession – one with high profits. This means that firms have the buffers to absorb a catch-up in labour costs without increasing prices in response, also in view of the fall in the cost of other inputs, like energy.
Persistently opportunistic profits should not put a dampener on disinflation. Profiteering strategies that increase inflation and the risk of second-round effects would trigger a monetary policy reaction. But other authorities should also intervene. The appropriate response to excess corporate profits is not more fiscal support to compensate consumers for high prices of goods and services. Rather, it is to intervene to prevent any abuse of market power.
Addressing spillovers
Let me now turn to how monetary policy should address spillovers.
We must take into account all the relevant information when taking decisions, and that includes developments outside the euro area. Given the global nature of the shocks we are facing, we need to consider how they are transmitted across markets and economies, alongside the potential spillovers from the policy response to those shocks. This is what we have done. And in response to tensions in international funding markets, we have worked with other major central banks to enhance the provision of US dollar liquidity via our standing liquidity swap line arrangements.[27]
At the same time, we need to tailor our policy response to the outlook for the euro area and avoid passively importing financing conditions from abroad through policy spillovers to interest rate expectations and long-term interest rates. We have the necessary autonomy to steer financing conditions in a way that reflects the differences between the euro area and other jurisdictions.[28]
We can reconcile these two objectives – factoring in spillovers but tailoring our policy to domestic conditions – if we calibrate our policy appropriately and communicate our reaction function clearly.
Our measures need to be calibrated in such a way that they achieve the appropriate domestic stance. To use a metaphor – if outside temperatures start falling after a period of hot weather, we have less need for air conditioning because temperatures inside will gradually cool, too. If we then apply this approach to our current situation, when calibrating our measures we should consider the restrictive impulse coming from the global tightening and from the vulnerabilities that are emerging in the financial sector abroad.
The clarity of our communication is also crucial, especially in view of the current financial tensions. In order to communicate our policy intentions clearly and consistently at a time when we must remain data-dependent and adapt to new developments, we need to set out a clear reaction function and stick to it.[29] Accordingly, in our latest monetary policy statement we emphasised that “The elevated level of uncertainty reinforces the importance of a data-dependent approach to our policy rate decisions, which will be determined by our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.”[30]
Conclusion
Let me conclude.
A string of shocks has created uncertainty for economies around the world. While the effects of some of these shocks are starting to unwind, it may be some time yet before we see volatility in activity and prices subside, and a new equilibrium settle in.
Notably, my remarks today have focused on the current economic situation. But we may well see longer-lasting changes to economic structures as supply chains are reconfigured to increase resilience to global shocks and align with shifting geopolitical strategies.
In the meantime, monetary policy must perform a difficult balancing act.
Faced with an exceptionally complex environment, we need to acknowledge the uncertainty prevailing in the economy. And we need to continuously assess the combined effect of our different policy instruments, the risks of non-linear effects and the spillovers from policies adopted elsewhere. This means our monetary policy should be data-dependent and adaptable. And it requires us to shape our communication on the basis of our monetary policy reaction function.
In a speech last month I summarised my thinking by saying that we do not want “to drive like crazy at night with our headlights turned off”.[31] The recent financial tensions have made this conviction even stronger.
Compliments of the European Commission.
Footnotes:

The possible consequences that an incorrect calibration of monetary policy could have for financial stability and the transmission of monetary policy are discussed in Panetta, F. (2022), “Mind the step: calibrating monetary policy in a volatile environment”, keynote speech at the ECB Money Market Conference, Frankfurt am Main, 3 November.

Panetta, F. (2023), “Monetary policy after the energy shock”, speech at an event organised by the Centre for European Reform, the Delegation of the European Union to the United Kingdom and the ECB Representative Office in London, 16 February.

The risks of policy normalisation – in particular the interaction between rate hikes and quantitative tightening – are discussed in Panetta, F. (2022), “Normalising monetary policy in non-normal times”, speech at a policy lecture hosted by the SAFE Policy Center at Goethe University and the Centre for Economic Policy Research (CEPR), 25 May.

Panetta, F. (2021), “Monetary autonomy in a globalised world”, welcome address at the joint BIS, BoE, ECB and IMF conference on “Spillovers in a “post-pandemic, low-for-long” world”, 26 April.

The Global Supply Chain Pressure Index, developed by the Federal Reserve Bank of New York, decreased considerably in February 2023 and is now below its historical average. This decrease was broad-based across factors but driven mainly by a decline in European and Asian delivery times. This latest estimate suggests that global supply chain conditions have largely normalised.

See Chart 5 in Panetta, F. (2022), “Greener and cheaper: could the transition away from fossil fuels generate a divine coincidence?”, speech at the Italian Banking Association, 16 November.

The ECB Consumer Expectations Survey suggests that euro area consumer inflation expectations have reached a turning point. Median expectations for inflation three years ahead fell to 2.5% in January 2023, from 3.0% in the previous month.

Panetta, F. (2023), “Monetary policy after the energy shock”, op. cit.

Panetta, F. (2023), “Monetary policy after the energy shock”, op. cit.

Lagarde, C. (2023), “The path ahead”, speech at the ECB and its Watchers Conference, 22 March.

The resilience of profits started to be visible during the pandemic, when there was an unusual recession with an increase in unit profits (in contrast with past recessions), while fiscal support absorbed the economic shock.

High input price pressures facilitate increases in profit margins, as the extent to which increases in selling prices reflect the pass-through of increased costs or go beyond the cost increases and benefit profit margins is less clear in such an environment.

Supply-demand mismatches limit competition and enable profit-maximising companies to expand their profit margins without losing market shares.

In the euro area, all private domestic demand components contracted in the fourth quarter of 2022. Private domestic expenditure – the sum of private consumption and investment (excluding non-residential construction and Irish intellectual property products) – dropped by 0.8% quarter on quarter, amid declining real disposable income, lingering uncertainty and tighter financing conditions. In the United States, real private domestic final purchases – which includes private consumption, residential investment and business fixed investment – increased at a subdued annual rate of 0.2% in the fourth quarter of 2022.

Estimates suggest, however, that the reopening is already priced into commodity prices and that its impact on oil prices has been more than offset by ample supply and weak global demand.

With the United States representing over 25% of global consumption – about twice as much as either the euro area or China – and driving much of the growth in global spending on durable goods, the surge in US demand exacerbated pandemic-related bottlenecks worldwide. See Chart 8 in Broadbent, B. (2021), “Lags, trade-offs and the challenges facing monetary policy”, speech at Leeds University Business School, 6 December.

Panetta, F. (2021), “Patient monetary policy amid a rocky recovery”, speech at Sciences Po, 24 November.

ECB analysis finds that a tightening by the Federal Reserve System generates spillovers to euro area real activity and inflation that are comparable to the effects of this tightening on the US economy. Estimates are obtained based on a sample spanning 1991 to 2019, using high frequency-based US monetary policy shocks (sum of conventional, Odyssean forward guidance and quantitative easing) in monthly smooth local projections. For example, a one standard deviation US monetary policy tightening shock contracts US and euro area equity prices about equally by up to 0.75% over a two-year horizon. See Lane, P.R. (2023), “The euro area hiking cycle: an interim assessment”, speech at the National Institute of Economic and Social Research, 16 February.

A tightening in the United States also results in an appreciation of the US dollar, which increases pressure on other central banks to tighten in order to avoid the depreciation of their currencies against the dollar leading to a deterioration of their domestic inflation outlooks. This was particularly noteworthy in the context of the energy shock, because the price of energy commodity imports is often denominated in US dollars.

Dieppe, A. and Brignone, D. (2022), “Synchronised interest rate hikes, spillovers and risks to global growth”, VoxEU, 14 November; Panetta, F. (2022), “Mind the step: calibrating monetary policy in a volatile environment”, op. cit.; and Obstfeld, M. (2022), “Uncoordinated monetary policies risk a historic global slowdown”, Realtime Economics, Peterson Institute for International Economics, 12 September.

The decline in M1 largely reflects shifts away from the unusually large stock of overnight deposits towards other less-liquid but better-remunerated instruments. The sharp deceleration in M3 is driven by the run-off of the Eurosystem balance sheet and the sharp slowdown in credit.

ECB (2023), Euro area bank lending survey, January.

Panetta, F. (2022), “Normalising monetary policy in non-normal times”, op. cit.

These crises were triggered by specific events (the announcement of a fiscal package in the United Kingdom and a shift in sentiment among Silicon Valley Bank’s depositors – tech companies, venture capital and high net worth individuals – that exposed large unhedged interest rate risks).

Panetta, F. (2022), “Mind the step: calibrating monetary policy in a volatile environment”, op. cit.

The first of these is a measured approach to interest rate increases and balance sheet normalisation. The second is the flexibility embedded in our reinvestments under the pandemic emergency purchase programme. The third is the Transmission Protection Instrument.

The frequency of seven-day US dollar operations has been increased from weekly to daily. See ECB (2023), “Coordinated central bank action to enhance the provision of US dollar liquidity”, 19 March.

Panetta, F. (2021), “Monetary autonomy in a globalised world”, op. cit.

In the past, when concerns about having reached the lower bound were dominating discussions, forward guidance helped insulate the euro area from financial spillovers. But forward guidance is not suited to the current environment. See Panetta, F. (2023), “Monetary policy after the energy shock”, op. cit.

ECB (2023), “Monetary policy statement”, 16 March.

Panetta, F. (2023), “Monetary policy after the energy shock”, op. cit.

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On this note: be sure to check out the EACCNY’s podcast series on the FUTURE OF TECHNOLOGY

Digital technologies shielded labor and productivity from the pandemic, while lagging countries accelerated the adoption of technology. However, digitalization gaps persist.
As the world does its best to move on from the pandemic, one of the lasting legacies for many advanced economies has been greater adoption of digital technologies. Working from home is now common, and many companies have expanded online operations.
And as the crisis recedes, we can now see that digitalization, as measured by the share of workers using a computer connected to the internet, has proved to be a silver lining across many economies. This has far-reaching and long-lasting implications for productivity and labor markets, as we detail in a new staff discussion note focusing on advanced economies.
Before the pandemic, digitalization varied widely by country, industry, and company. For example, more than four-fifths of workers in Sweden had computers with internet access in 2019, the most in our study, while Greece had the lowest share, with less than two-fifths. Two years later, the Greek share had surged almost 8 percentage points, to 45 percent, narrowing the gap with Sweden with one of the most significant gains shown in our study.
Across advanced economies, digitalization increased by an average of 6 percentage points, our research shows. The results underscore how the pandemic accelerated digitalization, especially in economies or industries that had been lagging.
Digitalization has historically been lower in contact-intensive sectors, while small businesses tend to lag larger counterparts, a trend observed across many countries. Notably, however, these disparities were not solely driven by differences by industry. Greek restaurants and hotels, for example, trail Sweden’s by 38 percentage points.
Small firms, which have historically been less digitalized, enjoyed the biggest gains. Similarly, sectors that are least digitalized invested more in digitalization.
The surge in digitalization saved many firms during the pandemic, helping them adapt to lockdowns through remote work and online operations. Our research measures possible gains of digitalization using two different productivity gauges: labor productivity, which measures output per hours worked, and total factor productivity, which tracks output relative to the total inputs used in its production. Our findings confirm that high levels of digitalization helped shield productivity and employment from the shock, with the most digitalized industries experiencing significantly smaller losses in labor productivity and hours worked than less digitalized sectors.
At the depths of the pandemic in 2020, our research shows, higher digitalization in a sector reduced labor productivity losses by a sizable 20 percent when comparing the 75th and 25th percentiles of digitalization. Moreover, had less-digitalized economies matched the 75th percentile in the sample for each sector, aggregate labor productivity growth during the pandemic would have been a quarter higher.
While some changes brought about by the pandemic may not endure, evidence for larger firms shows a growing total factor productivity differential between high- and low-digitalized firms as the crisis drew to a close.
It’s too soon to assess the longer-term effects of digitalization, but we can see that it helped boost productivity, protect employment, and mitigate economic disruptions during the pandemic.
Labor markets and remote work
At the onset of the pandemic, policymakers feared greater digitalization could widen job market inequality by increasing demand for higher-skilled workers and displacing low- and medium-skilled workers.
While digital occupations were more shielded from layoffs than non-digital ones during the crisis, there is little evidence so far of a structural shift in the composition of labor demand toward digital occupations. Indeed, as we showed in a September working paper, vacancies data showed a strong increase in the demand for less-skilled workers as the economy started to recover.
A change that is more persistent and could have long-term implications in the labor market is the working-from-home revolution. Prior to the crisis, only 5 percent of workers typically worked from home in Europe, but by 2021 that had topped 16 percent.
Countries where working from home is more common saw larger increases in labor force participation, indicating that this arrangement may attract more workers to the labor market. For example, participation has already surpassed pre-crisis levels in the Netherlands, where over 20 percent of workers usually work from home, while in Italy, where less than 10 percent of workers work from home, participation remains below pre-pandemic trends.
Working from home can generate significant welfare gains by reducing commutes and increasing time management flexibility. Working from home can boost attachment to the labor market and the labor supply, while supporting the environment by reducing commuting.
The pandemic accelerated adoption of digital technologies and shielded productivity. However, with persistent gaps across countries and sectors, policymakers must seize the moment and take steps to continue closing the digitalization gap and ensure that the gains from digitalization are broadly shared.
This includes promoting policies that maintain healthy competition in digital markets and adapting labor laws and regulations to facilitate remote work. Doing so can build a more resilient and adaptable economy better prepared to navigate future crises.
Authors:

Florence Jaumotte is Acting Division Chief of the Structural and Climate Policies Division in the IMF Research Department

Myrto Oikonomou is an Economist in the African Department of the IMF

Carlo Pizzinelli is an economist in the Research Department of the IMF

Marina M. Tavares is an economist in the Research Department of the IMF
This blog reflects research contributions by Longji Li, Andrea Medici, Ippei Shibata and Jiaming Soh.

Compliments of the IMF.
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On 20 March 2023, the European Commission has started unannounced inspections at the premises of a company active in the energy drinks sector in various Member States.
The Commission has concerns that the inspected company may have violated EU antitrust rules that prohibit cartels and restrictive business practices (Article 101 of the Treaty of the Functioning of the European Union (‘TFEU’) and Article 53 of the European Economic Area Agreement (‘EEA’)). The inspected company may also have violated EU antitrust rules that prohibit abuses of a dominant position (Article 102 of the TFEU and Article 54 of the EEA).
The Commission officials were accompanied by their counterparts from the national competition authorities of the Member States where the inspections were carried out.
Unannounced inspections are a preliminary step in an investigation into suspected anticompetitive practices. The fact that the Commission carries out such inspections does not mean that the company is 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 several factors, including the complexity of each case, the extent to which the undertakings concerned cooperate with the Commission and the scope of 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.
Compliments of the European Commission.
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You may have heard of simulation theory, the notion that nothing is real and we’re all part of a giant computer program. Let’s assume at least for the length of this blog post that this notion is untrue. Nonetheless, we may be heading for a future in which a substantial portion of what we see, hear, and read is a computer-generated simulation. We always keep it real here at the FTC, but what happens when none of us can tell real from fake?
In a recent blog post, we discussed how the term “AI” can be used as a deceptive selling point for new products and services. Let’s call that the fake AI problem. Today’s topic is the use of AI behind the screen to create or spread deception. Let’s call this the AI fake problem. The latter is a deeper, emerging threat that companies across the digital ecosystem need to address. Now.
Most of us spend lots of time looking at things on a device. Thanks to AI tools that create “synthetic media” or otherwise generate content, a growing percentage of what we’re looking at is not authentic, and it’s getting more difficult to tell the difference. And just as these AI tools are becoming more advanced, they’re also becoming easier to access and use. Some of these tools may have beneficial uses, but scammers can also use them to cause widespread harm.
Generative AI and synthetic media are colloquial terms used to refer to chatbots developed from large language models and to technology that simulates human activity, such as software that creates deepfake videos and voice clones. Evidence already exists that fraudsters can use these tools to generate realistic but fake content quickly and cheaply, disseminating it to large groups or targeting certain communities or specific individuals. They can use chatbots to generate spear-phishing emails, fake websites, fake posts, fake profiles, and fake consumer reviews, or to help create malware, ransomware, and prompt injection attacks. They can use deepfakes and voice clones to facilitate imposter scams, extortion, and financial fraud. And that’s very much a non-exhaustive list.
The FTC Act’s prohibition on deceptive or unfair conduct can apply if you make, sell, or use a tool that is effectively designed to deceive – even if that’s not its intended or sole purpose. So consider:
Should you even be making or selling it? If you develop or offer a synthetic media or generative AI product, consider at the design stage and thereafter the reasonably foreseeable – and often obvious – ways it could be misused for fraud or cause other harm. Then ask yourself whether such risks are high enough that you shouldn’t offer the product at all. It’s become a meme, but here we’ll paraphrase Dr. Ian Malcolm, the Jeff Goldblum character in “Jurassic Park,” who admonished executives for being so preoccupied with whether they could build something that they didn’t stop to think if they should.
Are you effectively mitigating the risks? If you decide to make or offer a product like that, take all reasonable precautions before it hits the market. The FTC has sued businesses that disseminated potentially harmful technologies without taking reasonable measures to prevent consumer injury. Merely warning your customers about misuse or telling them to make disclosures is hardly sufficient to deter bad actors. Your deterrence measures should be durable, built-in features and not bug corrections or optional features that third parties can undermine via modification or removal. If your tool is intended to help people, also ask yourself whether it really needs to emulate humans or can be just as effective looking, talking, speaking, or acting like a bot.
Are you over-relying on post-release detection? Researchers continue to improve on detection methods for AI-generated videos, images, and audio. Recognizing AI-generated text is more difficult. But these researchers are in an arms race with companies developing the generative AI tools, and the fraudsters using these tools will often have moved on by the time someone detects their fake content. The burden shouldn’t be on consumers, anyway, to figure out if a generative AI tool is being used to scam them.
Are you misleading people about what they’re seeing, hearing, or reading? If you’re an advertiser, you might be tempted to employ some of these tools to sell, well, just about anything. Celebrity deepfakes are already common, for example, and have been popping up in ads. We’ve previously warned companies that misleading consumers via doppelgängers, such as fake dating profiles, phony followers, deepfakes, or chatbots, could result – and in fact have resulted – in FTC enforcement actions.
While the focus of this post is on fraud and deception, these new AI tools carry with them a host of other serious concerns, such as potential harms to children, teens, and other populations at risk when interacting with or subject to these tools. Commission staff is tracking those concerns closely as companies continue to rush these products to market and as human-computer interactions keep taking new and possibly dangerous turns.
Compliments of Federal Trade Commission.
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The challenges to the European Union’s security and resilience are becoming increasingly complex and dynamic. A range of actors constantly test our resilience, seeking to exploit the openness, interdependence and connectivity of our societies and economies.
The weaponisation of energy and the acts of sabotage against the Nord Stream gas pipelines have led to heightened attention to ensure the resilience of our critical infrastructure. Against this background, it is crucial for both the EU and NATO to support efforts to enhance national and collective resilience against threats to our critical infrastructure.
Today EU and NATO are joining forces to step up the existing cooperation by launching an EU-NATO Task Force on Resilience of Critical Infrastructure to reinforce our common security. This Task Force was announced jointly by President von der Leyen and NATO Secretary General Stoltenberg on 11 January 2023.
On today’s occasion, President von der Leyen said: “We must strengthen the resilience of our critical infrastructure to always be ready. Today we successfully launched the first meeting of the Task Force for Resilient Critical Infrastructure. EU and NATO senior experts will work hand in hand to identify key threats to our critical infrastructure and work on responses.”
The EU and NATO will share best practices, enhance shared situational awareness, develop key principles to improve resilience including mitigating measures and remedial actions. The Task Force will cover four sectors at this stage: energy, digital infrastructure, transport, and space. The Task Force is between EU and NATO staff, and it will be established within the EU-NATO Structured Dialogue on Resilience.
Only by working together, we can counteract those seeking to undermine our security, and ensure that our critical infrastructure remains robust and reliable in the face of evolving threats.
Compliments of the European Commission.
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