Euro area net saving decreased to €678 billion in four quarters up to third quarter of 2022, compared with €731 billion one quarter earlier
Household debt-to-income ratio declined to 94.7% in third quarter of 2022 from 96.0% one year earlier
Non-financial corporations’ debt-to-GDP ratio (consolidated measure) decreased to 77.6% in third quarter of 2022 from 79.4% one year earlier

Total euro area economy
Euro area net saving decreased to €678 billion (6.5% of euro area net disposable income) in the four quarters to the third quarter of 2022, as compared with €731 billion one quarter earlier. Euro area net non-financial investment increased to €667 billion (6.4% of net disposable income), as investment by all four main sectors of the economy, namely households, general government, and non-financial and financial corporations, increased (see Chart 1).
Euro area net lending to the rest of the world decreased to €39 billion (from €214 billion in the previous quarter), as net saving decreased and non-financial investment increased. Net lending by households decreased to €318 billion (3.1% of net disposable income, after 3.6%). Net lending of non-financial corporations declined to €3 billion (0.0% of net disposable income, after 1.4%) while that of financial corporations was broadly unchanged at €68 billion (0.7% of net disposable income). The decrease in net lending by the total private sector was partially offset by a decline in net borrowing by the general government sector (-3.4% of net disposable income, after -3.6%).

Chart 1
Euro area saving, investment and net lending to the rest of the world
(EUR billions, four-quarter sums)

Sources: ECB and Eurostat.
* Net saving minus net capital transfers to the rest of the world (equals change in net worth due to transactions).

Data for euro area saving, investment and net lending to the rest of the world (Chart 1)
Households
Household financial investment increased at a broadly unchanged annual rate of 2.6% in the third quarter of 2022. This was due to higher growth rates of investment in currency and deposits (4.0%, after 3.7%) and debt securities (7.4%, after 0.0%), which were offset by a deceleration of investment in shares and other equity (1.4%, after 2.3%) and in life insurance (1.2%, after 1.6%) (see Table 1 below).
Households were overall net buyers of listed shares. By issuing sector, they were net buyers primarily of listed shares issued by non-financial corporations and the rest of the world (i.e. shares issued by non-euro area residents), and to a lesser extent of listed shares of MFIs, other financial institutions and insurance corporations. Households made net purchases of debt securities issued by general government and to a lesser extent non-financial corporations and MFIs, while selling debt securities issued by other financial institutions and the rest of the world (see Table 2.2. in the Annex).
The household debt-to-income ratio[1] decreased to 94.7% in the third quarter of 2022 from 96.0% in the third quarter of 2021. The household debt-to-GDP ratio declined to 58.2% in the third quarter of 2022 from 60.5% in the third quarter of 2021 (see Chart 2).

Table 1
Financial investment and financing of households, main items
(annual growth rates)

Financial transactions

2021 Q3
2021 Q4
2022 Q1
2022 Q2
2022 Q3

Financial investment*
4.0
3.5
3.0
2.7
2.6

Currency and deposits
6.2
4.9
4.2
3.7
4.0

Debt securities
-9.3
-7.9
-6.5
0.0
7.4

Shares and other equity
3.5
3.8
2.7
2.3
1.4

Life insurance
2.4
2.2
1.9
1.6
1.2

Pension schemes
2.1
2.0
2.1
2.1
2.1

Financing**
3.6
3.9
4.4
5.3
5.0

Loans
4.0
4.1
4.2
4.3
4.2

Source: ECB.
* Items not shown include: loans granted, prepayments of insurance premiums and reserves for outstanding claims and other accounts receivable.
** Items not shown include: financial derivatives’ net liabilities, pension schemes and other accounts payable.

Data for financial investment and financing of households (Table 1)

Chart 2
Debt ratios of households and non-financial corporations
(percentages of GDP)

Source: ECB and Eurostat.
* Outstanding amount of loans, debt securities, trade credits and pension scheme liabilities.
** Outstanding amount of loans and debt securities, excluding debt positions between non-financial corporations.
*** Outstanding amount of loan liabilities.

Data for debt ratios of households and non-financial corporations (Chart 2)
Non-financial corporations
In the third quarter of 2022, the annual growth of financing of non-financial corporations increased to 3.5% from 3.2% in the previous quarter, reflecting an acceleration in financing by loans as well as shares and other equity, while the financing by trade credits and debt securities decelerated (see Table 2 below).
The acceleration of loan financing was due to higher growth rates in loans from MFIs, from within the non-financial corporations sector, from general government and from the rest of the world, while loans from other financial institutions decelerated (see Table 3.2 in the Annex).
Non-financial corporations’ debt-to-GDP ratio (consolidated measure) decreased to 77.6% in the third quarter of 2022 from 79.4% in the third quarter of 2021; the non-consolidated, wider debt measure, decreased to 140.7% from 142.5% (see Chart 2).

Table 2
Financing and financial investment of non-financial corporations, main items
(annual growth rates)

Financial transactions

2021 Q3
2021 Q4
2022 Q1
2022 Q2
2022 Q3

Financing*
2.3
3.0
3.0
3.2
3.5

Debt securities
2.0
5.6
5.8
4.9
3.2

Loans
3.6
4.4
4.6
5.4
6.3

Shares and other equity
1.1
1.1
1.1
1.1
1.4

Trade credits and advances
6.7
11.1
10.9
11.4
9.4

Financial investment**
4.2
4.9
4.7
4.7
4.7

Currency and deposits
7.0
9.6
8.6
7.9
7.4

Debt securities
-0.2
-5.2
-1.4
4.3
10.3

Loans
6.9
7.2
7.2
6.5
6.2

Shares and other equity
1.2
1.6
2.0
2.4
2.8

Source: ECB.
* Items not shown include: pension schemes, other accounts payable, financial derivative’s net liabilities and deposits.
** Items not shown include: other accounts receivable and prepayments of insurance premiums and reserves for outstanding claims.

Data for financing and financial investment of non-financial corporations (Table 2)
For queries, please use the Statistical information request form.
Notes

These data come from a second release of quarterly euro area sector accounts from the European Central Bank (ECB) and Eurostat, the statistical office of the European Union. This release incorporates revisions and completed data for all sectors compared with the first quarterly release on “Euro area households and non-financial corporations” of 11 January 2023.
The euro area and national financial accounts data of non-financial corporations and households are available in an interactive dashboard.
The debt-to-GDP (or debt-to-income) ratios are calculated as the outstanding amount of debt in the reference quarter divided by the sum of GDP (or income) in the four quarters to the reference quarter. The ratio of non-financial transactions (e.g. savings) as a percentage of income or GDP is calculated as sum of the four quarters to the reference quarter for both numerator and denominator.
The annual growth rate of non-financial transactions and of outstanding assets and liabilities (stocks) is calculated as the percentage change between the value for a given quarter and that value recorded four quarters earlier. The annual growth rates used for financial transactions refer to the total value of transactions during the year in relation to the outstanding stock a year before.
Hyperlinks in the main body of the statistical release lead to data that may change with subsequent releases as a result of revisions. Figures shown in annex tables are a snapshot of the data as at the time of the current release.

Compliments of the European Central Bank.
Footnote:
1. Calculated as loans divided by gross disposable income adjusted for the change in pension entitlements.
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The 2021 surge in global shipping costs was a canary in the coal mine for the persistent rise in inflation

It bears remembering that, as recently as the second half of 2021, the Federal Reserve considered that the surge in consumer price inflation would dissipate, with price increases returning to the Fed’s 2 percent target in 2022. In testimony before Congress, Fed Chair Jerome Powell affixed the now infamous “transitory” moniker to the ongoing price increases, which he ascribed to temporary supply bottlenecks and price declines in the early stages of the pandemic.
The Fed rejected the notion that price increases reflected an overheated economy—a view that was nevertheless already making the rounds in certain segments of Congress—and did not foresee any tightening before 2023 or 2024. New York Federal Reserve Bank President John Williams, who also serves as vice chair of the Fed’s policymaking committee, expected inflation to run at about 2 percent in both 2022 and 2023.
The Fed was not alone in misreading the implications of the data already available in 2021. The IMF, whose mandate is to take an independent view of developments and policies in member countries, described the inflationary surge in a blog by its (then) chief economist, Gita Gopinath, in the same terms as the Fed, pointing to transitory causes and taking comfort in the anchoring of inflation expectations. Like the Fed, the IMF did not mention in its updates the possibility of economic overheating and inflation persistence.
Fast-forward to spring 2022: the IMF’s World Economic Outlook revealed that the institution’s inflation projections were off by a factor of more than 3 for advanced economies and 2 for all other countries. These facts show that the inflation surprise was global.
To be fair, there were factors that were not foreseeable in 2021, such as supply chain disruptions related to China’s zero-COVID policy and commodity price increases owing to Russia’s invasion of Ukraine. There were also factors whose impact was difficult to predict with precision—for example, the unwinding of pandemic-era savings, which boosted demand. Economic forecasters, whether at the Fed or at the IMF, are not geopolitical or public health experts, and often the best they can do is to make an educated guess.
But while policymakers may get a pass for not factoring into their decisions what was unknowable a year ago, they should be held accountable for missing known drivers of inflation, especially those that pointed to enduring price pressures. It’s likely that the Fed has had to hike interest rates further to make up for its delayed start. Recession risks are very plausibly larger as a result, as are the adverse global spillovers from Fed policy.
So was there a smoking gun? In a recent study, my coauthors and I focus on a key driver of global inflation that was very evident already in 2021: the rapid increase in global shipping costs. By October 2021, indicators of the cost of shipping containers by maritime freight had increased by over 600 percent from their pre-pandemic levels, while the cost of shipping bulk commodities by sea had more than tripled.
What caused this remarkable increase? As manufacturing activity picked up following extended COVID-19 lockdowns, demand for shipping intermediate inputs (such as energy and raw materials) by sea increased significantly. At the same time, shipping capacity was severely constrained by logistical hurdles and bottlenecks related to pandemic disruptions and shortages of container equipment. Ports around the world lacked workers, who had to self-isolate after testing positive for COVID-19, and public health restrictions prevented truck drivers and ship crews from crossing borders.
While skyrocketing food and energy prices were making headlines, the surge in shipping costs seemed to pass largely under the radar, despite its potential inflationary impact. Our analysis suggests that a doubling of shipping costs causes inflation to increase by roughly 0.7 percentage point. Given the actual increase in global shipping costs during 2021, we estimate that the impact on inflation in 2022 was more than 2 percentage points—a huge effect that few central banks would dismiss.
Our study also shows that the effect of the shipping cost shock on inflation is longer-lasting than the effects of commodity price shocks, peaking after about a year and lasting up to 18 months. By contrast, the impact of global oil prices on consumer price inflation peaks after only two months.
Of course, this average result varies across economies and regions, and it depends on monetary policy frameworks, particularly central banks’ track record of stabilizing prices and anchoring expectations, as well as on more structural features such as geography (which affects an economy’s remoteness and dependence on goods shipped by sea).
Our evidence suggests that the impacts of surging shipping costs are likely to be larger and more persistent in countries with less-anchored inflation expectations and weaker monetary policy frameworks. Lower-income countries and some emerging market economies may be more at risk than advanced economies with established price stability credentials.

Remote small-island states in the Pacific and the Caribbean are the most affected, according to our study’s results, with an inflationary transmission that is about double the average in the sample as a whole. This amplifies risks of wage-price spirals in such countries (a loop in which inflation leads to higher wage growth, fueling even higher inflation). When shipping costs surge, policymakers everywhere, but especially in such countries, may need to tighten their monetary policy preemptively.
The pandemic spike in shipping costs is more than a year behind us, and our research suggests that we should already have seen most of its inflationary impact by now. Our estimates, moreover, are symmetric, such that declines in shipping costs would tend to bring inflation down in the following year. The implication is for the big moderation in shipping costs in 2022 to contribute to a reversal of inflationary pressures.
Shipping costs’ role as a driver of global inflation is underrecognized. This needs to change. Shipping cost shocks can alert central banks tasked with ensuring price stability of dangers ahead and help them reduce the risk of once again falling behind the curve.
Author:

Jonathan D. Osstry, is professor of the practice of economics at Georgetown University and the former acting director of the IMF’s Asia and Pacific department

Compliments of the IMF.
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Governor Christopher J. Waller at the C. Peter McColough Series on International Economics, Council on Foreign Relations, New York, New York |

Thank you, Ben, and thank you to the Council on Foreign Relations (CFR) for inviting me to be part of this discussion. It has been close to a year since the Federal Open Market Committee (FOMC) began tightening monetary policy. We began raising interest rates in March 2022 and shrinking our securities holdings in June in order to bring inflation down to our 2 percent target.1 Today I thought I would spend a few minutes taking stock of the year behind us and talking about what’s next.
A year ago, inflation was elevated and rapidly accelerating, and the Fed moved to quickly and dramatically tighten monetary policy. At the end of December, the federal funds rate target was set in a range of 4.25 percent to 4.5 percent, the highest in 15 years. Economic activity, meanwhile, has been holding up well. After shrinking slightly in the first half of 2022, real gross domestic product grew at an annual rate of 3.2 percent in the third quarter, and monthly data suggest it grew around 2 percent in the fourth quarter. I expect such slowing to continue in this quarter, which is both expected and desirable in our ongoing fight to lower inflation.
The FOMC’s goal in raising interest rates is to dampen demand and economic activity to support further reductions in inflation. And there is ample evidence that this is exactly what is going on in the business sector. On the manufacturing side, industrial production declined for the second month in December. And the Institute for Supply Management’s (ISM) forward-looking indicators of orders and customers’ inventory suggested that further weakening is in train. Meanwhile, the ISM survey for nonmanufacturing businesses, which had reported expansion since April of last year, indicated a slight contraction in December. This slowdown in services activity was widespread, affecting 11 of 17 sectors in the survey, with significant slowdowns in construction and real estate, two industries heavily affected by higher interest rates. This slowing in business activity is consistent with the FOMC’s goal of damping demand and reducing production so that it is in better alignment with the productive capacity of the economy. The goal is not, I would emphasize, to halt economic activity, and so we will be watching these sectors closely to see how this moderation continues.
Growth in consumer spending has also begun to slow. While that growth was surprisingly strong through most of the second half of 2022, nominal personal consumption expenditures growth slowed to 0.1 percent in November, and retail sales fell 1 percent. We don’t have spending data on goods and services for December, but retail sales fell another 1.1 percent. While the latest readings of consumer sentiment from the University of Michigan moved up some from historic lows, I continue to expect that last year’s decline in real incomes, along with higher borrowing costs, will moderate consumer spending this year and help return inflation more promptly to the FOMC’s 2 percent target. Job one is maintaining the progress we are making in lowering inflation, and moderation in consumer spending will support that progress.
The slowing in output growth has occurred alongside the continuing strength of the labor market. Total nonfarm employment grew 223,000 in December, close to the average of 237,000 a month for the fourth quarter. That is down quite a bit from the monthly increase of 539,000 in the first quarter of 2022 but still a solid growth rate, far above the number of new jobs needed to keep pace with population growth. Employment grew robustly in the leisure and health-care sectors, where labor shortages are reportedly severe.
While the labor market is strong, it is also tight. The unemployment rate was 3.5 percent in December, matching the low reached before the pandemic, and the lowest in 53 years. But there are signs that demand for labor is moderating. Job openings reported in the November Job Openings and Labor Turnover Survey and job postings from December’s Indeed data are down from their recent peaks. Temporary-help employment, which has sometimes been a leading indicator for overall employment, has declined in recent months, but that decrease may be due at least in part to employers opting to hire full-time workers in place of temps to help keep jobs filled.
A robust labor market, despite modest economic growth, is a plus for workers and allows the Fed to focus on lowering inflation. It shows that jobs and income can hold up to the effects of higher interest rates, helping the FOMC continue its efforts to lower inflation to our 2 percent goal by further tightening monetary policy.
A potential downside of a tight labor market is if labor costs, which heavily influence inflation, grow so fast that they slow progress toward the FOMC’s 2 percent objective. Wages and other measures of compensation accelerated as inflation surged in the second half of 2021 and wage growth remained high in 2022. But as overall inflation has begun to moderate in recent months, so have some measures of growth in wages and other compensation. For example, the 12-month increase in average hourly earnings hit a recent peak of 5.6 percent in March (which is when the Fed began raising interest rates) and has been falling gradually and fairly steadily since then, reaching an annual rate of 4.6 percent in December. The 3-month annualized change in average hourly earnings—4.1 percent in December—is running below the 12-month rate and is thus a signal of ongoing moderation. These are encouraging signs, but we need to see continued improvement across various measures of labor costs, because additional moderation is needed to bring inflation down to our 2 percent goal and because a significant escalation in wage growth could drive up longer-range inflation expectations. Those longer-range expectations have been fairly stable through this period of very high inflation, and we want it to stay that way because escalating expectations could drive inflation higher.
Let me turn now to the outlook for inflation. Last week’s report on the Consumer Price Index (CPI) showed that inflation continued to moderate in December, which was very welcome news. First, I am going to spell out why this was such good news, and then I am going to turn around and explain why I am still cautious about the inflation outlook and supportive of continued monetary policy tightening.
Overall headline inflation fell a tenth of a percent month over month in December, the first monthly drop since May 2020. The 12-month change in inflation peaked at 9 percent in June, and has fallen every month since, to 6.5 percent in December.
A big factor in the monthly decline in headline inflation in December was a significant drop in energy prices, which more than offset an increase in food prices. The FOMC targets headline inflation because food and energy are considerable expenses for most people, but they are more volatile than other components of the index, and by factoring them out, “core” inflation can provide a picture of where inflation is headed. Here also, we are seeing some progress. Yearly core inflation was down in December to 5.7 percent, from 6 percent in November and a peak of 6.6 percent in September. Over the past three months, core CPI inflation has run at an annualized rate of 3.1 percent, a noticeable drop from earlier in 2022.
Another encouraging sign is that higher inflation was less concentrated—the share of categories of different goods and services with inflation over 3 percent has declined in the past several months, from almost three fourths in early 2022 to less than one half in December. That’s good news because it indicates that broader inflationary pressure across the economy is easing.
Now, here’s why I am cautious about these latest results and why I am not ready yet to substantially alter my outlook for inflation. Month-over-month core CPI inflation actually ticked up in December from November and is pretty much where it was in October and where it was in March when we began raising interest rates. Although inflation measured over 12 months has been falling, December’s reading is still close to where it was a year ago. Core inflation was 6 percent year over year (YOY) in January 2022 and was 5.7 percent YOY last month. Thus, it basically moved sideways all year. So, while it is possible to take a month or three months of data and paint a rosy picture, I caution against doing so. The shorter the trend, the larger the grain of salt when swallowing a story about the future. Back in 2021, we saw three consecutive months of relatively low readings of core inflation before it jumped back up. We do not want to be head-faked. I will be looking for the recent improvement in headline and core inflation to continue.
Wages, as I indicated earlier, are another stream of data that I will be watching for evidence of continued progress to help ease overall inflation. Though recent hourly earnings data are a positive development, I need to see more evidence of wage moderation to sustainable levels. The Federal Reserve Bank of Atlanta’s Wage Growth Tracker has been running higher lately and has moderated less. The employment cost index for December won’t be out until the end of this month. Over time, we need to see wages grow more in line with productivity growth plus 2 percentage points, consistent with the FOMC’s inflation target.
Those are reasons that I am cautious about the recent good news, but it is good news. We have made progress. Six months ago, when inflation was escalating and economic output had flattened, I argued that a soft landing was still possible—that it was quite plausible to make progress on inflation without seriously damaging the labor market. So far, we have managed to do so, and I remain optimistic that this progress can continue.
I believe that monetary policy should continue to tighten, but using a comparison I employed in a speech a couple months ago, the view from the cockpit is very different at 30,000 feet than it is close to the ground. When the FOMC began raising the federal funds rate last spring from near zero, it made sense to move quickly. But after front-loading monetary policy tightening, with many unprecedented 75 basis point hikes in the federal funds rate target, by early December I believed the policy stance was slightly restrictive, and I supported a decision by the Committee to hike by a still considerable 50 basis points.2 To return to the airplane image, after climbing steeply and using monetary policy to significantly raise interest rates throughout the economy, it was apparent to me that it was time to slow, but not halt, the rate of ascent.
And in keeping with this logic and based on the data in hand at this moment, there appears to be little turbulence ahead, so I currently favor a 25-basis point increase at the FOMC’s next meeting at the end of this month. Beyond that, we still have a considerable way to go toward our 2 percent inflation goal, and I expect to support continued tightening of monetary policy.
I think that is probably enough from me, so that there will be more time for you to ask questions. Thank you again to the CFR for the opportunity to be here today.

Compliments of the U.S. Federal Reserve.
Footnotes:
1. The FOMC communicated its intentions for some time before March, and this guidance effectively began monetary policy tightening before raising rates and beginning the tapering of asset purchases that month. The views expressed here are my own and to not necessarily reflect those of my colleagues on the FOMC. Return to text

2. Each 75 basis point hike was the largest rate single increase since the FOMC began announcing its rate decisions in 1994. The Committee raised rates at individual meetings by larger amounts in the early 1980s, when it raised the federal funds rate to near 20 percent. Return to text
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Fragmentation could make it even more difficult to help many vulnerable emerging and developing economies that have been hard hit by multiple shocks
As policymakers and business leaders gather at the World Economic Forum in Davos, they are facing a Gordian knot of challenges .
From the global economic slowdown and climate change to the cost-of-living crisis and high debt levels: there is no easy way to cut through it. Added to this are geopolitical tensions that have made it even more difficult to address vital global issues.
Indeed, even as we need more international cooperation on multiple fronts, we are facing the specter of a new Cold War that could see the world fragment into rival economic blocs. This would be a collective policy mistake that would leave everyone poorer and less secure.
It would also be a stunning reversal of fortune. After all, economic integration has helped billions of people become wealthier, healthier, and better educated. Since the end of the Cold War, the size of the global economy roughly tripled, and nearly 1.5 billion people were lifted out of extreme poverty. This peace and cooperation dividend should not be squandered.
Rising fragmentation risks
And yet, not everyone has benefited from global integration. Dislocations from trade and technological change have harmed some communities. Public support for economic openness has declined in several countries. And since the global financial crisis, cross-border flows of goods and capital have been leveling-off.
But that’s only part of the story. Trade tensions between the world’s two largest economies have been rising amid a global surge in new trade restrictions. Meanwhile, Russia’s invasion of Ukraine has caused not only human suffering, but also massive disruptions of financial, food, and energy flows across the globe.
Of course, countries have always placed some restrictions on trade in goods, services, and assets for legitimate economic and national security considerations. Supply chain disruptions during the COVID-19 pandemic have also increased the focus on economic security and making supply chains more resilient.
Since the outbreak, mentions in companies’ earnings presentations of reshoring, onshoring, and near-shoring have increased almost ten-fold. The risk is that policy interventions adopted in the name of economic or national security could have unintended consequences, or they could be used deliberately for economic gains at the expense of others.
That would be a dangerous slippery slope towards runaway geoeconomic fragmentation.
Estimates of the cost of fragmentation from recent studies vary widely. The longer-term cost of trade fragmentation alone could range from 0.2 percent of global output in a limited fragmentation scenario to almost 7 percent in a severe scenario—roughly equivalent to the combined annual output of Germany and Japan. If technological decoupling is added to the mix, some countries could see losses of up to 12 percent of GDP.
Yet, according to new IMF staff analysis, the full impact would likely be even larger, depending on how many channels of fragmentation are factored in. In addition to trade restrictions and barriers to the spread of technology, fragmentation could be felt through restrictions on cross-border migration, reduced capital flows, and a sharp decline in international cooperation that would leave us unable to address the challenges of a more shock-prone world.
This would be especially challenging for those who are most affected by fragmentation. Lower-income consumers in advanced economies would lose access to cheaper imported goods. Small, open-market economies would be hard-hit. Most of Asia would suffer due to its heavy reliance on open trade.
And emerging and developing economies would no longer benefit from technology spillovers that have boosted productivity growth and living standards. Instead of catching up to advanced economy income levels, the developing world would fall further behind.
Focus on what matters most: trade, debt, and climate action
 
So, how can we confront fragmentation? By taking a pragmatic approach. This means focusing on areas where cooperation is essential, and delay is not an option. It also means finding new ways to achieve common objectives. Let me highlight three priorities:
First, strengthen the international trade system.
In a global economy beset with low growth and high inflation, we need a much stronger trade engine. Trade growth is expected to decline in 2023, which makes it even more critical to roll back the distortionary subsidies and trade restrictions imposed in recent years.
Strengthening the role of trade in the global economy begins with vigorous World Trade Organization reform and by concluding WTO-based market-opening agreements. But finding agreement on complex trade issues remains challenging, given the diverse World Trade Organization membership, increasing complexity of trade policy, and heightened geopolitical tensions.
In some areas, plurilateral agreements, among subsets of WTO members, can offer a path forward. Take the recent agreement on regulatory cooperation in service industries—from finance to call centers—which can reduce the cost of providing services across borders.
We also need to be pragmatic about strengthening supply chains. To be clear, while most supply chains have been resilient, recent disruptions to food and energy supplies have raised legitimate concerns. Still, policy choices such as reshoring could leave countries more vulnerable to shocks. IMF research shows that diversification can cut potential economic losses from supply disruptions in half.
Meanwhile, countries should carefully weigh the costs, at home and abroad, of national security measures on trade or investment. We also need to develop guardrails to protect the vulnerable from unilateral actions. A good example is the recently agreed requirement to exclude from food export restrictions the exports to humanitarian agencies such as the World Food Program.
But these efforts, while important, aren’t enough. We also need better policies at home, from improving social safety nets, to investing in job training, to increasing worker mobility across industries, regions, and occupations. This is how we can ensure that trade works for all.
Second, help vulnerable countries deal with debt.
Fragmentation could make it even more difficult to help many vulnerable emerging and developing economies that have been hard hit by multiple shocks. Take one particular challenge that many countries face: debt. Fragmentation will make it harder to resolve sovereign debt crises, especially if key official creditors are divided along geopolitical lines.
About 15 percent of low-income countries are already in debt distress and an additional 45 percent are at high risk of debt distress. Among emerging markets, about 25 percent are at high risk and facing default-like borrowing spreads.
There are signs of progress on the Group of Twenty’s Common Framework for debt treatment: Chad recently reached an agreement with its official and private creditors; Zambia is progressing toward a debt restructuring; and Ghana just became the fourth country to seek treatment under the Common Framework, sending a signal that it is seen as an important pathway for debt resolution. But official creditors have a lot more work to do.
Countries seeking debt restructuring under the Framework will need greater certainty on processes and standards, as well as shorter and more predictable timelines. And we need to improve processes for countries not covered by the Framework. To support these improvements, the IMF, World Bank and Indian G20 presidency are working with borrowers and public and private creditors to quickly establish a global sovereign debt roundtable, where we can discuss current shortcomings and make progress to address them.
These and other pragmatic actions, such as further progress on majority voting provisions in sovereign loans and climate resilient debt clauses, can help improve debt resolution. That would reduce economic and financial uncertainty, while helping countries get back to investing in their future.
Third, step up climate action.
Collective action is just as vital to address the climate crisis. Just last year, we saw climate disasters on all five continents, with $165 billion in damages in the United States alone. It shows the massive economic and financial risks of unmitigated global warming.
But last year also brought some good news. The agreement at COP27 to set up a loss and damage fund for the most vulnerable countries shows that progress is possible with enough political will. Now we must take further pragmatic steps to cut emissions and curb fossil fuels.
One potential game changer could be an international carbon price floor among major emitters. It would focus on carbon pricing or equivalent measures in an equitable process that would complement and reinforce the Paris Agreement. Or consider the “just energy transition partnerships” between groups of donors and countries such as South Africa and Indonesia.
We also need to step up climate finance to help vulnerable countries adapt. Innovative use of public balance sheets—such as credit guarantees, equity and first-loss investments—can help mobilize billions of dollars in private financing.
And, of course, we need better data around climate projects: harmonized disclosure standards and principles will help, as will taxonomies to align investments to climate goals.
The role of the IMF
In all these areas, the IMF will continue to support its members—through policy advice, capacity development efforts, and financial support.
Since the start of the pandemic, we have provided $267 billion in new financing. And thanks to the collective will of our membership, we provided a record $650 billion allocation of special drawing rights, boosting our members’ reserves. This allowed many vulnerable countries to maintain access to liquidity, freeing up resources to pay for vaccines and health care.
And we are now helping countries with stronger reserves to channel their SDRs to countries whose need is greater. This pragmatic measure could make all the difference in many countries. So far, we have around $40 billion in SDR pledges to our new Resilience and Sustainability Trust, which will help low- and vulnerable middle-income countries address structural challenges such as pandemics and climate change.
In other words, we know the global issues that matter most, and we know that confronting fragmentation in these vital areas is essential.
Pragmatic measures to fight fragmentation may not be the simple sword swipe that cuts the Gordian knot of global challenges. But any progress we can make in rebuilding trust and boosting international cooperation will be critical.
The discussions in Davos will be a hopeful sign that we can move in the right direction and foster economic integration that brings peace and prosperity to all.
Author:

Kristalina Georgieva, Managing Director, IMF

Compliments of the IMF.
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Today, the Commission is presenting ‘A New Deal for Pollinators’ to tackle the alarming decline in wild pollinating insects in Europe, revising the 2018 EU Pollinators Initiative. Citizens have been increasingly calling for decisive action against pollinator loss, also through the recent successful European Citizens’ Initiative ‘Save Bees and Farmers‘. The renewed initiative sets out actions to be taken by the EU and the Member States to reverse the decline of pollinators by 2030 as today, one in three bee, butterfly and hoverfly species are disappearing in the EU. It complements the Commission’s proposal for a Nature Restoration Law of June 2022 and is a key part of the Biodiversity Strategy 2030, the Farm to Fork Strategy and the European Green Deal.
Reversing decline of pollinators by 2030
The revised EU Pollinators Initiative sets objectives for 2030 and actions under three priorities. The key priority is improving pollinator conservation and tackling the causes of their decline. This will be done through:

Better conservation of species and habitats – for example, the Commission will finalise conservation plans for threatened pollinator species; it will identify pollinators typical of habitats protected under the Habitats Directive which Member States should protect; and the Commission jointly with Member States will prepare  blueprint for a network of ecological corridors for pollinators, or ‘Buzz Lines’.

Restoring habitats in agricultural landscapes – notably through more support for pollinator-friendly farming under the Common Agricultural Policy.

Mitigating the impact of pesticide use on pollinators – for example through legal requirements to implement integrated pest management or through additional test methods for determining the toxicity of pesticides for pollinators, including sub-lethal and chronic effects. As the excessive use of pesticides is a key driver of pollinator loss, reducing the risk and use of pesticides as per the Commission’s Sustainable Use of Pesticides proposal will be critical.
Enhancing pollinator habitats in urban areas.
Tackling the impacts on pollinators of climate change, invasive alien species and other threats such as biocides or light pollution.

The initiative will also focus on improving knowledge of pollinator decline, its causes and consequences. Actions include establishing a comprehensive monitoring system, supporting research and assessment for example by mapping Key Pollinator Areas by 2025, and targeted actions to promote capacity-building and dissemination of knowledge.
A final priority is mobilising society and promoting strategic planning and cooperation. The Commission will support Member States to develop national pollinator strategies. The Commission and Member States shall also help citizens and business to act, for example by raising public awareness and supporting citizen science.
The full list of actions can be found in the Annex to the Communication ‘A New Deal for Pollinators’.
Next steps
The Commission invites the European Parliament and the Council to endorse the new actions and to be actively engaged in its implementation, in close cooperation with all relevant stakeholders. The new actions will complement forthcoming National Restoration Plans (under the proposed Nature Restoration Law) where Member States will identify the measures to achieve the legally binding target of reversing the decline of pollinator populations by 2030.
Later this year, the Commission will respond to the Citizens’ Initiative ‘Save Bees and Farmers’ through a dedicated communication. 
Background
Pollinators are an integral part of healthy ecosystems. Without them, many plant species would decline and eventually disappear along with the organisms that depend on them, which would have serious ecological, social and economic implications. With around 80% of crop and wild-flowering plants depending on animal pollination, pollinator loss is one of the largest threats to EU nature, human wellbeing and food security, as it compromises sustainable long-term agricultural production. Today’s geopolitical context has further strengthened the need to make our food system more resilient, including through protecting and restoring pollinating insects.
The initiative builds on comprehensive stakeholder consultations and institutional feedback from the European Parliament, the Council, the Committee of the Regions, and the European Court of Auditors. It is also in line with the recently adopted Kunming-Montréal Global Biodiversity Framework which includes a global target to reduce the risk from pesticides by at least 50% by 2030.
Compliments of the European Commission.
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On January 19, the European Commission, EU Member States, and 26 partners countries will launch “The Coalition of Trade Ministers on Climate”, the first Ministerial-level global forum dedicated to trade and climate and sustainable development issues. The Coalition will foster global action to promote trade policies that can help address climate change through local and global initiatives.
The Coalition aims to build partnerships between trade and climate communities to identify the ways in which trade policy can contribute to addressing climate change. It will promote trade and investment in goods, services and technologies that help mitigate and adapt to climate change.
A prominent element of the Coalition’s agenda is to identify ways in which trade policies can support the most vulnerable developing and least developed countries that face the greatest risks from climate change.
This high-level political dialogue will see the participation of Trade Ministers from different regions and income levels. Civil society, business, international organisations and climate and finance communities will participate in the Coalition’s work.
The Coalition is open to all interested countries, and so far consists of more than 50 ministers from 27 jurisdictions. The four co-leads are Ecuador, the EU, Kenya, and New Zealand. The other participants are: Angola, Australia, Barbados, Cabo Verde, Canada, Colombia, Costa Rica, Iceland, Gambia, Japan (Foreign Affairs & Trade), Republic of Korea, Maldives, Mozambique, Norway, Philippines, Rwanda, Zambia, Singapore, Switzerland, Ukraine, United Kingdom, United States and Vanuatu.
The Coalition will provide political guidance and identify trade-related strategies to adapt to changing climate conditions and extreme weather, for instance through the production, diffusion, accessibility and uptake of climate-friendly technologies. It will focus on finding trade-related solutions to the climate crisis in line with the United Nations Framework Convention on Climate Change (UNFCCC), the Paris Agreement, and the Sustainable Development Goals, whilst supporting ongoing efforts in this area in the World Trade Organization (WTO).
Next Steps
The next Ministerial meeting will take place in the margins of the next WTO Ministerial Conference planned in early 2024.
Background
The Climate Coalition was officially launched during the World Economic Forum Annual Meeting in Davos on 19 January 2022. It aims to identify the ways trade and trade policy can have a positive contribution to the current climate crisis. It will be a forum of high-level political dialogue to foster international cooperation on climate, trade and sustainable development.
Compliments of the European Commission.
The post Trade and Climate: EU and partner countries launch the ‘Coalition of Trade Ministers on Climate’ first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Introductory statement by Fabio Panetta, Member of the Executive Board of the ECB, at the Committee on Economic and Monetary Affairs of the European Parliament | Brussels, 23 January 2023 |
Our investigation into a digital euro started more than a year ago.
Closely involving the European Parliament in the investigation phase has been a priority for the ECB from day one.
Over the course of 2022, we regularly discussed key design options in this Committee.[1] Your views provided valuable input to our work and, together with the feedback from other public and private stakeholders[2], allowed us to make steady progress.
Such interactions are essential in ensuring that public money addresses the preferences and needs of citizens and businesses in an ever-evolving digital landscape.
People’s payment behaviour is changing at an unprecedented speed: over the past three years, cash payments in the euro area have dropped from 72% to 59%, with digital payments becoming increasingly popular (Chart 1).[3] In the Netherlands and Finland, for example, cash is used only in one fifth of the transactions. At the same time, people appreciate the option to pay with public money. Most see it as important or very important to always have that choice.

Chart 1: Digital payments further on the rise but cash remains an important option

Source: Study on the payment attitudes of consumers in the euro area (SPACE).

A digital euro would respond to this growing preference for electronic payments by making public money available also in digital form. Together with cash, a digital euro would offer Europeans access to means of payment that allow them to pay everywhere in the euro area, free of charge. Being easily accessible and convenient to use would support adoption and financial inclusion.
In my remarks today I will discuss how the digital euro could help enable us to use our money whenever, wherever we need it throughout the euro area.[4]
I will conclude my remarks with the work agenda for 2023, when we will conclude our investigation phase and the European Commission will present its legislative proposal.[5]
A convenient digital payment solution, giving people control over their money
The ECB is at the global forefront of the efforts by central banks to design state-of-the-art digital payment solutions for both retail and wholesale transactions.[6]
Payments are part and parcel of everyday life: we all usually carry at least one payment instrument, be it coins, banknotes, a credit card or a mobile phone.
Our priority for the digital euro project has always been clear: to preserve the role of central bank money in retail payments by offering an additional option for paying with public money, including where this is not possible today, for example in e-commerce.
The digital euro would not replace other electronic payment methods, or indeed cash. Rather, it would complement them. And by doing so, it would safeguard our monetary sovereignty while strengthening Europe’s strategic autonomy.
The initial releases would focus on enabling access to the digital euro for euro area residents, namely consumers, firms, merchants and governments.[7]
A digital euro should be easily accessible and usable throughout the euro area, like cash today. We believe this would be best achieved with a digital euro scheme.[8] By providing a single set of rules, standards and procedures, a scheme would allow intermediaries to develop products and services built on a digital euro.
The scheme would also ensure that citizens can always access certain core services, no matter which intermediary they have their account or wallet with.[9]
The digital euro would be a public good. It would therefore make sense for its basic services to be free of charge – for example when using the digital euro to pay another person, as is the case for cash.[10]
But on top of the basic services, people could choose to make use of any additional services offered by participating intermediaries on a voluntary basis.[11]
Conditional (or programmable) payments are often mentioned as one such innovative service – however, there is some confusion about the term, and this may raise concerns.
Our definition of conditional payments is that people could decide to authorise an automatic payment where pre-defined conditions of their own choosing are met.[12] For example: the payer could decide to set an automatic monthly payment in digital euro to pay their rent.[13] But the payee would not face any limitations as to what they can do with this money they receive every month.
We believe supervised intermediaries, who are in direct contact with users, are best placed to identify use cases for conditional payments and any other advanced payment services.[14]
But let me be clear: the digital euro would never be programmable money. The ECB would not set any limitations on where, when or to whom people can pay with a digital euro. That would be tantamount to a voucher. And central banks issue money, not vouchers.
We are also aware of some people’s concerns that a digital euro could harm the confidentiality of their payment data.
When it comes to the central bank, we propose that we do not have access to personal data.[15]
And it will be for you, as co-legislators, to decide on the balance between privacy and other important public policy objectives like anti-money laundering, countering terrorism financing, preventing tax evasion or guaranteeing sanctions compliance. On our side, we have been working on solutions that would preserve privacy by default and by design, thereby giving people control of their payment data.[16] To this end, we are also closely engaging with the European Data Protection Supervisor and the European Data Protection Board.
Using a digital euro easily and everywhere in the euro area
As public money, a digital euro would be a European public good which all citizens and firms should be able to access and use without barriers. This should be the case regardless of who their intermediary is or which Member State they are located in.
Offering universal accessibility and usability would be key for a digital euro to play its role as a monetary anchor and to fulfil people’s expectations. Feedback from citizens[17] reflects the value of having a payment instrument which is always an option for the payer. Citizens may not always pay with cash, but they like to always have the option to do so. The same logic applies to a digital euro.
As co-legislators, you can adopt regulatory measures that would ensure widespread acceptance of the digital euro in payments while ensuring that citizens have broad access to the digital euro.
But while these two factors are vital foundations for the digital euro, they alone are not sufficient. Attractive functionalities and convenient user experience would be equally key for widespread adoption.
We therefore want to design a digital euro with online and offline functionalities. These will allow it to serve different use cases[18] and offer users different benefits. For example, an offline functionality[19] would give payments a level of privacy that is close to that of cash. It would also increase resilience as it would work without internet access.
We are also envisaging two options for conveniently using a digital euro.
First, supervised intermediaries could integrate the digital euro into their own platforms. In this way, users could easily access the digital euro through the banking apps and interfaces they are already familiar with.
Second, the Eurosystem is considering a new digital euro app[20], which would include only basic payment functionalities performed by intermediaries. The app would ensure that no matter where you travel in the euro area, the digital euro would always be recognised and you would be able to pay with it.
The first releases are likely to offer contactless payments, QR codes and an easy way to pay online.[21] As the technology evolves, other forms of payment may become available in the future. When it comes to the hardware, people could pay either with mobile phones, physical cards or possibly other devices like smartwatches.
A convenient user experience requires close cooperation with all sections of the market: consumer groups who know best about consumer needs; intermediaries who would provide services to their customers; and merchants who want to offer a convenient payment solution.
We have started work on the digital euro scheme rulebook[22] to ensure a harmonised and user-friendly solution that works everywhere in the euro area. [23]
The work agenda for 2023
Let me conclude with the work agenda for the next months.
We will continue our investigation phase in 2023 and regularly involve this Committee in our work.[24]
Together with the European Commission, we are still analysing a possible compensation model for the digital euro. In parallel, we are reviewing all the design options to bring them together in a high-level design for the digital euro in the spring.
We are also finalising our prototyping[25] work and seeking input from the market to get an overview of options for the technical design of possible digital euro components and services.[26]
I will discuss all these topics with you in the upcoming months, before the Governing Council endorses any design and distribution options.
In the autumn our investigation phase will come to an end. Only at that point will the ECB Governing Council decide whether to move to the realisation phase.

Chart 2: Digital euro project timeline

Let me emphasise, once again, that moving to the realisation phase does not mean issuing the digital euro. During this phase we would develop and test the technical solutions and business arrangements necessary to eventually provide and distribute a digital euro, if and when decided.
The possible decision by the Governing Council to issue a digital euro would be taken at a later stage and only after the Parliament and the Council of the EU have adopted the legislative act.
The digital euro project is a truly European initiative. And it is not just a technical project: it has a clear political dimension in view of its broad societal implications. All European policymakers must thus play their part, bearing in mind our respective roles and mandates. And we must always seek broad support from European citizens.
I thus look forward to further fruitful cooperation with European co-legislators and I am personally committed to continuing our regular exchanges in this Committee.
I now look forward to your questions.
Compliments of the European Central Bank.

Footnotes:
1. See ECB (2022), Progress on the investigation phase of a digital euro, September; ECB (2022), Progress on the investigation phase of a digital euro – second report, December; and ECB (2022), Letter from Fabio Panetta to Ms Irene Tinagli on progress on the investigation phase of a digital euro. The first report covers topics such as the transfer mechanism, privacy and tools to control the amount of digital euro in circulation. The second report focuses on the roles of intermediaries, a settlement model, funding and defunding and a distribution model for the digital euro.
2. Further information on stakeholder engagement and project governance is available on the ECB’s website.
3. ECB (2022), Study on the payment attitudes of consumers in the euro area (SPACE), December. For further information, see also ECB (2023), “Digital euro – stocktake”, presentation to the Eurogroup, 16 January.
4. Panetta, F. (2022), “Building on our strengths: the role of the public and private sectors in the digital euro ecosystem”, introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 29 September.
5. Further information on this proposal is available on the European Commission’s website.
6. In recent years, the Eurosystem has been working on a new consolidated TARGET platform – a complex infrastructure that would offer the market enhanced and modernised services – in addition to developing a Eurosystem Collateral Management System that will simplify processes involving multiple jurisdictions, including the mobilisation of cross-border collateral. The Eurosystem has also been working to ensure that TARGET Services remain resilient to cyber threats as well as considering potential changes in the needs of its wholesale settlement services users and whether new technologies could make settlement in wholesale digital central bank money more efficient and secure. In particular, the Eurosystem has been assessing the potential of distributed ledger technology (DLT) and the extent to which it could improve its services. See also Panetta, F. (2022), “Demystifying wholesale central bank digital currency”, speech at the Symposium on “Payments and Securities Settlement in Europe – today and tomorrow” hosted by the Deutsche Bundesbank, Frankfurt am Main, 26 September.
7. Non-residents, including visitors, may also have access to the first releases of the digital euro, provided they have an account with a euro area payment service provider. Subsequent releases may enable access for individuals and businesses in the European Economic Area (EEA) and selected third-party countries. Permanent access should always be based on an agreement with the authorities of that jurisdiction.
8. Panetta, F. (2022), “Building on our strengths: the role of the public and private sectors in the digital euro ecosystem”, introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 29 September.
9. The core end-user services include user management (opening and closing an account, onboarding and offboarding users, know-your-customer checks, payment instrument management, linking digital euro holdings to a commercial bank account and user lifecycle management processes), liquidity management (funding, defunding and waterfall options) and transaction management (initiation, authentication and confirmation or rejection notifications). For more information, see Euro Retail Payments Board (2022), Core, optional and value-added services for the digital euro, December.
10. See ECB (2020), Report on a digital euro, October. The scope of digital euro basic services is yet to be defined but should be similar in nature to the basic services that credit institutions are to provide under the Payment Accounts Directive (PAD). They could therefore include such features as the free opening of digital euro wallets/accounts, making payments between individuals as well as the funding and defunding of digital euro accounts/wallets.
11. Examples of these additional services include (i) an account information service, which would enable a third party to integrate digital euro information into their own account information services, thereby providing end users with an overall view of their financial situation across different intermediaries at any given moment; (ii) recurring payments, which would support conveniently paying for ongoing services (e.g. electricity bills or digital service subscriptions); (iii) pay-per-use enabled via pre-authorisation, which would support certain payment contexts in which the payment amount is unknown but funds need to be reserved until the final amount is authorised by the consumer (e.g. when paying for fuel at the petrol station); and (iv) a payment initiation service, which would enable payment service providers not holding end users’ digital euro accounts to trigger payment initiation.
12. It will nonetheless always be for the user to decide whether they want to use conditional payments and, if they do, which conditions they want to apply to their payments.
13. Additional examples of conditional payments include (i) a payment vs. delivery option, where the payment instruction is triggered by a third party other than the payer or payee, for instance the postal service responsible for delivery of a product that the payer purchased online; (ii) automatic reimbursement, where upon the sale of a subsidised product a request to pay for the subsidised amount would be automatically sent from the merchant to the company or authority subsidising it; or (iii) pay-per-use services (see footnote 11).
14. The Eurosystem can support the market-led development of these services via standards in the scheme rulebook and/or by providing necessary back-end functionalities that enable the provision of such services by intermediaries. For instance, the reservation of funds in digital euro could be enabled in the back-end infrastructure.
15. For more information on foundational privacy options see Panetta, F. (2022), “A digital euro that serves the needs of the public: striking the right balance”, introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 30 March, and ECB (2022), “Digital euro – Privacy options”, presentation to the Eurogroup, 4 April.
16. Ibid.
17. This feedback applies to both a digital euro and cash. See: Kantar Public (2022), Study on New Digital Payment Methods, March, and ECB (2022), Study on the payment attitudes of consumers in the euro area (SPACE), December.
18. For more information on the use cases see Panetta, F. (2022), “A digital euro that serves the needs of the public: striking the right balance”, introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 30 March.
19. Offline payments are payments where payer and payee are not connected to the internet and need to be in physical proximity to each other – like when paying in cash. An offline functionality would allow holdings, balances and transaction amounts to remain unknown to anyone but the user. The Union legislator will be responsible for ensuring this is enabled in relevant legislation.
20. A euro area app with a homogeneous look and feel would facilitate a standardised approach to connecting end users to intermediaries. The app would enable the initiation of payments by intermediaries for the prioritised use cases. The underlying objective behind making such an app available is to provide the market with the minimum required development, ensuring that intermediaries – including smaller ones who may not want to bear the investment costs of setting up their own payment interface – keep their roles in digital euro distribution. At the same time, the app would respond to the preferences of certain end users who have called for an independent access channel in which basic functionalities are available, as expressed by consumer’s associations and market surveys. See, for instance, the feedback provided by consumer associations on the 4th ERPB technical session on digital euro. The dual approach of an integrated option plus a digital euro app would yield the best results in terms of providing value for end users, as they would have greater choice. This also applies to intermediaries, since they would be able to build their integrated solutions and attract customers through value-added services, whilst overall ensuring a speedy time to market for the digital euro. It would also strengthen the position of the digital euro as a payment solution that provides support for the monetary anchor policy objective and pan-euro area reach.
21. In terms of technological options for payment initiation, the ECB has considered specific ideas to address the prioritised use cases, whilst also following the key objectives for the digital euro. The ECB would prioritise the use of QR codes for all use cases (peer-to-peer, e-commerce and point-of-sale), “alias/proxy” functionality for peer-to-peer and e-commerce (including app-to-app redirection) and NFC (near-field communication) for the point of sale.
22. As communicated in a letter to Ms Irene Tinagli, the ECB appointed a rulebook manager in December 2022. The ECB also published a call for market participants to join the Rulebook Development Group in January 2023. The aim of the Group is to support the drafting of a scheme rulebook, obtain market input and gain an industry perspective.
23. Panetta, F. (2022), “Building on our strengths: the role of the public and private sectors in the digital euro ecosystem”, introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 29 September.
24. See ECB (2022), Letter from Fabio Panetta to Ms Irene Tinagli on progress on the investigation phase of a digital euro.
25. Developing a prototype is a learning activity in an experimental environment.The ECB is testing the extent to which the Eurosystem’s back-end functionalities ­– namely the settlement infrastructure working in the background to record transfers and digital euro positions – can be smoothly integrated with the existing front-end payment solutions available to the public. As mentioned in a letter to Ms Irene Tinagli, the ECB published a technical onboarding package and also made it available to all companies across the euro area in December 2022. The ECB will also report on the findings of the prototyping exercise in the second quarter of 2023.
26. As pre-announced in a letter to Ms Irene Tinagli, the ECB is inviting relevant parties to take part in market research to assess options for the technical design of possible digital euro components and services. Participation in the market research will not be remunerated and will not influence eligibility for future procurement procedures related to a digital euro or any other procurement procedures. Nor will it imply any pre-selection for a potential subsequent tender. The ECB intends to announce the findings of the market research in the second quarter of 2023.

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Europe’s got talent. But talent needs to be nurtured, especially as the EU is going through important demographic transition. This is even more needed in regions that suffer from a shrinking labour force and a low share of persons with a tertiary education, and in regions hit by the departure of young people.
If left unaddressed, this transition will trigger new and growing territorial disparities as regions age and fall behind in number and skills of their workforce. It can change Europe’s demographic landscapes hampering the resilience and competitiveness of the EU.
Ensuring that regions facing a talent development trap become more resilient and attractive is crucial in the EU’s commitment of leaving nobody and no place behind.
This is why the Commission is launching the ‘Talent Booster Mechanism’. This Mechanism will support EU regions affected by the accelerated decline of their working age population to train, retain and attract the people, the skills and the competences needed to address the impact of the demographic transition.
The Mechanism is presented in today’s Communication on Harnessing Talent in Europe’s Regions and is the first key initiative in 2023 contributing to the European Year of Skills as proposed by the Commission, which aims to bring a fresh impetus for re- and upskilling. The Communication offers tailor-made, place based and multi-dimensional solutions, including the use of existing EU funds and initiatives to support regions most affected by the ongoing demographic transition and its side-effects and prevent the emergence of new and increased territorial disparities in the EU.
The Commission is also publishing today its 2023 Report on the Impact of Demographic Change, which updates the Demography Report of 2020. It revisits the demographic trends and the impacts that had been identified in light of recent developments, such as Brexit, Covid or the Russian military aggression against Ukraine. The Report stresses that, to ensure future prosperity and well-being in the EU, it is crucial to address the challenges brought about by the demographic transition. These challenges include an ageing as well as declining population, and a shrinking working-age population, but also increasing territorial disparities, including a growing urban-rural divide. The Report looks into how and if the established demographic patterns are accelerated or disrupted, and when they take place, if the disruptions are transitory, or have a lasting impact on demographic change.
The ‘talent development trap’ in some EU Regions
EU Member States are facing a sharp decline of their working age population. This population has decreased by 3.5 million people between 2015 and 2020 and is expected to shed an additional 35 million people by 2050.
82 regions in 16 Member States (accounting for almost 30% of the EU population) are severely affected by this decline of the working age population, a low share of university and higher-education graduates, or a negative mobility of their population aged 15-39. These regions face specific structural challenges such as inefficiencies in labour market, education, training and adult learning systems, low performance in the areas of innovation, public governance or business development, and low access to services. By addressing these challenges, the regions could attract more skilled workers. Several of these regions are already in a ‘talent development trap’ while the others face this risk in the near future. If left unaddressed this situation will threaten the long-term prosperity of the EU.
A new EU mechanism: the ‘Talent Booster Mechanism’
The Commission will develop the Talent Booster Mechanism based on 8 pillars:

A new pilot project will be launched in 2023 to help regions facing a ‘talent development trap’ elaborate, consolidate, develop and implement tailored and comprehensive strategies, as well as to identify relevant projects, to train, attract and retain skilled workers. Support will be provided to pilot regions selected on the basis of an open call.
A new initiative on ‘Smart adaptation of regions to demographic transition’ will kick off in 2023 to help regions with higher rates of departure of their young people to adapt to the demographic transition and invest in talent development through tailored place-based policies. Benefiting regions will be selected on the basis of an open call.
The Technical Support Instrument (TSI) will support Member States, upon demand under the TSI 2023 call, with reforms at national and regional level, necessary to address the shrinking of the working-age population, the lack of skills and respond to local market needs.

Cohesion Policy programmes and the Interregional Innovation Investments will stimulate innovation and opportunities for high-skill jobs and thus contribute improving possibilities to retain and attract talents in these regions.

A new call for innovative actions will be launched under the ‘European Urban Initiative‘ to test place-based solutions led by shrinking cities that address the challenges of developing, retaining and attracting skilled workers.

EU initiatives that support the development of talents will be signposted on a dedicated webpage. This will provide easier access to information to interested regions about EU policies in areas such as research and innovation, training, education, and youth mobility.

Experiences will be exchanged and good practices will be disseminated: regions will have the possibility to set up thematic and regional working groups to address specific professional or territorial challenges.

The analytical knowledge required to support and facilitate evidence-based policies on regional development and migration will be further developed.

Unleashing talent through existing EU funds and initiatives
The Communication also highlights how existing EU instruments and policies can support economic revitalisation and the development of the right skills to attract high-potential activities in the affected regions, including through the steer of the European Semester. Among others, the new European Innovation Agenda that sets out the Deep Tech Talent Initiative, a specific flagship to respond to the talent gap in deep tech sectors, integrating all regions in Europe.
The Communication also stresses how Cohesion Policy is and will continue to help these regions to diversify their economy, upgrade the accessibility to services, boost the efficiency of public administration and ensure the involvement of the regional and local authorities through dedicated place-based strategies.
Finally, it offers many examples of national and regional initiatives and best practices that effectively address the structural challenges in a local context, enhancing the regions’ attractiveness for talents. To facilitate mutual learning, the Commission continues to work with national authorities, mapping the most acute demographic challenges they have identified as well as examples of policies and projects aimed at managing the impacts of demographic change.
Next steps
The Commission will regularly report on the implementation of this Communication.
Background
Addressing demographic change is key to building a fairer and more resilient society. As the on-going demographic transition affects various policy areas, it requires that policymakers, engage in complex coordination involving all relevant actors at EU, national, regional, and local level. While most of the policy levers dealing with these challenges remain at the national level, the Commission takes account of the implications and impact of demographic change in its policy proposals.
The Commission already adopted a Report on the Impact of Demographic Change in Europe in 2020, which paved the way for further initiatives in 2021 with the adoption of the Green paper on ageing and the Long-term vision for the EU’s rural areas towards 2040.
Among the most recent initiatives at EU level which support Member States in dealing with demographic change in various areas and sectors, there is the European Care Strategy with the Council Recommendations on access to affordable, high-quality long-term care and early childhood education and care, the EU Comprehensive Strategy on the Rights of the Child and the European Child Guarantee, Youth Employment Support Package, the Commission Recommendation on Effective active support to employment, the Council Recommendation on ensuring a fair transition to climate neutrality, the Disability Employment Package and the recent proposal to make 2023 the European Year of Skills as well as the Communication on Harnessing Talent in Europe’s regions that was adopted today.
Compliments of the European Commission.
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Revenue gains from the implementation of a historic agreement to reform the international tax system will be higher than previously expected, according to new OECD analysis released today.
The two-pillar solution to address the tax challenges arising from the digitalisation and globalisation of the economy will lead to additional taxing rights for market jurisdictions and put a floor on tax competition through the creation of a global 15% minimum effective corporate income tax rate.
The proposed global minimum tax is now expected to result in annual global revenue gains of around USD 220 billion, or 9% of global corporate income tax revenues. This is a significant increase over the OECD’s previous estimate of USD 150 billion in additional annual tax revenues attributed to the minimum tax component of Pillar Two.
Pillar One, designed to ensure a fairer distribution of taxing rights among jurisdictions over the largest and most profitable multinational enterprises (MNEs) is now expected to allocate taxing rights on about USD 200 billion in profits to market jurisdictions annually. This is expected to lead to annual global tax revenue gains of between USD 13-36 billion, based on 2021 data.
The new estimates reflect a significant increase compared to the USD 125 billion of profits in previous estimates. The analysis finds that low and middle-income countries are expected to gain the most as a share of existing corporate income tax revenues.
“The international community has made significant progress towards the implementation of these reforms, which are designed to make our international tax arrangements fairer and work better in a digitalised, globalised world economy,” OECD Secretary-General Mathias Cormann said. “This new economic impact analysis again underlines the importance of a swift, efficient and widespread implementation of these reforms to ensure these significant potential revenue gains can be realised. Widespread implementation will also help stabilise the international tax system, enhance tax certainty and avert the proliferation of unilateral digital services taxes and associated tax and trade disputes, which would be bad for the global economy and economies around the world.”
The new estimates on the economic impact of the two-pillar solution are based on updated data and incorporate most of the recently agreed design features included in the Amount A Progress Report and the GloBE Model Rules, many of which have not been accounted for in other studies.
The update to the OECD’s earlier assessments, including its detailed Economic Impact Assessment issued in October 2020, shows that projected revenue gains under Pillar One have increased, and continue to rise over time, due to both revisions to the design of the tax reform and increased profitability of in-scope MNEs. It also shows increased projected revenue gains from Pillar Two, which reflects some increases in global low-taxed profit, including as a result of improved data coverage.
The analysis highlights that several design features included in the recent Amount A Progress Report would have particularly beneficial impacts for small and low-income countries.
The latest findings were presented at a webinar today. A full economic impact analysis as well as a detailed methodology report will be released in the coming months.
Further information on the Economic Impact Assessment is available at: https://oe.cd/eia.
Contacts:

Grace Perez-Navarro, Director of the OECD Centre for Tax Policy and Administration (CTPA) | Grace.Perez-Navarro@oecd.org

David Bradbury, Deputy Director of CTPA | David.Bradbury@oecd.org

Lawrence Speer, OECD Media Office | Lawrence.Speer@oecd.org

Compliments of the OECD.
The post OECD | Revenue impact of international tax reform better than expected first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Stronger financial regulation and supervision, and developing global standards, can help address many concerns about crypto assets
The already volatile world of crypto has been upended anew by the collapse of one its largest platforms, which highlighted risks from crypto assets that lack basic protections.
The losses punctuated an already perilous period for crypto, which has lost trillions of dollars in market value. Bitcoin, the largest, is down by almost two-thirds from its peak in late 2021, and about three-quarters of investors have lost money on it, a new analysis by the Bank for International Settlements showed in November.

During times of stress, we’ve seen market failures of stablecoins, crypto-focused hedge funds, and crypto exchanges, which in turn raised serious concerns about market integrity and user protection. And with growing and deeper links with the core financial system, there could also be concerns about systemic risk and financial stability in the near future.
Many of these concerns can be addressed by strengthening financial regulation and supervision, and by developing global standards that can be implemented consistently by national regulatory authorities.
Two recent IMF reports on regulating the crypto ecosystem are especially timely amid the severe turmoil and disruption in many parts of the crypto market and the repeated cycles of boom and bust for the ecosystem around such digital assets.
Our reports address the issues noted above at two levels. First, we take a broad approach, looking across key entities that carry out the core functions within the sector, and hence, our conclusions and recommendations apply to the entire crypto asset ecosystem.
Second, we focus more narrowly on stablecoins and their arrangements. These are crypto assets that aim to maintain a stable value relative to a specified asset or a pool of assets.
New challenges
Crypto assets, including stablecoins, are not yet risks to the global financial system, but some emerging market and developing economies are already materially affected. Some of these countries are seeing large retail holdings of, and currency substitution through, crypto assets, primarily dollar-denominated stablecoins. Some are experiencing cryptoization—when these assets are substituted for domestic currency and assets, and circumvent exchange and capital control restrictions.
Such substitution has the potential to cause capital outflows, a loss of monetary sovereignty, and threats to financial stability, creating new challenges for policy makers. Authorities need to address the root causes of cryptoization, by improving trust in their domestic economic policies, currencies, and banking systems.
Advanced economies are also susceptible to financial stability risks from crypto, given that institutional investors have increased stablecoin holdings, attracted by higher rates of return in the previously low interest rate environment. Therefore, we think it’s important for regulatory authorities to quickly manage risks from crypto, while not stifling innovation.
Specifically, we make five key recommendations in two Fintech Notes, Regulating the Crypto Ecosystem: The Case of Unbacked Crypto Assets and Regulating the Crypto Ecosystem: The Case of Stablecoins and Arrangements, both published in September.

Crypto asset service providers should be licensed, registered, and authorized. That includes those providing storage, transfer, exchange, settlement, and custody services, with rules like those governing providers of services in the traditional financial sector. It’s particularly important that customer assets are segregated from the firm’s own assets and ring-fenced from other functions. Licensing and authorization criteria should be well defined, and responsible authorities clearly designated.
Entities carrying out multiple functions should be subject to additional prudential requirements. In cases where carrying out multiple functions might generate conflicts of interest, authorities should consider whether entities should be prohibited to do so. Where firms are permitted to, and do carry out multiple functions, they should be subject to robust transparency and disclosure requirements so authorities can identify key dependencies.
Stablecoin issuers should be subject to strict prudential requirements. Some of these instruments are starting to find acceptance beyond crypto users, and are being used as a store of value. If not properly regulated, stablecoins could undermine monetary and financial stability. Depending on the model and size of the stablecoin arrangement, strong, bank-type regulation might be needed.
There should be clear requirements on regulated financial institutions, concerning their exposure to, and engagement with, crypto. If they provide custody services, requirements should be clarified to address the risks arising from those functions. The recent standard by Basel Committee on Banking Supervision on the prudential treatment of banks’ crypto assets exposures recently is very welcome in this respect.
Eventually, we need robust, comprehensive, globally consistent crypto regulation and supervision. The cross-sector and cross-border nature of crypto limits the effectiveness of uncoordinated national approaches. For a global approach to work, it must also be able to adapt to a changing landscape and risk outlook.

Containing user risks will be difficult for authorities around the world given the rapid evolution in crypto, and some countries are taking even more drastic steps. For example, sub-Saharan Africa, the smallest but fastest growing region for crypto trading, nearly a fifth countries have enacted bans of some kind to help reduce risk.
While broad bans might be disproportionate, we believe targeted restrictions offer better policy outcomes provided there is sufficient regulatory capacity. For instance, we can restrict the use of some crypto derivatives, as shown by Japan and the United Kingdom. We can also restrict crypto promotions, as Spain and Singapore have.
Still, while developing global standards takes time, the Financial Stability Board has done excellent work by providing recommendations for crypto assets and stablecoins. Our Fintech Notes draw many of the same conclusions, a testament to our close collaboration and shared observations on the market. For its part, the IMF will continue to work with global bodies and member nations to help leading policy makers working on this topic to best serve individual users as well as the global financial system.
Authors:

Bo Li
Nobuyasu Sugimoto
Parma Bains
Fabiana Melo
Arif Ismail

Compliments of the IMF.

The post IMF | Crypto Contagion Underscores Why Global Regulators Must Act Fast to Stem Risk first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.