Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Luke Heighton on 16 November 2022 |
We’ve done a good amount of monetary policy normalisation, says Chief Economist Philip R. Lane in an interview with Market News. We will continue to raise interest rates until we’ve reached a level that will make sure inflation comes back to our 2% target in a timely manner.
What do you expect December’s Eurosystem growth and inflation projections to show?
The staff projections are going to cover 2023, 2024 and 2025. I think for 2023 the teams involved would have to take into account a number of factors. Number one, inflation is higher now than was expected in the last round. So the starting point for inflation is different compared to the last round. Over the course of the autumn it has become clear that next year energy prices are likely to remain higher than previously expected. Even though a lot of gas has been stored and we’ve had mild weather so far this winter, it’s accepted that, based on the current outlook, the risks about gas supply are also going to be here next year. I think it’s also clear that, at least in some countries, the pass-through of high energy wholesale prices to retail prices is not over. So we will see more of that. And in terms of fiscal policy, it looks like fiscal deficits are wider than foreseen in the September projection. So there is more fiscal support for the economy next year and that has inflation implications.
For the medium term, looking into 2024, 2025, I think there are really two big issues. One is that it’s clear that wages are set to increase more strongly than normal. We already saw in the September projection that there will be several years of nominal wages growing more quickly, because workers have experienced a significant loss in their real wages. We do expect this kind of catch-up process to drive nominal wages higher over several years. And, as we already had in September, there will have to be a kind of reassessment of the wage outlook in the context of the higher inflation rates, the status of the labour market and the fiscal support that is still there.
The other factor that’s going to be relevant for 2024-25 is the feedback loop. There’s been a big jump in the yield curve and it’s starting to pass through to bank lending conditions. Even if this does not have an immediate effect on the economy and on inflation, we would expect to see it kicking in more strongly in 2024 and 2025.
So for those years the forecast will have to balance the fact that inflation has a knock-on effect, for example, on the wage mechanism. But on the other hand, we do have the fact that the financial conditions are far different than what we had going into the September forecast.
A number of Governing Council members have recently expressed worries about second-round effects. How much of a concern, in terms of the inflation outlook, is pay growth?
This year we’ve had a very large increase in the price level, so there’s been a very big drop in living standards. At the same time unemployment in historical terms is quite low. So even if the European economy experiences stagnation or a mild recession later this year and at the start of next year, it still has quite a lot of support for ongoing growth. Even if the energy shock levels out next year – so it’s no longer a source of inflation, and even if globally bottlenecks are easing – so the pressure from global commodity prices and global goods prices also levels off: there’s still going to be an inflation dynamic in 2024-25.
Labour costs are a big fraction of the domestic component of inflation. But then the question is: how long is that going to be for? And as I said earlier on: it’s going to be stronger than the historical average, because workers will be trying to rebuild living standards. But how much and for how long labour costs will contribute to domestic inflation remains open and is a source of high uncertainty. There will be some calculation in the December projections, but month-by-month, quarter-by-quarter, over the next year, this is going to be one of the key issues we’re going to watch. I don’t think we’re going to have a conclusive answer next year.
But there is a very important feedback loop here, which is also relevant for the decisions by firms. We’ve done a good amount of monetary policy normalisation, and we gave a clear signal that we will continue to raise rates until we have reached a level that will make sure inflation comes back to 2 per cent in a timely manner. Firms and workers should understand that price and wage-setting should take place in the context that the more expensive financial conditions will dampen demand next year and in the years after that. Firms should be careful about excessively raising mark-ups, and workers should be careful about what a sustainable wage increase is. There is an important interaction between what we do and how these price and wage decisions are set. Another way of saying this is that firms and workers should fully understand that inflation is going to come down over these years towards our 2 per cent target.
What would you need to see to recommend raising rates by 75 basis points in December? Conversely, what would justify a smaller rate hike?
We said in our recent meetings – and we did so again in October – that we expect to raise rates further. It’s usually neither necessary nor wise to try and jump immediately to your target rate. In December we will make another hike and the scale of it should continue to make progress towards the levels needed. But it’s not necessary to conceive completing that transition in December. Each meeting is different. But one platform for considering a very large hike, such as 75 basis points, is no longer there. When we were at zero, that did not correspond to anyone’s idea of the interest rate level necessary. Going to 1.5 per cent is still below where we need to go. But the more you’ve already done on a cumulative basis, that changes the pros and cons of any given increment. We will have to look at it in terms of the inflation outlook that we have in December and take into account that we are at a different point now, and also to recognise that there are lags in the transmission process.
Would increasing rates above 2 per cent in December offer greater scope to slow the pace of interest rate hikes in the first quarter of 2023?
I am not going to comment on the exact level at any one meeting. Clearly, there’s a connection: the higher the level of the interest rate, the smaller the remaining gap to the target rate. What matters is the level we’re going to arrive at. The exact allocation across different meetings is a secondary issue. But the more we’ve already done, the less we need to do.
How likely is it that the ECB will stop – or pause – the hiking cycle either before or at the point when it begins quantitative tightening (QT)?
I don’t think December is going to be the last rate hike. Trying to jump forward to February, to March, to May or June next year, I think it’s too early to have very strong views at this point. The logic of a pause for the ECB: we’re not at that point. The more relevant argument than whether to pause is to move at the appropriate time to smaller increments. And then, eventually, you get to a point, where, essentially you say: okay, we’re at the level where it’s probably going to be wise to hold at this level for a while but also signal that we will be open to do more if needed, because we are living under high uncertainty.
Then let me come to the second part of your question, about QT. We shouldn’t interconnect the issue so much. What is clear is that you want to make decent progress on raising the policy rate before you start mapping out QT. And by December, we will have made decent progress on that. We said that we will lay out a roadmap, general principles in December. The roadmap will subsequently convert into a more precise plan that will allow for the asset purchase programme (APP) portfolio to decline at a certain pace in the coming months. But I don’t think we’re going to be on a meeting-by-meeting basis interconnecting the interest rate decision with the pace for the next month or two. It should be probably more mechanical than that. I think that’s a pretty basic principle.
By how much would you expect QT to lower the terminal rate of interest?
I wouldn’t approach the question like that, because there’s no scenario in which we keep the APP at its current level. Of course, if you don’t scale down the APP portfolio, the policy rate would have to be higher – there is a substitution effect there. But the market does expect some degree of runoff of the APP, and that is already reflected in the yield curve. So the calibration of the APP schedule has to perform two objectives. One is to contribute to the overall stance by essentially reversing the kind of compression of term premia that quantitative easing (QE) did; and the other is to make sure that this is done in an orderly way, because we have to allow for the market to adjust.
The ECB has said that the expected shallow eurozone recession will not in itself be sufficient to bring inflation back to target. What is the sacrifice ratio that would?
We have to remember where we are. There’s going to be a fairly large reduction in the inflation rates simply through base effects. But even if that reduces the inflation rate, it still leaves the cost of living permanently higher. So the price level is very important for wage dynamics. Going back to the monetary policy issue, we have to think about where inflation is headed in 2024-25 and what the distance is to our 2 per cent target. We also have to take into account what’s already happened. The yield curve is higher, we see adjustments in bond markets and we see bank lending rates going up. More expensive financing conditions will mean a lower level of demand. That will mean a lower level of GDP and a lower level of employment. But the labour market has two margins at the moment: one is unemployment, the other is vacancies. You could have a slowdown in the economy, where one part of adjustment will be fewer vacancies. And with fewer vacancies, wage pressure will go down. And if you don’t have the option to move to a new job, then wage bargaining changes. It could also be the case that firms opt to hold on to workers and there is a degree of labour hoarding. Under those circumstances unemployment may not rise as much as in previous cycles. I would say we would expect unemployment to go up as well, that is true, but in the context of levels that right now are historically quite low.
Your colleague Mr Panetta warned earlier this week that the ECB must be alive to the dangers of excessive tightening, which he said could result in a permanent loss of output in response to persistently lower demand. Do you agree?
We are absolutely clear and we have a primary mandate that we will get to our target in a timely manner. But it has always been the case and always will be the case that we want to do it in a way that minimises the side effects in terms of lower output and higher unemployment. The history of recessions does indicate that they tend to leave a long-term footprint. But what’s also true is that there’s an appreciation that the balancing act requires us to avoid under-tightening. Because if you under-tighten, inflation remains too high for too long, and then in turn you may end up having a bigger recession later on, with a bigger permanent drop in output.
We currently do think that any recession will be mild and short-lived. But you can definitely construct scenarios where that recession gets bigger and longer. And if you have rising credit risk, then you will have financial tightening coming from the decline in the economy, and that will be important. Financial conditions in the euro area also interconnect with financial conditions globally. And with other central banks also tightening, you’d have to think about that spillover. If tightening in the rest of the world leads to lower global inflation pressures, lower commodity prices, lower pressure on tradeable goods prices, then the inflation forecast could improve for international reasons in addition to domestic reasons. This all goes back to why we are taking a meeting-by-meeting approach. We are giving a kind of directional orientation that we have more to do. But in terms of the exact scale of what we need to do, it would be a mistake to be overly fixated in either direction.
How happy are you currently with financial conditions across the eurozone?
What we see this year is a sharp change in the inflation outlook, which in turn led to a sizeable revision in monetary policies around the world. And, of course, the whole financial system is going to take time to absorb that. We would call on everyone to recognise that we’re in a new environment and to manage those risks. I was involved myself in previous reports about what happens if you move away from the low-for-longer environment, so I think that the risk factors are clear. But in terms of where we actually are, I think the adjustment so far has been very much within the lines of reverting to normal rather than creating historically tight conditions.
Has the LDI fiasco in Britain affected your thinking in any way?
Maybe it sends out two signals: I think there’s a clear message for governments everywhere that it’s very important to have fiscal strategies that are clearly anchored in debt sustainability and in making sure debt ratios are on a downward path. Second, we have to be vigilant for pockets of the markets that may have been taken by surprise. But let me again emphasise here that what we have is a kind of smooth adjustment so far to a very different environment.
The European Commission is currently in the process of renegotiating EU fiscal rules. What bearing, if any, does that have for the outlook for monetary policy?
Before the energy shock, this year the Commission would have forecast a pretty big drop in debt and deficit ratios in the coming years. There has been an improvement this year because a lot of the pandemic programmes have been stopped and we’ve seen the recovery in the economy, which has boosted tax revenues. This has allowed a lot of energy programmes to be launched, a lot of which are temporary in nature. One of the big issues, I think, for the coming year, is to make sure that these interventions are temporary and targeted, and are basically embedded in a larger strategy of making sure debt ratios, especially for the high-debt countries, are firmly on a downward path. I think everyone shares this analysis. But what is true is that having fiscal deficits that remain relatively high will support demand in the economy and add to medium-term inflation pressures. Everyone has to really look at this quite carefully, because a lot of the fiscal programmes right now are basically transfers to households or to firms. And the multiplier on transfers is lower than on government consumption or government investment. A lot of people who receive these transfers may just save them, so it’s not clear whether it will result in the same boost to aggregate demand.
Last week the ECB changed its collateral rules, which saw asset swap spreads tighten. How much does this solve the problem?
I think there are three factors here. One is the increase in our securities lending facility. The second is: the German debt management office has also announced measures. And the third is the targeted longer-term refinancing operations (TLTROs) decision we took in October, which will also release collateral back into the system. Of course, we’ll always be attentive to market functioning and collateral scarcity issues. I would mention, also, that governments will still be issuing quite a lot of debt, and we’re not going to be net purchasers, so the amount of collateral coming into the market from that source will also ease pressures.
So there shouldn’t be any need, for example, to issue short-dated paper to relieve a year-end collateral squeeze?
We will always be vigilant, but I think the measures we’ve put in place will be sufficient.
Banks are pushing for the ECB to set up reverse repo operations, yet so far the bank has been hesitant to do so. Why? Is it under consideration?
First, the ECB always thinks about everything all the time, so there’s no informational value in saying something is “under consideration”. The ECB always has a range of options for how it can manage its liquidity but I think the decisions we made last week will suffice. Also, we always have to think about the differences between the euro area, which remains very decentralised, and the American financial system. The Fed has a particular approach, but it’s not necessarily the best approach for us.
Does the lower-than-expected US October inflation print have any bearing on expectations for the eurozone HICP outlook?
One month of data does not constitute a trend, so let’s be cautious about this, we need a longer horizon. But if it turns out to be the case that there is a trend, there are basically two forces behind it. One is a decline in global inflation pressure, which will also benefit the euro area by lowering pressure on import prices. The other element could be a decline in domestic inflation. And we saw that, in fact, services inflation came down as well. That could suggest that the United States is now making progress in its adjustment, and of course that would be good news for the world economy and for us.
The German ZEW survey has just recorded a substantial rebound in expectations, although the outlook is still in negative territory, largely on the back of hopes that inflation will fall in the near future and monetary tightening will not be as severe as initially anticipated. Is this optimism justified?
A lot has been done to preserve energy supplies this winter, whether that’s the filling up of gas storage or many firms – and indeed many households – reducing energy consumption. Clearly, compared to worst-case scenarios, this has led to a degree of confidence building for the near term. On our side, I do think that what we’ve done has helped – in the sense of ending the QE programmes and the by-now sizeable and repeated increases in policy rates – the actions we take demonstrate that there will be downward pressure on inflation.
Then you come to the near term and that’s where we should take into account that there is a lot of inflation pressure remaining in the pipeline, but this differs across countries. In some countries, Spain for example, energy inflation may have come down primarily because a lot of the adjustment happened a year ago. For other countries with longer-term contracts for energy, the pass-through to retail prices is ongoing. Sooner rather than later, the accumulated pass-through will convert into downward pressure on inflation, but let’s see whether the peak turns out to be this side of Christmas or the other.
So we might see, for want of a better word, some choppiness in near-term inflation expectations?
Around March, after the war started, there was a pick-up in consumer expectations. But they have been relatively stable in recent months. They haven’t improved, but they haven’t deteriorated either. I would say that these days my focus is on three levels. Historically, there would have been a kind of differentiation between short term and long term. But actually, I think the medium term is quite important. I do think, by and large, across all types of surveys and market indicators, people believe that over a longer horizon, inflation will get back to 2 per cent. People also understand that in the near term, over the next number of months, inflation is going to be elevated compared to our targets. But the important issue for us is the two-way feedback loop between medium-term expectations. Where do people think inflation will be in 2023, 2024, 2025? That will influence pricing decisions and wage decisions, while also recognising that these medium-term inflation expectations clearly will also be influenced by our decisions.
Across the euro area, corporate profits are soaring at the same time as an increasing number of households and businesses are struggling.
There isn’t a universal message here. In some sectors, where demand was surprisingly strong this year, it is clear that one major source of inflation was not cost increases: it was firms responding to high demand compared to supply by raising mark-ups. A second category is clearly some types of energy firms which are generating windfall profits. There’s a third category of firms which are suffering because they have very high energy bills, demand may not be particularly strong, and for those firms the profit margins are being squeezed. The message here is not so much for those firms but for the firms where mark-ups are currently high. These firms should be paying attention to the macroeconomic situation, to our policy, to the fact that demand conditions will be tighter next year. I am thinking about the tourism industry, for example, or the restaurant industry, all sorts of industries, which benefited from reopening this year. It will be very important to recognise demand conditions will be tighter and it would be a mistake to seek to preserve very high mark-ups in that scenario.
Compliments of the European Central Bank.
 
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Today, the EU Commission has continued its response to the ongoing energy crisis by proposing a Market Correction Mechanism to protect EU businesses and households from episodes of excessively high gas prices in the EU. This complements measures to reduce gas demand and ensure security of supply through diversification of energy supplies. The new mechanism aims to reduce the volatility on European gas markets while safeguarding the security of gas supply.
Following the Russian invasion of Ukraine and weaponisation of energy supplies, natural gas prices have seen unprecedented price peaks across the EU, reaching all-time highs in the second half of August this year. The extreme price spike over almost two weeks in August was highly damaging for the European economy, with contagion effects on electricity prices and an increase in overall inflation. The Commission is proposing to prevent the repetition of such episodes with a temporary and well-targeted instrument to automatically intervene on the gas markets in case of extreme gas price hikes. 
A safety ceiling on gas prices
The proposed instrument consists of a safety price ceiling of €275 on the month-ahead TTF derivatives. The Title Transfer Facility (TTF), which is the EU’s most commonly used gas price benchmark, plays a key role in the European wholesale gas market. The mechanism would be triggered automatically when both of the following conditions are met:

the front-month TTF derivate settlement price exceeds €275 for two weeks;
TTF prices are €58 higher than the LNG reference price for 10 consecutive trading days within the two weeks.

When these conditions are met, the Agency for the Cooperation of Energy Regulators (ACER) will immediately publish a market correction notice in the Official Journal of the European Union and inform the Commission, European Securities and Markets Authority (ESMA) and the European Central Bank (ECB). The following day, the price correction mechanism will enter into force and orders for front-month TTF derivatives exceeding the safety price ceiling will not be accepted. The mechanism can be activated as of 1 January 2023. 
Safeguards to ensure security of supply and market stability
The proposed Council Regulation contains safeguards to avoid disruption to the energy and financial markets. To help avoid security of supply problems, the price ceiling is limited to only one futures product (TTF month-ahead products) so that market operators will still be able to meet demand requests and procure gas on the spot market and over-the-counter. To ensure gas demand does not increase, the proposal requires Member States to notify within two weeks from the activation of the Market Correction Mechanism which measures they have taken to reduce gas and electricity consumption. Once today’s proposal for a Market Correction Mechanism is adopted in Council, the Commission will also propose to declare an EU-alert under the Save Gas for a Safe Winter regulation that was adopted in July, triggering mandatory gas savings to ensure demand reduction. In addition, there will be constant monitoring by ESMA, ECB, the Agency for the Cooperation of Energy Regulators (ACER), the Gas Coordination Group and the European Network of Transmission System Operators for Gas (ENTSO-G).
To react to possible unintended negative consequences of the price limit, the proposal foresees that the mechanism can be suspended immediately at any time. This can happen:

Automatically, with a deactivation, when its operation is no longer justified by the situation on the natural gas market, namely when the gap between the TTF price and the LNG price is no longer met during 10 consecutive trading days.
By a Commission suspension decision when risks to the Union’s security of supply, to demand reduction efforts, to intra-EU flows of gas, or financial stability are identified.

There is also a possibility for the Commission to prevent the activation of the mechanism in case relevant authorities, including the ECB, warn of such risks materialising.
Background
Today’s proposal builds on a wide range of actions the Commission has been taking to tackle the issue of high energy prices over the past year. In Spring 2022, it expanded its Energy Prices Toolbox from October 2021 with the Communication on short-term market interventions and long-term improvements to the electricity market design and the REPowerEU Plan. It also proposed new minimum gas storage obligations and gas demand reduction targets to ease the balance between supply and demand in Europe, and Member States swiftly adopted these proposals before the summer.
Prices increased further over the summer months, which were also marked by extreme weather conditions caused by climate change. In September, the Commission swiftly responded by proposing additional emergency measures to reduce electricity demand and capture unexpected energy sector profits to distribute more revenues to citizens and industry.
On 18 October, the Commission proposed additional measures to address high gas prices specifically and strengthen security of gas supply via joint purchasing, default solidarity to apply in case of emergency, a new pricing reference benchmark for LNG and a temporary collar to prevent extreme spikes in derivatives markets. It also proposed the legal basis for a market correction mechanism to address exceptionally high gas prices in the short term.
Today’s proposal builds upon Article 23 and 24 of the Commission’s 18 October proposal. It responds to the call from the EU Leaders on 20 and 21 October, and follows extensive consultations with the Member States. The Commission was tasked to urgently submit concrete decisions on additional measures to tackle high energy prices, including a temporary dynamic price corridor on natural gas transactions to immediately limit episodes of excessive gas prices, with the necessary safeguards. The proposal for a Market Correction Mechanism contains elements to preserve financial stability, which the Commission considers essential.  Today’s proposal for a Council Regulation is based on Article 122 of the Treaty, to be adopted by a Qualified Majority of Member States. It is designed to be in force for one year but it can be prolonged following a review due by November 2023.
Compliments of the European Commission.
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At the COP27 UN Climate Change Conference which ended on Sunday morning in Sharm el-Sheikh, Egypt, the European Commission showed ambition and flexibility to keep the goal of limiting global warming to 1.5 degrees within reach. After a difficult week of negotiations, a strong and united European effort helped secure a hard-fought deal to keep the targets of the Paris Agreement alive. The EU’s bridge-building also helped to put in place balanced new funding arrangements, with an expanded donor base, to help vulnerable communities to face loss and damage caused by climate change.
On mitigation, Parties agreed that limiting global warming to 1.5C requires rapid, deep and sustained reductions in global greenhouse gas emissions, reducing them by 43 percent by 2030 relative to the 2019 level. They also recognised that this requires accelerated action in this critical decade, and reiterated the call from the Glasgow Climate Pact for nationally determined contributions (NDCs) to be updated as necessary to align with the Paris Agreement temperature goal, by the end of 2023. They also affirmed that the Glasgow Climate Pact will guide a new Mitigation Work Programme to encourage Parties to align their targets and actions towards net zero.
On loss and damage, the Parties decided to establish new funding arrangements for assisting developing countries that are particularly vulnerable to the adverse effects of climate change. This includes a new fund with a focus on addressing loss and damage, to be established by a transitional committee which would also look into expanding sources of funding.
The Implementation COP
The final COP27 outcomes today complement the many bilateral and multilateral agreements secured by the Commission in the past two weeks. President von der Leyen participated in the Leaders’ Summit at the beginning of COP27 and signed Partnerships with Kazakhstan on raw materials, batteries and renewable hydrogen and with Namibia on sustainable raw materials and renewable hydrogen, and announced with Egyptian president El-Sisi a Strategic Partnership on Renewable Hydrogen, which was signed by Executive Vice-President Timmermans and Commissioner Kadri Simson. President von der Leyen also launched Forestry and Climate Partnerships with Congo, Guyana, Mongolia, Zambia and Uganda. The importance of nature to the interconnected climate and biodiversity crises will also be a key focus of the upcoming COP15 on Biodiversity, which takes place in Montreal, Canada in December.
At an event to take stock of the Global Methane Pledge launched by the EU and US one year ago, Mr Timmermans welcomed the growing support for this initiative, which is now backed by over 150 countries. Executive Vice-President Timmermans also announced a new Team Europe Initiative to provide over €1 billion of financing for helping Africa to adapt to climate change. During COP27 the EU also welcomed and endorsed South Africa’s Just Energy Transition Investment Plan, and signed a new Just Energy Transition Partnership with Indonesia at the G20 in Bali.
President Ursula von der Leyen said on the outcome of COP27: “COP27 has confirmed that the world will not backtrack on the Paris Agreement, and is an important step towards climate justice. However science is clear that much more is needed to keep the planet liveable. What is equally clear is that the EU played a key role in Sharm el-Sheikh and will not relent on its domestic and international climate action. I thank Executive Vice-President Timmermans and our negotiating team for working night and day to unblock the difficult talks, and avoiding a breakdown of the UNFCCC process that will remain critical. Our negotiating team was able to build trust with our partners around the world, by staying strong on mitigation and showing flexibility on funding for the loss and damage caused by climate change.”
Background
Throughout the conference, the Commission hosted over 125 side events at the EU Pavilion in Sharm el-Sheikh and online on issues such as biodiversity protection and nature restoration, energy security and the green transition, sustainable finance, food and water security, and research and innovation. These included a passionate dialogue between Executive Vice-President Timmermans and youth representatives from around the world.
Under the 2015 Paris Agreement, 194 countries agreed to submit Nationally Determined Contributions (NDCs) which represent their individual emissions reduction targets. Collectively, these NDCs should contribute to keeping average global temperature change below 2°C and as close as possible to 1.5°C by the end of the century. The 2022 reports from the UN’s Intergovernmental Panel on Climate Change (IPCC) warned that the world is set to reach the 1.5ºC level within the next two decades and that only the most drastic cuts in carbon emissions would help prevent an environmental disaster. This level of temperature rise would have extremely harmful effects that pose an existential challenge.
The European Union is a global leader in climate action, having already cut its greenhouse gas emissions by over a quarter since 1990, while growing its economy by over 60%. With the European Green Deal presented in December 2019, the EU further raised its climate ambition by committing to reaching climate neutrality by 2050. This objective became legally binding with the adoption and entry into force of the European Climate Law, in July 2021. The Climate Law also sets an intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. This 2030 target was communicated to the UNFCCC in December 2020 as the EU’s NDC under the Paris Agreement. In 2021, the EU presented a package of proposals to make its climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030. The EU will update its NDC, as appropriate, as soon as possible after all these proposals are adopted.
Climate finance is critical to support vulnerable communities to protect themselves against the impacts of climate change and to support sustainable economic growth. Developed countries have committed to mobilise a total of $100 billion of international climate finance per year from 2020 until 2025 to help the most vulnerable countries and small island states in particular, in their mitigation and adaptation efforts. The EU is the biggest donor representing around a quarter of the target.
Compliments of the European Commission.
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The Commission calls upon the Council to take the necessary decisions without any further delay to allow Bulgaria, Romania and Croatia to fully participate in the Schengen area. In a Communication adopted today, the Commission takes stock of the three Member States’ strong record of achievements in the application of the Schengen rules.
For years, these Member States have significantly contributed to the well-functioning of the Schengen area, including during the time of the pandemic and more recently when faced with the unprecedented consequences of the war in Ukraine. While the three countries are already bound in part by the Schengen rules, the internal border controls with these Member States have not been lifted and therefore they do not enjoy the full benefits that come with being part of the Schengen area without internal border controls. Becoming fully part of the Schengen area is a requirement for these Member States and they should therefore be permitted to do so given that they fulfil the conditions.
An enlarged Schengen area without internal border controls will make Europe safer – through reinforced protection of our common external borders and effective police cooperation – more prosperous – by eliminating time lost at borders and facilitating people and business contacts – and more attractive – by significantly expanding the world’s largest common area without internal border controls.
Bulgaria has put in place a strong border management with efficient border surveillance and systematic border checks. Fight against cross-border crime is prioritised through international police cooperation, including with Europol. The Schengen Information System is well-established. Bulgaria also demonstrated that it has the necessary structures in place to ensure respect for fundamental rights, guaranteeing access to international protection, respecting the principle of non-refoulement.
Romania has high-quality and strong border management, including border surveillance and systematic border checks, and international police cooperation. Fight against irregular migration and trafficking in human beings are two priorities where Romania is active. The Schengen Information System is well established. Concerning the respect for fundamental rights, Romania has effective structures in place to guarantee access to international protection respecting the principle of non-refoulement.
Bulgaria and Romania successfully completed the Schengen evaluation process in 2011. The Council recognised the completion of the evaluation process in two separate Council Conclusions, but no Council decision on the lifting of internal borders has been taken for more than 11 years. Given the time passed since 2011, as well as with a view to strengthen mutual trust and in acknowledgement of the development of the Schengen rules since 2011, Bulgaria and Romania issued a Joint Declaration in the Council in March 2022. Bulgaria and Romania invited a team of experts on a voluntary basis under the coordination of the Commission to look into the application of the latest developments of the Schengen rules.
This voluntary fact-finding mission, which took place in October 2022, confirmed that Bulgaria and Romania have not only continued implementing the new rules and tools, but that they have also substantially reinforced the overall application of the Schengen architecture in all its dimensions. Moreover, these two countries proved to have a model track record of implementation of the Schengen rules.
In December 2021, the Council confirmed that Croatia had fulfilled the conditions required to join the Schengen area without internal border controls. The evaluation process took place from 2016 to 2020. It included a successful targeted verification visit in 2020 to verify the implementation of actions in external border management. Croatia has made considerable efforts to ensure that controls of external borders comply with fundamental rights obligations. In particular, Croatia set up an Independent Monitoring Mechanism in June 2021, which provides for independent human rights monitoring of border-related operations involving migrants and asylum-seekers. The Mechanism directly involves Croatian stakeholders and is guided by an independent Advisory Board. Croatia was the first Member State to put in place such a mechanism. A new agreement extending and reinforcing the Independent Monitoring Mechanism was signed on 4 November 2022. This new agreement fully reflects all the recommendations issued by the Advisory Board on 27 October 2022.
Next steps
Under the steer of the Czech Presidency, on 8 December the Justice and Home Affairs Council will vote on the full participation of Bulgaria, Romania and Croatia to the Schengen area without internal border controls.
Background
The Schengen area is the largest free-travel area in the world, with currently 22 EU countries participating (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia), as well as 4 associated non-EU countries (Norway, Iceland, Switzerland and Liechtenstein). Ireland maintains an opt-out on the abolition of internal border controls.
Countries wishing to join the Schengen area must undergo a series of Schengen evaluations to confirm whether they fulfil the conditions necessary for the application of the Schengen rules. Once the Schengen Evaluation missions confirm the readiness of the Member State to join the area without internal border controls, a unanimous approval from all other Member States applying the Schengen acquis in full is required. The European Parliament must also give its consent.
On 10 November 2022, the European Parliament gave a positive opinion on the draft Council Decision on the full application of the Schengen acquis in Croatia. On 18 October 2022, the European Parliament adopted a resolution inviting the Council to allow Romania and Bulgaria to join the Schengen area.
Compliments of the European Commission.
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A shared understanding of how climate change affects the economy can be the basis for global action. To help inform and guide policy across the globe central bankers and supervisors have developed climate scenarios. This is the final post in a series on the occasion of COP27.

Climate change is happening right now, and is already having an impact on us all, though not everywhere in the same way. But do we share a common understanding of how climate change affects our economies and our financial systems? And what impact it has on growth, inflation or unemployment? Without a common language for climate risks it will be difficult to agree on urgently needed common policy responses. To help build such understanding, central bankers and supervisors have joined forces as the Network for Greening the Financial System (NGFS)[1].
While the ECB and other central banks and supervisors from around the world are not in the driver’s seat to implement climate policies, they should play an important role to address climate change within their mandates, rigorous analysis being a key tool. The NGFS has thus developed, together with leading academic climate institutions[2], a common picture of what our economies might look like under different assumptions. These are called “climate scenarios”.
The NGFS climate scenarios combine, for the first time, the analysis of transition, physical and macro-financial risks. We describe how these climate scenarios can help policy-makers, financial institutions and the public to deal with the uncertainty ahead.
Shedding light on plausible futures ahead
Put simply, climate scenarios ask crucial questions like ‘what can happen?’ and ‘what should happen?’ The scenarios are like key pieces of a mosaic that offer glimpses into possible futures. In this way, it is possible to look up the expected economic loss for a specific country – let’s say Spain or Morocco in any year between now and 2100 – under different assumptions. The scenarios are available through an online public platform, free of charge. Check them out on the NGFS Scenario Portal[3].
Importantly, the NGFS scenarios are not forecasts. Instead, they aim at exploring a range of plausible futures for financial risk assessment in an environment of radical uncertainty.
The NGFS scenarios are regularly updated and are improved with each new iteration. They:

… provide a common starting point for analysing climate-related risks and their impact on the economy and financial system,
… produce results that are internally consistent, applicable at the global level and comparable across regions, and
… represent a global public good as a set of freely accessible climate pathways.

A useful guide to climate risks
The framework explores a set of six scenarios (see Chart 1). Orderly scenarios assume that governments introduce ambitious climate policies immediately and gradually, which will keep both physical and transition risks at bay. Disorderly scenarios explore higher transition risks when climate policy responses are uncoordinated or delayed. And hot-house-world scenarios assume climate policy efforts are insufficient to stop global warming, leading to irreversible changes in climate (e.g., sea level rise) and severe consequences from physical risks. The too little, too late scenarios will be implemented at a later stage. They will show that a late and uncoordinated transition fails to limit physical risks, but those are yet to be explored.

Chart 1
The NGFS scenarios framework

The NGFS framework explores a set of six scenarios that are characterised by their overall level of physical and transition risk. This is driven by the level of policy ambition, policy timing, coordination, and technology levers.

Source: Network for Greening the Financial System (2022), “NGFS Climate Scenarios for central banks and supervisors”, Banque de France, September.
Notes: Positioning of scenarios is approximate, based on an assessment of physical and transition risks out to 2100. NDCs stands for Nationally Determined Contributions: this scenario includes all pledged targets even if not yet backed up by implemented effective policies.

An immediate coordinated transition will be less costly in the long run.

The recently released NGFS scenarios[4] illustrate the benefits of an immediate coordinated transition towards a greener economy. Acting now would be somewhat more expensive at the beginning (less than 1% of GDP compared to doing nothing). But immediate action would bring large benefits from 2030 onwards. By contrast, the long-term implications of a hot-house-world would be extremely severe. Global economic output could reduce by 4% in 2050 relative to the net zero scenario, meaning that the world would be significantly poorer if we fail to stop global warming. That would already be the case if only currently planned climate policies are implemented (see Chart 2)[5].
Furthermore, in case climate change is not mitigated, the GDP drop with respect to an orderly transition will just increase over time beyond 2050, until it reaches much more critical values. These results also confirm that reaching global net zero CO₂ emissions around 2050 requires ambitious and immediate policy action as well as technological innovation.

Chart 2
How climate change could impact the global economy – annual relative loss of GDP

GDP impact due to transition and physical risks
World aggregate, per cent deviation in two scenarios in comparison to the orderly net zero transition

Source: IIASA NGFS Climate Scenarios Database, NiGEM model (REMIND inputs).
Notes: Economic impacts are modelled out to 2050, and they represent the percentage deviation in GDP in two adverse scenarios (delayed transition and current policies) with respect to an orderly transition towards a greener economy (which is to be considered the first-best option). While both the current policies and delayed transition show higher GDP values in the first decade with respect to the orderly transition (transition costs), the chart shows that after 2030 GDP in both scenarios is lower than in an orderly transition (transition benefits): furthermore, the transition benefits considerably outweigh the transition costs in the medium-to-long run.

The NGFS scenarios have become a key ingredient for exploratory stress test and scenario analysis exercises worldwide[6]. Alongside the impact of climate change and climate policies on the key macroeconomic indicators (such as GDP, commodity prices, inflation and interest rates), the NGFS scenarios also give some insight that can inform policy-makers. For example, they provide estimates of the investments needed across energy sectors to reach the climate targets. The scenarios also show how much all these variables differ across regions and can thus support the calibration of country-specific climate policies and risk assessment exercises.

A common starting point to tackle challenges ahead
The work on the scenarios needs to evolve further to be useful for other new challenges as well. The turmoil in energy markets and the Russian war against Ukraine show that we need to prepare for unpredictable risks in the near future. We need to better assess the consequences of natural disasters to inform policy analysis and stress testing exercises. We will therefore strive to make the NGFS scenarios more comprehensive over time. In this way, they remain a global public good, based on state-of-the-art climate knowledge: accessible to anyone, anywhere in the world as a useful guide to climate risk assessment and policymaking.
Authors:

Jean Boissinot
Paula González Escribano
Cornelia Holthausen
Laura Parisi
Clément Payerols
Livio Stracca

The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
Compliments of the European Central Bank.
Footnotes:
1. The Network for Greening the Financial System (NGFS) is a group of, by now, 116 central banks and supervisors (and 19 observers) from across five continents committed to sharing best practices, contributing to the development of climate- and environment-related risk management in the financial sector and mobilising mainstream finance to support the transition toward a sustainable economy.
2. The NGFS climate scenarios have been developed in partnership with an academic consortium from the Potsdam Institute for Climate Impact Research (PIK), International Institute for Applied Systems Analysis (IIASA), University of Maryland (UMD), Climate Analytics (CA) and the National Institute of Economic and Social Research (NIESR). This work was made possible by grants from Bloomberg Philanthropies and ClimateWorks Foundation.
3. Users can register and access the scenario data for free here. Transition scenario data are available in the NGFS IIASA Scenario Explorer, and physical scenario data in the NGFS CA Climate Impact Explorer.
4. See here the new, third vintage of the NGFS climate scenarios released on 6 September 2022.
5. Impacts on GDP represent a lower-bound, due to simplifying assumptions and partial assessment of transition and physical risk channels. They incorporate some of the near-term impacts from COVID-19, but do not yet account for the war in Ukraine or the current energy crisis. The NGFS scenarios nevertheless remain extremely informative about the possible impact of these developments, as laid out in the accompanying note “Not too late – Confronting the growing odds of a late and disorderly transition”.
6. See NGFS-FSB joint report “Climate Scenario Analysis by Jurisdictions: Initial findings and lessons“, published 15 November 2022. This stock-taking exercise shows that the vast majority of the 53 institutions that are members of the Financial Stability Board and the NGFS have completed, are conducting, or plan to conduct a climate scenario analysis exercise rely on the NGFS scenarios.

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New data released today highlight continuing base erosion and profit shifting (BEPS) risks and the need to implement the two-pillar solution to ensure that large multinational enterprises (MNEs) pay a fair share of tax wherever they operate and earn their profits.
The OECD’s latest annual Corporate Tax Statistics, covering over 160 countries and jurisdictions, includes new aggregated Country-by-Country Report (CbCR) data on the activities of almost 7,000 MNEs, representing a major boost in tax transparency efforts.
The new CbCR data show that the median value of revenues per employee in jurisdictions with a corporate income tax (CIT) rate of zero is USD 2 million as compared to just USD 300,000 for jurisdictions with a CIT rate above zero. Moreover, in investment hubs, related party revenues account for 35% of total revenues, whereas the average share of related party revenues in high, middle and low income jurisdictions is around 15%. While these effects could reflect some commercial considerations, they are also likely to indicate the existence of BEPS.
The data released today also show that the corporate income tax remains an important source of revenue for most countries, especially for developing and emerging market economies. On average, the CIT accounts for a higher share of total taxes in Africa (18.8%), Asia and Pacific (18.2%) and in Latin America and the Caribbean (15.8%) than in OECD countries (9.6%).
After decades of cuts to statutory CIT rates, the new data point to a stabilisation of CIT rates in 2022 with some narrowing of tax bases in 2021, as countries sought to strike a balance between raising revenue and incentivising investment. The stabilisation of CIT rates may also be a response to the fiscal challenges faced by governments in the wake of the COVID-19 pandemic. The average combined (central and sub-central government) statutory tax rate for all jurisdictions covered in the dataset was 20% in 2022, compared to 20% in 2021 and 28% in 2000.
There is some evidence that governments have used the CIT system to try to boost economic recovery, by incentivising investment, especially in R&D. The data point to a narrowing of corporate tax bases, driven by more generous capital allowances, with these provisions being used in 65 jurisdictions in 2021, up from 57 in 2019. The data also suggest an increase in the generosity of R&D tax provisions in 2020 and 2021 in a number of OECD countries and EU member states following the outbreak of the COVID-19 crisis.
Compliments of the OECD
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“Check against delivery”
Good morning, ladies and gentlemen, and welcome to the EU pavilion here at COP27, to open our energy day.
We meet here after a difficult year. Climate change has left its mark on the world with wildfires and droughts, freak storms and floods. Russia has attacked a peaceful neighbour and made energy into a political weapon. And we are facing a truly global energy crisis, triggered by Russia’s actions.
For Europe in particular, the latter has meant drastically smaller energy supplies from Russia and unsustainably high electricity and gas prices. But the consequences are felt on energy markets around the planet.
How do we, as Europe, respond to these challenges? I do not believe that we can solve today’s problems with yesterday’s solutions.
We all know that this winter – and the next – are going to be challenging. But we are in this difficult position not because we have been too green, but because we have not been green enough. We are learning the hard way what relying on fossil fuels and untrustworthy partners can mean.
So we are drawing the obvious conclusions from today’s predicament. We will end our dependency on Russian fossil fuels. AND we will remain committed to the Paris Agreement and the European Green Deal, reaching climate-neutrality by 2050 and reducing greenhouse gas emissions by at least 55% by the end of this decade.
Our response to the twin climate and energy challenge is a plan called REPowerEU. It has three main pillars – saving energy, ramping up renewables and diversifying our energy supply.
Energy savings and efficiency are the foundation of our efforts. Last year, we received 155 bcm of Russian gas. By now, Russian pipeline gas makes up only 9% of our supply, and at any moment it may stop entirely.
We cannot simply replace this gas with the same amount of gas from other suppliers. It is both unsustainable and unfeasible. We must cut our demand. In August and September, the gas consumption in the EU was 15% lower than usual. Exactly the goal we have set ourselves for this winter, with the Save Gas for a Safe Winter plan.
We have also agreed to use less electricity, in particular when it comes to peak hours, when gas-fired power plants are often needed.
Saving should of course not be a short-term crisis measure. We need to waste less energy and become more energy efficient in the long term, making lasting, structural changes. I hope that this will be one of the legacies of this crisis.
What we cannot save, we must produce as sustainably as possible. This is not only good for the climate, but for our energy security: home-grown renewables come with much fewer risks than imported fossil fuels. Wind is more difficult to turn off – or sabotage – than a pipeline.
Our energy system cannot become renewables-based overnight, but we can accelerate the process. As with energy efficiency, we are upgrading our 2030 renewables target, proposing 45% of renewable sources in our energy mix by then.
There are already some very encouraging signs. 2022 is going to be a record year for solar energy in the EU, with 40 GW of new capacity installed. Both the North and Baltic Sea countries have very ambitious plans for offshore energy, surpassing what we envisaged in our offshore energy strategy just two years ago. Already today, 38% of our electricity comes from renewables, which is more than from fossil sources.
But we must push further. One bottleneck that prevents faster progress is permitting. If it can take almost a decade for a project to get a green light, a renewables revolution is not likely to happen.
To improve the situation, the Commission has proposed a comprehensive overhaul of our permitting system. It makes clear that renewable projects are in the overriding public interest; creates go-to areas where environmental risks are lower and permitting can be faster; and streamlines the processes overall.
To make sure that renewables can already help us to address the crisis this winter, we have made an additional emergency proposal to accelerate permitting in areas where it can have an effect in the coming months – for example rooftop solar, heatpumps and repowering existing projects.
We have increased our ambition for renewable hydrogen and biomethane as alternatives for fossil gas and come out with a solar strategy.
Among other things, we aim to double solar PV capacity by 2025 and install 600GW by 2030. To get there, we will oblige EU Member States to install rooftop solar energy on new buildings from 2026; and we are setting up a Solar Alliance to work with industry and interest groups to build a strong and competitive EU solar sector.
I mentioned earlier that we do not plan to replace every molecule of Russian gas with molecules from other suppliers. We are not going to increase our gas consumption – not this winter nor later. Our trajectory towards net zero is clear. But we must acknowledge that some of this Russian gas needs to be replaced and our imports reorientated.
As we are doing this, engaging with reliable suppliers around the world, like our host country Egypt, we want to have a relationship that goes beyond gas. We look to future cooperation, for example on renewable hydrogen or other clean technologies.
Ladies and gentlemen, I outlined in very broad strokes, what the EU is doing as a response to the current energy crisis, and to stay the course towards our Paris goals.
But as this is the Implementation COP, it is important that you hear not just from me and the European Commission, but also from our Member States who are turning our common ambition into local action.
I am therefore especially glad to welcome four of my colleagues who have kindly agreed to help me in opening the EU energy day and give their perspective of the challenges we are facing and the opportunities we should grasp.
Teresa, Leonore, Tinne and Rob are among those who defend the necessity of the green transition most fiercely. Thank you so much for joining me and our audience today – the floor is yours.
Compliments of the European Commission.
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In February, in the same week that Russia invaded Ukraine, the IPCC issued a stark warning to the global community. Its message could not have been clearer: the climate is changing faster than our capacity to adapt. So the world must deliver better and faster. The global fossil fuel crisis must be a game changer. And my friends, let us not take the highway to hell; let us earn the clean ticket to heaven. That is our responsibility.
For Europe, the answer is REPowerEU. We are not just cutting our dependency on Russian fossil fuels – that is good, but that is not enough – but we are massively accelerating the roll-out of renewables. The European Union’s additional renewable capacity is set to more than double this year, up to 50 gigawatts. And if we accelerate and if we scale up – and that is our plan – we can, in the next year, meet a new all-time record of over 100 gigawatts of additional renewable capacity. Because we know that every kilowatt-hour of electricity that we generate from renewable sources – like solar and wind, and green hydrogen – is not only good for our climate, but also good for our independence and our security of supply.
Here, the Global South has the resources in abundance. So let us team up. That is why the European Union is signing new hydrogen partnerships with Egypt, with Namibia and with Kazakhstan. That is why we are supporting partners such as Vietnam and South Africa to decarbonise their economies. We need to reach the Paris goal. And Europe is staying the course.
We will reduce our greenhouse gas emissions by at least 55% until 2030. And that is cast in law. With our Fit for 55 Package, we are putting in place the most ambitious legal framework worldwide. And we call on all major emitters to increase their ambitions, too.
In addition, we need tangible progress on our global goal for adaptation. Those most in need, in the developing world, must be supported in adapting to a harsher climate. This is also why this COP must make progress on averting, minimising and addressing loss and damage from climate change. It is high time to put this on the agenda.
Finally, we urge our partners in the Global North to step up their climate finance to the Global South. Team Europe is providing its fair share of the USD 100 billion promise. For the second year in a row, we have exceeded EUR 23 billion – despite the COVID-19 pandemic, despite the Russian war. And a big bulk of our climate finance goes already to adaptation. So it is doable and we call on others to step up, too.
My message to you today is: Europe is staying the course. So let us do this journey together.
Thank you so much.
Watch President von der Leyen’s statement here
Compliments of the European Commission.
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Following the European Council meeting of 20-21 October 2022, the Commission has today proposed an unprecedented support package for Ukraine of up to €18 billion for 2023. This will come in the form of highly concessional loans, disbursed in regular installments as of 2023.
This stable, regular and predictable financial assistance – averaging €1.5 billion per month – will help cover a significant part of Ukraine’s short-term funding needs for 2023, which the Ukrainian authorities and the International Monetary Fund estimate at €3 to €4 billion per month. The support put forward by the EU would need to be matched by similar efforts by other major donors in order to cover all of Ukraine’s funding needs for 2023.
Thanks to this package, Ukraine will be able to keep on paying wages and pensions and maintain essential public services running, such as hospitals, schools, and housing for relocated people. It will also allow Ukraine to ensure macroeconomic stability, and restore critical infrastructure destroyed by Russia in its war of aggression, such as energy infrastructure, water systems, transport networks, roads and bridges.
Support under the instrument will be accompanied by reforms, to further enhance the rule of law, good governance, anti-fraud and anti-corruption measures in Ukraine. Therefore, while taking into account the evolution on the ground, financial support will be framed by policy conditions, geared towards strengthening Ukraine’s institutions and preparing the ground for a successful reconstruction effort, as well as supporting Ukraine on its European path.
How will this package work?
Building on previous Macro-Financial Assistance packages, this Macro-Financial Assistance+ (MFA+) instrument offers high flexibility and very favourable terms for Ukraine, catering to the country’s current situation and ensuring swift action to support the Ukrainian people.
The funds will be provided through highly concessional loans, to be repaid in the course of maximum 35 years, starting in 2033. In a further expression of solidarity, the EU also proposes to cover Ukraine’s interest rate costs, through additional targeted payments by Member States into the EU budget. EU Member States and third countries will also be able to add more funds to the instrument, to be used as grants, should they wish to do so. The funds will then be channelled through the EU budget, allowing Ukraine to receive the support in a coordinated manner.
The MFA+ instrument will be accompanied by reforms to help Ukraine advance on its path to becoming a member of the EU. This means that the Ukrainian government will have to complement the financial support with sectoral and institutional reforms, including anti-corruption and judicial reforms, respect of the rule of law, good governance, and modernisation of the national and local institutions. We will check that these reforms have been effectively put in place when paying out the instalments.
How will the package be financed?
To secure the funds for the loans, the Commission proposes to borrow on capital markets using the diversified funding strategy. This would enable the Commission to use the full portfolio of funding instruments to secure market funding on the most advantageous terms, when these are needed.
To guarantee this borrowing for Ukraine, the Commission proposes to use the headroom of the 2021-2027 EU budget in a targeted manner for Ukraine, limited in time. The headroom is the difference between the own resources ceiling (i.e. the maximum amount of resources that the Commission can ask Member States to contribute in a given year) and the funds that it actually needs to cover the expenses foreseen by the budget. The headroom, which is already used to guarantee the borrowing for financial assistance programmes to Member States, will guarantee bond investors that the amounts lent to the EU to finance Ukrainian loans borrowing will be repaid under all circumstances.
Next steps
To ensure a smooth delivery of the package, the Commission is putting forward three legislative proposals. These will need approval by the European Parliament and EU Member States in the Council before entering into force.
As always, the Commission will be working hand in hand with all EU institutions concerned for a swift adoption.
Background
Russia’s unprovoked and unjustified invasion of Ukraine has inflicted horrific human pain and mass-scale destruction of towns and communities. The European Union and its Member States have shown unwavering solidarity with people fleeing the war. The Union has immediately mobilised support to the Ukrainian government to keep its essential functions going, on top of the emergency and humanitarian assistance, and military aid provided to Ukraine.
Since the start of the war, Team Europe has mobilised €19.7 billion to support Ukraine, a large part of which comes in the form of macro-financial assistance (MFA). We have already disbursed €4.2 billion in MFA and will disburse further €2.5 billion by the end of the month as second disbursement of EUR 5 billion emergency MFA. Another €620 million in grants as budget support has also been disbursed to help Ukraine cover urgent needs on the ground.
In addition, Member States have shown unprecedented solidarity by welcoming millions of people fleeing the war in Ukraine. To support these efforts, the EU has activated the Temporary Protection Directive, granting access to jobs, housing, education and healthcare across the EU to over 4 million people fleeing the war.
The Commission is also coordinating its largest ever operation under the EU Civil Protection Mechanism for a wide array of support measures for Ukrainian citizens, including in the health, energy, food and agriculture sectors, and providing shelters, machinery as well as vital medical and energy equipment and evacuations.
Furthermore, the Commission, together with the Member States and the Energy Community, has been providing support for the Ukrainian energy system since this spring, and stepped up its efforts following the targeted shelling of vital energy infrastructure. The EU’s Civil Protection Mechanism has facilitated the shipment of generators, transformers and cables, among others. Under the Ukraine Energy Support Fund established by the Energy Community at the request of the European Commission, €25.5 million have been made available to cover the immediate needs in the energy sector. The Commission also delivered more than €40 million worth Chemical, Biological, Radiological and Nuclear threat countermeasures and equipment from the EU reserves and allocated €13 million for the restoration of laboratories damaged by the Russian occupiers at Chornobyl.
To support Ukraine, the Commission has also put forward measures to facilitate trade, notably the suspension of import duties on Ukrainian exports, and to establish solidarity lanes to help Ukraine export agricultural goods.
In addition, military assistance measures amounting to €3.1 billion have been provided under the European Peace Facility. This will be used to reimburse Member States for their in-kind military support to Ukraine.
The EU’s efforts to support Ukraine come on top of the comprehensive set of actions put forward to tackle the dramatic consequences of Russia’s war of aggression. The invasion has led to the ramping up of energy prices and of the overall cost of living for citizens in the EU. In this context, both the EU and Member States have been taking concrete measures to support businesses and households, especially vulnerable ones, in their ability to pay their energy bills and to ensure access to energy supplies.
Compliments of the European Commission.
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Europe is punching below its weight in the climate-technology competition. The continent needs to facilitate risk capital markets and to invest more in research and development. This is the 4th post in a series of climate-related entries on the occasion of COP27.

Virtually non-existent half a century ago, nowadays climate-friendly technologies and products like the electric car, the solar panel and the heat pump are all around us. This often creates the wrong impression that timely green transition is just a political problem: if only all governments agreed to put the right policies in place, global warming would no longer be an existential threat. In reality, the technological challenges may be even more daunting. A range of economic activities – from freight, water and air transportation to metallurgy or cement production – still involve burning fossil fuels, and green technological alternatives either do not exist or are not available at the necessary scale. Many climate-friendly technologies still need to be invented and implemented to have any hope of fulfilling the Paris Climate Agreement.
The EU has so far contributed less to the development of new green technologies than its size and wealth would suggest. We discuss why this is, and what can be done to jumpstart Europe’s green-innovation engine.[1]
Green innovation across the world
Globally, the number of per-capita green patents – defined as technological inventions that reduce greenhouse gas emissions when producing and consuming energy – increased five-fold between the 1970s and the early 2010s. The average EU member state has been a notable laggard in this process. For example, at the peak of green innovation in 2011, there were 17 green patents per 1 million population in the EU. In comparison, during that same year there were more than three times as many green patents per million population in the US (54) and four times as many in Japan (69).
There are also enormous differences across EU member states (see Figure 1). At one extreme is Denmark: with 92 green patents per 1 million population in 2011, it is ahead of all selected peers. Four other countries (Austria, Finland, Germany, and Sweden) are solid innovators, with more than 30 green patents per 1 million population. At the same time, one out of three EU countries registered less than 1 green patent per 1 million population.[2]

Chart 1
Green patents per million population in 2011

Source: PATSTAT and authors’ calculations.

Why so few green ideas?
There are three principal factors that stimulate innovation in green technologies. The first is pricing appropriately the carbon emissions released during production. When consumers are forced to pay the social cost of carbon emissions, producers have an incentive to invest in low-carbon technologies.[3] In this way, a carbon tax has a similar effect to an energy price shock, such as the oil price shock of the 1970s that led to many of the energy-saving technologies we use today.[4] At the same time, although all EU member states are covered by an Emissions Trading Scheme, as of end-2021 only 11 have some form of a carbon tax.
Second, higher levels of Venture Capital (VC) investment are associated with significantly higher number of green patents per capita (see Figure 2). This is to be expected given that unlike bank lending, equity investment is ideally suited to support risky investment, and from there all types of innovation, including new green technologies. It is not a coincidence that countries with deeper equity markets reduce their carbon footprint faster.[5] At present, however, Europe attracts only around 10% of global VC investment, compared with around 40% in both North America and China.

Chart 2
VC investment and green innovation in EU, 2005—2014

Source: European Venture Capital Association, Eurostat and PATSTAT.

Third, higher investment in research and development (R&D) is even more strongly correlated with more green innovation. This is hardly surprising: every piece of technology we use today was first an idea on the drawing board in a research lab. But though the Lisbon Agenda committed EU member states to spending at least 3% of their GDP on R&D 20 years ago, very few of them have consistently done so.
Would higher investment make a material difference? It would. Historically, the top performers in the EU in terms of VC and R&D investment, as a ratio of GDP, are Sweden and Finland, respectively. Our back-of-the-envelope calculations show that if every EU member state had similar investment to the top performers, green patents per capita in the EU right now would be higher than in the US.
We need more ambitious government policy
These observations imply that while both the private and the public sector have a role to play, governments are solely responsible for enacting policies that ultimately stimulate innovation. For one, there is a role for green R&D subsidies to private entreprises. And while large public spending on R&D is envisaged in the coming years, including through programmes like the EU’s Green Deal[6] and Horizon Europe,[7] projected overall outlays still fall way short of the 3% Lisbon target. The EU simply needs to spend much more on applied climate science if it wants to invent and commercialize the game-changing climate technologies of tomorrow. This applies both to individual countries and to the EU as a whole. In fact, one idea could be for climate-related R&D investment to involve a pooling of resources across EU member states, similar to the Airbus experience with aerospace design and manufacture.
In addition, while the EU is responsible for more than 30 % of all top scientific publications, it only has 12% of the world’s unicorns (start-up companies worth more than $1 billion). The disconnect between scientific quality and commercial success is largely due to an insufficiently dynamic VC industry. A more ambitious “green” Capital Markets Union with a strong equity finance component could facilitate the deepening of risk capital markets in the EU and increase their contribution to green innovation.

Now is the time to redouble our collective efforts and hasten along the path of decarbonisation.

And finally, while high energy prices at present make it politically possible to postpone the introduction of carbon taxes, a gradual and irreversible carbon pricing policy needs to be in place in the long run for green innovation to thrive.
The ECB is committed within its mandate to supporting the green transition. But while it can reinforce governments’ actions, governments are the only ones who have the proper tools to rev up Europe’s green innovation engine. If European governments put in place policies to support green innovation through R&D spending, risk capital markets and carbon pricing, then Europe has a real chance to become a green innovation leader.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

1. The discussion in this blog is based on the results in Aghion, Boneva, Breckenfelder, Laeven, Olovsson, Popov, and Rancoita, 2022, “Financial Markets and Green Innovation,” ECB Working Paper 2686.
2. Differences across countries in green innovation broadly mirror differences in total innovation.
3. See Acemoglu, Aghion, Bursztyn, and Hemous, 2012, “The environment and directed technical change,” American Economic Review 102, 131–166.
4. See Hassler, Krussel, and Olovsson, 2021, “Directed technical change as a response to natural-resource scarcity,” Journal of Political Economy 129, 3039–3072.
5. See De Haas and Popov, 2022, “Finance and green growth,” Economic Journal, forthcoming.
6. See A European Green Deal.
7. See Horizon Europe.

Compliments of the European Central Bank.
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