Authorities must tighten macroeconomic policies to bring down inflation, while helping vulnerable households and viable firms cope with the energy crisis

As Russia’s war in Ukraine takes a rising toll on Europe’s economies, growth is flagging across the continent, while inflation shows little sign of abating.
Europe’s advanced economies will grow by just 0.6 percent next year, while emerging economies (excluding Türkiye and conflict countries Belarus, Russia, Ukraine) will expand by 1.7 percent, according to projections in our latest World Economic Outlook. That’s down by 0.7 percentage point and 1.1 percentage points, respectively, from July’s projections.
This winter, more than half of the countries in the euro area will experience technical recessions, with at least two consecutive quarters of shrinking output; among these countries, output will fall, on an average, by about 1.5 percent from its peak. Croatia, Poland and Romania will experience technical recessions as well, with an average peak-to-trough output decline of more than 3 percent. Next year, Europe’s output and income will be nearly half a trillion euros lower as compared to the IMF’s pre-war forecasts—a stark illustration of the continent’s severe economic losses from the war.
And while inflation is projected to decline next year, it will stay significantly above central bank objectives, at about 6 percent and 12 percent, respectively, in advanced and emerging European economies.
Growth and inflation could both get worse than these already sobering forecasts. European policymakers have swiftly responded to the energy crisis and built adequate gas storage ahead of the heating season, but further disruptions to energy supplies could lead to more economic pain.
Our scenarios show that a complete shutoff of remaining Russian gas flows to Europe, combined with a cold winter, could result in shortages, rationing and gross domestic product losses of up to 3 percent in some central and eastern economies. On top of these, it could also result in yet another bout of inflation across the continent.
Even without any new energy supply disruptions, inflation could remain higher for longer. Most of the inflation surge so far is driven by high commodity prices—primarily energy, but also food, particularly in the Western Balkan countries. While these prices might remain elevated for some time, there is hope that they will stop increasing and thereby contribute to a steady decline in inflation throughout 2023.
Inflation risks
However, our latest Regional Economic Outlook shows that the pandemic and Russia’s war in Ukraine might have fundamentally altered the inflation process, with rising input and labor shortages contributing notably to the recent high-inflation episode. This suggests there may be less economic slack and, accordingly, more underlying inflationary pressures, than commonly thought across Europe.
These results highlight a risk to our forecasts and those by others that inflation will fall steadily next year. Other wild cards include a de-anchoring of medium-term inflation expectations, or a much sharper acceleration in wages that would trigger an adverse feedback loop between prices and wages.

European policymakers face severe trade-offs and tough policy choices as they address a toxic mix of weak growth and high inflation that could worsen.
In a nutshell, they should tighten macroeconomic policies to bring down inflation, while helping vulnerable households and viable firms cope with the energy crisis. And, in these extraordinarily uncertain times, stand ready to adjust policies in either direction in response to how the situation evolves. This will depend on whether incoming data signal higher inflation, a deepening recession—which would warrant some reconsideration of policy—or both.
Central banks should continue raising policy rates for now. Real interest rates remain generally accommodative, labor markets are projected to be broadly resilient, inflation forecasts are above target, and inflation is still at risk of further increase.
Tightening needed
In advanced economies, including in the euro area, tight monetary policy will likely be needed in 2023 unless activity and employment weaken more than expected, materially bringing down medium-term inflation prospects.
A tighter stance is generally warranted in most emerging European economies, where inflation expectations are not as well anchored, demand pressures are stronger and nominal wage growth is high—often in the double digits.
Continuing to raise policy rates for now is also an insurance policy against risks, including a de-anchoring of inflation expectations or a feedback loop between prices and wages, that would require even stronger and more painful central bank responses down the road.
For example, in advanced European countries, our analysis suggests that if workers and firms start setting wages based on past inflation rather than central bank targets—as was partly the case prior to the 1990s, inflation could be nearly 2 percent higher at the end of next year. Should this happen, policy rates may need to rise by 2 percentage points and output could fall by as much as 2 percentage points more than currently projected. By contrast, if the overall demand declines—more than expected—resulting in deeper recessions and a 2 percentage points increased drop in output, both inflation and required policy rates at the end of next year could be nearly 1.5 percentage points lower than anticipated.
Fiscal policy
Fiscal policy must balance competing objectives. One is the need to rebuild fiscal space and help monetary policy in its fight against inflation. This calls for fiscal consolidation to proceed in 2023 at a faster pace in countries with less fiscal space, greater vulnerability to tighter financial conditions or stronger cyclical positions. This includes most emerging European economies.
But fiscal policy also needs to help mitigate the brutal impact of higher energy prices on people and viable firms. This suggests that the pace of consolidation may have to be slowed for a few months. Higher energy prices have increased European households’ cost of living by some 7 percent on average this year despite the widespread measures taken to ease this burden.
Going forward, it will be important to keep energy-related support temporary to contain fiscal costs, and to maintain the price signals that will foster energy savings. Compared with price interventions, a better option is to support low- and middle-income households through lump-sum rebates on their energy bills. A close alternative is to combine general lump-sum discounts with additional support for the poor through the welfare system, financed by higher taxes for high-income households. Yet another, less efficient alternative is to implement higher tariffs for higher levels of energy consumption; while such an approach is not fully targeted to the vulnerable, it is still a better option than broad price caps.

Finally, steady implementation of reforms that enhance productivity, relieve supply constraints in energy and labor markets, and expand economic capacity remain essential to raise growth and ease price pressures over the medium-term. This includes accelerating the implementation of the 800-billion-euro economic recovery package, the Next Generation EU programs.
Strength, coordination and solidarity pulled Europe out of the COVID-19 crisis. Once again, the task ahead is immense, but if European policymakers muster the spirit of the pandemic response, it can be accomplished.

Author:

Alfred Kammer is the Director of the European Department at the International Monetary Fund

Compliments of the IMF.
The post IMF | Europe Must Address a Toxic Mix of High Inflation and Flagging Growth first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Welcome, and thank you for joining us to discuss topics important to the nation’s economy. This research seminar is part of the Federal Reserve’s series of events called “Toward an Inclusive Recovery.”
Today’s seminar, hosted by the Board of Governors, will focus on how the COVID-19 pandemic affected educational outcomes and the subsequent impact we anticipate for transitions to the labor force. We have invited accomplished researchers to discuss their work—and what practical lessons might be drawn from it—that could help inform community development practice and public policy considerations.
As I am sure you are aware, the pandemic created significant disruptions for our students and the education system. At the onset of the pandemic, steps taken to slow the spread of COVID-19 resulted in widespread closures of businesses and schools. Many, myself included, were immediately concerned about the negative effects on education from changes that included shifting to virtual instruction, lack of access to technology, and changes to the accessibility and provision of childcare. It is critical to consider that access to education at every step along a student’s learning path serves as a pipeline into the labor force and enables future generations of Americans to participate and thrive in our dynamic labor market. The disruption of education throughout the pandemic undoubtedly led to an absence of workers in the labor force, creating a shortage that held back the early economic recovery.
Education outcomes, including learning losses and achievements, take time to measure, aggregate, and analyze. As we enter the fourth academic year affected by the pandemic, data on student performance are becoming more available. Much of this early data confirms our initial concerns. For example, early test scores show that throughout the country nine-year-olds suffered a decline in learning outcomes during the pandemic. But other data also indicate that learning losses were unequal and disproportionately affected low-performing students and low-income students.
It is likely that the sudden shift to online classes contributed to the learning declines. According to the Board’s 2020 Survey of Household Economics and Decisionmaking (the SHED), only 22 percent of parents with children attending virtual classes agreed that their children learned as much as they would have attending classes in person at school. I hope that the return to in-person learning and reopening of schools will enable children to resume normal learning and that academic achievement will rebound.
It seems that even with this return to in-person attendance, many schools are struggling to provide students with the same quality of education as they did pre-pandemic. With the return to onsite education, many schools are confronting challenges that impair their ability to meet the educational needs of students. A number of educators appear to have left the profession, as indicated by the nearly 100,000 more job openings for teachers in July 2022 than before the pandemic.1
Complicating these issues, across the country the return to in-person instruction has been met by an increase in chronic absenteeism, which is defined as a student missing at least 10 percent of school days in a school year. Compared to a typical school year pre-pandemic, 72 percent of U.S. public schools reported an increase in chronic absenteeism among their students during the 2021–22 school year, which is a 39 percent increase over the previous year.2
Missed school typically means missed learning, so chronic absenteeism is a key metric of school performance. It’s likely that these challenges will result in lower graduation rates and possibly less stable employment than would have otherwise been the case.
These outcomes raise difficult questions about how to best respond to the needs of students and educators going forward. For example, how can curricula be adjusted to meet students where they are today, after nearly three years of pandemic-impacted learning? How can we best re-engage the larger proportion of students who may have become disconnected as a result of these pandemic-related disruptions to their education? What does this all mean for the future of the labor force?
In addition to the challenges facing primary and secondary education, higher education was not immune to pandemic disruptions. Like K-12 education, studies show that online instruction reduced the academic performance of college students.3 In addition, we have seen declines in both college enrollment and the rate of first-year college students who continue their education into a second year.4 These declines are most pronounced at community colleges and open-access programs. Some of this decline was due to a supply-induced shortage resulting from colleges unable to offer remote learning options for many technical and vocational programs. The reduction in these “hands-on” programs, such as air-conditioning repair and auto detailing, had a greater impact on male enrollment and may lead to labor supply shortages for some of these skills-based professions.5
Education is the greatest and most effective input into the future of our labor market. In order to have the strongest possible labor force in the future, it is critical to understand and act immediately to address the educational losses experienced during the pandemic. I’m sure there’s much to learn about how these education challenges, both longstanding and more recent, will ultimately affect the job market. That’s a question of particular interest to policymakers, and it’s one of the most important reasons that we host events like this seminar. I look forward to hearing from the experts we have invited here today to discuss ideas to successfully and quickly address academic declines, expand K-12 education options, improve higher education outcomes, and prepare this generation to participate and thrive in the future labor force.
I hope that the research presented today is useful to you in your work. Community development professionals in our audience may consider how the design and implementation of their services can be enhanced. And researchers may encounter ideas that spark new work that can shed further light on these important topics. Thank you so much for joining us.
Compliments of the U.S. Federal Reserve.
1. Bureau of Labor Statistics Job Openings and Labor Turnover Survey. Accessed via FRED. Return to text

2. National Center for Education Statistics, “More than 80 Percent of U.S. Public Schools Report Pandemic Has Negatively Impacted Student Behavior and Socio-Emotional Development,” press release, July 6, 2022. Return to text

3. Michael S. Kofoed, Lucas Gebhart, Dallas Gilmore, and Ryan Moschitto, “Zooming to Class?: Experimental Evidence on College Students’ Online Learning during COVID-19,” Discussion Paper Series No. 14356 (Bonn, Germany: IZA Institute of Labor Economics, May 2021). Return to text

4. Persistence and Retention, Fall 2020 Beginning Postsecondary Student Cohort (PDF), Persistence and Retention Report Series (National Student Clearinghouse Research Center, June 2022). Return to text

5. Diane Whitmore Schanzenbach and Sarah Turner, “Limited Supply and Lagging Enrollment: Production Technologies and Enrollment Changes at Community Colleges during the Pandemic,” NBER Working Paper 29639 (National Bureau of Economic Research, January 2022). Return to text

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The Commission is today proposing a new emergency regulation to address high gas prices in the EU and ensure security of supply this winter. This will be done through joint gas purchasing, price limiting mechanisms on the TTF gas exchange, new measures on transparent infrastructure use and solidarity between Member States, and continuous efforts to reduce gas demand. The regulation contains the following main elements:

Aggregation of EU demand and joint gas purchasing to negotiate better prices and reduce the risk of Member States outbidding each other on the global market, while ensuring security of supply across the entire EU;
Advancing work to create a new LNG pricing benchmark by March 2023; and in the short term proposing a price correction mechanism to establish a dynamic price limit for transactions on the TTF gas exchange, and a temporary collar or bandwith to prevent extreme price spikes  in derivatives markets;

Default solidarity rules between Member States in case of supply shortages,  extending the solidarity obligation to Member States without direct pipeline connection to involve also those with LNG facilities; and a proposal to create a mechanism for gas allocation for Member States affected by a regional or Union gas supply emergency.

In combination with already agreed measures on gas and electricity demand reduction, gas storage, and redistribution of surplus energy sector profits, these new steps will improve stability on European gas markets this winter and beyond. The measures will also help to further mitigate the price pressure felt by European citizens and industry, while ensuring security of supply and a functioning internal market. The Commission will continue its work in other areas, including revision of the State aid Temporary Crisis Framework later this month, and further development of ways to limit the impact of high gas prices on electricity prices.
In addition, the Commission will carry out a needs assessment on REPowerEU to speed up the clean energy transition and avoid fragmentation in the single market, with a view to making proposals to enhance the EU financial firepower for REPowerEU. The Commission is also proposing a targeted flexible use of Cohesion Policy funding to tackle the impact of the current energy crisis on citizens and businesses, using up to 10% of the total national allocation for 2014-2020, worth close to €40 billion.
Joint purchasing
While the EU has made strong progress on filling its gas storage for this winter, achieving over 92% filling as of today, we need to prepare for possible further disruption, and lay a sound foundation for the following year. Therefore, we propose to equip the EU with new legal tools to jointly purchase gas. The Commission would contract a service provider to organise demand aggregation at EU level, grouping together gas import needs and seeking offers on the market to match the demand. We propose a mandatory participation by Member States’ undertakings in the EU demand aggregation to meet at least 15% of their respective storage filling targets. Companies would be allowed to form a European gas purchasing consortium, in compliance with EU competition rules. Joint purchasing will help smaller Member States and companies in particular, which are in a less favourable situation as buyers, to access gas volumes at better conditions.
The Regulation also includes provisions to enhance transparency of intended and concluded gas supply purchases, in order to assess whether the objectives of security of supply and energy solidarity are met.  The Commission should be informed before the conclusion of any gas purchase or memorandum of understanding above a volume of 5TWh (just over 500 million cubic meters) and may issue a recommendation in case of a potentially negative impact on the functioning of joint purchasing, the internal market, the security of supply or energy solidarity.
Addressing high gas exchange prices
Although wholesale prices have decreased since the peak of summer 2022, they remain unsustainably high for a growing number of Europeans. Building on our previous work with Member States to mitigate the impact of high electricity prices and redistribute excessive energy sector profits to citizens and industry, we are today proposing a more targeted intervention in market gas prices. Many gas contracts in Europe are indexed to the main European gas exchange, the TTF, which no longer accurately reflects the price of LNG transactions in the EU. The Commission is therefore developing a new complementary price benchmark with ACER to address this systemic challenge. The new benchmark will provide for stable and predictable pricing for LNG transactions. Under the proposed Regulation, the Commission would task ACER to create an objective daily price assessment tool and subsequently a benchmark that could be used by energy market operators to index the price in their gas contracts.
While this benchmark is being developed, the Commission proposes to put in place a mechanism to limit prices via the main European gas exchange, the TTF, to be triggered when needed. The price correction mechanism would establish, on a temporary basis, a dynamic price limit for transactions on the TTF. Transactions at a price higher than the dynamic limit would not be allowed to take place in the TTF. This will help avoid extreme volatility and excessive prices. In addition, to limit excessive price volatility and prevent extreme price spikes in the energy derivatives markets, the Commission proposes introducing a new temporary intra-day price spike collar to be established by EU derivatives exchanges. This mechanism will protect energy operators from large intra-day price movements.
To ease the liquidity issues many energy companies currently face in meeting their margin requirements when using derivative markets, the Commission has adopted today new rules for market participants, expanding the list of eligible collateral on a temporary basis to non-cash collaterals, including government guarantees. Secondly, the Commission has adopted new rules increasing the clearing threshold from €3 billion to €4 billion. Below this threshold, non-financial firms will not be subject to margin requirements on their OTC (over-the-counter) derivatives. Both these measures will provide much needed relief for companies, while also maintaining financial stability. The introduction of these measures follows extensive consultation with European and national regulators, as well as stakeholders and market participants. Finally, ACER and the European Securities and Markets Authority (ESMA) are enhancing their cooperation, by creating a new joint Task Force, to strengthen their capabilities to monitor and detect possible market manipulation and abuse in Europe’s spot and derivative energy markets, as a precautionary measure to protect the stability of the market.
Solidarity and demand reduction
The Commission is closely monitoring demand reduction measures. Preliminary analysis on the basis of reporting by Member States shows that in August and September EU gas consumption would be around 15% lower than the average of the previous 5 years. Similar efforts will be needed every month until March in order to comply with the Council Regulation. Member States will report every two months on their progress. The Commission stands ready to trigger the EU Alert or review such targets if current measures prove insufficient. To reinforce preparedness for possible emergencies, the Commission also proposes measures allowing Member States to further reduce non-essential consumption to ensure that gas is being supplied to essential services and industries, and to extend solidarity protection to cover critical gas volumes for electricity generation. This should under no circumstances affect the consumption of households that are vulnerable customers.
As not all Member States have put in place the necessary bilateral solidarity agreements, the Commission proposes setting default rules. This will ensure that any Member State facing an emergency will receive gas from others in exchange for fair compensation. The obligation to provide solidarity will be extended to non-connected Member States with LNG facilities provided that the gas can be transported to the Member State where it is needed. To optimise the use of LNG and pipeline infrastructure the Commission proposes new tools to provide information on available capacity, and new mechanisms to ensure that capacity is not booked and left unused by market operators. The Commission is also proposing today a Council Recommendation on critical infrastructure protection in light of the suspected sabotage of the Nord Stream 1 & 2 gas pipelines.
Background
The Commission has been tackling the issue of rising energy prices for the past year, and Member States have deployed many measures at national level which the Commission provided through the Energy Prices Toolbox adopted in October 2021
The energy market situation has worsened considerably since Russia’s invasion of Ukraine and its further weaponisation of its energy resources to blackmail Europe, which exacerbated an already tight supply situation after the COVID-19 pandemic. As Russia has continued to manipulate gas supplies, cutting off deliveries to Europe for unjustified reasons, markets have become tighter and more nervous. The Commission therefore expanded on the Energy Prices Toolbox in Spring 2022 with the Communication on short-term market interventions and long-term improvements to the electricity market design and the REPowerEU Plan. The Commission 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 particular, droughts and extreme heat have had an impact on electricity generation by hydropower and nuclear, further reducing supply.  Therefore, in September the Commission proposed and Member States agreed additional measures based on Article 122 of the Treaty to reduce electricity demand and capture unexpected energy sector profits to distribute more revenues to citizens and industry. Today’s proposals complement the steps already taken, and continue our work to tackle the exceptional situation on global and European energy markets. The Commission has also published today the first part of its annual State of the Energy Union Report.
Quotes by Members of the College of Commissioners
President Ursula von der Leyen said: “Russia’s war on Ukraine has severe consequences on global and European energy markets. We act in unity and have prepared well for the winter ahead, filling our gas storages, saving energy, and finding new suppliers. Now we can tackle excessive and volatile prices with more security. We will introduce a temporary mechanism to limit excessive prices this winter, while we develop a new benchmark so that LNG will be traded at a fairer price. We provide legal tools for joint EU purchasing of gas, ensure solidarity in security of supply for all Member States and negotiate with our reliable gas suppliers to secure gas at affordable prices. But we must also accelerate investment in renewables and infrastructure. Investing more and faster in the clean energy transition is our structural response to this energy crisis.”
Executive Vice-President Frans Timmermans said: “The next few winters will be tough, but today’s package helps to keep European families warm and industry going. By taking measures now and developing the tools to buy gas together instead of outbidding each other, we can again head into the next heating season with enough gas in storage. In response to the extremely volatile prices caused by Putin’s weaponisation of energy, the Commission is also working to return stability to the energy market. But cheap fossil fuels will not return and we need to accelerate our transition to renewables. This is why we need to consider ways to fund additional investment in Europe’s green energy transition via REPowerEU.”
Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “In crisis situations with supply shortages, joining forces to negotiate can be an effective way to achieve better prices and better conditions. In the context of the current gas crisis, we stand ready to accompany firms willing to enter into a joint purchasing consortium, subject to safeguards and in line with our competition rules. Our goal is to ensure the full benefits of joint purchasing can be reaped and further passed through.”
Commissioner for Energy Kadri Simson said: “Russia’s invasion of Ukraine has fundamentally changed the situation on the EU energy market. Tools and rules that served us well before are no longer adequate to ensure secure and affordable energy supply. To tackle this crisis effectively, we need to be able to buy gas together, to target excessively high prices, and to ensure solidarity between our Member States in case of shortages. The steps we have taken so far are working, with prices easing and demand decreasing. But today’s proposals are needed to better prepare for this winter and beyond.”
Commissioner for Financial services, financial stability and Capital Markets Union Mairead McGuinness said: “Our measures today are significant for energy operators and energy derivative markets, while maintaining stability in the financial system. These time-limited and targeted measures focus on easing the liquidity stress that some energy firms have faced in meeting their margin requirements and on tackling extreme price volatility on energy derivative markets. We have worked closely with ESMA, the EBA and ACER, as well as national energy and financial regulators. Russia’s brutal war on Ukraine is impacting energy markets with consequences also for consumers and businesses, which we are addressing today.”
Compliments of the European Commission.
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The ECB Blog investigates how change in the policy rate affects wages very differently depending on characteristics of employees and firms, such as firms’ size and their access to credit. Results show that the effects are symmetric during times of easing and tightening.
The ECB uses its policy rates to achieve price stability. But its decisions also have side effects on labour markets. To better understand how interest rate cuts and hikes affect labour market outcomes we look at workers, firms and credit. We investigate how characteristics such as workers’ age and education, or the size of the companies where they are employed, determine the extent to which payslips and hours worked are affected by monetary policy decisions.
But how can we gather the necessary information? We link two datasets from Portugal: one dataset provides detailed information on the employees of firms, and the other, information on loans to those firms.[1] Both date back to the launch of the euro. This allows us to match data on individual workers and the firms they work for, with the bank loans the firms drew down over two decades which includes periods of monetary policy easing and tightening.[2]
Our work began before the recent monetary policy normalisation and was initially focused on periods of monetary easing but we can prove that the effects are symmetric, for both policy easing and tightening. For example, workers with high education tend to benefit most after rate cuts in terms of wage increases and hours worked. But they are also among the most affected when the ECB increases policy interest rates, which slows wage growth. At the same time, workers in small and young firms are the most positively affected by policy rate cuts in terms of wage increases and hours worked. But they are also among the most affected during policy rate hikes.
But let us take a step back and look at the design of our study.
Rate cuts affect wages more in small firms
The recent public debate about the distributive effects of monetary policy has focused on workers’ income, age, race[3] and origin. There is also evidence that employers’ characteristics drive wage differences. To find out more we took three steps:

We investigated which firms benefit the most from policy rate changes
We then assessed which employees in these firms benefited the most
We looked at the loan data to understand the role of credit in this context

Step 1: In which type of firms do workers benefit the most from ECB rate changes?
We address this question by estimating the heterogeneous impact of monetary policy conditions on wages, hours worked and employment across different types of firms. We estimate that a 1 percentage point (pp) decrease in the monetary policy rate is associated with a 1.16 pp stronger increase in wages of workers in small firms compared to large firms, as shown by Chart 1. Smaller firms increase wages more after a rate cut than bigger firms. We also estimate that workers in young firms benefit the most compared to workers in old firms. Since workers in smaller and younger firms tend to earn lower wages, policy rate cuts narrow the wage differential across firms in the economy.
Step 2: Which type of workers benefit the most from policy rate changes?
To address this question, we assess the impact of monetary policy on workers with high vs low levels of education. Following a monetary policy rate cut, the hours worked and wages earned by employees with more education increase by more than those of less educated workers. In particular, the labour market effects are most pronounced for better educated workers in small firms. Interest rate cuts are associated with the movement of highly educated workers towards small firms. In turn, this is coupled with a stronger increase in capital investment in small firms. What could be the reason for that? One interpretation is that small firms can often have less success securing credit than larger firms. This handicap is reduced in the aftermath of monetary policy easing. Small firms use improved access to finance for more capital investment, and this increases the value for better educated employees. So, we took a closer look at credit in our third step.

Chart 1
Monetary policy, wages and firm size
Estimated impact of one percentage point policy rate cut, on average wages, of firms of different sizes.
Dots represent the mean estimates of impact on wages. The vertical lines represent the variation in these estimates (‘’margin of error’’).

Sources: Jasova, Mendicino, Panetti, Peydro, Supera (2022). Notes: X-axis shows the size of firms. They increase in size relative to each other as you move right along the x-axis. The y-axis shows the estimated wage increase of employees in the firms represented on the x-axis. The wage increase estimated on the y-axis is always relative to the increases in wages in the largest firms (these firms are visible in the 80-100 quintile). In all cases, the impact on wages has been caused by a 1 percentage point cut in the monetary policy rate.

Monetary easing improves access to credit for small firms
Step 3: What is the role of credit in driving wage differentials after a rate cut?
We start by comparing the impact of a rate cut on wages for firms with and without bank credit. We find that credit plays an important role in explaining the effects of monetary rate changes on the distribution of wages. The wage outcomes for workers in small firms is fully driven by firms with an existing bank-borrowing relationship. In fact, for small firms without bank credit, it simply does not matter. Next, we use a novel measure of firm-level credit sensitivity to monetary policy, as well as measures of bank health, to capture financial constraints that firm and/or banks, respectively, might be experiencing. By alleviating financial constraints, monetary policy rate cuts allow easier access to credit for constrained firms and for firms borrowing from more constrained banks. Workers in these firms benefit more in terms of wages earned and hours worked when rates are falling. In particular, we also find that these effects depend on the state of the economy and are 2 to 3.5 times stronger in crisis periods than in normal times.
What is most relevant at present is that the effects of policy rate changes are symmetric for times of easing and tightening. So, in times of increasing policy rates, the wages of workers in larger firms are less negatively affected than those in smaller firms. This increases the wage differential across firms in the economy. But, at the same time, workers with less education are less affected. Since low-education workers tend to earn lower wages, rate increases narrow the wage differential across workers in the economy.
While the traditional view in macroeconomics focuses on aggregate effects, more recent research sheds a light on how heterogeneous the effects of monetary policy can be. It is important for policymakers to be aware that their decisions affect different types of workers and firms differently for at least two reasons. First, understanding the distributional consequences of monetary policy can help policymakers understand the impact of their actions on inequality. In this respect, earnings are a relevant source of inequality. Second, understanding heterogeneity can also be important to draw conclusions for aggregate effects, and especially so, in a monetary union where countries differ in their compositions of workers and firms. In this post we have argued that the repercussions of monetary policy on workers’ individual wages vary depending on whether they work in small or large firms as well as on their education level. Hence, the overall impact of policy rate changes in a country is going to be affected by the share of small vs large firms as well as by the share of workers with high vs low education levels.
Compliments of the European Central Bank.
Footnotes:
1. All results reported in this blog will be made available in Jasova, Mendicino, Panetti, Peydro, Supera, 2022 (Monetary Policy, Labour Income Redistribution and the Credit Channel: Evidence from Matched Employer-Employee and Credit Registers, forthcoming, ECB Working Paper)
2. Portuguese data are special in that they allow us to follow workers over time as they move across different firms and, at the same time, have a detailed picture of firm borrowing conditions. The results presented in this article are derived from two primary matched datasets. The first is the linked employee-employer dataset covering all private sector employees in Portugal (Quadros de Pessoal) constructed by the Portuguese Ministry of Labour Solidarity and Social Security. The second is the credit register reporting monthly level data on all loans that firms receive from credit institutions supervised by the Bank of Portugal (Central de Responsabilidades de Credito). In addition, the analysis uses firm-level balance sheet data (Informacao Empresarial Simplificada) and Bank of Portugal’s proprietary bank balance sheet data (Balanco das Instituicoes Monetarias e Financeiras).
3. See, among others, Dossche, Slacalek and Wolswijk, Monetary Policy and Inequality, Economic Bulletin Article, European Central Bank Economic Bulletin Issue 2, 2021, and references therein.
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Some experts are sceptical whether monetary tightening and rapid raising of interest rates are an effective tool to tame inflation, which in the euro area is driven mainly by extremely high energy prices, by Russia’s energy blackmail towards those European countries supporting Ukraine against Russian aggression. Are you confident that the European Central Bank (ECB) will manage to curb the record high inflation that reached 10% in September and to get it back to the ECB’s target of 2% over the medium term?
An important part of the inflationary process that we are now facing has been driven by external factors, such as increased energy prices, more expensive raw materials, food, etc. According to our calculations, energy and food prices currently account for two-thirds of inflation in the euro area. However, inflation is also being pushed up by demand for goods and services, as is particularly the case in the Baltic countries. Increased demand can be contained through decisions to normalise monetary policy, while I agree that monetary policy has no influence on energy prices.
Nevertheless, it is very important to avoid second-round effects and prevent inflation being passed on to wages, which would push inflation higher. In order to avoid this, inflation expectations need to remain anchored. Market participants must have confidence in the credibility of the central bank. We will do whatever is necessary to bring inflation back to our 2% target over the medium term.
The OPEC+ alliance, which also includes Russia, recently decided to substantially cut oil production as of November. This has already driven oil prices higher. It is likely that this decision has not made it any easier for the ECB to achieve its goal of bringing inflation down to the target level.
Oil prices are global prices as they depend on producers and the world economic outlook. From an economic perspective, lower oil prices could help reduce inflation and, at the same time, support the economic recovery, thereby facilitating the decisions of policymakers.
What is the state of the euro area economy at the moment?
I think we are going to face a very difficult combination of low economic growth, including the possibility of a technical recession, and high inflation. According to our September projections, inflation will be hovering around 10% until the end of this year and will start to gradually decline in 2023. In this context, monetary policy has to focus on the evolution of inflation, which is what the Governing Council will be looking at when taking decisions. However, the environment will be very challenging and uncertain.
What is your forecast for the euro area’s economic development?
What we considered as our downside scenario in September, is coming closer to the baseline scenario. The current global context, including the monetary policy action, the energy shock and deterioration of the terms of trade, among others, point towards a slowdown of the global economy and, eventually, of the inflation rate as well.
Under the downside scenario from our September projections, the euro area economy would shrink by almost 1% in 2023, while the baseline scenario envisages GDP growth of 0.9%. The difference between the baseline and downside scenarios lies in the evolution of energy supplies from Russia. The assumption under the baseline scenario is that 20% of energy deliveries would continue to be supplied, whereas the downside scenario assumes a total cut-off. Currently, as I have said before, we are getting closer to the downside.
Is it correct that forecast inflation is also higher under the downside scenario?
That’s right. Under the downside scenario, annual inflation is expected to decline from an average rate of 8.4% this year to 6.9% in 2023. Under the baseline scenario, inflation is expected to go down from an average of 8.1% this year to 5.5% in 2023.
Currently the interest rate on the ECB deposit facility is 0.75% in the euro area. What should be the terminal rate to anchor inflation expectations?
That is very difficult to say. We are dependent on the data we receive. There is a very high level of uncertainty. We do not know how the war will develop and what impact it will have on energy prices. All these factors make it very difficult to determine the level of the terminal rate.
We have adopted a prudent stance: our response will depend on how the data evolves in the coming months. In December we will have new projections for inflation and GDP growth that will guide our decisions, despite the high uncertainty.
Historically, average interest rates in advanced economies hovered around 4%. Is this a reality that euro area businesses and mortgage borrowers will face again?
This will depend on various circumstances. Over the last 15 years interest rates have been much lower than that figure and we have had negative interest rates for a long period of time. In my view, structural factors that pushed inflation down in recent times have started to shift. Globalisation is not going to be as intense as it was, and the energy shock can drive inflation higher. So, I think that monetary policy has to adjust to these new structural features that may push inflation upwards when compared to the past decade.
The cost of borrowing for governments has risen dramatically in recent weeks and months. For instance, the Estonian government recently issued ten-year bonds at 4%, despite having among the lowest levels of debt in the euro area. Yields of ten-year government bonds of southern euro area countries fluctuated on average around 3-5%. What is your advice to governments – how should they keep the rising borrowing costs under control?
Fiscal policy has to be supportive of the process of monetary policy normalisation conducted by the ECB. We cannot ignore the fact that inflation is the main problem in the euro area, which is quite obvious in the Baltic countries. Inflation is reducing the purchasing power of households, especially of those that are more vulnerable, and is dampening investment.
Thus, we have to pursue a normalisation of monetary policy. Higher interest rates are needed to try to subdue the rising level of inflation that is clearly above our 2% target over the medium term.
Could you please specify what kind of fiscal policy would be compatible with the anchoring of inflation expectations?
As we are in the process of normalisation of our monetary policy, fiscal policy needs to play a different role than the one played during the pandemic. In the current context, fiscal policy has to be more selective and targeted to support the most vulnerable groups of society. If countries start putting in place indiscriminate measures across the board, the mission of monetary policy will become more challenging and we may be unable to achieve the ultimate goals of reducing dependence on Russian energy and supporting the green transition.
Fiscal policy and monetary policy do not seem to be going hand in hand. The governments of Germany, Lithuania and other euro area countries have chosen the path of subsidising energy prices, which increases their borrowing and budget deficits.
I don’t comment on the policy decisions of any government. But, as a general recommendation, fiscal policy has to be compatible with the process of normalisation of our monetary policy stance. State support has to be temporary and targeted to the most vulnerable groups while facilitating the green transition.
What is your assessment of the policy implemented by the Lithuanian government?
I think that Lithuania is implementing a very prudent fiscal policy. With a public debt ratio of 40% of GDP, Lithuania’s public debt and budget deficit are clearly below the euro area average.
The main problem is inflation, which currently is above 20% – at levels also observed in the other Baltic countries. Disparities in inflation rates among euro area countries will have to be monitored and analysed in detail.
Compliments of the European Central Bank.
The post Interview with Luis de Guindos, Vice-President of the ECB, conducted by Dalius Simenas on 10 October 2022 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Ladies and gentlemen,
It is truly an honour to be here in Harvard Law School. I am coming directly from Washington, where I represented the European Union at meetings of the IMF and World Bank.
I had the chance to meet my American counterparts and ministers from around the world.
At these global gatherings, and others I have attended recently, notably the G20 in Indonesia, there is a sense of upheaval in the air.
The world is clearly changing.
Today I want to share some thoughts with you on why these changes are happening, and how they may play out.
Above all, I want to explain why I believe strong transatlantic leadership is required at this moment. Because without it, the world may change in ways that are contrary to our shared values.
As Harvard students, you are the leaders of tomorrow.
My hope for you is that you may enter the world of work with the same optimism I did when I graduated.
When I was your age, the changes happening in the world seemed overwhelmingly positive.
My generation of Latvians grew up under the rigid restrictions of the Soviet Union.
But as graduates in the early 1990s, we were entering a new reality of freedom and choice. We felt hopeful and confident that our talents and ambitions could achieve their maximal expression in the world.
I hope you will get to experience the same.
But to make sure this happens – to make sure your leadership can achieve its full potential – the leaders of today must fight for our cherished western values of democracy, rule of law, human rights, economic freedom, and tackling climate change.
We must strive for a world order where Harvard Law School’s Motto – “truth, law and justice” – continues to be the guiding light.
If the EU and U.S. fail to lead the way at this crucial moment, truth, law and justice may be overtaken by something far darker.
I am speaking, of course, of Russia’s brutal and illegal invasion of Ukraine, and its profound impact on today’s world.
This is not a regional conflict on the fringes of the European Union. We have entered an existential battle.
Innocent men, women and children are dying because of Putin’s war of choice. In this despot, Europe faces an enemy with nuclear bombs at his fingertips.
The war is causing turmoil across many parts of the globe, with families and businesses facing a global spike in food and energy prices.
There are deep financial and monetary implications.
Russia, and Russia alone, bears the responsibility for these problems.
As the war’s shockwaves ripple across continents, they are causing a profound realignment of international relations, economically and geopolitically.
So far, the democratic world has rallied together in a huge show of solidarity. This unity caught Putin and other autocrats around the world by surprise.
But this war is a test case of our democratic values, and our ability to convince others to stand up against a brutal attack on a sovereign nation.
We are profoundly grateful to the U.S. and our like-minded allies for their support to Ukraine, and coordination on sanctions against Russia.
We now have to focus on reaching beyond our like-minded partners.
First, we need to fight back in the global information war. And we need to invest real resources in this work, both at home and abroad.
At home, we have for many years seen anti-democratic forces, including Russia, meddling in the internal politics of the EU.
By supporting extremist and anti-EU parties. Using lobbyists. Paid thinktanks. Online disinformation and hacking. And we know that this meddling is not limited to Europe. We should take stronger action against this interference.
The European Commission will soon propose a Defence of Democracy Package to protection our democratic sphere from covert foreign influence.
At the global level, we need to dramatically improve our outreach.
Only by working together, across regions and across platforms, can we get the message out that the current food and energy crisis was not caused by Western sanctions, but by Russia’s readiness to game on hunger and starvation.
In a wider sense, we need to invest heavily in alliance-building, particularly with the developing world.
There are many “potentially like-minded” allies out there. To reach them, and get them on board, we need to get out of our comfort zone. In practice, that means doing more to understand and address their needs.
The EU and U.S. share the same view: namely, that the war in Ukraine is a brutal attack on a sovereign democratic nation by an autocratic regime.
But a number of emerging economies and developing countries see this war differently.
Some are taking geopolitical advantage of it, including by increasing trade and cooperation with the aggressor state. Some justify their neutrality by recalling historic injustices.
Take the UN vote in March: Five non-democratic regimes blocked the resolution condemning Russia’s war. But another 35 abstained. This is the middle ground I am talking about. These are the countries we need to persuade.
And we are in a race against the clock. Because non-democratic powers are rushing to form their own alliances against the so-called “declining West”.
Indeed, the most powerful among them already have strong economic and political bonds with the developing world.
The developing world needs to feel that we are there for them and will help them to weather this crisis.
Our action towards them will count more than words.
So what can we do?
We need to be visible on the ground, and engage both at local and global levels.
The EU has for example ramped up its engagement in Africa, both on a bilateral and region-to-region basis.
We need to reform our global institutions so that decision-making works equally well for developed, emerging, and less-developed economies.
The same goes for international financial institutions.
They can deliver more development finance – while in return, developing countries need to ensure they have the correct governance framework in place.
Emerging markets fear the spillovers from our interest rate adjustments, and we are mindful of that.
Good progress is being made on Special Drawing Rights to help vulnerable countries. Voluntary contributions of 80 billion dollars have been pledged towards the global goal of 100 billion dollars.
23 billion comes from the EU . The U.S. has pledged 20 billion dollars, though this still needs to be approved by Congress. It is important that the EU and U.S. continue to show leadership, encouraging more countries to pledge.
We should also keep pushing for the implementation of the Common Framework for Debt Treatment. Almost all G20 members would support the publication of indicative guidelines to provide additional clarity and predictability to eligible countries.
However, opposition from China has so far prevented the guidelines’ adoption.
In parallel, it will be important to continue the international work to strengthen debt transparency, and to address the challenges stemming from collateralised debt transactions.
We also need to help the most vulnerable countries to deal with the war’s spillover effects.
So we welcome the new IMF Food Shock Window to support Ukraine – and other countries. Since it requires more resources, the European Commission will contribute €100 million to the Poverty Reduction and Growth Trust Subsidy Accounts.
Fixing the World Trade Organization is a crucial piece of the puzzle. It needs to be revitalized, updated and reimagined.
The 12th WTO Ministerial took place in June. Against expectations, it succeeded in delivering a number of very significant outcomes.
During this intense week of negotiations in Geneva, we sat down with countries from around the world. There were huge differences of opinion.
But we also saw that results are achievable, because, broadly speaking, most countries still want a functioning rules base for global trade.
They recognize that this remains their best bet for achieving their economic potential.
A reformed WTO must treat everyone the same, which brings me to my next point:
I would like to say a brief word on China.
Its failure to condemn Russia’s barbaric war, and in some cases, outright support for Russia, is influencing the views of EU countries and companies.
But it is also true that, despite the worsening political context, EU-China trade remain robust, and our economies are much more interlinked than is the case with the U.S. and China.
Accordingly, the EU should continue engaging with China with pragmatism and without naivety. We recognise that our trading relationship needs more balance and reciprocity. And working with the U.S., we must place a greater focus on diversification and better risk management.
But we also need to work together on shaping joint responses to global trade and economic challenges, such as disruptions in supply chains, WTO reform, and issues related to food security and the global level playing field.
In a general sense, trade has a crucial role to play to help the EU and U.S. advance our shared geopolitical goals.
By developing rules-based relationships with countries around the world, by incentivizing our companies and investors to make a positive economic impact in these countries, we increase our wider attractiveness and trustworthiness as partners.
The EU and U.S. are committed to the green and digital transformations of our economies.
By supporting and incentivizing similar transformations in partner countries, we can build a greener economy as well as a democratic and trustworthy digital infrastructure.
This can also help to create resilient supply chains, notably for critical raw materials and inputs.
This is why the EU is determined to ramp up its trade outreach, notably to Latin America and the Indo-Pacific.
Last, let me turn to the Transatlantic relationship itself.
The EU-U.S. relationship is the central artery of the world economy. Last year we traded almost one trillion euro’s worth of goods and services. Our supply chains are deeply intertwined.
But our relationship goes far beyond economics. We have aligned views on most global challenges.
We have opened positive new chapters over the past two years. We have put several disputes to bed, and found new, dynamic avenues of cooperation.
The Transatlantic Trade and Technology Council is living proof of this renewal.
This new forum is designed to shape the rules, tools and standards of the future. It is a laboratory of 21st century ideas.
The TTC’s structure is agile enough to address emerging challenges.
We notably achieved rapid cooperation on sanctions against Russia via export controls, and aligning measures on import bans.
We expanded its remit to address global food insecurity and supply chain issues, as well as meeting the challenge of Russia’s information manipulation and interference.
This is necessary. Because technologies will have an increasingly dominant role in future conflicts, in a classical military but also hybrid warfare sense.
The TTC can be the vehicle to address this and other challenges.
Of course, some difficulties remain.
The EU would notably like to see the U.S. fully take our needs on board whenever it is framing policies that impact us. And vice-versa.
For example, while we fully support the aim of the U.S. Inflation Reduction Act to help businesses and society reach climate goals, some of its provisions are very worrying.
Many of the green subsidies provided for in the Act discriminate against EU automotive, renewables, battery and energy-intensive industries.
The IRA privileges U.S. companies over others by offering generous financial incentives. This risks weakening competition and raising prices. I add that EU green subsidies are not designed in such a discriminatory manner.
We cannot afford to waste time and resources on trade disputes and other distractions. There is too much at stake in the wider world.
Ladies and gentlemen, I want to conclude on a more hopeful note.
All the positive changes I have described are achievable.
A better world is possible. A world where you can emerge from this great house of learning and apply your talents to their fullest extent.
But to achieve this better world, we must first stay the course and help Ukraine win the war. And such a victory is within reach.
We must, therefore, not allow division or fatigue to derail us.
It is essential that full bipartisan support from the U.S. continues, for further sanctions against Russia, and funding and military support for Ukraine.
And in Europe, likewise, now is the time to show real resolve.
It will take time, but if we stay united, working together, the EU and U.S. can help to deliver justice for Ukraine.
I view this as our shared duty, because Ukraine made a clear democratic choice to become a modern European state, anchored in Western values.
We must not fail them.
Thank you.
Compliments of the European Commission.
The post Keynote Address by Executive Dombrovskis at Harvard Law School Event on “Power and Alliances: The Transatlantic Partnership in a Changing World” first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

By Friedrich Wenzel Bulst & Sophie De Vinck, DG Competition[1]
Over the last two decades, our lives have become increasingly built on and around digital technologies. As a result, digital markets have become a central focus of competition enforcement. Following a flurry of reporting on the metaverse as the next digital frontier, this piece explores what we may expect from the metaverse and what that could mean for EU competition law enforcement. In particular, it gives a brief overview of a) current conceptions of the metaverse and its main components, b) what competition in the metaverse may look like and c) what challenges may arise for competition law enforcers.
What are the main elements of the metaverse?
The metaverse is many things at once: a buzzword, a vision of the future, a new version of the Internet, and perhaps most of all a concept around which there are still a number of question marks.
What seems clear is that the metaverse is widely understood as a virtual, immersive environment involving people interacting through avatars. While the first seedlings of the metaverse grew in the gaming world and it has a strong social networking component, it may potentially affect all areas of life. For example, it could impact how people interact in the realm of entertainment (e.g. gaming), creativity (e.g. digital fashion), or work (e.g. collaborative engineering) and could also be used to create simulations in various other domains (e.g. for developing industrial prototypes or for training healthcare professionals to experiment surgery in a realistic and safe manner).
Among the building blocks of the metaverse are Virtual Reality (VR), Augmented Reality (AR) and mixed reality, enabling the creation of an artificial environment as well as the combination of digital content with the physical world in a way that feels “real”. Different hardware devices, such as headsets, allow entry to the resulting interactive environment and several, partly novel, mechanisms will likely be used for financial transactions in the metaverse, including blockchain-based smart contracts and non-fungible tokens.
Among the things that we don’t know yet is to what extent the metaverse will live up to its hype. History shows us many examples of technological innovation being proclaimed as revolutionary, but technological changes seem to usually develop iteratively over time. Many of the metaverse’s building blocks are not new – virtual replications of the real world were also what made games such as Second Life popular a couple of decades ago. Whether the “new” iterations of the metaverse – said to provide new levels of creativity, interactivity, entertainment and connectivity – will turn out to be all that is promised (or feared), will depend on the interaction of various economic, socio-cultural, political and technological factors, at the right time and place. It may also be that certain applications of the metaverse (e.g. entertainment) will continue to target a more niche audience whereas others (e.g. the use of the metaverse for simulations in an enterprise environment) could become ubiquitous more rapidly.
In any case, it is important to start thinking about the potential opportunities as well as risks of the metaverse, including from a competition law perspective.
What about competition in the metaverse?
While the elements supporting a metaverse are still coming together, companies are already taking strategic steps, for example through mergers and acquisitions or by hiring a specialised workforce. Their objective is to secure a presence in “their” corner of the metaverse – or, in some cases, to have “their” metaverse be the game-changer in terms of user adoption.
At the outset, these companies include traditional media conglomerates alongside the main digital players and specialised gaming companies, but as the metaverse develops, companies from many corners of the economy are expected to follow. As companies start outlining their plans for the metaverse, it remains to be seen which business models and monetisation strategies could become prevalent. We can expect some revenue generation from the sale of headsets and other hardware, but it seems likely that the main monetisation strategies will centre on e-commerce, advertising and other digital services.  For example, the metaverse is expected to provide new marketing and advertising opportunities through virtual billboards, sponsorship of virtual events or other custom integrations. As the metaverse will further integrate the digital world into consumers’ day-to-day lives, it will generate huge amounts of information on users and their every-day activities. Data use and data monetisation strategies, including in relation to advertising, can, as a result, be expected to become important revenue drivers in a metaverse context.
The nature of competition for and in the metaverse will likely depend on how the metaverse platform(s) and their applications will be structured and how they will interoperate.
At this stage, the openness, mobility and connectivity of users, products and services on and in the metaverse, are often presented as essential characteristics of the metaverse and its competitive environment. But what that will mean in practice, remains to be seen. If one or more metaverse platforms essentially becomes a closed ecosystem, consumers would not be able to travel freely between different metaverse “worlds”. They would for example not be able to bring along virtual goods or services from one metaverse platform to another. This could – with consumers locked into a closed system – lead to the emergence of gatekeepers that control access to a metaverse and its users, similar to the developments observed in a number of core platform services identified in the European Union’s recently agreed Digital Markets Act. Moreover, metaverse markets may benefit from strong network effects and be prone to “tipping”, as businesses and users would tend to benefit from having a critical mass of other users present on the same platform. When this happens, it becomes very difficult for new competitors to break into the market or for existing competitors to expand further.
In such a scenario, the conduct of the company that is essentially controlling access to “its” metaverse may constrain its consumers, business partners and competitors in numerous ways. A metaverse gatekeeper could for example push users to adopt certain services or products by bundling them with “must-have” metaverse hardware or software. They could impose exorbitant prices for accessing the metaverse or some of their metaverse-based offerings. They could engage in exclusive deals with certain third-party providers of metaverse services, reducing consumer choice and limiting competitors’ access to their platform. They could also use their unique insights into user behavior (on the basis of access to certain data) to reinforce their market power inside and outside the metaverse market(s).
These potential competition challenges are not new – many have already been observed in other digital markets and ecosystems. At the same time, as the metaverse is still very much taking shape, there are also opportunities to make sure that certain problems from other digital contexts are not imported into the metaverse. Instead, one could also imagine the metaverse as an open competitive environment, organised on the basis of multiple interoperable worlds, between which users can easily move virtual goods and services in a secure way. This would for example mean that avatars could travel seamlessly from one to the other branded environment, for example meeting up with others to attend a concert in a different metaverse platform, without hitting any virtual walls. It is likely however that this would require extensive collaboration on underlying standards and technology, which in itself, depending on the circumstances, could have a restrictive effect on competition.
What are the challenges for competition law enforcement?
Economic activity is subject to competition law regardless of whether it happens offline or online – even when it happens in a virtual world. Just as companies develop their strategies for the metaverse, authorities will have to be ready to take action if and when appropriate. This includes EU competition law authorities, which continuously follow market and technological developments, including possible challenges that such developments may bring for the functioning of markets. Of course, other regulatory instruments will also be of importance to tackle certain other challenges surrounding the metaverse, including in relation to data protection and privacy, intellectual property or, last but not least, in relation to users’ safety and protection of their fundamental rights. For example, when it comes to wider societal challenges, the Digital Services Act provides tools aiming to ensure a safe metaverse environment where the fundamental rights of its users, such as freedom of expression, are adequately protected. In President von der Leyen’s 2022 State of the Union letter of intent, the metaverse is mentioned as one of the areas to look into in the context of the EU’s Digital Strategy.
To tackle possible metaverse-related competition challenges, the European Commission already disposes of many well-tested tools within traditional competition law enforcement. Our antitrust enforcement and merger control rules are technology-neutral and versatile.
Successfully applying these competition rules to the metaverse will contribute to ensuring that existing and emerging markets – whatever their final shape or form – function well for businesses and consumers alike.
In addition, as regards the broader competitive environment, the Digital Markets Act provides tools to foster contestability in the metaverse should it be at risk, either because relevant services are within its scope or through the provisions that ensure futureproofing of the Act.
These are shared challenges, which will have a worldwide impact and will be of keen interest to regulators on both sides of the Atlantic, as our technology markets are closely connected and interlinked. As such, we may expect that topics relevant to the metaverse will also (continue to) be discussed in specialised fora, both at the global level such as the International Competition Network (ICN) and the OECD, but also bilaterally, for example in the EU-US Trade and Technology Council. In parallel and specifically for competition, the EU-US Joint Technology Competition Policy Dialogue is a track of cooperation between the European Commission, the US Department of Justice and the US Federal Trade Commission, launched in December 2021, which focuses on competition policy matters and enforcement, and increased cooperation in the tech sector. The main objective of the Joint Dialogue is to maximise the impact of the EU and US competition authorities’ enforcement in the technology sector. Such continued cooperation will likely contribute to shaping policy approaches of relevance to the metaverse, for example on platform governance or international standardisation of emerging technologies.
In other words, even if the metaverse is still a concept surrounded by question marks, at least one thing seems clear: There are good reasons for competition law enforcers on both sides of the Atlantic to be actively accompanying technological and market evolutions in this area and to thereby increase the chances that the metaverse will be competitive, innovative and open.
Authors:

Dr. Friedrich Wenzel Bulst, LL.M. (Yale) is head of the antitrust unit responsible for the media sector in the European Commission’s Directorate-General for Competition and an honorary professor at Bielefeld University.
Sophie De Vinck, Ph.D., is a case handler at the antitrust unit responsible for the media sector in the European Commission’s Directorate-General for Competition.

[1] The authors wish to thank Denis Sparas for his valuable input on this article.
Compliments of the Directorate-General for Competition (DG COMP) at the European Commission.
Disclaimer: the information and views expressed do not necessarily reflect an official position of the European Commission.
The post DG COMP | Understanding the metaverse – a competition perspective first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Policy responses to currency depreciation pressures should focus on the drivers of the exchange-rate moves and signs of market disruptions
The dollar is at its highest level since 2000, having appreciated 22 percent against the yen, 13 percent against the Euro and 6 percent against emerging market currencies since the start of this year. Such a sharp strengthening of the dollar in a matter of months has sizable macroeconomic implications for almost all countries, given the dominance of the dollar in international trade and finance.
While the US share in world merchandise exports has declined from 12 percent to 8 percent since 2000, the dollar’s share in world exports has held around 40 percent. For many countries fighting to bring down inflation, the weakening of their currencies relative to the dollar has made the fight harder. On average, the estimated pass-through of a 10 percent dollar appreciation into inflation is 1 percent. Such pressures are especially acute in emerging markets, reflecting their higher import dependency and greater share of dollar-invoiced imports compared with advanced economies.

The dollar’s appreciation also is reverberating through balance sheets around the world. Approximately half of all cross-border loans and international debt securities are denominated in US dollars. While emerging market governments have made progress in issuing debt in their own currency, their private corporate sectors have high levels of dollar-denominated debt. As world interest rates rise, financial conditions have tightened considerably for many countries. A stronger dollar only compounds these pressures, especially for some emerging market and many low-income countries that are already at a high risk of debt distress.
In these circumstances, should countries actively support their currencies? Several countries are resorting to foreign exchange interventions. Total foreign reserves held by emerging market and developing economies fell by more than 6 percent in the first seven months of this year.

The appropriate policy response to depreciation pressures requires a focus on the drivers of the exchange rate change and on signs of market disruptions. Specifically, foreign exchange intervention should not substitute for warranted adjustment to macroeconomic policies. There is a role for intervening on a temporary basis when currency movements substantially raise financial stability risks and/or significantly disrupt the central bank’s ability to maintain price stability.
As of now, economic fundamentals are a major factor in the appreciation of the dollar: rapidly rising US interest rates and a more favorable terms-of-trade—a measure of prices for a country’s exports relative to its imports—for the US caused by the energy crisis. Fighting a historic increase in inflation, the Federal Reserve has embarked on a rapid tightening path for policy interest rates. The European Central Bank, while also facing broad-based inflation, has signaled a shallower path for their policy rates, out of concern that the energy crisis will cause an economic downturn. Meanwhile, low inflation in Japan and China has allowed their central banks to buck the global tightening trend.

The massive terms-of-trade shock triggered by Russia’s invasion of Ukraine is the second major driver behind the dollar’s strength. The euro area is highly reliant on energy imports, in particular natural gas from Russia. The surge in gas prices has brought its terms of trade to the lowest level in the history of the shared currency.

As for emerging markets and developing economies beyond China, many were ahead in the global monetary tightening cycle—perhaps in part out of concern about their dollar exchange rate—while commodity exporting EMDEs experienced a positive terms-of-trade shock. Consequently, exchange-rate pressures for the average emerging market economy have been less severe than for advanced economies, and some, such as Brazil and Mexico, have even appreciated.
Given the significant role of fundamental drivers, the appropriate response is to allow the exchange rate to adjust, while using monetary policy to keep inflation close to its target. The higher price of imported goods will help bring about the necessary adjustment to the fundamental shocks as it reduces imports, which in turn helps with reducing the buildup of external debt. Fiscal policy should be used to support the most vulnerable without jeopardizing inflation goals.
Additional steps are also needed to address several downside risks on the horizon. Importantly, we could see far greater turmoil in financial markets, including a sudden loss of appetite for emerging market assets that prompts large capital outflows, as investors retreat to safe assets.
Enhance resilience
In this fragile environment, it is prudent to enhance resilience. Although emerging market central banks have stockpiled dollar reserves in recent years, reflecting lessons learned from earlier crises, these buffers are limited and should be used prudently.
Countries must preserve vital foreign reserves to deal with potentially worse outflows and turmoil in the future. Those that are able should reinstate swap lines with advanced-economy central banks. Countries with sound economic policies in need of addressing moderate vulnerabilities should proactively avail themselves of the IMF’s precautionary lines to meet future liquidity needs. Those with large foreign-currency debts should reduce foreign-exchange mismatches by using capital-flow management or macroprudential policies, in addition to debt management operations to smooth repayment profiles.
In addition to fundamentals, with financial markets tightening, some countries are seeing signs of market disruptions such as rising currency hedging premia and local currency financing premia. Severe disruptions in shallow currency markets would trigger large changes in these premia, potentially causing macroeconomic and financial instability.
In such cases, temporary foreign exchange intervention may be appropriate. This can also help prevent adverse financial amplification if a large depreciation increases financial stability risks, such as corporate defaults, due to mismatches. Finally, temporary intervention can also support monetary policy in the rare circumstances where a large exchange rate depreciation could de-anchor inflation expectations, and monetary policy alone cannot restore price stability.

For the United States, despite the global fallout from a strong dollar and tighter global financial conditions, monetary tightening remains the appropriate policy while US inflation remains so far above target. Not doing so would damage central bank credibility, de-anchor inflation expectations, and necessitate even more tightening later—and greater spillovers to the rest of the world.
That said, the Fed should keep in mind that large spillovers are likely to spill back into the US economy. In addition, as a global provider of the world’s safe asset, the US could reactivate currency swap lines to eligible countries, as it extended at the start of the pandemic, to provide an important safety valve in times of currency market stress. These would usefully complement dollar funding provided by the Fed’s standing Foreign and International Monetary Authorities Repo Facility.
The IMF will continue to work closely with our members to craft appropriate macroeconomic policies in these turbulent times, relying on our Integrated Policy Framework. Beyond precautionary financing facilities available for eligible countries, the IMF stands ready to extend our lending resources to member countries experiencing balance of payments problems.
Authors:

Gita Gopinath
Pierre-Olivier Gourinchas

Compliments of the IMF.
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The OECD delivered today a new global tax transparency framework to provide for the reporting and exchange of information with respect to crypto-assets. The Crypto-Asset Reporting Framework (CARF) responds to a G20 request that the OECD develop a framework for the automatic exchange of information between countries on crypto-assets. The CARF will be presented to G20 Finance Ministers and Central Bank Governors for discussion at their next meeting on 12-13 October in Washington D.C, as part of the latest OECD Secretary-General’s Tax Report.
The new transparency initiative, developed together with G20 countries, comes against the backdrop of a rapid adoption of the use of crypto-assets for a wide range of investment and financial uses. Unlike traditional financial products, crypto-assets can be transferred and held without the intervention of traditional financial intermediaries, such as banks, and without any central administrator having full visibility on either the transactions carried out or on crypto-asset holdings. The crypto market has also given rise to new intermediaries and service providers, such as crypto-asset exchanges and wallet providers, many of which currently remain unregulated.
These developments mean that crypto-assets and related transactions are not comprehensively covered by the OECD/G20 Common Reporting Standard (CRS), increasing the likelihood of their use for tax evasion while undermining the progress made in tax transparency through the adoption of the CRS.
“The Common Reporting Standard has been very successful in the fight against international tax evasion. In 2021, over 100 jurisdictions exchanged information on 111 million financial accounts, covering total assets of EUR 11 trillion,” OECD Secretary-General Mathias Cormann said. “Today’s presentation of the new crypto-asset reporting framework and amendments to the Common Reporting Standard will ensure that the tax transparency architecture remains up-to-date and effective.”
In this vein, the CARF will ensure transparency with respect to crypto-asset transactions, through automatically exchanging such information with the jurisdictions of residence of taxpayers on an annual basis, in a standardised manner similar to the CRS.
The CARF will target any digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions. Carve-outs are foreseen for assets that cannot be used for payment or investment purposes and for assets already fully covered by the CRS. Entities or individuals that provide services effectuating exchange transactions in crypto-assets for, or on behalf of customers would be obliged to report under the CARF.
The CARF contains model rules that can be transposed into domestic legislation, and commentary to help administrations with implementation. Over the next months, the OECD will be taking forward work on the legal and operational instruments to facilitate the international exchange of information collected on that basis of the CARF and to ensure its effective and widespread implementation, including the timing for starting exchanges under the CARF.
The OECD has also put forward to the G20 a set of further amendments to the CRS, intended to modernise its scope to comprehensively cover digital financial products and to improve its operation, taking into account the experience gained by countries and business. As with  the CARF, this work will be complemented with an update to the international legal and operational mechanisms for the automatic exchange of information pursuant to the amended CRS, as well as with a coordinated timelines to bring the agreed amendments into effect.
 
Compliments of the OECD.
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Growth is projected to slow to 2.7% as the war in Ukraine, inflation, and Covid recovery weigh on the world economy.
Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic.
Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.
To access the World Economic Outlook Report October 2022, visit https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022
Compliments of the IMF.
The post IMF | The IMF cut its 2023 global economic forecast to 2.7% first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.