On 25 May 2022, the European Commission is proposing to add the violation of EU restrictive measures to the list of EU crimes. The Commission is also proposing new reinforced rules on asset recovery and confiscation, which will also contribute to the implementation of EU restrictive measures. While the Russian aggression on Ukraine is ongoing, it is paramount that EU restrictive measures are fully implemented and the violation of those measures must not be allowed to pay off. Today’s proposals aim to ensure that the assets of individuals and entities that violate the restrictive measures can be effectively confiscated in the future. The proposals come in the context of the ‘Freeze and Seize’ Task Force, set up by the Commission in March.
Making the violation of EU restrictive measures an EU crime
Firstly, the Commission is proposing to add the violation of restrictive measures to the list of EU crimes. This will allow to set a common basic standard on criminal offences and penalties across the EU. In turn, such common EU rules would make it easier to investigate, prosecute and punish violations of restrictive measures in all Member States alike.
The violation of restrictive measures, meets the criteria set out in Article 83(1) TFEU, as it is a crime in a majority of Member States. It is also a particularly serious crime, since it may perpetuate threats to international peace and security, and has a clear cross-border context, which requires a uniform response at EU level and global level.
Accompanying the proposal, the Commission is also setting out how a future Directive on criminal sanctions could look like in a Communication with an Annex. The potential criminal offences could include: engaging in actions or activities that seek to directly or indirectly circumvent the restrictive measures, including by concealing assets; failing to freeze funds belonging to, held or controlled by a designated person/entity; or engaging in trade, such as importing or exporting goods covered by trade bans.
Once the EU Member States agree on the Commission’s initiative to extend the list of EU crimes, the Commission will present a legislative proposal based on the accompanying Communication and Annex.
Reinforcing EU rules on asset recovery and confiscation to EU restrictive measures
Secondly, the Commission is putting forward a proposal for a Directive on asset recovery and confiscation. The core objective is to ensure that crime does not pay by depriving criminals of their ill-gotten gains and limiting their capacity to commit further crimes. The proposed rules will also apply to the violation of restrictive measures, ensuring the effective tracing, freezing, management and confiscation of proceeds derived from the violation of restrictive measures.
The proposal modernises EU asset recovery rules, among others, by:

Extending the mandate of Asset Recovery Offices to swiftly trace and identify assets of individuals and entities subject to EU restrictive measures. These powers will also apply to criminal assets, including by urgently freezing property when there is a risk that assets could disappear.
Expanding the possibilities to confiscate assets from a wider set of crimes, including the violation of EU restrictive measures, once the Commission proposal on extending the list of EU crimes is adopted.
Establishing Asset Management Offices in all EU Member States to ensure that frozen property does not lose value, enabling the sale of frozen assets that could easily depreciate or are costly to maintain.

Members of the College said:
Vice-President for Values and Transparency, Věra Jourová said: “EU sanctions must be respected and those trying to go around them punished. The violation of EU sanctions is a serious crime and must come with serious consequences. We need EU-wide rules to establish that.  As a Union we stand up for our values and we must make those who keep Putin’s war machine running pay the price”     
Commissioner for Justice and Consumers, Didier Reynders, said: “We must ensure that persons or companies that bypass the EU restrictive measures are held account. Such action is a criminal offence that should be sanctioned firmly throughout the EU. At present, divergent criminal definitions and sanctions as regards the violation of the restrictive measures can still lead to impunity. We need to close the loopholes and provide judicial authorities with the right tools to prosecute violations of Union restrictive measures”.
Commissioner for Home Affairs, Ylva Johansson said: “Crime bosses use intimidation and fear to buy silence and loyalty. But usually their greed means embrace of a rich lifestyle. That always leaves a trail. Now the European Commission is proposing new tools to fight organised crime by following this trail of assets. This proposal allows Asset Recovery officers to trace and freeze: trace where the assets are and issue an urgent freezing order. The tracing allows assets to be found and the urgent freezing gives time for courts to act. This proposal will cover new types of crime including firearms trafficking, extortion, to the tune of 50 billion. Our proposal also goes after unexplained wealth. Those at the top of criminal gangs will no longer be insulated from prosecution. Lastly the criminalisation of sanctions violation mean that reaction time against rogue actors is much quicker.”
Background
Restrictive measures are an essential tool for defending international security and promoting human rights. Such measures include asset freezes, travel bans, import and export restrictions and restrictions on banking and other services. Currently, there are over 40 regimes of restrictive measures in place in the EU and the rules criminalising the violations of such measures vary across Member States.
The Union has put in place a series of restrictive measures against Russian and Belarusian individuals and companies, as well as sectoral measures some of which date back to 2014. The implementation of EU restrictive measures following the Russian attack on Ukraine shows the complexity of identifying assets owned by oligarchs, who hide them across different jurisdictions through complex legal and financial structures. An inconsistent enforcement of restrictive measures undermines the Union’s ability to speak with one voice.
In order to enhance Union-level coordination in the enforcement of these restrictive measures, the Commission set up the ‘Freeze and Seize’ Task Force. Besides ensuring coordination among Member States, the Task Force seeks to explore the interplay between restrictive measures and criminal law measures. So far, Member States reported frozen assets worth €9.89 billion and blocked €196 billion worth of transactions. On 11 April, Europol, jointly with Member States, Eurojust and Frontex, launched Operation Oscar to support financial and criminal investigations targeting criminal assets owned by individuals and legal entities covered by EU sanctions.
Restrictive measures are only effective if systematically and fully enforced, and violations punished. Member States are already required to introduce effective, proportionate and dissuasive penalties for violations of restrictive measures. However, some Member States use much broader definitions, others have more detailed provisions in place. In some Member States, violation of restrictive measures is an administrative and a criminal offence, in some purely a criminal offence, and in some, restrictive measures violations currently only lead to administrative penalties. This patchwork enables persons subject to restrictive measures to circumvent them.
The Commission has also published today a progress report on the implementation of the EU Security Union Strategy, which highlights the security threats stemming from Russia’s unprovoked and unjustified war against Ukraine. The report emphasizes the need of a coordinated EU approach on a range of issues and highlights that fight against organised crime is one of the top priorities for the EU in ensuring a Security Union for all.
Compliments of the European Commission.
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Effective tax rates on labour rebounded in 2021 as the global economy recovered and many countries began withdrawing or scaling back measures implemented in response to the COVID-19 pandemic, according to a new OECD report.
Taxing Wages 2022 shows that rising household incomes in 2021 coupled with the reversal of many tax and benefit policies linked to the pandemic drove increases in effective taxes on wages across the OECD. This marks a turn-around from 2020, when the pandemic drove significant decreases in the labour tax wedge – defined as the total taxes on labour paid by both employees and employers, minus family benefits, as a percentage of the labour cost to the employer.
The report points to an increase in the tax wedge in a majority of OECD countries during 2021, as many countries withdrew or scaled back measures introduced to support households during the pandemic. In spite of these increases, the average tax wedge across the OECD declined slightly as relatively large declines in the tax wedge were observed in a small number of countries where new COVID-19 support measures were introduced in 2021.

In most countries, increases to the tax wedge in 2021 have more than offset the sharp declines recorded in 2020 for a number of household types, and have seen the tax wedge rebound to higher levels than in 2019 before the pandemic. For a one-earner couple on 100% of the average wage with two children and for a single-parent household earning 67% of the average wage with two children, the tax wedge was larger in 2021 than it was in 2019 in 21 countries.
The average tax wedge for the one-earner couple on 100% of the average wage with two children declined by 1.2 percentage points over the 2019-21 period, while that of the single parent on 67% of the average wage with two children declined by 1 percentage point. Both falls were larger than the decline for the single worker without children, for whom the tax wedge fell by 0.3 percentage points to 34.6%.
Between 2020 and 2021, the tax wedge for the single worker increased in 24 of the 38 OECD countries, fell in 12 and remained the same in two. The increases exceeded one percentage point in Israel, the United States and Finland, while the declines exceeded one percentage point in Australia, Latvia, Greece and the Czech Republic. In almost all countries where the tax wedge increased for this household type, the rise was driven by higher personal income tax, as higher average wages interacted with the progressivity of tax systems.
The tax wedge for one-earner households on the average wage with two children increased in 27 countries, fell in 10 countries and remained unchanged in one between 2020 and 2021. The increase exceeded one percentage point in 10 countries, with the largest increases seen in Lithuania, Austria and Canada. Decreases of over one percentage point were observed in five countries, with the largest fall in Chile (of 25.5 percentage points) due to the Emergency Family Income, a temporary COVID-19 support measure.
The gap between the OECD average tax wedge for the single worker and the one-earner couple with children widened by 0.36 percentage points between 2020 and 2021 to 10.2 percentage points.
Taxing Wages 2022 provides unique cross-country comparative data on income tax paid by employees, cash benefits received by in-work families and the associated social security contributions and payroll taxes made by employees and employers across the OECD, which are key factors when individuals consider their employment options and businesses make hiring decisions.
The report illustrates how these taxes are calculated and examines the impact on household incomes. It enables cross-country comparisons of labour costs and the overall tax and benefit position for eight different household types, varying by income level and household composition (single persons, single parents, one- or two-earner households, with or without children).
This year’s report includes a special chapter on how labour taxation has responded to the economic shocks related to the COVID-19 pandemic. It pays particular attention to what drove the changes in the main indicators, including trends in average wages and changes to tax and benefit systems in response to the pandemic in 2020 and 2021. These include changes in personal income tax, social security contributions, payroll taxes and cash benefits paid to workers.
Further information and individual country notes are available at: https://oe.cd/taxingwages.
Contacts:

David Bradbury, Head of the OECD’s Tax Policy and Statistics division | David.Bradbury@oecd.org
Lawrence Speer, OECD Media Office | Lawrence.Speer@oecd.org

Compliments of the OECD.
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It’s FTC 101. Companies can’t tell consumers they will use their personal information for one purpose and then use it for another. But according to the FTC, that’s the kind of digital bait-and-switch Twitter pulled on unsuspecting consumers. Twitter asked users for personal information for the express purpose of securing their accounts, but then also used it to serve targeted ads for Twitter’s financial benefit. It wasn’t Twitter’s first alleged violation of the FTC Act, but this one will cost the company $150 million in civil penalties.
The story starts with the FTC’s 2010 complaint against Twitter. In that case, Twitter told users that users could control who had access to their tweets and that their private messages could be viewed only by recipients. But according to the FTC, Twitter didn’t have reasonable safeguards to ensure users’ choices were honored. The 2010 complaint cited multiple instances in which Twitter’s actions – and inactions – led to unauthorized access of users’ personal information. To settle that case, the company agreed to an order that became final in 2011 that would impose substantial financial penalties if it further misrepresented “the extent to which [Twitter] maintains and protects the security, privacy, confidentiality, or integrity of any nonpublic consumer information.”
The just-announced $150 million civil penalty stems from a new complaint filed by the Department of Justice on behalf of the FTC, alleging that Twitter violated the order in the earlier case by collecting customers’ personal information for the stated purpose of security and then exploiting it commercially. You’ll want to read the complaint for the details, but here’s how the FTC says Twitter deceived its customers.
From May 2013 through September 2019, Twitter prompted users to provide their telephone numbers or email addresses for security purposes, such as to enable multi-factor authentication. (Multi-factor authentication is an additional layer of security that requires separate forms of identification to access an account – for example, a password and a code sent to a user’s verified email address.) Twitter also told people it would use their personal data to help with account recovery (for example, if users forgot their passwords) or to re-enable full access if Twitter detected suspicious activity on a person’s account. The FTC says Twitter induced people to provide their phone numbers and email addresses by claiming that the company’s purpose was, for example, to “Safeguard your account.” Twitter further encouraged users to provide that information because “An extra layer of security helps make sure that you, and only you, can access your Twitter account.”
But according to the FTC, much more was going on behind the scenes. In fact, in addition to using people’s phone numbers and email addresses for the protective purposes the company claimed, Twitter also used the information to serve people targeted ads – ads that enriched Twitter by the multi-millions.
Just how persuasive was Twitter’s security pitch? During the time period covered by the complaint, more than 140 million users gave Twitter their email addresses or phone numbers for security purposes. Would that same number of people have given Twitter that information if they knew how else Twitter was going to use it? We don’t think so. If you’re struck by the irony of a company exploiting consumers’ privacy concerns in a way that facilitated further invasions of consumers’ privacy, it’s an irony not lost on the FTC.
In addition to imposing a $150 million civil penalty for violating the 2011 order, the new order adds more provisions to protect consumers in the future:

Twitter is prohibited from using the phone numbers and email addresses it illegally collected to serve ads.
Twitter must notify users about its improper use of phone numbers and email addresses, tell them about the FTC law enforcement action, and explain how they can turn off personalized ads and review their multi-factor authentication settings.
Twitter must provide multi-factor authentication options that don’t require people to provide a phone number.
Twitter must implement an enhanced privacy program and a beefed-up information security program that includes multiple new provisions spelled out in the order, get privacy and security assessments by an independent third party approved by the FTC, and report privacy or security incidents to the FTC within 30 days.

What can other companies take from the latest action against Twitter?
What the text giveth, a privacy policy or buried disclaimer cannot taketh away. Consumers have a right to rely on what you say at the time you ask for their information. Trying to take it back in a contradictory statement buried elsewhere on your website is unlikely to correct a misrepresentation.
Keeping customers’ information secure is a win-win. Consumers benefit when companies take extra steps to protect their personal data. So let’s be clear: Multi-factor authentication can be an effective way to do that. Don’t discourage people from agreeing to multi-factor authentication by making them give up their privacy to use it.
Violating FTC orders will result in substantial penalties. The FTC takes order enforcement seriously and will use every lawful means to hold recidivists responsible for further violations.
Compliments of the U.S. Federal Trade Commission.
The post Twitter to pay 0 million penalty for allegedly breaking its privacy promises – again first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, the Commission is presenting the State of Schengen Report 2022. This is the first time the Commission is presenting such report, following last year’s Schengen Strategy. This report  is part of the Commission’s initiative to reinforce the Schengen governance through a yearly reporting exercise presenting the state of Schengen, identifying priorities for the year ahead and monitoring progress made at the end of a given year. The State of Schengen report will serve as basis for discussions of Members of the European Parliament and Home Affairs Ministers in the Schengen Forum on 2 June, and in the upcoming Schengen Council on 10 June.
Vice President Margaritis Schinas said: “The Schengen area has unified our continent and is emblematic of the European way of life. Over the past year we have taken decisive steps to further strengthen Schengen’s governance and rebuild trust in this crucial driver of our economies. Today’s reports reflect that unwavering commitment to ensure Schengen emerges stronger from the variety of challenges it has faced.”
Commissioner for Home Affairs Ylva Johansson said: “The freedom to move, live and work in different Member States is held dear by Europeans. Recent crises and challenges have shown that we cannot take this freedom for granted. We will keep working together to deliver on the priorities set out in the State of Schengen Report, and to steer the European Border and Coast Guard to work in a more effective and integrated way. Schengen is a shared responsibility that requires the engagement and commitment of all of us.”
A state of play of the Schengen area and new priorities
The State of Schengen Report 2022 is the starting point for the new annual Schengen cycle. The cycle provides for a regular ‘health-check’ on Schengen, allowing to identify problems early on to ensure common responsibility and to promote the uptake of appropriate measures. Interinstitutional discussion will take place at the Schengen Forum on 2 June, and political deliberations will follow in the June Schengen Council. This process is part of the new Schengen governance that enhances participation of all the actors involved to monitoring the functioning of the Schengen area and follow-up with necessary measures. The new Schengen Evaluation and Monitoring Mechanism, which the Commission proposed in June 2021 and which has been recently adopted by the Council, will play a crucial role in this new Schengen governance model.
The report sets a list of priority actions for 2022-2023 that are to be addressed at both national and European level such as:

implementing the new IT architecture and interoperability for border management,
making full use of cross-border cooperation tools,
ensuring systematic checks at the external borders of all travellers,
ensuring that Frontex reaches the full potential of its mandate,
lifting all long-lasting internal border controls, and
adopting the revised Schengen Borders Code.

The report also reminds of the importance of completing the Schengen area and calls upon the Council to adopt the decisions to allow Croatia, as well as Romania and Bulgaria to formally become a part of it, in view of the fact that all criteria have been fulfilled. The same will apply to Cyprus once it has successfully completed the Schengen evaluation process.
The report also presents the priorities resulting from the Schengen evaluations. The Schengen evaluations currently cover external border management, police cooperation, return, the Schengen information System, visa policies and data protection.
While Schengen evaluations during the last years have demonstrated that in general terms Member States implement adequately the Schengen rules, there are some areas where improvements can be made. This demonstrates that the evaluation mechanism is effective and leads to continuous strengthening of the Schengen area. Additional efforts are required notably in the fields of return and the Schengen Information System. Indeed, in an area without controls at the internal borders, solid police cooperation between Member States together with effective implementation of the large-scale information systems, notably the Schengen Information System is indispensable, as well as effective return and common visa policies.
In parallel to the State of Schengen Report, the Commission is also consulting the institutions on the future multiannual strategic policy for European integrated border management, and presenting a report on the implementation of the obligation Member States have to carry out systematic checks at the external borders of the EU.
The future of European integrated border management
With today’s Policy Document, the Commission is starting a consultation with the European Parliament and the Council on the future of integrated border management.

It launches the multiannual strategic policy cycle for European Integrated Border Management, which will guide how all the actors within the European Border and Coast Guard operate over the next five years.
It sets the way forward reflecting on the main elements of the Integrated Border Management. This includes: border control; search and rescue; risk analysis; inter-agency, EU and international cooperation; return; fundamental rights; research and innovation; and education and training.
It will lead to a Communication establishing the Multiannual Strategic Policy for European integrated border management, to be adopted by the end of 2022.

Systematics checks at the external borders of the EU
The Commission is also publishing the report on the implementation of the Article 8 of the Schengen Border Code, according to which Member States are under an obligation to carry out systematic checks against relevant databases on all persons crossing the EU’s external borders, including persons enjoying the right to free movement. This measure was intended to strengthen the EU’s internal security following findings that EU citizens were among foreign terrorists fighters returning to the EU.
The report to the European Parliament and the Council analyses the implementation and impact of these systematic checks. It concludes that the application of systematic checks filled an important regulatory gap, despite challenges faced by Member States in the implementation of these rules. The Commission intends to address those challenges and support Member States in the upcoming review of the Practical Handbook for Border Guards, which is used by Member State competent authorities when carrying out border checks on persons.
Next Steps
The reports adopted today will feed into the next Schengen Forum in June. The upcoming Schengen Council will be the opportunity for Ministers to endorse the policy priorities identified in the State of Schengen Report. Increased political ownership based on dialogue and regular monitoring will ensure implementation of the priorities for the Schengen area. For this reason, the Commission calls on Member States and EU agencies to take the necessary steps to deliver on these priorities and take the necessary follow-up actions. The Commission also invites the Schengen Council in June to endorse the key elements of the new Schengen governance model and the priorities for 2022-2023. The Commission will closely accompany this process both at the political and technical levels, and it will report on progress achieved and follow-up actions at the end of the annual cycle.
Background
Today’s proposals complement the EU’s continuous efforts to improve Schengen’s overall functioning and governance. The Schengen area without controls at internal borders is a historic achievement of European integration. Since its foundations were laid in 1985, it has changed the daily reality of millions of people. Almost 1.7 million people reside in one Schengen State and work in another. People have built their lives around the freedoms offered by the Schengen area, with 3.5 million people crossing between Schengen States every day. In June 2021, the Commission presented the Schengen Strategy taking stock of the challenges the area has faced in recent years and sets out a path forward to make the Schengen area stronger and establish a solid Schengen Governance.
Compliments of the European Commission.
The post State of Schengen: EU Commission sets new priorities and new governance model first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Economists miscalculated the disruptions of the global financial crisis and the pandemic—and need to build better models
Does globalization enhance resilience? Or does it have no effect? Or the opposite effect?
For the two major economic disruptions so far this century—the global financial crisis starting in 2008 and the COVID-19 pandemic starting in 2020—economists’ answers to those questions were largely wrong. As for the financial crisis, most of them underestimated the risks of financial globalization, and when it came to the pandemic, most overestimated the risks of sprawling, intricate production networks and trade globalization.
As the Russian invasion of Ukraine and the sweeping sanctions that followed now threaten to ignite a third great crisis, it’s important to understand where economic analysis goes wrong and the adjustments practitioners need to make to get things right. The flawed predictions about the financial crisis and the pandemic certainly reflected inadequate understanding of the workings of financial and trade markets. And they most likely also grew out of overreliance on imperfect economic modeling.
Before the financial crisis, most economists had a positive view of financial globalization’s effects on resilience. The thinking was that the growth of the financial sector, especially international finance, would allow economic agents and countries to diversify risk through financial instruments. New financial products would fill missing markets. The expectation was that cross-border financial integration would lead to more risk sharing.
There were significant caveats and voices of doubt. In 2005, former IMF Chief Economist Raghuram Rajan warned that “even though there are far more participants who are able to absorb risk today, the financial risks that are being created by the system are indeed greater. … They may also create a greater (albeit still small) probability of a catastrophic meltdown.”
Overreliance on self-correcting financial markets
In fact, the US subprime mortgage crisis did spill over to global banks and across borders precisely because of those same links that were supposed to provide insurance and resilience. Two years after he left office as chairman of the Federal Reserve, Alan Greenspan finally conceded that he was in error about regulation, in congressional testimony on October 23, 2008. “A humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending,” The New York Times reported.
More broadly, a vast literature has focused on why global finance proved so fragile and led to the global financial crisis. Incomplete knowledge about networks, global imbalances, loose monetary policies that led to excessive risk-taking, improperly aligned incentives, and gaps in regulation, perhaps in part for political economy reasons—among many factors—have all been cited by researchers.
A crisis whose initial magnitude was estimated at less than $200 billion wreaked havoc on the global financial system to the tune of several trillion dollars, resulted in devastating unemployment and social costs around the globe, and set off the worst recession since the Great Depression.
Overestimating the pandemic’s damage
What happened during the COVID-19 crisis? As the pandemic began, world production and trade seemed highly vulnerable. Over the past few decades, both have increasingly relied on just-in-time global value chains. In this system, key materials and components are produced in different countries or regions based on comparative advantages. While these production networks and global value chains have enhanced efficiency, they have also led to new fragility. A single missing input can block entire production chains. To capture the idea of “critical inputs,” economists used models with low elasticities of substitution between different inputs.
This line of thought seemed to be vindicated by disruptions following natural disasters, including Hurricane Katrina and New Orleans in 2005 and the Great East Japan Earthquake of 2011. A 2021 study of the Japanese case found that “even if average firm-level effects are not necessarily large, the potential propagation of shocks over the economy’s production network can impact a significant fraction of firms, thus resulting in movements in macroeconomic aggregates.” Other researchers suggested that similar logic could apply to the transmission of shocks across borders.
In the context of COVID-19, this implied that if the pandemic knocked out only one key country—or region within a country, or factory for that matter—it could break entire production chains. Given the diffusion of the pandemic around the world, trade could be particularly vulnerable. This view was not common only in academic circles. Emphasizing supply disruption, the World Trade Organization and several other groups warned that the pandemic would lead to a collapse in trade. Serious news outlets reported that such disruption was taking place, such as the Wall Street Journal in an August 2020 article, “Covid Crisis Drives Historic Drop in Global Trade.” Against this backdrop, it was expected that the pandemic would devastate global economies. For instance, the IMF’s World Economic Outlook (WEO) projections in April 2020 forecast a large drop in world trade, even as a share of world income.
What actually happened was quite different. Chart 1 shows the evolution of projections of world merchandise imports by value. World merchandise imports are commonly used as a measure of trade globalization. The advantage of this measure is that several vintages of projections are readily available.

The chart shows two striking facts. First, at the onset of the pandemic in April 2020, the IMF forecast a collapse in world trade. It materialized at first but wasn’t as deep as expected. Second, the rebound was substantially sharper than estimated, and by the third quarter of 2020 trade was well above the levels projected before the pandemic. The October 2021 and January 2022 issues of the WEO projected that the upsurge was likely to continue. Thus, the collapse that the supply-chain theory seemed to predict turned out to be rather short-lived.
This pattern was not simply a reflection of assumptions about world GDP. Chart 2 shows that even as a share of GDP the initial projections from April 2020 were unduly pessimistic. On that basis, trade soared well above pre-pandemic projections by the third quarter of 2020. The picture doesn’t change when we exclude imports of oil, whose price rose sharply. And the pattern holds even when we focus on trade volumes rather than values.

Trade rebounded extremely quickly in all regions even as the pandemic raged on. This was especially true in Asia, a region where complex value chains are common. Chart 3 shows the sharp bounce-back in global merchandise trade for advanced economies and emerging markets.

Where forecasts went wrong
The prediction that expanding production networks and trade globalization would make the world economy less resilient turned out to be wrong. Why? The question has two components: (1) Why did demand for traded goods boom? (2) How could supply increase to satisfy this unprecedented expansion of demand?
Regarding the first question, massive government fiscal stimulus increased demand for traded goods, and the composition of demand tilted toward durable imports. The pandemic shifted consumption patterns from services such as travel, transportation, and entertainment to goods such as electronics and other durables, which are trade-intensive and global-value-chain-intensive. This pro-trade composition effect was the opposite of what happened during the financial crisis, when uncertainty depressed trade-intensive investment.
As for the second question of how supply was able to catch up and lead to a sharp rebound in global trade, it could be that rather than a source of fragility, global value chains have hidden strengths. Participation in these linkages could have raised exporters’ vulnerability to foreign shocks, but it may also have made them less susceptible to domestic shocks—a largely unnoticed effect. During the COVID-19 crisis, we have observed both mechanisms at work. Whatever the reason, the collapse in trade was short-lived, and commerce quickly surpassed pre-pandemic levels as supply at least partially kept up with booming demand. We call this the “resilience of global trade.”
Reports of widespread shortages and bottlenecks are now common. This is to be expected to some extent in the context of surging trade. With global commerce projected to be close to 25 percent higher in 2022 than predicted soon after the pandemic hit, shortages were bound to occur. The October 2021 WEO noted that the rise in shipping costs during the early phases of the recovery were driven predominantly by increasing demand. This does not mean that supply disruptions do not matter or that they have been fully mended. The point is rather that supply ultimately must match demand to lead to higher realized outcomes. Less severe supply shortages could have meant an even greater rebound in trade.
Lessons for economists
What lessons can economists learn from this double error?
The mistaken assessments of the global financial crisis and the pandemic may in part reflect an imperfect understanding of the microstructure of financial and trade markets. In the case of financial markets, economists were mesmerized by the narrative that the development of missing markets would automatically lead to risk diversification. Nobel laureate Joseph Stiglitz argued in 2009 that the belief that markets are efficient–—and that efficient markets rule out the possibility of a bubble—gave the Federal Reserve the confidence to ignore mounting evidence that there was indeed a bubble. In the case of trade, economists were perhaps captivated by the logic of comparative advantage, economies of scale, and production networks. In the case of both blunders, what may have led economists astray was that they put too much faith in stylized models.
What should have been just modeling or strategies for simplification became the lens to analyze the effect of globalization on resilience. And although the mistakes pointed in opposite directions, they may oddly enough have had the same origin. Economic models are ultimately a simplified description of the real world. Although such models help us better understand how economies work, their true test lies in flagging risk or lack of risk to guide preemptive policy responses.
From a forward-looking perspective, the questions are, Can the profession lead, and how can it encourage a more critical view of prevailing paradigms? In a 2021 lecture, Pierre-Olivier Gourinchas, currently IMF research department director and economic counsellor, discussed post-financial-crisis progress toward understanding the implications of the microstructure of financial markets. He argued that the global financial crisis powerfully reminded the world of the importance of financial frictions and linkages and showed how economic research in the past two decades aimed to address this problem.
It is still early to draw definitive conclusions about the economic effects of the COVID-19 pandemic, but clearly “it is already a powerful illustration of the role of sectoral production frictions and linkages, especially across borders,” as a speaker at the IMF Annual Research Conference put it in 2021. Nobel laureate Michael Spence argues that “we need better models for predicting how supply chains will evolve, including their likely responses to shocks.” Apart from the humanitarian tragedy, the war in Ukraine is also a reminder of the importance of trade and financial linkages in today’s integrated global economy. Future research should no doubt focus on such linkages, especially when analyzing long-term effects on the global economy.
Authors:

Prachi Mishra is a division chief in the IMF’s Research Department

Antonio Spilmbergo, deputy director, IMF’s Research Department

Compliments of the IMF.
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Russia has demonstrated that it is an unreliable supplier of energy to Europe through unjustified and unacceptable actions such as cutting off electricity and natural gas to Finland, halting natural gas exports to Poland and Bulgaria, and threatening similar actions against other European nations. The European Commission and the United States condemn Russia’s use of energy blackmail and reaffirm our commitment to strengthening Europe’s energy security.
Across Europe, from the Nordics to the Balkans, efforts are underway to diversify supplies and reduce dependence on Russian gas. Since 2020, Finland has been interconnected to Estonia via the Balticonnector, a project supported by the European Commission, which increases security of supply for Finland and the region. Furthermore, on May 1, the Poland-Lithuania Gas Interconnector started its commercial operation which reinforces optionality and resilience of the whole Baltic gas market and was also supported through the Connecting Europe Facility of the European Commission.
The European Commission and the United States understand the urgency of taking decisive action to reduce energy imports from Russia. Together, we are partnering to address these challenges under our joint Task Force on Energy Security announced by Presidents Biden and von der Leyen on March 25. Through the Task Force we will continue working to diversify Europe’s supply of natural gas while we accelerate the deployment of energy efficiency and smart technologies in European homes and businesses, electrify heating, and ramp-up clean energy output to reduce demand for fossil fuels altogether.
As an important step towards realizing the goals of the Task Force, the European Commission and the United States welcome Finland’s contract to lease a floating LNG import terminal from a U.S. provider that will be operational before the end of this year.
Compliments of the European Commission.
The post Joint Statement between the European Commission and the United States on European Energy Security first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

On 23 May, 2022, the Council approved conclusions on developing the Union’s cyber posture. The posture aims to demonstrate the EU’s determination to provide immediate and long-term responses to threat actors seeking to deny the EU a secure and open access to cyberspace and affect its strategic interests, including the security of its partners.
Cybersecurity initiatives
In the conclusions Council highlights the five functions of the EU in the cyber domain:

strengthen resilience and capacities to protect;
enhance solidarity and comprehensive crisis management;
promote the EU’s vision of cyberspace;
enhance cooperation with partner countries and international organisations;
prevent, defend against and respond to cyber-attacks.

Ministers, among other things, call upon the Commission to propose EU common cybersecurity requirements for connected devices and associated processes and services, invites relevant authorities such as the EU’s Agency for Cybersecurity (ENISA) to formulate recommendations in order to reinforce the resilience of communications networks and infrastructure within the EU and stresses the importance of establishing regular cyber exercises in order to test and develop the EU internal and external response to large-scale cyber incidents.
Background
Cyberspace has become an arena for geopolitical competition and therefore the EU must be able to swiftly and forcefully respond to cyberattacks, such as state-sponsored malicious cyber activities targeting the EU and its Member States and make full use of all its instruments. Hostile actors need to be aware that cyberattacks against Member States and EU institutions will be detected early, identified promptly and met with all necessary tools and policies.
Compliments of the European Council.
The post Cyber posture: EU Council approves conclusions first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

What is included in this year’s European Semester Spring Package?
The 2022 European Semester Spring Package includes:

a Communication on the main elements of the European Semester Spring Package;
country-specific recommendations (CSRs) for 27 Member States;
country reports for 27 Member States;
in-depth reviews for 12 Member States
a report under Article 126(3) of the Treaty on the Functioning of the EU;
opinions on the draft budgetary plans of Germany and Portugal;
the fourteenth enhanced surveillance report for Greece;
post-programme surveillance reports for Cyprus, Ireland, Spain and Portugal;
a proposal for a Council Decision on guidelines for the employment policies of the Member States; and
a monitoring report on progress towards the UN Sustainable Development Goals in an EU context.

How has the European Semester process been adapted this year?
For the 2022 cycle, the European Semester preserves its main purpose of broad economic and employment policy coordination, while evolving in line with the implementation requirements of the Recovery and Resilience Facility (RRF). The implementation of the RRF makes it necessary to continue adapting the European Semester to take into account overlaps and ensure that joint efforts can focus on the delivery of high-quality and ambitious recovery and resilience plans (RRPs).
The implementation of the plans will drive Member States’ reform and investment agendas for the years to come. The European Semester, with its broader scope and multilateral surveillance, will complement this implementation process. The two processes will continue to be intrinsically linked and every effort will be made to avoid overlaps and eliminate unnecessary administrative burdens.
As announced in the 2022 Annual Sustainable Growth Survey, this year’s Spring Package reintroduces country reports and country-specific recommendations (CSRs). The country reports provide a snapshot of the existing and newly emerging challenges along the four dimensions of competitive sustainability, as well as an analysis of individual Member States’ resilience.
How does the European Semester Spring Package take account of the exceptional circumstances brought about by Russia’s invasion of Ukraine?
The EU economy reached its pre-pandemic output level in the autumn of 2021 and the outlook before Russia invaded Ukraine was for a phase of prolonged and robust expansion.
However, Russia’s war of aggression against Ukraine has created a new environment, exacerbating pre-existing headwinds to growth, which were previously expected to subside. Further hikes in commodity prices, renewed supply disruptions and heightening uncertainty are denting growth and imply significant downside risks. It also poses additional challenges to the EU economies related to security of energy supply and fossil fuel dependency on Russia.
REPowerEU is Europe’s plan to end Europe’s dependency on Russian fossil fuels as soon as possible. It is also about rapidly reducing our dependence on Russian fossil fuels by fast-forwarding the clean transition and joining forces to achieve a more resilient energy system and a true Energy Union.
The CSRs adopted in the context of the European Semester provide guidance to Member States to adequately respond to persisting and new challenges and deliver on their shared key policy objectives. This year, they also include guidance on new and dedicated REPowerEU chapters in the RRPs, to reduce the dependency on fossil fuels through reforms and investments in line with the REPowerEU objectives.
What is the link between the European Semester Spring Package and REPowerEU?
The CSRs adopted in the context of the European Semester provide guidance to Member States to adequately respond to persisting and new challenges and deliver on their shared key policy objectives. This year, this includes an energy-related recommendation to all Member States addressing major challenges such as security of supply, EU´s energy independence and climate change – offering targeted guidance for each Member State on reducing the dependency on fossil fuels in line with the REPowerEU objectives. Measures to be included in the REPowerEU chapters are expected to address the 2022 country-specific recommendations related to energy challenges.
How do the country-specific recommendations reflect the Commission’s priorities?
The RRF is the central tool to deliver the EU policy priorities under the European Semester and, in combination with REPowerEU, to address newly emerged challenges.
In line with the RRF Regulation, national RRPs cover all or a significant subset of the relevant CSRs.
Targeted new CSRs address a limited number of additional reform and investment challenges. The Commission proposes that the Council address all Member States which have had their recovery and resilience plan approved with:

a recommendation on fiscal policy, including fiscal structural reforms where relevant;
a recommendation on the implementation of the RRP and the cohesion policy programmes;
a recommendation on energy policy in line with the objectives of REPowerEU and the European Green Deal; and
where relevant, an additional recommendation on outstanding and/or newly emerging structural challenges.

The scope of the recommendations is larger for Member States that do not yet have approved RRPs.
How do the country-specific recommendations support the green transition?
The CSRs adopted in the context of the European Semester provide guidance to Member States to adequately respond to persisting and new challenges and deliver on their shared key policy objectives. This year, they also include guidance on reducing the dependency on fossil fuels in line with the REPowerEU objectives.
The CSRs focus on the need to end the European dependency on fossil fuel imports from Russia, while at the same time reduce the use of fossil fuels by prioritising energy savings and producing clean energy. Where relevant, Member States are recommended to accelerate and reinforce their reforms and investments in these areas, backed by financial and legal measures to build the new energy infrastructure and system that Europe needs.
How do the country-specific recommendations provide guidance to Member States on reducing dependence on fossil fuels in line with REPowerEU objectives?
The EU is heavily reliant on fossil fuels. Around 90% of the gas used in the EU is imported, with Russia providing almost half of these volumes in 2021.
A new country-specific recommendation has been introduced and tailored to each Member State in order to reduce the EU’s reliance on fossil fuels overall, and gas dependency on Russia. The recommendations take into consideration the need for Member States to accelerate the deployment of renewable energy and the necessary infrastructure sector, as well as increasing energy efficiency to reduce energy consumption overall. They also consider the need and potential to increase the capacity of interconnections across the EU.
What fiscal guidance is the Commission providing to Member States for the period ahead?
The specific nature of the macroeconomic shock imparted by Russia’s invasion of Ukraine, as well as its long-term implications for the EU’s energy security needs, call for a careful design of fiscal policy in 2023.
Based on the spring 2022 forecast, which projects GDP growth to remain in positive territory over the forecast horizon albeit amid high uncertainty and downside risks, a broad-based fiscal impulse to the economy in 2023 does not appear warranted. Fiscal policy should expand public investment for the green and digital transition and energy security. Full and timely implementation of the RRPs is key to achieving higher levels of investment. Fiscal policy should be prudent in 2023, by controlling the growth in nationally-financed primary current expenditure, while allowing automatic stabilisers to operate and providing temporary and targeted measures to mitigate the impact of the energy crisis and to provide humanitarian assistance to people fleeing from Russia’s invasion of Ukraine.  Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances.
Moreover, Member States’ fiscal plans for next year should be anchored by prudent medium-term adjustment paths reflecting fiscal sustainability challenges associated with high debt-to GDP levels that have increased further due to the pandemic. To reduce risks from climate change, Member States are encouraged to systematically consider its implications on budgetary planning, alongside with policies and tools that help prevent, reduce and prepare for climate-related impacts in a fair way. Green budgeting practices in the Member States should be continued and encouraged to ensure coherence of public expenditures and revenues with environmental goals.
Fiscal policies should continue to be appropriately differentiated across Member States:

Member States with high debt should ensure a prudent fiscal policy in 2023, in particular by limiting the growth of nationally-financed current expenditure below medium-term potential output growth, taking into account continued temporary and targeted support to households and firms most vulnerable to energy price hikes and to people fleeing Ukraine. For the period beyond 2023, these countries should pursue a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring credible and gradual debt reduction and fiscal sustainability in the medium term through gradual consolidation, investment and reforms.
Member States with low/medium term should ensure current expenditure is in line with an overall neutral policy stance in 2023, taking into account continued temporary and targeted support to households and firms most vulnerable to energy price hikes and to people fleeing Ukraine. For the period beyond 2023, Member States should pursue a fiscal policy aimed at achieving prudent medium-term fiscal positions.

Does the Commission have any concerns regarding Member States’ fiscal sustainability?
Continuing to ensure public debt sustainability remains important for many Member States. Medium- and long-term fiscal sustainability challenges largely reflect the significant impact of the COVID-19 pandemic on public finances, which added to existing pre-crisis debt vulnerabilities in several countries.
The challenge of rising expenditure on pensions, health care and long-term care because of an ageing population needs to go hand in hand with ensuring adequacy of pensions and other social benefits. Putting pension systems on a sustainable footing from both a fiscal and social perspective will require further reforms to lengthen careers and making labour markets more inclusive.
Improving the fiscal sustainability of health care and long-term care requires improving their efficiency, while at the same time ensuring their adequacy and accessibility.
What is the Commission’s assessment on the status of the general escape clause?
Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.
On 3 March 2021, the Commission concluded that the deactivation of the general escape clause of the Stability and Growth Pact should be conditional upon the state of the EU and euro area economy, recognising that it will take time for the economy to return to more normal conditions and that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy with the level of economic activity in the EU or euro area compared to pre-crisis levels as the key quantitative criterion.  In the context of war in Europe, unprecedented energy price hikes and continued supply chain disturbances, the state of the EU and euro area economy has not returned to more normal conditions. Moreover, the decision on the continued application or deactivation of the general escape clause should also consider the need for fiscal policy to be able to respond appropriately to the economic repercussions of Russia’s military aggression against Ukraine, including from energy supply disruptions.
The continued activation of the general escape clause in 2023 will provide the space for national fiscal policy to react promptly when needed, while ensuring a smooth transition from the broad-based support to the economy during the pandemic times towards an increasing focus on temporary and targeted measures and fiscal prudence required to ensure medium-term fiscal sustainability.
The general escape clause does not suspend the Stability and Growth Pact. It allows for a temporary departure from the normal budgetary requirements, provided that this does not endanger fiscal sustainability in the medium term. In autumn 2022, the Commission will re-assess the relevance of proposing to open excessive deficit procedures based on the outturn data for 2021. In spring 2023, the Commission will assess the relevance of proposing to open excessive deficit procedures based on the outturn data for 2022, in particular taking into account compliance with the fiscal country-specific recommendations addressed to the Member States by the Council. Based on the above considerations, and given the implications of heightened uncertainty and strong downside risks on the economic outlook for the EU and euro area as a whole, the Commission considers that the Union is not yet out of a period of severe economic downturn.
On this basis, the conditions to maintain the general escape clause in 2023 and to deactivate it as of 2024 are met. The Commission invites the Council to endorse this conclusion to provide clarity to Member States.
When will the Commission present the next steps on the economic governance review?
The Commission will provide orientations on possible changes to the economic governance framework after the summer break and well in time for 2023.
What are the main findings of the Article 126(3) report?
The Commission prepared a report under Article 126(3) of the Treaty on the Functioning of the European Union for 18 Member States (Belgium, Bulgaria, Czechia, Germany, Estonia, Greece, Spain, France, Italy, Latvia, Lithuania, Hungary, Malta, Austria, Poland, Slovenia, Slovakia and Finland).
For all these Member States except Finland, the report assesses their compliance with the deficit criterion. In the case of Lithuania, Estonia and Poland, the report was prepared due to a planned deficit in 2022 exceeding the 3% of GDP Treaty reference value, whereas the other Member States had a general government deficit in 2021 exceeding 3% of GDP.
For Member States with general government gross debt above 60% of GDP in 2021 and who did not respect the debt reduction benchmark – namely Belgium, France, Italy, Hungary and Finland – the report assesses compliance with the debt criterion in 2021 based on outturn data.
The report finds that the deficit criterion is not fulfilled by Belgium, Bulgaria, Czechia, Germany, Estonia, Greece, Spain, France, Italy, Latvia, Lithuania, Hungary, Malta, Austria, Poland, Slovenia and Slovakia. Taking into account all relevant factors, the report finds that the debt criterion is not fulfilled by Belgium, France, Italy, Hungary and Finland. The debt criterion is complied with by Slovakia.
As regards Member States with a debt ratio above the 60% of GDP reference value, the Commission considers, within its assessment of all relevant factors, that compliance with the debt reduction benchmark would imply a too demanding frontloaded fiscal effort that risks to jeopardise growth. Therefore, in the view of the Commission, compliance with the debt reduction benchmark is not warranted under the current exceptional economic conditions.
The Commission does not propose to open new excessive deficit procedures in spring 2022. The COVID-19 pandemic continues to have an extraordinary macroeconomic and fiscal impact that, together with the current geopolitical situation, creates exceptional uncertainty, including for designing a detailed path for fiscal policy. On these grounds, the Commission considers that a decision on whether to place Member States under the excessive deficit procedure should not be taken.
Romania is the only Member State under an excessive deficit procedure, based on the pre-pandemic developments. On 3 April 2020, the Council decided that an excessive deficit existed in Romania based on planned excessive deficit in 2019. In its latest recommendation of 18 June 2021, the Council asked Romania to put an end to the excessive deficit situation by 2024 at the latest. Romania’s general government deficit in 2021 and the fiscal effort in 2021 are in line with those recommended by the Council. Therefore, the procedure is kept in abeyance.
The Commission will reassess Member States’ budgetary situation in autumn 2022. The monitoring of debt and deficit developments will continue on the basis of the 2022 autumn Economic Forecast and the 2023 Draft Budgetary Plans to be submitted by euro area Member States by 15 October 2022. In autumn 2022, the Commission will reassess the relevance of proposing to open excessive deficit procedures.
What are the general findings of the country reports?
The country reports provide a snapshot of the existing and newly emerging challenges along the four dimensions of competitive sustainability, as well as an analysis of the individual Member States’ resilience.
The reports take stock of the implementation of past CSRs and of the measures included in the recovery and resilience plans that will largely drive and complement Member States’ reform and investment agendas until 2026.
The reports identify key outstanding or newly emerging challenges, not sufficiently covered by commitments undertaken in the recovery and resilience plans, which are the basis for this year’s CSRs. This ‘gap analysis’ and the related recommendations notably take into account the need to reduce our energy dependencies following Russia’s invasion of Ukraine, in line with the REPowerEU objectives, and to properly address the related socio-economic implications.
Each country report presents an accessible narrative for the reader to quickly become acquainted with the economic and employment outlook of the country, its key challenges, the main thrust of the policy response envisaged, as well as topical outstanding issues. In addition, the annexes of each report provide country-specific data and analysis across a wealth of topics, covering cross-cutting perspectives (such as progress towards the Sustainable Development Goals) as well as specific policy areas and shedding light on questions such as “the employment and social impact of the green transition”. Such analysis draws on a wide range of data and tools, including the resilience dashboards developed by the Commission, the Social Scoreboard agreed with Member States, and many more.
The findings are varied and – inherently – country-specific given the combination of shocks affecting each country differently. Moreover, as their RRPs differ in scope and magnitude, the key findings distinguish between actions already foreseen in the plans and remaining challenges to be addressed.
How does the Commission assess the recent evolution of macroeconomic imbalances?
The assessment of macroeconomic vulnerabilities is marked by a strong economic recovery from the COVID-19 crisis in a context of rising uncertainty in face of the surging energy and commodity prices and other impacts from the Russian aggression of Ukraine. Private and public debt levels are easing as the economy rebounds from the crisis. Nonetheless, in many cases they remain above their pre-COVID-19 levels, reflecting the sharpness of the economic contraction in 2020, and the measures taken to support the economy. External rebalancing remains incomplete: the current accounts of large net-debtor countries with significant cross-border tourism sectors have improved, but remain below their pre-COVID-19 levels, while large current account surpluses in some Member States persist despite some temporary reduction during the pandemic. House prices are growing at their fastest pace in over a decade. The banking sector weathered the pandemic crisis well, although some risks might emerge as moratoria on debt repayments have ended and temporary support measures are withdrawn.
Overall, vulnerabilities are receding and are falling below their pre-pandemic levels in various Member States; justifying a revision of the classification of imbalances in two cases. The policy agenda embedded in the RRPs, as well as past policy action support further adjustment and stronger fundamentals for the concerned economies, delivering prospects for a continued narrowing of vulnerabilities. Economic growth will support further adjustment but countries marked by low potential growth could face challenging dynamics. Inflationary pressures are rising and tighter financing conditions and exchange rate volatility may weigh on debt servicing. This is a particular risk where private or public debt is held in foreign currencies, and where refinancing needs are substantial.
What are the main findings of the in-depth reviews?
The Commission has assessed the existence of macroeconomic imbalances for the 12 Member States selected for in-depth reviews in the 2022 Alert Mechanism Report. All those Member States had been identified with imbalances or excessive imbalances in the last annual cycle of surveillance under the Macroeconomic Imbalances Procedure.

Ireland and Croatia are no longer experiencing imbalances. In Ireland, debt ratios have declined significantly over the years and continue to display strong downward dynamics. In Croatia, debt ratios have also declined significantly over the years and continue to display strong downward dynamics.
Greece, Italy, and Cyprus continue to experience excessive imbalances.
Germany, Spain, France, the Netherlands, Portugal, Romania, and Sweden continue to experience imbalances.

Details on the country-specific aspects for the 12 concerned Member States are laid out in Appendix 4 of the Communication.
In which areas is the implementation of country-specific recommendations particularly lagging behind? What will the Commission do to improve this?
The 2022 European Semester cycle takes stock of the Member States’ policy action taken to address structural challenges identified in the CSRs adopted since 2019.
Following the establishment of the RRF, the 2022 CSR assessment takes into account the policy action taken by the Member States to date, as well as the commitments undertaken in the recovery and resilience plans, depending on their degree of implementation.
Overall, at least some progress has been achieved with the implementation of 63% of the 2019-2020 CSRs. Compared to last year’s assessment, additional progress has been achieved regarding both 2019 CSRs of a structural nature and more crisis-oriented 2020 CSRs. However, reform implementation differs significantly across policy areas. In particular, Member States have made most progress over recent years in the area of access to finance and financial services, followed by progress in the areas of anti-money laundering and business environment. On the other hand, progress has been particularly slow on pension systems, the single market, competition and state aid, and housing.
Progress with the implementation of the fiscal recommendations adopted in 2021 has been sizeable. Member States have made at least “some progress” in almost 80% of the recommendations addressed to them in July 2021.
The RRF is a central tool to deliver EU and national policy priorities under the European Semester, as the recovery and resilience plans are required to address all or a significant subset of the relevant CSRs. The CSR assessment reflects the current early stages of the RRF’s implementation, rather than the level of progress that could be achieved assuming a full implementation of the plans. Therefore, considerable additional progress in addressing structural CSRs is expected in the years to come with the further implementation of the RRF.
What is the Commission’s assessment of the German draft budgetary plan?
Germany submitted an updated draft budgetary plan (DBP) for 2022 in April, after a new government took office in December 2021.
In 2022, based on the Commission’s forecast and including the information incorporated in its updated Draft Budgetary Plan, the fiscal stance, including the impulse provided by the RRF, is projected to be supportive, as recommended by the Council. Germany plans to provide continued support to the recovery by making use of the RRF to finance additional investment. As recommended by the Council, Germany also plans to preserve nationally financed investment.
The Commission recalls the importance of the composition of public finances and the quality of budgetary measures, including through growth-enhancing investment, notably supporting the green and digital transition. These objectives are fulfilled by the measures underpinning the updated Draft Budgetary Plan.
Germany is invited to regularly review the use, effectiveness and adequacy of the support measures, including those aimed at addressing the increase in energy prices, and stand ready to adapt them to changing circumstances.
What is the Commission’s assessment of the Portuguese draft budgetary plan?
Portugal submitted a new DBP for 2022 in April when the draft law on the State Budget for 2022 was presented to the Portuguese Parliament. In autumn 2022, the Commission did not assess the DBP as submitted by Portugal, given that the State Budget for 2022 had been rejected in the Portuguese Parliament. It instead invited the Portuguese authorities to submit a new DBP for 2022 in due course, and as soon as a government presented to the Portuguese Parliament a new draft law on the State Budget for 2022.
In 2022, based on the Commission’s forecast and including the information incorporated in the DBP, the fiscal stance – including the impulse provided by the RRF – is projected to be supportive. As recommended by the Council, Portugal plans to provide continued support to the recovery by making use of the RRF to finance additional investment. As recommended by the Council, Portugal also plans to preserve nationally financed investment. Portugal broadly limits the growth of nationally financed current expenditure as the significant expansionary contribution of nationally financed current expenditure in 2022 is mainly due to the above-mentioned measures to address the economic and social impact of the increase in energy prices, as well as the costs of providing support to displaced persons. Given the level of Portugal’s government debt and high sustainability challenges in the medium term, when taking supportive budgetary measures, it is important to preserve prudent fiscal policy in order to ensure sustainable public finances in the medium term.
The Commission recalls the importance of the composition of public finances and the quality of budgetary measures, including through growth-enhancing investment, notably supporting the green and digital transition. Making decisive progress in strengthening expenditure control, cost-efficiency, and appropriate budgeting – in particular through intensified efforts in the planned review of public expenditure and in the implementation of measures to improve the financial sustainability of the National Health Service and state-owned enterprises – remains important to facilitate the rechannelling of public resources towards new strategic policy priorities, such as delivering on the twin transition.
Portugal is invited to regularly review the use, effectiveness and adequacy of the support measures, including those aimed at addressing the increase in energy prices, and stand ready to adapt them to changing circumstances.
What are the main findings of the enhanced surveillance report for Greece?
The Commission has published the fourteenth report for Greece under the enhanced surveillance framework that was activated following the conclusion of the financial assistance programme in August 2018. The report concludes that Greece has taken the necessary actions to achieve agreed commitments, despite the challenging circumstances triggered by the economic implications of new waves of the pandemic as well as of Russia’s invasion of Ukraine.
The authorities have completed a number of specific commitments in the areas of public financial management, property taxation, disability benefits, environmental inspections and justice, and agreed on the extension of the mandate of the Hellenic Financial Stability Fund. The EU institutions welcome the close and constructive engagement in all areas and encourage the authorities to keep up the momentum and, where necessary, reinforce the efforts, in particular as concerns reforms in the area of financial sector policies, primary health care, the cadastre, codification of the labour legislation, and reaching the agreed targets for the clearance of arrears.
The report could serve as a basis for the Eurogroup to decide on the release of the next set of policy-contingent debt measures.
The successful delivery of the bulk of the policy commitments and the effective reform implementation have improved the resilience of the Greek economy and strengthened its financial stability. This has significantly reduced the risks of adverse spill-over effects on other Member States in the euro area, hence effectively addressing the condition underpinning the application of enhanced surveillance. The authorities remain committed to reform implementation and to completion of outstanding elements. On the basis of these considerations, the European Commission may not prolong enhanced surveillance after its expiration on 20 August 2022.
What are the main findings of the post-programme reports for Cyprus, Ireland, Spain, and Portugal?
Cyprus‘ economy rebounded strongly from the recession-related to the COVID-19 pandemic. Growth is expected to slow down this year – as Russia’s invasion of Ukraine and the related sanctions are expected to have a negative impact and higher inflation dampens disposable income – before rebounding in 2023. The country’s fiscal position improved markedly in 2021. The general government deficit is expected to narrow further in 2022 and 2023. The Cypriot financial sector also performed well during the COVID-19 crisis and significant further progress was achieved in reducing non-performing loans (NPLs). Cyprus continues to have a sizeable liquidity buffer and benefits from ‘investment grade’ ranking by three major rating agencies.
Ireland‘s economy is expected to continue to grow strongly, though the Russian invasion of Ukraine poses new challenges, including general uncertainty, additional inflationary pressures and new supply bottlenecks, as well as lower growth in Ireland’s trading partners. The outlook for the public finances is favourable, also thanks to buoyant tax revenues. Irish banks recorded sound results for 2021 and remain on a stable footing despite the pandemic. Overall, downside risks prevail.
Spain‘s economy remains on a recovery path despite the disruptions prompted by Russia’s invasion of Ukraine. More dynamic tourism activity and the implementation of the recovery and resilience plan are expected to sustain economic growth over the forecast horizon, while targeted policy response could help moderate energy prices and mitigate the impact of Russia’s invasion of Ukraine on vulnerable households and on the most exposed economic sectors. The very dynamic performance on the revenue side is driving the recovery of the government balance. Nonetheless, downside risks are predominant given the context of large global instability and uncertainty. The Spanish banking sector has remained resilient during the pandemic and the level of NPLs moderate.
Portugal‘s economy has continued to recover at a strong pace, rising beyond its pre-pandemic level in the first quarter of 2022. Growth is expected to continue at a sound pace, helped by the improved outlook in the tourism sector. Public finances have benefited from the recovery and the public deficit turned out significantly below government plans in 2021 and supports the expectation of a comparatively favourable budgetary outlook for 2022. The government debt-to-GDP ratio is set to move below its pre-pandemic level in 2023. The banking sector has improved its profitability, while solvency rates have remained stable after the end of most credit moratoria in September 2021. Overall, the economic outlook remains favourable but the balance of risks has moved to the downside.
What is the current economic and employment outlook?
After the soft patch at the turn of 2021, the EU economy entered 2022 with the prospect of a vigorous expansion over this year and the next. The Russian invasion of Ukraine and the related heightened uncertainty, however, has forced a reassessment of the economic outlook.
According to the Spring 2022 Economic forecast, real GDP growth in the EU is set to slow from an estimated 5.8% in 2021 to 2.7% in 2022 and 2.3% in 2023. Inflation is expected to be higher and remain high for longer than in the previous forecast, driven by war-induced commodity price increases and broadening price pressures. For 2022, it is projected at 6.1% and 2.7% in 2023. While the new growth outlook is considerably less bright than projected before the invasion of Ukraine, it still implies economic expansion, adding momentum to the comfortable starting position upon entering the crisis and the crucial support provided by the full deployment of the RRF. At the same time, the unprecedented nature and size of the new shocks makes all projections subject to considerable uncertainty.
The COVID-19 crisis has affected sectors, regions, and population groups unevenly, and revealed underlying vulnerabilities. Over the past year, the labour market has rallied. By the fourth quarter of 2021, the employment rate had reached 74.0%, surpassing the pre-pandemic level at the end of 2019 by 0.6 pps. The unemployment rate decreased to 6.2% in March 2022 (1.3 pps less than one year before), with substantial support from short-time work schemes and other job retention measures during the peak of the crisis. Over the same period, the monthly youth unemployment rate declined by 4.2 pps to 13.9%, reaching the lowest level ever recorded.
What is included in the proposal on guidelines for employment policies?
This year’s Commission proposal for the employment policies of the Member States for 2022 aligns the narrative to the post-pandemic environment, bringing in more elements related to making the green transition socially fair, as well as reflecting recent policy initiatives of particular relevance, notably in the context of the Ukraine crisis.
For example, the proposed revisions to the Employment Guidelines:

take into account the post-pandemic environment, with flexible working arrangements, such as telework;
incorporate recent policy developments, such as the European Child Guarantee and improving working conditions for people working through digital labour platforms;
underline the need to redouble efforts to address labour shortages and skills mismatches through skills policies and lifelong learning; emphasise the importance of a fair energy transition and policy measures to mitigate its social impact;
refer to support for labour market access and social integration of people fleeing the war in Ukraine; and
underline the importance of support measures for vulnerable households in light of the increase in energy prices and cost of living.

The Guidelines link actions to the three EU headline targets on employment, skills and poverty reduction for 2030 as agreed by EU Leaders at the Porto Summit in 2021, and underline the importance of ambitious national targets.
What lessons can be drawn from the analysis of the EU’s progress in implementing the UN Sustainable Development Goals (SDGs)? How have the SDGs been taken into account in the Spring Package?
The Commission remains committed to integrating the United Nations Sustainable Development Goals (SDGs) into the European Semester. It provides the opportunity for taking a comprehensive look at progress towards EU targets as well as globally shared objectives. The Commission does so along the four dimensions of competitive sustainability, i.e. macroeconomic stability, aspects of environmental sustainability, productivity and fairness.
The 2022 European Semester cycle provides updated and consistent reporting on progress towards the achievement of the SDGs across Member States. Specifically, the country reports summarise the progress of each Member State towards implementation of the SDGs, and include a detailed annex, based on the monitoring carried out by Eurostat.
The country reports will also make reference to the recovery and resilience plans of the 24 Member States which have been adopted by the Council. The support provided under the RRF underpins a significant number of reforms and investments that are expected to help Member States make further progress towards the SDGs.
While progress has been observed in past years with regard to almost all SDGs, there are areas where more needs to be done. This includes, for example, combatting climate change and its impacts (SDG13).
The Commission will continue to monitor the effects of the COVID-19 pandemic and the current geopolitical situation on progress towards achieving the SDGs.
What are the main findings of Eurostat’s report on progress in the implementation of the UN Sustainable Development Goals in the EU? 
The EU made progress towards most goals (14 out of 17 SDGs) over the last five years of available data. The EU continued to make the most progress towards fostering peace and personal security within its territory and improving access to justice and trust in institutions (SDG 16), followed by the goals of reducing poverty and social exclusion (SDG 1) as well as the economy and the labour market (SDG 8).  The assessment of EU progress for the goals on partnerships (SDG 17), clean water and sanitation (SDG 6) and life on land (SDG 15) is broadly neutral, meaning they are characterised by an almost equal number of sustainable and unsustainable developments.
What are the next steps in the European Semester process?
The Commission calls on the European Council to endorse and on the Council to adopt the Commission proposals for the 2022 CSRs. The Commission also calls on Member States to implement the recommendations fully and in a timely manner, in close dialogue with their social partners, civil society organisations and other stakeholders at all levels.
Compliments of the European Commission.
The post Questions and answers on the European Semester 2022 Spring Package first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Commission’s 2022 European Semester Spring Package provides Member States with support and guidance two years on from the first impact of the COVID-19 pandemic and in the midst of Russia’s ongoing invasion of Ukraine.
The Spring 2022 Economic Forecast projects the EU economy to continue growing in 2022 and 2023. However, while the EU economy continues to show resilience, Russia’s war of aggression against Ukraine has created a new environment, exacerbating pre-existing headwinds to growth, which were previously expected to subside. It also poses additional challenges to the EU economies related to security of energy supply and fossil fuel dependency on Russia.
Linking the European Semester, the Recovery and Resilience Facility and REPowerEU
The case for reducing our dependency on fossil fuels from Russia has never been clearer. REPowerEU is about rapidly reducing our dependence on Russian fossil fuels by fast-forwarding the clean transition and joining forces to achieve a more resilient energy system and a true Energy Union.
The European Semester and the Recovery and Resilience Facility (RRF) – at the heart of NextGenerationEU – provide for robust frameworks to ensure effective policy coordination and to address the current challenges. The RRF will continue to drive Member States’ reform and investment agendas for years to come. It is the main tool to speed up the twin green and digital transition and strengthen Member States’ resilience, including through the implementation of national and cross-border measures in line with REPowerEU.
The country-specific recommendations adopted in the context of the European Semester provide guidance to Member States to adequately respond to persisting and new challenges and deliver on shared key policy objectives. This year, they include recommendations for reducing the dependency on fossil fuels through reforms and investments, in line with the REPowerEU priorities and the European Green Deal.
Fiscal policy guidance
The activation of the general escape clause of the Stability and Growth Pact in March 2020 allowed Member States to react swiftly and adopt emergency measures to mitigate the economic and social impact of the pandemic. Coordinated policy action cushioned the economic blow and paved the way for a robust recovery in 2021.
Policies to mitigate the impact of higher energy prices and support those fleeing Russia’s military aggression against Ukraine will contribute to an expansionary fiscal stance in 2022 for the EU as a whole.
The specific nature of the macroeconomic shock imparted by Russia’s invasion of Ukraine, as well as its long-term implications for the EU’s energy security needs, call for a careful design of fiscal policy in 2023. Fiscal policy should expand public investment for the green and digital transition and energy security. Full and timely implementation of the RRPs is key to achieving higher levels of investment. Fiscal policy should be prudent in 2023, by controlling the growth in nationally financed primary current expenditure, while allowing automatic stabilisers to operate and providing temporary and targeted measures to mitigate the impact of the energy crisis and to provide humanitarian assistance to people fleeing from Russia’s invasion of Ukraine. Moreover, Member States’ fiscal plans for next year should be anchored by prudent medium-term adjustment paths reflecting fiscal sustainability challenges associated with high debt-to GDP levels that have increased further due to the pandemic. Finally, fiscal policy should stand ready to adjust current spending to the evolving situation.
The Commission considers that the conditions to maintain the general escape clause of the Stability and Growth Pact in 2023 and to deactivate it as of 2024 are met. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Ukraine, unprecedented energy price hikes and continued supply chain disturbances warrant the extension of the general escape clause through 2023. The continued activation of the general escape clause in 2023 will provide the space for national fiscal policy to react promptly when needed, while ensuring a smooth transition from the broad-based support to the economy during the pandemic times towards an increasing focus on temporary and targeted measures and fiscal prudence required to ensure medium-term sustainability.
The Commission will provide orientations on possible changes to the economic governance framework after the summer break and well in time for 2023.
Article 126(3) report on compliance with the deficit and debt criteria of the Treaty
The Commission has adopted a report under Article 126(3) of the Treaty on the Functioning of the EU (TFEU) for 18 Member States (Belgium, Bulgaria, Czechia, Germany, Greece, Spain, France, Italy, Latvia, Lithuania, Hungary, Malta, Estonia, Austria, Poland, Slovenia, Slovakia and Finland). The purpose of this report is to assess Member States’ compliance with the deficit and debt criteria of the Treaty. For all these Member States except Finland, the report assesses their compliance with the deficit criterion. In the case of Lithuania, Estonia and Poland, the report was prepared due to a planned deficit in 2022 exceeding the 3% of GDP Treaty reference value, whereas the other Member States had a general government deficit in 2021 exceeding 3% of GDP.
The pandemic continues to have an extraordinary macroeconomic and fiscal impact that, together with the current geopolitical situation, creates exceptional uncertainty, including for designing a detailed path for fiscal policy. The Commission therefore does not propose to open new excessive deficit procedures.
The Commission will reassess Member States’ budgetary situation in the autumn of 2022. In spring 2023, the Commission will assess the relevance of proposing to open excessive deficit procedures based on the outturn data for 2022, in particular taking into account compliance with the fiscal country-specific recommendations.
Addressing macroeconomic imbalances
The Commission has assessed the existence of macroeconomic imbalances for the 12 Member States selected for in-depth reviews in the 2022 Alert Mechanism Report.
Ireland and Croatia are no longer experiencing imbalances. In both Ireland and Croatia, debt ratios have declined significantly over the years and continue to display strong downward dynamics.
Seven Member States (Germany, Spain, France, the Netherlands, Portugal, Romania, and Sweden) continue to experience imbalances. Three Member States (Greece, Italy, and Cyprus) continue to experience excessive imbalances.
Overall, vulnerabilities are receding and are falling below their pre-pandemic levels in various Member States, justifying a revision of the classification of imbalances in two cases, where also notable policy progress has been made.
Opinions on the draft budgetary plans of Germany and Portugal
On 19 May, the Commission adopted its opinions on the 2022 draft budgetary plans of Germany and Portugal.
Germany submitted an updated draft budgetary plan for 2022 in April, after a new government took office in December 2021. Also Portugal submitted a new draft budgetary plan for 2022 in April. The Commission did not assess the draft budgetary plan submitted by Portugal in the autumn of 2021, given that the State Budget for 2022 had been rejected in the Portuguese Parliament.
Germany’s fiscal stance in 2022 is projected to be supportive. Germany plans to provide continued support to the recovery by making use of the RRF to finance additional investment. Germany also plans to preserve nationally financed investment.
Portugal’s fiscal stance in 2022 is projected to be supportive. Portugal plans to provide continued support to the recovery by making use of the RRF to finance additional investment. Portugal also plans to preserve nationally financed investment. Portugal is expected to broadly limit the growth of nationally financed current expenditure in 2022.
Enhanced surveillance report and post-programme surveillance reports
The fourteenth enhanced surveillance report for Greece finds that the country has taken the necessary actions to achieve the agreed commitments, despite the challenging circumstances triggered by the economic implications of new waves of the pandemic as well as of Russia’s invasion of Ukraine. The report could serve as a basis for the Eurogroup to decide on the release of the next set of policy-contingent debt measures.
The Commission has also adopted the post-programme surveillance reports for Ireland, Spain, Cyprus, and Portugal. The reports conclude that the repayment capacities of each of the Member States concerned remain sound.
Employment guidelines
The Commission is also proposing guidelines – in the form of a Council decision – for Member States’ employment policies in 2022. Every year, these guidelines set common priorities for national employment and social policies to make them fairer and more inclusive. Member States will now be called to approve them.
Member States’ continued reforms and investments will be crucial to supporting high-quality job creation, the development of skills, smooth labour market transitions, and to address the ongoing labour shortages and skills mismatches in the EU. The guidelines provide steering on how to continue modernising labour market institutions, education and training, as well as social protection and health systems, in order to make them fairer and more inclusive.
This year, the Commission proposes to update the guidelines for Member States’ employment policies with a strong focus on the post-COVID 19 environment, on making the green and digital transitions socially fair, as well as on reflecting recent policy initiatives, including in response to Russia’s invasion of Ukraine, such as measures to enable access to the labour market for people fleeing the war in Ukraine.
Progress towards the UN Sustainable Development Goals
The Commission remains committed to integrating the United Nations Sustainable Development Goals (SDGs) into the European Semester. The 2022 European Semester cycle provides updated and consistent reporting on progress towards the achievement of the SDGs across Member States. Specifically, the country reports summarise the progress of each Member State towards implementation of the SDGs, and include a detailed annex, based on the monitoring carried out by Eurostat.
The country reports also make reference to the recovery and resilience plans of the 24 Member States which have been adopted by the Council. The support provided under the RRF underpins a significant number of reforms and investments that are expected to help Member States make further progress toward the SDGs.
In parallel to the Spring Package, Eurostat has today released the “Monitoring report on progress towards the SDGs in an EU context”. The EU has made progress towards most of the SDGs over the last five years of available data. Most progress has been achieved towards fostering peace and personal security within the EU territory and improving access to justice and trust in institutions (SDG 16), followed by the goals of reducing poverty and social exclusion (SDG 1) as well as the economy and the labour market (SDG 8). In general, further efforts will be necessary to achieve the Goals, in particular in the environmental area like clean water and sanitation (SDG 6) and life on land (SDG 15).
Members of the College said:
Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People, said: “Russia’s invasion of Ukraine has undoubtedly put Europe into extraordinary economic uncertainty. This has resulted in significantly higher prices for energy, raw materials, commodities and food, and is hurting consumers and businesses. With this European Semester Spring package, we are looking to sustain Europe’s economic recovery from the pandemic, and simultaneously phase out our strategic dependence on Russian energy before 2030.”
Paolo Gentiloni, Commissioner for Economy, said: “Ever since the first weeks of the pandemic more than two years ago, the EU and national governments have delivered strong and coherent policy support to our economies, helping to sustain a swift recovery. Today, our common priorities are investment and reform. This is reflected in the recommendations presented today, with their clear focus on the implementation of national recovery and resilience plans and on the energy transition. Fiscal policies should continue to transition from the universal support provided during the pandemic to more targeted measures. As we navigate the new period of turbulence caused by Russia’s invasion of Ukraine, governments must also have the flexibility to adapt their policies to unpredictable developments. The extension of the general escape clause to 2023 recognises the high uncertainty and strong downside risks in a situation where the state of the European economy has not normalised.”
Nicolas Schmit, Commissioner for Jobs and Social Rights said: “The Commission’s Employment Guidelines are a vital aspect of Member States’ priority-setting and policy coordination for employment and social policies. In the wake of the pandemic, it is crucial that the Union and its Member States ensure that the green and digital transitions are socially just. The Commission’s 2022 Guidelines pave the way towards creating more and better jobs and promoting social fairness, which includes supporting the integration of people fleeing the war in Ukraine into labour markets.”
Next steps
The Commission invites the Eurogroup and Council to discuss the package and endorse the guidance offered today. It looks forward to engaging in a constructive dialogue with the European Parliament on the contents of this package and each subsequent step in the European Semester cycle.
Compliments of the European Commission.
The post European Semester Spring Package: Sustaining a green and sustainable recovery in the face of increased uncertainty first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has published a study looking at the potential reasons behind the relatively lower ongoing costs, and better performance, of environmental, social and governance (ESG) funds compared to other funds, between April 2019 and September 2021.
ESMA recently determined that ESG equity undertakings for collective investment in transferable securities (UCITS), excluding exchange-traded funds, were cheaper and better performers in 2019 and 2020 compared to non-ESG peers.
Understanding the cost and performance dynamics of ESG funds is of particular interest as it may bring insights for the overall fund industry on how to make funds more affordable and profitable for retail investors.
ESMA, in today’s article, is looking at some of the potential drivers behind this relative cheapness, and outperformance, of ESG funds, and finds several differences between the two categories of funds:

ESG funds are more oriented towards large cap stocks;
ESG funds are more oriented towards developed economies; and
The sectoral exposures also differ between ESG and non-ESG funds.

Even after controlling for these differences, ESG funds remain statistically cheaper and better performing than non-ESG peers. Further research is thus needed to identify the other factors driving these cost and performance differences.
Contact:

Solveig Kleiveland, Senior Communications Officer | press@esma.europa.eu

Compliments of the European Securities and Market Authority.
The post ESMA study looks at reasons for lower costs in ESG funds first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.