Remarks by Kristalina Georgieva, IMF Managing Director, to the Eurogroup on a Strategy for European Competitiveness, Luxembourg
As prepared for delivery
Thank you, Paschal, for your kind invitation to address ministers today on industrial policy, as part of your broader deliberations on competitiveness.
Last year, when I spoke here about the European capital market union, I started by saying it was a topic close to my heart, one we at the IMF deeply cared about. This year, a different tone: industrial policy is not something my colleagues and I cherish. And there are good reasons for it.
Let me note up-front that I plan to speak not just about industrial policy, but about how it fits in Europe’s strive for competitiveness. As I have argued many times, Europe’s core strength is the single market: fundamentally, Europe derives its prosperity, its competitiveness, and—yes—its market power from its cohesion.
With this basic truth in mind, today I will urge you to place discussions on the role and composition of industrial policy in the context an overarching, high-level strategy for productivity and competitiveness.
As I observed a short while ago as I presented the conclusions of the IMF’s annual consultation on euro area policies, the EU confronts a daunting list of challenges. Population aging; weak productivity growth; energy security; our common struggle against climate change; and, not least, the geoeconomic fragmentation that has, unfortunately, become our new global reality.
Preserving and sharpening Europe’s competitive edge in the face of such challenges requires not a reactive and piecemeal approach, but a well-thought out, multi-pronged strategy. Industrial policy may have a role to play as a small part of this strategy, but let me emphasize: in this case small—well-targeted and well-designed—is beautiful.
***
Of course, it’s a tough world out there—this much we know, I know. Last night I flew in from China, tomorrow I fly out to the United States. For me, this is a short stop at home—always very pleasant. Yes, Europe is geographically in the middle.
But is Europe caught in the middle too? To some extent, one can say Yes.
We see the major shifts underway. We know that many of the geopolitical concerns are real, that economic security actually matters. Across the globe, we see a resurgence in the use of industrial policy. In the US, the Inflation Reduction Act with its local-content requirements. In China, a history of support for various sectors.
Last year alone, we count over 2,600 industrial policy measures worldwide—with the US, China, and the EU making up roughly half of the total. These measures covered at least one-fifth of world trade. More than 70 percent were trade-distorting. Good economic rationale? Often not clear.
Still, some people like to say we live in a world of carnivores and that Europe behaves more like a herbivore. I am not so sure—at least not when I see last week’s tariff announcements on Chinese electric vehicles. You know that some form of retaliation will probably follow. My staff has given me a line on this matter, which I endorse. Let me quickly read it to you:
“The EU and China both benefit from an open trade system; we encourage them to cooperate to address the underlying concerns. Trade restrictions can distort the allocation of investment from where it is optimal, raising the cost of goods and services for final users. They can also slow the green transition and trigger retaliatory actions. We encourage all parties to work within the multilateral framework to resolve their differences.”
So there you have it: our cautionary position on the destructive potential of tit-for-tat protectionist measures.
As a general point, industrial policy can be a powerful tool, one that can, on rare occasion, be put to good use. But remember, history is littered with examples of industrial policy interventions gone wrong — the support for British Leyland in the UK, the ailing shipbuilders in Germany, Groupe Bull for computers made in France, BioValley in Malaysia, Solyndra in the United States, and the list can go on an on. In my personal experience looms large the former Soviet bloc: an entire economic system built around party functionaries deciding how to allocate the people’s savings. We know how that ended.
It is clear to see: technocrats picking winners and interfering in markets is a risky business—costly and distortionary. Design with care, handle with care. Use only when no better tools are available.
Full disclosure: this is personal for me. Having grown up on the other side of the Iron Curtain—the colder side of the Cold War—I much prefer the invisible hand of the market to the heavy hand of big government.
And a side comment: we know that with the pandemic shock and the energy shock governments everywhere have become much bigger. Debt and deficits are high, and now is the time to dial it back, not forward—we need front-loaded fiscal consolidation and lower debt, including to prepare for future shocks.
Coming back to industrial policy, let me briefly unpack when it can be appropriate. Two conditions must be satisfied. First, we must see a clearly identified market failure—the market not properly pricing or delivering a necessary thing. Second, we must assess that a broad-spectrum, less-distortionary, first-best policy approach is either unavailable or unable to deliver the desired outcome on its own.  Only when both conditions are satisfied can the use of an industrial policy intervention be appropriate—and then too, not always.
***
Three concrete examples of cases where industrial policy may have a role to play:

One, climate change. We know that the private sector alone will not deliver enough mitigation, and we know that our best tool—carbon pricing, vital as it is—cannot alone deliver rapidly enough to save us from calamity. There is simply no time to waste. This is existential. It is not something we can afford to take chances on. We at the IMF would argue that there may be a case to bolster mitigation efforts with industrial policy in support of the development and adoption of early-stage clean technologies. But let me be clear: we see no economic case for protecting mature clean tech—let this be produced wherever is least costly, globally. We all benefit from cheaper wind turbines and solar panels!
Two, supply-chain resilience. We saw during the pandemic the problems that arose from concentrated microchip supply. Diversification of the supply of critical goods like semiconductors is a real aim, and private firms may not have the incentive to do enough on their own—they weigh the benefits to themselves but not necessarily to the companies that rely on them further down. Does this mean we have a case for intervening to promote domestic chip production? Not necessarily, but perhaps in some circumstances—after careful analysis of the pros and cons, taking care to preserve a level playing field across firms.
Third, strategic public goods. Defense-related sectors are a classic example, where safeguarding the national security interest may be seen to require promoting domestic production and avoiding excessive reliance on foreign suppliers.

Let me offer a few words on industrial policy design when deployment is contemplated.
Three guiding principles:

First, know that picking winners and losers is inherently difficult. So, use industrial policy judiciously.
Second, as a European specificity, be sure to not undermine the single market. It is the EU’s greatest achievement. It is what gives the EU its economies of scale and scope, its heft on the global scene. Consider the externalities of state aid, for example: recent analysis by IMF staff finds that, while state aid may encourage the firms that receive it to hire more workers or invest more, it actually reduces, by a larger margin, jobs and investment in other firms in the same sector and in other EU countries that do not receive the aid. State aid may still be justified from a social perspective to redress a market failure and deliver benefits in the medium term but beware the potential for collateral damage. Thus, in Europe even more than elsewhere, use industrial policy with caution.
Third, let not industrial policy erect trade barriers that do more harm than good. Favoring domestic firms by relying on tariffs, discriminatory public procurement, or investment-screening controls is not only distortive, it tends to trigger retaliation, leading to less-efficient resource allocation globally. Recent history tells us that when one country introduces protectionist measures, there is about 75 percent probability of retaliation within a year. Ultimately, we get higher prices and fewer choices for consumers—self-defeating. When I think about the new tariffs on electric vehicles, I ask myself: to protect whom? Not today’s grass-roots consumer, who will probably pay more for green transportation. Not climate and the environment. Perhaps there is some intertemporal argument, but we at the IMF are unconvinced—watch out for some new analysis, coming soon.

Given the IMF’s role as guardian of the international monetary system, let me repeat the last point: a global escalation of tariffs can only make us collectively worse off while also undermining our existential struggle against climate change.
Finally, following on from the principles, a few specific recommendations for industrial policy interventions:

(A) Keep them temporary and try to preserve competition—in the free-market system, competition is what encourages firms to innovate, fostering a dynamic and resilient economy in the long run. Public policy interventions should endeavor to work with, not against, commercial incentives—for instance, by embracing public‒private co-investment where possible. And a clear exit strategy is imperative. Don’t just go in, know how you will get out!
(B) Keep them limited in scope to contain the fiscal costs and distortions, and coordinate at the EU level to protect the single market. Avoid national subsidies for national champions, complex and varied tax incentives, and divergent regulatory standards that lead to intra-EU fragmentation. Please: keep national politics out of it!
(C) Design and deliver national state-aid measures in ways that limit the adverse spillovers and fiscal strains on other member states. Your neighbor may not have your fiscal space!

In a nutshell: minimize distortions to international trade, avoid protectionist measures, comply with WTO rules, and protect Europe’s most precious economic asset: the single market. Whenever and wherever possible, choose cooperation over conflict!
***
Before I end, let me go back to where I began: advocating for a high-level competitiveness strategy. Let me list some critical aspects of that strategy—not things you shouldn’t do, things you should do!
Fundamentally, as I noted, Europe’s competitiveness derives from its cohesion. Your strategy, therefore, must center on strengthening the single market.
Many parallel efforts will be needed—it brings me back to the concluding messages of our euro area policy consultation. You need to remove trade barriers within the EU. You need to strengthen the labor market by allowing workers to move more freely with skills that are continuously upgraded and recognized across the union. You need to invest in EU infrastructure, including cross-border electricity grids for energy security. And you need to mobilize unprecedented volumes of money for the green transition.
I have spoken separately about the need for a more-ambitious EU budget and the savings of centralizing some projects of common interest. Hugely important.
Finally, you need to build a single European financial system, comprising both a banking union and a capital market union. Ultimately, this is about improving the allocation of savings to enhance productivity and growth potential.
I have said this before: Europe is rich, but it suffers from what I call “lazy money”—across the Atlantic, savings work much harder. Total financial sector assets in the euro area amount to about 60 trillion euros, not far short of the US’s 80 trillion euros. But, whereas in the US only one-third of the total sits in banks, in the euro area the banking share is two-thirds. Two implications to highlight today as I close:

One, while it is vital to press forward on capital market union, Europe cannot afford to neglect banking union—banks are where most of the money is. Please work together, in a cooperative spirit, to resolve the home‒host issues—I’m sure we can all agree that it is unacceptable that people can cross borders within the EU more easily than bank liquidity and capital!
Two, with banks being inherently less-well-suited to financing innovation—startups need long time horizons, and they often have no physical collateral to offer—targeted capital-market interventions may be necessary. I alluded to this earlier: the possibility of focused actions to support innovation and early-stage clean-tech. One specific idea from us: more action to support Europe’s under-developed venture capital industry. Again, we have a paper coming out soon. Among other things, its authors find that the European Investment Bank and European Investment Fund play a very constructive role in supporting financing for innovative European startups.

We are all familiar with the narrative of bright ideas being born in Europe but then migrating away to grow up elsewhere—Europe as someone else’s innovation supermarket. Europe needs a stronger venture capital industry, better able to support the best European startups so they can scale-up at home.
***
To sum it up: be generous in protecting and building the single market. Be stingy in using industrial policy. Promote the ideas of the future, not the industries of the past. Have a comprehensive strategy for competitiveness.
Thank you!
 
Read the full remarks here.
 
 
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€5 billion for high-speed rail, urban transport and upgrading ports
€2.6 billion for onshore wind, upgrading electricity grids, small scale renewables and biofuels
€2.9 billion for urban development, education, housing, health and water
€2.1 billion for corporate innovation, steel and semiconductor business financing

The Board of Directors of the European Investment Bank (EIB) today approved €12.8 billion of new financing to upgrade sustainable transport, increase renewable energy use, build new student housing, improve earthquake and flood protection, and help business to expand.
“Today we approved nearly €13 billion for flagship projects around Europe and beyond. From high-speed rail in Portugal, sustainable transport in Kyiv, Lille and Helsinki, renewable energy in Lithuania and support for small businesses. These investments will improve lives, and they signal the EIB Group’s commitment to continue supporting targeted investment that will boost European resilience, productivity growth and innovation.” said EIB President Nadia Calviño.
Investing in better transport
The Board backed €5 billion of financing to improve rail transport across Europe and port infrastructure in Cape Verde.
The EIB approved investment to build a high-speed rail line between Porto and Lisbon, upgrade trains in Germany and the Czech Republic, replace trams and buses in Lille, construct a light rail line in Helsinki.
Additional support for rail and urban transport investment in Ukraine was also agreed.
Scaling up renewable energy
€2.6 billion of new energy investment was approved by the Board. This includes new wind and solar power schemes, upgrading and expanding electricity distribution, financing small scale renewable energy use by industry and backing biofuel and biomethane production.
Amongst the new clean energy schemes agreed today are construction of a new onshore windfarm in Lithuania, district heating in the Netherlands and small-scale renewable energy projects across France and Greece.
Backing corporate innovation and business investment
The Board agreed €2.1 billion of new business financing, including support to expand semiconductor manufacturing, develop digital distribution technologies, back more energy efficiency steel production and convert existing industrial facilities to enable produce renewable packaging.
New schemes to improve access to finance by business in Ukraine and female entrepreneurs in Africa and the Caribbean were also agreed.
Improving health, education, water, and natural catastrophe preparedness
New investment to upgrade healthcare in Belgium and Malta, improve higher education in the Netherlands, expand student housing in Cyprus and tackle wastewater challenges in Germany were approved.
Backing for rehabilitation of buildings and infrastructure damaged by recent earthquakes and measures to address the risks of landslides and floods in Italy was also agreed.
Supporting business, transport and emergency response investment in Ukraine
Today’s board also approved investment to ensure that companies across Ukraine can access finance, upgrade urban and national rail links and to create a new 112 emergency call system in the country.
Background information
The European Investment Bank (ElB) is the long-term lending institution of the European Union, owned by its Member States. It finances sound investments that contribute to EU policy objectives. EIB projects bolster competitiveness, drive innovation, promote sustainable development, enhance social and territorial cohesion, and support a just and swift transition to climate neutrality.
The EIB Group, which also includes the European Investment Fund (EIF), signed a total of €88 billion in new financing for over 900 projects in 2023. These commitments are expected to mobilise around €320 billion in investment, supporting 400,000 companies and 5.4 million jobs.
 
 
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The Commission is today providing policy guidance to Member States under the 2024 European Semester Spring Package to build a robust and future-proof economy that secures competitiveness, resilience and long-term prosperity for all, while maintaining sound public finances, in the face of a challenging geopolitical environment.
The EU is determined to take further steps to enhance its long-term competitiveness, prosperity and leadership on the global stage and to strengthen its open strategic autonomy. While the EU and its Member States have strong assets to build on, the EU will continue to address structural challenges that hamper its competitiveness, ensuring higher productivity growth and stronger investment and addressing labour and skills shortages.
This requires an integrated approach across all policy areas: macroeconomic stability, promoting environmental sustainability, productivity and fairness. The European Semester provides this policy coordination, including the implementation of NextGenerationEU, with the Recovery and Resilience Facility (RRF) at its core, and Cohesion Policy programmes. The European Semester cycle also provides updated reporting on progress towards the delivery of the Sustainable Development Goals and identifies investment priorities for the upcoming mid-term review of Cohesion Policy.
Resilience in the face of challenges
The European Semester has played a crucial role in supporting strong and coordinated economic policy responses over the past five years, as the EU was confronted by a series of extraordinary challenges. The EU has demonstrated a high degree of economic and social resilience in the face of major shocks, including the COVID-19 pandemic, Russia’s war of aggression against Ukraine and the related energy price surges and inflation hikes. Looking ahead, the Spring 2024 Economic Forecast projects GDP growth in 2024 at 1.0% in the EU and 0.8% in the euro area, on the back of a strong labour market and dynamic private consumption. In 2025, growth is forecast to accelerate further to 1.6% in the EU and to 1.4% in the euro area. Meanwhile, inflation is expected to fall from 6.4% in 2023 to 2.2% in 2025.
Targeted recommendations to Member States
The 2024 country reports analyse economic, employment and social developments in each Member State and take stock of the implementation of recovery and resilience plans (RRPs) and Cohesion Policy programmes. The reports also identify key challenges, with a particular focus on competitiveness, and priority reforms and investments. Based on this analysis, the Commission proposes country-specific recommendations (CSRs) to provide guidance to Member States on how to tackle those key challenges that are only partially or not addressed in Member States’ RRPs.
The country-specific recommendations are divided into:

A recommendation on fiscal policy, including fiscal-structural reforms, where relevant;

A recommendation to continue or accelerate implementation of the national recovery and resilience plans and Cohesion Policy programmes; and
Where relevant, further recommendations on outstanding and/or newly emerging structural challenges, with a focus on improving competitiveness.

Effective delivery of NextGenerationEU and Cohesion Policy: crucial drivers of a competitive EU economy
As illustrated in this year’s country reports, NextGenerationEU and other EU funding programmes have supported the EU’s recovery towards a greener, more digital, fairer and more resilient future through job creation, improved competitiveness, macroeconomic stability and territorial and social cohesion.
To date, the Commission has disbursed over €240 billion to Member States in RRF grants and loans for the successful implementation of key reforms and investments. Also, over €252 billion has been disbursed under the Cohesion Policy funds since the beginning of the COVID-19 pandemic.
Most Member States continue to make good progress in the delivery of their RRPs and Cohesion Policy programmes. However, some Member States need to urgently address emerging delays and structural challenges, to ensure the timely implementation of investments and reforms included in their RRP. This Semester cycle also provides guidance to Member States in view of the forthcoming mid-term review of Cohesion Policy programmes.
Policy guidance to enhance competitiveness
The Spring Package calls on Member States to take policy action to promote competitiveness and increase productivity. To this end, Member States are invited in the CSRs to:

Ensure a business environment supportive to competitiveness, taking full advantage of the opportunities generated by the single market, especially for SMEs;
Improve educational outcomes and support skills development, with high-quality education and training based on modernised curricula, since addressing labour and skills shortages is essential to ensure the EU’s prosperity;
Facilitate access to finance by improving savings allocation and capital financing and facilitating capital market and alternative forms of financing, especially for SMEs. Implement ambitious reforms to build integrated research and innovation ecosystems, focusing on science-business collaboration and knowledge transfers for example; and
Accelerate the green and digital transition, increasing the autonomy, resilience and competitiveness of the EU’s net-zero industry, addressing labour and skills shortages, boosting public investment in digital infrastructure and skills, and tackling regulatory barriers to digitalisation.

Strengthening fiscal sustainability
The COVID-19 pandemic, the surge in energy prices, and the required policy response have contributed to a substantial increase in public debt in several Member States in recent years. Fiscal policies should put debt on a downward path or to keep it at prudent levels, while preserving investment.
The new economic governance framework makes 2024 a year of transition for fiscal policy coordination in the EU. The fiscal policy guidance and decisions under the new framework contained in the Spring Package aim to strengthen Member States’ debt sustainability and promote sustainable and inclusive growth in all Member States.
Under the new rules, Member States will prepare medium-term plans setting out their expenditure paths and their priority reforms and investments. The recommendations included in the Spring Package provide a strong underpinning for the reform and investment commitments Member States must set out in these plans.
The CSRs provide that Member States should pursue prudent fiscal policies by ensuring that the growth in net expenditure in 2025 and beyond is consistent with the fiscal adjustment requirements under the new governance framework.
Concretely, this means that Member States with public debt above 60% of GDP or a deficit above 3% of GDP should ensure that the growth in net expenditure is limited to a rate that puts the government debt-to-GDP ratio on a plausible downward path over the medium term, while bringing the general government deficit to below 3% of GDP and maintaining it below this reference value over the medium term.
Fiscal surveillance
The Commission prepared a Report under Article 126(3) of the Treaty on the Functioning of the EU (TFEU) for 12 Member States to assess their compliance with the deficit criterion of the Treaty: Belgium, Czechia, Estonia, Spain, France, Italy, Hungary, Malta, Poland, Slovenia, Slovakia and Finland. In this assessment, the Commission takes into account relevant factors brought forward by Member States in case their public debt-to-GDP ratio is below 60% of GDP or their deficit is assessed as being ‘close’ to the 3% reference value and ‘temporary’.
In light of the assessment contained in the report, the opening of a deficit-based excessive deficit procedure is warranted for seven Member States: Belgium, France, Italy, Hungary, Malta, Poland and Slovakia.
The Report under Article 126(3) is only the first step into opening the excessive deficit procedures. In light of this assessment, and after considering the opinion of the Economic and Financial Committee, the Commission intends to propose to the Council to open deficit-based excessive deficit procedures for these Member States in July 2024. As part of the Autumn European Semester Package, to ensure consistency with the adjustment path set out in the medium-term plans, the Commission will propose to the Council recommendations to put an end to the excessive deficit situation.
In 2020, the Council decided that an excessive deficit existed in Romania, based on 2019 data. According to the Commission’s assessment, Romania has not taken effective action to correct this and put an end to its excessive deficit situation.
Assessing macroeconomic imbalances
The Commission has assessed the existence of macroeconomic imbalances for the 12 Member States selected for in-depth reviews in the 2024 Alert Mechanism Report. Overall, after the big terms-of-trade shock of 2022, macroeconomic imbalances tended to ease in most Member States.

France, Spain, and Portugal are no longer experiencing imbalances as vulnerabilities have overall declined. Fiscal sustainability risks will be surveyed under the reformed fiscal rules.
Greece and Italy are now found to be experiencing imbalances after experiencing excessive imbalances until last year as vulnerabilities have declined but remain a concern. Fiscal sustainability risks will be surveyed under the reformed fiscal rules.
Slovakia is now found to be experiencing imbalances. The vulnerabilities related to cost competitiveness, external balance, housing market and household debt have lingered, and policy action has not been forthcoming.
Romania is now found to be experiencing excessive imbalances after experiencing imbalances until last year as vulnerabilities related to external accounts, mainly linked to large and increasing government deficits, remain, while significant price and cost pressures have increased and policy action has been weak.
Germany, Cyprus, Hungary, the Netherlands, and Sweden continue to experience imbalances.

Post-programme surveillance reports
Post-programme surveillance assesses the economic, fiscal and financial situation of Member States that have benefited from financial assistance programmes, focusing on their repayment capacity. The post-programme surveillance reports for Ireland, Greece, Spain, Cyprus and Portugal conclude that all five Member States retain the capacity to repay their debt.
Assessing social convergence challenges
In this Semester cycle, the Commission has carried out for the first time a two-stage analysis of employment, skills and social challenges in each Member State, based on the revised Social Scoreboard and the principles of a Social Convergence Framework. The first-stage analysis is included in the Joint Employment Report (JER) 2024, while a more detailed second-stage analysis was published by the Commission services in May 2024 for seven Member States (Bulgaria, Estonia, Spain, Italy, Lithuania, Hungary and Romania).
Employment guidelines
The Commission is proposing guidelines for Member States’ employment policies in 2024. These guidelines set common priorities for national employment and social policies to make them fairer and more inclusive.
The 2023 guidelines are updated to cover actions to tackle skills and labour shortages and improve basic and digital skills. New technologies, artificial intelligence and algorithmic management and their impact on the world of work are also included. In addition, the guidelines refer to recent policy initiatives, in areas of particular relevance such as platform work, the social economy, and affordable housing.
Finally, the Commission underlines the importance of monitoring progress towards the EU-wide 2030 headline targets, and the contributing national targets, in the areas of jobs, skills and poverty reduction.
Next steps
The Commission invites the Eurogroup and the Council to discuss the package and to 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.
 
For more information, please contact:

Veerle Nuyts, Spokesperson
Marajke Slomka, Press Officer

 
 
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The Commission has today proposed an annual EU budget of €199.7 billion for 2025. The budget will be complemented by an estimated €72 billion of disbursements under NextGenerationEU. This substantial financial envelope will support the EU in meeting its political priorities while integrating the changes agreed in the mid-term revision of the Multiannual Financial Framework (MFF) in February 2024.
The draft budget 2025 directs funds to where they can make the greatest difference, in cooperation and in line with the needs of the EU Member States and our partners around the world to make Europe more resilient and fit for the future to the benefit of EU citizens and businesses. This will be done by fostering the green and digital transitions, by creating jobs while strengthening Europe’s strategic autonomy and global role. It will enable support to key critical technologies through the Strategic Technologies for Europe Platform (STEP).
The draft budget 2025 will also provide – in line with the MFF mid-term revision – continued support for Syrian refugees in Türkiye and the wider region, the Southern Neighbourhood including the external dimension of migration, as well as the Western Balkans. Crucially, it will provide stable and predictable support to Ukraine.
The Commission proposes to allocate the following amounts to the various EU priorities (in commitments):

€53.8 billion for the Common Agricultural Policy and €0.9 billion for the European Maritime, Fisheries and Aquaculture Fund, for Europe’s farmers and fishers, but also to strengthen the resilience of the agri-food and fisheries sectors and to provide the necessary scope for crisis management.
€49.2 billion for regional development and cohesion to support economic, social and territorial cohesion, as well as infrastructure supporting the green transition and Union priority projects.
€16.3 billion to support our partners and interests in the world, of which, among others, €10.9 billion under the Neighbourhood, Development and International Cooperation Instrument — Global Europe (NDICI — Global Europe), €2.2 billion for the Instrument for Pre-Accession Assistance (IPA III) and €0.5 billion for the Growth Facility for the Western Balkans, as well as €1.9 billion for Humanitarian Aid (HUMA).
A further €4.3 billion will be available in grants under the Ukraine Facility complemented by €10.9billion in loans.
€13.5 billion for research and innovation, of which mainly €12.7 billion for Horizon Europe, the Union’s flagship research programme. The Draft Budget also includes the financing of the European Chips Act under Horizon Europe and through redeployment from other programmes.
€4.6 billion for European strategic investments, of which, for instance, €2.8 billion for the Connecting Europe Facility to improve cross-border infrastructure, €1.1 billion for the Digital Europe Programme to shape the Union’s digital future, and €378 million for InvestEU for key priorities (research and innovation, twin green and digital transition, the health sector, and strategic technologies).
€2.1 billion for spending dedicated to space, mainly for the European Space Programme, which will bring together the Union’s action in this strategic field.
€11.8 billion for resilience and values, of which, among others, €5.2 billion for the rising borrowing costs for NGEU, €4 billion Erasmus+ to create education and mobility opportunities for people, €352 million to support artists and creators around Europe, and €235 million to promote justice, rights, and values.
€2.4 billion for environment and climate action, of which mainly €771 million for the LIFE programme to support climate change mitigation and adaptation, and €1.5 billion for the Just Transition Fund to make sure that the green transition works for all.
€2.7 billion for protecting our borders, of which mainly €1.4 billion for the Integrated Border Management Fund (IBMF), and €997 million (total EU contribution) for the European Border and Coast Guard Agency (Frontex).
€2.1 billion for migration-related spending within the EU, of which mainly €1.9 billion to support migrants and asylum-seekers in line with our values and priorities.
€1.8 billion to address defence challenges, of which mainly €1.4 billion to support capability development and research under the European Defence Fund (EDF) and €244.5 million to support Military Mobility.
€977 million to ensure the functioning of the Single Market, including €613 million for the Single Market Programme, and €205 million for work on anti-fraud, taxation, and customs.
€583 million for EU4Health to ensure a comprehensive health response to people’s needs, as well as €203 million to the Union Civil Protection Mechanism (rescEU) to be able deploy operational assistance quickly in case of a crisis.
€784 million for security, of which, notably, €334 million for the Internal Security Fund (ISF), which will combat terrorism, radicalisation, organised crime, and cybercrime.
€196 million for secure satellite connections under the new Union Secure Connectivity Programme.

The draft budget for 2025 is part of the Union’s long-term budget as adopted at the end of 2020 and as amended in February 2024, including subsequent technical adjustments, and seeks to turn its priorities into concrete annual deliverables.
The annual budget for 2025 will have to be formally adopted by the Budgetary Authority before the end of the year.
Background
The draft EU budget for 2025 includes the expenditure covered by the appropriations under the long-term budget ceilings, financed from own resources. These are topped up by expenditure under NextGenerationEU, financed from borrowing on the capital markets. For the “core” budget, two amounts for each programme are proposed in the draft budget – commitments and payments. “Commitments” refer to the funding that can be agreed in contracts in a given year; and “payments” to the money actually paid out. All amounts are in current prices.
For more information, please contact:

Olof Gill, Spokesperson
Veronica Favalli, Press Officer

 
 
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Blog post by Era Dabla-Norris, Ruud de Mooij | New generative-AI technologies hold immense potential for boosting productivity and improving the delivery of public services, but the sheer speed and scale of the transformation also raise concerns about job losses and greater inequality. Given uncertainty over the future of AI, governments should take an agile approach that prepares them for highly disruptive scenarios.

A new IMF paper argues that fiscal policy has a major role to play in supporting a more equal distribution of gains and opportunities from generative-AI. But this will require significant upgrades to social-protection and tax systems around the world.
How should social-protection policies be revamped in the face of disruptive technological changes from AI? While AI could eventually boost overall employment and wages, it could put large swaths of the labor force out of work for extended periods, making for a painful transition.
Lessons from past automation waves and the IMF’s modeling suggest more generous unemployment insurance could cushion the negative impact of AI on workers, allowing displaced workers to find jobs that better match their skills. Most countries have considerable scope to broaden the coverage and generosity of unemployment insurance, improve portability of entitlements, and consider forms of wage insurance.
At the same time, sector-based training, apprenticeships, and upskilling and reskilling programs could play a greater role in preparing workers for the jobs of the AI age. Comprehensive social-assistance programs will be needed for workers facing long-term unemployment or reduced local labor demand due to automation or industry closures.

To be sure, there will be important differences in how AI impacts emerging-market and developing economies—and thus, how policymakers there should respond. While workers in such countries are less exposed to AI, they are also less protected by formal social-protection programs such as unemployment insurance because of larger informal sectors in their economies. Innovative approaches leveraging digital technologies can facilitate expanded coverage of social-assistance programs in these countries.
Should AI be taxed to mitigate labor-market disruptions and pay for its effects on workers? In the face of similar concerns, some have recommended a robot tax to discourage firms from displacing workers with robots.
Yet, a tax on AI is not advisable. Your AI chatbot or co-pilot wouldn’t be able to pay such a tax—only people can do that. A specific tax on AI might instead reduce the speed of investment and innovation, stifling productivity gains. It would also be hard to put into practice and, if ill-targeted, do more harm than good.
So, what can be done to rebalance tax policy in the age of AI? In recent decades, some advanced countries have scaled up corporate tax breaks on software and computer hardware in an effort to drive innovation. However, these incentives also tend to encourage companies to replace workers through automation. Corporate tax systems that inefficiently favor the rapid displacement of human jobs should be reconsidered, given the risk that they could magnify the dislocations from AI.

Many emerging market and developing countries tend to have corporate tax systems that discourage automation. That can be distortive in its own way, preventing the investments that would enable such countries to catch up in the new global AI economy.
How should governments design redistributive taxation to offset rising inequality from AI? Generative-AI, like other types of innovation, can lead to higher income inequality and concentration of wealth. Taxes on capital income should thus be strengthened to protect the tax base against a further decline in labor’s share of income and to offset rising wealth inequality. This is crucial, as more investment in education and social spending to broaden the gains from AI will require more public revenue.
Since the 1980s, the tax burden on capital income has steadily declined in advanced economies while the burden on labor income has climbed.

To reverse this trend, strengthening corporate income taxes could help. The global minimum tax agreed by over 140 countries, which establishes a minimum 15-percent effective tax rate on multinational companies, is a step in the right direction. Other measures could include a supplemental tax on excess profits, stronger taxes on capital gains, and improved enforcement.
The latest AI breakthroughs represent the fruit of years of investment in fundamental research, including through publicly funded programs. Similarly, decisions made now by policymakers will shape the evolution of AI for decades to come. The priority should be to ensure that applications broadly benefit society, leveraging AI to improve outcomes in areas such as education, health and government services. And given the global reach of this powerful new technology, it will be more important than ever for countries to work together.
—Fernanda Brollo, Daniel Garcia-Macia, Tibor Hanappi, Li Liu, and Anh Dinh Minh Nguyen contributed to the staff discussion note on which this blog is based.

 
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Blog post by Maarten G.A. Daman | Many people appreciate privacy when paying, and want their data protected. Current electronic means of payment are not optimal in this regard. We are designing the digital euro to be the most private electronic payment option. The ECB Blog explains.
Paying is a private affair for many people. The idea that tech companies, banks, governments or employers might track payments is not particularly appealing. Cash provides a solution to avoid such tracing, but it can be inconvenient or simply impossible to use in certain situations (for example when buying online). Privacy is therefore an important factor when we think about current and future means of payment. As we design the digital euro, the ECB and the euro area central banks are making sure that our new digital money comes with a high level of privacy and robust data protection. The ECB Blog explains what future users of the digital euro can expect.
Will it be as private as cash? Not quite, but close. The digital euro promises you better privacy and data protection than other current electronic means of payment.
What is the digital euro?
The digital euro is an important project of the European Union: a central bank digital currency meant to complement cash as a day-to-day means of payment. Anyone could use it in shops, online or between individuals. Best of all, you will be able to use it wherever digital payments are accepted throughout the euro area. Of course you want your name, the recipient of your transaction, the amount of the payment and all other associated data to be protected. So do we.
Privacy will be guaranteed by the regulation for the digital euro, to be adopted by the European Union legislator via the usual democratic process. Ultimately, it will be up to European legislators to decide on the appropriate balance between privacy and other public policy objectives, like countering money laundering and other illicit activities. The digital euro will be implemented in line with this regulation. Our desire to ensure a high level of privacy has driven us to pioneer innovative technical solutions surpassing those typically offered by existing digital payment methods.
But how is the Eurosystem going to protect your data?
Using the digital euro offline: close to cash
Choosing to pay with an “offline digital euro” would allow you to maintain a level of privacy that is close to cash. For example, you could pay a friend for your share of a dinner and only you and your friend would know the payment information. How? You would simply both have the digital euro app on your smartphones and hold them next to each other to transfer the money.
That might sound familiar because some commercial payment solutions allow for digital transfers among friends. But the digital euro has a huge advantage in terms of privacy. Nobody else would see your personal transaction details when paying offline. So, you would first fund your digital euro account with your money from your regular bank account, using your smartphone for example. This is similar to withdrawing cash at an ATM and putting banknotes into your wallet. Now you can transfer digital euro and use the offline function. This way the digital euro personal payment data stays solely between the two phones. Neither your bank, your friend’s bank, nor the Eurosystem will be able to see the personal payments data.
This offline function of the digital euro will also work if you are not connected to the internet, e.g. while hiking in the mountains. And the digital euro will work across borders, for instance if your friend has an account in a different euro area country.
The digital euro online offers more privacy than commercial solutions
Today most payment methods allow the provider to collect a significant amount of information on who is making a payment and for what. Many people feel uncomfortable about the use of their payment data for commercial purposes. That is why the Eurosystem is implementing strong data protection into the digital euro design. We are doing so in several ways:

Technology: Your digital euro identity will be separated from your payment data so that the Eurosystem will process a very limited amount of data. Your bank will pseudonymise your data, which means that your name is not visible to the Eurosystem and is replaced by a random identification number.
Rules: The Eurosystem will hold only very limited data. In addition, we will ensure that our service providers comply with high standards. We will enforce the same privacy and data protection rules that apply to the Eurosystem, impose our robust IT security and cyber rules, and include strong contractual safeguards such as audit rights and penalties for contract breaches.
Organisational measures: The digital euro will benefit from the same organisational measures that apply to all our staff, such as security clearances (i.e. background checks) and segregation between business areas. These measures will help prevent issues like conflicts of interest.

What is perhaps even more important than the technical details is that the digital euro is a public project. Why is that important? Public institutions like the ECB have no interest in making money with payment data. We will only have a small amount of data and we would not be allowed to sell your payment information or use it for marketing purposes. Compared with most payment providers today, this is one of the core differences from a privacy perspective.
Data protection compliance
Design is one thing, but it is as important that the rules of data protection are audited and enforced. We plan to establish a data protection compliance and audit framework. An independent group, composed of data protection officers, will assess the implementation of data protection safeguards. The group will be independent from the digital euro operations, IT, risk management and other entities involved in the digital euro.
The independent group will further enhance the transparency and reliability of the digital euro project and comes on top of the already existing assurance by the European Data Protection Supervisor and our internal auditors. Not only must privacy be done, it must be seen to be done.
Conclusion
We will protect your payment data using a strong legal framework, technological innovation, and rigorous compliance. Ensuring state-of-the-art privacy and data protection is an essential part of the digital euro project.
 
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
 
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Today the Council adopted a revised regulation regarding EU guidelines for the development of the trans-European transport network (TEN-T). The new law aims to build a reliable, seamless, and high-quality transport network that ensures sustainable connectivity across Europe without physical interruptions, bottlenecks, and missing links.
The TEN-T network is a key instrument of the EU’s transport policy with a huge contribution to our sustainable mobility objectives, as well as to economic, social, and territorial cohesion. The adoption of the revised regulation today is definitely a milestone towards a sustainable and resilient network in Europe, which should address the mobility concerns of our citizens and businesses for the years to come.
Georges Gilkinet, Belgian deputy prime minister and minister of mobility
The TEN-T network will be developed or upgraded step by step with the new regulation setting clear deadlines for its completion in three phases: until 2030 for the core network, 2040 for the extended core network and 2050 for the comprehensive network. The new intermediary deadline of 2040 was introduced to advance the completion of large-scale, mainly cross-border projects, such as missing rail connections, ahead of the 2050 deadline that applies to the wider, comprehensive network. For example, new high-speed rail connections between Porto and Vigo, and Budapest and Bucharest, must be completed for 2040. As another example, upon the network’s completion, passengers will be able to travel between Copenhagen and Hamburg in 2.5 hours by train, instead of the 4.5 hours required today.
To ensure infrastructure planning meets real operational needs and by integrating rail, road, and waterways, the new regulation merges the core network corridors with the rail freight corridors to the so-called ‘European Transport Corridors’. These corridors are of the highest strategic importance for the development of sustainable and multimodal freight and passenger transport flows in Europe.
Finally, in response to the impact of Russia’s war of aggression against Ukraine and to ensure better connectivity with key neighbouring countries, the new regulation extends four European Transport Corridors of the TEN-T network to Ukraine and Moldova whilst downgrading cross-border connections with Russia and Belarus.
Next steps
Following today’s adoption, the legislative act will be signed by the presidents of the Council and of the European Parliament before being published in the EU’s official journal in the coming weeks. The revised regulation will enter into force twenty days after this publication.
Background information
The proposal for a revised regulation was adopted by the Commission on 13 December 2021 as part of the legislative package for efficient and green mobility. In response to the impact of Russia’s war of aggression against Ukraine, the Commission adopted an amended proposal on 27 July 2022 introducing several changes to the initial text. The revised proposal calls for unification of the TEN-T network by using the European standard rail track gauge. It also strives for better connectivity of Ukraine and the Republic of Moldova with the EU through the extension of the relevant European Transport Corridors. Barbara Thaler (EPP/AT) and Dominique Riquet (Renew Europe / FR) were the European Parliament’s co-rapporteurs on this file and a provisional agreement was reached between the co-legislators on 18 December 2023.
 
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Dimosthines Mammonas, Press Officer

 
 
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Blog post by Piero Cipollone | For the last quarter of a century, the euro has been a key global currency, second only to the dollar. It has demonstrated its resilience despite the coronavirus pandemic, Russia’s war in Ukraine and the tragic conflict in the Middle East. The euro’s estimated share of international currency use stands at over 19 per cent, a level that has remained broadly stable over the past five years.

Nevertheless, the currency’s place on the global stage cannot be taken for granted, as a recent report by the European Central Bank on the international role of the euro shows. More reforms are needed.
China’s increasingly large role in global trade is encouraging use of its currency. By 2023, the renminbi’s share of China’s trade invoicing had risen to around one-quarter for goods and one-third for services. It is racing with the euro to become the second most used currency for trade finance[1].
History shows that the evolution of global currencies is deeply intertwined with that of the global geopolitical order. In an increasingly multipolar world, there are signs that the fragmentation of the global monetary system is no longer a remote possibility. To diversify and protect against geopolitical risks, central banks — led by China’s — are accumulating gold at the fastest pace seen since the second world war. And anecdotal evidence suggests that some countries are exploring ways of using their own currencies more in international trade transactions instead of those of countries sanctioning Russia.
Yet nowhere else are the risks of global monetary system fragmentation more visible than in international payments. At a time when we should be integrating payment systems to reduce their complexity and cost to users, some nations are deliberately creating separate platforms as alternatives to existing global infrastructures.
For example, China, Iran and Russia have created their own cross-border payment messaging systems, while BRICS members have started to discuss a “bridge” platform for linking digital payments and settlement. These developments could potentially disrupt the smooth flow of capital and reduce the efficiency of the global financial system.
Given these shifts, there are compelling economic and political reasons for seeking to preserve the euro’s global currency status. This status brings tangible benefits to European citizens, such as low borrowing costs in international capital markets and protection from exchange rate volatility. Moreover, in a fragmented geopolitical landscape, the euro’s international currency status provides strategic autonomy by shielding Europeans from external financial pressures.
Internally, the euro’s appeal to foreign investors hinges on maintaining confidence in its stability, supported by well-anchored expectations of price stability and sound economic policies. And its appeal depends on the size and liquidity of the market for safe euro-denominated debt securities and the resilience of the underlying market infrastructures, particularly as a haven in times of stress. A majority of official reserve managers have expressed an interest in increasing their euro holdings but note that the currency’s attractiveness is hampered by a lack of highly-rated assets and centrally-issued debt.[2]
So building a stable, technically resilient, and deeper market for internationally accepted euro debt securities is essential. To be a reliable haven in times of stress, this market could be supported by a robust and flexible supply of common instruments.[3] Providing a broader pool of euro-denominated safe assets, which would act as a European risk-free benchmark, would also be crucial to deepening euro-denominated capital markets. That is why building a genuine European capital markets union must go hand in hand with efforts to further strengthen the fiscal dimension of the EU economic and monetary union.
Externally, Europe needs to further develop the infrastructure for making cross-border payments in euro with key partners. This could, for example, involve interlinking the euro area’s Target Instant Payment Settlement system with fast payment systems in other jurisdictions, either through bilateral links or by connecting to a common, multilateral platform. Such steps could strengthen the trade and financial relations with key partners, including emerging economies, especially where legislation on combatting money laundering and terrorist financing is fully aligned with the international standards established by the Financial Action Task Force. They could also pave the way for central bank digital currencies to be used to make cross-border payments in the future.
Robert Mundell — the late international economist whose Nobel Prize-winning work was so influential for the creation of Europe’s single currency — once said of the euro: “In all the aspects in which it was expected economically to make an improvement, it has performed spectacularly.”[4] By bolstering safety, liquidity and connectivity, we can ensure that the euro continues to strengthen as a cornerstone of the global monetary system.
This blog post was also published in the media as an opinion piece.

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Footnotes:

“China’s renminbi pips Japanese yen to rank fourth in global payments”, Financial Times, December 21, 2023.
“HSBC Reserve Management Trends: How central bank reserve managers are adapting their strategies amid a rapidly changing environment”, 15 April 2024.
Panetta, F. (2020), “Covid-19 crisis highlights the euro’s untapped potential”, Financial Times, June 12.
Wallace, L. (2006), “Ahead of His Time – Interview with Robert Mundell”, Finance and Development, Volume 43, No 3.

 
 
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The US dollar continues to cede ground to nontraditional currencies in global foreign exchange reserves, but it remains the preeminent reserve currency

Blog post by Serkan Arslanalp, Barry Eichengreen , Chima Simpson-Bell | Dollar dominance—the outsized role of the US dollar in the world economy—has been brought into focus recently as the robustness of the US economy, tighter monetary policy and heightened geopolitical risk have contributed to a higher greenback valuation. At the same time, economic fragmentation and the potential reorganization of global economic and financial activity into separate, nonoverlapping blocs could encourage some countries to use and hold other international and reserve currencies.

Recent data from the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) point to an ongoing gradual decline in the dollar’s share of allocated foreign reserves of central banks and governments. Strikingly, the reduced role of the US dollar over the last two decades has not been matched by increases in the shares of the other “big four” currencies—the euro, yen, and pound. Rather, it has been accompanied by a rise in the share of what we have called nontraditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and the Nordic currencies. The most recent data extend this trend, which we had pointed out in an earlier IMF paper and blog.

These nontraditional reserve currencies are attractive to reserve managers because they provide diversification and relatively attractive yields, and because they have become increasingly easy to buy, sell and hold with the development of new digital financial technologies (such as automatic market-making and automated liquidity management systems).
This recent trend is all the more striking given the dollar’s strength, which indicates that private investors have moved into dollar-denominated assets. Or so it would appear from the change in relative prices. At the same time, this observation is a reminder that exchange rate fluctuations can have an independent impact on the currency composition of central bank reserve portfolios. Changes in the relative values of different government securities, reflecting movements in interest rates, can similarly have an impact, although this effect will tend to be smaller, insofar as major currency bond yields generally move together. In any event, these valuation effects only reinforce the overall trend. Taking a longer view, over the last two decades, the fact that the value of the US dollar has been broadly unchanged, while the US dollar’s share of global reserves has declined, indicates that central banks have indeed been shifting gradually away from the dollar.

At the same time, statistical tests do not indicate an accelerating decline in the dollar’s reserve share, contrary to claims that US financial sanctions have accelerated movement away from the greenback. To be sure, it is possible, as some have argued, that the same countries that are seeking to move away from holding dollars for geopolitical reasons do not report information on the composition of their reserve portfolios to COFER. Note, however, that the 149 reporting economies make up as much as 93 percent of global FX reserves. In other words, non-reporters are only a very small share of global reserves.
One nontraditional reserve currency gaining market share is the Chinese renminbi, whose gains match a quarter of the decline in the dollar’s share. The Chinese government has been advancing policies on multiple fronts to promote renminbi internationalization, including the development of a cross-border payment system, the extension of swap lines, and piloting a central bank digital currency. It is thus interesting to note that renminbi internationalization, at least as measured by the currency’s reserve share, shows signs of stalling out. The most recent data do not show a further increase in the renminbi’s currency share: some observers may suspect that depreciation of the renminbi exchange rate in recent quarters has disguised increases in renminbi reserve holdings. However, even adjusting for exchange rate changes confirms that the renminbi share of reserves has declined since 2022.
Some have suggested that what we have characterized as an ongoing decline in dollar holdings and rise in the reserve share of nontraditional currencies in fact reflects the behavior of a handful of large reserve holders. Russia has geopolitical reasons to be cautious about holding dollars, while Switzerland, which accumulated reserves over the last decade, has reason to hold a large fraction of its reserves in euros, the Euro Area being its geographical neighbor and most important trading partner. But when we exclude Russia and Switzerland from the COFER aggregate, using data published by their central banks from 2007 to 2021, we find little change in the overall trend.
In fact, this movement is quite broad. In our 2022 paper, we identified 46 “active diversifiers,” defined as countries with a share of foreign exchange reserves in nontraditional currencies of at least 5 percent at the end of 2020. These include major advanced economies and emerging markets, including most of the Group of Twenty (G20) economies. By 2023, at least three more countries (Israel, Netherlands, Seychelles) have joined this list.

We also found that financial sanctions, when imposed in the past, induced central banks to shift their reserve portfolios modestly away from currencies, which are at risk of being frozen and redeployed, in favor of gold, which can be warehoused in the country and thus is free of sanctions risk. That work also showed that the demand for gold by central banks responded positively to global economic policy uncertainty and global geopolitical risk. These factors may lie behind the further accumulation of gold by a number of emerging market central banks. Before making too much of this trend, however, it is important to recall that gold as a share of reserves still remains historically low.

In sum, the international monetary and reserve system continues to evolve. The patterns we highlighted earlier—very gradual movement away from dollar dominance, and a rising role for the nontraditional currencies of small, open, well-managed economies, enabled by new digital trading technologies—remain intact.
—For more, see IMF First Deputy Managing Director Gita Gopinath’s May 7 speech: Geopolitics and its Impact on Global Trade and the Dollar.

 
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