Keynote speech by Piero Cipollone, Member of the Executive Board of the ECB, at the Bundesbank Symposium on the Future of Payments
 
Frankfurt am Main, 7 October 2024
The foundations of the financial system as we know it today can be traced back to 14th-century Italy,[1] when double-entry bookkeeping[2] was introduced, along with nostro and vostro accounts[3] to facilitate the settlement of foreign trades across separate, independent ledgers[4].
Although today’s financial markets are highly complex and sophisticated, the fundamental practice of bookkeeping across ledgers has remained largely unchanged and continues to exert a significant influence on existing market structures. For example, at each stage of the securities life cycle, banks, brokers, information providers and other market participants play an essential role in intermediation. This complexity comes at a cost: research shows that on the whole, financial intermediation costs in advanced economies have increased since the late 1960s.[5]
In Europe, this complexity is compounded by regulatory fragmentation across the continent, resulting in the ongoing fragmentation of capital markets. For example, there are 35 different exchanges for listings and 41 exchanges for trading.[6] Some effort has been made towards integration in the post-trade sector, including through the creation of the TARGET2-Securities (T2S) platform, which can be used to transfer securities and cash between investors across Europe[7], and through common platforms used by central securities depositories (CSDs). But the lack of harmonisation in the legislative and regulatory framework regarding custody, asset servicing and tax-related processes, for example, prevents the sector from reaping the benefits and synergies that an integrated European market could bring.[8]
The European Union (EU) has taken steps to address the regulatory barriers that exist in order to create deeper and more integrated capital markets.[9] But many obstacles still remain, such as insufficient regulatory harmonisation, the absence of unified supervision[10] or the lack of a permanent safe asset and integrated banking system[11]. This has led to multiple calls for renewed efforts, including from euro area finance ministers[12], EU institutions[13] and Enrico Letta and Mario Draghi in their recent reports[14].
But there is one crucial dimension that has often been overlooked, and that is technology. My aim today is not to discuss how to create a capital markets union for traditional assets, but to discuss how to create one for digital assets from the outset.
Although technology has undeniably helped facilitate the provision of financial services through electronic bookkeeping, for example, digital technology has so far failed to deliver financial integration in Europe. In fact, non-interoperable technological ecosystems in each country – shaped by diverging national regulatory regimes – have created siloed pools of asset liquidity, further entrenching fragmentation.
However, recent advancements in digital technology offer an opportunity to create an integrated European capital market for digital assets – in other words, a digital capital markets union.
Financial institutions are increasingly exploring the potential of tokenisation, which is the process of using new technologies, such as distributed ledger technology (DLT), to issue or represent assets in digital form, known as tokens. Unlike conventional assets, these tokens are not recorded on a centralised ledger but using DLT. Imagine a future where money and securities no longer sit in electronic, book-entry accounts but “live” on distributed ledgers held across a network of traders, each with a synchronised copy.
If public authorities fail to act, this could lead to fragmentation. But if they seize the opportunity, then the benefits of this new approach could reach far beyond tackling technological inefficiencies, eventually resulting in a move away from the centuries-old structure of intermediation to a unified, distributed ledger or a constellation of fully interoperable ledgers. This transition could help us deal with the current fragmentation of financial infrastructures, reduce barriers to entry and serve as a driver of capital market integration in Europe.
As a central bank, we recognise that our role in this transformative journey is to maintain trust and confidence in the value of money and the financial system. To fulfil this mandate, we have to adapt to the evolving technological landscape that is reshaping how money is exchanged and financial transactions are settled in an increasingly digital world. Understanding these innovations, preparing for them and – when they materialise – supporting their safe adoption are central to our mission. In addition, central bank money has a key role to play in facilitating the interoperability and integration of decentralised systems.[15]
Today, I want to explore how we can build an integrated European capital market for digital assets from the outset. At the same time, while the potential benefits of advances tokenisation and DLT are significant, we must also consider the risks to the financial market structure and the provision of central bank money. I will discuss how central banks can effectively support this technological transition.
 
The transformative potential of tokenisation and DLT in capital markets: balancing innovation with risk
In recent years, there has been a notable increase in the adoption of financial technology, including the use of tokens and DLT. This transformation is not just theoretical: it is happening now.
In the banking sector alone, over 60% of EU banks surveyed are actively exploring, experimenting with or using DLT solutions, while 22% have already started using DLT applications.[16] However, the use of DLT is not yet widespread. Currently, it is mainly used for primary issuance, although further applications and use cases are increasingly being looked at. But there is strong interest in exploring the potential of DLT, and leading global financial market infrastructures such as DTCC, Clearstream and Euroclear are aiming to set standards to facilitate the adoption of tokenisation across the financial sector.
The public sector is also contributing to this movement. Since having a solution for settling transactions in central bank money makes DLT-based solutions more attractive and less risky, there is strong demand from market participants to be able to use central bank money to settle digital asset transactions. As a result, the Eurosystem is conducting exploratory work to test DLT for the settlement of wholesale transactions in central bank money.[17] Similarly, the Bank for International Settlements’ Innovation Hub has launched several projects exploring this theme.[18]
The promise of tokenisation and DLT lies in the creation of a transparent ledger which would make it possible to perform the three key functions of asset trading, namely negotiation, settlement and custody, on the same platform.[19] This is expected to reduce transaction costs by reducing the need for reconciliation, matching and other data processing steps, which would foster resilience and make it possible to operate on a 24/7, 365 days a year basis. DLT also supports the native issuance of digital assets, enabling direct transactions between a wide range of investors. This could lower barriers to entry and create opportunities for small issuers, such as small and medium-sized enterprises, to access capital markets. DLT would also enhance efficiency by significantly reducing settlement times and using the self-executing, programmable functions in smart contracts.
This could potentially bring substantial savings. According to some estimates, automation and smart contracts could reduce annual infrastructure operational costs by approximately USD 15-20 billion in global capital markets.[20]
In addition to these savings, the possibility of extensive implementation of tokenisation and DLT offers opportunities to overhaul market structures. This could prove instrumental in tackling the technological obstacles hindering the establishment of a capital markets union in Europe. The new ecosystem could be designed from scratch in a more integrated and harmonised manner by providing a “common set of rails” – a shared ledger or an ecosystem of fully interoperable ledgers – that would ensure reachability, open access and compatibility across participants’ services. CSDs, banks, investment managers and other market stakeholders would provide their services directly on a shared infrastructure, while each would be able to maintain a level of control and customisation over the functionalities. This would also allow a more flexible approach to the role of each participant in the ecosystem. From a technical perspective, it would also be possible to bring together all assets, functionalities and market players on one centralised platform. But it is precisely the combination of a shared infrastructure with customised control that could encourage different stakeholders to agree on “common rails” instead of relying on their own infrastructures, as they often do today.
However, the early development stages of DLT present significant coordination challenges and risks to the financial system.
There are therefore three primary risks that we must address.
The first is the potential for an uncoordinated proliferation of DLT platforms, which could result in a fragmented landscape. In this nascent stage of development, established financial institutions are apprehensive about DLT but are nevertheless keen to take advantage of its potential. Several new DLT platforms could emerge as a result, as market participants develop their own solutions without fully considering the broader economic implications. This could exacerbate the existing fragmentation among CSDs and other proprietary ledgers, leading to a lack of standardisation. This, in turn, would pose new coordination challenges and jeopardise our objective of establishing a digital capital markets union for Europe.[21]
The second risk is that central bank money could lose its status as the safest and most liquid settlement asset. If end users – in this case firms and investors – demand an “on-chain” means of payment to seamlessly support automated transactions via DLT, the lack of a solution for settling transactions in central bank money could encourage banks or stablecoin issuers to offer private money alternatives. A permanent shift from central bank money to commercial bank money or stablecoins could disrupt the existing two-tier monetary system and threaten financial stability by undermining central bank money’s role as a risk-free settlement asset. This would contradict the principles agreed at international level.[22]
Lastly, public authorities still have more work to do to understand and assess the inherent risks and vulnerabilities stemming from DLT-based tokenisation.[23] Tokenisation does not remove the vulnerabilities we know of from traditional finance, although these vulnerabilities may play out differently depending on design choices, adoption and scale. The key issue will be the choice of settlement assets, which could amplify liquidity risk or other vulnerabilities, but other risks could also emerge if new entities fall outside the scope of regulation or there are operational weaknesses.
To deal with these risks, central banks and regulators must act early and work with market participants from the outset. If we drag our feet while other jurisdictions move faster and produce better solutions, we could see financial activities migrating elsewhere and private entities from outside the EU assuming a dominant position in European capital markets. Moreover, European market participants may then adopt uncoordinated approaches and invest in their own infrastructures. They could then resist any efforts by central banks to introduce enhanced settlement solutions, particularly if these threatened the viability of their new business models. If we don’t act soon, it may be impossible to achieve a genuine digital capital markets union with efficient wholesale payment and settlement services using risk-free central bank money.
 
A European vision for the future of digital capital markets
Given the early stage of market development and the strategic approaches being adopted by industry players, it is paramount that central banks provide clear direction. By offering clear and consistent guidance, the ECB serves as a crucial coordination mechanism for the European financial industry. This helps market participants align their efforts and innovate within a common framework, fostering interoperability.
Central banks should play a proactive role in this transformation for two main reasons. First, it is vitally important to maintain, if not increase, the use of central bank money as the settlement asset in wholesale markets. Central bank money plays a pivotal role as the anchor of our two-tier monetary system, serving as a cornerstone of financial stability.
The second reason is to promote robust, stable and integrated European capital markets. Therefore, our aim is to facilitate the provision of central bank money settlement for wholesale transactions of DLT assets, thereby using the financial industry’s adoption of DLT to address existing shortcomings associated with the fragmentation of European capital markets.
One way to achieve this would be to move towards a European ledger, which would be a single-platform solution where assets and cash would coexist on one chain. Many market participants believe this is a must if we want to fully reap the benefits of DLT. This ledger would address the technological complexities, inefficiencies and fragmentation that are currently preventing the integration of European capital markets for traditional assets.
A European ledger could bring together token versions of central bank money, commercial bank money and other digital assets on a shared, programmable platform. In essence, this would see T2S evolving into a DLT-based, single financial market infrastructure for Europe. While central banks would provide the platform, or the “rails” so to speak, market participants would supply the content, or the “trains”. However, further consideration would have to be given to the specifics of this platform, including the scope of services, governance structure, operational procedures and the potential implications for existing infrastructure and assets.
One risk of the unified ledger is that it entails choosing one technological solution over all others. As all market players will use it, they will be less inclined to explore and promote alternative innovative technical solutions to provide the same services. Another option would therefore be to allow the coordinated development of an ecosystem of fully interoperable technical solutions. This flexibility would be beneficial, as it would better serve specific use cases and the coexistence of legacy and new solutions.
We need to reflect on this trade-off.
Research is continuing in the market, but in the meantime, there is a pressing need for solutions that would make it possible to settle DLT transactions in central bank money. This provides an opportunity to build on the interoperability solutions we have been trialling as part of the Eurosystem’s exploratory work. This trial, in which the Eurosystem offers interoperability between its central bank money settlement services and external DLT platforms for both real and mock transactions, was successfully launched in May 2024 and will run until November. Some 60 industry participants are involved, in addition to central banks.
Offering such solutions could allow the Eurosystem and market participants to experiment and develop DLT-based solutions further, unlocking investment in the industry. To this end, we have started to look at how we can build on our ongoing exploration. We will also examine the eligibility of DLT-based assets for use as collateral in Eurosystem credit operations.
However, there is a risk that relying on existing interoperability solutions over the long term could perpetuate inefficiencies in the post-trade environment given the ongoing lack of full harmonisation and standardisation. Such interim solutions are thus a stopgap measure to smooth the transition towards our long-term vision.
These efforts must align with EU legislators and regulators who have a window of opportunity to create a comprehensive, European regulatory and supervisory framework that will support financial integration for digital assets while protecting market participants and preserving the underlying infrastructures. The limited progress in advancing a capital markets union for traditional assets shows that harmonising new activities from the outset is much easier than ironing out any differences at a late stage. Building on the EU’s DLT pilot regime, this new framework should aim to establish the harmonised regulation and integrated supervision of digital assets.
 
Conclusion
Let me conclude.
In the current era of rapid technological change, “whosoever desires constant success must change his conduct with the times”.[24]
These insights mirror the European financial sector’s current exploration of tokenisation and DLT. These technologies do not just have the potential to enhance efficiency. They could also fundamentally reshape the very structure of financial intermediation – a system that has remained largely unchanged for centuries. Many financial market participants have already started to delve into these technologies, recognising their transformative potential.
As prudent central bankers, we must also adapt to these new technologies if we are to fulfil our mandate of preserving trust and confidence in money and the financial system. Our primary objective in this evolving landscape is to ensure that central bank money – the safest and most liquid settlement asset – remains a cornerstone of stability, even in a capital market based on tokens and DLT. Or to quote Tancredi in Lampedusa’s The Leopard[25], “For things to stay the same, everything must change”.
However, the current nascent stage of market development does not just pose challenges. It also offers a unique opportunity. By establishing a clear vision of a digital capital markets union – an integrated European digital ecosystem where assets and cash coexist on one or more fully interoperable chains – these emerging technologies could help to address the existing shortcomings of European capital markets.
In embracing this technological shift, we are not merely reacting to change, but actively participating in shaping a more efficient, innovative and resilient financial future for Europe.
Thank you for your attention.

I would like to thank Cyril Max Neumann and Jean-Francois Jamet for their help in preparing this speech, as well as Ulrich Bindseil, Alexandra Born, Johanne Evrard, Daniel Kapp, Mirjam Plooij and Anton Van der Kraaij for their comments.
Sangster, A. (2024), “The emergence of double entry bookkeeping”, The Economic History Review, pp. 1-30, May.
A nostro/vostro account is a bank account where one bank has another bank’s money on deposit, typically on behalf of a foreign bank in relation to international trade or other financial transactions. The terms “nostro” and “vostro” are used to indicate which bank has money on deposit.
Yamey, B. S. (2011), “Two-currency, nostro and vostro accounts: historical notes, 1400-1800”, Accounting Historians Journal, Vol. 38, No 2, pp. 125-143, December.
Bazot, G. (2018), “Financial Consumption and the Cost of Finance: Measuring Financial Efficiency in Europe (1950-2007)”, Journal of the European Economic Association, Vol. 16, Issue 1, pp. 123-160, February. The study provides evidence that the ratio of domestic financial intermediaries’ income to GDP increases continuously in Germany, France, the United Kingdom and Europe more broadly over the period from 1950 to 2007, even during the 1990s and the 2000s. When including property income and capital gains, this ratio stood at 6-7% in Germany, France and the UK, and around 9% in the United States at the end of the period. The study then measures the unit cost of financial intermediation based on the ratio of financial income to financial assets intermediated. It finds that the European unit cost appears to have increased since the late 1960s but by a smaller proportion than in the United States. See also Philippon, T. (2015), “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation”, American Economic Review, Vol. 105, No 4, pp. 1408-1438, April. This paper finds that the unit cost of intermediation does not seem to have decreased significantly with advances in information technology and changes in how the finance industry is organised. Philippon finds that the annual cost of intermediation is 1.5-2% of intermediated assets, while Bizot finds that the European unit cost of financial intermediation falls within a similar range.
Wright, W. and Hamre, E.F. (2021), “The problem with European stock markets”, New Financial LLP, March. There are also a large number of central counterparties (CCPs) and central securities depositories (CSDs). However, a large part of EU CCP and CSD activity is concentrated in a few CSDs and CCPs within large corporate groups. For instance, the three largest groups represent 96% of European CSD settlement activity and 93% of assets under custody. See also Euroclear (2024), “Unlocking scale and competitiveness in Europe’s markets – Enablers for an integrated and digitised post-trade architecture”, Whitepaper, September.
T2S provides a common platform on which securities and cash can be transferred between investors across Europe, using harmonised rules and practices. Banks pay for securities on the platform using the account they have with their central bank, so the money used to settle transactions is central bank money. As a result, transaction risk is greatly reduced. T2S lays the foundations for a single market for securities settlement and thus contributes to achieving greater integration of Europe’s financial market.
For an example, see Born, A., Heymann, D. S., Chaves, M. and Lambert, C. (2024), “Frictions in debt issuance procedures and home bias in the euro area”, Financial Integration and Structure in the Euro Area, ECB, April.
European Council and Council of the European Union (2024), What the EU is doing to deepen its capital markets and McGuinness, M. (2024), “Vested interests must not block the EU’s capital markets union”, Financial Times, 19 March.
Lagarde, C. (2023), “A Kantian shift for the capital markets union”, speech at the European Banking Congress, 17 November and Véron, N. (2024), “Capital Markets Union: Ten Years Later”, European Parliament, March.
Panetta, F. (2023), “Europe needs to think bigger to build its capital markets union”, The ECB Blog, 30 August.
Eurogroup (2024), Statement of the Eurogroup in inclusive format on the future of the Capital Markets Union, 11 March.
ECB (2024), Statement by the ECB Governing Council on advancing the Capital Markets Union, 7 March; European Council (2024), Special meeting of the European Council – Conclusions, 18 April 2024; and European Commission (2024), Mission Letter from Ursula von der Leyen to Henna Virkunnen, 17 September.
Letta, E. (2024), Much more than a market – Speed, Security, Solidarity. Empowering the Single Market to deliver a sustainable future and prosperity for all EU Citizens, April; Draghi, M. (2024), The future of European competitiveness – A competitiveness strategy for Europe, September.
Cipollone, P. (2024), “Modernising finance: the role of central bank money”, keynote speech at the 30th Annual Congress of Financial Market Professionals organised by Assiom Forex, 9 February.
European Banking Authority (2024), Uses of DLT in the EU banking and payments sector: EBA innovation monitoring and convergence work, April.
European Central Bank (2024), “Second group of participants chosen to test DLT for settlement in central bank money”, MIP News, 21 June.
Bank for International Settlements (2023), “Blueprint for the future monetary system: improving the old, enabling the new”, Annual Economic Report, Chapter III, 20 June.
These three functions are currently performed by three different entities (exchange, settlement infrastructure and CSD).
Global Financial Markets Association (2023), Impact of Distributed Ledger Technology in Global Capital Markets, 17 May.
See also ECB (2024), Statement by the ECB Governing Council on advancing the Capital Markets Union, 7 March.
See Bank for International Settlements, (2012), Principles for financial market infrastructures, April.
The Financial Stability Board is assessing the potential financial stability implications of tokenisation in an upcoming report.
Machiavelli, N. (1513), Discourses on the First Ten Books of Titus Livius, Third Book, Chapter IX.
Lampedusa, G.T. di (1958), The Leopard.

 
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The global economy is turning the corner as growth remained resilient through the first half of 2024, with declining inflation, though significant risks remain, according to the OECD’s latest Interim Economic Outlook.
With robust growth in trade, improvements in real incomes and a more accommodative monetary policy in many economies, the Outlook projects global growth persevering at 3.2% in 2024 and 2025, after 3.1% in 2023.
Inflation is projected to be back to central bank targets in most G20 economies by the end of 2025. Headline inflation in the G20 economies is projected to ease to 5.4% in 2024 and 3.3% in 2025, down from 6.1% in 2023, with core inflation in the G20 advanced economies easing to 2.7% in 2024 and 2.1% in 2025.

GDP growth in the United States is projected to slow from its recent rapid pace, but to be cushioned by monetary policy easing, with growth projected at 2.6% in 2024 and 1.6% in 2025. In the euro area, growth is projected at 0.7% in 2024, before picking up to 1.3% in 2025, with activity supported by the recovery in real incomes and improvements in credit availability. China’s growth is expected to ease to 4.9% in 2024 and 4.5% in 2025, with policy stimulus offset by subdued consumer demand and the ongoing deep correction in the real estate sector.
“The global economy is starting to turn the corner, with declining inflation and robust trade growth. At 3.2%, we expect global growth to remain resilient both in 2024 and 2025,” OECD Secretary-General Mathias Cormann said. “Declining inflation provides room for an easing of interest rates, though monetary policy should remain prudent until inflation has returned to central bank targets. Decisive policy action is needed to rebuild fiscal space by improving spending efficiency, reallocating spending to areas that better support opportunities and growth, and optimising tax revenues. To raise medium-term growth prospects, we need to reinvigorate the pace of structural reforms, including through pro-competition policies, for example by reducing regulatory barriers in services and network sectors.”
The Outlook highlights a range of risks. The impact of tight monetary policy on demand could be larger than expected, and deviations from the expected smooth disinflation path could trigger disruptions in financial markets. Persisting geopolitical and trade tensions, including from Russia’s war of aggression against Ukraine and evolving conflicts in the Middle East, risk pushing up inflation again and weighing on global activity. On the upside, real wage growth could provide a stronger boost to consumer confidence and spending, and further weakness in global oil prices would hasten disinflation.
As inflation moderates and labour market pressures ease further, monetary policy rate cuts should continue, even though the timing and the scope of reductions will need to be data-dependent and carefully judged to ensure inflationary pressures are durably contained.
With public debt ratios elevated, rebuilding fiscal space is key to be able to react to future shocks and future spending pressures, including from population ageing and needed investments in the digital transformation and the climate transition. Fiscal policy needs to focus on containing spending growth and optimising revenues, while credible medium-term adjustment paths would help stabilise debt burdens.
“Governments also need to turn the corner on structural reforms,” OECD Chief Economist Álvaro Santos Pereira said. “The pace of regulatory reforms in recent years has been stalling, and in important parts of the economy reform progress came to a standstill. Amid sluggish productivity growth and tight fiscal space, product market reforms that promote open markets with healthy competitive dynamics remain a key lever to reinvigorate growth.”
Read original post here.

 
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The adoption of artificial intelligence in the financial sector presents significant opportunities for efficiency and value creation, but it also introduces potential risks that must be addressed.
On 22 May 2024, the Organisation for Economic Co-operation and Development (OECD) and the Financial Stability Board (FSB) held a roundtable with experts from the public and private sectors and with academics to analyse trends and use cases of artificial intelligence (AI) in finance. Roundtable participants discussed opportunities and risks and shared emerging best practices regarding policy frameworks.
The growing adoption of AI technologies by banks, insurers, and asset managers is resulting in efficiency gains in areas such as risk modelling, trading, claims handling, fraud detection, and financial crime prevention. Generative AI use in finance does not seem transformational at present, at least for regulated financial institutions, as it focuses on operational efficiency improvements and is largely exploratory. Supervisors are also benefiting from AI, with an enhanced capacity to manage large volumes of data.
Notwithstanding these benefits, the use of AI also raises concerns in terms of model risk, data protection, governance, privacy, and ethics. It may also create financial stability risks given its potential to amplify interconnections among financial firms as well as complexity and opacity concerns around models and data.
Policymakers should strive to promote the safe use of AI in financial services, particularly through global cooperation on standards and best practices.
 
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Easing the burden on lower-income households is not only socially fair, but also economically efficient
Poor households in Germany and France pay up to $2 more per ton of emitted carbon dioxide than their higher-income compatriots. That is because products and services that wealthier people are likelier to consume—such as imported goods and travel outside the European Union—are exempt from carbon pricing. In other words, carbon pricing is regressive, meaning the poor pay proportionally more than the rich, as a share of their income.
New IMF research shows that correcting that distortion, in other words, equalizing carbon prices across countries, would spread the economic burden of emission reductions more evenly across households and alleviate the weight on poorer Europeans.
It is not only a socially fair objective. This would also be economically more efficient. It would ensure that cheaper emissions reduction options are implemented first, which would lower the cost of achieving European countries’ emission targets. And it would also distribute the cost of emissions reduction across firms, sectors, and countries.
The average highest-income household in Europe paid about $10.75 per ton of carbon dioxide in 2020. As the Chart of the Week shows, the lowest-income households pay on average $1.25 more. This gap rises to $1.75 and $2 in countries such as Germany and France, and $5 in Bulgaria.

Making carbon prices more uniform within countries and, better yet, across countries, would help equalizing the burden of cutting greenhouse gas emissions within EU countries.
In fact, a global price would be most effective in this regard, as it would raise carbon pricing embedded in EU households’ imports. Because such a scheme would also imply large differences in burdens across countries, one possible alternative is the IMF’s carbon price floor proposal, which could promote economic efficiency. The ongoing extension of carbon pricing to road transport and heating fuels should also make carbon pricing less regressive.
EU economies will likely remain more open (on average) and apply higher carbon prices than their trade partners. So, the revenues from pricing domestic carbon emissions will continue to exceed the carbon pricing costs embodied in European household consumption bundles. This should allow the burden of carbon pricing on lower-income households to be eased.
 
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WASHINGTON – On September 25, 2024, under the United States-European Union Trade and Technology Council (TTC), the Office of the United States Trade Representative, the United States Department of Labor, and the European Commission held a virtual meeting of the transatlantic tripartite Trade and Labor Dialogue (TALD).
During the meeting, government officials briefed stakeholders, including labor unions and businesses, on the progress made by the United States and the European Commission on the “TALD Social Partner Joint Statement on Transatlantic Forced Labor Trade Strategy” and debriefed on the January 2024 labor stakeholder workshop on the “Promotion of good quality jobs for a successful, just, and inclusive green economy,” which was held under the Transatlantic Initiative for Sustainable Trade (TIST).
U.S. and European Commission officials provided updates on how we are working collaboratively towards eradicating forced labor from our supply chains. This included actions on forced labor policies, support for businesses and labor unions to implement effective due diligence, support for third countries, and the promotion of decent work.
The United States and European Commission also discussed the January 2024 TIST labor stakeholder workshop and potential next steps, including hosting a workshop at a later date to further discuss public and private investments that combat climate change, create high-quality jobs, and address skills shortages in clean energy industries.
 
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CHIPS Investment Expected to Nearly Double U.S. Production Capacity of Sensor and Power Chips at Bloomington, Minnesota Manufacturing Facility
Today, as part of the Biden-Harris Administration’s Investing in America agenda, the U.S. Department of Commerce announced its first award under the CHIPS Incentives Program’s Funding Opportunity for Commercial Fabrication Facilities of up to $123 million in direct funding to Polar Semiconductor (Polar). The award follows the previously signed preliminary memorandum of terms and the completion of the Department’s due diligence. The award will expand and modernize the company’s manufacturing facility in Bloomington, Minnesota. The Department will distribute the funds based on Polar’s completion of project milestones.
“Semiconductors – those tiny chips smaller than the tip of your finger – power everything from smartphones to cars to satellites and weapons systems. I signed the CHIPS and Science Act to revitalize American leadership in semiconductors, strengthen our supply chains, protect our national security, and advance American competitiveness. And over the last three and a half years, we have done just that, catalyzing over $400 billion in private sector investments in semiconductors and electronics that are creating over 115,000 construction and manufacturing jobs. This year alone, the United States is on pace to see more investment in electronics manufacturing construction than it did over the last 24 years combined,” said President Joe Biden. “Today’s announcement that the Department of Commerce has finalized the first commercial CHIPS Incentives award with Polar Semiconductor marks the next phase of the implementation of the CHIPS and Science Act, and demonstrates how we continue to deliver on the Investing in America agenda. Polar’s new facility will also be completed under a Project Labor Agreement to support its construction workforce, creating good-quality union jobs in Bloomington, Minnesota. Today’s announcement is just one of the many ways our Investing in America agenda is reshoring U.S. manufacturing, investing in workers and communities across the country, and advancing America’s leadership in the technologies of tomorrow.”
“Today represents an important milestone in the implementation of the historic CHIPS and Science Act as we announce the first award agreement with Polar,” said U.S. Secretary of Commerce Gina Raimondo. “The Biden-Harris Administration’s investment in Polar will create a new U.S.-owned foundry for sensor and power semiconductors and modernize and expand Polar’s facilities in Minnesota, strengthening our national and economic security, bolstering our supply chains, and creating quality jobs.”
The Biden-Harris Administration’s investment will support Polar’s efforts to almost double its U.S. production capacity of sensor and power chips within two years. This award catalyzes a total investment of more than $525 million from private, state, and federal sources to transform Polar from a majority foreign-owned in-house manufacturer to a majority U.S.-owned commercial foundry. Through Polar’s semiconductor manufacturing operations, the Administration’s investment is expected to create over 160 manufacturing and construction jobs in Minnesota.
For more information about Polar’s award, please visit the CHIPS for America website.
“The Biden-Harris Administration’s investment into Polar marks the first award, of many to come, into communities across our nation to regain our lead in semiconductor manufacturing,” said Lael Brainard, National Economic Advisor.
“Polar and its employees are excited to embark on our transformative project. We welcome new customers and partnerships, and as a domestic U.S.-owned sensor and advanced power semiconductor merchant foundry, we will support technology and design innovation, protect intellectual property, facilitate onshoring and technology transfers, and provide efficient low- to high-volume manufacturing with world-class quality,” said Surya Iyer, President and Chief Operating Officer of Polar Semiconductor. “Through our collaborative and sustained workforce development efforts, we expect to support customers with highly skilled employees today and into the future. We are pleased to close on the significant equity investment from Niobrara Capital and Prysm Capital, and we extend our sincere thanks to our partners at the U.S. Department of Commerce, the State of Minnesota, and the City of Bloomington for their support of the future of American semiconductor manufacturing.”
The purpose of the Award Phase is to finalize comprehensive due diligence and negotiate the final award documents. As stated in the CHIPS Notice of Funding Opportunity for Commercial Fabrication Facilities, the Department will distribute direct funding based on the completion of project components in connection with both the capital expenditures for the project and production and commercial milestones. The program will track the performance of each CHIPS Incentives Award through financial and programmatic reports, in accordance with the award terms and conditions, to establish a compliance program to monitor that commitments are being upheld.
About CHIPS for America
CHIPS for America has allocated more than $35 billion in proposed funding across 16 states and proposed to invest billions more in research and innovation, which is expected to create over 115,000 jobs. Since the beginning of the Biden-Harris Administration, semiconductor and electronics companies have announced over $400 billion in private investments, catalyzed in large part by public investment. CHIPS for America is part of President Biden and Vice President Harris’s economic plan to invest in America, stimulate private sector investment, create good-paying jobs, make more in the United States, and revitalize communities left behind. CHIPS for America includes the CHIPS Program Office, responsible for manufacturing incentives, and the CHIPS Research and Development Office, responsible for R&D programs, that both sit within the National Institute of Standards and Technology (NIST) at the Department of Commerce. Visit chips.gov to learn more.
 
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The EU has kicked off a week of high-level meetings and events during the UN General Assembly in New York. During the weekend, Executive Vice-President Vestager, Vice-President Šuica and Commissioner Urpilainen participated in the Summit of the Future’s Action Days covering topics ranging from youth, children’s rights, sustainable development, demography, gender equality and sexual reproductive health, as well as the Global Digital Compact adopted at the Summit of the Future.
On Sunday, President of the European Council Charles Michel, High Representative/Vice-President Josep Borrell, and Commissioner Jutta Urpilainen, represented the EU in a trilateral meeting with the African Union and the United Nations. See the Joint Communiqué here. They then held a bilateral meeting with UN Secretary-General António Guterres. High Representative Borrell co-hosted a Ministerial dinner on the Middle East with the participation of representatives from all over the world. Commissioner Kyriakides attended the annual Representation Matters reception organised by Women Political Leaders focusing on enhancing women’s participation in policymaking.
Today, President Ursula von der Leyen will deliver a keynote address at the Association of Small Islands States Leaders’ Meeting, which will be live on EbS at 14:00 CEST (08:00 EST). High Representative Borrell will reiterate the EU’s support to Ukraine’s energy sector in a G7+ Foreign Ministers meeting, including the €160 million package worth of support announced by President von der Leyen last week. In the afternoon, he will chair the annual informal meeting of EU Foreign Affairs Ministers, with Ukraine and the Middle East region on top of the agenda. Ukrainian Foreign Minister Andrii Sybiha will join a part of the meeting upon the High Representative’s invitation. Commissioner Urpilainen will represent the Commission at that meeting. Doorstep remarks will be transmitted live on EbS as of 20:45 CEST (14:45 EST). High Representative Borrell will hold a press conference at around 00:00 CEST (18:00 EST), transmitted live on EbS. In the evening, he will participate in a G7 Foreign Ministers’ meeting.
Vice-President Šuica, together with the African Union and UNICEF, will bring leaders from governments, business and civil society at the High-Level event ‘Proven solutions for children: accelerating progress for the SDGs and beyond’, focusing on concrete, cost-effective, and evidence-backed policy solutions for every child. Vice-President Šuica will also speak at a high-level event on children and climate change organised by UNICEF and the UN Climate Change Conference COP 29. Commissioner Johansson will host the high-level side event ‘Leading the way forward: managing migration globally’ together with UNHCR, IOM and UNDOC drawing political attention. Commissioner Urpilainen will sign a Declaration on School Meal Coalition with the World Food Programme during the Global Education Forum, committing to ensure that every child receives a nutritious meal in school by 2030. Commissioner Simson will participate in the Global Renewables Summit, the first high-level public-private summit to discuss the progress, opportunities and challenges of tripling renewable energy globally by 2030. She will deliver opening remarks at the Sustainability Summit. Commissioner Hoekstra will participate in a roundtable organised by the World Economic Forum on mobilising Business for COP impact.
 
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I would like to thank Secretary General Guterres and H.E. K P Sharma Oli, Prime Minister of Nepal, for spearheading this important discussion on strengthening our multilateral system for a better tomorrow. The timing could not be more important—the choices we make this decade will be critical for determining our future.
When we look into the future, it is important to first recognize where we are today. Let me start with the current state of the global economy. On the positive side, the world economy has proven to be remarkably resilient to the multiple shocks of the last years. Inflation generated by these shocks, and the response to them, is finally receding. Major economies are poised to avoid the recession that many feared would take hold.
But we also see that prospects for growth are at their weakest in decades, which means fewer jobs and lower incomes. We expect global growth of around 3 percent each year over the next five years. This is almost a percentage point lower than in the decades before the pandemic.
Worryingly, these trends are most dramatic for low-income countries. These countries’ output is still 7.5 percent below the pre-pandemic growth trajectory. Add to this elevated debt pressures, and we see risks of a low growth-high debt trap.
The political economy environment is also becoming even more complex. In many countries, feelings of unfairness are eroding trust and stoking social unrest. Globally, fragmentation is rising.
And yet, we stand at the cusp of a remarkable transformation fueled by green innovation and technological change. We can harness green growth and create green jobs if policymakers are laser focused on reshaping their economies. Technology can provide a much-needed boost to productivity if deployed properly. For instance, IMF analysis suggests that artificial intelligence has the potential to add up to 0.8 percentage point to global growth.
This global backdrop translates into three essential policy recommendations for our member countries: (i) continue to do what works well—implement strong policies and build strong institutions; (ii) remove the obstacles to growth both domestically and internationally; and (iii) resist excessive protectionism, so we can build a stronger global economy together.
The IMF is doing its part, driven by four priorities. First, we will continue to work with our members to help them design sound macroeconomic policies. Second, we will leverage our financial strength to direct more resources to low-income countries. We provided financing of US$370 billion to our members over the past few years, and we are generating more funding for low-income countries through the Poverty Reduction and Growth Trust and the Resilience and Sustainability Trust. Third, we will continue to help countries address debt issues and speed up debt restructuring, including through the Common Framework. We established, jointly with the World Bank, the Global Sovereign Debt Roundtable and we modified our debt policies to ensure that we can provide financing to countries more quickly. Finally, we will continue to work to become more representative. Our membership agreed to create a third chair for Sub-Saharan Africa on our Executive Board to improve the region’s voice and representation. We are also working with our membership towards a new quota formula.
My message today is simple: together we are stronger. Let us work together to lift our ambition now, in this decade, to build a better future for all.
Thank you.
IMF Communications Department
 
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Yesterday’s main takeaways from the College Members included President Ursula von der Leyen’s speech at the Association of Small Island States Leaders’ Meeting. You can read the full speech here. Furthermore, High Representative Josep Borrell chaired the informal meeting of EU Foreign Ministers. You can read the full press remarks at the press conference here. Commissioner Ylva Johansson hosted representatives from partner countries and international organisations to discuss migration and forced displacement. Commissioner Jutta Urpilainen signed a Declaration with the World Food Programme. Commissioner Kadri Simson delivered opening remarks at the Sustainability Summit. You can read the full speech here. 
Today, President von der Leyen and High Representative/Vice-President Borrell will attend the opening session of the General Debate of the UN General Assembly. President von der Leyen will deliver the opening remarks at the Global Renewables Summit at 11:30 EST (17:30 CEST), which will be live streamed on EbS. She will also co-host the event ‘Innovation for a Sustainable Future: Working together on industrial growth and decarbonization’, together with the Prime Minister of Canada, Justin Trudeau. You can follow her speech on EbS at 14:30 EST (20:30 CEST).
High Representative/Vice-President Borrell will address the UN Security Council in a meeting on Ukraine, which will be streamed live on EbS at around 16:30 EST (22:30 CEST). He will deliver press remarks after the meeting at ca. 17:30 EST (23:30 CEST). In the evening, he will participate in a dinner of Transatlantic Foreign Ministers, hosted by US Secretary of State, Antony Blinken.
Commissioner Stella Kyriakides will speak at a side event on Infection Prevention and Control (IPC) and Antimicrobial Stewardship ‘From policy to implementation at the point of care’, and attend the Food Waste Champions ‘Champions 12.3′. She will also participate in the High-Level Dinner ‘The Road from New York to Jeddah’ focusing on global challenges of Anti-Microbial Resistance, hosted by the United Kingdom and the Kingdom of Saudi Arabia.
Commissioner Urpilainen will speak in the side event ‘Three Years On – Supporting Afghan Women’s Rights’, co-organised by the EU and UN Women, where she will announce new support for the Afghan people’s basic needs and livelihoods in line with the EU’s established principled approach, including specific attention to women and girls. She will deliver press remarks ahead of the meeting at ca. 17:45 EST (23:45 CEST). You can follow it live on EbS. She will also open the panel ‘The Do’s and Dont’s of Sustainable Supply Chains’ at the Leaders’ Summit of the UN Global Compact, speak at the side-event ‘Investing in the Future: Unlocking Sustainable Financing for Sexual and Reproductive Health (SHR)’ and attend the event on the Lobito Corridor, hosted by the US.
Commissioner Urpilainen will speak in the side event ‘Three Years On – Supporting Afghan Women’s Rights’, co-organised by the EU and UN Women, where she will announce new support for the Afghan people’s basic needs and livelihoods in line with the EU’s established approach based on principles, including the EU’s specific attention to women and girls. She will deliver press remarks ahead of the meeting at ca 17:45 EST (23:45 CEST). You can follow it live on EbS. She will also open the panel ‘The Do’s and Dont’s of Sustainable Supply Chains’ at the Leaders’ Summit of the UN Global Compact, speak at the side-event ‘Investing in the Future: Unlocking Sustainable Financing for Sexual and Reproductive Health (SHR)’ and attend the event on the Lobito Corridor, hosted by the US.
Commissioner Simson will speak in the panel on ‘Financing the clean transition’ and Commissioner Wopke Hoekstra in the roundtable on ‘Carbon Markets’, at the Bloomberg Global Business Forum. He will also participate in the High Ambition for the High Seas event, ‘Accelerating Political Momentum for Ratification and Implementation of the High Seas Treaty’, deliver a keynote speech on the EU’s Climate Transition in a Geopolitical Landscape at Columbia University, and attend the High Ambition Coalition Ministerial dinner.
 
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The following is an address by former Italian Prime Minister Mario Draghi, ahead of his recent report titled “The future of European competitiveness – A competitiveness strategy for Europe.” You can read the full report at the link below.
 
Dear Madame President,
Dear Honourable Members of the European Parliament,
Dear Executive Vice-President of the European Commission,
 
Let me start by saying that I’m very honoured to be invited to speak to you in this plenary today.
And I would like to thank the President of the European Parliament, Roberta Metsola, for this invitation and for her continuous support of my work.
Let me also thank the representatives of the political groups whom I had the pleasure to meet some weeks ago. Our exchange was wide-ranging, frank, fruitful and contributed decisively to shaping my thinking as I was finalising the report.
Last week, I presented this report on the future of Europe’s competitiveness to the President of the European Commission.
The starting point is that Europe is facing a world undergoing dramatic change. World trade is slowing, geopolitics is fracturing and technological change is accelerating.
It is a world where long-established business models are being challenged and where some key economic dependencies are suddenly turning into geopolitical vulnerabilities.
Of all the major economies, Europe is the most exposed to these shifts.
We are the most open: our trade-to-GDP ratio exceeds 50%, compared with 37% in China and 27% in the United States.
We are the most dependent: we rely on a handful of suppliers for critical raw materials and import over 80% of our digital technology.
We have the highest energy prices: EU companies face electricity prices that are 2-3 times higher than those in the United States and in China.
We are severely lagging behind in new technologies: only four of the world’s top 50 tech companies are European.
And we are the least ready to defend ourselves: only ten Member States spend more than or equal to 2% of GDP on defence, in line with NATO commitments.
In this setting, we are all anxious about the future of Europe.
My concern is not that we will suddenly find ourselves poor and subservient to others. We still have many strengths in Europe.
It is that, over time, we will inexorably become less prosperous, less equal, less secure and, as a result, less free to choose our destiny.
The European Union exists to ensure that Europe’s fundamental values are always upheld: democracy, freedom, peace, equity and prosperity in a sustainable environment.
If Europe cannot any longer deliver these values for its people, it will have lost its reason for being.
So, this report is not only about competitiveness – it is about our future and the common commitment that we need to reclaim it.
 
The challenges Europe faces are complex and, as such, they present us with difficult choices. But they are choices we must confront.
The purpose of this report is to lay out a strategy for Europe to change course: pinpointing the priorities we should focus on, explaining the trade-offs we face, and offering pragmatic solutions to resolve them.
The report identifies three main areas for action.
The first is aiming at closing the innovation gap with the United States and China.
EU companies spent around EUR 270 billion less on R&D than their US counterparts in 2021, largely because we have a static industrial structure dominated by the same companies and technologies as decades ago.
The top 3 investors in R&D in Europe have been dominated by automotive companies for the last twenty years. It was the same thing in the US in the 2 early 2000s, with autos and pharma leading, but now the top 3 are all tech companies.
The core problem in Europe is that new companies with new technologies are not rising in our economy. In fact, there is no EU company with a market capitalisation over EUR 100 billion that has been set up from scratch in the last fifty years. All six US companies with valuations above EUR 1 trillion have been created in that period of time.
This lack of dynamism does not reflect lack ideas or lack of ambition. Europe is full of talented researchers and entrepreneurs. It is because innovation often lacks synergies, and because we are failing to translate ideas into commercial success. Innovative companies that want to scale up in Europe are hindered at every stage by the lack of a Single Market and an integrated capital market, stopping the cycle of innovation in its tracks.
As a result, many European entrepreneurs prefer to seek financing from US venture capitalists and scale up in the US market. Between 2008 and 2021, close to 30% of the “unicorns” founded in Europe – that is to say, start-ups that went on the be valued at over USD 1 billion – relocated their headquarters abroad.
And these figures do not include the many young, talented Europeans who go to study in the United States and found their companies there. It is a huge loss for our economy in terms of jobs and brain drain.
The innovation gap is at the root of Europe’s slowing productivity growth relative to the US. So, we must bring innovation back to Europe – and the report proposes to do so through reforming the whole innovation ecosystem.
It starts with establishing our universities and research institutions at the frontier of academic excellence, and making it easier for researchers to commercialise their ideas. Only about one-third of the patented inventions registered by European universities are commercially exploited.
The next step is encouraging innovative start-ups to scale up in Europe by removing regulatory hurdles. This is not about deregulation: it is about ensuring the right balance between caution and innovation, and ensuring that regulation is consistently applied within Europe.
A key initiative we propose is the creation of a new EU-wide legal statute: the “Innovative European Company”. This status would immediately provide 3 companies with a single digital identity valid throughout the EU, and it is foreseen that these companies could then have access to harmonised legislation.
We also call for a profound review of how we spend public money on innovation in Europe. If spent wisely, public funds can be a powerful tool to launch breakthrough technologies. These technologies are often too risky or require too much financing for the private sector to undertake alone, especially in an environment like ours is where scaling up is typically difficult.
Yet, even though the public sector in the EU spends about as much on innovation as the United States as a share of GDP, just one-tenth of this spending takes place at the EU level. The report calls for EU spending on innovation to be expanded and refocused on a smaller number of commonly agreed priorities, with a larger allocation for disruptive innovation. In other words, we need to increase the intensity of financing.
The success of these measures will in turn depend on integrating the Single Market and Europe’s capital markets, so that private investment can be reoriented towards hi-tech sectors and the industrial structure can evolve.
Finally, a critical issue for Europe will be integrating new technologies like artificial intelligence into our industrial sector. AI is improving incredibly fast, as the latest models released in the last few days show. We need to shift our orientation from trying to restrain this technology to understanding how to benefit from it.
The cost of training frontier AI models is still high, which is a barrier for companies in Europe that don’t have the backing of US big tech firms. But, on the other hand, the EU has a unique opportunity to lower the cost of AI deployment by making available its unique network of high-performance computers.
The report recommends increasing the capacity of this network and expanding access to start-ups and industry. Many industrial applications of AI do not require the latest advances in generative AI, so it’s well within our reach to accelerate AI uptake with a concerted effort to support companies.
That said, the report recognises that technological progress and social inclusion do not always go together. Major transitions are disruptive. Inclusion hinges on everyone having the skills they need to benefit from digitalisation.
So, while we want to match the United States on innovation, we must exceed the US on education and adult learning. We therefore propose a profound overhaul of Europe’s approach to skills, focused on using data to understand where skills gaps lie and investing in education at every stage.
For Europe to succeed, investment in technology and in people cannot substitute for each other. They must go hand in hand.
 
The second area for action is a joint plan for decarbonisation and competitiveness.
If Europe’s ambitious climate targets are matched by a coherent plan to achieve them, decarbonisation will be an opportunity for Europe. But if we fail to coordinate our policies, there is a risk that it could run contrary to competitiveness – and ultimately be delayed or even rejected.
The first priority is to lower energy prices.
Over time, decarbonisation will help shift power generation towards secure, low-cost, clean energy sources. But without a European plan, it will take a long t ime before end users see the full benefits.
In 2022, at the peak of the energy crisis, natural gas was the price-setter 63% of the time, despite making up only 20% share of the EU’s electricity mix. Even if our renewable targets are met, fossil fuels will still set energy prices for much of the time for at least the remainder of this decade.
We must transfer the benefits of decarbonisation faster to Europeans by making energy prices lower and less volatile in Europe. And the report puts forward a set of – several initiatives – to achieve this goal.
In parallel, we call for pressing ahead with clean energy installation in a technology-neutral way. This approach should include renewables, nuclear, hydrogen, bioenergy, and carbon capture, utilisation and storage.
Increasing the pace of permitting and raising investment in grids will be key – the key – to unlocking this potential. Otherwise, by 2040 we could lose up to 10 t imes more renewable energy generation than we lose today owing to grid constraints. From a European perspective, rapidly increasing the deployment of interconnectors should be the focus.
Decarbonisation is also an opportunity for the EU industry.
The EU is a world leader in clean technologies like wind turbines, electrolysers and low-carbon fuels. We are also strong in green innovation. More than onef ifth of clean and sustainable technologies worldwide are developed here.
Yet, it is not guaranteed we will seize this opportunity. Chinese competition is becoming acute, driven by a powerful combination of subsidies, innovation and scale. By 2030 at the latest, China’s annual manufacturing capacity for solar photovoltaic is expected to be double the level of global demand, and for battery cells it is expected to at least cover the level of global demand.
Europe faces a trade-off. Increasing reliance on China may offer the cheapest route to meeting our climate targets. But China’s State-sponsored competition represents a threat to otherwise productive industries, and to the promise that the green transition will bring “good green jobs”.
We will not be able to manage this challenge with black-and-white solutions. This is why the report proposes a differentiated approach according to sectors and technologies.
There are some technologies, like solar panels, where foreign producers are too far ahead and attempting to capture production in Europe will only set back decarbonisation. Even if those countries are using subsidies, we should let foreign taxpayers finance cheaper installation of clean energy in Europe. There are other sectors, however, where we are open to using foreign technology and to increasing inward investment.
There are still other sectors, like batteries, where we do not want to be fully dependent on foreign technology for strategic reasons, and so it is key to keep the know-how in Europe. Determining strategic value should take place according to rigorous criteria which avoid protecting vested interests.
Finally, there are the so-called “infant industries” where Europe has an innovative edge that we need to nurture until companies are ready to compete internationally.
To be clear: this should not be read by anyone as a call for blanket protectionism. Our priority is to do everything possible to make all partners comply with the WTO rules, including those who presently do not. Although 6 some of the proposals in the report will require negotiations, they are generally aligned with the spirit of those rules.
Insofar as we use trade measures, they should be careful, defensive and especially designed only to level the playing field. We should clearly distinguish between innovation abroad – which is good for Europe – and State-sponsored competition, which harms our workers.
The proposals should also not be seen as a programme for defending national champions or “picking winners”, like some of the failed industrial policies of the past. In fact, the report argues for returning to the normal State aid regime, while foreseeing State aid for investment projects of common European interest.
 
The third area for action is increasing security and reducing dependencies.
Peace is the first and foremost objective of Europe, at home and abroad. And we must continue in this steadfast effort. But security threats are rising and we must prepare.
For Europe to remain free, we must be more independent. We must have more secure supply chains for critical raw materials and technologies. We must increase production capacity at home in strategic sectors. And we must expand our industrial capacity in defence and space.
But independence comes at a cost.
Securing critical raw materials will mean diversifying away from countries that were the cheapest suppliers in the world of yesterday. Strengthening the supply chain for semiconductors will require major new investments. The cost of developing our defence capability will be substantial.
These costs will be much more manageable if we have a strategy to reduce our dependencies and increase our security together.
The report recommends developing a genuine EU “foreign economic policy”, coordinating preferential trade agreements and direct investment with resource-rich nations, building up stockpiles in selected critical areas, and creating industrial partnerships to secure the supply chain of key technologies.
It also sets out a strategy to enhance Europe’s domestic presence in the most advanced chips segments.
This “foreign economic policy” should reflect European values and reconcile our security interests with solidarity towards middle and low-income countries, helping them to develop and decarbonise as we do.
For defence, our key weakness is excessive fragmentation of the industrial base, compounded by lack of coordination among Member States, unnecessary duplication and lack of interoperability of equipment. In the defence sector, common planning comes before common expenditure.
EU countries are, collectively, the second largest military spenders in the world, but we do not help our defence and space industries to build up scale. Collaborative procurement accounted for less than a fifth of spending on defence equipment procurement in 2022. Almost four-fifths of total procurement spending went to non-EU suppliers.
The report therefore recommends increasing substantially the aggregation of demand between groups of Member States, as well as raising the share of joint defence procurement and common R&D spending.
In the defence sector, this consolidation of spending should be matched by selective integration and consolidation of EU industrial capacity, with the explicit aim of increasing scale, standardisation and interoperability.
However, at the same time, higher scale should not lead to lower competition. Europe has many highly sophisticated SMEs in the defence sector that could make an exceptional contribution to our common defence.
 
A key question that has arisen in the last few days is how to finance the massive investments that transforming Europe’s economy will entail.
Europe has set itself a series of ambitious objectives that have been endorsed by EU institutions and the Member States.
We have enshrined becoming carbon-neutral by 2050 in EU law. We have committed to raise public spending on innovation to 3% of GDP a year. Member States that are part of NATO are committed to invest at least 2% of GDP on defence per year. Over the past months, this House and the EU leaders 8 have discussed and agreed on the urgent, immediate and medium-term defence needs for Europe. And they have also set out targets for upgrading our digital infrastructure as part of the Digital Decade.
The report contains a bottom-up analysis by Commission staff of the investment needs to carry out these objectives. And they reach the conclusion that EUR 750-800 billion in additional investment will be required each year. Analysis by the European Central Bank arrives at similar figures.
These investments are vital to carry out the objectives of the report. But let me be clear: they are not new investment needs that the report has identified. They are the needs required to deliver on the EU’s existing objectives. Once these objectives were agreed, the numbers followed.
However, it is a massive volume of investment. And we calculate that, to marshal investment on this scale, the share of investment in GDP would have to rise to levels not seen in Europe since the 1960s and 70s. The effort would be more than double that of Marshall Plan.
So, we must ask the question of how we will finance it.
Historically, investment in Europe has been financed about 80% privately and 20% publicly. We asked staff from the Commission and the International Monetary Fund to conduct simulations to see whether we could maintain that split for such a large investment push.
The results show that to finance this volume of investment, we must make progress on Capital Markets Union, so that private savings can be channelled into investment across the whole EU. But even with mobilising private finance, public support will still be required.
Two key conclusions emerge.
First, if the EU carries out the strategy outlined in the report and productivity rises, capital markets will be more responsive to the flow of private savings, and it will be much easier for the public sector to finance its share. Faster productivity growth could reduce the costs for governments by one-third.
Second, to lift productivity, some joint investment in key projects – such as breakthrough research, grids, defence procurement – will be critical, and these projects could be funded through common debt.
It is natural that these large numbers create worries about rising debt levels. It is also legitimate to be concerned about common debt issuance.
But it is important to remember that this debt is not for general government spending or subsidies. It is to carry out the objectives that are critical for our future competitiveness, and that – and I stress this – we have all already agreed upon.
If one objects to building a true Single Market, to capital market integration, and objects to debt issuance, one objects to our EU objectives.
 
This report has come out at a difficult time for our continent.
On many key questions, we are divided about what to do. There is discontent in large parts of Europe about the direction in which we are heading. And there is considerable unease about the future.
My role, as set out by the European Commission, is to present you with a diagnosis of where Europe stands and to offer you recommendations on how to move forward. But it is for you, our elected representatives, to turn this agenda into actions.
We will only overcome division in Europe if the will to change receives broad democratic backing. The choices we face are too important to be settled by technocratic solutions. Our elected institutions must be at centre of the debate on Europe’s future – and on the actions that will shape it.
I trust that we can find consensus, if only because the alternatives look progressively bleaker.
As I observed some time ago, Europe faces a choice between paralysis, exit or integration. Exit has been tried and has not delivered what its proponents hoped for. Paralysis is becoming untenable as we slide towards greater anxiety and insecurity.
So, integration is our only hope left.
It is important that all of us understand that the size of the challenge we face far exceeds the size of our national economies. And we are facing a world where we risk losing not just peace, but also our freedom.
In this world, it will be only through unity that we will be able to retain our strength and defend our values.
Thank you.
Read full report here.
 
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