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IMF | How Strengthening Standards for Data and Disclosure Can Make for a Greener Future

Imagine you plan to invest your savings and are looking for a firm or sector with a sustainable business model or a project that can make a real difference in the transition to a low-carbon economy. Where do you get reliable information to assess and compare projects from different companies?

“Data gaps make it difficult to assess firms’ exposure to climate risk.”

To give investors access to decision-useful information to effectively price and manage climate risks, there is an urgent need to strengthen the “climate information architecture.” There are three building blocks needed to support it: (i) high-quality, reliable, and comparable data, (ii) a harmonized and consistent set of climate disclosure standards, and (iii) a broadly agreed upon global taxonomy.
High-quality, reliable, and comparable data
Currently, investors and policymakers face a lack of forward-looking, granular, and verifiable data—especially on firms’ efforts to move to sustainable business models (e.g., by reducing their greenhouse gas emissions). While a growing number of firms set emission reduction targets for themselves, the vast majority still does not provide this information, as shown in the chart below. Data gaps are particularly large for small and medium enterprises and for firms in emerging markets. These gaps make it difficult to assess firms’ exposure to climate risk and determine the impact of their investments on nonfinancial objectives, such as combating climate change.
Harmonized and consistent set of climate disclosure standards
One way to close these data gaps is through more and better disclosure of climate information by households, firms, and financial institutions. However, while firms are accustomed to publishing financial statements, “sustainability reporting” of climate-change risks and opportunities—in line, for instance, with the recommendations of the Task Force on Climate-related Financial Disclosures—is still in its infancy, and uptake is low, especially for smaller firms.
Moreover, with more than 200 frameworks, standards, and other forms of guidance on sustainability reporting and climate related disclosures across 40 countries, part of the problem is the multitude of existing frameworks currently used by firms and financial institutions, which undermines consistency and comparability. For example, some corporates may be asked to report according to different frameworks in different countries, making it difficult for investors to assess climate risks faced by such firms.

Broadly agreed-upon global taxonomy
Taxonomies—such as the recently published EU taxonomy are classifications of assets or activities that aim to improve market clarity on the extent to which investments support climate change adaptation and mitigation efforts. A well-designed and globally agreed taxonomy plays an important role in fostering sustainable finance markets, by helping communication with investors and facilitating the flow of capital towards climate-sustainable investments
However, by focusing excessively on fully sustainable investments, taxonomies can fail to recognize efforts by firms and countries to transition to a climate-sustainable business model, hindering the flow of capital to such firms. This is especially problematic in emerging markets where investments for transition purposes are needed the most and can have the largest benefits.
The way forward
Standardized and decision-useful information will be critical to help meet the large financing and investment needs associated with climate change mitigation and adaptation. Work to bridge the data gaps by the Network for Greening the Financial System to produce a detailed list of currently missing data items is an important step toward better data. For its part, the IMF has created a Climate Change Indicators Dashboard that brings together climate-related data needed for macroeconomic and financial policy analysis. Technological solutions, such as artificial intelligence and open-source data platforms and tools, can also be used for data collection and distribution.
As earlier IMF work has argued, convergence toward more-standardized sustainability reporting should now be a priority. To be useful in decision making, the information that gets reported should, first off, allow for investors to assess the value and the risks of firms and projects. Second, it should enable the monitoring of financial stability risks from climate change—something the IMF has also previously examined. And finally, the information should allow investors, policymakers, customers and other stakeholders to understand how firms will transition toward a more climate-sustainable business model.
Consolidating the multiple existing reporting initiatives is challenging. The International Financial Reporting Standards Foundation’s initiative to develop global sustainability reporting standards will help to promote transparency and global comparability. Aligning financial and non-financial reporting and providing assurance by auditors would also facilitate decision making, improving market confidence. Moving quickly in this direction is imperative, and building and improving on existing frameworks should be encouraged.
While steps towards globally agreed-upon taxonomies are less advanced than those on disclosure and data, efforts by the EU and others are notable. However, taxonomies must be flexible enough to recognize the complex efforts taken by companies to transition to a climate sustainable business model, especially in emerging markets and developing economies where investments are needed the most.
Challenges remain
To make more progress, a consistent, timely, and uniform implementation of internationally agreed sustainability reporting standards is necessary. Here, strong international commitment will be needed, while taking into account regional, institutional, and legal specificities, and while allowing individual jurisdictions to introduce additional requirements, if necessary. Moreover, implementation challenges for emerging markets—and for many small and medium enterprises—will have to be considered carefully.
Looking further ahead, the scope of the standards will need to be widened to address broader sustainability dimensions, for example environmental issues such as the loss of biodiversity, as well as social and governance issues.
Compliments of the IMF.
The post IMF | How Strengthening Standards for Data and Disclosure Can Make for a Greener Future first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

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OECD | Inheritance, estate and gift taxes could play a stronger role in addressing inequality and improving public finances

Inheritance taxation can be an important instrument to address inequality, particularly in the current context of persistently high wealth inequality and new pressures on public finances linked to the COVID-19 pandemic, according to a new OECD report.
Inheritance Taxation in OECD Countries provides a comparative assessment of inheritance, estate and gift taxes across the 37-member OECD, and explores the potential role these taxes could play in raising revenues, addressing inequalities and improving the efficiency of tax systems in the future.
The report highlights the high degree of wealth concentration in OECD countries as well as the unequal distribution of wealth transfers, which further reinforces inequality. On average, the inheritances and gifts reported by the wealthiest households (top 20%) are close to 50 times higher than those reported by the poorest households (bottom 20%).
The report points out that inheritance taxes – particularly those that target relatively high levels of wealth transfers – can reduce wealth concentration and enhance equality of opportunity. It also notes that inheritance taxes have generally been found to generate lower efficiency costs than other taxes on the wealthy, and to be easier to assess and collect than other forms of wealth taxation.
A majority of OECD countries currently levy inheritance or estate taxes – 24 in total. However, these taxes typically raise very little revenue. Today, only 0.5% of total tax revenues are sourced from inheritance, estate and gift taxes on average across the countries that levy them.

Courtesy of the OECD.
Generous tax exemptions and other forms of relief are a key factor limiting revenue from these taxes, according to the report. In addition to limiting revenue, relief provisions primarily benefit the wealthiest households, reducing the effective progressivity of inheritance and estate taxes.
Individuals are often able to pass on significant amounts of wealth tax-free to their close relatives thanks to high tax exemption thresholds. Tax relief is also common for transfers of specific assets (e.g. main residence, business and farm assets, pension assets, and life insurance policies). In a number of countries, inheritance and estate taxes can also largely be avoided through in-life gifts, due to their more favourable tax treatment.
These provisions reduce the number of wealth transfers that are subject to taxation, sometimes significantly so. For instance, across eight countries with available data, the share of estates subject to inheritance taxes was lowest in the United States (0.2%) and the United Kingdom (3.9%) and was highest in Switzerland (12.7%) (Canton of Zurich) and Belgium (48%) (Brussels-Capital region).
“While a majority of OECD countries levy inheritance and estate taxes, they play a more limited role than they could in raising revenue and addressing inequalities, because of the way they have been designed,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. “There are strong arguments for making greater use of inheritance taxes, but better design will be needed if these taxes are to achieve their objectives.”
The report underlines the wide variation in inheritance tax design across countries. The level of wealth that parents can transfer to their children tax-free ranges from close to USD 17 000 in Belgium (Brussels-Capital region) to more than USD 11 million in the United States. Tax rates also differ. While a majority of countries apply progressive tax rates, one-third apply flat rates, and tax rate levels vary widely.
The report proposes a range of reform options to enhance the revenue potential, efficiency and fairness of inheritance, estate and gift taxes, while noting that reforms will depend on country-specific circumstances.
It finds strong fairness arguments in favour of an inheritance tax levied on the value of the assets that beneficiaries receive, with an exemption for low-value inheritances. Levying an inheritance tax on a lifetime basis – on the overall amount of wealth received by beneficiaries over their lifetime through both gifts and inheritances – would be particularly equitable and reduce avoidance opportunities, but could increase administrative and compliance costs. Scaling back regressive tax reliefs, better aligning the tax treatment of gifts and inheritances and preventing avoidance and evasion are also identified as policy priorities.
To make these taxes more acceptable by the public at large, the report underlines the need to provide citizens with information on inequality and the way inheritance and estate taxes work, as these tend to be misunderstood.
“Inheritance taxation is not a silver bullet, however,” said Mr Saint-Amans. “Other reforms, particularly in relation to the taxation of personal capital income and capital gains, are key to ensuring that tax systems help reduce inequality. The OECD will be undertaking new work in that area, in particular as the progress made on international tax transparency and the exchange of information is giving countries a unique opportunity to revisit personal capital taxation.”
Experts from the OECD Centre for Tax Policy and Administration will lead a webinar discussion of the report on Wednesday 12 May 2021 at 11:00 CEST. Register.
Further information on Inheritance Taxation in OECD Countries is also available at: http://oe.cd/inheritancetax.
Contacts:

Media enquiries should be directed to Pascal Saint-Amans, Director, OECD Centre for Tax Policy and Administration (+33 1 4524 9108), David Bradbury, Head of the OECD’s Tax Policy and Statistics division (+33 1 4524 1597), or to Lawrence Speer (+33 1 4524 7970) in the OECD Media Office (+33 1 4524 9700).

Compliments of the OECD.
The post OECD | Inheritance, estate and gift taxes could play a stronger role in addressing inequality and improving public finances first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

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Governor Cuomo Launches a New Decade of the Regional Economic Development Council Initiative

Round XI Will Award More Than $750 Million Across All 10 REDC Regions to Build Back Better in a Post-COVID Economic Recovery
Governor Andrew M. Cuomo today launched Round XI of the Regional Economic Development Council initiative, officially kicking off a new decade of economic development in a post-pandemic recovery. The 2021 funding round includes more than $750 million in state economic development resources. The Consolidated Funding Application will open on May 10, enabling businesses, municipalities, not-for-profits and the public to begin applying for assistance from dozens of state programs for job-creation and community development projects.
“The COVID pandemic has taken a tremendous toll on our State, but now is our time to build back better and stronger than before and create a New York that serves our children and their children and their children,” Governor Cuomo said. “It’s going to be hard – it’s always hard to do what has never been done before – but after what New Yorkers have been through this part year, there is no challenge they can’t meet today. We’re announcing a new decade of the Regional Economic Development Councils so that regionals all across the state can plan their own economic rebirth and come up with their own smart and daring plans to rebuild, and New York State will fund it. We’ve done this before and it’s worked tremendously well, but it’s more important this year than ever before because the stakes are higher this year than ever before.”
Over the past 10 years, the Regional Economic Development Councils have revitalized the state’s economy from the ground up through a community-based and performance-driven approach to economic development. This year, New York State will again leverage the expertise of the REDCs to invest $750 million in strategic, regional efforts to drive the recovery in every corner of the state.
“As we enter the eleventh round of this initiative and as the State continues to move forward following the devastating effects of the pandemic, we are committed to this bottom-up approach to foster regional partnerships and make strategic investments,” said Lieutenant Governor Kathy Hochul, Chair of the statewide Regional Economic Development Councils. “New York has seen tremendous growth in all 10 regions through the REDCs.”
Round XI includes core capital and tax-credit funding that will be combined with a wide range of existing agency programs totaling approximately $750 million. The core funding includes $225 million in grants and tax credits to fund high value regional priority projects. The Budget also makes over $525 million in resources from state agencies available to support community revitalization and business growth consistent with the existing REDC plans through the CFA process.
In order to be responsive to the immediate needs of the development community and as the state is making crucial investments to generate economic activity, the $150 million in grant funds from Empire State Development will be made available to projects on a continuous and competitive basis this round.
Round XI Awards
The Regional Councils will identify and recommend priority projects that will be eligible for up to $150 million in capital funds on a rolling basis, meaning projects will be reviewed throughout the round. An emphasis will be placed on project readiness and alignment with each region’s strategic plan. Additionally, projects within each region will also be eligible for a share of $75 million in Excelsior Tax Credits to help attract and grow business in the region. Projects from all 10 regions submitted through the CFA will be eligible for over $525 million in other state agency funds, which are available on a set timeline. Regional Economic Development Councils will review these projects and provide scores that reflect how well a project aligns with a region’s goals and strategies.
The 2021 REDC Guidebook and list of available resources is accessible here. The CFA – available here – will open on Monday, May 10, and the deadline for applications is Friday, July 30 at 4 p.m.
The REDC process continues to improve the State’s approach to economic development, creating regional strategies for bottom-up, economic growth and streamlining the State funding application process. To date, through the REDC competition, more than $6.9 billion has been awarded to more than 8,300 job creation and community development projects consistent with each region’s strategic plans, which project to create and retain more than 240,000 jobs statewide.
To date, through the REDC competition:

Western New York REDC has been awarded $620.4 million for 890 projects;
Finger Lakes REDC has been awarded $721 million for 950 projects;
Southern Tier REDC has been awarded $702.3 million for 764 projects;
Central New York REDC has been awarded $789.8 million for 801 projects;
Mohawk Valley REDC has been awarded $697.7 million for 721 projects;
North Country REDC has been awarded $682.2 million for 690 projects;
Capital Region REDC has been awarded $673 million for 933 projects;
Mid-Hudson REDC has been awarded $713.6 million for 914 projects;
New York City REDC has been awarded $615.9 million for 819 projects; and
Long Island REDC has been awarded $727 million for 885 projects.

About the Consolidated Funding Application
As part of Governor Cuomo’s efforts to improve the State’s economic development model, the Consolidated Funding Application was created to streamline and expedite the grant application process. The CFA process marks a fundamental shift in the way state resources are allocated, ensuring less bureaucracy and greater efficiency to fulfill local economic development needs. The CFA serves as the single-entry point for access to economic development funding, ensuring applicants no longer have to slowly navigate multiple agencies and sources without any mechanism for coordination. Now, economic development projects use the CFA as a support mechanism to access multiple state funding sources through one application, making the process quicker, easier, and more productive. Learn more about the CFAhere.
About the Regional Economic Development Councils
The Regional Economic Development Council initiative is a key component of Governor Cuomo’s approach to State investment and economic development. In 2011, Governor Cuomo established 10 Regional Councils to develop long-term strategic plans for economic growth for their regions. The Councils are public-private partnerships made up of local experts and stakeholders from business, academia, local government, and non-governmental organizations. The Regional Councils have redefined the way New York invests in jobs and economic growth by putting in place a community-based, bottom up approach and establishing a competitive process for State resources. Learn more about the Regional Councils here.
Contact:

Albany: (518) 474 – 8418
New York City: (212) 681 – 4640
Press.Office@exec.ny.gov

Compliments of the Governor’s Office of New York.
The post Governor Cuomo Launches a New Decade of the Regional Economic Development Council Initiative first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

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ECB | Central banks in a shifting world: selected takeaways from the ECB’s online Sintra Forum

The 2020 ECB Forum on Central Banking addressed some key issues from the ongoing monetary policy strategy review and embedded them in discussions of major structural changes in advanced economies and the post-COVID recovery. In this column, two of the organisers highlight some of the main points from the papers and debates, including whether globalisation is reversing, implications of climate change, options for formulating the ECB’s inflation aim, challenges with informal monetary policy communication, relationships between financial stability and monetary policy, how to make a monetary policy framework robust to deflation or inflation traps and the role of fiscal policy for the recovery from the pandemic.
1 Introduction
The 2020 ECB Forum was one of the “ECB listens” events through which the ECB collects the views of relevant outside parties on its monetary policy framework. Policymakers, academics and market economists debated the implications of selected key structural changes that have a bearing for how monetary policy works in the euro area, combined with discussions on core topics featuring in the strategy review. We group some of the main issues debated in five sections below. All papers, discussions and speeches can be found in the conference e-book (ECB 2021). Video recordings of all sessions are available on the ECB website.
2 Fundamental structural changes in the world economy: “Slowbalisation” and climate change
One of the key structural changes in the world economy over the last decades was globalisation. But since the Great Financial Crisis and with the rise of populism the issue has emerged as to whether this process is reversing to de-globalisation. Pol Antras (in Antras 2021) argues that international trade and supply chains have slowed but not reversed (“slowbalisation”) and may be regarded as not likely to turn to de-globalisation. The backward-looking part is illustrated in Chart 1, which shows that after a period of very fast “hyperglobalisation” between the mid-eighties and 2008, the share of world trade in world GDP has stayed roughly constant.

Chart 1
World trade relative to world GDP (1970-2018)
Source: Antras (2021), based on World Bank’s World Development Indicators (link).
Note: Trade is defined as the sum of exports and imports of goods and services.

Looking forward, Antras argues that two out of three main factors that explained “hyperglobalisation” are unlikely to reverse. First, new technologies will continue to foster trade, because those substituting (foreign) labour (such as robotisation or 3D printing) still generate increased demand for traded goods (such as machines or IT parts). Second, the high sunk costs of establishing global supply chains make them resilient to temporary shocks and re-shoring only attractive for very persistent shocks. The only hyperglobalisation factor risking to reverse is multilateral trade liberalisation. To the extent that agents perceive the COVID-19 pandemic as temporary, it is unlikely to become a persistent de-globalisation force.
Susan Lund (in Lund 2021) added that China rotating from exports to domestic consumption and building domestic supply chains can account for most of the global trade slowdown over the last decade. As both reflect economic development, it may be regarded as a positive story, one also other emerging economies may go through in the future.
Climate change is likely to set in motion another set of major structural changes in the world economy. But Frederick van der Ploeg (in van der Ploeg 2021) strongly warns of the great risk that policy responses will be too timid and too late, implying an unsmooth carbon transition with stranded assets and financial instability. A sudden shift in climate policy or a technological breakthrough can lead to sudden changes in the market valuation of firms (so-called tipping events). Chart 2 (taken from van der Ploeg 2018) illustrates that the route of a cap to global warming taken by the Intergovernmental Panel on Climate Change (dotted line) would increase the carbon price (and therefore reduce carbon emissions and increase renewables) much faster than economists’ preferred approach of pricing carbon at its estimated social costs (solid line). The reason is that economists’ “Pigouvian” approach does not take peak temperature constraints into account, and thus prices do not have to rise so fiercely under it.

Chart 2
Evolution of the carbon price implied by the Pigouvian versus the carbon budget approach to climate policy
Source: van der Ploeg (2018) and van der Ploeg (2021)
Note: The solid line represents the necessary evolution of the calibrated optimal carbon price, as derived from a simplified Dynamic Integrated Climate-Economy (DICE, see e.g. Nordhaus 1993) model that sets the optimal price equal to the social cost of carbon (“Pigouvian approach”). The social cost is defined as the present discounted value of all future production losses stemming from emitting one ton of carbon today. The dotted line not only takes into account the social cost of carbon but also the need to keep peak global warming below 2 ℃ (relative to global temperature in the pre-industrial era; “carbon budget approach”). This is in line with the route taken by the IPCC.

Van der Ploeg (2021) calls for climate policies being delegated to a politically independent emissions authority (“carbon central bank”), the carbon price starting relatively high and then growing moderately but steadily (avoiding paradoxical emission increases due to the anticipation of future policy tightening), using revenues to compensate low-income households and to support firms at risk from carbon-intensive imports as well as keeping financial stability risks under control with climate stress tests. Francois Villeroy de Galhau suggested that central banks look at whether climate risks are adequately reflected in their collateral frameworks. Krogstrup (2021) concluded that fiscal policy should be first in line for a cost-efficient carbon transition, but central banks will address their stake in it.
3 Formulations of central banks’ inflation aim close to the effective lower bound of nominal interest rates
One of the key challenges for monetary policy in our times is the sustained downward trend in natural interest rates that can be estimated for the past decades (Laubach and Williams 2003, Brand et al. 2018). The low estimates of natural rates imply that central banks’ conventional interest rate policy may not be able to provide sufficient stimulus in the presence of negative shocks, as policy rates cannot be reduced low enough below the natural rate.
Klaus Adam (in Adam 2021) argued that an increase in the inflation target could be a solution, because – if the increase is credible – the inflation expectations that it would induce would stimulate the economy through lower real interest rates. His research suggests that the declining natural rate also influences asset price volatility and that therefore the efficiency of financial markets has a bearing on the extent to which the target should be increased and whether monetary policy should react to longer run asset price fluctuations. More precisely, the New-Keynesian model developed in Adam et al. (2020) suggests that, with rational expectations in financial markets, the optimal increase in the target to compensate for the constrained policy rate is relatively small (red line in Chart 2). The inflation target needs to be increased by much more when subjective price expectations create procyclical asset price fluctuations (blue line in Chart 2), as the effective lower bound (ELB) of monetary policy rates is hit more often.

Chart 3
Relationships between the optimal inflation target, the natural rate of interest and expectation formation in housing markets due to the effective lower bound on nominal rates
Source: Adam (2021)
Note: This chart illustrates the optimal inflation target, i.e., the average inflation outcome under optimal conduct of monetary policy. For each considered level of the average natural rate (on the x-axis), the chart reports the optimal inflation target (on the y-axis) in an economy with an effective lower bound constraint, relative to the target that would be optimal in the absence of a lower-bound constraint. The blue line shows the optimal inflation target in an economy where house prices are efficient (i.e. driven by fundamentals only). The red line reports the optimal inflation target for the case where housing prices are driven – at least partly – by fluctuations in subjective housing price expectations. Numbers are based on a New Keynesian sticky price model from Adam, Pfaeuti and Reinelt (2020), calibrated to US data. In the absence of a lower bound constraint, the optimal inflation target is zero, because the model abstracts from other forces that make targeting positive average rates of inflation optimal.

Interestingly, in this model the central bank finds “leaning” against inefficient asset price fluctuations optimal, undershooting the inflation target in upturns and overshooting it in downturns. The reason is that inefficiently high asset price volatility has too high a welfare cost in terms of capital misallocation towards appreciating assets.
Argia Sbordone (in Sbordone 2021) argued that, in Adam’s model, the increased incidence of the lower bound constraint does not imply that optimal policy raises the long-term inflation target. Instead, it increases the time for which the central bank should temporarily target higher future inflation than its stated long-term inflation target. This de facto would be similar to average inflation targeting (AIT), the policy announced by the US Federal Reserve in 2020. In Sbordone’s view such a policy is preferable, because it faces a lower risk of permanently higher inflation when ELB incidences turn out to be infrequent. Alan Blinder made the point, however, that the vague formulation by the Fed risked undermining the basic idea of AIT.
Jordi Galí (in Galí 2021, Chart 1) showed a similar negative relationship as Adam between the natural rate and the central bank’s optimal inflation target, based on a New-Keynesian model calibrated to euro area data (Andrade et al. 2021). It suggests that while a target between 1.5 and 2 per cent would be optimal for a higher real interest rate, for the lower levels estimated nowadays the target could easily increase to around 3 per cent. However, for increasingly aggressive monetary policy rules embodying an AIT with long enough averaging window, the optimal target could be reduced to close to 2 per cent. Aggressive countercyclical fiscal policy rules would have a similar effect in the model. Galí concluded that rather than deciding in favour of one of the three options, policy makers may want to pursue all the three at the same time.
Volker Wieland (in Wieland 2021) regarded it as problematic to raise the ECB’s inflation aim at a time when inflation is very low, as the distance between the two is very large in such a situation and further policy easing may be difficult to achieve. Hence, the desired inflation expectations effect may not materialise and the central bank’s credibility be eroded. Vítor Constâncio and Ignazio Visco argued the other way around, worrying that too little ambition could contribute to de-anchoring inflation expectations making convergence to the desirable levels of inflation more difficult.
Moreover, as Wieland saw a significant part of low inflation in the euro area being caused by import prices and the headline HICP inflation index does not cover faster rising owner-occupied housing prices, he recommended that the ECB uses a wider range of inflation measures. Based on a model in Wieland (2020), he also wondered whether uncertainty about the effectiveness of quantitative easing and some unintended side effects would not justify a slower rather than faster convergence towards the inflation aim.
4 Undesirable informal monetary policy communication
Annette Vissing-Jorgensen opened the topic of monetary policy communication (Vissing-Jorgensen 2021). One of her main points was that unattributed individual communication, such as “sources stories” in the media driven by disagreements among policy makers, are subject to a prisoner’s dilemma-type problem and unambiguously detrimental. She illustrated this point with a game-theoretic model of individual policy makers trying to “spin” market expectations towards their preferred choices (Vissing-Jorgensen 2020). While asset prices may not be distorted on average, as victories and defeats cancel out over time, the policy space of the decision-making body will still be constrained, as central banks have to mind about too material deviations between market expectations and ultimate decisions. Vissing-Jorgensen recommended consensus-building in monetary policy committees, as it would naturally reduce incentives for engaging in such individual informal communications.
5 Monetary policy, the allocation of risk and central bank independence
Lucrezia Reichlin (in Reichlin 2021) spelled out a conceptual framework for the relationships between monetary policy, risk and financial stability in the new world of unconventional instruments. She stressed the multi-dimensional nature of unconventional monetary policy “packages”, which control the entire yield curve and create complex interactions between macroeconomic and financial risks.
These policies can only be effective in supporting the macroeconomy, if they induce the creation of new assets climbing up the risk spectrum. If the new assets finance productive activities, then the additional risks are “good”. But prudential policy would need to prevent the creation of “bad” risks. Delayed, partial or incoherent use of the range of instruments would undermine effectiveness; and so would be neglecting interactions and coordination with fiscal policy.
Hyun Shin (in Shin 2021) complemented this with emphasising the importance of “elastic nodes” in the financial system, which need to help accommodate the much-increased demand for money in situations of stress. The first line of defence should be well-capitalised and resilient commercial banks; an example being how US banks allowed companies to draw on their credit lines during the “dash for cash” in March 2020 (at the start of the COVID crisis). In fact, several Forum speakers – such as Jerome Powell and Bank of England Governor Andrew Bailey – confirmed that banks generally stood up to this first major test of the reforms introduced after the Great Financial Crisis.
Markus Brunnermeier (in Brunnermeier 2021) broadened the discussion with a proposal about how a monetary policy strategy can be robustified against the risk of a central bank getting trapped in high inflation or deflation. In the post-COVID recovery an “inflation whipsaw” could emerge, in that pent-up demand, government commitments or capital re-allocation could create a reversal from low to high inflation (Brunnermeier et al. 2020). In other words, it is necessary that the central bank can “put on the breaks” later, in order to be able to confidently stimulate the economy with force in the low inflation context.
But if during the downturn government debt becomes too high, a situation of fiscal dominance could occur, as the central bank could not raise interest rates in the upturn without destabilising the budgets. Similarly, if the banking sector was not to maintain its resilience and if the government was unwilling or unable to recapitalise the banks, the central bank may be forced to stabilise them with monetary policy redistributing risk – a situation of financial dominance. Brunnermeier suggested that the relevant tail risks would be considered in a re-oriented second pillar in the ECB’s monetary policy strategy. This would institutionalise heterogeneous thinking and go against relying on a uniform class of economic models.
6 The role of fiscal policy in the post-COVID recovery
Evi Pappa (in Pappa 2021) made a strong plea for discretionary fiscal policy taking a prominent role in the recovery from the COVID pandemic. The theoretical case relies on higher fiscal multipliers in a situation in which conventional monetary policy is close to the ELB, as the central bank would not tighten in response to inflation expectations ensuing from the fiscal stimulus. In line with this, Christine Lagarde argued in her introductory speech to the Forum (Lagarde 2021) that monetary policy should minimise any crowding out effects on private investment that may emerge from rising market interest rates that the fiscal expansion could induce.
Based on the experiences with European Union structural funds for member states and regions over the last 30 years, Pappa particularly supported public investment spending funded by the Next Generation EU recovery programme. Her estimations in Table 1 (Canova and Pappa 2020) suggest that grants provided by the European Regional Development Fund have sizeable short-term effects. Measurable effects of grants by the European Social Fund take more time to materialise. At the same time, Pappa cautioned that the literature suggests that the size of fiscal multipliers can depend on many factors.

Table 1
Average cumulative multipliers from grants under the European Regional Development Fund (ERDF) and the European Social Fund (ESF)
Source: Canova and Pappa (2020)
Notes: This table examines the dynamic effects of ERDF and ESF grants on regional (NUTS3-level) macroeconomic variables in European Union countries, using local projections. The main regression specification is as follows: yi,t,h=ai,h+bi,hyi,t−1,h+ci,hxi,t,h+ei,t,hyi,t,h=ai,h+bi,hyi,t-1,h+ci,hxi,t,h+ei,t,h ,where yi,t,hyi,t,h is the cumulative growth of the macroeconomic variable of interest in region i and year t over the time-horizon h (either 1,2 or 3 years, see columns) and xi,t,h xi,t,h is the cumulative change in the relevant grant (scaled by regional gross-value added). The estimated coefficients displayed in the table correspond to ci,hci,h and standard errors are in parentheses. The coefficients can therefore be interpreted as the cumulative fiscal multipliers of the fund grants (euro change per euro of grants), or put differently as elasticities measured in per cent, at each horizon h. Given the potential endogeneity of structural funds to EU economic conditions, the authors instrument actual grants with their “innovations”. To this effect they run the following auxiliary regression: xi,t,h=αi,h+βi,hwt,h+ui,t,hxi,t,h=αi,h+βi,hwt,h+ui,t,h, where wt,hwt,h represents a set of four aggregate euro area variables: GDP, employment, the GDP deflator, the nominal interest rate, and the nominal effective exchange rate. They then use the “innovation” ui,t,hui,t,h as an instrument for xi,t,hxi,t,h in the main equation.

Vítor Gaspar (in Gaspar 2021) added that while national fiscal support packages increased euro area public debt by about 17 percentage points during 2020 to above 100 per cent of GDP, the primary risk at the time of the Forum was the premature withdrawal of fiscal support. Moreover, he joined Evi Pappa in supporting public investment, emphasising the International Monetary Fund’s assessment that fiscal multipliers are particularly elevated in periods of high uncertainty (see Chart 4, based on IMF 2020), such as the case during the COVID pandemic (e.g. Barrero and Bloom 2020). According to Gaspar, this happens because public support to investment in green and digital technologies would facilitate and give confidence to private firms to invest, in part because public investments signal governments’ commitment to sustainable growth.

Chart 4
Public investment multipliers and private investment “crowd-in” for different levels of economic uncertainty

Cumulative two-year-ahead macroeconomic effects of a one-percent-of-GDP unexpected increase of public investment

Source: Gaspar (2021) and IMF Fiscal Monitor (October 2020)
Note: Effects on the vertical axes are measured in percentage changes over two years. Results are based on local projection estimations using the model yi,t+k−yi,t=αi+γt+β1G(zi,t)FE+i,t+β2(1−G(zi,t))FE+i,t+θMi,t+εi,tyi,t+k-yi,t=αi+γt+β1Gzi,tFEi,t++β21-Gzi,tFEi,t++θMi,t+εi,t, where yi,tyi,t is the log of the macroeconomic variable of interest (real GDP for panel a) and private investment for panel b) for country i in year t, FE+i,tFEi,t+ is a positive unexpected shock to public investment spending (as share of GDP), in deviation from IMF forecasts, z is an indicator of the degree of uncertainty, and G(zi,t)Gzi,t is the corresponding smooth transition function between different levels of uncertainty. Mi,tMi,t includes lagged GDP growth and lagged shocks. Uncertainty is measured by the standard deviation of GDP growth rate forecasts across professional forecasters as published by Consensus Economics, using for each year the spring vintage of the forecasts. Data covers 72 advanced and emerging markets; the sample period is 1994-2019.

Lagarde (2021) contributed that in a pandemic emergency, when interest rates are already very low, private demand is constrained by health containment measures and levels of economic uncertainty are very high, fiscal policy can be particularly effective for at least two more reasons. First, it can support the sectors most affected in a more targeted way than monetary policy (Woodford 2020). Second, as fiscal policy determines about half of total spending in the euro area, it can help coordinate the other half, breaking “paradox of thrift” dynamics in the private sector and thereby also reinvigorating the transmission of monetary policy. All in all, the right policy mix requires that fiscal policy remains at the centre of the stabilisation effort.
Authors:

Philipp Hartmann
Glenn Schepens

Authors’ note: All views expressed are summarised to the best of our understanding from the various participants’ Forum contributions and should not be interpreted as the views of the ECB or the Eurosystem
Compliments of the European Central Bank.
The post ECB | Central banks in a shifting world: selected takeaways from the ECB’s online Sintra Forum first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

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John Bruton | Why did Brexit happen and what will be its effects?

Lecture given by John Bruton, former Taoiseach, to a webinar organised by the University of East Anglia in Norwich on Tuesday 11 May 2021 at 6.30pm |
Ireland is more affected by what happens in the UK than is any other country.
This is due to the facts that
+ Ireland is host to the UK’s only land border with another state
+ Geographically, Ireland’s easiest route to the Eurasian land mass is through UK territory
+ Politically, Ireland has been intertwined with the UK for most of the last millennium, including to this day under the mutual  Treaty obligations we and the UK share under the Belfast Agreement of 1998.
So it is important for citizens on my state to understand what is going on in the UK, and why it is going on.
While most people in the world were surprised by the UK decision to leave the European Union, Irish people were shocked.
The EU is a habit of mind, more than it is a legal structure
But before going into that, let me say a word about that the EU is, and what it is not.
EU is not a state, and is not about to become one.
It is, instead, a habit of consultation and common action between states, underpinned by legal and institutional arrangements. These arrangements are evolving in response to needs as they arise. More than it is a legal structure, the EU is a habit of mind. That is what a political institution is, a habit of thinking together.
Ireland will remain within that institution, with some influence on its evolution.
The UK will not, which is unfortunate. I say this is unfortunate because the security of much of Ireland’s infrastructure is dependent on links through the UK and its territorial waters.
The sea is no longer the barrier to hostile forces, that it was in 1939, in 1804, or 1745.
Increased Global interdependence has brought increased vulnerability.
Close and well structured relations with ones near neighbours across the sea, is important to the security of any island state, including Britain and  Ireland.
 A decision taken without a plan
Irish people were, as I said, shocked by the UK decision to leave the EU in 2016.
This was partly because it seemed the decision was taken without any regard to the effect it might have in either part of Ireland, and on the peace of the island.
But the shock was  all the greater, because the decision seemed to have been taken, without a clearly articulated plan, for the new relationship that the UK would have with the EU, or, for that matter, with Ireland.
Given our own experience with referenda, this struck us as reckless.
Taking an irrevocable decision on principle, without first negotiating what it might mean in practice, is like a pilot taking off without a flight path.
Incidentally, this is also why I have reservations about the drafting, of the provisions in the Belfast Agreement of 1998, for calling a referendum on Irish unity. It could simply put the cart before the horse.
The UK voters agreed to “take back control” from the EU in 2016, but without an agreed project for using the control they were taking back. Even now, five years after the decision, the plan is not yet visible.
Was England ever comfortable in the EU?
It was the more elderly section of the UK electorate that were strongest in their support for leaving the EU. This was surprising because these were electors, who were old enough to have had had a vote in 1975 referendum, when they decided the UK decided should remain in the EU.
Perhaps the UK was never comfortable being associated with continental Europe, even in 1975.
Churchill favoured a United States of Europe, but with Britain staying aside from it.
Churchill’s successor as Prime Minister, Harold Macmillan, wanted free trade with Europe, but initially, he wanted no part of a Customs Union and no political Union.
He did not believe the Common Market, when it was launched in 1957 by six countries without Britain, would work. But it did work.
Meanwhile the UK lost its Empire, its links with the Commonwealth were weakening, and the Suez debacle of 1956 had reminded it that its alliance with the US was not based on equality.
So, in 1961, Macmillan changed his mind, and made what he called  at the time the “grim choice” to join the Common Market, only to have the application vetoed by de Gaulle.
De Gaulle felt that Britain was too close the US, and was not wholehearted in its commitment to Europe.  He was not wrong on the latter point.
Eventually, another Conservative Prime Minister, Edward Heath, did succeed in persuading France to allow the UK to join the European Communities.
It is important to recall what the British people were told in the 1970’s about what joining the Common Market would mean.
Many Brexit supporters have recently claimed that the UK only ever wanted to join a common market, without any political strings, and that they were misled by their leaders. This is simply not so.
Edward Heath, who had fought in the Second World War himself, told the House of Commons, in April 1975, that the European Communities
“were founded for a political purpose, the political purpose was to absorb the new Germany into the structure of the European family”.
So the political goal was not hidden, and the British people formally accepted continued EU membership on that basis, in their 1975 Referendum.
Gradually, the UK had come around to the view that it should not stand aside from the growing common endeavour of the Common Market/European Union. As the newly appointed Prime Minister, Margaret Thatcher put it in a speech in Luxembourg in October 1979;
“Britain could not turn away from a voluntary association designed to express the principles of Western Democracy……Nor (she said) could any enterprise properly lay claim the proud name of Europe, that did not include Britain….. “
She continued
“  It took the British the whole of the 1950’s to realize these simple truths. It took the Six (Six Common Market members) the whole of the 1960’s to respond”
These words of Mrs Thatcher suggest that at last, in 1979, Britain was comfortable as a member of the EU.
What changed Britain’s attitude to the EU?
What happened to undo the lessons the UK had, according to Mrs Thatcher, learned in the 1950s?
On the surface, four issues led UK public opinion to turn away from the EU.
+ the rows about the UK’s financial contribution from 1979 onwards,
+ the ejection of the £ from the European Monetary System,
+ immigration, through the interaction of  the free movement provisions of the EU Treaties, and the EU’s enlargement to include the poorer countries of post Communist Europe and
+ the upsurge in identity politics, in the wake of the financial crash of 2008.
I think there also were deeper reasons than these.
The memory of the First and Second World Wars had faded. The importance of maintaining a structure of peace and interdependence in Europe  slowly diminished in the public mind in Britain. Communism was no longer a threat.
Indeed there is some evidence for the suggestion that long periods of peace encourage peoples to indulge in separatism.
One can perhaps see this even within the UK itself. UK solidarity was greatest during the World Wars and diminished after they were over.  All states are synthetic and imperfect creations, and  are subject to change.
The importance of self image
England’s self image played a part in its increasing discomfort with the EU.
Britain sees itself a
“a fortress built by nature for herself”, as  “ a scepter’d isle”, surrounded by seas controlled by Britain.
The religious divisions of the sixteenth century underlined this sense of separateness.
Roman jurisdiction over the King’s marriage was rejected.
This religious dimension was reinforced by the fact that Britain’s main continental rivals, over three centuries up to 1900, were Catholic powers, Spain and France, and Britain was emphatically Protestant. Legally it still is.
From the 1760’s to mid 20th century, Britain had the world’s biggest Empire.
And Let us not forget that that Empire stood with Britain in 1940, when France had been defeated, America was neutral, and Russia was still on the sidelines.
For this valid historical reason, the Commonwealth still has an emotional appeal in Britain, out of all proportion to its present political or economic importance.
The Monarchy has also given Britain a sense of self confidence, and an emotional bond, that makes compromise with European neighbours, including with Ireland, seem a little less necessary.
These factors were as much in play in 1975, when the British people decided to stay in the Common Market, as they were in 2016, when they decided to leave it. So the different decisions remain puzzling, to outsiders like me.
Untrammeled sovereignty… the goal of UK negotiators
Turning to the more recent negotiation, the organising principle of Brexit, from a UK perspective, seems to be to have been the restoration of untrammelled sovereignty to the Westminster Parliament, and to it only.
For the UK, Sovereignty apparently must reside in one place, and ONLY in one place.
Even the minutest issue, such as the health standards for plants, or the safety and content of food, must be decided in Westminster only, and not in common with Brussels.
This concern with indivisible sovereignty is the only reason  the UK has declined to have a Plant and Veterinary standards agreement  with the EU, and is thus the reason we have problems with supplies to garden centres and Supermarkets in NI, through the outworking of the agreed Irish Protocol.
Sovereignty is everything, and trumps everything.
But, in this thinking, if sovereignty cannot be delegated upwards, to an international treaty based organisation like the EU, it is  also difficult to conceive of it being delegated downwards,  internally to nations within the UK itself.
Sovereignty and devolution… uneasy bedfellows
Gordon Brown, former Prime Minister, claimed in a Guardian article last year, that it would soon be
” impossible to hold together a UK of nations and regions in the straitjacket of a centralised state.”
His main criticism was that the UK government was taking decisions, like setting the terms for Brexit, without ,properly and formally, taking into account the views of the devolved parliaments in Edinburgh, Cardiff and Belfast.
Two of these had clearly stated that they wanted to stay in the EU Single Market, but the Westminster government ignored them. It was guided instead by the opinion of English MPs.
The contradictions here are profound and enduring.
In a speech in which she spoke of the
“precious union”
of the four nations, that the then PM, Theresa May, also announced that the UK would leave both Customs Union and Single Market( something to which the people of  2 of the 4 nations were opposed).
Later she felt free to go outside the long settled Barnett formula for dividing up finance between the devolved administrations, so she could give an extra £1 billion to Northern Ireland, in return for the support of the DUP for her minority government in Westminster.
She only showed the devolved administrations the text of her Article 50 letter, initiating UK withdrawal from the EU, on the day she sent it to Brussels.
The European Union operates according to a written rule book, the Lisbon Treaty, which is a sort of constitution, which is interpreted by a single Court system.
In effect the UK Union has only one rule….”Westminster decides.”
The durability of this arrangement will be tested in future.
The Brexit test for Europe
The EU will also be tested in coming years too.
Many advocates of Brexit in the UK saw it as loosening the unity of the EU. This has not happened. In fact the fiscal integration of the EU has deepened since the UK left,
Even though there have been policy failures, as on vaccination, the unity of the EU has not weakened. Indeed some the supposedly anti EU parties, in Italy and France, have actually modified their positions in a more favourable direction. This is not what the Daily Telegraph expected.
But let us wait and see.
“In politics, being deceived is no excuse”
Who won in the Brexit Trade negotiation?
The fact that there is any agreement at all, after all the brinkmanship and bad blood, is a tribute to all involved.
It is in the nature of a divorce, like Brexit, that both sides actually lose.
First let us look at the British side.
For them, the goal was “sovereignty”.
While traditionally sovereignty has been seen as the unfettered power of the British Parliament to legislate, Boris Johnson interpreted it as taking back control into the hands of British Ministers, rather than Parliament as such.
From a British point of view, the Agreement goes some way towards meeting this goal. British Ministers have ”taken back control”, at least on paper,  of many issues, at least as far as the island of Britain is concerned.   But not as far as Northern Ireland is concerned!
This is because UK voters, in 2016, simply forgot about Northern Ireland and ignored the problems of the UK land border there with the EU. There were reassured there would be no problem, but as the Polish philosopher, Leszek Kolokowski said;
“In politics, being deceived is no excuse”
Future EU rules, in which neither the UK, nor the people of Northern Ireland, nor their elected representatives,  will have a direct or indirect  say, will continue to apply in Northern Ireland under the Protocol the UK Parliament  agreed with the EU, in its haste to leave.
In sum, Boris Johnson and the UK Parliament traded more UK sovereignty over the island of Britain, for LESS UK sovereignty over Northern Ireland.
In future, the more British rules diverge from EU rules, the more will Northern Ireland diverge from the rest of the United Kingdom. And more divergence is the declared goal of the current UK government.
This creates a political mine field.
The implications for NI unionists could be quite destabilising if the UK government , in order to justify Brexit,  decides to  diverge  radically from the EU, on trade and regulatory matters.
More divergence is the “Whole Point” of Brexit
In a letter to EU leaders last year, Boris Johnson said British laws would diverge from those of the EU and added
“That is the point of our exit, and our ability to enable this, is central to our future democracy”.
Divergence from the EU is central to the future of British democracy according to the Prime Minister.
Where will that leave Northern Ireland under the terms of the Protocol he signed, and which was endorsed by Parliament?
The Joint EU/UK Committee, set up under the Withdrawal Agreement, will need to monitor the political and security consequences of this  rush to diverge.
Title X of the Agreement requires advance notice, and consultations, of changes in regulations as between the UK and the EU. It will be important for peace and security that these consultations include representatives of all major interests in Northern Ireland.
What the UK achieved
That said, the Agreement contains significant gains for the UK side, at least as far as the island of Britain is concerned.
Firstly, there will be no direct application of decisions of the European Court of Justice on the island of Britain.
Secondly, while the UK has accepted that it will not regress from present high social, environmental and quality standards, it will be free to set its own UK standards for the island of Britain. These will, as I have said, be different from those applying in Northern Ireland and in the EU.
This right to diverge is what UK Brexiteers saw as an expression of UK’s sovereignty, and they have got it.
But, thirdly, the UK also accepts that divergence will not come for free.
As one advocate of Brexit, Dr Liam Fox MP, put it in Westminster during the debate on the Agreement
“If we want to access the Single Market, there has to be a price to be paid.  If we want to diverge from the rules of the Single Market, there has to a price to be paid”
The Agreement establishes detailed mechanisms to negotiate the  ”price” will  have to be paid, mostly by consumers in the form of higher prices,  for divergence.  It will going on for years to come.
These mechanisms in the  Trade and Cooperation Agreement ( A Partnership Council, Joint Committees, and Arbitration Tribunals) are completely untested at this stage. A great deal will depend on the particular use the UK decides to make of its new freedoms.
Arbitration tribunals… our joint future
If problems arise and these cannot be settled in the committee system, there is an agreed provision for arbitration. Three person Arbitration Tribunals which will operate on strict time limits will be set up. If the Arbitrators find that either the EU or the UK has breached the agreed principles, the other party will be allowed to impose tariffs or prohibitions, to compensate for losses it has suffered.
Incidentally, these tariffs, if imposed, will have to be paid on goods going from Britain to NI or vice versa.
This aspect of the Agreement is valuable from an EU point of view.
In its absence, any disputes would have had to be referred to the disputes resolution system of the WTO.   That WTO system is both cumbersome and narrow. Parties before the WTO can stall, adopt delaying tactics, or ignore rulings. Disputes there can drag on for years, as we have seen with the US/EU dispute about subsidies to Boeing and Airbus. So reaching agreement on a customised EU/UK disputes resolution mechanism was an important achievement for Michel Barnier.
But there are potential downsides in the Agreement for the EU too.
We will be replacing a single set of rules, interpreted by a single judicial authority, the European Court of Justice (ECJ) with individual Arbitration Tribunals, operating under tight deadlines. This could lead to inconsistent decisions in different areas of trade. If a Tribunal interprets EU law differently to the interpretation later made by the ECJ on the same subject, there could be real difficulties
The UK will be free to negotiate trade agreements of its own with non EU countries. These negotiations may create additional pressure for even more divergence between UK and EU standards.
The UK may come under pressure to allow the imports to the UK,  that would not meet EU standards.
For example, the UK may come under pressure to accept chlorinated chicken, hormone treated beef, or foods that have been genetically modified. If these products are then incorporated into processed foods, which are then exported to the EU, there could be big problems. We have experience of food quality scares in the past.
There are separate and detailed provisions for imports which could upset the playing field on which EU and British producers will compete.  This could arise if there are hidden subsidies or monopolistic practices.
How the EU must respond to Brexit
In global terms, the continent of Europe has been weakened by Brexit.
Brexit will force the EU to up its game.
As a single entity, the UK will be able to move more quickly to set new regulations for new sectors, based on the technologies of the future. The EU, with 27 members to satisfy, and budget of only 1% of GDP, may move more slowly. That must be addressed.
I hope that the Conference of the Future of Europe, meeting for the first time this week, will not be afraid to streamline EU decision making procedures, including, in necessary, by targeted Treaty Amendments.
A Union that is unable to amend its constitution eventually gets into trouble, as the US is finding.
Peace and stability, rather than a chance in sovereignty, must be the first priority for Ireland
Although legally speaking the issues are unconnected, Brexit has led to speculation that there might soon be a poll, under the terms of the Belfast Agreement of 1998, on Irish unity.
The 1998 Agreement says that there should be such a poll if the Secretary of State for Northern Ireland believes such a poll would result in a vote for Irish unity. It assumes there would also be poll in Ireland as well.The relevant text in the Agreement is as follows;
“The Secretary of State shall exercise the power under paragraph 1 if at any time it appears likely to him that a majority of those voting would express a wish that Northern Ireland should cease to be part of the United Kingdom and form part of a united Ireland.”
A majority for this purpose could be as little as 50.5% to 49.5%.
According to some of those present in the final days of the negotiation of the Agreement, the organisation and consequences of holding such a poll were not much considered at the time. But the text is there, and it has legal force.
That said, the history of Northern Ireland, since 1920, demonstrates the danger of attempting to impose, by a simple majority, a constitutional settlement, and an identity, on a minority who feel they have been overruled. If, for example, a 49.5% minority in Northern Ireland votes to stay in the UK, and resolutely rejects rule from Dublin, one could expect there would be difficulties, not least for the government in Dublin.
A poll in those circumstances could repeat the error of 1920, and add to divisions, rather than diminish them.
I was a bit surprised then to see Bertie Ahern,  a former Taoiseach, call for the border polls to take place in 2028 (the 30th anniversary of the Good Friday Agreement).
Target dates tend to be misinterpreted as promises, a sense of inevitability takes over, opinion becomes polarised, and rational discussion of the risks becomes impossible.
Reducing a complex issue, with many nuances and gradations, to an over simplified Yes/No question is risky anyway, and deciding such a matter by referendum, irrevocably, without first negotiating the details, is not wise. It can lead to unforeseen results. This is, perhaps, a lesson of the 2016 Brexit Referendum.
Strangely, the Belfast Agreement, does not require the UK government to consult with the Irish government before calling such a poll, even though a poll on the same subject would have to take place in the Irish Republic.
The result of the poll would have major financial, security and cultural consequences for the Republic.
This omission, therefore,  of a provision to consult the Irish government gives weight to the suggestion that this part of the Agreement were not examined in depth by the negotiators in 1998.
Even though all other legislative decisions inside Northern Ireland must, under the same Belfast Agreement, be agreed by a procedure of parallel consent of both nationalists and unionists, this, possibly irrevocable, existential decision on sovereignty could be made by a  simple majority, of as little as a single vote, in a referendum.
This may be the law. But it sits uneasily beside the principles set out in the Agreement itself which say the parties will
“endeavour to strive in every practical way towards reconciliation and rapprochement within the framework of democratic and agreed arrangement”
It seeks something “agreed”, rather than something “decided” by a simple majority.
Deciding the biggest question of all by a simple majority runs up against the principles in the Downing Street Declaration of 1993, agreed by Albert Reynolds and John Major.
It said that Irish unity should be achieved
“by those who favour it, persuading those who do not, peacefully and without coercion or violence”
This type of persuasion of the opposite community, is not taking place within Northern Ireland  at the moment, in either a pro Union or a pro United Ireland direction.  Thanks to Brexit, positions are more polarised now than ever.
In the Downing Street Declaration in 1993, the Taoiseach, Albert Reynolds said on behalf of the Irish people
“Stability will not be found under any system which is refused allegiance, or rejected on grounds of identity, by a significant minority of those governed by it”.
Let us face facts. A poll on unity, carried by a narrow majority of say 51% to 49%, could not be guaranteed to deliver a system that would not be
“at risk of being rejected, on grounds of identity, by a significant minority”
“The consent of the governed is an essential ingredient of stability” was what John Major and I agreed in the Framework Document of 1995.
Irish unity, carried by a 51/49% margin, might not obtain the requisite consent of the defeated 49%., who would still have to be governed.  That is practical politics.
So, I say that peace and stability, tolerance and gradualism, should be our guiding principles in approaching the question of sovereignty over Northern Ireland.
The focus now should  be on making all the three strands of the Good Friday Agreement yield their full potential, rather than fixating on territorial sovereignty through a border poll.
We must first build sustained reconciliation, and shared goals, between the two communities in Northern Ireland.
That is a commonsense precondition for success of any of the many constitutional options that might be considered at some stage in the future.
Compliments of Ambassador John Bruton.
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European Green Deal: EU Commission aims for zero pollution in air, water and soil

Today, the European Commission adopted the EU Action Plan: “Towards Zero Pollution for Air, Water and Soil” – a key deliverable of the European Green Deal and the main topic of this year’s EU Green Week. It sets out an integrated vision for 2050: a world where pollution is reduced to levels that are no longer harmful to human health and natural ecosystems, as well as the steps to get there. The plan ties together all relevant EU policies to tackle and prevent pollution, with a special emphasis on how to use digital solutions to tackle pollution. Reviews of relevant EU legislation are foreseen to identify remaining gaps in EU legislation and where better implementation is necessary to meet these legal obligations.
Executive Vice-President for the European Green Deal Frans Timmermans said: “The Green Deal aims to build a healthy planet for all. To provide a toxic-free environment for people and planet, we have to act now. This plan will guide our work to get there. New green technologies already here can help reduce pollution and offer new business opportunities. Europe’s efforts to build back a cleaner, fairer, and more sustainable economy must likewise contribute to achieving the zero pollution ambition.”
Commissioner for the Environment, Oceans and Fisheries Virginijus Sinkevičius said: “Environmental pollution negatively affects our health, especially the most vulnerable and socially deprived groups, and is also one of the main drivers of biodiversity loss. The case for the EU to lead the global fight against pollution is today stronger than ever. With the Zero Pollution Action Plan, we will create a healthy living environment for Europeans, contribute to a resilient recovery and boost transition to a clean, circular and climate neutral economy.”
To steer the EU towards the 2050 goal of a healthy planet for healthy people, the Action Plan sets key 2030 targets to reduce pollution at source, in comparison to the current situation. Namely:

improving air quality to reduce the number of premature deaths caused by air pollution by 55%;
improving water quality by reducing waste, plastic litter at sea (by 50%) and microplastics released into the environment (by 30%);
improving soil quality by reducing nutrient losses and chemical pesticides’ use by 50%;
reducing by 25% the EU ecosystems where air pollution threatens biodiversity;
reducing the share of people chronically disturbed by transport noise by 30%, and
significantly reducing waste generation and by 50% residual municipal waste.

The Plan outlines a number of flagship initiatives and actions, including:

aligning the air quality standards more closely to the latest recommendations of the World Health Organisation,
reviewing the standards for the quality of water, including in EU rivers and seas,

reducing soil pollution and enhancing restoration,
reviewing the majority of EU waste laws to adapt them to the clean and circular economy principles,
fostering zero pollution from production and consumption,
presenting a Scoreboard of EU regions’ green performance to promote zero pollution across regions,

reduce health inequalities caused by the disproportionate share of harmful health impacts now borne by the most vulnerable,

reducing the EU’s external pollution footprint by restricting the export of products and wastes that have harmful, toxic impacts in third countries,
launching Living Labs for  green  digital  solutions  and  smart  zero pollution,
consolidating the EU’s Knowledge Centres for Zero Pollution and bringing stakeholders together in the Zero Pollution Stakeholder Platform,
stronger enforcement of zero pollution together with environmental and other authorities.

Jointly with the Chemicals Strategy for Sustainability adopted last year, the action plan translates the EU’s zero pollution ambition for a toxic-free environment into action. It goes hand in hand with the EU’s goals for climate neutrality, health, biodiversity and resource efficiency and builds on initiatives in the field of energy, industry, mobility, food, circular economy, and agriculture.
This year’s EU Green Week, the biggest annual event on environment policy, on 1 – 4 June will allow citizens across the EU to discuss zero pollution from its many angles at the main Brussels conference, online and in more than 600 partner events.
Background
Pollution is the largest environmental cause of multiple mental and physical diseases, and of premature deaths, especially among children, people with certain medical conditions and the elderly. People who live in more deprived areas often live close to contaminated sites, or in areas where there is a very high flow of traffic. A toxic-free environment is also crucial to protect our biodiversity and ecosystems, as pollution is one of the main reasons for the loss of biodiversity. It reduces the ability of ecosystems to provide services such as carbon sequestration and air and water decontamination.
According to a recent EEA report on Health and Environment, in the EU,  every year over 400 000 premature deaths (including from cancers) are attributed to ambient air pollution, and 48 000 cases of ischaemic heart disease as well as 6.5 million cases of chronic sleep disturbance to noise, next to other diseases attributable to both.
The EU has already set many targets linked to pollution. Existing legislation on air, water, marine, and noise sets out objectives for environmental quality, and many laws address the sources of pollution. In addition, the Commission has announced some overarching targets for reducing nutrient losses and pesticides in the Farm to Fork and Biodiversity strategies to help achieve our biodiversity goals.
Compliments of the European Commission.
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EU Commission | Spring 2021 Economic Forecast: Rolling up sleeves

The Spring 2021 Economic Forecast projects that the EU economy will expand by 4.2% in 2021 and by 4.4% in 2022. The euro area economy is forecast to grow by 4.3% this year and 4.4% next year. This represents a significant upgrade of the growth outlook compared to the Winter 2021 Economic Forecast which the Commission presented in February. Growth rates will continue to vary across the EU, but all Member States should see their economies return to pre-crisis levels by the end of 2022.
Economic growth resumes as vaccination rates increase and containment measures ease
The coronavirus pandemic represents a shock of historic proportions for Europe’s economies. The EU economy contracted by 6.1% and the euro area economy by 6.6% in 2020. Although in general, businesses and consumers have adapted to cope better with containment measures, some sectors – such as tourism and in-person services – continue to suffer.
The rebound in Europe’s economy that began last summer stalled in the fourth quarter of 2020 and in the first quarter of 2021, as fresh public health measures were introduced to contain the rise in the number of COVID-19 cases. However, the EU and euro area economies are expected to rebound strongly as vaccination rates increase and restrictions are eased. This growth will be driven by private consumption, investment, and a rising demand for EU exports from a strengthening global economy.
Public investment, as a proportion of GDP, is set to reach its highest level in more than a decade in 2022. This will be driven by the Recovery and Resilience Facility (RRF), the key instrument at the heart of NextGenerationEU.
Labour markets improve slowly
Labour market conditions are slowly improving after the initial impact of the pandemic. Employment rose in the second half of 2020 and unemployment rates have decreased from their peaks in most Member States.
Public support schemes, including those supported by the EU through the SURE instrument, have prevented unemployment rates from rising dramatically. However, labour markets will need time to fully recover as there is scope for working hours to increase before companies need to hire more workers.
The unemployment rate in the EU is forecast at 7.6% in 2021 and 7% in 2022. In the euro area, the unemployment rate is forecast at 8.4% in 2021 and 7.8% in 2022. These rates remain higher than pre-crisis levels.
Inflation
Inflation rose sharply early this year, due to the rise in energy prices and a number of temporary, technical factors, such as the annual adjustment to the weightings given to goods and services in the consumption basket used to calculate inflation. The reversal of a VAT cut and the introduction of a carbon tax in Germany also had a noticeable effect.
Inflation will vary significantly over the course of this year as the assumed energy prices and changes in the VAT rates generate noticeable fluctuations in the level of prices compared to the same period last year.
Inflation in the EU is now forecast at 1.9% in 2021 and 1.5% in 2022. For the euro area, inflation is forecast at 1.7% in 2021 and 1.3% in 2022.*
Public debt to peak in 2021
Public support for households and businesses has played a vital role in mitigating the impact of the pandemic on the economy, but has resulted in Member States increasing their levels of debt.
The aggregate general government deficit is set to rise by about half a percentage point to 7.5% of GDP in the EU this year and by about three quarters of a percentage point to 8% of GDP in the euro area. All Member States, except for Denmark and Luxembourg, are forecast to run a deficit of more than 3% of GDP in 2021.
By 2022, however, the aggregate budget deficit is forecast to halve to just below 4% in both the EU and the euro area. The number of Member States running a deficit of more than 3% of GDP is forecast to fall significantly.
In the EU, the ratio of public debt to GDP is forecast to peak at 94% this year before decreasing slightly to 93% in 2022. The euro area debt-to-GDP ratio is forecast to follow the same trend, rising to 102% this year and then falling slightly to 101% in 2022.
The risks to the outlook remain high but are now broadly balanced
The risks surrounding the outlook are high and will remain so as long as the shadow of the COVID-19 pandemic hangs over the economy.
Developments in the epidemiological situation and the efficiency and effectiveness of vaccination programmes could turn out better or worse than assumed in the central scenario of this forecast.
This forecast may underestimate the propensity of households to spend or it may underestimate consumers’ desire to maintain high levels of precautionary savings.
Another factor is the timing of policy support withdrawal, which if premature, could jeopardise the recovery. On the other hand, a delayed withdrawal could lead to the creation of market distortions and barriers to exit of unviable firms.
The impact of corporate distress on the labour market and the financial sector could prove worse than anticipated.
Stronger global growth, particularly in the US, could have a more positive impact on the European economy than expected. Stronger US growth, however, could push up US sovereign bond yields, which could cause disorderly adjustments in financial markets that would hit highly indebted emerging market economies with high foreign currency debts particularly hard.
Members of the College said:
Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People said: “While we are not yet out of the woods, Europe’s economic prospects are looking a lot brighter. As vaccination rates rise, restrictions ease and people’s lives slowly return to normal, we have upgraded forecasts for the EU and euro area economies for this year and next. The Recovery and Resilience Facility will help the recovery and will be a real game changer in 2022, when it will ramp up public investments to the highest level in over a decade. Much hard work still lies ahead, and many risks will hang over us as long as the pandemic does.  Until we reach solid ground, we will continue to do all it takes to protect people and keep businesses afloat.”
Paolo Gentiloni, Commissioner for Economy said: “The shadow of COVID-19 is beginning to lift from Europe’s economy. After a weak start to the year, we project strong growth in both 2021 and 2022. Unprecedented fiscal support has been – and remains – essential in helping Europe’s workers and companies to weather the storm. The corresponding increase in deficits and debt is set to peak this year before beginning to decline. The impact of NextGenerationEU will begin to be felt this year and next, but we have much hard work ahead – in Brussels and national capitals – to make the most of this historic opportunity. And of course, maintaining the now strong pace of vaccinations in the EU will be crucial – for the health of our citizens as well as our economies. So let’s all roll up our sleeves.”
Background
The Spring 2021 Economic Forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices, with a cut-off date of 28 April 2021. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 30 April. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.
Following the final adoption of the RRF regulation and significant progress on the preparation of the recovery and resilience plans, the Spring Forecast incorporates the reform and investment measures set out in draft RRPs for all Member States. However, at the time of the cut-off date, details of some plans were still under discussion in a number of Member States. In such cases, simplified working assumptions have been used for the recording of RRF-related transactions, specifically regarding the time profile of expenditure (assumed to be linear over the RRF lifetime) and its composition (assumed to be split between public investment and capital transfers.)
Compliments of the European Commission.
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ECB | A global accord for sustainable finance

Blog post by Fabio Panetta, Member of the Executive Board of the ECB |
The COVID-19 pandemic has caused the largest decrease in global economic activity on record. But the drop in carbon dioxide emissions has been only temporary. Although global CO2 emissions fell by 6.4% overall in 2020, they had already begun to increase in the second half of the year and have now returned to pre-crisis levels.
The fact that last year’s extraordinary circumstances still did not bring global emissions into line with the targets set by the 2015 Paris climate agreement is a stark reminder of the scale of the challenge we face. As the Nobel laureate economist William Nordhaus reminds us, climate change is the quintessential global externality. Its effects are spread around the world and no country has sufficient incentives or capacity to solve the problem on its own. International coordination is therefore essential.
Fortunately, a return to multilateral cooperation through the G7, the G20, and the Financial Stability Board (FSB) offers a unique window of opportunity. Following US President Joe Biden’s decision to rejoin the Paris agreement, the European Union’s commitment to reach carbon neutrality by 2050, and China’s pledge to do the same by 2060, we may now be at a turning point for global climate action.
Three priorities stand out on the international agenda. The first is the need to increase global carbon prices. Putting a higher price on carbon is the most cost-effective way to reduce emissions at the necessary scale and speed. By internalizing the social cost of emissions – making emitters pay – carbon pricing leverages the power of markets to steer economic activities away from carbon-intensive activities.
Currently, carbon prices are far too low. The International Monetary Fund calculates that the average global carbon price is only $2 per ton. And, according to the World Bank, only 5% of global greenhouse-gas emissions are priced within the range required to achieve the Paris agreement’s goals.
Here, advanced economies can lead by example and use the current policy window to commit to carbon-price paths consistent with the Paris accord. Although smaller advanced economies account for only a limited share of global emissions, their adoption of decisive decarbonization measures could encourage developing countries to follow suit.
The second priority is to use the recovery from the COVID-19 pandemic to “build back better.” Decisions made now will shape the climate trajectory for decades to come. Policymakers should seize this opportunity to set the global economy on a sustainable growth path. The EU recovery package – Next Generation EU – lives up to that ambition.
The third priority goes to the heart of the financial system and central banking: financing the green transition. Phasing out fossil fuels implies the need for massive investment, even if estimates of the precise figure are subject to significant uncertainty. Looking beyond emissions reductions to the broader sustainability agenda, the United Nations estimates that implementing the 2030 Sustainable Development Agenda will require global investments of $5-7 trillion per year. To fill this gap, it will be crucial to mobilize the resources of financial intermediaries, including banks.
Sustainable-finance products – such as green lending, green and sustainable bonds, and funds with environmental, social, and governance (ESG) characteristics – have grown dramatically in recent years. Unfortunately, the field suffers from information asymmetries and insufficient transparency.
To foster the growth of sustainable finance, many countries have started developing regulatory frameworks to combat “greenwashing,” and the EU is at the forefront of these efforts. Yet in the absence of global coordination, different jurisdictions have developed different approaches, and industry-based initiatives have proliferated.
The resulting edifice of inconsistent and incomparable standards, definitions, and metrics has fragmented sustainable-finance markets, reducing their efficiency and limiting the cross-border availability of capital for green investment. As jurisdictions compete to attract finance, the risk of regulatory arbitrage and a race to the bottom has grown. If left unaddressed, this trend could result in lower standards globally, increasing the likelihood of greenwashing.
But we now have an opportunity to start devising a common global approach. Sustainable finance is a top priority for both the G20 under its Italian presidency and the G7 under its British presidency. Moreover, in a public letter shortly after her confirmation, US Secretary of the Treasury Janet Yellen called for an upgrade to the G20’s sustainable-finance working group to “reflect its importance.”
A key first step is to agree on minimum standards for corporate disclosures. If a company’s sustainability performance is unclear or unknown, ascertaining the sustainability of the related financial assets is impossible. We must replace the current alphabet soup of reporting frameworks with a common standard. To that end, the EU’s approach – including the ongoing revision of the Corporate Sustainability Financial Reporting Directive – represents an advanced benchmark toward which any international standard should aim.
For a common standard to launch a race to the top, it must not fall short of the best international practices. It should cover all ESG aspects of sustainability. And it should require companies to disclose not just issues that influence enterprise value, but also information on the company’s broader environmental and social impact (known as “double materiality”).
A second and even greater challenge is to ensure that countries develop consistent classifications of what counts as sustainable investment. If an activity or asset is considered sustainable in one country but unsustainable in another, there cannot be a truly global sustainable-finance market.
To ensure a global level playing field, today’s leaders should aim for an agreement on common principles for well-functioning and globally coherent taxonomies. Just as governments need to be mindful of the risk of carbon leakage, they must account for the risk of carbon financing leakage.
Finally, we need to ensure that all segments of financial activity remain aligned with broader climate objectives. The enormous energy consumption and associated CO2 emissions of crypto-asset mining could undermine global sustainability efforts. Bitcoin alone is already consuming more electricity than the Netherlands. Controlling and limiting the environmental impact of crypto assets, including through regulation and taxation, should be part of the global discussion.
Climate change and sustainability are global challenges that require global solutions – and nowhere more so than in the financial sector. The current political environment offers us a rare opportunity to make substantial progress. We must not waste it.
This blog post first appeared as an opinion piece in Project Syndicate.
Compliments of the European Central Bank.
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ECB | Private sector working group on euro risk-free rates publishes recommendations on EURIBOR fallbacks

Working group recommendations should help EURIBOR users comply with EU Benchmarks Regulation fallback obligations
Key milestone reached with publication of recommendations as working group enters new phase and secretariat passes from ECB to ESMA

The private sector working group on euro risk-free rates has today published its recommendations addressing events that would trigger fallbacks in EURIBOR-related contracts, as well as €STR-based EURIBOR fallback rates (rates that could be used if a fallback is triggered). While there is currently no plan to discontinue EURIBOR, the development of more robust fallback language addresses the risk of a potential permanent discontinuation and is in line with the EU Benchmarks Regulation (BMR). The valuable feedback from the two market-wide consultations on the draft recommendations has been taken into account in the final recommendations.
As with similar for a in other currency areas, the working group’s recommendations are not legally binding for market participants. They do, however, provide guidance and represent the prevailing market consensus on EURIBOR fallback trigger events and €STR-based fallback rates, which market participants may consider in their contracts.
The decision approving these recommendations was unanimous.
Now that the working group on risk-free rates has delivered the last of its predefined deliverables, it will focus more on monitoring benchmark rate developments in general. It has been decided that the secretariat will move to the European Securities and Markets Authority (ESMA), which, as provided for in the BMR, will supervise the administrator of EURIBOR as of 2022. This means that the working group’s publications will, from now on, be available on ESMA’s website. Communication aspects (media enquiries, newsletter, etc.) will also be taken over by ESMA.
Contact:

William Lelieveldt | william.lelieveldt@ecb.europa.eu | tel.: +49 69 1344 7316

Notes

Fallbacks deal with the risk that a benchmark rate used in a financial contract becomes unavailable and that the benchmark rate used “falls back” to another rate. Under the EU Benchmarks Regulation, users of benchmarks are required to have fallback arrangements in their contracts.
The working group on euro risk-free rates, for which the European Central Bank (ECB) currently provides the secretariat, is an industry-led group established in 2018 by the ECB, the Financial Services and Markets Authority, ESMA and the European Commission. Its main tasks are to identify and recommend alternative risk-free rates and transition paths (see Terms of reference). The secretariat of the group will pass from the ECB to ESMA on 11 May 2021.

Compliments of the European Central Bank.
The post ECB | Private sector working group on euro risk-free rates publishes recommendations on EURIBOR fallbacks first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

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ECB updates treatment of leverage ratio in the Eurosystem monetary policy counterparty framework

Amendments to give effect to the leverage ratio becoming a binding Pillar 1 own-funds requirement under the Capital Requirements Regulation (CRR)
Change will apply as of 28 June 2021

On May 7, the European Central Bank (ECB) has today published amendments to its monetary policy implementation Guideline[1] to give effect to the leverage ratio becoming a binding Pillar 1 own-funds requirement. The amended guideline implements a decision taken by the Governing Council on 6 May 2021. The decision is linked to this prudential requirement becoming binding as of 28 June 2021, in line with the entry into force of related regulatory requirements.[2]
Under the amended Guideline, automatic measures are applied in case of breaches of the leverage ratio requirement or in case the information on the leverage ratio is incomplete or not made available in time. As of 28 June 2021, the treatment of the leverage ratio in the Eurosystem monetary policy counterparty framework will be aligned with that of existing Pillar 1 own-funds requirements, consisting of the common equity tier 1 capital ratio, the tier 1 capital ratio and the total capital ratio.
Guideline ECB/2021/23 is available on the ECB’s website and will be published in the 23 official EU languages in the Official Journal of the European Union.[3]
Contact:

Eva Taylor | eva.taylor[at]ecb.europa.eu | tel.: +49 69 1344 7162.

Compliments of the European Central Bank.
The post ECB updates treatment of leverage ratio in the Eurosystem monetary policy counterparty framework first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.