Today, the European Commission has concluded that Croatia is ready to adopt the euro on 1 January 2023, bringing the number of euro area Member States to twenty.
The conclusion is set out in the 2022 Convergence Report, which assesses the progress that Bulgaria, Czechia, Croatia, Hungary, Poland, Romania and Sweden have made towards joining the euro area. These are the seven non-euro area Member States that are legally committed to adopting the euro. The Report concludes that:

Only Croatia and Sweden meet the price stability criterion.
All Member States fulfil the criterion on public finances, except Romania which is the only Member State subject to an excessive deficit procedure.
Bulgaria and Croatia are the two Member States fulfilling the exchange rate criterion.
Bulgaria, Croatia, Czechia and Sweden fulfil the long-term interest rate criterion.

The Report finds that Croatia fulfils the four nominal convergence criteria and its legislation is fully compatible with the requirements of the Treaty and the Statute of the European System of Central Banks/ECB.
The Commission’s assessment is complemented by the European Central Bank’s (ECB) own Convergence Report, which has also been published today.
Croatia’s adoption of the euro
In light of the Commission’s assessment, and taking into account the additional factors relevant for economic integration and convergence, including balance of payments developments and integration of product, labour and financial markets, the Commission considers that Croatia fulfils the conditions for the adoption of the euro. It has therefore also adopted proposals for a Council Decision and a Council Regulation on euro introduction in Croatia.
The Council will make the final decisions on Croatia’s euro adoption in the first half of July, after discussions in the Eurogroup and in the European Council, and after the European Parliament and the ECB have given their opinions.
The Report, therefore, marks a crucial and historic step on Croatia’s journey towards adopting the euro.
Overall assessment of preparedness
In all of the non-euro area Member States examined except Croatia, the Report also finds that national legislation in the monetary field is not fully compatible with EMU legislation and with the Statute of the European System of Central Banks/ECB.
The Commission also examined additional factors referred to in the Treaty that should be taken into account in the assessment of the sustainability of convergence. This analysis shows that the Member States examined are generally well integrated economically and financially in the EU. However, some of them still experience macroeconomic vulnerabilities and/or face challenges related to their business environment and institutional framework which may pose risks as to the sustainability of the convergence process.
The effective implementation of the reforms and investments set out in their national recovery and resilience plans will address key macro-economic challenges. In the case of Hungary and Poland, the plans are currently being assessed by the Commission to make sure that all assessment criteria are being fulfilled.
Members of the College said:
President of the European Commission Ursula von der Leyen said: “Today, Croatia has made a significant step towards adopting the euro, our common currency. Less than a decade after joining the EU, Croatia is now ready to join the euro area on 1 January. This will make Croatia’s economy stronger, bringing benefits to its citizens, businesses and society at large. Croatia’s adoption of the euro will also make the euro stronger. Twenty years after the introduction of the first banknotes, the euro has become one of the most powerful currencies in the world, improving the livelihoods of millions of citizens across the Union. The euro is a symbol of European strength and unity. Congratulations, Croatia!”
Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People, said: “Croatia has shown great commitment, diligence and perseverance in its efforts to meet the conditions for adopting the euro on January 1, 2023. Taking on Europe’s common currency as its own will mark the completion of Croatia’s integration into the European Union less than a decade after its EU accession. This is a great achievement. It will bring real benefits to Croatian people and businesses and make Croatia’s economy more resilient. It also shows that the euro remains an attractive and successful global currency. Our currency is a symbol of Europe’s strength, unity and solidarity at a time when these qualities are being tested by a war raging on our doorstep.”
Paolo Gentiloni, Commissioner for Economy, said: “Today marks a historic milestone on Croatia’s European journey, reflecting the determined efforts the Croatian authorities have made to meet the criteria for entry into the euro area. The Croatian people can now look forward to joining more than 340 million citizens already using the euro as their currency, a rock of stability in these turbulent times. And in the year in which we celebrated the twentieth anniversary of the euro’s birth as a physical currency, the euro area as a whole can now look forward to welcoming its twentieth member.”
Background
The Convergence Report by the European Commission forms the basis for the Council of the EU’s decision on whether a Member State fulfils the conditions for joining the euro area.
The Convergence Report of the European Commission is separate to, but published in parallel with, the Convergence Report of the ECB.
Convergence reports are issued every two years, or when there is a specific request from a Member State to assess its readiness to join the euro area – for example, Latvia in 2013.
All Member States, except Denmark, are legally committed to join the euro area. Denmark, which negotiated an opt-out arrangement in the Maastricht Treaty, is therefore not covered by the Report.
While the COVID-19 pandemic and the subsequent economic recovery in 2021 had a very significant impact on the findings of the 2022 Convergence Report, the impact of Russia’s unprovoked invasion of Ukraine which began in February 2022 on the historical data used to prepare the Report has been limited. The extent to which the economic convergence indicators are affected by the crisis triggered by Russia’s military agression as well as by other ongoing economic developments is fully captured in the economic projections for 2022 and 2023, which the Commission published on 16 May 2022 (Commission Spring 2022 Economic Forecast) and which are used to assess the sustainability of convergence.
Compliments of the European Commission.
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On the first day of the special European Council taking place on 30-31 May, EU leaders agreed on the sixth package of sanctions against Russia, that includes a ban on crude oil and petroleum products, with a temporary exception for crude oil delivered by pipeline.
President of the Commission Ursula von der Leyen welcomed the agreement, calling it an important step forward. She also recalled other restrictive measures that this package of sanctions includes, such as de-SWIFTing Sberbank, by far Russia’s largest bank, and the suspension of broadcasting of three big Russian state-owned broadcasters from EU airwaves.
Speaking about EU’s support to Ukraine, President von der Leyen said the EU was working on a mechanism to have an extraordinary EUR 9 billion of macro-financial assistance.
EU leaders noted that Ukraine’s reconstruction would require comprehensive support to rebuild the country for the future, and that the EU and its Member States were ready to play a major role. In that regard, the leaders discussed the Commission’s proposal to create a platform that would channel all the international initiatives in raising the necessary investment. President von der Leyen underlined that ‘investment comes with reform’. “It is important that we stand together to give Ukraine a fair chance to rise from the ashes and to be able to leapfrog forward that investment – concerning reconstruction as well as the improvement of the state of Ukraine,” she concluded.
Read more
Opening remarks by President von der Leyen at the joint press conference with President Michel following the special meeting of the European Council of 30 May 2022
European Council conclusions on Ukraine, 30 May 2022
Compliments of the European Commission.
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On 25 May 2022, the European Commission is proposing to add the violation of EU restrictive measures to the list of EU crimes. The Commission is also proposing new reinforced rules on asset recovery and confiscation, which will also contribute to the implementation of EU restrictive measures. While the Russian aggression on Ukraine is ongoing, it is paramount that EU restrictive measures are fully implemented and the violation of those measures must not be allowed to pay off. Today’s proposals aim to ensure that the assets of individuals and entities that violate the restrictive measures can be effectively confiscated in the future. The proposals come in the context of the ‘Freeze and Seize’ Task Force, set up by the Commission in March.
Making the violation of EU restrictive measures an EU crime
Firstly, the Commission is proposing to add the violation of restrictive measures to the list of EU crimes. This will allow to set a common basic standard on criminal offences and penalties across the EU. In turn, such common EU rules would make it easier to investigate, prosecute and punish violations of restrictive measures in all Member States alike.
The violation of restrictive measures, meets the criteria set out in Article 83(1) TFEU, as it is a crime in a majority of Member States. It is also a particularly serious crime, since it may perpetuate threats to international peace and security, and has a clear cross-border context, which requires a uniform response at EU level and global level.
Accompanying the proposal, the Commission is also setting out how a future Directive on criminal sanctions could look like in a Communication with an Annex. The potential criminal offences could include: engaging in actions or activities that seek to directly or indirectly circumvent the restrictive measures, including by concealing assets; failing to freeze funds belonging to, held or controlled by a designated person/entity; or engaging in trade, such as importing or exporting goods covered by trade bans.
Once the EU Member States agree on the Commission’s initiative to extend the list of EU crimes, the Commission will present a legislative proposal based on the accompanying Communication and Annex.
Reinforcing EU rules on asset recovery and confiscation to EU restrictive measures
Secondly, the Commission is putting forward a proposal for a Directive on asset recovery and confiscation. The core objective is to ensure that crime does not pay by depriving criminals of their ill-gotten gains and limiting their capacity to commit further crimes. The proposed rules will also apply to the violation of restrictive measures, ensuring the effective tracing, freezing, management and confiscation of proceeds derived from the violation of restrictive measures.
The proposal modernises EU asset recovery rules, among others, by:

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

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

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

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

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

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

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

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

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

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

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

Systematics checks at the external borders of the EU
The Commission is also publishing the report on the implementation of the Article 8 of the Schengen Border Code, according to which Member States are under an obligation to carry out systematic checks against relevant databases on all persons crossing the EU’s external borders, including persons enjoying the right to free movement. This measure was intended to strengthen the EU’s internal security following findings that EU citizens were among foreign terrorists fighters returning to the EU.
The report to the European Parliament and the Council analyses the implementation and impact of these systematic checks. It concludes that the application of systematic checks filled an important regulatory gap, despite challenges faced by Member States in the implementation of these rules. The Commission intends to address those challenges and support Member States in the upcoming review of the Practical Handbook for Border Guards, which is used by Member State competent authorities when carrying out border checks on persons.
Next Steps
The reports adopted today will feed into the next Schengen Forum in June. The upcoming Schengen Council will be the opportunity for Ministers to endorse the policy priorities identified in the State of Schengen Report. Increased political ownership based on dialogue and regular monitoring will ensure implementation of the priorities for the Schengen area. For this reason, the Commission calls on Member States and EU agencies to take the necessary steps to deliver on these priorities and take the necessary follow-up actions. The Commission also invites the Schengen Council in June to endorse the key elements of the new Schengen governance model and the priorities for 2022-2023. The Commission will closely accompany this process both at the political and technical levels, and it will report on progress achieved and follow-up actions at the end of the annual cycle.
Background
Today’s proposals complement the EU’s continuous efforts to improve Schengen’s overall functioning and governance. The Schengen area without controls at internal borders is a historic achievement of European integration. Since its foundations were laid in 1985, it has changed the daily reality of millions of people. Almost 1.7 million people reside in one Schengen State and work in another. People have built their lives around the freedoms offered by the Schengen area, with 3.5 million people crossing between Schengen States every day. In June 2021, the Commission presented the Schengen Strategy taking stock of the challenges the area has faced in recent years and sets out a path forward to make the Schengen area stronger and establish a solid Schengen Governance.
Compliments of the European Commission.
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Economists miscalculated the disruptions of the global financial crisis and the pandemic—and need to build better models
Does globalization enhance resilience? Or does it have no effect? Or the opposite effect?
For the two major economic disruptions so far this century—the global financial crisis starting in 2008 and the COVID-19 pandemic starting in 2020—economists’ answers to those questions were largely wrong. As for the financial crisis, most of them underestimated the risks of financial globalization, and when it came to the pandemic, most overestimated the risks of sprawling, intricate production networks and trade globalization.
As the Russian invasion of Ukraine and the sweeping sanctions that followed now threaten to ignite a third great crisis, it’s important to understand where economic analysis goes wrong and the adjustments practitioners need to make to get things right. The flawed predictions about the financial crisis and the pandemic certainly reflected inadequate understanding of the workings of financial and trade markets. And they most likely also grew out of overreliance on imperfect economic modeling.
Before the financial crisis, most economists had a positive view of financial globalization’s effects on resilience. The thinking was that the growth of the financial sector, especially international finance, would allow economic agents and countries to diversify risk through financial instruments. New financial products would fill missing markets. The expectation was that cross-border financial integration would lead to more risk sharing.
There were significant caveats and voices of doubt. In 2005, former IMF Chief Economist Raghuram Rajan warned that “even though there are far more participants who are able to absorb risk today, the financial risks that are being created by the system are indeed greater. … They may also create a greater (albeit still small) probability of a catastrophic meltdown.”
Overreliance on self-correcting financial markets
In fact, the US subprime mortgage crisis did spill over to global banks and across borders precisely because of those same links that were supposed to provide insurance and resilience. Two years after he left office as chairman of the Federal Reserve, Alan Greenspan finally conceded that he was in error about regulation, in congressional testimony on October 23, 2008. “A humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending,” The New York Times reported.
More broadly, a vast literature has focused on why global finance proved so fragile and led to the global financial crisis. Incomplete knowledge about networks, global imbalances, loose monetary policies that led to excessive risk-taking, improperly aligned incentives, and gaps in regulation, perhaps in part for political economy reasons—among many factors—have all been cited by researchers.
A crisis whose initial magnitude was estimated at less than $200 billion wreaked havoc on the global financial system to the tune of several trillion dollars, resulted in devastating unemployment and social costs around the globe, and set off the worst recession since the Great Depression.
Overestimating the pandemic’s damage
What happened during the COVID-19 crisis? As the pandemic began, world production and trade seemed highly vulnerable. Over the past few decades, both have increasingly relied on just-in-time global value chains. In this system, key materials and components are produced in different countries or regions based on comparative advantages. While these production networks and global value chains have enhanced efficiency, they have also led to new fragility. A single missing input can block entire production chains. To capture the idea of “critical inputs,” economists used models with low elasticities of substitution between different inputs.
This line of thought seemed to be vindicated by disruptions following natural disasters, including Hurricane Katrina and New Orleans in 2005 and the Great East Japan Earthquake of 2011. A 2021 study of the Japanese case found that “even if average firm-level effects are not necessarily large, the potential propagation of shocks over the economy’s production network can impact a significant fraction of firms, thus resulting in movements in macroeconomic aggregates.” Other researchers suggested that similar logic could apply to the transmission of shocks across borders.
In the context of COVID-19, this implied that if the pandemic knocked out only one key country—or region within a country, or factory for that matter—it could break entire production chains. Given the diffusion of the pandemic around the world, trade could be particularly vulnerable. This view was not common only in academic circles. Emphasizing supply disruption, the World Trade Organization and several other groups warned that the pandemic would lead to a collapse in trade. Serious news outlets reported that such disruption was taking place, such as the Wall Street Journal in an August 2020 article, “Covid Crisis Drives Historic Drop in Global Trade.” Against this backdrop, it was expected that the pandemic would devastate global economies. For instance, the IMF’s World Economic Outlook (WEO) projections in April 2020 forecast a large drop in world trade, even as a share of world income.
What actually happened was quite different. Chart 1 shows the evolution of projections of world merchandise imports by value. World merchandise imports are commonly used as a measure of trade globalization. The advantage of this measure is that several vintages of projections are readily available.

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

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

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

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

Antonio Spilmbergo, deputy director, IMF’s Research Department

Compliments of the IMF.
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