One of the many figures in a new report released today by the European Commission shows just how important an open trade policy is for European employment. The Trade and Jobs Report provides a host of statistics on European jobs connected to European trade.
The report provides data over time at both European and Member State level, and gives statistics by industry, skill level, gender etc. For example, it shows that over 38 million jobs in the EU are supported by EU exports, 11 million more than a decade ago. These jobs are on average 12% better paid than those of the economy as a whole. The increase in export-supported jobs follows an even stronger increase in EU exports: alongside a 75% increase in export-related jobs between 2000 and 2019, total exports increased by 130%. The data indicate clearly that more trade means more jobs, and the best way to increase this is through securing new opportunities through trade agreements and diligently enforcing them. Given that 93% of all EU exporters are small and medium-sized companies (SMEs), it is also vital to help them understand opportunities and terms offered by a comprehensive network of 45 trade agreements concluded by the EU.
Executive Vice-President and Commissioner for Trade, Valdis Dombrovskis, said: “These figures confirm that trade is a key driver for job growth in the EU, as shown by the astonishing 75% growth in export-related jobs in the last two decades. As economic recovery gathers pace, it is our priority to keep boosting exports and create markets for EU goods and services. This will support our companies – especially SMEs, which represent 93% of all EU exporters – to create jobs for people across the EU. The continued roll-out of our new EU trade strategy, with its strong emphasis on opening new opportunities and being assertive in implementing our trade agreements, will play a crucial role in reinforcing this trend.”
Trade creates and supports jobs all across the EU, and the numbers are increasing. The highest increases seen since 2000 have been in Bulgaria (+368%), Slovakia (+287%), Ireland (+202%), Slovenia (+184%) and Estonia (+173%). The report includes detailed factsheets about the results for every EU Member State.
The figures released today also highlight an important positive spillover effect within the EU from exports to the world. When EU exporters in one Member State do well, workers in other Member States also benefit. This is because firms providing goods and services along the supply chain also gain when their end-customer sells the final product abroad. To give an example, French exports to non-EU countries support around 658,000 jobs in other EU Member States, while Polish exports support 200,000 such jobs.
Moreover, EU exports to countries around the world support almost 24 million jobs outside the EU. These jobs have more than doubled since 2000. For instance, 1.5 million jobs in the United States, 2.2 million in India and 530,000 in Turkey are supported by the production of goods and services in those counties that are incorporated into EU exports through global supply chains.
Finally, the study also looks into the gender pattern, concluding that there are more than 14 million women in jobs supported by trade in the EU.
Background
The European Commission identified trade policy as a core component of the European Union’s 2020 Strategy. Given the fast-changing global economic landscape it is more important than ever to fully understand how trade flows affect employment. This can only be done by gathering comprehensive, reliable and comparable information and analysis to support evidence-based policymaking.
Guided by that objective, the European Commission’s Joint Research Centre (JRC) and the Commission’s Directorate-General for Trade have collaborated to produce a publication that aims to be a valuable tool for trade policymakers and researchers.
Following the first edition from 2015, the report features a series of indicators to illustrate in detail the relationship between trade and employment for the EU as a whole and for each EU Member State using the World Input-Output Database released in 2016 as the main data source. This information has been complemented with data on employment by age, skill and gender. All the indicators relate to the EU exports to the world to reflect the scope of EU trade policymaking.
Although this report and analysis focus on exports for methodological reasons, it is important to note that imports are vital for the EU economy as well. Indeed, they are also essential for our domestic production and exports; two-thirds of the EU’s imports consist of raw materials, parts and components, many of which find their way into the EU’s exported goods and services. Access to the best inputs is a critical factor for EU production and competitiveness in today’s world.
Compliments of the European Commission.
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The Council of the European Union:

NOTES that in 2020, the framework for the annual coordination of economic, fiscal and employment policies across the European Union known as the European Semester was temporarily adjusted due to the COVID-19 pandemic towards addressing the negative health and socio-economic consequences. New economic circumstances and the European response to the COVID-19 crisis caused a temporary adjustment of the European Semester also in 2021 with policy guidance focusing solely on fiscal policies, as the attention was put on the preparation, adoption and implementation of the Recovery and Resilience Plans.
WELCOMES that the adjustment of the European Semester in 2020 and 2021 including on fiscal guidance contributed to the coordination of policy actions to effectively address the pandemic, sustain the economy and support a sustainable recovery. AGREES that also during this exceptional period, the European Semester proved to be a credible and flexible framework for the EU economic, fiscal and employment policy coordination.
UNDERLINES that the European Semester and the Recovery and Resilience Facility should continue, without duplications, to tackle the crisis’ impact and to contribute to strengthening economic resilience and sustainable, dynamic and inclusive long-term growth, thus enhancing convergence among the EU economies. STRESSES that the European Semester should continue to ensure comprehensive surveillance of fiscal, financial, economic and employment policies, and it should closely monitor remaining and evolving risks and challenges, detect policy gaps, and ensure their follow-up. The European Semester should pay particular attention to the green and digital transition, which must be a key driver in the recovery; it should promote sustainable economic growth, well-functioning labour markets and social inclusion.
CALLS for a swift return to the core elements of the European Semester in the 2022 cycle, especially reinstating country reports and country-specific recommendations. UNDERLINES the need to take into account the ongoing recovery process, the related uncertainties and the implementation of the Recovery and Resilience Facility. STRESSES that country-specific recommendations should focus on a comprehensive range of challenges concerning economic, fiscal and employment policies, including those with large spillovers.
STRESSES the need for ensuring the complementarity and exploring synergies between the European Semester and the implementation of the Recovery and Resilience Facility, including streamlining of reporting requirements, wherever possible, to avoid excessive administrative burden and overlaps. LOOKS FORWARD to the Commission’s early guidance on national reporting and monitoring requirements, especially regarding the minimum requirements for the annual national reform programmes.
UNDERLINES the importance of an open dialogue with the Commission services on national economic, fiscal and employment policies throughout the European Semester cycle. Broad-based mutual understanding of national policy needs can increase national ownership in the European Semester and contribute to the improved implementation of relevant policy reforms. HIGHLIGHTS that, together with national ownership, transparency of the process must be ensured.
RECALLS that multilateral surveillance and the related peer reviews remain central in the EU economic policy coordination under the European Semester. UNDERLINES that high-quality Commission analysis and policy recommendations are key for efficient multilateral reviews and subsequent national policy action.
ACKNOWLEDGES the expectation of the deactivation of the general escape clause of the Stability and Growth Pact as of 2023. STRESSES the need to safeguard the economic recovery, also taking into account the uncertainty of the economic outlook and the asymmetric impacts of this crisis, while ensuring that fiscal policy is agile and adjusted to circumstances, and fiscal sustainability preserved in the medium term.
STRESSES the importance of continued monitoring of the implementation of country-specific recommendations under the European Semester and the communication of the annual assessment of the implementation progress. Regular stocktaking at the EU level and related peer reviews remain crucial for promoting reform implementation. NOTES that it may require several years to effectively implement major structural reforms, and therefore RECALLS the possible benefits of issuing policy recommendations on structural economic policies less frequently than annually, combined with an annual assessment.
WELCOMES the continued implementation of the Macroeconomic Imbalance Procedure also during the COVID-19 pandemic and in the context of the related heightened economic uncertainties, including the Commission’s 2021 Alert Mechanism Report and in-depth reviews. CALLS for close monitoring of the evolution of existing imbalances and remaining vigilant for detecting and addressing also new imbalances. RECALLS that swift and effective implementation of the Recovery and Resilience Facility has a potential for contributing to the correction and prevention of imbalances.
PLANS to have thorough discussions on the economic governance review which was relaunched by the Commission on 19 October, and its potential implications on the operation of the European Semester, especially as regards the Stability and Growth Pact and the Macroeconomic Imbalance Procedure

Compliments of the Council of the European Union.
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Economic governance and recovery
Ministers exchanged views on the EU economy following the COVID-19 pandemic, and on the implications of recent developments for economic governance. They discussed the future of the EU’s economic governance framework and gave their initial views on the way forward. This topic will be discussed further and ministers will continue their consultations in order to reach a broad consensus in due course.

Our efforts on boosting the economic recovery are taking effect. The EU’s response to the pandemic is showing good results. Now it is time to reflect on the future of our economic governance. Today, we exchanged initial views on the future of fiscal policy. It is necessary to continue discussions and try and find common ground.

Andrej Šircelj, Slovenia’s Minister for Finance

They also discussed the current situation regarding the financing of Next Generation EU, a temporary recovery package to help boost EU economies in the wake of COVID-19, and the implementation of the Recovery and Resilience Facility, the centrepiece of Next Generation EU which supports reforms and investments in EU member states through loans and grants.

A recovery plan for Europe (background information)

Ministers approved conclusions on the future of the European Semester in relation to the Recovery and Resilience Facility. The conclusions call for the return of the essential elements of the European Semester in the 2022 cycle, in particular country reports and country-specific recommendations.

The future of the European Semester in the context of the Recovery and Resilience Facility (Council conclusions, 9 November 2021)
European Semester (background information)

Energy prices and inflation
Ministers discussed the recent steep increase in energy and consumer prices and the associated policy implications. They exchanged views on the Commission’s toolbox of measures that the EU and its member states can use and are already using to address the immediate impact of energy price increases.

Tackling rising energy prices: a toolbox for action and support (European Commission)

Financial services
Economy and finance ministers held a policy debate on a set of legislative proposals mostly aimed at implementing the outstanding Basel III agreements, i.e. reform measures intended to help reinforce the resilience of the EU banking sector and strengthen its supervision and risk management. The exchange of views was preceded by a presentation of this package of proposals by the Commission.

Banking package (European Commission)

The Slovenian presidency also provided information on the current financial services legislative proposals.
International meetings
The Slovenian presidency and the European Commission provided information and follow-up on the meetings of G20 finance ministers and central bank governors and on the IMF annual meetings of 13-14 October 2021.
Any other business
The European Court of Auditors presented its annual report on the implementation of the EU budget for the 2020 financial year.

ECA’s annual report on the implementation of the EU budget for the 2020 financial year

Compliments of the European Council.
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Today, the European Commission approved the eighth contract with a pharmaceutical company with a view to purchasing its potential vaccine against COVID-19. The contract with Valneva provides for the possibility for all EU Member States to purchase almost 27 million doses in 2022. It also includes the possibility to adapt the vaccine to new variant strains, and for Member States to make a further order of up to 33 million additional vaccines in 2023.
The contract with Valneva comes in addition to an already secured broad portfolio of vaccines to be produced in Europe, including the contracts already signed with AstraZeneca, Sanofi-GSK, Janssen Pharmaceutica NV, BioNtech-Pfizer, CureVac, Moderna, and Novavax. This diversified vaccines portfolio will ensure Europe is well prepared for vaccination, once the vaccines have been proven to be safe and effective.  Member States could decide to donate the vaccine to lower and middle-income countries or to re-direct it to other European countries.
President of the European Commission, Ursula von der Leyen, said: “The contract allows for the vaccine to be adapted to new variants. Our broad portfolio will help us to fight COVID and its variants in Europe and beyond. The pandemic is not over. Everyone who can should get vaccinated.”
Stella Kyriakides, Commissioner for Health and Food Safety, said: “Our EU Vaccines Strategy continues to deliver, at a time when COVID-19 case numbers are unfortunately rising again across the EU. The Valneva vaccine adds another option to our broad portfolio, once it is proven to be safe and effective by the European Medicines Agency. We continue to support Member States in their vaccination efforts, and the message remains the same: trust the science, and vaccinate, vaccinate, vaccinate.”
Valneva is a European biotechnology company developing an inactivated virus vaccine, made of the live virus through chemical inactivation. This is a traditional vaccine technology, used for 60-70 years, with established methods and high level of safety. Most of the flu vaccines and many childhood vaccines use this technology. This is currently the only inactivated vaccine candidate in clinical trials against COVID-19 in Europe.
The Commission, with the support of EU Member States, has taken a decision to support this vaccine based on a sound scientific assessment, the technology used, the company’s experience in vaccine development and its production capacity to supply all EU Member States.
Background
The European Commission presented on 17 June 2020 a European Strategy to accelerate the development, manufacturing and deployment of effective and safe vaccines against COVID-19. In return for the right to buy a specified number of vaccine doses in a given timeframe, the Commission finances part of the upfront costs faced by vaccines producers in the form of Advance Purchase Agreements.
In view of the current and new escape SARS-CoV-2 variants, the Commission and the Member States are negotiating new agreements with companies already in the EU vaccine portfolio that would allow to purchase rapidly adapted vaccines in sufficient quantities to reinforce and prolong immunity.
In order to purchase the new vaccines, Member States may use the REACT-EU package, one of the largest programmes under the new instrument Next Generation EU that continues and extends the crisis response and crisis repair measures.
Compliments of the European Commission.
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November 08, 2021 | “Flexible Average Inflation Targeting and Prospects for U.S. Monetary Policy” by Vice Chair Richard H. Clarida at the Symposium on Monetary Policy Frameworks, The Brookings Institution, Washington, D.C. (via webcast) |
Outlooks and Outcomes for the U.S. Economy
The U.S. economy in the second quarter of this year made the transition from economic recovery to economic expansion.1 Given the catastrophic collapse in U.S. economic activity in the first half of 2020 as a result of the global pandemic and the mitigation efforts put in place to contain it, few forecasters could have expected—or even dared to hope—in the spring of last year that the recovery in gross domestic product (GDP), from the sharpest decline in activity since the Great Depression, would be either so robust or as rapid. In retrospect, it seems clear that timely and targeted monetary and fiscal policy actions—unprecedented in both scale and scope—provided essential and significant support to the economic recovery as it got under way last year. Indeed, the National Bureau of Economic Research’s Business Cycle Dating Committee determined in July that the recession that began in March of last year ended in April, making it not only the deepest recession on record, but also the briefest.2 The recovery that commenced in the summer of 2020 was quite robust, and, with one quarter to go, GDP growth in 2021 is projected by the Fed and many outside forecasters to be the fastest since 1983. However, it must be noted that the course of the economy this year and beyond will depend on the course of this virus. That said, under the median projection for GDP growth in the September Summary of Economic projections, the level of real GDP will have returned to its pre pandemic trend growth trajectory by the fourth quarter of 2021, which if realized would represent one of the most rapid such recoveries in 50 years.3
In the September SEP round, my individual projections for GDP growth, the unemployment rate, inflation, and the policy rate path turned out to be quite close to the path of SEP medians for each of these variables over the 2021–24 projection window. Under these projections, GDP growth steps down from 5.9 percent this year to 3.8 percent in 2022 and further to 2.5 percent and 2 percent in 2023 and 2024, respectively. Not surprisingly, the projected path of above-trend GDP growth in 2021 and 2022 translates into rapid declines in the projected path for the unemployment rate, which is projected to fall to 3.8 percent by the end of 2022 and 3.5 percent by the end of 2023. This modal projection for the path of the unemployment rate is, according to the Atlanta Fed jobs calculator, consistent with a rebound in labor force participation to its estimated demographic trend and is also consistent with cumulative employment gains this year and next that, by the end of 2022, eliminate the 4.2 million “employment gap” relative to the previous cycle peak.4
My projections for headline and core PCE (personal consumption expenditures) inflation are, alas, also similar to the median SEP numbers. Under the projected SEP path for inflation, core PCE inflation surges to at least 3.7 percent this year before reverting back to 2.3 percent in 2022, 2.2 percent in 2023, and 2.1 percent in 2024. Thus, the baseline outlook for inflation over the three-year projection window reflects the judgment, shared with many outside forecasters, that under appropriate monetary policy, most of the inflation overshoot relative to the longer-run goal of 2 percent will, in the end, prove to be transitory. But as I have noted before, there is no doubt that it is taking much longer to fully reopen a $20 trillion economy than it did to shut it down. Although in a number of sectors of the economy the imbalances between demand and supply—including labor supply—are substantial, I do continue to judge that these imbalances are likely to dissipate over time as the labor market and global supply chains eventually adjust and, importantly, do so without putting persistent upward pressure on price inflation and wage gains adjusted for productivity. But let me be clear on two points. First, realized PCE inflation so far this year represents, to me, much more than a “moderate” overshoot of our 2 percent longer-run inflation objective, and I would not consider a repeat performance next year a policy success. Second, as always, there are risks to any outlook, and I and 12 of my colleagues believe that the risks to the outlook for inflation are to the upside.
Prospects for U.S. Monetary Policy
In September 2020, the FOMC introduced—and since then has reaffirmed—outcome-based, threshold guidance that specifies three conditions that the Committee expects will be met before it considers increasing the target range for the federal funds rate, currently 0 to 25 basis points.5 This guidance in September of last year brought the forward guidance on the federal funds rate in the statement into alignment with the new flexible average inflation targeting framework adopted in August 2020.6 To quote from the statement, these conditions are that “labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”
While we are clearly a ways away from considering raising interest rates, if the outlooks for inflation and unemployment I summarized a moment ago turn out to be the actual outcomes realized over the forecast horizon, then I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022.7 Core PCE inflation since February 2020—a calculation window that smooths out any base effects resulting from “round trip” declines and rebounds in the price levels of COVID-19-sensitive sectors and, coincidentally, also measures the average rate of core PCE inflation since hitting the effective lower bound (ELB) in March 2020—is running at 2.8 percent through September 2021 and is projected to remain moderately above 2 percent in all three years of the projection window. Moreover, my inflation projections for 2023 and 2024, which forecast inflation rates similar to the SEP medians, would by year-end 2022, to me, satisfy the “on track to moderately exceed 2 percent for some time” threshold specified in the statement. Finally, while my assessment of maximum employment incorporates a wide range of indicators to assess the state of the labor market—including indicators of labor compensation, productivity, and price-cost markups—the employment data I look at, such as the Kansas City Fed’s Labor Market Conditions Indicators, are historically highly correlated with the unemployment rate.8 My expectation today is that the labor market by the end of 2022 will have reached my assessment of maximum employment if the unemployment rate has declined by then to the SEP median of modal projections of 3.8 percent.
Given this economic outlook and so long as inflation expectations remain well anchored at the 2 percent longer-run goal—which, based on the Fed staff’s common inflation expectations (CIE) index, I judge at present to be the case—a policy normalization path similar to the median SEP dot plot on page 4 of our September 2021 projections would, under these conditions, be entirely consistent, to me, with our new flexible average inflation targeting framework and the policy rate reaction function I discussed in remarks here at Brookings in November 2020.9 In the context of our new framework, it is important to note that while the ELB can be a constraint on monetary policy, the ELB is not a constraint on fiscal policy, and appropriate monetary policy under our new framework, to me, must—and certainly can—incorporate this reality. Indeed, under present circumstances, I judge that the support to aggregate demand from fiscal policy—including the roughly $2 trillion in accumulated excess savings accruing from (as yet) unspent transfer payments—in tandem with appropriate monetary policy, can fully offset the constraint, highlighted in our Statement on Longer-Run Goals and Monetary Policy Strategy, that the ELB imposes on the ability of inflation-targeting monetary policy, acting on its own and in the absence of sufficient fiscal support, to restore, following a recession, maximum employment and price stability while keeping inflation expectations well anchored at the 2 percent longer-run goal.10
Before I conclude, let me say a few words about our Treasury and mortgage-backed securities (MBS) purchase programs. In our December 2020 FOMC statement, we indicated that we would maintain the pace of Treasury and MBS purchases at $80 billion and $40 billion per month, respectively, until “substantial further progress” has been made toward our maximum-employment and price-stability goals. Since then, the economy has made progress toward these goals. At our meeting last week, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage‑backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
Thank you very much for your time and attention. I look forward to the conversation with Ben Bernanke, Philip Lane, and Rachana Shanbhogue.
Compliments of the U.S. Federal Reserve.
References
Ahn, Hie Joo, and Chad Fulton (2020). “Index of Common Inflation Expectations,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, September 2.
——— (2021). “Research Data Series: Index of Common Inflation Expectations,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, March 5.
Christiano, Lawrence, Martin Eichenbaum, and Sergio Rebelo (2011). “When Is the Government Spending Multiplier Large?” Journal of Political Economy, vol. 119 (February), pp. 78–121.
Clarida, Richard H. (2020). “The Federal Reserve’s New Framework: Context and Consequences,” speech delivered at “The Economy and Monetary Policy,” an event hosted by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, Washington (via webcast), November 16.
——— (2021). “The Federal Reserve’s New Framework and Outcome-Based Forward Guidance,” speech delivered at “SOMC: The Federal Reserve’s New Policy Framework,” a forum sponsored by the Manhattan Institute’s Shadow Open Market Committee, New York (via webcast), April 14.
Eggertsson, Gauti B. (2011). “What Fiscal Policy Is Effective at Zero Interest Rates?” in Daron Acemoglu and Michael Woodford, eds., NBER Macroeconomics Annual 2010, vol. 25 (Chicago: University of Chicago Press), pp. 59–112.
National Bureau of Economic Research, Business Cycle Dating Committee (2021). “Determination of the April 2020 Trough in US Economic Activity,” announcement, July 19.
Powell, Jerome H. (2020). “New Economic Challenges and the Fed’s Monetary Policy Review,” speech delivered at “Navigating the Decade Ahead: Implications for Monetary Policy,” a symposium sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo., August 27.
Woodford, Michael (2011). “Simple Analytics of the Government Expenditure Multiplier,” American Economic Journal: Macroeconomics, vol 3 (January), pp. 1–35.
Woodford, Michael, and Yinxi Xie (2020). “Fiscal and Monetary Stabilization Policy at the Zero Lower Bound: Consequences of Limited Foresight,” NBER Working Paper Series 27521. Cambridge, Mass.: National Bureau of Economic Research, July.

1. The views expressed are my own and not necessarily those of other Federal Reserve Board members or Federal Open Market Committee participants. I would like to thank Burcu Duygan-Bump and Chiara Scotti for assistance in preparing these remarks. Return to text

2. See National Bureau of Economic Research (2021). Return to text

3. The most recent SEP, released following the conclusion of the September 2021 FOMC meeting, is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm. Return to text

4. More information on the jobs calculator can be found on the Atlanta Fed’s website at https://www.atlantafed.org/chcs/calculator. Return to text

5. The FOMC statements containing the guidance (see the fourth paragraph in each statement) are available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm. Return to text

6. The revised Statement on Longer-Run Goals and Monetary Policy Strategy, unanimously approved on August 27, 2020, is available on the Board’s website at https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications-statement-on-longer-run-goals-monetary-policy-strategy.htm. For a discussion of the elements that motivated the launch of the review and a summary of the key changes that were introduced, see Clarida (2020, 2021) and Powell (2020). Return to text

7. Of course, data for December 2022 employment and 2022:Q4 GDP and PCE inflation will not be released until January 2023. Return to text

8. The Labor Market Conditions Indicators can be found on the Kansas City Fed’s website at https://www.kansascityfed.org/data-and-trends/labor-market-conditions-indicators. Return to text

9. The Fed staff’s CIE index—which is now updated quarterly on the Board’s website—is a relevant indicator that this goal is being met. See Ahn and Fulton (2020, 2021). Return to text

10. For a theoretical analysis of the fiscal and monetary policy mix at the ELB, see Woodford and Xie (2020). For studies of the government expenditure multiplier at the ELB, see Woodford (2011); Christiano, Eichenbaum, and Rebelo (2011); and Eggertsson (2011). Return to text

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November 08, 2021 | “The U.S. Housing and Mortgage Market: Risks and Resilience” by Governor Michelle W. Bowman at the Women in Housing and Finance Public Policy Luncheon, Washington, D.C. |
Good afternoon, everyone. It is a pleasure to join you today. Thank you for the invitation. Developments in the housing and mortgage markets have a major effect on the economy and the financial system, so the Federal Reserve Board monitors these markets closely. I am happy to share some of my observations about these markets and to learn from your knowledge and experiences as well.1
I know I am speaking to an audience with considerable expertise in these areas, and so you know already that 2020 and 2021 have been interesting times, to say the least, in housing and mortgage markets. I will focus my comments today on three areas: the strong increase in home prices in the past year and a half, the wind-down of forbearance programs enacted after the advent of COVID-19, and what we learned about the financial stability risks associated with nonbank mortgage companies during the pandemic. As I hope will become apparent during these remarks, these three topics may seem unrelated but they are actually connected.
I will start with some comments on home prices. Home prices had been rising at a moderate rate since 2012, but since mid-2020, their growth has accelerated significantly. In total, home prices in September were 21 percent higher than in June 2020. Home price increases are also widespread. In September, about 90 percent of American cities had experienced rising home prices over the past three months, and the home price increases were substantial in most of these cities.2
These sharp increases raise the concern that housing is overvalued and that home prices may decline. Historically, large home price increases are somewhat less concerning if they are supported by economic fundamentals rather than speculation. Fundamentals certainly seem to be a large part of the story behind the increases we’ve seen since the middle of last year. The demand for housing has risen for several reasons. Interest rates are low, families have accumulated savings, and income growth in the past 18 months has been quite strong. Families are also reconsidering where, and in what kind of home, they want to live. Purchases of second homes, for example, have been somewhat high in the past 18 months. Meanwhile, the supply of new homes has been held back by shortages of materials, labor, and developed lots.
Another reason to be less concerned about the recent escalation in home prices is that we do not see much of the decline in underwriting standards that fueled the home price bubble in the mid-2000s. Mortgage underwriting standards have remained conservative relative to the mid-2000s, in part because of the mortgage policy reforms that were put in place in the aftermath of the housing crisis. Investor activity is subdued relative to that time as well.
Nonetheless, home prices do decline from time to time. In inflation-adjusted terms, U.S. home prices fell from 1979 to 1982 and from 1989 to 1993, although by much less than from 2006 to 2012.3 Although the declines in national home prices were modest in some of these episodes, some areas of the country experienced sharp declines. As we all know, home price declines cause problems and strain throughout the economy. To give just one example, families and small business owners borrow against their homes to fund big-ticket purchases and business expansions, and house price declines make it harder to use homes as loan collateral. This effect can be amplified if a credit crunch occurs, in which lenders react to the decline in house prices by pulling back on their lending. With banks and the broader financial system currently quite robust, such a credit crunch seems unlikely. Nonetheless, I know how painful these declines can be, especially in certain markets. For example, from my experience living in rural Kansas, I understand how smaller communities with a less diversified housing and employment base can take a long time to recover from a fall in home prices. I wonder also about communities with a sizable share of second-home owners. So I will continue to watch the incoming data closely.
Falling home prices would certainly be very dramatic, but continued outsized increases could also be problematic. First, high home prices make it more difficult for low- to moderate-income households to become homeowners, as larger down payments and other financing requirements effectively lock these households out of the housing market. Second, and related to one of the Federal Reserve’s monetary policy goals, rising home prices and rents raise the cost of housing. Because housing costs are a large share of living expenses for most people, these increases are adding to current inflationary pressures in the economy. Indeed, we are already seeing sizable increases in rent and owners’ equivalent rent in many parts of the country.
In addition, there are signs of underlying supply and demand imbalances that will contribute to increases in housing costs and inflation. Early in the pandemic, the strength in home prices was thought to be driven by the decline in mortgage rates. But it has become increasingly clear that the low supply of homes, in combination with a strong demand for housing, is an important part of the story. Before this past year, the pace of construction of new homes was below its long-run average for more than a decade. The supply chain bottlenecks that I mentioned earlier are slowing down construction further. These issues affect the rental market too: The multifamily rental market is at historic levels of tightness, with over 95 percent occupancy in major markets.4 I anticipate that these housing supply issues are unlikely to reverse materially in the short term, which suggests that we are likely to see higher inflation from housing for a while.
I am also watching carefully what happens as borrowers reach the end of the forbearance on mortgage payments. As of October, 1.2 million borrowers were still in forbearance, down from a peak of 4.7 million in June 2020. Of these remaining borrowers, 850,000 will reach the end of their forbearance period by the end of January 2022. Meanwhile, the temporary limitations on foreclosures put in place by the Consumer Financial Protection Bureau will expire at the end of the year.5
Forbearance has been an important support for workers dislocated by the pandemic and for their families. Transitioning the remaining borrowers from forbearance to a mortgage modification or other resolution may be a heavy lift for some servicers. Each transition requires getting in contact with the borrower, discussing options, and figuring out which resolution makes the most sense for each borrower. This is time-consuming and detailed work. It is also crucially important. Obviously, we want to ensure that borrowers who are struggling financially receive the help that they need, and I want to acknowledge that many of these borrowers are from communities that have traditionally been underserved by the mortgage market. In addition, if servicers handle loan modifications poorly and on a large scale, the macroeconomy and financial stability can be affected as well. In the aftermath of the last financial crisis, the flood of foreclosures led to downward pressure on home prices. The same dynamic has not unfolded during the pandemic. Forbearance, foreclosure moratoriums, and fiscal support have kept distressed borrowers in their homes.6
Fed supervisory staff are communicating with significant supervised institutions to ensure that they are preparing for the increased operational risks. If the transition out of forbearance is handled smoothly, I am cautiously optimistic that it will not have a material effect on the larger economy. The share of mortgages in distress—defined as those in forbearance or seriously delinquent—was about 4.5 percent in October 2021, about half the share of mortgages that were seriously delinquent in 2010.7 In addition, many of the mortgages in distress now are insured by the Federal Housing Administration or the Department of Veterans Affairs, and these agencies can require that certain mortgage modification protocols are followed. Outside of these mortgages, the share of borrowers who are not making mortgage payments has returned to pre-pandemic levels. Nonetheless, we are aware of the risks and will monitor this situation closely.
Mortgage servicing, however, has increasingly moved from Fed supervised banks and into nonbank mortgage companies that are supervised by state regulators. In a speech late last year, I focused on some of the possible financial stability risks associated with nonbank mortgage servicers.8 I would like to update you on my thinking about this issue today.
When widespread forbearance was introduced last year, concerns were raised that it would impose strains on nonbank servicers. That is because when a borrower does not make a mortgage payment, the servicer is required to make the payment on the borrower’s behalf. Servicers are eventually reimbursed for these advances, but they are required to finance the unpaid amounts. And unlike banks, nonbanks cannot turn to the Federal Reserve System or the Federal Home Loan Banks when they need liquidity.
As it turned out, nonbank mortgage servicers had cash to meet their operational needs. Mortgage refinancing surged because of the drop in long-term interest rates, and nonbank servicers used the proceeds from these refinacings to fund the advances associated with forbearance.
However, if home prices had fallen, instead of rising so sharply, many borrowers might have faced obstacles to refinancing because their homes had fallen in value, and so nonbank servicers would not have had revenue from refinancing to put toward paying advances. Some nonbank servicers might obtain funds by borrowing against their mortgage servicing rights (MSRs). MSRs are a significant asset for nonbanks. In total, nonbanks hold about four times as much in MSRs as they do in cash.9 But MSRs decline in value when home prices fall, and so this borrowing might also have been less available as a funding source in those circumstances.
The Financial Stability Oversight Council raised concerns about the financial resilience of nonbank mortgage companies in its 2020 annual report and recommended that state and federal regulators coordinate closely to collect data, identify risks, and strengthen oversight of nonbank mortgage companies.10 I think this is appropriate. The ideal mortgage finance system must have a place for institutions of many different types and sizes—both bank and nonbank—that are able to serve the varying needs of different customers. For this system to be sustainable, though, I think like activities should be treated in a like manner, and I am concerned about some of the differences in the prudential oversight of banks and nonbanks in the mortgage market.
To return to my theme at the beginning: These are interesting times for housing and mortgage markets. And in such times, I think we can all agree that it’s wise to closely monitor developments and be prepared for whatever the future may bring. Fortunately, that is exactly what Women in Housing and Finance is all about. So I would encourage all of us—including the tremendous talent assembled here today—to continue thinking hard about how we can continue to build a resilient and dynamic housing market that meets the needs of the American people.
Compliments of the U.S. Federal Reserve Board.

1. The views expressed are my own and not necessarily those of other Federal Reserve Board members or Federal Open Market Committee participants. Return to text

2. Staff estimate based on data from CoreLogic on 383 metropolitan statistical areas (MSAs). An MSA’s price level is defined as having risen if its three-month percent increase exceeds 1 percent. All series are seasonally adjusted using the trend-cycle component of an ARIMA (autoregressive integrated moving average) model. In 85 percent of MSAs, the home price increase, measured on an annualized basis, was more than 10 percent. Return to text

3. Statistics are from historical housing market data used in Robert Shiller’s book Irrational Exuberance, which are updated monthly. See Robert J. Shiller (2015), Irrational Exuberance, 3rd ed., fig. 3.1 (Princeton, N.J.: Princeton University Press). Return to text

4. See Jay Parsons (2021), “U.S. Apartment Vacancy Plunges in September to Record Low as Leave Renewals Surge,” RealPage Analytics Blog, October 6, https://www.realpage.com/analytics/apartment-vacancy-plunges-lease-renewals-surge-september-2021. Return to text

5. The statistics in this paragraph are from Federal Reserve Bank of Philadelphia (2021), Examining Resolution of Mortgage Forbearances and Delinquencies (PDF) (Philadelphia: Philadelphia Fed, October 21). Return to text

6. See Elliot Anenberg and Tess Scharlemann (2021), “The Effect of Mortgage Forbearance on House Prices during COVID-19,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System, March 19). Return to text

7. The statistic for October 2021 is from Federal Reserve Bank of Philadelphia (2021) in note 5; the statistic for 2010 is from the Federal Reserve Bank of New York Consumer Credit Panel/Equifax. Serious delinquency is defined as 90 or more days delinquent or in foreclosure. Return to text

8. See Michelle W. Bowman (2020), “The Changing Structure of Mortgage Markets and Financial Stability,” speech delivered at the “Financial Stability: Stress, Contagion, and Transmission,” 2020 Financial Stability Conference hosted by the Federal Reserve Bank of Cleveland and the Office of Financial Research, Cleveland, November 19. Return to text

9. This calculation from the Board’s staff is based on data from the Conference of State Bank Supervisors, Nationwide Multistate Licensing System & Registry. Return to text

10. See Financial Stability Oversight Council (2020), 2020 Annual Report (PDF) (Washington: FSOC). Return to text

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Welcome address by Philip R. Lane, Member of the Executive Board of the ECB, at the ECB Conference on Money Markets | 8 November 2021 |
Welcome to our annual conference on money markets. This is a prominent event in our calendar: it is difficult to over-state the importance of understanding money markets for the design and implementation of monetary policy. Money markets are a seismograph for central bank liquidity conditions and market expectations of future policy, while money market rates are central to the transmission of monetary policy through their impact on economy-wide financing conditions.
In recent weeks, there has been volatility in money markets around the world, as traders work to absorb the implications of the recent increase in inflation rates for central bank policy decisions. At the ECB, our decision-making is guided by our new monetary policy strategy, as demonstrated by the revision of our interest rate forward guidance that we decided in July.
A central element in our monetary policy strategy is the principle that if the economy is close to the effective lower bound it is necessary to adopt especially forceful or persistent monetary policy action to avoid negative deviations from the inflation target becoming entrenched. Despite the high current inflation rate, the analysis indicating that the euro area is still confronted with weak medium-term inflation dynamics remains compelling. In particular, the backdrop of the adverse demand shocks and positive supply developments during the pre-pandemic period — in which inflation averaged just 0.9 percent between 2014 and 2019 – has had a persistent impact on price- and wage-setting dynamics. In 2020, the inflation rate further declined to 0.3 percent on account of the initial adverse pandemic shock to the economy and inflation. The euro area has been confronted for an extended period with extensive slack and weak medium-term aggregate demand conditions, as reflected in the chronically-large aggregate current account surplus. While fiscal policy has been forcefully counter-cyclical during the pandemic (including the launch of the innovative Next Generation EU initiative), the capacity of fiscal policy to support aggregate demand dynamics over the medium term is constrained by high aggregate national debt levels and the absence of a permanent central fiscal capacity. These factors reinforce our strategic assessment that extensive monetary accommodation is required to ensure that inflation pressure builds up on a persistent basis in order to stabilise inflation at two per cent over the medium term.
How do we reconcile the current high inflation rate and the subdued prospects for inflation over the medium term? Our analysis points to three temporary factors that are acting to push up inflation today but are projected to fade over the course of next year. First, the pandemic initially exerted powerful downward pressure on inflation. In part, this was due to the severe drop in economic activity during 2020; in part, some policy measures directly contributed to lower inflation in 2020, especially the temporary VAT cut in Germany. The economic recovery during 2021 and termination of temporary tax cuts has operated in the opposite direction, temporarily pushing up the inflation rate. In particular, the base effect of unusually-low prices during 2020 has contributed to higher inflation during 2021, but these unusually-low prices will fall out of the inflation calculation (which compares prices today with prices twelve months ago) at the end of this year. In terms of individual factors, the reversal of the temporary German VAT cut is a quantitatively-important component that will no longer feature in the data in the new year.[1]
Second, inflation pressures related to bottlenecks can in part be attributed to the unexpectedly-strong European and global recovery from the pandemic shock. In the June 2020 Eurosystem staff macroeconomic projections, it was foreseen that euro area GDP for 2021 would remain 4 percentage points below the 2019 pre-pandemic level; in the latest September 2021 projections, euro area GDP for 2021 is foreseen to run only 1.8 percentage points below the 2019 level. Similarly, at the global level, the June 2020 update to the IMF World Economic Outlook (WEO) forecast assessed that world GDP in 2021 would barely exceed the 2019 level (by 0.2 percentage points), whereas the October 2021 WEO puts global output in 2021 at 2.6 percentage points above the 2019 level. The performance is much stronger than initially expected, which can be attributed to the success of vaccination campaigns and other public health measures, together with extensive policy support around the world. However, a by-product of an unexpectedly-strong recovery is that there have been extensive demand-supply mismatches in the global markets for commodities and manufactured goods, which have been exacerbated by some sector-specific supply disruptions (including in the semi-conductor industry). There are also mis-matches in some segments of domestic labour markets, especially in those services sectors that suffered the most from the severe lockdowns but are now experiencing high demand, such as in hospitality.
However, the nature of such bottleneck-induced inflation is that there is an inherent temporary component. In particular, demand-supply mismatches should be alleviated over time through the expansion of supply capacity, together with some normalisation of demand patterns following the reopening. All else equal, if lack of supply is putting upward pressure on prices today, the introduction of extra supply over time will operate in the opposite direction as an anti-inflationary force. The expansion of supply capacity can also be expected in domestic labour markets, through the reversal of the pandemic-related drop in the labour force participation rate and the return of many international workers that had temporarily gone back to their home countries.
Third, the largest single contributor to the currently-high inflation rate has been the surge in energy prices. While energy inflation has been influenced by both base effects (energy prices dropped sharply in 2020) and bottleneck effects (demand-supply mismatches have been extensive for both oil and natural gas), the contribution of energy to overall inflation is typically stronger in the near term than in the medium term, also due to the adverse macroeconomic impact of high energy prices. In particular, since the euro area is a significant net importer of energy, an increase in global energy prices constitutes a negative terms of trade shock, depressing the net revenues of European firms and the disposable income of European households. This adverse aggregate demand channel means that an energy price shock can simultaneously raise headline inflation but, all else equal, exert downward pressure on the path of underlying inflation.[2]
Taken together, these three forces explain why inflation is temporarily high and provide solid reasons to expect inflation to decline through the course of next year.
In relation to the connection between our inflation analysis and our interest rate policy, it is always necessary to keep in mind that monetary policy affects the inflation rate only with a considerable lag. In particular, an abrupt tightening of monetary policy today would not lower the currently-high inflation rates but would serve to slow down the economy and reduce employment over the next couple of years and thereby reduce medium-term inflation pressure. Given our assessment that the medium-term inflation trajectory remains below our two per cent target, it would be counter-productive to tighten monetary policy at the current juncture.
In particular, our new forward guidance specifies three conditions that need to be met before we would start raising our policy rates. The first condition is that the Governing Council “sees inflation reaching two per cent well ahead of the end of its projection horizon.” The second condition is that the two per cent target is reached “durably for the rest of the projection horizon”. The third condition is that the Governing Council “judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term.”[3]
With regard to temporarily-high inflation, the requirement that we need to see inflation reaching two per cent not only “well ahead of the end of our projection horizon” but also “durably for the rest of the projection horizon” ensures that interest rate policy will not react to inflation shocks that are expected to fade away before the end of our projection horizon (which will include 2024 in the December round).
Moreover, the condition that “realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term” serves an important purpose in our analysis of the incoming data: it sharply differentiates between the volatile components of headline inflation and the dynamics of underlying inflation, which is the persistent component that is the best guide to medium-term inflation dynamics. In assessing underlying inflation, it is critically important to filter out the temporary impact of base effects and bottlenecks on goods inflation and services inflation.
The persistent component in wage dynamics will be central in the assessment of underlying inflation, especially in view of the high share of services in the overall price level and the high share of labour in services value added. Accordingly, tracking wage outcomes – adjusted for productivity – and differentiating between transitory and persistent components in wage settlements will be pivotal in assessing progress in the realised path of underlying inflation. In particular, a one-off shift in the level of wages as part of the adjustment to a transitory unexpected increase in the price level does not imply a trend shift in the path of underlying inflation.
In addition to rate forward guidance, the calibration of asset purchases also plays a major role in ensuring that the monetary stance is sufficiently accommodative to deliver the timely attainment of our medium-term two per cent target. In particular, the compression of term premia through the duration extraction channel is quantitatively-significant in determining longer-term yields and ensuring that financing conditions are sufficiently supportive to be consistent with the delivery of our medium-term inflation objective.
Finally, it is vitally important that the ECB is always attentive to the full risk distribution of possible outcomes, rather than focusing only on the baseline assessment. In our latest monetary policy meeting, we assessed that, in the near term, supply bottlenecks and rising energy prices are the main risks to the pace of recovery and the outlook for inflation. If supply shortages and higher energy prices last longer, these could slow down the recovery. At the same time, if persistent bottlenecks feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, price pressures could become stronger. However, economic activity could outperform our expectations if consumers become more confident and save less than currently expected. We will continuously reassess these risk factors, in line with incoming data flows.
Compliments of the European Central Bank.

By pushing down the current price level compared with the future price level, a temporary VAT cut can be an effective stimulus measure during a downturn as it encourages a shift in consumption towards the present. The data suggest that the German VAT cut was effective in raising consumption: see Bachmann, R., Born, B., Goldfayn, O., Kocharkov, G., Luetticke, R. and Weber, M. (2021), “A Temporary VAT Cut as Unconventional Fiscal Policy”, Discussion Paper Series, No. 16690, Centre for Economic Policy Research, London.

Under a different scenario, if energy prices rise due to hikes in carbon taxes, there is no decline in the terms of trade and aggregate demand can be protected through the recycling of carbon tax revenues.

Our two percent target is expressed in relation to the HICP. While our strategy recognises that the inclusion of the costs related to owner-occupied housing in the HICP would better represent the inflation rate that is relevant for households, the full inclusion of owner-occupied housing in the HICP is a multi-year project. In the meantime, the Governing Council in its monetary policy assessments will take into account inflation measures that include initial estimates of the cost of owner-occupied housing in its wider set of supplementary inflation indicators. However, in terms of the two percent inflation target, clarity requires that this is guided by the prevailing HICP measure, which is produced by Eurostat on a timely, comprehensive basis with the application of the highest statistical standards.

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European Commission President Ursula von der Leyen announced today €1 billion at the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow as the European Union contribution to the Global Forests Finance Pledge. This 5-year support package from the EU budget will help partner countries to protect, restore and sustainably manage forests worldwide and deliver on the Paris Agreement.
President Ursula von der Leyen said: “Forests are the green lungs of the earth. We need to protect and restore them. I gladly announce that we are pledging €1 billion to protect world forests. This is a clear sign of the EU’s commitment to lead global change to protect our planet, in line with our EU Green Deal.”
Commissioner for International Partnerships, Jutta Urpilainen, added: “The EU’s contribution pledged today to sustainably manage, restore and protect forests will support sustainable growth and jobs, climate mitigation and adaptation, as well as preservation of biodiversity in our partner countries. The European Union will work in partnerships with governments, civil society, indigenous peoples and private actors, in a multilateral approach, to achieve the Sustainable Development Goals and to put people and planet first. The specific focus on the Congo Basin is a timely message on the importance of this unique area and its ecosystem.”
This pledge is the European Commission’s contribution to the Global Forests pledge made at COP26 by the international community. As a follow-up, the EU will work with partner countries to conserve, restore and ensure the sustainable management of forests in a comprehensive and integrated way. Within the €1 billion pledged today, €250 million will go to the Congo Basin, covering eight countries (Cameroon, Central African Republic, Democratic Republic of the Congo, Republic of the Congo, Equatorial Guinea, Gabon, Burundi and Rwanda) to protect the world’s second largest tropical rainforest region while improving livelihoods for its populations.
Background
More than 1.6 billion people all over the world depend on forests for food, medicine and livelihoods. Forests preserve soil and support 80% of the world’s biodiversity, with the biggest forest basins outside the EU’s territory.
Because they produce oxygen and purify the air, forests are also essential for mitigating climate change as they absorb up to 30% of Green House Gas Emissions. They are equally important for climate adaptation. Greenhouse gas emissions linked to deforestation are the second biggest cause of climate change. Between 1990 and 2016, the world has been losing forest cover at a rate equivalent to about 800 football pitches an hour.
Since the early 1990s, the EU has been supporting forest conservation, particularly in Central Africa through the EU flagship ECOFAC programme (Preserving Biodiversity and fragile ecosystems in Central Africa). This continuous support helped conserve around 16 million ha of humid forests in the Congo Basin, while promoting sustainable development and livelihoods amongst the local population.
Today’s European Commission pledge is funded by the NDICI-Global Europe instrument.
Compliments of the European Commission.
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Speech by Christine Lagarde, President of the ECB, on the occasion of the 175th anniversary of Banco de Portugal in Lisbon |
Introduction
I am delighted to be here in Lisbon to celebrate the 175th anniversary of the Banco de Portugal, an institution that can be proud of its contribution to Portuguese history.
And it is a history that is fused with Europe. Lisbon was home to the peaceful Carnation Revolution of 1974, which ushered in democracy and marked a crucial step towards Portugal’s membership of the European Community. Not long after, the city gave its name to one of the most important treaties to have shaped the European Union – the Treaty of Lisbon.
But Portugal’s past is also rich with lessons for Europe today. One of the defining events for Portugal was the Lisbon earthquake of 1755, which struck the city in the early hours of a November morning.
The earthquake was first and foremost a human tragedy. The number of deaths in the city was estimated at between 20,000 and 30,000.[1] The catastrophe sparked a great debate about the causes of such destruction, attracting the finest minds of the era, such as Voltaire and Kant, and marking a seminal moment in the European Enlightenment.
The earthquake was also an enormous economic shock, costing between 32% and 48% of Portuguese GDP.[2] Yet the Portuguese leaders of that time managed to turn a terrible disaster into a starting point for transformation. They acted immediately and forcefully in the direct aftermath of the earthquake, providing life-saving assistance to the city’s population and focusing on recovering from the natural disaster. This prevented an even greater catastrophe.
Perhaps most crucially, the earthquake provided the government with a now-or-never moment for a far-reaching reform of the economy.[3] Portugal launched a series of measures, including industrial development policies, that would go on to revitalise the country in the latter half of the eighteenth century.
There are some clear parallels between that episode and the situation in Europe today as we recover from the coronavirus (COVID-19) pandemic.
We have also faced a human tragedy, with over 800,000 people in the EU losing their lives.[4]
We have reacted decisively to prevent even worse outcomes: policies have worked together in an unprecedented way to preserve jobs and stave off bankruptcies.
And now we have a chance to transform the economy, accelerating the necessary green and digital transitions and protecting ourselves in a fast-changing world.
In this process, we have drawn – and must still draw – on the strengths that characterised Portugal’s response to the unexpected disaster of the Lisbon earthquake: resolve, recovery, and resilience.
Resolve and recovery
Following the outbreak of the pandemic, the euro area experienced a highly unusual recession.
We saw an extraordinary contraction in economic activity with euro area real GDP’s steepest fall on record.[5] Portugal’s economy was hit even harder.[6] Lockdowns and physical distancing measures delivered a particularly hard blow to the services sector, which is the most labour-intensive part of the economy. This threatened jobs and incomes on a previously unforeseen scale.
But the historic magnitude of the pandemic crisis was matched by the resolve of Europe’s policy response to overcome it. Faced with an unprecedented threat to citizens’ welfare, we saw an unprecedented degree of alignment between monetary policy, fiscal policy and regulatory policy – and unprecedented cooperation between European countries.
In particular, national and European policies worked together to protect jobs by financing wide-ranging job retention schemes. More than one-quarter of the labour force in Portugal benefited from temporary state support during the most acute phase of the crisis in 2020.[7] This was aided by close to €6 billion in loans under the EU’s SURE instrument.[8]
This decisive joint intervention meant that, despite the scale of the contraction, the unemployment rate increased only marginally – by less than half a percentage point between 2019 and 2020 – in Portugal and the euro area as a whole.[9] For comparison, after the great financial crisis, the unemployment rate rose by well over 4 percentage points in both.
The ECB also played its role. Our pandemic emergency purchase programme (PEPP) ensured that financing conditions for all sectors of the economy remained favourable, even during the darkest moments of the crisis. Coupled with measures taken by ECB Banking Supervision, our policy response is estimated to have saved more than one million jobs.[10]
The overall European policy mix proved crucial in bridging the crisis while vaccination campaigns got underway. Today over three-quarters of adults in Europe are fully vaccinated.[11] Portugal has the highest rate of fully vaccinated people in the world, according to one measure.[12]
As a result of Europe’s resolve, we have created the conditions for a sustained recovery.
We expect to see euro area GDP back at its pre-pandemic level before the end of this year, while Portugal’s GDP should reach that level by mid-2022.[13] After the great financial crisis, it took the euro area seven years to get back to its pre-crisis level and Portugal a decade. However, growth momentum is moderating somewhat owing to the effects of supply bottlenecks and the rise in energy prices.
Market interest rates have risen over the past weeks, mainly as a result of greater market uncertainty about the inflation outlook, spillovers from abroad to policy rate expectations in the euro area, and some questions about the calibration of asset purchases in a post-pandemic world.
In our forward guidance on interest rates, we have clearly articulated the three conditions that need to be satisfied before rates will start to rise. Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year.
Regarding asset purchases, for the time being, we continue to use the PEPP to safeguard favourable financing conditions and ensure that borrowing costs for all sectors of the economy do not unduly tighten. An undue tightening of financing conditions is not desirable at a time when purchasing power is already being squeezed by higher energy and fuel bills, and it would represent an unwarranted headwind for the recovery.
As for the calibration of bond purchases in a post-pandemic world, we will announce our intentions in December. Even after the expected end of the pandemic emergency, it will be still important that monetary policy – including the appropriate calibration of asset purchases – supports the recovery and the sustainable return of inflation to our target of 2%.
European resilience in an uncertain world
With the recovery underway, now is the time for Europe to focus on building more resilience.
The pandemic has created both internal and external challenges for Europe.
Internally, it has irreversibly sped up the green and digital transitions. Nine out of ten Europeans now want the EU to become climate-neutral by 2050.[14] And the pandemic has accelerated the digitalisation of products and services in Europe by seven years, according to one estimate.[15]
This is a positive development, but it could create difficulties if the transition is not managed well. Specifically, if we move too slowly, there is a risk that the green transition may cause more volatility in energy prices. The digital transition could also increase inequality between those with high levels of digital skills and those without.
Externally, the pandemic has shown us how vulnerable we are to disruptions that threaten the global trading order – and this is particularly true for Europe, with our deep integration into the global economy.
Indeed, today’s supply chain disruptions may only be a dress rehearsal for some of the difficulties we will face when natural disasters become more frequent, or if international relations become more fraught and supply chains start to be influenced by geopolitical biases.
So how can we strengthen our resilience along these two dimensions?
On the internal front, we need to step up our investment in the sectors of the future. And we have an ideal tool for the job: the €750 billion Next Generation EU (NGEU) fund. It gives us a mechanism to stay focused on future-oriented investment even when national fiscal policies become less expansionary after the pandemic. And it helps reduce the green and digital divide within Europe, which is crucial for ensuring that future growth is equitable.
There are major opportunities here for Portugal. Over the last 15 years, the carbon intensity of Portugal’s economy was over one-fifth above the EU average.[16] The European Commission’s most recent Digital Economy and Society Index placed Portugal 18th out of 27 in terms of digital performance.[17]
But now Portugal, one of the first to submit proposals for NGEU funds, is set to receive €16.6 billion in grants and loans, a sizeable majority of which will support green and digital initiatives.[18] This should reinforce the positive trends that are already underway: for example, energy sector carbon emissions have halved since 2005.[19]
To make the most of this opportunity, all economies need to be able to adapt to changes faster. As demand moves towards the sectors of the future, supply needs to be able to adjust with it.
This is an important reason why NGEU is linked to reform plans that allow the economy to make the most of the European investment push. In this area, Europe can in fact learn from Portugal’s experience. The country suffered very badly during the sovereign debt crisis, but it managed to implement difficult labour market reforms as part of an economic adjustment programme. These reforms ultimately increased the labour market’s ability to adjust to changes.[20]
On the external front, we need to be ready for a more uncertain world. As I have recently argued, this means using Europe’s economic weight to support reciprocated trade openness globally, while strengthening its own domestic demand to insure against a more volatile global economy.[21]
Europe’s goal of “open strategic autonomy” helps reduce vulnerabilities while continuing to support open trade. That goal can include pursuing supply chain diversification for those inputs that have strategic implications for the European economy. For example, 93% of the EU’s supply of magnesium, a crucial resource for the automotive and construction industries, comes from China alone.[22]
As a result, regionalisation will likely become more important for Europe, a trend that was already clear before the pandemic. Export integration within the euro area consistently outpaced export integration with the rest of the world in the decade following the great financial crisis.[23] In fact, by 2019 over 70% of the euro area’s contribution to global value chains was regional.[24]
This is a trend that Portugal is well placed to benefit from. Its gains in competitiveness during the last crisis helped the country enjoy strong export growth in the years leading up to the pandemic.[25] In recent years, Portugal has formed stronger trade ties with the euro area as well. By July 2021, roughly 65% of Portugal goods exports went to the euro area, compared with under 60% back in 2014.
Conclusion
Let me conclude.
For Europe to master today’s challenges, we must demonstrate a drive and capacity for reform. That requires courage. We should follow in the footsteps of the people of Portugal all those generations ago.
The pandemic, like the Lisbon earthquake, was a human tragedy and an unexpected economic shock. But through its resolve, Europe has achieved a strong economic recovery. Let us now work on building a more resilient future.
And as we look to that future, I am reminded of the Portuguese poet Fernando Pessoa, who once wrote, “Trago comigo as feridas de todas as batalhas que evitei” – “I bear the wounds of all the battles I’ve avoided.”
If Europe does not seize the unique opportunity presented by the pandemic and push ahead with the transformation of the economy, we will all be the worse for it in the long run.
But we can take courage from the example set by our forebears. If Portugal could achieve such a fundamental revitalisation of its economy in the eighteenth century, so too can Europe in the twenty-first century.
Europe should embrace this lesson from Lisbon.
Compliments of the European Central Bank.
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