2021 Per Jacobsson Lecture by Christine Lagarde, President of the ECB, at the IMF Annual Meetings, 16 October 2021 |
It is a pleasure to be back in Washington and to deliver this year’s Per Jacobsson Lecture.
As a young man in the 1920s, Jacobsson worked in the Economic and Financial Section of the League of Nations Secretariat. There, he was actively involved in work on Europe’s financial reconstruction in the wake of the greatest shock that had hit the continent: the First World War.
The outbreak of that conflict in 1914, which killed so many and injured even more, marked the end of the first era of globalisation. The unprecedented flows of trade that had characterised the global economy between the 1870s and the early 1900s collapsed, as borders were replaced by battlelines.
The pre-war world quickly became, as the writer Stefan Zweig put it, “the world of yesterday”. This shows how fast what had once seemed so permanent can change. Globalisation will always be vulnerable to global shocks, as we have recently seen with the pandemic.
But the pre-pandemic world has not joined the world of yesterday just yet. A powerful economic logic drove the most recent era of globalisation, and that logic remains just as valid today.
However, we are seeing this logic challenged in important ways. Protectionism is rising, climate change is accelerating and industrial policy is shifting. Economies that have embraced globalisation, like Europe, are more exposed to these changes.
Europe has reaped the benefits of globalisation in the past and has suffered enormously from its fall-back. To reap the benefits in the future in a globalised world in transition, Europe must adapt.
That 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.
A stronger Europe would be a global public good, providing an anchor of stability in a less predictable world. And it has the scale to prepare this journey. Will it have the will?
Europe in a globalised world
In the decades before the pandemic, rapid globalisation profoundly transformed international trade for the better. Between 1995 and 2010, the pace of world trade growth expanded twice as fast as that of world GDP growth.[1] And the nature of trade was transformed by the expansion of global value chains, a web of interlinkages that developed as production unbundled across borders.
This integration was driven by technological progress in the private sector[2], but it was also enabled by public policy. Governments across advanced economies pushed for trade barriers to be lowered and the World Trade Organization to be expanded to include emerging economies. Globalising trade was seen as desirable for two main theoretical reasons:
The first was the classical argument, going back to David Ricardo, about the mutual gains from trade.[3] Lowering barriers would allow countries to exploit their comparative advantages. Countries would also benefit from lower import prices, technology spillovers and productivity gains from the international division of labour.
The second reason was to exploit diverse sources of demand as a means of diversifying risk in the face of domestic shocks. Deeper trade integration would allow countries to “rotate” demand to growing external economies when they experienced domestic slowdowns. As a result, business cycle volatility could be partially decoupled from its adverse effects on long-term growth.[4]
Both these arguments were broadly borne out.
Globalisation did increase growth: across all economies, a one-point increase in measures of globalisation was associated with an increase in the five-year growth rate by 0.3 percentage points.[5] Hundreds of millions of people were lifted out of poverty in emerging markets. And Europe benefited, too. Between 2000 and 2017, jobs supported by exports to the rest of the world increased by two-thirds, to 36 million.[6]
Trade integration also allowed countries’ growth to become less beholden to swings in domestic conditions.[7] This proved especially valuable for Europe in the wake of the sovereign debt crisis. The ability to rotate demand from the domestic economy to the rest of the world provided a crucial outlet for producers. Between 2010 and 2014, external demand as a share of euro area GDP more than doubled.
But the flipside of greater trade openness is greater exposure to global shocks and, if the correct policies are not in place, the potential for people to turn against globalisation. For example, international trade can have implications for income inequality in advanced economies, which in turn can spur protectionism if not tackled effectively through distributional policies.[8]
Between 1999 and 2019, trade as a share of GDP rose from 31% to 54% in the euro area, whereas in the United States it rose from 23% to 26%. But while Europe’s social model meant that protectionist pressures remained minor, we began to see a new shift towards protectionism in other major economies in the late 2010s.
Still, our deep integration into the global economy meant that we in Europe were particularly exposed to these changes – and our scope to benefit from open trade and diverse demand was arguably reduced.
Europe’s largest gains from trade had taken place against the backdrop of a particular geopolitical constellation, marked by the global dominance of the United States after the end of the Cold War and a multilateral commitment to governance by rules. But the re-emergence of protectionism began to call that global economic order into question.
In parallel, waning trade growth reduced the scope for countries to rotate demand to external economies when they needed to. After 2008, the pace of globalisation slowed and world trade growth no longer outstripped world GDP growth. In fact, by 2019 world trade growth had more than halved since the year before. This contributed to a manufacturing recession in the euro area on the eve of the pandemic.
For all these reasons, I was already highlighting back in 2019 the need for Europe to acknowledge that the world around us was changing fast, and to reconsider whether its growth model was sufficiently balanced in light of these changes.[9]
A globalised world in transition
The pandemic has so far only reinforced this message. Though it is still too early to draw firm conclusions, the pre-crisis trends that capped the gains from both trade and diversifying demand could be becoming stronger.
First, the trend towards protectionism shows no signs of abating. In 2020, more than 1,900 new restrictive trade measures were implemented worldwide. That is 600 measures more than the average of the previous two years.[10] And there is evidence of further discriminatory practices being introduced this year.[11]
This could cloud the outlook for future growth in world trade, especially if it elicits tit-for-tat responses. ECB analysis shows that, in a hypothetical case in which one major economy raises tariffs and non-tariff barriers by 10% and other countries respond in kind, world trade would be almost 3% lower than its baseline and global GDP would be almost 1% lower.[12]
Moreover, new trade barriers not only harm euro area exports but the nature of these barriers is creating new vulnerabilities for Europe. Behind some protectionist measures is a shift in industrial policy, mainly led by China and the United States, towards security over efficiency in supply chains. This could create geopolitical biases in global supply chains in the future, especially for goods considered strategically important.
Such shifts would raise hard questions for industries where Europe is dependent on a limited number of global suppliers. For example, 45% of Europe’s imports of active pharmaceutical ingredients are sourced from China, as is 98% of our supply of rare earth metals.[13]
Second, there are signs that the global economy could increasingly be a source of shocks for Europe rather than a stabiliser against volatility.
We are already seeing that the just-in-time supply chains which have defined this era of globalisation are highly vulnerable to systemic shocks. And the efficiency of those supply chains multiplies the consequences of disruptions. The World Bank estimates that, for many goods traded in global value chains, a delay by one day is equal to putting in place a tariff of over 1%.[14]
This naturally affects the euro area more than other economies by virtue of our exposure to globalisation. For example, ECB analysis finds that exports of euro area goods would have been almost 7% higher in the first half of this year were it not for pandemic-induced supply bottlenecks. For the rest of the world, the figure is only 2.3%.[15]
Looking ahead, imported volatility might increase rather than decrease. Even after the disruptions created by the pandemic are resolved, we will have to contend with the consequences of a changing climate and changing industrial structures.
As the world heats up and climatic conditions become more extreme, we will face increasingly frequent ecological shocks. And we know from past experience that these shocks can have profound effects on supply chains.
For example, after the Tōhoku earthquake in Japan in 2011, US affiliates of Japanese multinationals saw their output fall at roughly the same rate as the declines in imported inputs from Japan.[16] Likewise, the 2013 drought in New Zealand – which produces around half of the world’s powdered milk – caused a significant spike in world milk prices, with EU prices jumping by around a fifth between May and October of that year.
Even the necessary response to climate change – the acceleration of the green transition – could initially create frictions in the global environment. In September, policies to reduce energy consumption in Asia led to supply chain disruptions after companies shut down production to comply with requirements.
It is likely that multinational companies will respond to these disruptions by diversifying their supply chains in order to increase their resilience. We already saw such diversification occur in the wake of the SARS pandemic two decades ago.[17] At the start of this year, around a quarter of major companies said that diversifying suppliers would be their top priority over the next few years.[18]
But reorganisation of this nature could have implications for the composition of global demand.
For a start, it could accelerate rebalancing away from investment-led growth in major emerging markets, which could make the outlook for external demand more uncertain. Consider that China has contributed, on average, one-third of total global growth since 2005 – more than the contribution of all advanced economies put together.[19]
Also, firms could end up holding permanently higher inventories as an insurance policy against disruptions. There is already evidence that companies hold higher levels of foreign inputs that are more difficult to source[20], and changes in these inventories play a key role in the dynamics of international trade. Companies run down inventories when uncertainty rises during recessions – sharply cutting foreign orders[21] – and trade only recovers when inventories have been stabilised[22]. A move away from just-in-time supply chains could therefore mean longer periods of inventory adjustment.
Today, faced with historically long delivery times, global manufacturers’ stockpiling of inputs continues to run higher than before the pandemic.[23] We do not yet know if this will become a permanent feature of our economy or if it is just a panic-driven reaction to current shortages. But if it does persist, we could see a more volatile industrial business cycle.
Navigating the post-pandemic world
So how should Europe respond to these changes?
There are two priorities, both of which would help Europe act as an anchor of stability in a more fractured and uncertain world.
As a first priority, we need to be clear that turning our back on trade openness is not the answer.
Even if the protectionist actions of others mean that the gains from trade are no longer as pronounced, the answer is not to respond in kind. Instead, we should use our economic weight to shape openness in a European direction, which means one characterised by being reasonable rather than reactionary, by cooperation rather than conflict, and by redistributing the gains of globalisation to those who have lost out. This is essential to make openness sustainable.
In particular, Europe has immense potential to use the size of its single market to set its values and standards in other parts of the world through open trade – the so-called Brussels effect.[24] This is already tangible in many areas. But it is naturally strongest where the single market is at its deepest. So, as new sectors emerge, like digital services and the green economy, it is crucial that our single market deepens in tandem so that we can continue to use our domestic strength to exert a positive global influence.
At the same time, we need to protect against risk in areas where our vulnerabilities are excessive. There are vital goods and services that we cannot easily produce at home, and where we need more insurance against external shocks. This lies behind Europe’s ambition to increase its “open strategic autonomy”. The European Commission has found that 34 products used in the EU are extremely vulnerable to supply chain disruptions given their low potential for diversification and substitution inside the Union.[25]
To achieve strategic autonomy, some re-shoring or near-shoring of specific sectors – like semiconductors and pharmaceuticals – is probably inevitable in the long term. And the European Commission is already taking measures to strengthen the international role of the euro, which can ultimately make European companies more resilient to the unfavourable actions of others, such as foreign sanctions.
The second priority is for Europe to strengthen its own domestic demand. This is essential to compensate for a more uncertain global landscape in which economies may find it harder to rely on external demand in times of need. That would make European growth more robust, as well as helping stabilise global growth if the contribution of other economies weakens.
In the decade before the pandemic, Europe tended to import demand from the rest of the world. Annual domestic demand growth was, on average, 2 percentage points lower in the decade after 2008 than in the decade preceding it, and it was slower than that of our main trading partners. This was reflected in a persistent current account surplus.
To reverse that trend, we need to learn the lessons of the past and implement policies that strengthen our internal sources of growth. There are three components to this.
First, we need to steer public and private investment towards the areas of the economy that will generate higher real incomes in the future, namely the green and digital sectors. Green investment is estimated to have a multiplier two to three times higher than non-green investment.[26] The pandemic has already shifted activity in this direction, but we need to provide the financing and regulatory framework to help the economy adjust smoothly.
Europe already has the ideal tool in place to kickstart this process, in the form of the €750 billion Next Generation EU (NGEU) fund set up in response to the pandemic. The European Commission estimates that NGEU could raise potential output by 3% in some countries by 2024.[27] But we also need to flank NGEU – which is temporary – with permanent progress on broadening and deepening Europe’s capital markets for green and innovative investment.[28]
Second, unlike after the great financial crisis, fiscal policy support should not be withdrawn until the recovery is more mature. But it should shift from a blanket approach to a more targeted action plan that supports sustainably higher demand. This means that fiscal policy will need to facilitate structural changes in the economy rather than preserving sunset sectors. And, taking a medium-term perspective, it will need to follow a rules-based framework that underpins both debt sustainability and macroeconomic stabilisation.
Third, monetary policy will continue supporting the economy in order to durably stabilise inflation at our 2% inflation target over the medium term. The ECB is committed to preserving favourable financing conditions for all sectors of the economy over the pandemic period. And once the pandemic emergency comes to an end – which is drawing closer – our forward guidance on rates as well as asset purchases will ensure that monetary policy remains supportive of the timely attainment of our target.[29]
Conclusion
Let me conclude.
Europe, more than any other major economy, reaped the gains of globalisation in the decades leading up to the pandemic. But now we must sow the seeds for a future in which globalisation becomes a more unpredictable terrain.
The benefits of trade and diversifying demand are still there to be had. But they are facing headwinds that Europe cannot ignore. This means we must adapt and change to continue thriving in a global economy and to remain an anchor of stability and peace.
The good news is that we are already on the right path. As Stefan Zweig once wrote, “once a man has found himself there is nothing in this world that he can lose.” Europe’s historic response to the pandemic shows that it has found itself.
That allows us to focus on building resilience to face global challenges as and when they arise. In this sense, the pandemic has given us an opportunity and we must seize it.
1. Cigna, S., Gunnella, V. and Quaglietti, L. (forthcoming), “Global Value Chains: Measurement, Trends and Drivers”, Occasional Paper Series, ECB, Frankfurt am Main.
2. Baldwin, R. (2016), The Great Convergence: Information Technology and the New Globalization, Harvard University Press, Cambridge, MA.
3. Ricardo, D. (1817), On the Principles of Political Economy and Taxation, John Murray, London, reprinted in Sraffa, P. (1951) (ed.), The Works and Correspondence of David Ricardo, Vol. 1, Cambridge University Press, Cambridge.
4. Kose, M.A., Prasad, E.S. and Terrones, M.E. (2006), “How do trade and financial integration affect the relationship between growth and volatility?”, Journal of International Economics, Vol. 69, No 1, pp. 176-202.
5. Lang, V.F. and Tavares, M.M. (2018), “The Distribution of Gains from Globalization”, IMF Working Papers, No 18/54, International Monetary Fund
6. Arto, I., Rueda-Cantuche, J.M., Cazcarro, I., Amores, A.F., Dietzenbacher, E., Victoria Román, M. and Kutlina-Dimitrova, Z. (2018), “EU exports to the world: effects on employment”, European Commission, November.
7. Kose, M.A., Prasad, E.S. and Terrones, M.E., op. cit.
8. Stolper, W.F. and Samuelson, P.A. (1941), “Protection and Real Wages”, The Review of Economic Studies, Vol. 9, No 1, pp. 58-73; Mayda, A.M. and Rodrik, D. (2005), “Why are some people (and countries) more protectionist than others?”, European Economic Review, Vol. 49, pp. 1393–1430.
9. Lagarde, C. (2019), “The future of the euro area economy”, speech at the Frankfurt European Banking Congress, 22 November.
10. Cigna, S., Gunnella, V. and Quaglietti, L., op. cit.
11. As evidenced by 2021 data from Global Trade Alert (number of new interventions implemented each year – all state interventions).
12. Lane, P.R. (2019), “Globalisation and monetary policy”, speech at the University of California, 30 September.
13. European Commission, “In-depth reviews of strategic areas for Europe’s interests”.
14. World Bank (2020), World Development Report: Trading for Development in the Age of Global Value Chains.
15. Frohm, E., Gunnella, V., Mancini, M. and Schuler, T. (2021), “The impact of supply bottlenecks on trade”, Economic Bulletin, Issue 6, ECB.
16. Boehm, C.E., Flaaen, A. and Pandalai-Nayar, N. (2019), “Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tōhoku Earthquake”, The Review of Economics and Statistics, Vol. 101, No 1, MIT Press, March, pp. 60-75.
17. Shingal, A. and Agarwal, P. (2020), “How did trade in GVC-based products respond to previous health shocks? Lessons for COVID-19”, EUI RSCAS Working Paper, No 2020/68, Global Governance Programme 415.
18. Ernst & Young (2021), “How COVID-19 impacted supply chains and what comes next”, February.
19. ECB (2017), “China’s economic growth and rebalancing and the implications for the global and euro area economies”, Economic Bulletin, Issue 7, ECB.
20. Alessandria, G., Kaboski, J.P. and Midrigan, V. (2013), “Trade wedges, inventories, and international business cycles”, Journal of Monetary Economics, Vol. 60, No 1, pp. 1-20.
21. Novy, D. and Taylor, A.M. (2020), “Trade and Uncertainty”, The Review of Economics and Statistics, Vol. 102, No 4, pp. 749-765.
22. Alessandria, G., Kaboski, J.P. and Midrigan, V. (2011), “US Trade and Inventory Dynamics”, American Economic Review, Vol. 101, No 3, pp. 303-307.
23. Williamson, C. (2021), “Global manufacturing prices spike higher amid supply constraints, but demand pressures show signs of easing”, IHS Markit, 4 October.
24. Bradford, A. (2015), “The Brussels Effect”, Northwestern University Law Review, Vol. 107, No 1.
25. European Commission (2021), “Strategic dependencies and capacities”, Commission Staff Working Document, 5 May.
26. Specifically, the multipliers are estimated to be 1.1-1.5 for renewable energy investment and 0.5-0.6 for fossil fuel energy investment, depending on horizon and specification. See Batini, N., di Serio, M., Fragetta, M., Melina, G. and Waldron, A. (2021), “Building Back Better: How Big Are Green Spending Multipliers?”, IMF Working Papers, No 2021/087, International Monetary Fund, March.
27. Pfeiffer, P., Varga, J. and in ‘t Veld, J. (2021), “Quantifying Spillovers of Next Generation EU Investment”, European Economy Discussion Papers, No 144, European Commission, July
28. Lagarde, C. (2021), “Towards a green capital markets union for Europe”, speech at the European Commission’s high-level conference on the proposal for a Corporate Sustainability Reporting Directive, 6 May.
29. Lagarde, C. (2021), “Monetary policy during an atypical recovery”, speech at the ECB Forum on Central Banking “Beyond the pandemic: the future of monetary policy”, Frankfurt am Main, 28 September.
Compliments of the European Central Bank.
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October 14, 2021 | GENEVA |
United States Trade Representative Katherine Tai today delivered a speech an event hosted by the Graduate Institute’s Geneva Trade Platform about the World Trade Organization’s important role in the global economy, why it must adapt to the rapidly changing global economy, and how it can help unlock broad-based economic prosperity.
You can watch Ambassador Tai’s speech at https://www.youtube.com/watch?v=DaKSYxJEGNk.
Ambassador Tai’s remarks as prepared for delivery are below:
Good afternoon.  Thank you to Dmitry and Richard, the Geneva Trade Platform, and the Graduate Institute of International and Development Studies for hosting me today and putting together this event.
It is a pleasure to be back in Geneva.  I have looked forward to making this trip since becoming the United States Trade Representative in March, and I am grateful to be here with all of you today.
I spent a lot of time in this city earlier in my career representing the United States Government with pride before the World Trade Organization.
I appreciate the importance of the institution.  And I respect the dedicated professionals representing the 164 members, as well as the WTO’s institutional staff working on behalf of the membership.  I also want to thank Director-General Dr. Ngozi for leading this organization through a difficult and challenging year.
Let me begin by affirming the United States’ continued commitment to the WTO.
The Biden-Harris Administration believes that trade – and the WTO – can be a force for good that encourages a race to the top and addresses global challenges as they arise.
The Marrakesh Declaration and Agreement, on which the WTO is founded, begins with the recognition that trade should raise living standards, ensure full employment, pursue sustainable development, and protect and preserve the environment.
We believe that refocusing on these goals can help bring shared prosperity to all.
For some time, there has been a growing sense that the conversations in places like Geneva are not grounded in the lived experiences of working people.  For years, we have seen protests outside WTO ministerial conferences about issues like workers’ rights, job loss, environmental degradation, and climate change as tensions around globalization have increased.
We all know that trade is essential to a functioning global economy.  But we must ask ourselves: how do we improve trade rules to protect our planet and address widening inequality and increasing economic insecurity?
Today, I want to discuss the United States’ vision for how we can work together to make the WTO relevant to the needs of regular people.
We have an opportunity at the upcoming 12th ministerial conference – or MC12 – to demonstrate exactly that.
Throughout the pandemic, the WTO rules have kept global trade flowing and fostered transparency on measures taken by countries to respond to the crisis.  But many time-sensitive issues still require our attention.  We can use the upcoming ministerial to deliver results on achievable outcomes.
The pandemic has placed tremendous strain on peoples’ health and livelihoods around the world.  The WTO can show that it is capable of effectively addressing a global challenge like COVID-19, and helping the world build back better.
There are several trade and health proposals that should be able to achieve consensus in the next month and a half.
I announced in May that the United States supports text-based discussions on a waiver of intellectual property rights for COVID-19 vaccines.  The TRIPS Council discussions have not been easy, and Members are still divided on this issue.  The discussions make certain governments and stakeholders uncomfortable.  But we must confront our discomfort if we are going to prove that, during a pandemic, it is not business as usual in Geneva.
The United States is also working on a draft ministerial decision aimed at strengthening resiliency and preparedness through trade facilitation.  Our proposal would improve the sharing of information, experiences, and lessons learned from COVID-19 responses to help border agencies respond in future crises.
It is important that our work on trade and health does not end at MC12.  This pandemic will not be over in December, and it will not be the last public health crisis we encounter.  In the next six weeks, we also have an opportunity to conclude the two-decades-long fisheries subsidies negotiations and show that the WTO can promote sustainable development.
We want to continue working with Members to bridge existing gaps in the negotiations.
To this end, the United States is sharing options to respond to developing countries’ request for flexibilities.  We believe that any agreement must establish effective disciplines that promote sustainability.
It must also address the prevalence of forced labor on fishing vessels.  We call on all Members to support these goals.
I recognize that discussing these complex issues during a pandemic is hard.  Despite this challenge, we can reach meaningful outcomes and set ourselves up for candid and productive long-term conversations on reforming the WTO.
As I mentioned earlier, the reality of the institution today does not match the ambition of its goals.  Every trade minister I’ve heard from has expressed the view that the WTO needs reform.
The Organization has rightfully been accused of existing in a “bubble,” insulated from reality and slow to recognize global developments.  That must change.
We are used to talking to each other, a lot.  We need to start actually listening to each other.
We also must include new voices, find new approaches to problems, and move past the old paradigms we have been using for the last 25 years.
We need to look beyond simple dichotomies like liberalization vs. protectionism or developed vs. developing.  Let’s create shared solutions that increase economic security.
By working together and engaging differently, the WTO can be an organization that empowers workers, protects the environment, and promotes equitable development.
Our reform efforts can start with the monitoring function.  In committees, Members deliberate issues and monitor compliance with the agreements.  This important work is a unique and underappreciated asset of the WTO.
Increasingly, however, Members are not responding meaningfully to concerns with their trade measures.  The root of this problem is a lack of political will.  But committee procedures can be updated to improve monitoring work.
At MC12, Ministers can direct each committee to review and improve its rules.
It is also essential to bring vitality back to the WTO’s negotiating function.  We have not concluded a fully multilateral trade agreement since 2013.
A key stumbling block is doubt that negotiations lead to rules that benefit or apply to everyone. But we know that negotiations only succeed when there is real give and take.
We can successfully reform the negotiating pillar if we create a more flexible WTO, change the way we approach problems collectively, improve transparency and inclusiveness, and restore the deliberative function of the organization.
Over the past quarter century, WTO members have discovered that they can get around the hard part of diplomacy and negotiation by securing new rules through litigation.
Dispute settlement was never intended to supplant negotiations.  The reform of these two core WTO functions is intimately linked.
The objective of the dispute settlement system is to facilitate mutually agreed solutions between Members.  Over time, “dispute settlement” has become synonymous with litigation – litigation that is prolonged, expensive, and contentious.
Consider the history of this system.
It started as a quasi-diplomatic, quasi-legal proceeding for presenting arguments over differing interpretations of WTO rules.  A typical panel or Appellate Body report in the early days was 20 or 30 pages.  Twenty years later, reports for some of the largest cases have exceeded 1,000 pages.  They symbolize what the system has become: unwieldy and bureaucratic.
The United States is familiar with large and bitterly fought WTO cases.  Earlier this year, we negotiated frameworks with the European Union and the United Kingdom to settle the Large Civil Aircraft cases that started in 2004.
We invoked and exhausted every procedure available.  And along the way, we created strains and pressures that distorted the development of the dispute settlement system.
With the benefit of hindsight, we can now ask: is a system that requires 16 years to find a solution “fully functioning?”
This process is so complicated and expensive that it is out of reach for many – perhaps the majority – of Members.
Reforming dispute settlement is not about restoring the Appellate Body for its own sake, or going back to the way it used to be.
It is about revitalizing the agency of Members to secure acceptable resolutions.
A functioning dispute settlement system, however structured, would provide confidence that the system is fair.  Members would be more motivated to negotiate new rules.
Let’s not prejudge what a reformed system would look like. While we have already started working with some members, I want to hear from others about how we can move forward.
Reforming the three pillars of the WTO requires a commitment to transparency.  Strengthening transparency will improve our ability to monitor compliance, to negotiate rules, and to resolve our disputes.
I began these remarks with an affirmation of commitment.  I’d like to conclude with an affirmation of optimism.
I am optimistic that we can and will take advantage of this moment of reflection.
In reading over the Marrakesh Agreement’s opening lines, I was struck by the founding Members’ resolve to develop “a more viable and durable multilateral trading system.”
These words are just as relevant today as they were then. We still need to work together to achieve a more viable and durable multilateral trading system.
It is easy to get distracted by the areas where we may not see eye to eye.  But in conversations with my counterparts, I hear many more areas of agreement than disagreement.
We all recognize the importance of the WTO, and we all want it to succeed.
We understand the value of a forum where we can propose ideas to improve multilateral trade rules.  We should harness these efforts to promote a fairer, more inclusive global economy.
WTO Members are capable of forging consensus on difficult, complicated issues. It’s never been easy, but we’ve done it before.  And we can do it again.
Thank you.
The post USTR | Ambassador Katherine Tai’s Remarks As Prepared for Delivery on the World Trade Organization first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Statement by Christine Lagarde, President of the ECB, at the forty-fourth meeting of the International Monetary and Financial Committee | IMF Annual Meetings, 14 October 2021 |
Global economic activity has continued to recover since our previous meeting in April this year, thanks to further progress in vaccination campaigns and supportive economic policies. However, the pace of the recovery remains uneven across sectors and countries, and the spread of the more contagious Delta variant of the coronavirus (COVID-19), coupled with supply bottlenecks, is casting a shadow over the near-term growth prospects for the global economy.
The main challenge for policymakers continues to be steering the economy safely out of the crisis. It remains crucial that policy support is not withdrawn prematurely. On the fiscal side, support measures should be increasingly targeted. And on the monetary side, clear communication by major central banks is essential, also in view of the recent inflation developments. The policy mix should be accompanied by well-tailored structural reforms to enhance long-term growth and minimise scarring effects from the pandemic, along with action to accelerate the green and digital transitions.
Euro area developments and outlook
The rebound phase of the euro area economy is increasingly advanced, despite supply bottlenecks and continuing uncertainty about the pandemic. Euro area activity rebounded strongly in the second quarter of this year and looks set to also have been strong in the third quarter, supported by a marked recovery in domestic demand on the back of the success of vaccination campaigns and substantial monetary and fiscal policy support. While there is still uncertainty about how the pandemic will develop from here, we see the risks surrounding the euro area growth outlook as being broadly balanced over the medium term. The downside risks are related both to the pandemic and supply bottlenecks becoming more persistent than is currently expected. However, upside risks could also materialise from higher confidence effects and further spending by consumers.
Inflation has increased markedly since the beginning of this year and we expect it to rise further this autumn. We continue to view this upswing as being largely driven by temporary factors, especially the strong recovery in oil prices from the sharp drop in spring 2020, the reversal of the temporary VAT reduction in Germany, and cost pressures arising from temporary shortages of materials and equipment. The impact of these factors should fade out of annual rates of price changes in the course of next year, dampening annual inflation. Our baseline scenario foresees inflation gradually increasing thereafter, but remaining below our 2% target over the medium term. Inflation could prove weaker than foreseen if a renewed tightening of pandemic-related restrictions were to affect economic activity. On the other hand, price pressures could become more persistent if supply bottlenecks last longer or wages rise more than is currently anticipated. So far, there is no evidence of significant second-round effects through wages and inflation expectations in the euro area remain anchored, but we continue to monitor risks to the inflation outlook carefully.
Monetary policy
The ECB’s Governing Council concluded its review of our monetary policy strategy in July. As part of the review, a symmetric 2% inflation target over the medium term was adopted. Our new strategy also recognises the importance of taking into account the effective lower bound on nominal interest rates, which can require especially forceful or persistent monetary policy measures.
In support of this inflation target and in line with our monetary policy strategy, the Governing Council revised its forward guidance on the key ECB interest rates. We expect them to remain at their present or lower levels until we see inflation reaching 2% well ahead of the end of our projection horizon and durably for the rest of the projection horizon, and we judge that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term.
Preserving favourable financing conditions over the pandemic period is essential to reduce uncertainty and bolster confidence, thereby underpinning economic activity and safeguarding medium-term price stability. The Governing Council regularly recalibrates the net purchases under the pandemic emergency purchase programme (PEPP) based on a joint assessment of financing conditions and the inflation outlook. At its meeting in September, the Governing Council assessed that the prevailing level of financing conditions, in conjunction with the slight improvement in the medium-term inflation outlook, allow favourable financing conditions to be maintained with a moderately lower pace of net asset purchases under the PEPP than in the second and third quarters of this year.
The Governing Council also confirmed in September its other measures, namely the level of the key ECB interest rates, the forward guidance on their likely future evolution, the purchases under the asset purchase programme, the reinvestment policies and the longer-term refinancing operations. It stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term.
Europe’s response to the coronavirus shock
During the COVID-19 crisis, fiscal policy support has been critically important in containing the economic fallout, with fiscal and monetary policy reinforcing each other. Going forward, ambitious, targeted and coordinated fiscal policy should continue to complement monetary policy. As the recovery solidifies, fiscal measures need to become more targeted and the quality of public finances should be improved. Moreover, fiscal measures should go hand in hand with structural reforms in order to lift long-term growth. The Next Generation EU programme is of utmost importance here. By linking public investment and growth-enhancing reforms, it will help ensure a stronger and more uniform recovery across the euro area and accelerate the green and digital transitions.
Euro area banking sector developments and financial stability issues
The improving economic environment has contributed to a decline in near-term financial stability risks. Continued fiscal support helped the corporate sector recover from the pandemic, although the situation continues to vary across industries and firms. With corporate insolvencies remaining subdued, bank loan performance turned out to be more resilient than initially feared, although it is still too early to assess the full impact of the pandemic. Positive asset quality and financial market developments supported the return of bank profitability to pre-pandemic levels, and the ECB’s stress test results published in July showed that the euro area banking system would be resilient to adverse economic developments.
Amid reduced uncertainty, the Supervisory Board of the ECB decided not to extend its system-wide recommendation on banks’ capital distributions. Instead, it returned to the previous supervisory practice of discussing capital trajectories and dividend or share buy-back plans with each bank in the context of the normal supervisory cycle. The ECB reminded banks to remain prudent when deciding on distributions and not to underestimate the risk that additional losses may later have an impact on their capital trajectories. As the economic recovery takes hold, financial vulnerabilities associated with an upswing are building up. So targeted macroprudential measures for residential real estate markets and the activation of macroprudential capital buffers should be considered in some euro area countries to build resilience in a timely manner.
In the medium term, after the COVID-19 crisis it will be important to look at the capital framework for banks holistically, with a view to simplifying it and removing potential obstacles to its effectiveness. In particular, the functioning of capital and liquidity buffers warrants further consideration, and an assessment needs to be made of whether there is sufficient releasable capital in place to address future systemic shocks.
Specific attention may need to be paid to the non-bank financial sector, where the COVID-19 market turmoil revealed significant vulnerabilities. Taking into account its growing role in financing the real economy and the interlinkages with the rest of the financial system, the sector needs to be made more resilient through regulatory reforms and the further development of a macroprudential approach.
Longer-term financial stability vulnerabilities have been also building up. The pandemic has left a legacy of significantly higher debt in non-financial sectors. Residential real estate prices have continued to rise sharply in many euro area countries, underpinned by strong lending dynamics, which raises concerns of potential overvaluation. Vulnerabilities in financial markets have also increased amid strong risk exposure and deteriorating liquidity at non-bank financial institutions. And in the banking sector, long-standing challenges associated with weak profitability and overcapacity may limit some banks’ ability to invest to stay competitive in a more digitalised future.
International crisis response
Global cooperation has been instrumental in our response to the pandemic so far, and this cooperation should continue. Preserving trade openness and ensuring universal access to vaccines and treatments remains of key importance for a durable global economic recovery. Support for the most vulnerable countries needs to remain high on the international agenda, also in view of the divergence in vaccination rates and limited policy space in emerging markets and low-income countries. In this context, the ECB welcomes the crisis response measures taken by the IMF as well as the G20 Debt Service Suspension Initiative (DSSI) and the Common Framework for debt treatments beyond the DSSI. This support was further strengthened in August by the general allocation by the IMF of special drawing rights (SDRs) of a historical magnitude, which is a strong signal of constructive multilateral cooperation helping the global recovery. We call for additional IMF members to sign voluntary SDR trading arrangements to facilitate SDR exchanges and ensure the burden is adequately shared across a wider set of countries.
We take note of the discussions on channelling SDRs to vulnerable countries. National central banks of EU Member States may only lend their SDRs to the IMF if this is compatible with the monetary financing prohibition included in the Treaty on the Functioning of the European Union. Retaining the reserve asset status of the resulting claims is paramount. This requires that the claims remain highly liquid and of high credit quality. The direct financing of multilateral development banks by national central banks of EU Member States through SDR channelling is not compatible with the monetary financing prohibition.
Bolstering the recovery to transform the global economy
This pandemic is a prime opportunity for us to build a more resilient future and make progress towards the global economy we want to see, namely a greener, more digital and more inclusive one. We welcome the plans to further integrate climate change-related issues into IMF surveillance. At the ECB, we have recently established a climate change centre to help us harness internal expertise and shape our climate agenda in line with our mandate. Reflections on climate change and environmental sustainability were central to our recent monetary policy strategy review, as we examined how the risks posed by climate change feed into our monetary policy framework. The resulting climate action plan we announced in July presents a comprehensive roadmap to step up our involvement in climate change-related matters, in line with our obligations under the EU treaties.
The ECB has already taken concrete steps to strengthen the role of climate risk in both financial stability monitoring and banking supervision. The ECB recently published the methodology and results of our economy-wide climate stress test, showing that there are clear benefits for both banks and companies if they act early and ensure an orderly transition. The exercise will also be used to inform the 2022 supervisory climate stress test that will be conducted to test banks’ preparedness to assess climate risks. ECB Banking Supervision has also asked banks to conduct self-assessments in the light of the ECB guide on climate-related and environmental risks and to draw up action plans. The preliminary results were published in August and show that banks have made some progress in adapting their practices, but they are still moving too slowly. Next year, ECB Banking Supervision will conduct a full supervisory review of banks’ risk management and disclosure practices.
As regards the digital economy, the ECB will continue to contribute to the G20 initiative to enhance cross-border payments to make them faster, cheaper and more inclusive, and to address the opportunities and challenges of the digitalisation of finance. At the ECB, we have launched the investigation phase of a digital euro project that will address key issues regarding the potential design and distribution of a digital euro, which would be a complement to cash, not a replacement for it. International cooperation on digital currencies will remain essential in the period ahead.
Compliments of the European Central Bank.
The post ECB | IMFC Statement by Christine Lagarde first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The Commission adopted today a Communication on Energy Prices, to tackle the exceptional rise in global energy prices, which is projected to last through the winter, and help Europe’s people and businesses. The Communication includes a “toolbox” that the EU and its Member States can use to address the immediate impact of current prices increases, and further strengthen resilience against future shocks. Short-term national measures include emergency income support to households, state aid for companies, and targeted tax reductions. The Commission will also support investments in renewable energy and energy efficiency; examine possible measures on energy storage and purchasing of gas reserves; and assess the current electricity market design.
Presenting the toolbox, Energy Commissioner Kadri Simson said: “Rising global energy prices are a serious concern for the EU. As we emerge from the pandemic and begin our economic recovery, it is important to protect vulnerable consumers and support European companies. The Commission is helping Member States to take immediate measures to reduce the impact on households and businesses this winter. At the same time, we identify other medium-term measures to ensure that our energy system is more resilient and more flexible to withstand any future volatility throughout the transition. The current situation is exceptional, and the internal energy market has served us well for the past 20 years. But we need to be sure that it continues to do so in the future, delivering on the European Green Deal, boosting our energy independence and meeting our climate goals.“
A toolbox of short- and medium-term measures
The current price spike requires a rapid and coordinated response. The existing legal framework enables the EU and its Member States to take action to address the immediate impacts on consumers and businesses.
Priority should be given to targeted measures that can rapidly mitigate the impact of price rises for vulnerable consumers and small businesses. These measures should be easily adjustable in the Spring, when the situation is expected to stabilise. Our long-term transition and investments in cleaner energy sources should not be disrupted.
Immediate measures to protect consumers and businesses:

Provide emergency income support for energy-poor consumers, for example through vouchers or partial bill payments, which can be supported with EU ETS revenues;
Authorise temporary deferrals of bill payments;
Put in place safeguards to avoid disconnections from the grid;
Provide temporary, targeted reductions in taxation rates for vulnerable households;
Provide aid to companies or industries, in line with EU state aid rules;
Enhance international energy outreach to ensure the transparency, liquidity and flexibility of international markets;
Investigate possible anti-competitive behaviour in the energy market and ask the European Securities and Markets Authority (ESMA) to further enhance monitoring of developments in the carbon market;
Facilitate a wider access to renewable power purchase agreements and support them via flanking measures.

The clean energy transition is the best insurance against price shocks in the future, and needs to be accelerated. The EU will continue to develop an efficient energy system with high share of renewable energy. While cheaper renewables play an increasing role in supplying the electricity grid and setting the price, other energy sources, including gas, are still required in times of higher demand. Under the current market design gas still sets the overall electricity price when it is deployed as all producers receive the same price for the same product when it enters the grid – electricity. There is general consensus that the current marginal pricing model is the most efficient one, but further analysis is warranted. The crisis has also drawn attention to the importance of storage for the functioning of the EU gas market. The EU currently has storage capacity for more than 20% of its annual gas use, but not all Member States have storage facilities and their use and obligations to maintain them vary.
Medium-term measures for a decarbonised and resilient energy system:

Step up investments in renewables, renovations and energy efficiency and speed up renewables auctions and permitting processes;
Develop energy storage capacity, to support the evolving renewables share, including batteries and hydrogen;
Ask European energy regulators (ACER) to study the benefits and drawbacks of the existing electricity market design and propose recommendations to the Commission where relevant;
Consider revising the security of supply regulation to ensure a better use and functioning of gas storage in Europe;
Explore the potential benefits of voluntary joint procurement by Member States of gas stocks;
Set up new cross-border regional gas risk groups to analyse risks and advise Member States on the design of their national preventive and emergency action plans;
Boost the role of consumers in the energy market, by empowering them to choose and change suppliers, generate their own electricity, and join energy communities.

The measures set out in the toolbox will help to provide a timely response to the current energy price spikes, which are the consequence of an exceptional global situation. They will also contribute to an affordable, just and sustainable energy transition for Europe, and greater energy independence. Investments in renewable energy and energy efficiency will not only reduce dependence on imported fossil fuels, but also provide more affordable wholesale energy prices that are more resilient to global supply constraints. The clean energy transition is the best insurance against price shocks like this in the in the future, and needs to be accelerated, also for the sake of the climate.
Background
The EU, like many other regions in the world, is currently experiencing a sharp spike in energy prices. This is principally driven by increased global demand for energy, and in particular gas, as the economic recovery after the height of the COVID-19 pandemic gathers speed. The European carbon price has also risen sharply in 2021, but at a lesser rate than gas prices. The effect of the gas price increase on the electricity price is nine times larger than the impact of the carbon price increase.
The Commission has been consulting widely on the appropriate response to the current situation, and has participated in debates on this issue with Members of the European Parliament and Ministers in the Council of the European Union, while also reaching out to industry and to international energy suppliers. Several Member States have already announced national measures to mitigate price rises, but others are looking to the Commission for guidance on what steps they can take. Some international partners have already indicated plans to increase their energy deliveries to Europe.
The toolbox presented today allows for a coordinated response to protect those most at risk. It is carefully designed to tackle the short-term needs of bringing down energy costs for households and businesses, without harming the EU internal energy market or the green transition in the medium-term.
Next Steps
Commissioner Simson will present the Communication and toolbox to Members of the European Parliament on Thursday 14 October and to Energy Ministers on 26 October. European Leaders are then due to discuss energy prices at the upcoming European Council on 21-22 October. This Communication is the Commission’s contribution to the continued debate among EU policy makers. The Commission will continue its exchanges with national administrations, industry, consumer groups and international partners on this important topic, and stands ready to respond to any additional requests from Member States.
Compliments of the European Commission.
The post Energy prices: EU Commission presents a toolbox of measures to tackle exceptional situation and its impacts first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

1. Why has the Commission adopted a Communication on Energy Prices?
The European Union, like many other regions in the world, is currently facing a sharp spike in energy prices. This is a serious concern for citizens, businesses, the European Commission and governments all over the EU.
Today’s spike is principally driven by increased global demand for energy, in particular gas, linked to the global economic recovery. While energy price fluctuations have occurred in the past, the current situation is exceptional as European households and companies face the prospect of higher energy bills at a time when many have been hit by loss of income due to the pandemic. This could weigh on Europe’s recovery and its fairness and inclusiveness, and exacerbate energy poverty. It also risks undermining confidence and support in the clean energy transition which is required not just to avert disastrous climate change but also to reduce the EU’s vulnerability to fossil fuel price volatility.
The European Commission aims to help and support Member States in addressing the negative impact on households and businesses. Having listened to Member States, the European Parliament, industry and consumers, and international partners, it has prepared this Communication to enact and support appropriate measures to mitigate the impact of the current energy price rises.
2. How long is the current situation expected to last?
Market expectations on energy commodities indicate that the current price increases are likely to be temporary. Wholesale gas prices are likely to remain high over the winter months and fall in the Spring, when the situation is expected to stabilise. The prices would remain, however, higher than the average of the past years.
In the longer term, greater investment in renewables, energy efficiency, buildings and smarter energy systems in Europe will increase the EU’s energy independence from imported fossil fuels and contribute to lower wholesale prices. However, in the medium term, new adjustments of supply and demand could occur and further episodes of price volatility on wholesale markets cannot be ruled out for a variety of geopolitical, technological and economic reasons.
3. Does the Commission expect EU Member States to run out of gas this winter?
While energy supply is not at immediate risk, security of supply and gas storage levels need continuous monitoring. Current EU gas storage levels are slightly above 75%. This is below the 90% average at this time in the last 10 years, but storage levels have been steadily rising since the summer.
Together with the EU’s experts group on gas security of supply (“Gas Coordination Group”) and the European Network of Transmission System Operators for Gas (ENTSO-G), the Commission is closely monitoring the security of supply situation, including the level of gas storage and imports. As foreseen by the EU rules, ENTSO-G published its “Winter Outlook” on 12 October to assess the capacity of the gas network to cope with possible problems during the next winter. The outlook finds that the European gas infrastructure offers sufficient flexibility to the market across the winter.
4. What measures is the Commission proposing to tackle the current price spike?
The current price spike requires a rapid and coordinated response. The existing legal framework enables the EU and its Member States to take action to address the effects of sudden price fluctuations. The immediate response should prioritise tailored measures that can rapidly mitigate the effects on vulnerable groups, can easily be adjusted when the situation improves, and avoid interfering with market dynamics or dampening incentives for the transition to a decarbonised economy. In the medium term, the policy response should focus on making the EU more efficient in the use of energy, less dependent on fossil fuels and more resilient to energy price spikes, while providing affordable and clean energy to end-users.
The toolbox presented as part of this Communication allows a co-ordinated approach to protect those most at risk. It is carefully calibrated to meet the above goals.
Immediate measures to protect consumers and businesses:

Provide emergency income support for energy-poor consumers, for example through vouchers or partial bill payments, which can be supported with EU ETS revenues;
Authorise temporary deferrals of bill payments;
Put in place safeguards to avoid disconnections from the grid;
Provide temporary, targeted reductions in taxation rates for vulnerable households;
Provide aid to companies or industries, in line with EU state aid rules;
Enhance international energy outreach to ensure the transparency, liquidity and flexibility of international markets;
Investigate possible anti-competitive behaviour in the energy market and ask European Securities and Markets Authority (ESMA) to further enhance monitoring of developments in the carbon market;
Facilitate a wider access to renewable power purchase agreements and support them via flanking measures. 

Medium-term measures for a decarbonised and resilient energy system:

Step up investments in renewables, renovations and energy efficiency and speed up renewables auctions and permitting processes;
Develop energy storage capacity, to support the evolving renewables share, including batteries and hydrogen;
Ask European energy regulators (ACER) to study the benefits and drawbacks of the existing electricity market design and propose recommendations to the Commission where relevant;
Consider revising the security of supply regulation to ensure a better use and functioning of gas storage in Europe;
Explore the potential benefits of voluntary joint procurement by Member States of gas stocks;
Set up new cross-border regional gas risk groups to analyse risks and advise Member States on the design of their national preventive and emergency action plans;
Boost the role of consumers in the energy market, by empowering them to choose and change suppliers, generate their own electricity, and join energy communities;
Adopt a rule book for cybersecurity for electricity;
Propose, by December 2021, a Council Recommendation providing further guidance to Member States on how best to address the social and labour aspects of the green transition. 

5. How does the EU internal energy market work, and is it the cause of the current high prices?
Before the internal energy market, the European energy system was characterised by energy monopolies and prices set by regulators, leading to an expensive, inefficient system that did not allow customers to benefit from competition between energy companies. The internal energy market has moved the EU away from this situation. The current market design allows all EU citizens to choose between different electricity and gas suppliers and provides clear price signals to incentivise investments in clean technologies. By connecting 27 national energy markets, the integrated EU energy market has brought costs down, saves millions of tons of CO2, and enhances security of supply. The internal market also facilitates consumer empowerment – including through joining energy communities or producing their own electricity.
The wholesale electricity market is where the producers of energy (power plants) sell electricity, and energy retailers buy it to deliver to their clients. It is a so-called “marginal” pricing system, which works by putting on the market power plants by the order of their price, starting with the least expensive and going until the last plant is dispatched that is needed to meet consumers’ demand. It is this last plant that sets the overall price, and which is often (in the hours of higher consumer demand) a gas or coal power plant. All electricity producers are paid the same price for the same product – electricity. There is general consensus that the marginal model is the most efficient for liberalised electricity markets because generators have an interest not to bid higher than their actual operating costs. Other systems lead to more inefficient outcomes and favour speculation, to the detriment of consumers.
The market also works across borders through a process known as market coupling, which ensures efficient markets where electricity flows from areas with lower electricity prices to those with higher prices. This keeps electricity costs down for consumers throughout the EU and means that Member States can rely on supplies from their neighbours when needed, supporting security of electricity supply.
Electricity producers and suppliers also trade on forward markets. These forward prices reflect periods of high and low demand and allow both producers and suppliers to reduce the risks of short-term movements in energy prices. Effective forward markets are also a key part of the internal market.
The wholesale electricity price is one of the components of the final electricity bill paid by consumers. The final electricity bill also reflects the costs of transporting and distributing it (network costs) and taxes and levies. On average, each of the three electricity bill components makes up one third of the total bill, with some variation between Member States.
With the current wholesale electricity price being driven up by global gas prices, some have questioned whether this market model is still appropriate. As the price spikes are driven by global conditions, it is unlikely that alternative market models would produce better outcomes. Nevertheless, the Commission is now tasking ACER (the agency of European energy regulators) to look into the benefits and drawbacks of the current market model, and its implementation by Member States, to ensure that the market design continues to serve our needs.
6. Are external energy suppliers to blame for the current situation?
The current electricity price increase is primarily due to global demand for gas, which is soaring as the economic recovery is picking up. This rising demand has not yet been matched by increasing supply, and the effects are felt not only in the EU but also in other regions of the world.
Given the global nature of the current price surge, international cooperation on the supply, transport and consumption of natural gas can help in keeping natural gas prices in check. The Commission is in dialogue with the main natural gas producing and consuming countries to facilitate increased natural gas trade. This dialogue with our international partners aims at enhancing the liquidity and flexibility of the international gas market in order to ensure sufficient and competitive natural gas supplies.
Lower-than-expected gas volumes have been observed coming from Russia, tightening the market as the heating season approaches. Though it has fulfilled its long-term contracts with its European counterparts, Gazprom has offered little or no extra capacity to ease pressure on the EU gas market. Delayed infrastructure maintenance during the pandemic has also constrained gas supply from Russia and other suppliers.
7. Is the EU’s climate ambition or carbon pricing responsible for the rise in prices?
The current situation is not the result of the EU’s climate ambition. Renewable electricity prices continue to be lower and more stable than fossil fuels. Investments in clean domestic energy production and greater energy efficiency reduce the EU’s energy import bill and dependence on non-EU suppliers.
The effect of the gas price increase on the electricity price is nine times bigger than the effect of the carbon price increase. From January 2021 to September 2021, the EU ETS price has increased by about €30/tCO2, which translates into a cost increase of about €10/MWh for electricity produced from gas (assuming a 50% efficiency) and about €25/MWh for electricity produced from coal (assuming a 40% efficiency). This is clearly outweighed by the observed increase of the gas price of about €45/MWh over the same period, which translates into additional electricity production cost of about €90/MWh.
The carbon price in the EU ETS rose primarily because of higher demand for allowances due to more robust economic activity following COVID-19 and expectations linked to the EU’s 2030 climate ambition, but not only. High gas prices themselves contribute to an increasing carbon price since they lead to an increased use of coal for power generation and consequently trigger more demand for emission allowances.
Emission allowances are classified as financial instruments under the revised Directive on Markets in Financial Instruments, to ensure a safe and efficient trading environment and protect the EU carbon market against market abuse and other types of misconduct. As such, trading in emission allowances is already subject to a robust oversight regime.
For more information

Press release

Compliments of the European Commission.
The post Questions and Answers: EU Commission Communication on Energy Prices first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Christine Lagarde, President of the ECB, at the Finance at Countdown event |
The urgent need to transition to carbon neutral
We have seen this summer what climate change can do in terms of disasters. We had floods in Europe, heatwaves in North America and elsewhere; there have been ample examples this year of what the world may look like in the future. And it might be worse. The prominence of climate change in the public debate shows that people are now sitting up and taking notice. To quote Honoré de Balzac, “It is easy to sit up and take notice. What is difficult is getting up and taking action”. This is now what we are seeing, and I take the view that everybody must take action, whatever their role, mission and position.
What we did at the ECB is conduct an economy-wide climate stress test, which provides evidence that there is a need for urgent action.[1] We conducted an exercise that combined the financial information and climate exposures of four million companies and some 1,600 consolidated euro area banks, and we mapped this to data in order to understand, on the basis of the scenarios of the Network for Greening the Financial System, what the climate change consequences could be. Let me give you one number: the default probabilities of the corporate loan portfolios of the most vulnerable banks could increase by 30% in a scenario of no further climate policies. And we also found out that the risks would be concentrated in certain areas and in certain banks.
An orderly transition to carbon neutral entails greater costs in the near term, but these are far outweighed over the longer term by lower physical risks and higher output. It is a no-brainer option. We need to take action. Even a disorderly transition, where policies are enacted in a haphazard way or before green technologies are fully mature, is still less costly than sitting down and watching and there being no transition at all. The long-run benefits from acting early on climate are clear.
In that context, I wanted to focus on three particular elements which are critically important and in which the financial sector can provide serious input: by disseminating information, accelerating innovation and bolstering adaptation.
Information
Financial markets have certainly started to grasp the opportunities of the green transition. Since 2015, assets under management of ESG funds[2] have almost tripled and the outstanding amount of green bonds issued by euro area residents has increased tenfold[3]. Yet this is just a fraction of the finance needed to meet net zero ambitions.
One of the key strengths of financial markets is their ability to absorb, analyse and disseminate information in a way that far exceeds what individuals can achieve by themselves. That is a role that can greatly benefit the green transition. Yet for sustainable finance itself to be sustainable, it needs to be trustworthy. That means taking active steps to root out greenwashing, developing standards and labels for financial products and ensuring that disclosures are comprehensive, internationally comparable and auditable. In addition, disclosures should be complemented by forward-looking measures that assess alignment with climate goals and net zero commitments. It is the future path for climate impact that matters most.
Innovation
By disseminating information, the financial sector can help steer credit to where it is needed to advance the transition. And one of the most vital places is innovation. Technological progress is necessary to further decouple economic growth from carbon usage, reduce emissions and develop working technologies for carbon capture and storage.
There are sectors where green innovation is beginning to have an impact. Solar power is now consistently a cheaper source of power than new coal or gas plants and in fact has become one of the cheapest forms of electricity generation the world has ever seen.[4] Renewables already generate more electricity worldwide than natural gas, and are set to surpass coal in the next couple of years.[5]
Yet there remain challenges for renewable energy to overcome, including the ability to flexibly change output on demand, or otherwise to efficiently store at scale. And there are several carbon-intensive sectors, such as metallurgy, cement and agriculture, for which carbon-zero technology is not yet mature and where much more and further innovation is needed.
While the rate of new technologies for climate change mitigation is increasing, Europe still has work to do. Bridging that gap and further accelerating innovation involves focusing on the entire structure of the financial system. Evidence produced by research at the ECB suggests that equity investments may play a beneficial role in boosting green innovation[6], and funding for venture capital is another area where the euro area needs to pick up the pace. That is why completing the capital markets union, as financial as it may sound, is going to contribute to this innovation that is needed and for which financing is indispensable.
Adaptation
The third contribution that finance can make is to bolster the process of adaptation to climate. Even if we manage to limit global warming to the goals of the Paris Agreement, physical risks are still set to increase.[7] For example, extreme sea level events that used to occur once in a hundred years could become annual events by the end of this century. While every effort needs to be made to contain that rise by transitioning to carbon neutral, greater attention also needs to be placed on mitigating and adapting to climate.
Banks can help ensure economic activity takes place in less exposed locations by incorporating exposures to physical risks, such as floods and droughts, into lending decisions. But banks are not the only players. Insurance companies can also play a key role by mitigating the negative impacts of climate-related catastrophes. Recent joint work between the European Central Bank and the European Insurance and Occupational Pensions Authority, which brings together all the insurance actors, finds that economic activity is less affected by catastrophes when a greater share of damages are covered by insurance.[8] As such events become more frequent due to climate change, the value to society of insurance protection increases.
Yet, when you look at the protection around Europe, there is a significant protection gap: roughly speaking, only a third of the damage from catastrophes in Europe is currently insured. For climate-related catastrophes such as droughts, heatwaves and wildfires, the coverage drops to just about 7%. And there are reasons to suspect that coverage may fall even further. There are widespread reports of households and businesses in California and Australia struggling to renew insurance in the wake of devastating wildfires.[9] So further consideration is needed at national and European levels to ensure the right constellation of risk-pooling is in place to ensure continued coverage. We need to adapt.
Conclusion
Combating climate change requires action from all parts of society. I have mentioned three important ways through which the financial sector can help protect against climate change: through information, innovation and adaptation. The ECB will also contribute within its mandate. Climate considerations played an important part in our recently concluded strategy review.[10] And climate change is definitely part of our considerations for setting monetary policy and implementing it. The Governing Council has decided on a comprehensive action plan to further incorporate climate change considerations throughout our policy framework.[11]
We need to not just sit up but take action. All of us, including the financial sector, including central banks, can play their part. And they will.
Compliments of the European Central Bank.
The post ECB | The contribution of finance to combating climate change first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Options to magnify the impact of the Special Drawing Rights Allocation through voluntary channeling.
One of the most significant measures introduced by the International Monetary Fund in response to the global pandemic was the recent historic allocation of Special Drawing Rights, or SDRs. The challenge now is to ensure this distribution is redirected—or channeled—to where the need is greatest. To that end, we are exploring three options to enable more resilient and sustainable economic futures for the poorest and most vulnerable countries.

‘The task now is to redirect the SDRs to their greatest effect.’

The IMF’s response to COVID-19
Since the onset of the COVID-19 pandemic, the IMF has lent nearly $117 billion to 87 countries. We reshaped our lending policies to enhance our support to members, and recently reformed our concessional lending policy framework under the Poverty Reduction and Growth Trust (PRGT) to expand our lending to low-income countries.
We have also joined forces with the other international organizations to help accelerate the global vaccine rollout, and improve access to non-vaccine therapeutics and diagnostics.
But we didn’t stop there. The historic SDR allocation, back in August, equivalent to $650 billion, boosted liquidity and reserves around the world. About $275 billion of that $650 billion went to emerging and developing countries, and low-income countries received about $21 billion, equivalent to as much as 6 percent of GDP in some cases.
Putting SDRs to work
The task now is to redirect the SDRs to their greatest effect. The International Monetary and Financial Committee, and leaders of the G7 and G20 called on the IMF to explore ways in which countries with strong external positions could voluntarily channel some of their SDRs to poorer and more vulnerable countries.
Against this backdrop, we are exploring three (non-mutually exclusive) options:
Increase the size of the PRGT on which we are already making good progress. Pledges of $24 billion in loan resources have already been received in the last 16 months, including $15 billion from existing SDRs.
But the journey is far from complete. Additional resources of around $28–50 billion are still needed to allow the IMF to better respond to the financing needs of our low-income members over the coming years. We also need grant contributions of SDR 2.3 billion for the subsidy account to continue lending through the PRGT at zero interest rates; fundraising efforts are ongoing.
Create a new IMF-administered Resilience and Sustainability Trust, or RST.
Channel SDRs to other prescribed SDR holders, comprising 14 organizations including the World Bank, some regional central banks, and multilateral development banks.
A new trust with a long-term purpose
Even as we fight this current pandemic, we cannot lose sight of other long-term challenges that countries face as we rebuild the global economy. We are experiencing a changing climate, increasing inequality, changing demographics, and a breakneck pace of digitalization, to name just a few.
These long-term structural challenges put vulnerable countries at risk of falling further behind. Often, these challenges go unaddressed because of financing and capacity constraints. Not implementing these reforms, however, puts at risk external, social, and economic stability.
The proposed RST would support policy reforms to help build economic resilience and sustainability, especially in low-income countries and small states, as well as vulnerable middle-income countries. It would aim to support access to more affordable financing by lending at cheaper rates and with longer maturities than the IMF’s traditional lending terms. Consistent with the IMF’s mandate, this financing would help be focused on balance of payments stability.
The purposes of the funding would be reached by consensus across the membership. For example, climate might be one, but there are several other worthy global public policy goals that may need to be considered such as pandemic preparedness.
For most creditors, channeled SDRs have to maintain their reserve asset status. This requires ensuring that the trust provides liquidity, and the ability of creditors to encash quickly should they have a balance of payments need, and finally, adequate credit risk protection for the donors.
We also propose developing a multi-layered credit risk protection framework that includes policy safeguards, financial buffers, and a diversified creditor and borrower base that would ensure that loans to the trust are sufficiently safe and liquid so that channeled SDRs can maintain their reserve asset status. In addition, since RST lending would likely “top up” a regular IMF-supported program, it would benefit from the accompanying strong policy safeguards, to ensure macroeconomic stability.
We are also working on several additional design features such as size of the trust, eligibility perimeter, conditionality, lending terms, and the financial architecture. We continue to engage with our membership and other stakeholders to ensure full buy-in, while working closely with other international financial institutions, especially the World Bank, to ensure that the RST is a part of a broader strategy for international country assistance, leveraging the respective mandates of each institution. We believe the membership will benefit from such an approach.
Getting across the finish line
The world has an historic opportunity to use the recently allocated $650 billion SDRs to help poorer countries in a way that promotes the global public policy agenda.
Building consensus is never easy; it takes time. Creative solutions are needed to bridge differences. We are confident that with the international community’s support, the RST is one such innovative solution which could become operational in just over a year. We are hopeful of further progress at the upcoming Annual Meetings. The pandemic has shown us the importance of working collectively. And together, we can tackle the greatest challenges we now face for a better future for everyone.
Authors:

Ceyla Pazarbasioglu is Director of the Strategy, Policy, and Review Department (SPR) of the IMF

Uma Ramakrishnan is currently Deputy Director of the IMF’s Strategy, Policy and Review Department

Compliments of the IMF.
The post IMF | Sharing the Recovery: SDR Channeling and a New Trust first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, Executive Vice-President Frans Timmermans, who leads the EU’s international negotiations on climate, and Special Presidential Envoy for Climate John Kerry hosted a virtual ministerial meeting to mobilise further support for the Global Methane Pledge. The co-convenors and Executive Director of the United Nations Environment Programme Inger Andersen affirmed the critical importance of rapidly reducing methane emissions as the single most effective strategy to reduce near-term global warming and keep the goal of limiting warming to 1.5 degrees Celsius within reach.
Following initial announcement of support by Argentina, Ghana, Indonesia, Iraq, Italy, Mexico and the United Kingdom at the MEF, 24 new countries announced today that they will join the Global Methane Pledge. The new supporters are Canada, Central African Republic, Congo-Brazzaville, Costa Rica, Cote d’Ivoire, Democratic Republic of the Congo, Federated States of Micronesia, France, Germany, Guatemala, Guinea, Israel, Japan, Jordan, Kyrgyz Republic, Liberia, Malta, Morocco, Nigeria, Pakistan, Philippines, Rwanda, Sweden, and Togo. With these commitments, 9 of the world’s top 20 methane emitters are now participating in the Pledge, representing about 30% of global methane emissions and 60% of the global economy.
In addition, more than 20 philanthropies announced combined commitments of over $200 million to support implementation of the Global Methane Pledge.
Background
At the Major Economies Forum on Energy and Climate (MEF) on September 17, 2021, President Ursula von der Leyen and President Joe Biden announced, with support from seven additional countries, the Global Methane Pledge—an initiative to be launched at the World Leaders Summit at the 26th UN Climate Change Conference (COP26) this November in Glasgow, United Kingdom.
Methane is a potent greenhouse gas and, according to the latest report by the Intergovernmental Panel on Climate Change, accounts for about half of the 1.0 degree Celsius net rise in global average temperature since the pre-industrial era, making methane action an essential complement of energy sector decarbonisation.
Countries joining the Global Methane Pledge commit to a collective goal of reducing global methane emissions by at least 30 percent from 2020 levels by 2030 and moving towards using highest tier IPCC good practice inventory methodologies to quantify methane emissions, with a particular focus on high emission sources. Successful implementation of the Pledge would reduce warming by at least 0.2 degrees Celsius by 2050.
The European Union, the United States, and other early supporters will continue to enlist additional countries to join the Global Methane Pledge, ahead of its formal launch at COP26.
Compliments of the European Commission.
The post Joint EU-US Statement on the Global Methane Pledge first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Vice Chair for Supervision Randal K. Quarles at The Structured Finance Association Conference, Las Vegas, Nevada |
Now that business travel has started to pick back up as we emerge from the COVID event, a prosaic but insistent problem has reappeared: what to read on a long plane flight. Like most of you, I try to get some work done—but, also like most of you, out of an amalgam of security concerns and indolence, I often don’t succeed. Something must improve the hours, but Kant is a little heavy, P.G. Wodehouse a little light, and T.S. Eliot looks like you’re just showing off. So, over the last few weeks, I’ve been re-reading Joan Didion while making my way from point A to point B: Slouching Toward Bethlehem, The White Album, and Where I Was From. As it turns out, Joan Didion is a particularly apt author to be reading on the way to this conference—not because the conference is being held in Las Vegas, although her four-page summation of this “most extreme and allegorical of American settlements” is a classic. But rather, because a nearly constant theme of her writing is change: how hard it is to recognize that things have changed; how hard it is to come to terms with it once recognized; how insistent people can be that surely, they will be OK.
And given that introduction, I’m sure you have now guessed what I intend to talk to you about today: LIBOR, the benchmark formerly known as the London Interbank Offered Rate. LIBOR was the principal benchmark used to set interest rates for a vast number of commercial loans, mortgages, securities, derivatives, and other products. For a number of years—certainly at least since July of 2017, and really for several years before—it has been clear that LIBOR would end, but some believed it was not clear exactly when LIBOR would end. And, as a result, many market participants have continued to use LIBOR as if that end date would surely be in some indefinitely distant future, as if LIBOR would remain available forever.
Earlier this year, however, things changed, and changed significantly. Two things happened which together make clear that LIBOR will no longer be available for any new contracts after the end of this year, just 86 days from now. First, the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, and ICE Benchmark Administration (IBA), which administers LIBOR, announced definitive end dates for LIBOR.1 No U.S. dollar LIBOR tenors will be available after June 30, 2023.2
So, now there was a definitive and immovable date fixed for the end of LIBOR. However, the second thing that happened made clear that long before that end date in 2023, LIBOR would not be available for any new contracts after the end of this year. Following the FCA and IBA announcements about the end of LIBOR, the Federal Reserve and other regulators published guidance making clear that we will focus closely on whether supervised institutions stop new use of LIBOR by the end of this year—86 days from now.
If LIBOR will not be available for new contracts, what is the point of IBA continuing to provide USD LIBOR quotes until mid-2023? Those LIBOR quotes will allow many existing contracts to mature according to their terms, thus greatly reducing the costs and risks of this transition. Otherwise, many banks would have had to re-negotiate hundreds of thousands of loan contracts before December 31, an almost impossible task. But the whole process only works if no new LIBOR contracts are written while the legacy contracts are allowed to mature. So, those new LIBOR contracts will not be made. Change is difficult, but it is inescapable.
What is LIBOR, and Why is it Going Away?
LIBOR was intended to be a measure of the average interest rate at which large banks can borrow in wholesale funding markets for different periods of time, ranging from overnight to one month, three months, and beyond. LIBOR is an unsecured rate, which means that it measures interest rates for borrowings that are made without collateral and therefore include some credit risk.
At first blush, it may seem peculiar that a borrowing rate for banks in London has been used so widely. Why, for example, are more than $1 trillion of residential mortgages in the United States tied to LIBOR? The answer is that, over time, LIBOR’s pervasiveness became self-reinforcing. Lenders, borrowers, and debt issuers relied on LIBOR because, first, everyone else used LIBOR, and second, they could hedge their LIBOR exposures in liquid derivatives markets. Today, USD LIBOR is used in more than $200 trillion of financial contracts worldwide.
Federal Reserve officials have described LIBOR’s flaws on numerous occasions.3 The principal problem with LIBOR is that it was not what it purported to be. It claimed to be a measure of the cost of bank funding in the London money markets, but over time it became more of an arbitrary and sometimes self-interested announcement of what banks simply wished to charge for funds. That might not have become such a debacle had it been clear to everyone what the ground rules were, but the ground rules for LIBOR were anything but clear.
As a result of subsequent changes to the process, LIBOR panel banks now provide evidence of actual transactions where possible. A fundamental problem, however, is that LIBOR has been unable to separate itself from its perception as a measure of bank funding costs, yet the market on which LIBOR is based—the unsecured, short-term bank funding market—dwindled after the 2008 financial crisis. This means that, for many LIBOR term rates, banks must estimate their likely cost of such funding rather than report the actual cost.
Many LIBOR panel banks are uncomfortable estimating their funding costs in producing a benchmark perceived by many to measure actual funding costs. As a result, the great majority of the panel banks have determined that they will not continue participating in the process. This is why the FCA and IBA have announced definitive end dates for LIBOR.
I should note here that regulators have warned about LIBOR-related risks for many years. Beginning in 2013, the U.S. Financial Stability Oversight Council and the international Financial Stability Board, which I currently chair, expressed concern that the decline in unsecured short-term funding by banks could pose serious structural risks for unsecured benchmarks such as LIBOR.4 To mitigate these risks and promote a smooth transition away from LIBOR, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC) in November 2014.5 As I will describe further in a moment, the ARRC has worked to facilitate the transition from LIBOR to its recommended alternative, the Secured Overnight Financing Rate (SOFR).
Supervisory Efforts
In November 2020, the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) sent a letter to the banking organizations we regulate noting that, after 2021, the use of LIBOR in new transactions would pose safety and soundness risks.6 Accordingly, we encouraged supervised institutions to stop new use of LIBOR as soon as is practicable and, in any event, by the end of this year. The letter also noted that new contracts entered into before December 31, 2021, should either use a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation.
Recently, a number of institutions have asked what would qualify as “new” use of LIBOR after 2021. We are working with other agencies to provide additional guidance about this issue. In my view, however, “new” use of LIBOR would include any agreement that creates additional LIBOR exposure for a supervised institution or extends the term of an existing LIBOR contract.
Earlier this year, the Federal Reserve issued another supervisory letter that provided guidance concerning supervised institutions’ LIBOR transition plans.7 As the end of LIBOR approaches, Federal Reserve examiners have intensified their focus on supervised institutions’ transition planning. In general, institutions of all sizes have acknowledged year-end as the stop date for new LIBOR contracts and are operationally prepared to offer alternative rates. However, based on data from the second quarter of 2021, we estimate that large firms used alternative rates for less than 1 percent of floating rate corporate loans and 8 percent of derivatives. To be ready for year-end, lenders will have to pick up the pace, and our examiners expect to see supervised institutions accelerate their use of alternative rates.
Transitioning to Alternative Rates
A handful of firms have said that they may want more time to evaluate potential alternative rates. There is no more time, and banks will not find LIBOR available to use after year-end no matter how unhappy they may be with their options to replace it. I would note that the ARRC has been publishing tools to facilitate the use of SOFR for almost four years.8 SOFR is a broad measure of the cost of borrowing cash overnight, collateralized by Treasury securities. It rests on one of the deepest and most liquid markets in the world. It is calculated transparently by the Federal Reserve Bank of New York, engendering market confidence. And it can be used for all types of transactions. Notably, the ARRC recently recommended SOFR term rates, which will facilitate the transition from LIBOR to SOFR for market participants who wish to use a forward-looking rate.9 Given the availability of SOFR, including term SOFR, there will be no reason for a bank to use LIBOR after 2021 while trying to find a rate it likes better.
This is especially true for capital markets products. As I described recently in remarks to the Financial Stability Oversight Council, it is critical that capital markets and derivatives markets transition to SOFR. Market participants have expressed nearly universal agreement that this is the right replacement rate for such products.10 The ARRC did not recommend any other rate for capital markets or derivatives, and market participants should not expect such rates to be widely available.
Loans, however, are different from derivatives and capital markets products, and raise different issues. With respect to loans, the Federal Reserve, OCC, and FDIC issued a letter last year explaining that we have not endorsed a specific replacement rate.11 We have not changed that guidance. A bank may use SOFR for its loans, but it may also use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs. But a bank will not find LIBOR available after year-end, even if it doesn’t want to use SOFR for loans and hasn’t chosen a different alternative reference rate. Reviewing banks’ cessation of LIBOR use after year-end will be one of the highest priorities of the Fed’s bank supervisors in the coming months. If market participants do use a rate other than SOFR, they should ensure that they understand how their chosen reference rate is constructed, that they are aware of any fragilities associated with that rate, and—most importantly—that they use strong fallback provisions.
To conclude, I emphasize that market participants should be ready to stop using LIBOR by the end of 2021.12 One-week and two-month USD LIBOR will end in only 12 weeks. The remaining USD LIBOR tenors will end in mid-2023, but the LIBOR quotes available from January 2022 until June 2023 will only be appropriate for legacy contracts. Use of these quotes for new contracts would create safety and soundness risks for counterparties and the financial system. We will supervise firms accordingly.
Market participants should act now to accelerate their transition away from LIBOR. The reign of LIBOR will end imminently, and it will not come back. To return to where we started, the year of magical thinking is over.
Compliments of the U.S. Federal Reserve Board.

1. See https://www.fca.org.uk/news/press-releases/announcements-end-libor and https://ir.theice.com/press/news-details/2021/ICE-Benchmark-Administration-Publishes-Feedback-Statement-for-the-Consultation-on-Its-Intention-to-Cease-the-Publication-of-LIBOR-Settings/default.aspx. Return to text
2. One-week and two-month U.S. dollar LIBOR tenors will end as of December 30, 2021. IBA will cease publishing all remaining U.S. dollar LIBOR rates after June 30, 2023. Return to text
3. See https://www.federalreserve.gov/newsevents/speech/quarles20190410a.htm, https://www.federalreserve.gov/newsevents/speech/powell20140904a.htm, and https://www.federalreserve.gov/newsevents/testimony/vanderweide20210415a.htm. Return to text
4. See Financial Stability Oversight Council, 2013 Annual Report (PDF) (Washington: Department of the Treasury, 2013). See also Financial Stability Board, Reforming Major Interest Rate Benchmarks (PDF) (Basel, Switzerland: Financial Stability Board, July 2014). Return to text
5. The ARRC’s voting members are private sector firms, but the Federal Reserve and other official sector entities serve as ex-officio members of the ARRC. Return to text
6. See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201130a.htm. Return to text
7. See SR 21-7, “Assessing Supervised Institutions’ Plans to Transition Away from the Use of the LIBOR.” Earlier this year, I gave a speech that described this supervisory letter in detail. See also https://www.federalreserve.gov/newsevents/speech/quarles20210322a.htm. Return to text
8. The Federal Reserve Bank of New York began publishing SOFR in April 2018. Return to text
9. See https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf. Return to text
10. See https://www.federalreserve.gov/supervisionreg/files/quarles-libor-presentation-20210611.pdf. Return to text
11. See https://www.federalreserve.gov/supervisionreg/srletters/SR2025.htm. Return to text
12. The Federal Reserve recognizes that market participants cannot fix some legacy LIBOR contracts. In particular, there are approximately $10 trillion of so-called “tough” legacy contracts that mature after LIBOR ends, but lack workable fallback language to address the end of LIBOR. The Federal Reserve welcomes efforts in Congress to craft federal legislation that would provide a workable fallback for these contracts. Return to text

Major reform of the international tax system finalised today at the OECD will ensure that Multinational Enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023.
The landmark deal, agreed by 136 countries and jurisdictions representing more than 90% of global GDP, will also reallocate more than USD 125 billion of profits from around 100 of the world’s largest and most profitable MNEs to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits.
Following years of intensive negotiations to bring the international tax system into the 21st century, 136 jurisdictions (out of the 140 members of the OECD/G20 Inclusive Framework on BEPS) joined the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy. It updates and finalises a July political agreement by members of the Inclusive Framework to fundamentally reform international tax rules.
With Estonia, Hungary and Ireland having joined the agreement, it is now supported by all OECD and G20 countries. Four countries – Kenya, Nigeria, Pakistan and Sri Lanka – have not yet joined the agreement.
The two-pillar solution will be delivered to the G20 Finance Ministers meeting in Washington D.C. on 13 October, then to the G20 Leaders Summit in Rome at the end of the month.
The global minimum tax agreement does not seek to eliminate tax competition, but puts multilaterally agreed limitations on it, and will see countries collect around USD 150 billion in new revenues annually. Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises. It will re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.  Specifically, multinational enterprises with global sales above EUR 20 billion and profitability above 10% – that can be considered as the winners of globalisation – will be covered by the new rules, with 25% of profit above the 10% threshold to be reallocated to market jurisdictions.
Under Pillar One, taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year. Developing country revenue gains are expected to be greater than those in more advanced economies, as a proportion of existing revenues.
Pillar Two introduces a global minimum corporate tax rate set at 15%.  The new minimum tax rate will apply to companies with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually. Further benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.
“Today’s agreement will make our international tax arrangements fairer and work better,” said OECD Secretary-General Mathias Cormann. “This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy. We must now work swiftly and diligently to ensure the effective implementation of this major reform,” Secretary-General Cormann said.
Countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023. The convention is already under development and will be the vehicle for implementation of the newly agreed taxing right under Pillar One, as well as for the standstill and removal provisions in relation to all existing Digital Service Taxes and other similar relevant unilateral measures. This will bring more certainty and help ease trade tensions. The OECD will develop model rules for bringing Pillar Two into domestic legislation during 2022, to be effective in 2023.
Developing countries, as members of the Inclusive Framework on an equal footing, have played an active role in the negotiations and the Two-Pillar Solution contains a number of features to ensure that the concerns of low-capacity countries are addressed. The OECD will ensure the rules can be effectively and efficiently administered, also offering comprehensive capacity building support to countries which need it.
Further information on the continuing international tax reform negotiations is also available at: https://oe.cd/bepsaction1.
Highlights Brochure
Frequently Asked Questions
Contacts:

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration | Pascal.Saint-Amans@oecd.org

Lawrence Speer | Lawrence.Speer@oecd.org

OECD Media Office | news.contact@oecd.org

Compliments of the OECD.
The post OECD | International community strikes a ground-breaking tax deal for the digital age first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.