How will our economy evolve over the next few years? The ECB and Eurosystem staff produce quarterly macroeconomic projections. These aim to assess how the economy in the euro area will develop.
Today we again published a baseline scenario as well as two alternative scenarios, taking into consideration the high uncertainty surrounding the impact of the coronavirus on the eurozone economic outlook
Overview
Following a drop of 15.0% in the first half of 2020, euro area real GDP rebounded by 12.5% in the third quarter, which was a significantly stronger increase than expected in the September 2020 ECB staff projections. Nevertheless, the recent intensification of containment measures in response to a strong resurgence of coronavirus (COVID-19) infections across countries is expected to result in another decline in activity in the fourth quarter. Activity is also expected to be subdued in the first quarter of 2021. Despite this near-term setback, positive news on the development of vaccines gives cause for greater confidence in the assumption of a gradual resolution of the health crisis throughout 2021 and in early 2022. This, together with substantial support from monetary and fiscal policies – partly related to the Next Generation EU (NGEU) package – and the ongoing recovery in foreign demand, should allow a firm rebound during the course of 2021, with real GDP expected to return to its pre-crisis level by mid-2022. Thus, even though the near-term outlook has deteriorated, the path of euro area GDP from 2022 is expected to be broadly similar to that foreseen in the September 2020 ECB staff projections. As the policy measures are expected to be successful in averting large financial amplification effects and limiting the economic scars of the crisis, real GDP in 2023 is expected to stand 2½% above its 2019 pre-crisis level.
As regards inflation, upward base effects associated with the earlier slump in oil prices and upward impacts from the reversal of the VAT rate cut in Germany imply a rebound in headline inflation in 2021. HICP inflation excluding energy and food is expected to show a much more muted recovery in 2021 as broad-based disinflationary effects from weak demand, especially across the services sectors, dominate upward cost pressures from supply side constraints. Over the medium term headline inflation is expected to gradually increase, mainly reflecting a slight rise in the contribution of HICP inflation excluding energy and food which, however, is seen to remain rather subdued, at 1.2%, in 2023. Overall, the baseline foresees HICP inflation rebounding from 0.2% in 2020 to 1.0% in 2021 and then gradually increasing further to 1.1% in 2022 and 1.4% in 2023. Compared with the September 2020 ECB staff projections, HICP inflation has been revised down for 2020 and 2022, on account of weaker incoming data for HICP inflation excluding energy and food and a downward reassessment of inflationary pressures since the previous projections in the context of abundant but diminishing slack in the goods and labour markets.[1]
In view of the continued significant uncertainty regarding the evolution of the pandemic, potential medical solutions (including the distribution and take-up of vaccines) and the degree of economic scarring, two alternative scenarios have again been prepared. The mild scenario sees a more successful containment of the virus, a swift roll-out of vaccines and limited scarring. In this scenario, real GDP would rebound by 6.0% next year, reaching pre-crisis levels as early as the end of 2021, with inflation rising to 1.5% in 2023. In contrast, the severe scenario, with a delayed resolution of the health crisis and substantial and permanent losses to economic potential, would imply a marginal increase in 2021 in real GDP, which would stand in 2023 still almost 2% below its pre-crisis levels, with inflation at only 0.8% in that year.
Read the  FULL REPORT HERE.
Compliments of the European Central Bank.
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The European Commission has today presented a strategy to prevent a future build-up of non-performing loans (NPLs) across the European Union, as a result of the coronavirus crisis. The strategy aims to ensure that EU households and businesses continue to have access to the funding they need throughout the crisis.
Banks have a crucial role to play in mitigating the effects of the coronavirus crisis, by maintaining the financing of the economy. This is key in order to support the EU’s economic recovery. Given the impact coronavirus has had on the EU’s economy, the volume of NPLs is expected to rise across the EU, although the timing and magnitude of this increase is still uncertain. Depending on how quickly the EU’s economy recovers from the coronavirus crisis, banks’ asset quality – and in turn, their lending capacity – could deteriorate.
Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People, said: “History shows us that it is best to tackle non-performing loans early and decisively, especially if we want banks to continue supporting businesses and households. We are taking preventive and coordinated action now. Today’s strategy will help contribute to Europe’s swift and sustainable recovery by helping banks to offload these loans from their balance sheets and keep credit flowing.”
Mairead McGuinness, Commissioner responsible for financial services, financial stability and the Capital Markets Union, said: “Many firms and households have come under significant financial pressure due to the pandemic. Making sure that European citizens and businesses continue to receive support from their banks is a top priority for the Commission. Today we put forward a set of measures that, while ensuring borrower protection, can help prevent a rise in NPLs similar to the one after the last financial crisis.”
In order to give Member States and the financial sector the necessary tools to address a rise of NPLs in the EU’s banking sector early on, the Commission is proposing a series of actions with four main goals:

Further developing secondary markets for distressed assets: This will allow banks to move NPLs off their balance sheets, while ensuring further strengthened protection for debtors. A key step in this process would be the adoption of the Commission’s proposal on credit servicers and credit purchasers which is currently being discussed by the European Parliament and the Council. These rules would reinforce debtor protection on secondary markets. The Commission sees merit in the establishment of a central electronic data hub at EU level in order to enhance market transparency. Such a hub would act as a data repository underpinning the NPL market in order to allow a better exchange of information between all actors involved (credit sellers, credit purchasers, credit servicers, asset management companies (AMCs) and private NPL platforms) so that NPLs are dealt with in an effective manner. On the basis of a public consultation, the Commission would explore several alternatives for establishing a data hub at European level and determine the best way forward. One of the options could be to establish the data hub by extending the remit of the existing European DataWarehouse (ED).

Reform the EU’s corporate insolvency and debt recovery legislation: This will help converge the various insolvency frameworks across the EU, while maintaining high standards of consumer protection. More convergent insolvency procedures would increase legal certainty and speed up the recovery of value for the benefit of both creditor and the debtor. The Commission urges the Parliament and Council to reach an agreement swiftly on the legislative proposal for minimum harmonisation rules on accelerated extrajudicial collateral enforcement, which the Commission proposed in 2018.

Support the establishment and cooperation of national asset management companies (AMCs) at EU level: Asset management companies are vehicles that provide relief to banks that are struggling by enabling them to remove NPLs from their balance sheets. This helps banks re-focus on lending to viable firms and households instead of managing NPLs. The Commission stands ready to support Member States in setting up national AMCs – if they wish to do so – and would explore how cooperation could be fostered by establishing an EU network of national AMCs. While national AMCs are valuable because they benefit from domestic expertise, an EU network of national AMCs could enable national entities to exchange best practices, enforce data and transparency standards and better coordinate actions. The network of AMCs could furthermore use the data hub to coordinate and cooperate with each other in order to share information on investors, debtors and servicers. Accessing information on NPL markets will require that all relevant data protection rules regarding debtors are respected.

Precautionary measures: While the EU’s banking sector is overall in a much sounder position than after the financial crisis, Member States continue to have varying economic policy responses. Given the special circumstances of the current health crisis, authorities have the possibility to implement precautionary public support measures, where needed, to ensure the continued funding of the real economy under the EU’s Bank Recovery and Resolution Directive and State aid frameworks

Background
The Commission’s NPL strategy proposed today builds upon a consistent set of previously implemented measures. In July 2017, finance ministers in the ECOFIN agreed on a first Action Plan to tackle NPLs.
In line with the ECOFIN Action Plan, the Commission announced in its Communication on completing the Banking Union of October 2017 a comprehensive package of measures to reduce the level of NPLs in the EU. In March 2018, the Commission presented its package of measures to tackle high NPL ratios.
The proposed measures included the NPL backstop, which required banks to build minimum loss coverage levels for newly originated loans, a proposal for a Directive on credit servicers, credit purchasers and for the recovery of collateral and the blueprint for the set-up of national asset management companies. To mitigate the impact of the coronavirus crisis, the Commission’s Banking Package from April 2020 has implemented targeted “quick fix” amendments to the EU’s banking prudential rules. In addition, the Capital Markets Recovery Package, adopted in July 2020, proposed targeted changes to capital market rules to encourage greater investments in the economy, allow for the rapid re-capitalisation of companies and increase banks’ capacity to finance the recovery.
The Recovery and Resilience Facility (RRF) will also provide substantial support to reforms aimed at improving insolvency, judicial and administrative frameworks and underpinning efficient NPL resolution.
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Today, the Commission and the High Representative of the Union for Foreign Affairs and Security Policy are presenting a new EU Cybersecurity Strategy. As a key component of Shaping Europe’s Digital Future, the Recovery Plan for Europe  and the EU Security Union Strategy, the Strategy will bolster Europe’s collective resilience against cyber threats and help to ensure that all citizens and businesses can fully benefit from trustworthy and reliable services and digital tools. Whether it is the connected devices, the electricity grid, or the banks, planes, public administrations and hospitals Europeans use or frequent, they deserve to do so with the assurance that they will be shielded from cyber threats.
The new Cybersecurity Strategy also allows the EU to step up leadership on international norms and standards in cyberspace, and to strengthen cooperation with partners around the world to promote a global, open, stable and secure cyberspace, grounded in the rule of law, human rights, fundamental freedoms and democratic values.
Furthermore, the Commission is making proposals to address both cyber and physical resilience of critical entities and networks: a Directive on measures for high common level of cybersecurity across the Union (revised NIS Directive or ‘NIS 2′), and a new Directive on the resilience of critical entities. They cover a wide range of sectors and aim to address current and future online and offline risks, from cyberattacks to crime or natural disasters, in a coherent and complementary way.
Trust and security at the heart of the EU Digital Decade
The new Cybersecurity Strategy aims to safeguard a global and open Internet, while at the same time offering safeguards, not only to ensure security but also to protect European values and the fundamental rights of everyone. Building upon the achievements of the past months and years, it contains concrete proposals for regulatory, investment and policy initiatives, in three areas of EU action:

Resilience, technological sovereignty and leadership

Under this strand of action the Commission proposes to reform the rules on the security of network and information systems, under a Directive on measures for high common level of cybersecurity across the Union (revised NIS Directive or ‘NIS 2′), in order to increase the level of cyber resilience of critical public and private sectors: hospitals, energy grids, railways, but also data centres, public administrations, research labs and manufacturing of critical medical devices and medicines, as well as other critical infrastructure and services, must remain impermeable, in an increasingly fast-moving and complex threat environment.
The Commission also proposes to launch a network of Security Operations Centres across the EU, powered by artificial intelligence (AI), which will constitute a real ‘cybersecurity shield’ for the EU, able to detect signs of a cyberattack early enough and to enable proactive action, before damage occurs. Additional measures will include dedicated support to small and medium-sized businesses (SMEs), under the Digital Innovation Hubs, as well as increased efforts to upskill the workforce, attract and retain the best cybersecurity talent and invest in research and innovation that is open, competitive and based on excellence.      

Building operational capacity to prevent, deter and respond

The Commission is preparing, through a progressive and inclusive process with the Member States, a new Joint Cyber Unit, to strengthen cooperation between EU bodies and Member State authorities responsible for preventing, deterring and responding to cyber-attacks, including civilian, law enforcement, diplomatic and cyber defence communities. The High Representative puts forward proposals to strengthen the EU Cyber Diplomacy Toolbox to prevent, discourage, deter and respond effectively against malicious cyber activities, notably those affecting our critical infrastructure, supply chains, democratic institutions and processes. The EU will also aim to further enhance cyber defence cooperation and develop state-of-the-art cyber defence capabilities, building on the work of the European Defence Agency and encouraging Member States to make full use of the Permanent Structured Cooperation and the European Defence Fund.   

Advancing a global and open cyberspace through increased cooperation

The EU will step up work with international partners to strengthen the rules-based global order, promote international security and stability in cyberspace, and protect human rights and fundamental freedoms online. It will advance international norms and standards that reflect these EU core values, by working with its international partners in the United Nations and other relevant fora. The EU will further strengthen its EU Cyber Diplomacy Toolbox, and increase cyber capacity-building efforts to third countries by developing an EU External Cyber Capacity Building Agenda. Cyber dialogues with third countries, regional and international organisations as well as the multi-stakeholder community will be intensified. The EU will also form an EU Cyber Diplomacy Network around the world to promote its vision of cyberspace.
The EU is committed to supporting the new Cybersecurity Strategy with an unprecedented level of investment in the EU’s digital transition over the next seven years, through the next long-term EU budget, notably the Digital Europe Programme and Horizon Europe, as well as the Recovery Plan for Europe. Member States are thus encouraged to make full use of the EU Recovery and Resilience Facility to boost cybersecurity and match EU-level investment. The objective is to reach up to €4.5 billion of combined investment from the EU, the Member States and the industry, notably under the Cybersecurity Competence Centre and Network of Coordination Centres, and to ensure that a major portion gets to SMEs.
The Commission also aims at reinforcing the EU’s industrial and technological capacities in cybersecurity, including through projects supported jointly by EU and national budgets. The EU has the unique opportunity to pool its assets to enhance its strategic autonomy and propel its leadership in cybersecurity across the digital supply chain (including data and cloud, next generation processor technologies, ultra-secure connectivity and 6G networks), in line with its values and priorities.
Cyber and physical resilience of network, information systems and critical entities
Existing EU-level measures aimed at protecting key services and infrastructures from both cyber and physical risks need to be updated. Cybersecurity risks continue to evolve with growing digitalisation and interconnectedness. Physical risks have also become more complex since the adoption of the 2008 EU rules on critical infrastructure, which currently only cover the energy and transport sectors. The revisions aim at updating the rules following the logic of the EU’s Security Union strategy, overcoming the false dichotomy between online and offline and breaking down the silo approach.
To respond to the growing threats due to digitalisation and interconnectedness, the proposed Directive on measures for high common level of cybersecurity across the Union (revised NIS Directive or ‘NIS 2′) will cover medium and large entities from more sectors based on their criticality for the economy and society. NIS 2 strengthens security requirements imposed on the companies, addresses security of supply chains and supplier relationships, streamlines reporting obligations, introduces more stringent supervisory measures for national authorities, stricter enforcement requirements and aims at harmonising sanctions regimes across Member States. The NIS 2 proposal will help increase information sharing and cooperation on cyber crisis management at national and EU level.
The proposed Critical Entities Resilience (CER) Directive expands both the scope and depth of the 2008 European Critical Infrastructure directive. Ten sectors are now covered: energy, transport, banking, financial market infrastructures, health, drinking water, waste water, digital infrastructure, public administration and space. Under the proposed directive, Member States would each adopt a national strategy for ensuring the resilience of critical entities and carry out regular risk assessments. These assessments would also help identify a smaller subset of critical entities that would be subject to obligations intended to enhance their resilience in the face of non-cyber risks, including entity-level risk assessments, taking technical and organisational measures, and incident notification. The Commission, in turn, would provide complementary support to Member States and critical entities, for instance by developing a Union-level overview of cross-border and cross-sectoral risks, best practice, methodologies, cross-border training activities and exercises to test the resilience of critical entities.
Securing the next generation of networks: 5G and beyond
Under the new Cybersecurity Strategy, Member States, with the support of the Commission and ENISA – the European Cybersecurity Agency, are encouraged to complete the implementation of the EU 5G Toolbox, a comprehensive and objective risk-based approach for the security of 5G and future generations of networks.
According to a report published today, on the impact of the Commission Recommendation on the Cybersecurity of 5G networks and the progress in implementing the EU toolbox of mitigating measures, since the progress report of July 2020, most Member States are already well on track of implementing the recommended measures. They should now aim to complete their implementation by the second quarter of 2021 and ensure that identified risks are adequately mitigated, in a coordinated way, particularly with a view to minimising the exposure to high-risk suppliers and avoiding dependency on these suppliers. The Commission also sets out today key objectives and actions aimed at continuing the coordinated work at EU-level.
Members of the College said:
Margrethe Vestager, Executive Vice-President for a Europe Fit for the Digital Age, said: “Europe is committed to the digital transformation of our society and economy. So we need to support it with unprecedented levels of investment. The digital transformation is accelerating, but can only succeed if people and businesses can trust that the connected products and services – on which they rely – are secure.”
Josep Borrell, High Representative, said: “International security and stability depends more than ever on a global, open, stable and secure cyberspace where the rule of law, human rights, freedoms and democracy are respected. With today’s strategy the EU is stepping up to protect its governments, citizens and businesses from global cyber threats, and to provide leadership in cyberspace, making sure everybody can reap the benefits of the Internet and the use of technologies.”   
Margaritis Schinas, Vice-President for Promoting our European Way of Life, said: “Cybersecurity is a central part of the Security Union. There is no longer a distinction between online and offline threats. Digital and physical are now inextricably intertwined. Today’s set of measures show that the EU is ready to use all of its resources and expertise to prepare for and respond to physical and cyber threats with the same level of determination.”
Thierry Breton, Commissioner for the Internal Market said: “Cyber threats evolve fast, they are increasingly complex and adaptable. To make sure our citizens and infrastructures are protected, we need to think several steps ahead, Europe’s resilient and autonomous Cybersecurity Shield will mean we can utilise our expertise and knowledge to detect and react faster, limit potential damages and increase our resilience. Investing in cybersecurity means investing in the healthy future of our online environments and in our strategic autonomy.”
Ylva Johansson, Commissioner for Home Affairs, said: “Our hospitals, waste water systems or transport infrastructure are only as strong as their weakest links; disruptions in one part of the Union risk affecting the provision of essential services elsewhere. To ensure the smooth functioning of the internal market and the livelihoods of those living in Europe, our key infrastructure must be resilient against risks such as natural disasters, terrorist attacks, accidents and pandemics like the one we are experiencing today. My proposal on critical infrastructure does just that.”
Next Steps
The European Commission and the High Representative are committed to implementing the new Cybersecurity Strategy in the coming months. They will regularly report on the progress made and keep the European Parliament, the Council of the European Union, and stakeholders fully informed and engaged in all relevant actions.
It is now for the European Parliament and the Council to examine and adopt the proposed NIS 2 Directive and the Critical Entities Resilience Directive. Once the proposals are agreed and consequently adopted, Member States would then have to transpose them within 18 months of their entry into force.
The Commission will periodically review the NIS 2 Directive and the Critical Entities Resilience Directive and report on their functioning.
Background
Cybersecurity is one of the Commission’s top priorities and a cornerstone of the digital and connected Europe. An increase of cyber-attacks during the coronavirus crisis have shown how important it is to protect hospitals, research centres and other infrastructure. Strong action in the area is needed to future-proof the EU’s economy and society.
The new Cybersecurity Strategy proposes to integrate cybersecurity into every element of the supply chain and bring further together EU’s activities and resources across the four communities of cybersecurity – internal market, law enforcement, diplomacy and defence. It builds on the EU’ Shaping Europe’s Digital Future and the EU Security Union Strategy, and leans on a number of legislative acts, actions and initiatives the EU has implemented to strengthen cybersecurity capacities and ensure a more cyber-resilient Europe. This includes the Cybersecurity strategy of 2013, reviewed in 2017, and the Commission’s European Agenda on Security 2015-2020. It also recognises the increasing inter-connection between internal and external security, in particular through the Common Foreign and Security Policy.
The first EU-wide law on cybersecurity, the NIS Directive, that came into force in 2016 helped to achieve a common high level of security of network and information systems across the EU. As part of its key policy objective to make Europe fit for the digital age, the Commission announced the revision of the NIS Directive in February this year. The EU Cybersecurity Act that is in force since 2019 equipped Europe with a framework of cybersecurity certification of products, services and processes and reinforced the mandate of the EU Agency for Cybersecurity (ENISA).
As regards Cybersecurity of 5G networks, Member States, with the support of the Commission and ENISA have established, with the EU 5G Toolbox adopted in January 2020, a comprehensive and objective risk-based approach. The Commission review of its Recommendation of March 2019 on the cybersecurity of 5G networks found that most Member States have made progress in implementing the Toolbox.
Starting from the 2013 EU Cybersecurity strategy, the EU has developed a coherent and holistic international cyber policy. Working with its partners at bilateral, regional and international level, the EU has promoted a global, open, stable and secure cyberspace guided by EU’s core values and grounded in the rule of law. The EU has supported third countries in increasing their cyber resilience and ability to tackle cybercrime, and has used its 2017 EU cyber diplomacy toolbox to further contribute to international security and stability in cyberspace, including by applying for the first time its 2019 cyber sanctions regime and listing 8 individuals and 4 entities and bodies. The EU has made significant progress also on cyber defence cooperation, including as regards cyber defence capabilities, notably in the framework of its Cyber Defence Policy Framework (CDPF), as well as in the context of the Permanent Structured Cooperation (PESCO) and the work of the European Defence Agency.
Cybersecurity is a priority also reflected in the EU’s next long-term budget (2021-2027). Under the Digital Europe Programme the EU will support cybersecurity research, innovation and infrastructure, cyber defence, and the EU’s cybersecurity industry. In addition, in its response to the Coronavirus crisis, which saw increased cyberattacks during the lockdown, additional investments in cybersecurity are ensured under the Recovery Plan for Europe.
The EU has long recognised the need to ensure the resilience of critical infrastructures providing services which are essential for the smooth running of the internal market and the lives and livelihoods of European citizens. For this reason, the EU established the European Programme for Critical Infrastructure Protection (EPCIP) in 2006 and adopted the European Critical Infrastructure (ECI) Directive in 2008, which applies to the energy and transport sectors. These measures were complemented in later years by various sectoral and cross-sectoral measures on specific aspects such as climate proofing, civil protection, or foreign direct investment.
Compliments of the European Commission.
The post New EU Cybersecurity Strategy and new rules to make physical and digital critical entities more resilient first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

New international standards on the automatic exchange of information for tax purposes have so far been satisfactorily implemented by countries worldwide, marking an important milestone in the global fight against tax evasion, according to a new report published today by the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum).
The first Peer Review of the Automatic Exchange of Financial Account Information shows that 88% of jurisdictions engaged in automatic exchange since 2017-18 were deemed to have satisfactory legal frameworks in place. The report notes that a second stage of the monitoring process, now underway, will assess the effectiveness of automatic exchange in more than 100 jurisdictions.
The peer review report was presented during the first day of the annual plenary meeting of the Global Forum, which is bringing together ministers, high-level authorities and delegates from more than 100 member jurisdictions. The three-day meeting is focusing on how the tax transparency agenda can promote the fairness of tax systems while strengthening revenue mobilisation. The event will highlight recent achievements and challenges in the context of the COVID-19 pandemic.
“The Global Forum continues to be a game-changer,” said OECD Secretary-General Angel Gurría. “In spite of the COVID-19 crisis, it has successfully delivered on the global peer review process, offering further proof that automatic exchange is becoming the global standard. Ensuring access to financial account information for tax administrations helps ensure everyone pays their fair share of tax, boosting revenue mobilisation for countries worldwide, and particularly for developing countries.”
In 2019, countries automatically exchanged information on 84 million financial accounts worldwide, covering total assets of USD 10 trillion. EUR 107 billion in additional tax revenues have been identified through voluntary disclosure programmes, offshore tax investigations and related measures since 2009, an increase over the EUR 102 billion figure reported in 2019.
The Global Forum Secretariat provided technical assistance in 2020 to 59 developing country members, including training to thousands of officials, as part of efforts to strengthen tax collection capacity worldwide. “The battle for transparency is being fought on many fronts,” said Zayda Manatta, Head of the Global Forum Secretariat. “We are moving fast towards full implementation of the existing standards, and taking every effort to ensure all our members benefit from them.”
Further information on the Global Forum’s activities can be found in its latest annual report.

Image courtesy of the OECD.
Contacts:

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration

Zayda Manatta, Head of the Global Forum Secretariat | zayda.manatta@oecd.org

Lawrence Speer in the OECD Media Office | lawrence.speer@oecd.org

Compliments of the OECD.
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Speech by Chair Jerome H. Powell before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C. | December 01, 2020 |
Chairman Crapo, Ranking Member Brown, and other members of the Committee, thank you for the opportunity to update you on our ongoing measures to address the hardship wrought by the pandemic.
Our public health professionals continue to deliver our most important response, and we remain grateful for their service.
The Federal Reserve, along with others across government, is using its policies to help alleviate the economic burden. Since the pandemic’s onset, we have taken forceful actions to provide relief and stability, to ensure that the recovery will be as strong as possible, and to limit lasting damage to the economy.
Economic activity has continued to recover from its depressed second-quarter level. The reopening of the economy led to a rapid rebound in activity, and real gross domestic product, or GDP, rose at an annual rate of 33 percent in the third quarter. In recent months, however, the pace of improvement has moderated.
Household spending on goods, especially durable goods, has been strong and has moved above its pre-pandemic level. In contrast, spending on services remains low largely because of ongoing weakness in sectors that typically require people to gather closely, including travel and hospitality.
The overall rebound in household spending is due, in part, to federal stimulus payments and expanded unemployment benefits, which provided essential support to many families and individuals.
In the labor market, more than half of the 22 million jobs that were lost in March and April have been regained, as many people were able to return to work. As with overall economic activity, the pace of improvement in the labor market has moderated. Although we welcome this progress, we will not lose sight of the millions of Americans who remain out of work. The economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been hardest hit. In particular, the high level of joblessness has been especially severe for lower-wage workers in the services sector, for women, and for African Americans and Hispanics. The economic dislocation has upended many lives and created great uncertainty about the future.
As we have emphasized throughout the pandemic, the outlook for the economy is extraordinarily uncertain and will depend, in large part, on the success of efforts to keep the virus in check.
The rise in new COVID-19 cases, both here and abroad, is concerning and could prove challenging for the next few months. A full economic recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.
Recent news on the vaccine front is very positive for the medium term. For now, significant challenges and uncertainties remain, including timing, production and distribution, and efficacy across different groups. It remains difficult to assess the timing and scope of the economic implications of these developments with any degree of confidence.
The Federal Reserve’s response has been guided by our mandate to promote maximum employment and stable prices for the American people, along with our responsibilities to promote the stability of the financial system. We have been taking broad and forceful actions to more directly support the flow of credit in the economy. Our actions, taken together, have helped unlock almost $2 trillion of funding to support businesses large and small, nonprofits, and state and local governments since April. This, in turn, has helped keep organizations from shuttering and has put employers in both a better position to keep workers on and to hire them back as the economy continues to recover.
These programs serve as a backstop to key credit markets and have helped restore the flow of credit from private lenders through normal channels. We have deployed these lending powers to an unprecedented extent. Our emergency lending powers require the approval of the Treasury and are available only in very unusual circumstances, such as those we find ourselves in today. Many of these programs have been supported by funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and I have included detailed information about those facilities in my written testimony.
The CARES Act assigns sole authority over its funds to the Treasury Secretary, subject to the statute’s specified limits. The Secretary has indicated that these limits do not permit the CARES Act-funded facilities to make new loans or purchase new assets after December 31 of this year. Accordingly, the Federal Reserve will return the unused portion of funds allocated to the lending programs that are backstopped by the CARES Act in connection with their termination at the end of this year. As the Secretary noted in his letter, non-CARES Act funds in the Exchange Stabilization Fund are available to support emergency lending facilities if they are needed.
Everything the Fed does is in service to our public mission. We are committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible on behalf of communities, families, and businesses across the country.
Thank you. I look forward to your questions.
Summary of Section 13(3) Facilities Using CARES Act Funding
The Municipal Liquidity Facility
The Municipal Liquidity Facility (MLF) helps state and local governments better manage the extraordinary cash flow pressures associated with the pandemic, in which expenses, often for critical services, are temporarily higher than normal and tax revenues are delayed or temporarily lower than normal. This facility addresses these liquidity needs by purchasing the short-term notes typically used by these governments, along with other eligible public entities, to manage their cash flows. By addressing the cash management needs of eligible issuers, the MLF was also intended to encourage private investors to reengage in the municipal securities market, including across longer maturities, thus supporting overall municipal market functioning.
Under the MLF, the Federal Reserve Bank of New York lends to a special purpose vehicle (SPV) that will directly purchase up to $500 billion of short-term notes issued by a range of eligible state and local government entities. Generally speaking, eligible issuers include all U.S. states, counties with a population of at least 500,000 residents, cities with a population of at least 250,000 residents, certain multistate entities, and revenue-bond issuers designated as eligible issuers by their state governors. Notes purchased by the facility carry yields designed to promote private market participation—that is, they carry fixed spreads based on the long-term rating of the issuer that are generally larger than those seen in normal times. With funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Department of the Treasury has committed to make a $35 billion equity investment in the SPV.
The MLF was announced on April 9, 2020, and closed its first transaction on June 5. As of November 25, the facility had purchased two issues for a total outstanding amount of $1.7 billion.
The MLF has contributed to a strong recovery in municipal securities markets, which has facilitated a historic issuance of approximately $275 billion of bonds since late March. State and local governments and other municipal bond issuers of a wide spectrum of types, sizes, and ratings have been able to issue bonds, including long maturity bonds, with interest rates that are at or near historical lows. Those municipal issuers that do not have direct access to the Federal Reserve under the MLF have still benefited substantially from a better-functioning municipal securities market.
The Main Street Lending Program
The Federal Reserve established the Main Street Lending Program (Main Street) to support lending to small and medium-sized businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. These businesses and nonprofits have good longer-term prospects but have encountered temporary cash flow problems due to the pandemic and, as a result, are not able to get credit on reasonable terms. In addition to providing loans for borrowers in current need of funds, Main Street offers a credit backstop for firms that do not currently need funding but may if the pandemic continues to erode their financial condition.
Under Main Street, the Federal Reserve Bank of Boston has set up one SPV to manage and operate five facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), the Main Street Expanded Loan Facility (MSELF), the Nonprofit Organization New Loan Facility (NONLF), and the Nonprofit Organization Expanded Loan Facility (NOELF). The SPV will purchase up to $600 billion in Main Street loan participations, while lenders retain a percentage of the loans. Main Street loans have a five-year maturity, no principal payments in the first two years, and no interest payments in the first year. Businesses with less than 15,000 employees or 2019 revenues of less than $5 billion are eligible to apply for Main Street loans. Available loan sizes span from $100,000 to $300 million across the facilities and depend on the size and financial health of the borrower. With funding from the CARES Act, the Department of the Treasury has committed to make a $75 billion equity investment in the SPV.
The business facilities (MSNLF, MSPLF, and MSELF) and nonprofit facilities (NONLF and NOELF) have broadly similar terms but differ in their respective underwriting standards. The business facilities use the same eligibility criteria for lenders and borrowers and have many of the same terms, while other features of the loans extended in connection with each facility differ. The loan types also differ in how they interact with the borrower’s outstanding debt, including with respect to the level of pre-crisis indebtedness a borrower may have incurred. Similarly, the nonprofit facilities have many of the same characteristics, but some features of the loans extended in connection with each facility differ. Eligible lenders may originate new loans under MSNLF, MSPLF, and NONLF or may increase the size of existing loans under MSELF and NOELF.
Main Street became operational on July 6, 2020. The Federal Reserve and the Department of the Treasury have modified the program several times to reflect extensive consultations with stakeholders, most recently by lowering the minimum loan threshold and adjusting fees to make the program more accessible. As of November 25, nearly 600 lenders representing more than half of U.S. banking assets have registered to participate in the program, and the program has purchased just under $6 billion in participations.
Since Main Street became operational, the number of registered lenders and the amount of loan participations continue to increase. Program usage will depend on the course of the economy, the demand for credit by small and medium-sized businesses, and the ability of lenders to meet credit needs outside the Main Street program. Demand for Main Street loans may increase over time if the pandemic continues to affect the ability of businesses and nonprofits to access credit through normal channels and as other support programs expire.
The Secondary Market Corporate Credit Facility
The Secondary Market Corporate Credit Facility (SMCCF) is designed to work alongside the Primary Market Corporate Credit Facility (PMCCF), discussed later, to support the flow of credit to large investment-grade U.S. companies so that they can maintain business operations and capacity during the period of dislocation related to COVID-19. The SMCCF supports market liquidity by purchasing, in the secondary market, corporate bonds issued by investment-grade U.S. companies, by U.S. companies that were investment grade before the onset of the pandemic and remain near investment grade, and by U.S.-listed exchange-traded funds (ETFs) whose investment objective is to provide broad exposure to the market for U.S. corporate bonds.
Under the SMCCF, the Federal Reserve Bank of New York lends to an SPV that purchases in the secondary market both corporate bond portfolios in the form of ETFs and individual corporate bonds to track a broad market index. The SMCCF purchases ETF shares and corporate bonds at fair market value in the secondary market and avoids purchasing shares of ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio. The pace of purchases is a function of the condition of the U.S. corporate bond markets. With funding from the CARES Act, the Department of the Treasury has committed to make a $75 billion equity investment in the SPV for the PMCCF and SMCCF, with a $25 billion allocation toward the SMCCF.
The SMCCF staggered its launch of ETF and bond purchases in order to act as quickly and effectively as possible. Through ETF purchases beginning on May 12, 2020, the SMCCF provided liquidity to the corporate bond market relatively quickly. The Federal Reserve began direct corporate bond purchases under the broad market index purchase program on June 16. In its first week of bond purchases, the SMCCF was purchasing about $370 million per day. As of November 25, purchases have been slowed to a current daily pace of approximately $20 million of bonds and no ETFs, and the total SMCCF outstanding value has reached $13.6 billion.
The SMCCF’s announcement effect was strong, quickly improving market functioning and unlocking the supply of hundreds of billions of dollars of private credit. Since late March, more than $1.6 trillion in corporate bonds have been issued without direct government or taxpayer involvement. The SMCCF has materially reduced its pace of purchases over the past few months as a result of the substantial improvements in the functioning of the U.S. corporate bond markets. The pace of purchases going forward will continue to be guided by measures of market functioning, increasing when conditions deteriorate and decreasing when conditions improve.
The Primary Market Corporate Credit Facility
The Primary Market Corporate Credit Facility (PMCCF) is designed to work alongside the Secondary Market Corporate Credit Facility (SMCCF) to support the flow of credit to large investment-grade U.S. companies so that they can maintain business operations and capacity during the period of dislocation related to COVID-19. The PMCCF supports market liquidity by serving as a funding backstop for corporate debt.
Under the PMCCF, the Federal Reserve Bank of New York lends to an SPV. The SPV will purchase qualifying bonds and syndicated loans with maturities up to four years. With funding from the CARES Act, the Department of the Treasury has committed to make a $75 billion equity investment in the SPV for the PMCCF and SMCCF, with a $50 billion allocation toward the PMCCF.
The dual announcement of the PMCCF and SMCCF was well received by the market. Between March 23 and April 6, 2020, credit spreads for investment-grade bonds declined substantially. As of November 25, there have not been any PMCCF transactions, nor have any indications of interest been received. While the PMCCF has not purchased any bonds since it opened, it serves as a backstop should markets enter another period of stress.
The Term Asset-Backed Securities Loan Facility
The Term Asset-Backed Securities Loan Facility (TALF) supports the flow of credit to consumers and businesses by enabling the issuance of asset-backed securities (ABS) guaranteed by newly and recently originated consumer and business loans.
Under the TALF, the Federal Reserve Bank of New York lends to an SPV. The SPV will make up to $100 billion of three-year term loans available to holders of certain triple-A-rated ABS backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets. The Federal Reserve lends an amount equal to the market value of the ABS less a haircut, and the loan is secured at all times by the ABS. With funding from the CARES Act, Department of the Treasury has committed to make a $10 billion equity investment in the SPV.
As of November 25, the TALF has extended $3.8 billion in loans since its launch on May 20, 2020. Loans have been collateralized by SBA-guaranteed ABS, commercial mortgage-backed securities (CMBS), and ABS secured by insurance premium finance loans or student loans.
The announcement and presence of the TALF has substantially helped improve liquidity in the ABS markets, including those for CMBS and collateralized loan obligations, with spreads in some ABS sectors returning close to normal levels. The TALF interest rates are attractive to borrowers when market conditions are stressed but not under normal conditions. While the facility is authorized to extend up to $100 billion in loans, total take-up will likely be much less unless ABS market conditions worsen.
Compliments of the U.S. Federal Reserve.
The post U.S. FED | Speech on Coronavirus Aid, Relief, and Economic Security Act first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at the Rome Investment Forum 2020 | Rome, 14 December 2020 |
2020 has been a year like no other. We have faced an economic contraction without precedent in peacetime: in the first half of this year output in the euro area declined by more than 15%. But we have also seen a collective response that has no precedent in the history of our monetary union.
That response has protected our economy from a potentially catastrophic depression. And now, with positive news on vaccines, we are finally able to glimpse the light at the end of the tunnel.
But we still need to pass through the tunnel. 2021 will likely be a “pandemic year”, characterised by high uncertainty and widespread vulnerabilities among firms and households. How the European economy emerges from the crisis will depend on how we manage this transition.
So what I would like to argue today is that policymakers must commit to continue providing certainty to the economy. The end of the pandemic is now in sight, and we need to extend policy support in order to underpin the recovery.
But expansionary policies must not be wasted. Only by taking the opportunity to invest in Europe’s recovery can we re-emerge on the other side with a more dynamic economy and a more sustainable debt burden.
A common shock, a common response
The coronavirus (COVID-19) is a common shock that has had asymmetric effects[1], hurting some sectors and economies much more than others. But what has defined this crisis – and set it apart from previous ones – is the policy response at the European level and the recognition that a common shock requires a common response.[2]
From the outset, monetary and fiscal policies have reinforced each other. The ECB has taken forceful monetary policy measures to stabilise markets and prevent a tightening of financing conditions. And fiscal policy has empowered monetary policy by offsetting lost private sector income and enabling banks to support the real economy. European policies – the ECB’s monetary policy and the joint EU fiscal support – have generated a European dividend.
This was a step change in European crisis management. As a result, the euro area economy was able to stage a strong rebound over the summer, as containment measures were lifted.
However, the recovery has been temporarily suspended in recent months due to the resurgence of the pandemic. Eurosystem staff now project that the euro area economy will contract by more than 2% in the fourth quarter of this year, with GDP falling by 7.3% overall in 2020. Growth next year will be 3.9%, 1.1 percentage points lower than expected in September.
Inflation will remain subdued for a protracted period: it is currently negative and is projected to rise to just 1.1% in 2022 and 1.4% in 2023; excluding its more volatile components, it is expected to increase to only 1.2% in 2023. This inflation weakness reflects the significant demand gap that the economy will be facing in the next two years. And – of relevance to today’s forum – this has implications for business investment.
With high uncertainty compounding weak demand and financial vulnerability[3], it is not surprising that businesses today are reluctant to make irreversible decisions. According to a recent survey by the European Investment Bank, more than 80% of companies consider uncertainty the main barrier to investment – and this figure rises to 96% in Italy.[4] It is therefore little wonder that, at the end of the third quarter, total investment in the euro area was about 10% below its pre-pandemic level. Consumption and GDP were down 4.6% and 4.3%, respectively.

Chart 1 – Euro area business investment, private consumption and GDP
(index: Q4 2019 = 100)

Image courtesy of the ECB.Source: Eurostat.

So the question for policymakers is how to create certainty for businesses to invest once more.[5] We cannot provide clarity about when the vaccine will be widely available or even how people will respond when that day comes. But we can guarantee our commitment to support the recovery: the stabilisation effort should therefore continue until the economy is on a solid, durable recovery path.
Indeed, if firms are to invest more today, they must be confident that their financing costs will not rise prematurely and leave them with an unaffordable debt burden. For monetary policy, this means providing certainty about financing conditions well into the future.
Last week, the ECB’s Governing Council did just that.
The ECB’s contribution: preserving favourable financing conditions
Since the very beginning of this crisis, the ECB has taken forceful measures to ensure that all sectors can benefit from favourable financing conditions.
In March we launched the pandemic emergency purchase programme (PEPP), under which we had purchased €700 billion of private and public sector bonds by the end of November. Nearly all euro area sovereigns are now borrowing at negative rates up to five-year maturities, while corporate bond spreads have narrowed significantly.
Our purchases were complemented by a further easing of our targeted longer-term refinancing operations (TLTROs). Over the past six months, more than €1.3 trillion has been allotted to banks at very favourable rates on the condition that they continue providing financial support to the real economy. TLTROs are a powerful form of support to small and medium-sized enterprises, which mainly rely on bank lending.
Our measures are ensuring that households, firms and governments can benefit from very accommodative financing conditions throughout the euro area. And in order to provide the certainty that the economy needs, the ECB is committed to preserving favourable financing conditions well into the future. To this end, last week we decided to strengthen our monetary policy action.
We increased the envelope of the PEPP by €500 billion, to a total of €1.85 trillion, and extended the horizon for the net purchases until at least March 2022.[6] This large envelope gives us considerable firepower. It allows us to respond flexibly at any time and with the necessary force to resist a premature tightening of financing conditions that could jeopardise the return of inflation in a sustained way to our aim of 2% over the medium term.
We have also extended the most favourable conditions on our TLTROs until June 2022 and broadened their size, in terms of maximum borrowing allowance. This will help calm fears of a tightening of financing conditions in the coming months – fears which we saw emerging in our latest survey on the access to finance of small and medium-sized enterprises.[7]
The PEPP envelope can be further expanded and extended, if warranted by the inflation outlook. And we stand ready to adjust all our instruments if downside risks to the outlook materialise, including those stemming from exchange rate dynamics. Indeed, an appreciation of the euro could significantly affect euro area inflation.[8]
There should be no doubt here: the ECB will not accept inflation settling at levels that are inconsistent with its aim. This is why we took action, and why we will continue to provide the monetary accommodation that is necessary to support the convergence of inflation to 2% over the medium term.
Our commitment to preserve favourable financing conditions will support the strengthening of inflation dynamics in two main ways.
First, over the coming months, where uncertainty is still high and the private sector is reluctant to take risks, fiscal policy will remain the main actor in the stabilisation effort and, as such, a key channel for transmitting monetary policy to the real economy.[9] Confidence in future financing conditions will remove obstacles to fiscal policy playing this role in full.
And when uncertainty recedes, monetary transmission through the private sector will gain more traction. Firms will be able to take full advantage of favourable financing conditions and carry out their investment plans. This is the second expansionary effect – and, crucially, the ECB’s commitment to preserve favourable financing conditions makes this effect more powerful over time.
That commitment is linked to supporting the return of inflation to our aim over the medium term. Given our projections – which foresee that even in a mild scenario inflation would rise to only 1.5% in 2023 – this means that financing conditions will need to remain very supportive even as growth accelerates from next year onwards. As a result, monetary policy will become more accommodative relative to the growth outlook.
Also in the light of the prolonged deviations of inflation below our aim over a number of years, a steady return to 2% is essential to anchor inflation expectations.
Investing in Europe’s recovery
But firms need certainty about more than just financing conditions. They also need reassurance about future demand and growth.
To lift the economy out of the crisis, governments need to wisely use the fiscal space created by our monetary policy and other key decisions at the European level – in particular joint EU borrowing. Next Generation EU (NGEU) alone will provide fiscal support amounting to about 5% of euro area GDP, focused in particular on those countries that have been hit hardest by the crisis, including Italy.
We will exit this crisis with higher public and private debt levels everywhere, so achieving growth rates that remain higher than interest rates will be crucial. For fiscal authorities, this means they should focus on high-quality, productive investment spending that lifts potential growth.
Many European economies have seen their growth capacity decline over recent decades. Capital deepening virtually stagnated, leading to lacklustre productivity performance.[10] Reversing this trend is necessary to ensure debt sustainability.[11]

Chart 2 – Labour productivity growth and decomposition
(period averages of annual percentage changes and percentage point contributions)

Image courtesy of the ECB.
Sources: The European Commission’s AMECO database and ECB staff calculations.Notes: Productivity is measured in terms of output per person employed. Percentage point contributions are computed using a Cobb-Douglas production function, with capital deepening contributions estimated using two-period average factor shares. The total factor productivity (TFP) contribution is taken as the residual.

NGEU spending should focus on investment in those areas with the greatest potential to boost productivity and labour participation. If this happens, the possible gains are large. According to ECB estimates, NGEU funds could increase real output in the euro area by up to 1.5% by 2026 relative to the baseline scenario. High efficiency and institutional quality will be key to maximising the benefits of NGEU.
For Italy, the possible gains are larger: up to 3.5% of GDP if funds are well invested. Moreover, NGEU grants could reduce public debt-to-GDP ratio by more than 5 percentage points by 2026.[12]
The gains will be highest if investment spending is targeted at the technologies and sectors that will drive the economy after the pandemic.[13] More than half of EU firms expect to increase their use of digital technologies in response to COVID-19.[14] This requires enhancing digital skills and infrastructure, in order to be ready to face the digital challenge. For example, in the euro area the share of individuals with at least basic digital skills ranges from 79% in the Netherlands to 42% in Italy.[15]
If spent wisely, NGEU funds will contribute to significantly improving technological capabilities. This would not only ensure that all our economies are ready to take advantage of this transformation. It would also reduce one of the differences in structural conditions that has contributed to divergences among European economies.[16]
NGEU funds can be directly used to accelerate digitalisation, for instance by increasing the use of e-government services. The fiscal space that NGEU creates in national budgets can also be reallocated towards digital training and education.
In the past, pandemics have sparked innovation in how economies are structured. Recent research shows that government interventions during the 1918 influenza pandemic helped spur innovation after the pandemic ended.[17] I see no reason why we cannot do the same.
However, we must also recognise that digitalisation tends to reward those with higher skills and so could exacerbate inequalities. Therefore, during the transition attention should be given to the social implications of reallocating resources towards more digitalised sectors.[18]
Investment to support the transition to a low-carbon economy will also be a key component of the recovery from the pandemic throughout the euro area. Italy should not be lagging behind in this area.
Conclusion
The coronavirus shock may be a turning point for Europe. The agreements reached by EU leaders in recent months show that we all understand that addressing challenges together brings benefits to everyone.
Our common response at the European level must now continue, in order to provide clarity on the policies that will be implemented to underpin and strengthen the recovery.
To put the economy on a solid, durable growth path consistent with the return of inflation to our aim, monetary and fiscal policy need to remain accommodative for an extended period of time.
Fiscal policy must focus on investment in order to boost potential growth. We must resist the temptation to take hazardous shortcuts. Only growth, not financial alchemy, can guarantee debt sustainability and pave the way for prosperity.
Compliments of the European Central Bank.
The post ECB | A commitment to the recovery first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by President von der Leyen on 12 December 2020, Brussels |
“Check against delivery”
Dear guests of the Climate Ambition Summit!
55% – That is now indeed Europe’s calling card. I am glad that the 27 European Leaders have signed up to the European Commission’s proposal for taking climate action to a new level of ambition. Together with the agreement on our next 7-year-budget, the 55% agreement is the go-ahead for scaling up climate action across our economy and society.
We have already started. From boosting renewable energy, creating hydrogen valleys and producing the most sustainable batteries to launching a wave of building renovation, decarbonising transport and protecting and restoring our nature. We are serious about getting our economy on a more sustainable path.
But this is not a task for Europe alone. Europe only accounts for less than 10% of global emissions. Climate change is more than a European issue. It is a human issue. And today, there is a global movement for climate action. A movement that counts on powerful nations but also on countless cities, NGOs, people of good will. Europe wants to contribute to the movement and make it grow.
We want to work with all those who agree that we must put a price on carbon. We are ready for more ambitious commitments with like-minded countries. We are supporting developing countries, to help them decouple their emissions and their economic growth. Just like we are doing in Europe.
And it is more than cutting emissions. It is about green finance. It is about restoring biodiversity. It is about a new circular economy that creates jobs and prosperity while preserving nature. Many things have to change, so that our planet can remain the same for the next generation. 55% is Europe’s contribution on the road to Glasgow. Let us walk this road together!
Compliments of the European Commission.
The post Speech by President von der Leyen at the Climate Ambition Summit first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Central banks have played a pivotal role in easing financial conditions in response to the COVID-19 shock, and helped avert a catastrophic downturn. However, their work is far from done. Yet more monetary stimulus will be needed to support economic recovery, and central banks are implementing innovative new strategies to provide it.

Policymakers must weigh the pros of more stimulus today against the cons of higher financial stability risks in the future.

While the new approaches are both necessary and welcome, it is critical that policymakers weigh the pros of providing more stimulus today against the potential cons of higher financial stability risks down the road. In a new paper, I present a model for quantifying the tradeoff between support today and vulnerability tomorrow.
New strategies for new challenges
Even prior to the pandemic, central banks were struggling to boost economic activity and bring inflation to target . A range of policies, including forward guidance and asset purchases, was deployed to spur a strong recovery in employment after the Global Financial Crisis. But a sharp decline in the neutral rate of interest reduced the scope to counter low inflationary pressures. Even with interest rates very low out the yield curve, inflation remained chronically low and appeared to be pulling down long-run inflation expectations in many economies. This is a concern because it would put downward pressure on nominal yields and further erode policy space.
The COVID-19 crisis has greatly intensified these challenges. Employment has collapsed, threatening a major humanitarian crisis in many economies, and inflation has been further depressed by weak activity and falling commodity prices. While more stimulus is needed—along with better ways to anchor inflation expectations—the post-2008 playbook won’t suffice. Policy rates have already been pushed to zero or below, and very low yields on long-term government bonds limit the scope to provide stimulus through purchases of these instruments.
Last month, I joined a panel hosted by the IMF, New Policy Frameworks for a “Lower-for-Longer” World, to consider how some leading central banks are addressing these challenges. Richard Clarida (Federal Reserve), Philip Lane (European Central Bank), and Carolyn Wilkins (Bank of Canada) discussed the monetary policy frameworks reviews that their institutions have launched, focusing on new ways to boost employment and inflation in this very low-rate environment.
The Fed recently completed its review, adopting an innovative “make-up” strategy also being considered by other central banks: to allow inflation to overshoot its target to make up for a period in which it has run low, helping to better anchor inflation expectations around targets. The prospect that the central bank will allow the economy to run hot in the future—so that inflation can overshoot—may create more optimism today and fuel a stronger recovery.
Financial stability tradeoffs
Central banks are also exploring how unconventional policies already in use, such as purchases of sovereign bonds or corporate debt, can be used more aggressively. Combined with new approaches, this can play a critical role in speeding the recovery from COVID-19, as well as from future shocks hitting economies. But these even more accommodative policies may pose substantial risks down the road by encouraging excessive risk-taking and a build-up of vulnerabilities.
Ideally, financial regulation (macroprudential policies) should serve as the first line of defense in mitigating financial stability risks, consistent with Fund policy advice. But that may fall short, often reflecting the lack of tools to contain vulnerabilities such as in nonbank financial institutions, or implementation hurdles stemming from the political process.
Accordingly, it is crucial that monetary policymakers incorporate macro-financial stability considerations in their decision making, besides the path of output, unemployment, and inflation. At the “New Frameworks” event, I presented a “New Keynesian” modeling framework that allows central banks to quantify the tradeoff between boosting inflation and output in the near-term and increasing financial stability risks down the road.
In the framework, easy monetary policy stimulates aggregate demand not only through standard channels, but also through a risk-taking mechanism. Looser monetary policy today relaxes financial conditions and reduces near-term risks to both output and financial stability, but also cause financial fragilities to grow over time, increasing output risk in the medium term. The framework is designed to help policymakers balance this “intertemporal” tradeoff associated with “low-for-long” monetary policies, including those deployed in response to COVID-19.
Macroprudential policies may influence these tradeoffs, and the active deployment of tools to contain financial stability would allow more prolonged accommodation and promote faster recovery. It is also vital to consider how monetary policy easing by major central banks may affect financial stability in foreign economies through increased risk-taking and a buildup of leverage. The IMF’s efforts to develop an integrated policy framework in recent years—which considers how central banks can use macroprudential policies, capital flow management tools, and foreign exchange intervention to achieve their objectives—should be constructive in assessing how to mitigate such risks.
Conclusions
Central banks’ bold and innovative strategies to address the challenges of a “lower-for-longer” environment post-COVID-19 should provide additional firepower to support faster global recovery and help achieve their inflation targets. But central banks need to be vigilant in managing the risks to financial stability that may accompany these accommodative policies and should make the future consequences of their present actions a key part of their decision making.
Author:

Tobias Adrian, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department

Compliments of the IMF.
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“In a changing global landscape, I believe it is time for a new transatlantic agenda fit for today’s world. And I believe it is Europe who should take the initiative.” President Ursula von der Leyen, November 2020
Following the election of President Biden and Vice-President Harris by the people of the United States of America, combined with a more assertive and capable European Union, and a new geopolitical and economic reality, the European Commission and the High Representative are putting forward a proposal for a new, forward-looking transatlantic agenda for global change.
This proposal is centred on areas where EU-US interests converge, our collective leverage can best be used and where global leadership is required. It has a united, capable and self-reliant EU at its core, which is good for Europe, good for the transatlantic partnership and good for the multilateral system.
THIS NEW TRANSATLANTIC AGENDA WILL BE GUIDED BY: Stronger multilateral action and institutions Pursuit of common interests and leveraging our collective strength Looking for solutions that respect our common values of fairness, openness and competition.
Click here to read the entire program the EU Commission outlined.
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While the Commission will continue to do its utmost to reach a mutually beneficial agreement with the UK, there is now significant uncertainty whether a deal will be in place on 1 January 2021.
The European Commission has today put forward a set of targeted contingency measures ensuring basic reciprocal air and road connectivity between the EU and the UK, as well as allowing for the possibility of reciprocal fishing access by EU and UK vessels to each other’s waters.
The aim of these contingency measures is to cater for the period during which there is no agreement in place. If no agreement enters into application, they will end after a fixed period.
President von der Leyen said: “Negotiations are still ongoing. However, given that the end of the transition is very near, there is no guarantee that if and when an agreement is found, it can enter into force on time. Our responsibility is to be prepared for all eventualities, including not having a deal in place with the UK on 1 January 2021. That is why we are coming forward with these measures today”.
The Commission has consistently called on all stakeholders in all sectors to prepare for all possible scenarios on 1 January 2021. While a “no-deal” scenario will cause disruptions in many areas, some sectors would be disproportionately affected due to a lack of appropriate fall-back solutions and because in some sectors, stakeholders cannot themselves take mitigating measures. The Commission is therefore putting forward today four contingency measures to mitigate some of the significant disruptions that will occur on 1 January in case a deal with the UK is not yet in place:

Basic air connectivity: A proposal for a Regulation to ensure the provision of certain air services between the UK and the EU for 6 months, provided the UK ensures the same.

Aviation safety: A proposal for a Regulation ensuring that various safety certificates for products can continue to be used in EU aircraft without disruption, thereby avoiding the grounding of EU aircraft.

Basic road connectivity: A proposal for a Regulation covering basic connectivity with regard to both road freight, and road passenger transport for 6 months, provided the UK assures the same to EU hauliers.

Fisheries: A proposal for a Regulation to create the appropriate legal framework until 31 December 2021, or until a fisheries agreement with the UK has been concluded – whichever date is earlier – for continued reciprocal access by EU and UK vessels to each other’s waters after 31 December 2020. In order to guarantee the sustainability of fisheries and in light of the importance of fisheries for the economic livelihood of many communities, it is necessary to facilitate the procedures of authorisation of fishing vessels.

The Commission will work closely with the European Parliament and Council with a view to facilitate entry into application on 1 January 2021 of all four proposed Regulations.
Readiness and preparedness for 1 January 2021 is now more important than ever. Disruption will happen with or without an agreement between the EU and the UK on their future relationship. This is the natural consequence of the United Kingdom’s decision to leave the Union and to no longer participate in the EU Single Market and Customs Union. The Commission has always been very clear about this.
Background
The United Kingdom left the European Union on 31 January 2020. At the time, both sides agreed on a transition period until 31 December 2020, during which EU law continues to apply to the UK. The EU and the UK are using this period to negotiate the terms of their future partnership. The outcome of these negotiations is uncertain.
The Withdrawal Agreement remains in force. It guarantees the rights of EU citizens in the UK, as well as our financial interests, and protects peace and stability on the island of Ireland, amongst many other things.
Public administrations, businesses, citizens and stakeholders on both sides need to prepare for the end of the transition period. The Commission has worked closely with EU Member States to inform citizens and businesses about the consequences of Brexit. It published almost 100 sectoral guidance notices – in all official EU languages – with detailed information on what administrations, businesses and citizens have to do to prepare for the changes at the end of the year.
Since July, the Commission has been carrying out a virtual “tour des capitales” to discuss Member States’ readiness plans.
The Commission has also launched a number of awareness-raising campaigns and intensified its stakeholder outreach over recent months. It provided training and guidance to Member State administrations, and will continue to organise sectoral seminars with all Member States at technical level, to help fine-tune the implementation of readiness measures, in particular in the areas of border checks for persons and goods.
Compliments of the European Commission.
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