The European Commission has disbursed €14 billion to nine EU countries in the second installment of financial support to Member States under the SURE instrument. As part of today’s operations, Croatia has received €510 million, Cyprus €250 million, Greece €2 billion, Italy an additional €6.5 billion, Latvia €120 million, Lithuania €300 million, Malta €120 million, Slovenia €200 million and Spain an additional €4 billion.
This support, in the form of loans granted on favourable terms, will assist these Member States in addressing sudden increases in public expenditure to preserve employment. Specifically, they will help cover the costs directly related to the financing of national short-time work schemes, and other similar measures they have put in place as a response to the coronavirus pandemic, including for the self-employed.
At the end of October, Italy, Spain and Poland already received a total of €17 billion under the EU SURE instrument. Once all SURE disbursements have been completed to the 9 countries receiving financial support today, Croatia will receive €1 billion, Cyprus €479 million, Greece €2.7 billion, Italy €27.4 billion, Latvia €192 million, Lithuania €602 million, Malta €244 million, Slovenia €1.1 billion and Spain €21.3 billion.
Today’s disbursement follow the second issuance of social bonds under the EU SURE instrument, marked by very strong investor interest.
The SURE instrument can provide up to €100 billion in financial support to all Member States. The Commission has so far proposed to make €90.3 billion in financial support available to 18 Member States. The next disbursements will take place over the course of the months ahead, following the respective bond issuances.
Members of the College said:
President of the European Commission Ursula von der Leyen said: “The second wave is hitting Europe hard. The EU is here to support. We want to protect people from this virus and we also want to protect their jobs, as this crisis affects businesses too. Many jobs are on the line. With SURE, we mobilise up to €100 billion in loans to EU countries to help finance short-time work schemes. This second disbursement of €14 billion will help workers receive an income. More will come.”
Commissioner Johannes Hahn, in charge of Budget and Administration, said: “The second SURE issuance has once again been an overwhelming success and I am glad that as a result of it citizens in more of our Member States are getting the much needed support at times of crisis.”
Commissioner for Economy Paolo Gentiloni said: “After last week’s second issuance of SURE social bonds, again massively oversubscribed, today we deliver the €14 billion raised to nine EU countries. In these sombre times for so many European workers and companies, I am proud that the Commission is helping to bring hope and support.”
Background
On 10 November, the European Commission issued social bonds for the second time under the EU SURE instrument, for a total value of €14 billion. The issuing consisted of two bonds, with €8 billion due for repayment in November 2025 and €6 billion due for repayment in November 2050. The issuance has received an overwhelming response in the capital markets and the bonds were 13 and 11.5 times oversubscribed, respectively for the 5- and 30-year tranche, resulting in favourable pricing terms for both bonds. The terms on which the Commission borrows are passed on directly to the beneficiary Member States.
The bonds issued by the EU under SURE benefit from a social bond label. This provides investors with confidence that the funds mobilised will serve a truly social objective.
Compliments of the European Commission.
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Keynote speech by Luis de Guindos, Vice-President of the ECB, at the 23rd EURO FINANCE WEEK |
Frankfurt am Main, 16 November 2020
I am honoured to open the 23rd Euro Finance Week. My remarks today will focus on two main issues. First, I will provide an overview of the current economic situation in the euro area, and focus on how the pandemic has amplified existing vulnerabilities in the financial system. And second, I will highlight the important role that financial regulation and prudential policy have played in response to the pandemic so far, and argue that further policy measures are needed.
An uneven recovery across sectors and countries increases the risks of fragmentation
The pandemic crisis has put great pressure on economic activity, with euro area growth expected to fall by slightly less than 8% in 2020. While the gradual relaxation of social distancing measures created a strong yet incomplete rebound in economic activity in the third quarter, that recovery started losing momentum. The tighter containment measures recently adopted across Europe are weighing on current growth. With the future path of the pandemic highly unclear, risks are clearly tilted to the downside. Economic uncertainty is being augmented by geopolitical risks, such as the possibility of a no-deal Brexit. While its impact on the euro area economy should be contained, such an outcome could amplify the macro-financial risks to the euro area economic outlook. On the upside, news about a potential vaccine fosters hope of a faster return to pre-pandemic growth levels.
The severity of the pandemic shock has varied greatly across euro area countries and sectors, which is leading to uneven economic developments and recovery speeds. Countries more heavily affected by the coronavirus crisis and the associated containment measures suffered the sharpest falls in economic activity in the first half of 2020. And growth forecasts for 2020 also point towards increasing divergence within the euro area. The recent European initiatives, such as the Next Generation EU package, should help ensure a more broad-based economic recovery across various jurisdictions and avoid the kind of economic and financial fragmentation that we observed during the euro area sovereign debt crisis.
The economic impact of the pandemic is highly skewed at the sector level. Consumers have adopted more cautious behaviour, and the recent tightening of restrictions has notably targeted the services sector, including hotels and restaurants, arts and entertainment, and tourism and travel. Output losses and the expected recovery will be significantly more uneven across sectors than in previous crises, as a result.
The pandemic has amplified existing vulnerabilities in the euro area financial system
Fiscal support has played a key role in mitigating the impact of the pandemic on the economy and preserving productive capacity. This is very welcome, notwithstanding the sizeable budget deficits anticipated for 2020 and 2021 and the rising levels of sovereign debt.
While policy support will eventually need to be withdrawn, abrupt and premature termination of the ongoing schemes could give rise to cliff-edge effects and cool the already tepid economic recovery. Loan guarantees, tax deferrals and direct transfers have alleviated immediate liquidity constraints for many firms, thus keeping a lid on insolvencies during the acute phase of the crisis. However, corporate bankruptcies are projected to increase in 2021. Credit risk has risen for SMEs in particular, as they are more dependent on bank financing than large firms. A premature withdrawal of loan guarantee schemes may induce banks to tighten credit standards. This would result in a credit crunch for non-financial corporations and translate into a sharp rise in company defaults.
The pandemic has also weighed on the long-term profitability outlook for banks in the euro area, depressing their valuations. From around 6% in February of this year, the euro area median banks’ return on equity had declined to slightly above 2% by June. The decline in profitability is being driven mainly by higher loan loss provisions and weaker income-generation capacity linked to the ongoing compression of interest margins. Looking ahead, bank profitability is expected to remain weak and not to recover to pre-pandemic levels before 2022. This profitability outlook is reflected in rock-bottom bank valuations, with the stock prices of euro area banks recovering less than the overall market over the summer.
Non-performing loans (NPL) are likely to present a further challenge to bank profitability. But there is typically a lag between a contraction in economic activity and the formation of new NPLs. The policy support provided to borrowers through moratoria and public guarantees may imply that this lag will be longer than in past downturns, and NPLs may start to materialise in the course of next year. Banks have already anticipated some future credit losses by increasing their provisions. This is in response to a doubling in the value of loans where credit risk has significantly increased since origination, also known as Stage 2 assets. And despite these efforts, loan loss provisions of euro area banks, could still be below needs suggested by fundamentals. Newly originated loans have also tended to have greater credit risk, with banks reporting a higher probability of default according to their internal ratings-based portfolios in the second quarter of the year. This is in line with results of the ECB’s vulnerability analysis. Under the baseline scenario, credit losses would continue increasing and the solvency position of the significant euro area banks would deteriorate by mid 2022.
Moving on, the non-bank financial sector continued to be an important source of financing for companies and thereby helped support the economic recovery. Non-banks have absorbed the vast majority of the new debt securities issued by non-financial corporates in the euro area this year – notably also from sectors more sensitive to the economic fallout from the pandemic.
At the same time, non-banks also played a more negative role in amplifying the market turmoil this spring. Investment funds, including money market funds, experienced outflows of a magnitude last seen during the global financial crisis. This only stopped once the ECB launched its pandemic emergency purchase programme (PEPP). The PEPP indeed proved to be a turning point in financial markets. Flows into investment funds turned positive again in the subsequent months, quickly compensating for all the redemptions experienced in February and March. However, these flow dynamics imply that investment funds shed large volumes of assets procyclically, in the first quarter of the year, before becoming a net buyer again once market valuations started to recover.
One major reason why investment funds are particularly liable to amplify adverse market dynamics is their structurally low liquidity buffers. Low cash holdings force investment funds to sell relatively illiquid assets in the event of outflows, which serves to depress asset prices. Although funds temporarily increased their holdings of liquid assets in response to this year’s market stress, their cash positions have already returned to pre-pandemic levels. This again leaves the sector vulnerable to large redemptions in the event of any renewed stress in the financial markets. Moreover, financial vulnerabilities were aggravated by investment funds continuing to increase their exposure to credit risk. More than three-quarters of the bonds purchased by funds after March 2020 were rated BBB or below.
Policy considerations for the banking sector
Starting in March 2020, European and national prudential authorities took swift and extraordinary policy measures to address the impact of the pandemic on the euro area banking sector. Thanks to this prompt policy reaction, coupled with the forceful fiscal and monetary support measures that have been put in place and the stronger capital positions that banks have built since the global financial crisis, banks have contributed to absorb the shock of the pandemic by meeting increased demand for credit.
Looking ahead, it will be essential for banks to be willing to make use of the available capital buffers to absorb losses without excessive deleveraging. Over the medium term, a rebalancing between structural and cyclical capital requirements is desirable to create macroprudential policy space. A greater share of releasable buffers would enhance macroprudential authorities’ ability to act countercyclically.
But we must not lose sight of key structural weaknesses in the European banking sector that were evident even before the crisis hit. For quite some time now, European bank valuations have been depressed by very low profitability caused by excess capacity, limited revenue diversification and low cost efficiency. The need to tackle these structural issues is now more urgent than ever.
Although banks have stepped up cost-cutting efforts in the wake of the pandemic, they need to push even harder for greater cost efficiency. Consolidation via mergers and acquisitions is another potential avenue for reducing overcapacity in the sector. The planned domestic mergers in some countries are an encouraging sign in this regard.
Furthermore, a comprehensive approach at national and EU level will be needed if distressed assets on bank balance sheets increase significantly. Market-based solutions should take a leading role, and actions at the European level to make secondary markets for NPLs more efficient and transparent would be desirable. Further actions might include guidance on best practices for government-sponsored securitisation schemes, or new solutions that would help troubled but viable firms to restructure outstanding debts and raise new equity.
Finally, we also need to make progress on the banking union, which unfortunately remains unfinished. Renewed efforts are urgently required to improve its crisis management framework. This includes finalising the agreement on the European Stability Mechanism as a backstop to the Single Resolution Fund and ensuring an orderly and efficient exit of small and medium-sized banks in particular, by harmonising the powers to transfer assets and liabilities in liquidation with the support of deposit guarantee funds. We also need to facilitate the flow of capital and liquidity within banking groups, subject to adequate financial stability safeguards and establish the third pillar of banking union – the European deposit insurance scheme.
Policy considerations for the non-bank sector
The developments in the investment fund sector highlight the fact that the current policy framework relies to a large extent on ex post liquidity management tools such as suspensions or gating, which asset managers can use at their discretion. However, we saw that these tools were not enough to alleviate the liquidity strains from a system-wide perspective and can have adverse effects on investors scrambling for liquidity. Only the decisive policy action by central banks helped stabilise financial markets and improve liquidity conditions across a broad range of markets and institutions.
This suggests that a comprehensive macroprudential approach for non-banks needs to be devised. Policies should address system-wide risk and reflect the fact that the sector comprises a diverse set of entities and activities. This would ensure that the non-bank sector is better able to absorb shocks in the future. Authorities should be equipped with a range of policies to effectively mitigate the build-up of risks during periods of exuberance.
In particular, the liquidity of investment funds’ assets should be closely aligned with redemption terms. Funds should also be required to hold a sufficiently large share of cash and highly liquid assets to manage increased liquidity needs stemming from outflows or margin calls in periods of stress. During the spring turmoil, increasing margin calls helped to ensure that the extraordinary market volatility did not result in concerns about counterparty risk. At the same time, it contributed to amplify the liquidity pressures in the system for non-bank financial intermediaries in particular. This warrants further analysis to assess whether adjustments to margining practices and the related regulatory approaches are needed to reduce excessive procyclicality in initial margins.
As money market funds also demonstrated significant vulnerabilities during the recent market turmoil further work should focus on enhancing liquidity requirements and reconsidering the share of their liquid assets.
Conclusion
Let me conclude.
As I’ve outlined, the banking sector has weathered the crisis to date fairly well, despite a number of risks and vulnerabilities. It has helped to absorb the shock and avoided a credit crunch that would have been detrimental to the economy. Going forward, it is urgent to tackle structural weaknesses in the European banking sector, by reducing overcapacity and enhancing cost-efficiency to address its persistently low profitability. Furthermore, it will be important for banks to be willing to use their capital buffers to absorb losses and continue to support lending. On the non-bank side, investment funds continue to be vulnerable to sudden outflows during periods of market stress due to their relatively small liquidity buffers. A review of the liquidity requirements for money market funds and their portfolio composition is also necessary. This calls for the timely roll-out of a comprehensive macroprudential framework for non-banks.
Compliments of the European Central Bank.
The post ECB | The euro area financial sector in the pandemic crisis first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Commission has today launched a new complaints system for reporting market access barriers and breaches of Trade and Sustainable Development commitments in the EU’s trade agreements and under the Generalised Scheme of Preferences.
The new complaints system reflects the Commission’s increased efforts to strengthen the enforcement and implementation of trade agreements. It follows the Commission’s appointment in July of its first Chief Trade Enforcement Officer (CTEO) to oversee its tougher action on enforcing trade policy, as well as the Commission’s 15-point Trade and Sustainable Development (TSD) Action Plan of 2018. This Plan reflects the consensus of promoting close long-term TSD engagement, on the one hand, and of stepping up monitoring efforts – and more assertive enforcement – on the other hand. Complaints will be channelled through a new centralised Single Entry Point system in DG Trade to allow for a responsive, focussed and structured process.
Executive Vice-President and Commissioner for Trade Valdis Dombrovskis said: “The Commission has made enforcement a top priority, along with a sharper focus on implementing trade agreements. Under this new system, complaints relating to sustainable development commitments will be given the same level of focus and attention as market access barriers. It is a real step forward because stakeholders now will play a direct role in ensuring that EU trade policy delivers both on trade opportunities and on raising labour and environmental standards. The complaints system will be accessible to all relevant parties and businesses and Commission services will assess each complaint and take action as needed.”
The complaints procedure is open to Member States, individual companies, business/trade associations, civil society organisations and citizens from the EU. The complaint forms – one for market access barriers and one for violations of sustainable development commitments – will be accessible online for EU-based stakeholders on the ‘Access2Markets’ portal on DG TRADE’s website. Complainants will be required to provide a detailed factual description of the issue at stake and to list any actions already taken to address it.  For market access issues, the complainant will need to describe the alleged barrier’s potential economic impact. For sustainable development issues, the complainant must give details of the impact and seriousness of the alleged breach.
After launching the complaint, the complainant will be informed as to whether it leads to an enforcement action. The Commission services will inform the complainant about the content of the action plan, which may identify the steps suitable for tackling the issues subject to the complaint but also indicate to the extent possible timelines of specific actions. The Commission services could also provide periodic updates on specific actions undertaken to address the issue, depending on the sensitivity and confidentiality of each of the steps undertaken.
The entry into operation of the new complaints system is accompanied, on the website of DG Trade, by a notice containing operating guidelines for the system and a notice on the broader working approaches to enforcement and implementation work of DG Trade under the CTEO.
EU action to tackle barriers facing European companies around the world has been successful, with the Commission’s work to remove barriers between 2014 and 2018 generating at least €8 billion additional exports in 2019.
Compliments of the European Commission.
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Today, the European Commission launched the New Consumer Agenda to empower European consumers to play an active role in the green and digital transitions. The Agenda also addresses how to increase consumer protection and resilience during and after the COVID-19 pandemic, which brought significant challenges affecting the daily lives of consumers. More concretely, the Agenda puts forward priorities and key action points to be taken in the next 5 years together with Member States at European and national levels. This will, among other things, include a new legal proposal aiming to provide better information on sustainability to consumers, adapting existing legislation to the digital transformation as well as an action plan on product safety with China.
Vice-President for Values and Transparency, Věra Jourová, said: “We want to empower consumers to play their role in the green and digital transitions. At the same time we must ensure that our rules to protect consumer rights remain up to speed with today’s digital reality – especially through vigorous enforcement and increased responsibility of online platforms.”
Commissioner for Justice, Didier Reynders, said: “European consumers are at the core of a global change. Their actions can make a significant difference. Consumers need to be empowered to make sustainable choices and be reassured that their* rights will be protected in all circumstances. The new Agenda introduces measures that will promote a fair digital and green society, taking into account that consumer behaviour transcends borders of individual Member States.”
Consumer rights in COVID-19 crisis
Whether online scams or cancelled travel arrangements, the COVID-19 pandemic has affected many areas of consumers’ lives. The Commission will continue to tackle consumer scams, in cooperation with the Consumer Protection Cooperation network and in dialogue with the platforms and all relevant actors. In addition, the Commission will continue to ensure the protection of travellers and passengers EU rights in case of cancelled trips*. The Commission will analyse the longer-term impact of COVID-19 on the consumption patterns of Europeans, which will serve as a basis for future policy initiatives.
Empowering consumers and ensuring better protection
The New Consumer Agenda presents a vision for EU consumer policy from 2020 to 2025 focusing on five key priority areas:

Green transition – The Commission aims to ensure that sustainable products are available to consumers on the EU market and that consumers have better information to be able to make an informed choice. Next year, the Commission will present a proposal to equip consumers with better information on the sustainability of products and to fight practices, such as greenwashing or early obsolescence. The Commission will also promote repair and encourage more sustainable and “circular” products. The green transition cannot happen without companies – the Commission is determined to work with economic operators to encourage their pledges in support of sustainable consumption, beyond what is required by law.

Digital transformation – The digital transformation is radically changing consumers’ lives offering new opportunities but also presenting them with challenges. The Commission aims to tackle online commercial practices that disregard consumers’ right to make an informed choice, abuse their behavioural biases or distort their decision-making processes, such as dark patterns and hidden advertising. In addition, consumers’ interests need to be duly taken into account when setting rules governing the digital economy and requirements for Artificial Intelligence (AI). To adapt current rules to the ongoing digitalisation and the increase of connected products, the Commission will also review the directive related to product safety. As there is a need to reinforce consumer protection regarding digitalisation of retail financial services, the directives for consumer credit and marketing of financial services will be reviewed.

Effective enforcement of consumer rights – While enforcement of consumer rights is the responsibility of Member States, the Commission has a coordinating and supporting role. The Commission will assist Member States in the timely implementation and enforcement of consumer law, including through the Consumer Protection Cooperation network. The Commission will also support national authorities, such as by deploying a toolbox of innovative e-tools to strengthen national authorities’ capacity to tackle illegal online commercial practices and identify unsafe products.

Specific needs of certain consumer groups – Certain groups of consumers in certain situations can be particularly vulnerable and need specific safeguards, for instance children, older people or those with disabilities. The Commission will look into requirements for childcare product standards. In relation to those with financial vulnerabilities, exacerbated by COVID-19 crisis, the Commission will increase funding for improved debt advice in Member States. The Commission will also support initiatives providing local advice on how to access information – online and offline.

International cooperation – In a globalised world in which online purchases transcend borders, cooperation with international partners has become crucial. The Commission will develop an Action Plan with China in 2021 to enhance the safety of products sold online. As of 2021, the Commission will also develop regulatory support, technical assistance and capacity building for EU partner regions including in Africa.

Next steps
The Commission will come forward with the initiatives announced in the agenda and looks forward to a wide-ranging dialogue with all interested parties on the priorities and actions as well as the cooperation methods to promote consumer protection together in the years ahead.
Background
The EU has a solid consumer protection framework developed over many years and recently enhanced through several legislative initiatives from which consumers in the EU will benefit in the years to come including the 2018 New Deal for Consumers
The New Consumer Agenda, builds on 2012 Consumer Agenda and is the product of intensive preparations and discussions with interested parties. In June 2020, the Commission launched an EU-wide open public consultation on the new European consumer policy for the next period. The public consultation has provided valuable input for setting up the new Consumer Agenda, and showed general support for its main priorities, including the need to respond to the COVID-19 pandemic. The agenda complements other Commission initiatives such as the Green Deal and the Circular Economy Action Plan, and it will also ensure that the implementation of the Multi-Annual Financial Framework will take consumer priorities into account.
Compliments of the European Commission.
The post New Consumer Agenda: European Commission to empower consumers to become the driver of transition first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Commission has approved an investment package of more than €280 million from the EU budget for over 120 new LIFE programme projects. This EU funding will trigger total investments of nearly €590 million to help meet these projects’ ambitious goals for environment, nature, and climate action. This amount represents a 37% rise compared to last year.
The projects will help to achieve the European Green Deal objectives by supporting the EU Biodiversity Strategy and the Circular Economy Action Plan, contributing to the green recovery from the Coronavirus pandemic, and helping Europe become a climate-neutral continent by 2050, among others. Many of the new projects are cross-country projects involving several Member States.
Frans Timmermans, Executive Vice-President for the European Green Deal said: “The European Green Deal is our roadmap to a green, inclusive, and resilient Europe. LIFE projects epitomise these values as they bring together Member States for the protection of our environment, the restoration of nature, and support of biodiversity. I’m looking forward to the results of these new projects.”
Virginijus Sinkevičius, Commissioner for the Environment, Oceans and Fisheries added: “LIFE projects can really make a tangible difference on the ground. They bring solutions to some of the most serious challenges of our time such as climate change, loss of nature and unsustainable use of resources. If replicated across the EU at speed and scale, they can help the EU achieve its ambitious EU Green Deal goals and contribute to building a greener and more resilient Europe for all of us, but also for generations to come.”
Approximately €220 million are allocated to a wide range of projects on environment and resource efficiency, nature and biodiversity, and environmental governance and information and over €60 million to support climate change mitigation, adaptation and governance and information projects.
This includes major investments aimed at protecting and enhancing Europe’s biodiversity. Projects such as restoring peatlands – unique ecosystems home to many highly adapted, rare and threatened species – will contribute to the implementation of the EU Biodiversity Strategy. Peatlands are also an important carbon sink, and can boost Europe’s drive toward climate neutrality by 2050.
The LIFE projects also support reducing energy consumption in new buildings, in line with the recently launched EU Renovation Wave Strategy. Funds will go into developing universal and affordable low-carbon solution that could reduce energy consumption in all new buildings by up to 40%.
Funds will also go towards projects that prevent food waste and lead to improved waste management in line with the new EU’s Circular Economy Action Plan.
Financial resources are also being earmarked for numerous projects that will help energy-intensive industries to reduce greenhouse gas emissions in line with the Commission’s ambitious Climate Target Plan and our climate neutrality objective.
The numbers in brief

34 LIFE nature & biodiversity projects will support the implementation of the EU Birds and Habitats Directives as well as the EU Biodiversity Strategy to 2030. They have a total budget of €221 million, of which the EU will pay €133 million.

47 LIFE environment and resource efficiency projects will mobilise €208 million, of which the EU will provide €76 million. These projects cover actions in five areas: air, environment and health, resource efficiency and circular economy, waste, and water.

8 LIFE environmental governance and information projects of nearly €17 million with just over €9 million EU contribution will raise awareness of environmental issues among the wider public and help public authorities to promote, monitor and enforce compliance with EU environmental legislation.

16 LIFE climate change mitigation projects will have a total budget of approximately €86 million, of which just under €32 million from the EU.

15 LIFE climate change adaptation projects will mobilise €50 million, €26 million of which will come from EU funds.

3 LIFE climate governance and information projects will improve governance and raise awareness about climate change with a total budget of €7 million of which the EU is contributing just under €4 million.

Project descriptions and more details can be found in the Annex to this press release.
Background
The projects were selected among more than 1250 applications submitted under the LIFE 2019 call for proposals, published in April 2019. The LIFE programme is the EU’s funding instrument for the environment and climate action. It has been running since 1992 and has co-financed more than 5 500 projects across the EU and in third countries. At any given moment, some 1 100 projects are in progress. The budget for 2014–2020 is set at €3.4 billion in current prices. For the next long-term EU budget 2021-2027, the Commission is proposing to increase LIFE funding by almost 60%.
Compliments of the European Commission
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Independent review to be launched on payments infrastructure
TARGET2 incident on 23 October 2020 caused outage lasting almost 10 hours
Findings of the review to be published by the second quarter of 2021

The European Central Bank (ECB) will launch an independent review of an incident that affected its real-time gross settlement system TARGET2 on 23 October 2020, causing an outage for almost 10 hours. An initial investigation determined that a software defect in a network device was the specific technical cause of the incident. The independent review will also take into account other incidents that affected TARGET Services during 2020, including those affecting directly and indirectly TARGET2 Securities (T2S), the securities settlement platform operated by the Eurosystem.
The independent review will allow the Eurosystem to draw lessons from the incidents and address them. It will look into the robustness of the business continuity model, the adequacy of the regular recovery tests, the efficiency of the change management procedures and the communication protocols.
The main findings of the review will be shared with market participants and made public by the second quarter of 2021.
The Eurosystem is committed to identifying lessons learned from the recent incidents in full transparency and taking action accordingly in order to continue providing highly efficient and reliable financial market infrastructures to European agents.
TARGET2 is the leading European platform for processing large-value payments. It is owned and operated by the Eurosystem, which comprises the ECB and the 19 national central banks of the euro area. Central banks and commercial banks can submit payment orders in euro to TARGET2, where they are processed and settled in central bank money, i.e. money held in an account with a central bank. TARGET2 settles payments related to the Eurosystem’s monetary policy operations, as well as bank-to-bank and commercial transactions.
T2S is a platform managed by the Eurosystem that offers harmonised and centralised settlement of securities in central bank money. Currently 20 countries across Europe use T2S.
For media queries, please contact Alexandrine Bouilhet, tel.: +49 172 174 93 66.
Compliments of the European Central Bank.
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The European Commission has today welcomed the agreement between the European Parliament and EU Member States in the Council on Europe’s next long-term budget and NextGenerationEU, the temporary recovery instrument. Once adopted, the package of a total of €1.8 trillion will be the largest package ever financed through the EU budget. It will help rebuild a post-COVID-19 Europe, which will be greener, more digital, more resilient and better fit for the current and forthcoming challenges.
President Ursula von der Leyen said: “I welcome today’s agreement on our Recovery Plan and the next Multiannual Financial Framework. We now need to move forward with finalising the agreement on the next long-term budget and NextGenerationEU by the end of the year. Help is needed for citizens and business badly hit by the coronavirus crisis. Our recovery plan will help us turn the challenge of the pandemic into an opportunity for a recovery led by the green and digital transition”.
European Commissioner Johannes Hahn in charge of the budget, who worked to facilitate the deal since the beginning of the mandate, said: “Today’s agreement will allow to reinforce specific programmes under the long-term budget for 2021-2027 (including Horizon Europe, Erasmus+, EU4Health). All in all, the EU long-term budget together with NextGenerationEU will amount to more than €1.8 trillion. It will play an essential role to support the recovery and make sure traditional beneficiaries of EU funds receive the sufficient means to continue their work during these very challenging times for all”.
Main elements of today’s compromise include:

More than 50% of the amount will support modernisation through policies that include research and innovation, via Horizon Europe; fair climate and digital transitions, via the Just Transition Fund and the Digital Europe Programme; preparedness, recovery and resilience, via the Recovery and Resilience Facility, rescEU and a new health programme, EU4Health.

Traditional policies such as cohesion and common agricultural policy also continue to receive significant financial support, so much necessary to ensure stability in times of crisis and their modernisation that should contribute to the recovery and the green and digital transitions.

30% of the EU funds will be spent to fight climate change, the highest share ever of the largest European budget ever. The package also pays a specific attention to biodiversity protection and gender equality.

The budget will have strengthened flexibility mechanisms to guarantee it has the capacity to address unforeseen needs. This is making it a budget fit not only for today’s realities but also for tomorrow’s uncertainties.

As proposed in May 2020 and agreed by EU leaders on 21 July 2020, to finance the recovery, the EU will borrow on the markets at more favourable costs than many Member States and redistribute the amounts.
A clear roadmap towards new own resources to help repay the borrowing. The Commission has committed to put forward proposals on a carbon border adjustment mechanism and on a digital levy by June 2021, with a view to their introduction at the latest by 1 January 2023. The Commission will also review the EU Emissions Trading System in spring 2021, including its possible extension to aviation and maritime. It will propose an own resource based on the Emissions Trading System by June 2021. In addition, the Commission will propose additional new own resources, which could include a Financial Transaction Tax and a financial contribution linked to the corporate sector or a new common corporate tax base. The Commission will work to make a proposal by June 2024.
In terms of EU budget protection, now, for the first time, the EU will have a specific mechanism to protect its budget against breaches of the rule of law as agreed on 5 November. At the same time, final beneficiaries of EU funding in the Member State concerned will not be negatively affected by this mechanism.

Next steps
The MFF Regulation and the Interinstitutional Agreement endorsed today must now be formally adopted by the European Parliament and the Council, in line with their respective roles and procedures.
In parallel, work must continue towards a final adoption of all other elements of the package, including the sectoral legislation and the Own Resources Decision.
In the case of the Own Resources Decision, which will enable the Commission to borrow, ratification by all Member States in line with their constitutional requirements is also needed. The European Parliament, at the September plenary, has already provided its positive opinion on this piece of legislation. The adoption by the Council is the next step.
In parallel, negotiations on the annual budget for 2021 have to take place. The 21-day conciliation period, during which the European Parliament and the Council should reach an agreement, runs between 17 November and 7 December this year.
The Commission remains fully committed to accompany the process.
Background
The Commission put forward its proposal for the EU’s next long-term budget on 2 May 2018. The framework proposal was immediately followed by legislative proposals for the 37 sectoral programmes (e.g. cohesion, agriculture, Erasmus, Horizon Europe, etc). Between 2018 and the beginning of 2020, the Commission worked hand in hand with the rotating Presidencies of the Council, and in close collaboration with the European Parliament, to take the negotiations forward.
On 27 May 2020, in response to the unprecedented crisis caused by the coronavirus, the European Commission proposed the temporary recovery instrument NextGenerationEU of €750 billion, as well as targeted reinforcements to the long-term EU budget for 2021-2027.
On 21 July 2020, EU heads of state or government reached a political agreement on the package. Since then, the European Parliament and the Council, and with the participation of the European Commission, held 11 trilateral political trilogues on the deal with the aim of fine-tuning the final parameters of the deal.
Compliments of the European Commission.
 
EACCNY SEMINAR IN THIS CONTEXT: Be sure to attend EACCNY’s December 2nd discussion with Werner Hoyer, President of the EUROPEAN INVESTMENT BANK, and Frans Timmermans, Executive Vice-President in charge of the Green Deal at the EUROPEAN COMMISSION: EU Recovery & Green Deal Investment Dialog: The Recovery plan for the EU & how US Investors can be a part of it |
The post EU budget: European Commission welcomes agreement on €1.8 trillion package to help build greener, more digital and more resilient Europe first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Keynote speech by Christine Lagarde, President of the ECB, at the ECB Forum on Central Banking | Frankfurt am Main, 11 November 2020 |
Let me begin by welcoming all of you to this year’s ECB Forum on Central Banking. Regrettably, we cannot be together in Sintra this time, but I trust that this virtual environment will be no less conducive to challenging ideas and productive debate.
The purpose of this year’s conference is to examine the challenges facing central banking in a shifting world. We will be discussing many of the long-term trends monetary policy has to contend with, including shifting patterns of globalisation, climate change and a lower natural interest rate.
Actually, the largest shift central banks are facing today may well turn out to be the pandemic itself. As John Kenneth Galbraith said, “the enemy of the conventional wisdom is not ideas, but the march of events”. And the events we are seeing today are momentous.
The coronavirus (COVID-19) has produced a highly unusual recession and is likely to give rise to a similarly unsteady recovery. Today I would like to talk about how the ECB’s monetary policy has responded to this unique environment, and how we can best contribute to supporting the economy going forward.
A highly unusual recession
The deliberate shutdown of the economy triggered by the COVID-19 pandemic has produced a highly unusual recession. Most importantly, it has infiltrated and crippled sectors that are normally less sensitive to the economic cycle. In a regular recession, manufacturing and construction are typically hit harder by the cyclical downturn, while services are more resilient. But during the lockdown in the spring, we saw the reverse.
Compare our experience in the first half of this year with the first six months following the Lehman crash. After Lehman, manufacturing contributed 2.8 percentage points to the recession and services contributed 1.7 percentage points. But this year, the loss was 9.8 percentage points for services and much less, 3.2 percentage points, for manufacturing.
This has three important implications.
First, research finds that the recovery from a services-led recession tends to be slower than from a durable goods-led recession, as services create less pent-up demand than consumer goods.[1] For example, people are unlikely to take twice as many holidays abroad next year to compensate for their lack of foreign travel this year.
Second, as services are more labour-intensive, services-led recessions have an outsized effect on jobs. Five million people in the euro area lost their jobs in the first half of this year. Of those, almost half worked in retail and wholesale trade, accommodation and food services, and transportation, despite these activities representing less than one-fifth of output. In the six months after Lehman, the worst affected sector – industry – suffered only 900,000 job losses.
And third, these job losses hurt socio-economic groups unevenly. In the first half of 2020, the labour force contracted by almost 7% for people with low skills – who typically also have lower incomes – while it fell by 5.4% for those with medium skills and rose by 3.3% for those with high skills. This is double the loss of low-skilled jobs we saw in the six months after Lehman.
In addition to their social impact, job losses for people with lower incomes present a particular threat to the economy, because around half of those at the bottom of the income scale face liquidity constraints and therefore consume more of their income.[2] The labour-intensity of the worst-hit sectors also heightens the risk of hysteresis and “scarring” in the labour market.
While job retention schemes have played a key role in mitigating these risks, they could not eliminate them entirely. Even though many workers quickly returned to regular employment once restrictions were lifted, a large number of people who lost their jobs in the spring left the labour force and stopped looking for work, with 3.2 million workers classified as “discouraged”. This is so far different from the post-Lehman period, when the drop in employment was matched by a rise in unemployment.
And young people have been particularly affected, seeing disproportionate lay-offs and delayed entry into the labour market. Research finds that this can have a variety of long-lasting effects, including lower earnings ten to fifteen years later, and worse future health conditions.[3]
So, from the outset, this unusual recession has posed exceptionally high risks. That is why an exceptional policy response has been required. And what has defined this policy response, in Europe in particular, is the policy mix.
Learning the lessons of the last decade, there has been a renewed consensus that the composition of policies matters for overcoming the crisis. More than ever before, macroeconomic, supervisory and regulatory authorities have dovetailed and made each other’s efforts more powerful.
Policy responses to the pandemic
What has this meant for monetary policy? There are two main ways in which we have adapted the ECB’s policy to the pandemic: via the design of our tools and via the transmission of our monetary policy.
First of all, we have responded to the unique features of the recession by designing a set of tools specifically tailored to the nature of the shock, including recalibrating our targeted longer-term refinancing operations (TLTROs), expanding eligible collateral, and launching a new €1.35 trillion pandemic emergency purchase programme (PEPP). The PEPP in particular has the dual function of stabilising financial markets and contributing to easing the overall monetary policy stance, thereby helping to offset the downward impact of the pandemic on the projected path of inflation.
The stabilisation function of the PEPP is ensured by its flexibility, which is crucial given the unpredictable course of the pandemic and its uneven impact across economies. In this context, the PEPP’s flexibility allows us to react in a targeted way and counter fragmentation risks. This was key in reversing the tightening of financing conditions that we saw in the early days of the crisis.
In parallel, the stance function of the PEPP gives us the scope to counter the pandemic-driven shock to the path of inflation – a path that has also been greatly influenced by the specific characteristics of this recession. Not only has inflation fallen into negative territory, but we have already seen services inflation, which is normally the more stable part of the price index, drop to historic lows.
But the PEPP, together with the other measures we have taken this year, has provided crucial support to the inflation path and prevented a much larger disinflationary shock.[4] And its impact has been amplified by interactions with other policies. For instance, the combined effect of the ECB’s monetary and supervisory measures is estimated to have saved more than one million jobs.[5]
At the same time, the nature of the pandemic also affects the transmission of monetary policy. Normally, an easing of financing conditions boosts demand by encouraging firms to borrow and invest, and households to bring forward future income and consume more. In turbulent times, monetary policy interventions also eliminate excess risk pricing from the market.
But when interest rates are already low and private demand is constrained by design – as is the case today – the transmission from financing conditions to private spending might be attenuated. This is especially true when firms and households face very high levels of uncertainty, leading to higher precautionary saving and postponed investment.[6] In these circumstances, it is crucial that monetary policy ensures favourable financing conditions for the whole economy: private and public sectors alike. Indeed, these are the times when fiscal policy has the greatest impact, for at least two reasons.
First, fiscal policy can respond in a more targeted way to the parts of the economy affected by health restrictions. Research shows that, while monetary policy can increase overall activity in this environment, it cannot support the specific sectors that would be most welfare-enhancing. Fiscal policies, on the other hand, can directly respond where help is most needed.[7]
We have seen the efficacy of such targeting in the euro area this year. The ECB’s Consumer Expectations Survey shows that households with lower income have seen a greater reduction in the hours they work, but they have also received a higher share of government support. As a result, while compensation of employees fell by more than 7% in the second quarter, household disposable income fell by only 3%[8], because government transfers compensated for the loss of income.
Second, fiscal policy can break “paradox of thrift” dynamics in the private sector when uncertainty is present. Public expenditure accounts for around 50% of total spending in the euro area and can therefore act as a coordination device for the other 50%. Our consumer survey demonstrates this: people who consider government support to be more adequate display less precautionary behaviour. And in this way, by brightening economic prospects for firms and households, fiscal policy can help reinvigorate monetary transmission through the private sector.
The risk of an unsteady recovery
But regrettably the economic recovery from the pandemic emergency could well be bumpy. We are seeing a strong resurgence of the virus and this has introduced a new dynamic. While the latest news on a vaccine looks encouraging, we could still face recurring cycles of accelerating viral spread and tightening restrictions until widespread immunity is achieved.
So the recovery may not be linear, but rather unsteady, stop-start and contingent on the pace of vaccine roll-out. In the interim, output in the services sector may struggle to fully recover.
Indeed, services were already showing a declining trend before the latest round of restrictions: the services PMI fell from 54.7 in July to 46.9 in October. And while manufacturing has so far remained relatively resilient, there is a risk of the recovery in manufacturing also slowing once order backlogs are run down and industrial output becomes better aligned with demand.
In this situation, the key challenge for policymakers will be to bridge the gap until vaccination is well advanced and the recovery can build its own momentum. The strength of the rebound in the third quarter suggests that the initial policy response was effective and the capacity of the economy to recover is still in place. But it will require very careful policy management to ensure that this remains the case.
Above all, we must ensure that this exceptional downturn remains just that – exceptional – and does not turn into a more conventional recession that feeds on itself. Even if this second wave of the virus proves to be less intense than the first, it poses no less danger to the economy.
In particular, if the public no longer sees the pandemic as a one-off event, we could see more lasting changes in behaviour than during the first wave. Households could become more fearful about the future and increase their precautionary saving. Firms that have survived up to now by increasing borrowing could decide that remaining open no longer makes business sense. This could trigger a “firm exit multiplier”, where the closure of businesses faced with health restrictions cuts demand for complementary businesses, in turn causing those firms to reduce their output.[9]
If that were to happen, the recession could percolate through the economy to sectors not directly affected by the pandemic – and potentially trigger a feedback loop between the real economy and the financial sector. Banks might start tightening credit standards in the belief that corporate creditworthiness is deteriorating, leading to firms becoming less willing or able to borrow funds, credit growth slowing and banks’ risk perceptions rising further. The ECB’s bank lending survey is already signalling a possible tightening in the months to come. We are also seeing indications that small and medium-sized firms are expecting their access to finance to deteriorate.
A continued, powerful and targeted policy response is therefore vital to protect the economy, at least until the health emergency passes. Concerns about “zombification” or impeding creative destruction are misplaced, especially if a vaccine is now in sight. Remember that lockdowns are a non-economic shock that affects productive and unproductive firms indiscriminately. Policies that protect viable businesses until activity can return to normal will help our productive capacity, not harm it.
The right policy mix is essential.
Fiscal policy has to remain at the centre of the stabilisation effort – the draft budgetary plans suggest that fiscal support next year will be significant and broadly similar to this year, and the Next Generation EU package should become operational without delay. Supervisory authorities are working to ensure that banks can continue to support the recovery by readying them for a potential deterioration in asset quality.[10] And structural policies have to be stepped up so that policy support can accompany the wide-ranging changes that the pandemic will bring, such as an accelerating spread of digitalisation and a renewed focus on climate issues.[11]
The outlook for monetary policy
So what is the role of monetary policy in this response?
It is clear that downside risks to the economy have increased. The impact of the pandemic is now likely to continue to weigh on economic activity well into 2021. Moreover, demand weakness and economic slack are weighing on inflation, which is expected to remain in negative territory for longer than previously thought. This is partially due to temporary factors, but the fall in measures of underlying inflation also appears to be connected to the weakening of activity. And developments in the exchange rate may have a negative impact on the path of inflation.
Continued policy support is therefore necessary to achieve our inflation aim. But we should also consider how best to provide that support.
The unusual nature of the recession and the unsteadiness of the recovery make assessing the inflation path harder than in normal times. Shifts in consumption baskets caused by supply-side restrictions are creating significant noise in the inflation data.[12] And the stop-start nature of the recovery means the short-term path of inflation is surrounded by considerable uncertainty.
In these conditions, it is vital that monetary policy underpins inflation dynamics by supporting demand and preventing second-round effects, where the negative pandemic shock to inflation feeds into wage and price-setting and becomes persistent. To that end, the best contribution monetary policy can make is to ensure favourable financing conditions for the whole economy. Two considerations are important here.
First, while fiscal policy is active in supporting the economy, monetary policy has to minimise any “crowding-out” effects that might create negative spillovers for households and firms. Otherwise, increasing fiscal interventions could put upward pressure on market interest rates and crowd out private investors, with a detrimental effect on private demand.
Second, monetary policy has to continue supporting the banking sector to secure policy transmission and prevent adverse feedback loops from emerging. Firms are still dependent on new flows of credit. And those that have borrowed heavily so far need certainty that refinancing will remain available on attractive terms in order to avoid excessive deleveraging.
In other words, when thinking about favourable financing conditions, what matters is not only the level of financing conditions but the duration of policy support, too. All sectors of the economy need to have confidence that financing conditions will remain exceptionally favourable for as long as needed – especially as the economic impact of the pandemic will now extend well into next year.
Currently, all conditions are in place for both the public and private sectors to take the necessary measures. The GDP-weighted sovereign yield curve is in negative territory up to the ten-year maturity. Nearly all euro area countries have negative yields up to the five-year maturity. Bank lending rates are close to their historic lows: around 1.5% for corporates and 1.4% for mortgages. And our forward guidance on our asset purchase programmes and interest rates provides clarity on the future path of interest rates.
But it is important to ensure that financing conditions remain favourable. This is why the Governing Council announced last month that we will recalibrate our instruments, as appropriate, to respond to the unfolding situation. The Council is unanimous in its commitment to ensure that financing conditions remain favourable to support economic activity and counteract the negative impact of the pandemic on the projected inflation path.
In the weeks to come we will have more information on which to base our decision about this recalibration, including more evidence on the success of the new lockdown measures in containing the virus, a new set of macroeconomic projections and more clarity on fiscal plans and the prospects for vaccine roll-outs.
While all options are on the table, the PEPP and TLTROs have proven their effectiveness in the current environment and can be dynamically adjusted to react to how the pandemic evolves. They are therefore likely to remain the main tools for adjusting our monetary policy.
Looking beyond our next policy meeting, our ongoing strategy review gives us an opportunity to reflect on the best combination of tools to deliver financing conditions at the appropriate level, how those tools should be implemented, and what features our toolkit needs to have to deliver on such a strategy.
Conclusion
Let me conclude.
The pandemic has produced an unusual recession and will likely generate an unsteady recovery. All policy areas in Europe have responded promptly and decisively. The European policy mix has proven that when different authorities work together – within their respective mandates – countries can successfully absorb the pandemic shock.
The second wave of COVID-19 presents new challenges and risks, but the blueprint for managing it is the same. The ECB was there for the first wave and we will be there for the second wave. We are, and we continue to be, totally committed to supporting the people of Europe.
In pursuit of our mandate, we will continue to deliver the financing conditions necessary to protect the economy from the impact of the pandemic. This is the precondition for stabilising aggregate demand and securing the return of inflation to our aim.
Compliments of the ECB.
The post ECB | Speech by Chrstine Lagarde: Monetary policy in a pandemic emergency first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Remarks by Vitor Gaspar at ECB Forum on Central Banking 2020 | November 12 |
1.  Introduction
It is such a pleasure to participate in the ECB Forum on Central Banking and discuss the paper by Evi Papa on Fiscal Rules and Macroeconomic Stabilization in the Euro Area. The paper reviews relevant theoretical and empirical literature and, at the end, examines the Next Generation EU program. The paper is well-written, and it covers a vast landscape. If offers much to learn and to think about.
In my discussion, I will focus on policy. I will argue that it is useful to adopt a broad perspective that considers politics, finance and fiscal policy as fundamentally inter-twined. Interactions between monetary and fiscal policy are better understood in such broad context. I will move on to give a very quick overview of the evolution of ideas and perspectives about macroeconomics that impacted monetary unification in Europe. I will give examples of how experience forced re-thinking. I will go on documenting recent fiscal policy developments, prospects and risks. Finally, I will comment on Next Generation EU. In doing so, I will make a strong case for public investment in smart and green technologies. I will identify implementation challenges and highlight the importance of public infrastructure governance, transparency and accountability.
2. Politics, Financial Integration and Fiscal Policy
Milton Friedman argued we are subject to the tyranny of the status quo. “Only a crisis – real or perceived – produces real change.”[1] Interestingly, much earlier, Jean Monnet articulated a similar thought, specifically aimed at European integration: “Europe will be made in crises. It will become the sum of the responses to those crises.”[2] Coming even closer to the theme of this session fiscal crises have provoked political revolutions. That was the case for England in 1688 and for France and the US in 1789. Fiscal crises have often changed the distribution of political power within multilayered government structures. The political relevance of fiscal crises is emphasized by Thomas Sargent in many contributions.[3]
In the 1990s, when the launch of the euro area was being prepared, the dominant framework to think about macroeconomic policies had a Real Business Cycle (RBC) core, complemented with elements inspired by Keynesian macroeconomics. The framework was labelled New Keynesian[4] or New Neoclassical Synthesis[5]. Goodfriend and King (2001) put the framework to work as it applied to policymaking in the euro area. They presented their work at the first ECB central banking conference. For my purposes I want to emphasize the following: first, monetary policy should focus on maintaining price stability. By keeping to a stable price level path, monetary policy is also neutral policy.  That is, it keeps economic activity in line with potential output or, in other words, it keeps the output gap at zero. Second, with complete and perfectly integrated financial markets, a small open economy can get full insurance, against idiosyncratic shocks, at fair terms. Third, given that monetary policy would smooth the business cycle, in response to demand disturbances, for the euro area and financial markets would provide insurance against idiosyncratic risks, fiscal policy should focus making sure that public finances support resilient, smart, sustainable and inclusive growth.
The Delors Report (1989) had already pointed to important qualifications. Specifically, while it noted that “markets can exert a disciplinary influence on profligate governments,” it warned than market discipline was subject to important limitations: “Rather than leading to a gradual adaptation of borrowing costs, market views of the creditworthiness of official borrowers tend to change abruptly and result in the closure of access to market financing. Market forces might either be too slow and weak or too sudden and disruptive.”[6] The Report concluded that binding rules were necessary. Such rules would favor financial stability.   Independence of monetary policy, in turn, called for the exclusion of direct central bank financing by Treasuries. Such constraints were reflected in the Maastricht Treaty and lie at the roots of European fiscal rules.
Figure 1Euro Area Spreads (10-year bonds, Jan. 1995–Oct. 2020)
Sources: Thomson Reuters Datastream, Bloomberg, Haver Analytics, Global Financial Data and International Financial StatisticsNotes: Spreads are against Germany.
3. Debt, Deficits and Public Finance Risks
Prior to the pandemic, public debt in the Euro Area was declining at an average of 1.7 percentage points of GDP per year over 2016-19. In 2020, this ratio will jump by an unprecedented amount – 17 percentage points – to 101 percent of GDP. This is illustrated in Figure 2.
Figure 2Euro Area Public Debt and Fiscal Balance (2016–2025, in percent of GDP)

Public Debt
Overall balance

Sources: IMF Fiscal Monitor and WEO.

As shown in Figure 3, the major increase in the primary deficit and the sharp contraction in economic activity are the main drivers of this jump up in debt. The IMF baseline scenario, based on information at end-September 2020, considered that after such exceptional development, the public debt to GDP in the Euro Area would resume its downward trajectory, albeit at a slower pace than before. This downward path is explained by negative interest-growth differentials and gradual reduction in the primary deficit.

Figure 3Euro Area Public Debt and Fiscal Balance (2016–2025, in percent GDP)

Sources: IMF Fiscal Monitor, WEO, and IMF staff calculations.

Figure 4 illustrates a number of important points. First, monetary policy matters a lot for fiscal policy. The figure gives two examples. July 26, 2012, “whatever it takes” and March 18, 2020, the announcement of the PEPP. In both cases the response of bond yields – and yield differentials – was quick and sizeable. Second, the divergence in bond yields in the period of the fiscal crises in the euro area was associated with persistent divergence in fiscal policies and economic results. Financing conditions also diverged for private corporations based in different member states. Clearly the single financial market fragmented under stress. Fiscal policy was strongly pro-cyclical in the countries hit by sharply rising sovereign yields, so their economies suffered a double blow from higher borrowing costs and fiscal contraction. This leads to the final point: the performance of the euro area member states from the start of the GFC is far from stellar. The best performers delivered over the period on par with the US. The laggards fell way behind. These phenomena created political challenges within and between countries. Divergences will likely persist and may even increase with COVID 19.

Figure 4Euro Area Spreads (10-year bonds, Jan. 2008–Oct. 2020)

Sources: Thomson Reuters Datastream, Bloomberg, Haver Analytics, Global Financial Data and International Financial Statistics.Notes: Spreads are against Germany.

High public debt levels are not the most immediate risk in the Euro Area. Policymakers should not withdraw fiscal support prematurely, as highlighted by Alfred Kammer, in his recent press, briefing during the IMF Annual Meetings (https://www.imf.org/en/News/Articles/2020/10/21/tr102120-transcript-of-october-2020-european-department-press-briefing), the (policy) mistakes made in the aftermath of the GFC should be avoided. Of course, in the world of Goodfriend and King (2001) this would not be a problem because monetary policy would offset the effects on aggregate demand of withdrawing of fiscal support.
Euro Area policy patterns in the aftermath of the GFC, and their intimate relation with financial market conditions, can be illustrated with the cases of Italy and Spain. Figure 5 shows both of these countries tightened their fiscal stance (as measured by changes in the cyclically adjusted primary balance, as a ratio to potential output) in the middle of economic recessions.

Figure 5Fiscal Stance and Output Gap

Sources: IMF Fiscal Monitor, WEO, and staff estimates.Notes: Output gap as percent of potential GDP. Cyclically adjusted primary balance, in percent of potential GDP.

As I mentioned, the procyclicality of fiscal policy coincided with fragmentation in financial markets. One of its manifestations, illustrated in Figure 6, was a rapid widening of sovereign debt spreads. Vicious cycles involving increasingly costly access to finance and reduced space to confront the recession ensued. It is important to note that, more generally, fiscal policy was pro-cyclical in many other countries, in the euro area, including Germany itself.

Figure 6Fiscal Stance and 10-year Bond Spreads

Sources: Thomson Reuters Datastream, Bloomberg, Haver Analytics, Global Financial Data, International Financial Statistics, CEPR, WEO, and IMF staff estimates.Notes: Spreads are averaged by month and reported in the chart using monthly frequency. Spreads are against Germany. Cyclically adjusted primary balance, in percent of potential in fiscal year GDP, and is annual frequency.

Turning back to the present, I have presented above the debt and deficit projections under the IMF’s baseline scenario.  But the WEO also considers alternative scenarios. It discusses possible risks. Unfortunately, some risks have already materialized. On the upside, growth has overperformed expectations in the third quarter of 2020. But recent weeks have been associated with a second wave of COVID 19 in Europe. Partial lockdowns have been adopted in many places.  Government fiscal responses to support livelihoods will result in substantial further increases in deficits and debts. Economic activity and employment will also be adversely affected.
The medium-term horizon is thus subject to particularly acute uncertainties.
4. The Case for Public Investment and the Next Generation EU
The October 2020 Fiscal Monitor (FM) makes the case for public investment. The relevant macroeconomic context includes very low interest rates, high precautionary savings, weak private investment and a gradual erosion of the public capital stock over time.
But the novel argument in the FM relates to uncertainty. The FM shows that investment multipliers are particularly high when macroeconomic uncertainty is elevated—as it is now.

Figure 7Uncertainty Indices

Sources: Barrero and Bloom (2020)Notes: Data are from the World Uncertainty Index’s website’s World Pandemic Uncertainty Index (WPUI) which measures discussions about pandemics at the global and country level in the Economist Intelligence Unit (see Ahir, Bloom and Furceri, 2020). Monthly values for Economic Policy Uncertainty (EPU) index from www.policyuncertainty.com. See Baker, Bloom, and Davis (2016) for details of EPU index construction.

Public investment can also support the transformation of our economies going forward. Investment in health and education, in digital and green infrastructure can connect people, improve economy-wide productivity, and improve resilience to climate change and future pandemics.
Overall, fiscal policy can provide a bridge to smart, resilient, green, and inclusive growth. Interestingly, the literature reviewed by Pappa (2020) is much less favorable.
Why is that? COVID 19 is associated with very large macroeconomic uncertainty captured in the FM by the dispersion of economic forecasts. Altig et al. (2020) and Barrero and Bloom (2020) present a wide variety of measures of uncertainty. Figure 7 reproduces two of their examples: uncertainty about COVID 19 and uncertainty about economic policy. They show that uncertainty is elevated for a wide variety of uncertainty metrics. Furthermore, COVID 19 will be enduring for a while which means that the traditional concerns with time-to-build are less relevant than usual.
The new evidence in the FM shows that during times of high uncertainty the multiplier associated to public investment is four times larger than in the “baseline”. This happens because public investment can buttress private investors’ confidence and induce them to invest. That is so, in part, because it signals the government’s commitment to sustainable growth. Public investment projects can also stimulate private investment more directly. For example, investments in digital communications, electrification, or transportation infrastructure create new private investment opportunities directly through the creation of opportunities for value-added goods and / or services.
But good governance of public investment is crucial. The Next Generation EU identifies important priorities (e.g. green investment). But implementation is crucial.
The FM finds that the cost of an individual project can increase by as much as 10 to 15 percentage points just because it is undertaken in a period of heightened public investment effort. Cost increases tend to be higher and project delays longer if projects are approved and undertaken in these periods. Fast increases in public investment are also associated with increased vulnerabilities to corruption. More generally, improving the governance of project selection and management is important, because there is scope to improve the efficiency of infrastructure on average.  All these themes are covered in a book on infrastructure governance (“Well Spent”) recently published by the IMF.[7]

Figure 8Fiscal Multipliers

Sources: IMF staff estimates.Notes: Panel 1: two-year ahead fiscal multipliers of public investment. Panel 2: semi-elasticity of private investment to public investment. **stands for statistically significant coefficient at two standard deviations confidence interval.
Author:

Vitor Gaspar, Director of the Fiscal Affairs Department of the International Monetary Fund

Contact:

Ting Yan, Press Officer | MEDIA@IMF.ORG

Compliments of the IMF.
The post “Central Banks in a Shifting World” – Discussion of Evi Papa’s Fiscal Rules, Policy and Macroeconomic Stabilization in the Euro Area first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Securities and Markets Authority (ESMA), the EU securities markets regulator, today publishes its first annual report on the use by National Competent Authorities (NCAs) of sanctions under the Alternative Investment Fund Managers Directive (AIFMD).
The report published today contains an overview of the applicable legal framework and information on the penalties and measures imposed by NCAs from 1 January 2018 to 31 December 2018 and from 1 January 2019 to 31 December 2019.
The number of NCAs issuing sanctions increased between the reporting periods, from 14 in 2018 to 17 in 2019. Whilst the number of financial penalties decreased substantially, the total amount imposed doubled to €9m in 2019 due to high cumulative sanctions issued by two NCAs.
A small number of NCAs are responsible for a majority of sanctions, and in general the numbers on a national level appear low. In order to understand the possible reasons behind the uneven use of the sanctioning tool among Member States, ESMA organised a one-day workshop on 16 July 2020 for NCAs’ staff working in supervision and enforcement teams on the topic of sanctions in UCITS and AIFs.
Next steps
ESMA continues its work to foster supervisory convergence in the application of the AIFMD and will issue separate reports on an annual basis for future reporting periods.
Compliments of the European Securities and Markets Authority (ESMA).
The post ESMA publishes first report on use of sanctions under the AIFMD first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.