Today the College of Commissioners approved our Pact for the Mediterranean. For millennia, the Mediterranean has been a bridge between continents. For people, goods and ideas. These exchanges have shaped who we are and how we live. The truth is that Europe and the Mediterranean cannot exist without each other. And today, the future of our two shores is more connected than ever before. In an increasingly competitive and contested global economy, our economic ties with our Southern neighbours have already grown stronger.
Trade between the European Union and the rest of Mediterranean has increased by over 60% in just 5 years. Our value chains are more and more interconnected. So, the time is ripe for deeper integration. We should simplify making business between us. We should create new ties between our industries, our universities, our institutions. This is why today we are making a clear offer to our neighbours. Let us create a Common Mediterranean Space, with the goal of progressive integration between us. This is the essence of the Pact for the Mediterranean.
The Pact is the result of almost a year of dialogue and intense engagement with our neighbours. It is a Pact between partners. It focuses on three main pillars. The first pillar – the heart of our work – is people. The second is the economy. And the third is the link between security, preparedness and migration. For each pillar, we have identified initiatives that will deliver real change on the ground – more than 100 concrete ideas and actions. From creating a Mediterranean University, to connecting our cultural institutions and civil societies. From building AI factories across the Mediterranean, to a new initiative for Mediterranean start-ups. From managing migration together, to the new European Firefighting Hub in Cyprus. And the list is much longer. The focus is on getting things done. These initiatives will form an action plan, to be agreed with our 10 Southern neighbours. Because, to quote a proverb that is shared across the region: “Actions speak louder than words”.
On the European side, we will mobilise our financial instruments in a Team Europe approach. And crucially, we will leave no stone unturned to mobilise private investments. We also want to step up triangular cooperation, in particular with Gulf countries. Working with them is essential on projects like the India-Middle East-Europe Corridor.
This is a very special moment for the Mediterranean but also for Europe as both share a common future of peace and cooperation often during unimaginable pain and loss. The devastating war in Gaza has finally come to an end marking a pivotal moment not only for Gaza but also for the European Union and the wider Mediterranean marking the moment when future of the region is being rewritten. Europe has a stake in shaping a future of peace and prosperity. Because this is our common region. And we want to play our part as partners. It is our commitment to our shared Mediterranean home.
Thank you.
 
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Without timely and consistent implementation, we undermine the resilience of the financial system, leaving it vulnerable to future shocks

This letter was submitted to G20 Finance Ministers and Central Bank Governors (FMCBG) ahead of the G20’s meeting on 15-16 October 2025.
Andrew Bailey underscores the importance of cooperation and multilateral institutions to address the pressures from the challenging global environment.
Amid elevated risks and uncertainty, Mr Bailey highlights the need for implementing global standards and remaining vigilant to emerging threats. To facilitate this, the FSB will enhance its surveillance of vulnerabilities in the financial system, while shifting its focus from policy development to monitoring and facilitating the implementation of agreed reforms.
The letter introduces the reports that the FSB is delivering to the G20, namely:
• G20 Roadmap for Cross-border Payments: Consolidated progress report for 2025
• Monitoring Adoption of Artificial Intelligence and Related Vulnerabilities in the Financial Sector 
• G20 Implementation Monitoring Review Interim Report, delivered today with the Chair’s letter
• A thematic review, monitoring progress implementing the FSB Global Regulatory Framework for Crypto-asset Activities (to be published on 16 October).
Read full text here.

 
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By: Tobias Adrian
Policymakers should strengthen oversight of nonbank financial intermediaries, whose increasing interconnectedness with banks could exacerbate adverse shocks
Stretched asset valuations and pressures in core sovereign bond markets are keeping financial stability risks elevated amid heightened economic uncertainty. These vulnerabilities could be amplified by the growth of nonbank financial institutions—through their growing importance as market makers, liquidity providers and intermediaries in private credit, real estate, and crypto markets.
As we detail in our new Global Financial Stability Report, stress testing shows that the vulnerabilities of these nonbank intermediaries can quickly transmit to the core banking system, amplifying shocks, and complicating crisis management.
To be clear, policymakers have had nonbanks on their radar for some time. They include insurance companies, pension funds, and investment funds; and while they do not take deposits, they play an increasingly large role in global markets. Regulatory treatment also varies considerably, with dedicated supervisory frameworks for insurance companies and less comprehensive prudential oversight for many others.
While nonbanks can help facilitate capital market activities and channel credit to borrowers, their expansion also increases risk-taking and interconnectedness in the financial system. Together, nonbanks now hold around half of the world’s financial assets. In the United States and the euro area, many banks now have nonbank exposures that exceed their Tier 1 capital—a crucial cushion that allows a bank to absorb losses and remain stable in times of crisis. Similarly, nonbanks now account for half of daily foreign exchange market turnover, more than double their share of 25 years earlier, as we show in an analytical chapter of the GFSR.

This shift in financial intermediation calls for a more comprehensive, forward-looking approach to risk assessment. Unlike banks, nonbanks, for the most part, operate under lighter prudential regulation. In addition, many provide limited disclosure of their assets, leverage, and liquidity—making vulnerabilities and interconnections harder to detect.
Some regulators, including those in the United Kingdom and Australia, have begun integrating system-wide stress tests and scenario analysis to better understand interactions between banks and nonbanks. These efforts have revealed the need for better data, stronger domestic and cross-border coordination, and regulatory innovation to keep pace.
Nonbanks can transmit risks to the financial system through many channels, including private credit, real estate, and crypto assets, as mentioned above—all requiring policymaker attention. One channel we study in the new GFSR is the impact on banks. For several years, the IMF has applied its Global Stress Test, or GST, to assess banking sector resilience. This time, our test models a stagflationary shock—combining a recession, higher inflation, and rising yields on government debt. The stress test finds that banks holding about 18 percent of global assets would see their Common Equity Tier 1 ratios fall below 7 percent. Although the results mark an improvement from earlier assessments, these tests reveal a subset of weaker banks within the system.
To capture the growing interlinkages between banks and nonbanks, we introduced a new layer of analysis to our stress testing, focused on spillover risks. The results are striking: adverse developments in nonbanks—such as downgrades by credit rating agencies or falling collateral values—could significantly affect banks’ capital and liquidity ratios.
In a stress scenario in which nonbanks become riskier and fully draw their credit lines from banks, about 10 percent of US banks and 30 percent of European banks (by assets) would see their regulatory capital ratios fall by more than 100 basis points. In other words, bank losses and capital declines increase sharply alongside stress among nonbanks, demonstrating that vulnerabilities in the nonbank sector are interconnected—they can quickly transmit to the core banking system, amplifying shocks and complicating crisis management.

Another channel through which nonbanks can amplify stress in the financial system is through core bond markets—high-quality, investment-grade fixed-income securities that serve as benchmarks for the broader market. One way this can occur is via liquidity mismatches in open-ended investment funds, which arise when investors can sell shares quickly but the assets needed to meet redemptions take more time to sell. When market volatility spikes, investor redemptions and margin calls can force these funds to sell their most liquid assets.
The GFSR’s analysis of US mutual funds shows that, assuming outflow patterns similar to March 2020 and an 80-basis-point increase in interest rates, forced bond sales could reach nearly $200 billion—three-quarters of which would be Treasury securities. In extreme cases, sales could overwhelm dealer intermediation capacity, disrupt market functioning, and spill over into funding markets. These results underscore the importance of ensuring that mutual funds have adequate liquidity management tools to help reduce the risk of forced sales.
Greater nonbank involvement in sovereign bond markets does have positive effects, as we show in another analytical chapter of the GFSR. Emerging market economies with stronger fundamentals have increased their local-currency borrowings from domestic nonbanks, such as pension funds and insurance companies. The rising share of bonds held by nonbanks in emerging economies has coincided with improved liquidity when bond markets face global shocks and has likely reduced government reliance on bank borrowing.
But it’s also important to distinguish between domestic and foreign nonbanks. Foreign institutions remain key investors in emerging market assets. These investments could be withdrawn when markets become turbulent, tightening emerging market financial conditions. That means the cross-border impact of nonbanks needs to be better understood.
Policy priorities
Financial stability ultimately depends on sound policies and resilient institutions. Prudent fiscal and monetary policies, limits on external imbalances—such as current account deficits and external debt, and effective lender-of-last-resort and emergency liquidity assistance remain essential. At the same time, amid the growing prominence of nonbanks, policymakers must reinforce the resilience of the core of the financial system.
Our GST’s finding—that many banks remain vulnerable—underscores the need to further strengthen capital and liquidity by implementing internationally agreed standards, notably Basel III. Safeguarding the banking sector against contagion from weak banks can be achieved by advancing recovery and resolution frameworks and enhancing central banks’ emergency liquidity assistance.
The growing importance of nonbanks, and their links with banks, also calls for enhanced supervision. This means collecting more comprehensive data, improving forward-looking analysis—such as system-wide liquidity examinations—and strengthening coordination among sector supervisors.
Private credit certainly warrants closer attention. Nonbank lenders, especially private credit funds, have grown rapidly in recent years, adding to financial stability risks because they are less transparent and not as firmly regulated. Finally, to address liquidity pressures and forced bond sales by nonbanks, it is essential to improve and expand the availability and usability of liquidity management tools for open-ended investment funds.
—This blog is based on Chapter 1 of the October 2025 Global Financial Stability Report, “Shifting Ground Beneath the Calm: Stability Challenges amid Changes in Financial Markets.” For more, see the recent explainer blog: Five Megatrends Shaping the Rise of Nonbank Finance.
 
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Eurogroup President and Minister for Finance of Ireland, Paschal Donohoe, will represent the euro area at the Annual Meetings of the IMF and World Bank Group in Washington, DC, this week.
As President of the Eurogroup, Minister Donohoe will participate in the G7 Finance Ministers and Central Bank Governors’ meeting as well as in a range of IMF meetings. The Annual Meetings provide an opportunity for Finance Ministers and Central Bank Governors from around the world along with leading figures from the IMF and World Bank to meet and discuss global economic and development challenges, including the IMF’s assessment of the global economic outlook. The Eurogroup President will also participate in a series of media engagements to highlight the European economic and financial policy agenda.

The IMF and World Bank Group celebrated their 80-year anniversary last year, and now, maybe more than any time in recent memory, they are needed to help address the global challenges that we face. Multilateralism, particularly in the face of persistent and ongoing global conflicts and recent economic turbulence, is key for securing effective and resilient outcomes. During my visit, I look forward to a series of constructive engagements with Ministerial colleagues and officials at the IMF and the World Bank on how best to address these economic challenges and further our shared goals.
For more information, please contact:
• Kornelia Kozovska, Spokesperson for the Eurogroup President

 
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By: Pierre-Olivier Gourinchas
Dialing down uncertainty, reducing vulnerabilities, and investing in innovation can help deliver durable economic gains
In April, the United States shook global trade norms by announcing sweeping tariffs. Given the complexity and fluidity of the moment, our April report offered a range of estimates for the growth downgrade, from modest to significant, depending on the ultimate severity of the trade shock.
Six months on, where are we? The good news is that the growth downgrade is at the modest end of the range. The reasons are clear. The United States negotiated trade deals with various countries and provided multiple exemptions. Most countries refrained from retaliation, keeping instead the trading system largely open. The private sector also proved agile, front-loading imports and speedily re-routing supply chains.
As a result, the increase in tariffs and its effect has been smaller than expected so far. We now project global growth at 3.2 percent this year and 3.1 percent next year, a cumulative downgrade of 0.2 percentage point since our forecast a year earlier.

Should we conclude that the shock triggered by the tariff surge had no effect on global growth? That would be both premature and incorrect.
Premature because the US statutory effective tariff rate remains high and trade tensions continue to flare up with no guarantee yet on lasting trade agreements. Past experience suggests that it may take a long time before the full picture emerges. So far, the incidence of the tariffs seems to fall squarely on US importers, with import prices (excluding tariffs) mostly unchanged, and limited retail price increases. But they may still pass costs onto US consumers, as some have started to do, and trade may reroute permanently, leading to global efficiency losses.
Incorrect because other economic forces besides trade policy are simultaneously at play. In the United States, tighter immigration policies are shrinking the foreign-born labor supply—another negative supply shock on top of that from tariffs. So far, this has been offset by cooling labor demand, keeping unemployment steady. Financial conditions remain loose, the dollar has softened in the first half of the year, and AI-driven investment is booming. These demand-side forces are supporting activity, while adding further to the price pressures from the negative supply shocks.
In tariff-hit economies, other dynamics are helping to cushion the blow. China is weathering higher tariffs with a weaker real exchange rate, redirected exports to Asia and Europe, and fiscal support. Germany’s fiscal expansion is lifting euro area growth. Emerging market and developing economies benefitted from easier global financial conditions thanks in part to the depreciation of the US dollar, and they continue to demonstrate strong resilience reflecting in part hard-earned gains from stronger policy frameworks.
Still, despite multiple offsetting drivers, the tariff shock is further dimming already lackluster growth prospects. We expect a slowdown in the second half of this year, with only a partial recovery in 2026, and, compared to last October’s projections, inflation is expected to be persistently higher. Even in the United States, growth is weaker and inflation higher than we projected last year—hallmarks of a negative supply shock.

Overall, despite a steady first half, the outlook remains fragile, and risks remain tilted to the downside. The main risk is that tariffs may increase further from renewed and unresolved trade tensions, which, coupled with supply chain disruptions, could lower global output by 0.3 percent next year. Apart from this, four simmering downside risks are especially worrying:
1. The AI surge, promise or peril?
Today’s surging investment in artificial intelligence echoes the dot-com boom of the late 1990s. Optimism is fueling tech investment, lifting stock valuations, and boosting consumption via capital gains. This could push the real neutral interest rate upwards. Continued exuberance may require tighter monetary policy just as in the late 1990s.
But there is also a flip side. Markets could reprice sharply, especially if AI fails to justify lofty profit expectations. That would dent wealth and curb consumption, with adverse effects potentially reverberating through the financial system.

2. China’s structural struggles
The outlook remains worrisome in China, where the property sector is still on shaky footing four years after its property bubble burst. Financial stability risks are elevated and rising as real estate investment continues to contract, overall credit demand remains weak, and the economy teeters on the edge of a debt-deflation trap. Manufacturing exports have buoyed growth, but it is hard to see how this could last.
Even the pivot toward investment in new strategic sectors such as electric vehicles and solar panels through the use of large-scale subsidies, while boosting productivity in these sectors, may have contributed to a significant overall misallocation of resources and lackluster aggregate productivity gains. Across different countries, industrial policy can help boost production in targeted sectors but should be handled with care as it often brings significant fiscal, hidden costs, and potential spillovers.

3. Mounting fiscal pressures
Many governments, including some major advanced economies, face growing fiscal strains and have achieved only limited progress in rebuilding fiscal space. Without immediate action, slower economic growth, higher real interest rates, coupled with elevated debt and new spending needs—for defense, economic security, climate—will further tighten the fiscal vise. Low-income countries are especially vulnerable, despite efforts to improve their primary balances, as they face the prospect of significantly reduced aid flows. Many poorer countries remain scarred by the shocks of the last five years. Limited opportunities could fuel social unrest, particularly among unemployed youth.
4. Institutional credibility at risk
As fiscal constraints become more binding, many institutions face rising political pressure. For central banks, pressures to ease monetary policy, whether to support the economy at the expense of price stability, or to lower debt servicing costs, always backfire. While it may lower real interest rates in the short term, inflation and inflation expectations ultimately increase more than desirable. Trust in central banks helps anchor inflation expectations—especially amid shocks, as seen during the recent cost-of-living crisis. As independence erodes, decades of hard-won credibility will vanish, imperiling macroeconomic and financial stability.

The right policies can help
While downside risks dominate, a few important developments could quickly brighten the outlook. First, resolving policy uncertainty would provide a significant lift to the global economy. Clearer and more stable bilateral and multilateral trade agreements can raise global output by 0.4 percent in the very near term. A return to low tariffs that prevailed before January 2025 based on these agreements adds even more upside, about 0.3 percent. Second, beyond its effects on investment, AI could raise total factor productivity. Under modest assumptions, the combined effects of lower uncertainty, lower tariffs, and AI could raise global output by about 1 percent in the near term.
This underscores how policies that help restore confidence and predictability can improve our growth prospects. For trade policy, the objective should be to reduce uncertainty and set clear, transparent rules that reflect the changing nature of trade relations, looking to deepen trade ties where possible. That most countries have so far avoided retaliation and sought to forge better trade deals offers a glimmer of hope.
This needs to be paired with improved domestic policies which will also go a long way in reducing global imbalances. Where needed, fiscal policy should aim to reduce vulnerabilities. This should be done gradually and credibly, but governments must not delay further. Improving the efficiency of public spending is an important way to encourage private investment. Monetary policy should remain independent, transparent and tailored with a key objective to maintain price stability.
Beyond short-term stability, we must invest more in the future. Governments should empower private entrepreneurs to innovate and thrive. Productivity fuels sustainable growth, and the progress of AI, with the right guardrails, can help lift medium-term prospects. While sectoral industrial policies are increasingly tempting policymakers, policies to support education, public research, infrastructure, governance, financial stability, and smart regulation that balances innovation with risk management offer a better and less costly path.
A pragmatic and adaptive multilateral system that fosters cooperation can help us meet these challenges.
—This blog is based on Chapter 1 of the October 2025 World Economic Outlook, “Global Economy in Flux, Prospects Remain Dim.”
 
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By: Era Dabla-Norris, Davide Furceri, Zsuzsa Munkacsi, Galen Sher
Spending more efficiently and reallocating public funds toward investment and innovation can be a powerful growth strategy
Over the past two decades, Rwanda achieved remarkable progress. Nearly every household now has access to mobile phones and primary education. More than half the population has electricity, and one in five has clean drinking water and sanitation services. Rwandans consume three times more electricity and live 20 years longer.
These gains came from relatively modest increases in investment, education, and health spending from $150 to $420 per person—which is even below the sub-Saharan African average. What made the difference in Rwanda was more efficient public spending. This approach is an answer to fiscal pressures stemming from slow growth, rising debt, aging populations, and growing demands for defense. The key is to make every penny of taxpayer resources count.
Our new analysis of 174 economies in the latest Fiscal Monitor shows that governments could gain one-third more value from their spending, on average, by adopting best practices. By spending more efficiently and better allocating existing resources, emerging markets and developing economies can increase output by 11 percent, and advanced economies by 4 percent, over the long term. Spending smarter is more than a fiscal tactic—it’s a growth strategy.

What spending smarter means
First, it means allocating existing spending better. In most countries, public investment, which can be growth-enhancing, has declined by 2 percentage points of total expenditure over the past two decades. Another such area is education, where public spending has remained modest at about 11 percent of total spending. At the same time, many countries are faced with high public wage bills, which account on average for a quarter of total expenditure.
Second, it means improving the “technical efficiency of spending”—the maximum achievable output given a fixed level of public expenditure. To measure this, we compare observed outcomes to best-practice management, technology, and institutional arrangements. For example, Canada spends about $2,500 per person annually on education—roughly $300 less than other advanced economies. Yet adults complete an average of 13.7 years of schooling, making Canada the second best in the world, behind Germany.
Significant economic gains
Smart public spending can substantially boost long-term growth in both advanced and developing economies.
Our analysis shows that shifting 1 percent of gross domestic product from lower‑impact government consumption into infrastructure investment raises output by about 1.5 percent in advanced economies and 3.5 percent in emerging market and developing economies over about 25 years. Redirecting the same amount toward human capital investment, for example by upgrading education systems, can yield around 3 to 6 percent, respectively, in those two country groups. Importantly, this reallocation of spending can also reduce income inequality.
Spending more efficiently amplifies these long-term gains. Improving investment efficiency by 10 percentage points can further boost output gains by 1.4 percent. The faster countries close these gaps, the greater and quicker the payoffs.
Complementary policies also matter. In advanced economies, pairing research and development with human capital investment enhances productivity. In emerging and developing economies, combining infrastructure spending with education spending balances near‑term and longer‑term gains: physical capital boosts output quickly, while human capital builds future productivity.

Making reforms work
Spending reforms are challenging. Countries often establish minimum legal levels of funding for education, health, and social protection. Public salaries and pensions are also hard to change. Globally, about one-third of spending is effectively “locked in,” with advanced economies facing the highest rigidity.
But there are good examples of how to move forward. Estonia and Sweden reduced rigidity by actively using multiyear fiscal planning, which requires new spending to be offset in future years. They also linked budget allocations more closely to past performance. This strategic approach to spending reforms is more effective than across-the-board cuts, which can disrupt essential services and reduce efficiency.
Combating corruption, strengthening the rule of law, and increasing budget transparency could also increase efficiency. Competitive procurement processes, improved management of public investment, and digitalization of public finances help too. Togo, for example, increased its investment efficiency by 5 percentage points after introducing cost-benefit analyses for all projects and multiyear planning in 2016.
Linking retirement ages to life expectancy, or emphasizing disease prevention to curb future health costs, can secure long-term sustainability of social spending. Aligning public compensation with market benchmarks and strengthening payroll controls are also key—especially in developing economies where public sector wages often exceed private sector ones by 10 percent or more.
Finally, spending reviews with clear objectives and links to budget decisions help governments identify savings and increase impact. In the Slovak Republic, such reviews uncovered potential savings of 7 percent of public expenditure.
The bottom line is this: by stepping up spending efficiency and better channeling existing resources, countries can strengthen public finances, build resilience, and increase their long-term economic growth.
 
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The European labour market remains resilient, with low unemployment levels, despite a decline in employment growth, according to the European Commission’s latest report. In 2024, job growth decreased to 0.8%, compared to 1.2% in 2023, as a result of economic pressure and geopolitical instability. Nevertheless, the unemployment rate in Europe remains near its record low.
Despite welcomed progress over the last decade which saw certain sectors experience significant rises in pay, one in five workers remain in low-paying jobs. In 2024, wages rose by 2.7%; they are expected to exceed pre-pandemic levels in most Member States by the end of the year. The report highlighted that measures such as increased minimum wages can support low-wage earners with their cost of living.
The report emphasises the need for enhanced initiatives to improve productivity and job quality, which are essential for maintaining high wages and competitiveness.
EU initiatives such as the Minimum Wage Directive, the Competitiveness Compass and the forthcoming Quality Jobs Roadmap aim to promote fair income, skills development and innovation-led growth.
“Europe’s social and employment model is strong and adaptable. This report shows welcomed progress in wages, but we must not be complacent – we need to do more to increase the purchasing power of workers to help tackle the cost of living crisis. The important role of minimum wages,point to concrete measures that can benefit workers, employers and the wider economy. We must continue protecting and investing in people – this helps build a resilient Europe where everyone in society can benefit from economic progress” said Executive Vice-President for Social Rights and Skills, Quality Jobs and Preparedness Roxana Mînzatu.
 
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