The European Innovation Council (EIC), part of the EU research and innovation programme Horizon Europe, will support European deep tech research and high-potential start-ups with €1.4 billion next year. The EIC Work Programme 2025, which the Commission adopted today, represents an increase of nearly €200 million in comparison with 2024.
In addition to a bigger budget, the 2025 work programme brings several improvements, including better access to scale-up equity funding with the EIC Strategic Technologies for Europe Platform (STEP) scale-up scheme, introduced following the STEP regulation adopted earlier this year. Other improvements based on the recommendations of the EIC Board are also included.
The main highlights are:

New EIC STEP Scale-up scheme, which will work with a budget of €300 million in 2025 (and expected to grow to €900 million over the period 2025-27) to provide larger investments in companies aiming to bring strategic technologies to the EU market and avoid strategic dependencies. It will provide investments of between €10 and €30 million through the EIC Fund per company to leverage private co-investment, achieving at least €50 to €150 million in total. The EIC STEP Scale-up scheme will help address a market gap in deep tech scale-up funding in Europe, targeting digital technologies, clean and resource-efficient technologies including net-zero, and biotechnologies.

Updated set of ‘EIC Challenges’:

€120 million for emerging technologies including autonomous robots, climate resilient crops, converting waste to input materials and medical diagnosis.
€250 million for earlier stage companies in specific target technologies including generative artificial intelligence, new space, agri tech and future mobility solutions.

Increasing access to Business Acceleration Services for emerging companies from ‘widening countries’ (countries with lower levels of research and innovation performance).

Awarding of Seals of Excellence under the Transition and Accelerator calls and the new STEP Seal under the STEP Scale-up scheme and Accelerator Challenge calls: these Seals aim to facilitate access to complementary and alternative funding sources such as Cohesion Policy Funds as well as to EIC Business Acceleration Services.

Four schemes
The EIC Work Programme 2025 is built around three main funding schemes:

EIC Pathfinder – €262 million for multi-disciplinary research teams to undertake visionary early-stage technology research and development with the potential to lead to technology breakthroughs (grants up to €4 million).

EIC Transition – €98 million to turn research results into innovation opportunities, following up on results generated by EIC Pathfinder, European Research Council Proof of Concept and Horizon Europe Pillar 2 (societal challenges) collaborative projects (grants up to €2.5 million).

EIC Accelerator – €634 million for start-ups and SMEs to develop, commercialise and scale up innovations with the potential to create new markets or disrupt existing ones (grants below €2.5 million, investments from €500 000 to €10 million).

In addition, the EIC Strategic Technologies for Europe Platform (STEP) Scale-up scheme – €300 million – will provide additional equity funding to promising companies driving innovation in critical areas (SMEs, start-ups, spin-offs and small mid-caps) to help them secure larger private co-investment for further scaling their businesses (investments from €10 to €30 million).
Direct financial support to innovators is complemented with access to a wide range of business acceleration services and support actions offering leading expertise and linking with corporates, investors and ecosystem actors.
Background
The European Innovation Council was launched in March 2021 as a major novelty under the Horizon Europe programme, building on a pilot phase from 2018-2020. It has a budget of over €10 billion between in 2021-2027. So far, under Horizon Europe, the EIC has supported more than 630 companies and more than 450 research projects.
The EIC’s investment arm, the EIC Fund, has reached €1 billion in actual investments in deep tech start-ups, leveraging over four times as much in co-investments. This makes the EIC Fund the largest and the most active deep tech co-investment fund in Europe. To further boost access of breakthrough EIC companies to venture capital, the Commission has recently launched the EIC Trusted Investors Network.
The Strategic Technologies for Europe Platform (STEP) regulation entered into force in March 2024 and revises the Horizon Europe legislation to introduce new flexibilities for investment support and enabling larger investments under the EIC for companies in strategic areas. The EIC is one of a number of EU programmes that implements STEP.
All potential applicants can join the EIC information days that will take place on 5th (general one) and 6th (EIC Accelerator Challenges) of November 2024.
 
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Prepared by Lukas Boeckelmann, Lorenz Emter, Isabella Moder, Giacomo Pongetti and Tajda Spital
This box reviews recent developments in global and euro area greenfield foreign direct investment (FDI) and analyses the role of geopolitics in shaping these. As firms and policymakers increasingly look at ways to reduce the vulnerability of their supply chains, understanding recent dynamics in greenfield investment is important as these may foreshadow a reconfiguration of global trade networks, the fragmentation of which could be particularly detrimental for the euro area.[1] Greenfield FDI flows refer to foreign investments made by companies to build new or extend existing production capacity. In the last decade, annual FDI outflows and inflows amounted to 1.4% and 0.6% respectively of euro area GDP and 1.0% and 1.2% respectively of global GDP excluding the euro area. The euro area is the largest source of outward greenfield FDI, accounting for 19% of global outflows in the last two years, followed by the United States, which accounted for 15%. This box uses information on announced greenfield FDI projects from a dataset provided by fDi Markets.[2]
Ex ante, the effect of geopolitical fragmentation on the direction of FDI flows is ambiguous. On the one hand, firms and policymakers might look to friend-shore and/or near-shore production to make supply chains less vulnerable to geopolitical tensions or to safeguard their assets from potential future violations of property rights. On the other hand, firms might increase their investments in geopolitically distant countries, i.e. countries which take an observably different stance on foreign policy issues, if they think that future trade tensions might impede their access to local markets.
Aggregate greenfield FDI flows are already showing increasing signs of fragmentation along geopolitical fault lines. Western companies have been ramping up investment in friendly (western) countries, while lowering investment in geopolitically distant (eastern) countries.[3] Greenfield FDI flows within the western bloc have been on the rise since 2016, while flows between the eastern and western blocs have declined, suggesting that western companies are increasingly friend-shoring or near-shoring their production capabilities (Chart A). The increase in greenfield investment within blocs is in line with evidence collected from earnings calls, which have seen a noticeable uptick in references to “friend-shoring”.

Chart A
Global greenfield FDI flows

(four-quarter moving averages, USD billions)

Sources: fDi Markets and ECB staff calculations.
Note: The latest observations are for the first quarter of 2024.

Euro area outward flows have followed the same trend, with greenfield investments increasingly tilted towards geopolitically friendly countries, such as the United States. Euro area FDI outflows seem to be increasingly pulled towards western bloc countries, in particular the United States. One driver may be that euro area firms are trying to increase their local production content for the US market in response to incentives created by the US Inflation Reduction Act (IRA).[4] Flows of greenfield FDI into the euro area are, in turn, dominated by US investments, which accounted for more than 30% of overall inflows in 2023. The recent pick-up in investment in the euro area appears to be part of a broader trend of rerouting US investments away from China to the benefit of more friendly and neutral countries.
While flows between opposing blocs have been relatively contained, there is also evidence that firms have stepped up investment between geopolitical blocs in anticipation of protectionist measures and retaliatory tariffs. Available data suggest that the flow of Chinese FDI to the neutral and western blocs increased steeply around the time the IRA was passed into law. This suggests that, in response to the heightened domestic content requirements introduced by the IRA, Chinese firms shifted their production in order to bypass the trade restrictions imposed on their goods (Chart B, panel a). This mirrors similar developments after 2016 when the threat of higher US tariffs on Chinese goods coincided with an increase in Chinese FDI flows to the western and neutral blocs. Moreover, while overall greenfield FDI flows from the euro area to China are on a declining trend, German firms, mainly driven by the automotive sector, have increased their investment in China in recent years. At the same time, we see evidence of Chinese companies increasing domestic production content in the EU, mostly in non-euro area countries, particularly Hungary (Chart B, panel b). This might also be due to firms pre-emptively relocating their production in anticipation of rising trade tensions.

Chart B
Greenfield FDI from China

a) Chinese outbound FDI to geopolitical blocs

b) Chinese outbound FDI to the EU and the euro area

Sources: fDi Markets and ECB staff calculations.
Notes: The vertical line in panel a) refers to the third quarter of 2022, the period when the IRA was signed into law. The latest observations are for the first quarter of 2024.

A more formal econometric analysis suggests that fragmentation along geopolitical fault lines has increased over time. We employ a gravity model for FDI flows that distinguishes between flows within the western and eastern blocs and flows between the blocs.[5] The results suggest that trends in global FDI flows along geopolitical fault lines, as shown in Chart A, were not driven by country-specific characteristics (such as economic growth) and instead reflect increasing geopolitical fragmentation. Independent of geographic distance, it is estimated that FDI flows within geopolitical blocs were almost three times higher than FDI flows between geopolitical blocs in the three years up to the first quarter of 2024 (Chart C).

Chart C
Ratio of FDI flows within blocs to FDI flows between blocs

(ratio)

Source: ECB staff calculations.
Notes: The chart plots the ratio of the coefficients of FDI flows within the western and eastern blocs to the coefficients of FDI flows between the two blocs, estimated using a gravity model for 12-quarter rolling windows between the first quarter of 2003 and the first quarter of 2024. The latest observation is for the first quarter of 2024 and refers to an estimation period between the second quarter of 2021 and the first quarter of 2024.

Econometric evidence shows that the overall effect of geopolitical divides on FDI is negative. We find that the effect of geopolitical distance on global and euro area greenfield FDI flows has increased since Russia’s invasion of Ukraine (Chart D).[6] Our estimates suggest that the widening geopolitical divide has dampened global FDI flows by around 3% (or €30 billion).[7] For the euro area, the value of announced greenfield FDI projects is also significantly smaller in destination countries that are geopolitically more distant, and this negative relationship has become much more pronounced since the Russian invasion of Ukraine, with annual flows falling by €14 billion. Moreover, we find that the increase in geopolitical distance between the euro area and China over the same period is associated with a decrease of around 20% in the value of flows between the two areas.[8]

Chart D
Effect of geopolitical distance on value of bilateral greenfield FDI flows over time

(elasticities, percentages)

Sources: fDi Markets and ECB staff calculations.
Notes: The chart plots the coefficients of geopolitical distance for the euro area and the rest of the world, estimated using a gravity model following Aiyar et al., op. cit. Dots depict point estimates while bars refer to the 95% confidence interval. Intra-euro area flows are excluded.

The impact of the shifts in FDI on trade and euro area output remains uncertain. On the one hand, a shift by euro area firms to increase production in the United States or other countries – for example, in response to domestic content requirements – may dampen production at home. On the other hand, higher FDI outflows may safeguard the overall competitiveness of European exporters and may, for example by increasing FDI income streams, preserve some domestic jobs, particularly in high-skilled corporate services. Moreover, euro area and other EU countries also appear to have benefited from inward FDI, which has averaged 0.7% of GDP since 2022, exceeding pre-pandemic levels.[9] More broadly, to the extent that a change in global greenfield FDI patterns along geopolitical lines foreshadows an accelerating fragmentation of global trade networks, the trends detected may prove detrimental to global and euro area output. Given its greater openness to trade and stronger integration into global value chains, such fragmentation would be more detrimental for the euro area than for other large economies.[10]

Geoeconomic fragmentation of trade would be detrimental to the euro area, lowering GDP by more than 2% and raising consumer prices by almost 4%. See also the box entitled “Friend-shoring global value chains: a model-based assessment”, Economic Bulletin, Issue 2, ECB, 2023.
The data are collected primarily from publicly available sources (e.g. media outlets, industry organisations and investment-promoting agency newswires) and report investment-level information for over 300,000 greenfield FDI announcements between 186 countries starting in January 2003.
To analyse FDI fragmentation, the world economy is assumed to fragment into three distinct blocs: a “western” (United States-centric) bloc, an “eastern” (China-centric) bloc and a “neutral” bloc comprising non-aligned countries. This classification is based on the geopolitical index outlined in the special feature entitled “Geopolitical fragmentation risks and international currencies”, The international role of the euro, ECB, June 2023.
The IRA significantly steps up US efforts in the fight against climate change and aims to increase the ability of the United States to attract key green technologies. It provides for significant financial incentives (such as tax credits for the purchase of electric vehicles and investment in renewable energy equipment) that are conditional on specific domestic content requirements.
We estimate a gravity model for quarterly greenfield FDI flows between nearly 200 source and destination countries for the period from the first quarter of 2003 to the first quarter of 2024, using dummy variables for FDI flows within and between the geopolitical blocs. The gravity model assesses the flows within and between the western and eastern blocs against a third category, “other”, encompassing flows between these two blocs and neutral (non-aligned) countries and flows between neutral countries.
Instead of including dummy variables for geopolitical alignment as above, we use geopolitical distance as measured by an index proposed in Bailey, M.A., Strezhnev, A. and Voeten, E., “Estimating Dynamic State Preferences from United Nations Voting Data”, The Journal of Conflict Resolution, Vol. 61, No 2, February 2017, pp. 430-456, which is based on voting patterns in the United Nations General Assembly in order to proxy geopolitical distance, following Aiyar, S., Malacrino, D. and Presbitero, A.F., “Investing in friends: The role of geopolitical alignment in FDI flows”, European Journal of Political Economy, Vol. 83, June 2024.
These effects are relative to a counterfactual of no geopolitical tensions – but not necessarily relative to a counterfactual in which firms do not respond optimally to the associated risks by diversifying supplies and production and by buying insurance against future shocks.
These results are robust to excluding Russia from the sample, so we can exclude the possibility that a general decoupling between the West, in particular the euro area, and Russia is driving the larger coefficient estimates in the most recent period. Moreover, the extent to which the euro area may have become generally less attractive as an investment location, owing to its proximity to the conflict and, for example, the energy price shock it triggered, would be controlled for by the time-varying destination country fixed effects.
These developments are comparable to the United States, where FDI inflows have averaged 0.6% of GDP since 2022, also exceeding pre-pandemic levels.
See the box entitled “Friend-shoring global value chains: a model-based assessment”, op. cit.

 
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Leading up to the inaugural convening of the International Network of AI Safety Institutes, Commerce Department highlights implementation of President Biden’s historic AI Executive Order, which tasked the Department with numerous responsibilities to spur the safe development, deployment and adoption of responsible AI. 
Today, U.S. Secretary of Commerce Gina Raimondo marked the one-year anniversary of President Biden and Vice President Harris’ historic Executive Order (EO) on the Safe, Secure and Trustworthy Development of AI by reflecting on the progress made by the Commerce Department to implement significant pieces of the landmark EO.
“President Biden instructed me and leaders across the Administration to pull every lever to keep pace with rapid advancements in AI to mitigate the risks so we can harness the benefits. Over the last year, that is precisely what we’ve done at Commerce, building a national AI safety institute, collaborating with leaders in industry, academia, and civil society, and working with partners and allies around the world to write the rules of the road on AI,” said Secretary of Commerce Gina Raimondo. “We’ve made tremendous progress over the last year, but we’re clear-eyed on the work that remains. We’re going to continue charging ahead to fulfill the goals of this historic EO to spur the safe development and deployment of AI in our societies.”
Since President Biden signed the AI EO in October 2023, the Department of Commerce has led implementation of significant policy priorities. In the last year, the Department has established, staffed and stood up the U.S. AI Safety Institute (U.S. AISI); created a consortium dedicated to AI safety compromised of approximately 280 members; released new guidance and software to help improve the safety, security and trustworthiness of artificial intelligence systems; signed agreements for formal collaboration on AI safety research, testing, and evaluation with leading AI companies; and completed pre-deployment testing of a new advanced model, among other action items.
Just last week, the Biden-Harris Administration announced the release of the National Security Memorandum (NSM) on AI. The NSM is designed to galvanize federal government adoption of AI to advance the national security mission. Among other key announcements, the NSM designates the U.S. AI Safety Institute, housed within Commerce’s National Institute of Standards and Technology (NIST), as the center of the whole-of-government approach to advanced AI model testing and evaluation. It empowers the U.S. AISI to collaborate with the national security and intelligence community to ensure we’re working in lock step to drive the safe, secure, and trustworthy development and use of AI.
A White House Fact Sheet underscoring AI accomplishments in the year since the Biden-Harris Administration’s historic EO is available here.
Key Commerce EO Priorities Implemented Include:

Defense Production Act authorities to compel developers of the most powerful AI systems to report vital information, especially safety test results, to the U.S. government. These companies have notified the Department of Commerce about the results of their red-team safety tests, their plans to train powerful models, and large computing clusters they possess capable of such training. Last month, the Department of Commerce proposed a rule to require the reporting of this information on a quarterly basis.

Led the way on AI safety testing and evaluations to advance the science of AI safety. The U.S. AISI at the Department of Commerce has begun pre-deployment testing of major new AI models through recently signed agreements with two leading AI developers.

Developed guidance and tools for managing AI risk. The U.S. AISI and NIST at the Department of Commerce published voluntary frameworks for managing risks related to generative AI and dual-use foundation models, and earlier this month, AISI released a Request for Information on the responsible development and use of AI models for chemical and biological sciences.

Issued a first-ever National Security Memorandum (NSM) on AI. The NSM directs concrete steps by federal agencies to ensure the United States leads the world’s development of safe, secure and trustworthy AI; to enable agencies to harness cutting-edge AI for national security objectives, while protecting human rights and democratic values; and to advance international consensus and governance on AI. This essential document designates the AI Safety Institute as the center of the whole-of-government approach to advanced AI model testing and will guide rapid and responsible AI adoption by the Department of Defense and Intelligence Community.

Identified measures—including approaches for labeling content and improving transparency—to reduce the risks posed by AI-generated content. The Department of Commerce submitted to the White House a final report on science-backed standards and techniques for addressing these risks, while NIST has launched a challenge to develop methods for detecting AI-generated content.

Released a report on the potential benefits, risks, and implications of dual-use foundation models for which the model weights are widely available, including related policy recommendations. The Department of Commerce’s report draws on extensive outreach to experts and stakeholders, including hundreds of public comments submitted on this topic.

Announced a competition for up to $100 million to support the application of AI-enabled autonomous experimentation to accelerate research into – and delivery of – targeted, industry –relevant, sustainable semiconductor materials and processes.

Published guidance addressing vital questions at the intersection of AI and intellectual property. To advance innovation the U.S. Patent and Trademark Office (USPTO) has released guidance documents addressing the patentability of AI-assisted inventions, on the subject matter eligibility of patent claims involving inventions related to AI technology, and on the use of AI tools in pursuing patent and trademark applications.

Engaged foreign leaders on strengthening international rules and norms for AI, including at the 2023 UK AI Safety Summit, where Vice President Harris and Secretary Raimondo participated. U.S. AISI Director Elizabeth Kelly later participated in the AI Seoul Summit in May 2024. In the United Kingdom, Vice President Harris and Secretary Raimondo unveiled a series of U.S. initiatives to advance the safe and responsible use of AI, including the establishment of AISI at the Department of Commerce.

Announced a global network of AI Safety Institutes and other government-backed scientific offices to advance AI safety at a technical level. This network, which will launch in November at the inaugural network convening in San Francisco, will accelerate critical information exchange and drive toward common or compatible safety evaluations and policies.

Developed comprehensive plans for U.S. engagement on global AI standards and AI-related critical infrastructure topics. NIST and DHS, respectively, will report on priority actions taken per these plans in 90 days. Additionally, the United States has launched a global network of AI Safety Institutes and other government-backed scientific offices to advance AI safety at a technical level.
 
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Abstract:
This paper examines the asymmetry in global spillovers from Fed policy across tightening versus easing episodes several examples of which have been on display since the global financial crisis (GFC). We build a dynamic general equilibrium model featuring: (i) occasionally binding collateral constraints in the financial sector with significant cross-border exposure; and (ii) global supply chains, allowing us to match the asymmetry of spillovers across contractionary versus expansionary monetary policy shocks. We find clear asymmetries in the transmission of US monetary policy, with significantly larger spillovers during contractionary episodes under both conventional and unconventional monetary policy changes. Our results also reveal that the greater the size of international credit and supply chain networks and the policymakers’ aversion to exchange rate fluctuations in the rest of the world, the greater the spillover effects of US monetary policy shocks.
Read full post here.
 
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Prepared by Pedro Baptista, Colm Bates, Omiros Kouvavas, Pedro Neves and Katia Werkmeister
Understanding how consumers perceive drivers of inflation is crucial for interpreting shifts in their inflation expectations, which can significantly influence real economic decisions. The narratives consumers construct to explain inflation play a key role in shaping their expectations, with different drivers – such as wages or profits – implying different degrees of inflation persistence.[1] To explore this further, in June 2023 and March 2024 the ECB’s Consumer Expectations Survey (CES) asked consumers to select what they thought had been the main driver of the 2022-23 surge in inflation from three answer options: firms’ profits, wage costs, or other input costs. While consumer perceptions shifted, notably in the lead-up to early 2024, they have since stabilised, making the March 2024 survey data indicative of broader trends. Analysing these evolving perceptions helps explain adjustments in inflation expectations and how shifts in macroeconomic narratives affect inflation dynamics going forward.
In March 2024 most consumers in the euro area attributed the 2022-23 surge in inflation mainly to (other) input costs, followed by profits and wages. Panel a) of Chart A shows the percentages of respondents selecting each option for each country. Other input costs (e.g. energy, raw materials or other business costs) was selected as the main driver by 66% of euro area respondents, followed by firms’ profits (20%) and wages (14%). While this ranking of inflation drivers was common across individual countries, there was considerable variation in the frequency of each answer. The order of the countries is based on the percentage of respondents selecting wages as the main driver. The Netherlands (27%) and Belgium (22%) lead this ranking, with Austria (19%) and Germany (17%) following closely behind, and France (9%), Finland (8%) and Greece (8%) at the bottom. In Greece, a noticeable percentage of consumers (43%) believe firms’ profits were the main driver of inflation.

Chart A
Perceived main driver of inflation

a) By country
(percentages of respondents)

b) Change between June 2023 and March 2024
(percentage point changes; annual percentage changes)

Sources: ECB Consumer Expectations Survey (CES), Eurostat and ECB calculations.
Notes: Panel a): Weighted estimates. Percentages of respondents selecting each option per country in March 2024. The question in the CES reads as follows: “According to your view, what is the main factor driving the change in the general level of prices for goods and services in your country during the past 12 months”. The answer options were: “1. The main driver is firms’ profits; 2. The main driver is wage costs for firms; 3. The main driver is other input costs for firms (e.g. energy, raw materials or other business costs)”. Panel b): The bars refer to weighted estimates of the change in the percentages of respondents selecting each answer option between June 2023 and March 2024. The coloured points refer to the annual percentage changes in the second quarter of 2024 for unit labour costs, energy inflation and unit profits, as derived from official data.

 
Compared with June 2023, consumers’ perceptions of the main drivers of inflation shifted towards wages, although other input costs were still seen as the strongest driver overall. The question on the perceived main driver of inflation was first posed in the June 2023 CES and repeated in the March 2024 CES.[2] Panel b) of Chart A shows the change in the percentages of respondents selecting each answer option between June 2023 and March 2024 for the euro area as a whole. The percentage of consumers selecting firms’ profits decreased by 5 percentage points, while the percentage selecting wage costs increased by 6 percentage points. This is in line with developments in wage growth and unit profits over the same period. The percentage of respondents selecting other input costs remained broadly constant, changing only by less than 1 percentage point.

Chart B
Wages as the main driver of inflation

a) By respondent educational level and age
(percentages of respondents)

b) By country and wage growth level
(percentages of respondents; annual percentage changes)

Source: ECB Consumer Expectations Survey (CES).
Notes: Weighted estimates. Percentage of respondents selecting wages as the main driver of inflation per country in March 2024. Negotiated wages refers to the annual growth rate, including one-off payments, for the first quarter of 2024.

 
Consumers selecting wages as the main driver of inflation are generally younger, without a college degree and live in countries where wage growth has been relatively high in the past year. Panel a) of Chart B shows the prevalence of wages as the main driver of inflation according to educational level and age. A possible explanation for this finding is that recent wage growth has been particularly strong among minimum-wage employees, who typically have a lower level of education and are in the younger age group. Furthermore, in countries where past wage growth has been high, a greater proportion of respondents tend to select wages as the main driver of inflation (Chart B, panel b).
Changes in consumer perceptions of the main drivers of inflation follow recent developments. Wages have gained more weight in their perceptions, while the role of profits has waned, in line with recent developments in wages and unit profits. Such changes demonstrate how narratives about inflation are reflected in consumer perceptions of the main drivers of inflation, which, in turn, may affect how they form their inflation expectations. This therefore highlights the importance of monitoring shifts in inflation narratives.

 For empirical evidence, see Andre, P. et al., “Narratives about the Macroeconomy”, Discussion Paper, No 17305, Centre for Economic Policy Research (CEPR), May 2022.
The findings from the June 2023 CES are presented and discussed in the box entitled “What do consumers think is the main driver of recent inflation?”, Economic Bulletin, Issue 6, ECB, 2023.

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Growth is projected to hold steady, but amid weakening prospects and rising threats, the world needs a shift in policy gears
Blog Post by Pierre-Olivier Gourinchas | Let’s start with the good news: it looks like the global battle against inflation has largely been won, even if price pressures persist in some countries. After peaking at 9.4 percent year-on-year in the third quarter of 2022, we now project headline inflation will fall to 3.5 percent by the end of next year, slightly below the average during the two decades before the pandemic. In most countries, inflation is now hovering close to central bank targets, paving the way for monetary easing across major central banks.

The global economy remained unusually resilient throughout the disinflationary process. Growth is projected to hold steady at 3.2 percent in 2024 and 2025, but some low-income and developing economies have seen sizable downside growth revisions, often tied to intensifying conflicts.

In advanced economies, growth in the United States is strong, at 2.8 percent this year, but will revert toward its potential in 2025. For advanced European economies, a modest growth rebound is expected next year, with output approaching potential. The growth outlook is very stable in emerging markets and developing economies, around 4.2 percent this year and next, with continued robust performance from emerging Asia.

The decline in inflation without a global recession is a major achievement. As Chapter 2 of our report argues, the surge and subsequent decline in inflation reflects a unique combination of shocks: broad supply disruptions coupled with strong demand pressures in the wake of the pandemic, followed by sharp spikes in commodity prices caused by the war in Ukraine.
These shocks led to an upward shift and a steepening of the relationship between activity and inflation, the Phillips curve. As supply disruptions eased and tight monetary policy started to constrain demand, normalization in labor markets allowed inflation to decline rapidly without a major slowdown in activity.
Clearly, much of the disinflation can be attributed to the unwinding of the shocks themselves, together with improvements in labor supply, often linked to increased immigration. But monetary policy played a decisive role by keeping inflation expectations anchored, avoiding deleterious wage-price spirals, and a repeat of the disastrous inflation experience of the 1970s.
Despite the good news on inflation, downside risks are increasing and now dominate the outlook. An escalation in regional conflicts, especially in the Middle East, could pose serious risks for commodity markets. Shifts toward undesirable trade and industrial policies can significantly lower output relative to our baseline forecast. Monetary policy could remain too tight for too long, and global financial conditions could tighten abruptly.
The return of inflation near central bank targets paves the way for a policy triple pivot. This would provide much-needed macroeconomic breathing room, at a time where risks and challenges remain elevated.
The first pivot—on monetary policy—is under way already. Since June, major central banks in advanced economies have started to cut policy rates, moving toward a neutral stance. This will support activity at a time when many advanced economies’ labor markets are showing signs of cooling, with rising unemployment rates. So far, however, the rise in unemployment has been gradual and does not point to an imminent slowdown.

Lower interest rates in major economies will ease the pressure on emerging market economies, with their currencies strengthening against the US dollar and financial conditions improving. This will help reduce imported inflation, allowing these countries to pursue their own disinflation path more easily.
However, vigilance remains key. Inflation in services remains too elevated, almost double pre-pandemic levels. A few emerging market economies are facing a resurgence of inflationary pressures and have started to raise policy rates again.
Furthermore, we have now entered a world dominated by supply disruptions—from climate, health, and geopolitical tensions. It is always harder for monetary policy to contain inflation when faced with such shocks, which simultaneously increase prices and reduce output.
Finally, while inflation expectations remained well-anchored this time, it may be harder next time, as workers and firms will be more vigilant about protecting pay and profits.
The second pivot is on fiscal policy. Fiscal space is a cornerstone of macroeconomic and financial stability. After years of loose fiscal policy in many countries, it is now time to stabilize debt dynamics and rebuild much-needed fiscal buffers.
While the decline in policy rates provides some fiscal relief by lowering funding costs, this will not be sufficient, especially as long-term real interest rates remain far above pre-pandemic levels. In many countries, primary balances (the difference between fiscal revenues and public spending net of debt service) need to improve.
For some, including the United States and China, current fiscal plans do not stabilize debt dynamics. In many others, while early fiscal plans showed promise after the pandemic and cost-of-living crises, there are increasing signs of slippage.
The path is narrow: delaying consolidation increases the risk of disorderly market-imposed adjustments, while an excessively abrupt turn toward fiscal tightening could be self-defeating and hurt economic activity.

Success requires implementing a sustained and credible multi-year adjustments without delay, where consolidation is necessary. The more credible and disciplined the fiscal adjustment, the more monetary policy can play a supporting role by easing policy rates while keeping inflation in check. But the willingness or ability to deliver disciplined and credible fiscal adjustments have been lacking.
The third pivot—and the hardest—is toward growth-enhancing reforms. Much more needs to be done to improve growth prospects and lift productivity, as this is the only way we can address the many challenges we face: rebuilding fiscal buffers; coping with aging and shrinking populations in many parts of the world; tackling the climate transition; increasing resilience, and improving the lives of the most vulnerable, within and across countries.
Unfortunately, growth prospects for five years from now remain lackluster, at 3.1 percent, the lowest in decades. While much of this reflects China’s weaker outlook, medium-term prospects in other regions, including Latin America and the European Union, have also deteriorated.
Faced with increased external competition and structural weaknesses in manufacturing and productivity, many countries are implementing industrial and trade policy measures to protect domestic workers and industries. But external imbalances often reflect macroeconomic forces: a weakening domestic demand in China, or excessive demand in the United States. Addressing these will require setting the macro dials appropriately.
Moreover, while industrial and trade policy measures can sometimes boost investment and activity in the short run—especially when relying on debt-financed subsidies—they often lead to retaliation and fail to deliver sustained improvements in standards of living. They should be avoided when not carefully addressing well-identified market failures or narrowly defined national security concerns.
Economic growth must come instead from ambitious domestic reforms that boost technology and innovation, improve competition and resource allocation, further economic integration and stimulate productive private investment.
Yet while reforms are as urgent as ever, they often face significant social resistance. How can policymakers win the support they need for reforms to succeed?
As Chapter 3 of our report shows, information strategies can help but can only go so far. Building trust between government and citizens—a two-way process throughout the policy design—and the inclusion of proper compensation to offset potential harms, are essential features.
Building trust is an important lesson that should also resonate when thinking about ways to further improve international cooperation and bolster our multilateral efforts to address common challenges, in the year that we celebrate the 80th anniversary of the Bretton Woods institutions.
—This blog is based on the October 2024 World Economic Outlook. For more, see blog posts on the report’s analytical chapters: Global Inflationary Episode Offers Lessons for Monetary Policy and Support for Economic Reforms Hinges on Communication, Engagement, and Trust.

Compliments of the International Monetary FundThe post IMF | As Inflation Recedes, Global Economy Needs Policy Triple Pivot first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Tokenisation has the potential to offer benefits to the financial system, such as increased efficiency and transparency, but it may also have financial stability implications.
This report is focused on a subset of tokenisation initiatives – tokenisation based on distributed ledger technology (DLT) as the underlying technology platform – assessed to be the most relevant for financial stability based on recent market developments. In particular, the report focuses on the tokenisation of financial assets, such as tokenised money that may potentially be used as a settlement asset for payments and other financial assets. It does not examine tokenisation initiatives involving central bank digital currencies (CBDCs) or crypto-assets.
The report analyses recent developments in DLT-based tokenisation, including the potential uses of tokenised assets and their interaction with the traditional financial system.
The limited publicly available data on tokenisation suggest that its adoption is very low but appears to be growing. Owing to its small scale, tokenisation does not, therefore, currently pose a material risk to financial stability. Nevertheless, the report identifies several financial stability vulnerabilities associated with DLT-based tokenisation, which relate to liquidity and maturity mismatch; leverage; asset price and quality; interconnectedness; and operational fragilities. Tokenisation could have implications for financial stability if the tokenised part of the financial system scales up significantly, if increased complexity and opacity of tokenisation projects lead to unpredictable outcomes in times of stress, and if identified vulnerabilities are not adequately addressed through oversight, regulation, supervision, and enforcement.
The report reviews the financial stability implications of these identified vulnerabilities and sets out considerations for the FSB and relevant standard-setting bodies.
 
Compliments of the Financial Stability BoardThe post FSB | The Financial Stability Implications of Tokenisation first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.