Lord Mayor, Ambassadors, Governor Bailey, distinguished guests, it is a great honour to be here with you this evening.
Thank you Lord Mayor for the invitation, and thanks to the City of London corporation for this opportunity in this storied venue.
As a proud Irishman and European, my connections with the United Kingdom and London in particular run very deep, both personally and professionally.
London is very much a home away from home for me. It is where I first moved to from Dublin, it’s where I started my first job, and it’s where lifelong friendships and relationships were formed.
Standing here amidst the timeless grandeur of Guildhall, we are reminded of London’s rich history where every corner tells a story of a city that has shaped the world.
As part of my preparation for tonight, I was reading about the history of Guildhall. This remarkable backdrop is a place where court was held, taxes collected, and laws and regulations fine-tuned. Indeed, I read that ‘guildhall’ probably comes from the Saxon word ‘gild’, meaning a payment. It is a resilient demonstration of what has gone before.
It is appropriate then to set out what I see as a key issue for our economies in the future. And one that is common for Europe, for the UK and indeed for the global economy – namely, how to pay for and meet the very large investment needs which our societies face in the years to come, and do so in a way that reduces inequalities within our countries.
We are in a period of historic change, with new technologies fundamentally changing how we live, wars across the world, and having recently emerged from a global pandemic. All of this is occurring while our ecology and environment is being reshaped by climate change.
The lesson from history is that any of one of these changes would have restructured the societies and economies that have gone before. All of these changes are happening together for us.
This is why we are close to an inflection point among Western economies as we look at the fiscal positions of the EU, the US and the UK and critically the demands on those budgets.
So this evening, I will hone in on three specific areas:

first, making the case for market based economies;
second, how this in turn fits the rationale for the European Union; and
third, why a sea-change in capital markets union in Europe is underway, which leaves great grounds for optimism.

I will then conclude with some thoughts looking ahead from the shared perspectives faced by the UK and Europe.
 
Markets work, but we need to keep on making the case for them
So to begin, I want to set out the case for market economies and how this can help us approach the financing or investment gaps that we now confront.
From my student days right through to being a Minister, I have seen first-hand how easily opinions become divided between ardent and unapologetic advocates for unbridled laissez-faire on the one side and advocates of a State of the Leviathan on the other.
The market economy is under intense scrutiny, with the current political environment shining a lens on many of its deficiencies.
The needle of public opinion is fragile, perhaps due to the ‘permacrisis’ narrative that has gained traction in recent years.
The risk of such trends taking on nationalistic and protectionist hues is very real. Most of us will recall our economic history, in particular the great British classical liberals of the 19th century. Adam Smith, David Ricardo, John Stuart Mill and many others warned of the inherent dangers that such protectionism could bring in the form of vested interests and economic inefficiencies that ultimately fail to deliver on the benign intentions behind such policies.
Their insights are still very relevant today.
Yet I do not believe we face a binary choice here between State dominance and laissez-faire economics.
These arguments are well made in Martin Wolf’s excellent book, ‘The Crisis of Democratic Capitalism’, where he says “people expect the economy to deliver reasonable levels of prosperity and opportunity to themselves and their children. When it does not, relative to those expectations, they become frustrated and resentful”.
This encapsulates well the role of markets within democracies and the need to work to maintain the social licence and support for those values. Wolf also emphasises the large extent to which an economy which rewarded people for developing new commercial ideas in competition with one another has been a “driving force behind the transformation in prosperity over the past two centuries”.
However, it is clear that there is dissatisfaction in how market economies are delivering within democracies and this is clearly affecting political outcomes.
Faith in the economy’s ability to deliver for households has ebbed and eroded in recent times. Eurobarometer survey data shows that while 47% of Europeans are satisfied with the situation of the economy – the highest level since 2019 – 73% expect their standard of living to decrease in the time ahead. This echoes similar surveys carried out elsewhere in the Western world. For example, the Edelman Trust Barometer last year showed a significant collapse in economic optimism across Western liberal democracies, confidence levels at their bleakest in Western Europe (France (12%), Germany (15%), Italy (18%), the Netherlands (19%), the UK (23%), Spain (26%), Sweden (29%), Ireland (31%)) and Japan (just 9%) in terms of expectations of being better off in five years, with levels also low in Canada (28%), Australia (30%) and the United States (36%).
In instances of recent market failures or disruptions, it has been the State – in many cases through coordinated action at the international level – that has stepped in, whether through the response to the financial crisis of 2008, the Covid pandemic or the recent energy price shock.
But this is simply not sustainable. Addressing our future priorities which relate to health care, the climate transition and security implies substantial funding needs.
As outlined by the IMF earlier this year, we have a policy trilemma (see IMF report):

first, spending demands and pressures remain very high – for wages, for pensions, for health care, etc,
second, there is an inherent resistance to higher levels of taxation,
third, there is a need to bring deficit and debt levels down to safer levels, to create space for investment and to rebuild budgetary buffers.

In this environment and facing these issues, the challenge is to more than making the case for market based economies. This is more than a communication challenge. This is about how markets are organised. This is why there is a new imperative to harness private savings and investment and to rekindle faith in the private sector’s capacity to effectively respond to public demand for societal transformations.
This is vital because the public purse and the tax payer cannot fund on their own, the investments that societies need to respond to the many changes that we now confront.
As Wolf argued so clearly, the success of the market economy rests very much on the support of the public. This consideration needs to be present in our policy-making. We should not lose sight of how our decisions are communicated and explained to our citizens in an environment where public opinion so easily becomes a victim of false narratives and misinformation.
 
Evolving the EU Single Market to deliver market change 
As President of the Eurogroup, it will be no surprise to this assembled audience to know that the following questions are top of my mind in a European context, namely:

how to support the development of markets within the EU, in a way that is beneficial to EU citizens and to the common good; and
how to communicate appropriately with the public about how the EU operates.

The EU policies that provide the most tangible and practical benefits are the most popular among citizens. Given my role as President of the Eurogroup, I will take the single currency, the euro, as an example.
The euro, certainly in relation to Guildhall, is in its absolute infancy. Despite its infancy it is not without its own trials and tribulations.
This magnificent structure standing since 1411, survived both the Great Fire of London and the Blitz. The euro too has evolved, surviving existential crises like the financial and sovereign debt crisis.
Just this year, we marked the 25th anniversary since the euro came into force as a single currency. In the space of only two decades, the euro has grown to become the second largest reserve currency in the world.
The euro area, its’ institutions and functioning have been modified and improved to address deficiencies in the original construct – a clear example is the establishment of centralised banking supervision following the financial crisis.
The periods in between shocks have also been marked by solid and sustained growth and convergence, perhaps best encapsulated by the recent record levels of employment and activity across European labour markets, where jobless numbers have never been lower, even in spite of a war on our continent.
The success of the euro is not just evident in economic data but it is also recognised by its citizens – with 79% of citizens living in the euro area believing that having the euro is a good thing for the EU, while 69% believe that it is a good thing for their own country (source:  Eurobarometer, November 2023).
The EU and its member states must continually challenge themselves to ensure that we are indeed delivering on its promise, in a way which truly benefits our citizens in a meaningful and tangible way.
A good starting point is the recognition that a number of critical aspects to the four basic freedoms remain partial or incomplete.
In the period ahead, there will continue to be a lot of focus on breaking down unnecessary impediments to creating a truly integrated single market in Europe.
Despite free movement of capital being one of the fundamental pillars of the EU single market, we have not yet realised a truly single market for capital.
The simple reality is that entrepreneurs and businesses in Europe are more likely to seek bank funding than their counterparts in the United States.
Banks play a critical role enabling deeper and more liquid markets. But we know banks typically are more conservative in their lending and also more focused on domestic rather than international markets.
Similarly, if you are an investor and you need capital, the main players tend to be US firms and agencies and the equity market in Europe is less than half the size of the US.
We need to be able to better provide the opportunities and conditions for our companies to find the financing they need to grow, innovate and become more competitive within Europe. We need to take down the barriers which prevent them from fully benefiting from a single market for capital where a business in one European country can easily access financing opportunities in another. We need more competition and greater diversification of risks across the Union.
That is why capital markets union has to be central to our agendas.
 
Why doing more on CMU is back on the agenda
It is because we are at ‘an inflection point’ in relation to the public finances and investment needs.
Debt levels, partly as a result of the pandemic, remain high, and potentially stretched in some cases.
At the same time, the demands for spending are at all-time highs and will only get larger as our populations age.
That is the uncomfortable but obvious truth.
At a time of growing dissatisfaction about the role of market-based solutions and at a time of such widespread budget challenges, making further progress on Capital Markets Union is essential.
The EU itself has the answer to these questions – in this case, the Capital Markets Union. I truly believe that making progress on the Capital Markets Union will bring tangible benefits to our businesses, and better opportunities for our citizens to provide and save for future projects.
This is all the more important at a time of growing dissatisfaction about the role of capitalism and market economies.
Our capital markets are vital as a means of unlocking funding sources – to close the gap between demand and supply, addressing the needs of citizens, communities and society as a whole.
The reality of course is that this is ‘simple economics but difficult politics’. To quote what is known as the ‘Juncker dilemma’, we all know what to do we just don’t know how to get elected if we do it!
Or maybe this is a case of ‘we know what we need to do, we just can’t see why it’s important to getting us elected’. If this conundrum catches on, Lord Mayor, I will christen it the ‘Mainelli dilemma’, in honour of you!
But I am increasingly optimistic on the prospects of real progress towards a true capital markets union in Europe as there is a sea change in attitudes and political determination in recent months.
At the origin has been the recent work by the Eurogroup, the body that I am privileged to Chair, done at the request of EU leaders. Following extensive engagement with industry we agreed on a set of proposals on the future of European Capital Markets in March.
These are ambitious but realistic proposals that I believe will deliver tangible progress.
Our pragmatic proposals centre on three pillars of action around the rubric of ‘ABC’, with thirteen priority measures comprising 42 actions, as follows:

A for Architecture – that is, how we can reduce barriers, how we can develop a better regulatory and supervisory system that works for businesses, investors and savers,
B for Business – ensuring that businesses, especially SMEs looking to grow quicker, have access as well as the knowledge and capacity to benefit from the appropriate funding to grow and remain competitive in Europe, and
C for Citizens – how we can create better opportunities for citizens to save for future projects, investments and retirement, and facilitate access to capital markets for retail investors.

In addition to the three pillars of our statement, there is another ‘3’ I’d like to mention – the three avenues through which progress will need to be made going forward.
First, there is the EU legislative track, and our statement, which represents the political consensus and identifies recommended areas of focus for initiatives to be brought forward by the European Commission.
Second, measures which can be progressed at the national level, with the aim of developing and deepening European capital markets.
The third and final avenue is industry, which has a crucial role to play in the development of Europe’s capital markets. So while we cannot instruct industry, our statement does include a number of areas which I hope industry will consider over the coming months and years.
Our agreement was endorsed by EU Leaders at the March Euro Summit, and also served as the foundation for the April European Council conclusions.
At the Eurogroup, Ministers agreed a high-level work programme which will ensure that the implementation of our agreement remains at the top of the political agenda over the course of the next year. There is a political consensus and I am determined to keep the pressure on and ensure implementation.
What does this mean?
It means building institutional momentum on CMU within European institutions and also within member states.  And we see progress already, not least in political guidelines for the next European Commission outlined in July by President von der Leyen.
To maintain momentum within member states we will hold regular follow-up sessions at technical and Ministerial level to monitor progress on national initiatives to deepen capital markets.
We must act now to take advantage of this momentum.
To play the ‘devil’s advocate’, without a true capital markets union in Europe, I think the green transition as one prime example, is far less likely to happen. This would likely weaken further the case for market based economies, I spoke about at the beginning of my remarks.
We need to make the case for the potential within our economies and the necessity of unblocking funding sources and recent agreements in Europe give me a real sense of hope.
Change is happening and we have the necessary political momentum.
 
Common challenges
Of course, it is not just the EU which is looking at these questions – I know that the UK is also keen to make the most of its capital markets with the right architecture within the financial services sector to provide security for investors, as well as capital for businesses.
There are common challenges faced by both the EU and UK financial sectors. These include issues prioritised by Chancellor Reeves like reforming the pensions system, an area which the Eurogroup has also identified as a priority and where we intend to make progress in the coming months and years. Enlarging the use of longer-term savings and investment products, including through occupational and personal pension schemes will be critical to the success of CMU. Just today I met the Chancellor and discussed these common issues and I look forward to working with her at the G7.
More broadly it is particularly welcome that the UK-EU Memorandum of Understanding on Financial Services was signed last year, paving the way for the first two meetings of the Joint EU-UK Financial Regulatory Forum.
This Forum provides the opportunity to exchange views on key issues of importance for both jurisdictions, with the aim of preserving financial stability, market integrity and the protection of investors and consumers.
Of course, the UK and EU each have to make their own decisions about how to make progress. However, it is really welcome that we have moved onto a new footing in our relationship which allows us to exchange views on these important topics for our citizens and businesses.
Financial instability does not respect borders, so we have to work closely together in partnership to build resilience and safeguard stability.
More broadly, l strongly welcome the UK Government’s intention to strengthen and deepen relations with the EU.
Ireland has always supported the closest possible relationship between the EU and the UK and we will continue to do so. I hope the ‘first steps’ taken to re-build trust and develop relationships turn into a ‘steady walk’.
 
The case for optimism
I have covered a lot of ground and I want to conclude on an optimistic note.
I strongly believe that our economies and societies have fared well in the face of a pretty severe set of shocks.
If I was to pick one word to encapsulate how the euro area has fared, it would be ‘resilience’.
The pandemic for one was, I hope, a once in a lifetime shock – a black swan event. The forecasts for our future, at that point, were so bleak.
In fact, the euro area economy bounced back very quickly and multiple times faster than the slow dis-jointed recovery that marked the post financial crisis era. The UK economy also showed very strong GDP numbers following the pandemic. These are foundations that we build upon.
However, we need to do more. Europe and the United Kingdom need to double down on our shared democratic values and priorities.
Democracies and economies need to change, and how our capital markets change is part of that in order to address the societal transformations underway. They need to change to address the big issues we face – our investment needs for climate change, digital transformation, defence spending and ageing.
This is the benchmark against which we need to judge the success of the market economy we are developing and communicating about.
So to return to where I began – the remarkable backdrop of this centre of City government since the Middle ages and central to the City’s development since the Romans founded Londinium here 2000 years ago – this Guildhall.
When building the architecture of our financial future, we can draw inspiration from this building, which has stood the trials and tribulations and tests of time.
We need strong foundations to underpin our market, we need sturdy pillars to support it, we need talented craftsmen shape it and carve it, and importantly we need merchants to operate it.
Let the building begin.
 
For more information, please contact:

Kornelia Kozovska, Spokesperson for the Eurogroup President

 
Compliments of the European CouncilThe post European Council | Keynote speech by the Eurogroup President, Paschal Donohoe, to the City of London Corporation on ‘Financing Our Future’, 3 September 2024 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

By Alexander Al-Haschimi, Lorenz Emter, Vanessa Gunnella, Iván Ordoñez Martínez, Tobias Schuler and Tajda Spital | Euro area exporters are facing tougher competition from China. But why is that? The ECB Blog looks at the important role played by price competitiveness and the ongoing industrial upgrades being made in China.
Euro area manufacturers have long benefited from Chinese exports, such as using cheap parts to produce their own finished products. In recent years, however, China has increasingly become an exporter of final goods itself. This has coincided with significant decline in the euro area’s share in the global export market, while China’s share has steadily increased (Chart 1). In this post, we look at what is behind this and what it means for euro area exporters.
 
Chart 1
Global non-energy goods export market shares (percentages)

Source: Trade Data MonitorNotes: Market shares in values of manufacturing exports excluding energy and other specific and non-classified products (HS2 sectors 25, 26, 27, 97, 98, 99). The euro area export market share shows extra-euro area trade. Latest observation: 2023.
China’s export strength is of course not the only reason for the euro area’s declining share, which has fallen by eleven percentage points since 2000, a similar but more gradual than the decline of the share of the United States. Two additional factors play a role: Europe’s gradual transition from a manufacturing-based to a more services-oriented economy and the rising integration of China and other emerging economies into the global market drive the longer-term trend.
Additionally and more recently, global preferences shifted during the pandemic, with demand moving away from goods and markets in which the euro area has historically specialised, i.e. capital goods like machinery and electrical equipment.[1] Supply disruptions, also brought on by the pandemic, compounded these difficulties because of European exporters’ deep integration in regional and global supply chains.[2] Finally, the energy shock following Russia’s invasion of Ukraine meant higher energy and other input costs, eroding euro area exporters’ price competitiveness further.
Euro area and China are now in direct competition
Our analysis indicates that recent losses in euro area price competitiveness are particularly linked to competition from China. Since 2021, China has accounted for the euro area’s entire appreciation in the real effective exchange rate based on producer prices (Chart 2). This measure lets us compare price developments vis-à-vis other countries and regions. Since the nominal CNY-EUR exchange rate remained broadly stable over this period, the euro area’s competitiveness loss is primarily due to an unfavourable evolution of the relative Producer Price Index (PPI). Simply put, euro area products became more expensive vis-à-vis Chinese products, for reasons we discuss in more detail below.
 
Chart 2
Euro area real exchange rates

(index, 2021Q1=100, increase=worsening price competitiveness)Source: ECB.Notes: China’s share in manufacturing trade is used as weight to exclude China from the real effective exchange rate. Latest observation: 2024Q2.
 
The impact of shifts in price competitiveness between the euro area and China hinges on their direct competition in export markets. While cheap intermediate products from China make input cheaper for euro area firms, they also pose a challenge if both compete with their end-products in the same markets.[3] Two decades ago, China competed mainly in low-value sectors, such as clothing, footwear, or plastic. That mostly affected southern euro area economies, which were exporting the same types of goods. As China’s exports have moved up the value chain, they are challenging more and more European exporters, including those in high value-added industries like automotive and specialised machinery. Indeed, the number of sectors in which both the euro area and China have a revealed comparative advantage (RCA) – meaning they export more in these sectors than the global average – has increased steadily in recent years (Chart 3).
 
Chart 3
Sectors in which the euro area and China have an RCA compared to rest of the world (percentages)

Sources: UNCTAD and ECB staff calculations. Notes: Sectors with RCA>1 in both the euro area and China, as a share of the number of sectors in which the euro area has RCA>1.In total, 259 sectors are being considered for each year. Euro area aggregate computed as a weighted average based on export value weights. Latest observation: 2023.
With Chinese and euro area firms increasingly competing in similar export markets, price competitiveness differences matter more and more – and China gained significant price competitiveness vis-à-vis the euro area in recent years. Chinese export prices have been declining primarily because of three factors. First, the downturn in the country’s real estate market has dampened demand, resulting in substantial price reductions for certain commodities. Steel export prices, for example, have dropped by more than 50% since the start of the downturn in 2022, as have cement export prices.[4] Second, China’s advanced manufacturing sectors are gaining a significant cost advantage due to substantial government subsidies, in particular in high-tech sectors.[5] Third, excess capacity within China’s domestic market is intensifying domestic competition, leading to a decline in prices and a compression of profit margins inside the country.[6] This makes exports an increasingly important source of revenues as profit margins outside mainland China, and especially in the euro area, can be substantially higher.[7] Chinese electric vehicle makers have already assumed a dominant position in Southeast Asia despite selling at a premium relative to the domestic market. Given their comparatively higher profit margins, Chinese firms also have considerable room to further reduce their prices, thereby enhancing their competitiveness with respect to euro area firms.
The increasing price competitiveness pressures in the last four years have already dampened euro area export performance. Indeed, export market shares fell particularly in sectors in which euro area prices increased relatively more than Chinese prices. This trend is illustrated in Chart 4, which shows euro area export market shares declining sharply in sectors where euro area producer prices have risen more than those of China particularly in high-energy intensive sectors. To understand the chart, keep in mind that the size of the bubbles represents how much each sector contributes to total euro area exports. Bigger bubbles mean the sector is more significant for euro area exports, and their position shows how much prices have changed and how market shares have shifted. For example, the car industry faced between 2019 and 2023 disadvantages in their producer prices relative to Chinese manufacturers of 7.5 percent and a loss of market share by more than 15 percent.
One major reason for this recent shift is the euro area’s struggle with the energy crisis, which has hit energy-intensive sectors like basic metals (iron and steel) and chemicals/plastic products particularly hard. These sectors have seen significant drops in both price competitiveness and market shares. Another factor is China’s excess capacity in several manufacturing sectors. In the motor vehicles sector, for example, China has gained market share from the euro area, especially in battery electric vehicles (BEVs), thanks to its dominance in global battery production and resulting price advantage.
 
Chart 4
China-euro area relative price changes and relative market share changes

x-axis: relative China-euro area PPI change between 2019 and 2023 (percentages), y-axis: relative China-euro area export market share change between 2019 and 2023 (percentage points)
Source: Haver, TDM and ECB staff calculations.Notes: Export market shares in values. The sectors food and wood are excluded from the scatterplot. Size of bubbles based on share of each sector in total extra euro area exports in 2023.
 
Going forward, the competitive pressure from China is set to intensify significantly. Production plans for green energy technology such as BEVs entail a sharp rise in output, which is projected to significantly outpace growth of domestic demand, further compounding existing overcapacities in these sectors. China is also investing substantially in additional export shipping capacity. For instance, the scheduled delivery of additional shipping vessels is projected to significantly increase China’s annual export capacity of cars multiple times over between 2023 and 2026. The global absorption of these additional exports likely necessitates a further compression of profit margins, thereby increasing competitiveness pressures on euro area exports over the coming years.
Euro area manufacturers must adapt to this evolving landscape, not least because the sector employs over 20 million people and makes up 15 percent of euro area GDP. Embracing innovation, investing in sustainable and energy-efficient technologies, and enhancing supply chain resilience are steps that can help bolster competitiveness. Additionally, strategic market diversification and closer collaboration within the euro area could help mitigate the risks posed by the external challenges. Furthermore, policymakers should aim at developing a fair and level playing field for the trade links with China.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
 

See, e.g., “Global Trade and Value Chains during the Pandemic“, in World Economic Outlook, Chapter 4, April 2022
For more details, see box entitled “The impact of supply bottlenecks on trade” in ECB Economic Bulletin, Issue 6, 2021. See “Understanding the impact of COVID-19 supply disruptions on exporters in global value chains”, ECB Economic Bulletin, Issue 1, 2023.
See Aghion P., Bergeaud A., Lequien M., Melitz M. and Zuber T. (2024), “Opposing Firm-Level Responses to the China Shock: Output Competition versus Input Supply,” American Economic Journal: Economic Policy, American Economic Association, vol. 16(2), pp. 249-269 and Friesenbichler, K. S., Kügler, A., and Reinstaller, A. (2024), “The impact of import competition from China on firm‐level productivity growth in the European Union”, Oxford Bulletin of Economics and Statistics, 86(2), pp. 236-256.
China is exerting downward pressure on prices both directly and indirectly. For instance, the decline in steel prices indirectly influences the European market despite anti-dumping measures as Chinese firms are exporting to third countries.
While China is increasingly demonstrating an ability to innovate in high tech sectors, as evidenced in the past with 5G telecommunication technology, EVs, and mobile phones, among others, the Chinese cost of research and production is kept artificially low by state subsidies that are approximately four times higher than in other advanced and major emerging market economies, offered in the form of direct subsidies, tax incentives or below-market credit. See also DiPippo, G. et al. (2022). “Red ink: estimating Chinese industrial policy spending in comparative perspective.” Center for Strategic and International Studies and “Key factors behind productivity trends in EU countries” in ECB Occasional Paper Series, No. 268, 2021.
China’s excess capacity can be defined as a level of production that cannot be absorbed by demand at current prices. This excess capacity stems from weak domestic demand following the downturn of the real estate market and from government investment-led policies, boosting the supply side of the economy. Recent survey evidence confirms the existence of overcapacities and their deflationary effects. In a May 2024 survey by the European Chamber of Commerce in China, over one-third of respondents among European companies in China observed overcapacity in their industry over the past year and cited overinvestment as the main reason for overcapacity. See European Union Chamber of Commerce in China. (2024). “Business Confidence Survey”. This is supported by sectoral data on rising inventory-to-sales ratios coupled with declining profitability and a structural Bayesian VAR analysis, demonstrating that export growth in several sectors is increasingly supply driven. See also “The evolution of China’s growth model: challenges and long-term prospects”, ECB Economic Bulletin, Issue 5, 2024.
For Chinese EV producers, profit margins in the euro area can be up to 10 times higher than in China. See “Ain’t No Duty High Enough” (2024). Rhodium Group.

Check out The ECB Blog and subscribe for future posts.
 
Compliments of the European Central BankThe post ECB | Why competition with China is getting tougher than ever first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Following its stress test earlier this year, the Federal Reserve Board on Wednesday announced final individual capital requirements for all large banks, effective on October 1.
Large bank capital requirements are informed by the Board’s stress test results, which provide a risk-sensitive and forward-looking assessment of capital needs. The table shows each bank’s common equity tier 1 capital requirement, which is made up of several components, including:

The minimum capital requirement, which is the same for each bank and is 4.5 percent;
The stress capital buffer requirement, which is based in part on the stress test results and is at least 2.5 percent; and
If applicable, a capital surcharge for the largest and most complex banks, which is updated in the first quarter of each year to account for the overall systemic risk of each of these banks.

If a bank’s capital dips below its total requirement announced today, the bank is subject to automatic restrictions on both capital distributions and discretionary bonus payments.
Also today, the Board announced that it had modified the stress capital buffer requirement for Goldman Sachs, after the firm’s request for reconsideration. Based on an analysis of additional information presented by the firm in its request, the Board determined it would be appropriate to adjust the treatment of particular historical expenses incurred by the bank in the stress testing models’ input data, due to the non-recurring nature of those expenses. As a result, the bank’s stress capital buffer requirement has been adjusted to 6.2 percent from a preliminary 6.4 percent.
The Board is focused on continuously improving the stress testing framework. To that end, the Board will analyze whether to revise regulatory reporting forms to better capture these types of data and to explore possible refinements to certain model components.
 
Compliments of the Federal Reserve BoardThe post The Fed | Federal Reserve Board announces final individual capital requirements for all large banks, effective on October 1 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

New governors in Bosnia and Herzegovina and Papua New Guinea lifted the share of central banks with women leaders to 16 percent
Women are leading more central banks than ever before, thanks to appointments in the past year, but recent gains still leave the share of female governors far short of parity.
The number of women in governor roles rose to 29 this year from 23 last year, though that left the share of female leaders at just 16 percent of the world’s 185 central banks, according to an April report by the Official Monetary and Financial Institutions Forum. Greater gender balance in senior positions may help increase the diversity of thought and checks and balances, in turn contributing to increased economic and financial stability and improved performance, IMF research shows.
Appointments this year in Bosnia and Herzegovina and Papua New Guinea are examples of how smaller economies are driving more progress on gender balance, according to OMFIF, a London-based think tank for monetary, economic and investment issues.
This year’s rise was the biggest gain in more than a decade of surveys, but the Chart of the Week shows how central banks still have much room to make progress toward greater parity in the ranks of top policymakers steering the global economy.

The tally adds to evidence of the struggle of women at central banks as well as in the economics discipline, where they remain underrepresented even after steady gains.
A first-of-its-kind IMF survey of the European Central Bank and its Group of Seven counterparts showed last year that fewer than half of employees at those institutions are women, but on average only a third of women are economists or managers. This survey underscores how policies to eliminate gender gaps have been only partially successful.
ECB Executive Board member Isabel Schnabel has cited a substantial gender imbalance in economics—one that the institution is determined to change among its own staff. Schnabel noted in a 2020 speech that the barriers aren’t insurmountable, and that mentoring opportunities and ensuring childcare can help narrow gender imbalances.
The latest additions to the list of countries naming a woman as central bank chief came in January, when Jasmina Selimović began a six-year term in Bosnia and Herzegovina and Elizabeth Genia was appointed to the top job after serving as acting governor. Last year, Michele Bullock became the first woman to lead the Reserve Bank of Australia.
Cambodia, Georgia, Moldova and Montenegro also appointed women as the heads of their monetary authorities last year, according to OMFIF’s 2024 gender balance index.
 
Compliments of the IMFThe post IMF | Women Lead Record Number of Central Banks, but More Progress is Needed first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the July 2024 SCE Labor Market Survey, which shows a sharp increase in the proportion of job seekers compared to a year ago. Satisfaction with wage compensation as well as with nonwage benefits and promotion opportunities at respondents’ current jobs all deteriorated. The average expected likelihood of receiving an offer in the next four months increased compared to a year ago, while the average expected likelihood of becoming unemployed in the next four months reached a series high. The average expected wage offer (conditional on receiving one) declined year-over-year, while the average reservation wage (the lowest wage at which respondents would be willing to accept a new job) increased year-over-year but retreated slightly from a series high recorded in March 2024.
Experiences

Among those who were employed four months ago, 88% were still with the same employer, a series low since the start of the survey and down from 91.4% in July 2023. The rate of transitioning to a different employer increased to 7.1%—the highest reading since the start of the survey—from 5.3% in July 2023. The increase compared to a year ago was primarily driven by women.
The proportion of individuals who reported searching for a job in the past four weeks increased to 28.4%—the highest level since March 2014—from 19.4% in July 2023. The increase was most pronounced among respondents older than age 45, those without a college degree, and those with an annual household income less than $60,000.
19.4% of individuals reported receiving at least one job offer in the past four months, essentially unchanged from July 2023. The average full-time offer wage received in the past four months decreased slightly to $68,905 from $69,475 in July 2023.
Satisfaction with wage compensation, nonwage benefits, and promotion opportunities at respondents’ current jobs all deteriorated relative to a year ago. Satisfaction with wage compensation at the current job fell to 56.7% from 59.9% in July 2023. Satisfaction with nonwage benefits fell to 56.3% from 64.9%. And satisfaction with promotion opportunities dropped to 44.2% from 53.5%. These declines were largest for women, respondents without a college degree and those with annual household incomes less than $60,000.

Expectations

The expected likelihood of moving to a new employer increased to 11.6% from 10.6% in July 2023, while the average expected likelihood of becoming unemployed rose to 4.4% from 3.9% in July 2023. The current reading is the highest since the series started in July 2014.
The average expected likelihood of receiving at least one job offer in the next four months increased to 22.2% from 18.7% in July 2023. The average expected likelihood of receiving multiple offers in the next four months rose to 25.4% from 20.6% in July 2023.
Conditional on expecting an offer, the average expected annual salary of job offers in the next four months declined to $65,272 from $67,416 in July 2023, though it remains significantly higher than pre-pandemic levels. The decline was broad-based across age and education groups.

The average reservation wage—the lowest wage respondents would be willing to accept for a new job—increased to $81,147 from $78,645 in July 2023, though it is down slightly from a series high of $81,822 in March 2024.
The average expected likelihood of working beyond age 62 increased to 48.3% from 47.7% in July 2023, and versus a series low of 45.8% in March 2024. The average expected likelihood of working beyond age 67 increased to 34.2% from 32% in July 2023, partially reversing the steady declining trend observed in the series since the onset of the pandemic.

Detailed results are available here.
 
Compliments of the New York Federal ReserveThe post NY Fed | SCE Labor Market Survey Shows Sharp Increase in Job Seekers, While Current Job Satisfaction Deteriorates first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Blog post by Olly Bartrum | Fiscal rules have come under a range of criticism in recent years in the UK and elsewhere. In general, the argument of critics has been that they encourage sub-optimal economic policy-making. For example, they have been blamed for forcing countries into counterproductive austerity to not enforcing fiscal sustainability adequately.
Despite this, fiscal rules are increasingly being adopted by countries across the world, even if they are not always followed in practice. Evidence does suggest that fiscal rules are important for fiscal sustainability but that they need to be designed right and that the overall fiscal framework – the conventions and processes that govern how fiscal policy is made – needs to be supportive of their implementation.
Economic and fiscal policy has been far from perfect since fiscal rules were introduced in the UK in 1997. The main rules in place are that public sector net debt should be on course to fall as a share of GDP in five years’ time, and that public sector borrowing should not exceed 3% of GDP in five years’ time.
A group of us at the Institute for Government – a non-partisan UK-based thinktank with a mission to improve government effectiveness – recently published a report (Strengthening the UK’s fiscal framework) analysing problems with UK fiscal policy and whether changes to the rules or how they are used could help.
‘Fiscal fiction’: the inconsistency between budgeting frameworks and fiscal rules
A salient problem in the UK over recent years has been what we refer to as ‘fiscal fiction’, whereby fiscal rules are only met through implausible plans from the government. This arises principally from an inconsistency between the horizons of the fiscal rules on one hand and the medium-term expenditure framework on the other.
The UK’s current set of fiscal rules (our eighth set since 2009 that will shortly be replaced by our ninth by the recently elected new government) includes target fiscal metrics five years ahead on a rolling basis. Plans for tax and welfare policies are also always set out on a rolling five-year basis, with forecasts scrutinised and published by the Office for Budget Responsibility (OBR, the UK’s independent fiscal institution).
Detailed multi-year expenditure plans on the other hand, initiated through ‘spending reviews’,  typically have a much shorter time-frame. In the UK a spending review performs the usual function of reviewing existing expenditure, but also sets multi-year budgets for all government departments. Such budgets are, however, set for a period of anywhere between one and five years, and they are set on a fixed rather than a rolling basis. This means that, in the period immediately preceding a new spending review, detailed spending plans will not extend far into the future. Currently, for example, we only have departmental spending plans up to the end of March 2025. For the years of the fiscal forecast beyond that, the government provides a ‘pencilled in’ number for total government expenditure, which the OBR must take as given when reviewing the government’s plans.
UK governments have taken advantage of the inconsistency between these elements of the fiscal framework by pencilling in tight aggregate spending plans in the years not covered by a spending review, helping them to appear to be on course to meet fiscal rules which only apply in five years’ time. Crucially, the government has not needed to spell out how it would achieve these tight plans. In practice, at every spending review since 1997, except one, the government has revised the plans upwards.
This behaviour leads the government to systematically deliver policy giveaways in the short-term while announcing unrealistic, never-to-be-delivered spending cuts in the longer term (see chart). This is damaging for fiscal sustainability. Fiscal rules only work as a discipline if they force politicians to make the difficult trade-offs necessary to meet them.
To overcome these problems, we recommend that the government moves to a medium-term expenditure framework that sets budgets for a longer time period on a rolling basis and shortens the horizon of fiscal rules from five to three years (using escape clauses to allow an appropriate degree of flexibility during crises). This would mend the hole that currently exists in the framework and ensure that fiscal rules fulfil their function.
Chart: Effects of policy on borrowing in different years of Office for Budget Responsibility forecasts, November 2010 to November 2023

 
Changes to the framework that can encourage more strategic and long-term fiscal policy
Our report makes further recommendations on changes to the fiscal rules and wider fiscal framework in order to address other problems beyond fiscal fiction in the policy-making process. Our main recommendation is that it is essential for the chancellor to set out a comprehensive fiscal strategy, describing how government will use fiscal policy to achieve its objectives on long-run growth, net zero, demand management, intergenerational fairness and so on. Rules should follow from this. In recent times, it appears that fiscal rules have become the strategy rather than tools to implement it.
We also recommended that the remit of the OBR should be changed through updated legislation to give it greater flexibility in its assessment of the government’s rules and performance against them, moving away from a ‘pass or fail’ model of assessment of the rules and with greater license to consider fiscal sustainability more broadly. This would allow the OBR to criticise, for example, gaming of the rules (e.g. selling assets at less than fair value), which might ensure government is consistent with meeting the letter of the rules, but not their spirit.
This should be supported by greater emphasis from the OBR on the uncertainties in the fiscal forecast, and on the longer-term effects of policies, looking beyond the usual five-year period covered by its economic and fiscal forecasts where appropriate.
The report also sets out that any set of future UK fiscal rules should:

Treat investment differently to current spending. The UK has had relatively volatile and low levels of public investment, partly because ministers have found cutting capital investment to be less politically controversial than cuts to day-to-day spending.
Specify the metrics targeted by rules as ranges rather than point targets, to reduce the incentives that ministers face to constantly micromanage fiscal policy as the five-year forecast evolves, which creates damaging policy uncertainty.
Rules should include escape clauses to allow the government to deviate from them in the case of crises.

Overall, our analysis suggests that fiscal rules are an important and inevitable part of any robust fiscal framework. But they only work if they support broader, coherent fiscal objectives and are complemented by other aspects of the fiscal framework.
 
Compliments of the IMFThe post IMF | Removing the ‘Fiction’, and Other Flaws, from the UK Fiscal Framework first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

U.S. Department of Commerce Outlines $1.6 Billion in Proposed Funding to Support Multiple Projects in Texas and Utah to Increase Production of Chips Vital for U.S. Economic and National Security
Today, the Biden-Harris Administration announced that the U.S. Department of Commerce and Texas Instruments (TI) have signed a non-binding preliminary memorandum of terms (PMT) to provide up to $1.6 billion in proposed direct funding under the CHIPS and Science Act to strengthen domestic supply chain resilience, advance our national security, and bolster U.S. competitiveness in current-generation and mature-node semiconductor production. President Biden and Vice President Harris championed the CHIPS and Science Act, a key component of the Investing in America agenda, to usher in a new era of semiconductor manufacturing in the United States, bringing with it a revitalized domestic supply chain, good-paying jobs, and investments in the industries of the future. The proposed funding would support TI’s investment of more than $18 billion through the end of decade to construct three new state-of-the-art facilities, including two in Texas and one in Utah, and is estimated to create over 2,000 manufacturing jobs and thousands of construction jobs over time.
Headquartered in Dallas, TI is a global leading manufacturer of analog and embedded processing semiconductors. The company has played an important role in the U.S. economy for almost a century, with the invention of the integrated circuit, creating the technological foundation for the modern electronics and semiconductor industries. Today, TI specializes in the production of current-generation and mature-node chips, also referred to as “foundational” chips, which are the building blocks for nearly all electronic systems, including power management integrated circuits, microcontrollers, amplifiers, sensors, and more. TI’s planned projects would meaningfully support the increasing needs for economic and national security applications – areas that TI has supported for decades.
“During the pandemic, shortages of current-generation and mature-node chips fueled inflation and made our country less safe. With this proposed investment from the Biden-Harris Administration in TI, a global leader of production for current-generation and mature-node chips, we would help secure the supply chain for these foundational semiconductors that are used in every sector of the U.S. economy, and create thousands of jobs in Texas and Utah,” said U.S. Secretary of Commerce Gina Raimondo. “The CHIPS for America program will supercharge American technology and innovation and make our country more secure – and TI is expected to be an important part of the success of the Biden-Harris Administration’s work to revitalize semiconductor manufacturing and development in the U.S.”
“Americans across the country felt the impact of semiconductor shortages during the pandemic—from car and appliance scarcities, to manufacturing lines halted and jobs lost. With the CHIPS and Science Act, President Biden and Vice President Harris took action to strengthen our supply chains, create good-paying jobs, and advance U.S. competitiveness,” said Assistant to the President for Science and Technology and Director of the White House Office of Science and Technology Policy Arati Prabhakar. “Texas Instruments is a global leader in foundational chip manufacturing, and thanks to the leadership of President Biden and Vice President Harris, TI is investing in our future here at home.”
Shortages of current-generation and mature-node chips were one of the driving factors of supply chain disruptions during the COVID-19 pandemic, causing acute impacts on the U.S. automotive, industrial, and defense industries, and on the availability of goods for Americans. TI’s more than $18 billion planned investment through the end of the decade across these three facilities would significantly increase its domestic production capacity of foundational chips, bolstering resilience against major economic disruptions. As one of the only companies building high-volume 300-mm wafer capacity for foundational technologies in the United States, this proposed CHIPS investment would help support CHIPS for America’s Vision for Success by substantially increasing domestic manufacturing capabilities for mature-node chips.
“The historic CHIPS Act is enabling more semiconductor manufacturing capacity in the U.S., making the semiconductor ecosystem stronger and more resilient,” said Haviv Ilan, president and CEO of Texas Instruments. “Our investments further strengthen our competitive advantage in manufacturing and technology as we expand our 300mm manufacturing operations in the U.S. With plans to grow our internal manufacturing to more than 95% by 2030, we’re building geopolitically dependable, 300mm capacity at scale to provide the analog and embedded processing chips our customers will need for years to come.”
The proposed CHIPS funding would be split across three projects in two locations:

Sherman, Texas: Construction of two new, large-scale 300-mm fabrication facilities that are expected to produce 65nm – 130nm essential chips, with anticipated production capacity of more than one hundred million chips every day. The Sherman site is one of the only greenfield production sites for chips on 300-mm wafers in the U.S.
 Lehi, Utah: Construction of a new, large-scale 300-mm fabrication facility to produce 28nm – 65nm analog and embedded processing chips, which is anticipated to produce tens of millions of chips every day. This project represents the largest economic investment in Utah’s history.

TI will continue to further its strategic approach of building closer direct customer relationships and maintaining inventory for high levels of customer service, both of which would help advance U.S. economic security.
“One of the four main pillars Secretary Raimondo laid out for successful implementation of the CHIPS and Science Act is the United States increasing its production capacity for current-generation and mature-node chips most vital to U.S. economic and national security,” said Under Secretary of Commerce for Standards and Technology and National Institute of Standards and Technology Director Laurie E. Locascio. “With our proposed investment in the world’s global leader of current-generation and mature-node chips, we would significantly advance our economic and national security and mitigate supply chain vulnerabilities, which were the driving factors of the CHIPS and Science Act.”
The proposed investment is estimated to create over 2,000 manufacturing jobs and thousands of construction jobs over time. Additionally, the PMT includes $10 million in proposed dedicated workforce funding to support the development of the company’s semiconductor and construction workforce. TI is committed to building a future-ready workforce, and invests in enhancing the skills of current employees, expanding internships and creating pipeline programs with a focus on building electronic and mechanical skills. TI has robust engagements with 40 community colleges, high schools, and military institutions across the U.S. to develop future semiconductor talent. TI provides their employees with a range of child care benefits that include Flexible Spending Accounts, paid parental leave, and services to match employee families with commercial child care centers according to their preferences. The company also plans to partner with additional providers to increase availability of child care services near their facilities.
The company has indicated that it plans to claim the Department of the Treasury’s Investment Tax Credit, which is expected to be up to 25% of qualified capital expenditures. In addition to the proposed direct funding of up to $1.6 billion, the CHIPS Program Office would make approximately $3 billion in proposed loans – which is part of the $75 billion in loan authority provided by the CHIPS and Science Act – available to TI under the PMT.
As explained in its first Notice of Funding Opportunity, the Department may offer applicants a PMT on a non-binding basis after satisfactory completion of the merit review of a full application. The PMT outlines key terms for a potential CHIPS incentives award, including the amount and form of the award. The award amounts are subject to due diligence and negotiation of award documents and are conditional on the achievement of certain milestones. After the PMT is signed, the Department begins a comprehensive due diligence process on the proposed projects and continues negotiating or refining certain terms with the applicant. The terms contained in any final award documents may differ from the terms of the PMT being announced today.
About CHIPS for America
Over two years after the passage of CHIPS and Science Act, the Biden-Harris Administration is moving full speed ahead in order to help protect our economic and national security and restore American leadership in an industry that we started decades ago. Since the beginning of the Administration, semiconductor and electronics companies have announced nearly $400 billion in private investments, catalyzed in large part by public investment. By allocating over $31 billion in proposed funding across 15 states to build factories domestically and proposing to invest billions more in research and innovation, CHIPS for America is creating an estimated 100,000+ jobs, including tens of thousands of good-paying jobs that don’t require a college degree. Our efforts are a meaningful step towards ensuring that the United States produces more of the world’s most advanced technologies – from AI to defense systems and everyday items like cars and medical devices. With a focus on expanding capacity, enhancing capabilities, maintaining competitiveness, and driving commercialization, CHIPS for America is working towards driving our future, securing our supply chains, and cementing America’s place at the forefront of technology.
CHIPS for America is part of President Biden’s economic plan to invest in America, stimulate private sector investment, create good-paying jobs, make more in the United States, and revitalize communities left behind. CHIPS for America includes the CHIPS Program Office, responsible for manufacturing incentives, and the CHIPS Research and Development Office, responsible for R&D programs, that both sit within the National Institute of Standards and Technology (NIST) at the Department of Commerce. Visit https://www.chips.gov to learn more.
 
Compliments of the U.S. Department of CommerceThe post DoC | Biden-Harris Administration Announces Preliminary Terms with Texas Instruments to Expand U.S. Current-Generation and Mature-Node Chip Capacity first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.