What are the results of the Conference on the Future of Europe?
The results of the Conference are presented in the report on the outcome of the Conference, handed over to the Presidents of the European Parliament, the Council and the European Commission on 9 May 2022. The centrepiece is the 49 proposals for the future of Europe set out in that report, covering nine topics: climate change and the environment; health; a stronger economy, social justice and jobs; EU in the world; values and rights, rule of law, security, digital transformation, European democracy, migration, education, culture, youth and sport. These proposals include general objectives and more than 300 concrete measures for the institutions to follow up on. Besides these proposals, the report includes a factual overview of the architecture of the Conference, focusing on its citizen-driven and innovative dimension, an overview of the Conference Plenary, as well as the recommendations of citizens’ panels and references to national events and the report on the Multilingual Digital Platform.
How was the consensus reached on the results of the Conference?
The 49 proposals were formulated by the Conference Plenary on a consensual basis and then put forward to the Executive Board. At the Plenary meeting on 29 and 30 April 2022, representatives of the European Parliament, the Council, the Commission, representatives from national parliaments reached a consensus on the final proposals of the Conference plenary and approved and the process that led to them.  The 108 members of the citizens’ component expressed their final say on the basis of this consensus. At its meeting on 6 May 2022, the Executive Board drew up the Conclusions of the Plenary and endorsed by consensus the report on the outcome of the Conference.
Why and when was the Conference launched?
The Conference was launched to allow, by way of a citizens-focused, bottom-up, grass roots exercise, all Europeans to have a say on what they expect from the European Union and have a greater role in shaping the future of the Union.
The signing of the Joint Declaration on the Conference on the Future of Europe on 10 March 2021 by the Presidents of the three EU institutions paved the way for this unprecedented, open and inclusive European democratic exercise, which places citizens at its very heart. On 19 April 2021, the Multilingual Digital Platform of the Conference was launched, and on 9 May 2021, an inaugural event of the Conference took place in the European Parliament’s premises in Strasbourg.
Who participated in the Conference and what were its main elements?

The Multilingual Digital Platform was set up as the main hub of the Conference. It gave everyone the chance to participate, by putting forward and debating ideas, as well as participating in events across Europe and reporting on their outcomes.
A central and particularly innovative feature of the Conference was the European Citizens’ Panels. A total of some 800 randomly selected citizens, representative of the EU’s sociological and geographical diversity, organised into four Panels of 200 citizens, met for three deliberative sessions each and made recommendations. A third of each Panel is composed of young people (age 16 – 25).
Member States organised National Citizens’ Panels based on the same principles. In addition, they contributed to the Conference through a wide range of events and initiatives.
A Conference Plenary was set up to debate the recommendations from the National and European Citizens’ Panels, and the input gathered from the Multilingual Digital Platform, grouped by themes. Together with citizens representing European Citizens’ Panels and national panels/events, it gathered representatives of EU institutions and advisory bodies, elected representatives at national, regional and local level, and representatives of social partners and civil society.
An Executive Board oversaw the organisation of the Conference.

What was the input of the Multilingual Digital Platform to the results of the Conference?
The Multilingual Digital Platform allowed to gather ideas from participants on the platform, as well as input from the multitude of original and innovative events taking place under the umbrella of the Conference in the Member States. By May 2022, close to 5 million individual visitors had visited the Multilingual Digital Platform and there were over 50,000 active participants, 18,000 ideas debated, and over 6,500 events registered on the Platform.
Throughout the Conference, reports were drawn up on the contributions submitted on the Platform. The reports, including the thematic mind maps, provided valuable input to the work of the European Citizens’ Panels. Many ideas on the Platform are therefore reflected in the recommendations of the European Citizens’ Panels. Contributions gathered through the Platform were also debated and discussed in the Conference Plenary and its Working Groups.
What was the input of the European Citizens Panels and national panels to the final results of the Conference?
Each of the four European Citizens’ Panels covered different topics in their work, focusing on (1) Stronger economy, social justice, jobs/education, youth, culture, sport/digital transformation; (2) European democracy/values and rights, rule of law, security; (3) Climate change, environment/health; and (4) EU in the world/migration. Each panel came up with a set of recommendations, and selected 20 ambassadors to the Conference Plenary to present and debate these recommendations.
In addition, six Member States – Belgium, France, Germany, Italy, Lithuania and the Netherlands – organised National Citizens’ Panels under the same principles as European Citizens’ Panels.
Altogether, the four European Citizens’ Panels and six National Panels adopted 178 recommendations, which were the main basis for the proposals prepared in the Conference Plenary and Working Groups.
What was the role of the Conference Plenary?
The Conference Plenary met seven times from June 2021 to April 2022. It ensured that the recommendations from the National and European Citizens’ Panels, and input gathered from the Multilingual Digital Platform, were debated and turned into proposals. After the recommendations were presented by and discussed with citizens, the Plenary put forward its proposals on a consensual basis to the Executive Board. Nine Plenary Working Groups were also established, to prepare the debates and the proposals of the Conference Plenary. The Working Groups held lively and constructive debates in their meetings ahead of the Conference Plenaries, as well as online.
At the 7th Conference Plenary, 49 proposals of the Plenary, covering nine topics, were on a consensual basis put forward to the Executive Board.
What was the impact of the Russian aggression against Ukraine on the Conference?
The geopolitical developments during the Conference, and especially the Russian invasion of Ukraine, gave a new perspective to the Conference process. They underlined the importance of upholding democratic values in EU Member States and in the world, while continuing to engage with citizens and nurturing the democratic legitimacy of the EU, which is a peace project in its origin. Ukrainian citizens and Members of the Parliament were heard during the Plenary and invited to the closing event of the Conference. Several citizens’ recommendations became more prominent in the light of these developments and Plenary discussions frequently considered the proposals in the new geopolitical context.
How will the results of the Conference be followed up and how will the participants be informed about it?
The Conference allowed the EU institutions to listen carefully to the concerns, ambitions, and ideas expressed by citizens across Europe. The next step in this process is to come up with concrete EU action building on the outcome of the Conference, contained in the final report. The EU institutions will now examine swiftly how to follow up effectively on this report, each within their own sphere of competences and in accordance with the Treaties. A feedback event will take place to update citizens in autumn 2022.
Compliments of the European Commission.
The post Questions and Answers – Conference on the Future of Europe first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Digital money is reaching a crossroad, where today’s policy and regulatory choices will affect the evolution of the monetary and payments landscape. Should future money in circulation be mostly publicly issued in the form of central bank digital currency (CBDC) or privately issued, or is there space for a healthy balance of the two? How do trends in “private” crypto assets affect plans to develop CBDC? This seminar will explore these and other questions with high-level policymakers from around the world.

EVENT RECORDING HERE (April 18, 2022)

Digital money is reaching a crossroad. The seminar discussed the prospects of digital public and private money and policymakers’ considerations in supporting and regulating their development.
Key Points:

Future of digital money. Georgieva recognized that digital money would play a bigger role in the future with innovations driven by the private sector and trust built by the participation of central banks, regulators, and standard setters. Sitharaman noted that digital money can improve financial inclusion and facilitate more targeted government transfers. Menon noted that the most revolutionary future is to build a tokenized economy that monetizes previously unmonetizable assets and records them on a distributed ledger.

Digital money in emerging markets. Sitharaman noted that the Indian government has been focusing on building digital platforms as public goods to embrace more innovation in this field. Campos Neto highlighted that the Central Bank of Brazil is closely following developments in digital money, including the vertical integration of the payment, content and messaging functions by Big Techs, as well as the new protocols based on which the private digital money is operating.

CBDC. Georgieva noted that CBDC is being considered by over 100 countries based on an IMF survey. Menon and Campos Neto recognized that wholesale CBDC could facilitate cross-border payments. Campos Neto emphasized that enhancing interoperability of CBDCs and coordination among CBDC-issuing countries would be key for their success.

Regulation. Campos Neto noted that regulation needs to be forward-looking as the development of digital money is fast and non-linear. Sitharaman stressed the need to have a global and technology-driven approach to regulate digital money.

Quotes:
“We are at the crossroads around how fast, how far, and in what proportions, but I see this as a one-way street in which digital money is going to play a bigger role.” Kristalina Georgieva
“What people need is something [as money] that has five characteristics: fast, cheap, secure, transparent, and open.” Roberto Campos Neto
“We should look at the underlying activity, and the nature and quality of the crypto assets, to determine specific risks they pose and the right-size regulation to address those risks.” Ravi Menon
“Regulation using technology will have to be so adaptive and nimble that it has to not be behind the curve, but be sure that is it on the top of it.” Nirmala Sitharaman
Compliments of the IMF.
The post IMF | Money at a Crossroad: Public or Private Digital Money? first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Philip R. Lane, Member of the Executive Board of the ECB, at Bruegel |

Introduction
There are three main analytical challenges in assessing the economic and inflation outlook for the euro area. First, the pandemic remains a first-order driving force. Over the winter, pandemic restrictions still limited economic activity in the euro area. While these restrictions are currently being lifted and case numbers are declining, the current set of restrictions in China is contributing to a further wave of bottleneck pressures in global supply chains and limiting domestic demand in a major region of the world economy. At the same time, the re-opening of the European economy and the prospects for a more normal summer tourist season are set to provide significant momentum in the coming months, especially for services sectors and tourist-intensive countries.
Second, the significant jump in energy prices since the summer of 2021 represents a major macroeconomic shock. In particular, since oil and gas are primarily imported into the euro area, this constitutes a major adverse terms of trade shock, reducing the aggregate real income of the euro area. In addition to the adverse implications of lower real income for consumption and investment, a persistent increase in energy prices may reduce aggregate supply capacity by making it uneconomic to operate energy-intensive production technologies at full capacity in some industries. This concern applies especially to the tradables sector to the extent that there has also been an increase in the relative price of energy in Europe compared to other parts of the world. In terms of inflation dynamics, even if a rise in energy prices is ultimately a level effect, a protracted phase of temporarily-high inflation runs the risk of affecting medium-term inflation dynamics through a re-setting of inflation expectations.
Third, the Russian invasion of Ukraine is a watershed for Europe. The economic impact of the war is operating through several mechanisms including: the amplification of the energy shock; a new set of bottlenecks; and downward revisions in consumer and business confidence. Moreover, the war constitutes a significant source of uncertainty, which is acting as a further drag on economic activity.[1]
In what follows, I review some of the implications of these three forces for the economic outlook and the inflation outlook. I do not attempt to provide a comprehensive overview: rather, the aim is to highlight some of the factors relevant for understanding the current situation.
Economic developments
High energy costs, pandemic-related restrictions, global bottlenecks and, latterly, the initial impact of the war go some way towards explaining the subdued economic performance of the euro area in the last quarter of 2021 and the first quarter of 2022: the quarter-on-quarter growth rates were just 0.3 per cent and 0.2 per cent respectively.
Although the easing of pandemic-related restrictions in Europe will provide an important source of momentum in the coming months (especially for the services sector), the pandemic is still contributing to global bottlenecks, while the energy shock and the war will continue to exert an adverse impact on domestic activity.
Chart 1 shows different vintages of the IMF’s World Economic Outlook. Compared to the profile of a prolonged multi-year phase of output remaining far below the pre-pandemic level that was embedded in the October 2020 vintage, the development and rollout of vaccines (together with considerable policy support) enabled a much faster recovery, as captured in the October 2021 vintage. However, the impact of new pandemic waves, the energy shock and the war have all contributed to a substantial downward revision in the expected output path, as reflected in the latest April 2022 projections. During 2021, the faster-than-expected global recovery – in combination with the asymmetric and idiosyncratic nature of the impact of the pandemic across industries and regions – helps to explain the emergence of sectoral demand-supply mismatches (bottlenecks) and the jump in energy prices.

Chart 1
Euro area and world GDP

(index 2019=100)

Sources: IMF World Economic Outlook and ECB calculations.

In relation to the composition of domestic demand, Chart 2 shows that consumption and investment remain below pre-pandemic levels, whereas government spending (the sum of public consumption and public investment) has been substantially above the pre-pandemic level since the second half of 2020. The still-subdued level of private expenditure in the euro area stands in contrast to the much stronger recovery in domestic demand in the United States.

Chart 2
Consumption, investment and government spending

(index: Q4 2019 = 100)

Sources: Eurostat, and ECB projections and calculations.
Note: The latest observations are for the first quarter of 2022.

Chart 3 shows a range of Purchasing Managers’ Index (PMI) confidence indicators. The left panel shows the assessment of the current situation in manufacturing and services. The re-opening of the economy is supporting the continuing improvement in the services sector. Although the manufacturing indicator edged down in March, it remained broadly stable in April, so that the overall profile has so far been resilient to the outbreak of the war. However, in the middle panel, we see that this resilience did not hold for export orders, which have declined more than total orders, since the war and the Covid wave in China are already affecting the external sector. The right panel shows the expectations component, which fell abruptly for manufacturing in particular but has remained in expansionary territory. This can be interpreted as an expectation of a slowdown in growth but not a recession.

Chart 3
PMI confidence indicators

(diffusion index: 50 = no change)

Source: Markit.
Note: The latest observations are for April 2022.

Turning to the labour market, Chart 4 reinforces the message of Chart 2: the recovery in the labour market has been asymmetric, with public sector employment above the pre-pandemic level, employment in industry and construction only now reaching the pre-pandemic level and employment in services still below the pre-pandemic level. As indicated in the right panel of Chart 4, the distance to the pre-pandemic level is larger for the intensive margin (hours worked per employee) than for the extensive margin (numbers employed). At an aggregate level, the ongoing reduction in the unemployment rate and the recovery in the labour force participation rate underline the overall improvement in the labour market.

Chart 4
Labour market: employment and hours worked by sector

(index: Q4 2019 = 100; left panel: persons employed; right panel: total hours worked)

Source: Eurostat.
Note: The latest observations are for the fourth quarter of 2021.

At the same time, the downward revision in the expected output path as a result of the war and high energy prices will have implications for the future evolution of the labour market. In terms of the impact of the war on the labour market, Adrjan and Lydon (2022) highlight a striking pattern in online job postings: since late February, the growth rate of job postings — in the twenty-one European countries with an Indeed job site — has on average fallen eight percentage points relative to their immediate pre-war trend. Of course, this aggregate shift should be interpreted in the context of the significant positive trend in recent months and take into account the different dynamics across countries.[2]
Inflation
Chart 5 shows the change in the price level over the year from April 2021 to April 2022. Energy prices have increased by about 40 per cent. This increase in the relative price of energy is far higher than the individual spikes experienced in the 1970s. It is also four times larger than the energy price spikes previously observed over the last two decades since the creation of the euro (Chart 6). Chart 5 shows as well that the other main categories also have seen above-target inflation rates over the last year, especially the food category.

Chart 5
Energy, food, goods and services inflation

(annual percentage changes)

Sources: Eurostat and ECB calculations.
Note: The HICP – food series shown is HICP food including alcohol and tobacco. The latest observations are for April 2022 (flash).

Chart 6
Difference between HICP – energy and HICP excluding energy from 1991 to present

(percentage points)

Sources: Eurostat and ECB calculations.
Note: The latest observations are for April 2022 (flash).

In understanding the factors driving price increases across sectors, it is important to bear in mind that the rise in energy prices puts upward pressure on costs across all sectors, given the importance of energy as a production input in the food, manufacturing, construction and services sectors.[3] Bottlenecks are also generating temporary upward pressure on costs, even if the eventual resolution of these bottlenecks should reverse these cost pressures in the future. In addition, the lifting of pandemic restrictions can be expected to generate temporary price pressures in re-opening sectors, in view of the recovery in demand for newly-unrestricted services and initial supply and labour market constraints in these sectors.
These themes are illustrated in Chart 7. The left panel suggests that about one percentage point in the current inflation rate for non-energy industrial goods can be attributed to the indirect impact of elevated energy costs and the contribution of bottlenecks. To the extent that the increase in energy costs is ultimately a level effect and bottlenecks eventually are resolved, this suggests that there is a temporary component in the current rate of goods inflation. The right panel shows that services inflation is currently most intense in the contact-intensive sectors that are currently re-opening, which also suggests that the completion of the re-opening process can alleviate services inflation.

Chart 7
Decomposition of inflation in non-energy industrial goods and services inflation

(annual percentage changes; percentage point contributions)

Sources: Eurostat, Narrow Inflation Projections Exercise and ECB calculations.
Notes: HICP non-energy industrial goods inflation is de-meaned by the model mean over the sample from July 2009 to February 2022. Services inflation is decomposed with non-constant weights. The latest observations are for April 2022 (flash).

Still, these adjustment processes (the absorption of higher energy costs across all sectors of the economy, the impact of bottlenecks and the post-pandemic re-establishment of those sectors most affected by the pandemic) may still have some distance to run, as is also suggested by indicators of rising costs in the earlier stages of production before goods and services reach consumers.
In addition, the process of adjustment in nominal wages adds a further dimension to near-inflation dynamics, both due to the overall recovery in the labour market and the adverse impact of unexpected inflation over recent months on real wages. Furthermore, even after the adjustment to these shocks has been completed, it is important to assess whether this phase of high inflation might permanently re-set inflation expectations and thereby also affect longer-term inflation dynamics.
Chart 8 shows developments in nominal wages, including the information embedded in an experimental forward-looking wage tracker developed by ECB staff. This forward-looking tracker is based on the information for wage trends in 2022 and 2023 embedded in already-finalised wage settlements. The overall tracker indicates only sideways movement in aggregate wage growth at around an annual two percent rate.[4] However, if we focus just on the wage agreements that have been concluded since the start of 2022, these indicate higher wage growth at around 3 per cent in 2022 and 2.5 per cent in 2023. The front-loaded nature of recent wage settlements (with 2022 increases larger than 2023 increases) suggests that wage-setters understand that there is a temporary component to the currently high inflation rate. In assessing wage developments, it is also relevant that, under typical conditions and allowing for labour productivity growth at about one per cent, nominal wage growth at three per cent is consistent with the two per cent inflation target. Although so far only a relatively small number of wage contracts have been renegotiated since inflation started to increase strongly in the second half of 2021, the outcomes from the latest wage settlements might provide a helpful guide to the likely outcomes of upcoming negotiations and contribute to a more accurate assessment of realised progress in underlying inflation.[5],[6],[7]

Chart 8
Forward looking euro area wage tracker

(annual percentage changes; percentage share)

Sources: Calculated based on microdata on wage agreements in Germany, Italy, Spain and the Netherlands. Data fort the Netherlands is based on the database maintained by the Dutch employer association AWVN. For Italy the data comes from Istat (contratti collettivi e retribuzioni contrattuali), for Spain from the Ministerio de Trabajo y Economía Social and for Germany from Bundesbank.
Notes: Experimental euro area wage tracker includes weighted average of Germany, Italy (data from July 2021 to September 2022) Spain and the Netherlands. The orange line shows the weighted average of wage increases in agreements that have not yet expired, weighted by the number of workers covered by these agreements. The green lines show weighted averages of wage increases in agreements that were concluded in 2022, weighted by the number of workers covered by these agreements. Latest observations: Last agreements signed in NL ES, IT and DE in March 2022

Chart 9 shows the expected momentum in inflation dynamics, as captured by the April 2022 median results from the Survey of Monetary Analysts.[8] The left panel shows the headline HICP, while the right panel shows the core HICPX indicator. Compared to the 6 per cent inflation realised over Q2 2021 to Q1 2022, the coming twelve months (Q2 2022 to Q1 2023) are projected to see cumulative headline inflation at 3.7 percent. In the subsequent two years (Q2 2023 to Q1 2025), inflation per year is projected to be slightly below 2 per cent. In essence, Chart 9 indicates that one more year of inflation momentum above target is expected by market analysts before returning to the target level. In relation to HICPX, the next twelve months are projected to see cumulative core inflation at 2.3 per cent, while core inflation over Q2 2023 to Q1 2025 is expected to average 1.9 per cent per year.

Chart 9
Realised and expected level of HICP and HICP excluding energy and food

(percentages)

Source: Survey of Monetary Analysts.
Note: Expectation is based on the median from the April 2022 Survey of Monetary Analysts.

In terms of the evolution of longer-term inflation expectations, Charts 10-12 present a range of indicators. In relation to the Survey of Professional Forecasters, Chart 10 conveys two messages. First, over the course of 2021, there was a significant re-anchoring of longer-term inflation expectations at our two per cent target: the distribution in the Q1 2021 survey was similar to the prevailing pattern for an extended period before the pandemic with the modal expectation at around 1.6 per cent, whereas the distributions in the Q1 2022 and Q2 2022 surveys show the modal expectation at 2.0 per cent and a significant rightward shift in the mass of the distribution. Second, there is also a visible difference between the Q1 2022 and Q2 2022 survey: the right tail of the distribution has expanded, with more forecasters expecting long-term inflation above 2.5 per cent, significantly higher than the target level.

Chart 10
Long-term inflation expectations

(annual percentage changes; percentages of respondents)

Source: ECB Survey of Professional Forecasters.
Notes: Respondents are asked to report their point forecasts and to separately assign probabilities to different ranges of outcomes. This chart shows the distribution of point forecast responses.

A similar message is conveyed by market measures of inflation compensation, as shown in Chart 11. The left panel of Chart 11 shows that the estimated “true” (that is, corrected for risk premia) longer-term inflation expectations of market participations re-anchored over the course of 2021 at around 2 per cent, after an extended period substantially below the target. In terms of inflation risk, there has been a significant shift from an inflation risk discount until mid-2021 to an increasing inflation risk premium in recent months.

Chart 11
Inflation-linked swap rate

(percentages per annum)

Sources: Refinitiv and ECB calculations.
Notes: Premia-adjusted average estimates based on two affine term structure models following Joslin, Singleton and Zhu (2011) applied to ILS rates adjusted for the indexation lag (monthly data), as in Camba-Mendez and Werner (2017); see Burban, V. et al. (2021), “Decomposing market-based measures of inflation compensation into inflation expectations and risk premia”, Economic Bulletin, Issue 8, ECB. The latest observations are for the end of April 2022 (monthly models).

Chart 12 shows the three-year-ahead inflation expectations from the Consumer Expectations Survey. The left panel shows that there has been a marked shift in the March results – having been quite stable at around 2 per cent, the median expectation moved up to 2.9 per cent. In particular, there was a shift in the proportion of participants reporting expected inflation rates above 4 per cent. In line with the literature on household inflation expectations, the most important signal is conveyed by the shift in the distribution of beliefs about future inflation more than the precise level of expected inflation.

Chart 12
Inflation expectations in the ECB Consumer Expectations Survey

(left panel: annual percentage changes; right panel: annual percentage changes; percentages of respondents)

Sources: ECB Consumer Expectations Survey and ECB staff calculations.
Notes: “Median” refers to the median across individual respondents. Data is winsorised at the 2nd and 98th percentile. The latest observations are for March 2022.

Taken together, Charts 10-12 indicate that there has been a substantial and widespread shift in longer-term inflation expectations since early 2021, largely in the direction of re-anchoring expected inflation at the two percent target. This suggests that the euro area is unlikely to revert to the persistent below-target inflation trend that was so entrenched before the pandemic. At the same time, the most recent signals from surveys and market-based measures also suggest that the right tail of the distribution is expanding, which warrants close monitoring.
Monetary policy
In recent years, the monetary stance of the ECB has been determined by a combination of policy measures: the low level of the key policy rates, rate forward guidance, asset purchases and targeted lending operations. The period of very low interest rates for banks in the targeted lending programme (TLTRO III) is scheduled to end next month. Moreover, as shown in Chart 13, there has been a very substantial decline in the rate of asset purchases in recent months and the Governing Council expects to end net purchases under the asset purchase programme (APP) in the third quarter.

Chart 13
Monthly flow of net purchases under APP and PEPP

(EUR billions)

Source: ECB.
Notes: The chart shows aggregated net purchases for all public and private APP and PEPP programmes at month-end. The latest observation is for 30 April 2022. The values for May and June 2022 were inferred from the ECB’s most recent monetary policy announcement (14 April 2022).

Furthermore, as shown in Chart 14, there has been a remarkable shift in the yield curve during the initial months of 2022. In part, this reflects the re-pricing of risk premia in the current highly-uncertain environment. In part, it reflects the anticipation of market participants that the rate forward guidance criteria of the ECB are closer to being fulfilled and that the medium-term inflation outlook will call for a normalisation of policy rates over time.

Chart 14
Overnight interest rate swap yield curve

(percentages per annum)

Sources: Bloomberg, Refinitiv and ECB calculations.
Note: The curves refer to the day before the respective Governing Council meetings (15 December 2021, 9 December 2020 and 11 December 2019). The latest observations are for 29 April 2022.

In thinking about the normalisation process, gradualism is an important consideration. In particular, while the normalisation process should ultimately result in policy rates reaching the level that maintains inflation at two percent on a durable basis, the timeline to complete this normalisation process is intrinsically uncertain for two basic reasons.
First, it is important to take the time to observe the impact of shifts in financing conditions on inflation dynamics. There is a wide range of estimates of the impact of higher interest rates on activity levels and inflation pressures. In particular, it is likely that there are significant interaction effects between shifts in financing conditions and other macroeconomic forces. Accordingly, the feedback loop between various steps in the policy normalisation process and inflation dynamics needs to be incorporated into the monetary policy decision process. In particular, moving along the normalisation path, both the benchmark market interest rates and the lending margins will adjust. Whereas the elasticity of benchmark rates to the gradual reduction and eventual termination of net purchases can be estimated reasonably precisely building on past experience, the reaction of the loan pricing policies of banks (and the re-setting of the terms and conditions of lending agreements) to the policy normalisation is not very well forecastable and depends on a number of factors. In turn, the impact of higher interest rates and a tightening of credit conditions on economic activity and on the formation of inflation expectations are also subject to considerable uncertainty.
Second, high uncertainty about the economic impact of the war in Ukraine, the energy shock and the post-pandemic recovery suggests that it is unlikely that the economy will quickly settle into a new steady-state equilibrium. It follows that cyclical factors are likely to be important for the course of monetary policy, in addition to the underlying normalisation process.
For these reasons, the calibration of our policies will remain data-dependent and reflect our evolving assessment of the outlook. Our over-riding commitment is that the Governing Council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability. We stand ready to adjust all of our instruments within our mandate, incorporating flexibility if warranted, to ensure that inflation stabilises at our two per cent target over the medium term.
Compliments of the European Central Bank.

The March 2022 ECB staff macroeconomic projections included adverse and severe scenarios in addition to the baseline projections in recognition of the highly-uncertain impact of the war on the euro area economy and the inflation outlook.

Adrjan, P.l and Lydon, R. (2022), “Job Posting Growth Stalls in Europe” Indeed Hiring Lab Blog, 4 May.

See also Lane, P.R. (2022), “Monetary policy during the pandemic: the role of the PEPP”, Speech at the Paris School of Economics, 31 March, Lane, P. R. (2022), “Inflation in the near-term and in the medium-term”, Opening remarks at MNI Webcast, 17 February and Lane, P.R. (2022), “Bottlenecks and monetary policy”, The ECB Blog, 10 February.

Wage agreements specify both current and future wage increases and frequently cover 1-2 years. The wage trackers reflect the average wage growth among those workers for whom agreements are already in place – the so-called coverage. This coverage is decreasing with the length of the time horizon – as the longer one looks into the future the more agreements will have run out. The experimental wage tracker for the euro area reflects a weighted average of wage increases based on micro data on wage agreements in Germany, Italy, Spain and the Netherlands.

For more than half of the private sector employees in the euro area, inflation does not play a formal role in wage setting, but can be an important factor in wage negotiations and in some countries there is renewed pressure to introduce or increase the prevalence of indexation clauses. See, for example, ECB (2022) “An initial analysis of the impact of inflation on collective bargaining in 2022”, Bank of Spain Economic Bulletin, Issue 1See also ECB (2021) “The prevalence of private sector wage indexation in the euro area and its potential role for the impact of inflation on wages” Economic Bulletin, Issue 7.

Also substantial increases in minimum wage increases, which are in some countries linked to inflation, can be expected to contribute more strongly than usual to euro area wage growth in 2022 and 2023. See ECB (2022), ”Minimum wages and their role for euro area wage growth”, Economic Bulletin, Issue 3.

A pickup in nominal wages later this year is also in line with the results in the March 2022 Corporate Telephone Survey.See ECB (2022), “Main findings from the ECB’s recent contacts with non-financial companies”, Economic Bulletin, Issue 3.

To capture momentum in inflation dynamics, I focus on the cumulative change in the price level over a twelve month period.

The post ECB | Philip R. Lane: The euro area outlook: some analytical considerations first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

In order to unleash the full potential of health data, the European Commission is presenting a regulation to set up the European Health Data Space. This proposal supports individuals to take control of their own health data, supports the use of health data for better healthcare delivery, better research, innovation and policy making and enables the EU to make full use of the potential offered by a safe and secure exchange, use and reuse of health data.
The European Health Data Space is a health specific ecosystem comprised of rules, common standards and practices, infrastructures and a governance framework that aims at

empowering individuals through increased digital access to and control of their electronic personal health data, nationally and cross-borders, as well as support to their free movement, fostering a genuine single market for electronic health record systems, relevant medical devices and high risk artificial intelligence (AI) systems (primary use of dataSearch for available translations of the preceding linkEN•••)
providing a consistent, trustworthy and efficient set-up for the use of health data for research, innovation, policy-making and regulatory activities (secondary use of data)

As such, the European Health Data Space is a key pillar of the strong European Health UnionSearch for available translations of the preceding linkEN••• and it is the first common EU data space in a specific area to emerge from the European strategy for dataSearch for available translations of the preceding linkEN•••.
Trust is a fundamental enabler for the success of the European Health Data Space. The European Health Data Space will provide a trustworthy setting for secure access to and processing of a wide range of health data. It builds on

General Data Protection Regulation (GDPR)

Data Governance ActSearch for available translations of the preceding linkEN•••

Data ActSearch for available translations of the preceding linkEN•••

NIS Directive

As horizontal frameworks, they provide rules that also apply to the health sector. However, more specific rules are developed in the European Health Data Space Regulation, taken into account the sensitivity of health data.
Compliments of the European Commission.
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Plenary adopts 49 proposals (more than 300 measures) for wide-ranging reforms
Parliament’s delegation decided by broad majority to support the proposals
MEPs will, based on citizens’ demands, seek to formally initiate amending the Treaties
Citizens’ feedback on proposals overwhelmingly positive, plea for swift follow-up

The Conference Plenary concluded its work, with MEPs expressing their approval of the outcome and announcing that Parliament intends to kick-start EU reforms.
At its final meeting, that took place on Friday and Saturday at the European Parliament in Strasbourg, the Conference Plenary reached a consensus on its final draft proposals. It has now adopted 49 proposals, which include more than 300 measures on how to achieve them, across 9 themes, based on 178 recommendations from the European Citizens’ Panels, input from the National Panels and events, and 43 734 contributions on 16 274 ideas recorded on the multilingual digital platform.
You can find an indicative summary of Parliament’s positions and ongoing work related to the Conference Plenary’s proposals in this background note.
Parliament’s decision
On Friday, Parliament’s delegation decided to support the Plenary’s draft proposals. MEPs highlighted the important role that Parliament played in the run-up to this moment, for example by guaranteeing that citizens’ input would remain at the centre of the deliberations throughout the process.
Speakers from five political groups representing a broad majority (EPP, S&D, Renew, Greens/EFA, and The Left) agreed that the draft proposals are a major political achievement. They also pointed to Parliament’s concrete achievements in ensuring an effective and democratic process – for example through the establishment of the Working Groups, which delivered the draft Plenary proposals. MEPs representing the ID and ECR groups argued that the proposals do not reflect public opinion in the EU, and stated that their groups would not support them.
Watch a recording of the EP delegation debate.
Consensus in Plenary, MEPs ready to push for Treaty revision
The session on Friday started with the proposals being presented by the Chairs of the Working Groups and the citizen Spokespersons, during which virtually all speakers agreed that the proposals comprise important reforms based on citizens’ recommendations.
Following the presentations, representatives of the four institutional components of the Conference (Parliament, Council, Commission, and national parliaments) approved the proposals by consensus. During his speech on behalf of Parliament’s delegation, the Co-Chair of the Conference Guy Verhofstadt confirmed that the political groups will table a resolution during Parliament’s 2-5 May plenary session to call for a revision of the Treaties. Commenting that this Conference has made him realise the importance of participatory mechanisms complementary to representative democracy, he stated that MEPs must fight hard to ensure that the Conference’s proposals will be turned into the reforms that the EU needs.
Catch up with Guy Verhofstadt’s speech on behalf of the Parliament’s delegation or watch a recording of MEPs’ speeches in Plenary.
Citizens demand action
On Saturday morning, citizens took the floor to comment on the final proposals and the process that led to them, strongly approving of both. They highlighted that they are now expecting the EU institutions and member states to ensure the appropriate follow-up, and the importance of not letting citizens down in the aftermath of this historic moment. They also commented on how their ideas evolved through the Conference’s debates and the impact that Russia’s war in Ukraine had on them, as well as on how they realised the importance of standing up for their ideas while preparing the proposals.
Watch a recording of the Plenary’s concluding meeting.
Next steps
On Europe Day (9 May), the three Co-Chairs of the Executive Board will present the final report of the Conference to the Presidents of the EU institutions at a ceremony in the European Parliament in Strasbourg.
Contacts:

Kyriakos KLOSIDIS, Press Officer | kyriakos.klosidis@europarl.europa.eu

Sanne DE RYCK, Press Officer | sanne.deryck@europarl.europa.eu

Hana RAISSI , Press officer | hana.raissi@europarl.europa.eu

Compliments of the European Parliament.
The post Future of Europe: Conference Plenary ambitious proposals point to Treaty review first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

STATEMENT BY THE U.S. DEPARTMENT OF STATE:
The Internet has been revolutionary. It provides unprecedented opportunities for people around the world to connect and to express themselves, and continues to transform the global economy, enabling economic opportunities for billions of people. Yet it has also created serious policy challenges. Globally, we are witnessing a trend of rising digital authoritarianism where some states act to repress freedom of expression, censor independent news sites, interfere with elections, promote disinformation, and deny their citizens other human rights. At the same time, millions of people still face barriers to access and cybersecurity risks and threats undermine the trust and reliability of networks.
Democratic governments and other partners are rising to the challenge. Today, the United States with more than 60 partners from around the globe launched the Declaration for the Future of the Internet.
This Declaration represents a political commitment among Declaration partners to advance a positive vision for the Internet and digital technologies. It reclaims the promise of the Internet in the face of the global opportunities and challenges presented by the 21st century. It also reaffirms and recommits its partners to a single global Internet – one that is truly open and fosters competition, privacy, and respect for human rights. The Declaration’s principles include commitments to:

Protect human rights and fundamental freedoms of all people;
Promote a global Internet that advances the free flow of information;
Advance inclusive and affordable connectivity so that all people can benefit from the digital economy;
Promote trust in the global digital ecosystem, including through protection of privacy; and
Protect and strengthen the multi-stakeholder approach to governance that keeps the Internet running for the benefit of all.

In signing this Declaration, the United States and partners will work together to promote this vision and its principles globally, while respecting each other’s regulatory autonomy within our own jurisdictions and in accordance with our respective domestic laws and international legal obligations.
Over the last year, the United States has worked with partners from all over the world – including civil society, industry, academia, and other stakeholders to reaffirm the vision of an open, free, global, interoperable, reliable, and secure Internet and reverse negative trends in this regard. Under this vision, people everywhere will benefit from an Internet that is unified unfragmented; facilitates global communications and commerce; and supports freedom, innovation, education and trust.
DOWNLOAD THE DECLARATION
The Declaration for the Future of the Internet Partners
Albania | Andorra | Argentina | Australia | Austria | Belgium | Bulgaria | Cabo Verde | Canada | Colombia | Costa Rica | Croatia | Cyprus | Czech Republic | Denmark | Dominican Republic | Estonia | The European Commission | Finland | France | Georgia | Germany | Greece | Hungary | Iceland | Ireland | Israel | Italy | Jamaica | Japan | Kenya | Kosovo | Latvia | Lithuania | Luxembourg | Maldives | Malta | Marshall Islands | Micronesia | Moldova | Montenegro | Netherlands | New Zealand | Niger | North Macedonia | Palau | Peru | Poland | Portugal | Romania | Serbia | Slovakia | Slovenia | Spain | Sweden | Taiwan | Trinidad and Tobago | the United Kingdom | Ukraine | Uruguay
OPEN CALL FOR PARTICIPATION
The Declaration remains open to all governments or relevant authorities willing to commit and implement its vision and principles.  Contact the nearest U.S. embassy, mission, or representative to learn more.
Compliments of the U.S. Department of State.

STATEMENT BY THE EUROPEAN COMMISSION:
On April 28th, the European Union, the United States, and several international partners have proposed a Declaration for the Future of the Internet, setting out the vision and principles of a trusted Internet. Partners support a future for the Internet that is open, free, global, interoperable, reliable and secure and affirm their commitment to protecting and respecting human rights online and across the digital world. So far, 60 partners have endorsed the Declaration, including all EU Member States, and more countries are expected to follow suit in the coming weeks. The list of signatories is available here.
The Declaration for the Future of the Internet is in line with the rights and principles strongly anchored in the EU and builds on the Declaration on Digital Rights and Principles that the Commission has proposed to co-sign together with the European Parliament and the Council of the European Union.
Ursula von der Leyen, President of the European Commission, said: “The Internet has brought humanity together, like never before in history. Today, for the first time, like-minded countries from all over the world are setting out a shared vision for the future of the Internet, to make sure that the values we hold true offline are also protected online, to make the Internet a safe place and trusted space for everyone, and to ensure that the Internet serves our individual freedom. Because the future of the Internet is also the future of democracy, of humankind.”
The Declaration for the Future of the Internet has been launched today at a hybrid event in Washington, D.C., organised by the White House’s National Security Council. Margrethe Vestager, Executive Vice-President for a Europe fit for the Digital Age and Thierry Breton, Commissioner for Internal Market, participated via video conference.
The partners in the Declaration affirm that the Internet must reinforce core democratic principles, fundamental freedoms and human rights as reflected in the Universal Declaration of Human Rights. They share the belief that the Internet should operate as a single, decentralised network of networks, where digital technologies are used in a trustworthy way, avoiding unfair discrimination between individuals and allowing for contestability of online platforms, and for fair competition among businesses.
In launching this Declaration, the partners also express their strong concerns about the repression of Internet freedoms by some authoritarian governments, the use of digital tools to violate human rights, the growing impact of cyberattacks, the spread of illegal content and disinformation and the excessive concentration of economic power. They commit to cooperating to address these developments and risks. They also share the vision that digital technologies have the potential to promote connectivity, democracy, peace, the rule of law and sustainable development.
The current situation in Ukraine dramatically demonstrates the risk of severe disruption of the Internet, notably in the form of total or partial shutdowns. There is also a risk of fragmentation of the Internet, as the Russian government has been threatening to disconnect partially or totally from the global Internet, as well as of being misused, as there is currently a surge in cyberattacks, online censorship and disinformation. This shows once again the importance of stepping up our actions to defend the global open Internet, which is a driving force for the economies and societies worldwide.
Partners will work together to continue to deliver on the promise of connecting humankind and will translate the principles of the Declaration into concrete policies and actions, while respecting their regulatory autonomy. Other stakeholders will be invited, including from civil society and industry, to support the Declaration and facilitate its implementation. Partners will promote these principles globally, within the multilateral system.
Members of the College said:
Margrethe Vestager, Executive Vice-President for a Europe fit for the Digital Age, said: “The Internet is a part of our daily lives. Faced with corporate power and state power Europe’s approach to the Internet, is based on a clear guideline: people’s power. So our vision is a global, open Internet where people can freely express themselves and companies have a chance to compete and innovate. Many countries around the world are reflecting on how best to maximise opportunities of the Internet and minimise the risks for their populations.”
Josep Borrell, High Representative of the Union for Foreign Affairs and Security Policy, said: “The Declaration for the Future of the Internet is a clear message in a time of geopolitical and digital upheaval: the EU is committed to maintaining the Internet free, open, global, interoperable, reliable, and secure. We stand against efforts to divide the Internet and will continue to work together with our partners around the world to protect human rights online and across the digital ecosystem. The DFI enlarges the law-governed digital space, brings together coalitions of like-minded partners that share a vision of a human-centric digital transformation. It is a demonstration of the EU’s Digital Diplomacy being an effective part of our foreign policy toolbox.”
Thierry Breton, Commissioner for Internal Market, said: “Online, as well as offline, people should be free, safe and empowered to pursue their aspirations. This is in Europe’s DNA and we are committed to work with our international partners to promote an open, neutral, interoperable and secure Internet where rights are protected and illegality is removed, where innovation thrives and everyone has access to content and services of their choice. This Declaration will ensure that the Internet and the use of digital technologies reinforce, not weaken, democracy and respect for human rights.”
Next Steps
The Declaration is an inclusive initiative, and the partners will continue to reach other governments to involve them in the Declaration. All partners will reach out to the private sector, international organisations, the technical community, academia, and civil society, and other relevant stakeholders worldwide to work in partnership to achieve the vision of an open, free, global, interoperable, reliable and secure Internet.
These efforts will culminate in an event in the summer of 2022, where partners will discuss with the multi-stakeholder community how the Declaration and its principles can elevate and support the future of the global Internet. Workshops on this subject will also take place in the next months.
While the Declaration and its guiding principles are not legally binding, it should be used as a reference point for public policy makers, as well as citizens, businesses, and civil society organisations.
Background
The European Union worked together with the United States and a group of international partners to devise a positive agenda and shared vision for the future of the global Internet. The Declaration for the Future of the Internet is fully consistent with EU values as enshrined in the Charter of Fundamental Rights and the EU Digital Rights Principles as part of Europe’s Digital Decade, as well as a broad range of digital policy initiatives led by the EU.
It follows the announcement made in the Digital Compass Communication to build on a renewed transatlantic relationship that leads the way to a wider coalition of like-minded partners; one that is open to and developed together with all those who share the EU’s vision of the digital transformation.
The Declaration is of political nature. Adhering to the principles contained in the Declaration does not create legally binding effects for the European Union and its Member States and does not pre-empt or prejudge our position in other fora.
Declaration for the Future of the Internet
Compliments of the European Commission.
The post EU & U.S. Statements on “A Declaration for the Future of the Internet” first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The announcement by Gazprom that it is unilaterally stopping delivery of gas to customers in Europe is yet another attempt by Russia to use gas as an instrument of blackmail.
This is unjustified and unacceptable.
And it shows once again the unreliability of Russia as a gas supplier.
We are prepared for this scenario. We are in close contact with all Member States.
We have been working to ensure alternative deliveries and the best possible storage levels across the EU.
Member States have put in place contingency plans for just such a scenario and we worked with them in coordination and solidarity.
A meeting of the gas coordination group is taking place right now.
We are mapping out our coordinated EU response.
We will also continue working with international partners to secure alternative flows.
And I will continue working with European and world leaders to ensure the security of energy supply in Europe.
Europeans can trust that we stand united and in full solidarity with the Member States impacted in the face of this new challenge. Europeans can count on our full support.
Compliments of the European Commission.
The post Statement by Commission President von der Leyen following the announcement by Gazprom on the disruption of gas deliveries to certain EU Member States first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Commission has proposed today to suspend for one year import duties on all Ukrainian exports to the European Union. The proposal, which is an unprecedented gesture of support for a country at war, would also see the suspension for one year of all EU anti-dumping and safeguard measures in place on Ukrainian steel exports.
This far-reaching step is designed to help boost Ukraine’s exports to the EU. It will help alleviate the difficult situation of Ukrainian producers and exporters in the face of Russia’s military invasion.
European Commission President Ursula von der Leyen, said: “Russia’s unprovoked and unjustified aggression is severely affecting the Ukrainian economy.  I have been in discussions with President Zelensky on ways of supporting the economy, beyond the macro-financial assistance and grants we are providing. We both agree on the critical importance of a quick and broad import duty suspension to boost Ukraine’s economy. The step we are taking today responds to this call. It will greatly facilitate the export of Ukrainian industrial and agricultural goods to the EU. We continue to stand by Ukraine in these dire times.”
European Commission Executive Vice-President and Commissioner for Trade Valdis Dombrovskis, said: “The EU has never before delivered such trade liberalisation measures, which are unprecedented in their scale: granting Ukraine zero tariff, zero quota access to the EU market. Since the start of Russia’s aggression, the EU has prioritised the importance of keeping Ukraine’s economy going – which is crucial both to help it win this war and to get back on its feet post-war. These measures will directly help Ukrainian producers and exporters. They will inject confidence into the Ukrainian economy and send a strong signal that the EU will to do whatever it takes to help Ukraine in its hour of need.”
As well as leading to tragic loss of life and mass displacement of innocent civilians of Ukraine, the Russian military aggression is having a devastating impact on Ukraine’s economy and its ability to trade with the rest of the world due to the severe impact on its production capacity and vital export routes. In this difficult context, the EU wants to do as much as possible to help Ukraine to maintain its trade position with the rest of the world and further deepen its trade relations with the EU.
The EU is also already taking measures on the ground to facilitate overland goods transport to help to get Ukrainian products out into the world. For example, the Commission has already started liberalising the conditions for Ukrainian truck drivers transporting goods between Ukraine and the EU, as well as facilitating transit and the use of EU infrastructure to channel Ukrainian exports towards third countries. These measures will add much-needed flexibility and certainty for Ukrainian producers.
Background
In 2021, with an ambitious agenda of implementation of the Deep and Comprehensive Free Trade Area (DCFTA), bilateral EU-Ukraine trade had reached its highest level since the entry into force of the DCFTA (more than €52 billion, double the value prior to entry into force of the DCFTA in 2016). With the Russian invasion, the Ukrainian economy and its trade with the world have suffered immensely. Alongside the raft of measures in various fields the EU has taken to support Ukraine, from imposing sanctions on Russia to providing funding for military aid, these trade measures will strengthen the EU’s economic assistance to Ukraine and keep its access to the world open as it faces Russia’s aggression. The last EU-Ukraine Summit (12 October 2021) reflected a number of positive ongoing processes, such as the launch of the Article 29 review on further trade liberalisation.
Next steps
The proposal now needs to be considered and agreed by the European Parliament and the Council of the European Union.
Compliments of the European Commission.
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Interview with El Correo (Grupo Vocento) | Interview with Luis de Guindos, Vice-President of the ECB, conducted by Adolfo Lorente and Manu Álvarez on 26 April |
Will interest rates already rise in July?
It will depend on the data and the new macroeconomic projections in June. In April the ECB’s Governing Council decided that asset purchases will end in the third quarter. In my opinion, there’s no reason why this shouldn’t happen in July. Rates will rise after that. Exactly how long after has not been decided. It could be months, weeks or days. July is possible, but that’s not to say it’s likely.
We haven’t even had the first rate hike yet, but the market is already pricing in two rate hikes this year, and there’s even talk of a third. Are you under even more pressure to act?
We are driven by data, not by markets. Markets can sometimes be wrong. Within the Governing Council we haven’t discussed any predetermined path for rate rises.
Some economists are criticising you for acting excessively slowly.
These comments stem from the comparison with the United States, but the situation in Europe is different. There are two main factors that will determine interest rates. On the one hand, you have the evolution of second-round effects – in other words, wage increases that are incompatible with price stability. And on the other hand, you have inflation expectations, which we should monitor to make sure they don’t rise above our target of 2% over the medium term. So far, we haven’t seen wage increases that would put this target at risk, but we have to be very attentive because this is a delayed indicator.
Do you see any risk of a recession, even if just out of the corner of your eye?
The invasion of Ukraine will increase inflationary pressures and reduce economic growth. The fact that the prices of raw materials and energy have increased in the way they have implies, in practice, a tax on workers and companies, because these imported production factors are becoming more expensive. And, ultimately, this implies a decline in living standards. On the risk of recession – in June we will have new projections. What we are already seeing is a significant weakening of growth. Even so, in 2022 growth will be positive. And if we stick to the technical definition of a recession – two consecutive quarters of negative growth – we currently don’t see it.
And one quarter?
Certainly not two.
But in the scenario in which Germany, under pressure from its partners, decides to cut off its supply of Russian gas, the impact on its economy could act as a very significant drag on the entire euro area.
One can always imagine worse scenarios. In the March projections with three scenarios: one baseline, one adverse and one that we call severe, we did not see a recession, not even in the severe scenario. Let´s wait for the June projections.
With the withdrawal of stimulus, are there countries that may experience problems related to funding or their budget deficit?
Nominal rates for public debt have increased all over the world, but risk premia are still relatively stable. The risk of fragmentation has not materialised, but it’s something we are monitoring. We currently don’t see any tensions in this respect, and the situation is in no way comparable to 2011 and 2012.
Is Spain – the fourth largest economy in the euro area – ready to cope with a rate increase?
The Spanish economy has two strengths. First, the financial system is healthy, following the restructuring of the banking sector. This allowed banks to continue lending to firms and households under favourable conditions, even during the pandemic. And second, the Spanish economy is competitive, as the balance of payments of its current account remains in surplus. This has been the case since 2013, even though it was previously inconceivable.
And what are its weaknesses?
Again, there are two. The first is the fiscal situation. The debt-to-GDP ratio is close to 120% and the structural deficit is nearing 5%. In addition, both headline and underlying inflation in Spain are back above the European average. And as Banco de España has warned, corporate margins are starting to be significantly affected, as the profitability of Spanish firms is falling because of the rising costs of energy and commodities. This factor has to be carefully considered.
Would you advise the Spanish Government to start taking seriously the need for increased budgetary stability?
My recommendation – and this is not only for Spain, but for all countries with a weaker fiscal profile – would be to present credible budget plans to Brussels. Plans that set out a prudent and sensible process of fiscal consolidation. With these levels of inflation, interest rates are not going to be as low as they have been in recent years, and governments need to prepare for this. The key, also from the markets’ perspective, is to have credible proposals.
There has been a lot of talk about the Spanish economy’s extreme dependence on the ECB. Beyond the literature, what is the true impact, in figures, of all the measures adopted?
There is one figure that is particularly indicative. During the pandemic, in 2020 and 2021, the ECB bought €120 billion of Spanish debt in the secondary market each year. This is equivalent to Spain’s total net issuance. European support, including via the Next Generation EU fund adopted by the European Council, has been crucial, especially for an economy like Spain’s. It was the Spanish economy that suffered the largest decline in 2020 and, despite strong growth of 5.1% in 2021, it was below the European average. And unlike the rest of Europe, income levels have not recovered to pre-pandemic levels.
Is it sustainable for a government to link pension increases to inflation by law?
Pension indexation is a social policy decision and it is not my place to question it. It’s a respectable decision, but it is also clear that it will have consequences for the sustainability of the system. So, such a decision needs to be accompanied by measures that ensure the system remains sustainable over the medium term.
And what about public sector wages?
I must stress that as Vice-President of the ECB, I cannot enter into the discussion of what a government or party says or does. In general, it’s necessary to be prudent when taking decisions. Sometimes the credibility conveyed by the measures is as important as the measures themselves.
As Banco de España defends, is this the time for wage restraint and for employers and unions to reach wage agreements?
The European and Spanish economies will face a complex situation, with high inflation, a downward trend in growth and smaller company margins. This will have an impact on investment and employment. In such a situation, where difficult decisions will have to be taken, it will be important to have the greatest possible social and political support for economic policy.
And do you think Spain is prepared politically to reach such agreements?
I have made a general remark. I can’t assess the situation of any specific country.
Another issue on the table – not only in Spain – is taxes. Is there any scope for reducing taxes in this crisis environment?
Not all countries are in the same situation. The public sector can play a role in cushioning the impact of the war on businesses and households. But this can also increase the budget deficit.
Some sectors criticise this theory because reducing taxes would further fuel inflationary pressures.
We are talking about temporary and selective measures that should be targeted at the most vulnerable sectors. If the measures are well designed, fiscal policy can help to lessen the impact of an external supply shock like the current one preventing those negative effects for inflation over the medium term. The pandemic affected lots of companies that are now being hit by a second shock. As I said, Spanish companies are seeing significant cuts to their margins.
At a time of uncertainty, the health of the financial sector is key. Do you think there are countries that still need to make an effort to recapitalise their banks?
Broadly speaking and judging by the capital and liquidity levels of European banks, we are in a much better situation than in the past. The pandemic crisis caused a great deal of concern about the potential impact on the financial system, but it has proven to be resilient.
So, you are completely calm when it comes to this matter…
There are still risks. Nominal interest rates are rising in the markets, which enables the banking sector to achieve higher profit margins. But it may also have an impact on non-performing loans. If they increase, bank profitability drops. And for the banks, customer creditworthiness is key.
Looking back, has progress in the Spanish banking sector been good enough? Would you have signed off on the current state of play when you were Minister for the Economy?
In 2011 and 2012 bank risk was a heavy burden that was dragging Spain into a very deep recession. There was a need to request the bank bailout, reform the old savings banks and create [the asset management company] Sareb, as there were more than €110 billion of irrecoverable loans to the real estate sector. In 2017 Banco Popular went into a liquidity crisis, which ended in the bank’s resolution. At that time, despite the size of the entity, there was no longer a contagion effect in the financial sector. So, after years of reforms, the situation in the banking sector was already very different. And today it is one of the strengths of the Spanish economy.
In the case of Banco Popular, would it have been possible to resolve it in just a few hours in 2011?
It would have been completely impossible.
Are the calls for mergers between financial institutions still on the table?
Yes. The European banking sector has a structural problem of low profitability, which it needs to address. Profitability has improved in recent months, but mainly due to the reduction of provisions. Now that we’re in an environment of lower economic growth, there will be a need to analyse whether that trend is sustainable over time or whether other measures are needed.
Do the ECB’s recommendations target domestic or cross-border mergers?
With 19 countries sharing a currency, in a single market and with a single banking supervisor, cross-border mergers would be ideal. Cross-border mergers are not straightforward because there are different regulatory systems and each country has its own unique features. But in a single European system, we should strive to have truly European banks. That being said, domestic mergers also serve their purpose as they can help to reduce excess capacity in some countries, keep costs down and increase bank profitability.
Kutxabank is continuing with its independence strategy.
I can’t comment on individual banks. As is widely known, Kutxabank is an entity with high levels of capital and liquidity which can play an important role in the banking sector in Spain and Europe.
This interview was published in El Correo, El Diario Vasco, El Diario Montañés, La Verdad, Ideal, Hoy, Sur, La Rioja, El Norte de Castilla, El Comercio, Las Provincias and La Voz de Cádiz (Spain).
Compliments of the European Central Bank.
The post ECB Speech | No predetermined path for rate rises first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.