Campaigning across Europe ahead of this year’s European elections was a reminder of what makes our Union what it is. Almost 500 million people with such disparate cultures, complex histories and differing perspectives all coming together at the same time to articulate their wish for an entire Union of 27 countries. In casting their vote they also help to build a shared European identity – all of this bound together by our rich and varied cultural tapestry. This is Europe’s greatest strength. It makes Europe more than a construct or a project. Europe is our home: unique in design and united in diversity.
From the record number of first-time voters to those who have voted in every European election, people expressed hopes and aspirations for a healthier and more prosperous future. But they also pointed to the fact that we are in an era of anxiety and uncertainty. Europeans have real doubts and concerns about the instabilities and insecurities we face – from the cost of living, housing and doing business to the way issues such as migration are handled. From our security at home to the wars in Ukraine and the Middle East. They also worry that Europe is often not fast enough; that it can be either too distant or too burdensome.
All of these expectations and concerns are real, legitimate and must be responded to. For that reason, I believe it is essential that the democratic centre in Europe holds. But if that centre is to hold it must live up to the scale of the concerns and the challenges that people face in their lives. Failure to do so would fuel resentment and polarisation and leave a fertile ground for those who peddle simplistic solutions but in reality want to destabilise our societies.
This is the backdrop to what is an era of profound change – for our society and our security, our planet and our economy. The speed of change can be destabilising and, for some, can lead to a sense of loss for the world as it used to be and a worry for the world as it will be.
All of this – coupled with the fallout from elections and events in a more contested world – has created a turbulent and potentially seismic period for Europe. The risks are real, the responsibilities serious.
Europe now faces a clear choice.
A choice to either face up to the uncertain world around us alone. Or to unite our societies and unite around our values.
A choice to be dependent, to let the divisions weaken us. Or to be bold in our ambition and sovereign in our action, working with our partners around the world.
A choice to ignore new realities or the speed of change. Or to be clear-eyed about the world and threats around us as they really are.
A choice to let the extremists and appeasers prevail. Or to ensure our democratic forces stay strong.
My view is that our era’s greatest challenges – from security to climate change to competitiveness – can only be solved through joint action. Our threats are too great to tackle individually. Our opportunities too big to grasp alone.
Against this backdrop, I believe Europe must choose its best option: Union.
This is based on a deep conviction that it is only Europe that can live up to our generational challenges in this unstable world – whether supporting Ukraine for as long as it takes, protecting our planet, ensuring social fairness, defending democracy, supporting livelihoods, industries and farmers, or leading on the tech breakthroughs that will shape the world for the rest of this century.
In the last five years, Europe has shown what it can achieve when it does it together. When it is fast and uses its size and power – as we did when securing vaccines for every Member State at the same time. When it is bold and ambitious – as we were with on the twin green and digital transitions and our recovery plan, NextGenerationEU. When it is united – as we have been in support of Ukraine, freedom and democracy at the darkest and most difficult of times.
It is time for Europe to step up collectively once again.
This is a shared responsibility for all European voters, but also for all those flying the European flag, from Kyiv to Chisinau, Tbilisi and across the Western Balkans – as well as those calling for a European future in the streets of towns and cities across our Union and continent. We must prepare for that future – by supporting all candidates in their merits-based journey to our Union, and by preparing our Union for the future with essential reforms.
The Union that we choose cannot be boiled down to a binary question of more or less Europe. For these times, we need a Union that is faster and simpler, more focused and more united, more supportive of people and companies. We need a Union that acts where it has added value and where we all mobilise together with a clear goal and a collective mission – EU institutions, national and regional governments, private sector, social partners, citizens and civil society.
We have achieved a lot together in the last five years, from the European Green Deal to NextGenerationEU, the Pact on Migration and Asylum and the implementation of the European Pillar of Social Rights. We must and will stay the course on all of our goals, including those set out in the European Green Deal.
Our focus must now be on implementing what we have agreed, working closely with all stakeholders and focusing on our big challenges. This is why I want to define a set of focused and collective objectives for 2030 and beyond, with clear targets and outcomes in these priority areas.
Defence and security. Sustainable prosperity and competitiveness. Democracy and social fairness. Leading in the world and delivering in Europe.
The Political Guidelines are our plan for European strength and unity. The priorities set out here draw on my consultations and on the common ideas discussed with the democratic forces in the European Parliament, and also on the European Council’s Strategic Agenda for 2024-2029. They are not an exhaustive work programme but aim to steer our common work.
The next five years will define Europe’s place in the world for the next five decades. It will decide whether we shape our own future or let it be shaped by events or by others.
In a world of adversity and uncertainty, I believe Europe must choose to stick together and dare to think and act big. To live up to the legacy of our past, to deliver for the present, and to prepare a stronger Union for the future.
This is the driving force behind these guidelines and all that I want to work on with the European Parliament and the Member States in the next five years.
 
Read entire statement here.
 
 
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Blog post by Svetla Daskalova, Federico Maria Ferrara, Pedro Formoso da Silva, Pamina Karl and Thomas Vlassopoulos | Repo markets are vital for banks to source liquidity and securities. They also represent an essential link in the monetary policy transmission chain. While the Eurosystem is in the process of reducing its market footprint, repo markets are going through a phase of change. The ECB Blog looks at dynamics in this market.
Monetary policy and repo markets are closely connected. The removal of monetary policy accommodation and the ongoing reduction of the Eurosystem’s footprint in financial markets set in motion some forces with countervailing effects on euro area repo markets. In this blog post, we identify these opposite forces and how they have influenced the dynamics in this market segment. In doing so, we take stock of the recent past to reflect on the growing importance of repo markets as a channel for liquidity redistribution, and outline the challenges for repo markets that lie ahead in this respect.
But first, what is a repo? “Repo” is short for “repurchase agreement”, which is a transaction where one market participant sells a security to another one, with an agreement to repurchase it later. Therefore, repos can offer a secured way to borrow and deposit cash for banks and other financial intermediaries, or a means to obtain a specific security. Moreover, repo markets are of critical importance for the smooth functioning of the government bond market, as they provide the financing for bond investments and help market participants source specific securities. Disruptions in repo markets can propagate to secondary government bond markets, affecting market liquidity and banks’ funding conditions. Thus, dysfunction in repo markets can have an adverse effect on the broader financial system and impede the smooth transmission of monetary policy.
How has the reduction of the Eurosystem’s footprint in government bond markets supported repo market functioning?
As repo markets play such a crucial role, it is worth checking how they have coped with the reduction of the Eurosystem’s footprint in euro area government bond markets.
Since 2022, the Eurosystem has made significant headway towards reducing its presence in government bond markets. The early repayments of the Targeted Longer-Term Refinancing Operations (TLTROs) in Q4 2022, after the decision to change their pricing, set this process in motion. With the repayments of more than EUR 2 trillion of outstanding TLTROs, almost 60% of the collateral previously mobilised with the Eurosystem in exchange for these funds has returned to the market. Especially in Q4 2022, significant volumes of government bonds that were previously tied up as collateral have made their way back into repo markets (collateral worth almost EUR 300 bn by now). After this initial phase, the amount of government bonds released has, however, remained stable, and other marketable but also non-marketable securities were demobilised instead (Chart 1, LHS).
This initial step of TLTRO repayments was followed by the decision to start a gradual run-off of the asset purchase portfolio (APP) in March 2023 and to reduce the holdings of the pandemic emergency purchase portfolio (PEPP) as of July 2024. These decisions made a significant contribution to shrinking the Eurosystem’s footprint in euro area government bond markets, which was further supported by an increase in net issuance (Chart 1, RHS).
Chart 1
LHS: Eurosystem collateral released since the TLTRO III repayments in November 2022 (LHS axis: EUR trillion; RHS axis: %) RHS: Contributors to the reduction in Eurosystem footprint in euro area government bond markets, November 2022 – June 2024 (%)

Sources: Eurosystem, CSDB, ECB calculations.Notes: The purple line in the LHS chart reports the ratio of released collateral to total credit repaid. The RHS chart displays the share of factors contributing to the reduction of the Eurosystem’s footprint in euro area government bond markets. It considers the change of total nominal amount of euro area government bonds outstanding, Eurosystem’s outright holdings and mobilised collateral since November 2022. Outright holdings are euro area government bonds held by the Eurosystem via purchase programmes, adjusted with euro area government bonds lent back via the Securities Lending against cash programme. Mobilised collateral includes euro area government bonds mobilised as collateral for open market operations.Latest observation: 30 June 2024.
Before the extensive scaling back of the Eurosystem’s market presence, repo markets experienced some difficulties. In 2022, the proper functioning of repo markets was hindered by the scarcity of high-quality assets like highly-rated government bonds.[2] This threatened to delay the transmission of monetary policy in the early stages of the tightening cycle. The improved availability of collateral since then has helped to significantly alleviate such shortages of assets and played a positive role in ensuring a much quicker alignment of repo rates to changes in policy rates.
Dynamics in government deposits and link to repo markets
In addition to the reduction of the Eurosystem’s presence in euro area government bond markets, some other balance sheet dynamics have also had a bearing on repo markets. A case in point was non-monetary policy deposits – i.e., deposits placed with the Eurosystem by euro area governments and official-sector entities outside the euro area. The negative interest rate environment had prompted an increase in such deposits since 2014.[3] During the COVID-19 pandemic, many euro area debt management offices also built large cash buffers to mitigate cash flow volatility and funding risk in view of the heightened macroeconomic uncertainty and the large fiscal commitments made. Non-monetary policy deposits reached more than €1,000 billion during the pandemic (Chart 2).
As long as the movements in and out of these deposits were gradual and smooth, their size was less of a concern. However, at the beginning of the Eurosystem’s path to monetary policy normalisation, when the policy rate moved back into positive territory, the zero-percent ceiling on non-monetary policy deposits risked catalysing abrupt and sizeable outflows from the Eurosystem’s accounts into euro area repo markets. Such concerns affected the pass-through of the ECB’s policy rate hikes to repo markets in September 2022.
Chart 2
Non-monetary policy deposits: government deposits and deposits of official-sector entities outside the euro area (EUR billion)
Source: Eurosystem.Notes: Temporary suspension of 0% ceiling for remuneration was announced on 8 September 2022 (green vertical line). New ceiling remuneration was announced on 7 Feb 2023 (black vertical line). New ceiling remuneration was implemented on 1 May 2023 (red vertical line).Latest observation: 30 June 2024.
In the face of potential adverse effects on market functioning, the Eurosystem took action to ensure the smooth transmission of monetary policy. First, in September 2022, the Governing Council decided to temporarily remove the interest rate ceiling of zero percent for the remuneration of government deposits held with the Eurosystem, which incentivised governments to keep liquidity on the Eurosystem’s accounts for longer. Later, in February 2023, the Governing Council announced a new ceiling for the remuneration of euro area government deposits, set at the €STR minus 20 basis points. The remuneration of deposits held by foreign central banks was also adjusted accordingly. These changes came into effect on 1 May 2023.[4]
The aim of these adjustments was to encourage a gradual and orderly reduction of non-monetary policy deposits, thus minimising the risk of potential adverse effects on market functioning. As a result, non-monetary policy deposits have been on a declining trend since the end of summer 2022, and there were no significant disruptions in repo markets triggered by these outflows (Chart 2).
Modest effects from changes in the remuneration of minimum reserves
The speed and extent of the rise in policy rates has been the hallmark of the process of departing from the ECB’s previously very accommodative stance. However, this rate increase, coupled with an abundance of remunerated reserves, prompted the need for the Governing Council to assess whether it could achieve the same outcomes in terms of policy stance and transmission at a reduced cost for the Eurosystem. The outcome of this assessment was the decision announced in July 2023 to stop remunerating minimum reserves as of September 2023.[5]
When taking this decision, the Governing Council was cognisant that one of the possible reactions to the change could be that banks would reduce the reserve base for minimum reserve calculations through balance sheet optimisation strategies. Instead of accepting unsecured deposits, they could switch to secured deposits or FX swaps – instruments that are not included in the calculation of the reserve base. Such strategies could exert pressures on money markets including repo markets, especially on the days when minimum reserve requirements (MRR) are calculated.
Chart 3
Month-end volumes of overnight transactions (LHS, EUR bn) and rate change (RHS, basis points) in secured money markets
Source: MMSR, ECB calculations.Notes: Averages refer to month-ends (excluding quarter-ends) and quarter-ends (excluding year-ends) over the period January 2022 to June 2023, i.e., before the remuneration of minimum reserve requirements (MRR) was reduced from deposit facility rate (DFR) to 0%. Repo volumes and rates refer to 1-day transactions of MMSR reporting agents’ cash borrowing volumes against all euro area government bond collateral.Latest observation: 30 June 2024.
So far, the minimum reserve reporting dates since July 2023 did see slightly higher volumes in repo markets compared to averages seen since 2022 (Chart 3, LHS). However, there was no noticeable price impact, in the context of the overall easing of collateral scarcity. Thus, any additional flows into the repo market were well absorbed (Chart 3, RHS) and the repo market impact of the change in minimum reserve remuneration has been modest.
Are repo markets at the cusp of a transformation?
Overall, we have witnessed an easing of asset scarcity and improved repo market functioning in 2023 and 2024. Yet, given the still high excess liquidity in the euro area, the nature of the repo market remains fundamentally unchanged for the time being, as it continues to be dominated by the intention to source collateral. Looking ahead, the challenge will be whether repo markets can successfully transition to a new paradigm in which they are an efficient and effective vehicle for distributing liquidity in the euro area. This is particularly pertinent as the Eurosystem dials down its presence in funding markets and excess liquidity is being reabsorbed.
Chart 4
Outstanding volumes of liquidity-motivated repo transactions (EUR billion)
Sources: ECB, SFTD, BrokerTec, Eurex, MTS, ECB calculations.Notes: Chart displays liquidity-motivated (general collateral, GC) repo volumes based on BrokerTec/MTS one-day repo transactions and on Eurex GC pooling trades as reported in Securities Financing Transactions Data (SFTD). Calculations are based on a single-counting approach.Latest observation: 30 June 2024.
Although it is still early days, there are some tentative signs that such a transformation of repo markets may already be underway. This is shown, for instance, by the considerable rise in activity of liquidity-motivated transactions on major European trading platforms (Chart 4), which went hand-in-hand with the reduction of excess liquidity in the system.
 
Conclusion
As the Eurosystem dials down its footprint, markets need to rise up to the challenge of providing viable and effective alternatives. For banks, this means preparing to tap multiple and alternative sources of liquidity, including some that have not been used for a long time. As a result, going forward, repo markets will have to prove their ability to efficiently redistribute liquidity to all corners of the financial system.

We are grateful to Benjamin Hartung, Katja Hettler, Annette Kamps, Benoit Nguyen, and Rita Fernandes Vitorino Besugo for their contribution to this blog post.
Several factors contributed to the scarcity of high-quality collateral in repo markets. First, the increase and volatility in yields of government bonds, amid the sharp repricing of interest rate expectations. This lowered government bonds’ value and simultaneously increased demand for these high-quality assets in repo markets. Second, the substantial holdings of government bonds of the Eurosystem reduced the amount of high-quality assets available to market participants.
Until September 2022 the relevant legal framework foresaw a remuneration ceiling for non-monetary policy deposits of zero percent if the deposit facility rate (DFR) was zero percent or higher. In the presence of a negative DFR, however, their remuneration was linked either to DFR or to €STR and, therefore, was more attractive compared to the situation under positive rates.
Following a comprehensive review of the remuneration of the different types of non-monetary policy deposits, the Eurosystem confirmed on 16 April 2024 the remuneration ceiling for euro area government deposits and most other non-monetary policy deposits.
In October 2022 the Governing Council decided to reduce the remuneration of minimum reserves from the rate on the Main Refinancing Operations (MRO) to the Deposit Facility Rate (DFR), while leaving the actual minimum reserves’ ratio unchanged at 1%.

 
 
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Long periods of slow economic growth can cause a jump in inequality. But a balanced set of policies can stave off that outcome.
Blog post by Kristalina Georgieva, Managing Director of the IMF | The global economy is stuck in low gear, which could deal a major blow to the fight against poverty and inequality.
Group of Twenty finance ministers and central-bank governors gathering this week in Rio de Janeiro face a sobering outlook. As the IMF’s latest World Economic Outlook update shows, global growth is expected to reach 3.2 percent this year and 3.3 percent in 2025, well below the 3.8 percent average from the turn of the century until the pandemic. Meanwhile, our medium-term growth projections continue to languish at their lowest in decades.
To be sure, the global economy has shown encouraging resilience to a succession of shocks. The world didn’t slip into recession, as some predicted when central banks around the world raised interest rates to contain inflation.
Yet, as we move beyond the crisis years of the pandemic, we need to prevent the world from falling into a prolonged period of anemic growth that entrenches poverty and inequality.
The pandemic already set back the fight. Extreme poverty increased after decades of decline, while global hunger surged and the long-term decline in inequality across countries stalled.
New IMF analysis suggests periods of stagnation lasting four years or more tend to push up income inequality within countries by almost 20 percent—considerably higher than the increase due to outright recession.
During periods of stagnation, sluggish job creation and wage growth increase structural unemployment and reduce the share of a country’s income flowing to workers. Together with limited fiscal space, these forces tend to widen the gap between those at the top and bottom of the income ladder.

In other words, the longer we’re stuck in a world of low growth, the more unequal that world would become. That in itself would be a setback to the progress we’ve made in recent decades. And as we have seen, rising inequality can foster discontent with economic integration and technological advancements.
It is therefore timely that Brazil has made fighting inequality, poverty and hunger a priority of its G20 presidency. With the right policies, we can still escape a low-growth, rising-inequality trap, while working to reduce poverty and hunger. Let me highlight three priority policy areas.
Gearing Up Inclusive Growth
First, we need to address the underlying problem of slow growth. Most of the decline in growth in recent decades has been driven by a slump in productivity. A big reason for the slump is that labor and capital aren’t flowing to the most dynamic firms.
But a smart mix of reforms could jumpstart medium-term growth. Measures to promote competition and improve access to finance could get resources flowing more efficiently, boosting productivity. Meanwhile, bringing more people into the labor force, such as women, could counter the drag on growth from aging populations.
We must also not forget the role that open trade has played as an engine of growth and jobs. In the last 40 years, real income per capita has doubled globally, while more than a billion emerged from extreme poverty. Over that same period, trade as a share of gross domestic product increased by half. It’s true that not everyone benefited from trade, which is why we must do more to ensure the gains are shared fairly. But to close off our economies would be a mistake.
Making Fiscal Policies People-Focused
Second, we must do more to ensure that fiscal policies support the most vulnerable members of society.
The challenge is that many economies are facing severe fiscal pressures. In developing countries, debt-servicing costs are taking up a bigger share of tax revenue at a time when they are tackling a growing list of spending demands, from investments in infrastructure to the cost of adapting to climate change. A gradual and people-focused fiscal effort can alleviate fiscal risks while limiting any negative impact on growth and inequality, including by raising revenue, improving governance, and protecting social programs.
There is much scope for developing countries to raise more revenue through tax reforms—as much as 9 percent of GDP, according to our research. Yet it is crucial to take a progressive approach, which means making sure those who can afford to pay more taxes contribute their fair share. Taxing capital income and property, for example, offer a relatively progressive way to raise more tax revenue.

Regardless of the strategy, people need to have confidence that the taxes they pay will be used to deliver public services—not enrich those in power. Governance improvements, such as to increase transparency and reduce corruption, must also be part of the equation.
At the same time, social-spending programs can make a big difference to inequality, including through school meals, unemployment insurance, and pensions. These should be protected. Well-targeted cash-transfer programs—such as Brazil’s Bolsa Familia—can support the vulnerable.
Our research shows that strong redistributive policies in a growing G20 economy—such as social-spending programs and public investment in education—can reduce inequality between 1.5 and 5 times more than weaker policies.
Strengthening the Global Backstop
Finally, we need a strong global financial safety net for countries that need support. With that goal in mind, the IMF is working on a package of reforms to our lending framework.
To continue to serve the needs of our most vulnerable members, we are reviewing our concessional lending instrument for low-income countries, the Poverty Reduction and Growth Trust. With demand expected to exceed pre-pandemic levels, it is vital that our membership comes together to ensure the PRGT is adequately resourced and its long-term finances are put on a sustainable footing.
We are also taking a close look at our surcharge policy for the first time in nearly a decade. The review aims to ensure we can continue to provide financing at affordable rates to members who need our support.
Last year our members gave us a strong vote of confidence by agreeing to increase our permanent quota resources, allowing us to maintain our lending capacity. I am counting on G20 members to now ratify the increase.
One of the lessons of recent history has been that we must not ignore those left behind by economic and technological progress—be they individuals within a country, or entire nations struggling to close the gap. But with the right policies, and by working together, we can build a prosperous and equitable world for all.

 
Full post can be found here

Compliments of the IMF
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The Organisation for Economic Co-operation and Development (OECD) announced a pilot phase to monitor the application of the Hiroshima Process International Code of Conduct for Organisations Developing Advanced AI Systems. This initiative will test a reporting framework intended to gather information about how organisations developing advanced artificial intelligence (AI) systems align with the Actions of the Code of Conduct and is a significant milestone under the G7’s ongoing commitment to promoting safe, secure and trustworthy development, deployment and use of advanced AI systems.
The G7 Hiroshima AI Process, launched in May 2023, delivered a Comprehensive Policy Framework that included several elements: the OECD’s report Towards a G7 Common Understanding of Generative AI, International Guiding Principles for All AI Actors and for Organisations Developing Advanced AI Systems, the International Code of Conduct for Organisations Developing Advanced AI Systems, and project-based co-operation on AI. Under Italy’s current G7 Presidency, G7 members have focused on advancing these outcomes.
The pilot phase of the reporting framework, available until 6 September 2024, marks a critical first step towards establishing a robust monitoring mechanism for the Code of Conduct as called for by G7 Leaders. The draft reporting framework was designed with input from leading AI developers across G7 countries and supported by the G7 under the Italian Presidency. It includes a set of questions based on the Code of Conduct’s 11 Actions. A finalised reporting framework will facilitate transparency and comparability around measures to mitigate risks of advanced AI systems and contribute to identifying and disseminating good practices.
Organisations developing advanced AI systems are welcome to participate in the pilot. Responses provided during this period will be used to refine and improve the reporting framework, with the aim of launching a final version later this year. A common framework could improve the comparability of information available to the public and simplify reporting for organisations operating in multiple jurisdictions.
The OECD has been at the forefront of AI policy making since 2016. The OECD Recommendation on AI, adopted in 2019 as the first intergovernmental standard on AI and updated in 2024, serves as a global reference for AI policy. The OECD has a track record for global intergovernmental collaboration on an equal footing to tackle challenging public policy issues that transcend national borders.
Media queries should be directed to Reemt Seibel in the OECD Media Office (+33 1 45 24 97 00).

Working with over 100 countries, the OECD is a global policy forum that promotes policies to preserve individual liberty and improve the economic and social well-being of people around the world.

 
 
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Thank you very much, dear Roberta,
Good afternoon to everyone,
I guess you have heard my speech, and you might have read the Political Guidelines. So you can imagine that this is a very emotional and special moment for me now. I just want to make three very short remarks before moving on to your questions.
The first one is a more personal remark. I cannot begin without expressing how grateful I am for the trust and the confidence of the majority of the European Parliament. 401 votes in favour – you will recall that last time, it was 8 votes above the necessary majority. This time it is 41, so this is much better. This sends a strong message of confidence. I think it is also recognition for the hard work that we carried out together in the last five years in the last mandate. We have spared no effort. We have navigated the most troubled waters that our Union has ever faced. And we have kept the course on our long-term European goals. I also want to thank you, Roberta, the Group leaders of the democratic forces in the Parliament and all the MEPs for the excellent cooperation including during the last mandate but also for the very substantial exchanges we have had over the past two weeks – after the elections and over the past two weeks. I think this is a very good foundation for the next five years. And I think this was tangible in the debate today.
Second, I want to highlight that I was very happy to have the opportunity to carry out a real, pan-European electoral campaign. As you know, it brought me from Helsinki to Lisbon, from Bucharest to Rome and many different places. I engaged with people from all walks of life. And I enjoyed taking part in the series of TV debates that we had with the other candidates. I think this makes our European democracy much more vibrant.
And finally, let me walk you briefly through the next steps. I will now focus on building my team of Commissioners for the next five years. In the coming weeks, I will ask Leaders to put forward their candidates. I will – as I did last time – write a letter and ask for the proposal of a man and a woman as candidate. The only exception is, like last time, when there is an incumbent Commissioner who stays. And then, I will interview the candidates as of mid-August, and I want to pick the best-prepared candidates who share the European commitment. Once again, I will aim for an equal share of men and women at the College table. The new team will get ready to successfully pass the Parliament hearings. And then I will again seek the confirmation of this House.
Thank you very much.
For more information, please contact:

Eric Mamer, Chief Spokesperson

Arianna Podesta, Deputy Chief Spokesperson

 
 
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Reforms could increase investment in high-tech startups that power innovation

Blog post by Nathaniel Arnold, Guillaume Claveres, Jan Frie | The European Union has a productivity problem. Its people produce nearly 30 percent less per hour worked than they would have, had real output per hour worked increased in line with that in the United States since 2000.

A failure to sufficiently develop innovative startups into “superstar” firms is one of the reasons for the bloc’s poor productivity growth.
Europe’s fragmented economy and financial system partly underly this problem. Without a more frictionless single market for goods, services, labor, and capital, it’s more expensive and difficult for successful startups to scale up.
On top of that, Europe’s bank-based financial system is not well-suited to finance risky startups. High-tech startups often develop new technologies and business models, which are risky and may be hard for banks to assess. And the value of startups often lies in their people, ideas, and other intangible capital, which is difficult to pledge as collateral for a bank loan. Banks are also constrained by rules that (rightly) limit lending to risky firms without collateral—even fast-growing ones that are likely to make large profits later.
European pools of private capital are also smaller and more fragmented than in the US. Europeans park more of their savings in bank accounts rather than capital markets. Americans invested $4.60 in equity, investment funds, and pension or insurance funds for every dollar invested in such assets by Europeans in 2022. In part, this is because Europeans rely more on pay-as-you-go pensions than Americans. But regardless of the reason, the end result is less availability of equity financing for companies.
The fragmentation of markets stems in part from national laws, regulations, and taxes that hamper cross-border consolidation, capital raising, and risk-sharing. Many institutional investors prefer to allocate capital to companies based in their own countries. This often applies to investments in venture capital as well, especially in smaller funds.
Greater venture capital investments could spur productivity and strengthen the EU’s innovation ecosystem. But Europe’s shallow pools of venture capital are starving innovative startups of investment and making it harder to boost economic growth and living standards.
As our new paper argues, measures to strengthen the EU’s venture capital markets and remove cross-border financial frictions to pension funds and insurers investing in venture capital could increase the flow of funding to promising startups and fuel productivity gains.
The EU lost its largest venture capital center, London, following the United Kingdom’s vote to leave the Union in 2016 and its remaining centers lack the scale of those in the United States.
Over the past decade, the EU’s venture capital investments averaged just 0.3 percent of gross domestic product, less than one-third the average in the US. American venture capital funds raised $800 billion more than their European counterparts over this period.

Venture capitalists invest heavily in high-risk research and development activities that are pivotal to spreading innovative ideas and raising overall growth. They are skilled at picking promising startups and channeling resources to the best-performing companies.
Compared with competitors across the Atlantic, Europe’s more established startups also have less attractive options to grow through initial public offerings in the EU. This reduces the incentives to invest in them in the first place. And, when fast-growing startups start to scale up quickly, they often need to seek financing abroad because the availability in Europe is limited—the so-called scale up financing gap. Many startups then move operations overseas when they get that scale up financing from abroad. Europe then loses out on many of the benefits of having startups succeed at home—both the direct growth impact and positive spillovers such as technology diffusion.
National authorities could take several steps to support their domestic venture capital markets:

The venture capital sector is characterized by high risk and information asymmetries, but also positive externalities not internalized by individual investors. Well-designed preferential tax treatments for equity investments in startups and venture capital funds could help jumpstart the sector where it is underdeveloped or non-existent due to these market failures.
Reduce regulatory and tax frictions to investing in venture capital. Developing private pension funds would have multiple benefits, including expanding domestic capital pools to invest in capital markets and venture capital.
Enable national public financial institutions—which have played an important role in supporting the development of the venture capital sector in some countries—to expand capital availability and other support to venture capital funds and innovative startups. They should invest on commercial terms and help attract more private capital, especially from institutional investors such as pension funds and insurers. This can be done quickly before other efforts bear fruit.

Measures at the European level would help too. The single most important step the EU could take is to complete the single market for goods, services, labor, and capital. This will take time.
More immediately, the authorities could:

Fine-tune rules for insurers and other investors in larger venture capital funds to reduce impediments to investing in venture capital, especially to support growth financing.
Expand the capacity and instruments of the European Investment Fund (EIF) and the European Investment Bank to channel more resources to venture capital funds and innovative startups.
Encourage the EIF to develop a fund-of-funds aimed at attracting capital from institutional investors across the EU that would finance large venture capital funds with a pan-EU focus. This would help reduce fragmentation of capital pools, increase the familiarity of institutional investors with venture capital as an asset class, and help close the scale up financing gap.

Over the medium term:

Reduce stock market fragmentation to boost their depth, liquidity, and valuations, which will make listing in the EU more attractive. This is a key part of the capital market union agenda, but will be more politically challenging.

While government interventions are often a less-than-perfect solution, they may be needed in the near term to accelerate the development of the venture capital sector and financing for innovative startups. This would not only spur EU productivity, but also bolster competitiveness. More venture capital financing for “clean tech” sectors would also support the EU’s green ambitions and reduce the need to rely on costly subsidies that could distort the single market.

Full post can be found here

Compliments of the IMF

The post IMF | Europe Can Better Support Venture Capital to Boost Growth and Productivity first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Blog post by Pierre-Olivier Gourinchas | Our global growth projections are unchanged at 3.2 percent this year and slightly higher at 3.3 percent for next year, but there have been notable developments beneath the surface since the April World Economic Outlook.

Growth in major advanced economies is becoming more aligned as output gaps are closing. The United States shows increasing signs of cooling, especially in the labor market, after a strong 2023. The euro area, meanwhile, is poised to pick up after a nearly flat performance last year.
Asia’s emerging market economies remain the main engine for the global economy. Growth in India and China is revised upwards and accounts for almost half of global growth. Yet prospects for the next five years remain weak, largely because of waning momentum in emerging Asia. By 2029, growth in China is projected to moderate to 3.3 percent, well below its current pace.
As in April, we project global inflation will slow to 5.9 percent this year from 6.7 percent last year, broadly on track for a soft landing. But in some advanced economies, especially the United States, progress on disinflation has slowed, and risks are to the upside.

In our latest WEO update, we find that risks remain broadly balanced, but two downside near-term risks have become more prominent.
First, further challenges to disinflation in advanced economies could force central banks, including the Federal Reserve, to keep borrowing costs higher for even longer. That would put overall growth at risk, with increased upward pressure on the dollar and harmful spillovers to emerging and developing economies.
Mounting empirical evidence, including some of our own, points to the importance of global ‘headline’ inflation shocks—mostly energy and food prices—in driving the inflation surge and subsequent decline across a broad range of countries.
The good news is that, as headline shocks receded, inflation came down without a recession. The bad news is that energy and food price inflation are now almost back to prepandemic levels in many countries, while overall inflation is not.
One reason, as I emphasized previously, is that goods prices remain high relative to services, a legacy of the pandemic initially boosting goods demand while restricting their supply. This makes services comparatively cheaper, increasing their relative demand—and, by extension, that of the labor needed to produce them. This is putting upward pressure on services prices and wages.
Indeed, services prices and wage inflation are the two main areas of concern when it comes to the disinflation path, and real wages are now close to prepandemic levels in many countries. Unless goods inflation declines further, rising services prices and wages may keep overall inflation higher than desired. Even absent further shocks, this is a significant risk to the soft-landing scenario.

Second, fiscal challenges need to be tackled more directly. The deterioration in public finances has left many countries more vulnerable than foreseen before the pandemic. Gradually and credibly rebuilding buffers, while still protecting the most vulnerable, is a critical priority. Doing so will free resources to address emerging spending needs such as the climate transition or national and energy security.
More importantly, stronger buffers provide the fiscal resources needed to address unexpected shocks. However, too little is being done, magnifying economic policy uncertainty. Projected fiscal consolidations are largely insufficient in too many countries. It is concerning that a country like the United States, at full employment, maintains a fiscal stance that pushes its debt-to-GDP ratio steadily higher, with risks to both the domestic and global economy. The increasing US reliance on short-term funding is also worrisome.
With higher debt, slower growth, and larger deficits, it would not take much for debt trajectories to become much less comfortable in many places, especially if markets send government bond spreads higher, with risks for financial stability.

Unfortunately, economic policy uncertainty extends beyond fiscal considerations. The gradual dismantling of our multilateral trading system is another key concern. More countries are now going their own way, imposing unilateral tariffs or industrial policy measures whose compliance with World Trade Organization rules is questionable at best. Our imperfect trading system could be improved, but this surge in unilateral measures isn’t likely to deliver lasting and shared global prosperity. If anything, it will distort trade and resource allocation, spur retaliation, weaken growth, diminish living standards, and make it harder to coordinate policies that address global challenges, such as the climate transition.
Instead, we should focus on sustainably improving medium-term growth prospects through more efficient allocation of resources within and across countries, better education opportunities and equality of chances, faster and greener innovation and stronger policy frameworks.
Macroeconomic forces—desired national savings and domestic investment together with global rates of return on capital—are the primary determinants of external balances. Should these imbalances be excessive, trade restrictions would be both costly and ineffective at addressing the underlying macroeconomic causes. Trade instruments have their place in the policy arsenal, but because international trade is not a zero-sum game, they should always be used sparingly, within a multilateral framework, and to correct well-identified distortions. Unfortunately, we find ourselves increasingly at a remove from these basic principles.
As the eight decades since Bretton Woods have shown, constructive multilateral cooperation remains the only way to ensure a safe and prosperous economy for all.
 

 
Full post can be found here

Compliments of the IMF

The post IMF | Global Growth Steady Amid Slowing Disinflation and Rising Policy Uncertainty first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Blog Post by Jakob Feveile Adolfsen, Danielle Kedan and Marie-Sophie Lappe | The green transition will significantly increase demand for key minerals over the coming decades. The impact on energy prices will ultimately depend on how supply adjusts. The ECB Blog looks at the geopolitical risks involved.
The green transition relies on certain key minerals, in particular lithium, copper, nickel, cobalt, manganese, and graphite. Assuming that the transition takes place in accordance with the Paris Agreement, demand for these key inputs will almost quadruple by 2040.[1] The impact on energy prices will depend on how supply adjusts. Ensuring the necessary supply of these “green minerals” is therefore vital.
Russia’s attack on Ukraine illustrated how geopolitical developments can significantly affect commodity markets and inflation.[2] IMF research confirms this and underlines that geopolitical fragmentation might disrupt the green transition by impairing access to green minerals.[3] The questions are therefore: what are the geopolitical risks to green minerals supply? What are the political relationships between main consumers and suppliers? And what can be done to contain demand for and secure supplies of green minerals?
What could cause supply disruptions?
The mining of raw minerals is mainly concentrated in developing and emerging market economies in South America and Africa (Chart 1). Supplies of green minerals are currently more concentrated than for other commodities such as oil, even compared to when OPEC was formed (Chart 2). The concentration of mine production makes green minerals particularly susceptible to supply chain disruptions and trade restrictions. In fact, all minerals explored in this blog are currently subject to export restrictions.[4]

Chart 1
Share of three largest mine producers (left) and reserve holders (right)

(percent)

Sources: United States Geological Survey, British Geological Survey, and ECB staff calculations.
Latest observation: 2021 (annual).

Chart 2
Concentration of mine production and reserves

(Herfindahl–Hirschman Index)

Sources: United States Geological Survey, British Geological Survey, BP Statistical Review of World Energy and ECB staff calculations.
Notes: The Herfindahl-Hirschman Index (HHI) is a measure of market concentration. The HHI can range from 0 to 10,000. The higher the number, the more concentrated the market. An HHI of less than 1,500 is generally considered to be a competitive market, an HHI of 1,500 to 2,500 is considered moderately concentrated, and an HHI of 2,500 or greater is highly concentrated. 1960 denotes the year when OPEC was established.
Latest observation: 2021 (annual).

Certain mineral-rich countries are reportedly looking to form mineral cartels, although thus far without success.[5] There are multiple factors that determine success in forming a cartel, such as barriers to entry, political stability and inelasticity of demand.[6] Among these factors, concentration of supply can facilitate a cartel’s ability to control market shares, and thereby prices.
A successful cartel ultimately requires agreement amongst members and a high degree of trust to maintain collusion. Based on voting patterns in the United Nations (UN), the top three miners of copper, nickel and graphite generally show high political alignment, with a disagreement score that is below the UN average and comparable with or even below that of the oil cartel, OPEC(+) (Chart 3). This would suggest some political basis for cartel formation. Although political disagreement scores among miners of lithium, cobalt and manganese are above the UN average, this is largely skewed by the presence of Australia, which tends to disagree with other top raw producers of these three minerals. This suggests that potential cartels might form that exclude Australia, as was the case in the oil market where the United States has never been a part of OPEC.

Chart 3
Political disagreement among top-three mine producers and reserve holders

(index – higher value indicates higher disagreement among key producers)

Sources: United States Geological Survey, United Nations General Assembly Voting Data (see Bailey, M. A., A. Strezhnev and E. Voeten (2017), “Estimating Dynamic State Preferences from United Nations Voting Data”, Journal of Conflict Resolution, 61(2)) and ECB staff calculations.
Notes: The disagreement score for each mineral is calculated as the average political disagreement among the top-three producers or reserve holders. For OPEC(+), the average political disagreement between all member countries is used.
Latest observation: 2020.

What’s the political connection between consumers and suppliers?
Geopolitically, China currently appears to be better positioned than the EU and the United States in terms of securing supplies of green minerals. China exhibits the lowest level of political disagreement with the main mine producers of green minerals (Chart 4). This is a trend that began at the end of the Cold War. The comparable political disagreement levels for the EU are generally above the UN averages, but still well below levels for the United States.

Chart 4
Political disagreement of the EU, the United States and China with mine producers over time

(index – higher value indicates higher disagreement with key mine producers)

Sources: United States Geological Survey, United Nations General Assembly Voting Data (Bailey, Strezhnev and Voeten, 2017) and ECB staff calculations.
Notes: Political disagreement between two countries is calculated as the distance between preference scores based on records of UN voting for every year. Each region’s disagreement score with minerals producers is calculated as the average of the region’s disagreement with the five largest producers in every year, weighted by the market share of that producer for every mineral. Solid lines are the averages across the six minerals covered in this blog post. Dashed lines indicate the maximum and minimum disagreement scores for the respective years.
Latest observation: 2020.

China has also strategically positioned itself in the green mineral supply chain by becoming the single largest processer of nickel, copper, lithium and cobalt, accounting for between 35-70% of processing activity. Moreover, its upstream control of raw commodities has been increasing due to investments in mining abroad. Although both the United States and EU have taken steps to build their own supply chains of critical materials, considerable investment will be needed to catch up with China’s investments, suggesting that China will retain its dominant position for the foreseeable future.
So what can be done?
Several actions can be taken to enhance the security of green mineral supplies. First, encouraging private investment in mineral extraction and refining can help to diversify supply risks. By facilitating extraction of reserves and the entry of new producers, this could weaken the power of current market leaders. Second, research into substitute materials for green technologies is producing promising first results, and could reduce future demand for green minerals. Third, these minerals are recyclable. This means that there is a secondary source of supply that is likely to grow in the future as both the stock of recyclable products and investment into recycling technologies increase.
The EU recently took an important step in adopting the Critical Raw Materials Act. By 2030, at least 10% of the EU’s annual consumption of critical raw materials should be extracted within the EU, and 40% should be processed domestically. Moreover, approvals procedures for raw materials projects will be streamlined and strategic projects will benefit from access to finance and shorter approvals timeframes. Recyclability of minerals is also promoted, as at least 15% of annual consumption should be covered by domestic recycling in 2030. The share of imports from a single third-party country should also not exceed 65% of annual consumption. This benchmark aims to diversify supply risks, which will be further supported by the creation of a raw materials club for countries interested in strengthening global supply chains and the establishment of an EU export credit facility to reduce the risks of investing abroad.
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.
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International Energy Agency (2021), “The Role of Critical Minerals in Clean Energy Transitions”.
From an historical perspective, the geopolitical risks for Europe related to green minerals are similar to those it has faced in sourcing other inputs for non-green use, such as oil from the Middle East and gas from Russia.
See Alvarez, J. A., Andaloussi, M. B., Maggi, C., Sollaci, A., Stuermer, M., & Topalova, P. (2023). “Geoeconomic Fragmentation and Commodity Markets” (No. 2023/201). International Monetary Fund.
See OECD database on Trade in Raw Materials (2022).
Indonesia announced in October 2022 that it was studying the possibility of forming an OPEC-style cartel for nickel, cobalt and manganese. Argentina, Chile and Bolivia, the so-called “lithium triangle” which together account for 30% of mining and around 50% of reserves, are reportedly in discussions to form a lithium cartel. See “Indonesia considers OPEC-style cartel for battery metals”, Financial Times, 31 October 2022.
For a more detailed discussion, see Charlton (1977), Politics and Commodity Cartels, Peach Research, Vol. 9 and Levenstein and Suslow (2006), “What Determines Cartel Success?”, Journal of Economic Literature, 44(1).

 
 
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