By Luca Nocciola and Alejandro Zamora-Pérez[1]
What factors could drive transactional demand for central bank digital currency (CBDC)? We analyse payment survey data to arrive at a framework for understanding the role of adoption frictions and design strategies in shaping CBDC demand. The results of our analysis show that, while consumers may initially prefer to use more traditional payment methods, a design tailored to their specific needs could significantly increase CBDC uptake. Raising awareness and capitalising on network effects could also boost demand for CBDC.
Public money: “too much” versus “too little” demand
Central banks are at various stages in investigating and developing central bank digital currencies (CBDCs) alongside cash. While cash use is losing ground to digital private payment methods, the role of public money in payments remains crucial. The potential implications of a society without public money has long been a topic of debate[2], highlighting concerns about maintaining its key role in payments. In the digital era, these discussions have resurfaced in central banking and academia. The Eurosystem is now preparing for the potential development of a digital euro alongside cash, the use of which is declining. One of the main motivations for introducing a CBDC is to consolidate the role of public money as the anchor of the monetary system (Lagarde and Panetta, 2022), a sentiment not confined to the euro area alone. In 2022 the Bank for International Settlements conducted a survey of 86 central banks, which revealed that the main reason for introducing a CBDC was to enhance payment efficiency and safety (Kosse and Mattei, 2023). Central banks’ ongoing efforts in CBDCs reflect global momentum and interest in the future of public money in payments.
While there is considerable interest in issuing CBDCs, one challenge lies in striking the right balance between “too much” and “too little” consumer demand (Ahnert et al., 2022). Extensive research has already tackled situations in which a CBDC might become too popular, potentially undermining the banking system (Burlon et al., 2024; Assenmacher et al., 2024). However, much less research has gone into ensuring there is sufficient interest in a CBDC for it to be used as a regular means of payment. Despite being universal to any CBDC, this challenge has been identified and qualitatively assessed in the euro area (Bindseil et al, 2021; Panetta, 2022 and Kantar Public, 2022). Here, drawing on Nocciola and Zamora-Pérez (2024), we shed further light on this “too little” scenario. Using a model based on survey data, we quantitatively examine some of the potential drivers and barriers to CBDC adoption and discuss strategies to overcome these obstacles.
Assessing potential transactional demand for CBDC
Advances in the digital payments landscape underscore the importance of understanding the extent to which consumers might use a CBDC as a new form of digital currency and the need for comprehensive data on consumers’ current payment methods. To that end, the study on payment attitudes of consumers in the euro area (SPACE)[3] collects survey data on current consumer behaviour and preferences concerning payment methods. The 2022 edition of SPACE spanned 17 euro area countries with over 40,000 respondents. The survey includes a payment diary, in which respondents recorded their transactions and respective means of payment, together with a questionnaire asking them to rank different payment instruments according to their most important attributes, such as transaction speed and convenience.
Using this data and on the basis of a model, we study how consumers’ payment choices are related to current preferences for certain attributes of payment instruments.[4] We simulate a CBDC that resembles existing means of payment and assess the transactional demand for it. Payment methods, including CBDC, are distilled into various attributes, encompassing features like ease of use, transaction speed and safety. Additionally, we exploit consumers’ preferences for features such as budgeting usefulness and privacy protection.[5] Comparing these attributes with familiar benchmarks such as cash and cards offers a framework for exploring the different designs of a CBDC.
To this end, it is important to differentiate between adoption and usage when discussing the uptake of new payment methods. We cannot assess novel payment technologies like a CBDC on the same playing field as entrenched methods like cash and cards. First, there is the adoption phase: this is when consumers decide to include a new payment method in their repertoire. But adopting a method does not necessarily translate into using it regularly. For instance, some consumers might prefer the idea of a CBDC and choose to adopt it, but if they have a deeply ingrained habit of using cash, they might not use the CBDC often in practice.
We find that adoption costs play a pivotal role in determining the success of new payment methods. Introducing a novel payment method presents an inherent “cost” to consumers, and this is not purely a monetary cost – it also encompasses the effort, time and adjustments required of consumers when adapting to a new payment method. Previous qualitative findings show that some consumers are satisfied with current methods based on familiar technologies and prefer less complexity rather than adopting new methods (Kantar 2022; Kantar Public 2023). In contrast to those studies, we gauge this cost quantitatively by exploiting the SPACE survey and delving into the adoption patterns of mobile payment apps – a technology that, despite being available for some time, has only gained traction in the sampled countries relatively recently.[6] The idea behind our approach is straightforward: if those accustomed to cash and cards hesitate to embrace mobile payments due to the perceived cost of switching, they might exhibit similar reluctance towards another newly introduced means of payment, such as a CBDC. Our findings show that consumers generally face a substantial adoption cost, revealing a preference for established payment methods like cash or cards and a tendency to stick to familiar habits.[7] However, pinpointing the reasons for this cost offers avenues to lowering it.
Evidence on the drivers of demand for CBDC as a means of payment
Key among the strategies that central banks may consider is addressing those factors that drive CBDC adoption. We identify three potential drivers – design alignment with consumer preferences, effective information dissemination, and leveraging network effects from emerging payment technologies.
For a start, a CBDC’s design attributes can heavily influence how attractive it is to users. Our study suggests that CBDC demand could be influenced by merging the perceived top qualities of cards (like speedy transactions and ease of use) with the benefits of cash (such as tracking expenses and preserving privacy). The left panel of Chart 1 offers a glimpse into the potential impact of a CBDC tailored to consumer preferences, compared with one that is not. While it is essential to view these findings as indicative results rather than fixed outcomes – given the interplay of various factors – the chart does seem to suggest that a well-designed CBDC would enjoy more substantial adoption and regular usage.

Chart 1
Indicative results for central bank strategies to influence CBDC adoption and usage

Effect of consumer-tailored design

Effect of effective information campaign

(rate of change of adoption and usage shares from baseline)
(rate of change of adoption and usage shares from baseline)

Sources: SPACE survey (European Central Bank, 2022) and authors’ calculations.
Notes: Both panels illustrate the normalised effects of two distinct central bank strategies on CBDC adoption and usage, relative to a baseline simulation. The left panel assesses the impact of a consumer-tailored design (blue bars), while the right panel examines the outcomes following an information campaign (yellow bars). “Adoption” and “usage” stages are plotted on the x-axis. The values represent the rate of change from the baseline in each situation, with results at 95% confidence intervals displayed. The consumer-tailored design exploits specific user preferences on CBDC features (against a baseline not accounting for preferences), whereas the information campaign leverages information strategies (against a baseline without an effective information campaign). These results highlight the indicative influence of targeted policy interventions on CBDC design and implementation.

Second, ensuring consumers have the right information can make it easier for them to embrace new payment methods, such as a CBDC. The literature often highlights the crucial role that raising awareness plays in boosting the appeal of novel technologies, including payment methods. To gain a clear and causal understanding of how new information influences payment choices, we need to look at an unexpected event or “exogenous shock” that might change the usual consumer behaviour. The COVID-19 pandemic provides such an opportunity. This unforeseen event significantly altered many consumers’ habits. The SPACE survey delves into these changes, specifically asking participants if discovering new payment methods due to the pandemic influenced their payment choices even two years later. Our model exploits this information from the SPACE survey, and we find that discovering new payment options, like mobile apps, can significantly reduce the barriers people face when adopting a new means of payment. Based on this fact, we model what might happen if there was a targeted campaign to raise consumers’ awareness of a CBDC as a prospective means of payment. The results depicted in the right panel of Chart 1 suggest that with the right targeted information, consumers might find it easier to make the switch to a CBDC. However, it is important to note that these results should not be seen as an attempt to make an accurate inference, but rather as indicative insights illustrating the potential influence of effective information dissemination on consumer behaviour towards CBDCs.
Network effects fuelled by the spread of emerging payment technologies can substantially boost CBDC adoption. The diverse landscapes within the sampled countries, as captured by the SPACE survey, reveal differences in both payment habits and available payment options across different countries. This variation can be exploited to analyse the relevance of an environment that is favourable to new payment methods.[8] Chart 2 shows the importance of an environment in which new payment technologies are gaining traction, because the collective adoption of a method can be self-reinforcing. As more people use new payment methods, like mobile apps, their popularity snowballs, creating an environment where the adoption of new payment technologies – including CBDC – becomes more likely. We find that network effects can act as powerful multipliers, making markets receptive to emergent payment technologies fertile grounds for promoting CBDC.

Chart 2
Network effects: indicative impact of current diffusion of novel payment means on CBDC adoption

(x-axis: percentage of consumers using novel means of payment (exemplified by mobile payment apps); y-axis: percentage of consumers in a country adopting CBDC)

Source: SPACE survey (European Central Bank, 2022) and authors’ calculations.
Notes: The chart illustrates how the simulated CBDC adoption rates (y-axis, represented in percentages) relate to the spread of novel payment technologies in different countries, exemplified by the use of mobile apps for peer-to-peer and point-of-sale payments in various countries (x-axis, represented in percentages). The yellow confidence intervals are at the 95% level. As mobile apps are not used widely in most euro area countries, usually accounting for below roughly 10% of total transactions, the values above this 10% threshold are estimated. Although the confidence intervals are wide due to a lack of data, all estimates point to the same finding: more extensive diffusion of mobile payments in a country generally results in higher CBDC adoption rates among consumers.

Finally, although we lack the data necessary to produce the relevant simulation, it is likely that other important factors could boost CBDC adoption, such as the role of legislation in ensuring its distribution and obliging merchants to accept it at the point of sale, as found in Kantar Public (2022). These two components of the role of legislation could be important in accelerating these network effects, as suggested by Bindseil et al. (2021). Additionally, the universality of use cases could further enhance adoption.[9]
Conclusions
We assess potential drivers for the adoption of CBDC as a means of payment, providing insights which could contribute to the design of adoption strategies. In the digital age, the role of public money in our daily transactions is evolving, and it is important to ensure that CBDCs can effectively fit into this changing landscape. Drawing on the SPACE survey data, we develop a framework to quantitatively measure how likely consumers are to use CBDC as a means of payment in everyday transactions, by accounting for individuals’ preferences for payment method attributes. We distinguish between the initial decision to adopt a CBDC and the subsequent decision to use it, emphasising that the costs and barriers associated with the initial adoption phase are vital in understanding overall demand. Building on insights from previous qualitative research, our analysis confirms that three drivers are key to consumer demand: how CBDC is designed, the level of consumer awareness and the growth of current new payment technologies. However, we do not cover all potentially relevant factors, such as the role of legislation in exploiting network effects, ensuring efficient distribution, and boosting adoption through universal use cases. In sum, our research provides a framework for understanding the role of adoption costs and design strategies in shaping demand for CBDC.
 

References
Ahnert, T., Assenmacher, K., Hoffmann, P., Leonello, A., Monnet, C. and Porcellacchia, D. (2022). “Cold hard (digital) cash: the economics of central bank digital currency”, ECB Research Bulletin, No 100, Frankfurt am Main.
Assenmacher, K., Ferrari Minesso, M., Mehl, A., and Pagliari, M. S. (2024). “Managing the transition to central bank digital currency“, ECB Working Paper Series, No. 2907, Frankfurt am Main.
Bindseil, U., Panetta, F. and Terol, I. (2021), “Central Bank Digital Currency: functional scope, pricing and controls”, ECB Occasional Papers, No 286, Frankfurt am Main.
Black, F. (1987), “Banking and interest rates in a world without money” in F. Black, Business Cycles and Equilibrium, Oxford: Basil Blackwell, pp. 1-20.
Burlon, L., Muñoz, M. A. and Smets, F. (2024), “The Optimal Quantity of CBDC in a Bank-Based Economy,” American Economic Journal: Macroeconomics (forthcoming).
European Central Bank (2020), The Eurosystem cash strategy.
European Central Bank (2022), Study on the payment attitudes of consumers in the euro area (SPACE) – 2022, European Central Bank, Frankfurt am Main.
Friedman, B. M. (1999), “The future of monetary policy: The central bank as an army with only a signal corps?” International Finance, Vol 2 No. 3, pp. 321-338.
Huynh, K. P., Molnar, J., Shcherbakov, O. and Yu, Q (2020), “Demand for payment services and consumer welfare: the introduction of a central bank digital currency”, Bank of Canada Staff Working Paper, No 2020-7, Bank of Canada, Ottawa.
Kantar Public (2022), Study on new digital payment methods, March.
Kantar Public (2023), Study on digital wallet features, March.
King, M. (1999), “Challenges for monetary policy: new and old”, Quarterly Bulletin, Bank of England, Vol. 39, pp. 397-415.
Kosse, A. and Mattei, I. (2023), “Making headway-Results of the 2022 BIS survey on central bank digital currencies and crypto” BIS Paper, No 136, Bank for International Settlements, Basel.
Lagarde, C. and Panetta, F. (2022), “Key objectives of the digital euro”, The ECB Blog, 13 July.
Li, J. (2022), “Predicting the demand for central bank digital currency: a structural analysis with survey data” Journal of Monetary Economics, Vol. 134, pp. 73-85.
Nocciola, L. and Zamora-Pérez, A. (2024) “Transactional demand for central bank digital currency”, ECB Working Paper Series, No 2926, Frankfurt am Main.
Panetta, F. (2022), “A digital euro that serves the needs of the public: striking the right balance”, Introductory statement at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 30 March.
Wicksell, K (1936), Interest and prices, Ludwig von Mises Institute.
Woodford, M. (2000), “Monetary policy in a world without money”, International Finance, Vol. 3, No 2, pp. 229-260.
Zamora-Pérez, A. (2021), “The paradox of banknotes: Understanding the demand for cash beyond transactional use”, ECB Economic Bulletin, Issue 2, European Central Bank, Frankfurt am Main.

This article was written by Luca Nocciola (Directorate General Market Infrastructures and Payments, European Central Bank) and Alejandro Zamora-Pérez (Directorate Banknotes, European Central Bank), drawing on selected results of Nocciola and
Zamora-Pérez (2024). The authors gratefully acknowledge the comments by Ulrich Bindseil, Piero Cipollone, Ignacio Terol, Anton van der Kraaij, Claudia Lambert, Livio Stracca, Gareth Budden, Alexander Popov and Luc Laeven. The views expressed here are those of the authors and do not necessarily represent the views of the European Central Bank or the Eurosystem.
Historical discussions on the challenges of a cashless economy – and, by extension, an economy without public money in payments – date back to Wicksell (1936), who inquired as to whether private banks could control price fluctuations in a credit-only system. Over time some economists (Black, 1987; King, 1999; and Friedman, 1999) have expressed concerns about the overall effectiveness of the central bank’s policies in such scenarios, while others have downplayed potential risks (Goodhart, 2000; and Woodford, 2000).
See European Central Bank (2022).
There are similar studies by Huynh et al (2020) and Li (2023).
According to previous qualitative surveys, these attributes also play an important role for consumers when considering the prospective adoption of new means of payment (Kantar Public, 2023).
Despite over two decades of mobile payment availability, usage remains limited, particularly at the POS. In 2022, mobile apps accounted for just 3% of POS payments on average, with usage ranging from 1% in Slovenia to 10% in the Netherlands, according to the latest SPACE survey data. However, mobile payments are increasingly being used for person-to-person (P2P) transactions, averaging 10% in 2022, up from 3% in 2019, from 1.5% in Austria to 43% in the Netherlands.
Our findings should not be interpreted as a direct extrapolation of demand for any specific CBDC.
Although our analysis primarily assesses the impact at the point-of-sale, we also address the potential influence of the
person-to-person (P2P) use case, in line with findings that highlight its relevance (Kantar Public, 2023). Hence, our simulation includes data on the aggregate usage of both P2P and POS transactions with novel means of payment, such as mobile payments, to estimate the potential level of adoption of a CBDC.
Our data primarily focus on established payment features and do not explicitly capture preferences for innovative features identified in the referenced qualitative surveys which still have a low adoption rate, such as QR code payments, offline payments, conditional payments or the benefit of integrated payment solutions. While these innovative features are among the unobservable factors that influence consumer behaviour in our model, the absence of specific data on them precludes detailed policy simulations.

 
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“Check against delivery”
Today, I have met with the Conference of Presidents of the political groups in the European Parliament. In this meeting I have presented to the Parliament the planned structure of the new college, based on my political guidelines, on which we worked together; intensive weeks of negotiations with the Member States.
I know that you are very interested in the structure but allow me to speak first about the content that defines the structure. Together, we have defined core priorities. They are built around prosperity, security, democracy. The backdrop is: competitiveness in the twin transition, and they are very much intertwined and cross-cutting.
The whole college is committed to competitiveness! We have dissipated the former rigid stovepipes.
This is one of the main recommendation of the Draghi report. Strengthening our tech-sovereignty, security and democracy. Building a competitive, decarbonised and circular economy, with a fair transition for all. Designing a bold industrial strategy with innovation and investment at its heart. Boosting European cohesion and regions. Supporting people, skills and our social model. Ensuring Europe can assert its interests and lead in the world. And this is reflected in the titles of the six Executive Vice-Presidents.
Another principle: as the treaty says, each Member of the College is equal – and each Commissioner has an equal responsibility to deliver on our priorities. That means that all Commissioners must work together. In this spirit, each Executive Vice-President will also have a portfolio to focus on – for which they will have to work with other Commissioners. Because what affects security affects democracy, what affects the economy affects society, and what affects climate and environment, also affects people and business.
This is also why we do not have the extra layer of Vice-Presidents. Leaner structure, more interactive and interlinked.
Another topic is balance in general. Be it gender or topic or geography.
As you will see, we now have 11 women in the College I propose today. That is 40%. When I received the first set of nominations and candidates, we were on track for around 22% women and 78% men. That was unacceptable. So I worked with the Member States and we were able to improve the balance to 40% women and 60% men. And it shows that – as much as we have achieved – there is still so much more work to do. And with this in mind I assigned six Executive Vice-presidents.
Six Executive Vice-Presidents: four women, two men. Three from Member States that joined before the fall of the Iron Curtain. And three from Member States that joined after Europe was reunited. From the Baltics, Nordics and Eastern Europe. Ministers and Prime Ministers. Different backgrounds. But all with one common goal – and that is to make Europe stronger.
So allow me to introduce them.
Teresa Ribera will be Executive Vice-President of a Clean, Just and Competitive Transition. She will also be responsible for Competition policy. She will guide the work to ensure that Europe stays on track for its goals set out in the European Green Deal. And that we decarbonise and industrialise our economy at the same time.
Henna Virkkunen will be the Executive Vice-President for Tech-Sovereignty, Security and Democracy. She will also be responsible for the portfolio on digital and frontier technologies. I will ask Henna to look at the internal and external aspects of security. But also to strengthen the foundations of our democracy, such as the rule of law, and protect it wherever it comes under attack.
Stéphane Séjourné will be the Executive Vice-President for Prosperity and Industrial Strategy. He will also be responsible for the Industry, SMEs and the Single Market portfolio. He will guide the work to put in place the conditions for our companies to thrive – from investment and innovation to economic stability and trade and economic security.
As you already know, Kaja Kallas will be our High Representative and Vice-President. We are in an era of geostrategic rivalries and instability. Our foreign and security policy must be designed with this reality in mind and it must be more aligned with our own interests. I know that I can count on her to bring all of this together – and be the bridge between our internal and external policies. And to ensure we stay a Geopolitical Commission.
I am also very happy to entrust the role of Executive Vice-President for People, Skills and Preparedness to Roxana Mînzatu. She will have the responsibility for skills, education and culture, quality jobs and social rights. This is under the umbrella of demography. Roxana will notably lead on a Union of Skills and the European Pillar of Social Rights. She will focus on those areas which are crucial to unite our society.
Raffaele Fitto will be Executive Vice-President for Cohesion and Reforms. He will be responsible for the portfolio dealing with cohesion policy, regional development and cities. We will draw on his extensive experience to help modernise and strengthen our cohesion, investment and growth policies.
This is the team of Executive Vice-Presidents which will work hand in hand with each other and with all Commissioners.
And I would now like to introduce them to you all.
I will start here with Maroš Šefčovič, to whom I am very happy to give two roles. He will be Commissioner for Trade and Economic Security. This is a new portfolio which also includes customs policy. I have also entrusted him with a second role: Commissioner for Interinstitutional Relations and Transparency. For this second role, he will report directly to me.
Valdis Dombrovskis will also have a double role. He will be the Commissioner for Economy and Productivity. I have also given him the role of Commissioner for Implementation and Simplification. He will report directly to me on this part of his work.
Dubravka Šuica will be the Commissioner for the Mediterranean. I am entrusting her with this new role. She will also be responsible for the wider southern neighbourhood. She will work closely with Kaja Kallas – and many other Commissioners – to develop our shared interests with the region.
Olivér Várhelyi will be Commissioner for Health and Animal Welfare. He will be responsible for building the European Health Union and continuing the work on beating cancer and on preventive health.
Wopke Hoekstra will be the Commissioner for Climate, Net Zero and Clean Growth. He will continue to work on implementation and adaptation, on climate diplomacy and decarbonisation. And he will also be responsible for taxation.
Andrius Kubilius will be the Commissioner for Defence and Space. He will work on developing the European Defence Union and boosting our investment and industrial capacity.
Marta Kos, it should be noted that the Government of Slovenia has suggested Marta Kos as Member of the College. The nomination procedure which involves the consultation of the national Parliament for a non-binding opinion is ongoing. She will be Commissioner for Enlargement – also responsible for our Eastern neighbourhood.
She will work on supporting Ukraine – and continuing the work on reconstruction, and support candidate countries to prepare them for accession.
Jozef Síkela will be the Commissioner for International Partnerships. He will lead the work on Global Gateway – and ensure that we develop mutually beneficial partnerships which invest in a common future.
Costas Kadis will be the Commissioner for Fisheries and Oceans. I count on his experience to help build a resilient, competitive, and sustainable sector and present the first European Oceans Pact.
Maria Luís Albuquerque will be the Commissioner for Financial Services and the Savings and Investment Union. This will be vital to strengthen and complete our Capital Markets Union and ensure that private investment powers our productivity and innovation.
Hadja Lahbib will be the Commissioner for Preparedness and Crisis Management. This is another new portfolio which will look at resilience, preparedness and civil protection. She will be responsible for leading our efforts on crisis management and humanitarian aid.
Magnus Brunner will be the Commissioner for Internal Affairs and Migration. He will of course focus on the implementation of the Pact on Asylum and Migration – but also on strengthening our borders and developing a new internal security strategy.
Jessika Roswall will be the Commissioner for Environment, Water Resilience and a Competitive Circular Economy. She will have an important job to help preserve our environment and put nature on the balance sheet. She will help develop a more circular and more competitive economy. And she will lead the work on water resilience which is a big priority for the years ahead.
Piotr Serafin will be the Commissioner for Budget, Anti-Fraud and Public Administration. He will report directly to me and notably focus on preparing the next long-term budget and ensure we have a modern institution to deliver for Europeans.
Dan Jørgensen will be the Commissioner for Energy and Housing. His work will help to bring down energy prices, invest in clean energy and ensure that we cut our dependencies. He will be the first ever Commissioner for Housing – looking at all aspects from energy efficiency to investment and construction.
Ekaterina Zaharieva will be Commissioner for Research and Innovation. We must put research and innovation, science and technology at the centre of our economy. She will help ensure that we invest more and focus our spending on strategic priorities and on groundbreaking innovation.
Michael McGrath will be Commissioner for Democracy, Justice and the Rule of Law. I have entrusted him with the responsibility to take forward the European Democracy Shield. He will also lead our work on the rule of law, anti-corruption and consumer protection.
Apostolos Tzitzikostas will be Commissioner for Sustainable Transport and Tourism. He is responsible for mobility of goods and people. These are essential sectors for our competitiveness but also for our transitions, for connecting people and driving local economies.
Christophe Hansen will be the Commissioner for Agriculture and Food. He will have the task to bring to life the report and recommendations of the Strategic Dialogue. And based on the Strategic Dialogue he will develop a Vision for Agriculture and Food in the first 100 days of the mandate.
Glenn Micallef will be Commissioner for Intergenerational Fairness, Culture, Youth and Sport. Intergenerational fairness is a cross cutting topic. It affects all of us – and especially young people. It is about the right balance in a society. And I have entrusted Glenn to watch over it.
The key message is that wherever we come from, whatever our job title: we must all work together. We will have open debates. We will all be independent in thought and action. And we will all take ownership of what is agreed. This is the team that I am putting forward today.
On this basis, once the European Parliament has received the official letter of the Council in agreement with the President of the Commission, it may proceed with the formal proceedings for the nomination of the new college. Always in accordance with its rules of procedure.The post European Commission | Press statement by President von der Leyen on the next College of Commissioners first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

EU companies grow and innovate less than American counterparts
Blog post by Diego Cerdeiro, Gee Hee Hong, Alfred Kammer | In the European Union, income per person, one of the main gauges of living standards, is on average one-third less than in the United States, mostly because of lower productivity—as emphasized by Mario Draghi’s Sept. 9 competitiveness report for the European Commission. But what is the cause of the problem? As we show in the forthcoming Regional Economic Outlook, Europe’s aggregate productivity problem can be traced back to performance differences at the firm level.
Among large, leading companies, productivity and innovation have diverged markedly across both sides of the Atlantic. Market valuations of US-listed firms have more than tripled since 2005, while Europe’s have grown by only 60 percent. While valuations can reflect expectations that end up unmet, our analysis suggests that the divergence stems also from a productivity gap across all industries and is particularly pronounced in technology sectors. Productivity for US technology firms has surged by nearly 40 percent since 2005, yet it’s little changed for European companies. This significant difference is underpinned by much greater innovation efforts among enterprises in the United States, where research and development spending as a share of sales is more than double that of Europe.

Europe also suffers from a broader lack of business dynamism beyond large corporations. There is a lower number of startups, and too few among them grow fast and eventually become large firms. In the United States, the fastest growing young companies employ six times more people (as share of total employment) than their European counterparts. With fewer successful young firms, there are also fewer large and highly productive companies later on. There is, instead, an overabundance of small and low-growth firms.
Europe’s weaker business dynamism is partly due to constraints to scaling up—particularly in innovation. Two key factors are a smaller market size and access to finance:

Market size: While the EU and US markets are comparable in terms of purchasing-power parity gross domestic product, the EU’s is still highly fragmented. Trade intensity between EU countries is less than half the level between US states. That means a European business doesn’t benefit from economies of scale and network effects the way an American one does—which is especially harmful in tech, where scaling up quickly is critical.

Access to finance: In the last two decades, US-listed firms have issued about twice as much equity relative to their size as their European counterparts. Equity is crucial to finance intangible investments like patents or trademarks that can’t be pledged as collateral for bank credit, and to protect these investments against short-term economic fluctuations. Funding through debt also bears higher interest rates, especially for younger businesses. Venture capital investment could help these firms, but the size of that market in the EU as a share of the economy is only around a quarter what it is in the US.

Addressing these root causes behind the underperformance of European businesses will require significant action at both the EU and domestic levels.
Deepening the European single market would lift constraints to growth for Europe’s most productive firms. Removing remaining barriers to trade within the EU and advancing the capital markets union would incentivize firms to undertake R&D and other investments that only pay off with a large customer base. For example, investing more in physical infrastructure to connect EU countries and deeper services trade liberalization can expand firms’ market access within Europe. Easing the constraints that inhibit venture capital would increase the availability of equity financing for startups and young firms. Measures include harmonizing regulations that hinder investments in larger venture funds; and having the European Investment Fund play a catalytic role by providing a quality seal, including through due diligence as a public good.
Improving business dynamism also requires strong domestic efforts that match EU-level ambitions. Easing remaining administrative barriers to entry would help more people start businesses, especially in services sectors. Facilitating the entry of new, innovative firms also calls for labor market regulations that protect workers, not jobs. This means combining more flexible layoff procedures with adequate unemployment benefits and strong active labor market policies that support job search and skill development. Tax and regulatory incentives for small firms should be made temporary to incentivize firm growth. Finally, supporting tertiary education and addressing skill mismatches are critical to foster ideas creation through new firms and technology adoption by existing businesses.
The EU must find common ground for removing barriers to goods, services, capital, and labor flows within the single market. The efforts will need to span multiple areas, opening protected sectors, lowering regulatory costs of operating across borders, expanding the capital market for innovative ventures, and investing in education. A thriving business sector is key to reducing Europe’s large productivity and income per capita gap.
See full post here.
 
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NEW YORK—The Federal Reserve Bank of New York’s Center for Microeconomic Data today released the August 2024 Survey of Consumer Expectations, which shows inflation expectations remained unchanged at the short- and longer-term horizons, and rebounded somewhat at the medium-term horizon after a sharp decrease last month. Labor market expectations were mixed, but largely stable. Households were more optimistic about the availability of credit a year from now. Delinquency expectations rose slightly again, to the highest level since April 2020.
The main findings from the August 2024 Survey are:
Inflation

Median inflation expectations at the one- and five-year horizons remained unchanged in August at 3.0% and 2.8%, respectively. Median inflation expectations at the three-year horizon rebounded somewhat from the low July reading, increasing from 2.3% to 2.5%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) increased at all three horizons.
Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—was unchanged at the one-year horizon and declined at the three- and five-year horizons.
Median home price growth expectations increased to 3.1% from 3.0% in July.
Median year-ahead expected price changes increased by 0.1 percentage point to 3.6% for gas, by 0.2 percentage point to 7.3% for rent, and 0.4 percentage point to 8.0% for medical care, but declined by 0.3 percentage point to 4.4% for food and 1.3 percentage points to 5.9% for the cost of a college education.

Labor Market

Median one-year-ahead expected earnings growth increased to 2.9% from 2.7%, just above its 12-month trailing average of 2.8%. The increase was most pronounced for respondents in households with less than $50,000 annual income.
Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased to 37.7% from 36.6% in July.
The mean perceived probability of losing one’s job in the next 12 months decreased by 1.0 percentage point to 13.3%, falling below the 12-month trailing average of 13.7%. The mean probability of leaving one’s job voluntarily in the next 12 months also decreased, to 19.1% from 20.7%, falling slightly below the 12-month trailing average of 19.4%.
The mean perceived probability of finding a job if one’s current job was lost decreased by 0.2 percentage point to 52.3%, remaining below the 12-month trailing average of 53.9% and well below its year-ago reading of 55.7%.

Household Finance

Median expected growth in household income increased by 0.1 percentage point to 3.1%, remaining within the narrow range of 3.0% to 3.1% the series has maintained for the past year.
Median household spending growth expectations increased by 0.1 percentage point to 5.0%. The series has moved within a narrow range of 4.9% to 5.2% since November 2023, remaining well above its February 2020 level of 3.1%.
Perceptions of credit access compared to a year ago improved with a smaller share reporting tighter conditions compared to a year ago. Expectations about future credit access also improved, with a smaller share of respondents expecting tighter credit conditions a year from now, and a larger share expecting easier conditions. The shares reporting or expecting worse credit conditions are at their lowest levels since early 2022, while the share expecting improved credit availability is at its highest level since September 2021.
The average perceived probability of missing a minimum debt payment over the next three months increased by 0.3 percentage point to 13.6%, its third consecutive increase. The current reading is the highest since April 2020.
The median expected year-ahead change in taxes at current income level declined by 0.1 percentage point to 3.9%.
Median year-ahead expected growth in government debt decreased to 9.1% from 9.3%.
The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months increased by 1.5 percentage points to 26.6%.
Perceptions about households’ current financial situations deteriorated slightly with fewer respondents reporting being better off than a year ago and more respondents reporting being worse off. Year-ahead expectations also deteriorated somewhat, with a larger share of respondents expecting to be worse off. Overall, respondents remain considerably more optimistic about their financial situation compared to a year ago.
The mean perceived probability that U.S. stock prices will be higher 12 months from now remained unchanged at 39.3%.

About the Survey of Consumer Expectations (SCE)

The SCE contains information about how consumers expect overall inflation and prices for food, gas, housing, and education to behave. It also provides insight into Americans’ views about job prospects and earnings growth and their expectations about future spending and access to credit. The SCE also provides measures of uncertainty regarding consumers’ outlooks. Expectations are also available by age, geography, income, education, and numeracy.
The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, this panel allows us to observe the changes in expectations and behavior of the same individuals over time. For further information on the SCE, please refer to an overview of the survey methodology, the interactive chart guide, and the survey questionnaire.
 
For more information, please contact:

Connor Munsch, Corporate Communications Analyst, FEDERAL RESERVE BANK OF NEW YORK
The post NY Fed | Consumers’ Inflation and Labor Market Expectations Remain Largely Stable first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

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

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

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

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

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

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

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

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

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

Kornelia Kozovska, Spokesperson for the Eurogroup President

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