Blog post by Fabio Panetta, Member of the ECB’s Executive Board | With rising geopolitical tensions and urgent global challenges such as the climate and digital transitions, Europe needs to bolster its resilience to shocks and invest strategically. In order to achieve this, we need to work together, as a more integrated Europe is better positioned to realize shared goals in a fragmented global economy.
Central to this strategy is the creation of an integrated European capital market — a vision set out by the European Commission in 2015, and commonly known as the capital markets union (CMU).
A fully functioning CMU would both enhance Europe’s economic structure and benefit the euro area. It would do this in three main ways:
It would allow us to reap the benefits of euro area-wide capital markets, and facilitate greater risk-sharing across member countries. At present, barriers between national markets are deterring cross-border investment, leaving European firms and households largely reliant on national funding, as well as overly exposed to domestic economic shocks. By eliminating these barriers, the CMU would help investment flow across the euro area, which would diversify risk and mitigate the effects of local shocks.
There is also a pressing need for the CMU to complement traditional banking channels in financing the innovation vital for Europe’s future growth — notably in the energy and technology sectors. Equity funding and specialized forms of investment, such as venture capital, are typically more suitable than debt funding for the financing of innovation, since such projects often involve high levels of risk and uncertain returns, making it difficult to commit to regular debt repayments.
Finally, a fully functioning CMU would be beneficial for the implementation of the European Central Bank’s (ECB) monetary policy. By fostering deep, liquid and integrated capital markets, the CMU would support the timely, smooth and even transmission of monetary policy to firms and households.
Since the Commission launched its CMU action plan in 2015, progress has been made. For example, the European Union has adopted legislation to develop EU securitization markets, and thereby enhance firms’ access to funding. It has also further harmonized prudential rules for investment firms, and eased investment conditions for European venture capital to promote risk capital funding.
Additional steps are also being taken under the 2020 CMU action plan to simplify the rules for the public listing of EU companies, harmonize national insolvency regimes and address issues related to the taxation of financial instruments, which hamper cross-border investment and make equity funding less attractive than debt financing.
But despite this progress, the results are not yet satisfactory. Europe’s capital market remains fragmented across national borders, and ECB analysis shows that financial integration in Europe is still much lower than before the global financial crisis.
Moreover, Europe’s capital markets are less developed than those of other advanced economies. In the euro area, bond markets as a percentage of GDP are three times smaller than in the United States. And although equity represents firms’ main source of funding in both jurisdictions, in the euro area it is mainly unlisted, while in the U.S. most equity is listed, opening firms up to a greater pool of potential investors.

Chart 1
Sources of external financing of non-financial corporations in the euro area and the United States

(2022; ratio to GDP)

Sources: ECB (euro area accounts); OECD and ECB calculations.

Still, Europe does have a prominent role in certain market segments, such as the green bond sector. But the market for green bonds remains niche, representing less than 3 percent of the global bond market. Moreover, as the green transition accelerates, Europe’s “green advantage” might fade if we don’t make progress with the CMU. For example, venture capital activity, shown to be pivotal for funding green innovation and decarbonization, remains limited in the euro area. And there are signs that Europe’s green bond market is becoming increasingly fragmented, pointing to a lack of common standards and obstacles to cross-border investment.
All of this suggests that simply addressing specific barriers to market integration may not be sufficient to establish a genuine CMU. We must keep our eyes on the broader picture, and there are two critical blind spots in the development of a genuine CMU.
The first is the lack of a permanent European safe asset.
Historically, mature capital markets have been built around a public safe asset. In the U.S., for example, capital markets developed alongside the issuance of federal bonds.
A risk-free benchmark is necessary for critical financial activities. It would enable better pricing of risky financial products, such as corporate bonds or derivatives, encouraging the development of such products. It would provide a common form of collateral that would promote centralized clearing activity and cross-border collateralized trading in interbank markets. It would also help diversify bank and non-bank exposure. And it would support the euro’s international role, helping to attract foreign investors.
Establishing such a permanent European safe asset would be a game changer, but it hinges on Europe having a standing fiscal capacity with a borrowing function. Without that, building a deep and competitive CMU will prove much more difficult.
The second blind spot is the lack of a complete banking union, which restricts European banks to operating in one or just a few national markets.
Banks play a crucial role in the functioning of all major capital markets. They operate — and often have a leading role — in crucial segments like asset management, bond underwriting and trading, initial public offerings and financial advice. They are active traders in securities markets and often provide market-making services. Thus, it is difficult to envisage a genuine CMU without the key players being able to operate throughout the euro area.
The global landscape is evolving rapidly, and Europe must keep pace, if not lead, that change. To be successful, it needs a genuine — and complete — CMU.
Compliments of the European Central Bank.The post ECB | Europe Needs to Think Bigger to Build its Capital Markets Union first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Recent years have seen growing interest in differences between labour and capital income taxation. New stylised effective tax rates show that governments almost always
tax the capital income individuals receive more favourably than wage income. But that is only part of the story, because governments also usually tax labour and capital income at the firm level. After accounting for firm-level taxes, capital is still taxed more favourably than labour in many OECD countries, but in others, the reverse is true.
Interest in the taxation of labour and capital income is growing
Many governments tax labour and capital income differently, in line with prevailing theoretical views that capital should be taxed more favourably than labour. But recent academic findings have challenged these views, with some studies supporting better alignment of the tax treatment of capital and labour. The concentration of capital income among high income earners and concerns about inequality also are driving greater interest in the topic.
Governments tax individuals’ capital income more favourably than labour income, benefitting high earners
In most countries, when looking at taxes payable by individuals at hypothetical high income levels1 (including personal income taxes and employee social security contributions), stylised effective tax rates(ETRs)reveal that dividends or capital gains from shares are taxed more favourably than wage income. Reasons include
that capital income may be taxed under a separate tax rate schedule (e.g. at lower flat rates), may be exempt from tax or employee social security contributions, or attract special tax credits. This preferential tax treatment of capital income generally benefits high income earners who earn a greater share of their income from capital sources. In some countries, the gap between ETRs on labour and capital income also rises with income – the higher the income level, the more preferential the tax treatment of capital
income compared to labour income.
The gap between labour and capital income taxation tends to be smaller when accounting for taxes paid by firms
Governments also levy firm-level taxes on labour and capital income. Firm-level taxes on profits (corporate income tax) are often higher than firm-level taxes on wages (employer social security contributions and payroll taxes), adding to the total tax burden on capital relatively more than on labour. Even after accounting for the combined effect of these firm-level taxes and taxes paid by individuals on wage and dividend income, the tax treatment of dividend income is more favourable than that of labour income in many OECD countries. But the gap between the two is generally smaller than when considering only taxes paid by individuals. However, for some countries and income levels, the opposite result is evident – wage income is tax-preferred after accounting for firm-level taxes.
The differential tax treatment of labour and capital income affects the efficiency and equity of tax systems
The results show that capital income is tax-preferred compared to labour income in many OECD countries, affecting the equity and efficiency of tax systems. Different ETRs for capital income and labour income reduce horizontal equity, since taxpayers earning the same income from different sources are taxed differently. Capital income is concentrated at the top of the distribution, so high earners benefit disproportionately from preferential capital income tax treatment, reducing vertical equity. Differential tax treatment between labour and capital income can also create distortions that may reduce the efficiency of tax systems. Balancing these implications with other policy objectives such as promoting savings and investment is a key challenge for policy makers.
This work highlights the need for further analysis
Differential tax treatment between labour and capital income can open the door to strategies to minimise tax, including income shifting, capital gains deferral and the strategic timing of income realisation. Upcoming OECD work will delve further into how individuals, particularly those with higher incomes, use such strategies to minimise the taxes they pay. Future work will also consider the pros and cons of different tax policy options that governments may consider to enhance the efficiency and equity of their personal income tax systems.
The full article with tables can be read here.
Compliments of the OECD.
 The post OECD | The Taxation of Labor vs. Capital Income: Focus on High Earners first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Blog post by Josep Borrell, High Representative of the European Union for Foreign Affairs and Security Policy / Vice-President of the European Commission
Since the start of the invasion of Ukraine, the EU has imposed 11 rounds of ever-tighter sanctions against Russia. Some people claim these sanctions have not worked. This is simply not true. Within a year, they have already limited Moscow’s options considerably causing financial strain, cutting the country from key markets and significantly degrading Russia’s industrial and technological capacity. To stop the war, we need to stay the course.

Our restrictive measures, to use the technically correct term, are unprecedented in their scope, focusing on key sectors of the Russian economy that are crucial to Moscow’s war effort. In addition, the EU has also imposed travel bans and asset freezes on more than 1,500 individuals and almost 250 entities.
Hard tangible effects across Russia’s economy
These measures are producing hard, tangible effects across Russia’s economy, despite the huge oil and gas revenues Russia used as a buffer in the first year of the invasion. And their effects will intensify over time, as the measures have a long-term impact on Russia’s budget, and its industrial and technological base.

The Russian economy contracted in 2022 by 2.1%. Manufacturing in particular – growing steadily before the invasion – was down 6% at the end of 2022, with high and medium-high technology manufacturing recording a 13% annual loss. The production of motor vehicles was down 48% year-on-year, other transport equipment by 13% and computer, electronic and optical production by 8% while retail trade was 10% lower and wholesale trade 17%.
The outlook for 2023 remains bleak
And the outlook for 2023 remains bleak. According to the latest OECD report, Russia’s GDP is foreseen to shrink by up to 2.5%. All the components of Russian private demand, including private investment and consumption, remain depressed. Only public expenditure related to the war effort, i.e. defence spending, is up.
Russian carriers are no longer able to fly to, from and over EU territory. Most modern aircraft operated by Russian carriers are dependent on European and American spare parts and technical assistance, which have been banned. The ban on new investment across the energy sector and export restrictions on technology and services for the energy industry have undermined the viability of Russian companies. The credit rating agency Moody’s has already downgraded 95 Russian firms (including most energy companies).

Source: European Commission
Compared to 2021, 58% of total EU imports from Russia were already cut off in 2022 – an unprecedented decoupling. Non-energy imports from Russia have fallen close to 60%, with the most visible drops for iron and steel, precious metals and wood. This movement is accelerating: the decline in imports of non-energy goods is above 75% for the first quarter of 2023, and the fall is even greater for energy goods, at minus 80%.

Source: European Commission
Since 10 August 2022, EU imports of Russian coal have stopped completely affecting around one fourth of all Russian coal exports. The G7+ energy sanctions on oil have proven effective. The price of Russian oil has fallen since the start of the EU embargo and G7+ oil price caps. The International Energy Agency (IEA) reports an average Russian crude oil export price at around $ 60/barrel in April 2023, a $ 24/barrel discount compared to the global oil price. The IEA also estimates that total Russian oil revenues are down 27% from a year before. At the same time, as was intended by the G7+ countries, despite falling exports to the EU, the overall volume of Russian global oil exports held up relatively well, helping to keep global markets stable. On gas, Russia’s own decision to cut flows and the EU’s strong diversification efforts resulted in a dramatic fall in volumes. Despite this, we have managed to get sufficient gas stocks ahead of next winter.

Source: European Commission
On the export side, restrictive measures to date cover around 54% of 2021 EU exports, targeting key capital and intermediate goods where Russia has a high dependency on supplies from the EU, United Kingdom, United States and Japan. Overall EU exports of goods were 52% below the annual average before the war in 2022.

Source: European Commission
EU exports on dual-use items and advanced technologies, which are essential to produce the equipment and weapons used by Russia to wage its war, dropped by 78% in 2022 compared to 2019-2021. EU trade restrictions so far exclude products, other than luxury goods, primarily intended for private consumption like pharmaceuticals, food, medical devices and some specific agricultural machinery. However, even in many areas that are not under sanctions, many EU companies have stopped trading with Russia and EU exports in non-sanctioned sectors are down by over 10% on average.
Russia’s war of aggression is the root cause of the global food insecurity
At the same time, the EU is also ensuring that its sanctions do not unduly affect trade in sectors, such as food and energy security, for third countries around the globe, in particular the least developed ones. Specific exemptions and guidance have been established to that effect. Russia’s war of aggression is the root cause of the global supply shock in the areas of food and related items by invading Ukraine, one of the main breadbasket of the world. The fact that Russia decided to exit the Black Sea Grain Initiative last July, attacking since then massively silos and Ukrainian ports, risks to aggravate again the global food security situation in coming months. The EU will continue to counter Russia’s false narrative on these issues and work closely with partners that are negatively affected by Russia’s actions to mitigate these effects.
Russia had an important budgetary surplus for the first half of 2022 due to high oil and gas prices but it has been erased in subsequent months, with the federal budget ending in a deficit in 2022. The fiscal situation is expected to worsen. January-April figures for 2023 showed Russia’s oil and gas federal budget revenues, representing 45 % of Russia’s budget in 2022, dropping 52%. The government is trying to address the revenue slump by extracting high dividends from state-owned enterprises and levying additional taxes on large businesses but these have their own costs and are unlikely to plug the growing fiscal deficit.
While the Russian government still has fiscal space with a public debt that stood at 17% of GDP at the end of 2021 and accumulated assets in the National Wealth Fund (NWF) that remain sizeable (as of April 2023, $ 154 billion, or 7.9% of GDP), it squeezed productive and social spending. In 2023, nearly a third of the federal budget is expected to be spent on defence and domestic security while funding for schools, hospitals and roads is slashed further.
In 2023, the current account surplus has decreased dramatically as import volumes recovered due to the increase in more costly substitution imports. At the same time, sanctions on Russian exports and the G7 price caps effectively reduced the income from Russia’s main exports. Russia has turned increasingly to the yuan as a means of transaction and a store of value – a currency with non-transparent capital controls. This in turn has increased the costs of doing financial transactions between Russia and the outside world.

Benefitting from measures like banning non-residents from transacting in the financial markets and a record current account surplus due to high commodity prices, the rouble appreciated against the euro following the start of the war. The exchange rate thus very much reflected the decoupling of the Russian economy from the global one. With the degradation of the current account, the rouble depreciated again in the second half of 2022 and has further weakened massively in 2023. It is now at its weakest for many years, trading at lower levels than during the pandemic. To try to halt this fall, the Russian Central Bank had to raise sharply interest rates from 7.5% in July to 12% on 15 August. This high interest rate will put an even greater brake on economic activity in Russia in coming months.
Large parts of the reserves of the Central Bank of Russia have been immobilised in the EU and other countries (of the € 300 billion assets immobilised, € 207 billion are in the EU). The EU, together with partners, is working to find ways to use revenues of the immobilised assets of the Russian central bank to support Ukraine’s reconstruction and for the purposes of reparation, while ensuring this is done in accordance with EU and international law.
Russia is trying to counter EU measures
Meanwhile, Russia is trying to counter EU measures. It is turning to non-sanctioning countries in search of technology and intermediate products. Russia’s overall imports fell post-invasion by around 18% from April to November 2022 compared to the same period of 2021. After this slump, Russia’s imports from China increased by 27%, in particular for machinery, electrical equipment and cars. Russia has also been introducing measures that have made it more difficult and costly for foreign companies to leave the Russian market.
While it is questionable if others can fully fill the space left by sanctioned EU goods, it underlines the need to act more firmly against the circumvention of EU sanctions. To this end, we are stepping up our engagement with key third countries, urging them to closely monitor and act against trade in EU sanctioned goods, particularly those found on the battlefield in Ukraine. In this regard, the EU Special Envoy David O’Sullivan will play an important role.
Within a year, sanctions have already limited Moscow’s political and economic options, causing financial strain, cutting the country from key markets, increasing the costs of trading and significantly degrading Russia’s industrial capacity. Looking at Russia’s long-term growth prospects, the technological degradation and the exit of foreign companies will hamper investment and productivity growth for years. The labour market situation was not favourable before the invasion due to Russia’s demographics. Mass conscription has worsened it further and the growing lack of opportunities exacerbates the brain drain from Russia. In short: Russia’s decision to attack Ukraine has obviously pushed the Russian economy towards isolation and decline.
Compliments of the European Commission.
The post EU Commission | Yes, The Sanctions Against Russia Are Working first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Investment Bank (EIB) has published the results of a survey on the investment levels in CEE companies — “Business Model Update: Are CEE Companies Investing Enough?”. The analysis was published as part of the Warsaw School of Economics (SGH) Report, which is to be presented at the Economic Forum in Karpacz (5 to 7 September 2023). The findings show that investment activity is recovering after the crises caused by the coronavirus pandemic and the war in Ukraine. Companies are trying to break away from the old capital-intensive growth model and are looking for new opportunities in this regard, especially those related to the use of modern technologies and innovation. The level of investment in enterprises in the CEE region (77%) is close to the average in the European Union (80%) and the United States (81%).
EIB Vice-President Teresa Czerwińska remarked, “Investment by CEE enterprises in product and service innovation is higher than the EU average. This is a positive trend that will accelerate the development of the region, create new jobs, and certainly increase the region’s competitiveness on the international market.”
“Enterprises in the CEE region, after the crises caused by the coronavirus pandemic and the war in Ukraine, are returning to the path of growth. The vast majority of investments involve the replacement or expansion of production capacity, which will allow enterprises to become more efficient and more environmentally friendly in future,” said EIB Chief Economist Debora Revoltella.
The main investment aim of companies located in the CEE region remains capacity replacement — the same as the EU average (46% of companies in CEE countries and in the European Union). This is followed by capacity expansion (25% of companies in CEE) and innovation (17%). Manufacturing companies (20%) and large organisations (18%) invest relatively more in innovation. Companies from Poland (22%), Slovenia (19%) and the Czech Republic (17%) allocate the greatest share of funds to innovation, investing in the development of new products or services.
Allocation of investment in the last financial year by country (%)

Question: What proportion of your total investment was spent on: (a) replacing production capacity (including existing buildings, machinery, equipment, and IT); (b) expanding production capacity for existing products/services; (c) developing or introducing new products, processes and services? Basis: all companies that made investments during the last financial year (excluding “don’t know” responses and companies that declined to answer).
In contrast to EU and US companies, those operating in the CEE region allocated a bigger share of their investment to machinery and equipment (53% vs. 49% in the EU and 47% in the US), and a smaller share to intangible assets (24% vs. 37% in the EU and 33% in the US). The share of companies intending to focus primarily on product and service innovation in CEE (27%) exceeded the result recorded in the EU (24%) and the US (21%) in this regard. Innovation is an especially important investment priority for manufacturing firms and large companies.
In particular, machinery and equipment dominated the investment expenditure of manufacturing (60% of investment expenditure) and construction companies (59%), while service companies invested relatively more in digital technologies (18%). The share of investment in intangible assets was highest in Latvia, Slovakia, Slovenia and the Czech Republic.
Investment areas by country (%)

Question: In the last financial year, how much did your company invest in each of the following areas with the intention of maintaining or increasing future profits? Basis: all companies that made investments during the last financial year (excluding “don’t know” responses and companies that declined to answer).
The most frequently cited long-term barriers to investment in the CEE region are uncertainty about the future (87%), energy costs (87%) and availability of skilled workers (82%). The average results for the European Union are similar.
Impact of climate change on investment
Companies in the region are concerned about the cost of taking zero-carbon measures, which for businesses means modernising production methods. Due to the high proportion of fossil fuels in energy production in CEE countries, and to energy-intensive production methods, enterprises in the region are particularly exposed to this risk. As a result, the share of CEE companies that see the transition to more demanding climate standards and regulations as a threat is higher than the percentage of those that see this process as an opportunity (36% and 18%, respectively). These figures contrast with the overall situation in the European Union, where the shares are almost the same (threat: 32%; opportunity: 29%). Compared to small and medium-sized enterprises, many more large enterprises view the transition to zero-carbon as an opportunity (14% vs. 22%).
CEE companies are taking steps to adopt a more environmentally friendly business model. Nearly 90% of companies in the region are aiming to reduce greenhouse gas emissions, which is in line with the EU average. The main projects undertaken in this regard in CEE countries are waste reduction and processing (67%) and investments in energy efficiency (55%), which have proven very profitable in recent years. Compared to the EU average, CEE enterprises invested less frequently in sustainable transport (43% vs. 32%). Across the region, companies in Romania (93%) and Poland (90%) were most likely to undertake such projects, while companies in Bulgaria were less likely (70%).
The percentage of CEE companies investing in energy efficiency (nearly 40%) is close to the EU average, despite the fact that the region favours a more energy-intensive business model. Companies in the manufacturing sector (48%) and large organisations (50%) were most likely to undertake such investments.
Investment financing
Own funds (70%) accounted for the largest share of financing among CEE companies in 2022, followed by external sources (25%), with group financing accounting for an average of 4% of overall corporate investment in CEE countries. The percentage of companies using external financing is highest in Romania (32%) and lowest in the Czech Republic (18%).
Three-quarters (75%) of the companies that say they use external financing obtained bank loans in the last financial year, of which 21% obtained a loan on preferential terms. There are significant differences in this regard between countries in the region: Preferential bank loans are most common in Hungary (39%), the Czech Republic (36%) and Romania (36%), and least common in Latvia (5%), Poland (7%) and Estonia (8%).
The proportion of companies experiencing financial difficulties in obtaining external financing is higher in CEE countries (9.2%) than the EU average (6.2%). The main problem reported by companies in the region was the rejection of loan applications (5.8%).
General Information
About the EIB Group Investment Survey
The EIB Group Investment Survey is the EIB’s annual flagship report. It is designed to serve as a monitoring tool that provides a comprehensive overview of the changes and factors driving investment and its financing within the European Union. The report combines the EIB’s internal analysis with the results of collaboration with leading experts in order to explain key market trends and provide a more in-depth look at specific topics. The 2022–2023 survey reflects the EU economy’s resilience to repeated shocks and its capacity for renewal, delivering on the promise of productive public and private investment. Featuring the results of the EIB’s annual investment survey, the report presents the responses of around 12 500 companies across Europe to a wide range of questions about corporate investment and investment financing; it also includes a survey of EU municipalities.
The EIB Group is the long-term lending institution of the European Union, owned by its Member States. It consists of the European Investment Bank and the European Investment Fund. The EIB Group provides financial support for investments that contribute to EU policy goals, such as social and territorial cohesion and a just transition towards climate neutrality.
The EIB is the first multilateral development bank to move away from financing projects connected with fossil fuels, and has pledged to support €1 trillion in climate investment over the course of this decade. More than half of the loans granted by the EIB Group in 2022 were for climate and environmentally sustainable development projects. At the same time, almost half of the projects financed by the EIB within the European Union were located in cohesion regions (i.e. regions with lower per capita incomes), underlining the Bank’s commitment to equitable growth.
Compliments of the EIB – a Platinum Member of the EACCNY.

The post EIB | How Central and Eastern European companies are investing — findings from the EIB Group Investment Survey first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Growing trade restrictions may reverse economic integration and undermine the cooperation needed to protect against new shocks and address global challenges.
In a shock-prone world, economies must be more resilient—individually and collectively. Cooperation is critical, but greater protectionism could lead to fragmentation, and even split nations into rival blocs just as fresh shocks expose the global economy’s fragility.
While estimates of the cost of fragmentation vary, greater international trade restrictions could reduce global economic output by as much as 7 percent over the long term, or about $7.4 trillion in today’s dollars. That’s equivalent to the combined size of the French and German economies, and three times sub-Saharan Africa’s annual output.
More deliberate global cooperation clearly is needed. International institutions can play a vital role, bringing countries together to help solve global challenges, as IMF Managing Director Kristalina Georgieva writes a new essay for Foreign Affairs.
There are signs cooperation is faltering. As the Chart of the Week shows, new trade barriers introduced annually have nearly tripled since 2019 to almost 3,000 last year.

Other forms of fragmentation—like technological decoupling, disrupted capital flows, and migration restrictions—will also raise costs. In addition, global flows of goods and capital have leveled off since the global financial crisis. IMF research shows geopolitical alignments increasingly influence both foreign direct investment and portfolio flows.
The IMF continues to underscore that the international community, supported by global institutions such as ours, should pursue targeted progress where common ground exists and maintain collaboration in areas where inaction would be devastating.
“Policymakers need to focus on the issues that matter most not only to the wealth of nations but also to the economic well-being of ordinary people,” Georgieva wrote in Foreign Affairs. “They must nurture the bonds of trust among countries wherever possible so they can quickly step up cooperation when the next major shock comes.”
Compliments of the IMF.The post IMF | The High Cost of Global Economic Fragmentation first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.