Keynote address of Kristalina Georgieva, Managing Director at Singapore Fintech Festival |  President Tharman, excellencies, distinguished guests: good morning! It’s a pleasure to be in Singapore again. And it’s an honor to join you this morning at this impressive forum to take stock of how far we’ve come and set the course for the future.
There is no better place to look into this future than Singapore — a place where fintech flourishes and where this festival brings the unlimited energy of fintech enthusiasts.
FinTech innovation has already been transformative — and will continue to be so — changing the world of finance and making it much more accessible to hundreds of millions of businesses and people who used to be cut off from it.
I am proud the IMF is part of this great community and that I am with you today. I come in the footsteps of my predecessor, Christine Lagarde, who five years ago gave a speech here encouraging policymakers to follow the “winds of change,” and embark on a digital money voyage by exploring the use of central bank digital currencies, or CBDCs, and fintech.
Five years on, I’m here to provide an update on that voyage. I have four main messages. First, countries did set sail. Many are investigating CBDCs and are developing regulation to guide digital money developments. Second, we have not yet reached land. There is so much more space for innovation and so much uncertainty over use-cases. Third, this is not the time to turn back. The public sector should keep preparing to deploy CBDCs and related payment platforms in the future. Fourth, these platforms should be designed from the start to facilitate cross-border payments, including with CBDCs.
We’ve left port and are now on the high seas. This calls for courage and determination. We can learn from you: entrepreneurs, business leaders, and investors. You are sailors in the world of fintech. Every day you brave the open waters. Waves and winds are your inspiration. 
If anything, we need to raise another sail to pick up speed. The world is changing faster than most imagined. Just take artificial intelligence – a key theme of this festival. Look at the number of months before various applications reached 100 million users. The average is 3 years. It took ChatGPT 2 months!
The CBDC voyage
Adoption of CBDCs is nowhere close. But about 60 percent of countries are exploring them in some form today. CBDCs can replace cash which is costly to distribute in island economies. They can offer resilience in more advanced economies. And they can improve financial inclusion where few hold bank accounts.
In some countries the case seems dim today, but even they should remain open to potentially deploy CBDCs tomorrow. Why?
First, the benefits of CBDCs will stem from what happens in the payments environment. How many other countries will adopt CBDCs? To what extent will cash become obsolete? And will private forms of money proliferate?
Libra was a wake-up call that turned out to be a false alarm. But others, more compliant, will come knocking. In that case, CBDCs would offer a safe and low-cost alternative. They would also offer a bridge to go between private monies and a yardstick to measure their value, just like cash today which we can withdraw from our banks.
Second, the success of CBDCs will rely on policy decisions and how the private sector responds. The actions of many of you here today will matter!
Country authorities wishing to introduce CBDCs may need to think a little more like entrepreneurs. Communication strategies, and incentives for distribution, integration, and adoption, are as important as design considerations.
Will you, fintech leaders and developers, spend the resources onboarding merchants so they accept CBDCs? Will you make it easy for CBDCs to be integrated into financial services and messaging apps so people can pay each other from any environment? It depends on your return, that’s only fair.
Third, the benefits of CBDCs will depend on how technologies evolve.
AI, for instance, could amplify some of the benefits of CBDCs. It could improve financial inclusion by providing rapid, accurate credit scoring based on various data. It could provide personalized support to people with low financial literacy. To be sure, we need to protect personal privacy and data security, and avoid embedded biases so we don’t perpetuate inequality but aim to reduce it. Managed prudently, AI could help.
Another important potential transformation resulting from the work of many of you is the tokenization of financial assets, such as bonds issued on blockchains. This opens another door to CBDC, potentially in wholesale form, to pay for those assets.
So countries should continue exploring CBDCs.
In that spirit, I am delighted to announce the launch of a CBDC Handbook available on the IMF website starting today. The Handbook is intended to collect and share knowledge on CBDCs for policymakers around the world—to help them to sail ahead.
The cross-border payments voyage
To the extent CBDCs are deployed, they must be built to facilitate cross-border payments, which are at present expensive, slow, and available to few. Again, we must start this work today so we don’t have to backpedal tomorrow.
Efficient cross-border payments allow for capital to get more quickly to where it is needed. Small businesses can grow beyond borders, and households can receive needed funds from abroad. While we see encouraging declines in the cost of remittances, they remain above Sustainable Development Goal targets. We must ensure that countries do not get stuck on the wrong side of the digital divide.
We know what to do to make cross-border payments more efficient in the short term: improve what we already have. This is the spirit of the G20 Roadmap to enhance cross-border payments. In fact, I’m happy to announce that the IMF and World Bank will soon publish a common plan to provide capacity development to countries in just this area.
But in the medium term, new cross-border platforms may help. Think of these as next-generation virtual town-squares where central banks, commercial banks, and potentially even households and firms, can gather to exchange CBDCs in wholesale or retail form. Such platforms can even be built to interface with traditional forms of money and manage risks from payments.
These platforms are being actively explored by a range of players.
Banks and fintech companies are at the forefront. They are building infrastructure to pay each other, and to exchange financial assets on common blockchain networks.
The public sector is also pushing the frontier, including with the help of the BIS Innovation Hub. The Monetary Authority of Singapore is particularly active. Its project Guardian explores platforms to exchange digital money and assets. IMF staff will participate in project Guardian as observers to advise on the implications for the international monetary system. Thank you, Ravi Menon, for including us!
As you all know, there are many ships sailing these waters. And that is very good.
But we may be at a point where the public sector needs to offer a little more guidance. Not to crowd out, not to disrupt. But to act as a catalyst, to ensure safety and efficiency—and to counter fragmentation.
What we need in this voyage is a compass.
One way to provide a compass is to establish the desirable properties of cross-border platforms from a policy standpoint. For instance, platforms must allow countries to manage capital flows and retain control over their money supply. Equally important, we need common rules of the game on fighting money laundering and terrorist financing, and on data protection for instance.
AI could help here as well. AI solutions known as RegTech could reduce costs of compliance. It would be like using priority lanes in airports, skipping over the long queues at security.
Again, like CBDCs, we don’t need to decide today whether cross-border platforms are desirable. It’s about keeping the option open, building capacity, and setting the design contours to support the integration and stability of the international monetary system. If not, we may actually end up fragmenting it.
No one institution can provide such guidance. We will have to collaborate tightly across international institutions, central banks, and ministries of finance. The IMF can and will play its part.
Conclusion
Let me conclude with the following: We will be in the high seas for some time. But the potential payoff is clear—a more inclusive international financial system that meets our future needs.
So let us not disembark at the first island. Nor turn back. There is value in the voyage itself.
As Marcel Proust once said, “The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.”
That speaks to the strength of the Singapore Fintech Festival, and of all of you gathered here – the strength of many eyes. The power to bring fresh perspectives to problems and challenges old and new. I look forward to continuing this voyage with all of you. Let us sail together.
 
Compliments of the IMF.The post IMF | Central Banks Should Continue Digital Currency Development first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The ECB Blog looked at how communication has become a key factor for the transmission of a central bank’s policies in a recent post.[1] Central banks exercise a profound influence on what occurs in the economy through what they say. While banks and financial institutions hang on to their every word as decisions affect financing conditions and the economy, the wider public – which is certainly not less affected by monetary policy decisions – follows the communication of central banks indirectly, if at all.
This is where the news media comes into play. Journalists select and condense information about the activities of central banks for the public. Media coverage thus plays a key role in influencing what the public thinks about monetary policy, and even whether it thinks about it at all.[2]
The ECB regularly offers one occasion during which journalists can address questions directly: the press conference. Eight times a year – immediately after the policy meetings of the Governing Council – the ECB President and the Vice-President are available to answer questions from the media. The Q&A part of the press conference last usually 30 to 45 minutes, during which around 10 journalists get the chance to ask questions. Once they get the floor, the selected journalists are free to ask what they consider appropriate and most interesting.
The press conference is a key communication event: it is closely followed by newspapers, TV and news wires, and it is the basis upon which other media form their own comments and coverage. In this post (and in the ECB Working Paper on which it is based) we take a closer look at who is asking, what kinds of topics they are raising, and we investigate geographic patterns.
Let’s begin with who asks the questions.
Look who’s asking
Chart 1 summarises where questions came from across a ten-year period between May 2012 and July 2022. All in all, President Christine Lagarde and her predecessor Mario Draghi answered a total of 2,166 questions posed by 266 journalists representing 124 media outlets.
The lion’s share of these more than 2,000 questions was posed by international media specialising in economic coverage like the Financial Times, Bloomberg, CNBC, Reuters and The Wall Street Journal. Within the European Union, northern and southern EU outlets asked roughly equal shares of questions (25% and 20%, respectively), while enquiries from eastern EU media accounted for only 1% of the total. While the question of why enquiries come from where they do is an interesting one, here we will focus on the distribution as it actually is.

Chart 1
Number of questions asked by region and audience type

y-axis: number of questions, on top of the bars: percentage over the total

Sources: Angino, S., and Robitu, R., (2023), “One question at a time! A text mining analysis of the ECB Q&A session“, Working Paper Series, No 2852, ECB

It is not all about monetary policy
We used structural topic modelling (STM) to group the questions into topics. STM is a well-known technique in text analysis. It is based on the idea that each text – in our case each question – is a mixture of different topics, with each topic being a distribution of words. It is then up to the researcher to assign a name to these clusters of words.
We identified nine recurring topics among the journalists’ questions, not all of which are about monetary policy. The topics that do relate to the core of the ECB’s work include “Conventional monetary policy”, “Purchase programmes”, “Inflation and economic outlook” and “Deflation and Zero Lower Bound (ZLB)”. Another frequent topic revolves around the “Banking System”, related to keywords such as the state of the banking union, European banking supervision, and even more specific issues: for instance, non-performing loans, and even the situation of individual banks.
Some questions concern past and potential future crises threatening the existence of the monetary union, and the reversibility of the euro. They are captured by the topic “Sovereign debt crisis and European Monetary Union (EMU)”, which was unsurprisingly very prominent between 2012 and 2015.
“National affairs” captures questions on the economic, financial, and political affairs of Member States. This topic comprises structural reforms and fiscal policy, as well as issues on which the ECB cannot comment, such as national elections or referenda.
We also found two topics connected to the internal processes of the ECB. The first is “Governance”, which is mainly connected to the Governing Council deliberations, including the unanimity, or lack thereof, in their decisions. Other issues captured by this topic are legal ones, for instance the rulings of the German Federal Constitutional court on various ECB programmes (like in 2013 or in 2020). The second operational topic is “Communications”. This topic includes references to forward guidance,a monetary policy tool used to provide information about their future monetary policy intentions, but also comprises words like “announcement”, “signal” and “minutes”. This, in our view, adds to the evidence of the increasing interest in central bank communications.
The next question is: do journalists from different parts of the euro area and the world ask about the same topics? And do questions from outlets catering for general audiences differ from those for expert audiences?
Paese che vai, usanza che trovi[3]

The topics journalists inquire about differ depending on the geographical sphere of their outlet and on the type of audience they report for.

After having identified the nine topics in the questions, we move onto the differences across media types. We consider five outlet groups: “Northern EU – general audience”, “Northern EU – specialised audience”, “Southern EU – general audience”, “Southern EU – specialised audience”, and “International”. Virtually all outlets in the international group specialise in economics and finance so there is no need to differentiate audiences.
What do we find? First, international media tend to focus on technical topics related to monetary policy more than national outlets. In Chart 2, these are the topics like “Purchase programmes”, “Conventional monetary policy”, and “Deflation and ZLB” – more pertinent for expert audiences than the wider public.

Chart 2
Estimated topic proportions by region and audience

Percentage

Sources: Angino and Robitu (2023).

At the same time, international outlets ask very little about national affairs. The share of their questions that these outlets devote to the topic is 8 percentage points smaller than the equivalent share for national media targeting the wider public, in both the Northern and Southern EU groups. This finding suggests that general audiences are more interested in national affairs than in abstract and technical areas of the ECB’s activities like unconventional monetary policy.
The sovereign debt crisis (yellow in the chart) also features more in the questions of general audience outlets. This topic is especially prominent in Southern EU outlets.
The “Banking System” topic (dark green in the chart) is also very salient in the South. In fact, outlets in that region devote a share of their questions to this topic that is between 8 and 14 percentage points larger than that devoted by outlets elsewhere. This appetite for banking supervision topics squares with evidence from other research on the matter.[4] Why might this be? While this is beyond the scope of our analysis, the banking crises of recent decades and the subsequent reforms in Europe’s south may be an important clue.
Coverage of the “Governance” and “Communications” topics, meanwhile, does not change much across different media spheres.
What about differences between general and specialised audience outlets? They are especially important in the Southern EU group. Specialised outlets in the South tend to be quite similar to international outlets. In the Northern EU group, however, the most sizeable difference is in the “Inflation and economic outlook” topic (light blue). The share of their questions that specialised outlets devote to this topic is 8 percentage points larger than the share devoted to it by general outlets.
So what?
When they have the chance, journalists don’t just ask the ECB about its monetary policy. They often stray into topics well beyond what is usually considered the main role of a central bank. What exactly they focus on depends on their geographical scope and the type of audience they cater to.
Outlets targeting the wider public want to focus on more domestic, political and vivid issues that attract the public’s interest. So the ECB faces a trade-off. By granting questions to these outlets, it can broaden the discussion and speak on topics close to citizens’ hearts. The risk, on the other hand, is being confronted with sensitive issues lying beyond the scope of its mandate.
 
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
 
Footnotes:

For further info see also Blinder, A., et al. (2008), “Central bank communication and monetary policy: A survey of theory and evidence“, Working Paper Series, No 898, ECB or Assenmacher, K., et al. (2021), “Clear, consistent and engaging: ECB monetary policy communication in a changing world“, Occasional Paper Series, No 274, ECB.
According to the latest Knowledge and Attitudes survey, whose fieldwork took place in Autumn 2022, 75% of respondents in the euro area have heard about the ECB on television, 45% via printed press, 40% via online press, 37% on radio, and 29% via at least one social media platform.
Italian proverb referring to how different countries have different customs, broadly equivalent to “when in Rome, do as the Romans do”.
See for instance, ECB communication with the wider public.

 
Compliments of the ECB.The post ECB | A European view on central banking and the economy first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Although geopolitical risks and their effects on global production and trade are much debated, little empirical evidence has emerged of increased fragmentation in global value chains. Disruption caused by the coronavirus (COVID-19) pandemic, the Russian war against Ukraine and increased geopolitical tensions across the board raise questions about whether we are witnessing a trend towards deglobalisation. Most analysis to date does not find evidence of significant changes in aggregate European trade patterns. Nonetheless, the ways that firms are adjusting their trading relations and supply chain management may take time to unfold, given the challenges and costs involved in modifying business models, supply chains and contracts.[1] Survey evidence is therefore helpful to identify new trends. To this end, the European Bank for Reconstruction and Development (EBRD), the Banca d’Italia, the Deutsche Bundesbank and others have recently conducted surveys asking firms about supply chain risks.[2]
This box summarises the findings from a recent ECB survey of leading firms operating in the euro area, focusing on their production-location and input-sourcing decisions, particularly in response to supply chain risks.[3] The firms surveyed are mostly multinationals with significant operations in the EU, while most also have a large share of their activity outside the EU. Table A at the end of this box summarises the sample in terms of extra-EU activity. The questionnaire had three parts, covering questions related to (i) trends in the location of production/operations and their main drivers; (ii) trends in input sourcing, dependency and supply chain risks; and (iii) the implications of these trends for activity, employment and prices.
These large firms expect to become more active in (re)locating operations over the next five years to make their businesses more resilient (Chart A). Companies were asked how the location of their production/operations had changed over the last five years and how they expected it to evolve over the next five years. The replies indicate higher shares of firms expecting to (re)locate more production both into and out of the EU in the next five years than in the previous five years.[4] But there is still a higher proportion of companies expecting to move production out of the EU than into the EU. A higher share of firms also said that they expected a tendency to (i) relocate more production geographically closer to the final production site or country of sales (“near-shoring”), (ii) diversify operations to a greater extent across countries, and/or (iii) (re)locate more production within/into countries politically closer to the main country of sales (“friend-shoring”) in the next five years than in the last five years.[5] The near-shoring of production (or producing “local for local”) was already a fairly common trend which is now expected to intensify.[6] The friend-shoring of production, by contrast, had not been so evident in the past but was expected to become much more commonplace – 42% of firms envisage pursuing such a strategy, up from just 11% in the previous five years. Looking at the findings in detail, it is primarily the firms that were already near-shoring or expecting to near-shore that now also anticipate diversifying and friend-shoring some of their operations. Furthermore, these actions are broadly equally associated with firms saying they envisage moving more production into and those saying they envisage moving more production out of the EU.

Chart A
Past and future trends in location of production/operations

(percentages of responses)

Source: ECB.
Notes: Responses to the question “How has the location of your company’s production/operations changed in the last five years and how do you expect it to evolve in the next five years?” Respondents could choose one or more of the following replies: Tendency to (i) move more production/operations into the EU, (ii) move more production/operations out of the EU, (iii) (re)locate more production/operations geographically closer to the final production location or country of sales (“near-shoring”), (iv) diversify production/operations to a greater extent across countries, (v) (re)locate more production/operations to countries politically closer to the main country of sales (“friend-shoring”). The category “Neither into nor out of the EU” captures the responses of firms which did not signal a tendency to move production either into or out of the EU.

Geopolitical risk was the most frequently cited factor behind decisions to (re)locate production into the EU, while demand and cost factors motivate moves out of the EU (Chart B). Firms were given a list of factors and asked which of these were important for them in relation to recent or planned future moves of production/operations into or out of the EU. Almost half cited geopolitical risk/uncertainty as an important factor relating to recent or planned future moves into the EU. This highlights a shift in firms’ priorities from simply focusing on cutting costs or improving efficiency to also factoring resilience into their decisions. The next most important factor for moving into the EU was climate change (transition to net zero). Regulation, financial incentives and local content requirements were, broadly speaking, equally likely to be factors relevant for moves into or out of the EU. At the same time, labour (cost/shortages/skills), energy costs and the changing geographical distribution of sales were the main factors for moving production out of the EU.

Chart B
Importance of factors for moving production/operations into or out of the EU

(percentages of responses)

Source: ECB.
Notes: Responses to the question “Which of the following factors do you consider particularly important in relation to recent or planned future moves of production/operations into or out of the EU?” Respondents could choose any of the above replies that applied to their company. Responses are ranked according to the net score (“into the EU” less “out of the EU”).

As regards input sourcing, firms expect to increasingly near-shore, diversify and/or friend-shore their supply chains in the next five years, with some increase in the share of sourcing from inside the EU (Chart C). Companies were asked how the geographical distribution of their cross-border sourcing of inputs had changed in the last five years and how they expected it to evolve in the next five years. The replies indicate that a higher share of firms expect to increasingly source inputs from inside the EU in the next five years than in the last five years, while there was no increase in the share of companies saying they expected to source more inputs from outside the EU.[7] A higher share of firms said they expected to increasingly source inputs (i) geographically closer to the country of production (“near-shoring”), (ii) from a more diverse range of suppliers in different countries, and/or (iii) from countries politically closer to the country of sales (“friend-shoring”) in the next five years than they had in the last five years (up from 55% to 80%). Diversifying and near-shoring the sourcing of inputs were already fairly common and were expected to become more so in the coming years. By contrast, the friend-shoring of input sourcing had, as was the case with the location of production, not been typical in the past but was expected to become much more so (with 42% of responding firms expecting to pursue such a strategy compared with just 9% having done so in the past). The increase in the share of firms expecting to pursue any or all of these strategies was negligible among firms who also said they envisaged sourcing more inputs from outside the EU, but it was significant for firms who also said they expected to source more inputs from inside the EU. Accordingly, an expected increase in the near-shoring, diversification and/or friend-shoring of input sourcing appears to be tilting these firms, on average, towards greater use of EU suppliers.

Chart C
Past and future trends in input sourcing

(percentages of responses)

Source: ECB.
Notes: Responses to the question “How has the geographical distribution of your company’s cross-border sourcing of inputs changed in the last five years and how do you expect it to evolve in the next five years?” Respondents could choose one or more of the following replies: Tendency to increasingly source inputs (i) from inside the EU, (ii) from outside the EU, (iii) geographically closer to the country of production (“near-shoring”), (iv) from a more diverse range of suppliers in different countries, and (v) from countries politically closer to the country of sales (“friend-shoring”). The category “Neither into nor out of the EU” captures the responses of firms which did not signal a tendency to source a higher share of inputs from within or outside the EU.

China was the dominant source of critical inputs and also the country most frequently mentioned in terms of perceived risks, either to the company’s own supply chain or that of its sector (Chart D). In total, 55% of respondents said that their company sourced critical inputs (fully or heavily) from a specific country or countries.[8] Of these, almost all (52% of all respondents) said that the supply of critical inputs from at least one of those countries was subject to elevated risk.[9] In turn, a large majority of these identified China as that country (or one of those countries), with all of them considering this an elevated risk. Coming a distant second, only 8% of respondents said that their company sourced critical inputs from the United States, and only 5% flagged this as a particular risk. As to those countries which posed – or could pose – a risk to supply chains in their sector more generally, two-thirds of all respondents cited China, while the United States, Taiwan, India, Turkey and Russia were also each cited by more than 10% of respondents.

Chart D
Supply chain dependency and risks, by country

(percentages of responses)

Source: ECB.
Notes: Responses to the questions (i) “Does your company presently source critical inputs which depend (fully or heavily) on supply from a specific country; and if so, which one(s)?”, (ii) “Do you consider the supply of critical inputs from this country or any of these countries to be subject to elevated risk?”, and (iii) “More generally, which countries (if any) pose – or could pose – risks to supply chains in your sector?” Countries mentioned by three or more respondents are included in the chart. Many more countries were mentioned by just one or two respondents.

Most firms said that it would be very hard for them to substitute critical inputs originating from countries deemed to be an elevated risk. Among the respondents who said that their company sourced critical inputs (heavily or fully) from a specific country they considered an elevated risk, almost two-thirds said that if those critical inputs were suddenly no longer available, replacing them with inputs originating from elsewhere would be “very hard”, while nearly a third said it would be “hard” (Chart E, panel a). In this context, two-thirds said that their company mainly sourced these critical inputs directly from firms located in the country concerned, and one-sixth said that they mainly sourced them directly from their own facilities in the country concerned, with the remainder sourcing them mainly via distributors.
Most companies were, however, implementing strategies to reduce their exposure to the country or countries concerned (Chart E, panel b). Among the same respondents who said that their company sourced critical inputs (heavily or fully) from a specific country they considered an elevated risk, only three said that they had neither adopted, nor intended to adopt, a strategy to reduce their exposure. Almost 40% said that they were pursuing a strategy to mostly source the same inputs from other countries outside the EU, 20% that they were pursuing a strategy to mostly source the same inputs from other countries inside the EU, while 15% said that they were pursuing other strategies, such as holding more inventory, diversifying their input sources, monitoring risk more closely, changing the composition of their product(s) or closing down some production capacity. Just under 20% had not yet adopted a strategy but were considering doing so in the near future.

Chart E
Ease of substitution of inputs and strategies to reduce country exposure

(percentages of responses)

Source: ECB.
Notes: Responses to the questions (i) “In case these inputs were suddenly no longer available, how easy would it be to substitute them with inputs originating elsewhere?” and (ii) “Is your firm implementing or is it planning to implement a strategy to reduce exposure to the country – or countries – concerned?” The percentages of responses refer only to those who said that their company presently sourced critical inputs which depended (fully or heavily) on supply from a specific country and that they considered to be subject to elevated risk. A small number of respondents gave more than one response to question (ii) and these responses have been weighted accordingly.

On balance, the impact of changes in production location and cross-border sourcing of inputs on EU activity was perceived to be limited, while the impact on employment located in the EU was considered significant. Companies were asked to assess the impact of changes in production location and cross-border input sourcing on their company’s activity, employment and selling prices in the EU in the last five years (Chart F, panel a) and what they expected in the next five years (Chart F, panel b). In terms of activity, a large share of respondents said that these changes were likely to influence the share of their company’s value added generated in the EU in the next five years compared with the last five years. That said, those anticipating higher and lower shares broadly balanced out. Respondents did, however, see the impact of these changes as increasingly negative for the share of their company’s employment located in the EU. This would be consistent with companies citing the cost of – and access to – labour and skills as the most important factor in their recent or planned future decisions to move production or operations out of the EU.

Chart F
Overall impact of production location and input sourcing decisions on activity, employment and prices

(percentages of responses)

Source: ECB.
Note: Responses to the question “What has been/will be the impact of changes in production location and/or cross-border input sourcing on your company’s activity, employment and selling prices in the EU?”

Changes in production location and cross-border sourcing of inputs led to higher prices, but this impact was expected to ease slightly in the next five years. 60% of contacts said that changes in production location and/or cross-border input sourcing had pushed up their average prices in the last five years, compared with just 5% who said that their prices had fallen as a result. Looking ahead to the next five years, the share of firms expecting upward pressure on prices was still high (45%) but lower than when looking back at the last five years. One interpretation would be that moves to make business operations and supply chains more resilient are costly per se, but the impact on costs, and therefore prices, can be mitigated if these changes are carefully planned. In this regard, past moves may to a greater extent have been unplanned and sudden (e.g. in response to the pandemic or Russia’s invasion of Ukraine) and therefore more costly than intended future moves to respond to production and supply chain risks.

Table A
Share of company sales, production and input sourcing outside the EU across the survey sample

Less than 20%
20-50%
More than 50%

Sales
16
27
20

Production
20
24
18

Input sourcing
18
22
22

Source: ECB.
Note: The numbers in the table refer to the number of responding companies in each category.

 
Footnotes:

See the blog posts by Di Sano, M., Gunnella, V. and Lebastard, L., “Deglobalisation: risk or reality?”, ECB, 12 July 2023, and Koh, S.-H., MacLeod, C. and Rusticelli, E., “Shifting sands: trade partner patterns since 2018”, OECD, 12 July 2023.
The EBRD survey focuses on 15 EBRD countries; see “Global supply chains in turbulence”, Transition report 2022-23, EBRD, 2022. The Banca d’Italia survey focuses on Italian firms; see Bottone, M., Mancini, M. and Padellini, T., “Navigating Fragmentation Risks: China Exposure and Supply Chains Reorganization among Italian Firms”, Banca d’Italia, 2023. The Deutsche Bundesbank survey focuses on German firms (data collection completed and analysis forthcoming).
The survey was sent to companies with which the ECB maintains regular contact as part of its gathering of information on current business trends. A total of 65 responses were received during July-August 2023. This is a relatively small sample in terms of the overall number of firms, but the aggregate value added of these firms generated globally is equivalent to around 5% of euro area GDP.
With regard to Brexit, respondents were asked to ignore changes brought about solely by the reclassification of the UK from an EU to a non-EU country if there had been no physical change in the location of production or input sourcing.
42% of firms said they had near-shored, diversified and/or friend-shored production in the last five years, while 74% said they expected to do so in the next five years.
28% of firms said they had near-shored production in the last five years, while 49% said they expected to do so in the next five years. It is striking that this first number is identical to the share that, in a similar ECB survey in 2016, replied that it had become more common in the past five years for companies in their sector to produce/operate in the local markets where goods and services are sold. See the box entitled “Global production patterns from a European perspective: insights from a survey of large euro area firms”, Economic Bulletin, Issue 6, ECB, 2016.
This result is driven mainly by companies that are truly global (with more than 50% of their sales, production and input sourcing presently outside the EU) and by companies that import (either intermediate or final) products into the EU.
In the questionnaire, it was clarified that “By ‘critical’ inputs we mean goods without which a significant part of your business activity could not be completed or would suffer significant delays or the quality of the good or service produced by your firm would significantly decrease.” Respondents were asked to indicate up to five countries, but most named just one or two.
In the questionnaire, it was stated that “Such risks could include the risk of sudden escalation of economic or political tensions between countries (e.g. China and the US) resulting in bans on the import or export of specific products, a tightening of local content requirements (e.g. in the context of the EU/UK trade agreement), sourcing from countries at (risk of) conflict, risks stemming from climate change…etc.”

 
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Blog post by Clémence Berson and Vasco Botelho, Senior Economists | The euro area labour market is in pretty good shape despite the recent economic shocks. The share of people in the labour force has never been higher. Who are these new workers? We find that the labour force has changed quite a bit in terms of gender, age, education level and national origin over the last two decades.

But first, let’s look at more recent developments. When the pandemic hit, millions of workers lost their jobs. More than six million were discouraged or decided to leave the labour market for other reasons. This led to a 2.5 percentage point drop in the labour force participation rate (LFPR).[1] In the summer of 2020 only 62.1% of the population aged from 15 to 74 had a job or was looking for one. This compares to 64.6% before the pandemic broke out in early 2020.
This gloomy situation didn’t last long. The euro area economy recovered quickly, thanks in part to widespread policy support measures such as job retention schemes. Many people came back to the labour market, which brought the participation rate back to pre-pandemic levels as early as the fourth quarter of 2021. A year and a half later, in the second quarter of 2023, the participation rate hit 65.5%, 0.9 percentage points above its pre-pandemic peak. At that point in time around 3.8 million new workers were attached to the labour market. Nevertheless, participation rates in the United States (69%) and United Kingdom (68%) suggest that there is still scope for further increases.
Before and after the pandemic: who joined the labour force
What drove the changes in the labour participation rate in the euro area? We focus on gender, age, education level and nationality groups in Chart 1. Comparing the quarter before the pandemic outbreak to mid-2023, we first consider the increases in the LFPR for each group (yellow bars). Second, we examine composition effects, noted by changes in the relative size of each group in the working age population (red bars). For example, as the population grew older, the share made up of workers aged 25 to 54 shrank, and the share made up of older workers increased. This means that even though more workers aged 25 to 54 entered the labour market, their overall contribution to the LFPR was negative as their share of the population faded. The overall negative contribution by this group of workers is represented in the age category of Chart 1 by the blue bar.

Chart 1
Contributions to the change in the LFPR between Q4 2019 and Q2 2023

Percentages

Source: Eurostat, European Union Labour Force Survey (EU LFS), Integrated Economic and Social Statistics, and authors calculations.

Since the fourth quarter of 2019, women, older workers aged 55 to 74, highly educated persons[2], and immigrants have contributed most to the increase in the euro-area LFPR. Women mainly increased their participation rate, while other socio-demographic groups increased both their participation in the labour market and their relative size in the working age population. Men, younger workers aged 15 to 24 and natives also contributed positively, but to a lesser extent.
People are retiring later
The euro area population aged significantly over the last decades. The average age was 42.9 years in 2002 and 45.2 years in 2022. With the ageing of the baby boomer generation, older workers became more prominent in the working age population, with their relative share gradually increasing from 27.1% in 2002 to 33.8% in 2022. The ageing of the working population has offset increases in the LFPR. In fact, the LFPR would be 1.6 percentage points higher in 2023 if not for the effects of population ageing (see Chart 2). This is on account of older workers displaying a lower labour market attachment than workers aged 25 to 54.

Chart 2
Impact of ageing on the euro area LFPR over time

Percentage

Source: Eurostat, European Union Labour Force Survey (EU LFS), Integrated Economic and Social Statistics, and authors calculations. The age-adjusted labour force participation rate keeps the working age population shares constant by age groups as they were in 1997.

At the same time, older workers have become significantly more attached to the labour force, in part due to pension reforms and increased life expectancy (see Chart 3). The participation of workers aged 25 to 59 is considerably higher than that of both the younger and older cohorts. We note a very large increase in the participation rate of workers aged 50 to 64 over the last two decades, which compensated the downward impact of population ageing.

Chart 3
Euro-area LFPR by age

Percentage

Source: Eurostat, European Union Labour Force Survey (EU LFS), Integrated Economic and Social Statistics, and authors’ calculations.

More women working or on the job market
Women have substantially increased their attachment to the labour market in recent decades. Their LFPR increased from 48.1% in 1997 to 60.8% in the beginning of 2023. At the same time, the LFPR of men has been broadly stable between 68% and 70% since 1997. This is in part thanks to policy measures aimed at increasing female employment, which include subsidised childcare services for working parents with small children, tax changes and improved leave policies.
Euro-area workers tend to be more educated over time, with the share of workers with an undergraduate degree or higher increased from 22% in 2002 to 37% in 2022. And higher levels of education tend to lead to higher levels of participation in the labour market, including in the euro area. Around 80% of people with an undergraduate degree or higher are active in the labour market, which compares to less than 50% among persons that have not finished a secondary school degree or similar. As the proportion of more highly educated workers in the labour force increases, participation rates tend to mechanically increase.
Workers move across borders for new jobs
Migration, too, supports an increase in labour supply in the euro area. The share of foreign workers in the working population has risen steadily, from 6.9% in 2005 to 11.5% in 2023. 60% of these immigrant workers come from non-EU countries. Labour mobility within the EU also helped increase labour participation rates. EU citizens often move across euro-area countries for work-related reasons. In fact, the LFPR for immigrants from within the EU increased from 68.8% in 2005 to 74.7% in the second quarter of 2023.[3]
The LFPR’s rise above pre-pandemic levels indicates a growing supply of workers. Older, female, highly educated and foreign workers are still the main contributors to the rise in the LFPR. Both historical trends and comparisons to other jurisdictions suggest that women and older workers will continue to drive future increases.[4] Population ageing will of course continue to reduce the LFPR, as workers simply become too old to work. But the overall trend of a growing workforce remains. This should have a mitigating effect on the tightness of the labour market over the longer term.[5]
 
The views expressed in each article are those of the authors and do not necessarily represent the views of the European Central Bank and the Eurosystem.
 
Footnotes:

The labour force participation rate is the share of persons in the population aged from 15 to 74 who are working or actively searching for a job.
Low-educated persons have a less than primary, primary, and lower secondary education level, medium-educated persons have an upper secondary and post-secondary non-tertiary education level and high-educated persons have a tertiary education level.
For comparison, the LFPR for nationals stood at 65.3% in the second quarter of 2023, while the LFPR for immigrants from outside the EU has remained stable at around 64%.
The labour force participation rate for women aged from 15 to 74 in the US stood at 63.1% in the second quarter of 2023, slightly higher than for the euro area. For the US, the labour force participation of working-age women reached its historical peak at around 65% at the turn of the millennium, and progressively decreased until it reached 62.8% in the first quarter of 2020. The US labour force participation for women aged from 15 to 74 plunged to 60.5% during the pandemic and is now progressively recovering, surpassing its pre-pandemic levels in the second quarter of 2023.
Another channel to be considered is the rise of remote working. This provided the opportunity to work without the need to commute and, in this way, incentivised these persons to be more active in the labour market. Recent data from the ECB Consumer Expectations Survey (CES) points to a decline in the number of discouraged workers and to a rebound in the labour force participation rate following the pandemic. In particular, the box article titled “The labour market recovery in the euro area through the lens of the ECB Consumer Expectations Survey”, ECB Economic Bulletin, Issue 2/2022, notes that the increase in the participation rate has in part been the result of transitions of respondents who were not actively searching for work directly into employment. The recovery in the labour force participation rate following the onset of the pandemic might also have been affected by a structural shift in preferences on work from home (WFH) patterns. In a recent box article titled “How people want to work – preferences for remote work after the pandemic”, it is noted that, while both employers and workers are still adapting to the changing WFH patterns, it appears likely that remote work will remain in substantially higher demand than before the onset of the pandemic. Regarding health-related labour market discouragement from the pandemic, another box, “COVID-19 and retirement decisions of older workers in the euro area”, showed that older workers who displayed a poorer state of health were more likely to retire early.

 
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After having dealt successfully with the challenges of the pandemic and the energy price shock triggered by Russia’s war in Ukraine, Europe faces the difficult task of restoring price stability while securing strong and green growth over the longer term. Global shifts from geoeconomic fragmentation and the current impact of climate change have introduced new economic challenges that add to long-standing growth problems and could stall convergence.
Cooling headline inflation is providing some relief to households and firms. Easing commodity prices and supply constraints have been mainly responsible, but persistent core inflation has proved more difficult to tackle. Central banks across Europe have tightened their monetary policies substantially, and governments are scaling back fiscal support.
The lingering effects of last year’s energy price shocks and tighter policies are also contributing to a growth slowdown this year. Countries with larger manufacturing or energy-intensive sectors are slowing more than those that depend on services and tourism. Overall, the growth forecast is shaped by the opposing forces of tighter macroeconomic policies and the recovery in real incomes, as inflation falls and wages rise.
The outlook for Europe is for a soft landing, with inflation declining gradually. Growth in the region overall is expected to slow to 1.3 percent in 2023 from 2.7 percent last year, and improve to 1.5 percent in 2024. Within advanced European economies, service-oriented economies will recover faster than those with relatively larger manufacturing sectors, which face low external demand and are more exposed to high energy prices. Similarly European emerging market economies will experience a mild recovery in 2024, but the extent will vary across countries depending on the energy intensity of production, service sector orientation, and, especially for the easternmost countries, disruption of trade relationships with Russia.
Monetary policy is approaching the end of the tightening cycle. A moderate fiscal consolidation is projected for 2023, picking up in 2024. Although a robust US economy is an important backstop to global demand, weaker activity in China, additional commodity price shocks, and the materialization of financial stability risks are important downside risks to growth. Tighter monetary policy has elevated credit costs and weakened household and corporate real estate balance sheets. Even though banks’ capital buffers are healthy, they could become strained under an adverse scenario.
Inflation is expected to recede only gradually over the forecast period. While subdued domestic demand in 2023 and lower commodity prices will be passed through to core inflation, the projected recovery in real incomes and still-strong labor markets will slow the pace of disinflation. Most countries are not expected to reach inflation targets before 2025. Sustained nominal wage growth above inflation and productivity growth rates is a key risk to disinflation, especially in European emerging market economies. Inflation could become entrenched, requiring additional policy tightening and potentially leading to stagflation.
Europe is facing these risks at a time when structural shifts from geopolitical fragmentation and climate change are compounding already-existing long-term growth problems. Europe’s medium-term growth prospects have declined for some time, with weakening productivity growth a key factor. The new challenges of higher and more volatile energy costs and changes in supply and trade relationships are disrupting production structures. They add to well-known factors (such as population aging and labor supply  constraints) that have stymied potential growth.
For most European emerging market economies, the combination of weak productivity and a loss of wage-cost competitiveness could stall economic convergence. In these circumstances, stabilization of public debt trajectories could also prove challenging, especially in high-debt countries where debt needs to be outright reduced.
In this context, economic policies should aim to restore price stability and strengthen economic fundamentals. History suggests that it takes several years for inflation to return to normal levels after an inflationary episode.
Maintaining a restrictive monetary policy stance is thus paramount to securing the return of inflation to target within a  reasonable timeframe. Uncertainty about inflation persistence is large, and the cost of easing too early is substantial. The required tightness of monetary policy varies with country circumstances, but many central banks will have to maintain high policy rates for some time.
Meanwhile, countries should step up their efforts to rebuild or preserve fiscal buffers while protecting critical spending needs. By reducing deficits, fiscal policy complements monetary policy in the fight against inflation. Remaining untargeted energy support should be phased out and expenditure and revenue inefficiencies tackled. But these savings may not be enough to address spending needs on education, demographic headwinds, infrastructure, and climate change while also reining in large deficits. Moreover, public debt-to-GDP ratios are projected to increase over the medium term in most European emerging market economies, as a result of sluggish growth and rising debt service cost. These countries will also need to better rationalize expenditure and mobilize revenues to bring public debt ratios on a downward path. For EU economies, strengthening the capacity to absorb EU grants for climate-resilient infrastructure, social protection, and accelerating the green transition continues to be a priority.
Macrofinancial policies should ensure that emerging risks to stability are monitored and contained. Banks have increased their profits from rising net interest margins. These resources should be used to raise capital buffers, including through regulatory requirements. Given banks’ credit exposure to the real estate sector, robust buffers are even more important at a time, like the current one, when the property market faces structural and cyclical headwinds.
Structural policies remain crucial for achieving strong, green, and evenly distributed growth. Reforms should focus on removing barriers that prevent economic innovation and dynamism. A strengthened business environment with policies that encourage investment and spending on research and development will enhance competition that increases productivity. In European emerging market economies, attracting investment also requires strengthening public sector management and governance; better job matching; and reliable digital, transportation, and energy infrastructure. Europe needs to preserve its most important growth asset—the single market. Sectoral policies can play a role (when network externalities are present) by raising research and development spending and opening access to new technologies, leading to increased efficiencies and facilitating the
green transition. But such policies need to be deployed surgically and with care, avoiding costly subsidy races or use of distortionary tariffs. International collaboration on climate change, including a global carbon price floor, is essential to reducing emissions while maintaining competitiveness. Recent agreements on strengthening Europe’s emissions trading system are an important step toward achieving the European Union’s climate goals.
 
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