The weaker growth outlook and tighter monetary policy call for prudence in managing debt and conducting fiscal policy
Global debt remained above pre-pandemic levels in 2021 even after posting the steepest decline in 70 years, underscoring the challenges for policymakers.
Total public and private debt decreased in 2021 to the equivalent of 247 percent of global gross domestic product, falling by 10 percentage points from its peak level in 2020, according to the latest update of the IMF’s Global Debt Database. Expressed in dollar terms, however, global debt continued to rise, although at a much slower rate, reaching a record $235 trillion last year.
Private debt, which includes non-financial corporate and household obligations, drove the overall reduction, decreasing by 6 percentage points to 153 percent of GDP, according to our unique tally, which has been published annually since 2016. The decline of 4 percentage points for public debt, to 96 percent of GDP, was the largest such drop in decades, our database shows (for further details see the 2022 Global Debt Monitor).
The unusually large swings in debt ratios are caused by the economic rebound from COVID-19 and the swift rise in inflation that has followed. Nevertheless, global debt remained nearly 19 percent of GDP above pre-pandemic levels at the end of 2021, posing challenges for policymakers all over the world.

Variation across countries
Debt dynamics varied significantly across country groups, however.
The fall in debt was largest in advanced economies, where both private and public debt fell by 5 percent of GDP in 2021, reversing almost one-third of the surge recorded in 2020.
In emerging markets (excluding China), the fall in debt ratios in 2021 was equivalent to almost 60 percent of the 2020 increase, with private debt falling more than public debt.
In low-income developing countries, total debt ratios continued to increase in 2021, driven by higher private debt.

Factors behind the global debt swings
Three main drivers explain these unusually large movements in both private and public debt around the world:

Large fluctuations in economic growth. The economic recession at the onset of the pandemic contributed to a pronounced drop in GDP, which was reflected in the sharp rise in debt-to-GDP ratios in 2020. As economies moved on from the worst of the pandemic, the strong rebound in GDP helped the 2021 fall in debt ratios.

High and more volatile inflation. Likewise, inflation rates fell significantly in the first year of the pandemic. This trend was reversed in 2021 as prices rose sharply in many countries. During 2020 and 2021, economic activity and inflation moved together: inflation fell and then rose with output. These factors induced large swings in nominal GDP that contributed to the changes in debt ratios.

Effects of economic shocks on the budgets of governments, firms, and households. The volatile economic conditions also had a considerable impact on debt dynamics through budgets. Debt and deficits increased significantly in 2020 because of the economic recession and the sizable support extended to individuals and businesses. In 2021, fiscal deficits declined but remained above their pre-pandemic levels (see October 2022 Fiscal Monitor).

A few country examples illustrate these effects. The economic rebound and rise in inflation pushed debt down by more than 10 percentage points of GDP in Brazil, Canada, India, and the United States, but actual debt fell less owing to the financing needs of government and the private sector. In other cases—for example, in China and Germany—public debt increased as the large deficits more than compensated for the rise in nominal GDP.

More generally, the rebound helped to reduce public debt ratios between 2 and 3.5 percent of GDP (with the largest effect among advanced economies), while inflation shaved off between 1.5 and 3 percentage points (the effect was more pronounced in emerging markets). Conversely, fiscal deficits increased public debt by around 4.5 percent of GDP with considerable variation across countries.
How governments should respond
Managing the high debt levels will become increasingly difficult if the economic outlook continues to deteriorate and borrowings costs rise further. The high inflation levels continue to help reduce debt ratios in 2022, especially where deficits are returning to pre-pandemic levels.
However, the relief to debt dynamics from “inflation surprises”—that is, when price levels are different from what was expected—and the temporary growth rebound cannot be permanent (see April 2022 Fiscal Monitor). If high inflation were to become persistent, spending will increase (for example, on wages) and investors will demand a higher inflation premium to lend to governments and private sector.
The weaker growth outlook and tighter monetary policy calls for prudence in managing debt and conducting fiscal policy. Recent developments in bond markets show investors’ heightened sensitivity to deteriorating macroeconomic fundamentals and limited fiscal buffers.
Governments should adopt fiscal strategies that help reduce inflationary pressures now and debt vulnerabilities over the medium term, including by containing expenditure growth—while protecting priority areas, including support to those hardest hit by the cost-of-living crisis. This would also facilitate the work of central banks and allow for smaller increases in interest rates than would otherwise be the case. In times of turbulence and turmoil, confidence in long-run stability is a precious asset.
Authors:

Vitor Gaspar, Director of the Fiscal Affairs Department at the IMF

Paulo Medas, Division Chief in the IMF’s Fiscal Affairs Department and oversees the IMF’s Fiscal Monitor

Roberto Perrelli, Senior Economist in the IMF’s Fiscal Policy and Surveillance Division, Fiscal Affairs Department
This blog incorporates research by Youssouf Kiendrebeogo, Virat Singh, Zhonghao Wei, Andrew Womer, and Chenlu Zhang

Compliments of the IMF.
The post IMF | Riding the Global Debt Rollercoaster first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Keynote speech by Fabio Panetta, Member of the Executive Board of the ECB, at the Insight Summit held at the London Business School | London, 7 December 2022 |
It is a true pleasure to be back at the London Business School.[1] I did my PhD here many years ago. As soon as I arrived, I found myself immersed in an environment where pioneering academic research and economic analysis were carried out in a friendly atmosphere. In those years I learned not only to be rigorous in doing research, but also the importance of doing one’s job with enthusiasm.
I still have vivid memories of stimulating and motivating discussions with my fellow students and the faculty. I am particularly grateful to my PhD supervisor and dear friend, Professor Richard Brealey.
Moving from the past to the future, today I will discuss crypto-assets and the destiny of digital finance.
When I last spoke about crypto finance at Columbia University last April, I likened it to the Wild West and warned about the risks stemming from irrational exuberance among investors, negative externalities and the lack of regulation.[2]
Crypto markets have since witnessed a number of painful bankruptcies. The crypto dominos are falling, sending shockwaves through the entire crypto universe, including stablecoins and decentralised finance (DeFi).[3]
The crash of TerraUSD, then the world’s third-largest stablecoin, and the recent bankruptcy of the leading crypto exchange FTX and 130 affiliated companies each took only a few days to unfold. This is not just a bubble that is bursting. It is like froth: multiple bubbles are bursting one after another.
Investors’ fear of missing out seems to have morphed into a fear of not getting out.
The sell-off is exposing those “swimming naked”.[4] It has laid bare some unbelievably poor business and governance practices across a number of crypto firms. It has revealed that some investors have been acting carelessly by investing blindly without proper due diligence. And similar to the sub-prime crisis, the crash has uncovered the interconnections and opaque structures within the crypto house of cards.
This is set to dampen enthusiasm in the belief that technology can free finance from scrutiny. The crash has served as a cautionary reminder that finance cannot be trustless and stable at the same time. Trust cannot be replaced by religious faith in an algorithm. It requires transparency, regulatory safeguards and scrutiny.
Does this mean we are witnessing the endgame for crypto? Probably not. People like to gamble. On horse races, football games and many other events. And some investors will continue to gamble by taking speculative positions on crypto-assets.
Today I will argue that the fundamental flaws of crypto-assets mean that they can quickly collapse when irrational exuberance subsides. We should therefore focus on protecting inexperienced investors and preserving the stability of the financial system.
Ensuring that crypto-assets are subject to adequate regulation and taxation is one path to achieving this. Here, we need to move rapidly from debate to decision and then implementation.
But even regulation will not be enough to address the shortcomings of cryptos. To harness the possibilities of digital technologies, we must provide solid foundations for the broader digital finance ecosystem.
This requires a risk-free and dependable digital settlement asset, which only central bank money can provide. And that is why the ECB is working on a digital euro while also considering new technologies for the future of wholesale settlement in central bank money.
Fundamental flaws in crypto finance
The philosophy behind cryptos is that digital technology can replace regulated intermediaries and avoid state “intrusion”. In other words, that it is possible to build a trustless but stable financial system based on technology.
This is just an illusion, as was clear from the outset and confirmed by recent developments. In fact, it is precisely the absence of regulation and public scrutiny that blinded investors to the risks involved, leading to the rise and subsequent fall of crypto-assets.
The risks associated with crypto finance stem from three fundamental flaws. I will address each of them in turn.
Unbacked crypto-assets offer no benefits to society
The main structural flaw of unbacked crypto-assets – which form the bulk of the crypto market (Chart 1) – is that they do not offer any benefits to society.

Chart 1
Market capitalisation of crypto-assets
(EUR billions)

Sources CryptoCompare and ECB calculations.
Notes: Crypto-asset market capitalisation is calculated as the product of circulating supply and the price of crypto-assets. If the circulating supply were adjusted for the lost bitcoins which are proxied by those that have not been used for longer than seven years, it would be around 20% lower. The selected major altcoins are Cardano (ADA), Bitcoin Cash (BCH), Dogecoin (DOGE), Link (LINK), Litecoin (LTC), Binance Coin (BNB), Ripple (XRP), Polkadot (DOT) and Solana (SOL). The selected major stablecoins are Gemini USD (GUSD), True USD (TUSD), USD Coin (USDC), Tether (USDT), Binance USD (BUSD) and Pax Dollar (USDP). Algorithmic stablecoins were excluded.

Despite consuming a vast amount of human, financial and technological resources, unbacked crypto-assets do not perform any socially or economically useful function. They are not used for retail or wholesale payments – they are just too volatile and inefficient.[5] They do not fund consumption or investment. They do not help fuel production. And they play no part in combating climate change. In fact, unbacked crypto-assets often do the exact opposite: they can cause huge amounts of environmental damage.[6] They are also widely used for criminal and terrorist activities, or to evade taxes.[7]
As a form of investment, unbacked crypto-assets lack any intrinsic value. They have no underlying claim: there is neither an issuer who is accountable and liable, nor are they backed by collateral. They are notional instruments, created using computing technology, which do not generate financial flows[8] or use value for their holders. Therefore, their value cannot be estimated from future income discounted to the present, like for real and financial assets.
Unbacked crypto-assets cannot help to diversify portfolios. Recent developments show that their value does not increase when income becomes more valuable to consumers – such as in periods of high inflation or low growth. Crypto-assets are not digital gold. Their price changes show increasing correlation with stock markets (Chart 2), with much higher volatility. And recent developments highlight their intrinsic instability: the first bitcoin exchange-traded fund lost more on its price since its launch than any other that has been issued.[9]

Chart 2
Correlation between bitcoin and stock markets
60-day rolling correlation between bitcoin and selected stock indices

Sources: Bloomberg, CryptoCompare and ECB calculations.

Many investors have suffered significant losses from the crypto collapse and cannot expect any compensation. There are no insurance schemes. And in several instances, crypto-assets have been shown to offer little protection against IT and cyber risks.[10]
On the whole, it is difficult to see a justification for the existence of unbacked crypto-assets in the financial landscape. Their combined features mean that they are just speculative assets. Investors buy them with the sole objective of selling them on at a higher price. In fact, they are a gamble disguised as an investment asset.
Millions of investors were lured by an illusory narrative of ever-rising crypto-asset prices – a narrative that was fuelled by extensive news reports and investment advice on social media, highlighting past price increases and features such as artificial scarcity to create the fear of missing out. Many invested without understanding what they were buying.[11]
Irrational enthusiasm prospered on self-fulfilling expectations:[12] the textbook definition of a bubble. Like in a Ponzi scheme, such dynamics can only continue so long as a growing number of investors believe that prices will continue to increase. Until the enthusiasm vanishes and the bubble bursts.
The market value of crypto-assets has shrunk from €2.5 trillion at its peak a year ago to less than €1 trillion today (Chart 1). The price of bitcoin[13] has fallen by more than 70% from its peak (Chart 3).

Chart 3
Price of bitcoin
(EUR)

Sources: CryptoCompare and ECB calculations.

Stablecoins are exposed to runs
The second structural flaw is the purported stability of stablecoins, which the entire crypto ecosystem has relied on to underpin trading in crypto-assets and liquidity provision in DeFi markets.[14]
Although stablecoins represent only a small part of the crypto-asset market,[15] crypto trading using Tether, the largest stablecoin, accounts for close to half of all trading on crypto-asset trading platforms (Chart 4).[16]

Chart 4
Stablecoin trading volumes and use in crypto trading

Sources: IntoTheBlock, CryptoCompare and ECB calculations.
Notes: Panel a): The data are for the period from 1 January 2020 to 29 November 2022. Trading volume data are based on CryptoCompare’s real-time aggregate index methodology (CCCAGG), which aggregates transaction data from more than 250 exchanges. The chart reflects the sum of trading volumes involving bitcoin or ether (monthly average), as well as the respective percentages of the volume of trades occurring between bitcoin/ether and listed assets or asset groups. “Other stablecoins” includes USD Coin, DAI, Pax Dollar, TerraUSD and 12 other large stablecoins. “Other crypto-assets” includes 29 of the largest unbacked crypto-assets after bitcoin and ether. “Official currencies” includes USD, EUR, JPY, GBP, RUB, PLN, AUD, BRL, KRW, TRY, UAH, CHF, CAD, NZD, ZAR, NGN, INR and KZT. “Other” consists of remaining assets not included in the preceding categories.
Panel b): The data are for the period from 1 January 2022 to 29 November 2022. Stablecoin liquidity in decentralised exchanges is approximated based on the ten most liquid pairs on Curve, Uniswap and SushiSwap as at 29 November 2022. “Stablecoins (collateralised)” includes Tether, USD Coin and True USD. “Stablecoins (algorithmic)” includes DAI, Magic Internet Money and three further stablecoins. “Other crypto-assets” includes ether, PAX Gold and FNK wallet. “DeFi Tokens” includes wrapped bitcoin, Uniswap’s governance token UNI, SushiSwap’s governance token SUSHI and 16 other tokens of different DeFi protocols.

Stablecoins appeal to users because it is claimed that, unlike unbacked cryptos, they provide stability by having their value tied to a portfolio of assets – known as “reserve assets” – against which stablecoin holdings can be redeemed.[17] Algorithmic stablecoins, meanwhile, aim to match supply and demand to maintain a stable value.
But the recent crypto crash has highlighted that – without sound regulation – stablecoins are stable in name only.
Digital innovation cannot, for example, build stable values on the basis of codes and mechanisms of dependency. This was the key takeaway from the collapse of the algorithmic stablecoin TerraUSD,[18] which lost its peg to the US dollar in May and has since been trading for less than 10 US cents (Chart 5).[19]

Chart 5
TerraUSD’s lost peg
(USD)

Source: CryptoCompare.

Tether also temporarily lost its peg amid the ensuing market stress.[20] This showed that, even for collateralised stablecoins, risks cannot be eliminated easily.[21] Without public backing,[22] the risks of contagion and runs are widespread and the liquidation of part of the reserve assets can have procyclical effects and further reduce the value of the remaining reserve assets. These risks are magnified when the composition of the reserve assets is concealed.
Overall, this scramble for stability and the shortcomings of stablecoins underscore the importance of a settlement asset that maintains its value under stressed conditions. In the absence of a risk-free digital anchor, which only digital central bank money can provide, stablecoins represent an overambitious attempt to create a risk-free digital asset backed by risky assets.

Crypto markets are highly leveraged and interconnected
The third structural weakness is the fact that crypto markets may have incredibly high leverage and interconnections. This creates strong procyclical effects, given the lack of shock absorption capacity.
Crypto exchanges allow investors to increase exposures by up to 125 times the initial investment (Chart 6, left panel). As a result, when shocks hit and deleveraging is needed, they are forced to shed assets, putting strong downward pressure on prices (Chart 6, right panel).

Chart 6
DeFi’s vulnerabilities: leverage and procyclicality

Source: Bank for International Settlements (2021), “DeFi risks and the decentralisation illusion”, BIS Quarterly Review, December.

These procyclical effects are exacerbated by the pervasive overcollateralisation adopted in DeFi lending to compensate for the risks posed by anonymous borrowers.[23] Moreover, funds borrowed in one instance can be reused as collateral in subsequent transactions, allowing investors to build large exposures. Shocks can propagate rapidly across collateral chains and are amplified by positions liquidated automatically using smart contracts.
These are precisely the dynamics we have seen at work in the recent crypto failures, which have sent shockwaves throughout the crypto universe, including in DeFi markets[24] used to build leverage.[25]
The inadequate governance of crypto firms has magnified these structural flaws. Insufficient transparency and disclosure, the lack of investor protection, and weak accounting systems and risk management were blatantly exposed by the implosion of FTX.[26] Following this event, crypto-assets may move away from centralised to decentralised exchanges, creating new risks owing to the absence of a central governance body.[27]
The destiny of digital finance
These fundamental flaws have led many to predict the demise of crypto-assets. But these flaws alone are unlikely to spell the end of cryptos, which will continue to attract investors looking to gamble.
Gambling is perhaps the second oldest profession in the world. It has been traced back to ancient China, Greece and Rome. People have always gambled in different ways: casting lots, rolling dice, betting on animals or playing cards. And in the digital era I expect them to continue gambling by taking speculative positions on crypto-assets.
We therefore need to mitigate the risks, while harnessing the innovative potential of digital finance beyond cryptos. There are two elements to this.
Regulating crypto-assets
The first is to regulate crypto-assets and ensure that they do not benefit from preferential treatment compared with other assets.[28]
The recent failures of crypto entities do not seem to have had a material impact on the financial sector. But they have highlighted the immense potential for economic and social damage if we leave cryptos unchecked.[29] And the links between the crypto market and the financial system may become stronger, especially as major tech companies enter the sector.
That is why we now need – urgently – to regulate crypto-assets. It is crucial that the regulatory frameworks currently in the legislative process quickly enter into force and start being implemented so that words can be followed by deeds.
Addressing financial risks
Regulators must walk a tightrope. For one, they need to build guardrails to tackle regulatory gaps and arbitrage. But they also need to avoid legitimising unsound crypto models and refrain from socialising the risks through bailouts.[30]
Regulatory efforts should primarily be directed at preventing the use of crypto-assets as a way of circumventing financial regulation. The principle of “same functions, same risks, same rules” applies regardless of technology. This should be coupled with measures to ensure that the risks of crypto-assets are clear to all. Potential buyers should be fully aware of the risks they take when buying cryptos and the services surrounding them.[31] Gambling activities should be treated as such.
The other task is to shield the mainstream financial system from crypto risks, notably by segregating any crypto-related activities of supervised intermediaries.
The EU’s Regulation on Markets in Crypto-Assets (MiCA) is leading the way in building a comprehensive regulatory framework. MiCA will regulate stablecoins, crypto-assets other than stablecoins, and crypto-asset service providers. It will subject stablecoin issuers of e-money tokens[32] and asset-referenced tokens[33] to licensing and supervision. And it will regulate the reserve assets backing stablecoins in order to contain their risks. In turn, the regulation requires that buyers of crypto-assets are informed about the inherent risks involved. It is crucial that the regulation enters into force as soon as possible.[34]
Looking ahead, the regulation of crypto activities will have to be adapted to the continuous evolution of crypto risks. Given the time needed to design and apply new legislation, it is important to empower regulators, overseers and supervisors to adjust their instruments to keep pace with market and technological developments.
The ECB is not responsible for regulating investment activities. But we are responsible for overseeing European payment systems, and we have already taken action in this field. Our oversight framework for payment instruments, schemes and arrangements – the PISA framework – that was launched last year addresses the risks of stablecoins and other crypto-assets for payment systems.
Since crypto-assets know no borders, their regulatory framework must be global. This requires rapid implementation of the Financial Stability Board’s recommendations to make the regulatory, supervisory and oversight approaches to crypto activities consistent and comprehensive across different countries.[35] Swift progress is also needed to finalise the Basel Committee on Banking Supervision’s framework for the prudential treatment of banks’ crypto-asset activities.
Addressing and internalising social risks
Authorities also need to address the significant social costs of crypto-assets, such as tax evasion, illicit activities and their environmental impact.[36] The use of crypto-assets for money laundering and terrorist financing could be prevented by applying the standards set by the Financial Action Task Force.[37]
The other task is to ensure that the taxation of crypto-assets is harmonised across jurisdictions and consistent with how other instruments are taxed.[38] In Europe, given the negative externalities that crypto activities can generate across multiple Member States, the EU should introduce a tax levied on cross-border crypto issuers, investors and service providers. This would generate revenues that can be used to finance EU public goods that counter the negative effects of crypto-assets.[39]
Such a tax could, for example, address the high energy and environmental costs associated with some crypto-mining and validation activities. This would be in line with the current EU priorities to address climate change and ensure energy security[40]. Crypto-assets deemed to have an excessive ecological footprint should also be banned.[41]
Balancing innovation and stability: an anchor for digital finance
But even regulation would not be enough to provide a stable basis for digital finance. The second factor at play here is that, in order to harness the opportunities offered by technological innovation, we need to give digital finance – like other forms of finance – an anchor of stability in the form of a digital risk-free asset.
Only central bank money can provide an anchor of stability
Some commentators are of the view that adequate regulation would allow stablecoins to provide such a risk-free asset. This is a misconception.
Stablecoins invest their reserve assets in market instruments, which inevitably exposes them to several risks: liquidity, credit, counterparty and operational risks. Prudent investment policies can reduce but not eliminate such risks. The riskiness of stablecoins will over time lead to them being traded at variable prices, making them unsuitable as risk-free assets.
Risks could theoretically be eliminated by allowing full-reserve – or narrow – stablecoins to hold their reserve assets entirely in the form of risk-free deposits at the central bank. This would avoid custody and investment risks for stablecoins and underpin their commitment to reimburse coin holders at par value at all times.
But other fundamental problems would then emerge. In fact, this would be tantamount to outsourcing the provision of central bank money. It could even threaten monetary sovereignty if a stablecoin were to largely displace sovereign money. And narrow stablecoins could divert sizeable deposits away from banks, with potential adverse consequences for the financing of the real economy.[42]
Only central bank money can provide an anchor of stability. The solution is to extend today’s two-tier monetary system into the digital age. This system is built on the complementary roles of central bank money and commercial bank money.
Central bank money is currently available for retail use in only physical form – cash. But the digitalisation of payments is eroding the role of cash and its ability to provide an effective monetary anchor. Central bank digital currencies would instead preserve the use of public money for digital retail payments. By offering a digital, risk-free common denominator, a central bank digital currency would facilitate convertibility among different forms of private digital money. It would thus preserve the singleness of money and protect monetary sovereignty. The ECB is working on a digital euro precisely for these reasons.[43]
To preserve its crucial role, public money must also continue to be used as a settlement asset for wholesale financial transactions.[44]
The Eurosystem currently provides settlement in central bank money for wholesale transactions with its TARGET services. And we are exploring what would happen if new technologies were to be widely adopted by the financial industry. Whether such a scenario will materialise is uncertain, but we must be ready to respond if it does. Our response may include making central bank money available for wholesale transactions on one or more distributed ledger technology platforms, or creating a bridge between market DLT platforms and existing central bank infrastructures.[45]
By ensuring that the role of central bank money as the anchor of the payment system is preserved for both retail and wholesale transactions, central banks will safeguard the trust on which private forms of money ultimately depend.
Conclusion
Let me conclude. Born in the depths of the global financial crisis, crypto-assets were portrayed as a generational phenomenon, promising to bring about radical change in how we pay, save and invest. Instead, they have become the bubble of a generation. It is now obvious to everyone that the promise of easy crypto-money and high returns was a bubble doomed to burst. It turns out that crypto-assets are not money. Many are just a new way of gambling.
There is an urgent need globally for regulation to protect consumers from the risks of crypto-assets, define minimum requirements for crypto firms’ risk management and corporate governance, and reduce the run and contagion risks of stablecoins. We should also tax crypto-assets according to their social costs.
But regulation will not turn risky instruments into safe money. Instead, a stable digital finance ecosystem requires well-supervised intermediaries and a risk-free and dependable digital settlement asset, which only digital central bank money can provide.
Speaker:

Fabio Panetta

Compliments of the European Central Bank.
The post ECB Speech | Crypto dominos: the bursting crypto bubbles and the destiny of digital finance first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The global economy is expected to slow further in the coming year as the massive and historic energy shock triggered by Russia’s war of aggression against Ukraine continues to spur inflationary pressures, sapping confidence and household purchasing power and increasing risks worldwide, according to the OECD’s latest Economic Outlook.
The Outlook highlights the unusually imbalanced and fragile prospects for the global economy over the next two years. The global economy is projected to grow well below the outcomes expected before the war – at a modest 3.1% this year, before slowing to 2.2% in 2023 and recovering moderately to a still sub-par 2.7% pace in 2024.
Growth in 2023 is strongly dependent on the major Asian emerging market economies, who will account for close to three-quarters of global GDP growth next year, with the United States and Europe decelerating sharply.
Persistent inflation, high energy prices, weak real household income growth, falling confidence and tighter financial conditions are all expected to curtail growth. Higher interest rates, while necessary to moderate inflation, will increase financial challenges for both households and corporate borrowers.

Inflation is projected to remain high in the OECD area, at more than 9% this year. As tighter monetary policy takes effect, demand and energy price pressures diminish and transport costs and delivery times continue to normalise, inflation will gradually moderate to 6.6% in 2023 and 5.1% in 2024.
“The global economy is facing serious headwinds. We are dealing with a major energy crisis and risks continue to be titled to the downside with lower global growth, high inflation, weak confidence and high levels of uncertainty making successful navigation of the economy out of this crisis and back toward a sustainable recovery very challenging,” OECD Secretary-General Mathias Cormann said during a presentation of the Outlook. “An end to the war and a just peace for Ukraine would be the most impactful way to improve the global economic outlook right now. Until this happens, it is important that governments deploy both short- and medium-term policy measures to confront the crisis, to cushion its impact in the short term while building the foundations for a stronger and sustainable recovery.”
The OECD points to substantial uncertainty surrounding the economic outlook. Growth may be weaker than projected if energy prices rise further, or if energy supply disruptions affect gas and electricity markets in Europe and Asia. Rising global interest rates may put many households, firms and governments under greater pressure as debt service burdens rise. Low-income countries will remain particularly vulnerable to high food and energy prices, while tighter global financial conditions may raise the risk of further debt distress.
Against this backdrop, the Outlook lays out a series of policy actions that governments should take to confront the crisis. Further monetary policy tightening is needed in most major advanced economies and in many emerging market economies to firmly anchor inflation expectations and lower inflation durably.
Fiscal support that is being provided to help cushion the impact of high energy costs should be increasingly temporary and preserve incentives to reduce energy consumption. Support measures should be designed to minimise fiscal costs and be concentrated on aiding the most vulnerable households and companies.
Managing the energy crisis will require more decisive policy support to boost investment in clean technologies, foster energy efficiency, secure alternative supplies and realign policy with climate mitigation objectives.
The cost-of-living crisis also calls for structural reforms that can have a direct effect on household incomes, ease supply constraints and reduce prices. To this end, countries should focus on policies to improve the functioning of international trade, enhance productivity, tackle gender gaps in the labour market and boost living standards.
Contacts:

For the full report and more information, visit the Economic Outlook online. Media queries should be directed to the OECD Media Office (+33 1 4524 9700).

Compliments of the OECD.
The post OECD | Russia’s war of aggression against Ukraine continues to create serious headwinds for global economy first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The move comes amid a decline in offshore financial centers’ share of global FDI
The United States recorded the largest increase of inward foreign direct investment of all economies in 2021. The latest release of the IMF’s Coordinated Direct Investment Survey shows the US position increasing by $506 billion, or 11.3 percent, last year.
For the 112 economies that reported data, inward FDI positions rose by an average of 7.1 percent in national currencies. In dollar terms, this global growth figure translates to only 2.3 percent, due to the recent strengthening of the greenback.
As the Chart of the Week shows, the United States is now the world’s top destination for FDI, while China has moved up to the third position. It also shows how smaller economies take prominent positions among the global top 10. The Netherlands, Luxembourg, Hong Kong SAR, Singapore, Ireland, and Switzerland all appear on this list even though none of these economies rank among the top 10 when it comes to gross domestic product.

The apparent disconnect between FDI data and the real economy comes down to the fact that these numbers are fundamentally a set of financial statistics. They show cross-border financial flows and positions between entities tied to each other by a direct or indirect ownership share of at least 10 percent. Such flows can end up as investments into productive activities within a country, like funds going into new factories and machinery, but they can also be purely financial investments with little to no link to the real economy.
For instance, many multinational companies set up special purpose entities in offshore financial centers where funds just flow through the economy, as an intermediate step towards their final destination. These entities are often established to obtain tax or regulatory benefits and can inflate FDI data considerably even though they have relatively little tangible impact on the host economy.
Research by Damgaard, Elkjaer, and Johannesen and Lane and Milesi-Ferretti shows how offshore financial centers play an outsized role in global FDI statistics, which increased even further in the years following the 2008 global financial crisis. The latest data from the CDIS shows that offshore financial centers still account for a disproportionately high share of global FDI. However, their share has gradually declined since 2017, while that of the largest economies such as the United States and China has increased.
The exact drivers of this development are hard to disentangle, but are likely linked to several policy initiatives. For example, the fall in the offshore financial centers’ share of global FDI comes after the US Tax Cuts and Jobs Act took effect in 2018.
This legislation reduced incentives to keep profits in low-tax jurisdictions and led to a substantial US repatriation of funds from foreign subsidiaries. Additionally, sustained international efforts to reduce tax avoidance, like the OECD/G20 Base Erosion and Profit Shifting initiative, may have halted some flows to offshore financial centers.
This highlights the continued need for comprehensive and timely statistics to better understand these developments and to guide policymakers in their decision-making on international investment and tax policies. In addition to the CDIS, the IMF has launched an initiative to collect data on special purpose entities and released the first set of SPE statistics earlier this year. Country reporting of comprehensive FDI statistics was also an important part of the second phase of the G20 Data Gaps Initiative, with 19 out of 20 member economies now reporting data.
Even more policy-relevant data are in the pipeline. In close collaboration with its members and other international organizations, the IMF is updating the balance of payments manual to strengthen its relevance for surveillance and policy analysis.
Authors:

Jannick Damgaard
Carlos Sánchez-Muñoz

Compliments of the IMF.
The CDIS is the only worldwide survey of FDI positions and is conducted annually by the IMF. The database presents detailed data on bilateral FDI relations among economies. It aims to provide a geographic distribution of inward and outward FDI worldwide, contribute to a better understanding of the extent of globalization, and support the analysis of cross-border linkages and spillovers in an increasingly interconnected world.
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I. Introduction
The U.S.-EU Trade and Technology Council (TTC) met outside Washington, D.C., on December 5, 2022.  The meeting was co-chaired by U.S. Secretary of State Antony Blinken, U.S. Secretary of Commerce Gina Raimondo, U.S. Trade Representative Katherine Tai, European Commission Executive Vice President Margrethe Vestager, and European Commission Executive Vice President Valdis Dombrovskis, joined by U.S. Deputy Under Secretary of Labor Thea Lee, Jamaica Minister for Information Communication Technology Floyd Green, and Kenya Cabinet Secretary for Information, Communication and the Digital Economy Eliud Owalo.
The TTC is a key mechanism to support stronger transatlantic relations and to deliver concrete outcomes.  We reaffirm that international rules-based approaches to trade, technology, and innovation that are founded on solid democratic principles and values can improve the lives of our citizens and generate greater prosperity for people around the world.  Through the TTC’s ten working groups, we are supporting sustainable, inclusive economic growth and development, promoting a human-centric approach to the digital transformation, and ensuring that international norms and the international trade rulebook are respected and reflect our shared values. We will continue to work together to modernize and reform the World Trade Organization (WTO) as set out in the WTO MC12 Outcome Document.
Geostrategic challenges, including Russia’s full-scale invasion of Ukraine and increased assertiveness of autocratic regimes, have reinforced the importance of our shared democratic values, commitment to universal human rights, and leadership role in upholding an international rules-based order.  The United States and the European Union reiterate our strong condemnation of Russia’s illegal and unjustifiable war of aggression against Ukraine and reaffirm our unwavering commitment to stand firmly with Ukraine for as long as it takes to ensure Ukraine’s sovereignty, independence, and territorial integrity.  We condemn attacks by Russia on Ukraine’s infrastructure and will continue supporting Ukraine in securing, maintaining, and rebuilding this infrastructure, including its telecommunications and internet infrastructure. We resolve to continue to impose severe and immediate costs on Russia and hold it accountable for its brutal war against Ukraine, including through unprecedented cooperation on sanctions-related export restrictions, and countering Russian disinformation.  We will also hold Belarus to account for its complicity in Russia’s war. The TTC Working Groups on Export Controls and on Misuse of Technology have made critical contributions to this successful and ongoing collaboration. The TTC Working Groups on Data Governance and Technology Platforms and on Misuse of Technology Threatening Security and Human Rights are coordinating to understand and address the spread of Russian information manipulation and interference, particularly in the context of Russia’s aggression against Ukraine, and its impact on third countries, notably in Africa and Latin-America.
The impact on our supply chains of Russia’s full-scale invasion of Ukraine has further underscored that we share an urgent need to identify and address supply chain vulnerabilities. The United States and the European Union recognize that the concentration of resources in key supply chains can expose our economies to challenging disruptions.  We plan to explore coordinated actions to foster diversification and make key supply chains more resilient.
To support our shared desire of tackling climate change, the United States and the European Union intend to launch a new Transatlantic Initiative for Sustainable Trade to advance our shared objective of achieving a green and sustainable future. We also took stock of the work of the dedicated U.S.-EU Task Force on the Inflation Reduction Act and noted the preliminary progress made. We acknowledge the EU’s concerns and underline our commitment to address them constructively. We underline the TTC’s role in achieving this and in supporting a successful and mutually supportive green transition with strong, secure, and diverse supply chains that benefit businesses, workers, and consumers on both sides of the Atlantic.
The United States and the European Union are establishing a Talent for Growth Task Force that will pursue our collective objective to recognize and develop the talent of our working-age populations.
II. Key Outcomes of the Third TTC Ministerial
1. Digital Infrastructure and Connectivity
Joint Initiatives with Jamaica and Kenya
The United States and the European Union are supporting secure and resilient digital connectivity and information and communication technology and services (ICTS) supply chains in third countries, provided by trusted suppliers.  As a first step, we intend to support inclusive ICTS projects in Jamaica and Kenya based on our common overarching principles.  This work reflects our commitments under our Global Gateway and Partnership for Global Infrastructure and Investment initiatives.

Cooperation on connectivity with Jamaica:  In cooperation with the government of Jamaica and other Jamaican stakeholders, we will connect over 1,000 public schools and children’s homes around Jamaica to robust, inclusive, and secure internet service, strengthen the digital competencies of teachers, and support the use of digital technologies by micro-, small-, and medium-sized enterprises.  Our efforts will also assist Jamaica’s electric utility, Jamaica Public Service, to expand reliable and trustworthy public Wi-Fi infrastructure in the New Kingston neighborhood of Jamaica’s capital, with the potential to expand the service across the country.  We also intend to support secure and resilient rural broadband connectivity provided by trusted suppliers in the country.

Cooperation on connectivity with Kenya:  In cooperation with the government of Kenya, we will support the implementation of Kenya’s 2022-2032 National Digital Masterplan by expanding school connectivity in Kenya and bridging gaps in last-mile connectivity.  First efforts will include a study on scalable solutions to expand school connectivity in Kenya, building fiber optic connections to schools in remote areas, a policy roadmap for affordable, secure, trustworthy and meaningful connectivity, and training options to develop the next generation of digital professionals.  We also will provide technical assistance to help Kenya update its Information and Communications Act and 5G Strategy in line with the principles set for high-quality global infrastructure projects at the TTC meeting in Paris-Saclay, France on May 16, 2022.

The United States and the European Union intend to expand our coordination on financing digital infrastructure projects in third countries, including through a Memorandum of Understanding between the U.S. Development Finance Corporation (DFC) and the European Investment Bank (EIB), which aims to enable increased collaboration on financing for secure connectivity in third countries.
Future Secure Connectivity Projects
The United States and the European Union recognize the importance of cooperating on trust and security in the ICT ecosystem.  We welcome projects that strengthen the resilience of that ecosystem, including subsea cables. The TTC Working Group on ICTS security and competitiveness intends to discuss transatlantic subsea cables’ connectivity and security, including alternative routes, such as the transatlantic route to connect Europe, North America and Asia. We also welcome supplier diversification efforts in ICTS supply chains and continue to discuss market trends towards open, interoperable approaches, alongside trusted, established architectures, in a technology neutral way.
2. Cooperation on New and Emerging Technologies
Artificial Intelligence (AI) Roadmap and Pilot Project on Privacy-Enhancing Technologies and Collaboration on AI and Computing Research for the Public Good
To fulfill our commitment on developing and implementing trustworthy AI, the United States and the European Union have issued a first Joint Roadmap on Evaluation and Measurement Tools for Trustworthy AI and Risk Management (AI Roadmap) and collected perspectives from relevant stakeholders.  This roadmap will inform our approaches to AI risk management and trustworthy AI on both sides of the Atlantic, and advance collaborative approaches in international standards bodies related to AI.  In conjunction with this effort, we aim to build a shared repository of metrics for measuring AI trustworthiness and risk management methods, which would support ongoing work in other settings such as the OECD and GPAI.  Our cooperation will enable trustworthy AI systems that enhance innovation, lower barriers to trade, bolster market competition, operationalize common values, and protect the universal human rights and dignity of our citizens.
Recognizing the importance of privacy in advancing responsible AI development, the United States and the European Union will work on a pilot project to assess the use of privacy enhancing technologies and synthetic data in health and medicine, in line with applicable data protection rules.
A joint study on the impact of AI on the workforce was finalized, with U.S. and EU case studies on hiring and logistics.
The United States and European Commission intend to bring together experts to explore collaboration on research projects in artificial intelligence and computing, that can benefit other partner countries and the global scientific community. This cooperation will aim at jointly addressing challenges in key focus areas such as extreme weather and climate forecasting; health and medicine; electric grid optimization; agriculture optimization; and emergency response management.
Collaboration on Quantum
The United States and the European Union plan to establish an expert task force to reduce barriers to research and development collaboration on quantum information science and technology, develop common frameworks for assessing technology readiness, discuss intellectual property, and export control-related issues as appropriate, and work together to advance international standards. This approach could serve as a basis for more enhanced cooperation in other emerging technology areas.
Electric Vehicle Charging
On May 16, 2022, at the TTC meeting in Paris-Saclay, the United States and the European Union decided to cooperate on Megawatt Charging Systems (MCS) standard for heavy-duty vehicles.  We welcome the progress on the physical prototype developed by industry.  We intend to continue working towards a common international standard to be adopted by 2024 at the latest to provide the highest level of interoperability, safety and security.
In parallel, we intend to develop in 2023 joint recommendations for government-funded implementation of electro-mobility charging infrastructure that aims to advance electric vehicle adoption in the United States and the European Union, as well as recommendations for future public demonstrations of Vehicle to Grid Integration pilots.  As intermediate steps, the United States and the European Union organized a stakeholder conference, are publishing the results of the ongoing research work, and have prepared public information on vehicle-to-grid integration and smart charging interoperability.
Other Standards and Research Cooperation
We have launched workstreams to increase standards cooperation on Additive Manufacturing, Recycling of Plastics, and Digital Identity, with plans to launch new workstreams on Post-Quantum Encryption and Internet of Things (IoT), with an initial focus on technical and performance standards for cybersecurity to be discussed in the U.S.-EU Cyber Dialogue.
Following the signing of the Administrative Arrangement in May 2022, we rolled out the Strategic Standards Information (SSI) mechanism, which will enable the United States and European Union to voluntarily share information about international standardization activities and promptly react to common strategic issues.  This mechanism will enable deepened cooperation to help shape global standards at international institutions such as the International Telecommunication Union (ITU), where we look forward to working with all ITU members and its new leadership.
Looking to the next TTC ministerial, and in coordination with key stakeholders, the United States and the EU intend to develop a common vision on research and development beyond 5G and 6G.
3. Building Resilient Semiconductor Supply Chains
Since the TTC ministerial meeting in Paris-Saclay, the United States passed the CHIPS and Science Act into law, and the European Chips Act has made steady progress in the co-legislative process.  The United States and the European Union recognize the importance of cooperating on promoting resilient supply chains.
To achieve this, the U.S. Department of Commerce and the European Commission are entering into an administrative arrangement to implement an early warning mechanism to address and mitigate semiconductor supply chain disruptions in a cooperative way.  The mechanism draws on the results of last summer’s pilot in which the United States and the European Union explored and tested approaches to the exchange of information and cooperation in case of disruptive events.
Transparency is a key tool to avoid concerns over public support programs.  Today, the U.S. Department of Commerce and the European Commission are entering into an administrative arrangement memorializing a common mechanism for reciprocal sharing of information about public support provided to the semiconductor sector to support transparency.  We intend to work with other likeminded countries to make similar commitments to transparency.
For our respective public support programs, we will also seek to exchange information and methodologies, share best practices, and develop a common understanding of market dynamics.  This includes:

Working with industry to promote initiatives aimed at advancing the transparency of demand for semiconductors;
Improving our understanding of forecasted global semiconductor demand to inform our common policy objective of avoiding over capacity and bottlenecks.  For this purpose, we expect to meet regularly and share information on demand forecast methodologies;
Exchanging information and best practices regarding investment approaches and terms and conditions for public support;
Exchanging areas of interest and exploring cooperative initiatives in research in semiconductors.

Building on this baseline of transparency, cooperation on potential disruptions, and a common understanding of global demand, we will work to avoid subsidy races and market distortions, and ensure a more resilient, sustainable and innovative semiconductors value chain.
4. Promoting Our Values Online
Declaration for the Future of the Internet
The principles of the Declaration for the Future of the Internet (DFI) – protection of universal human rights and fundamental freedoms, a global internet, and inclusive and affordable access to the Internet– are global in scope and enjoy support from the United States and the European Union.    The United States and the European Union again demonstrated their commitment to these principles on November 2, 2022, in Prague, where they engaged with the multi-stakeholder community, welcomed new countries that endorsed the Declaration, and reaffirmed their commitment to its vision and principles.
Protecting Human Rights Defenders Online
The United States and the European Union are deepening cooperation and mutual learning between U.S.- and EU-funded emergency mechanisms, in order to expand resources in support of human rights defenders worldwide.  We promote an open, free, global, interoperable, reliable, and secure Internet, in line with universal human rights, and seek to eliminate the use of arbitrary and unlawful surveillance to target human rights defenders. To underline our shared commitments, the European Union and the United States have released a joint statement on protecting human rights defenders online.
Addressing Internet Shutdowns
The United States and the European Union reiterate our alarm at the increasingly entrenched practice of government-imposed Internet shutdowns.  To address this issue, we have facilitated the creation of a multi-stakeholder group of technical experts who will document Internet shutdowns and their effects on society as rapidly and comprehensively as possible.  The group released its first report on recent Internet shutdowns.  We look forward to drawing on the findings of this report and future ones in our diplomatic work.
5. Enhancing Transatlantic Trade
Increasing the Use of Digital Tools
Digital technology can make it easier for companies, particularly small- and medium-sized enterprises, to engage in trade.  Prior to the next TTC co-chairs meeting, the United States and the European Union therefore plan to compile and exchange information on respective initiatives to use digital technology to simplify or reduce the cost of commercial actors’ interactions with our governments in relation to trade-related policy, legal requirements, or regulatory requirements.  The United States and the European Union intend to then build on this information exchange to develop joint best practices for the use of digital tools and to discuss how best to promote compatibility of such digital tools.
Mutual Recognition Agreements and Conformity Assessment-Related Initiatives
The United States and the European Union recognize the importance of mutual recognition agreements and conformity assessment-related initiatives for U.S. and EU stakeholders engaged in transatlantic trade in a range of sectors.  Before the next TTC co-chairs meeting, the United States and the European Union plan to explore ways in which the increased use of digital technology, where permissible, may help U.S. and EU stakeholders better utilize existing mutual recognition agreements to facilitate increased transatlantic trade.
The United States and the European Union will also explore the feasibility of extending the scope of the existing U.S.-EU Marine Equipment Mutual Recognition Agreement to include certain radio equipment.
The United States and the European Union also support regulators’ work on considering the necessary steps to extend the scope of the EU-U.S. Mutual Recognition Agreement annex for Pharmaceutical Good Manufacturing Practices to include vaccines and plasma-derived pharmaceuticals for human use, as discussed by the Joint Sectoral Committee.
With a view to providing mutual benefits and enhancing transatlantic trade, the United States and the European Union will continue exploring opportunities to improve cooperation in conformity assessment, including in machinery and other sectors.  This work will include exploring opportunities to improve cooperation on horizontal approaches to conformity assessment.
6. Trade, Security and Economic Prosperity
Cooperation on Export Controls and Sanction-Related Export Restrictions
Regarding cooperation on export control, we are looking at how to simplify transatlantic trade with regard to exports and re-exports of dual-use items and technologies while ensuring appropriate protection against misuse through pilot exchange of information on the disposition of U.S. exports to Europe and vice versa. We are facilitating trade between the United States and the European Union by more coordinated adoption and publication of multilateral control list revisions. We continue to consult on new regulatory actions. We are also planning to conduct coordinated export control outreach with partners. We are taking additional steps to enhance enforcement collaboration between the United States and the European Union, including through the exchange of best practices as appropriate and with a view to promoting the consistent application of sanction-related export restrictions targeting Russia and Belarus through regular information exchange, including regarding authorization and denial decisions.  Lastly, the United States and the European Union will cooperate on the export controls of sensitive and emerging technologies, while ensuring appropriate protection against misuse with a view to facilitate legitimate transatlantic trade and research interests.
Investment Screening
We have deepened our cooperation on investment screening through technical exchanges, including an in-person tabletop exercise in Brussels. We also continue to discuss security risks related to specific sensitive technologies, including those related to critical infrastructure, and to holistically assess the policy tools available to address these risks. The United States and the European Union underscore the importance of comprehensive, robust foreign investment screening mechanisms on both sides of the Atlantic in order to address risks to national security and, within the European Union, for public order, while remaining open for investment.  The United States and the European Union will continue to support the development and implementation of these mechanisms. The working group will be hosting a public stakeholder outreach event on the work of the Investment Screening Working Group in mid-December.
Addressing Non-Market Economic Policies and Practices
The United States and the European Union have shared concerns about the threat posed by a range of non-market policies and practices, such as those used in the medical devices sector and those involving government-owned or government-controlled investment funds. Following input received from stakeholders, the United States and the European Union have started exchanging information on the market situation of U.S. and EU medical devices companies in China, in order to better understand the impact of non-market policies and practices on U.S. and EU companies. The United States and the European Union are also deepening their exchanges to identify shared concerns relating to increasing use of the aforementioned investment funds. The two sides plan to work together on exploring which policy tools could address non-market policies and practices, including those affecting our medical devices companies. To that end, we will continue building a shared understanding of China’s economic and industrial directives and other non-market policies and practices, and develop coordinated action to foster supply chain diversification, build resilience to economic coercion, and reduce dependencies.
Addressing Economic Coercion
The United States and the European Union are increasingly concerned with the use of economic coercion that that seeks to undermine our legitimate choices and those of our partners at all levels of development, as well as global security and stability. We resolve to identify and address economic coercion and explore potential coordinated or joint efforts, bilaterally and with other likeminded partners, to improve our assessment, preparedness, resilience, deterrence, and responses to economic coercion.
7. Trade-Related Environment, Labor, and Health Initiatives
Transatlantic Initiative on Sustainable Trade
The United States and the European Union have already taken, and will continue to take, important policy steps to reduce carbon emissions and promote the accelerated deployment and uptake of environmental technologies.  Today we launch a transatlantic initiative on sustainable trade.
This initiative will enhance work across the TTC that strives to support the transition to low-carbon economies by identifying actions in key areas of trade and environmental sustainability that support our shared twin goals of a green and sustainable future and to increase transatlantic trade and investment. We intend to explore areas of cooperation to support these twin goals, including where there is opportunity to measurably decarbonize our energy intensive industries, and facilitate the deployment of goods and services essential to the transition to more circular, and net-zero, economies.
Trade and Labor Dialogue
The first principal-level session of Trade and Labor Dialogue (TALD) offered an opportunity to exchange views with senior representatives from labor, business, and government on both sides of the Atlantic.  During today’s meeting, we built on the technical meeting of September 20, 2022 and discussed the critical importance of eradicating forced labor in global trade and supply chains.  We explored how we can translate shared transatlantic values concerning combatting forced labor into concrete actions that promote internationally recognized labor rights, and promote resilient and sustainable trade and supply chains.
Health Information for Research
The United States and the European Union intend to work together intensively in the appropriate fora to facilitate the exchange of health information to support research, innovation, and advancements in public health in compliance with applicable legal requirements governing the protection of data, including the protection of health data.
8. Developing Talent for the Digital Transition and Economic Growth
The United States and the European Union are launching a Talent for Growth Task Force that will bring together government and private sector leaders from business, labor, and organizations that provide training,building on existing initiatives on both sides of the Atlantic.  The goal of the task force is to exchange best practices, and to serve as a catalyst for innovative skills policies.
We have a collective objective to develop systems of training for our working-age populations and means of recognizing the talent of all our people. The Talent for Growth Task Force will advise the TTC on the actions needed to achieve this. It will work with and encourage our respective communities to learn from each other, promote common taxonomies and tools, and inspire innovation on training programs; engage the public on the rewarding careers in technology sectors, including a focus on underrepresented communities; exchange on training programs that meet the changing demands of the market; build a skilled workforce that fosters growth and uninterrupted supply chains; facilitate small- and medium-sized businesses access to relevant skilled professionals  to foster competition; and help generate middle-income jobs to create a more resilient and equitable middle class.
III. Conclusion
These outcomes represent tangible progress across all workstreams established under the TTC.  We are committed to advancing these projects and developing new ones as we deepen and grow the transatlantic economic relationship, based on our shared values and principles.  The co-chairs intend to meet again in mid-2023 in Europe to review our joint work and discuss new ways to expand our partnership.
Compliments of the Office of the United States Trade Representative.
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The international Price Cap Coalition has finalised its work on implementing an oil price cap on Russian seaborne crude oil. EU Member States in the Council have also just approved in parallel its implementation within the EU.
The cap has been set at a maximum price of 60 USD per barrel for crude oil and is adjustable in the future in order to respond to market developments. This cap will be implemented by all members of the Price Cap Coalition through their respective domestic legal processes.
Ursula von der Leyen, President of the European Commission, said, “The G7 and all EU Member States have taken a decision that will hit Russia’s revenues even harder and reduce its ability to wage war in Ukraine. It will also help us to stabilise global energy prices, benefitting countries across the world who are currently confronted with high oil prices.”
While the EU’s ban on importing Russian seaborne crude oil and petroleum products remains fully in place, the price cap will allow European operators to transport Russian oil to third countries, provided its price remains strictly below the cap.
The price cap has been specifically designed to reduce further Russia’s revenues, while keeping global energy markets stable through continued supplies. It will therefore also help address inflation and keep energy costs stable at a time when high costs – particularly elevated fuel prices – are a great concern in the EU and across the globe.
The price cap will take effect after 5 December 2022 for crude and 5 February 2023 for refined petroleum products [the price for refined products will be finalised in due course]. It will enter into force simultaneously across all Price Cap Coalition jurisdictions. The price cap also provides for a smooth transition – it will not apply to oil purchased above the price cap, which is loaded onto vessels prior to 5 December and unloaded before 19 January 2023.
More Information
The EU’s sanctions against Russia are proving effective. They are damaging Russia’s ability to manufacture new weapons and repair existing ones, as well as hinder its transport of material.
The geopolitical, economic, and financial implications of Russia’s continued aggression are clear, as the war has disrupted global commodities markets, especially for agrifood products and energy. The EU continues to ensure that its sanctions do not impact energy and agrifood exports from Russia to third countries.
As guardian of the EU Treaties, the European Commission monitors the enforcement of EU sanctions across the EU.
The EU stands united in its solidarity with Ukraine, and will continue to support Ukraine and its people together with its international partners, including through additional political, financial, and humanitarian support.
The post G7 agrees oil price cap: reducing Russia’s revenues, while keeping global energy markets stable first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, Lustrum Symposium organised by Dutch Financial Law Association | Amsterdam, 1 December 2022 |

“We can’t overstate the importance of European Climate Law and the EU is setting the bar high,” says Executive Board member Frank Elderson. “As a central bank and banking supervisor, our policies will duly take into account the objectives of the Climate Law.”

I am honoured to speak at this 20th anniversary dinner, with so many distinguished lawyers around me. In this setting, I feel quite comfortable dwelling on legal issues for a while.
A topic close to my heart – apart from the law – is the ongoing climate and environmental crises. I am glad that we have long since moved on from the time when only scientists and activists were concerned with this topic. It is now high on policymakers’ agendas, as we saw at the recent United Nations Conference of Parties (COP27) at Sharm el-Sheikh, at which – along with world leaders and a wide range of policymakers and interest groups – the ECB was also represented.
I was struck by one story in particular.[1] The tiny Pacific nation of Vanuatu is badly exposed to cyclones and rising sea levels. To the inhabitants of Vanuatu, climate change is a human rights issue. And, as Vanuatu’s president, Nikenike Vurobaravu, stated, “we are measuring climate change not in degrees of Celsius or tonnes of carbon, but in human lives.”
Vanuatu now plans to ask the UN General Assembly to seek an opinion from the International Court of Justice on the human rights implications of the climate crisis. That opinion could determine the rights of countries most exposed to climate change. It could also touch on the obligations of those most responsible for driving the climate crisis.
Let’s now focus on Europe and the possible implications of these developments in international law for my own institution, the ECB. Under the Paris Agreement adopted at COP21 in 2015, many countries committed to the long-term goal of holding the increase in the global average temperature to well below 2°C above pre-industrial levels.[2]
To fulfil its commitment as one of parties to the Paris Agreement, the EU last year adopted the European Climate Law.[3] The implications of the Climate Law are significant. Before going into why, let me first explain what the Climate Law does.
The Climate Law has three key elements. The first is its objective that the EU reduce its greenhouse gas emissions by at least 55% by 2030, with a new reduction target to be set for 2040. The EU should achieve climate neutrality by 2050 and aim to achieve negative emissions thereafter. The second important element is to ensure that we move towards that objective. The European Commission has established a framework for assessing concrete progress and checking whether national and Union measures are consistent with the objective. It will issue regular reports on the conclusions of these assessments. The third and last element is to ensure that we use the most effective instruments to achieve the objective. The introduction of a European Scientific Advisory Board on Climate Change promotes the idea that all policies should be based on up-to-date scientific insights.
It is hard to overstate the importance of the Climate Law. The EU is setting the bar high. Allow me to quote what the law says about the transition to climate neutrality. It “requires changes across the entire policy spectrum and a collective effort of all sectors of the economy and society […] all relevant Union legislation and policies need to be consistent with, and contribute to, the fulfilment of the climate-neutrality objective while respecting a level playing field”[4].
We are starting to see this happen. From housing to energy and from transport to finance, the EU is introducing reforms to put Europe on track to become the first climate-neutral continent by 2050. So how will the Climate Law affect the ECB? For me, as a member of the ECB’s Executive Board and the Vice-Chair of its Supervisory Board, this question is relevant to both our monetary policy and banking supervision tasks.
This question matters because, in the field of the environment, the ECB is a policy taker, not a policymaker. So what does the ECB need to take from the policy and objectives reflected in the Climate Law? To answer this, we first need to consider whether the ECB is bound by the Climate Law. If so, the ECB would have to take measures towards achieving the climate-neutrality objective.
There is more, though. If the ECB is bound by the law, it would also have to ensure continuous progress in enhancing adaptive capacity, strengthening resilience and reducing vulnerability to climate change. Moreover, it would have to ensure that its policies on adaptation are coherent with and supportive of other such policies in the Union.[5]
That is quite a full plate. So, is the ECB bound by the Climate Law? There are definitely indications that it is. The Climate Law is addressed to “relevant Union institutions and the Member States”. In the European Anti-Fraud Office (OLAF) judgment[6], the European Court of Justice made it clear that, in principle, the ECB is bound by all regulations which bind the Union. There is no distinction to be made between the different institutions, bodies, offices and agencies. All are equal under the law, so to say.
However, the word “relevant” is ambiguous. Does it refer to any institution, where relevant? That would mean that every EU institution should comply with the Climate Law, whenever it develops policy or takes action relevant to the objective of the law. Or does it refer only to those institutions with competence to create policy relevant to achieving the objective of the Climate Law? The ECB would be directly bound by the law under the first interpretation but not under the second.
The Climate Law is not crystal clear on this point. It does not define “relevant institution”. But there are a number of strong indications that the ECB is not a relevant institution under the Climate Law. Let me explain why. The Climate Law does not contain many specific obligations. The law sets out a destination: climate neutrality. It does not tell us how to get there. How we do so will depend on environmental and economic policymaking. This is a Union competence the ECB does not have.
There are further arguments that support this interpretation. If the ECB is deemed to be a relevant institution, then it would have to submit its policies to the Commission for assessment and the Commission would monitor progress. That would be a fundamental change to the ECB’s accountability framework. Under current law, the ECB is only directly accountable to the European Parliament and the European Court of Auditors.[7]
A final reason for this view is institutional. If the ECB were deemed to be a relevant institution within the meaning of the Climate Law, this would be an implicit acceptance that the Council of the EU and the Parliament could set additional objectives for the ECB through the ordinary legislative procedure. However, the ECB’s objectives are laid down in the Treaty on the Functioning of the European Union (TFEU)[8], and their scope cannot be changed by secondary legislation. That would be a violation of the Treaty. Changing the ECB’s objectives requires a special procedure.
The ECB is – it seems – not directly bound by the Climate Law. So, can we ignore it? Not at all. To do so would be a violation of the Treaties. Article 11 of the TFEU provides that environmental protection requirements must be “integrated into the definition and implementation of the Union’s policies and activities”. This imposes an obligation on the ECB to take into account and consider the objectives of the Climate Law when performing its tasks. In addition, Article 11 could be understood as supporting measures which incorporate environmental considerations as secondary aims. This means the ECB could rely on Article 11 to support the climate neutrality dimension of measures falling within its monetary policy or supervisory competences. But it does not go so far as to establish an autonomous competence to adopt environmental measures. In addition, under Article 7 of the TFEU, the activities and policies of the ECB need to be consistent with Union law and therefore also with the Climate Law.
We have diligently assessed how these provisions of the Treaty, together with the Climate Law, affect our tasks, always being guided by and staying within our mandate. The ECB is not an environmental policy institution. The ECB is a central bank and banking supervisor. As such, let me share with you what we have done to reflect these legal requirements in the common fight against the climate crisis within our mandate.
First of all, when defining and implementing monetary policy, we need to take into account environmental protection requirements, such as the climate-neutrality objectives contained in the Climate Law. And that is what we have done. Last year the Governing Council adopted a comprehensive action plan[9] to further incorporate climate change considerations into its monetary policy framework.
There are a number of actions to which the ECB is committed under this plan. Let me now give a very concrete example of how the ECB has taken into account climate change considerations in the context of its corporate sector purchase programme (CSPP).
Under the CSPP, the Eurosystem purchases corporate bonds for monetary policy purposes. Right now we are in the reinvestment phase which means that we are no longer increasing our portfolio but only reinvesting bonds that mature. Up until October 2022, the Eurosystem purchased these bonds in accordance with the “market benchmark”. However, owing to the way the corporate bond market functions, this “market benchmark” has been criticised as leading to the purchase of a larger proportion of bonds from carbon-intensive firms.
Therefore, from October 2022, the ECB started to implement its decision to “tilt” CSPP reinvestments to increase the share of assets from issuers with better climate performance, rather than those with poorer climate performance. There are two main reasons for this decision.
First, the ECB considered this essential in order to effectively pursue its primary objective of maintaining price stability. Given that carbon-intensive issuers are more vulnerable to physical and transition risks arising from climate change, large holdings of bonds from such companies pose higher financial risks to the Eurosystem’s balance sheet, which has an impact on the implementation of its monetary policy.
Second, “tilting” the CSPP also serves the ECB’s secondary objective of supporting the general economic policies in the Union. “Tilting” its corporate bond reinvestments towards “greener” companies enables the ECB to align these reinvestments with the objectives set out in the Climate Law, which form part of those economic policies. This action was assessed as also being conducive, and not prejudicial, to price stability.
More generally, this measure ensures that the CSPP complies fully with the ECB’s obligations under Article 11 TFEU by integrating the objectives of the Climate Law into the definition and implementation of the ECB’s policies and activities.
This is one of the first steps in the ECB’s climate action plan, but the ECB is also looking into other ways to take climate-neutrality objectives into account in its monetary policy – for example, through the collateral that we ask when providing liquidity to banks.
For banking supervision, there are several dimensions that I will briefly discuss. Again, we do not directly apply the Climate Law. The Climate Law does not directly relate to our tasks as a banking supervisor nor does it relate to prudential supervision. Therefore the ECB does not impose an obligation on banks to take the necessary measures to contribute to the achievement of the objectives of the Climate Law. However, we cannot ignore it. Not only because we need to integrate environmental obligations into our policies due to Article 11 TFEU, but also since the law will have prudential implications. Therefore, the Climate Law and its consequences feature in our supervisory assessments, interactions with the banks and measures we take.
Why is that? Banks will be at the forefront of the energy and climate transition, whether they want to be or not. Their clients will face increasing hazards from climate change and environmental degradation as well as increasing regulation. Some clients will have to wind down their operations, others will be stuck with stranded assets. A mandatory energy label has been introduced for real estate[10], affecting the value of banks’ mortgage portfolios. Therefore, the ECB has identified exposure to climate-related and environmental risks as a key risk driver in the Single Supervisory Mechanism (SSM) Risk Map for the euro area banking system.[11] In order to guide banks regarding their risk management, the ECB has published supervisory expectations in its Guide on climate-related and environmental risks.[12] In addition, we have conducted a comprehensive review of banks’ practices related to strategy, governance and risk management on climate risks – the 2022 thematic review. We will continue to set expectations for banks to progressively manage risks on this front. These expectations are certainly not open ended. By the end of 2024, banks need to be in full compliance with all the supervisory expectations we set out in 2020.
Banks need to build their capabilities to withstand climate and environmental risks. We are happy that the Commission and the Council have acknowledged that this needs to have a foundation in prudential regulation as well. In the new banking package, the concept of “transition plans” is important. Under Article 76 of the proposed amendments to the Capital Requirements Directive (CRD VI)[13], a bank’s management board is required to monitor and address environmental risks arising in the short, medium and long term.[14] Banks have to make sure that their business model and strategy are not misaligned with the relevant Union policy objectives towards a sustainable economy and they need to manage potential risks from such misalignments.
Article 11 TFEU, the requirement to integrate environmental requirements into the policies and activities of the Union, plays a role in supervision. The ECB has a duty to integrate the Climate Law’s neutrality objectives into its supervisory policies and activities. However, we have some discretion as to how we do this. After all, the climate neutrality objective affects the ECB’s mandate in many respects and Article 11 TFEU does not prescribe how the ECB should integrate the environmental requirements. Do not expect us to act to regulate or enforce environmental policies. We will stick to our mandate. Our mandate is to keep under control the risks that banks and the financial system are facing, and in that capacity we have to look closely at the risks that are building up in the banking sector as a consequence of the climate crisis.
Lastly, I would like to draw your attention to the work of the Central Banks and Supervisors Network for Greening the Financial System (NGFS). In November 2021 the NGFS published an important report on climate-related litigation[15] which seeks to raise awareness about the growing source of litigation risk for public and private actors not convincingly supporting the climate change transition. Understanding the risks arising from climate-related litigation is clearly crucial for central banks and supervisory authorities, and the NGFS is continuing to monitor this field carefully. It plans to publish a further report next year with an update on the many developments since 2021.
I hope I am leaving you with the right impression. The ECB is not an environmental activist, but rather a prudent realist. It is our job to point out risks, whether they are macroeconomic, macroprudential, microprudential or related to litigation, and to ensure that the financial sector takes them duly into account.
Before I finish, let’s turn back to the brave fight of Vanuatu. You cannot blame Vanuatu’s president for seeking to defend the rights of countries most exposed to the ongoing climate and environmental crisis. Nor can we blame him for wanting to impose obligations on those most responsible for driving the crisis. Vanuatu’s mission is a stark example what the fight against the climate crisis is about. It underpins the task we have on our side. Europe has realistically no other choice than to deliver on the objectives of the Paris Agreement. If we waiver, the costs will only increase both in a moral and financial sense. Speaking as a European citizen, I would like us to be ready for the challenge ahead. As European central banker, supervisor and scholar of the law I will be even more forceful: our mandate requires us to be ready.
Compliments of the European Central Bank.

1. “The looming legal showdown on climate justice”, Financial Times, 10 November 2022.
2. Article 2(1)(a) of the Paris Agreement.
3. Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 (“European Climate Law”) (OJ L 243, 9.7.2021, p. 1).
4. Recital 25 of the European Climate Law.
5. Article 5 of the European Climate Law.
6. Case C-11/00, Commission v ECB, EU:C:2003:395.
7. Article 284(3) TFEU and Article 15.3 of the Protocol on the Statute of the European System of Central Banks and of the European Central Bank.
7. Articles 127(1) and 130 TFEU.
8. “ECB presents action plan to include climate change considerations in its monetary policy strategy”, press release, ECB, 8 July 2021.
9. Currently under revision. See Proposal for a Directive of the European Parliament and of the Council on the energy performance of buildings (recast) COM/2021/802 final.
10. See “ECB Banking Supervision – Assessment of risks and vulnerabilities for 2021”, ECB, 2021.
11. See Guide on climate-related and environmental risks, ECB, November 2020.
12. Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks, and amending Directive 2014/59/EU (COM/2021/663 final).
13. See also Articles 73 and 74 CRD VI.
14. “Climate-related litigation: Raising awareness about a growing source of risk”, NGFS, November 2021.

 
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