Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Petersberger Sommerdialog | Frankfurt am Main, 3 July 2021 |

After having lived through the deepest contraction in post-war times, the euro area economy has embarked on a strong recovery from the pandemic.
Confidence indicators are at their highest level in more than two decades, reflecting surging optimism among firms and consumers. According to the June 2021 Eurosystem staff projections, the euro area is expected to grow by 4.6% this year and by 4.7% in 2022, the fastest expansion in the history of the monetary union.
Inflation, too, has started to recover from the negative rates seen at the end of last year. The recent pick-up in price pressures has given rise to a controversial debate among economists, experts and financial market participants about the future prospect of inflation, not only in the euro area but globally.
The views are broadly divided into two camps: one believes that the inflationary effects will be transitory and will vanish rapidly as supply catches up with demand. Another sees higher inflation rates ahead, reflecting both more persistent supply and demand imbalances as well as the impact of prolonged policy stimulus.
In my remarks today I will argue that many of the factors causing inflation to rise this year are likely to fade in 2022. As the large prevailing labour market slack is receding only gradually, medium-term inflation is likely to remain below the Governing Council’s aim.
At the same time, rising long-term inflation expectations suggest that the exit from the pandemic provides, for the first time in many years, some ground for cautious optimism that the euro area economy may eventually escape the low growth, low inflation environment that has dominated the macroeconomic landscape for most of the past decade, with inflation eventually converging sustainably to levels closer to 2%.
For this to happen, continued fiscal and monetary policy support is needed to nurture and cultivate the nascent recovery and to set in motion a virtuous circle of rising underlying inflation and wages.
Pandemic-related developments driving global inflation higher
Global inflation has increased measurably since the start of the year.
In May it reached 3.8% across the 36 member countries of the Organisation for Economic Co-operation and Development (OECD), more than twice the rate recorded at the start of the year, and the highest rate since the outbreak of the global financial crisis in 2008 (left chart slide 2).
Although the increase in inflation is broad-based, its extent differs notably across countries. In the United States, for example, consumer prices – based on a harmonised basket of goods and services – rose by 6% year-on-year in May, while they increased by only 2% in the euro area (right chart slide 2).
Rising headline inflation reflects two complementary forces.
The first is a strong rise in energy prices. The price of Brent crude oil has increased by around 80% over the past 12 months (left chart slide 3).
Surging commodity prices reflect, to a large extent, base effects, meaning that price increases are statistically amplified by the exceptionally low prices observed a year ago.
This can easily be seen when comparing prices today with prices two years ago, before the pandemic hit. Over this period, energy price inflation in the euro area was, by and large, flat (right chart slide 3). That is, households saw no increase in energy costs over the past two years.
The second factor that has contributed to the observed rise in global headline inflation is the marked increase in the inflation rate of the broader consumption basket.
This increase has been much more dispersed across economies (left chart slide 4). In the euro area, for example, there has so far been limited upward pressure on core inflation, which excludes more volatile prices, such as those for food and energy.
Core inflation typically shows few signs of acceleration in the early stages of a recovery, as it takes time for economic slack to be reabsorbed and for underlying price pressures to build. Indeed, in the OECD as a whole, there is still abundant slack: the output gap is estimated to be around -3% this year, and is expected to remain negative in 2022 (right chart slide 4).
The unprecedented rise in global core inflation in recent months can be tied to two pandemic-related developments.
One is the unparalleled downturn in service sector activity last year, which depressed price pressure in contact-intensive sectors. In economies where re-openings are already in full swing, such as the United States, base effects in the most affected sectors, such as hospitality, are pulling underlying inflation higher (left chart slide 5).
In the euro area, remaining social distancing measures mean that these effects have not yet come into play as capacity utilisation remains subdued (right chart slide 5).
The second development is the emergence of supply bottlenecks in the manufacturing sector.
The global and euro area manufacturing sectors have been expanding at a fast pace for almost a year (left chart slide 6), reflecting a rotation in demand away from services towards goods. According to the purchasing managers’ index, which is a reliable gauge for actual growth, manufacturing output in the euro area is currently growing at an unprecedented pace.
Strong demand, in turn, is creating mounting shortages in chemicals, wood, plastic, metals and semiconductor chips, aggravated by shipping disruptions. The prices of many raw materials have surged strongly when compared with pre-pandemic levels, even when the latest easing in price pressures is taken into account (right chart slide 6).
As a result, euro area firms’ input prices and delivery times have increased to record highs (left chart slide 7). To protect their margins, firms are likely to pass through some of these costs to customers, albeit to varying degrees across countries and sectors.
In the euro area, goods inflation is currently four times as high as its average level over the past five years before the pandemic (right chart slide 7). But at an annual rate of change of just 1.2%, it remains low both in absolute terms and in international comparison.
The baseline inflation outlook for the euro area
Such supply-side shocks, if transient, are typically not relevant for the conduct of monetary policy. Given significant lags in the transmission of monetary policy, there is little central banks can do to mitigate short-term cost pressures.
Instead, what matters for monetary policy is how inflation will evolve in the medium term, which will depend, among other things, on the expected persistence of current inflation drivers.
The baseline scenario of the June 2021 Eurosystem staff macroeconomic projections for the euro area assumes that most, if not all, of the current inflation drivers will ultimately prove to be transitory.[1] The projections foresee an increase in HICP inflation to 2.6% in the last quarter of this year from 1.9% in June, before falling back to 1.5% in 2022 and 1.4% in 2023 (left chart slide 8).
There are good reasons to consider this baseline plausible.
In particular, vanishing base effects from both energy price inflation and past policy measures, such as last year’s value-added tax cut in Germany, will lead to a quasi-mechanical decline in inflation next year.[2] In addition, shortages of intermediate goods and shipping disruptions are expected to ease over time as supply catches up with demand.
In other words, it is reasonable to assume that, in the medium term, inflation will converge back to levels more in line with the predictions of standard Phillips curves that model inflation primarily as a function of domestic slack and inflation expectations – the latter ultimately determining whether transitory shocks become ingrained in the inflation process in the long run.
According to these models, underlying price pressure in the euro area is expected to gradually regain strength as transitory supply-side shocks fade (right chart slide 8). Upward revisions to core inflation for both 2022 and 2023 put expected underlying price dynamics slightly above the average prediction from a range of Phillips curves.
At 1.4%, core inflation in 2023 is predicted to reach levels above its post-2008 financial crisis average of 1.2%, reflecting expectations that slack will gradually be reabsorbed within the projections horizon, thereby putting upward pressure on wage growth.
Consequently, the current subdued headline inflation outlook in the euro area, relative to core inflation, is to a large extent driven by assumptions regarding future oil price developments.
Chances and risks around the euro area inflation outlook
Uncertainty around the baseline inflation outlook remains, however, exceptionally high at present.
On the one hand, the recovery remains heavily dependent on the evolution of the pandemic and on social distancing measures being removed swiftly.
The rapid spread of the Delta variant vividly demonstrates that, until herd immunity has been achieved, the risk of another wave of coronavirus (COVID-19) infections remains high. The mutation has already become a tangible impediment to international travel, putting the tourism season in the Mediterranean at risk, even though the macroeconomic consequences, including the need for broader containment measures, are likely to diminish once a critical mass of the population has been vaccinated.
The phasing out of job retention schemes, which have been an important pillar of support throughout the pandemic, constitutes another downside risk.
Should unemployment rise more forcefully in response to the structural changes unleashed by the pandemic, the increase in wage growth, needed to underpin demand, could be weaker than currently projected.
On the other hand, for the first time in many years, financial market prices have recently adjusted in ways that suggest that investors are preparing, cautiously but steadily, for the possibility of the euro area economy leaving the long period of very low inflation behind.
Option prices in financial markets, for example, suggest that investors currently price in almost a one-in-four chance that inflation over the next five years will average more than 2% – the highest level since 2014 (left chart slide 9).
Estimates of the inflation risk premium, which had turned negative a few years ago on the back of growing risks of deflation, now signal a renewed interest of investors to hedge against the risks of inflation (right chart slide 9). Flows into inflation-protected bond funds have accelerated measurably since around last summer in both the euro area and the United States.
Survey-based evidence points in a similar direction.
The results of our most recent survey of monetary analysts suggests that more than 40% of respondents see upside risks to inflation this year, while almost a third sees upside risks for 2022 (left chart slide 10).
Similarly, the share of consumers that expect inflation over the next 12 months to increase more rapidly than it did over the past 12 months is at the highest level in nearly 20 years, abstracting from the short-lived blip in expectations immediately after the outbreak of the pandemic last year (right chart slide 10).
There are three broad reasons that likely motivate these shifting expectations.[3]
Price level normalisation and pass-through of higher input prices
The first is that the impact on inflation of the re-opening of the euro area economy could be larger than expected. That is, even if supply and demand imbalances will ultimately prove short-lived, they may lift inflation during the transition phase above the levels currently projected.
This can be seen when comparing the inflation path of the December 2020 and June 2021 staff projections (left chart slide 11). Persistent upside surprises to inflation outcomes this year imply that, despite unchanged dynamics, inflation in 2022 is currently foreseen to be almost half a percentage point higher than projected in December of last year.
The HICP flash release for June, and the outcome for goods inflation in particular, suggests that future upward revisions remain possible.
Private forecasters, too, have repeatedly underestimated the extent of the rise in inflation during the pandemic, particularly in the United States and the euro area (right chart slide 11).
Upside surprises to inflation have coincided with a broader underprediction by market analysts of the euro area economy’s ability to sustain demand and profits in the presence of social distancing measures, showing up in a rare persistence of positive surprises (slide 12).
Looking ahead, further upside potential will, to a large extent, depend on the price elasticity of demand and hence the pricing power of firms.
After a long period of weak profits, many firms in the services sector may see the marked pick-up in demand as an opportunity to recoup foregone profits. Many services prices today remain below the levels that would likely have prevailed in the absence of the pandemic.
Transport prices, for example, fell throughout most of last year, which was an unprecedented phenomenon (left chart slide 13). Efforts to repair impaired balance sheets may upend the elasticities underpinning the predictions of our models.
Price level normalisation may go hand-in hand with a stronger and faster pass-through of higher input prices to final consumer prices.
In the past, there have often been substantial lags in the pass-through of pipeline pressure. ECB staff analysis finds, for example, that it usually takes one year or more for cost-push shocks in intermediate goods prices to pass through to HICP inflation (right chart slide 13).[4]
Surveys, however, signal that a historically large share of companies is raising output prices today (left chart slide 14). Many firms also expect prices to continue to rise in the near term.
Two factors might cause firms to frontload and strengthen the pass-through to consumer prices at present.
One relates to firms’ state-contingent pricing behaviour. Empirical evidence suggests that firms are more likely to pass through cost-push shocks in an environment of rising demand.[5]
Consumers being willing to accept higher prices in light of substantial excess savings might reinforce this channel. ECB staff estimates that the stock of accumulated excess savings amounted to €540 billion in the first quarter of this year, or 7.4% of annual disposable income in 2019.[6]
The other factor relates to non-linearity. Research by Goldman Sachs finds that, when cost pressures are within the historical norm, the pass-through of input costs to output prices is typically low and short-lived in the manufacturing sector (right chart slide 14). But at times of significant cost pressure, like today, pass-through is almost complete as firms seek to protect their margins.
The persistence of supply and demand imbalances
The second upside potential for inflation relates to the persistence of supply and demand imbalances.
Put simply, the longer demand will exceed supply, the higher the chances that underlying price pressures will gain sufficient traction to break the vicious pre-pandemic circle of low demand and low inflation.
On the demand side, there are chances that both private and public spending may keep demand above potential for a sustained period of time.
The extent to which private consumption may persistently push demand above potential growth will depend on the future evolution of precautionary savings as well as the extent of the unwinding of past “forced” savings.
The level of precautionary savings is closely linked to confidence effects.
Consumer confidence has surged measurably since the start of the year, with fears of unemployment falling sharply (left chart slide 15). The fast pace at which vaccinations are currently being rolled out is likely to have boosted confidence by materially reducing the risks of a future economic relapse.
The unwinding of forced savings, in turn, depends fundamentally on the marginal propensity of consumption of those who have accumulated these savings in the first place.
The Eurosystem staff projections assume only a modest absorption of the current excess stock of savings in the future, mainly because these savings are predominately held by high-income households with lower propensities to consume out of income or wealth (right chart slide 15).[7]
Alternative scenarios conducted by Eurosystem staff as part of the June projections provide a high-level approximation of the potential impact that relaxing some of these assumptions would have on projected inflation.
For example, in the mild scenario, which foresees the resolution of the health crisis by late 2021, additional confidence effects lead to a more forceful and faster pick-up of demand and, hence, a stronger decumulation of excess savings by households. As a result, inflation in 2023 could reach 1.7%, 0.3 percentage points higher than under the baseline scenario (left chart slide 16).
Prolonged and more effective fiscal stimulus may add to pent-up demand among households.
In the euro area, broader discretionary fiscal stimulus is expected to amount to more than 4% of GDP in 2021, about 1.5% in 2022 and 1.25% in 2023, marking a sharp shift from the past when the fiscal stance detracted from, rather than added to, growth.
In particular, large public infrastructure programmes on both sides of the Atlantic, largely motivated by the urgency to accelerate the transition to a carbon-free economy, may give rise to upside potential for inflation in two complementary ways.
One is through their effect on growth. There is a chance that fiscal multipliers associated with the “green” transition will be measurably higher than conventional multipliers. Recent research by the International Monetary Fund (IMF), for example, suggests that the estimated multipliers could be about twice as large (right chart slide 16).[8]
The other way is through the sustained impact of infrastructure programmes on the demand for commodities.
With the green transition in full swing, some analysts ponder the idea of a new commodities “supercycle”. The International Energy Agency estimates that the primary demand for copper alone, which is a key input for the green energy transition, could increase by almost 25% by 2030.
Many commodities, however, currently trade in backwardation, meaning that their expected price in the future is below the current spot price, largely reflecting the impact of the re-opening of economies on the convenience yield of holding physical stocks today.
Hence, sustained administrated increases in the global carbon price, together with strong demand for raw materials, imply a risk that backwardation may not be sustainable in the medium term, creating upside potential for inflation.
The Eurosystem staff projections quantify this potential.
While oil prices are already well above the assumptions underlying the June projections, option-implied densities suggest that if oil prices increased only slightly from current levels and remained at that level, headline inflation in 2023 could be 0.4 percentage points higher than under the baseline scenario, bringing medium-term inflation closer to the Governing Council’s aim (left chart slide 16).
Finally, on the supply side, differences in the pace at which the pandemic recedes across countries may prolong supply constraints by causing sustained disruptions to global value chains.
While inoculation rates in many advanced economies are about to reach a critical mass, the share of the population vaccinated in most emerging and developing economies remains far too low, leaving them vulnerable to the rapid spread of more infectious variants of the virus.
For example, the recent outbreak in southern China, dominated by the Delta variant, has again disrupted port services, causing massive shipping delays in major Chinese ports and pushing up already elevated shipping costs.
The potential for second-round effects
The third upside potential relates to second-round effects.
An example best illustrates this: today, the price of hairdressing is visibly above its pre-pandemic trend, and unlikely to reverse in the future, given sticky prices in this sector (left chart slide 17).
So, even if current price dynamics will ultimately be limited to a one-time level effect, if it extends to a broad category of goods and services and if it is not matched by higher wages, it may depress real incomes.
Perceptions of an erosion of purchasing power may be reinforced by price increases being concentrated in frequently purchased consumer goods and services (right chart slide 17).
Second-round effects refer to the possibility that a transitory rise in inflation may lead to stronger wage growth if unions attempt to re-establish workers’ pre-pandemic purchasing power, which may subsequently lead to firms passing on higher wages to final consumer prices.
Typically, central banks watch second-round effects with great caution, as they have the potential to alter the persistent underlying direction of inflation.
Today, however, with trend inflation having moderated visibly in recent years, and with real compensation per employee having expanded at a pace considerably slower than productivity per employee over the past two decades, a virtuous price-wage spiral may support demand, sustain underlying inflation and thereby help inflation to converge to our aim.
The chances of such a spiral materialising critically depend on the broader labour market situation, including the bargaining power of unions as well as the impact of the phasing out of job retention schemes on employment and wages.
At the current juncture, broader measures of labour market slack remain at very high levels, both when accounting for the number of workers in job retention schemes and for discouraged workers who left the labour force during the pandemic (left chart slide 18). Surveys confirm that, so far, most firms do not see labour as a factor limiting production. As a result, negotiated wage growth in the euro area remains at subdued levels (right chart slide 18).
Two factors might, however, strengthen the bargaining power of workers in the recovery from the crisis.
One is skill mismatch. The post-pandemic economy will be different from the pre-pandemic economy. Some sectors will shrink, others will expand, creating risks of skill mismatch, and potentially adding to the skill premium through “skill-biased technological change”.[9]
The other is a faster and broader pace of reabsorption of current labour market slack. The IMF, for example, expects the aggregate output gap in advanced economies to be already slightly positive in 2022, as GDP per capita this year is estimated to expand at its fastest rate since the 1980s.
Policy conclusions
In summary, and with this I would like to conclude, we are confronted with an inflation outlook that will be highly volatile until well into next year. Over time, the fading of price pressures from supply-side constraints should gradually give way to a demand-driven increase in underlying inflation, while leaving medium-term inflation falling short of the Governing Council’s aim of below, but close to, 2%.
Yet, with the share of vaccinated people approaching a critical mass, underpinning the economic recovery, there are chances for inflation to move closer to our aim in the medium term. While the spread of more infectious virus mutations may decelerate the reabsorption of slack, a stronger and faster pass-through of elevated producer price inflation, a more protracted period of growth above the economy’s potential and a virtuous price-wage spiral have the potential to lift the euro area economy out of the pre-pandemic low growth, low inflation environment.
Even in this environment, fears of too high inflation are unfounded. In the most benign scenario, inflation in the euro area over the coming years would very likely remain well below the levels that threatened price stability, and hence welfare and social cohesion, in the 1970s and 1980s, largely thanks to the stability-orientated policy frameworks of independent central banks.
Instead, after a long period of very low inflation, the current spirit of optimism and confidence, in combination with significant public and private investments in digital and green technologies, provide a welcome opportunity for long-term inflation expectations to re-align more closely with the Governing Council’s definition of price stability.
There is growing evidence that this re-alignment is gradually taking place. For it to become sustained, monetary policy needs to remain expansionary to avoid choking off the incipient recovery.
Years of repeated overprediction of the future path of inflation require that higher inflation prospects need to visibly migrate into the baseline scenario, and be reflected in actual underlying inflation dynamics, in line with our forward guidance, before they warrant a more fundamental reassessment of the medium-term inflation outlook.
Such patience may lead to inflation outcomes being moderately above our aim for a temporary period of time. This will be a necessary and proportionate requirement to set the conditions to escape low inflation.
PRESENTATION SLIDES HERE

Compliments of the European Central Bank.

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The Commission adopted today a package of decisions supporting the competitiveness and innovation capacity of the EU defence industry. The adoption of the first European Defence Fund (EDF) annual work programme paves the way to the immediate launch of 23 calls for proposals for a total of €1.2 billion of EU funding in support of collaborative defence research and development projects. Furthermore, under the EDF’s precursor programme, the European Defence Industry Development Programme (EDIDP), 26 new projects with a budget of more than €158 million were selected for funding. In addition, two major capability development projects received today a directly awarded grant of €137 million under the EDIDP.
Margrethe Vestager, Executive Vice-President for a Europe Fit for the Digital Age, said: “The European Defence Fund now plays a key role in making defence industrial cooperation in Europe a permanent reality. This will foster the EU’s competitiveness and contribute to achieving our technological ambitions. With significant participation of companies of all sizes and from across the EU, the Fund provides great opportunities to foster innovation and cutting edge capabilities. 30% of funding going to small and medium sized enterprises is a very promising start.”
Thierry Breton, Commissioner for Internal Market, said: “In 2021, the European Defence Fund is coming to life. With the EU’s first-ever dedicated defence programme, European cooperation in defence will become the norm. Public authorities will spend better together, and companies – big or small – from all Member States will benefit, resulting in more integrated European defence industrial value chains. In 2021 alone, the EDF will finance up to EUR 1.2bn in high-end defence capability projects such as the next generation of aircraft fighters, tanks or ships, as well as critical defence technologies such as military cloud, AI, semiconductors, space, cyber or medical counter measures.”
2021 EDF work programme: a step change in ambition
During the first year, the EDF will co-finance large-scale and complex projects for a total amount of €1.2 billion. To finance this ambitious roll-out, the 2021 EDF budget of €930 million has been complemented with a ‘top-up’ of €290 million from the 2022 EDF budget. This will allow to kick-start large-scale and ambitious capability development projects while ensuring broad thematic coverage of other promising topics.
With the objective of reducing fragmentation of the EU defence capabilities, enhancing competitiveness of the EU defence industry and the interoperability of products and technologies, the 2021 EDF work programme will incentivise and support a number of capability development and standardisation projects.
In the first year, the EDF will allocate around €700 million to the preparation of large-scale and complex defence platforms and systems such as next generation fighter systems or ground vehicles fleet, digital and modular ships, and ballistic missile defence.
Around €100 million will be dedicated to critical technologies, which will enhance the performance and resilience of defence equipment such as artificial intelligence and cloud for military operations, semiconductors in the field of infrared and radiofrequency components.
The EDF will also increase synergies with other civilian EU policies and programmes, notably in the field of space (around €50 million), medical response (around €70 million), and digital and cyber (around €100 million). This aims to foster cross-fertilisation, enable the entry of new players and reduce technological dependencies.
The Fund will spearhead innovation through more than €120 million allocated to disruptive technologies and specific open calls for SMEs. It will foster game-changing innovations, notably in quantum technologies, additive manufacturing and over the horizon radar, and tap into promising SMEs and start-ups.
Outcome of the 2020 EDIDP: 26 new projects and 2 direct awards
The final EDIDP financing cycle resulted in the award of support to the development of a number of new defence capabilities in areas as diverse and complementary as maritime security, cyber situational awareness or ground and air combat.
In particular, 26 new projects with a budget of more than €158 million were selected for funding, with a major focus on surveillance capacities (both space-based and maritime capacities), resilience (Chemical Biological Radiological Nuclear detection, Counter-Unmanned Air System) and high-end capabilities (precision-strike, ground combat, air combat).
The 2020 EDIDP cycle confirms also this year the fit-for-purpose model of the European Defence Fund, namely:

Highly attractive programme: 63 proposals competing in the calls involving more than 700 entities;

Reinforced defence cooperation: on average, 16 entities from 7 Member States participating in each project;

Wide geographical coverage: 420 entities from 25 Member States participating in the projects;

Strong involvement of SMEs: 35% of the entities and benefit from 30% of the total funding;

Consistency with other EU defence initiatives: notably the Permanent Structured Cooperation, with 15 out of 26 projects having PESCO status.

In EDIDP 2020, 10 entities controlled by third countries are involved in selected proposals following valid security-based guarantees.
In addition, two major capability development projects received a total grant of €137 million in view of their high strategic importance:

MALE RPAS, also known as Eurodrone, supporting the development of a medium-altitude and long-endurance drone (€100 million). Together with other selected projects in support of payload for tactical drones, swarm of drones, sensors, low observable tactical systems, more than €135 million will be invested to build technological sovereignty in drones, a critical asset for EU armed forces;
The European Secure Software-defined Radio (€37 million), ESSOR, boosting the EU’s armed forces interoperability by creating a European standardisation for communication technologies (software radios). Together with other projects selected in support of secure and resilient communication (with the use of quantum key distribution), optical point to point communication between military platforms and solutions for tactical networks, more than €48 million will be invested in secure communication systems.

Background
The European Defence Fund constitutes the Union’s flagship instrument to support defence cooperation in Europe and is a stepping stone for EU strategic autonomy. While complementing Member States’ efforts, the Fund promotes cooperation between companies of all sizes and research actors throughout the EU. The Fund has a budget of €7.953 billion in current prices, of which roughly one third will finance competitive and collaborative research projects, in particular through grants and two-thirds will complement Member States’ investment by co-financing the costs for defence capabilities development following the research stage.
The EDF precursor programmes were the European Defence Industrial Development Programme (EDIDP), with €500 million for 2019-2020, and the Preparatory Action on Defence Research (PADR), which had a budget of €90 million for 2017-2019. Their aim, similarly to that of the European Defence Fund, was to foster an innovative and competitive defence technological and industrial base and contribute to the EU’s strategic autonomy. The PADR covered the research phase of defence products, including disruptive technologies, while EDIDP has supported collaborative projects related to development, including design and prototyping.
Compliments of the European Commission.
The post Defence Industry: the EU Commission kick-starts the European Defence Fund with €1.2 billion and awards 26 new industrial cooperation projects for more than €158 million first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today the European Commission and the EU High Representative for Foreign Affairs and Security Policy outlined a proposal on how to take forward priorities for cooperation with our Eastern partners in the years to come. This agenda is based on the five long-term objectives, with resilience at its core, as defined for the future of the Eastern Partnership in March 2020. It will be underpinned by a €2.3 billion Economic and Investment plan in grants, blending and guarantees, with a potential to mobilise up to €17 billion in public and private investments. This proposal will contribute to the discussions on the future Eastern Partnership policy including at the Eastern Partnership summit planned for December 2021.
The comprehensive agenda aims at increasing trade, growth and jobs, investing in connectivity, strengthening democratic institutions and the rule of law, supporting the green and digital transitions, and promoting fair, gender-equal and inclusive societies.
High Representative/Vice-President Josep Borrell said: “The Eastern Partnership remains high on the European Union’s agenda.  We want to shape an agenda that responds to the unprecedented challenges – and opportunities – of today, while making it fit for the future. At the heart of our work will be promoting democracy, good governance and the rule of law, which are so crucial to unlock positive, concrete results in our cooperation. This includes Belarus, where we want to continue to support the people through our Eastern Partnership framework.”
Commissioner for Neighbourhood and Enlargement Olivér Várhelyi said:“We are putting forward an ambitious Economic and Investment Plan that will help stimulate jobs and growth and bring prosperity to the Eastern Partnership region. The Plan includes country flagships for all Eastern Partners, including support for a future democratic Belarus. This new agenda will support socioeconomic recovery after COVID-19 pandemic, strengthen economic relations and build trade routes between the EU and partner countries.”
The comprehensive agenda focusing on recovery, resilience and reform, includes selection of the top ten targets for 2025 with clear commitments in all the priority areas of cooperation. They encompass areas like the additional support to 500,000 SMEs, build or upgrade 3.000 km of priority roads and railways in line with EU standards address hybrid and cyber threats, fight corruption, reduce energy consumption by at least 20% in 250,000 households, improve access to safe water services and air quality, increased access to high-speed internet in 80% of households, assistance to vaccinate health workers, additional support to civil society and independent media, mobility opportunities for 70,000 students, researchers and young people.
The new agenda, also proposes a revision of the EaP multilateral architecture to adjust the framework to the new priorities and make it fully fit for purpose.
The regional economic and investment plan will support post – COVID socio-economic recovery and long-term resilience, taking into account the ‘build back better’ agenda. The plan outlines priority investments and defines a set of flagship initiatives, which have been jointly identified with the partner countries, in view of their priorities, needs and ambitions.
Background
The Eastern Partnership was launched in 2009 with the aim of strengthening and deepening the political and economic relations between the EU, its Member States and six Eastern European and South Caucasus partner countries: Armenia, Azerbaijan, Belarus, Georgia, the Republic of Moldova, and Ukraine. The Partnership has developed according to each partner’s interests, ambitions, and progress, allowing for differentiation in a flexible and inclusive way, to tackle common and global challenges and foster regional integration jointly.
Through its ambitious ’20 deliverables for 2020′ agreed at the 5th Eastern Partnership Summit in 2017, the EaP has delivered tangible results and improved people’s lives.  Work on a successor agenda began in 2019 with a broad and inclusive consultation. The resulting Joint Communication: Eastern Partnership policy beyond 2020: Reinforcing Resilience – an Eastern Partnership that delivers for all  and Council Conclusions on the Eastern Partnership policy beyond 2020 set out a new vision for the partnership, with resilience as overarching policy framework and five long-term policy objectives (economy and connectivity, good governance and the rule of law, environmental and climate resilience, support to digital transformation, and fair and inclusive societies), acknowledged at the EaP Leaders’ videoconference held in June 2020.
Next steps
The proposals will be discussed with partner countries, EU Member states, civil society and other key stakeholders in view of the 6th Eastern Partnership Summit in December 2021.
Compliments of the European Commission.
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The absence of clear references to SDGs and the lack of involvement of cities and regions in the national recovery plans could compromise the capacity to overcome the pandemic crisis
European local and regional leaders are calling for the Sustainable Development Goals of the United Nations (SDGs) to be put back on the top of the European Union’s agenda, asking the EU institutions and Member States to ensure their implementation by 2030. In an opinion adopted today by its plenary, the European Committee of the Regions (CoR) highlights that the COVID-19 pandemic has demonstrated the importance of sustainable development and that SDGs can help move towards a coherent, holistic vision within Next Generation EU . However, a recent CoR study points out a lack of explicit and transparent reference to the UN SDGs in many national recovery and resilience plans.
The ongoing pandemic and its expected economic, social and environmental consequences show a clear urgency to support the “localisation” of the SDGs in order to build back in a fairer way and avoid future health crises. SDGs should help Member States’ economies recover and deliver the digital and green transitions on the ground. However, a recent study commissioned by the CoR sounded the alarm about the lack of involvement of regions and cities in national recovery plans, while in many cases clear references to SDGs are missing, reducing the opportunity for a common understanding of the plans.
Ricardo Rio (PT/EPP), rapporteur and Mayor of Braga, said: ” The SDGs almost disappeared from the EU narrative: there is no overarching strategy and no effective mainstreaming or coordination of SDGs in the European Commission’s internal governance. This is all the more striking as in parallel the commitment of local and regional authorities on SDGs kept increasing. The preliminary results of our OECD-CoR survey clearly show that local and regional authorities are well engaged in a sustainable recovery, based on SDGs. 40% of respondents have been using them before the pandemic and now started to use them to address the recovery, while 44% are planning to do so to recover from COVID-19. This is a big opportunity for all policy-makers to come back stronger from this crisis and I will, together with the OECD, actively advocate for it at EU level .”
The OECD estimates that 65% of the 169 targets of the 17 SDGs cannot be reached without involvement of, or coordination with, local and regional authorities. Moreover, the results of a new CoR-OECD joint survey show that 60% of local and regional governments believe that the COVID-19 pandemic has led to more conviction that the SDGs can help take a more holistic approach for recovery. Therefore, the CoR regrets that the SDGs have progressively lost ground in the EU narrative, with a lower profile in EU policy-making jeopardising their chances of implementation by 2030.
CoR members urge European leaders to be ambitious and consistent in their domestic and foreign policy agendas and to declare with one clear purpose that the EU must be a leader and visible champion in the implementation of the SDGs at all governmental levels. The opinion points out that Sustainable Development Goals should provide a coherent framework for all EU policies and help align the priorities of all funding programmes. Nevertheless, sometimes the link between the UN objectives and main European initiatives like the new industrial strategy appear tenuous. Moreover, it calls on the European Commission to use the next Annual Sustainable Growth Strategy 2022 to formally reintegrate SDGs into the European Semester, better link SDGs and the Recovery and Resilience Facility (the cornerstone of Next Generation EU), and explicitly affirm SDGs as a way for the EU to shape a sustainable recovery.
Local and regional leaders ask the European Commission to renew the SDG multi-stakeholder platform or create another dialogue platform with clout and structured follow-up to foster expertise from all the different stakeholders from public and private institutions regarding the 2030 Agenda and to advise the Commission directly.
The rapporteur Mr Rio delivered the call to prominent EU policy makers already on Tuesday, when he took the floor at the Brussels Economic Forum 2021 , the flagship annual economic event of the European Commission, alongside President Von der Leyen and German Chancellor Angela Merkel.
Background information:
The CoR and the OECD jointly carried out a survey between May and Mid-June 2021 on SDGs as a framework for COVID-19 recovery in cities and regions. The survey included 86 responses from municipalities, regions and intermediary entities in 24 EU countries, plus a few other OECD & non-OECD countries. Preliminary findings were presented on Tuesday during the fourth edition of the Cities and Regions for the SDGs roundtable , a two-day online event that focused on the SDGs as a framework for long-term COVID-19 recovery strategies in cities and regions. The document is available here.
The CoR adopted a first opinion on ” Sustainable Development Goals (SDGs): a basis for a long-term EU strategy for a sustainable Europe by 2030 ” in 2019 by rapporteur Arnoldas Abramavičius (LT/EPP) Member of Zarasai District Municipal Council.
In November 2020 the European Commission published the staff working document ” Delivering on the UN’s Sustainable Development Goals – A comprehensive approach “.
Contact:

Matteo Miglietta | matteo.miglietta@cor.europa.eu | tel. +32 (0)470 895 382

Compliments of the European Committee of the Regions
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Financial stability vulnerabilities from climate change concentrated in certain regions, sectors and firms, with evolution of risks conditional on effective and timely transition to low carbon economy
Granular exposure mapping of climate hazards to financial risk reveals vulnerability to river flooding widespread across countries, compounded by wildfire, heat and water stress risk in some regions
Transition risk resulting from financial market repricing has cross-sector impact and varies within sectors owing to differences in emissions efficiency
Long-term scenario analyses suggest timely and orderly macroeconomic policies to tackle climate-related risk can reduce financial stability risks, notably for highest greenhouse-gas emitting sectors

The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) today published a joint report that takes a closer look at how a broadened set of climate change drivers affects millions of global firms and thousands of financial firms in the European Union (EU). It maps out prospective financial stability risks and contributes by further developing the analytical basis for more targeted and effective policy action.
The report tackles measurement gaps and, building on previous work in this field, establishes a detailed topology of physical and transition risks arising from climate change across regions, sectors and firms. It also applies a scenario analysis with long-dated financial risk horizons to capture prospective financial losses resulting from the timeliness and effectiveness of climate policies and technologies.
“These findings underline the crucial and urgent need for climate policies and economic transitions, not only to ensure that the targets of the Paris Agreement are met, but also to limit the long-run disruption to our economies, businesses and livelihoods,” said Christine Lagarde, President of the ECB and ESRB Chair.
The report’s granular mapping of financial exposures to climate change drivers finds three forms of risk concentration. First, exposures to physical climate hazards are concentrated at the regional level. The analysis shows, for example, that river floods will be the most economically significant widespread climate risk driver in the EU over the next two decades compounded by strong vulnerability to wildfires, heat and water stress in some regions. Around 30% of the euro area banking sector’s credit exposures to non-financial companies are to firms that are subject to a combination of these physical hazards.
Second, exposures to emission-intensive firms are concentrated not only across but also within economic sectors. Exposures to highly emitting firms occupy 14% of collective euro area banking sector balance sheets. While mainly concentrated in the manufacturing, electricity, transportation and construction sectors, they also vary considerably within sectors – suggesting scope for financial market repricing as widely varying emissions intensities narrow.
Third, exposures to climate risk drivers are concentrated in specific European financial intermediaries. Around 70% of banking system credit exposures to firms subject to high or increasing physical risk over the coming decades are concentrated in the portfolios of just 25 banks. At the same time, scope for financial market repricing associated with transition risk will be particularly large for investment funds, where more than 55% of investments are tilted toward high emitting firms and estimated alignment with the EU Taxonomy stands at only 1% of assets. While direct holdings by insurers of climate sensitive assets may be manageable, risks could be amplified by cross-holdings of investment funds of around 30%.
Long-term scenario analysis for EU banks, insurers and investment funds suggests that credit and market risk could increase as a result of a failure to effectively counteract global warming. In the projected scenario modelling what would happen in the event of an insufficiently orderly climate transition, physical risk losses – particularly for high emitting firms – would become dominant in around 15 years. This could lead to a decline in global GDP of up to 20% by the end of the century should mitigation prove to be insufficient or ineffective.
As work continues on more accurately measuring and modelling climate risk, the advances described in this report should provide valuable evidence to inform the broadening climate debate in the public and private sector alike.
Contact:

Eva Taylor | eva.taylor@ecb.europa.eu | tel.: +49 69 1344 7162.

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Today, the European Commission has proposed revisions of two sets of EU rules to enhance consumer rights in a world reshaped by digitalisation and the COVID-19 pandemic. The Commission is reinforcing its safety net for EU consumers, for example, by making sure that dangerous products are recalled from the market or that credit offers are presented to consumers in a clear way, easily readable on digital devices. The proposal updates both the existing General Product Safety Directive as well as the EU rules on consumer credit to safeguard consumers.
Věra Jourová, Vice-President for Values and Transparency, said: “Consumers face many challenges, especially in the digital world which revolutionised shopping, services or financial markets. This is why we are stepping up consumer protection on two fronts: we are making it easier for consumers to avoid risks related to having a credit and we are putting even stronger rules for product safety in place. It will also put more responsibility on market players and make it more difficult for bad actors to hide behind complicated legal jargon.”   
Didier Reynders, Commissioner for Justice, said: “The COVID-19 crisis has impacted consumers in multiple ways and many have faced financial difficulties. The digitalisation that has been accelerated by the pandemic, leads to a surge of online shopping and is profoundly changing the financial sector. It is our duty to safeguard consumers, in particular, the most vulnerable ones. With our revision of the existing EU rules on consumer credit and general product safety, that’s exactly what we do!”
Online sales have increased steadily in the last 20 years and in 2020, 71% of consumers shopped online, often buying new technology products. From wireless earplugs and air purifiers to gaming consoles – the market for technological gadgets is vast. The General Product Safety Regulation will address risks related to these new technology products, such as cybersecurity risks, and to online shopping by, introducing product safety rules for online marketplaces. It will ensure that all products reaching EU consumers, through online marketplaces or from the neighbourhood shop, are safe, whether coming from within the EU or from outside. The new Regulation will make certain that marketplaces fulfil their duties so that consumers do not end up with dangerous products in their hands.
The revision of the Consumer Credit Directive provides that information related to credits must be presented in a clear way, adapted to the digital devices so that consumers understand what they are signing up for. Furthermore, the Directive will improve rules with which creditworthiness, i.e. whether or not a consumer will be able to repay the credit, is assessed. This is to avoid the issue of over-indebtedness. The regulation will ask Member States to promote financial education and to ensure debt advice is made available to consumers.
Next steps
The Commission’s proposals will now be discussed by Council and Parliament.
Background
General Product Safety Regulation
The General Product Safety Directive, in force since 2001, ensures that only safe products are sold on the EU single market. However, too many unsafe products still circulate on the EU market, creating an uneven playing field for businesses and an important cost for society and consumers. In addition, the rules need to be updated to address challenges linked to new technologies and online sales.
Consumer Credit Directive Proposal
Directive 2008/48/EC on credit agreements for consumers established a harmonised EU framework for consumer credit and provided a solid framework for fair access to credit for European consumers. However, since its entering into force in 2008 the digitalisation has profoundly changed the decision-making process and the habits of consumers in general. The revision today aims to address these developments.
Both proposals are part of the New Consumer Agenda, launched last year, aiming to update the overall strategic framework of the EU consumer policy.
Compliments of the European Commission.
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The COVID-19 pandemic has exacerbated existing structural weaknesses in the corporate sector and capital markets. Without an effective policy response, the number of undercapitalised and underperforming firms will likely rise and remain high, while an increasing amount of productive resources will be tied up in non-viable companies, dragging down investment and economic growth, according to a new OECD report.
The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis says that substantial financial resources will be needed for investment both to support the recovery from the COVID-19 crisis and to further strengthen resilience to possible future shocks. Strengthening corporate governance policies and frameworks will help both existing and new companies access the capital they need.
“Good corporate governance and well-functioning capital markets play a crucial role in supporting the recovery of our economies coming out of the COVID-19 crisis,” OECD Secretary-General Mathias Cormann said, launching the report in Rome with Italy’s Minister of Economy and Finance, Daniele Franco. “They also help to make the business sector more dynamic, competitive and resilient to possible future shocks, including through more effective management of environmental, social and governance risks. The global reach and review of the G20/OECD Principles of Corporate Governance will be important in meeting these objectives.”
The bond market continued to be a significant source of capital for non-financial companies following the outbreak of the crisis, according to the report. In 2020, non-financial companies issued a historical amount of USD 2.9 trillion of corporate bond debt. As a result, the volume of outstanding corporate bond debt reached an all-time high in real terms of almost USD 15 trillion at the end of 2020.
The quality of the outstanding stock of corporate debt has been falling. Between 2018 and 2020, the portion of BBB rated bonds – the lowest investment grade rating – accounted for 52% of all investment grade issuance. Between 2000 and 2007, that share was just 39%. Globally, debt has also accumulated mainly in businesses with lower debt servicing capacity.
While the stock market provided record amounts of capital money to established companies in 2020, it has not provided sufficient support to new companies. Since 2005, more than 30,000 companies have delisted from stock markets globally, equivalent to 75% of all listed companies today. These delistings have not been matched by new listings, leading to a major reduction of publicly listed companies. As a result, significantly fewer companies are using public equity markets and a large portion of the money raised in 2020 went to fewer and larger companies.
A strong corporate governance framework is essential for a well-functioning capital market. To tackle challenges posed by the crisis, the report highlights four priorities for policy makers:

Adapt the corporate governance framework to address some of the weaknesses revealed by the pandemic, such as the management of health, supply chain and environmental risks, as well as issues related to audit quality, increased ownership concentration and complex company group structures.

Facilitate access to equity markets for sound businesses. This will help strengthen the balance sheets of viable corporations and the emergence of new business models that are essential for a sustainable recovery and long-term resilience.

Improve the management of environmental, social and governance risks, notably by developing comprehensive frameworks for producing consistent, comparable, and reliable climate-related disclosure.

Ensure insolvency frameworks support recovery and resilience. Fit-for-purpose insolvency regimes that are coherent across jurisdictions will be essential.

The Corporate Governance Factbook, also released today, highlights the extent to which the G20/OECD Principles of Corporate Governance influence the development of frameworks globally. For example, since the Principles were last updated in 2015, 90% of 50 jurisdictions, including all OECD, G20 and Financial Stability Board members, have amended either their company law or securities law, or both.
Contact:

Spencer Wilson, OECD Media Office | spencer.wilson@oecd.org |tel. + 33 1 45 24 81 18

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Today, the Commission published EU guidelines to ensure the safe resumption of activities in the cultural and creative sectors across the EU. At a time when the epidemiological situation is improving and vaccination campaigns are speeding up, Member States are gradually reopening cultural venues and activities. Today’s guidelines aim to provide a coordinated approach in line with the specific national, regional and local conditions. They are expected to guide the design and implementation of measures and protocols in EU countries to cover both the safe reopening as well as the sustainable recovery in the cultural and creative sectors.
Vice-President for Promoting our European Way of Life, Margaritis Schinas, said: “Culture helped people cope with the impacts of lockdowns and social distancing. It is now our turn to accompany the sectors in their path to reopening. We need coordinated and tailor-made efforts across the EU to allow the culture world to safely and gradually resume its activities and be more prepared for future crises. The cultural and creative sectors are strong European assets and are important for Europe’s sustainable recovery, increased resilience of European society, and more generally, our European way of life.”
Commissioner for Innovation, Research, Culture, Education and Youth, Mariya Gabriel said: “The cultural and creative industries and sectors have paid a heavy toll since the beginning of the coronavirus outbreak. At the same time, the crisis highlighted their importance for our society and economy. With the increased vaccine uptake, gradual lifting of restrictions, including in the field of culture is taking place. The aim of these guidelines is to facilitate coordination of Member States’ measures at EU level. Simultaneously, a safe re-opening of cultural settings should go hand in hand with a range of actions to ensure the sustainable recovery and resilience of the entire sector.”
The EU guidelines are based on the expertise of the European Centre for Disease Prevention and Control (ECDC) and exchanges with the Health Security Committee. They take into account the different epidemiological situations in the Member States and their evolution. They provide the indicators and criteria (such as the viral circulation, the vaccination coverage, the use of protective measures, the use of tests and contact tracing), to be taken into account when planning the resumption of certain activities.
More specifically, the guidelines recommend the following measures and protocols:

The lifting of all restrictions should be strategic and gradual, with a restricted number of participants at the beginning to assess the epidemiological situation;
Cultural establishments should have a preparedness plan detailing protocols of actions when COVID-19 cases are detected;

Targeted information and/or ad-hoc training should be made available for all staff in cultural establishments to minimise risks of infection;

Vaccination of persons working in cultural settings should be promoted to ensure their and the public’s protection;
Participants can be asked proof of negative COVID-19 test and/or vaccination and/or COVID-19 diagnosis in order to be admitted to the venue. Depending on the local circulation of variants, this requirement can be extended to fully vaccinated individuals;
Establishments should ensure that the contact details of the audiences are available in case they are needed for contact tracing;
The establishment should put in place targeted protective measures: maintaining social distancing whenever possible, clean and accessible hand-washing facilities, appropriate ventilation, and frequent cleaning of surfaces. The use of facemasks by attendees is an important complementary measure.

A range of actions to ensure the sustainable recovery of the entire sector should accompany the reopening of cultural venues. Actions at EU level complement those taken by Member States and by the sectors.
Member States are invited to take full advantage of the Recovery and Resilience Facility to invest broadly in the sectors and increase their capacity to adapt to new trends and emerge from the crisis.
The Commission has substantially increased its financial support to the cultural and creative sectors, with almost €2.5 billion from Creative Europe, and close to €2 billion from Horizon Europe dedicated to cultural, creative and inclusive projects from 2021 to 2027.
In autumn 2021, the Commission will publish an online guide on EU funding for culture, covering all existing EU funds that Member States and the sector can use.
Background
The wide-ranging restrictions, set in place since the outbreak of the COVID-19 pandemic to protect the health of citizens, have resulted in severe economic difficulties for a large proportion of the sectors, particularly for activities based on venues and visits as confirmed by the 2021 Annual Single Market Report. For example, cinema operators in the EU report a 70% drop in box office sales in 2020, music venues report a 76% drop in attendance (64% in revenues) and museums lost revenues up to 75-80% (in popular touristic regions). The crisis is expected to have a lasting impact on the entire value chain with collection of royalties for authors and performers also affected.
Since the onset of the pandemic, the Commission has taken several measures to address the consequences of the pandemic on the creative and cultural sectors, by complementing and supporting Member States’ actions. Measures range from additional flexibility in the implementation of existing programmes, and the setting-up of the Temporary Framework for state aid measures to additional funding under Creative Europe and Erasmus+ in 2020. In May 2020, the Commission also launched, in cooperation with the sector, a dedicated platform, Creatives Unite, to help artists, performers and others working in the cultural and creative sectors share information and initiatives to respond to the coronavirus crisis, and exchange ideas for a sustainable reopening.
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EU ambassadors today confirmed a provisional agreement reached between the Council presidency and the Parliament on a new directive harmonising rules for credit servicers and credit purchasers of non-performing loans issued by credit institutions.
The aim of the new rules is to support the development of the secondary market for non-performing loans in the EU in order to allow banks to clean their balance sheets of ‘bad loans’, while ensuring that the sale does not affect the rights of borrowers.

Efficient lending opportunities for our businesses and households are important for economic recovery in Europe. Making sure that credit institutions clean their balance sheets of non-performing loans will ensure better access to funding for citizens and entrepreneurs.
João Leão, Portugalʼs Minister for Finance

A bank loan is generally considered non-performing when more than 90 days pass without the borrower paying the agreed instalments or interests, or when it becomes unlikely that the borrower will reimburse it. Efficient management of non-performing loans is particularly important in the aftermath of the COVID-19 crisis to reduce risks in banks’ balance sheets and enable banks to focus on lending to businesses and citizens, thus supporting economic recovery in the EU.
The directive standardises the rules for credit servicers and credit purchasers across the EU and facilitates the sales of non-performing loans, including across national borders, while ensuring that borrowers’ rights are not hampered in the process. A designated authority in the home member state will authorise and supervise credit servicers, in close cooperation with the authorities of other member states.
The Council presidency and the Parliament’s negotiators have reached a provisional agreement on the following main issues discussed during the negotiations:

authorising credit servicing activities, to ensure borrowers are treated fairly and diligently
forbearance measures, to take into account the rights and interests of consumers before starting enforcement proceedings

Next steps
The Parliament and the Council are expected to adopt the directive after legal-linguistic revision. After it is signed and published in the Official Journal of the EU, the text will be transposed into national law within 24 months of the date of entry into force.
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Speech by Christine Lagarde, President of the ECB, at the Brussels Economic Forum 2021 | Frankfurt am Main, 29 June 2021 |

Thank you for inviting me to speak to you today.
The economist Rudi Dornbusch once said that “in economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”
That describes the situation we face today very well. The pandemic has accelerated pre-existing trends at a pace we could never have imagined. There are possibilities for our economy in 2022 which seemed at least a decade away in 2019.
Companies have digitised their activities 20 to 25 times faster than they had previously thought possible. One in every five workdays are expected to move to the home after the pandemic ends, compared with just one in every 20 before. And the call for greener lifestyles has become thunderous. Having accepted tough restrictions to fight the pandemic, 70% of Europeans are now in favour of stricter government measures to fight climate change.
Europe has long wanted to shift towards a more sustainable, more productive economy – and we now have the very real opportunity to do so. If we capitalise on this moment, the pandemic could accelerate labour productivity growth by around 1% a year by 2024 – more than double the rate achieved after the great financial crisis.
So how can we capitalise on this opportunity?
During the pandemic, we have mainly been acting to preserve the economy, which was the necessary thing to do. Compensation of employees fell by 3.5% in 2020 compared with 2019, but household real disposable income only declined by 0.3% – mainly because government transfers compensated for the loss of income.
But as the pandemic passes, we need to shift the focus from preserving the economy to transforming it. This will require us to redirect spending by both public and private sectors towards the green and digital sectors of the future. Specifically, we need to see investment of around €330 billion every year by 2030 to achieve Europe’s climate and energy targets, and around €125 billion every year to carry out the digital transformation.
The NextGenerationEU (NGEU) programme will help channel public investment towards transformative sectors. But it is currently less clear whether the private financial sector can do the same. Fragmentation across national financial markets in Europe might constrain our ability to finance future investments in sufficient volume.
This is why I have argued that we need to add another element to our post-pandemic recovery plan, which is to match NGEU with what I have termed a green capital markets union (CMU) – a truly green European capital market that transcends national borders.
I see three reasons why this makes sense.
First, capital markets are particularly well-suited to direct financing towards future-oriented sectors like green and digital.
Though banks have an important role to play, capital markets are better able to finance projects with a defined purpose, directly linking investors to the impact they intend to achieve. They can provide more innovative investment vehicles. And they are better at drawing retail investors towards supporting transformative activities.
Green capital markets would not only help the climate transition, but also the digital transformation of our economy. Green and digital investments are often two sides of the same coin. For instance, digital technologies such as smart urban mobility, precision agriculture and sustainable supply chains are critical to the green transition.
The second rationale for Green CMU is that Europe already has a head start as the home of green capital markets. We can build on this solid foundation.
Europe is the location of choice for global green bond issuance, with around 60% of all green senior unsecured bonds issued in 2020 originating here. And the market is growing rapidly – the outstanding volume of green bonds issued in the EU has grown almost eightfold since 2015.
In addition, the euro has taken the lead as the global currency of green finance. Last year, around half of all green bonds issued globally were in euro. There is great scope for this role to grow once the green transition takes off worldwide and we see a generational transfer of wealth to millennials, who are bound to be concerned about the future.
Third, Green CMU is an area where we have the potential to make rapid progress, since it does not face the same challenges as conventional capital markets.
The European Commission is working towards completing a fully fledged CMU, but it will take time, in part because capital markets have developed nationally. That means we first have to open up and harmonise those markets in order to integrate them further.
But the green bond market does not face these same barriers. In fact, it has already achieved greater pan-European scale than the conventional bond market. Holdings of green bonds within the EU have, on average, half the home bias of conventional bonds.
So we have a real opportunity to build a genuinely European capital market from the outset. That’s why, in my view, specific initiatives under the CMU action plan should be fast-tracked – even if they are only applied to sustainable finance for now.
We need proper European supervision of green financial products with official EU seals, such as the forthcoming EU Green Bond Standard. We need harmonised tax treatment of investments in sustainable finance products to prevent green investments fragmenting along national lines. And we need further convergence in the efficiency of national insolvency frameworks, which may even entail carving out special procedures for green finance.
If we succeed, it would not only accelerate the transformation of our economy, but also act as an engine for the CMU project generally, testing and putting in place some of the measures that are needed to advance wider capital market integration.
This double dividend is, to my mind, too good an opportunity to pass up. Institutional change in Europe often takes longer than we expect. But let’s show that, once we are committed, this change can happen faster than we ever thought possible.

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