Keynote speech by Luis de Guindos, Vice-President of the ECB, at the Joint conference of the ECB and the European Commission on European financial integration | Frankfurt am Main, 6 April 2022 |

Introduction
It is my great pleasure to open today’s conference. I would like to use this opportunity to reflect on some important developments in financial integration that have taken place over the last two years, and assess them from the perspective of an EU financial system for the future – the title of today’s conference.
I will begin by touching on the pandemic’s implications for the financial sector in Europe. I will discuss how the progress achieved on financial integration since the start of Economic and Monetary Union (EMU) has helped to increase the resilience of the EU financial sector, before arguing that a further deepening of EMU can help tackle the current and future challenges that come our way. I will then conclude by reflecting on the economic fallout from the Russian invasion of Ukraine, and the implications that could have for financial stability and financial integration.
Financial integration now and in the past
Let me first discuss the implications of the pandemic crisis. When the pandemic began, we saw a notable decrease in euro area financial integration. But thanks to fast and decisive policy action at the monetary, fiscal and prudential levels, this deterioration not only stopped, it actually reversed relatively quickly. This is in contrast to what has typically occurred in previous crises.
As the pandemic unfolded, public health measures, mobility restrictions and production constraints limited household consumption levels. This meant that key private channels of risk-sharing across euro area countries were restricted. So public risk-sharing via governments became crucial for macroeconomic stabilisation.
Major fiscal initiatives at EU level were key to ensuring that risks were shared among Member States, compensating for the fact that private financial channels were hampered. Sizeable fiscal risk-sharing mechanisms were established with the Next Generation EU recovery package. The associated investments and reforms are expected to improve risk-sharing at the public sector level over the coming years. Joint support from fiscal and monetary policy has been indispensable in avoiding a much deeper economic downturn. For example, credit support measures, such as loan guarantees, proved critical in shoring up the financing of firms and households during the pandemic.
At the same time, we should not overlook the decisive role played by the EU financial system in weathering the crisis, notably by being able to meet financing needs during the pandemic. The fact that the system could withstand a shock the size of the pandemic is testament to the effective implementation of ambitious financial reforms in the aftermath of the global financial crisis.
But it’s important to remember that it took a lot of hard work to achieve this resilience. EU financial integration has come a long way since the launch of EMU in 1992. Soon after the introduction of the euro, policymakers realised that the single currency alone was not enough to spur the further development and integration of the EU financial system. Support was needed from policies that were conducive to the free flow of financial services in the euro area, in addition to adequate legal, regulatory and supervisory frameworks, along with greater institutional integration. There were several milestones on the road towards European financial integration, including the European Commission’s Financial Services Action plan for the harmonisation of the EU financial services markets starting in 1999, the Lamfalussy architecture to improve regulatory processes introduced in 2001, the launch of the banking union in 2012 and the two subsequent action plans for the capital markets union (CMU) in 2015 and 2020.
Despite these achievements, there is still more work to be done. We need to push forwards and further deepen EMU. And we need to do so while keeping in mind the new challenges that we face, such as the transition to a sustainable economy.
The growth of green finance can facilitate – and, at the same time, benefit from – the integration of EU capital markets across borders. Deeper and more efficient capital markets, with equity playing a greater role, can be instrumental in encouraging the more rapid development and adoption of new technologies, including green technologies, and in facilitating the provision of finance across the EU. Indeed, research finds that carbon-intensive industries tend to reduce emissions faster in economies with deeper stock markets.[1]
Last November the European Commission published the CMU package containing legislative proposals and key commitments in the CMU action plan. This was an important step, but we need to be more ambitious in three main areas if we are to achieve a deeply integrated CMU.
First, we need to see a harmonisation of insolvency rules and withholding tax regimes. That will help create a more integrated financial sector that can easily operate across borders, including in green market segments. The ECB is therefore looking forward to the upcoming Commission proposals on this matter.
Second, reducing the debt-equity bias and harmonising venture capital frameworks across Member States are important steps to support equity and risk capital markets and thereby provide smoother financing for innovation.
Third, we need to make progress on the EU’s sustainable finance agenda. There should be no more delays as we strive for a reliable and transparent regulatory framework. Sustainability disclosures and reliable standards for green financial products are key to reaping the benefits of a green CMU. This is why we need the Corporate Sustainability Reporting Directive to be implemented swiftly, alongside the broad adoption of a sound and usable European green bond standard.
While CMU is a crucial pillar for EMU, we also need to see progress on other fronts. The banking union remains incomplete. But completing it is essential if we are to enhance the financial sector’s resilience and further address some of its structural challenges. These include low bank profitability, growing competition from fintech companies and the fragmentation of debt and equity markets along national lines.
Completing the banking union requires efforts in two areas: improving the crisis management framework and making progress towards a European deposit insurance scheme (EDIS). We very much welcome the balanced workplan proposed by the Eurogroup President, which should provide a good basis for reaching political agreement on these matters as swiftly as possible.
Another element to ensuring that banks further increase their resiliency is the timely and full implementation of the remaining elements of the Basel III agreement. The ECB welcomes the Commission’s proposals in this respect, which will lead to a stronger prudential framework and help tackle emerging risks, such as environmental risks.
Pushing ahead with these important initiatives will further strengthen Europe’s resilience to future crises, allowing us to respond quickly. After all, the terrible events of the last six weeks have reminded us how quickly the economic environment can change.
Financial stability and integration in view of the Russia-Ukraine war
The Russian invasion of Ukraine marks a watershed moment for Europe. This is, first and foremost, a human tragedy. But the economic fallout has also re-introduced substantial elements of uncertainty just as the euro area economy is emerging from the pandemic.
In the first weeks after the invasion, we saw visible implications for financial integration in the euro area, driven primarily by bond markets. Announcements of sanctions against Russia led – initially, at least – to a slight divergence of sovereign and corporate bond yields across euro area countries. This caused euro area indicators of financial integration to recede – as captured, for instance, by a measure of the convergence of asset prices across the euro area. But the good news is that this indicator has partly recovered since then. And, importantly, these movements were nowhere close to what we saw during the global financial crisis and at the beginning of pandemic.
For the euro area, the financial stability impact of the war has so far been relatively contained. Markets have generally been functioning well. Contrary to what happened in March 2020, there has been no dash for cash. While both banks and non-banks have been affected – especially the few that have large direct exposures to Russia and Ukraine – the economic fallout has not had a sizeable impact on the EU banking or financial systems as a whole. Euro area banks’ initial stock price reaction suggested a much stronger impact than was implied by their direct exposures, which stood at less than 1% of banks’ assets. This points to much greater concerns about growth and inflation, and the impact the conflict is having in amplifying them.
The invasion of Ukraine also demonstrated how vulnerable Europe is due to its high dependency on fossil fuel imports from Russia. Speeding up the green transition is a key priority from this perspective too – not only to address the urgent environmental and climate challenges we face, but also to help increase our energy security and protect the EU economy from energy price spikes.
Recent events have reaffirmed the importance of financial integration. First, financial integration together with adequate regulatory and supervisory frameworks improves the resilience of the EU economy and its financial sector. In particular, the sound capital and liquidity buffers that have helped European banks absorb shocks owe a lot to the Single Rulebook and European banking supervision – key elements of our banking union.
Second, financial integration has improved our ability to take credible actions and has given those actions greater weight. Close collaboration in various aspects of EU financial decision-making allowed EU financial sanctions to be adopted swiftly and implemented consistently. And the ECB, for its part, is taking an active role in implementing these sanctions in its areas of competence.
Conclusion
Let me conclude.
European integration has already come a long way since the start of EMU. But we are not at the finish line just yet. Our journey is an ambitious one, and we must quicken our pace.
During this troubled time for Europe, I am reminded of the words of Konrad Adenauer, the first Chancellor of West Germany. He once said: “European unity was a dream of a few people. It became a hope for many. Today it is a necessity for all of us.”
These words were spoken almost 70 years ago, just as the wheels of European integration were turning faster. Let us keep those wheels moving. Our current challenges call for decisive joint action from all of us as we work towards a strengthened European financial system and a solid EMU. I have no doubt that we will reach the finish line.
Thank you for your attention.
Compliments of the European Central Bank.

1. De Haas, R. and Popov, A. (2019), “Finance and carbon emissions”, Working Paper Series, No 2318, ECB, September.

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Variation in the Inflation Experiences of Households | Governor Lael Brainard at the Spring 2022 Institute Research Conference, Opportunity and Inclusive Growth Institute, Federal Reserve Bank of Minneapolis, Minneapolis, Minnesota (via webcast) |

It is a pleasure to join you to discuss differences in how households at different income levels experience inflation.1 I look forward to hearing from the panelists, who are doing important and interesting research on this topic.
By law, the Federal Reserve is assigned the responsibility to pursue price stability and maximum employment. The Federal Open Market Committee (the Committee) has long recognized the connection between stable, low inflation and maximum employment. Forty years ago, Paul Volcker noted that the dual mandate isn’t an either-or proposition and that runaway inflation “would be the greatest threat to the continuing growth of the economy… and ultimately, to employment.”2
Maximum employment and stable, low inflation benefit all Americans, but are particularly important for low- and moderate-income families. The combination of good job opportunities and stable, low inflation provides purchasing power to fill up gas tanks and grocery carts and pay housing and medical costs, leaving room to build emergency cushions and invest in education; retirement; and, for some, small businesses. Indeed, the Employment Act of 1946 called on the federal government to promote “maximum employment, production, and purchasing power.”3
While national data do not directly disaggregate the differential effects of inflation by household income groups, a variety of evidence suggests that lower-income households disproportionately feel the burden of high inflation. Lower-income families expend a greater share of their income on necessities; have smaller financial cushions; and may have less ability to switch to lower-priced alternatives. Arthur Burns noted in the late 1960s that “there can be little doubt that poor people…are the chief sufferers of inflation.”4
Today, inflation is very high, particularly for food and gasoline. All Americans are confronting higher prices, but the burden is particularly great for households with more limited resources. That is why getting inflation down is our most important task, while sustaining a recovery that includes everyone. This is vital to sustaining the purchasing power of American families.
Whose Cost of Living?
In assessing inflation faced by American consumers, economists and policymakers generally rely on the change in the consumer price index (CPI) or the change in the price index for personal consumption expenditures (PCE).5 Since January 2012, the Committee’s price-stability goal has been specified as a longer-run goal of 2 percent in terms of annual PCE inflation.6 Both CPI and PCE inflation metrics are assembled from a collection of underlying elementary price indexes for narrow subsets of goods and services.7 The price changes each month for the goods and services in these subsets are combined into measures of overall inflation by calculating a weighted average of all these subindexes, where the weights are based on average aggregate consumer expenditures in each category.
Using a national average of consumer expenditures to weight the categories has intuitive appeal. This measure is particularly useful, for example, in adjusting measures of overall expenditure for changes in prices to determine how much real growth has occurred between two periods. However, using a national average of expenditures to weight the categories has limitations when it comes to representing the true cost of living experienced by different types of households.
U.S. Households Have Different Inflation Experiences
Each household in the United States has a particular consumption bundle whose prices and quantities combine to make up that household’s cost of living. If we could start with each individual household’s cost of living and aggregate across households by giving equal weight to each household, it would create an economy-wide cost-of-living index. The change in such a cost-of-living index would represent the average inflation experienced by U.S. households. Instead, because the CPI and PCE indexes weight every dollar of expenditure equally, these indexes implicitly weight each household’s cost of living proportionally to their total expenditure.8 Since lower-income households represent a relatively smaller share of overall expenditure, the inflation associated with their consumption baskets is underrepresented in the official consumer price indexes.
It would be useful to have data about consumer inflation broken out by demographic groups, similar to labor market and personal-income data, in order to assess the differential effect of inflation across different groups of households.9 U.S. statistical agencies do not collect the information needed to accurately assess inflation at a household level, and it would require a large change in the way these agencies go about their work to do so. Nonetheless, recent research has begun to assess variation in the ways different households experience inflation.
Households at different income levels could experience differential inflation effects for several reasons: Consumption shares could differ systematically for low- and high-income households; the goods and services within each consumption category could differ; the ability to substitute for lower-priced alternatives of the same item could differ; and prices paid for the same good could differ systematically due to differences in access. I will briefly touch on these four reasons.
First, low- and moderate-income households could experience inflation that diverges from the average because their consumption baskets differ systematically from the average. 10 Lower-income households spend 77 percent of their income on necessities—more than double the 31 percent of income spent by higher-income households on these categories.11
Several studies have found that the consumption baskets of lower-income households have experienced higher-than-average inflation rates over time. Research from the Bureau of Labor Statistics (BLS) has examined the effect of different consumption baskets by using the same elementary price indexes as used in the official CPI but assigning the weights of these components to reflect the consumption bundles of different types of households. A 2021 working paper by BLS staff based on data from 2003 to 2018 found that a price index reflecting the consumption basket for households in the lowest-income quartile grew faster than the overall CPI, while a price index reflecting the consumption basket for households in the highest-income quartile grew more slowly than the overall CPI.12 A 2015 BLS study found a similar result using data from 1982 to 2014.13 Of course, the recent sharp increases in inflation may have affected the consumption bundles of lower-income households relative to the average differently than in previous cycles.
While these studies allow for differences in the weighting of price indexes across different income groups, they rely on the same elementary price indexes for subcategories of goods and services. As a result, they may miss additional sources of variation in the inflation rates experienced by households at different income levels.
This consideration brings us to the second point: Households with different levels of income may purchase significantly different items even within the same elementary index categories for goods and services. To take an extreme example, caviar and canned tuna are both in the same elementary index. The demand and supply dynamics for those products are likely quite different, meaning that their relative price dynamics are poorly described by a single index.
Third, households at different income levels may have differing abilities to substitute for lower-priced alternatives within an elementary category. Consider a price increase for a breakfast cereal that increases the prices of both the brand-name cereal and the corresponding lower-priced store-brand cereal but maintains a differential between them. A household that had been purchasing brand-name cereal could save money by purchasing store-brand cereal instead, perhaps even eliminating any effect of the price increase on their actual spending while purchasing the same quantity of cereal in that narrow category. However, a household that was already purchasing the store brand would have to either absorb the increase in cost or consume less within that category.
Finally, beyond the variation in inflation that comes from households buying different goods, research also shows that differences in inflation can result from households paying different prices for identical goods. Using transaction-level data, researchers found that almost two-thirds of the variation in inflation across households comes from differences in prices paid for identical goods, with only about one-third coming from differences in the mix of goods within broad categories.14 As a result of these differences, households with lower incomes, more household members, or older household heads experienced higher inflation on average. Variations in the prices paid for identical goods could reflect differences in the ability of some households to stock up when prices are discounted or to buy in bulk and save—options only available to households with the means to buy in larger quantities, adequate capacity to store larger quantities, or the flexibility to delay purchases if there is an opportunity to save in the future.
In addition, evidence suggests that inflation could be lower for items purchased online rather than from brick-and-mortar stores, suggesting that households who do not have full access to online shopping options could face a higher cost of living. One study of online transactions made between 2014 and 2017 found that online inflation averaged more than 1 percentage point per year lower than the equivalent CPI measure of the relevant product categories.15
We are only beginning to understand the ways in which inflation experiences vary from household to household, how this variation correlates with income and demographic information, and how these divergent inflation experiences change over time.16 This developing area of research will benefit from conferences like this one that help expand the frontier of our knowledge about the heterogeneity of experienced inflation.
Implications for the Outlook and Policy
High inflation places a burden on working families who are concerned about how far their paychecks will stretch as well as seniors living on fixed incomes. So now let me turn briefly to what we are seeing on inflation and the outlook for jobs and growth.
Headline PCE inflation for February came in at 6.4 percent on a 12-month basis. Food and energy account for an outsized one-fourth share of this high level of inflation and also constitute an outsized share of expenditure for lower-income Americans, who spend 26 percent of their income on food at home and transportation, compared with 9 percent for high-income Americans.17
Core inflation is also elevated, and inflationary pressures have been broadening out. Housing contributed about one-tenth of total PCE inflation in February and is the single greatest category of expenditures by far for lower-income Americans, who spend 45 percent of their income on housing, compared to 18 percent for high-income Americans.18 Durable goods inflation, particularly in autos, accounted for slightly more than one-fifth of total PCE inflation in February, representing a much greater contribution to inflation than was the case pre-pandemic. High durable goods inflation reflects pandemic-related supply constraints as well as persistently elevated demand associated with the pandemic. I will be carefully monitoring the extent to which demand rotates back to services and away from durable goods, where it has remained consistently above pre-pandemic levels, and the extent to which the services sector is able to absorb higher demand without generating undue inflationary pressure.
Russia’s invasion of Ukraine is a human tragedy and a seismic geopolitical event. The global commodity supply shock associated with Russia’s actions skews inflation risks to the upside and is expected to exacerbate high prices for gasoline and food as well as supply chain bottlenecks in goods sectors. The recent COVID lockdowns in China are also likely to extend bottlenecks.
These geopolitical events also pose downside risks to growth. That said, the U.S. economy entered this period of uncertainty with considerable momentum in demand and a strong labor market. As of the March labor report, payroll employment has increased at a pace of 600,000 jobs per month over the past six months, and the unemployment rate has fallen by a percentage point over that period and is now close to its pre-pandemic level. In contrast, until recently, the recovery in labor force participation was lagging far behind. So it is particularly noteworthy to see that the pandemic constraints on labor supply are diminishing for the prime-age workforce: The prime-age participation rate jumped 0.7 percentage points for women in March, following a similar-sized jump for men in February. An increase in labor supply associated with diminishing pandemic constraints combined with a moderation in demand associated with tightening financial conditions, slowing foreign growth, and a large decrease in fiscal support could be expected to reduce imbalances later in the year.
Against that backdrop, I will turn to policy. It is of paramount importance to get inflation down. Accordingly, the Committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting. Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19. The reduction in the balance sheet will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee’s Summary of Economic Projections. I expect the combined effect of rate increases and balance sheet reduction to bring the stance of policy to a more neutral position later this year, with the full extent of additional tightening over time dependent on how the outlook for inflation and employment evolves.
Our communications have resulted in broad market expectations for an expeditious increase in the policy rate toward a neutral level and a more rapid reduction in the balance sheet compared with 2017–19. Consistent with these expectations, we have already seen significant tightening in market financing conditions at longer maturities, which tend to be most relevant for household and business decisionmaking. For instance, 30-year mortgage rates have increased more than 100 basis points in just a few months and are now at levels last seen in late 2018.
Looking forward, at every meeting, we will have the opportunity to calibrate the appropriate pace of firming through the policy rate to reflect what the incoming data tell us about the outlook and the balance of risks. For today, every indicator of longer-term inflation expectations lies within the range of historical values consistent with our 2 percent target. On the other side, I am attentive to signals from the yield curve at different horizons and from other data that might suggest increased downside risks to activity. Currently, inflation is much too high and is subject to upside risks. The Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted. We are committed to bringing inflation back down to its 2 percent target, recognizing that stable low inflation is vital to maintaining a strong economy and a labor market that works for everyone.
Compliments of the U.S. Federal Reserve.

1. I am grateful to Kurt Lewis of the Federal Reserve Board for his assistance in preparing this text. These views are my own and do not necessarily reflect those of the Federal Reserve Board or the Federal Open Market Committee. Return to text

2. Paul Volcker (1979), interview on “The MacNeil/Lehrer Report” (PDF), PBS, October 10, p. 10. Return to text

3. See the Declaration of Policy on page 1 of the Employment Act of 1946, available at https://fraser.stlouisfed.org/files/docs/historical/congressional/employment-act-1946.pdf. Return to text

4. Quoted in John Palmer (1973), Inflation, Unemployment, and Poverty (Lexington, Mass.: Lexington Books), as referenced in Alan Blinder and Howard Esaki (1978), “Macroeconomic Activity and Income Distribution in the Postwar United States,” Review of Economics and Statistics, vol. 60 (November), pp. 604–9. Return to text

5. CPI and PCE inflation generally move together but vary in important ways, including variations generated by differences in the scope of the purchases considered in the households’ baskets, differences in the weights assigned to different categories of spending, and different formulas used to aggregate the underlying weighted price changes. For a recent comparison of CPI and PCE measures, see Noah Johnson (2017), “A Comparison of PCE and CPI: Methodological Differences in U.S. Inflation Calculation and their Implications” (PDF), BLS Statistical Survey Paper (Washington: Bureau of Labor Statistics, November). Return to text

6. The specific price-stability target of an inflation rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, was announced as part of the Statement on Longer-Run Goals and Monetary Policy Strategy following the January 2012 Federal Open Market Committee (FOMC) meeting. For more information, see the current version of that statement at https://www.federalreserve.gov/monetarypolicy/files/FOMC_LongerRunGoals.pdf as well as Chair Bernanke’s discussion of the decision at the January 24, 2012, press conference: https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20120125.pdf. For additional information regarding the FOMC’s preference for using a PCE-based measure of inflation, see the discussion of the change from CPI to PCE inflation projections in the February 2000 Monetary Policy Report at https://www.federalreserve.gov/boarddocs/hh/2000/february/fullreport.pdf#page=7. Return to text

7. According to the CPI section of the Handbook of Methods, the CPI survey collects about 94,000 prices per month to find prices in 243 basic item categories in 32 geographic areas, facilitating the creation of basic indexes for each of the resulting 7,776 item-area combinations that compose the CPI. See Bureau of Labor Statistics (2020), “Consumer Price Index” Handbook of Methods (Washington: BLS, November). Return to text

8. These two approaches are referred to as the democratic and plutocratic indexes, respectively. For more information on the literature of cost-of-living measurement and plutocratic and democratic indexes, see Robert A. Pollak (1998), “The Consumer Price Index: A Research Agenda and Three Proposals,” Journal of Economic Perspectives, vol. 12 (1), pp. 69–78. Return to text

9. See Austan Goolsbee (2021), “The Missing Data in the Inflation Debate,” New York Times, December 30, https://www.nytimes.com/2021/12/30/opinion/inflation-economy-biden-inequality.html. Return to text

10. See Pew Charitable Trusts (2016), Household Expenditures and Income, Issue Brief (Washington: Pew, March). Return to text

11. The values for the share of income spent in each category were constructed using microdata from the 2020 Consumer Expenditure Interview Survey (CEX). For full-income reporters with strictly positive values for total expenditure and income after tax, the income share of expenditure in a given category is the ratio of expenditure in a given category to income after tax. The numbers reported are the sum of the median income share from each of the four categories, where each is defined as the weighted median of these ratios for households in the bottom and top quintiles of the income distribution. Consumption categories are defined as in the CEX. Return to text

12. The study used data from the Consumer Expenditure Survey to construct a consumption basket for households in the lowest quartile of income as well as in the highest quartile of income. The authors calculated a Laspeyres index for the consumption basket of households in the lowest and highest income quartiles. From December 2003 to December 2018, the annualized percent change in the index for the lowest income quartile was 2.25 percent, and the annualized percent change in the index for the highest income quartile was 1.97 percent; the CPI-U had an annualized percentage change of 2.07 percent over that period. See Josh Klick and Anya Stockburger (2021), “Experimental CPI for Lower and Higher Income Households” (PDF), BLS Working Paper 537 (Washington: Bureau of Labor Statistics, March). Return to text

13. Three different baskets of “basic necessities” were considered in this study. The base experimental index included food, shelter, and clothing, and the additional two baskets included the components of the base index and added energy, and then both energy and medical care, respectively. During the period examined, the rate of overall consumer inflation was 2.78 percent, as measured by the regular CPI-U for All Items. In comparison, the base experimental index rose at an average annual rate of 2.91 percent from December 1982 to December 2014. The base-plus-energy experimental index increased at an average annual rate of 2.75 percent over the same period. The base-plus-energy-and-medical-care experimental index rose at an average annual rate of 2.99 percent during the same timeframe. See Jonathan Church (2015), “The Cost of ‘Basic Necessities’ Has Risen Slightly More than Inflation over the Last 30 Years,” Beyond the Numbers: Prices & Spending, vol. 4 (June), no. 10. Return to text

14. See Greg Kaplan and Sam Schulhofer-Wohl (2017), “Inflation at the Household Level,” Journal of Monetary Economics, vol. 91 (November), pp. 19–38. For a sample of 500 million transactions by about 50,000 U.S. households from 2004 to 2013, the authors found that over the nine years from the third quarter of 2004 through the third quarter of 2013, average inflation cumulates to 33 percent for households with incomes below $20,000 but to just 25 percent for households with incomes above $100,000.
This finding does not hold for housing, where a recent study found that housing inflation tends to be relatively similar across income quintiles, even though the share of income spent on housing varies considerably by income group. See table 2 and the related discussion in Daryl Larsen and Raven Malloy (2021), “Differences in Rent Growth by Income 1985-2019 and Implications for Real Income Inequality,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System, November 5). Return to text

15. The study used a matched set of entry-level item categories to create a digital price index (DPI) to compare with the equivalent CPI measure and found that overall DPI inflation is more than 1 percentage point per year lower than CPI inflation in those categories. Broken out by major groups, inflation was lower in the DPI than in the equivalent CPI in every category other than medicine and medical supplies. See Austan Goolsbee and Peter Klenow (2018), “Internet Rising, Prices Falling: Measuring Inflation in a World of E-Commerce,” AEA Papers and Proceedings, vol. 108 (May), pp. 488–92. Return to text

16. For example, a recent study also suggests that the differential rates of inflation between low- and high-income households varies over the cycle: The gap between the inflation associated with goods purchased by lower-income households relative to higher-income households rises during recessions and narrows during recoveries. See David Argente and Munseob Lee (2021), “Cost of Living Inequality During the Great Recession,” Journal of the European Economic Association, vol. 19 (April), pp. 913–52. Another recent working paper documents that prices rise more for products purchased relatively more by low-income households (necessities) during recessions and that the aggregate share of spending devoted to necessities is countercyclical. See also Jacob Orchard (2022), “Cyclical Demand Shifts and Cost of Living Inequality,” SSRN Working Paper (Rochester, NY: SSRN, February 12). Return to text

17. These statistics are based on the median income share in each category, defined as the weighted median of these ratios for households in the bottom and top quintiles of the income distribution; see footnote 12 for additional detail. Return to text

18. These statistics are based on the median income share in each category, defined as the weighted median of these ratios for households in the bottom and top quintiles of the income distribution; see footnote 12 for additional detail. Return to text

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Good afternoon to you all,
We have a vision of a better Europe in 2050, where pollution is brought down to levels no longer harmful to human health. We have defined it in the Zero Pollution Action Plan, which is part of the European Green Deal. When we adopted this action plan last year it was widely welcomed, but people wondered how it will work in practice. Today we’re showing what it means, with a significant strengthening of the rules that cover Industrial Emissions. The current framework is already a success. In just ten years, it’s lowered industrial emissions to air by between 40 and 85%, depending on the pollutant.
But the figures are still too high.
Large industrial plants and large livestock farms are responsible for more than half of total emissions of sulphur oxides and heavy metals, around 40% of greenhouse gases, and some 30% of nitrogen oxides and particulates. And the World Health Organisation is stressing that air pollution is a silent killer, causing hundreds of thousands of premature deaths in the EU every year. So today, we’re revising the rules. We’ve modernised the Industrial Emissions Directive, substantially raising the level of ambition and its potential to accompany industry in the green transition. The new version takes account of advances inside industry, it has a wider scope, and it gives citizens more detailed information about these emissions.
A few words about each of those themes.
First of all, the modernisation. There are many things I could mention here, but I will single out just a few. When Member States revise permits, they’ll be obliged to use stricter limit values for pollutants. That way we will ensure the direction of travel. Under the previous rules, the requirements for depollution and decarbonisation were independent. The new rules bring them closer together, so that future investments take better account of greenhouse gas emissions, resource efficiency and water reuse, all at the same time. Large installations will need to draw up Transformation Plans, showing how they propose to adopt techniques for pollution and carbon management between 2030 and 2050. We’re adding a few more flexibilities to the rules, to make it easier for operators to test and deploy emerging technologies. And to deal with the pace of innovation inside industry, and make sure EU rules take account of cutting-edge developments, we’re setting up a new Innovation Centre for Industrial Transformation & Emissions. That will ensure that news about the best advances really spreads throughout the industries in question.
Secondly, the scope. For the first time, large-scale cattle farming will be covered by these rules, together with more intensive pig and poultry farms. This means that around three-quarters of methane and ammonia emissions from livestock will now be included. As Frans mentioned already, new industries – like gigafactories for battery production, the mineral extraction industry and others – will be covered as well.
The third big change is reinforced rights for citizens. Member States and installation operators will have to make permit summaries publicly available on the internet, at no charge. A new Industrial Emissions Portal will make it easy to compare sites across sectors and Member States in the EU, to check on pollution and performance. And if operators fail to meet their obligations, citizens get better access to legal redress and compensation.
To conclude, these changes are indeed major, but we do this for good reason. The actions for livestock farms alone should bring benefits to human health in the region of €5.5 billion every year. Moreover, these changes will create more jobs, as the EU’s eco-innovation sector has shown in the past. And of course, these rules are designed to make our economy more efficient and more sustainable. That’s the spirit of the Green Deal, and that spirit is strong in the revised Directive.
Thank you.
Compliments of the European Commission.
The post EU Commissioner Sinkevicius’ statement on Industrial emissions first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Main results
War in Ukraine and sanctions against Russia
The Council discussed the implementation of the sanctions imposed by the EU on Russia, their effectiveness (with the aim of preventing any circumvention) and their strengthening. The ministers also discussed the economic issues related to the reception of Ukrainian refugees.
Ministers then welcomed Serhii Marchenko, Minister for Finance of Ukraine, who participated in his first ECOFIN meeting by video conference. The Council was able to reaffirm its full solidarity with the Ukrainian people and to take stock of the financial and material support provided to Ukraine.
The Council then discussed the impact of the war in Ukraine on the European economies, based on a new assessment by the European Commission. The discussion focused in particular on the measures taken at national and European level to deal with the increase in energy and raw material prices. The importance of coordination between member states of national support plans was stressed.
EU economy and finance ministers agreed to continue to monitor developments closely and confirmed the need for European unity and solidarity. Already on 25 February, the ministers had issued a declaration together with the European Commission and the European Central Bank, underlining their unity, their commitment to consider all possible sanctions, as well as their willingness to strengthen Europe’s strategic autonomy.

Ukraine: press statement from the EU Ministers for Finance, European Commission and the European Central Bank (press release, 25 February 2022)
Council adopts €1.2 billion assistance to Ukraine (press release, 21 February 2022)
Timeline – EU restrictive measures in response to the crisis in Ukraine (background information)
EU restrictive measures in response to the crisis in Ukraine (background information)

European economic and financial strategic autonomy
The Council adopted conclusions on the strategic autonomy of the European economic and financial sector. The current geopolitical context has made the concrete steps towards this objective even more crucial.

Council adopts conclusions on the strategic autonomy of the European economic and financial sector (press release, 5 April 2022)
Versailles declaration, 10-11 March 2022
Communication from the Commission: The European economic and financial system: fostering openness, strength and resilience, 19 January 2021
Conclusions of the European Council of 1 and 2 October 2020

European financial architecture for development
The Council discussed the implementation of the 2021 Council conclusions on strengthening the European financial architecture for development, taking the example of the EBRD and EIB initiatives to provide financial support to Ukraine.
The discussion was based on a presentation on the current status of implementation of the European financial architecture for development given by the Commission, the European Investment Bank (EIB), and the European Bank for Reconstruction and Development (EBRD).

Report from the Commission to the Council: Commission’s roadmap for an improved European financial architecture for development and 2021 progress report, 24 March 2022
European Financial Architecture for Development – EIB-EBRD Joint Report of 25 November 2021
Council adopts conclusions on enhancing the European financial architecture for development (press release, 14 June 2021)

Corporate taxation: fair and effective taxation for multinational groups
The Council discussed the work on the transposition into EU law of the global agreement reached at the OECD Inclusive Framework that multinationals should not pay less than 15% tax anywhere in the world.
The aim of the directive is to transpose into EU law the two-pillar reform of the rules on international corporate taxation, as agreed by the global OECD/G20 inclusive framework on base erosion and profit shifting (BEPS). This international agreement, which brings together 137 countries and jurisdictions, constitutes a major milestone towards an effective and fair system of profit taxation.

Recording of the discussion at the Ecofin Council meeting on 5 April 2022
Recording of the discussion at the Ecofin Council meeting on 15 March 2022
Recording of the discussion at the Ecofin Council meeting on 18 January 2022
Directive on ensuring a global minimum level of taxation for multinational groups in the Union – Policy debate
Proposal for a Council Directive on ensuring a global minimum level of taxation for multinational groups in the Union
Fair Taxation: Commission proposes swift transposition of the international agreement on minimum taxation of multinationals
Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy – 8 October 2021 (OECD)
Taxation (background information)

G20 and IMF meetings
The Council made preparations for the International Monetary Fund (IMF) spring meetings and agreed on the EU’s mandate for the upcoming G20 meeting of finance ministers and central bank governors on 20 April.
Financial services legislation
The Commission gave a presentation on the state of play as regards the implementation of financial services legislation.
Other items
The Council adopted updated Value Added Tax (VAT) rules and a reinforced mandate for the EU’s Fundamental Rights Agency (FRA). It also adopted a decision authorising member states to sign the second additional protocol to the convention on cybercrime (Budapest convention). This protocol will improve cross-border access to electronic evidence used in criminal proceedings. All three items were adopted without discussion.

Council directive amending directives 2006/112/EC and (EU) 2020/285 as regards rates of value added tax
Fundamental rights Council adopts reinforced mandate for Fundamental Rights Agency (Press release, 5 April 2022)
Access to e-evidence: Council authorises member states to sign international agreement (Press release, 5 April 2022)

Compliments of the European Council.
The post Economic and Financial Affairs Council, 5 April 2022 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The Council today adopted legislative amendments making it possible for member states to redirect resources from cohesion policy funds and the Fund for European Aid for the Most Deprived (FEAD) to assist the refugees escaping the Russian military aggression against Ukraine.
The swift amendment of the legislation on EU funds is a clear statement of the EU’s continued solidarity with the refugees from Ukraine and with the member states hosting them, in particular those sharing borders with Ukraine.
This is an important step in ensuring member states have sufficient resources to meet the growing needs for housing, education and healthcare.
Cohesion policy funds
The Council adopted the regulation on Cohesion’s Action for Refugees in Europe (CARE) amending the 2014-2020 legal framework governing the European Structural and Investment Funds (ESIF) and the Fund for European Aid for the Most Deprived (FEAD).
This measure will also reinforce member states’ ongoing efforts to tackle the extended impact of the COVID-19 pandemic.
In addition, the changes include exceptional flexibility to transfer resources between programmes financed by the European Regional Development Fund and the European Social Fund to address the inflow of refugees.
This flexibility means, for example, that ERDF resources earmarked for infrastructural projects can be reallocated to provide healthcare and education to persons escaping Russia’s war against Ukraine.
Member states can use overall up to €9.5 billion under the 2022 tranche of REACT-EU, one of the largest post-pandemic EU public investment programmes, as well as unallocated cohesion policy resources under the 2014-2020 budgetary period.
CARE also extends by one accounting year the 100% financing from the EU budget for cohesion programmes. This will alleviate the burden on national and regional budgets due to the inflow of refugees from Ukraine.
The start date for the new measures eligible for funding under CARE is set at 24 February 2022, the date of the Russian invasion.
The extension of the 100% financing, the unlocking of unprogrammed 2014-2020 cohesion funding, and the 2022 React-EU tranche are estimated to release almost €17 billion.
Home affairs funds
The Council also adopted an amendment to the 2014-2020 home affairs funds and to the 2021-2027 asylum, migration and integration fund. This amendment will provide extra resources for the reception of persons escaping the war in Ukraine.
It will extend by one year the implementation period of the 2014-2020 home affairs funds and unlock access to unspent amounts in the asylum and migration fund which had previously been earmarked for other purposes.
This will enable member states to urgently use the remaining funds to help address the mass inflow of persons and is expected to release an estimated maximum amount of €420 million in additional support from unused funds.
The text also provides member states and other public or private donors with the possibility to make additional financial contributions under the 2021-2027 fund as external assigned revenue. This external assigned revenue will make it possible to finance asylum and migration activities in member states during crises, including those arising from the invasion of Ukraine.
Next steps
The CARE regulation and the regulation amending the 2014-2020 home affairs funds and the 2021-2027 asylum, migration and integration fund will enter into force on the day after their publication in the Official Journal of the European Union, which is expected in the next few days.
Compliments of the European Council.
The post Ukraine: €17 billion of EU funds to help refugees first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Don’t expect easy answers or simple rules. Projecting growth, deficits, and interest rates is just the beginning
When does the level of debt become unsafe?
To answer this question, we need a definition of “unsafe.” I propose the following: Debt becomes unsafe when there is a non-negligible risk that, under existing and likely future policies, the ratio of debt to GDP will steadily increase, leading to default at some point.
The natural way to proceed is then straightforward.
The dynamics of the debt ratio depend on the evolution of three variables: primary budget balances (that is, spending net of interest payments minus revenues); the real interest rate (the nominal rate minus the rate of inflation); and the real rate of economic growth.
A two-step approach
The first step must be to form forecasts of those three variables under existing policies and work out the implications for the dynamics of the debt-to-GDP ratio. Forecasts of these levels for the next decade or so are likely to be available. But such forecasts are not enough; we need to assess the uncertainty associated with those forecasts, which means coming up with a range of possible outcomes for each variable.
That is much harder, and it involves answering some tricky questions. For example, what is the risk of a recession and its likely magnitude? What is the risk that real interest rates will rise? If they do, how does the maturity of the debt affect interest payments?
If debt is partly in foreign currency—often the case for emerging market economies—what is the likely distribution of the exchange rate? What is the probability that some of the implicit liabilities transform themselves into actual liabilities; that, for example, the social security system runs a large deficit which must be financed by a transfer from the government? What is the distribution of the underlying potential growth rate?
Going through this step delivers a distribution of the debt ratio, say, a decade from now. If the probability that the ratio steadily increases at the end of the horizon is small enough, we can conclude that the debt is safe. If not, we must move to the second step and answer the next set of questions: Will the government do something about it? And if the government announces new policies or commitments, what is the probability that it will deliver on those?
This second step is even harder than the first. The answers depend on the nature of the government: a coalition government may be less likely to take tough measures than one with a large legislative majority. The outcome depends not just on the current government, but on those in the future, and thus the results of future elections. It depends on the reputation of the country, and on whether, when, and why it has defaulted in the past.
If all this sounds difficult, that’s because it is. If it sounds like it depends on many assumptions that can be challenged, that’s because it does. This is not a defect of the approach but a reflection of the complexity of the world. But the exercise must be done. Indeed, it is what credit-rating agencies do, whether they use the same terms to describe the process, and whether or not their criterion for a less than perfect rating depends on the same definition as mine. With a lower rating comes the effective punishment; namely, a government will have to compensate investors for taking on the higher risk of default by paying a higher rate of interest.
The problem with rules
Now let me go back to the original question. When does the level of debt become unsafe?
The process I have described makes it obvious that the answer is not going to be some universal magic number. Nor will there be a combination of two magic numbers, one for debt and one for the deficit.
This is particularly obvious if we think of changes in the underlying interest rates. Suppose, as has been the case in the United States since the early 1990s, that the real interest rate falls by 4 percentage points. That implies a decrease in the real cost of servicing the debt of 4 percent of the debt ratio; so if debt is 100 percent of GDP, debt service falls by 4 percent of GDP. Quite obviously, lower rates imply much more favorable debt dynamics. A debt ratio that may have been unsafe in the early 1990s is much less likely to be unsafe now. We might conclude from this that the magic variable therefore should not be the ratio of debt to GDP, but rather the ratio of debt service to GDP. This would indeed be an improvement, but it comes with its own problems: the variability of debt-service costs depends on the variability of real interest rates, which can be substantial. An increase in the real rate from 1 percent to 2 percent will double the debt-service cost. The cost may be low but it is also uncertain, and the uncertainty will affect whether the debt is safe or not.

‘The answer is not going to be some universal magic number. ‘

The long decrease in real interest rates is in part what has triggered the current discussion on the appropriateness of magic numbers and the reforms of EU budget rules. But the point is much broader: take two countries with the same high debt ratio but with different types of governments, or debt denominated in different currencies. One’s debt might be safe, while the other’s might not.
So my answer to the question is, I do not know what level of debt, in general, is safe. Give me a specific country and a specific time, and I will use the approach above to give you my answer. Then we can discuss whether my assumptions are reasonable.
But don’t ask me for a simple rule. Any simple rule will be too simple. For sure, Maastricht criteria or so-called Black Zero (balanced budget) rules will, if they are respected, ensure sustainability. But they will do so at the cost of constraining fiscal policy when it should not be constrained. Most observers agree for example that fiscal consolidation in the European Union in the wake of the global financial crisis, a consolidation triggered by the rules, was too strong and delayed the EU recovery.
And do not ask me for a complex rule. It will never be complex enough. The history of the EU rules, and the addition of more and more conditions to the point where the rules have become incomprehensible but are still considered inadequate, proves the point.
Compliments of the IMF.
The post IMF | Deciding When Debt Becomes Unsafe first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Good afternoon. We have just concluded our EU-China summit. Today’s summit is not business as usual, because this is a war-time summit. We are living through the gravest security crisis in Europe since World War Two. Putin’s war in Ukraine continues to kill women and children and destroy entire cities, and this is a blatant violation of international law. The European Union’s top priority is to stop the war as soon as possible and to protect the Ukrainian people.
In times of crisis, dialogue is needed more than ever. That is why we focused on what can be done to end this war as soon as possible. The EU and China agreed that this war is threatening global security and the world economy. This global instability is not in China’s interest and not in the EU’s interest. We share a responsibility as global actors to work for peace and stability. We call on China to help end the war in Ukraine. China cannot turn a blind eye to Russia’s violation of international law.  These principles are enshrined in the UN Charter and principles sacred to China.
The EU, together with its international partners, has imposed heavy sanctions on Russia.  Our goal is to put pressure on the Kremlin to end the war. These sanctions also have a price for us in Europe, but this is the price of defending freedom and democracy. Any attempts to circumvent sanctions or provide aid to Russia would prolong the war. This would lead to more loss of life and a greater economic impact. This is not in anyone’s long-term interests. We will also remain vigilant on any attempts to aid Russia financially or militarily. However, positive steps by China to help end the war would be welcomed by all Europeans and by the global community.
We also discussed areas of shared interest where we cooperate, such as global health. We want to engage with China and all members of the WHO on a new agreement on pandemic prevention, preparedness and response. We are also cooperating with China to protect our planet.  We can and we must do more. We must be ready for COP27 in Egypt later this year.  We also called on China to further increase its ambition on environment, biodiversity and climate action.
We also discussed areas where we disagree. We raised our concerns about China’s treatment of minorities in Xinjiang and Inner Mongolia, and of the people of Tibet.  This includes the crackdown on human rights defenders. We also expressed our regret at the dismantling of the ‘one country, two systems’ principle in Hong Kong.  We also insisted a lot on the relaunch of the Human Rights Dialogue, and Prime Minister Li Keqiang confirmed that this relaunch would take place. We also raised individual human rights cases.
We also discussed our trade and economic relationship with China, to make it fairer, to ensure reciprocity, to achieve a level playing field, to rebalance our bilateral trade and investment relations. We also raised the issue of China’s discriminatory trade practices against Lithuania and the effects on the integrity of the single market.
We also touched on a number of international issues: Taiwan, of course, and the importance of preserving stability and the status quo in the Taiwan Strait, the challenges in Afghanistan, as well as the situation in Myanmar and the Korean Peninsula.
En conclusion, nous avons eu l’occasion de mener ces discussions avec les autorités chinoises dans ce contexte exceptionnel: cette situation extrêmement grave, avec cette guerre déclenchée par la Russie en Ukraine. Cette guerre est une tragédie pour l’Ukraine. Cette guerre est aussi une agression contre l’ordre international fondé sur des règles et contre le droit international en général.
Nous avons eu l’occasion d’argumenter, de plaider, d’expliquer quelle est la position de l’Union européenne et de quelle manière nous comptons sur l’engagement de la Chine afin d’agir de manière active, afin de participer à tous les efforts pour restaurer la paix et la stabilité.
Compliments of the European Council.
The post Remarks by President Charles Michel after the EU-China summit via videoconference first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The COVID-19 pandemic has accelerated the trend toward digitalisation of retail financial services.
This report examines whether the COVID-19 pandemic changed the ways in which individuals and firms engage with innovative financial service providers and traditional financial incumbents. Its main finding is that the pandemic has accelerated the trend toward digitalisation of retail financial services.
Comprehensive data on market shares of FinTechs, BigTechs and incumbent financial institutions in retail digital services are scarce. However, available proxies and insights from market participants suggest that BigTechs in particular have further expanded their footprint in financial services.
The report discusses benefits from accelerated digitalisation of financial services during the pandemic, and whether those observed changes may be structural or revert back to pre-pandemic levels once conditions normalise. The report also considers the financial stability implications of this accelerated trend towards digitalisation, such as potential market dominance of certain players, and the related concerns around incumbent financial institutions that may be digital laggards.
The report outlines the range of policy actions authorities have taken during the pandemic that may impact market structure and the role of FinTechs, BigTechs and incumbent financial institutions. These actions relate to financial stability, competition, data privacy and governance issues. The report also outlines parallel international work on third-party dependencies of the financial sector, for instance in cloud computing.
The report stresses the importance of cooperation between regulatory and supervisory authorities, including those charged with overseeing the bank and non-bank sectors, and where relevant, with competition and data protection authorities.
Compliments of the Financial Stability Board.
The post FSB | FinTech and Market Structure in the COVID-19 Pandemic: Implications for financial stability first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Introductory statement by Fabio Panetta, Member of the Executive Board of the ECB, at the Committee on Economic and Monetary Affairs of the European Parliament |

Thank you for inviting me to update you on the digital euro project and the progress made since we last met in November.
We have previously discussed the broad policy objectives associated with a digital euro.[1] Today, I would first like to highlight some important features which, by making a digital euro attractive to citizens and merchants alike, would help us to achieve these objectives.
I will do so by discussing the findings of the focus groups we held – which we are publishing today on the occasion of this hearing[2] – and our analysis of “use cases” for the digital euro. In the jargon of payments, this term refers to the payment segments that a digital euro could serve.
I will then present our preliminary findings on how to reconcile the right to confidentiality with the public interest in countering illegal activities, continuing the discussion we had a year ago.[3]
Meeting the payment needs of Europeans today and tomorrow
The primary aim of a digital euro is to maintain the accessibility and usability of central bank money in an increasingly digitalised economy. But for a digital euro to fulfil this role, people need to be able and willing to use it.
From the outset, I have stressed that a digital euro can only be successful if it meets the payment needs of Europeans today and in the future.
The findings of our focus groups provide valuable input here, though we are mindful of the natural limitations of qualitative analyses of this kind.[4]
The focus groups suggested that people see the ability to “pay anywhere” as the most important feature of a new digital payment instrument. This emerged in all countries and age groups. It means that, ideally, all merchants across the euro area – both in physical stores and online – would need to accept a digital euro. 20 years ago, the introduction of euro banknotes made it possible for us to pay with physical euros anywhere in the euro area. So it is no surprise that people expect to be able to use the digital complement to banknotes wherever they can pay digitally or online.
Instant, easy, contactless payments, especially for person-to-person payments, were the second-most valued feature. Cash has so far remained dominant in person-to-person payments. And we will ensure that people continue to have access to cash. But the focus groups confirm previous findings: preferences are shifting towards digital payments.[5] The experience of countries both inside[6] and outside[7] the euro area shows that contactless person-to-person payments may grow very rapidly when convenient digital solutions become available.
Participants in the focus groups would like to see a solution that would allow instant person-to-person payments regardless of the platform used by the payers and payees. Today, making mobile payments to friends at the click of a button – for example when splitting bills in restaurants or collecting money for a gift – is often easiest when everyone is using the same app. Participants therefore envisaged a one-stop solution that would reduce the need for multiple cards, devices and identification methods and give them access to a range of payment options on a single device.
Our focus groups also confirmed what I called “rational inattention” during our exchange in November.[8] People tend not to pay attention to – or understand – the difference between the digital euro and the euros they already spend using private digital means of payment. For the financial system to work smoothly, public money and commercial bank money are meant to be fully interchangeable yet distinguishable. People do not think twice about storing and using their money via private intermediaries because they know they can regularly go to the cash machine and withdraw banknotes without any problems. This provides tangible proof that their money in the bank is safe. Convertibility with central bank money on a one-to-one basis therefore anchors people’s confidence in private money, supporting its wide acceptance.[9]
The findings from focus groups were also used to validate our selection of possible use cases of a digital euro.[10] We identified them by looking both at our policy objectives and at the importance of different market segments.
Physical stores are the most important market segment for digital payments, accounting for more than 40 billion transactions in the euro area in 2019.[11] E-commerce payments are less numerous but are expected to continue to grow rapidly in the coming years.[12] These segments are served by a multitude of payment solutions, often with only domestic reach. So far, they have been dominated by non-European providers and technologies.[13]
Given their importance now and in the future, payments in e-commerce and physical stores, as well as person-to-person payments, are natural candidates to be prioritised among the possible use cases of a digital euro. The digital euro could also be used for payments between governments and individuals, for example to pay out public welfare allowances or to pay taxes.[14]
If a digital euro offered these payment options, we would achieve network effects, continue to ensure public access and full usability of central bank money for digital payments, and help to address sovereignty concerns. In the next steps of our investigation phase, we will therefore focus on assessing the actual feasibility of these use cases.
But we will leave the door open to the inclusion of other use cases in the future. We are monitoring emerging trends such as machine-to-machine payments.[15] And we are looking into solutions to respond to these trends in future releases of a digital euro.[16]
In the coming months, and building on the findings of the focus groups, we will carefully investigate how to design an attractive digital euro product that responds to the expectations of payers and payees alike.
Co-legislators have a key role to play. For instance, the ability to pay with digital euro anywhere could be fostered by giving it legal tender status. We are thoroughly and carefully analysing this issue together with the European Commission. We stand ready to discuss the matter further with you, also on the basis of the outcome of the upcoming consultation on digital euro the Commission has recently announced.
The trade-offs between privacy and other EU policy objectives
The legal framework will also be key when it comes to privacy, which is one of the most important design features of a digital euro.[17]
The public consultation we conducted between October 2020 and January 2021 indicated that protecting privacy is key, so that the digital euro helps to maintain trust in payments in the digital age.[18] Focus group participants also said they would appreciate options that give them control over their personal data.
It is not surprising that people expect payments in digital euro to guarantee high privacy standards. As payments go digital, private companies are increasingly monetising payment data.
We already provide cash, the payment instrument with the highest level of privacy. We are committed, as a public institution, to retain people’s trust in this area if a digital euro is issued.
At the same time, we need to assess privacy in the context of other EU policy objectives, such as anti-money laundering (AML) and combating the financing of terrorism (CFT). Concerns about regulations being circumvented, including to bypass international sanctions, have become even more prominent recently, notably in relation to crypto-assets.
Over the past few months we have investigated various options to address the trade-off between retaining a high degree of privacy and other important public policy objectives.[19]
Full anonymity is not a viable option from a public policy perspective. It would raise concerns about the digital euro potentially being used for illicit purposes.[20] In addition, it would make it virtually impossible to limit the use of the digital euro as a form of investment, but this limitation is essential from a financial stability perspective.[21]
This means that users would need to identify themselves when they start using the digital euro.[22] Supervised intermediaries – which are the natural candidates for distributing a digital euro – are best placed to manage this onboarding process.[23]
Moving beyond onboarding, our analysis suggests that digital euro transaction data should not be visible to the Eurosystem – or any other central entity – beyond what is strictly needed to perform its functions.[24]
In a baseline scenario, a digital euro would provide people with a level of privacy equal to or higher than that of private digital solutions. Under this set-up, personal and transaction data[25] would only be accessible to intermediaries to ensure compliance with AML/CFT requirements and relevant provisions under EU law.[26]
We have also been exploring options to go beyond this baseline and provide greater privacy, should the co-legislators decide in favour of this approach. This could allow the digital euro to replicate some cash-like features and enable greater privacy for lower-value payments, which are usually low risk in terms of money laundering, terrorism financing and violations of relevant EU law.
Consider paying “offline” in digital euro in a shop, with payer and payee in close proximity to each other. This would be very similar to making a cash payment. Should different standards apply for these two payments, even if the risk profiles are similar? Take the example of a chip that can store up to €200 in digital euro – the risk that it is used for money laundering purposes hardly seems higher than for a physical €200 banknote, especially if the chip requires biometric authentication before you can use it.
We are therefore exploring an offline functionality whereby holdings, balances and transaction amounts would not be known to anyone but the user. To contain the risks, these balances and private offline payments would have an upper limit.
In general, a greater degree of privacy could be considered for lower-value online and offline payments. These payments could be subject to simplified AML/CFT checks, while higher-value transactions would remain subject to the standard controls.[27]
If greater privacy were to be enabled for lower-value payments in digital euro, it should apply to transactions anywhere in the euro area. This would require a harmonised framework for simplified checks, as foreseen in the European Commission’s AML/CFT package from July 2021.[28]
The Eurosystem High-Level Task Force that I chair is exploring the technical and regulatory aspects, in close cooperation with the European Commission and the European data protection authorities.[29]
But there are important political choices to be made, which makes our dialogue with you crucial.
Conclusion
Let me conclude.
We are building a broad consensus around the policy objectives for a digital euro through our interactions with stakeholders, political authorities and other major central banks. But just recognising the political need for a digital euro will not by itself guarantee sufficient usage.
Step by step, we are getting a clearer picture of what citizens and merchants want, so we can finetune all the design features of a digital euro before any potential issuance. And co-legislators have a key role to play, for instance to enable greater privacy.
We do not want to be “too successful” and crowd out private payment solutions and financial intermediation. But the digital euro should be “successful enough” and generate sufficient demand by adding value for users.
We already have an idea of the views of the prospective users of a digital euro thanks to our discussions with focus groups. Towards the end of the year we will conduct another round of focus groups, this time giving participants a better idea of the envisaged user experience to gather their feedback.
We will also step up our dialogue with stakeholders in the coming weeks and months, listening to prospective users like consumer groups, small and medium-sized enterprises, retailers and large corporations, as well as to banks and payment service providers. We will also continue to interact with academia and think tanks.
We stand ready to discuss these consultations with you at future hearings. The alignment of European authorities and institutions, mindful of their respective mandates and independence, will be key if a digital euro is to be accepted.
I now look forward to our discussion.
Compliments of the European Central Bank.

Panetta, F. (2021), “Designing a digital euro for the retail payments landscape of tomorrow”, introductory remarks at the ECON Committee of the European Parliament, 18 November.

Study on New Digital Payment Methods, Report March 2022

See the letter to Ms Irene Tinagli MEP available on the ECB’s website.

The qualitative research was conducted by an external company in all euro area countries. To ensure the robustness of the research and to obtain a comprehensive overview of perceptions and attitudes on the topic, a carefully selected range of target audiences were interviewed across all 19 euro area countries. These included 2,160 members of the general public, 142 tech-savvy participants, 138 merchants and retailers, and 89 individuals with limited access to banking services or the internet, all of whom were interviewed using a tailored qualitative design per target group. At the same, given the qualitative nature of the research, no conclusions can be drawn with regard to the representativeness of these results for the population of the euro area.The aim of the focus groups was to explore the user perspective on new digital payment methods and potential key features which could drive the adoption of a new digital means of payment. Participants were not immediately presented with the concept of a digital euro for multiple reasons, including the complexity of the concept of central bank digital currencies in general and the concept of the digital euro specifically. Instead, the idea of a new “digital wallet” was introduced to encourage discussions about possible desirable features and functionalities of a new digital payment method in comparison with those already on the market. The digital euro was introduced towards the end of the discussion to explore the existing level of knowledge and understanding among respondents as well as their perception of a digital euro being backed by the ECB/Eurosystem.

ECB (2020), Study on the payment attitudes of consumers in the euro area (SPACE), December.

In 2019 Dutch consumers made 54% of their transactions with relatives, friends, colleagues and other acquaintances in cash and 45% electronically. Between 2018 and 2019, the share of cash fell by 5 percentage points, whereas that of electronic money transfers increased by 7 percentage points. See De Nederlandsche Bank (2020), “Shift of cash to debit card continues”, 20 April.

In Sweden, the successful introduction and rapid growth of Swish resulted in a sharp decline in the use of cash. See Sveriges Riksbank (2020), “Cash is losing ground”, 29 October.

Panetta, F. (2021), op. cit.

Panetta, F. (2021), “Central bank digital currencies: a monetary anchor for digital innovation”, speech at the Elcano Royal Institute, Madrid, 5 November.

A digital euro use case describes a payment segment that a digital euro could serve. For instance, a digital euro could be used by individuals to pay another individual (person to person), to pay e-retailers for online purchases (e-commerce) or for purchases made in a physical shop (point of sale). A digital euro could also be used by businesses to pay an individual (business to person) or to pay another company (business to business). Finally, a digital euro could be used for payments to/by the government (e.g. to pay tax or receive welfare payments) or for machine-initiated payments (e.g. to make fully automated payments initiated by a device or software based on predetermined conditions).

ECB (2020), op. cit.

Figures from Eurostat indicate that the adoption of e-commerce doubled in the euro area between 2015 and 2021. In terms of population reach, 73% of the EU population indicated that they had “bought online or ordered” “goods or services” for private use in the previous 12 months, compared with 62% in 2015. Looking at developments across countries, growth rates in e-commerce tend to be inversely correlated with e-commerce penetration. Compared with the United States (20%) and the United Kingdom (24%), e-commerce penetration is still relatively low in key European markets such as Spain (9%), France (9%) and Germany (14%), which suggests there is potential for continued growth. See, for example, McKinsey & Company (2021), “How e-commerce share of retail soared across the globe: A look at eight countries”, 5 March.

Non-European payment providers handle around 70% of European card payment transactions. See ECB (2019), Card payments in Europe, April. Furthermore, international e-payment solutions are gaining traction.

Public payments would allow direct digital payment of government subsidies and allowances to citizens that have no access to bank accounts, which could provide added value compared with existing solutions in the market.

Machine-to-machine payments are automated payments between machines. For example, autonomous vehicles, such as cars or trucks, or other industrial machines could pay for their own energy, maintenance and insurance and accept payments for their services.

Design features like privacy, programmability or an offline functionality could apply to multiple use cases.

Panetta, F. (2021), “A digital euro to meet the expectations of Europeans”, introductory remarks at the ECON Committee of the European Parliament, 14 April.

About 43% of respondents to the public consultation conducted by the ECB from 12 October 2020 to 12 January 2021 ranked privacy as the most important aspect of a digital euro, well ahead of other features.

From a user perspective, different privacy options could be envisaged. Full anonymity would mean the identity of users is unknown when they access services, with no “know your customer” (KYC) or customer due diligence (CDD) checks. Payments that would be fully transparent to the central bank would involve KYC checks during onboarding, and all transaction data and user profiling data would be fully transparent to the central bank. Payments that are non-transparent to third parties would also involve KYC checks during onboarding, but balances and transaction amounts would not be known to intermediaries or the central bank. Payments that are transparent to intermediaries would involve KYC checks during onboarding, and transaction data and user profiling data would be transparent to the intermediary for AML/CFT purposes. Selective privacy would involve KYC checks during onboarding, but there would be a higher degree of privacy for low-value transactions, while large-value transactions would remain subject to standard CDD checks.

The AML/CFT package proposed by the European Commission in July 2021 extends the ban on anonymous accounts to wallets, in line with the international standards of the Financial Action Task Force. This means that intermediaries of a digital euro will be prohibited from hosting anonymous accounts and/or wallets.

Panetta, F. (2021), “Evolution or revolution? The impact of a digital euro on the financial system”, speech at a Bruegel online seminar, 10 February.

The KYC and CDD checks currently in place include processes to determine a customer’s status, such as their political exposure, source of funds, appearance on sanction lists, etc. Users will need to go through the onboarding process when first starting to use a digital euro. One possibility could be to provide different types of accounts/wallets where the transaction amounts could be limited in proportion to KYC/CDD measures – similar to the risk-based approach taken by some other central banks.

ECB (2020), Report on a digital euro, October.

The Eurosystem would only access the minimum information required, for example for performing the settlement function (i.e. validating payments if performed by the Eurosystem), or for other central bank functions, such as supervisory and oversight tasks.

Personal data are understood as any information that relates to an individual who can be identified (e.g. name, physical and email addresses and location information). Transaction data include any information related to a specific payment, which includes payer’s wallet/account number, transaction counterparty, transaction amount, date/time/location of the transaction, and information about goods/services purchased (including billing or shipping address).

In particular, the requirements set out in the General Data Protection Regulation and the Payment Services (PSD 2) Directive.

Larger-value transactions would still be subject to standard CDD checks and it would be important to ensure that larger payments are not split into many smaller ones to circumvent checks.

The AML package proposes harmonising AML/CFT requirements, including CDD checks, across the EU. This would ensure a level playing field for CDD checks that could also benefit the digital euro. The package also proposes defining new harmonised conditions for simplified due diligence by means of a regulatory technical standard to be prepared by the future EU AML authority. Where lower risks are identified, simplified due diligence could potentially be applied, in certain circumstances, to certain digital euro transactions.

ECB (2021), “ECB intensifies technical work on digital euro with the European Commission”, MIP News, 19 January.

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