Today, the Commission is proposing to activate the Temporary Protection Directive  to offer quick and effective assistance to people fleeing the war in Ukraine. Under this proposal, those fleeing the war will be granted temporary protection in the EU, meaning that they will be given a residence permit, and they will have access to education and to the labour market.
At the same time, the Commission is also putting forward operational guidelines intended to help Member States’ border guards in managing arrivals at the borders with Ukraine efficiently, while maintaining a high level of security. The guidelines also recommend that Member States set up special emergency support lanes to channel humanitarian aid and recall the possibility of granting access to the EU on humanitarian grounds.
President of the European Commission, Ursula von der Leyen, said: “Europe stands by those in need of protection. All those fleeing Putin’s bombs are welcome in Europe.  We will provide protection to those seeking shelter and we will help those looking for a safe way home.”
Vice-President for Promoting our European Way of Life, Margaritis Schinas, said: “In a historically unprecedented move, the Commission is today proposing to grant immediate protection in the EU for those fleeing Ukraine. All those fleeing the war will be provided with a secure status and access to schools, medical care and work. At the same time, we are working to facilitate efficient crossings at the borders for people and their pets, with the necessary security checks. The times are bearing heavily down upon us but the European Union and every single one of its Member States is showing beyond a doubt that we are ready to step up to the plate and stand in solidarity with Ukraine.”
Commissioner for Home Affairs, Ylva Johansson, said: “I’m proud of how the EU and Member States are giving immediate support to those coming from the horrific threats of war. With our proposals today, we will give Member States further capacity to manage this crisis in an orderly and effective way. We will grant residency rights, labour market access and housing to people in need and finally with the guidelines we will make sure those fleeing the war in Ukraine can get to the EU quickly, without going through lengthy formalities at the borders.”
Temporary Protection Directive
Since the Russia’s military invasion of Ukraine, over 650,000 people have fled to neighbouring EU Member States. The Temporary Protection Directive was specifically conceived to give immediate protection to the persons who need it and to avoid overwhelming Member States’ asylum systems.
Under this proposal, Ukrainian nationals and people who have made Ukraine their home as well as their family members displaced by the conflict will be entitled to protection across the European Union. Non-Ukrainian nationals and stateless people legally residing in Ukraine who cannot return to their country or region of origin, such as asylum seekers or beneficiaries of international protection and their family members, will also be granted protection in the EU. Others who are legally present in Ukraine for a short-term and are able to return safely to their country of origins will fall outside the scope of this protection. Nevertheless, should be allowed access to the EU to transit prior to returning to their countries of origin.
Given the extraordinary and exceptional nature of this attack and the scale of new arrivals to the EU, the Temporary Protection Directive offers the appropriate response to the present situation by:

Providing immediate protection and rights: this includes residency rights, access to the labour market, access to housing, social welfare assistance, medical or other assistance, and means of subsistence. For unaccompanied children and teenagers, temporary protection confers right to legal guardianship and access to education.

Reducing pressure on national asylum systems by creating a protection status with reduced formalities. This will avoid overwhelming national asylum systems and allow the Member States to manage arrivals in an orderly and effective way in full respect for fundamental rights and international obligations.

Enhanced solidarity and responsibility sharing: The rules under the Temporary Protection Directive promote a balance of efforts between the Member States in hosting displaced persons from Ukraine. A ‘Solidarity Platform’, where Member States can exchange information about reception capacity will be coordinated by the Commission.

Further support from EU Agencies: Frontex, the European Union Asylum Agency and Europol can provide further operational support at the request of Member States to ensure smooth implementation of this decision.

Guidelines on border management
The guidelines on external border management clarify the facilitations available to Member States’ border guards under the Schengen rules in conducting border controls. This will help ensure efficient border management to help those fleeing the war find shelter without delay whilst maintaining a high level of security checks.
The facilitations available include:

Simplification of border controls at the EU’s borders with Ukraine: Under the Schengen rules, border guards can temporarily relax border checks in exceptional circumstances for certain categories of persons. The guidelines lay out criteria to help Member States decide whom this could apply to, addressing the needs ofvulnerable travellers such as children. Where the identity of the person arriving cannot be established, the regular border check should apply. In addition, Member States can also decide to perform border checks during or after the transport of the travellers to a safe location, and not at the border crossing point. These two measures will help reduce waiting time at the border so that people can reach a place of safety without delay.

Flexibility as regards entry conditions: Under the Schengen rules, border guards can authorise non-EU nationals to enter a Member State’s territory on humanitarian grounds even if they do not fulfil all entry conditions (for instance, even if they do not have a valid passport or visa with them). Member States could apply this derogation to allow entry to all those fleeing the conflict in Ukraine.

Allowing crossings at temporary border crossing points, outside official border crossing points: This could help reduce delays at the border in the current situation, for example in case the roads to official border crossing points are blocked by abandoned cars.

Easy access for rescue services and humanitarian assistance: Member States should make special arrangements to facilitate the entry and exit of rescue services, police and fire brigades, including to provide medical assistance, food and water to people waiting to cross the border. Member States should also set up special lanes at border crossing points to ensure access and return of organisations providing humanitarian assistance to people in Ukraine.

Personal belongings and pets: Those displaced from Ukraine can bring personal belongings without any customs duties. The guidelines also clarify the facilitations available for those coming with their pets.

The guidelines strongly recommend Member States make use of the support EU Agencies can provide – with Frontex able to assist on identifying and registering people arriving and Europol available to deploy officers supporting Member States with secondary checks.
Next Steps
It is for the Council to adopt the Temporary Protection proposal. The Council already expressed broad support for both measures at the extraordinary meeting of Sunday 27 February and has committed to discussing the two documents at the Justice and Home Affairs Council on Thursday, 3 March. Once adopted, temporary protection would start applying immediately and run for 1 year. This period is extended automatically by six monthly periods for a further year.
The Commission can propose at any time to the Council to end the temporary protection, based on the fact that the situation in Ukraine allows the safe and durable return of those granted temporary protection, or extend it, by one further year.*
The guidelines on external border management is a non-binding document intended to support border guards in their work. Member States’ border guards can immediately start making use of the clarifications it provides.
Background
Since the invasion of Ukraine by Russia, the EU is supporting the people of Ukraine. Through sanctioning Putin’s Russia and the Lukashenko regime in Belarus and stepping up its humanitarian support as well as financial and operational support to Member States, the EU and its Member States are providing a safe haven for people fleeing war in Ukraine.
Temporary protection is an exceptional measure to provide immediate and temporary protection to displaced persons from outside the EU and  unable to return to their country of origin.
The Schengen Borders Code – which sets the rules governing the crossing of the EU’s external borders and the entry conditions inside the EU for non-EU nationals – provides for flexibility in specific cases, to reduce formalities to a minimum in urgent crisis situations. Today’s guidelines clarify the possibilities and facilitations available to Member States’ border guards in managing the situation at the EU’s external borders with Ukraine.
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The Council today introduced further restrictive measures in view of the Russian Federation’s unprovoked and unjustified military aggression against Ukraine.
The Council decided in particular to prohibit:

the provision of specialised financial messaging services, which are used to exchange financial data (SWIFT), to Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, VNESHECONOMBANK (VEB), and VTB BANK’. This prohibition will enter into force on the tenth day after the publication in the Official Journal of the EU, and will also apply to any legal person, entity or body established in Russia whose proprietary rights are directly or indirectly owned for more than 50% by the above-mentioned banks.
to invest, participate or otherwise contribute to future projects co-financed by the Russian Direct Investment Fund.

sell, supply, transfer or export euro denominated banknotes to Russia or to any natural or legal person, entity or body in Russia, including the government and the Central Bank of Russia, or for use in Russia.

Today’s decisions complements the package of measures announced by the High Representative after the video conference of EU Foreign Affairs Ministers of 27 February. Such package also includes the provision of equipment and supplies to the Ukrainian Armed Forces through the European Peace Facility, a ban on the overflight of EU airspace and on access to EU airports by Russian carriers of all kinds, a ban on the transactions with the Russian Central Bank, and the prohibition for state-owned media Russia Today and Sputnik’ to broadcast in the EU.
The European Union condemns in the strongest possible terms the Russian Federation’s unprovoked and unjustified military aggression against Ukraine, and demands that Russia immediately ceases its military actions, unconditionally withdraws all forces and military equipment from the entire territory of Ukraine and fully respects Ukraine’s territorial integrity, sovereignty and independence within its internationally recognised borders.
Compliments of the European Council.
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The OECD has released the third batch of 2021/2022 updates to the transfer pricing country profiles, reflecting the current transfer pricing legislation and practices of 28 jurisdictions.
The updated country profiles add new information on countries’ legislations and practices regarding the transfer pricing aspects of financial transactions and the application of the Authorised OECD Approach (AOA) on the attribution of profits to permanent establishments. In addition, the country profiles reflect updated information on a number of transfer pricing aspects such as methods, comparability, intra-group services, cost contribution agreements, transfer pricing documentation and administrative approaches to prevent and resolve disputes.
In August and December 2021, the OECD had released the first and second batches of updated transfer pricing country profiles. With this third batch, the profiles for Brazil, Canada, Chile, China, Croatia, Dominican Republic, Estonia, Finland, Greece, Hungary, Israel, Korea, Liechtenstein, Lithuania, Luxembourg, Malta, Panama, Portugal, Slovenia, the United Kingdom, Uruguay and the United States have been updated, and 6 new country profiles from OECD/G20 Inclusive Framework on BEPS Members (Honduras, Iceland, Jamaica, Papua New Guinea, Senegal and Ukraine) were added, bringing the total number of countries covered to 91.
The OECD will continue to update existing transfer pricing country profiles to include new jurisdictions as changes in legislation or practice are submitted to the OECD Secretariat.
To access the latest transfer pricing country profiles, visit: https://oe.cd/transfer-pricing-country-profiles
Contact:

Manuel de los Santos, Acting Head of the Transfer Pricing Unit in the OECD Centre for Tax Policy and Administration | Manuel.DELOSSANTOS@oecd.org | +33 1 45 24 91 42 | ctp.communications@oecd.org

Compliments of the OECD.
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From the President of the United States on the Trade Agreements Program | March 2022 |

Forward
The 2022 Trade Policy Agenda and 2021 Annual Report of the President of the United States on the Trade Agreements Program are submitted to the Congress pursuant to Section 163 of the Trade Act of 1974, as amended (19 U.S.C. § 2213). Chapter IV and Annex III of this document meet the requirements of Sections 122 and 124 of the Uruguay Round Agreements Act with respect to the World Trade Organization. This report includes an annex listing trade agreements entered into by the United States since 1984. This report also includes an annex on U.S. trade in 2021, for which goods trade data by country are for full year 2021 and full-year services data by country are for 2020 (latest data available). The Office of the United States Trade Representative (USTR) is responsible for the preparation of this document and gratefully acknowledges the contributions of all USTR staff to its writing and production. We note, in particular, the contributions of Mitchell Ginsburg, David Oliver, Russell Smith, and Spencer Smith. Appreciation is extended to partner Trade Policy Staff Committee agencies.
The President’s Trade policy Agenda
I. Introduction
The Biden Administration recognizes that trade can––and should––be a force for good. Done right, and in coordination with other policy disciplines, it can grow the middle class, redress inequality, and level the playing field by promoting fair competition. We remain committed to upholding a fair and open global trading system – one that follows through on our trading partners’ longstanding commitment to conduct economic relations with a view to raising standards of living, ensuring full employment, and promoting sustainable development.
To realize these goals, we must take stock of what has worked and what has not. This requires us to identify and rethink aspects of the existing trading system that incentivize or enable unfair competition.
Competition in a global market provides Americans access to a wider variety of goods and services at competitive prices. But, too often our existing global trade rules have rewarded advantages that are not based on fair competition – or American values more broadly. Consumers in the global marketplace are also wage earners and producers, and members of broader communities that feel the effects of our trade policies. A trade model that promotes exploitation, whether of workers or the environment, is not efficient – it is a form of unfair competition. And it is not sustainable.
For these reasons, the Administration continues to advance its worker-centered trade policy. We are standing up for workers’ rights – but it is more than that. We are promoting a broader agenda of fair competition to ensure that workers are competing on the basis of skills and creativity, not exploitative cost advantages. We are laser-focused on working with partners and allies to chart new trade rules that do more to advance decarbonization and other critical environmental standards, support U.S. farmers, promote sustainable and resilient supply chains, and combat the COVID-19 pandemic. Through this approach, we can harness fair competition and support the American middle class with increased prosperity while promoting core American values.
As President Biden has explained, “[We] will pursue new rules of global trade and economic growth that strive to level the playing field so that it’s not artificially tipped in favor of any one country at the expense of others, and every nation has a right and the opportunity to compete fairly.”
Exploitation of workers and the environment are not the only forms of unfair practices that distort global trade at the expense of Americans. We must recognize that China, as a large, non-market economy, has uniquely distorted global trade through its economic policies and practices, causing harm to U.S. production, investment, and even consumption. In many ways, China’s integration into the global trading system has highlighted weaknesses in the current system – and the urgent need for reform. Lack of protections for workers, a weak environmental regime, and anticompetitive subsidies are the hallmarks of China’s artificial comparative advantage. It is an advantage that puts others out of business and violates any notion of fair competition.
That’s why the Biden Administration is realigning our trade policies towards China to defend the interests of America’s workers and businesses to strengthen our middle-class, create shared sustainable growth, and spur resilient climate action. We are working to counter China’s unfair economic practices, including by raising our concerns directly with China and working with our partners and allies to address shared challenges.
We know we cannot effectively advance our worker-centered trade policy alone. Many of our partners and allies share our goal of a fairer, more sustainable international economic regime, and we are steadily forging the partnerships necessary to update and enforce the rules governing the global economy and trade. One example is the Administration’s success in rallying the world behind a Global Minimum Tax on corporations to address yet another race to the bottom that, among other things, has deprived the United States of resources that should rightfully allow for investment in communities here at home. Another is the deal we reached with the European Union (EU) to combat global oversupply in the steel and aluminum industry and negotiate a first-of-its-kind trade arrangement predicating market access on the greenhouse gas emissions of imported steel and aluminum. A third example is the agreements we reached with the EU and the UK to resolve the longstanding aircraft disputes involving Boeing and Airbus, which allowed us to move past a perennial irritant and focus on shared interests, including financing on market terms and the challenges posed by non-market economies. We are building on this momentum to advance broader goals of fair competition through all available avenues, whether bilateral, regional, or multilateral discussions; existing trade agreements and frameworks; or new initiatives. Where the scope of the challenge requires new tools, we will pursue them as well.
A vital element of our effort to build an inclusive trade policy agenda is understanding the effects of our policies on underrepresented and underserved workers and communities, and ensuring that they have a say in how our policies are designed going forward. A more inclusive framework will lead to more durable trade policy. Approaches to trade that rest on a narrow base of support are unsustainable, and could ultimately undermine U.S. leadership at a critical juncture. While our ambition is high, we are rising to the challenge.
Precisely because it is focused on workers as the engine of the global economy, the Biden Administration’s trade policy will be a force for good – and will lead to a more durable, stable, and resilient trading system.
Continue Reading Here
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The United Nations Environment Assembly, meeting in Nairobi, has just agreed to launch negotiations on a legally binding global agreement to combat plastic pollution. EU diplomacy has played a key role in securing the support of the global community coming together in Nairobi for this agreement, which aims at reducing and eventually eliminating plastic pollution in all environments.
Executive Vice-President for the European Green Deal, Frans Timmermans said: “It is encouraging to see the global community come together at this time of crisis. Ever since the European plastics strategy was presented in 2018, the European Union has been a driving force to tackle plastic pollution. We are determined to keep pushing for ambitious global action, as the fight against the climate and biodiversity crises must involve all of us.” 
Speaking from Nairobi, Commissioner for Environment, Oceans and Fisheries Virginijus Sinkevičius welcomed the agreement: “About 11 million tonnes of plastic currently enter the ocean every year and this amount will triple in the next 20 years without an effective international response. Thus I am glad that with EU input the global community today stepped up to fight plastics pollution. We will engage actively in the discussions of a legally binding agreement that looks at all stages of the plastics life cycle from product design to waste.” 
The future agreement will aim to close the gaps that existing initiatives and agreements do not address, especially at the design and production phases of the plastics life cycle. It should bring together all stakeholders to achieve the overall goal to eliminate the leakage of plastic into the environment. The EU has put significant efforts throughout the years in outreach activities, working with partners and building support for a legally binding global agreement on plastics. The EU played a key role in bringing together the coalition of countries that spearheaded efforts towards today’s decision in Nairobi. 
Key steps towards a global agreement on plastics
As outlined in the European Green Deal and the Circular Economy Action Plan, the EU has emphasised the need for circular, life-cycle approach to plastics as a basis for a new legally binding global agreement. The solution lies in prevention, proper design and production of plastics, and their resource-efficient use, followed by sound management when it becomes waste. Commissioner Sinkevičius advocated this approach as a global priority in Nairobi.
The EU and its Member States believe that a global instrument needs to promote action at the national, regional and global levels and in particular enable countries to adopt implementation policies according to national specific circumstances, while applying a circular approach to plastics.
The future agreement could further identify the need for standards as well as measurable goals, and strengthen monitoring of plastic pollution, including marine plastic pollution, and assessment of their impacts in all environmental compartments. This would enable the adjustment of measures, both at the national and regional specific levels.
Next steps
The decision mandates the holding of the first session of the Intergovernmental Negotiating Committee in the second semester of 2022 and establishes the ambition to conclude negotiations by 2024. The EU will continue to work with its allies and other partners aiming at a rapid conclusion of the negotiations.
Background
Plastics can be a threat to the health and the environment if not treated properly. Approximately 300 million tonnes of plastic waste (an amount equivalent to the weight of the human population) are produced every year. However, only 9% is recycled; the vast majority of the rest accumulates in landfills or the natural environment. Over time, these materials break down into microplastics that ease additional pollutants into the human food chain, freshwater systems, and air.
Even with all commitments, efforts and actions that countries and regions are taking today, the world would see a limited reduction of plastic discharge into the oceans, of only 7% annually within 2040, if we continue with business as usual.
Despite a global momentum around the problem of plastic pollution, there is no dedicated international agreement specifically designed to prevent plastic pollution throughout the plastics lifecycle. The absence of agreed global response has hampered the ability of countries to implement effective measures, particularly those with trade implications and/or related to product standards. 
Compliments of the European Commission.
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In view of Russian Federation’s unprovoked and unjustified military aggression against Ukraine and the escalating situation, the Council today agreed on a new set of measures that will impose severe consequences on Russia for its actions. Such decisions was agreed in close coordination with EU’s partners and allies.
Firstly the Council adopted two assistances measures under the European Peace Facility (EPF) that will contribute to strengthening the capabilities and resilience of the Ukrainian Armed Forces to defend the territorial integrity and sovereignty of the country, and protect the civilian population against the ongoing military aggression. The assistance measures, worth in total EUR 500 000 000, will finance the provision of equipment and supplies to the Ukrainian Armed Forces, including – for the first time – lethal equipment.

Following the request by Foreign Affairs Minister of Ukraine, we are immediately responding by mobilising the European Peace Facility for two emergency assistance measures to finance the supply of lethal and non-lethal material to the Ukrainian army. This is the first time in history that the EU will be providing lethal equipment to a third country. We are doing everything we can to support Ukraine, we stand by the Ukrainian people.
High Representative of the European Union for Foreign Affairs and Security Policy

Secondly, the Council adopted severe restrictive measures related to aviation and finance.
EU member states will deny permission to land in, take off from or overfly their territories to any aircraft operated by Russian air carriers, including as a marketing carrier, or to any Russian registered aircraft, or to non-Russian registered aircraft which are owned or chartered, or otherwise controlled by a Russian legal or natural person.
Moreover, it will be prohibited to make transactions with the Russian Central Bank or any legal person, entity or body acting on behalf or at the direction of the Russian Central Bank.
The European Union condemns in the strongest possible terms the Russian Federation’s unprovoked and unjustified military aggression against Ukraine, as well as the involvement of Belarus in this aggression.
The European Union demands that Russia immediately ceases its military actions, unconditionally withdraws all forces and military equipment from the entire territory of Ukraine and fully respects Ukraine’s territorial integrity, sovereignty and independence within its internationally recognised borders. The European Council calls on Russia and Russia-backed armed formations to respect international humanitarian law and stop their disinformation campaign and cyber-attacks.
The use of force and coercion to change borders has no place in the 21st century. Tensions and conflict should be resolved exclusively through dialogue and diplomacy. The EU will continue cooperating closely with neighbours and reiterates its unwavering support for, and commitment to, the sovereignty and territorial integrity of Georgia and of the Republic of Moldova. It will continue strong coordination with partners and allies, within the UN, OSCE, NATO and the G7.
Compliments of the European Council.
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The Federal Reserve Board in March will begin a statistical study of household finances, the Survey of Consumer Finances, that will provide policymakers with important insight into the economic condition of a broad cross section of American families.
“This survey is one of the nation’s primary sources of information on the financial condition of different types of families,” Federal Reserve Board Chair Jerome Powell said in a letter to prospective survey participants. “Our most recent survey has been instrumental in continuing to understand the different experiences of American families during the economic uncertainty resulting from the COVID-19 pandemic.”
The data collected will provide a representative picture of what Americans own (from houses and cars to stocks and bonds), how and how much they borrow, and how they bank. Past study results have contributed to policy discussions regarding recovery of households from the Great Recession, changes in the use of credit, the use of tax-preferred retirement savings accounts, and a broad range of other issues. The sample design for the 2022 survey will include adjustments to improve the coverage of Black, Hispanic or Latino, and Asian families in the survey.
The current version of the survey has been undertaken every three years since 1983. It is being conducted for the Board by NORC, a social science research organization at the University of Chicago, through December of this year.
Participants in the study are chosen at random from 119 areas, including metropolitan areas and rural counties across the United States, using a scientific sampling procedure. A representative of NORC contacts each potential participant personally to explain the study and request time for an interview.
Individual survey responses are kept confidential. NORC uses names and addresses only for the administration of the survey, and that identifying information will be destroyed at the close of the study. NORC is forbidden from giving the names and addresses of participants to anyone at the Federal Reserve or anywhere else.
Summary results for the 2022 study will be published in late 2023 after all data from the survey have been assessed and analyzed.
The attached letter from Chair Powell will be mailed in mid-March to approximately 13,000 households urging their participation in the study.
Chair Powell’s letter (PDF)
Contact:

For media inquiries, e-mail media@frb.gov or call 202-452-2955

Compliments of the U.S. Federal Reserve.
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Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an online seminar organised by the Robert Schuman Centre for Advanced Studies and Florence School of Banking and Finance at the European University Institute |
Faced with exceptionally high uncertainty, we should accompany the economic recovery with a light touch, adjusting our monetary policy moderately and progressively as we receive feedback on the effects of our actions, says Executive Board member Fabio Panetta.
After many years of too-low inflation in the euro area, fears have turned to the prospect that inflation may remain too high for too long. Across advanced economies, the current inflation spike is proving to be broader and more persistent than initially expected, leading central banks to reassess the risk that it could become entrenched. This is no easy task, especially in the euro area.
Economic conditions in the euro area have benefited from the strong response of monetary policy and its positive interactions with fiscal policy during the pandemic. But this is not a typical business cycle, and we are not seeing a typical recovery.
The current inflation spike is for the most part not being driven by domestic factors – by an economy that is “running hot”, in other words. Demand remains below its pre-crisis trend.
Instead, the economy is experiencing a series of imported supply shocks that are pushing up inflation and depressing demand. The exit from the pandemic is characterised by global mismatches between demand and supply – in energy and goods markets in particular – with uneven effects across sectors.
As a result, past economic regularities may be a poor guide for the future.
This makes medium-term developments extremely hard to anticipate. There are forces at play that could delay the recovery and contain underlying price pressures, and others that could lead to accelerating inflation. Policy mistakes in either direction could push the economy onto an unfavourable path.
Faced with such uncertainty, there is a case for the central bank to accompany the recovery with a light touch, taking moderate and careful steps in adjusting policy, so as not to suffocate the as yet incomplete recovery.
If we are to durably escape the low inflation and low growth environment that has defined the past decade, we cannot afford to waste the progress we have made so far. In the spirit of William Brainard[1], we should take small steps in a dark room.
The dramatic conflict in Ukraine is now weighing negatively on both supply and demand conditions, making uncertainty more acute and exacerbating risks to the medium-term inflation outlook on both sides. In this environment, it would be unwise to pre-commit on future policy steps until the fallout from the current crisis becomes clearer. And the ECB stands ready to act to avoid any dislocation in financial markets that could stem from the war in Ukraine and to protect the transmission of monetary policy.
Inflation as an imported phenomenon
The recent inflation data in the euro area do not make for easy reading. Headline inflation reached 5% in January and is expected to stay above 2% for the entire year, while core inflation is at 2.3%. Inflation pressures are becoming widespread (Chart 1).[2]
To determine how monetary policy should respond, we need to understand the drivers of this inflation spike. I have previously spoken about “good”, “bad” and “ugly” inflation in this context, and each of these has different implications for policy.[3]
In short, good inflation is driven by domestic demand and wages consistent with our target, which monetary policy should seek to nurture until that target is reached. Bad inflation instead reflects negative supply shocks that raise prices and depress economic activity, which monetary policy should look through. Ugly inflation – the worst type of inflation – is driven by a de-anchoring of inflation expectations, which monetary policy should immediately stamp out.
Data indicate that bad inflation is still dominating in the euro area today.
Unlike in the United States, our economy is not experiencing excess domestic demand. Household nominal income has not recovered its pre-pandemic trend and households are saving more of their income than they did before the pandemic (Chart 2). Consumer spending and investment both remain well below their pre-crisis trends (Chart 3).
Inflation is largely imported, reflecting global shocks to supply and demand that are spilling over to our economy through import prices (Chart 4, left panel).
Around 60% of inflation in January was energy, of which the euro area is a net importer (Chart 4, right panel). This is the consequence of the recent extraordinary increases in oil and gas prices (Chart 5, left panel). These in turn mainly reflect shocks that compress energy supply, rather than stronger aggregate demand (Chart 5, right panel). The rise in the cost of energy has further accelerated after the Russian aggression against Ukraine.
Inflation is also being fuelled by the global shift in consumer spending from services to manufactured goods at a time when the pandemic has disrupted production. This has translated into global supply chain bottlenecks, high durable goods prices and strong pipeline pressures. This effect, which also represents a supply shock for the euro area, is now being reabsorbed, but at a different pace in different economies (Chart 6).
These global supply-driven increases in prices – above all energy and industrial goods, but also food – explain a good part of the currently high headline inflation (Chart 7, left panel).
In contrast, services inflation – the most domestic inflation component – has so far largely come from high-contact sectors (Chart 7, right panel). These sectors are experiencing frictions created by the pandemic and the reopening of the economy, and some of them (such as transport services) are also sensitive to energy prices.

Chart 1
Broadening and accelerating inflation pressures

(left-hand scale: percentages; right-hand scale: annual percentage changes)
Sources: Eurostat and ECB calculations.
Note: The latest observations are for December 2021.

Chart 2
Income and savings in the United States and euro area
Sources: Left panel: Eurostat and Federal Reserve System; right panel: Eurostat, Bureau of Economic Analysis and ECB calculations.
Notes: US quarterly data are computed as averages of monthly data. The latest observations are for the fourth quarter of 2021 for the United States and the third quarter of 2021 for the euro area.

Chart 3
Domestic demand in the United States and euro area
Sources: ECB and Federal Reserve System.
Notes: The latest observations are for the fourth quarter of 2021 for the United States and the third quarter of 2021 for the euro area. For the right panel, Ireland is excluded from the euro area aggregate due to the volatility it would impose on the data series, as large multinational firms use Ireland as their base of operations, which leads to large swings in investment in intellectual property products.

Chart 4
Strength of imported inflation
Sources: Left panel: World Input-Output Database, Eurostat and ECB staff calculations; right panel: Eurostat and ECB calculations.
Notes: Energy intensity is measured as the ratio between gross available energy and real GDP. The latest observations are for December 2021 for the left panel, and 2020 for the right panel.

Chart 5
Energy supply shocks in the euro area
Sources: Refinitiv and ECB staff calculations.
Notes: An energy equivalent price compares the price of two energy sources for the same energy content. Structural shocks are estimated using the spot price, futures to spot spread, market expectations of oil price volatility and stock price index. The latest observations are for 24 February 2022.

Chart 6
Shift in spending between goods and services
Sources: Bureau of Economic Analysis, Eurostat and ECB staff calculations.
Notes: Aggregation of all euro area countries except Slovenia, Greece, Lithuania, Slovakia, Portugal and Belgium, and using estimated values for Spain. The latest observations are for December 2021 for the United States and the third quarter of 2021 for the euro area.

Chart 7
Uncertain domestic inflation
Sources: Left panel: ECB and ECB staff calculations; right panel: Eurostat and ECB staff calculations.
Note: The latest observations are for December 2021.

Uncertainty in the inflation outlook
Imported supply shocks that underpin bad inflation increase the uncertainty surrounding the medium-term inflation outlook in two main ways.
First, energy-driven inflation acts as a “tax”[4] on consumption and a brake on production, over time generating effects akin to an adverse demand shock. This adds to the uncertainty around the growth outlook, making it harder to judge when the economy is likely to reach full capacity.
Before the invasion of Ukraine, the economy was seeing a bounceback after the slowdown created by the Omicron wave. But we were still some way short of returning to our pre-crisis GDP trend, across a range of possible estimates (Chart 8). In my view, GDP reaching the bottom end of this range would be the bare minimum needed to conclude that resources are fully utilised[5] – and current projections suggest that this will not happen until the middle of 2023.
The terms of trade tax from higher energy prices could further delay the return to that growth path. The heavier energy bill has already reduced household purchasing power by around 2% (Chart 9, left panel) and is negatively affecting consumer confidence (Chart 9, right panel). It is also eroding the financial buffers built up during the pandemic, especially for households with low incomes, reducing the degree to which dissaving can support consumption in the future (Chart 10).
Second, prolonged imported price shocks make it harder to assess whether inflation is feeding into domestic price pressures. The fact that core inflation is increasing above 2% may initially seem to suggest that domestic inflationary pressures are accumulating. However, rising core inflation is partly due to higher energy prices, which are pushing up costs in almost all sectors (Chart 11).
Similarly, industrial goods inflation may remain elevated in the near term due to higher input costs, but beyond that its dynamics are hard to predict. Inventory levels are starting to return to normal, which suggests that demand might have peaked. The memory of supply shortages might prompt firms to build precautionary stocks that initially prolong tensions but ultimately lead to excess inventories once bottlenecks ease. This would amplify the manufacturing cycle and the volatility of goods inflation.
The Russian invasion of Ukraine is now intensifying this uncertainty.
We face greater financial volatility in the short term. There is a risk of renewed market dislocations as investors anticipate the potential impact of sanctions and possible retaliatory actions. And these dislocations might be felt unevenly, threatening the smooth transmission of our monetary policy across the euro area.
But we also face greater macroeconomic uncertainty in the medium term. The higher energy prices triggered by the conflict in Ukraine point to a longer period of above-target inflation, while supply disruptions of raw materials and food could prove more persistent[6]. At the same time, these factors increase the terms of trade tax and depress economic confidence, aggravating downside risks to growth and further delaying the return to full capacity.

Chart 8
Real GDP remains below pre-pandemic trends

(Index: Q1 2015 = 100)
Sources: Eurostat, European Commission, ECB and ECB staff calculations.
Note: Potential growth based on European Commission estimates.

Chart 9
Impact of “bad” inflation on demand
Sources: Left panel: ECB and ECB staff calculations; right panel: European Commission.
Notes: Changes in purchasing power due to energy price fluctuations are computed as the year-on-year percentage change in the real price of energy, weighted by the nominal energy expenditure share (see Edelstein, P. and Kilian, L. (2009), “How sensitive are consumer expenditures to retail energy prices?”, Journal of Monetary Economics, Vol. 56, No 6, pp. 766-779). A negative value indicates a loss in consumer purchasing power. The latest observations are for January 2022.

Chart 10
Erosion of household savings due to higher energy inflation in 2021

(percentage points of income; income quintile)
Sources: ECB Consumer Expectations Survey and ECB staff calculations.
Notes: The chart refers to average aggregate effects across the income distribution, to savings cut for those households that have positive savings and rely on them to face the shock, and to dissaving for households that do not have positive savings and thus rely on alternative sources, like accumulated savings or payment deferrals, to face the shock. In 2021 the perceived average price change for utilities was 11%, and for transport services it was 9%. The actual inflation rates for energy items could suffer from an underestimation bias in cases of rising prices because domestic energy consumption is billed with a delay. The latest observations are for January 2022.

Chart 11
Impact of oil price changes on HICP excluding energy and food

(percentage points)
Sources: ECB and ECB staff calculations
Notes: The impact of oil price changes on HICP excluding energy and food are computed using the September 2021 basic model elasticities (BMEs) of the forecasting models in use in the national central banks of the Eurosystem.

The path to price stability
This uncertainty means the path to price stability is exposed to pitfalls on both sides.
As imported inflation now looks set to last longer, we will need to see wages catch up sufficiently to avoid a further fall in purchasing power. If that does not happen, we might face an adverse scenario of a slower closure of the output gap and renewed disinflationary pressures once bad inflation subsides.
However, we could be also confronted with an opposite, equally adverse scenario where high inflation proves to be so persistent that it destabilises inflation expectations. That could feed into wage negotiations and domestic price pressures, entrenching inflation above our target.
Whether the economy can avoid these risks and move along a stable path depends crucially on our policy response. In such a finely balanced situation, any errant policy measure could easily push the economy onto the wrong path and put at risk what we have achieved so far.
If we respond to a false signal and react to a rise in inflation that might not be lasting, we could suffocate the recovery. But if we are too timid in the face of mounting signs that inflation is becoming a domestic process, we might inadvertently give the impression that we lack determination to secure price stability.
In both scenarios, we should not infer the medium-term inflation outlook from present inflation figures. We need to carefully assess the prospects for wage growth, productivity growth and inflation expectations. This requires us to cross-check forward-looking indicators with evidence of what we can observe in the real economy.
So far, the labour market is not looking excessively tight, especially in comparison with other jurisdictions (Chart 12, left panel), and even a significant increase in wage growth would not put it much above trend productivity growth plus our inflation target (Chart 12, right panel).[7] Wage growth has remained moderate to date[8], perhaps reflecting workers’ concerns about job security, and the shock from the Ukraine conflict could prompt further caution. Different measures of inflation expectations also show no signs of de-anchoring on the upside (Charts 13 and 14).[9]
Therefore, the danger of high inflation becoming entrenched seems contained at the moment. At the same time, I would like to see more evidence that improvements in labour markets are translating into wage growth consistent with our 2% target to be confident that the low-inflation scenario has fully disappeared.
Indeed, a key conclusion of our strategy review was that, when coming out of a long period of low inflation, we should wait to see underlying inflation sufficiently advanced before adjusting policy, of which wages are a central component. And option-implied probabilities of tail events suggest that markets still see risks of eventually falling back into a too-low inflation regime.[10]
In the current situation, the task for the ECB is therefore twofold.
First, with the crisis in Ukraine raising uncertainty to unprecedented levels, our immediate priority is to protect the functioning of the financial sector and bolster confidence, in order to contain the impact of the shock on the economy and keep in place the conditions for the smooth implementation of monetary policy.
Second, we should aim to accompany the recovery with a light touch, taking moderate and careful steps as the fallout from the current crisis becomes clearer.

Chart 12
Wage pressures are not a cause for concern
Sources: Left panel: Eurostat, Bureau of Labour Statistics and ECB staff calculations; right panel: Eurostat and ECB staff calculations.

Chart 13
Consumer inflation expectations rise but fall back
Note: These data are derived from responses to the quantitative question on inflation expectations in the ECB’s Consumer Expectations Survey.

Chart 14
Inflation expectations are re-anchoring at 2%
Sources: Left panel: ECB Survey of Professional Forecasters; right panel: ECB Survey of Monetary Analysts.
Note: Values were rounded to one decimal place prior to aggregation.

Accompanying the recovery with a light touch
More than 40 years ago, William Brainard proposed the “conservatism principle”, which calls for cautious action when policymakers are faced with uncertainty.[11]
This principle does not apply to all forms of uncertainty. For example, when faced with deflationary shocks that risk rooting interest rates at the lower bound, it pays to act more decisively.[12] The same is true when inflation expectations are at risk of becoming de-anchored.[13] Both these considerations informed the ECB’s resolute response during the first phase of the pandemic.
And if measures to avoid market dislocations prove necessary in response to the war in Ukraine, we should intervene with equal determination, using all our instruments.
In this respect, we reiterated in our February decisions that “within the Governing Council’s mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability”.
But when policymakers are uncertain about the effects of their policy on the economy, it is advisable to take small steps – and this is the case for the path out of the pandemic. Confronted with supply shocks that are both inflationary and contractionary, we should adjust our policy moderately and progressively as we receive feedback on the effects of our actions.
We began reducing the pace of net asset purchases last year and we are on track to return to our pre-pandemic policy setting by September this year (Chart 15, left panel). Longer-term real yields have already returned to their pre-pandemic levels in the euro area (Chart 15, right panel).
The inflation outlook is stronger today than it was before the pandemic. Therefore, once the current crisis has abated, ensuring that monetary policy accompanies the recovery with a light touch may be consistent with a further adjustment in our net asset purchases. Beyond that, additional modifications to our stance should be considered carefully, for three main reasons.
First, in recent months euro area real yields have already risen more than in the United States, in spite of the different positions in the cycle (Chart 15, right panel). It would be imprudent to move further until we have strong confirmation that both actual and expected inflation is durably re-anchoring at 2% in a world of tighter financing conditions. This is especially important given that the equilibrium real interest rate is subject to large uncertainty (Chart 16), making it difficult to judge how far away we are from a neutral policy stance.
Second, we need to be certain that removing accommodation too suddenly will not trigger market turmoil, as this could lead to financial markets overreacting and financing conditions tightening abruptly. This would set back the recovery in underlying inflation and the re-anchoring of inflation expectations at our target.
We have already seen that, in the current environment, inflation expectations are highly sensitive to abrupt changes in the expected path of policy. Before the escalation of tensions in Ukraine, markets had brought forward their expectations of rate lift-off. This was associated with a reversal in the improvement of market-based inflation expectations (Chart 17, left panel).[14]
The fact that this decrease in inflation expectations was unique to the euro area[15] might have revealed concerns that the ECB would overreact to current inflation numbers and adjust its monetary policy too much and too quickly. These concerns were also hinted at by the shape of the €STR forward curve, which peaked in 2024 and then inverted somewhat, reflecting investors’ perceptions that the economy would be unable to sustain interest rates at those levels (Chart 17, right panel).
The end of net asset purchases in the euro area in 2018 was smooth mainly because short-term rates remained anchored by our forward guidance. We have not been in a situation before where markets are simultaneously reappraising the path of asset purchases and the path of rates, which could increase term premia along the yield curve. Moreover, markets are reappraising the tightening intentions of all major central banks at the same time, increasing the risk of undesirable spillovers on euro area financing conditions.
Third, a key lesson from the previous crisis is not only that rates should not be raised prematurely, but also that doing so without the right framework in place can lead to renewed financial fragmentation. And this fragmentation could force monetary policy into a trade-off: we would face a choice between triggering an excessive tightening of financing conditions in some parts of the euro area, which would result in domestic demand that is too low, or adjusting the stance by less than would be optimal.
Today, fragmentation could result from the legacy effects of the pandemic, so we need a different mechanism for addressing it than during the financial crisis.[16] We have a framework that has served us well over the last two years, when the flexibility of our pandemic emergency purchase programme and the European Commission’s Next Generation EU instrument proved sufficient to stem fragmentation. This gives us a good indication of the direction we should now take. And we know from experience that the more credible a backstop is, the less likely it is to be used.

Chart 15
The policy normalisation already achieved
Sources: Left panel: ECB and ECB calculations; right panel: Refinitiv, Bloomberg and ECB calculations.
Notes: APP stands for asset purchase programme. PEPP stands for pandemic emergency purchase programme. The euro area real rate is the difference between the nominal overnight index swap rate and the inflation-linked swap (ILS) rate. The US real rate represents the difference between treasury yields and the US breakeven inflation rate. The latest observations are for 15 February 2022 for the left panel, and 24 February 2022 for the right panel.

Chart 16
Econometric estimates of the real equilibrium rate

(percentages)
Sources: Brand, C., Bielecki, M. and Penalver, A. (eds.) (2018), “The natural rate of interest: estimates, drivers, and challenges to monetary policy”, Occasional Paper Series, No 217, ECB, December; Brand, C., Goy, G.; Lemke, W. (2020), “Natural Rate Chimera and Bond Pricing Reality”, DNB Working Papers, No 666, De Nederlandsche Bank, January; Ajevskis, Viktors (2018): “The natural rate of interest: information derived from a shadow rate model,” Latvijas Banka Working Paper, (2/2018); Brand, C. and Mazelis, F. (2019) “Taylor-rule consistent estimates of the natural rate of interest.” Working Paper Series 2257, European Central Bank; Fiorentini, G., Galesi, A., Pérez-Quirós, G. and Sentana, E. (2018): “The Rise and Fall of the Natural Interest Rate,” Banco de Espanã, Documentos de Trabajo, (1822); Geiger, F. and Schupp, F. (2018), “With a little help from my friends: survey-based derivation of euro area short rate expectations at the effective lower bound”, Bundesbank Discussion Paper, No 27; Holston, K., Laubach, T., and Williams, J. C. (2017). Measuring the natural rate of interest: International trends and determinants. Journal of International Economics, 108:59–75.; Jarocinski, Marek (2017): “VAR-based estimation of the euro area natural rate of interest,” ECB Draft Paper; Johannsen, B.K. and Mertens, E. (2021), “A Time-Series Model of Interest Rates with the Effective Lower Bound”, Journal of Money, Credit and Banking, 53: 1005-1046; ECB calculations.
Notes: Ranges span point estimates across models to reflect model uncertainty and no other source of r* uncertainty. The dark shaded area highlights smoother r* estimates that are statistically less affected by cyclical movements in the real rate of interest. The latest observations are for 16 February 2022.

Chart 17
Risks of a premature tightening
Sources: Left panel: Refinitiv and ECB Calculation; right panel: Refinitiv, Bloomberg and ECB calculations.
Notes: Left panel: The chart shows the one-year inflation linked-swap (ILS) rate four years ahead and the five-year ILS rate five years ahead. The solid vertical line refers to the day before the December Governing Council meeting (15 Dec), the day before the February Governing Council meeting (2 Feb) and the day of the Russian’s invasion of Ukraine (24 Feb). The solid vertical line refers to the day before the December Governing Council meeting (15 Dec). Latest observation: 24 February 2022. Right panel: The lift-off date is defined as the month during which the €STR forward rate exceeds by at least 10 bps the current €STR rate (respective red vertical lines). Latest observation: 24 February 2022 for realised €STR.

Conclusion
Let me conclude.
Whenever we are uncertain about the consequences of our actions, it makes sense to act prudently. Faced with high uncertainty surrounding the medium-term inflation outlook with pitfalls on both sides, we should adjust policy carefully and recalibrate it as we see the effects of our decisions, so as to avoid suffocating the recovery and cement progress towards price stability.
That was already the case before the invasion of Ukraine, but this terrible event has made the need for prudence even greater. The world has become darker, and our steps should be smaller still.
At the ECB we stand by the people of Ukraine, who are now seeing what they hold dearest threatened by an unjustifiable act of aggression that violates the most fundamental principles of international law. That a country can be subjected to a full military invasion should steel our determination to defend those principles wherever we are, however we can.
The ECB’s role is clear: we will take any measures necessary, using all our instruments to shore up confidence and stabilise financial markets. This is the duty of a central bank in times of emergency. And we will swiftly implement the sanctions decided on by the European Union.
The scenes we have witnessed this past week will scar our memories forever. But I hope that, one day, we will look back on this moment and be proud that we did our duty, showed resolve and unity, and sought to uphold the universal values of peace, freedom and prosperity.
Compliments of the European Central Bank.
The post ECB Speech | Small steps in a dark room: guiding policy on the path out of the pandemic first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

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The post Europe Accounts for 62% of all FDI Employment in Florida first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.