Opening remarks by Philip R. Lane, Member of the Executive Board of the ECB, at MNI Market News Webcast | Frankfurt am Main, 17 February 2022 |

In these brief opening remarks, I wish to discuss the forces shaping near-term and medium-term inflation dynamics.
On near-term inflation, I emphasised in a blog post last week that the current high inflation rates have been largely shaped by a pandemic cycle that has generated global bottlenecks for manufactured goods over the last year and, most importantly for the euro area, has seen a very substantial surge in energy prices in recent months.[1]
A comprehensive analysis of the implications of high energy prices for near-term and medium-term inflation dynamics should take into account four factors: first, the direct impact through the energy component of the HICP; second, the indirect impact, since energy is an important input for many other components of the HICP, such as food, transportation, goods and many consumer services; third, the potential for second-round effects on wages, with due differentiation between a one-off or catch-up wage adjustment and a revision in inflation expectations that would have persistent effects on wage growth; and, fourth, the macroeconomic impact, with high energy prices operating through negative income and wealth effects, while also affecting energy-sensitive production and investment plans. At a global level, the macroeconomic impact of an energy shock differs between energy-producing and energy-using regions. Since the euro area is a significant net importer of energy, a surge in energy prices constitutes a significant adverse terms of trade shock. Higher import prices for energy reduces the disposable incomes of households and the cash flows of energy-intensive firms. The impact of this terms of trade shock on euro area macroeconomic dynamics will warrant close monitoring in the coming quarters.
Moving from near-term to medium-term inflation dynamics, there is a clear potential linkage: if currently-high inflation causes a rethink about the likely level of medium-term inflation, a persistent shift in inflation expectations can play a significant role in determining inflation dynamics. There are several mechanisms at work here.
First, at any given time, the recent history of inflation is an important input in shaping the beliefs of households, firms and investors. Before the pandemic, there were widespread concerns that a long period of below-target inflation in the euro area had led to a downside de-anchoring of inflation expectations. In particular, there was a widely-held conjecture that myriad structural forces (combined with the effective lower bound for monetary policy) would keep inflationary pressures low for an extended period, with persistent monetary accommodation only gradually returning inflation to the two per cent target. The currently-high inflation rate calls this into question this conjecture through a stark demonstration that inflation is not destined to be always super low.
Of course, precisely how much medium-term inflation expectations might be affected by the current burst of inflation will depend on the intensity and duration of this spell of above-target inflation, the nature of its underlying drivers (in particular, the balance between external supply shocks versus domestic demand shocks) and the extent to which the central bank is trusted to deliver the two per cent target over the medium term.
It is especially important that the central bank is seen as symmetric in its commitment to the two per cent target – being fully prepared to react proportionately if there is a threat that inflation will settle above two per cent in the medium term, while also making sure not to over-react to the extent that there is a risk that high near-term inflation might induce an excessive monetary tightening that pushes inflation persistently below the two per cent target over the medium term.
Moreover, it should also be recognised that medium-term inflation expectations have been increasing from a low base towards the two per cent inflation target over the last year, even before the energy shock. In the specific context of the euro area, there are several factors indicating that the excessively-low inflation environment that prevailed from 2014 to2019 (a period over which inflation averaged just 0.9 per cent) might not re-emerge even after the pandemic cycle is over.
First, the scale of the fiscal and monetary response to the pandemic demonstrated the strength of the commitment to delivering macro-financial stability, rather than seeing a return of the pre-pandemic dynamics that acted as a powerful anti-inflationary force after the global financial crisis and the euro area sovereign debt crisis (the twin crises between 2008 and 2013). Importantly, this included substantial policy action at both EU and national level; with the former including the SURE programme, extra funding for the European Investment Bank and, most significantly, the NGEU initiative. In particular, the medium-term nature of the NGEU programme has provided an important anchor for medium-term economic prospects, especially for the main beneficiaries.
At the national level, we have witnessed the deployment of large-scale government interventions to buffer the impact of the pandemic shock on household and corporate incomes – through temporary employment protection schemes and tax cuts, among other initiatives – and to facilitate the normal financing of economic activity – especially through large-scale public loan guarantees. All this stands in contrast to the macroeconomic configuration that characterised the period after the twin crises which involved very muted aggregate demand, with many governments, households, firms and banks focused on sustained deleveraging after a period of excessive imbalances.
Second, the re-anchoring of medium-term inflation expectations towards two percent has also been supported by the clarity of the ECB’s new monetary policy strategy, which was finalised in July 2021 and backed up by its revised interest rate forward guidance. The revised strategy makes it clear that the monetary policy of the ECB is dedicated to delivering the two per cent target over the medium term, with a symmetric aversion to below-target and above-target deviations. The simplicity and transparency of the two per cent target increases accountability and improves clarity compared to the previous target of “below, but close to, two per cent.”
Third, in relation to structural forces, some revisions to beliefs about the operation of the world economy might also be contributing to a shift in inflation expectations. In particular, the level of excess capacity in global manufacturing might be structurally diminishing to the extent that China has embarked on a transition from an export-led to a domestically-focused economy. In related fashion, rising wages and incomes in emerging economies mean that demand-side factors might be more powerful than supply-side factors in relation to the impact of globalisation in the coming years. In parallel, the increasing visibility of aging dynamics in some Western economies – a trend that is also becoming visible in some emerging areas (especially China) – may result in a less dynamic labour supply at the global level. The net impact of demographic change on inflation dynamics is not straightforward: while a lower labour supply may potentially have a direct impact on labour costs, it could also have adverse implications for the potential growth rate of the world economy. Furthermore, the net impact on labour supply in individual regions will also depend on international migration policies that can amplify or mitigate regional imbalances in labour supply. Moreover, in relation to structural forces, the pandemic may also have accelerated the digitalisation of the world economy, which could operate as an anti-inflationary force by increasing national and international competition, including in previously-sheltered services sectors.
The carbon transition constitutes an important structural force that will be a primary contributor to macroeconomic dynamics in this decade and in the decades to come. The net impact of the carbon transition on inflation dynamics will depend on the exact transition path that emerges and the time horizon considered. In particular, the mechanical impact of the carbon transition on energy prices (which, in turn, will depend on the evolving mix between fossil fuels and renewables in energy production) must be assessed jointly with the implications of a sustained phase of transition-focused corporate, household and public investment. In particular, the impact on inflation dynamics must take take into account the shift in the composition of economic activity between investment and consumption and the wealth effects of the transition on the value of carbon-intensive assets, including housing. Moving towards a longer horizon, massive investment in renewable energy technologies should deliver sizeable efficiency gains in the production and use of energy over time, reducing overall expenditure on energy. Clearly, an orderly transition will have a more benign macroeconomic impact than a deferred process that requires sharper policy adjustment at a later stage.
Charts 1-7 show the evolution of inflation expectations across a range of indicators. Taken together, these indicators signal that the current high inflation rate is not expected to persist. At the same time, at a lower frequency, these indicators also support increasing confidence that the pre-pandemic below-target inflation pattern will not re-emerge as a medium-term equilibrium, with inflation expected to settle around the two per cent target.[2]

Chart 1
Euro area HICP inflation: Consensus Economics forecasts and Eurosystem staff projections
(annual percentage changes)
Sources: Consensus Economics, Eurostat, Haver Analytics and ECB staff calculations.
Note: The shaded blue and yellow areas denote the ranges of forecasts included in Consensus Economics surveys.

Chart 2
Longer-term inflation expectations from professional forecaster surveys
(annual percentage changes)
Sources: Survey of Professional Forecasters, ECB Survey of Monetary Analysis, Consensus Economics, Eurozone Barometer and ECB staff calculations.
Notes: The weighted average is calculated using the average number of respondents from each survey as weights. The latest observations is for the first quarter of 2022 for the SPF, January 2022 for Consensus Economics and the Eurozone Barometer and February 2022 for the Survey of Monetary Analysts.

Chart 3
Survey of Professional Forecasters: cross-sectional distribution of longer-term inflation point forecasts
(percentages of respondents; inflation point forecasts)
Sources: Survey of Professional Forecasters and ECB staff calculations.
Note: The latest observations are for the first quarter of 2022.

Chart 4
Survey of Monetary Analysts: distribution of longer-term inflation expectations
(percentages of respondents)
Sources: ECB Survey of Monetary Analysts (SMA) surveys between January 2020 and January 2022.
Notes: Values were rounded to one decimal prior to aggregation. The latest observations are for January 2022.

Chart 5
Consumer inflation expectations
(annual percentage changes)
Sources: ECB Consumer Expectations Survey and Eurostat.
Notes: Average denotes the winsorised (±2%) mean. The latest observations are for January 2022.

Chart 6
Inflation-linked interest rate swap rate in the euro area: 5-year rate 5 years ahead
(percentage per annum)
Sources: Reuters and ECB staff calculations.
Note: The latest observation is for 14 February 2022.

Chart 7
Headline inflation in the euro area
(annual percentage changes)
Sources: Eurostat and ECB staff calculations.
Notes: The latest observations are for the fourth quarter of 2021. The end-of-horizon projected values show the projected HICP inflation rate for the final year within the projection horizon.

The re-anchoring of inflation expectations has also been reinforced by improving labour market prospects. Since labour costs constitute the dominant share of domestic costs, it is difficult to sustain inflation at the target two per cent level if the labour market is too weak. Chart 8 shows the evolution of the unemployment rate since 2014, while Chart 9 shows the evolution of projected unemployment during the pandemic. Chart 8 and 9 show that the labour market has turned out to be stronger than was expected during the pandemic and that the latest staff projections postulate a significant further decline of the unemployment rate over 2022-2024, to a level of 6.6 per cent toward the end of this horizon. We would have to look back more than forty years to see such a low level of unemployment in the euro area. Of course, while these charts focus on the unemployment rate, it is always essential to take into account a wider set of indicators of labour market slack, especially in view of the role of pandemic-related labour market policies that might distort for longer the relation between the measured unemployment rate and the overall degree of labour market tightness.[3]

Chart 8
Unemployment rate in the euro area
(percentages of the labour force)
Sources: Eurostat and December 2021 ECB/Eurosystem staff projections.
Note: The latest observations are for December 2021.

Chart 9
Unemployment rate in ECB/Eurosystem staff projections
(percentages of the labour force)
Sources: ECB/Eurosystem staff projections and ECB staff calculations.

The projected tightening of the labour market in part reflects the success of macroeconomic policies during the pandemic, with fiscal policy focused on protecting household incomes, mitigating corporate vulnerabilities and maintaining the link between firms and workers through a focus on wage subsidy schemes and short-time working schemes rather than solely focusing on improving unemployment support programmes. It also is predicated on favourable aggregate demand conditions, including supportive financing conditions and fiscal policies. However, the projected tightening of the labour market also reflects the ageing of the euro area population and the possibility that the scale of the labour supply contribution from foreign workers may be weaker compared to the pre-pandemic trend. While such labour supply trends might tighten the labour market, these also have adverse implications for the trend path for potential output.
In summary, monetary policy must take into account both the near-term and medium-term forces shaping inflation dynamics. In line with its new monetary policy strategy, it should be clear that the ECB will set its monetary policy to deliver its symmetric two per cent target over the medium term, tolerating neither over-reactions nor under-reactions to emerging inflation risks. In particular, if the medium-term inflation dynamic is anticipated to stabilise around the two per cent target, this will permit a gradual normalisation of monetary policy. Whereas if inflation threatens to persist significantly above the two per cent target over the medium term, a tightening of monetary policy will be required. And finally, if inflation is anticipated to fall significantly below the two percent target over the medium term, setting an accommodative monetary policy will be necessary.
Compliments of the European Central Bank.

See Lane, P.R. (2022), “Bottlenecks and monetary policy”, The ECB Blog, 10 February.

At the same time, the visible decline in market-based measures of inflation compensation to below-target levels in recent weeks that is shown in Chart 6 will warrant monitoring. Since market-based measures of inflation compensation combine compensation for expected inflation and compensation for inflation risk premia, such indicators do not allow for straightforward interpretation but the variation over time in these measures is informative.

For inflation dynamics, it is also essential to monitor the extent of slack in capital utilisation and the mix of domestic and export demand (see also Lenza, M. and Jarocinski, M. ”An Inflation-Predicting Measure of the Output Gap in the Euro Area”, Journal of Money, Credit, and Banking, Vol. 50(6), pp. 1189-1224). In particular, the relation between output levels and price-determining expenditure levels will be different between current account surplus regions and current account deficit regions (see also See Galstyan, V. (2019), “Inflation and the Current Account in the Euro Area,” Economic Letter No 4, Central Bank of Ireland and Eser, F., Karadi, P., Lane, P.R., Moretti, L. and Osbat, C. (2020), “The Phillips Curve at the ECB,” The Manchester School, Vol. 88(S1), pp. 50-85..

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Today, the Commission is announcing an investment of over €110 million into LIFE programme integrated projects for environmental and climate protection, selected after a call for proposals covering the year 2020. The funding will support new major environmental and climate projects in 11 EU countries – Cyprus, Czechia, Denmark, Estonia, Finland, France, Latvia, Lithuania, the Netherlands, Poland and Slovenia. The projects contribute to a green recovery from the COVID-19 pandemic and support the European Green Deal’s objectives of making the EU climate neutral and zero-pollution by 2050. They are examples of actions to deliver key European Green Deal objectives under the EU Biodiversity Strategy for 2030 and the EU Circular Economy Action Plan.
Executive Vice-President responsible for the European Green Deal Frans Timmermans said: “We have no time to waste when it comes to the climate, biodiversity and pollution crises. The LIFE programme provides direct support to projects across the EU and enables entire countries and regions to protect and restore nature. Nature is our biggest ally and we need to take care of it so it can take care of us. My congratulations to each of the projects selected today.”
Commissioner for the Environment, Oceans and Fisheries Virginijus Sinkevičius added: “LIFE Programme integrated projects is one of the main tools to make the green transition a reality by delivering targeted changes on the ground. Through these projects, Member States can green their economies, bring back nature and biodiversity, and improve their resilience. I am looking forward to seeing the benefits that this investment will bring in the 11 countries and beyond their borders.”
Integrated projects allow Member States to pool additional EU funding sources, including agricultural, structural, regional and research funds, as well as national funding and private sector investment. Altogether, the 11 projects are expected to attract more than €10 billion of complementary funds, significantly multiplying the resources allocated today to make a real difference on the ground.
Delivering Green Deal objectives on the ground
Nature conservation: A project in France will introduce measures to halt and reverse biodiversity decline in the Grand Est region by, for instance, setting up three pilot forest areas. Another project will mitigate the adverse effects of human activities that threaten Finland’s marine and coastal biodiversity, by monitoring and improving the management of the national network of Marine Protected Areas. These projects will help deliver the EU Biodiversity Strategy for 2030.
Clean air: A project in Poland will implement measures to improve overall air quality in the region of Silesia where air pollution is among the most severe in Europe, by replacing small-scale solid-fuel domestic heating devices with less polluting alternatives. This project contributes to the EU’s 2030 greenhouse gas emission targets and the Zero Pollution Action Plan.
Waste management: In Cyprus, a project will aim to improve the infrastructure and collection systems for recyclable and biodegradable waste. In Latvia, the focus will be on improving separate waste collection and reuse of municipal waste. In Denmark, a project will work on waste prevention and on setting up a better waste regulatory framework. The project in Slovenia will aim to achieve a better recycling rate of non-hazardous construction and demolition waste, among other actions. In total, four projects will focus on waste prevention and recovering resources, contributing to the goals of the EU’s Circular Economy Action Plan and the Waste Framework Directive.
Climate change mitigation: LIFE funding will help Lithuania reach the objectives set out in its national energy and climate plan (NECP) including more efficient buildings, climate-friendly mobility, an energy-saving industry, and enhanced green public procurement. In Estonia, various tools and solutions will be created for the deep renovations on a range of buildings in three cities, which can then be replicated across Estonia and other Member States and support the EU’s Renovation Wave Strategy.
Climate change adaptation: In the Netherlands, LIFE funding will help stimulate climate change adaptation across several sectors: water management, infrastructure, agriculture, nature, health and spatial/urban planning. A project in the Moravian-Silesian Region in Czechia will increase the region’s climate resilience, improve the quality of the environment for inhabitants and support sustainable development. Both projects will be following the goals of the EU’s Adaptation Strategy.
Find out more about the 11 integrated projects in the short descriptions. 
Background
The LIFE programme is the EU’s funding instrument for the environment and climate action. It has been running since 1992 and has co-financed more than 5 500 projects across the EU and beyond. The Commission has increased LIFE programme funding by almost 60% for the 2021–2027 period. It now stands at €5.4 billion. LIFE has currently four sub-programmes: nature and biodiversity, circular economy and quality of life, climate change mitigation and adaptation, and clean energy transition.
The LIFE programme provides funding for integrated projects. These projects support the implementation of EU environmental and climate legislation and policies, on regional, multi-regional, national or trans-national level. Integrated projects help Member States comply with key EU legislation in six areas: nature conservation, water, air, waste management, climate change mitigation and climate change adaptation.
Compliments of the European Commission.
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On February 15, 2022, the EU is acting on its space ambitions by tabling two initiatives – a proposal for a Regulation on a space-based secure connectivity and a Joint Communication on an EU approach on Space Traffic Management (STM). Space technology is essential for facilitating our daily lives, contributing to a more digital, green and resilient future for our planet. As a major space power, the EU’s Space Programme already provides valuable data and services for a wide array of daily applications from transport, agriculture, and crisis response to the fight against climate change, to name a few.
However, due to new challenges and increased international competition, the EU’s space policy needs to constantly evolve and adapt if we want to continue enjoying freely the benefits that space brings. Today’s initiatives will help safeguard the efficiency and security of our current assets while developing European cutting-edge space technology to the benefit of our citizens and economy.
Space-based secure connectivity
In today’s digital world, space-based connectivity is a strategic asset for EU’s resilience. It enables our economic power, digital leadership and technological sovereignty, competitiveness and societal progress. Secure connectivity has become a public good for European governments and citizens. The Commission is thus putting forward an ambitious plan for an EU space-based secure communication system that will:

Ensure the long-term availability of worldwide uninterrupted access to secure and cost-effective satellite communication services. It will support the protection of critical infrastructures, surveillance, external actions, crisis management and applications that are critical for Member States’ economy, security and defence;

Allow for the provision of commercial services by the private sector that can enable access to advanced, reliable and fast connections to citizens and businesses across Europe, including in communication dead zones ensuring cohesion across Member States. This is one of the targets of the proposed 2030 Digital Decade. The system will also provide connectivity over geographical areas of strategic interest, for instance Africa and the Arctic, as part of the EU Global Gateway strategy.

Both governmental user needs and satellite communication solutions are changing rapidly. The EU space-based secure communication system seeks to meet these increased and evolving needs, and will also include the latest quantum communication technologies for secure encryption. It will be based on the development of innovative and disruptive technologies, and on the leveraging of the New Space ecosystem.
The total cost is estimated at €6 billion. The Union’s contribution to the Programme from 2022 until 2027 is €2.4 billion at current prices. The funding will come from different sources of the public sector (EU budget, Member States, European Space Agency’s (ESA) contributions) and private sector investments.
This initiative will further boost the competitiveness of the EU space ecosystem, as the development of a new infrastructure would provide a gross value added (GVA) of €17-24 billion and additional jobs in the EU space industry, with further positive spill-over effects on the economy through the downstream sectors using the innovative connectivity services. Citizens would also benefit from the technological advantages, reliability and operational performance of such satellite communication services ensuring high-speed internet connections across the EU.
Space Traffic Management
With an exponential increase in the number of satellites in orbit due to new developments in reusable launchers, small satellites and private initiatives in space, the resilience and safety of EU and Member States’ space assets are at serious risk. It is critical to protect the long-term viability of space activities by ensuring that space remains a safe, secure and sustainable environment. This makes Space Traffic Management a priority public policy issue, which requires the EU to act now, collectively and at a multilateral level, if we are to ensure a safe, secure and sustainable use of space for the generations to come.
Against this background, the Joint Communication establishes an EU approach on Space Traffic Management. The goal is to develop concrete initiatives, including operations and legislation, to promote the safe, secure and sustainable use of space while preserving the EU’s strategic autonomy and industry‘s competitiveness.
The EU approach focuses on four elements:

Assessing the STM civilian and military requirements and impacts for the EU;
Strengthening our technological capability to identify and track  spacecraft and space debris;
Setting out the appropriate normative and legislative framework;
Establishing international partnerships on STM and engaging at a multilateral level.

Members of College said:
Executive Vice-President Margrethe Vestager said: “Space technology is essential for our everyday life and security. Today’s initiatives will ensure secure, efficient connectivity at all times. It is benefitting both citizens and governments. It will play a key role in Europe’s digital transformation. And make us more competitive. I hope that an EU approach to space traffic management and space technology will guarantee a safe and sustainable use of space in the long run.”
The High Representative of the Union for Foreign Affairs and Security Policy, Josep Borrell, stated: “Space has become more crowded than ever, increasing the complexity and the risks related to space operations. To address this global challenge, we propose today an EU approach to Space Traffic Management. We will develop concrete capabilities, set norms and engage with key partners and in multilateral fora to ensure a safe, secure and sustainable use of space. While STM is a civilian endeavour, European security and defence depend on a safe, secure and autonomous access to space.”
Thierry Breton, Commissioner for the Internal Market, said: “Space plays a growing role in our daily lives, our economic growth, our security, and our geopolitical weight. Our new connectivity infrastructure will deliver high-speed internet access, serve as a back-up to our current internet infrastructure, increase our resilience and cyber security, and provide connectivity to the whole of Europe and Africa. It will be a truly pan-European project allowing our many start-ups and Europe as a whole to be at the forefront of technological innovation.”
Background
The two initiatives adopted today are concrete deliverables of the Action Plan on Synergies between civil, defence and space industries, where these two flagship projects are mentioned.
Secure Connectivity 
To implement this new space-based initiative ensuring secure connectivity across Europe, the Commission launched in December 2020 an initial system study to explore technical aspects and the potential service provision models.
Meanwhile, the Commission published an additional call to also involve the European New Space ecosystem to integrate technologically cutting-edge, innovative ideas by SMEs and start-ups. Two contracts were awarded in December 2021 and the technical work is now ongoing with results expected by June 2022.
Space Traffic Management
Since 2016, the Union already has a Space Surveillance & Tracking capability (SST), implemented by the EU SST Consortium. More than 130 European organisations from 23 Member States have registered so far to the EU SST services (collision avoidance, fragmentation analysis, re-entry analysis). Today, more than 260 EU satellites, including the Galileo and Copernicus fleets, benefit from the collision avoidance service.
In 2021, partners of EU SST shared 100 million measurements through their data-sharing platform. Most recently, the EU SST fragmentation service confirmed the detection of and monitored space debris from destruction of a satellite in low orbit (COSMOS 1408) following an anti-satellite test conducted by Russia on 15 November 2021.
Compliments of the European Commission.
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By Kristalina Georgieva, IMF Managing Director | Atlantic Council, Washington, DC |
Ladies and gentlemen, friends,
Let me start by thanking the Atlantic Council for providing a fitting venue to discuss central banks’ forays into Digital Currencies.
Since its founding in 1961, the Council has made important contributions to strategic, political, and economic policy debates. Those debates have served us well, helping us to test the boundaries of our thinking and be better prepared for what lies ahead.
So, today, we aim to test our thinking again. We have moved beyond conceptual discussions of CBDCs and we are now in the phase of experimentation. Central banks are rolling up their sleeves and familiarizing themselves with the bits and bytes of digital money.
These are still early days for CBDCs and we don’t quite know how far and how fast they will go.  What we know is that central banks are building capacity to harness new technologies—to be ready for what may lie ahead.
If CBDCs are designed prudently, they can potentially offer more resilience, more safety, greater availability, and lower costs than private forms of digital money. That is clearly the case when compared to unbacked crypto assets that are inherently volatile. And even the better managed and regulated stablecoins may not be quite a match against a stable and well‑designed central bank digital currency.
We know that the move towards CBDCs is gaining momentum, driven by the ingenuity of Central Banks.
All told, around 100 countries are exploring CBDCs at one level or another. Some researching, some testing, and a few already distributing CBDC to the public.
In the Bahamas, the Sand Dollar—the local CBDC—has been in circulation for more than a year.
Sweden’s Riksbank has developed a proof of concept and is exploring the technology and policy implications of CBDC.
In China, the digital renminbi [called e-CNY,] continues to progress with more than a hundred million individual users and billions of yuan in transactions.
And, just last month, the Federal Reserve issued a report that noted that “a CBDC could fundamentally change the structure of the U.S. financial system.”[i]
As you might expect, the IMF is deeply involved in this issue, including through providing technical assistance to many members. An important role for the Fund is to promote exchange of experience and support the interoperability of CBDCs.
As part of the service to our members, today we are publishing a paper that shines a spotlight on the experiences of six Central Banks at the frontier—including China and Sweden—to be covered in the panel discussion following my remarks.
We take away three common lessons from these Central Banks from which others may benefit.
Lesson number one: no one size fits all.
There is no universal case for CBDCs because each economy is different.
In some cases, a CBDC may be an important path to financial inclusion—for instance, where geography is an obstacle to physical banking.
In others, a CBDC could provide an essential backup in the event that other payment instruments fail. One such case was when the Eastern Caribbean Central Bank extended its CBDC pilot to areas struck by a volcanic eruption last year.
So, central banks should tailor plans to their specific circumstances and needs.
Lesson number 2, financial stability and privacy considerations are paramount to the design of CBDCs.
Central banks are committed to minimizing the impact of CBDCs on financial intermediation and credit provision. This is very important for the wheels of the economy to run smoothly. The countries we studied offer CBDCs that are not interest-bearing—which makes a CBDC useful, but not as attractive as a vehicle for savings as traditional bank deposits.
We also saw in all three active CBDC projects—in the Bahamas, China, and the Eastern Caribbean Currency Union—that they placed limits on holdings of CBDCs, again, to prevent sudden outflows of bank deposits into CBDC.
Limits on holdings of CBDCs also helps meet people’s desire for privacy while guarding against illicit financial flows. Smaller holdings are allowed without the need for full identification if the risks of money laundering and terrorist financing are low—this could be a boon for financial inclusion. At the same time, larger transactions and holdings require more stringent checks, as you would expect if you deposit a bag of cash at the bank.
In many countries, privacy concerns are a potential deal breaker when it comes to CBDC legislation and adoption. So, it’s vital that policymakers get the mix right.
And that brings me to lesson number three: balance.
Introducing a CBDC is about finding the delicate balance between developments on the design front and on the policy front.
Getting the design right calls for time and resources, and continuous learning from experience—including shared experiences across countries. In many cases, this will require close partnerships with private firms to successfully distribute CBDCs, build e-wallets, add features, and push the bounds of technology.
But the policy aspects are also paramount, including developing new legal frameworks, new regulations, and new case law.
On both fronts, a CBDC also requires prudent planning to satisfy policy targets like financial inclusion, and avoid undesirable spillovers such as sudden capital outflows that could undermine financial stability.
Taken together, careful design and policy considerations will underpin trust in CBDCs. But let us not forget that trust must be anchored in credible central banks with a history of delivering on their mandates.
Introducing a CBDC is no substitute for this underlying trust built over decades—a public good that allows money to grease the wheels of our economies.
The success of a CBDC, if and when issued, will depend on sufficient trust. And, in turn, any successful CBDC should continue to build trust in central banks.
So, let me conclude.
The history of money is entering a new chapter.
Countries are seeking to preserve key aspects of their traditional monetary and financial systems, while experimenting with new digital forms of money.
The paper we are releasing today shows that for those experiments to succeed policymakers need to deal with many open questions, technical obstacles, and policy tradeoffs.
It may not be easy or straightforward, but I am confident that the bright minds in Central Banks can succeed, thanks to their trademark resourcefulness and perseverance.
Fittingly, even the great inventor Thomas Edison acknowledged that: “There is no substitute for hard work.”
And this is what we embrace at the IMF: This hard work has already advanced. We are supporting countries in their CBDC experiments—to understand big picture trade-offs, to provide technical assistance, and to serve as a transmission line of learning and best practice across all 190 members. And we are stepping up collaboration with other institutions, such as the Bank for International Settlements, at par with the rapidly growing significance of digital money.
Today’s discussion is only the beginning of an exciting journey — and we have a great panel to take us further on it.
Thank you.
Compliments of the IMF.
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Eswar S. Prasad explains how technology is transforming the nature of money and how that will affect our lives |
In his latest book, The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, the Cornell University professor describes how digital currencies and other financial technologies are reshaping everything from consumer banking to monetary policy and international payments. In a conversation with F&D’s Chris Wellisz, Prasad lays out the advantages and perils of the new forms of money.
F&D: Is cash destined to wither away?
EP: The convenience of digital payments to both consumers and businesses makes it highly unlikely that cash will survive much longer. In China there are two private payment providers, Alipay and WeChat Pay, that have blanketed the entire Chinese economy with very low-cost digital payments. You can use those for something as simple as buying, say, a piece of fruit or a couple of dumplings from a street vendor. In advanced economies like Sweden, the private sector is doing an equally good job of providing very low-cost digital payments.
‘The convenience of digital payments makes it highly unlikely that cash will survive much longer.’
F&D: Is it likely that cryptocurrencies like Bitcoin will be used to buy a cup of coffee or pay the rent?
EP: Bitcoin has not worked very well as a medium of exchange that can be used for day-to-day transactions. One main reason is that Bitcoin has very unstable value. It’s as though you took a bitcoin in with you to a coffee shop, and one day you could buy a whole meal with it and on another day just get a small cup of coffee. In addition, Bitcoin is somewhat slow and cumbersome to use.
F&D: Is there a solution to the problem of volatility?
There are new cryptocurrencies called “stablecoins” that get their stable value essentially by being backed up by stores of fiat currency, such as US dollars or euros. They basically become linked to the value of those currencies, and they can then be used to make both domestic payments and payments across national borders more effectively and efficiently.
F&D: You explain in your book how stablecoins may not be as stable as they seem. What risks do they pose?
EP: A stablecoin issuer might say that they are going to hold stocks of liquid securities, but who is going to make sure that they do in fact hold the securities? Even if they did hold the securities, it’s possible that if a lot of people try to redeem those stablecoins and convert them back into fiat currencies at the same time, many of the securities that are supposed to back up the stablecoins might not be as liquid—that is, as easy to convert into fiat currencies—as one might expect.
‘We will soon have access to digital versions of the dollar or the Chinese renminbi and many of the other major currencies.’
F&D: Are there other risks?
EP: There are concerns that stablecoins, unless they are closely regulated, might become conduits for illicit financing of various sorts of activities, both within and across national borders. And the additional difficulty, of course, is that cryptocurrencies, including Bitcoin, know no borders. For a country by itself to effectively regulate these cryptocurrencies is going to be hard. We’ll have to undertake some sort of global coordination in terms of these regulatory policies.
F&D: Some countries are considering the adoption of a so-called central bank digital currency (CBDC). What is the rationale?  
EP: For some developing countries, the objective is that of broadening financial inclusion. There are many people in those countries who don’t have access to digital payments. They don’t have access to basic banking products and services. In countries like Sweden, where most people do have access to bank accounts, the imperative is a little different. The Swedish central bank, the Riksbank, envisions the e-krona, or the digital krona, as essentially a backstop to the private payment infrastructure.
F&D: How about China?
EP: The Chinese government is very concerned about two payment providers that have come to dominate the payment system and are blocking effectively the entry of new competitors who could provide innovations. The Chinese central bank views a digital yuan as essentially a complement to the existing payment systems, but one that could in principle increase the amount of competition.
F&D: How does a digital currency affect the ability of a central bank to control inflation and ensure full employment?
EP: Let’s say all American citizens had, in effect, an account with the Federal Reserve, then it would be a lot easier for the Fed to undertake certain operations such as stimulus payments. When the pandemic hit, the initial coronavirus stimulus bill involved a large amount of money being transferred to American households. Many households that had direct deposit information on file with the Internal Revenue Service were able to get direct deposits to their bank accounts, but households that did not have that information on file with the IRS ended up getting prepaid debit cards or checks, many of which were lost in the mail and some of which were misappropriated or mutilated.
F&D: Could central bank digital currencies be used to fight tax evasion and other crimes?
EP: If you cannot use cash to pay your gardener or babysitter, it’s much more likely that those payments will get reported to the government. And especially for large-value transactions, that will certainly make a difference in terms of tax revenues. Having digital money also reduces the use of cash for illicit transactions, say for drug trafficking or money laundering.
F&D: Are there risks for private sector banks and payment providers?
EP: If the government is in effect providing a very low-cost digital payment system, that might make it very difficult for private payment providers to continue their services because after all, what private corporation can compete with the deep pockets of the government? There is another risk, which is that commercial banks, which are very important in modern economies in terms of providing credit that fuels economic activity, might find that their deposits are being swept away into central bank accounts. In troubled times depositors might feel that ultimately their deposits are going to be safer with the central bank or other government institution compared to a commercial bank, even if the commercial bank deposits are insured.
F&D: Is there a solution to that problem?
EP: The experiments with CBDCs that are underway in China and Sweden are suggesting that what might work more efficiently is a dual-tier system of CBDCs. The central bank would provide the underlying payment infrastructure and provide the CBDC essentially in the form of digital tokens, but the actual digital wallets in which those CBDCs are maintained would be held  by the commercial banks.
F&D: What are the challenges facing emerging market and developing economies, which depend heavily on cross-border trade and investment?
EP: Friction-free international payments could certainly benefit importers and exporters. It could make it easier for them to conduct international trade transactions. But there are some risks as well. The more conduits you have for the international flow of capital, the harder it will be to manage those capital flows.
And that could lead not just to more capital flow volatility, but also to more exchange rate volatility. For small economies and developing economies in particular, capital flow volatility and exchange rate volatility can make the management of domestic economic policies that much more challenging.
F&D: What are the challenges for central banks in emerging markets?
EP: We are soon going to be moving to a world where we will have global access to digital versions of the dollar or the Chinese renminbi and many of the other major currencies. It is also likely that many megacorporations with worldwide reach, such as Amazon, could start issuing their own stablecoins.
So if you think about small economies, or economies that have central banks or currencies that are not very credible, one can easily see those currencies being swept away by other currencies, either official or private, that citizens of these countries trust a lot more than their own currencies.
F&D: Do you see a digital yuan threatening the dollar’s dominant position as a global currency by virtue of China’s status as a fast-growing world economy?
EP: It’s not just the economic size or the size of the financial markets of a country issuing a particular currency, but also the institutional framework in that country that maintains the trust of foreign investors. And these elements of trust include the rule of law, an independent central bank, and an institutionalized system of checks and balances. In all these dimensions, I think the US still retains a dominance relative to much of the rest of the world.
F&D: The Federal Reserve has a cautious attitude toward CBDCs. Why?
EP: One needs to think about what the user case really is for the CBDC in each country, and in the US certainly we have certain issues with our payment systems. A lot of payments are intermediated through credit cards, which are actually quite expensive for merchants to use because of the very high interchange fees. And many of those costs are passed on to consumers. About 5 percent of households in the US are still unbanked or underbanked. So you and I can use Apple Pay, but to use Apple Pay, we need to have that linked to a bank account or a credit card, and many households simply don’t have access to that. So a CBDC might at the margin increase financial inclusion, but the Fed already has a major project underway called “FedNow” to increase the efficiency of both retail payments as well as wholesale payments; that is, payments among businesses and financial institutions.
F&D: Do official digital currencies pose broader dangers for society?
EP: You could see an authoritarian government using a digital version of its central bank money essentially to surveil its population. And even a benevolent government might decide that it wants to make sure that the money its central bank issues not only is not used for illicit purposes, but is also not used for purposes it might regard as not necessarily socially beneficial. You might well start seeing money being used as an instrument not just of economic policy, but potentially even social policy. That would be dangerous for the credibility of central bank money and for central banks themselves.
This interview has been edited for length and clarity.
Authors:

ESWAR PRASAD is a professor at Cornell University and a senior fellow at the Brookings Institution.

CHRIS WELLISZ is a freelance writer and editor.

Opinions expressed in articles and other materials are those of the authors; they do not necessarily represent the views of the IMF and its Executive Board, or IMF policy.
Compliments of the IMF.
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The new European Health Emergency Preparedness and Response Authority (HERA) today presents its first annual work plan, which will have a budget of €1.3 billion in 2022 to prevent, prepare for and rapidly respond to cross-border health emergencies. Following the adoption of the 2022 work plan by the HERA Board, HERA can now start implementing actions to strengthen preparedness and response capabilities within the EU, address vulnerabilities and strategic dependencies and contribute to reinforcing the global health emergency architecture.
Announcing the adoption of the work plan at the informal EPSCO Council in Grenoble, Stella Kyriakides, Commissioner for Health and Food Safety, said: “Two years into the pandemic, we know that the capacity to respond decisively to cross-border health emergencies must be at the heart of a strong European Health Union. HERA is already operational and working to ensure that medical countermeasures are available for the present, but also ensuring that the right tools are available for any future health threats. The adoption of HERA’s first work plan will enable it to begin its critical mission, by becoming the EU’s health security watchtower for future health threats, as well as a key player for health crisis preparedness at global level.”
As a key pillar of a strong European Health Union, HERA has set out a number of ambitious deliverables for 2022, both in the context of the ongoing COVID-19 response, and for preparedness for potential future health threats.
Prevent and prepare for future cross border health emergencies: In the “preparedness phase”, HERA will work closely with other EU and national health agencies, industry, research community, civil society and international partners to improve the EU’s readiness for future health emergencies. Actions include:  

Procuring and stockpiling medical countermeasures for a series of public health threats with a budget of over €580 million;
Releasing over €300 million to research and development of medical countermeasures and innovative technologies against emerging threats;
Building a network of ever-warm manufacturing facilities that can be mobilised in case of emergency (EU FAB);
Establishing a long term and large scale EU platform for clinical trials and data platforms;
Identifying three high-impact health threats, in addition to COVID-19, by the end of spring in close collaboration with Member States in the HERA Board, EU agencies, international partners and experts.

Detect future health threats: HERA will in addition carry out threat assessments and intelligence gathering, develop models to forecast an outbreak, and map out a response plan at EU level. Actions for 2022 include:

Putting in place a state of the art real-time health threat detection and intelligence system;
Creating a dedicated IT platform for threat assessment and threat prioritisation.

Respond to health threats: In the context of the response to the COVID-19 pandemic, HERA’s emergency response functions have already been activated. In the event of further cross-border public health emergencies at EU level, additional action will be taken, notably by  activating emergency funding and launching mechanisms for monitoring, new targeted development, procurement and purchase of medical countermeasures and raw materials. Ongoing actions include:

Ensuring the timely provision of COVID-19 vaccines to EU Member States, including variant-adapted vaccines if needed;
Procurement of COVID-19 therapeutics for EU Member States;
Scaling up national capacities for the detection and scientific assessment of variants;
Ensuring delivery of vaccines across the world.

Background
The European Health Emergency Preparedness and Response Authority (HERA) is a key pillar of the European Health Union and a fundamental asset to strengthen the EU’s health emergency response and preparedness. HERA was established in September 2021 to replace ad hoc solutions to pandemic management and response with a permanent structure with adequate tools and resources to plan ahead the EU action in case of health emergencies. HERA will anticipate threats and potential health crises, through intelligence gathering and building the necessary response capacities. When an emergency hits, HERA should have response solutions ready ensuring the development, production and distribution of medicines, vaccines and other medical countermeasures.
The overall HERA budget is €6 billion for the period 2022-2027.
Compliments of the European Commission.
The post European Health Union: HERA launches first work plan with €1.3 billion for preparedness and response to health emergencies in 2022 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

After headline inflation had already reached very high levels in the United States in the first half of 2021, euro area inflation also recorded a very rapid increase in the second half of the year but remained much lower than in the United States. Comparing inflation developments in both economic areas could help to separate idiosyncratic factors from those related to the cyclical position, taking into account the fact that the euro area is lagging the US cycle. By December 2021 inflation in the United States, as measured by the US consumer price index (CPI), had reached 7.0% (up by 5.6 percentage points since January 2021), compared with inflation in the euro area, as measured by the Harmonised Index of Consumer Prices (HICP), which stood at 5.0% (up by 4.1 percentage points since January 2021) – see Chart A.[1] Energy inflation made a 2.2 percentage point contribution to headline inflation in the United States and a 2.5 percentage point contribution in the euro area in December, thereby accounting for around half of headline inflation for the euro area and around one-third for the United States in that month.[2] In January 2022 headline inflation in the euro area – according to Eurostat’s flash release – increased slightly further to 5.1%

Chart A
Headline inflation
(annual percentage changes, percentage point contributions)
Sources: US Bureau of Labor Statistics and ECB staff calculations.
Note: The latest observation is for December 2021 for the United States and January 2022 (flash release) for the euro area.

Most of the difference in overall inflation developments was due to the far stronger increase in inflation excluding energy and food (and from a higher starting point) in the United States than in the euro area. In the euro area, HICP inflation excluding energy and food (HICPX) started to increase in the second half of 2021 and stood at 2.6% in December – up 1.4 percentage points from the pre-crisis level of 1.2% recorded in February 2020. In the United States, by contrast, CPI inflation less food and energy, which had been substantially higher before the pandemic (standing at 2.4% in February 2020), began to soar from as early as April 2021 and increased substantially more (by 3.1 percentage points) to stand at 5.5% in December 2021 (Charts A and B). Part of the increase in HICPX inflation in the second half of 2021 in the euro area was due to base effects resulting from the temporary cut in value added tax in Germany in the second half of 2020. Without this temporary factor, HICPX inflation in the euro area would have been around 0.2 percentage points lower in each month of the second half of 2021 – leading to an even more marked difference in inflation excluding energy and food between the euro area and the United States. In January 2022 HICP excluding energy and food– according to Eurostat’s flash release – decreased to 2.3%.

Chart B
Inflation excluding food and energy
(annual percentage changes, percentage point contributions)
Sources: ECB and ECB staff calculations.
Notes: Items affected by supply disruptions and bottlenecks comprise new motor cars, second-hand motor cars, spare parts and accessories for personal transport equipment, and household furnishings and equipment (including electronics). Items affected by the reopening of the economy comprise clothing and footwear; recreation and culture; recreation services; hotels/motels; and domestic and international flight prices. Rents comprise actual rents paid by tenants – and for the United States also imputed rents for owner-occupied housing. The latest observation is for December 2021 for the United States and January 2022 (flash release) for the euro area.

Items affected by supply disruptions and bottlenecks and by the reopening of the economy play an important role as drivers of inflation excluding food and energy in the euro area and the United States. As illustrated in Chart B, one important factor in the differences in inflation excluding food and energy between the United States and the euro area is rents, which contribute much more strongly to inflation in the United States. This is in part linked to the fact that rents have recorded substantially stronger growth in the United States, but it also reflects the larger share of rents in the US consumption basket, which includes not only actual rents but also imputed rents for owner-occupied housing. While the impact of rents can help to explain differences in the level of inflation between the euro area and the United States, including before the pandemic, the high level of inflation excluding food and energy observed recently has been driven mainly by supply disruptions and bottlenecks and by effects related to the reopening of the economy. Supply chain bottlenecks have particularly affected prices for used and new cars, and car components, as well as household furnishings and equipment. In the United States, the prices for this group of items soared during the second quarter of 2021 and, after briefly easing, regained momentum in the last quarter of 2021. In particular, used car prices alone accounted for around 1.6 percentage points of CPI inflation less food and energy in December. Overall, items affected by supply disruptions and bottlenecks made a contribution of 2.6 percentage points to the annual growth rate of core CPI inflation in the United States in December (Chart D), whereas the average monthly contribution of this aggregate of items in 2015-19 had been marginally negative. In the euro area, the role of this aggregate has also increased – but its monthly contribution to HICPX inflation remained around 0.5 to 0.6 percentage points up to December 2021 and, thus, substantially smaller than in the United States (Chart B). Additionally, the prices of some goods and services have rebounded owing to the reopening of the economy, with their levels returning to or even exceeding pre-crisis levels. In the United States, this rebound is visible in prices for apparel and, among services, in prices for travel-related services and transportation, which have all risen strongly following the easing of containment measures. This contributed substantially to core CPI inflation in the second quarter of 2021 and remained significant in the last quarter, at around 0.7 to 0.8 percentage points in year-on-year terms (compared with a historical contribution of 0.04 percentage points). In the euro area, the contribution from such reopening effects only started to increase from late summer – in part linked to the later lifting of containment measures – but in recent months it has been similar in size to the contribution seen in the United States.
Turning to the underlying drivers of inflation developments, the United States is more advanced in the business cycle than the euro area and the US labour market has tightened, which has started to be reflected in some upward pressure on wages. Real GDP had already surpassed its pre-crisis level in the United States in the second quarter of 2021 – while in the euro area GDP reached its pre-crisis level only in the fourth quarter of 2021. In the United States, labour market tightness has increased sharply over recent months and the employment cost index for civilian workers has shown a relatively large increase (Chart C). This stands in contrast to the euro area, where so far wage growth – as measured by negotiated wages or, for example, the labour cost index – has remained quite subdued. It should be kept in mind that wage indicators are being distorted by the effects of the crisis, including the important role of job retention schemes, especially in the euro area, which complicates their interpretation.

Chart C
Developments in wages and labour costs
(annual percentage changes, ratio, share of survey respondents)
Sources: US Bureau of Labor Statistics, NBER, ECB, European Commission and ECB staff calculations.
Notes: The latest observation is for October 2021. For the United States, civilian workers comprise workers in the private non-farm economy, except those employed in private households, and workers in the public sector, except the federal government. Wage indicators are being distorted by the effects of the crisis, which complicates their interpretation.

Upside surprises in inflation data releases have continued to be larger for the United States than for the euro area over recent quarters. Consensus Economics forecasts, produced at a monthly frequency (Chart D, panel a), show that in recent months inflation developments have been higher than forecast in the euro area and even more so in the United States. Looking ahead, the latest monthly Consensus Economics forecasts published in January 2022 see headline inflation remaining elevated over most of 2022 both in the United States and in the euro area. Overall, headline inflation in the United States – which had exceeded 2% before the start of the pandemic – is expected to remain above 2% much longer than in the euro area (Chart D, panels a and b).

Chart D
Inflation expectations based on Consensus Economics surveys for US headline CPI inflation and euro area headline HICP inflation
a) Monthly inflation forecasts (annual percentage changes)

b) Annual inflation forecasts (annual percentage changes)
Sources: Consensus Economics, Eurostat, Haver Analytics and ECB calculations.
Note: In panel b) the shaded blue and yellow areas denote the ranges of forecasts included in Consensus Economics surveys.

Looking ahead, the degree of uncertainty around the outlook for inflation seems to be much larger for the United States than for the euro area. The latest Consensus Economics forecasts published in January 2022 expect headline inflation in the euro area to be 3.1% in 2022 and 1.6% in 2023. This was broadly in line with the December 2021 Eurosystem staff macroeconomic projections, which foresaw euro area annual inflation at 3.2% in 2022 and 1.8% in 2023 and 2024. The range of annual forecasts included in Consensus Economics, which can be seen as a measure of uncertainty, is especially wide for 2022 and somewhat narrower for 2023. For 2023, all annual forecasts included in the January 2022 Consensus Economics survey round see inflation in the euro area at between 0.8% and 2.2%, while for the United States all forecasts are in a range between 1.9% and 4% and only one forecaster sees inflation being below 2%. This higher level of inflation in the United States can be linked to differences in economic slack and labour market tightness compared with the euro area, leading to stronger wage pressures in the United States. At the same time, the pandemic is a unique situation with considerable differences compared with inflation developments in “normal” times, which require close monitoring and add to the uncertainty surrounding the inflation outlook in the United States as well as in the euro area.
Authors:

Sofía Cuquerella Ricarte
Ramon Gomez-Salvador
Gerrit Koester

Compliments of the European Central Bank.

To facilitate a comparison with the euro area, this box focuses on developments in CPI inflation in the United States, rather than developments in the US price index for total personal consumption expenditures (PCE). Although an indicator of HICP inflation is also available for the United States, the CPI is chosen as it allows for a greater level of detail for the analyses.

For a discussion of developments up to August 2021, see the box entitled “Comparing recent inflation developments in the United States and the euro area”, Economic Bulletin, Issue 6, ECB, 2021.

The post ECB | Recent inflation developments in the United States and the euro area – an update first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.