From COVID-19 to climate change, economies are facing new challenges.
The world is changing. From COVID-19 and climate change to digitalization and diverging demographics, the IMF’s member countries are confronting new challenges. The impacts of these challenges are being felt unevenly across countries and will inevitably play out in their balance of payments, potentially undermining global economic stability.

‘The challenges facing IMF member countries are constantly evolving.’

It is therefore important that the Fund also revisit its policy advice, lending activities and capacity building to see whether these should be adapted selectively, and in what ways, to meet the evolving needs of its membership. Ongoing efforts to establish a Resilience and Sustainability Trust are, for instance, intended to build on the historic 2021 SDR allocation of $650 billion and meet the longer-term financing requirements of members in greatest need as they adjust to a rapidly changing world.
Many longer-term challenges faced by low-income countries especially are inextricably linked with questions of development. Yet development finance alone is not sufficient to address the overlapping global public policy goals which require action from all international financial institutions. The Fund is staying well within its mandate by seeking to address these challenges. In fact, directional changes are necessary to ensure that the IMF continues to fulfill its mandate laid out more than 75 years ago in its Articles of Agreement—in particular, of assisting members to overcome balance of payments problems without resorting to measures that threaten national or international prosperity.
Directional change
When the IMF opened its doors in 1947, financing was understood to be immediate balance of payments lending of very short duration so that the recipient could ride out temporary shocks and maintain exchange rate parity against the US dollar or gold.
The Fund’s financing facilities have, however, had to be modernized over time as the nature of the balance of payments problems of its members evolved. For example, the now-mainstream Stand-by Arrangement (SBA) was considered a radical innovation when it was introduced in 1952 because it provided the member with assurances of a future use of the IMF’s resources, so long as it continued to meet the conditions for each loan tranche, rather than meeting an immediate need.
In the early 1970s, the Fund recognized that the oil price shock would affect its members differently according to their oil import bills—and would therefore give rise to current account movements and protracted balance of payments pressures. The IMF therefore introduced somewhat longer and more concessional financing instruments. With the widespread adoption of flexible exchange rates around the same time, the IMF also overhauled its surveillance activities.
Despite concerns at the time, these innovations did not change the fundamental character of the Fund as a monetary institution concerned with ensuring a viable and sustainable balance of payments as a prerequisite for macroeconomic and financial stability.
Adaptations and innovations continued as new challenges were recognized. The Fund’s fast-disbursing emergency assistance (financing and debt relief) was enhanced, including in the wake of natural disasters such as the Ebola virus in western Africa and the earthquake in Haiti. Thus, when the COVID 19 pandemic struck, the Fund was already uniquely placed to act quickly to provide temporary support to member countries in need, which it is following up with traditional lending programs as the crisis continues.
Challenges ahead
As the world emerges from the pandemic, traditional short-to-medium-term financing shocks will unfortunately recur. Sharper than expected monetary tightening in the face of inflationary pressures in advanced economies will, for example, have spillover effects on the balance of payments of emerging market countries. Countries with high debt burdens will need to work to avert fiscal and financing crises. And large commodity exporters and importers will need to continue to build resilience to large price swings. In helping countries address such challenges, the Fund will continue to deploy its traditional toolkit of surveillance, lending and capacity building, though minor modifications may sometimes be necessary.
However, increased surveillance and lending focus on longer-term issues is also critical at the current juncture. Deep-seated structural issues are becoming much more prevalent in today’s world; they should be addressed now to prevent larger and more painful balance of payments problems in the future.
Climate change affects all of humanity but its impact on countries is disparate. Similarly, not all countries will be equally able to seize the opportunities presented by digital change, such as central bank digital currencies. There are quite different demographic pressures in various parts of the world. Income and gender inequalities are widening.
Successfully addressing these challenges requires cooperation between the Fund and other institutions that have expertise in these areas, such as the World Bank. That such trends have disparate ramifications across the membership necessarily implies that they will manifest—to lesser or greater degrees—in the balance of payments of individual countries. Climate change will, for example, lead to higher food imports and outward migration in many affected countries.
Digital change will impact trade in goods and services but also capital flows by accelerating financial innovation. And unless demographic pressures are properly harnessed, countries with young fast-growing populations could face higher unemployment, while shortages of labor, goods and services could become problems for ageing societies.
Thus, the challenges facing IMF member countries are constantly evolving. Yet the need for policy advice—and, at times, financing—from the Fund remains. The IMF therefore continues to add selectively to its toolkits as it has in the past to ready itself to confront these challenges in collaboration with other institutions.
Authors:

Sanjaya Panth is Deputy Director of the Strategy, Policy, and Review Department (SPR) of the IMF

Ceyla Pazarbasioglu is Director of the Strategy, Policy, and Review Department (SPR) of the IMF

Compliments of the IMF.
The post How the IMF Continues to Change To Confront Global Challenges first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Interview with Süddeutsche Zeitung | Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Markus Zydra, Bastian Brinkmann and Meike Schreiber on 10 January 2022 |
Ms Schnabel, inflation in the euro area now stands at 5% – a record high. When are you finally going to intervene?
We view these figures with some concern, as they are higher than we initially expected. And we fully understand many people’s worries about the drop in real wages and interest income – all the more so as people on lower incomes are hit particularly hard by higher inflation. We take that very seriously.
Concerns alone will not bring inflation down.
Our decisions are based on a medium-term perspective covering around one to three years. We expect that inflation will fall significantly over the medium term. That is why we are not raising interest rates now, as some are calling for.
Long-term planning is all very well, but people are being hit by higher prices here and now.
Any measures we might take today will only have an effect with a lag. The current rate of inflation won’t be affected, only the future one. Most forecasts – our own and others − indicate that the surge in inflation caused by the pandemic will be followed by a marked decline. In our projections, medium-term inflation will even fall back below our target of 2%, even though we acknowledge that the projections are now subject to great uncertainty. That is why we should not raise interest rates prematurely, as that could potentially choke off the recovery. But we will act quickly and decisively if we conclude that inflation may settle above 2%. A precondition for raising interest rates is to end net asset purchases; and our December decision is a first step in this direction.
And if you get it wrong, we all pay a high price.
That’s exactly why we don’t base our decisions solely on economic models but also conduct surveys about expectations among households and firms, for example. This enables us to cross-check the plausibility of the projections. And these surveys do indeed show upward risks with respect to inflation. We are aware that monetary policy bears a huge responsibility for people’s prosperity. But premature action by monetary policy would also come at a price: it could hold back the nascent recovery, and that would jeopardise jobs.
But doesn’t the ECB’s inaction so far in truth reflect its fear that the euro debt crisis might flare up again, first and foremost in Italy, and that stock markets might collapse?
I know that some people in Germany take this view, but it’s not the case. Our actions are guided solely by our price stability mandate. Public borrowing by individual countries has no bearing on the Governing Council’s decisions. How financial markets will respond to the exit from our expansionary monetary policy measures is obviously an aspect that we need to consider because it affects the financing conditions for households and firms. But that is an entirely different matter to keeping interest rates low purely to help certain countries repay their debt.
EU surveys show that people perceive inflation to be even higher than measured. Doesn’t this perceived inflation harm your reputation?
Inflation is officially calculated using an average consumption basket; the selection of goods bought by an individual consumer typically differs. Moreover, people perceive some price changes more strongly than others, particularly for goods they consume frequently. The prices of petrol and heating fuel, for example, are now increasing significantly, with the result that perceived inflation is higher than actual inflation. We have an inflation calculator on our website which allows people to discover their individual inflation rate. In addition, when calculated over a longer period, inflation has not increased as much as suggested by latest figures. If one compares prices today with prices two years ago, one sees that average annual inflation in Germany in December was just 2.5%, as prices actually fell in the first year of the pandemic.
To ask a fundamental question: why are you aiming for inflation of 2%? Surely 0% is far more stable.
Let me mention two important reasons. First, we steer inflation for the entire euro area. At an average rate of 0%, some Member States would be experiencing deflation, which economists see as very harmful. Second, a slightly positive inflation target facilitates economic adjustment processes geared to preserving competitiveness. It enables a reduction in real, i.e. inflation-adjusted, wages. As nominal wages typically do not decline, any necessary adjustments could otherwise lead to higher unemployment.
Okay, that might sound plausible, but it’s very hard to understand. How do you intend to convince people on that basis?
Our policy can only succeed if people trust the ECB. That’s why we take every effort to explain complex topics in the simplest form possible. Perhaps we don’t always manage. However, that doesn’t mean we should pursue an inappropriate monetary policy just because we are worried that our measures are difficult to explain – that would have negative economic consequences. We must instead keep doing our best to make our actions understood.
At the regulars’ table and online, you don’t just face criticism; you’re now also attacked personally and an object of hate. How do you deal with that?
That can be very unpleasant. I try to ignore personal attacks. But Twitter, for instance, is a great medium, because I get feedback straight from people, some of whom I don’t know personally, who want to tell me something – directly and unfiltered. I also monitor what the tabloids are saying. Some things are exaggerated, but they do reflect the mood of the people, and it’s important for us to understand that mood. All in all, we’ve not yet done a good enough job of finding simple words to explain monetary policy. For that reason, we are putting a lot of energy into communication. We have to get even better in this regard.
Energy prices are driving up inflation fast. What annoys you more: the high price of petrol or the rising cost of heating?
I know that particularly the rising energy costs are a severe problem for many people right now. One of the reasons why energy prices have risen so sharply is that economic activity picked up strongly after the easing of the strict lockdown measures. In turn, the demand for energy took off, and supply was not able to catch up quickly. This caused prices for raw materials to rise at a pace that took many by surprise. Monetary policy cannot reduce the price of oil or gas. Instead, we are asking ourselves whether second-round effects will result from the high energy prices. This would imply that other goods and services would also become more expensive and wages would start rising, which could lead to a more persistent increase in inflation.
One way or another, that’s coming: transitioning to a climate-neutral economy is making carbon more expensive – and that will make almost everything else more expensive too. Is the goal of price stability at odds with the goal of climate neutrality?
There are ongoing debates about the impact of the green transition on inflation. If it leads to higher inflation, monetary policy needs to react under certain circumstances. This is especially the case if higher inflation threatens to become entrenched in people’s expectations, or if the green transition triggers an economic boom that in turn leads to rising prices.
In simple terms, higher interest rates. So the ECB could hamper the politically desirable transformation to a climate-neutral economy. Is a climate conflict likely to break out between central bankers and politicians?
The ECB is committed to price stability. The transition to a climate-neutral economy will require a change in relative prices, and the prime responsibility for this rests with the governments. The sooner we succeed in creating low-carbon alternatives, the smoother the transformation will be.
There was talk about you becoming Bundesbank President, but Joachim Nagel got the nod. Wouldn’t it have been about time to choose a woman in 2022?
I really look forward to working with Joachim Nagel. He’s a good choice – and I’m really happy here at the ECB. At 8% – or two out of 25 members – the proportion of women on the ECB’s Governing Council is of course disappointingly low. The German government could have contributed to increasing that share.
ECB President Christine Lagarde and you want to do more for women at the ECB. How?
This has been on the agenda for some time but has gained greater momentum under Madame Lagarde. Our research indicates that women at the ECB apply for promotions less often, even if they would have good chance to succeed. So, we are now explicitly encouraging women to apply. Since then, the figures have improved significantly. In addition, our gender strategy features explicit targets of 50% for new hires and promotions. We are already noticing that this makes a difference.
Discrimination and poor treatment of women at work are structural problems and occur everywhere. How is the ECB responding to the “Me Too” movement?
I’m not aware of any specific instances of sexual harassment at the ECB. But of course that doesn’t mean that this is true. How are we dealing with this? For one, the ECB is making every effort to create as inclusive an environment as possible, in which the probability of something like that happening is small. Sexual harassment is likely related to the general working atmosphere, like how we are dealing with hierarchies. At the same time, it must be possible for the people affected to report cases, and they must enjoy comprehensive protection when they do so. We have dedicated contact persons in every business area. We have also set up a whistleblowing platform where people can report incidents anonymously. And last but not least, we survey our staff regularly about the working environment and topics like diversity and inclusion. The ECB would certainly not tolerate such breaches in any form.
Particularly at the ECB, many staff stay for a very long time. Doesn’t this mean that you should actively investigate whether there were any cases earlier?
We started asking about inappropriate behaviour in our internal surveys in 2018. To date we have not received any indication that would suggest sexual harassment has taken place. We haven’t yet discussed whether we should investigate further back into the past. But that is certainly worthwhile to consider. What is important for us is to keep improving our structures and reporting systems.
Compliments of the European Central Bank.
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Introductory statement by Christine Lagarde, President of the ECB, at the meeting of the Conference of Parliamentary Committees for Union Affairs of the Parliaments of the European Union (COSAC) | Paris, 14 January 2022 |
Before I begin my remarks, I would like to take a moment to honour the memory of President David Sassoli. Like all who knew him, I was deeply saddened by his loss, and I would like to remember him with the words he said in his inaugural speech as President of the European Parliament: “Europe still has much to say if we can all speak with one voice”. His commitment to Europe, and to all Europeans, will be greatly missed.
I am very grateful for the chance to speak today with parliamentarians from across the EU. Almost 27 years ago to the day, also while inaugurating a French EU presidency, President François Mitterrand said: “the more Europe there will be, the more democratic this Europe must be, and the more parliamentary it must be”. These words remain as true today as they were at the time.
What a long way we have come since then. In January 2002, people in 12 EU countries held euro banknotes and coins in their hands for the very first time. Now, 20 years later, over 340 million people are using euro cash in their everyday life and our single currency is more popular than ever.
Reaching this point has not been easy. We have faced a series of crises, ranging from the global financial crisis to the sovereign debt crisis to the pandemic crisis. We have had to redesign and reinforce our institutional framework multiple times along the way.
But, despite the sceptics and against their expectations, we have prevailed – and we have emerged from each crisis stronger.
Today, though the number of infections in Europe remains very high, we are moving out of the emergency phase of the pandemic. This is thanks to our remarkable collective response. But we need to retain our sense of unity and direction as we move into the next phase.
The task we are facing now is to build on the foundations we have laid in the past two years and embed the lessons we have learned. If we do so, we can turn our achievements into lasting progress for Europe. I see three key directions in which this is possible.
These are providing stability, strengthening supply and ensuring strategic autonomy.
Providing stability
The COVID-19 pandemic has been a major shock to our societies and economies. But it has shown that Europe can provide stability for our economy. When policymakers work hand in hand towards the same goal, the results can be impressive.
Consider that from the onset of the global financial crisis, it took seven years for euro area GDP to get back to its pre-crisis level. Today, we expect GDP to exceed its pre-pandemic level in the first quarter of this year. This difference owes much to Europe’s combined policy response.
For our part, the ECB promptly launched a set of extraordinary measures to stabilise financial markets, secure monetary policy transmission and thereby defend price stability. Our commitment to preserving favourable financing conditions provided a bridge to support firms, households and governments to the other side of the pandemic. In parallel, actions taken by ECB supervisors ensured that banks could act as a conduit for our measures. Together, we estimate that this saved more than one million jobs.[1]
Our monetary policy was flanked by an ambitious fiscal policy response to stabilise jobs and incomes. Governments and parliaments provided direct support to workers and businesses. And they showed flexibility and solidarity at EU level: fiscal and state aid rules were temporarily suspended, and new common fiscal instruments were introduced, notably Next Generation EU (NGEU).
This has laid the groundwork for a strong recovery – much stronger than we imagined even a year ago. But there is still a need for stabilising policy as we navigate our way out of the pandemic.
The rapid reopening of the economy has led to steep rises in the prices of fuel, gas and electricity. It has also led to prices increasing for durable goods and some services, as demand outstrips constrained supply. Year-on-year inflation in the euro area reached 5% in December, with around half coming from energy prices.
These same factors are in turn weighing on growth in the near term, which slowed at the end of last year. Higher energy prices are cutting into household incomes and denting confidence, while supply bottlenecks are leading to shortages in the manufacturing sector.
We expect the drivers of inflation to ease over the course of this year. But we understand that rising prices are a concern for many people, and we take that concern very seriously. So let me reiterate that our commitment to price stability remains unwavering. We will take any measures necessary to ensure that we deliver on our inflation target of 2% over the medium term.
That is why, at our last Governing Council meeting, we recalibrated our policy measures, allowing for a step-by-step reduction in the pace of our net asset purchases, moving gradually from around €80 billion per month to €20 billion per month over the course of 2022.[2] We also ensured that we have the flexibility to respond to a range of circumstances. At the same time, we concluded that monetary accommodation is still needed for inflation to settle at 2% over the medium term.
Strengthening supply
Monetary policy works on the demand side of the economy by stabilising output around its potential level. But the level of potential output is mostly affected by the actions of other policymakers, besides the hard work of people and the strength of businesses. And this brings me to the second area on which we need to build: strengthening supply.
There are structural changes taking place in the economy today which could have a profound impact on the supply side of the economy. The green transition, the digital revolution and demographic shifts have all been accelerated by the pandemic. If we are to achieve sustainable growth in the future, supply and demand need to move together as the economy adjusts to these changes.
For example, the economy is already becoming greener as consumers change their behaviour and new regulation bites. And I am confident that this will ultimately provide a new source of growth for Europe: nine of the top 20 global players developing green-digital patents are European.[3] But if supply capacity cannot adjust quickly enough, the transition could be bumpy.
One possible consequence, as I have discussed elsewhere, is greater volatility in energy prices, as bridge technologies like natural gas have to be used to fill gaps in energy production.[4] And there is a risk that this could affect public confidence in decarbonisation. So the solution has to be to accelerate investment in renewables – and other green technologies – so that they come online faster.
We are fortunate in Europe that our policy response has not only focused on stabilising demand, but also on redirecting supply towards the sectors of tomorrow. NGEU is a unique tool that can provide the investment impetus we need. It is critical that it becomes a complete success. You, national parliamentarians, now have the opportunity to ensure a swift and effective implementation of the reform and investment plans presented by Member States.
That said, we will not be able to rely on NGEU alone to reorient our economy towards the future. It has a capacity of €750 billion until 2026, but achieving the green transition will moreover require additional investments of €520 billion per year by 2030.[5] Catching up with leading digital competitors – the United States and China – will require an additional €125 billion per year.[6]
If we are to close this gap, we also need to find ways of unlocking the large pool of private investment in Europe and across the world. For that, we need a robust, integrated and diversified EU financial sector.
This is one key reason why, in addition to completing the banking union, we need to further deepen Europe’s capital markets. Last year, I called for us to focus in particular on completing a “green capital markets union”.[7] This is because equity investors are more suitable to finance riskier and more innovative projects, which are key to the digital and green transition. We also have a first-mover advantage in green finance, with 60% of global green bond issuance taking place in the EU.
So how can we move forward?
At European level, the legislative proposals recently published by the European Commission under the Capital Markets Union Action Plan provide a good basis for discussion with the co-legislators. But we need to see progress at the national level, too. Tax and regulatory reforms aimed at supporting equity and venture capital investments are a key ingredient in deeper capital market integration.
Ensuring strategic autonomy
Taking these steps will create a stronger and more dynamic European equity landscape, which at the moment unfortunately lags behind our international peers. This, in turn, would strengthen Europe’s strategic autonomy, or, in other words, develop a higher degree of European sovereignty. This is the third area where I see potential to build on what we have achieved during the pandemic.
We have taken several steps over the last two years that have bolstered our autonomy in the world.
Our improved policy mix has helped strengthen our internal demand, making our growth more robust in a more uncertain global landscape.[8] NGEU has increased the credibility of EU bond issuances as a new class of common European safe asset, boosting the international role of the euro. And if the reform plans embedded in NGEU are implemented diligently, it will validate and strengthen the confidence being expressed by financial markets in this new asset class. The ECB, as part of its monetary policy operations, purchased around €100 billion in European supranational bonds last year.
But the pandemic has also opened up new fronts on which we need to consider our place in the world. In particular, it has dramatically sped up the digital revolution. Consumers have switched en masse to e-commerce, cashless payments have become the norm,[9] and almost half of EU firms say that they have used the crisis as an opportunity to become more digital.[10]
Strengthening Europe’s strategic autonomy is vital in this context, as the digital realm is a global one where other economies have a head start. We need to act together on digital issues in order to remain in control of essential economic activities and set the highest standards for our citizens.
The recent legislative initiatives – like the Digital Services Act or the Digital Markets Act – and the “Path to the Digital Decade” presented by the Commission last year will help to secure the EU’s global position in this field and project our standards across the world. And the ECB is also doing its share to prepare Europe for the new digital landscape, notably via the digital euro project.
We are currently investigating the key issues raised by its design and distribution. When this work concludes, in 2023, stakeholders – including Members of the European Parliament – will need to decide on the way forward. A digital euro would give people access to a simple, safe and reliable means of payment that is issued by the central bank, publicly guaranteed and universally accepted across the euro area.
A digital euro would also provide new business opportunities and act as a catalyst for technological progress and innovation: European intermediaries would be in a position to improve the services they offer to their customers and stay competitive as new actors enter the payments landscape. This would also support Europe’s monetary and financial sovereignty.
The digital euro would not replace cash. In fact, to coincide with the 20th anniversary of euro cash, the ECB has decided to launch a process of redesigning the banknotes to make them more relatable to Europeans of all ages and backgrounds.
Conclusion
Let me conclude.
Our joint response to the pandemic has shown what we can achieve when we act together. We are emerging from the crisis stronger and with a solid foundation to build on. But there is much still to be done, and we should not let our resolution fade as the urgency of the crisis passes.
During the last French EU presidency, President Nicolas Sarkozy said: “Europe needs to give itself the means to play the role it must have in the new world that is emerging.” These words still ring true today.
We have an opportunity today to take decisions that will allow us to master the next phase of challenges we will face. That is the best way to demonstrate to our fellow citizens, and to the whole world, that the euro brings us together – and by bringing us together, it makes us stronger.
I am now happy to further discuss these matters with you, as your support and contribution as parliamentarians will be essential in this endeavour.
Compliments of the European Central Bank.
The post ECB Speech | Conference of Parliamentary Committees for Union Affairs (COSAC) first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Pandemic-related special factors led to unusually low inflation in 2020 and unusually high inflation in 2021, Chief Economist Philip R. Lane tells Il Sole 24 Ore. 2022 is a transition phase: high inflation will be fading this year |
Euro area HICP inflation in December hit another record all-time high. Maybe a peak. Markets are now even more convinced that the ECB is going to raise interest rates at the end of this year. Is this data going to derail your monetary policy stance?
In our December projections we assessed that inflation at the end of 2021, including in the month of December, was going to be high. But we also believe that inflation will fall this year, and that it will go below our 2 per cent target in 2023 and 2024. This is driving our monetary policy assessment. We are looking beyond the inflation we have right now: monetary policy is based on the medium term.
European citizens are paying more for food, petrol, electricity. How far can the ECB tolerate prices shooting up? Is inflation really only “moderately” higher than your target?
The 5 per cent inflation number in December is unusually high. This is dominated by the fact that energy went up by 26 per cent last year. The key issue for us as the central bank is: do we see changes in household and firm decisions? Do we see changes in wage behaviour? But we do not see behaviour that would suggest inflation will remain above our target into the medium term.
Did you expect inflation to be so high in December? Was 5 per cent in the Eurosystem staff projections at the time of the December Governing Council meeting?
It is within the margin of error of what we expected. We knew we would have a concentration of price pressures at the end of 2021, especially the big surge in energy prices. This is visible in the December data, but the basic narrative remains in place.
By this you mean that interest rates are not going to go up this year?
This goes back to our December assessment that inflation will not only fall this year but will settle below our target in 2023 and 2024. The criteria for moving interest rates up are therefore not in place. This remains our view. As the year goes by, we will have more data and will continue to assess the situation.
Many market players still expect the first interest rate hike in the euro area at the end of this year: is there a problem of communication?
The data we have, make it quite unlikely that the criteria we set to raise interest rates will be fulfilled this year. Next year and the year after that, the same criteria will apply: these criteria are very clear and the market can study them. But let me focus on one element, we have a cross-check: to raise interest rates, we need to see sufficient progress in underlying inflation. The pandemic makes it more difficult to interpret indicators of underlying inflation. It will take some time to filter out the effects of the pandemic – base effects, supply bottlenecks and so on − and to have a proper assessment of what is going on with underlying inflation. We have highlighted on a regular basis that the central element in understanding underlying inflation is to find out what happens to the trend in wages. We will be looking at wage settlements throughout the year. Behind prices are costs, and the most important cost in the economy is wages. Labour costs are a big part of the overall price level, and labour costs tend to move on a more persistent and more gradual basis. Energy moves are abrupt, energy can go up and down in a volatile way. But a significant move in the persistent and underlying source of inflation is unlikely unless you see wages picking up quite a bit. Until now, the wage data do not indicate any major acceleration in underlying inflation.
US core inflation is expected to be 2.7 per cent this year. The Federal Reserve said it will raise rates “sooner or at a faster pace”; three hikes are expected in 2022 and three in 2023. The ECB rates are on hold. Does the euro area risk importing inflation with a weaker euro and a stronger US dollar?
It is important to see foreign exchange as part of the pandemic cycle. In 2020 we had a euro appreciation. In recent months, some of that appreciation was reversed. Compared to pre-pandemic levels, we had an initial appreciation of the euro, and now a depreciation. It is not a major element. I would not overly focus on the exchange rate.
Why is the ECB monetary accommodation being extended while the Federal Reserve and the Bank of England start tightening? Why is the ECB so far apart?
There is a crystal-clear difference. In the United States and the United Kingdom, the assessment is that inflation will not stabilise at the target of around 2 per cent unless there is a monetary policy tightening. The discussion about monetary tightening there depends on the assessment that inflation will remain above target: then monetary tightening is considered necessary. Our assessment for the euro area is different − inflation is expected not only to go back to the target but also to fall below the target − therefore our monetary policy reaction is different. This is the key issue.
It is crystal clear, but there is also confusion due to exceptional factors – the pandemic and bottlenecks – that are having an impact on inflation, with no historical parallel that can be made.
It is important to recognise the pervasive impact of the pandemic on inflation. Look at the three pandemic years, that is, 2020, 2021 and 2022. In 2020, we had low inflation or even disinflation. And this was one of the motivations for us to react with the pandemic emergency purchase programme (PEPP): inflation was too low. The ECB has a symmetric view: too high inflation and too low inflation are equally undesirable. In 2021, the world economy and the European economy recovered more quickly than expected. There was a fast recovery driven by vaccinations, demand was strong and supply could not keep up due to bottlenecks. In the initial stage of the pandemic, some countries reacted with special measures, such as the VAT cut in Germany, which drew up prices when it was reversed in 2021. We have a lot of special factors that are leading to unusually low inflation in 2020 and unusually high inflation in 2021. I see 2022 as a transition phase, gradually going out of the pandemic. The high pressure on inflation in 2021 will be fading this year, but 2022 is still part of the pandemic cycle. And when the pandemic is over, in 2023 and 2024, inflation will stabilise at a lower level, at about 1.8 per cent, which is much closer to our target compared to what we had before the pandemic. Inflation is not just going back to its pre-pandemic level. We have made progress by providing monetary policy support and fiscal support. The economic recovery in 2023 and 2024 in the euro area will bring inflation closer to our target.
Is the economic recovery solid in the euro area and in Italy? Can bottlenecks jeopardise the recovery?
Bottlenecks are another temporary factor: if there is a shortfall in production today, it means there is going to be more production later on. The order book is very good. Overall, in Europe we see a solid growth engine this year, next year and the year after that. This applies also to Italy. First, there is the bounceback from the pandemic. Italy was hit very hard in 2020 and it had a strong recovery in 2021, even if some sectors, such as tourism and travel, are not back to normal. Next Generation EU (NGEU) is another engine for growth and Italy is amongst the primary recipients. This is where I see the difference between the pandemic and the great financial crisis: we now have medium-term growth engines − NGEU will last for several years. Moreover, this time the banking system provided support for the recovery. The banking system is stronger. Now, there is more support for the recovery.
Italy’s growth is solid, but the BTP-Bund spread is widening, in spite of more flexibility in PEPP reinvestments to intervene against fragmentation. The ECB has always found instruments to intervene against fragmentation: the Securities Markets Programme, Outright Monetary Transactions, then PEPP net purchases: but why is flexibility now only in PEPP reinvestments?
In December, the Governing Council decided to end net purchases under the PEPP in March and to use PEPP reinvestments in a flexible way if needed. But to provide total clarity, we also considered it a good idea to remind people in more general terms that our mandate is price stability, and that on some occasions, to deliver our mandate, we have to use instruments and programmes that can be flexible to counter fragmentation. So in December we also said that if there is a threat to price stability, and this threat is fragmentation, under stressed conditions we will implement monetary policy in a flexible way. This is quite straightforward. It is a restatement of what the ECB needs to do: the ECB cannot always run monetary policy in a mechanical way in the euro area, where 19 countries adopt a single monetary policy. What is important is that we reiterate our flexibility when it is appropriate. And then we have the specific reminder that, as we move into the next phase in the recovery, we said we have a mechanism, PEPP reinvestments, by which we can deal with fragmentation risk.
The Federal Reserve will reduce its balance sheet after the first interest rate hike. The PEPP’s portfolio will be reinvested until 2024. And the asset purchase programme is still open-ended. When will the ECB balance sheet shrink? When will banks repay the targeted longer-term refinancing operations (TLTROs)?
With the TLTROs, the decisions are driven by banks: so long as TLTRO funding is available, it is up to banks to decide whether to replace TLTROs with funding on the market. As for the ECB balance sheet, there is a clear sequence: net purchases stop before the first interest rate increase, and only well after the first increase in interest rates will the central bank think about shrinking its balance sheet. This principle is valid for all central banks, it is fairly universal. But the ECB is further away from increasing interest rates than some other central banks. So the debate on when to start shrinking our balance sheet is also further away; the shrinkage of our balance sheet is much more a topic for the future than for today.
Asset purchasing is linked to interest rate hikes. The last ECB interest rate hike was more than ten years ago, in 2011: a rate hike could take markets by surprise. Is the ECB worried about price correction and asset valuation triggered by monetary policy tightening?
Investors, academics, they all know very well that in a world of low interest rates, rates eventually go up and there are implications for asset prices. Any bank, insurance company or pension fund will allow for this risk. Regulators and supervisors also think a lot about this. So it will not come as a surprise that at some point in time rates, short-term rates or long-term rates, will go up. But I also disagree that monetary policy has a significant surprise element. This is in contrast to major financial crisis episodes, for example what happened in September 2008, which came as a big surprise. It’s important for central banks to be clear, to be predictable. And I think we are very clear on interest rates and we are very predictable. The world can adapt to higher rates, and many institutions will already have allowed for this risk in their planning.
My last question is not on interest rates or monetary policy but on your very detailed proposal for the reform of the Stability and Growth Pact. Can you give your thoughts on the reform?
Let me give some initial suggestions at a personal level. One topic is that the fiscal framework should combine debt sustainability with fiscal countercyclicality. Fiscal policy must be sustainable in the longer term, but it should not aggravate the business cycle by loosening during expansion and tightening during recession. For debt sustainability, I agree we must see high debts coming down. But in a world of low rates, maybe an adjustment path can allow for a more moderate pace of reduction (for example, at 3 per cent per annum rather than the current 5 per cent). A second point is that the inflation element could be incorporated in the fiscal framework: fiscal policy has a bigger multiplier when interest rates are low and when inflation is low. But the debate has just started, it is early days, these ideas will be part of the debate in the European institutions.
Some proposals have been made, going as far as asking the ECB to sell its government bonds to specific buyers: would this be possible?
There is an important separation. The fiscal framework is for Member States and the European Union to decide. We are clear in our strategy: our monetary policy and our balance sheet is driven by price stability and by what is needed to stabilise inflation at our 2 per cent target. The fiscal framework cannot imply any particular imposition on the ECB. Fiscal policy matters a lot to the ECB. But there is a clear separation between fiscal policy and monetary policy.
Compliments of the European Central Bank.
The post ECB Interview | The pandemic cycle and inflation first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, the EU Commission and the European Union Intellectual Property Office (EUIPO) launched the new EU SME Fund, which offers vouchers for EU-based SMEs to help them protect their intellectual property (IP) rights. This is the second EU SME Fund aiming at supporting SMEs in the COVID-19 recovery and green and digital transitions for the next three years (2022-2024).
Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “Small is beautiful, but if SMEs want to grow or take the lead in new technologies, they need to protect their inventions and creations, as big companies do. New ideas and expertise are the main added value we have in the EU. With this Fund, we want to support SMEs to face those peculiar times and remain strong and innovative through the decades to come.”
Commissioner for Internal Market, Thierry Breton, said: “It goes without saying that SMEs have been particularly impacted by the COVID-19 crisis. But what does not change is that they remain the backbone of our economy, of our ecosystems. This Fund will support SMEs to valorise their innovations and creativity. And this is crucial for SMEs to recapitalise and drive the green and digital transitions.”
The EU SME Fund, with a budget of €47 million, will offer the following support:

Reimburse 90% of the fees charged by Member States for IP Scan services, which provide a broad assessment of the intellectual property needs of the applying SME, taking into account the innovative potential of its intangible assets;
Reimburse 75% of the fees charged by intellectual property offices (including national intellectual property offices, the European Union Intellectual Property Office and the Benelux Intellectual Property Office) for trademark and design registration;
Reimburse 50% of the fees charged by the World Intellectual Property Organisation for obtaining international trade mark and design protection;
Reimburse 50% of the fees charged by national patent offices for the registration of patents in 2022;
From 2023, further services could be covered e.g. partial reimbursement of the costs of the patent prior art search, of the patent filing application; private IP advice charged by IP attorneys (for patent registration, licensing agreements, IP valuation, alternative dispute resolution costs, etc.).

SMEs need a flexible intellectual property toolbox and quick financing to protect their innovations. Hence, for the first time the new EU SME Fund is now also covering patents. The Commission’s financial contribution, which amounts to €2 million, will be dedicated fully to the patent related services. For instance, an SME could apply for the reimbursement of the registration fee to patent its invention in a Member State.
EUIPO will manage the SME Fund through calls for proposals. The first call is launched today on the EUIPO website.
In order to ensure fair and equal treatment of potential beneficiaries as well as safeguarding an efficient management of the action, the application for grants will be open throughout the period 2022-2024. The applications will be examined and evaluated based on a ‘first in first out’ criterion. SMEs with no experience in the area of intellectual property are encouraged to apply first for an IP Scan service and only subsequently to the other services.
At the EU Industry Days (8-11 February 2022) a special session will be dedicated to the SME Fund allowing SMEs to ask questions of the experts managing the Fund and receiving a practical guide on how to apply for the different services. The special session is scheduled for 11 February 2022. It can be followed remotely by subscribing to the EU Industry Days.
Background
The EU needs to increase the resilience of its SMEs to enable them to cope with the current challenges created by the COVID-19 crisis and to help their transition to green and digital technologies. The EU capitalises on the value of the intangible assets its companies create, develop and share, by helping them manage these assets more effectively and by providing financial support and better access to finance.
The Commission published the Action Plan on Intellectual Property to support the EU’s recovery and resilience in November 2020. Among the priorities of the Action Plan, the Commission committed to promote an effective use and deployment of intellectual property tools, in particular by SMEs. Concretely, the Commission offered financial support for SMEs impacted by the COVID-19 crisis, helping them to manage their IP portfolios as well as helping them move towards green and digital technologies.
In 2021, the Commission together with EUIPO launched a first EU SME Fund offering services to reimburse the costs of IP Scan and national trade mark and design registration costs. A total of €6.8 million of the budget has been used by 12,989 SMEs from all 27 Member States. In total, 28,065 services were rendered in the first year of the initial SME Fund, which shows that the action proved very successful.
Compliments of the European Commission.
The post €47 million fund to protect intellectual property of EU SMEs in their COVID-19 recovery and green and digital transitions first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

During the post-pandemic recovery, the US and UK labour markets show many similarities, albeit with different implications for wages. This box reviews post-pandemic labour market developments in the United States and United Kingdom. It shows that, in both countries, imbalances between labour demand and labour supply are causing a high and unusual tightness for such an early stage in a recovery. This could translate into broad-based wage pressures, in turn posing a risk to inflation. Such pressures are becoming increasingly visible in the United States, but are less marked in the United Kingdom.
In the United States, labour demand outstrips supply. According to the latest available data, in October 2021 the labour force participation rate still stood significantly below its pre-crisis level (1.7 percentage points below the level prevailing in February 2020). Such a level is commonly observed at an early stage of a recovery in the labour market cycle. The maximum employment objective for the Federal Reserve System, of which the participation rate is one element, appears to be far from being reached (Chart A). At the same time, firms are opening positions at a fast pace in response to the rapid recovery of the US economy. This has brought vacancies to very high, even unprecedented, levels, which are usually associated with a late stage in the labour market cycle. As a result, labour market tightness has already jumped above pre-crisis levels, instead of making a slow recovery, as was the case after the global financial crisis (Chart A).[1] The lack of response on the part of labour supply (low participation) to rising labour demand (high level of vacancies) is indicative of a decline in matching efficiency in the current recovery. This appears to be the case especially for businesses with frequent customer contact, such as bars and restaurants, which have encountered difficulties in attracting workers. Moreover, a temporary increase in unemployment benefits (particularly significant for low-paid workers), early retirement, and an increased need to care for children and other family members during the pandemic, particularly for women, has also reduced the labour supply.[2] This partly accounts for what has been called the “Great Resignation”, as support programmes have allowed people more freedom to leave their jobs or to be more selective when looking for new ones.

Chart A
US employment rate, participation rate and labour market tightness
(percentages of civilian population; ratio of vacancies to unemployment; monthly)
Sources: BLS and author’s calculations.
Notes: Labour market tightness is measured by the ratio of vacancies to unemployment. Shaded areas indicate recessions. The latest observations are for September 2021 for tightness and October 2021 for employment and participation rates.

The increase in labour market tightness has translated into broadening wage pressures. While the high level of vacancies has been broad-based across industries, up to the second quarter of this year wage growth – as measured by the employment cost index – was limited to leisure and hospitality, as firms tried to make these contact-intensive and mostly low-paid jobs more attractive (Chart B). In the third quarter of this year, however, an acceleration in wages also became visible in most other industries, such as trade and, to a lesser extent, manufacturing, financial activities and professional services, although for the latter three industries still remaining within ranges observed in the past. This development has sparked a debate about the risk of a further broadening of wage pressures, and if it could ultimately lead to a wage-price spiral. Whether these risks materialise depends on various factors. First, most of the factors which have held back labour supply in the United States are expected to be temporary and to revert in the coming months, therefore reducing the level of tightness. The temporary increase in unemployment benefits has already expired. Second, new coronavirus (COVID-19) infections have been falling since summer, which should attenuate fears about returning to work in high-contact industries, and the reopening of schools should favour a return to work by parents. At the same time, above average productivity growth has kept unit labour costs, a measure that is more relevant for firms in setting prices than nominal wages, close to long-term averages. Third, the recent increase in inflation has to a large extent been driven by goods and services, for which wage growth has remained subdued (for example car manufacturing), or is related to other factors (such as rents, which are linked to housing market developments). On the other hand, although indexation clauses are not a common practice in the United States, the high inflation environment (highest headline inflation rate recorded since 1990), coupled with labour market tightness could translate into a heightened risk of higher wage demands proliferating going forward.

Chart B
US employment cost index by industry
(year-on-year growth rates)
Sources: BLS and author’s calculations.
Notes: The box plots represent the minimum, the first quartile, the median, the third quartile and the maximum from the first quarter of 1997 to the fourth quarter of 2019. The latest observations are for the third quarter of 2021.

The UK labour market is also showing signs of increased tightness, coupled with a slow recovery in employment and labour market participation. As in the United States, both the employment rate and the labour force participation rate have only slowly been approaching their pre-crisis levels. The respective gaps of 1.2 percentage points and 0.9 percentage points compared with February 2020 levels remain considerable and indicate an early cycle stage of the labour market recovery (Chart C). In contrast, vacancies have been increasing rather sharply, as UK firms have faced both an increased demand for goods and services (driven by the re-opening of the economy) and a decreased supply of low-skilled EU workers (owing to Brexit). As a result, labour market tightness has already surpassed pre-crisis levels, pointing towards a late stage in the cycle, as opposed to the slower recovery experienced in the aftermath of the global financial crisis (Chart C). Similar to the United States, the sluggish response of UK labour supply relative to strong labour demand suggests lower matching efficiency. This is for similar reasons, but also because of lower participation by many younger people who have chosen to stay in education. The furlough scheme may be another explanation for the tightness in the labour market, as employees on furlough had less incentive to join the pool of available workers and apply for new jobs. However, the scheme ended in September, meaning that labour market tightness might already be lower than the official data show.

Chart C
UK employment rate, participation rate and labour market tightness
(percentages of working age population and ratio of vacancies to unemployment, 3-month moving average)
Sources: ONS and authors’ calculations.
Notes: Labour market tightness is measured by the ratio of vacancies to unemployment. Shaded areas indicate recessions. The latest observations are for September 2021.

Reflecting the diverse developments in vacancies, wage pressures have so far remained limited to specific sectors. While economy-wide growth in average weekly earnings remains high (at 5.8% in September), most of the increase comes from negative base effects reflecting the introduction of the furlough scheme last year.[3] This can also be observed on a sectoral level, as base effects drove wages in the second quarter of this year to historically high rates across most industries. The latest data for the third quarter indicate that wage growth has not increased further and, in most cases, has even decelerated (Chart D).[4] Wage increases were most pronounced in professional and business services and in sectors previously relying on low-skilled migrant labour (construction, and leisure and hospitality). It is worth noting that even though specific professions (such as lorry drivers) experienced a substantial increase in earnings, this increase did not extend to the industry as a whole (trade, transportation and utilities). Therefore, the risk of broad-based wage pressures and a wage-price spiral appears less likely at this stage of the recovery, considering that the underlying wage growth remains much more contained.

Chart D
Average weekly earnings by industry in the United Kingdom
(year-on-year growth rates, 3-month moving average)
Sources: ONS and authors’ calculations.
Notes: The box plots represent the minimum, the first quartile, the median, the third quartile and the maximum from the first quarter of 2002 to the fourth quarter of 2019. The latest observations are for the third quarter of 2021.

Overall, while both the United States and United Kingdom are experiencing labour shortages, developments on the wage front differ to some extent. Factors constraining labour supply are expected to fade somewhat in both countries. In the United Kingdom, this is likely to reduce labour market tightness and to dampen what have been – up until now – very localised wage pressures. In the United States, expectations of further strong economic growth in the short term could prolong labour market tightness, in turn leading to broader-based wage increases.
Authors

Katrin Forster van Aerssen
Ramon Gomez-Salvador
Michel Soudan
Tajda Spital

Compliments of the European Central Bank.
The post ECB | The US and UK labour markets in the post-pandemic recovery first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The Council has approved an agreement between the EU and the UK on fishing opportunities for 2022, paving the way for EU fishermen and women to exercise their fishing rights in the Atlantic and the North Sea.
The decision determines fishing rights for around 100 shared fish stocks in EU and UK waters, including the total allowable catch (TAC) limit for each species.
At the Agriculture and Fisheries Council on 12-13 December, ministers set provisional TACs for fish stocks shared with the UK pending the outcome of the EU-UK consultations; these catch limits will be amended to take account of the new agreement.

The successful conclusion of this year’s consultations on shared fish stocks sets a good precedent for future negotiations with the UK. Thanks to good will and a constructive approach on both sides, we were able to reach an agreement that provides certainty for EU fishermen and women going forward.
Jože Podgoršek, Slovenian Minister for Agriculture

Next steps
The regulation on fishing opportunities for 2022 – including the amendment containing the final quotas – will be finalised by the Council’s legal and linguistic experts, following which it will be formally adopted by the Council and published in the Official Journal. The provisions will apply retroactively as of 1 January 2022.
Rest of the text (appears on the press release page only)
Background
Following the UK’s withdrawal from the EU, fish stocks jointly managed by the EU and the UK are considered shared resources under international law. The Trade and Cooperation Agreement (TCA) between the two parties sets out the terms under which the EU and the UK determine their respective fishing rights in the Atlantic and North Sea.
Under the TCA, both parties agree to hold annual talks with a view to determining TACs and quotas for the following year. Consultations are led by the Commission and take into account a number of factors, including:

international obligations
the recommended maximum sustainable yield (MSY) for each species, to ensure the long-term sustainability of fishing in line with the common fisheries policy
the best available scientific advice, with a precautionary approach taken where such advice is not available

the need to protect the livelihoods of fishermen and women

The Council provides political guidance to the Commission throughout the negotiation process and formally endorses the final agreement.

EU-UK fishing opportunities: timeline
Fish stocks shared between the EU and the UK
Fishing quotas after Brexit (feature story):

Compliments of the European Council.
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