The purchase of government bonds by emerging market central banks may be reminiscent for some of the days of monetary financing of the government, which was often followed by rising inflation and currency depreciations. However, the successful actions by several central banks in emerging Europe to buy government bonds during the COVID-19 pandemic countered this history.
Amid the financial market turmoil at the start of the pandemic, central banks in Croatia, Hungary, Poland, Romania, Serbia, and Turkey rolled out asset purchase programs (APPs), buying up local currency bonds issued by governments but also by the private sector in the case of Hungary. New IMF research suggests that asset purchases in emerging Europe contributed to the relief of financial market dysfunction, without signs of destabilizing effects. With this goal achieved and to support the transmission of higher policy rates to the longer end of the yield curve, central banks in emerging Europe should taper or end asset purchase programs once monetary policies are tightened.
Asset purchase programs in emerging Europe are distinct
Compared to APPs employed by advanced economy central banks during the pandemic, most APPs in emerging Europe were smaller in scale, though with significant differentiation within the region. They were also generally limited to the immediate period following the onset of the pandemic, except in Hungary and Poland, where asset purchases continue.

The limited scale and duration of these APPs is consistent with their goals, which was to mitigate financial market dysfunction, provide liquidity, and repair monetary policy transmission mechanisms. This sets these APPs apart from the quantitative easing employed by advanced economy central banks, which aimed to provide additional stimulus in the context of policy interest rates at or near the effective lower bound. Indeed, APPs in emerging Europe were mostly implemented alongside or even preceded conventional monetary policy easing. For example, Romania’s asset purchase program essentially concluded during the summer of 2020, but the policy interest rate only reached its low of 1.25 percent in January 2021.
Asset purchase programs reduced bond market pressures
IMF research suggests that APPs in emerging Europe were successful in alleviating market dysfunction in the immediate aftermath of the pandemic shock. Using an event study approach, we find evidence that APP announcements led to an easing of bond market liquidity pressures and a reversal in the surge in term spreads.

Importantly, we found no evidence that these APPs led to currency pressures. This may reflect their mostly limited duration and scope. In countries where APPs were more extensive or prolonged, the actions by central banks to absorb the added liquidity created by these purchases may have also played a role in minimizing the impact on exchange rates. For example, the central bank of Poland issued its own securities, while the central bank of Hungary used a deposit facility to drain liquidity created by purchases.
Tapering or discontinuing remaining asset purchase programs
After successfully alleviating initial market dysfunction, most APPs in the region have already concluded. For ongoing APPs in Hungary and Poland, central banks should consider the goals and their role in monetary policy tightening, which has already begun in Hungary. Increases in policy rates should be accompanied by a tapering or discontinuation of APPs, which would support the transmission of higher policy rates to the longer end of the yield curve.

In August, the National Bank of Hungary announced that it would begin to gradually reduce its purchases of government bonds. While the National Bank of Poland has not yet raised interest rates, the pace of purchases has slowed significantly from the spring months.
The future role of asset purchase programs
While APPs in emerging Europe were successful during the pandemic and now appear to be part of the toolkit, less clear are the conditions in which to use them in the future. In part, their use may depend on global circumstances. It is important to recognize that the nearly universal easing of monetary policies during the pandemic created more conducive conditions for EMs to employ such tools. It remains to be seen whether APPs could be employed by EMs in response to idiosyncratic shocks without triggering reactions such as currency depreciation.
Country fundamentals also matter. One concern about APPs in EMs is that they could abet fiscal dominance if they help support deficits that cannot be financed by conventional means. A strong track record of macroeconomic stability and credible economic institutions are likely to mitigate concerns about fiscal dominance. To this end, the structure and discipline provided by EU membership make these risks less acute, potentially enhancing future scope for APPs in these countries.
Authors:

William Lindquist
Nadeem Ilahi
Jaewoo Lee

Compliments of the IMF.
The post IMF | How Emerging European Economies Found a New Monetary Policy Tool first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

As crypto assets take hold, regulators need to step up.
Crypto assets offer a new world of opportunities: Quick and easy payments. Innovative financial services. Inclusive access to previously “unbanked” parts of the world. All are made possible by the crypto ecosystem.
‘Consumer protection risks remain substantial given limited or inadequate disclosure and oversight.’
But along with the opportunities come challenges and risks. The latest Global Financial Stability Report describes the risks posed by the crypto ecosystem and offers some policy options to help navigate this uncharted territory.
The Crypto Ecosystem—What Is It, What’s at Risk?
The total market value of all the crypto assets surpassed $2 trillion as of September 2021—a 10-fold increase since early 2020. An entire ecosystem is also flourishing, replete with exchanges, wallets, miners, and stablecoin issuers.
Many of these entities lack strong operational, governance, and risk practices. Crypto exchanges, for instance, have faced significant disruptions during periods of market turbulence. There are also several high-profile cases of hacking-related thefts of customer funds. So far, these incidents have not had a significant impact on financial stability. However, as crypto assets become more mainstream, their importance in terms of potential implications for the wider economy is set to increase.

Consumer protection risks remain substantial given limited or inadequate disclosure and oversight. For example, more than 16,000 tokens have been listed in various exchanges and around 9,000 exist today, while the rest have disappeared in some form. For example, many of them have no volumes or the developers have walked away from the project. Some were likely created solely for speculation purposes or even outright fraud.
The (pseudo) anonymity of crypto assets also creates data gaps for regulators and can open unwanted doors for money laundering, as well as terrorist financing. Although authorities may be able to trace illicit transactions, they may not be able to identify the parties to such transactions. Additionally, the crypto ecosystem falls under different regulatory frameworks in different countries, making coordination more challenging. For example, most transactions on crypto exchanges happen through entities that operate primarily in offshore financial centers. This makes supervision and enforcement not only challenging, but nearly impossible without international collaboration.
Stablecoins—which aim to peg their value usually against the US dollar—are also growing at lightning speed, with their supply climbing 4-fold throughout 2021 to reach $120 billion. The term “stablecoin,” however, captures a very diverse group of crypto assets and can be misleading. Given the composition of their reserves, some stablecoins could be subject to runs, with knock-on effects to the financial system. The runs could be driven by investor concerns about the quality of their reserves or the speed at which reserves can be liquidated to meet potential redemptions.

Significant challenges ahead
Although the extent of the adoption of crypto assets is difficult to measure, surveys and other measures suggest that emerging market and developing economies may be leading the way. Most notably, residents in these countries increased their trading volumes in crypto exchanges sharply in 2021.
Looking ahead, widespread and rapid adoption can pose significant challenges by reinforcing dollarization forces in the economy—or in this case cryptoization—where residents start using crypto assets instead of the local currency. Cryptoization can reduce the ability of central banks to effectively implement monetary policy. It could also create financial stability risks, for example through funding and solvency risks arising from currency mismatches, as well as amplify the importance of some of the previously mentioned risks to consumer protection and financial integrity.
Threats to fiscal policy could also intensify, given the potential for crypto assets to facilitate tax evasion. And seigniorage (the profits accruing from the right to issue currency) may also decline. Increased demand for crypto assets could also facilitate capital outflows that impact the foreign exchange market.
Finally, a migration of crypto “mining” activity out of China to other emerging market and developing economies can have an important impact on domestic energy use—especially in countries that rely on more C02-intensive forms of energy, as well as those that subsidize energy costs—given the large amount of energy needed for mining activities.
Policy action
As a first step, regulators and supervisors need to be able to monitor rapid developments in the crypto ecosystem and the risks they create by swiftly tackling data gaps. The global nature of crypto assets means that policymakers should enhance cross-border coordination to minimize the risks of regulatory arbitrage and ensure effective supervision and enforcement.
National regulators should also prioritize the implementation of existing global standards. Standards focused on crypto assets are currently mostly limited to money laundering and proposals on bank exposures. However, other international standards—in areas such as securities regulation, as well as payments, clearing and settlements may also be applicable and need attention.
As the role of stablecoins grows, regulations should be proportionate to the risks they pose and the economic functions they serve. For example, rules should be aligned with entities that provide similar products (e.g., bank deposits or money market funds).
In some emerging markets and developing economies, cryptoization can be driven by weak central bank credibility, vulnerable banking systems, inefficiencies in payment systems and limited access to financial services. Authorities should prioritize strengthening macroeconomic policies and consider the benefits of issuing central bank digital currencies and improving payment systems. Central bank digital currencies may help reduce cryptoization pressures if they help satisfy a need for better payment technologies.
Globally, policymakers should prioritize making cross-border payments faster, cheaper, more transparent and inclusive through the G20 Cross Border Payments Roadmap.
Time is of the essence, and action needs to be decisive, swift and well-coordinated globally to allow the benefits to flow but, at the same time, also address the vulnerabilities.
Authors:

Dimitris Drakopoulos is a Senior Financial Sector Expert in the Global Markets Analysis Division of the IMF’s Monetary and Capital Markets Department

Fabio M. Natalucci is a Deputy Director of the Monetary and Capital Markets Department

Evan Papageorgiou is a Deputy Division Chief in the Global Markets Monitoring & Analysis Division of the IMF’s Monetary and Capital Markets Department

Compliments of the IMF.
The post IMF | Crypto Boom Poses New Challenges to Financial Stability first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The Commission launched today five new EU missions, a new and innovative way to work together and improve the lives of people in Europe and beyond. EU missions aim to tackle big challenges in health, climate and the environment, and to achieve ambitious and inspiring goals in these areas.
A novelty of Horizon Europe and also an original concept in EU policy, bringing together several Commission services under the authority of nine College members, missions will support research to deliver on the Commission’s main priorities and find responses to some of the greatest challenges we are facing today: fighting cancer, adapting to climate change, protecting the ocean, seas and waters, living in greener cities and ensuring healthy soil and food. They are a new tool that includes a set of actions, such as research and innovation projects, policy measures and legislative initiatives, to achieve concrete goals with large societal impact and within a specified timeline. Five missions will aim to deliver solutions to key global challenges by 2030:

Adaptation to Climate Change: support at least 150 European regions and communities to become climate resilient by 2030;

Cancer: working with Europe’s Beating Cancer Plan to improve the lives of more than 3 million people by 2030 through prevention, cure and solutions to live longer and better;
Restore our Ocean and Waters by 2030;
100 Climate-Neutral and Smart Cities by 2030;

A Soil Deal for Europe: 100 living labs and lighthouses to lead the transition towards healthy soils by 2030.

Margrethe Vestager, Executive Vice-President for A Europe Fit for the Digital Age, said: “Today, we have launched five new missions. A mission is a new and innovative tool – a new way to work together within Horizon Europe. They are also an original concept in EU policy. The missions are commitments to solve some of the greatest challenges we are facing today: fighting cancer, adapting to climate change, protecting the ocean, seas and waters, living in greener cities and ensuring healthy soil and food. It is a set of actions – research and innovation projects, policy measures and legislative initiatives, citizens’ involvement – to achieve concrete goals with large societal impact. We want to deliver solutions to key global challenges by 2030!”
Mariya Gabriel, Commissioner for Innovation, Research, Culture, Education and Youth, said: “The response to the coronavirus pandemic has shown that we can only tackle our biggest problems with a collective effort rooted in research and innovation. This is also the starting point of the bold and ambitious EU missions. They will mobilise the enormous potential of the EU and rally instruments and policies to achieve important goals. And all this together with the citizens, who are involved from start to finish.”
With its Communication on EU missions adopted today, the Commission is giving them the go-ahead, after the approval of the missions’ individual plans this summer.
EU missions in Horizon Europe and beyond
Missions are a new collaborative approach to tackle some of the main challenges of our times. They provide a mandate to achieve specific goals in a set timeframe. They will also deliver impact by putting research and innovation into a new role, combined with new forms of governance and collaboration, as well as with a new way of engaging with citizens, including young people.
For example, the Adaptation to Climate Change mission plans to make available €100 million for large-scale demonstrations to address major climate induced hazards, such as flooding, fitted to local circumstances. The Cancer mission plans to establish a novel joint governance model to ensure a systematic and effective integration of research, innovation and policy developments on cancer in Europe. The Ocean and Waters mission will create a network of lighthouses at sea and river basin scale to implement the mission and expand the networks of marine protected areas. In the Climate-Neutral and Smart Cities mission, selected cities will involve their citizens in drawing up ‘Climate City Contracts’ to help reach climate neutrality by 2030. And with the Soil Deal mission people will be stimulated to participate in citizen science initiatives to collectively improve soil health.
Rooted in Horizon Europe, mission implementation will go far beyond research and innovation to develop new solutions and improve the lives of Europeans. Their novelty and added value is in operating as a portfolio of actions involving different instruments, business models and public and private investments at EU, national, regional and local levels. For missions to be successful, support from other European and national programmes will be crucial. Each mission will have a specific timeframe and budget tailored to its challenge and implementation plan.
EU missions connect directly to citizens, engaging them in their design, implementation and monitoring. Member States, regions and a wide range of public and private sector stakeholders will get involved to help ensure lasting outcomes for all EU citizens.
The missions support Commission priorities, such as the European Green Deal, Europe fit for the Digital Age, Europe’s Beating Cancer Plan, An economy that works for people and the New European Bauhaus. For instance, Mission Climate is already a concrete element of the new Climate Adaptation Strategy, Mission Cancer of Europe’s Beating Cancer Plan and the Mission Soil is a flagship initiative of the Long-term Vision for the EU’s Rural Areas.
The Commission published a Special Eurobarometer on science and technology on 23 September. The EU-wide survey’s results testify to the popular support for science and innovation to find solutions to the challenges identified by the missions. For instance, Europeans overwhelmingly see health and green energy as the areas were science and innovation will have a positive effect on their lives in the next 20 years.
Next Steps
EU missions are launching today into their full implementation phase. The first Horizon Europe work programme for 2021-22, published on 16 June, includes a set of actions that lay the ground for their implementation. It will be updated with a full research and innovation agenda by the end of the year. In parallel, missions will engage with participating regions, cities and organisations, as well as citizens in the Member States.
Background
Based on proposals that top experts in the Mission Boards handed over to the Commission in September 2020, five missions were identified in the Horizon Europe Strategic Plan. Horizon Europe provides initial funding to missions of up to €1.9 billion until 2023. In October 2020, the Commission validated the five proposed missions. They entered a preparatory phase to develop five detailed implementation plans including objectives, ways of reaching them and indicators for measuring performance. The Commission assessed these plans against specific criteria.
Compliments of the European Commission.
The post EU Commission launches EU missions to tackle major challenges first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Christine Lagarde, President of the ECB, at ECB Forum on Central Banking “Beyond the pandemic: the future of monetary policy” | Frankfurt am Main, 28 September 2021 |
The economy is back from the brink, but not completely out of the woods. After a highly unusual recession, the euro area is going through a highly atypical recovery.
This atypical recovery is leading to rapid growth, but also to supply bottlenecks appearing unusually early in the economic cycle. It is also causing inflation to rebound quickly as the economy reopens. And it is helping to accelerate pre-existing trends and new structural changes brought about by the pandemic, which could have implications for future inflation dynamics.
But it is important today to take a step back. To understand how monetary policy should operate in this environment, we need to recognise where we have come from and where current trends suggest we are going. As John Maynard Keynes wrote, policymakers must always “study the present in light of the past for the purposes of the future”.
We are coming from a decade of strong disinflationary forces that have depressed the whole inflation process. And while the robust recovery is supporting underlying inflation trends, what we are seeing now is mostly a phase of temporary inflation linked to reopening. Structural changes could create both upward and downward pressures on prices.
So, we still need an accommodative monetary policy stance to exit the pandemic safely and bring inflation sustainably back to 2%.
The inflation process before the pandemic
In the decade before the pandemic, inflation across advanced economies consistently surprised on the downside. The inflation process appeared to have slowed down along the transmission chain: from activity and employment to wages, and then from wages to prices. This was largely down to three factors.
First, gauging the true level of slack in the economy became harder.[1] Estimates of structural unemployment were consistently revised down as the economy strengthened.[2] And even as unemployment came down, many more people were drawn into the labour market, especially women and older people.[3]
Second, structural changes in labour markets meant that receding slack fed more slowly into wage growth. Employment increased rapidly after 2013 but was mainly channelled into lower-paying jobs.[4] In parallel, global forces – such as globalisation and automation – reduced workers’ bargaining power.[5]
Third, when wage growth did eventually pick up, firms were reluctant to pass on cost increases to consumers. Instead, we saw firms squeeze their profit margins.[6] This also reflected broader structural trends such as the digitalisation of services and the expansion of e-commerce.[7]
Recession and reopening
Then, the pandemic hit, which led to a highly unusual recession followed by a highly atypical recovery.
In conventional business cycles, the depth of the slump normally determines the pace of the recovery. After exceptionally deep recessions, both demand and supply are often impaired for many years. From the onset of the great financial crisis, for example, it took seven years for euro area GDP to get back to its pre-crisis level. Growth never reconnected with the trend we thought possible before 2008.
But during the pandemic, though GDP saw its steepest collapse on record, the overall economy has reopened largely intact.[8] We now expect GDP to exceed its pre-pandemic level by the end of this year – three quarters earlier than we forecast last December – and it should come close to reconnecting with its pre-crisis trend in 2023. From its trough, the recovery in GDP is the steepest in the euro area since 1975.
This outcome is largely attributable to the combined response of monetary and fiscal policy, which has preserved both demand and supply. For instance, real labour income fell by 3.6% in 2020, but household real disposable income dropped by only 0.2%, because government transfers filled the gap. This is in stark contrast with the sovereign debt crisis, when disposable income fell by 2% year-on-year.
The atypical nature of the recovery is creating frictions in the economy, which can produce opposing effects on growth and inflation.
In certain sectors, supply shortages are holding back production, which is unusual so early in the business cycle. ECB analysis finds that exports of euro area goods would have been almost 7% higher in the first half of this year were it not for supply bottlenecks.[9] These risks to growth could mount if the pandemic continues to affect global shipping and cargo handling as well as key industries like semiconductors.
At the same time, the reopening is also pushing up inflation, which reached 3% in August and is expected to rise further over the coming months. Higher inflation today is largely the result of two exceptional effects.
First, inflation collapsed last year when lockdowns were imposed, which is creating strong base effects as activity recovers. Half of total inflation in the euro area today is due to energy prices, which are making up the lost ground from 2020. Base effects from last year’s German VAT rate cut and the unusual timing of sales periods are also playing a role.
In fact, the low inflation rate last year and the high inflation rate this year equal, on average, the inflation rate observed in 2019 before the pandemic. So the price level now is roughly the same as if inflation had remained stable at its pre-pandemic level.
Second, imbalances between demand and supply in some sectors are pushing prices up.
Goods inflation rose to 2.6% in August, well above its historical average of 0.6% as – in addition to base effects – global supply chain disruptions met a sharp recovery in demand for durable goods.[10] Consumption of durables is already 1% above its pre-crisis trend,[11] while shipping costs are around nine times higher today than in June last year.
Services inflation has also been rising – to 1.1% in August[12] – and it would have reached 2% using the consumption weights of last year, slightly above its historical average. This is also largely the result of demand returning to the sectors hardest hit by the lockdowns. Inflation in high‐contact services accounts for virtually all of the rise we are seeing in services.
Once these pandemic-driven effects pass, we expect inflation to decline.
Base effects should drop out of the year-on-year calculation early next year, although we are seeing further increases in oil and gas prices.
It is harder to predict how long supply chain disruptions will last, but their ultimate impact on inflation will depend on how persistent they are and whether they feed through into higher than anticipated wage rises. Following the Japanese earthquake and nuclear disaster in 2011, production is estimated to have returned to normal after seven months for Japanese firms.[13] However, given the special nature of the pandemic and the recovery, it cannot be excluded that the resolution of supply-side bottlenecks may take longer now.
Monetary policy should normally “look through” temporary supply-driven inflation, so long as inflation expectations remain anchored. Indeed, we are monitoring developments carefully but, for now, we see no signs that this increase in inflation is becoming broad-based across the economy. A “trimmed mean”[14] of inflation – which removes the items with the highest and lowest inflation rates – stood at 2.1% in August. Furthermore, wage developments so far show no signs of significant second-round effects.
Inflation expectations also do not point to risks of a prolonged overshooting. Long-term market-based measures have risen by around 50 basis points since the start of the year – to around 1.75%[15] – and survey-based measures have risen slightly to 1.8%.[16] This represents a move in the right direction. But it is still some distance away from our symmetric 2% target.
Inflation dynamics beyond the pandemic
In fact, looking beyond the pandemic, we expect inflation to only slowly converge towards 2%.
This is visible in the outlook for underlying inflation, which is a good indicator of where inflation will settle over the medium term. We currently project core inflation – which is one measure of underlying inflation – at 1.5% in 2023. Our survey of monetary analysts also points to a gradual convergence of inflation, which is expected to climb to 2% and stabilise at that level only five years from now.[17]
This partly reflects the continuing pull of the structural factors that depressed inflation before the pandemic. But the pandemic has also created some new trends, which may have implications for the inflation outlook. Let me point to three.
The demand side
The first relates to changes on the demand side of the economy.
Historically, core inflation in the euro area has mostly been driven by services inflation, which has contributed 1.1 percentage points to the long-term average of 1.3 percentage points. This is both because services have a higher weight in consumption,[18] and because goods inflation has been held down by global forces of automation and competition.
Services inflation is closely linked to the strength of the domestic economy. It depends heavily on wage growth, as wages make up around 40% of the inputs for consumer services – double the share for goods. And robust domestic demand is crucial for a strong pass-through from wages to services prices.[19]
So the key question today is whether the transition out of the pandemic could lift the outlook for domestic demand and thereby contribute to more dynamic services inflation. Here we see forces that point in different directions.
First, owing mainly to lockdowns, households are sitting on a large stock of savings that they have accumulated during the pandemic. Our new consumer expectations survey suggests that households are not currently planning to spend those savings. But this might change if the economy continues along a dynamic recovery path, causing people to adjust their risk assessment.
Indeed, research suggests that consumption is influenced by people’s past experience of recessions, and the previous recessions in the euro area hit consumers especially hard.[20] From the onset of the great financial crisis and the sovereign debt crisis, it took seven years for consumption to get back to where it was at the start of 2008.
But by the end of 2022, we expect consumption to be almost 3% above its pre-pandemic level. And if that positive outlook is appropriately supported by the right policy mix, it could produce a virtuous circle, where people become more optimistic, upgrade their expectations of future income, and then spend more of the savings they have built up. This would help close the output gap from the demand side and put upward pressures on wages.
At the same time, there are forces that point to a slower pick-up in services inflation.
As I said in my speech here last year[21], there are limits to how much services can be consumed, meaning they are unlikely to benefit from the same kind of pent-up demand as goods. At the end of the second quarter, services consumption was still about 15% below its pre-pandemic trend, even as restrictions were being eased.
The pandemic has also produced considerable slack in the labour market. Employment is now recovering quickly, but we have so far observed that labour force participation is rising even faster. This is good news for the economy, but it also means that we expect unemployment to fall below its pre-crisis level only in the second quarter of 2023, and wages to grow only moderately.
The supply side
The second trend is related to changes on the supply side of the economy.
The pandemic has delivered a major shock to global supply chains and domestic labour markets. It has significantly accelerated the process of digitalisation – by seven years in Europe, according to one estimate.[22] And it may have distributional consequences that lead to changes in social contracts.[23]
In the long run, some of these changes might dampen inflationary pressures.
For example, digitalisation could trigger a second wave of globalisation based on the virtualisation of services. It might lead to higher trend productivity, which could temper unit labour cost growth even as wage growth becomes stronger. And it could also shift activity more towards digital “superstar” firms that have considerable market power and whose pricing is less sensitive to the business cycle.[24]
But over the coming years, there is also a chance that prices will be pushed up.
For instance, today’s supply shortages may induce firms to diversify their supply chains or re-shore some of their production. Previous pandemics like SARS were found to have had this effect.[25] That process could lead to higher cost structures that prioritise resilience over efficiency, which are then passed on to consumers. Geopolitics might also interfere in trade patterns and accelerate these shifts.
In parallel, faster digitalisation in Europe could initially create skill mismatches and scarcities, leading to wage increases even in the presence of persistent slack. The rate of job reallocations in major economies is estimated to double between 2019 and mid-2022.[26] This dynamic could also be reinforced by a renewed focus on inequality, which could lead to upward pressure on wages via rising minimum wages.[27]
The green transition
The third trend – which is probably the most important yet least explored – is the green transition, the shift towards a low-carbon economy.
The pandemic has given the green transition a boost. It could lead to an accelerated increase in auction prices in the EU Emissions Trading System, the introduction of carbon prices covering a wider range of economic activities, and the adoption of a Carbon Border Adjustment Mechanism – all of which could have a direct inflationary impact.
The Network for Greening the Financial System estimates that implementing ambitious transition policies in Europe could gradually increase inflation relative to its previous trend by up to one percentage point over the transition period, before returning to that trend.[28]
The green transition is also likely to make the pass-through of energy prices to consumer prices more complex. As energy supply shifts towards renewable sources, it will no longer be sufficient to look mainly at oil prices: we will also have to understand the energy mix and how the different sources are linked and can be substituted for each other. Renewable energy in the euro area has increased from 5% of total available energy in 1990 to about 15% today. Similarly, the share of natural gas has increased from 17% to 24%. Oil, meanwhile, has dropped from 43% to 38%.
The ongoing rise in natural gas prices is testament to the complexity this creates, as that rise partly reflects unusually low wind energy production in Europe this summer and the need to fill the gap with conventional energy sources that can be mobilised quickly. This, in turn, is having knock-on effects on other industries that rely on natural gas, like fertiliser manufacturing, and the industries that are dependent on by-products of fertiliser production, such as food packaging.
So we will need to understand these various transmission channels better. The impact of the green transition on inflation will ultimately hinge on the development of energy supply and the net effects of fiscal measures.
The increased use of natural gas to stabilise electricity production is only a bridge technology and will over time subside as new technologies for energy storage and distribution are more widely deployed. And the impact of carbon pricing will depend on whether the additional revenue is used to cut other consumption taxes, such as electricity taxes or VAT, directly support vulnerable groups or foster green investment.
If it is not, there is a risk that higher carbon pricing might reduce purchasing power and lead to relative price changes that push down underlying inflation. Research finds that introducing carbon taxes in euro area countries tends to raise headline inflation but lower core inflation.[29]
Policy implications
So how should monetary policy behave in this environment?
The key challenge is to ensure that we do not overreact to transitory supply shocks that have no bearing on the medium term, while also nurturing the positive demand forces that could durably lift inflation towards our 2% inflation target.
Our new forward guidance on interest rates is well-suited to manage supply-side risks. This guidance ensures that we will only react to improvements in headline inflation that we are confident are durable and reflected in underlying inflation dynamics. And the fact that inflation can move moderately above target for a transitory period allows us to be patient about tightening policy until we are certain that such improvement is sustained.
In terms of supporting demand, our monetary policy will continue to provide the conditions necessary to fuel the recovery. Indeed, our forward guidance has already led to a better alignment of rate expectations with our new inflation target, while helping to strengthen inflation expectations, which lowers real interest rates. We expect to see further progress toward an even tighter alignment between the expected time of lift-off for our policy rates and the most likely inflation outlook as markets continue to absorb the rationale and key purpose of our forward guidance.
All this should provide a decisive boost to private spending once the uncertainty brought about by the pandemic fades, especially given the new investment needs created by the green and digital transition. The European Commission estimates that we need to see investment of around €330 billion every year by 2030 to achieve Europe’s climate and energy targets[30], and around €125 billion every year to carry out the digital transformation.[31]
Going forward, the contribution of fiscal policy, and therefore the appropriate policy mix, will remain important. Fiscal policy is likely to stay supportive, with the cyclically-adjusted primary balance expected to be -4.1% this year, -1.6% next year and -1.5% in 2023. But the scope of pandemic-related fiscal transfers will need to change from a blanket-based approach to a more targeted action plan.
Fiscal policy will need to be surgical, meaning focused on those who have suffered particular hardship. It will need to be productivity-enhancing, meaning that it facilitates structural changes in the economy and shifts activity towards future-oriented sectors, and delivers on the agreed reform programmes under the Recovery and Resilience Facility. And, taking a medium-term perspective, fiscal policy will need to follow a rules-based framework that underpins both debt sustainability and macroeconomic stabilisation.
For our part, monetary policy is committed to preserving favourable financing conditions for all sectors of the economy over the pandemic period. And once the pandemic emergency comes to an end – which is drawing closer – our forward guidance on rates as well as purchases under the asset purchase programme will ensure that monetary policy remains supportive of the timely attainment of our medium-term 2% target.
Conclusion
Let me conclude.
The pandemic has caused a recession like no other, and a recovery that has few parallels in history. The inflation response reflects the exceptional circumstances we are in. We expect that those effects will ultimately pass.
But the pandemic has also introduced new trends that could affect inflation dynamics in the years to come. Those trends could produce both upward and downward price pressures. So, monetary policy must remain focused on steering the economy safely out of the pandemic emergency and lifting inflation sustainably towards our 2% target.
Footnotes:

See Jarociński, M. and Lenza, M. (2018), “An Inflation-Predicting Measure of the Output Gap in the Euro Area”, Journal of Money, Credit and Banking, Vol. 50, No 6, pp. 1189-1224; Eser, F., Karadi, P., Lane, P.R., Moretti, L. and Osbat, C. (2020), “The Phillips curve at the ECB”, The Manchester School, Vol. 88, pp. 50-85; Koester, G., Lis, E., Nickel C., Osbat, C. and Smets, F. (eds.) (2021), “Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers”, Occasional Paper Series, No 280, ECB, Frankfurt am Main, September.

In 2013, the European Commission estimated that structural unemployment (measured by the non-accelerating wage rate of unemployment (NAWRU)) in the euro area would rise to 11.6% in 2015. In 2019, after several years of strong demand growth, that rate was estimated at 7.7%.

The employment rate in the euro area rose to 73% by the end of 2019 – the highest on record. The participation rate for women in the euro area reached a record high of 68.7% in the fourth quarter of 2019.

See Kouvavas, O., Kuik, F., Koester, G. and Nickel, C. (2019), “The effects of changes in the composition of employment on euro area wage growth”, Economic Bulletin, Issue 8, ECB.

See Nickel, C., Bobeica, E., Koester, G., Lis, E. and Porqueddu, M. (eds.) (2019), “Understanding low wage growth in the euro area and European countries”, Occasional Paper Series, No 232, ECB, Frankfurt am Main, September.

See Hahn, E. (2019), “How are wage developments passed through to prices in the euro area? Evidence from a BVAR model”, Applied Economics, Taylor & Francis Journals, Vol. 53, No 22, May, pp. 2467-2485;Hahn, E. (2020), “The wage-price pass-through in the euro area: does the growth regime matter?”, Working Paper Series, No 2485, ECB, Frankfurt am Main, October; Bobeica, E., Ciccarelli, M. and Vansteenkiste, I. (2019), “The link between labor cost and price inflation in the euro area”, Working Paper Series, No 2235, ECB, Frankfurt am Main, February.

Anderton, R., Jarvis, V., Labhard, V., Morgan, J., Petroulakis, F. and Vivian, L. (2020), “Virtually everywhere? Digitalisation and the euro area and EU economies: Degree, effects, and key issues”, Occasional Paper Series, No 244, ECB, December.

There is, however, still heterogeneity across sectors. For example, as of the second quarter of 2021 real gross value added in high-contact services was still 10.5% below its level in the fourth quarter of 2019, while the overall economy was only 2.5% lower. See Battistini, N. and Stoevsky, G. (2021), “The impact of containment measures across sectors and countries during the COVID-19 pandemic”, Economic Bulletin, Issue 2, ECB.

Frohm, E., Gunnella, V., Mancini, M. and Schuler, T. (2021), “The impact of supply bottlenecks on trade”, Economic Bulletin, Issue 6, ECB.

Shifts in the timing of seasonal sales are also playing a role.

At the end of the second quarter.

The weights of the Harmonised Index of Consumer Prices (HICP) were updated in January 2021 reflecting the changes in consumption patterns brought about by the pandemic.

See Boehm, C.E., Flaaen, A. and Pandalai-Nayar, N. (2019), “Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tōhoku Earthquake”, The Review of Economics and Statistics, MIT Press, Vol. 101, No 1, March, pp. 60-75.

The trimmed means remove around 15% from each tail of the distribution of price changes in the euro area HICP each month.

Five-year forward five years ahead inflation-linked swap.

ECB (2021), Survey of Professional Forecasters, July.

ECB Survey of Monetary Analysts, September 2021.

Services are 61% of the core HICP basket.

When demand is higher, firms can pass on cost increases over-proportionally, such that profit margins increase. See Gumiel, J. E., and Hahn, E. (2018), “The role of wages in the pick-up of inflation”, Economic Bulletin, Issue 5, ECB, Frankfurt am Main.

See Malmendier, U. and Sheng Shen, L. (2018), “Scarred Consumption”, NBER Working Paper, No 24696.

See Lagarde, C. (2020), “Monetary Policy in a Pandemic Emergency“, keynote speech at the ECB Forum on Central Banking, Frankfurt am Main, 11 November.

See McKinsey (2020), “How COVID-19 has pushed companies over the technology tipping point—and transformed business forever”, October.

See Basso, G., Boeri, T., Caiumi, A. and Paccagnella, M. (2020), “The New Hazardous Jobs and Worker Reallocation”, OECD Social, Employment and Migration Working Papers No. 246.

Kouvavas, O., Osbat, C., Reinelt, T. and Vansteenkiste, I. (2021), “Markups and inflation cyclicality in the euro area”, mimeo.

See Shingal, A. and Agarwal, P. (2020), “How did trade in GVC-based products respond to previous health shocks? Lessons for COVID-19”, EUI RSCAS Working Paper, No 2020/68, Global Governance Programme 415.

Anayi, L., Barrero, J. M., Bloom, N., Bunn, P., Davis, S., Leather, J., Meyer, B., Oikonomou, M., Mihaylov, E., Mizen, P. and Thwaites, G. (2021), “Labour market reallocation in the wake of Covid-19”, VoxEu, 21 August.

CengizDubeLindnerZipperer, D., , A., , A. and , B. (2019), “The Effect of Minimum Wages on Low-Wage Jobs”, The Quarterly Journal of Economics, Vol. 134, Issue 3, August, pp. 1405-1454.

Network for Greening the Financial System (2021), “NGFS Climate Scenarios for central banks and supervisors”, slide deck, June.

McKibbin, W., Konradt, M. and Weder di Mauro, B. (2021), “Climate Policies and Monetary Policies in the Euro Area”, paper for ECB Forum 2021.

European Commission (2020), “Impact Assessment” accompanying the document “Stepping up Europe’s 2030 climate ambition: Investing in a climate-neutral future for the benefit of our people”, 17 September.

European Commission (2020), “Identifying Europe’s recovery needs”, 27 May.

Compliments of the European Central Bank.

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Today, as part of its work to create a future-proof and crisis-resilient regulatory framework for the pharmaceutical sector, the Commission has published a public consultation on the revision of the EU’s pharmaceutical legislation. This is the latest step towards an ambitious reform as announced in the Pharmaceutical Strategy for Europe, adopted in November 2020.
Stella Kyriakides, Commissioner for Health and Food Safety, said: “Today we take an important step for the reform of EU’s pharmaceutical legislation by the end of next year. A regulatory framework for pharmaceuticals, which is modernised and fit for purpose, is a key element of a strong European Health Union and crucial to addressing the many challenges this sector is facing. I call on all interested citizens and stakeholders to help us shape EU rules for the future, responding to patients’ needs and keeping our industry innovative and globally competitive.”
The consultation, which will run for twelve weeks, until 21 December, will gather the views from both the general public and stakeholders to support the evaluation of and the impact assessment for the revision of the EU’s pharmaceutical legislation. Today’s development follows on from the public consultation conducted for the preparation of the Strategy itself.
Since the adoption of the Strategy, the Commission has been working on a number of actions in close cooperation with Member States’ authorities, the European Medicines Agency and with stakeholders’ organisations. A major flagship action is the revision of the general pharmaceutical legislation, foreseen for end 2022, which is also being supported by an ongoing study. Other flagship actions of the Strategy focus on Health Technology Assessment, EU Health Data Space, legislation on rare diseases and medicines for children and strengthening the continuity and security of supply of medicines in the EU.
This public consultation launched today notably addresses:

The performance of the EU’s pharmaceutical legislation;
Unmet medical needs;
Incentives for innovation;
Antimicrobial resistance;
Future-proofing the regulatory framework for novel products;
Improved access to medicines;
Competitiveness of the European markets to ensure affordable medicines;
Repurposing of medicines;
Security of supply of medicines;
Quality and manufacturing of medicines;
Environmental challenges.

Background
The last comprehensive review of the general pharmaceutical legislation was tabled almost 20 years ago. Since then. societal and scientific changes, as well as new areas of concern such as antimicrobial resistance, environmental challenges and shortages of medicines, have emerged. In that context, the Pharmaceutical Strategy adopted in November 2020 includes an ambitious agenda of legislative and non-legislative actions to be launched over the coming years and has four main objectives:

Ensuring access to affordable medicines for patients, and addressing unmet medical needs (e.g. in the areas of antimicrobial resistance, cancer, rare diseases);
Supporting competitiveness, innovation and sustainability of the EU’s pharmaceutical industry and the development of high quality, safe, effective and greener medicines;
Enhancing crisis preparedness and response mechanisms, and addressing security of supply;
Ensuring a strong EU voice in the world, by promoting a high level of quality, efficacy and safety standards.

Compliments of the European Commission.
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Vaccination is the most effective response to the COVID pandemic. The United States and the EU are technological leaders in advanced vaccine platforms, given decades of investments in research and development.
It is vital that we aggressively pursue an agenda to vaccinate the world. Coordinated U.S. and EU leadership will help expand supply, deliver in a more coordinated and efficient manner, and manage constraints to supply chains. This will showcase the force of a Transatlantic partnership in facilitating global vaccination while enabling more progress by multilateral and regional initiatives.
Building on the outcome of the May 2021 G20 Global Health Summit, the G7 and U.S.-EU Summits in June, and on the upcoming G20 Summit, the U.S. and the EU will expand cooperation for global action toward vaccinating the world, saving lives now, and building better health security.
Pillar I: A Joint EU/US Vaccine Sharing Commitment: the United States and the EU will share doses globally to enhance vaccination rates, with a priority on sharing through COVAX and improving vaccination rates urgently in low and lower-middle income countries. The United States is donating over 1.1 billion doses, and the EU will donate over 500 million doses. This is in addition to the doses we have financed through COVAX.
We call for nations that are able to vaccinate their populations to double their dose-sharing commitments or to make meaningful contributions to vaccine readiness. They will place a premium on predictable and effective dose-sharing to maximize sustainability and minimize waste.
Pillar II: A Joint EU/US Commitment to Vaccine Readiness: the United States and the EU will both support and coordinate with relevant organisations for vaccine delivery, cold chain, logistics, and immunization programs to translate doses in vials into shots in arms. They will share lessons learned from dose sharing, including delivery via COVAX, and promote equitable distribution of vaccines.
Pillar III: A Joint EU/US partnership on bolstering global vaccine supply and therapeutics: the EU and the United States will leverage their newly launched Joint COVID-19 Manufacturing and Supply Chain Taskforce to support vaccine and therapeutic manufacturing and distribution and overcome supply chain challenges. Collaborative efforts, outlined below, will include monitoring global supply chains, assessing global demand against the supply of ingredients and production materials, and identifying and addressing in real time bottlenecks and other disruptive factors for global vaccine and therapeutics production, as well as coordinating potential solutions and initiatives to boost global production of vaccines, critical inputs, and ancillary supplies.
Pillar IV: A Joint EU/US Proposal to achieve Global Health Security. The United States and the EU will support the establishment of a Financial Intermediary Fund (FIF) by the end of 2021 and will support its sustainable capitalization.  The EU and United States will also support global pandemic surveillance, including the concept of a global pandemic radar. The EU and the United States, through HERA and the Department of Health and Human Services Biomedical Advanced Research and Development Authority, respectively, will cooperate in line with our G7 commitment to expedite the development of new vaccines and make recommendations on enhancing the world’s capacity to deliver these vaccines in real time.
We call on partners to join in establishing and financing the FIF to support to prepare countries for COVID-19 and future biological threats.
Pillar V: A Joint EU/US/Partners Roadmap for regional vaccine production. The EU and the United States will coordinate investments in regional manufacturing capacity with low and lower-middle income countries, as well as targeted efforts to enhance capacity for medical countermeasures under the Build Back and Better World infrastructure and the newly established Global Gateway partnership. The EU and the United States will align efforts to bolster local vaccine manufacturing capacity in Africa and forge ahead on discussions on expanding the production of COVID-19 vaccines and treatments and ensure their equitable access.
We call on partners to join in supporting coordinated investments to expand global and regional manufacturing, including for mRNA, viral vector, and/or protein subunit COVID-19 vaccines.
Compliments of the European Commission.
The post An U.S.-EU Agenda for Beating the Global Pandemic: Vaccinating the World, Saving Lives Now, and Building Back Better Health Security first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

From 26 September to 1 October, EU Executive Vice-Presidents Margrethe Vestager and Valdis Dombrovskis will be in the United States, where they will meet senior U.S. officials and participate in the first-ever meeting of the EU-U.S. Trade and Technology Council (TTC).
Executive Vice-President Dombrovskis will first travel to Washington, D.C., where he is speaking at an event on transatlantic cooperation organised by the Johns Hopkins University School of Advanced International Studies.(link is external) Executive Vice-President Vestager will first be in Los Angeles on Tuesday for a keynote at the Code Conference 2021.
While in Washington, Dombrovskis will also meet with International Monetary Fund Managing Director Kristalina Georgieva; Janet Yellen, Secretary of the Treasury; Jerome Powell, Chair of the Federal Reserve; Katherine Tai, United States Trade Representative; and Gina Raimondo, Secretary of Commerce. He will hold meetings with Ron Wyden, Chairman of the Senate Finance Committee, and Richard Neal, Chairman of the House Ways and Means Committee.
The Executive Vice-Presidents will then travel to Pittsburgh, where they will participate in the inaugural meeting of the EU-U.S. Trade and Technology Council, which was launched earlier this year by European Commission President Ursula von der Leyen and U.S. President Joe Biden.
Executive Vice-President Vestager will then head to New York where she will meet with UN Secretary General António Guterres before giving a keynote speech at the Fordham’s 48th Annual Conference(link is external) on International Antitrust Law and Policy. She will then meet with the acting assistant attorney general of the U.S. Department of Justice, Richard Powers. Dombrovskis will finish his visit in New York, as well, where he will participate in a Ministerial Meeting of the Global Forum on Steel Excess Capacity, as well as hold meetings with Special Envoy on Climate Michael Bloomberg and senior business leaders.
Compliments of the Delegation of the European Union to the United States.
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Introductory statement by Christine Lagarde, President of the ECB, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament (by videoconference) | Frankfurt am Main, 27 September 2021 |
Madam Chair,
Honourable members of the Economic and Monetary Affairs Committee,
Ladies and gentlemen,
It is a pleasure to be with you again today for the third regular hearing of the year.
In my confirmatory hearing before this Committee back in September 2019, I set out a goal: to ensure that the ECB engaged in a reflection on whether its monetary policy framework was sufficiently robust to meet future challenges.[1]
With the successful conclusion of our strategy review in July,[2] I believe we have achieved that goal. The review took the ECB’s mandate and primary objective of price stability, which is conferred by the Treaty, as a given. At the same time, we thoroughly looked at key aspects of citizens’ lives. We have recommended a roadmap to include the costs of owner-occupied housing in the Harmonised Index of Consumer Prices to better represent the inflation rate that is relevant for households. We have also developed a climate-related action plan to address the profound implications of climate change for price stability. Finally, we have modernised our external communication to make it more understandable to all citizens.
The review has been an 18-month-long journey involving an immense collective effort by staff across the Eurosystem, and I am particularly happy that this work has now been published in 18 Occasional Papers which were made available to the public on our website last week.[3] I would also like to reiterate my gratitude to this Committee for the important input it provided during the strategy review process.
In my remarks today, I will outline some of the key elements of our new strategy and provide an update on the outlook for the economy and for inflation, together with some reflections on our current monetary policy stance. Then, at the explicit request of this Committee, I will discuss the topic of financial dominance.
The ECB’s new monetary policy strategy in practice
Starting with our price stability objective, the new strategy incorporates two key innovations.
First, we have adopted what I would call a simple and clear symmetric inflation target of two per cent over the medium term. It is simple, easy to communicate and clear because it gives a well-defined yardstick to help us steer our monetary policy. And it is symmetric because both negative and positive deviations of inflation from the target are equally undesirable. We are convinced that this new formulation will avoid misperceptions about our reaction function when medium-term inflation is above or below the target and that it will better anchor inflation expectations.
The second important change is the recognition that, to maintain symmetry, the Governing Council needs to take into account the implications of the effective lower bound on nominal interest rates. In proximity to the lower bound, an especially forceful or persistent monetary policy response will be required.
In July we also revised our forward guidance on interest rates to bring it into line with the new strategic framework. The new formulation stipulates that the Governing Council will not consider raising rates unless three conditions have been met: first, we need to see inflation reaching two per cent well ahead of the end of the projection horizon; second, after convergence, inflation should be seen to be stabilising durably at the target through the end of the projection horizon; and third, realised progress in underlying inflation should, in our judgement, be sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term. Achieving these conditions may imply a transitory period in which inflation is moderately above our target.
Against the background of our new strategy, let me now focus on recent economic developments. In summary, it is evident that the economic recovery in the euro area is increasingly advanced. This is partly due to successful vaccination campaigns across Europe, which have prompted the easing of restrictions. This, in turn, has supported the rebound in economic activity, particularly in the services sector, which was hardest hit by the containment measures.
Consequently, the euro area economy rebounded by 2.2 per cent in the second quarter of the year, which was more than had been anticipated. We expect continued strong growth in the second half of 2021, enabling euro area output to exceed its pre-pandemic level by the end of the year. This positive short-term outlook is reflected in the September ECB staff projections, which foresee annual real GDP growth at 5.0 per cent in 2021, 4.6 per cent in 2022 and 2.1 per cent in 2023. The growth outlook continues to be uncertain and heavily dependent on the evolution of the pandemic, but risks to growth are broadly balanced.
Turning to inflation developments, which you have selected as a topic for this hearing, euro area inflation rose to 3.0 per cent in August and we expect it to rise further this autumn.
Nonetheless, we continue to view this upswing as largely temporary. A range of factors are currently pushing up inflation. Chief among them are the strong increase in oil prices since around the middle of last year, the reversal of the temporary VAT reduction in Germany, and cost pressures arising from temporary shortages of materials and equipment. The impact of these factors should dissipate in the course of next year. Although underlying price pressures have edged up over the summer, this is consistent with the opening up of the economy, which remains some distance away from operating at full capacity. As a result, the September ECB staff projections foresee annual inflation at 2.2 per cent in 2021 then moderating to 1.7 per cent in 2022 and 1.5 per cent in 2023.
While inflation could prove weaker than foreseen if economic activity were to be affected by a renewed tightening of restrictions, there are some factors that could lead to stronger price pressures than are currently expected. For example, if the temporary shortages of materials and equipment constrain production more persistently than we currently foresee, they could feed through more strongly along the pricing chain. Persistently high inflation could also result in higher than anticipated wage demands. But we are seeing limited signs of this risk so far, which means that our baseline scenario continues to foresee inflation remaining below our target over the medium term.
Favourable financing conditions are essential for the economy to continue its recovery and for inflation to converge durably to our target. We saw market interest rates ease over the summer but recently they have reversed this decline somewhat. However, bank lending conditions have remained very accommodative. Overall, this has left financing conditions for the economy remaining very favourable.
Thus, following a joint assessment of the inflation outlook and financing conditions, the Governing Council decided earlier this month to set a moderately slower pace of net asset purchases under the pandemic emergency purchase programme. We remain entirely committed to preserving these favourable financing conditions, which are necessary for a robust recovery that will restore inflation to its pre-pandemic level.
Financial stability considerations in our new monetary policy strategy
I will now turn to the second topic which you have selected for this hearing, namely the risk of financial dominance.
Financial dominance occurs when central banks delay the removal of monetary policy accommodation for longer than appropriate, in order to avoid market turmoil. Let me be clear on this. The ECB has a very clear primary mandate which is stipulated in the Treaty: price stability. As stipulated by the Treaty, any other consideration should be subordinate and without prejudice to delivering on our primary mandate.
Regarding the stability of the financial sector, our new strategy explicitly considers the interactions of price stability and financial stability, reflecting our belief that each is a precondition for the other.
To start with, the strategy recognises that macroprudential policy, along with microprudential supervision, is the first line of defence against the build-up of financial imbalances. Indeed, effective macroprudential policy can address such risks more directly in a targeted fashion, and thereby reduce the burden that would be placed on monetary policy.
Nonetheless, given that the macroprudential framework in the euro area is incomplete, and given the interaction between macroprudential and monetary policy, the Governing Council monitors and analyses financial stability risks and their potential to jeopardise price stability over the long haul. Indeed, a careful analysis of the potential side effects of our monetary policy for the health and stability of financial intermediaries is an integral part of the proportionality assessment that we regularly conduct to test whether the policy measures in place remain appropriate.
Let me give you a concrete example of how we consider the linkages between financial stability and price stability. Household mortgages have been excluded from the pool of loans considered eligible for use as collateral under the targeted longer-term refinancing operations (TLTROs). These operations allow us to support bank lending – a key condition in the current circumstances for a durable return of inflation to the target – while containing the risk that credit extension might fuel unsustainable house price increases.
In synthesis, a systematically proportionate response to shocks is a precondition for minimising financial stability risks and, as a result, threats of financial dominance. At the same time, a coordinated macroprudential policy response across the euro area remains vital to strengthen the impact of policy actions and to support monetary policy.
Conclusion
Let me conclude. Our new strategy addresses the challenges that have emerged since the ECB announced the outcome of its previous strategy review in 2003, including the decline in the equilibrium real interest rate, the expectation that this rate will remain low and the deflationary bias induced by the effective lower bound.
And it also responds to other structural changes in the economy – an important one being climate change, as this Parliament has continuously reminded us in its Resolutions on the ECB Annual Reports. The Governing Council agreed on the need to take climate change risks into account when designing and implementing our monetary policy. That will help us make better decisions. The detailed action plan sets out an ambitious timeline and outlines a wide range of actions, encompassing many areas of the ECB’s activity, and ultimately aims to consistently integrate climate change considerations in all aspects of the ECB’s monetary policy.[4]
Moreover, to further enhance our transparency and ensure that we are aware of citizens’ expectations and concerns in relation to our policies, we have modernised our communication policy and we will make outreach events a structural feature of our interaction with the public. But our efforts to ensure that we are accountable to European citizens do not stop there. This Parliament will continue to be our main interlocutor and your role in making sure that the people’s voices are heard by the ECB and that the ECB’s voice is heard by the people remains crucial to foster understanding of and trust in our policies.
Finally, two years after my first appearance before this Committee, I remain fully convinced of the need for an “open mind” to ensure that the ECB keeps delivering on its mandate in rapidly changing circumstances. We therefore intend to assess the appropriateness of our monetary policy strategy periodically, with the next assessment expected in 2025.
Thank you for your attention. I now stand ready to take your questions.
Compliments of the European Central Bank.
The post ECB Speech | Hearing of the Committee on Economic and Monetary Affairs of the European Parliament first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, today launches a consultation on proposals for improvements to the MiFID II framework on best execution reports. These proposals aim at ensuring effective and consistent regulation and supervision and enhancing investor protection.

ESMA’s proposals include technical changes to:

 the reporting obligations for execution venues:

aimed at simplifying the reporting requirements by reducing the granularity and volume of data to be reported; and
moving to a set of seven indicators aimed at disclosing meaningful information to help firms to assess venues’ execution quality; and

the reporting requirements for firms: focusing mainly on clarifying the requirements for firms that transmit client orders or decisions to deal to third parties for execution.

In addition, it proposes amendments to the relevant provisions of the MiFID II legislative framework to enable these technical changes to come into effect in the future.
Stakeholders are invited to provide their responses by 23 December 2021.
Next Steps
Since ESMA’s technical proposals can only be implemented after the relevant provisions of MiFID II have been amended, the outcome of this consultation will not lead to any immediate change of the existing RTSs 27 and 28 which currently regulate best execution reporting by execution venues and investment firms.
However, ESMA will consider the input received in supporting the European Commission in its assessment of the adequacy of the best execution reporting obligations, and any subsequent technical work to shape a well-functioning reporting regime.
Compliments of ESMA.

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At the UN High-Level Dialogue on Energy this week in New York, Executive Vice-President for the European Green Deal, Frans Timmermans and Commissioner for Energy, Kadri Simson presented three Energy Compacts, in partnership with the International Energy Agency and the International Renewable Energy Agency. In their roles as Energy Access Champion and Just Transition Champion in this UN process respectively, the Executive Vice-President and the Commissioner highlighted the EU’s willingness to lead the global efforts to reach universal energy access by 2030 and accelerate the clean energy transition, and showed concretely how the European Green Deal plays a role on the global stage.
Executive Vice-President Frans Timmermans, said: “Clean energy is more affordable now than ever, so the time is ripe to break the global dependence on fossil fuels. Recovery from the pandemic gives us an opportunity to transition faster and to build new energy systems based on renewables. It is important that we address these issues at this moment of recovery and cooperate to accelerate the global energy transition.”
Commissioner for Energy, Kadri Simson, said: “The EU is supporting the global dialogue on just transition based on our own experience in moving away from coal. We are inviting other donors, International Financial institutions and investors to take these steps with us, to turn roadmaps and strategies into projects which bring clean energy and sustainable jobs.”
The three UN Compacts which the Commission announced will contribute to mobilising the investments necessary to reach universal energy access and to accelerate the clean energy transition around the world.

Firstly, a new project with the International Energy Agency (IEA) will prepare zero emission energy roadmaps for countries dependent on coal. The roadmaps will propose inclusive pathways for energy system decarbonisation that ensure a just, socially fair transition that leaves nobody behind, while ensuring security of energy supply and growing energy access.
Secondly, we will cooperate with the International Renewable Energy Agency (IRENA) to prepare Regional Energy Transition Outlooks for Africa, Latin America and the Caribbean and Europe. They will provide a thorough analysis of the regions’ potential and options in terms of renewable energy, energy efficiency, infrastructure, energy access and cross-border cooperation, as well as an assessment of investment needs and socio-economic impact. They will include concrete policy recommendations to achieve the Sustainable Development Goal on energy, in line with the 1.5 degree Paris objective.
Thirdly, we will work with Denmark, Germany, IRENA and other partners on a Green Hydrogen Compact Catalogue. This will be designed to give a boost to green hydrogen worldwide, including a commitment to cooperate on renewable hydrogen development with the African Union in the framework of the Africa-Europe Green Energy Initiative.

The three Compacts are strongly linked to EU’s climate and energy priorities, in particular universal energy access, just transition, and the promotion of renewable energy, including green hydrogen. The Compacts will contribute to achieving the global clean energy transition and complement the EU’s commitments on climate finance.
The roadmaps and regional energy transition outlooks to be developed by the IEA and IRENA with targeted countries and regions will provide opportunities for guiding EU’s further energy policy orientations and investment cooperation. The roadmaps and outlooks will also support the Africa-EU Green Energy Initiative, to be launched next year.
Background
The UN High-Level Dialogue on Energy, taking place from 22 to 24 September 2021 (virtual), is the first UN gathering on energy since 1981. It aims at accelerating the achievement of Sustainable Development Goal 7 in support of the Decade of Action ahead of COP26. The main outcomes of the dialogue will include a global roadmap based on the recommendations of the Working Groups to achieve universal global access by 2030 and net zero emissions by 2050, and a series of “Energy Compacts” that present multi-stakeholder partnerships and voluntary commitments from Member States and non-state actors. The High-Level Dialogue is structured around five themes, supported by global champions, including EVP Timmermans (energy access) and Commissioner Simson (enabling the SDGs through inclusive and just energy transitions).
On the first day of the High-Level Dialogue, Executive Vice-President Timmermans delivered a speech during the panel on “Energy as a golden thread: a means to deliver on domestic and international priorities and goals”. Today, 24 September, he also participates in the leadership dialogue “Accelerating action to achieve universal energy access and net zero emissions.”
On 22 September, Commissioner Simson intervened with a speech at the session “Knowledge into Action: Advancing a just and inclusive energy transition that also addresses achieving universal energy access.”
In both keynote interventions, they outlined the European Green Deal ambition to make Europe the first climate-neutral continent by 2050 and to achieve a 55% reduction in greenhouse gas emissions emissions in the EU by 2030, presented in an ambitious package of legislative proposals on 14 July 2021.
Compliments of the European Commission.
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