The role of sectoral developments for wage growth in the euro area since the start of the pandemic

The economic consequences of and policy responses to the pandemic pose challenges for interpreting wage developments. Aggregate wage growth is mostly assessed in terms of compensation per employee or compensation per hour worked.[1] The coronavirus (COVID-19) pandemic has led to a substantial divergence between compensation per employee and compensation per hour. The high number of workers on job retention schemes played a decisive role in these developments, especially via the implications for hours worked per person. Such schemes tend to have a downward effect on compensation per employee, as employees usually retain their employment status but, in most countries, face pay cuts when enrolling in these schemes. Moreover, the benefits of such schemes are not included in statistical measures of compensation where they are directly paid to employees.[2] At the same time, such schemes have an upward effect on compensation per hour, as hours worked tend to be reduced far more strongly than pay.
Year-on-year growth in compensation per employee (CPE) dipped sharply at the start of the pandemic but was back at pre-crisis rates in the first quarter of 2021. This strong V-shaped pattern obviously mirrors the pattern of economic activity, but it is unusual in the sense that it has been driven mainly by adjustments in compensation and less by changes in employment (Chart A). By comparison, while the number of employees declined at a rate comparable to that during the great financial crisis, the total compensation of employees was clearly adjusting much more than back then. This can be explained by the more decisive role that job retention schemes played this time round. The schemes helped to preserve the employment status of employees but also came with some reduction in compensation as, in most countries, not all of the lost hours were reimbursed through the schemes and payments from these were mostly recorded as transfers rather than compensation.[3] As the economy recovered, hours worked normalised and the recourse to job retention schemes receded – leading to an adjustment in compensation. In the first quarter of 2021 zero annual growth of compensation and a still negative year-on-year growth rate in the number of employees brought CPE growth to 1.9% – close to its long-term average (since 1999) of 2.0%.

Chart A
Decomposition of growth in compensation per employee in the euro area
(annual percentage changes)
Sources: Eurostat and ECB staff calculations.
Notes: The latest observations are for the first quarter of 2021. For both panels, the series for employees is inverted, meaning that positive numbers reflect a reduction of the number of employees in year-on-year terms while negative numbers reflect an increase.

The movements in aggregate CPE growth conceal some notable sectoral differences (Chart B). With the onset of the crisis, wage growth slumped in the second quarter of 2020 to a similar extent in market services, industry (excluding construction) and construction. The third quarter saw a general recovery in wage growth which continued into early 2021 for industry and construction, while wage growth in market services experienced a second, albeit smaller, hit in the fourth quarter of 2020 as the pandemic necessitated a renewed period of lockdown that mainly affected service sector jobs. Within the services sector, non-market services stood out throughout the pandemic in the sense that wage growth remained close to its pre-crisis level until summer 2020 and even increased substantially in the second half of 2020 (reaching 3.7% in the fourth quarter) before falling back to 2.2% in the first quarter of 2021. Special bonuses in particular for employees in the health sector linked to their high workload, which were granted in many euro area countries, played an important role in the strong wage growth in non-market services in the second half of 2020. Overall, the dispersion of CPE growth has remained higher than during pre-pandemic times – underlining the importance of taking sectoral developments into account when analysing aggregate wage growth.

Chart B
Growth in compensation per employee in the euro area by main sector
(annual percentage changes)
Sources: Eurostat and ECB staff calculations.
Notes: The latest observations are for the first quarter of 2021. “Non-market services” includes public administration, defence, education, health and social work activities.

The differences in sectoral developments in CPE growth reflect the differences in the extent to which sectors were affected by the pandemic and the measures taken to contain it, in particular the recourse to job retention schemes. Contrary to previous crises, the pandemic hit the market services sector hardest, as a large part of its activity was especially affected by restrictions to physical mobility and lockdown measures. Harmonised data concerning the reliance on job retention schemes in the different sectors are not available for the whole euro area, but the relative adjustments in employment and hours worked per employee can provide some crude indication (see Chart C). In the second quarter of 2020 all sectors saw a large relative adjustment in hours worked per employee compared with employment. In construction, employment contracted only slightly, and the situation normalised again quite quickly from the third quarter of 2020 onwards. The industrial sector experienced a more substantial reduction in employment, which persisted until the first quarter of 2021, while hours worked per person normalised more quickly. The implied reduced recourse to job retention schemes was then visible in the continued recovery of compensation of employees. The market services sector was hit hardest with the largest losses in employment which, like those in industry, persisted until the first quarter of 2021. However, in contrast to the other sectors, hours worked per employee dipped again relative to employment in the fourth quarter of the year, implying a further decrease in compensation of employees in line with a renewed recourse to job retention schemes. There were no employment losses in non-market services during the crisis, and the reduction in hours worked per employee in the second quarter of 2020 was accompanied by only small losses in compensation of employees. This sector was characterised by considerable resilience in compensation of employees and wage growth relative to the other sectors.

Chart C
Sectoral developments in compensation per employee growth in the euro area
(annual percentage changes)
Sources: Eurostat and ECB staff calculations.
Notes: The latest observations are for the first quarter of 2021. “Non-market services” includes public administration, defence, education, health and social work activities.

The asymmetric impact of the pandemic is even more visible when distinguishing within the market services sector between high and low-contact services. As the restrictions introduced to contain the spread of the pandemic were aimed at reducing especially interpersonal contacts, high-contact services (including wholesale and retail trade, transport, accommodation and food service activities) suffered more than low-contact services (such as information and communication, finance and insurance, and real estate, among others). While CPE growth was hit substantially in both sub-sectors during 2020, the effects were far more pronounced for high-contact services owing to a much higher reduction in hours worked per employee given the stronger role of job retention schemes. CPE growth in low-contact services has been positive again since the third quarter of 2020, standing at 2.0% in the first quarter of 2021, up from 0.8% and 1.0% in the third and fourth quarters of 2020 respectively. However, CPE growth continued to be negative for high-contact services, as a result of pandemic restrictions affecting especially this sub-sector (Chart D).

Chart D
Wage developments in high and low-contact market services in the euro area
(annual percentage changes)
Sources: Eurostat and authors’ calculations.
Notes: “High-contact market services” comprises wholesale and retail trade, transport, accommodation and food services. “Low-contact market services” corresponds to market services excluding high-contact market services. The latest observations are for the first quarter of 2021.

The effects of the pandemic on growth in compensation per employee are expected to continue shaping wage developments in 2021 and across all sectors. The massive decrease in CPE growth in the second quarter of 2020 can be expected to lead to strong base effects in CPE growth in the second quarter of 2021. Such upward base effects can be expected to be strongest in the sectors hit most severely during the pandemic – namely high-contact services – but will also play an important role in other sectors. As labour markets are projected to gradually recover over the coming years and the impact of job retention schemes wanes, developments in compensation per employee should normalise in the main sectors of the economy. Going forward, a key question is whether sectoral wage negotiations will aim to make up for temporary losses in compensation during the pandemic at least partly and in some sectors, which could add to wage growth over the next years.
Authors:

Gerrit Koester
Eduardo Gonçalves

Compliments of the European Central Bank.

See the box entitled “Assessing wage dynamics during the COVID-19 pandemic: can data on negotiated wages help?”, Economic Bulletin, Issue 8, ECB, 2020.

See also the box entitled “Short-time work schemes and their effects on wages and disposable income”, Economic Bulletin, Issue 4, ECB, 2020.

See the box entitled “Developments in compensation per hour and per employee since the start of the COVID‑19 pandemic” in the article entitled “The impact of the COVID-19 pandemic on the euro area labour market”, Economic Bulletin, Issue 8, ECB, 2020.

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Assessing Progress as the Economy Moves from Reopening to Recovery, Governor Lael Brainard at “Rebuilding the Post-Pandemic Economy” 2021 Annual Meeting of the Aspen Economic Strategy Group, Aspen, Colorado |
The economy is reopening, consumer spending is strong, and hundreds of thousands of workers are finding jobs in the hard-hit leisure and hospitality sector each month. Pent-up demand has outstripped capacity in some sectors, as businesses that had pared back to survive the pandemic are encountering bottlenecks as they rehire and restock.1 These mismatches have made it more difficult to interpret the first few months of reopening data.
The second quarter of 2021 saw a large wave of demand buoyed by fiscal transfers, resulting in annualized real personal consumption expenditures (PCE) growth of 11.8 percent. Real gross domestic product grew at an annual rate of 6.5 percent in the second quarter of 2021, slightly less than many forecasters had projected, as that strong consumer demand outstripped production, resulting in a significant decline in inventories.
The tailwinds to growth from the fiscal stimulus during the first half are shifting to headwinds that will continue through the remainder of 2021 and 2022. Even so, pent-up consumption and full reopening are expected to more than offset fiscal headwinds in the second half such that PCE is expected to grow at a robust rate, and growth is expected to remain strong through the remainder of the year. By the end of the year, the U.S. economy is expected to achieve average annualized growth of 2.2 percent since the onset of COVID-19—slightly above most estimates of longer-term potential output growth. In short, growth this year is expected to compensate fully for last year’s sharp contraction—as a result of the strong policy response, effective vaccines, and the resilience and adaptability of American households, workers, and businesses.
While we are seeing progress on employment, joblessness remains high and continues to fall disproportionately on African Americans and Hispanics and lower-wage workers in the services sector.
Last December, the Committee indicated that asset purchases would continue until substantial further progress toward our employment and inflation goals had been achieved. The June data showed that there is a shortfall of 6.8 million jobs relative to the pre-pandemic level and 9.1 million jobs relative to the pre-pandemic trend, respectively. The employment-to-population (EPOP) ratio is 3.2 percentage points short of its pre-pandemic level for prime-age workers, a group that is not affected by the elevated level of early retirements during the pandemic. Thus, as of June, we had closed between one-fourth and one-third of the employment shortfall relative to last December according to a variety of measures.
Although the EPOP ratio for Black individuals has improved more strongly than the overall ratio over the course of 2021, closing about 40 percent of the December gap, it remains more than 3 percentage points below its pre-pandemic level and more than 2 percentage points below the current level of the EPOP ratio for white individuals.
Currently, it is difficult to disentangle the effects on labor supply of caregiving responsibilities brought on by the pandemic, fears of contracting the virus, and the enhanced unemployment insurance that was designed in part to address such constraints. Importantly, I expect to be more confident in assessing the rate of progress once we have data in hand for September, when consumption, school, and work patterns should be settling into a post pandemic normal.
I fully expect progress to continue, ultimately leading to a labor market as strong or stronger than we saw before the pandemic. Looking ahead, if jobs were to continue to increase at the second-quarter average monthly pace, about two-thirds of the outstanding job losses as of December 2020 and nearly half of the gap relative to the pre-pandemic trend would be made up by the end of 2021. If, instead, the rate of job growth were to accelerate notably, those levels could be reached somewhat sooner.
Today’s data showed that core PCE inflation rose 0.45 percent in June, once again driven by outsized contributions from a handful of categories. New and used vehicles contributed just under 40 percent of the June increase in core PCE, while price increases for travel-related items like hotels, airfares and rental cars contributed another 25 percent.2 All told, price increases associated with vehicles and vacations, categories that comprise about 8 percent of the core PCE basket, were responsible for over 60 percent of the June core PCE price increase.
Recent high inflation readings reflect supply–demand mismatches in a handful of sectors that are likely to prove transitory. In assessing inflation, an annualized 24-month measure that looks through the steep declines and subsequent rebound in prices in categories affected by the pandemic currently has core PCE inflation running at 2.3 percent and headline PCE inflation running at 2.4 percent. It is reasonable to expect these measures to remain near those levels for much of the rest of the year. By comparison, this 24-month measure was running at 1.6 percent in December 2020.
I am attentive to the risk that inflation pressures could broaden or prove persistent, perhaps as a result of wage pressures, persistent increases in rent, or businesses passing on a larger fraction of cost increases rather than reducing markups, as in recent recoveries. I am particularly attentive to any signs that currently high inflation readings are pushing longer-term inflation expectations above our 2 percent objective.
Currently, I do not see such signs. Most measures of survey- and market-based expectations suggest that the current high inflation pressures are transitory, and underlying trend inflation remains near its pre-COVID trend. Since the June FOMC meeting, five-year, five-year-forward inflation compensation based on Treasury Inflation-Protected Securities has declined a little less than 20 basis points, on net, and it currently stands at 2.2 percent, at the low end of its range of values prior to the 2014 decline. The second-quarter reading from the Federal Reserve Board’s index of common inflation expectations stands at 2.05 percent, which is at the bottom of the range that prevailed from 2008 to 2014, when 12-month total PCE inflation averaged 1.7 percent.3
Many of the forces currently leading to outsized gains in prices are likely to dissipate by this time next year. Current tailwinds from fiscal support and pent-up consumption are likely to shift to headwinds, and some of the outsized price increases associated with acute supply bottlenecks may ease or partially reverse as those bottlenecks are resolved. Lumber prices have fallen, wholesale used car prices appear to have peaked, and auto semiconductor production is projected to expand.
While there is good reason to expect that the inflation dynamics that prevailed for a quarter-century will reassert themselves on the other side of reopening, I will remain vigilant to any signs that inflationary pressures are likely to prove more persistent or that expectations are moving above target. If inflation moves persistently and materially above our target, we would adjust policy to guide inflation gently back to target.
There are risks on both sides of the outlook. There are upside risks to consumption spending associated with the high level of households’ savings. There are downside risks associated with the Delta variant. While the economy’s momentum is strong, vaccination rates remain low in some areas, and fears related to the Delta variant may damp the rebound in services and complicate the return to in-person school and work in some areas and slow the rotation from goods to services that account for three- fourths of the shortfall in jobs
In coming meetings, we will continue to assess progress and the conditions under which it will be appropriate to start paring back the pace of our asset purchases. Twenty-four-month core PCE inflation is now running at a 2.3 percent average annualized rate. In contrast, employment is still down by 6.8 million to 9.1 million relative to its pre-COVID level and trend, respectively, and it has closed about one-fourth to one-third of its December gap. The determination of when to begin to slow asset purchases will depend importantly on the accumulation of evidence that substantial further progress on employment has been achieved. As of today, employment has some distance to go.
It is important to emphasize that the achievement of substantial progress that will determine when the Committee starts reducing the pace of asset purchases is distinct from the maximum employment and inflation outcomes that are in the forward guidance for the policy rate. Remaining attentive to changing conditions and steady in our step-by-step approach to implementing policy under our new framework should ensure that the economy’s momentum is sufficient when tailwinds shift to headwinds to achieve and sustain maximum employment and inflation robustly anchored at 2 percent.
Compliments of the U.S. Federal Reserve.

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

2. The notable gap between the June PCE reading and the CPI reading is due, in part, to the lower weighting of vehicles in the PCE measure. Return to text

3. For more information about the index of common inflation expectations (CIE), see Hie Joo Ahn and Chad Fulton (2020), “Index of Common Inflation Expectations,” FEDS Notes (Washington: Board of Governors of the Federal Reserve System, September 2), https://doi.org/10.17016/2380-7172.2551. The CIE data are available through the second quarter on the Board’s website at https://www.federalreserve.gov/econres/notes/feds-notes/research-data-series-index-of-common-inflation-expectations-20210305.htm. Return to text

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History moves in uneven steps. Just as the telegraph erased time and distance in the 19th century, today’s innovations in digital money may bring significant changes in the way we lead our lives. The shift to electronic payments and social interactions brought on by the pandemic may cause similarly rapid and widespread transformations.

‘The challenges are significant, and so is the potential reward. But policy action must begin immediately.’

But we must look beyond the dazzle of technology and the alluring image of futuristic payment services. At the IMF, we must identify and help countries solve the deeper policy tradeoffs and challenges that are arising.
The rapid pace of change is a call to action—for countries to guide, and not be guided by, today’s transformations. It is also important for the IMF to engage early with countries, and usher in reforms that will contribute to the stability of the international monetary system, and foster solutions that work for all countries. There is a window of opportunity to maintain control over monetary and financial conditions, and to enhance market integration, financial inclusion, economic efficiency, productivity, and financial integrity. But there are also risks of stepping back on each of these fronts. We must enact the right policies today to reap the gains tomorrow.
We emphasize this in two papers published today, one on the new policy challenges, and one on an operational strategy for the Fund to engage with countries on the digital money revolution.
Digital money developing rapidly
Digital forms of money are diverse and evolving swiftly. They include publicly issued central bank digital currencies (CBDC)—think of these as digital cash, though not necessarily offering the same anonymity to avoid illicit transfers. Private initiatives are also proliferating, such as eMoney (like Kenya’s mobile money transfer service MPesa) and stablecoins (digital tokens backed by external assets, like USD-coin and the proposed Diem). These are digital representations of value that can be transferred at the click of a button, in some cases across national borders, as simply as sending an email. The stability of these means of payment, when measured in national currencies, varies significantly. The least stable of the lot, which hardly qualify as money, are cryptoassets (such as Bitcoin) that are unbacked and subject to the whims of market forces.
These innovations are already a reality, and growing rapidly. According to IMF data, CBDCs are being closely analyzed, piloted, or likely to be issued in at least 110 countries. Examples range from the Bahamas’ Sand Dollar already in use, to the People’s Bank of China’s eCNY pilot project, to countries like the United States where the benefits and drawbacks of a digital dollar are still being studied. Stablecoins, still esoteric two years ago, tripled in value in the last six months (from $25 billion to $75 billion), while cryptoassets doubled (from $740 billion to $1.4 trillion). And adoption is global. eMoney accounts are not only growing much more rapidly in low- and middle-income countries than in the rich ones, but are now also more numerous. Africa, in particular, is leading the way.
Opportunities are immense. A local artisan can receive payments more cheaply, potentially from foreign customers, in an instant. A large financial conglomerate can settle asset purchases much more efficiently. Friends can split bills without carrying cash. People without bank accounts can save securely and build transaction histories to obtain micro-loans. Money can be programmed to serve only certain purposes, and be accessed seamlessly from financial and social media applications. Governments can tax and redistribute revenues more efficiently and transparently.
Policy implications—opportunities and challenges ahead
We may well reap these benefits, but we must be aware of risks, and—importantly—of the bigger policy implications and tradeoffs. The challenges to policymakers are stark, complex, and widespread.
The most far-reaching implications are to the stability of the international monetary system. Digital money must be designed, regulated, and provided so that governments maintain control over monetary policy to stabilize prices, and over capital flows to stabilize exchange rates. These policies require expert judgment and discretion and must be taken in the interest of the public. Payment systems must grow increasingly integrated among countries, not fragmented in regional blocs. And it is essential to avoid a digital divide between those who gain from digital money services and those left behind. Moreover, the stability and availability of cross-border payments can support international trade and investment.
There are also implications for domestic economic and financial stability. The public and private sectors should continue to work together to provide money to end-users, while ensuring stability and security without stifling innovation. Banks could come under pressure as specialized payment companies vie for customers and their deposits, but credit provision must be sustained even during the transition. And fair competition must be upheld—not an easy task given the large technology companies entering the world of payments. Moreover, governments should leverage digital money to facilitate the transfer of welfare benefits or the payment of taxes. Scope even exists to bolster financial inclusion by decreasing costs to access payment and savings services.
Finally, new forms of money must remain trustworthy. They must protect consumers’ wealth, be safe and anchored in sound legal frameworks, and avoid illicit transactions.
The challenges are significant, and so is the potential reward. But policy action must begin immediately. This is the time to establish a common vision for the future of the international monetary system, to strengthen international collaboration, and to enact policies and establish legal and regulatory frameworks that will drive innovation for the benefit of all countries while mitigating risks.
Choosing the right path now is critical. Regulation, market structure, product features, and the role of the public sector can quickly ossify around less desirable outcomes. Backtracking later can be very costly.
The IMF has a mandate to help ensure that widespread adoption of digital money fosters domestic economic and financial stability, and the stability of the international monetary system. We plan to engage regularly with country authorities to evaluate country-specific policies, provide capacity development to avoid a digital divide, and develop analytical foundations to identify policy options and tradeoffs.
To do so, the IMF must deepen its expertise, widen its skillset, ramp up resources, and leverage its near universal membership. Still, we cannot do this alone. The challenges are so complex and multifaceted, that collaborating closely with other stakeholders is necessary. The World Bank, the Bank for International Settlements along with its Innovation Hub, international working groups and standard-setting bodies, as well as national authorities, are all complementary partners, each with its specific mandate and skillset. By joining hands, we will help households and firms leverage the benefits and avoid the pitfalls of the digital money revolution.
Authors:

Tobias Adrian
Tommaso Mancini-Griffoli

Compliments of the IMF.
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New data, released today, underlines the importance of the two-pillar plan being advanced by over 130 members of the OECD/G20 Inclusive Framework on BEPS to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate.
The data, released in the OECD’s annual Corporate Tax Statistics publication, shows the importance of the corporate tax as a source of government revenues, while also pointing to evidence of continuing base erosion and profit shifting behaviours.
Under the two-pillar solution to address the tax challenges arising from the digitalisation of the economy, Pillar One would re-allocate some taxing rights over multinational enterprises (MNEs) from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there. Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.
The data released today show that the corporate income tax is an important source of tax revenues for governments to fund essential public services, especially in developing and emerging market economies. On average, the corporate income tax accounts for a higher share of total taxes in Africa (19.2%) and in Latin America and the Caribbean (15.6%) than in OECD countries (10%).
The data also show that statutory corporate income tax (CIT) rates have been decreasing in almost all countries over the last two decades. Across 111 jurisdictions, 94 had lower CIT rates in 2021 compared with 2000, while 13 jurisdictions had the same tax rate, and only 4 had higher tax rates. The average combined (central and sub-central government) statutory CIT rate for all covered jurisdictions declined from 20.2% in 2020 to 20.0% in 2021, compared to 28.3% in 2000. These declining rates highlight the importance of Pillar Two, which will put a multilaterally agreed limit on corporate tax competition.
New Country-by-Country Reporting data also provides aggregated information on the global tax and economic activities of around 6000 MNE groups headquartered in 38 jurisdictions and operating across more than 100 jurisdictions worldwide. Country-by-Country reports (CbCRs), which are a major output under the OECD/G20 BEPS Project, provide tax authorities with the information needed to analyse MNE behaviour for risk assessment purposes. The release of today’s anonymised and aggregated statistics will continue to support the improved measurement and monitoring of BEPS.
The data contain some limitations1 and comparability between the 2016 and 2017 data is limited. Nonetheless, the new statistics suggest continuing misalignment between the location where profits are reported and the location where economic activities occur. This can be seen through differences in profitability, related-party revenues, and business activities of MNEs in investment hubs and zero-tax jurisdictions compared to MNEs in other jurisdictions. While these effects could reflect some commercial considerations, they are also indicate the existence of BEPS.
Evidence of continuing BEPS behaviours as well as the persistent downward trend in statutory corporate tax rates reinforce the need to finalise agreement and begin implementation of the two-pillar approach to international tax reform.
This year’s database also includes new indicators highlighting the use of tax incentives for research and development (R&D) investments. The indicators, which are accompanied by a new working paper, show that in 2020, among OECD countries offering tax support, R&D tax incentives decrease the effective tax rate on R&D investments by around 10 percentage points on average, compared to non-R&D investments.

The publication and data are accessible at: https://oe.cd/corptaxstats

A list of Frequently Asked Questions on CbCR is available at: https://oe.cd/corporate-tax-stats-CbCR-FAQ

1 These limitations are described in the disclaimer accompanying the data, available at: www.oecd.org/tax/tax-policy/anonymised-and-aggregated-cbcr-statistics-disclaimer.pdf

Contacts:

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration (CTPA) | pascal.saint-amans[at]oecd.org

Pierce O’Reilly, Head of CTPA’s Business and International Taxes Unit | pierce.oreilly[at]oecd.org

CTPA’s Communications Office | ctp.communications[at]oecd.org

Compliments of the OECD.
The post New OECD data highlights the importance of the international tax reform discussions first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Despite the tragic loss of life and immense challenges brought on by the pandemic, the US economy is making a remarkable recovery. The Biden administration’s proposed spending plans will add momentum, raising GDP by more than 5 percent from 2022 to 2024, and will create a lasting impact by increasing productivity and labor force participation.
The economic impact of the American Jobs Plan (AJP) and American Families Plan (AFP) was the focus of the IMF’s annual economic and policy review of the United States. After completing discussions with the country’s authorities, IMF staff issued a statement today summarizing their conclusions, which will be discussed by the IMF’s Executive Board on July 16.
The AJP and AFP will increase spending and tax expenditures by US$4.3 trillion over the next decade (about 18.7 percent of 2021 GDP), although the final size and composition of these plans will be subject to negotiation in the US Congress. The spending would be partly financed by raising taxes on corporate profits and high‑income households.
Addressing key challenges
The proposed plans are designed to address a range of challenges that have held back the economy. Many of these challenges have been magnified by the pandemic, which has worsened income inequality and had a disproportionate impact on historically marginalized groups. In this context, the AJP and AFP would make substantial investments in both physical and human capital to help alleviate these disparities and create greater opportunities for economic advancement. Significant investments in infrastructure, research and development, education, childcare, and in-home care would increase productivity and support participation in the labor force. The proposals for a refundable child tax credit, expanded earned income tax credit, and expanded healthcare coverage would reduce poverty and support lower-income groups.

The output impact
Overall, IMF staff estimate that the AJP and AFP will add a cumulative 5.3 percent to the level of US GDP during 2022-24, as spending ramps up over the next few years. This estimate takes into account how different types of government spending have different ‘fiscal multipliers,’ meaning that they affect the economy in distinct ways and to varying degrees. For example, cash transfers to households, such as the child tax credit, are likely to boost spending in the economy, while childcare support may also increase participation of parents in the labor force. Spending on the construction of physical infrastructure, research and development, and education may raise productivity over a longer horizon.
IMF analysis also shows that there is some uncertainty around the exact size and timing of these economic effects, which is reflected in the range of estimates produced by economic models, including the IMF’s G20MOD model and the Federal Reserve’s SIGMA model.
The inflation and debt sustainability implications
Inflation has been at high levels in recent months, but it is expected to decline over the rest of this year, as temporary inflationary factors subside. Starting next year, the proposed fiscal plans are expected to add moderate inflation pressures. The fiscal packages will be rolled out gradually over a ten-year window and are expected to boost the supply capacity of the economy, which will help alleviate concerns that the boost to demand will fuel underlying inflation. Overall, inflation is forecast to be around 2.5 percent by end-2022. The US has adequate fiscal space to implement these spending plans, although additional steps will be needed over the medium term to bring down public debt.
An inclusive recovery
The US recovery must be inclusive, and its benefits should be shared by all of society. As the pandemic recedes and the economy rebounds, it is more important than ever to support communities that have been historically underserved, marginalized, or affected by poverty. The proposed spending and tax changes will benefit female-headed households, who make up a disproportionate share of the poor, as well as Black and Hispanic families. Research has shown the importance of childcare support, universal pre-school, and generous “work-based” tax credits in supporting more women, minorities, and lower income workers to participate in the labor force. Investment in much-needed physical infrastructure should also benefit marginalized communities. The boost to productivity that these investments will produce can support more jobs with sustainably higher wages, in a more equitable economy.
Authors:

Andrew Hodge
Li Lin

Compliments of the IMF.
The post IMF | Boosting the Economy: The Impact of US Government Spending Plans first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Economy and finance ministers today welcomed the assessment of national recovery and resilience plans for Croatia, Cyprus, Lithuania and Slovenia. The Council will adopt its implementing decisions on the approval of these plans by written procedure shortly after the informal ministers’ meeting held today.
Following the formal adoption of the decisions, this second batch of member states will be able to use the facility’s funds to foster their economic recovery from the COVID-19 pandemic. All four member states requested pre-financing from their allocated funds, which will be disbursed after the signing of bilateral grant and loan agreements.

Good news for four more member states – Croatia, Cyprus, Lithuania and Slovenia. Following the approval of first 12 decisions on national plans earlier this month, we swiftly continued our work so that these member states could start receiving support for implementing their planned reforms and investments as soon as possible. We have to make the best possible use of these funds to recover from the crisis and pave the way to a resilient, greener and more digital Europe.
Andrej Šircelj, Slovenia’s Minister for Finance

The Recovery and Resilience Facility is the EU’s programme of large-scale financial support in response to the challenges the pandemic has posed to the European economy. The facility’s €672.5 billion will be used to support the reforms and investments outlined in the member states’ recovery and resilience plans.
Reforms and investments
The Council decisions are preceded by the Commission’s assessment of the national recovery and resilience plans. The plans have to comply with the 2019 and 2020 country-specific recommendations and reflect the EU’s general objective of creating a greener, more digital and more competitive economy.
The reforms and investments that Croatia plans to implement to reach these goals include improving water and waste management, a shift to sustainable mobility and financing digital infrastructures in remote rural areas. Cyprus intends, among other things, to reform its electricity market and facilitate the deployment of renewable energy, as well as to enhance connectivity and e-government solutions.
An increase in locally produced renewables, the green public procurement measures and further developing the rollout of very high capacity networks are some of the measures that Lithuania has included in its recovery and resilience plan. Slovenia plans to use a part of the allocated EU support to invest in sustainable transport, unlock the potential of renewable energy sources and further digitalise its public sector.
Next steps
Future disbursements from the facility will take place once the member states reach milestones and targets set for each investment and reform.
Compliments of the European Council
The post Recovery fund: ministers welcome assessment of four more national plans first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

For the first time since the creation of the Innovation Fund, the European Union is investing €118 million into 32 small innovative projects located in 14 EU Member States, Iceland and Norway. The grants will support projects aiming to bring low-carbon technologies to the market in energy intensive industries, hydrogen, energy storage and renewable energy. In addition to these grants, 15 projects located in 10 EU Member States and Norway will benefit from project development assistance worth up to €4.4 million, with the aim of advancing their maturity.
Executive Vice-President Timmermans said: “With today’s investment, the EU is giving concrete support to clean tech projects all over Europe to scale up technological solutions that can help reach climate neutrality by 2050. The increase of the Innovation Fund proposed in the Fit for 55 Package will enable the EU to support even more projects in the future, speed them up, and bring them to the market as quickly as possible.”
The 32 projects selected for funding were evaluated by independent experts for their ability to reduce greenhouse gas emissions compared to conventional technologies and to innovate beyond the state-of-the-art while being sufficiently mature to enable their quick deployment. Other criteria included the projects’ potential for scalability and cost effectiveness. The selected projects cover a wide range of relevant sectors to decarbonise different parts of Europe’s industry and energy sectors. The success rate of eligible proposals to this call for proposals is 18%.
The 15 projects that can benefit from project development assistance were assessed to be sufficiently innovative and promising in terms of their ability to reduce greenhouse gas emissions, but not yet mature enough to be considered for a grant. The support, to be provided as tailor-made technical assistance by the European Investment Bank, aims to advance their financial or technical maturity, with a view to potential re-submission under future Innovation Fund calls.
Next steps
Successful projects under the call for small-scale projects are starting to prepare individual grant agreements. These should be finalised in the fourth quarter of 2021, allowing the Commission to adopt the corresponding grant award decision and start disbursing the grants. Projects have up to four years to reach financial closure.
Projects offered development assistance under the call for large-scale projects will be contacted by the European Investment Bank to conclude individual agreements and enable the start of the service in the fourth quarter of 2021.
Compliments of the European Commission.
The post EU invests €122 million in innovative projects to decarbonise the economy first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Blog post by Fabio Panetta, Member of the Executive Board of the ECB | 27 July 2021 |
With the complete reopening of the economy in sight, what Europe needs to emerge stronger from the pandemic will change. We will have to shift from offsetting lost income to adding new income, and from preserving productive capacity to reallocating capital and labour towards sectors with more favourable opportunities.
Whether we will succeed depends on how we reform the way in which the European economy is governed.
When the pandemic hit, the European Union intervened to provide immediate support: Fiscal and state aid rules were suspended and powerful common instruments were introduced; the European Central Bank (ECB) adopted extraordinary actions to help the economy absorb the shock and loosened bank capital rules.
As the acute phase of the pandemic draws to a close, we are faced with a fundamental choice: Do we go back to the pre-crisis model of economic policymaking or do we opt to transform it?
During the financial crisis, the eurozone adopted a wrong policy mix, causing an economic gap to emerge with other major economies, one from which we have not yet recovered. Back then, the governance of Economic and Monetary Union (EMU) revolved around a dichotomy between a lack of coordination between fiscal and economic policies — outside of emergencies — and far-reaching policy conditionality when it came to financial assistance programs. These aid policies were conceived in partial equilibrium at the level of single countries; there was too little attempt to understand what they meant for the eurozone as a whole.
This system experienced policy failures and political backlash. Limited coordination led to a premature withdrawal of fiscal support and sluggish structural reforms, which, in turn, contributed to the eurozone’s second recession. Far-reaching conditionality unnecessarily divided Europe into creditor and debtor countries, resulting in a deep economic and political divide.
During the pandemic, however, Europe embraced a new model for managing crises. The virus and the restrictions put in place to contain it caused not only a huge negative demand shock but also a powerful and potentially long-lasting adverse supply shock. It accelerated digitalization and automation in ways that will radically transform production and the labor market.
In the face of these shocks, three paradigm shifts have taken place. First, the new European common fiscal instruments, which were introduced to ensure broad-based and faster recoveries, were designed explicitly in recognition that the EU is more than the sum of its parts.
Being funded collectively, the Next Generation EU (NGEU) package has created a critical fiscal policy space akin to federal budget support in other economies. ECB research suggests that if the entire NGEU loan envelope were taken up, the program could raise the public investment-to-GDP ratio in the eurozone by almost 40 percent by 2024. The ratio could even double in some countries.
The second shift is the recognition that reforms are more likely to emerge in a growing economy, where resources can be redistributed more easily. That has also highlighted the need to align demand- and supply-side policies at the EU level.
Europe’s sovereign debt crisis illustrated that austerity does not pay, and simply stimulating demand would not be sufficient to escape the low growth trap. The economy must adapt to the new economic environment created by the pandemic, with resources being reallocated across sectors and firms.
The most productive companies need to expand, and the unprofitable ones need to exit. NGEU recognizes this by providing grants to accelerate the green and digital transitions, in exchange for growth-enhancing recovery plans that modernize legal and institutional frameworks, enabling this reallocation of resources.
This points to the third paradigm shift, which is more institutional in nature: The explicit commitment by EU countries to transform their economies using European funding, so that the investment eventually repays itself through higher productivity growth and positive demand spillovers.
This reflects the growing awareness of how interdependent European economies are. For example, the European Commission estimates that countries like Belgium, Luxembourg, Austria and even Germany will obtain most of the GDP stimulus from NGEU through the boost in foreign-induced demand, stemming from other corners of the EU.
This autumn, as Europe reviews its economic governance, we have the possibility of taking decisions that will put the recovery and the post-crisis economy on stronger footing by building on these three paradigm shifts. But this will require a new approach.
First, we need to make sure this new “European social contract” embodied by NGEU is adopted through recovery and resilience plans that are ambitious and well implemented. The recovery fund is based on a joint effort — through a balance of responsibilities — by European and national authorities. It puts European money on the table, while member countries put forward concrete plans, which are consistent with EU priorities, to tackle their economic and institutional weaknesses. If successfully implemented, NGEU will help legitimize this new model, and the use of EU bonds, should a future crisis again threaten to overwhelm national policies.
Second, while NGEU grants will play a crucial role in managing the structural transformation created by the accelerated shift toward digitalization and automation, the EU liquidity toolbox remains insufficiently used or ill-suited to tackle this challenge head-on.
Loans under NGEU can be used to modernize the economy, but the available envelope remains partly untapped. Meanwhile, liquidity support provided by programs such as the temporary Support to mitigate Unemployment Risks in an Emergency (SURE) and the European Stability Mechanism remains targeted at yesterday’s challenges — notably, substituting lost income and supporting health expenditure, which were more pressing during the immediate public health crisis that we are now starting to emerge from.
These tools could be extended and adapted to support various policy objectives in the recovery phase, first and foremost boosting human capital through measures such as on-the-job training and active labor market policies. This would, in turn, stimulate employment growth as the recovery picks up speed.
Third, it’s important to note that the bulk of Europe’s fiscal firepower remains nested in national policies. Therefore, reforms to the rules that govern them are essential. Fiscal rules aim to guide governments on which policy trajectories are consistent with the sustainability of public finances. But because they affect demand directly and through expectations, they can only be stabilizing if they are countercyclical.
A targeted reform should therefore include both a conjunctural component (ensuring that fiscal policy is responsive to short-run market fluctuations and enables a strong recovery) and a structural component (strengthening the sustainability of debt over the economic cycle).
Only by protecting public investment over the entire business cycle, while successfully implementing structural reforms, can we boost productivity and growth potential and, ultimately, rebuild tax bases and service debt in the long run.
If we apply the lessons of the pandemic to our economic policy, we can emerge from this crisis with a stronger economy and greater social and political cohesion. Upgrading the rules by which the EMU is governed is unequivocally in the interest of all EU member countries, and the importance of NGEU cannot be overstated. Its success would recast the EU economic toolbox and shore up the European project for generations to come.
This blog post first appeared as an opinion piece in Politico.eu on 27 July 2021.
Compliments of the European Central Bank.
The post ECB | After the crisis: Economic lessons from the pandemic first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

New digital forms of money have the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers.
But doing so is not straightforward. It requires significant investment as well as difficult policy choices, such as clarifying the role of the public and private sectors in providing and regulating digital forms of money.
Some countries may be tempted by a shortcut: adopting cryptoassets as national currencies. Many are indeed secure, easy to access, and cheap to transact. We believe, however, that in most cases risks and costs outweigh potential benefits.
Cryptoassets are privately issued tokens based on cryptographic techniques and denominated in their own unit of account. Their value can be extremely volatile. Bitcoin, for instance, reached a peak of $65,000 in April and crashed to less than half that value two months later.
And yet, Bitcoin lives on. For some, it is an opportunity to transact anonymously—for good or bad. For others, it is a means to diversify portfolios and hold a speculative asset that can bring riches but also significant losses.
Cryptoassets are thus fundamentally different from other kinds of digital money. Central banks, for instance, are considering issuing digital currencies—digital money issued in the form of a liability of the central bank. Private companies are also pushing the frontier, with money that can be sent over mobile phones, popular in East Africa and China, and with stablecoins, whose value depends on the safety and liquidity of backing assets.
Cryptoassets as legal tender?
Bitcoin and its peers have mostly remained on the fringes of finance and payments, yet some countries are actively considering granting cryptoassets legal tender status, and even making these a second (or potentially only) national currency.
If a cryptoasset were granted legal tender status, it would have to be accepted by creditors in payment of monetary obligations, including taxes, similar to notes and coins (currency) issued by the central bank.
Countries can even go further by passing laws to encourage the use of cryptoassets as a national currency, that is, as an official monetary unit (in which monetary obligations can be expressed), and a mandatory means of payment for everyday purchases.
Cryptoassets are unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions. Households and businesses would have very little incentive to price or save in a parallel cryptoasset such as Bitcoin, even if it were given legal tender or currency status. Their value is just too volatile and unrelated to the real economy.
Even in relatively less stable economies, the use of a globally recognized reserve currency such as the dollar or euro would likely be more alluring than adopting a cryptoasset.
A cryptoasset might catch on as a vehicle for unbanked people to make payments, but not to store value. It would be immediately exchanged into real currency upon receipt.
Then again, real currency may not always be readily available, nor easily transferable. Moreover, in some countries, laws forbid or restrict payments in other forms of money. These could tip the balance towards widespread use of cryptoassets.
Proceed with caution
The most direct cost of widespread adoption of a cryptoasset such as Bitcoin is to macroeconomic stability. If goods and services were priced in both a real currency and a cryptoasset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities. Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a cryptoasset while expenditures remained mostly in the local currency, or vice versa.
Also, monetary policy would lose bite. Central banks cannot set interest rates on a foreign currency. Usually, when a country adopts a foreign currency as its own, it “imports” the credibility of the foreign monetary policy and hope to bring its economy–and interest rates–in line with the foreign business cycle. Neither of these is possible in the case of widespread cryptoasset adoption.
As a result, domestic prices could become highly unstable. Even if all prices were quoted in, say, Bitcoin, the prices of imported goods and services would still fluctuate massively, following the whims of market valuations.
Financial integrity could also suffer. Without robust anti-money laundering and combating the financing of terrorism measures, cryptoassets can be used to launder ill-gotten money, fund terrorism, and evade taxes. This could pose risks to a country’s financial system, fiscal balance, and relationships with foreign countries and correspondent banks.
The Financial Action Task Force has set a standard for how virtual assets and related service providers should be regulated to limit financial integrity risks. But enforcement of that standard is not yet consistent across countries, which can be problematic given the potential for cross-border activities.
Further legal issues arise. Legal tender status requires that a means of payment be widely accessible. However, internet access and technology needed to transfer cryptoassets remains scarce in many countries, raising issues about fairness and financial inclusion. Moreover, the official monetary unit must be sufficiently stable in value to facilitate its use for medium- to long-term monetary obligations. And changes to a country’s legal tender status and monetary unit typically require complex and widespread changes to monetary law to avoid creating a disjointed legal system.
In addition, banks and other financial institutions could be exposed to the massive fluctuations in cryptoasset prices. It is not clear whether prudential regulation against exposures to foreign currency or risky assets in banks could be upheld if Bitcoin, for instance, were given legal tender status.
Moreover, widespread cryptoasset use would undermine consumer protection. Households and businesses could lose wealth through large swings in value, fraud, or cyber-attacks. While the technology underlying cryptoassets has proven extremely robust, technical glitches could occur. In the case of Bitcoin, recourse is difficult as there is no legal issuer.
Finally, mined cryptoassets such as Bitcoin require an enormous amount of electricity to power the computer networks that verify transactions. The ecological implications of adopting these cryptoassets as a national currency could be dire.
Striking a balance
As national currency, cryptoassets—including Bitcoin—come with substantial risks to macro-financial stability, financial integrity, consumer protection, and the environment. The advantages of their underlying technologies, including the potential for cheaper and more inclusive financial services, should not be overlooked. Governments, however, need to step up to provide these services, and leverage new digital forms of money while preserving stability, efficiency, equality, and environmental sustainability. Attempting to make cryptoassets a national currency is an inadvisable shortcut.
Compliments of the IMF.
The post IMF | Cryptoassets as National Currency? A Step Too Far first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Making Europe the first climate neutral continent in the world is our goal. On July 14, the European Commission adopted a broad set of proposals to make the EU’s climate, energy, transport, and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.
These proposals aim to make all sectors of the EU’s economy fit to meet this challenge. They set the EU on a path to reach its climate targets by 2030 in a fair, cost effective and competitive way.

Revision of the EU Emission Trading System, including revision of the EU ETS Directive concerning aviation, maritime and CORSIA
Revision of the Regulation on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry (LULUCF)
Effort Sharing Regulation
Amendment to the Renewable Energy Directive to implement the ambition of the new 2030 climate target
Amendment of the Energy Efficiency Directive to implement the ambition of the new 2030 climate target
ReFuelEU Aviation – sustainable aviation fuels –
FuelEU Maritime – green European maritime space
Revision of the Directive on deployment of the alternative fuels infrastructure
Amendment of the Regulation setting CO2 emission standards for cars and vans
Carbon border adjustment mechanism
Revision of the Energy Tax Directive
Climate Action Social Facility

Resources

Delivering the European Green Deal (official webpage)

Official European Commission communications (PDF)

Press conferences on Delivering the European Green Deal and its individual proposals (video)

Compliments of the Delegation of the European Union to the United States.
The post Delivering the European Green Deal first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.