Blog post by Philip R. Lane, Member of the Executive Board of the ECB |
In this blog post, I will provide an overview of the inflation outlook, based on the latest ECB staff macroeconomic projections for the euro area. To set the scene, I first review the current economic situation before turning to the analysis of inflation dynamics during the pandemic.
Previewing the main messages, my assessment is that the volatility of inflation during 2020-2021 can be largely attributed to the nature of the pandemic shock: the increase in inflation during 2021 can be best interpreted as the unwinding of disinflationary forces that took hold in 2020 and does not constitute the basis for a sustained shift in inflation dynamics. The medium-term outlook for inflation remains subdued and closing the gap to our inflation aim will set the agenda for the Governing Council in the coming years.
The economic situation
The near-term economic situation continues to be dominated by high uncertainty amid the ongoing race between the roll-out of vaccination campaigns and the spread of the virus. The contraction in the fourth quarter of 2020 was milder than expected, reflecting the strong global recovery in the latter part of last year, some success in containing the pandemic and learning effects in maintaining economic activity in the presence of lockdowns. Manufacturing has held up especially well, supported by foreign demand, as indicated by the strong value of the March flash purchasing managers’ index for manufacturing. Even in the harder-hit services sector, the lockdown damage has been far less than it was during the first wave last spring.
However, the still-high level of infections, the risks posed by virus mutations and the associated prolongation of containment measures continue to weigh on euro area economic activity, especially in services, with GDP likely to have contracted again in the first quarter of this year. The further extension of lockdown measures will leave an imprint on activity in the second quarter, although the vaccination campaigns are expected to gain traction in the coming weeks.
The March ECB staff projections foresee the economic recovery gaining momentum in the second half of the year as the medical situation improves and economic restrictions are eased, with output growing at a rate of 4.0 per cent in 2021, 4.1 per cent in 2022 and 2.1 per cent in 2023. Factoring in the impact of the recently adopted American Rescue Plan of the US Administration under President Joe Biden would give euro area activity a meaningful cumulative boost of 0.3 per cent of GDP over the projection horizon. However, the expectation in the baseline that GDP will reach its pre-pandemic level only in the second quarter of 2022 testifies to the vast accumulated cost of the pandemic (Chart 1).
The large uncertainty associated with the effects of the pandemic shock is captured by the mild and severe alternative scenarios developed by ECB staff. Under the mild scenario, the pre-pandemic level of activity is reached as early as the third quarter of this year; under the severe scenario, the restoration is delayed to late 2023. Of course, the 2019 output level just serves as a convenient benchmark – a full calculation of the aggregate output cost of the pandemic should take into account the pre-pandemic expected growth path over 2020-2022.

Chart 1
Selected (B)MPE projections for real GDP growth(chain linked volumes, Q4 2019 = 100))
Sources: ECB and Eurosystem broad macroeconomic projections exercise.

Inflation dynamics
Given the sudden nature of the onset of the pandemic but its ultimately temporary nature, it should be no surprise to also see considerable volatility in inflation. As shown in Chart 2, there were substantial declines in the inflation rate over the course of 2020 (dipping into negative territory in the final months), but these are set to be largely reversed during 2021. Looking through these fluctuations, the average inflation rate over 2020 and 2021 is projected to be 0.9 per cent, which is quite close to the 2019 level.

Chart 2
Selected (B)MPE projections for inflation(annual percentage changes)
Sources: ECB and Eurosystem broad macroeconomic projections exercise.Notes: The dotted line refers to the projected average of inflation during the two years 2020 and 2021.

The volatility in inflation over 2020 and 2021 can be attributed to a host of temporary factors that should not affect medium-term inflation dynamics.
First, as shown in Chart 3, the pandemic has been associated with a significant cycle in oil prices, which fell from around USD 70 at the start of 2020 to below USD 20 in late April 2020 and subsequently recovered to around the January 2020 levels; in EUR terms, the variation was slightly less pronounced due to the 6 per cent appreciation of the euro against the US dollar over this period. Under the current oil price assumptions embedded in the staff projections, this profile will generate significant base effects in energy price inflation in 2021. In addition, the introduction of a carbon surcharge on prices of liquid fuels and gas in Germany in January 2021 also contributed materially to the rebound in energy price inflation.

Chart 3
Oil price developments(price per barrel)
Source: ECB.Notes: The latest observation is for 26March 2021.

Second, the pandemic also constituted a major asymmetric shock, involving a reallocation of consumer spending across different categories, with a collapse in expenditure on tourism, travel and hospitality, in contrast with an increase in expenditure on home-related items (including groceries and equipment needed for working, learning and exercising at home). This switch in expenditure intersected with sector-specific supply restrictions to exert a significant influence on relative price dynamics. In addition, since the price index is reweighted each January to take into account the composition of expenditure in the previous year, the 2021 HICP index assigns more weight to sectors that experienced a surge in expenditure (and thereby higher pricing pressure) in 2020 compared to sectors that suffered a sharp drop in expenditure (and thereby lower pricing pressure) (Chart 4).[1] This reweighting of the price index alone accounted for 0.3 percentage points of the increase in HICP inflation in January.
It is also plausible that the relative price movements in the pandemic had a net impact on aggregate inflation due to a convexity effect.[2] To the extent that some production inputs cannot be adjusted quickly, production functions will exhibit convex marginal costs, due to diminishing returns. In this situation, the price increases for those items experiencing a surge in demand will be larger than the price declines for those items experiencing a drop in demand: this convex pattern is evident in the cross-section of prices shown in Chart 5 and may have contributed to some “missing disinflation” during 2020, given the relatively limited decline in overall inflation compared to the drop in overall expenditure. This convexity pattern is not likely to be persistent: to the extent that the shift back to normal expenditure patterns is anticipated, demand-supply mismatches should be less severe. More generally, supply effects induced by the renewed lockdowns do not appear to be exerting upward pressure on inflation to the same extent as last spring. This is consistent with considerable adaptation and learning effects over the last year in negotiating the impact of the pandemic on production.

Chart 4
Changes in HICP inflation rates and weights(x-axis: change between the expenditure shares used in January 2021 HICP and those used in January 2020 HICP; y-axis: scaled change in annual inflation rates between January 2021 and January 2020)
Sources: Eurostat and ECB staff calculations.Notes: The inflation rates shown are scaled by the standard deviation of year-on-year changes in annual rates from January 2012 to December 2019. Dots that have been labelled are in dark blue. The size of the dots is scaled according to the weights used in January 2021 HICP. The latest observation is for January 2021.

Chart 5
Changes in demand and prices for goods and services(x-axis: year-on-year change in consumption expenditure in Q3 2020; y-axis: change in inflation from January to November 2020 over standard deviation 2018-19)
Sources: Eurostat and ECB calculations.Notes: Only items for which inflation and quantities move in the same direction are shown. For the methodology on the consumption expenditure series, please see ECB (2020), “Consumption patterns and inflation measurement issues during the COVID-19 pandemic”, Economic Bulletin, Issue 7. Domestic flights and package holidays are excluded. The latest observations are for the third quarter of 2020 for consumption expenditure and for November 2020 for inflation.

Third, some governments (most notably Germany) implemented temporary VAT reductions that temporarily pushed down inflation in the second half of 2020 but have temporarily raised inflation in 2021 as these schemes come to an end. VAT-related base effects on HICP inflation will be particularly significant in the second half of 2021.
Fourth, inflation volatility has also been generated by the rescheduling of seasonal sales. For example, clothing and footwear sales were brought forward from January to December in Germany and postponed in Italy and France.[3] Together, such shifts imparted a large boost to the annual rate of inflation of non-energy industrial goods (NEIG) in January (to 1.5 percent from -0.5 percent), even though these have partially unwound in February with an easing back in NEIG inflation to 1.0 percent.
Finally, uncertainty surrounding the signal for price pressures is further compounded by a larger degree of price imputations, since lockdown measures interfere with the usual collection of prices for some categories.
Looking through this short-term volatility, the projected medium-term inflation rate remains subdued amid still-weak demand and substantial slack in labour and product markets: the staff projections see headline annual inflation easing back to 1.2 per cent in 2022 and only reaching 1.4 per cent in 2023. Similarly, core inflation is projected to rise only very gradually from 1.0 per cent in 2021, 1.1 per cent in 2022 and 1.3 per cent in 2023. This pickup in inflation is based on the gradual reabsorption of slack in labour and product markets, in line with the recovery in overall demand and the fading out of the adverse temporary supply effects related to the pandemic and its containment measures. In turn, the recovery in overall demand is supported by our accommodative monetary policy as well as expansionary fiscal policies at national and EU levels. In comparative terms, the projected inflation path remains well below both the pre-pandemic inflation outlook (as reflected, for example, in the December 2019 staff projections, in which inflation was projected to be 1.6% in 2022, 0.4% higher than in the March 2021 projections) and the Governing Council’s inflation aim.
The impact of extensive slack on inflation dynamics is consistent with projected employment dynamics. The current state of the labour market is heavily shaped by the array of pandemic-related fiscal supports to firms and workers, such that the underlying prospects for employment and earnings remain highly uncertain. Although the increase in unemployment has been limited despite the vast pandemic shock, the headline unemployment figure masks considerable migration from employment straight into inactivity on the one hand and the life-support provided by the extensive job retention measures on the other (Chart 6).
The elevated uncertainty about job prospects also points to vulnerabilities ahead. Consistent with this, wages are expected to remain moderate in 2021, with wage negotiations having been widely postponed. Inactivity also damages labour productivity through the loss of current on-the-job knowledge. While the experience after the global financial crisis suggests that the wage Phillips Curve remains intact, the generation of sustained wage pressures requires a labour market that is sufficiently hot, which will require a reabsorption of a considerable amount of labour market slack.[4] Moreover, the elevated uncertainty about future employment and wage dynamics is likely to constrain consumer spending.

Chart 6
Unemployment (left panel) and unemployment expectations (right panel)
Sources: Eurostat, European Commission, national sources, and ECB calculations.

The trajectory also hinges on the speed with which the spectacular rise in the savings rate during the pandemic will be normalised. While savings over the past year have partly reflected diminished consumption opportunities and partly precautionary motives, it is reasonable to expect some boost to consumption due to catch-up effects, especially in relation to activities such as restaurant meals or recreational travel. At the same time, it is plausible that households smooth out any additional consumption over time and the pandemic shock may motivate households (especially in the most-affected euro area countries) to hold some precautionary buffers. In addition, the asymmetric distribution of these savings across the population matters for the propensity to dissave after the pandemic: older and wealthier households have fared much better than younger households but the former have a lower propensity to consume (Chart 7).[5]

Chart 7
Household financial situation and savings(change in percentage balance January 2020 – February 2021)
Sources: European Commission DG-ECFIN and ECB calculations.Notes: The revision in household financial situation and their ability to save is proxied by the change in net balances between January 2020 and February 2021.

Turning to investment, business sentiment and expectations beyond the near term have brightened. At the same time, the sustained loss of income in the sectors most affected by social restrictions has weakened corporate balance sheets, and uncertainty about the prospects for different sectors in the economy remains pronounced. In relation to investment, firms remain likely to delay or cancel some of their capital expenditure plans against the background of heightened uncertainty about future demand for their products, spare capacity and weakened balance sheets. The significant slack in product markets may also restrain the ability of firms to raise prices, despite the desire to rebuild profit margins from their currently-compressed levels.
A high level of domestic demand (consumption, investment, government spending) is an important factor in determining overall pricing pressures, since it is plausible that the domestic inflationary pressures from these sources are stronger than from foreign demand. This is reflected in the history of euro area inflation rates, which shows a low-frequency negative correlation between the euro area trade surplus and inflation.[6]
In terms of global cost-push shocks, there are some upward pressures from higher raw material prices and bottlenecks in some sectors (including semiconductors and freight). These are expected to be temporary (reflecting mismatches between supply and demand in the initial phase of a recovery) and are also partly directly offset by the euro appreciation over the last year. More generally, the goods that are produced using such intermediate inputs do not represent a sufficiently-large proportion of the overall consumption price index for such cost push shocks to play a dominant role in determining inflation dynamics. For instance, using input-output matrices, ECB staff estimates suggest that the 38 per cent increase in global basic metal prices that occurred between June 2020 and January 2021 would only add about 1.5 per cent to economy-wide output prices: moreover, this should be interpreted as an upper bound since it neglects general equilibrium effects and assumes that the surge in prices is fully permanent. Moreover, the impact on consumer prices (compared to output prices) is likely to be rather low, since the sectors most affected have low consumption shares, except perhaps for certain electrical and transport-related consumer products. In addition, to the extent that the pass-through to output prices and consumer prices occur only gradually, the impact on the annual inflation rate in any one year will be attenuated. With the same caveats, another example is provided by the 355 per cent increase in freight costs from China to the euro area over the same period: this is simulated to generate a mechanical impact of 0.3 per cent to euro area output prices. This reflects that such a shock has a quantitatively very limited impact for most sectors, with non-negligible impacts only for some IT, textiles and transport-related products. This indicates that the likely impact in turn on consumer prices would be overall very limited.
The US Administration’s American Rescue Plan will bring positive spillovers to the euro area, even if the impact on euro area output and inflation is limited by the relatively-low trade linkages between the euro area and the United States. Holding all other factors constant, model-based simulations indicate that its peak impact via trade and financial linkages on euro area annual inflation will be about 8 basis points in 2023, although any excessive pressure on long-term nominal yields would diminish the net impact.
Longer-term inflation expectations
While the analysis so far has focused on the level of aggregate economic slack as a constraint on inflation dynamics, it is also important to recognise that inflation outcomes are also shaped by economy-wide expectations about future inflation. In particular, the subdued level of inflation in the euro area in recent years can, in part, be attributed to the weakening in expected inflation on account of the persistence of below-target inflation outcomes.
Of course, there is no single rate of expected inflation, in view of the different ways inflation beliefs are formed by households, firms and financial traders. It is also important to take into account that beliefs are formed not only about the expected inflation rate but also the distribution of future inflation rates, including the tail risks of extremely-low or extremely-high inflation rates.
Market-based indicators of inflation compensation have increased from historic lows in recent weeks. In large part, this can be attributed to a less pessimistic global outlook, mainly related to the news about substantial US fiscal stimulus and the strong global recovery in manufacturing, trade and oil prices. In particular, the tail risk of extremely-low (or even negative) inflation outcomes has diminished, so that investors require greater compensation to hold longer-term nominal bonds, given the shift in the distribution of inflation outcomes. Of course, the recovery relative to the pandemic trough should not obscure the overall profile by which measures of inflation compensation are clearly subdued by historical standards and still at a significant distance to the ECB’s inflation aim.
Analysis of the recent evolution of some reference measures of market-based inflation compensation shows that similar but more pronounced upward moves were observed in the United States, with inflation expectations in advanced economies exhibiting a striking correlation with the price of oil. In line with this, sizeable co-movements between longer-term market-based measures of inflation compensation across jurisdictions are the norm, rather than the exception. Importantly, estimates suggest that this is not so much due to variation in the “true” inflation expectations embedded in these indicators, but primarily on account of a co-movement in risk premia (Chart 8).

Chart 8
Euro area 5y5y inflation-linked swap rate and the inflation risk premium(percentages per annum; percentages)
Sources: Refinitiv and ECB calculations.

In relation to the inflation beliefs of financial market participants, we do not rely solely on market-based indicators but complement our assessment with lower-frequency survey-based measures, such as the quarterly ECB Survey of Professional Forecasters (SPF). Survey-based measures of inflation expectations over the longer-term (for 2025) remained steady at 1.7 per cent in the ECB SPF in the first quarter of 2021.[7] It is also important to recognise the strong influence of the persistent component of inflation outcomes on beliefs about future inflation: for instance, Chart 9 shows the correlation between the average of past inflation outcomes and the evolution of long-term inflation expectations in the SPF.

Chart 9
Euro area average inflation and longer-term inflation expectations(percentages per annum)
Sources: ECB calculations.

Analysing the full set of inflation expectations across the range of economic actors (financial market participants, firms, households) is a demanding exercise.[8] For instance, it is likely that firms and households do not revise beliefs as quickly as financial investors because of informational constraints and the logic of rational inattention on the part of many households and firms in relation to cyclical fluctuations in the macroeconomic environment.[9]
The implications of a divergence in the dynamics of inflation beliefs between financial investors and participants in the real economy (households and firms) can be illustrated with model-based simulations (Chart 10). Using the ECB-BASE model, an ECB staff analysis compares the impact on macro-financial outcomes of a generalised improvement in inflation expectations to the impact if only the beliefs of financial investors are revised.[10] In the former case, the improvement in inflation expectations has a self-fulfilling positive impact on inflation outcomes and stimulates output through the reduction in the inflation-adjusted real interest rate, despite the tightening in longer-term nominal yields stemming from an increase in term premia. In contrast, if only financial investors revise inflation beliefs, nominal yields and term premia increase but the real economy faces higher real interest rates, since the nominal tightening is not offset by an improvement in the inflation beliefs of household and firms. Under this scenario, the net impact is a contraction in output and a decline in the projected inflation path.
This analysis suggests that it is important to study carefully the evolution of inflation beliefs across all sectors of the economy. In particular, the heterogeneity across individual households and firms. suggests that significant shifts in average inflation expectations are likely to occur only gradually over time. At the ECB, the pilot Consumer Expectations Survey promises to enrich our understanding of the dynamics of inflation expectations among households across the euro area. To the extent that the inflation beliefs of financial traders are revised more quickly than the inflation beliefs of firms and households, this analysis also explains why monetary policymakers pay attention to the speed of yield curve movements, in addition to the underlying fundamentals and the interconnections between the yield curve and broader inflation developments.

Chart 10
Macro-financial implications of higher longer-term inflation expectations
Source: ECB calculations based on ECB-BASE model and the analysis by Matthieu Darracq-Paries and Srecko Zimic in ECB (2021, forthcoming) Economic Bulletin op. cit.
Notes: In all simulations we assume 0.1 increase of long-term inflation expectations. Monetary policy and the exchange rate are kept unchanged. The scenarios vary according to the perception of the shock across the various agents. In red: all agents perceive the shock (benchmark case). In yellow: all agents, except the household sector, perceive the shock. In blue: only the financial sector perceives the shock.

Conclusion
In summary, the volatility of inflation during 2020-2021 can be largely attributed to the nature of the pandemic shock: the increase in inflation during 2021 can be best interpreted as the unwinding of disinflationary forces that took hold in 2020 and does not constitute the basis for a sustained shift in inflation dynamics.
The medium-term outlook for inflation remains subdued, amid weak demand and substantial slack in labour and product markets, with the staff projections foreseeing only a very gradual increase in price pressures: inflation is projected to reach only 1.4 per cent by 2023, well below the Governing Council’s inflation aim. Accordingly, in terms of the ECB’s price stability mandate, the pandemic shock continues to pose ongoing risks to the projected path of inflation.
Against this background, ensuring favourable financing conditions is fundamental to restoring inflation momentum and guiding the formation of inflation expectations through the commitment of the central bank to counter the negative pandemic shock to the inflation path and secure convergence towards the inflation aim over the medium term. Looking ahead, it is also vitally important that fiscal support is maintained and that the euro area fiscal response to the unfolding of the pandemic and the requirements for a strong recovery is appropriately calibrated.
Offsetting the negative pandemic shock to the inflation outlook is only the first stage of the monetary policy challenge. Even after the disinflationary pressures caused by the pandemic have been sufficiently offset (with a lead role for the pandemic emergency purchase programme), we will have to ensure that the monetary policy stance delivers the timely and robust convergence to our inflation aim. Our ongoing monetary policy strategy review will provide timely input into meeting this challenge.
Author:

Philip R. Lane, Member of the Executive Board of the ECB

Compliments of the European Central Bank.
The post ECB | Inflation dynamics during a pandemic first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Charles Michel, President of the European Council |
Good afternoon, President Biden. Thank you for accepting our invitation. We are delighted to welcome you today. It’s not common practice for the European Council to host foreign guests at our regular meetings. The last time was 11 years ago.  It was your good friend, Barack Obama.
In Washington, it might not be clear what the European Council does. As you know, the European Council is the gathering of the 27 EU Heads of State and Heads of Government, each responsible to their own people and parliaments. This group is the strategic hub of our Union.  And we decide on the orientation for our European project.
Mr President, you know well the challenges of bi-partisanship. Just imagine, partisanship times 27! Because 27 Member States.
Yet, most importantly, in the European Council, day after day, we forge our unity. By consensus. We decided here to become the first climate neutral continent by 2050. We decided here on our historic 1.8 trillion Covid recovery plan. On top of our national stimulus plans.
It is here, for example, that we determine the EU’s policy towards China, Russia and Turkey. And after the US elections, we discussed what your Presidency would mean for our transatlantic relationship. We are united in our assessment. This is a historic opportunity to re-energise our cooperation. And deepen our historic bond.
Since your election, we have talked a lot about you. Now we are happy to talk directly with you. America is back. And we are happy you are back.
Today, Covid-19 is the top priority.  No one is safe until everyone is safe. We must join forces to defeat the virus.
This includes working closely together on vaccines. To boost production and delivery, and ensure open supply chains. We will be the major producers of vaccines — to protect our people, and people around the world. So we must also lead efforts — through the COVAX Facility — to make sure vaccines reach all countries.
We have all the tools — science, ability, resources, and the collective will. By standing together, shoulder-to-shoulder, we can show that democracies are best suited to protect citizens, to promote dignity, and to generate prosperity.
The shock caused by the pandemic must be a wake-up call.  And we must build back better and smarter. That’s why the European Union has undertaken a fundamental twin transformation, with our Green Deal and our Digital Agenda. We were the first bloc to commit to climate neutrality by 2050. And others have followed. Your decision to bring America back to the Paris Agreement is wonderful news. It’s music to our ears. And we support the Earth Day summit you will convene next month.
In digital, we also want to lead by example. And avoid abusing our data resources like we have abused our natural resources. We believe people will not accept the over-exploitation of their personal data. Whether by companies in pursuit of profit. Or by states for the purpose of controlling their citizens. This is neither sustainable for business, nor for democracy.
We need a wise framework, where our digital resources will be used for innovation and economic development. And we must also protect the “environment” of our democracies and our individual freedoms. This is a complex and exciting challenge. Let’s frame this digital democratic standard together.
After the atrocities of WW II, we worked together to build the rules-based international order. We created the United Nations and other international institutions.
And for several decades, this rules-based order was challenged by the Soviet Union. They imposed their own rules and threatened with brutal force those who resisted. When the Soviet empire fell, we believed in the so-called “End of History” … the final victory of democracy. Indeed, democracy expanded. Free markets progressed. More countries joined the multilateral system.
But thirty years later, we know we were wrong about the general victory of liberal democracy. Authoritarian tendencies morphed into new models. They abused or bent the rules, using new tools (disinformation, cyber, and hybrid threats) to attack democracies, both from outside and from within. These new regimes threaten democracy, human rights and the rules-based order. At least as much as the Cold War regimes.
This is why NATO remains the cornerstone of our collective peace and security. And we Europeans are determined to assume our fair share of the burden. More than ever, it is up to America and Europe, with our like-minded partners, to promote the democratic model and free market economy.
What we do together today will determine the world our children and grandchildren will live in, tomorrow. That’s why yesterday we were pleased to host Secretary Blinken and discuss geopolitical topics like China, Russia, Iran or the Horn of Africa, Western Balkans, Eastern Partnership.
Let’s band together — to build a fairer, greener and more democratic world. Anchored in our common history. The EU is a peace project. If we live in peace, freedom and prosperity today it is because 76 years ago, countless Americans landed on our shores. They fought for our freedom, justice, and democracy.  And so many died — in the name of liberty. The Battle of the Bulge, in my home country, lives on still today in the hearts and minds of families. This binds us forever.
Let’s build on this friendship — to forge a new transatlantic mind-set. A strong basis for our renewed cooperation. Thank you again for joining us this evening. And for sharing your thoughts on our future cooperation.
Compliments of the European Council.
The post Introductory remarks by President Charles Michel at the videoconference of EU leaders with US President Biden first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Commission has disbursed €13 billion to six EU Member States in the sixth instalment of financial support under the SURE instrument. This is the third disbursement in 2021. As part of today’s operations, Czechia has received €1 billion, Belgium €2.2 billion, Spain €4.06 billion, Ireland €2.47 billion, Italy €1.87 billion and Poland €1.4 billion. This is the first time that Ireland has received funding under the instrument. The other five EU countries have already benefitted from loans under SURE.
These loans will assist Member States in addressing sudden increases in public expenditure to preserve employment. Specifically, they will help Member States cover the costs directly related to the financing of national short-time work schemes, and other similar measures that they have put in place as a response to the coronavirus pandemic, including for the self-employed. Today’s disbursements follow the issuance of the sixth social bond under the EU SURE instrument, which attracted a considerable interest by investors.
So far, 17 EU Member States have received a total of €75.5 billion under the SURE instrument in back-to-back loans. An overview of the amounts disbursed up to date and the different maturities of the bonds are available online here.
Overall, the Commission has proposed that 19 EU countries will receive €94.3 billion in financial support under SURE. This figure includes the additional €3.7 billion proposed by the Commission today for six Member States. The full amounts per Member State are online here. Member States can still submit requests to receive financial support under SURE which has an overall firepower of up to €100 billion.
To address Member States’ pending requests for 2021, the Commission will seek from the market further €13-€15 billion in the second quarter of 2021.
Later this year, the Commission is due to also launch the borrowing under NextGenerationEU, the recovery instrument of €750 billion to help build a greener, more digital and more resilient Europe.
Members of the College said
President Ursula von der Leyen said: “The crisis is tough on many workers, who fear for their jobs. This is why we have created SURE, to mobilise €100 billion in loans to finance short-time work schemes across the EU. Today we are disbursing a new tranche of €13 billion under SURE, supporting workers and companies in six Member States. This helps protect jobs and enables economies to recover faster from the crisis.”
Commissioner Johannes Hahn, in charge of Budget and Administration, said: “We are well in track to help business and people coping with these hard times. We have already delivered three fourths of the money committed for the SURE programme. Additional money will follow soon the second quarter.”
Commissioner Paolo Gentiloni, Commissioner for Economy, said: “As the effects of the pandemic continue to weigh on our economies, today the Commission is disbursing further significant financial support to six countries, including Ireland for the first time. This is a crucial contribution to national efforts to support workers through these difficult times. I’m proud of the European success story that is SURE.”
Background
On 23 March 2021, the European Commission issued the sixth social bond under the EU SURE.
The issuing consisted of two bonds, with €8 billion due for repayment in March 2026 and €5 billion due for repayment in May 2046.
The bonds attracted a strong demand from a wide range of investors, which ensured good pricing conditions that the Commission is directly passing on to the beneficiary Member States.
The bonds issued by the EU under SURE benefit from a social bond label. This provides investors in these bonds with confidence that the funds mobilised will serve a truly social objective.
Compliments of the European Commission.
The post EU Commission disburses further €13 billion under SURE to six Member States first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

On 24 March, EU High Representative for Foreign Affairs and Security Policy/Vice President of the European Commission, Josep Borrell, and the Secretary of State of the United States of America, Antony J. Blinken met in Brussels to discuss ways to strengthen the EU-U.S. relationship and coordinate responses to priority foreign policy, security, and economic issues. They also committed to cooperate in the face of global challenges, including addressing the global climate crisis, bringing an end to the COVID-19 pandemic, facilitating a sustainable economic recovery, and defending democratic values and fundamental freedoms including within multilateral structures.
During the meeting, the two sides decided to re-launch the bilateral dialogue on China, as a forum to discuss the full range of related challenges and opportunities.  They acknowledged a shared understanding that relations with China are multifaceted, comprising elements of cooperation, competition, and systemic rivalry. They also decided to continue meetings under the framework of the dialogue at senior official and expert levels on topics such as reciprocity, including economic issues; resilience; human rights; security; multilateralism; and areas for constructive engagement with China, such as climate change.
High Representative Borrell and Secretary Blinken confirmed that credible multi-party democracy, the protection of human rights and adherence to international law support the stability and prosperity of the Indo-Pacific. Both aim to cooperate to promote secure, sustainable, free and open maritime supply routes and supply chains and look forward to deepening cooperation with like-minded partners where interests and approaches intersect.
The two principals also discussed EU-U.S. partnership on climate action and working cooperatively to raise global ambition to put the world on a path to net-zero emissions by 2050.
The two sides plan to work together in multilateral fora, such as through the WHO and COVAX initiative to jointly address the global challenges of the COVID-19 pandemic, including facilitating global distribution of safe and effective vaccines, addressing humanitarian impacts, and building future pandemic preparedness, including through advancing global health security.
High Representative Borrell and Secretary Blinken acknowledged that the Joint Comprehensive Plan of Action (JCPOA) remained a key achievement of multilateral diplomacy despite existing difficulties. They shared concerns about Iran’s continued departure from its nuclear commitments under the JCPOA and underlined their full support for the work of the IAEA to independently monitor Iran’s nuclear commitments.  Secretary Blinken reaffirmed the U.S. readiness to reengage in meaningful diplomacy to achieve a mutual return to full implementation of the JCPOA by the United States and Iran. The High Representative welcomed the prospect of a U.S. return to the JCPOA.  Both sides expressed support for the ongoing diplomatic efforts, and the contacts of the High Representative as JCPOA Coordinator with all relevant partners, to ensure full implementation of the JCPOA nuclear and sanctions lifting commitments. The United States expressed readiness to engage in result-oriented discussions to that end.
High Representative Borrell and Secretary Blinken noted their determination to further address, in a coordinated manner, Russia’s challenging behaviour, including its ongoing aggression against Ukraine and Georgia; hybrid threats, such as disinformation; interference in electoral processes; malicious cyber activities; and military posturing.  Both sides also decided to coordinate their response to the shrinking space in Russia for independent political voices, civil society and media freedom and the dwindling respect for human rights and the rule of law. At the same time, both sides declared that they are ready to engage with Russia on issues of common interest and to encourage Russia to abandon confrontational approaches.
They also decided to continue close cooperation to encourage comprehensive reforms in the EU Eastern neighbourhood, including South Caucasus countries.
The two principals underscored that the EU and the United States share a strong interest in a stable and prosperous Western Balkans region. They reaffirmed their commitment to work together to support reconciliation and improve governance, build resilience and push forward key reforms for EU integration across the region.  EU-U.S. cooperation on the ground is vital for progress, including on the EU-facilitated dialogue on normalisation of relations between Kosovo and Serbia.
High Representative Borrell and Secretary Blinken affirmed the EU and the United States have a strategic interest in a stable and secure environment in the Eastern Mediterranean and will work hand in hand for sustainable de-escalation.  Both the United States and the EU are interested in the development of a cooperative and mutually beneficial relationship with Turkey, underpinned by rule of law and respect for fundamental rights.
The two principals shared their concern about the continuing humanitarian tragedy and human rights violations and abuses in Tigray. They discussed a variety of measures to support unhindered humanitarian access, investigations of human rights violations and abuses, a cessation of hostilities, and the immediate withdrawal of Eritrea from Ethiopian territory.
On the Grand Ethiopian Renaissance Dam (GERD) negotiations, they called on all parties to show flexibility and move promptly to resume productive negotiations in the coming weeks. They expressed concern over increased tensions between Sudan and Ethiopia and encourage both countries to resolve their difference through peaceful means. They also discussed the situation in Somalia, where they expected a political consensus to deliver an election without delay.
The European Union and United States intend to intensify their cooperation on Afghanistan, together with key partners, to advance the peace process and to ensure the long-term stability and prosperity of the country. The European Union and its Member States are the largest civilian assistance donors to Afghanistan, contributing to the common goal of stability in the region.
High Representative Borrell and Secretary Blinken expressed support for continued NATO-EU cooperation.  They agreed that NATO and the EU need new ways of working together and a new level of ambition because the multiple and evolving security challenges that NATO Allies and EU Member States face make robust NATO-EU cooperation essential to our shared security. The two principals recalled that capabilities developed through the defence initiatives of the EU and NATO should remain coherent, complementary and interoperable. They also noted that EU defence initiatives should enhance the European contribution to Transatlantic security and can offer concrete opportunities for cooperation between the EU and the United States.  With this in mind, the principals supported the fullest possible involvement of the United States in EU defence initiatives and enhanced dialogue on these issues.
Compliments of the European External Action Service (EEAS).
The post Joint press release on the meeting between High Representative/Vice-President Josep Borrell and the U.S. Secretary of State Antony Blinken first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, EU Commissioner for Justice, Didier Reynders, and U.S. Secretary of Commerce, Gina Raimondo, made the following statement regarding the negotiations on transatlantic data privacy flows:
“The U.S. Government and the European Commission have decided to intensify negotiations on an enhanced EU-U.S. Privacy Shield framework to comply with the July 16, 2020 judgment of the Court of Justice of the European Union in the Schrems II case.
These negotiations underscore our shared commitment to privacy, data protection and the rule of law and our mutual recognition of the importance of transatlantic data flows to our respective citizens, economies, and societies.
Our partnership on facilitating trusted data flows will support economic recovery after the global pandemic, to the benefit of citizens and businesses on both sides of the Atlantic.” 
Background
The EU-U.S. Privacy Shield was a mechanism for transfers of personal data from EU companies to companies in the U.S. that adhered to the mechanism. It was in place since 2016.
On July 16, 2020, the European Court of Justice invalidated the EU-U.S. Privacy Shield while confirming the validity of the EU Standard Contractual Clauses for the transfer of personal data to processors outside the EU/EEA (“SCCs”).
In August 2020 the European Commission and the U.S. Department of Commerce have initiated discussions to evaluate the potential for an enhanced EU-U.S. Privacy Shield framework to comply with the judgement of the Court in the Schrems II case.
Compliments of the European Commission.
The post Intensifying Negotiations on transatlantic Data Privacy Flows: A Joint Press Statement by European Commissioner for Justice Didier Reynders and U.S. Secretary of Commerce Gina Raimondo first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Our digital footprint generates enormous value, but too much of it ends up in Big Tech silos
Humanity has never been so comprehensively recorded. Smartwatches capture our pulse in real time for a distant artificial intelligence (AI) to ponder the risks of heart disease. Bluetooth and GPS keep track of whether some of us shop at gourmet stores and linger in the candy aisle. Our likes and browsing hours on social media are harvested to predict our credit risk. Our search queries on shopping platforms are run through natural language processors to generate uniquely targeted ads whose unseen tethers subtly remold our tastes and habits.
The generation and collection of data on individual human beings has become a big part of the modern economy. And it generates enormous value. Big data and AI analytics are used in productivity-enhancing research and development. They can strengthen financial inclusion. During the pandemic, data on real-time movements of entire populations have informed policymakers about the impact of lockdowns. Contact tracing apps have notified individuals who have been in potentially dangerous proximity to people infected with COVID-19.
But just as data have helped us monitor, adapt, and respond to COVID-19, the pandemic has brought into focus two fundamental problems with how it flows in the global economy (Carrière-Swallow and Haksar 2019). First, the data economy is opaque and doesn’t always respect individual privacy. Second, data are kept in private silos, reducing its value as a public good to society.
Whose data anyway?
Once the GPS, microphones, and accelerometers in the smart devices located in every pocket and on every bedside table and kitchen counter begin monitoring our behavior and environment, where do the data go? In most countries, they are collected, processed, and resold by whoever can obtain them. User consent is all too often granted by checking a box below lengthy legalistic fine print—hardly a means to serious informed consent. Analysis based on such granular data is a gateway to influencing behavior and has tremendous commercial value. To be sure, this is not a one-way street: consumers get many nice data-driven features for no direct financial cost in exchange. But are they getting enough?
Most transactions involving personal data are unbeknownst to users, who likely aren’t even aware that they have taken place, let alone that they have given permission. This gives rise to what is known in economics as an externality: the cost of privacy loss is not fully considered when an exchange of data is undertaken. The consequence is that the market’s opacity probably leads to too much data being collected, with too little of the value being shared with individuals.
By agreeing to install a weather application and allowing it to automatically detect its current city, people might unwittingly allow an app designer to continuously track their precise location. Users who sign up for a weather forecast with a sleek interface agree to share their location data, believing it’s just to enable the app’s full functionality. What they are providing, in fact, is a data trail about their daily routine, travel itinerary, and social activity. The weather forecaster may never get any better at predicting rain but could end up with a better prediction of the user’s creditworthiness than the scores compiled by traditional credit bureaus (Berg and others 2020).
Privacy paradoxes
Do we care about our privacy or not? Researchers have documented what is known as a “privacy paradox.” When asked to value their privacy in surveys, people frequently rank it as a very high priority. However, in their daily lives, these same people are often willing to give away highly sensitive personal data for little in exchange.
‘Why are people willing to hand over their location data in exchange for a weather forecast, but not to share it to protect their health?’
This paradox should have heralded good news for contact tracing apps, which rely on widespread usage to be effective (Cantú and others 2020). Unfortunately, in many countries where use of these tools is voluntary, take-up has been very low. Why are people willing to hand over their location data in exchange for a weather forecast, but not to share it to protect their health while helping fight a global pandemic that has killed over 2 million people? One reason may be that—unlike the weather app makers—public health agencies have designed their contact tracing apps to transparently announce how they will be collecting and using data, and this triggers concerns about privacy. Another reason is that authorizing governments to combine location information with data on a disease diagnosis may be seen as particularly sensitive. After all, knowledge of someone’s preexisting condition could lead to their exclusion from insurance markets in the future or open the door to other forms of stigma or discrimination.
How to use responsibly
The data generated by our smart devices are essentially a private good held by Big Tech companies that dominate social media, online sales, and search tools. Given how valuable these data are, it is not surprising that companies tend to keep them to themselves (Jones and Tonetti 2020). As more data beget better analysis, which in turn attracts more usage, more data, and more profits, these swollen data war chests fortify their platform networks and potentially stifle competition.
This finders keepers model tends to lead to too much data being collected, but the data are also insufficiently utilized exactly when they could be most helpful, kept in private silos while public needs remain unmet. Data sharing can support the development of new technologies, including in the life sciences. Consider how epidemiological research can benefit from scaling up big data analytics. A single researcher analyzing the experience of patients in their home country may be a good start, but it cannot rival the work of many researchers working together and drawing on the experience of many more patients from around the world—the key to the success of a number of cross-border collaborations.
How can data be made more of a public good? Commercial interests and incentives for innovation must be balanced with the need to build public trust through protection of privacy and integrity. Clarifying the rules of the data economy is a good place to start. Significant advances have resulted, for example, from the 2018 implementation in Europe of the General Data Protection Regulation (GDPR), which clarified a number of rights and obligations governing the data economy. EU residents now have the right to access their data and to limit how it is processed, and these rights are being enforced with increasingly heavy fines. But even as researchers have started to see the impact of the GDPR on the digital economy, there are still concerns about how to operationalize these rights and keep them from being simply a box-checking exercise.
People should have more agency over their individual data. There could be a case to consider the creation of public data utilities—perhaps as an outgrowth of credit registries—that could balance public needs with individual rights. Imagine an independent agency tasked with collecting and anonymizing certain classes of individual data, which could then be made available for analysis, subject to the consent of interested parties. Uses could include contact tracing to fight pandemics, better macroeconomic forecasting, and combating money laundering and terrorism financing.
Policies can also help consumers avoid becoming hostage within individual ecosystems, thus contributing to market contestability and competition. The European Union’s late-2020 proposals for the Digital Markets Act and the Digital Services Act have many new features. These include third-party interoperability requirements for Big Tech “gatekeepers”—including social media and online marketplaces—in certain situations and efforts to make it easier for their customers to port their data to different platforms.
Policies also have a role to play in keeping data secure from cyberattacks. An individual company does not fully internalize the harm to public trust in the entire system when its customers’ data are breached, and may thus invest less in cybersecurity than what would be in the public interest. This concern has special resonance in the financial system, where maintaining public confidence is crucial. This is why secure infrastructure, cybersecurity standards, and regulation are essential pillars of the open banking policies many countries have adopted to facilitate interoperability in sensitive financial data.
Global approach
Many countries have been developing policies aimed at a clearer, fairer, and more dynamic data economy. But they are taking different approaches, risking greater fragmentation of the global digital economy. These risks arise in many data-intensive sectors, ranging from trade in goods to cross-border financial flows. In the context of the pandemic, differing privacy protection standards make it harder to collaborate on crucial medical research across borders—true even before the pandemic—because of the difficulty of sharing individual results of biomedical trials (Peloquin and others 2020).
Global coordination is always a challenge, especially in an area as complex as data policy, where there is a multitude of interests and regulators even within individual countries, let alone across borders. Dealing with the fallout of the pandemic has spurred a new opportunity to ask hard questions about the need for common minimum global principles for sharing data internationally while protecting individual rights and national security prerogatives.
The current moment also affords an opportunity to explore innovative technological solutions. Consider whether jump-starting the recovery in international travel could be facilitated by a global vaccine registry. This could leverage old-fashioned paper-based international health cards but would call for development of standards and an interoperable data management system for reporting and consulting on people’s vaccination status—potentially linked to digital identity—as well as agreements on protection of individual privacy and barriers to access for other purposes.
There is a strong case for international cooperation to ensure that the benefits of the global data economy can build a more resilient, healthier, and fairer global society. To find a way forward together, we can start by asking the right questions.
Authors:

Yan Carrière-Swallow, Economist in Strategy, Policy, and Review Department, IMF

Vikram Haksar, Assistant Director, Monetary and Capital Markets Department, IMF

Compliments of the IMF.
The post IMF | Let’s Build a Better Data Economy first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Six countries remain subject to potential action while broader international tax negotiations continue
WASHINGTON – The United States Trade Representative (USTR) today announced the next steps in its Section 301 investigations of Digital Service Taxes (DSTs) adopted or under consideration by ten U.S. trading partners.  In January, USTR found that the DSTs adopted by Austria, India, Italy, Spain, Turkey, and the United Kingdom were subject to action under Section 301 because they discriminated against U.S. digital companies, were inconsistent with principles of international taxation, and burdened U.S. companies.  USTR is proceeding with the public notice and comment process on possible trade actions to preserve procedural options before the conclusion of the statutory one-year time period for completing the investigations.
“The United States is committed to working with its trading partners to resolve its concerns with digital services taxes, and to addressing broader issues of international taxation,” said Ambassador Katherine Tai.  “The United States remains committed to reaching an international consensus through the OECD process on international tax issues.  However, until such a consensus is reached, we will maintain our options under the Section 301 process, including, if necessary, the imposition of tariffs.”
The remaining four jurisdictions – Brazil, the Czech Republic, the European Union, and Indonesia – have not adopted or not implemented the DSTs under consideration when the investigations were initiated.  Accordingly, USTR is terminating these four investigations without further proceedings.  If any of these jurisdictions proceeds to adopt or implement a DST, USTR may initiate new investigations.
Federal Register notices seeking public comment on proposed trade actions in the six continuing investigations, and terminating the remaining four investigations, may be found here.
###
Background
On June 2, 2020, USTR initiated investigations into DSTs adopted or under consideration in ten jurisdictions:  Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.  Following comprehensive investigations, including consultations with the countries subject to investigation and consideration of public comments, in January 2021 USTR issued reports on DSTs adopted by Austria, India, Italy, Spain, Turkey. and the United Kingdom.
The reports detail unreasonable, discriminatory, and burdensome attributes of each of these countries’ DSTs.  In addition, USTR issued a status update in the investigations of the DSTs under consideration by Brazil, the Czech Republic, the European Union, and Indonesia.  The update discusses the status of each jurisdiction’s consideration of a possible DST, and notes U.S. concerns that DSTs may be adopted in the future.  The status updates are available here.
Termination of Section 301 Digital Services Tax investigations of Brazil, the Czech Republic, the European Union, and Indonesia, may be found here.
Proposed Action in Section 301 Investigation of Austria’s Digital Services Tax
Proposed Action in Section 301 Investigation of India’s Digital Services Tax
Proposed Action in Section 301 Investigation of Italy’s Digital Services Tax
Proposed Action in Section 301 Investigation of Spain’s Digital Services Tax
Proposed Action in Section 301 Investigation of Turkey’s Digital Services Tax
Proposed Action in Section 301 Investigation of the United Kingdom’s Digital Services Tax
Compliments of the Office of the United States Trade Representative (USTR).
The post USTR Announces Next Steps of Section 301 Digital Services Taxes Investigations first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Blog post by Christine Lagarde, President of the ECB |
One year ago, we launched our pandemic emergency purchase programme (PEPP). Since then, the PEPP has provided crucial support to euro area citizens in difficult times. It stabilised financial markets by preventing the market turbulence in the spring of last year from morphing into a full-blown financial meltdown with devastating consequences for the people of Europe. And it has ensured that financing conditions have remained favourable, helping households and families to sustain consumption, firms to remain in business and governments to undertake the necessary fiscal actions.
We launched the PEPP on 18 March 2020, with an initial envelope of €750 billion, as a targeted, temporary and proportionate measure in response to a public health emergency that was unprecedented in recent history.[1] The rapid spread of the coronavirus (COVID-19) and the far-reaching containment measures constituted an extreme economic shock, effectively switching off large parts of the economy. Public life came to a standstill.
Conditions in financial markets deteriorated sharply as liquidity dried up and investors sought the safety of the least risky assets, causing acute fragmentation in the single currency area. Equity prices dropped by nearly 40% in a matter of weeks, sovereign bond yields surged in most countries and corporate bond spreads widened to levels last seen during the global financial crisis.
In short, a perilous macro-financial feedback loop threatened to impair the smooth transmission of our monetary policy, putting at risk the achievement of the ECB’s price stability mandate. Indicators of stress across different market segments reflect the severity of the situation in global financial markets at the onset of the crisis (Chart 1).

Chart 1
Composite indicator of systemic stress for the euro area and the United States(0 = no stress, 1 = high stress)
Source: Working Paper Series, No 1426, ECB.
Notes: The composite indicator of systemic stress aggregates stress symptoms across money, bond, equity and foreign exchange markets and is computed from time-varying correlations among individual asset returns. The latest observation is for 18 March 2021.

The launch of the PEPP acted as a powerful circuit breaker. Market conditions stabilised before we bought even a single bond. Our commitment to do everything necessary within our mandate to support the euro area economy throughout the pandemic was understood and internalised by markets from day one.
Flexibility in the way asset purchases can be conducted under the PEPP underlined our commitment. To this day, this flexibility remains the PEPP’s most precious asset. It has allowed our purchases to fluctuate over time, across asset classes and among jurisdictions to stave off risks to the transmission of our policy where and when they were most pressing.
In the first months of the programme, when the risk-bearing capacity of private investors was severely constrained, we frontloaded purchases to help restore orderly liquidity conditions, absorbing assets at a pace well in excess of €100 billion every month, on top of the monthly purchases under the asset purchase programme, which we decided to also step up with an additional envelope of €120 billion. We also shifted a large share of our purchases to the commercial paper market to help euro area corporates manage their rising short-term cash needs. And we distributed our purchases across the euro area in a way that succeeded in reducing fragmentation and ensuring that all sectors and countries benefited from our monetary policy response.
By the summer, buttressed by the establishment of three European safety nets for households, firms and governments and the launch of the EU Recovery and Resilience Facility, euro area bond markets had largely been restored to normal, as also evidenced by the strong revival of the primary market for corporate bond issuance.
Additional wide-ranging measures targeted at ensuring that banks remained reliable carriers of our monetary policy protected corporate funding conditions well beyond capital markets. Our recalibrated targeted longer-term refinancing operations (TLTRO III), together with easier collateral standards, provide strong incentives for banks to maintain their lending to the real economy throughout the crisis, benefiting in particular small and medium-sized companies. After the operation settling later this week, we will have extended more than €2 trillion in loans to banks under TLTRO III at historically favourable rates, an unprecedented level of support.
Renewed stability in financial markets was a precondition which allowed the Governing Council to switch the focus in the calibration of PEPP from crisis relief mode to its second modality, that of contributing to an appropriate monetary policy stance. Price pressures in the euro area had softened considerably on account of paralysed activity and weak demand. Headline inflation was rapidly approaching negative territory, also due to temporary factors, and was expected to remain exceptionally weak for a considerable period of time.
Further decisive action was therefore needed to ensure that the PEPP could provide sufficient support to the euro area economy to help offset the pandemic-related downward shift in the projected path of inflation. In June 2020 we expanded the PEPP envelope by €600 billion, to a total of €1,350 billion, and announced that we expected purchases to run for at least another year.
By the end of last year, however, given the sharp resurgence in new COVID-19 infections, it had become clear that the economic fallout from the pandemic would be even more prolonged. The December Eurosystem staff macroeconomic projections pointed to a more protracted weakness in inflation than previously envisaged.
But the environment that the Governing Council faced towards the end of last year differed in two fundamental aspects from the challenges we faced in the early stages of the crisis.
One was the concrete prospect of the rollout of multiple vaccines bringing a solution to the health crisis, which provided some much-needed light at the end of the tunnel.
The other was the lasting success of our measures, and the PEPP in particular, in delivering a degree of monetary accommodation that was historic on various levels. The euro area GDP-weighted sovereign yield curve was firmly in negative territory and well below pre-crisis levels (Chart 2). The dispersion across euro area long-term sovereign yields had reached a new low for the period since the global financial crisis. And bank lending rates were at, or close to, historical lows.

Chart 2
Euro area GDP-weighted sovereign yield curve(percentages per annum)
Source: Refinitiv and ECB calculations.

Against this backdrop, the Governing Council committed to preserving favourable financing conditions for as long as needed in order to bridge the gap until vaccination allowed the recovery to build its own momentum.[2]
The pledge to use the PEPP to preserve favourable financing conditions relies on its inbuilt flexibility. It means that we can purchase less if financing conditions can be maintained on favourable terms even with a lower volume of bond purchases. And it means that we need to purchase more when we see a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation.
To underpin our commitment, in December 2020 the Governing Council decided to expand the PEPP envelope by an additional €500 billion, to a new total of €1,850 billion – more than 15% of pre-pandemic euro area GDP. Our promise to conduct net asset purchases until at least March 2022 strengthened public confidence in our commitment to remain a reliable and steady source of support even as vaccines are rolled out.
Two broad aspects are crucial to understanding how our commitment works in practice. The first is how we define financing conditions. And the second is how we assess favourability.
We think of financing conditions in a holistic and multifaceted way.
A holistic approach means taking a perspective that covers the entire transmission chain – from “upstream” to “downstream” stages. “Upstream” refers to the interest rates that are at the start of the transmission process: risk-free interest rates and sovereign yields. We say they are located upstream because, on the one hand, they respond fairly well to adjustments in the pace of PEPP purchases and, on the other, they influence, with a lag, the downstream financing conditions for companies and households seeking funding in the capital markets or via bank loans.
A multifaceted approach allows us to study each indicator in its own right rather than basing our assessment on composite measures of financing conditions. This ensures that we take a perspective that is sufficiently granular to allow us to detect movements in specific market segments in a timely manner.
This matters because not all shocks to financing conditions may occur in the upper stages of transmission. Changes in the conditions for government loan guarantee schemes, for example, may affect bank lending conditions without impinging on upstream indicators. Our multifaceted approach assigns an adequate weight to such indicators, also reflecting the importance of bank lending for growth and employment in the euro area.
How, then, do we assess the favourability of financing conditions?
Such an assessment cannot be conducted in isolation. It requires a joint test that appraises the prevailing financing conditions against the euro area’s economic and inflation outlook. That test is conducted incrementally: we assess the drivers, the pace and extent of the change in financing conditions since our last favourability assessment, and the impact of that change on progress towards countering the downward impact of the pandemic on the projected path of inflation.
The quarterly updates of the Eurosystem/ECB staff macroeconomic projections provide an appropriate platform for incorporating all the information that is relevant for us to conduct such a joint assessment. At the same time, we retain the option to adjust the pace of purchases at any point in time in response to potential changes in market conditions, as we have done in the past. In other words, we will continue to purchase flexibly over time, across asset classes and among jurisdictions.
At our Governing Council meeting on 11 March, we assessed recent changes in financing conditions against the latest ECB staff macroeconomic projections.
Downstream indicators, such as bank lending rates, had remained stable and close to historical lows. Upstream indicators, by contrast, had increased measurably since our December meeting. The 10-year euro area overnight index swap rate and the 10-year GDP-weighted sovereign yield had both increased by around 30 basis points, in large part reflecting prospects of a stronger global economic recovery.
A joint assessment of the evolution of financing conditions and the inflation outlook, however, concluded that there was a risk that the repricing in long-term bond yields could be inconsistent with offsetting the negative pandemic shock to the projected inflation path.
While inflation rose at the start of the year and is expected to increase further over the course of 2021, these developments largely reflect transitory factors. Underlying inflation is predicted to increase only moderately in the coming years as slack will continue weighing on price formation in the euro area.
Moreover, uncertainty around the inflation outlook remains considerable, and the latest staff projections suggested a medium-term inflation outlook that was broadly unchanged from the December 2020 projections, foreseeing inflation at 1.4% in 2023, still below the projected path seen before the pandemic.
In this environment, a sizeable and persistent increase in market-based interest rates, if left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy at a time when preserving favourable financing conditions still remains necessary to underpin economic activity and safeguard medium-term price stability.
Based on this joint assessment, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year. We will purchase flexibly according to market conditions and with a view to preventing a premature tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation.
The overall crisis response has powerfully illustrated how monetary, supervisory and fiscal policies can be mutually reinforcing, within their respective mandates. Looking back over the past year, the Governing Council has been resolute in its commitment to supporting the citizens of the euro area through this extraordinary crisis. The PEPP has been, and remains, at the core of our policy response to the crisis. And just as the pandemic and the macro-financial landscape have evolved over time, so has the PEPP. Its flexibility has allowed us to respond swiftly to the rapidly changing financial and macroeconomic landscape. Overall, it is fair to say that, without the PEPP, the euro area would presumably have experienced a severe economic and financial crisis with devastating consequences for society as a whole.
And while much progress has been made and we can see light at the end of the tunnel, we cannot be complacent. The near-term economic outlook is subject to uncertainty, relating in particular to the dynamics of the pandemic and the speed of vaccination campaigns. We therefore stand ready to adjust all of our instruments, as appropriate, to ensure that inflation moves towards our aim in a sustained manner, in line with our commitment to symmetry.
Compliments of the European Central Bank.
The post ECB | One year of the PEPP: many achievements but no room for complacency first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.