Today, the European Commission published its annual report on the Safety Gate, which is the EU rapid alert system for dangerous consumer products helping to take dangerous non-food products off the market. The report shows that the number of actions taken by authorities following an alert is growing year by year, reaching a new record number of 5,377, compared to 4,477 in 2019. 9% of all alerts raised in 2020 concerned products related to COVID-19, mostly masks meant to protect but failing to do so. Other examples for dangerous COVID-19 related products notified in the Safety Gate are disinfectants containing toxic chemicals, such as methanol that can lead to blindness or even death if swallowed, or UV sanitizers that exposed users to strong radiation causing skin irritations.
Didier Reynders, Commissioner for Justice, said: “The Safety Gate has demonstrated to be   crisis-proof: during the COVID-19 pandemic, it has helped protect consumers by being a key instrument to efficiently and swiftly circulate information concerning dangerous products, such as unsafe masks or toxic disinfectants and remove them from the market. With protective tools such as this one, consumer rights are further guaranteed.”  
Main findings of the report
Surveillance action focused on COVID-19 related products that have become essential to all consumers and hence in 2020 there were 161 alerts on masks, 3 alerts on specific overalls, 13 alerts on hand disinfectants and 18 alerts on UV lamps supposed to function as sterilizers. The alerts circulated in the system continue this year.
In 2020, authorities from the 31 participating countries of the Safety Gate network (EU Member States plus Norway, Iceland, Liechtenstein and the UK) exchanged a total of 2,253 alerts on measures taken against dangerous products through the system. They reacted with 5,377 follow-up actions. This represents an increase of more than 20% from the 2019 number of follow-ups.
According to the report, toys are the most notified product category (27% of total notifications), followed by motor vehicles (21%) and electrical appliances and equipment (10%). This illustrates that market surveillance in the EU has a special focus on children, a vulnerable consumer group. In general, the most frequently flagged concerns related products causing injuries such as fractures or concussions (25%), followed by chemical components in products  (18%) and risks for children to choke (12%).
In comparison to last year, more online marketplaces are committing to improve the safety of the products they sell. Yesterday, two new signatories have joined the Product Safety Pledge initiative: Joom and Etsy. They thus promise to check products on Safety Gate are not for sale on their websites and to act quickly in case national authorities signal to them any dangerous products, which should be taken down.
Next steps
The Commission rewards businesses that go the extra mile to protect consumers with the EU’s Product Safety Award. This year’s edition, which was launched for applications yesterday, will focus on initiatives aimed at protecting vulnerable consumers in particular and on the use of new technologies to enhance product consumer safety. The deadline to apply is April 30th. You can find more information here.
Background
Since 2003, the Safety Gate enables quick exchange of information between EU/EEA member states, the UK and the European Commission about dangerous non-food products posing a risk to health and safety of consumers. This way, appropriate follow-up action can be taken and products can be banned from the market.
Matching with the publication of the report, the Commission has launched its fully revamped Safety Gate public website with a modern and user-friendly interface to speed up and facilitate the notification process. Pages are progressively translated into all EU languages, Icelandic and Norwegian. Businesses can also use the Business Gateway to quickly and efficiently inform national authorities about security concerns regarding a product that they have put on the market.
Another action on consumer protection is the https://ec.europa.eu/info/files/product-safety-pledge_en , which sets out specific voluntary actions of marketplaces to swiftly remove offers of unsafe products from their platforms. To date, eleven online marketplaces have signed this agreement to cooperate with Member States to remove dangerous products from their websites: bol.com, eMAG, Wish.com, AliExpress, Amazon, eBay, Rakuten France, Allegro, Cdiscount, and yesterday, Etsy and Joom.
Compliments of the European Commission.
The post Protecting European consumers: Safety Gate efficiently helps take dangerous COVID-19 products off the market first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Governor Lael Brainard at the 2021 Annual Washington Conference, Institute of International Bankers (via webcast) |
It has now been one year since the devastating effects of the first wave of the COVID-19 pandemic hit our shores, a year marked by heartbreak and hardship.1 We look forward to a brighter time ahead, when vaccinations are widespread, the recovery is broad based and inclusive, and the economy fully springs back to life. But we should not miss the opportunity to distill lessons from the COVID shock and institute reforms so our system is more resilient and better able to withstand a variety of possible shocks in the future, including those emanating from outside the financial system.
The Dash for Cash
Investor sentiment shifted dramatically in the early days of March 2020 with the realization that COVID would disrupt the entire global economy. Short-term funding markets became severely stressed as market participants reacted to the advent of this low-probability catastrophic event. The abrupt repositioning and repricing of portfolios led to a dash for cash, as even relatively safe Treasury holdings were liquidated, volatility spiked, and spreads in Treasury and offshore dollar funding markets widened sharply. Forceful and timely action by the Federal Reserve and other financial authorities was vital to stabilize markets and restore orderly market functioning.
Although some parts of the financial system that had undergone significant reform in the wake of the Global Financial Crisis remained resilient, the COVID stress test highlighted significant financial vulnerabilities that suggest an agenda for further financial reform. I will briefly comment on these areas of vulnerability as well as areas where earlier reforms led to greater resilience.
Short-Term Funding Market Vulnerabilities
The COVID shock brought to the fore important vulnerabilities in the systemically important short-term funding markets that had previously surfaced in the Global Financial Crisis. Signs of acute stress were readily apparent in intermediaries and vehicles with structural funding risk, particularly in prime money market funds (MMFs). Indeed, it appears these vulnerabilities had increased, as assets held in prime MMFs doubled in the three years preceding last March. When the COVID shock hit, investors rapidly moved toward cash and the safest, most liquid financial instruments available to them. Over the worst two weeks in mid-March, net redemptions at publicly offered institutional prime MMFs amounted to 30 percent of assets. This rush of outflows as a share of assets was faster than in the run in 2008, and it appears some features of the money funds may have contributed to the severity of the run.2
The run in March forced MMFs to rapidly reduce their commercial paper holdings, which worsened stress in short-term funding markets. Funding costs for borrowers shot up, and the availability of short-term credit at maturities beyond overnight plunged. These markets provide the short-term credit many businesses need to keep operating and meet payrolls. So when short-term funding markets shut down, it can imperil many businesses, too.
For the second time in 12 years, a run on MMFs triggered the need for policy intervention to mitigate the effect on financial conditions and the wider economy. To head off the risk of widespread business failures and layoffs, the Federal Reserve took a number of actions, including announcing the Commercial Paper Funding Facility on March 17 and the Money Market Mutual Fund Liquidity Facility on March 18, 2020. Following the announcement of these facilities, prime MMF redemptions slowed almost immediately, and other measures of stress in short-term funding markets began to ease.
The March 2020 turmoil highlights the need for reforms to reduce the risk of runs on prime money market funds that create stresses in short-term funding markets. The President’s Working Group on Financial Markets has outlined several potential reforms to address this risk, and the Securities and Exchange Commission recently requested comment on these options.3 If properly calibrated, capital buffers or reforms that address the first-mover advantage to investors that redeem early, such as swing pricing or a minimum balance at risk, could significantly reduce the run risk associated with money funds. Currently, when some investors redeem early, remaining investors bear the costs of the early redemptions. In contrast, with swing pricing, when a fund’s redemptions rise above a certain level, the investors who are redeeming receive a lower price for their shares, reducing their incentive to run.4 Similarly, a minimum balance at risk, which would be available for redemption only with a time delay, could provide some protection to investors who do not run by sharing the costs of early redemptions with those who do. Capital buffers can provide dedicated resources within or alongside a fund to absorb losses and reduce the incentive for investors to exit the fund early.
To be sure, domestic money market funds are not the only vulnerable cash-management investment vehicles active in U.S. short-term funding markets. For example, offshore prime money funds, ultrashort bond funds, and other short-term investment funds also experienced stress and heavy redemptions last March. The runs on offshore MMFs that hold dollar-denominated assets like commercial paper underscore the importance of working with international counterparts to increase the resilience of short-term funding markets. We are supporting the work of the Financial Stability Board to assess options for mitigating the vulnerabilities of MMFs globally and report on them later this year.
The COVID shock also highlighted the structural vulnerabilities associated with the funding risk of other investment vehicles that offer daily liquidity while investing in less-liquid assets, such as corporate bonds, bank loans, and municipal debt. Funds that invest primarily in corporate bonds saw record outflows in March 2020. These open-end funds held about one-sixth of all outstanding U.S. corporate bonds prior to the crisis. Bond mutual funds, including those specializing in corporate and municipal bonds, had an unprecedented $250 billion in outflows last March, far larger than their outflows at any time during the 2007–09 financial crisis. The associated forced sales of fund assets contributed to a sharp deterioration in fixed-income market liquidity that necessitated additional emergency interventions by the Federal Reserve. In assessing possible reforms to address this run risk, swing pricing could be helpful, because it reduces the first-mover advantage for running from a fund by imposing a cost when redemptions are high. Swing pricing has been used for more than a decade in European mutual funds, where it has been shown to slow redemptions in stress events.5 In the United States, mutual funds have not adopted swing pricing, in part because of technical obstacles.
Treasury Market Functioning
The COVID shock also revealed vulnerabilities in the market for U.S. Treasury securities. The U.S. Treasury market is one of the most important and liquid securities markets in the world, and many companies and investors treat Treasury securities as risk-free assets and expect to be able to sell them quickly to raise money to meet any need for liquidity. Trading conditions deteriorated rapidly in the second week of March as a wide range of investors sought to raise cash by liquidating the Treasury securities they held. Measures of trading costs widened as daily trading volumes for both on- and off-the-run securities surged. Indicative bid-ask spreads widened by as much as 30-fold for off-the-run securities. Market depth for the on-the-run 10-year Treasury security dropped to about 10 percent of its previous level, and daily volumes spiked to more than $1.2 trillion at one point, roughly four standard deviations above the 2019 average daily trading volume. Stresses were also evident in a breakdown of the usually tight link between Treasury cash and futures prices, with the Treasury cash–futures basis—the difference between prices of Treasury futures contracts and prices of Treasury cash securities eligible for delivery into those futures contracts—widening notably.
Selling pressures were widespread, reflecting sales by foreign official institutions, rebalancing by asset managers, a rapid unwinding of levered positions, and precautionary liquidity raising. Available data suggest that foreign institutions liquidated about $400 billion in Treasury securities in March, with more than half from official institutions and the remainder from private foreign investors, at a time when offshore dollar funding markets also experienced acute stress. Domestic mutual funds sold about $200 billion during the first quarter, selling their less-liquid Treasury securities in order to raise cash to meet investor redemptions. Hedge funds reduced long cash Treasury positions by an estimated $35 billion.6
Dealers play a central role in the Treasury market by buying and selling securities and providing financing to investors. Their capacity or willingness to intermediate these flows was strained amid the elevated uncertainty and intense and widespread selling pressure in mid-March. Operational adjustments associated with the rapid move to remote work may also have inhibited intermediation.
The acute stresses in the Treasury market necessitated emergency intervention by the Federal Reserve at an unprecedented scale. The Federal Open Market Committee authorized purchases of Treasury securities and agency mortgage-backed securities (MBS) “in the amounts needed” to support smooth market functioning of these markets.7 Between March 12 and April 15, the Federal Reserve increased its holdings of Treasury securities by about $1.2 trillion and agency MBS by about $200 billion. The Federal Reserve provided overnight and term repurchase agreement (repo) operations to address disruptions in Treasury financing markets. These actions rapidly restored market functioning, and a variety of indicators had returned to pre-COVID levels by the summer.8
While the scale and speed of flows associated with the COVID shock are likely pretty far out in the tail of the probability distribution, the crisis highlighted vulnerabilities in the critically important Treasury market that warrant careful analysis. A number of possible reforms have been suggested to strengthen the resilience of the Treasury market. For instance, further improvements in data collection and availability have been recommended to enhance transparency related to market participants, such as broker-dealers and hedge funds. Some have suggested that the Federal Reserve could provide standing facilities to backstop repos in stress conditions, possibly creating a domestic standing facility or converting the temporary Foreign and International Monetary Authorities (FIMA) Repo Facility to a standing facility.9 Other possible avenues to explore include the potential for wider access to platforms that promote forms of “all to all” trading less dependent on dealers and, relatedly, greater use of central clearing in Treasury cash markets.10 These measures involve complex tradeoffs and merit thoughtful analysis in advancing the important goal of ensuring Treasury market resilience.
Offshore Dollar Funding Markets
The global dash for cash also led to severe stress in offshore dollar funding markets, where foreign exchange swap basis spreads increased sharply to levels last seen in the Global Financial Crisis. Foreign banking organizations serve as key conduits of dollar funding for foreign governments, central banks, businesses, nonbank financial institutions, and households.11 They hold $14 trillion in dollar-denominated claims—about half of the total global dollar claims of banks. The Federal Reserve and several other central banks responded swiftly to distress in the offshore dollar funding markets by announcing the expansion and enhancement of dollar liquidity swap lines on March 15, followed on March 19 by the reopening of temporary swap lines with the nine central banks that had temporary agreements during the Global Financial Crisis. On March 30, the Federal Reserve introduced a new temporary FIMA Repo Facility to support the liquidity of Treasury securities held by foreign monetary authorities, an important innovation. Following these interventions, foreign exchange swap basis spreads started moving down almost immediately and within a few weeks reached their levels before the COVID shock.
Central Clearing
The reforms put in place pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) in response to the previous crisis appear to have supported the resilience of the financial system as it absorbed the COVID shock. Importantly, regulators instituted global reforms to encourage and, in some cases, mandate central clearing after observing the loss of confidence in key banking intermediaries during the Global Financial Crisis associated with the opaque web of bilateral derivatives contracts. As a result, during the COVID turmoil, the greatly expanded scope of central clearing, with the attendant reduction in counterparty and settlement risks, supported the orderly functioning of critical securities and derivatives markets amid sharply increased trading volumes and spiking volatility. Moreover, several central clearing platforms (CCPs) successfully handled problems that emerged at a few smaller market participants, without noticeable spillovers to other markets and institutions.
However, as part of the risk controls that are inherent in central clearing, the COVID market turmoil generated exceptionally large flows of cash through CCPs from market participants with mark-to-market losses to those participants with corresponding gains. Furthermore, during the March COVID turmoil, a number of CCPs collected significantly higher financial resources from their members to protect against increased risk as captured by their risk models. These demands for liquidity were met adequately, and the markets operated efficiently and effectively, although the sudden spikes in CCP requirements may have stressed the liquidity positions of some trading firms. And while CCPs performed well during this period of stress, forceful public emergency interventions and the strong capitalization of banks likely mitigated the risks of large clearing member defaults.
The COVID-19 shock presents an important opportunity to reflect on lessons learned about central clearing by the public and private sectors. CCPs could consider the effects of the market dysfunction on their liquidity risk-management plans, including their assumptions regarding the ability to raise cash from noncash assets or securities. In addition to reassessing their liquidity planning, CCPs could also assess the tradeoffs between their own risk-management decisions and broader financial stability concerns, particularly in light of how CCPs may have contributed to deleveraging by some market participants in March by the magnitude of the increases in financial resources they collected when trading and volatility spiked. CCPs could assess their margin models, consider improvements to reduce pro-cyclicality, and consider increased transparency to help clearing members anticipate margin calls during periods of volatility. The holistic review by the Financial Stability Board, in which we participate, could provide important insights into these issues.12
Bank Capital and Liquidity
The resilience of the banking sector in response to the COVID shock underscores the importance of guarding against erosion of the strong capital and liquidity buffers and risk-management, resolution, and stress-testing programs put in place pursuant to the Dodd-Frank Act. Banks entered the pandemic with strong capital and liquidity buffers, especially those banks whose size and complexity are systemically important. Strong capital and liquidity buffers allowed the banking system to accommodate the unprecedented demand for short-term credit from many businesses that sought to bridge the pandemic-related shortfalls in revenues. Banks’ capital positions initially declined because of this new lending and strong provisioning for loan losses but have since risen above their pre-pandemic levels, reflecting better-than-expected loan performance and a reduction in credit provision as well as caps on dividends and restrictions on share repurchases in the past several quarters.
Strong capital and liquidity positions will remain important, as banks still face significant challenges—including an environment of higher-than-normal uncertainty. For instance, some sectors of commercial real estate loans and commercial and industrial loans are more vulnerable than before the crisis. Similarly, net interest margins could remain in the lower part of their historical ranges for some time. Although losses and delinquency rates on bank loans are currently low, performance could deteriorate as borrowers exit forbearance, with particularly hard-hit businesses and households facing arrears on rent and mortgage payments.13 Recent developments have been encouraging, but downside risks remain, which could delay recovery and lead to higher losses.
Bank resilience benefited from the emergency interventions that calmed short-term funding markets and from the range of emergency facilities that helped support credit flows to businesses and households. While the results of our latest stress test released in December 2020 show that the largest banks are sufficiently capitalized to withstand a renewed downturn in coming years, the projected losses take some large banks close to their regulatory minimums.14 According to past experience, banks that approach their regulatory capital minimums are much less likely to meet the needs of creditworthy borrowers. It is important for banks to remain strongly capitalized in order to guard against a tightening of credit conditions that could impair the recovery.
Cyclical Vulnerabilities
Structural vulnerabilities such as those discussed earlier could interact with cyclical vulnerabilities in the financial system, potentially magnifying the associated risks. Valuations are elevated in a number of asset classes relative to historical norms. After plunging as the pandemic unfolded last spring, broad stock price indexes rebounded to levels well above pre-pandemic levels. Some observers also point to the potential for stretched equity valuations and elevated volatility due to retail investor herd behavior facilitated by free online trading platforms. Risk appetite in credit markets is also elevated, with high-quality investment-grade (IG) corporate debt trading at slightly negative real yields and issuance of leveraged loans returning to 2019 levels. While financial markets are inherently forward-looking, taking into account the prospects of widespread vaccinations and substantial fiscal support, a variety of risks related to the virus could result in a sudden change in investor risk sentiment. This could, for instance, trigger outflows from corporate bond mutual funds and other managed funds with an investor base that is sensitive to fund performance. Commercial real estate prices are susceptible to declines if the pace of distressed transactions picks up or if the pandemic leads to permanent changes in patterns of use—for instance, a decline in demand for office space due to higher rates of remote work or for retail space due to a permanent shift toward online shopping.
Debt loads at large nonfinancial firms were high coming into the pandemic and remain so. Measures of leverage at large firms remain near the historical highs reached at the beginning of 2020, with the aggregate book value of debt exceeding 35 percent of assets in the third quarter. A large portion of IG debt is currently at the lowest IG rating, making this debt vulnerable to downgrades. Such downgrades may bring insurers, mutual funds, and other regulated institutional investors closer to internal or statutory thresholds on their holdings of non-IG securities, potentially forcing these institutions to shed assets.
Over a longer horizon, changes in the economic environment associated with low equilibrium interest rates, persistently below-target trend inflation, and low sensitivity of inflation to resource utilization could be expected to contribute to a low-for-long interest rate environment and reach-for-yield behavior. In these kinds of environments, it is valuable to deploy macroprudential tools, such as the countercyclical capital buffer, to mitigate potential increases in financial imbalances.
The Path Ahead
The COVID shock subjected the financial system to an acute stress that necessitated emergency interventions on a massive scale by financial authorities around the world. The COVID turmoil underscores the importance of ensuring the financial system is resilient to a wide range of shocks, including those emanating from outside the financial system. Regulators and international standard-setting bodies have an opportunity to draw important lessons from the COVID shock about where fragilities remain, such as in prime MMFs and other vehicles with structural funding risk. A number of common-sense reforms are needed to address the unresolved structural vulnerabilities in nonbank financial intermediation and short-term funding markets.
Compliments of the U.S. Federal Reserve.
The post U.S. FED | Speech: Some Preliminary Financial Stability Lessons from the COVID-19 Shock first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Accelerated by the pandemic, the digital future is coming at us faster than ever before, and maybe faster than we can imagine. In this issue, we explore the possible consequences—the good, the bad, and the gray.
For millions, technology has been a lifeline, changing the way we work, learn, shop, and entertain ourselves. In a year like no other, it has spurred game-changing digital shifts. Governments moved quickly, using mobile solutions to provide cash assistance; financial technology has helped the survival, and in some cases, growth of small- and medium-sized businesses; and the first national digital currency, in The Bahamas, provides a glimpse of the future of money.
Despite the promise of digital transformation, it can also drive unequal outcomes in education, opportunities, and access to health care and financial services. Automation has destroyed jobs, some permanently. The chasm between the digitally connected and the unconnected—across and within countries and between rural and urban areas—has amplified social and economic inequalities.
Daron Acemoğlu underscores that the government can and should play a regulatory role, with incentives for innovation toward “human-friendly” technologies that produce good jobs. Hyun Song Shin and coauthors elaborate on smart policies that can bring more people—particularly the poorest—into the financial system. And Sierra Leone’s Minister of Education, David Sengeh, describes in an interview how he has made his country’s education system both more digital and more inclusive.
Clearly for such initiatives to succeed, as Cristina Duarte emphasizes, countries must scale up investment in digital infrastructure, such as access to electricity, mobile and internet coverage, and digital ID.
Still, there are real risks: Tim Maurer focuses on addressing cyber threats to the financial system. Yan Carrière-Swallow and Vikram Haksar suggest that commercial interests must be balanced with protection of privacy and data integrity. Other contributors illuminate digital taxation, data bias and ethics, and the need for global tech cooperation.
Digitalization can transform economies and lives. The key takeaway: innovation needs to have public value and be shaped to bring everyone into the digital age.
Elsewhere in this issue, IMF chief economist Gita Gopinath highlights in a Straight Talk column the stark divergence in prospects across countries, regions, and sectors and the needed policy actions on several fronts. Sam Bowles and Wendy Carlin advance the view that the pandemic, along with climate change, will alter thinking about economics and the social contract. And authors Ruchir Agarwal, Ina Ganguli, and Patrick Gaule find that policies that help identify and nurture young talent from poorer countries could advance the global knowledge frontier.
Finally, Prakash Loungani profiles Tel Aviv University’s Assaf Razin, early scholar of the promise and perils of globalization.
Read FULL ISSUE here.
Author:

Gita Bhatt, Head of Policy Communications and Editor-In-Chief of Finance & Development Magazine, IMF

Compliments of the IMF.
The post The Haves and Have-nots Of the Digital Age first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Panel contribution by Luis de Guindos, Vice-President of the ECB, at the Banque de France / Sciences Po Financial Stability Review Conference 2021 “Is macroprudential policy resilient to the pandemic?” |
Introduction
It is a great pleasure to be here this afternoon and share some thoughts on the future of macroprudential policy in the euro area after the coronavirus (COVID-19) pandemic.
About one year ago, the euro area was hit by a major unexpected shock: the COVID-19 pandemic. While this health and economic crisis has had, and continues to have, a severe impact on European citizens and businesses, the euro area banking sector has so far weathered the crisis well. Rather than being part of the problem, it has been part of the solution. The banking sector has managed to support the economy through continued lending, including to the sectors most affected by the lockdown measures. Compared to past crisis episodes, there are two main reasons why banks have played a different role in this crisis.
First, in terms of capital and liquidity, the euro area banking sector was much better prepared than it was before the great financial crisis. This was not least due to the progress made over the past decade in strengthening the regulatory standards for banks and moving towards the banking union.
Second, credit provision during the pandemic has been aided by decisive government support measures, such as public loan guarantees and direct and indirect support to firms, and by relief measures taken by micro- and macroprudential authorities. Specifically, ECB Banking Supervision allowed banks to temporarily operate below the level of capital defined by Pillar 2 guidance and the combined buffer requirement and recommended that banks refrain from dividend payments and share buy-backs. On the macroprudential side, several national authorities either announced a full release of countercyclical capital buffers or revoked previously announced increases to these and other buffers. Together, the micro- and macroprudential measures were a strong signal to banks that they should make use of their existing capital buffers to continue to provide key financial services and absorb losses while avoiding abrupt and excessive deleveraging that would be harmful for the economy.
In my remarks today, I will focus on two key challenges which have become increasingly relevant in recent years and which should be part of our reflections on the future of macroprudential policy after the COVID-19 pandemic. These challenges relate to the creation of what we call “macroprudential space” and to the complementarities between monetary policy and macroprudential policy in a monetary and banking union. As I will argue, addressing these two challenges will increase the effectiveness of the macroprudential framework and strengthen the resilience of the euro area banking sector to major unexpected shocks in the future.
Macroprudential space
The experience of the initial phase of the pandemic illustrated the importance of having sufficient releasable capital buffers in the banking sector. When the pandemic struck in early 2020, macroprudential authorities in the euro area had little room for manoeuvre to release macroprudential capital buffers. Only seven euro area countries (including the three home countries of my fellow panel members) had enacted or announced a countercyclical capital buffer requirement above zero. In the euro area banking sector as a whole, countercyclical capital buffer requirements accounted for only 0.2% of risk-weighted assets at the end of 2019. By contrast, structural buffer requirements, comprising the capital conservation buffer, systemic risk buffers and buffers for systemically important institutions, stood at 3.4%. Unlike the countercyclical capital buffer, structural buffers were in principle not designed to be releasable. But, unlike minimum requirements, buffers are there to absorb unexpected losses and to help sustain lending under stress conditions. In short, the fact that only a tiny fraction of capital buffers has been explicitly releasable limited the macro-financial stabilisation function of macroprudential policy.
Banks’ reluctance to dip into their existing buffers seems to be driven by a desire to avoid market stigma and to keep some distance from the threshold for automatic restrictions on distributions. This could be an area of concern at the system-wide level, given that recent empirical evidence of bank behaviour during the pandemic suggests that banks are less active in maintaining credit supply if they operate close to the combined buffer requirement. A contraction of the credit supply could compromise the recovery and increase the risks to financial stability. Recent research by ECB staff further suggests that having higher countercyclical capital buffers at the onset of the pandemic, which could have been released during the current crisis, would have led to significantly improved bank lending and reduced the fall in euro area GDP in 2020 without compromising the solvency level of the banking system. [1]
The imbalance between cyclical and structural buffers has gained more attention in the macroprudential debate since the beginning of the pandemic. There seems to be a growing consensus on the need to reassess the current balance between structural and cyclical buffers and to create more macroprudential space that could be used in a system-wide crisis if needed. I strongly welcome this development and encourage further work and discussions on this important topic, including on specific ways to create macroprudential space.
While it would be premature to envisage a certain outcome at this point, I would like to suggest three guiding principles for further deliberations on this topic. First, the creation of macroprudential space should be capital-neutral. In other words, it should be achieved by amending or rebalancing certain existing buffer requirements rather than by creating additional buffer requirements for banks. Second, the additional macroprudential space created in this way needs to have strong governance in order to ensure that capital buffers are released in a consistent and predictable way across countries when facing severe, system-wide economic stress. Third, considerations to create macroprudential space should focus on options that ensure continued compliance with applicable international standards set by the Basel Committee. The capital conservation buffer would be a natural candidate for creating macroprudential space if it was made releasable in a context where these principles were adhered to. Specifically, the possible release of the capital conservation buffer in a system-wide crisis should be centrally governed in the euro area and could be combined with dividend restrictions in order to maintain equivalence with international standards.
Complementarities between macroprudential and monetary policy
The second challenge relates to complementarities between macroprudential and monetary policy. As widely recognised in the literature, policy outcomes can be improved if complementarities between these two policy areas are exploited.[2] For instance, during phases of risk build-up, effective macroprudential policy can unburden monetary policy with respect to financial stability concerns. An advantage of macroprudential instruments in this respect, and which is particularly relevant in a monetary union, lies in the possibility to target the use of instruments towards certain sectors and to address asynchronous business and financial cycles across Member States. Similarly, during phases of risk materialisation, releasing macroprudential policy buffers can support monetary policy via the impact on banks’ credit supply.
Exploiting the complementarities between monetary and macroprudential policy requires a structured approach to the interaction between the two policy areas. In a monetary and banking union, the institutional dimension to the issue requires further reflection in the medium term. Under the current institutional architecture of the monetary and banking union, monetary policy and microprudential policy decisions for significant institutions are taken centrally in the euro area. By contrast, macroprudential policy decisions are primarily taken in a decentralised manner by national authorities, with the ECB only having asymmetric powers for certain instruments, as set out in the SSM Regulation. In particular, the SSM Regulation assigns to the ECB the power to apply more stringent measures or higher requirements for a specific set of instruments defined in the single rulebook.
Based on this institutional setting, a major challenge lies in how to foster a coherent policy mix across macroprudential policies and monetary policy in the euro area, taking into account that assessing the interaction and complementarity is even more important in a monetary union than in a single jurisdiction. A coordinated macroprudential policy response across the euro area is vital to strengthen the impact of policy actions and to support monetary policy, for instance through the release of macroprudential buffers in a system-wide crisis. Greater coordination of macroprudential action across the euro area would also foster timely policy action, reduce fragmentation across national lines and better account for cross-border systemic spillover effects. Furthermore, beyond coordination, the use of selective macroprudential tools at the system-wide level should also be considered, without prejudice to the ability of the national macroprudential authorities to act at the national level to address idiosyncratic shocks.
Looking ahead, I believe we need to reflect on the merits of improving the current governance framework for macroprudential policy in the euro area by complementing it with a centrally managed countercyclical macroprudential tool. More specifically, the reflections should in my view consider an increased role for the ECB’s Governing Council in macroprudential policy, given its special role in and responsibility for both monetary and macroprudential policy in the euro area, as set out in the Treaties and in the SSM Regulation.
Conclusions
Macroprudential policy has helped to mitigate the short-term impact of the pandemic on the euro area economy, alongside monetary, fiscal and other prudential policies. The COVID-19 crisis also illustrated the benefits of releasable bank capital buffers, supporting the case for rebalancing between releasable and structural capital buffer requirements to create macroprudential space in the near term. The post-pandemic period will also provide an opportunity to reflect on ways to make macroprudential policy more effective. In addition to possible changes to macroprudential instruments, these considerations should touch upon the governance of macroprudential policy in the European monetary and banking union in order to make best possible use of the complementarities between monetary and macroprudential policy.
Compliments of the European Central Bank.
The post ECB | Speech: Macroprudential policy after the COVID-19 pandemic first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Christine Lagarde, President of the ECB, at the “Jahresimpuls Mittelstand 2021” of Bundesverband Mittelständische Wirtschaft | Frankfurt am Main, 1 March 2021 |
It is a great pleasure to have the opportunity to speak to you today.
At the ECB we care deeply about connecting with small and medium-sized enterprises (SMEs), since they are the foundation of the European economy.
SMEs make up 99.8% of all non-financial companies in the EU, provide 66.6% of jobs and generate 56.4% of added value.[1] It is decisions by companies like yours to invest, hire and innovate that put the European economy on a path to growth.
But in Germany, being part of the Mittelstand has a special quality that is about much more than the firm’s size. It is about the philosophy of how to do business and the spirit of management. As Ludwig Erhard said, what defines the Mittelstand is “eine Gesinnung und eine Haltung”[2], how one acts and behaves in society.
This way of doing business has brought tremendous economic success. Of the 2,700 “hidden champions” worldwide – SMEs that are leaders in niche markets – almost half are part of the German Mittelstand.[3]
And it has also helped to pull Germany through times of great crisis.
The Mittelstand was central to the country’s Wirtschaftswunder after the Second World War. It was critical to Germany’s swift bounceback from the global financial crisis in 2008. And, when we rebound from the shock of the pandemic, the Mittelstand will have to be one of the drivers once again.
The coronavirus is a double economic shock. Its effects have hit activity extremely hard, with GDP falling by 6.8% in the euro area last year and 5% in Germany. But it has also accelerated structural changes that will transform our lifestyles and our economies.
According to some estimates, the pandemic has brought forward the digital transition in Europe by seven years.[4] And it is estimated that 20% of work hours will move permanently from office to home.[5] This will lead to new patterns of demand and new ways of living.
So, our challenge will not only be to recover from the crisis, but also to adapt to the changes it has set in motion. And the Mittelstand – thanks to its agility, its focus on innovation and its commitment to competing by adding value – will have to be at the heart of this process.
For now, however, the pandemic is still weighing heavily on our economies, and especially on firms in the services sector. While manufacturing has recovered quite well since the first lockdown last year, buoyed by solid global demand, activity in the services sector has remained subdued owing to the social distancing measures that are still in place today.
This particularly affects SMEs, because they make up an outsized share of firms in the sectors worst-affected by the crisis and they employ around 75% of the people working in those sectors.[6] So it is no surprise that many SMEs in Europe were put at risk of liquidity problems.[7]
But the recession we have gone through is not a typical one. Firms have been hit by a public health crisis that affects them indiscriminately, irrespective of whether they are the best or worst performers.
That is why policymakers had to step in. They had to prevent an unjustified loss of capital, jobs and incomes that would have deeply damaged our economic potential.
Essentially, what many firms needed was a bridge to the other side of the pandemic – support to pay wages and cover bills until they can do so again themselves. So the policy response has been about putting that bridge in place.
Fiscal policy has rightly taken the lead, because it can be targeted at the firms and sectors most exposed to the crisis. And it has, on the whole, been effective. In Germany, more than six million people were enrolled in the “Kurzarbeit” scheme during the first lockdown last April, which was more than four times the peak during the global financial crisis.[8]
But it was also crucial that SMEs did not face a credit crunch at the very moment when their revenues were drying up. And for that they needed finance.
Just like households, entrepreneurs can be savers and investors, but also employers and borrowers that depend on access to loans. SMEs in particular rely on funding from banks, since they typically do not access capital markets. Over the last decade, 43% of external finance for SMEs in the euro area has come from bank loans – double the share for large firms.[9]
So when the lockdowns began, SMEs across Europe turned to banks to meet their liquidity needs – and it was vital that a cheap and elastic supply of credit was available.
This is where the ECB stepped in. We monitor SMEs’ access to finance very closely, including through a special Europe-wide survey. And we took a series of measures specifically designed to help channel credit to firms in need.
First, we launched our pandemic emergency purchase programme (PEPP), which helped stabilise financial markets. That was crucial to ensure that bank lending rates did not tighten suddenly, since bank loans are priced off sovereign borrowing costs.
Second, we recalibrated our targeted longer-term refinancing operations (TLTRO III), lending to banks at the lowest rate we have ever offered, but only on the condition that they used the funds to lend to firms. Banks have taken up €1.7 trillion in these operations so far.
To access that liquidity, banks have to provide collateral, so we also decided to make loans to smaller businesses and the self-employed eligible as collateral for our operations. This encourages banks to grant loans to SMEs and refinance them by borrowing from the ECB.
In parallel, our supervisory arm ensured that there were no prudential barriers to banks acting quickly, which freed up €120 billion in bank capital for new lending.
And fiscal authorities complemented our efforts, making available wide-ranging loan guarantees and other liquidity support measures – equalling close to 20% of euro area GDP. This was crucial to mitigate the higher credit risk banks face when lending to SMEs during a recession.
As a result, from March to May last year, bank lending to euro area firms rose by the largest amount on record. And it was SMEs that benefited the most from both cheap and abundant credit.
Lending rates on very small loans – which are a proxy for lending to SMEs – declined substantially, with firms able to borrow at the lowest rates ever recorded – below 2%.[10] And, since March, €730 billion in new small loans have been granted to SMEs in the euro area, including €138 billion to SMEs in Germany.
Our policies were key to achieving that outcome. Banks taking part in our TLTROs saw a considerable increase in their credit growth, with loans rising by over €400 billion in the year up to September. And this dovetailed with government loan guarantees to funnel credit to SMEs, which received more than 70% of all the guaranteed loans granted.[11]
The upshot is that more firms have been protected and more jobs have been saved. Without the ECB’s policies, we estimate that over one million more people would have lost their jobs.[12]
But we are not out of the woods yet.
With the tremendous progress made on vaccine technology, we can now see the light at the end of the tunnel. But we still cannot see exactly how long that tunnel is. We will continue to face a period of high uncertainty until more people have been vaccinated against the virus.
In this setting, it is crucial that the bridge for SMEs remains in place for as long as needed. The ECB will help ensure that firms and families can access the finance they need to weather this storm – and that they can do so in the confidence that financing conditions will not tighten prematurely.
That commitment is the best way to provide certainty to all sectors of the economy and to bring stability back to the euro area swiftly. And this, in turn, is the best contribution we can make to delivering on our mandate of price stability.
As Goethe said, “Im Idealen kommt alles auf die élans, im Realen auf die Beharrlichkeit an.”[13] Reality is currently hard for many firms and the future remains uncertain. And so we will persist and persevere until the pandemic emergency has passed.
It will take a team effort to get there – from health authorities, from fiscal authorities and from all of you here. But I can assure you that the ECB will continue to play its part, as we have done since the first days of the crisis.
Compliments of the European Central Bank.
The post ECB | Speech: The coronavirus crisis and SMEs first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Statements and remarks 26 February 2021 14:00 by President Charles Michel |
Today we discussed security and defense. We want to act more strategically, to defend our interests and to promote our values. So we need to increase our ability to act autonomously and to strengthen our cooperation with our partners. We are committed to cooperating closely with NATO. A stronger Europe makes a stronger NATO.
We exchanged views with Secretary General Stoltenberg about working together to improve our collective security and the challenges ahead. We also look forward to cooperating with the new US administration on a strong transatlantic agenda, including a close dialogue on security and defence.
Last week, President Biden said: “America is back.” We in Europe are ready – to do our part, to be a strong and reliable partner, not only to the US, but to all our partners like the UN and regional partners. We want to deepen security and defence cooperation among Member States; increase defence investment and enhance civilian and military capabilities and operational readiness.
And as cyber threats increase, we must reinforce our cyber resilience and improve our cybersecurity. In addition, we will step up our cooperation to combat hybrid threats and disinformation. In this context, the High Representative gave an update on a Strategic Compass that will guide our efforts in security and defence.  We intend to adopt this by March 2022. We will continue to review security and defence on a regular basis at the level of the European Council.
Nous avons eu aussi l’occasion de discuter du partenariat méridional sur le plan stratégique et sur le plan politique. Ce partenariat est basé sur une histoire commune et sur une géographie qu’il est tout autant.
We have a number of key priorities: strengthen the resilience of our economies and societies; preserve our collective security; tackle the challenge of mobility and migration; and offer prospects to young people on both sides of the Mediterranean. This should be based on an upgraded and intensified political dialogue across the Mediterranean.
Finally, we look forward to the implementation of the Joint Communication from the Commission and High Representative.
Sur ce partenariat méridional, le débat que nous avons eu ce matin donne un nouvel horizon; une nouvelle ambition sur le plan du dialogue politique, sur le plan de la coopération économique inspirée par nos valeur et nous souhaitons là aussi mettre en évidence nos intérêts stratégiques.
Contact:

 Barend Leyts, Spokesperson for the European Council President | press.president@consilium.europa.eu

Compliments of the Council of the European Union.
The post Remarks by President Charles Michel following the second session of the video conference of the members of the European Council first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Keynote speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Third Annual Conference organised by the European Fiscal Board on “High Debt, Low Rates and Tail Events: Rules-Based Fiscal Frameworks under Stress” |

One of the greatest conundrums and policy challenges of our times is the coincidence of persistently low real long-term interest rates and low inflation.
Even before the coronavirus (COVID-19) pandemic, inflation across many advanced economies had been falling short of central banks’ aims for nearly a decade. In the euro area, hopes that inflation would sustainably recover to levels closer to 2% have been repeatedly and persistently disappointed, despite highly favourable financing conditions.
Years of subdued price pressures have raised the spectre of low inflation becoming entrenched in people’s expectations. Considering that financial markets believe that real interest rates will remain in negative territory for the foreseeable future, private investors appear to harbour serious doubts about the capacity of the euro area economy to chart a sustainable path towards higher nominal growth.
In my remarks this morning, I will argue that the experience of the past decade requires us to think differently about the optimal policy mix in the vicinity of the effective lower bound. In particular, whether low inflation will prevail in the medium term will depend not only on monetary policy but also on the decisions made by fiscal policymakers, including on the structural side.
Monetary policy implications of persistent supply-side shocks
Before the pandemic, the global economy enjoyed a period of benevolent growth. Slack was gradually disappearing, output gaps had closed and unemployment had declined to record low levels in many advanced economies (see slide 2).
Even broader measures of slack, including, for example, the number of people working part-time involuntarily, signalled growing scarcity in labour markets (see left chart slide 3).
Yet, inflation in advanced economies did not show any signs of acceleration. Since 2012, there has not been a single year in which inflation for a group of advanced economies as a whole exceeded 2% – the level that is widely considered to be consistent with price stability (see right chart slide 3).
At first sight, these developments seem to point to a weakened relationship between economic slack and inflation. ECB staff analysis for the euro area, however, suggests that while the slope of the Phillips curve is flat, it has not changed in any statistically significant manner in recent years (see left chart slide 4).[1]
Instead, Phillips curve models point to other factors putting persistent downward pressure on underlying inflation in recent years (see right chart slide 4).
Research suggests that these factors include slow-moving secular forces, such as demographic change, the decline in productivity growth, the impact of globalisation and digitalisation on prices, profits and the bargaining power of workers, as well as far-reaching changes in energy production and consumption, also due to climate change.[2]
The coincidence of low inflation with a persistent decline in real interest rates corroborates the view that structural factors are likely to have played an important role in recent years (see left chart slide 5).
With more savings chasing fewer investments, low and stable inflation today is consistent with real short and long-term interest rates that are much lower than even a decade ago. Available estimates of this “equilibrium” rate of interest suggest that nowadays stable inflation is likely to require a negative real short-term interest rate (see right chart slide 5).
The implications of these developments for monetary policy are twofold.
First, since monetary policy is acting on the demand side, it has less traction in countering persistent structural shocks to inflation. In the absence of supply-side policies, inflation can then diverge from central banks’ aim for a protracted period of time.
Adaptive expectations raise the costs of such divergences. If firms and households expect inflation to remain at very low levels, it becomes even harder for central banks to achieve their inflation aim (see left chart slide 6).
Second, the decline in real interest rates limits the extent to which monetary policy can stabilise the economy in the wake of demand-side shocks.
The pandemic is a case in point. Despite the unprecedented severity of the crisis and the large shortfall in aggregate demand, the ECB did not cut its key policy rates. Although there is some room left to reduce short-term rates further, the benefits and costs of deeper negative rates need to be weighed carefully.
To circumvent the effective lower bound, central banks have resorted to unconventional monetary policies. For example, in response to the pandemic, the ECB launched a new asset purchase programme – the pandemic emergency purchase programme (PEPP) – and a new series of targeted longer-term refinancing operations (TLTRO III).
Such tools are powerful in directly influencing the relevant borrowing conditions of the private sector, and they have been instrumental in stimulating growth and inflation during the pandemic.
But after many years of continued monetary expansion, the risk-free yield curve in the euro area has become very flat – much flatter than in the United States (see right chart slide 6). As a result, there is less scope for asset purchases to further compress term premia and thus long-term yields.
Moreover, academics and the central banking community increasingly acknowledge that, even if real rates could be pushed lower, the effects on growth and inflation may be limited as aggregate demand may become less sensitive to interest rate changes when rates are very low, or when they have been low for a long time.[3] The result could be a “macroeconomic reversal rate”, at which the costs of further easing, especially in terms of financial stability, could outgrow the benefits.[4]
The euro area policy mix before and during the pandemic
The implication is that, in a world in which monetary policy is constrained and in which inflation is not solely determined by demand-side policies over a policy-relevant horizon, it will be difficult for monetary policy alone to stabilise the economy satisfactorily.
A key lesson from the literature is that, in these circumstances, monetary, fiscal and structural policies are needed to jump-start and reflate the economy.[5]
The failure of inflation to accelerate more forcefully in the euro area over the past decade may, in fact, be less of a conundrum when considering the response of public spending to even sizeable changes in interest rates: before the pandemic hit the euro area, the primary balance was positive and growing in the years after 2014 (see left chart slide 7). Public investment fell rather than rose (see right chart slide 7).
The lack of public investment might also have hampered private investment. For the euro area, there is evidence that public investment tends to crowd in private investment, rather than out.[6]
A public sector that is largely insensitive to interest rate changes significantly reduces the effectiveness of monetary policy, in particular in the euro area, where governments account for nearly half of total spending. An unresponsive fiscal authority disregards the broad empirical evidence that fiscal policy is particularly effective at the lower bound.[7]
Fiscal restraint was, of course, not without reason.
In many countries, years of cyclical upswing before the global financial crisis had not been used to build sufficient fiscal buffers. Elevated debt levels carry a particularly high vulnerability in a decentralised currency union, where the absence of a fully consolidated public balance sheet exposes governments to a higher risk of self-fulfilling debt crises.[8]
Fiscal policy, then, faces a difficult trade-off between business cycle stabilisation and debt sustainability, in particular in a situation with high legacy debt. This limits the extent to which governments can commit to sizeable expansionary fiscal policies, even if such policies would be optimal for society as a whole.
The pandemic has been a stark reminder of this trade-off. Risk premia on lower-rated sovereign bonds sky-rocketed in March last year, impairing the transmission of both monetary and fiscal policy.
Two decisions were necessary to break this vicious circle.
First, the launch of the PEPP concentrated market expectations around the good equilibrium. Sovereign spreads in Greece, for example, had fallen by 150 basis points before we even bought a single bond. The backstop function of the PEPP prevented private cross-border risk-sharing from collapsing more permanently, as it had done in past crises, thereby complementing efforts to increase public risk sharing (see left chart slide 8).[9]
Second, the European Commission lifted state aid requirements and decided to invoke the escape clause, and the launch of the EU Recovery and Resilience Facility pooled risks, thereby reducing pressure on national budgets. For the first time, a euro area-wide instrument was created with the specific aim of ensuring that the aggregate euro area fiscal stance is appropriately countercyclical.
Together, the PEPP and the Recovery and Resilience Facility created the conditions for national fiscal policies to mitigate the dramatic social and economic costs of this crisis. The experience of the past year suggests that, in the presence of both facilities, all national government bonds are, in essence, considered safe assets by private investors.
Indeed, never since the global financial crisis of 2008 has the spread between the GDP-weighted 10-year sovereign yield and the euro area risk-free rate been lower than today, despite the sharp rise in nominal debt and deficits (see right chart slide 8).
The policy response to the pandemic is a remarkable showcase for the power of monetary and fiscal policy interaction to boost confidence, stabilise aggregate demand and avoid a persistent destabilisation of medium to long-term inflation expectations.[10]
Macroeconomic stabilisation in the future
Both facilities, however, are temporary and linked to the pandemic, while the effective lower bound is likely to remain a recurring constraint in the future.
ECB staff simulations suggest that, at current levels of the real equilibrium interest rate, the lower bound may become binding one-quarter of the time – about twice as often as estimated when the euro was introduced.
The question, then, is how to ensure effective macroeconomic stabilisation in the euro area in the future.
The pandemic holds two lessons, one for monetary and one for fiscal policy.
First, monetary policy has to enable sustainable private and public spending.
Low rates do not mean that monetary policy no longer has a role to play. On the contrary, monetary support will remain an important pillar of macroeconomic stabilisation. But, in the vicinity of the lower bound, the central bank needs to weigh more carefully the evolving balance of the benefits and costs of lowering short- and long-term rates further.
In this environment, when financing conditions are at a level that incentivises all sectors of the economy to consume and invest, monetary policy can best support the economy by shifting its focus away from instrument activism – that is, from the intensity with which it uses the available array of instruments – and towards the duration of policy support.
By credibly promising to preserve favourable financing conditions for as long as needed central banks underscore their unwavering commitment to the achievement of their mandate and ensure that monetary policy does not itself become a source of uncertainty, both with respect to its short-term reaction function and the potential vulnerabilities that too negative yield curve constellations could create in the future.
The horizon of policy support will then depend on the extent to which the private and the public sector make use of accommodative monetary conditions. The intensity of policy support, in turn, will evolve endogenously with the economic recovery.[11]
This means that changes in nominal rates have to be monitored closely and interpreted in the light of their driving forces. For example, a rise in nominal yields that reflects an increase in inflation expectations is a welcome sign that the policy measures are bearing fruit. Even gradual increases in real yields may not necessarily be a cause of concern if they reflect improving growth prospects.
However, a rise in real long-term rates at the early stages of the recovery, even if reflecting improved growth prospects, may withdraw vital policy support too early and too abruptly given the still fragile state of the economy. Policy will then have to step up its level of support.
A policy of preserving favourable financing conditions includes a second element.
To ultimately empower fiscal policy as a transmission channel of monetary policy, the ECB needs to provide liquidity when risks of self-fulfilling price spirals threaten to undermine stability in the euro area as a whole.
As was the case during the pandemic, this may require temporary flexibility in the use of instruments. Being clear about this upfront reduces the emergence of destabilising dynamics in the first place and minimises the extent of interventions when they are needed.
In such situations, risks of moral hazard should not condemn the central bank to a course of inaction. These risks should be governed by other institutions outside crisis times.
The lesson for fiscal policy is that, in lower bound episodes, it has to become more responsive to downturns.
This requires fiscal tools that are specifically designed to provide macroeconomic stabilisation, ideally at the euro area level, but at least at the national level. Put simply, unconventional monetary policy needs to be complemented by unconventional fiscal policy.
The concept of unconventional fiscal policy is not yet well established.[12] A simple Google search, for example, returns more than 700,000 results for unconventional monetary policy but only about 8,000 entries for unconventional fiscal policy.
In essence, unconventional fiscal policy comprises measures that go beyond traditional automatic stabilisers, which tend to be too small to offset the effects of an adverse demand shock at the lower bound. These unconventional measures are only activated when the economy heads into a deep recession.
In the United States, for example, the length of unemployment benefits automatically increases as soon as the unemployment rate exceeds a certain threshold. The use of job furlough schemes in large parts of the euro area in response to the pandemic is another powerful example of how unconventional fiscal policies can stabilise household incomes to avoid risks of long-term scarring.
Similarly, theoretical and empirical evidence suggests that budget-neutral policies that work through the revenue side – for example, by engineering a specific path for consumption and labour taxes over time – can effectively support the efforts by central banks to boost inflation expectations and consumer spending at the lower bound.[13]
Creating a framework for effective stabilisation in the euro area
Refocusing stabilisation along these lines requires an institutional framework that reliably creates space for fiscal policy in good times and allows this space to be used in bad times to provide a policy mix that best protects the euro area economy against downturns.
In 2019, the European Fiscal Board concluded that the current framework remained insufficient to deliver a more countercyclical fiscal policy stance.[14] It also recommended focusing on a single operational indicator – an expenditure rule – and a single target, a debt anchor.
There is broad agreement that these proposals go in the right direction. Because most expenditure components are insensitive to business cycle variations, an expenditure rule can measurably help reduce the procyclicality of fiscal policy and thereby also support monetary policy.
An intense debate has emerged, however, about the appropriate level of the debt anchor, and the EU’s 60% reference value in particular.[15] Not few observers point to the benign implications of the sharp decline in real and nominal interest rates for debt sustainability. Despite much higher debt, interest rate expenses as a share of euro area GDP have declined from more than 5% in 1995 to 1.6% today (see left chart slide 9).
Rates can, of course, rise again in the future if required by the price stability mandate of the central bank even if depressed equilibrium interest rates will make monetary policy restrictive at much lower interest rate levels than in the past.
History suggests, however, that it would be a mistake to project the present environment into the indefinite future. Interest rate growth differentials have fluctuated widely in the past. Periods with negative “r-g” have often been followed by periods with positive “r-g”.[16]
It would be imprudent to assume that governments face no intertemporal budget constraints. A credible debt anchor remains an important pillar of a stability-oriented policy framework and central bank independence.
Yet, there is a case for reflecting on the appropriate pace at which this debt anchor should be reached over time.
Two considerations are most relevant for monetary policy.
First, ECB staff analysis suggests that, under the current rules, requirements to reduce debt in excess of the 60% threshold risk creating a vicious circle between monetary and fiscal policy when inflation is below our medium-term aim – which is precisely at a time when fiscal support is most needed.[17]
Correcting fiscal adjustment requirements for deviations from the ECB’s inflation aim would help break this circle. Simulation analysis suggests that such a “nominal” cyclical adjustment would significantly smooth adjustment requirements (see right chart slide 9).[18] It would create fiscal space and support price stability without endangering debt sustainability.
Second, the medium-term pace of adjustment should strike a sensible balance between the benign effects of the decline of real equilibrium interest rates on debt sustainability and the importance of a credible debt anchor for market expectations.
Take the pandemic as an example.
A mechanical application of the current rules could imply fiscal adjustment needs in some euro area economies that would be severely damaging from a societal, economic and monetary policy perspective.
Evidence shows that austerity does not pay off at times of weak growth, even if debt is already high.[19] Targeted fiscal support will improve rather than harm future debt dynamics by reducing the scars that the pandemic will leave.[20]
There is one further reason why a too mechanistic return to lower debt levels may be misguided: expenditure cuts often affect investment the most.
Reducing public investment further from already low levels would be a costly mistake. New research shows that many investments, in particular in education and infrastructure, pay for themselves at much higher real interest rates than the ones currently prevailing.[21]
The responsible use of the Recovery and Resilience Facility is crucial in that respect. It provides sizeable funds to promote investment in future technologies. But EU funds should not be taken as an excuse to reduce the investment component of national budgets.
Public investment and structural policies hold the key to a higher sustainable growth path and higher interest rates. Monetary policy must take the equilibrium interest rate largely as given. Fiscal policy can help raise it.
Conclusion
My conclusion is therefore that the current era of low inflation and low interest rates – which is unlikely to change in the near term in light of the pandemic – forces us to reconsider how monetary and fiscal policy should complement each other to protect the economy from large downturns and to minimise risks of long-term scarring.
Effective macroeconomic stabilisation in the vicinity of the lower bound requires both unconventional monetary and fiscal policies. Central banks need to establish and preserve a level of financing conditions that enables sustainable private and public spending. Fiscal policy, in turn, needs to recognise its role in the transmission of monetary policy in a low inflation, low interest rate environment.
Achieving this policy mix requires an institutional framework that creates the tools and the space for fiscal policy to support the efforts of the central bank when inflation is below its aim and that recognises the existence of a budget constraint in the long run.
Thank you.

Compliments of the European Central Bank.
The post ECB | Speech: Unconventional fiscal and monetary policy at the zero lower bound first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

To ensure that citizens can continue to enjoy roaming without additional charges when travelling in the EU, the Commission proposed today a new Roaming Regulation. At a time when non-essential travel is discouraged, this is an important action in preparing a brighter future. The new regulation will prolong the current rules that are due to expire in 2022, for another 10 years. It will also ensure better roaming services for travellers. For example, consumers will be entitled to have the same quality and speed of their mobile network connection abroad as at home, where equivalent networks are available. The new rules will also secure efficient access to emergency services, including improving awareness about alternative means for people with disabilities, as well as increase consumer awareness on possible fees from using value-added services while roaming.
Margrethe Vestager, Executive Vice-President for a Europe Fit for the Digital Age, said: “Wherever we are in Europe, we can check in with our loved ones, talk business and share stories while on the road without worrying about costly bills. The end of roaming charges is a prime example of how the EU keeps millions of citizens connected and improves their lives. The new rules will keep roaming at no extra charges and make it even better.”
Thierry Breton, Commissioner for the Internal Market, said: “Millions of Europeans have been enjoying the benefits of roaming throughout the EU at no extra charges. It is an established and successful cornerstone of the single market. In Europe’s Digital Decade everyone must be able to have excellent connectivity everywhere they are in Europe, just like at home. Today we confirm the commitment towards our citizens. In parallel we work to support investment in adequate infrastructure.”
Roam Like at Home
According to a new Eurobarometer survey, half of Europeans who own a mobile phone travelled to another EU country in the last two years. Thanks to the current Roaming Regulation EU roaming charges ended on 15 June 2017 and, since then, almost 170 million citizens enjoy roaming-free prices and benefits of staying connected while travelling in the single market. Use of data roaming increased 17 times in the summer of 2019, compared to the summer before the abolition of roaming surcharges (summer of 2016). The rapid and massive increase in roaming traffic since June 2017 shows that the end of roaming charges has unleashed the untapped demand for mobile consumption by travellers in the 27 EU Member States, as well as in Iceland, Liechtenstein and Norway. The current rules expire on 30 June 2022, and the conditions on the mobile telecoms market are still not conducive to sustainable ‘roam like at home’ for all businesses and customers while travelling in the EU. Therefore, it is important to extend the rules.
Same quality of service at home and abroad
According to latest Eurobarometer data, when travelling abroad in the EU, 33% of people said that they experienced lower mobile internet speed than they usually have in their home country and 28% that the network standard was lower than at home (e.g. 3G instead of 4G). The new rules proposed today aim to ensure that citizens and businesses benefit from the same quality of services as they do at home. This means that if they have 4G speeds and increasingly 5G as part of their subscription, they should not have lower network speeds when roaming, wherever these networks are available. When it comes to 5G services, consumers will need to know that they are able to use certain applications and services while roaming. Moreover, operators in the visited country should give access to all network technologies and generations upon a reasonable wholesale roaming access request.
Effective access to emergency services abroad
The proposed regulation aims to secure that customers who are roaming can access emergency services and benefit from caller location transmission seamlessly and free of charge, including through means other than voice calls, such as SMS or emergency applications. In addition, travellers should be informed about the means of reaching emergency services, including those designed for disabled people, in the EU country they are visiting.
Prevent unexpectedly high costs and bills
While roaming, travellers should be able to confidently call numbers to access value-added services, such as technical helpdesks, customer care of airlines or insurance companies, or even freephone numbers, which may be accompanied by unexpected charges in roaming. The new roaming rules call for operators to provide sufficient information to consumers about the increased costs they might incur from using value-added services while roaming.
Roaming sustainability for operators
The new rules will ensure that roaming without charges and the enhanced benefits for consumers is sustainable for operators. The rules envisage further reductions in wholesale roaming prices – the prices operators charge each other for using their network when their customers travel abroad. Inter-operator price caps are set at a level that allows operators to recover the cost of providing roaming services. At the same time, it preserves incentives to invest in networks and avoid distortion of domestic competition in the markets of the visited countries.
Background
The Commission recently reviewed the regulation that abolished roaming charges as of June 2017 for an initial timeframe of five years. The review reports showed that ‘fair-use’ policies, or the measures that operators can take to prevent abuse of roaming and the system of exceptional derogations to the rules, have been functioning to avoid negative effects on national markets, operators and consumers. The review also concluded that measures to regulate inter-operator prices are still necessary to ensure roaming sustainability. It further confirmed that the demand for mobile services while travelling in the EU/EEA has rapidly increased since the abolition of roaming charges. As part of its review, the Commission also ran a public consultation, from June to September 2020, to collect views on retail and wholesale roaming services and on the impact of prolonging these rules.
Compliments of the European Commission.
The post EU Commission proposes new Regulation to ensure EU travellers continue to benefit from free roaming first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Commission adopted today a new EU Strategy on Adaptation to Climate Change, setting out the pathway to prepare for the unavoidable impacts of climate change. While the EU does everything within its power to mitigate climate change, domestically and internationally, we must also get ready to face its unavoidable consequences. From deadly heatwaves and devastating droughts, to decimated forests and coastlines eroded by rising sea levels, climate change is already taking its toll in Europe and worldwide. Building on the 2013 Climate Change Adaptation Strategy, the aim of today’s proposals is to shift the focus from understanding the problem to developing solutions, and to move from planning to implementation.
Executive Vice-President for the European Green Deal, Frans Timmermans said: “The COVID-19 pandemic has been a stark reminder that insufficient preparation can have dire consequences. There is no vaccine against the climate crisis, but we can still fight it and prepare for its unavoidable effects. The impacts of climate change are already felt both inside and outside the European Union. The new climate adaptation strategy equips us to speed up and deepen preparations. If we get ready today, we can still build a climate-resilient tomorrow.”
Economic losses from more frequent climate-related extreme weather are increasing. In the EU, these losses alone already average over €12 billion per year. Conservative estimates show that exposing today’s EU economy to global warming of 3°C above pre-industrial levels would result in an annual loss of at least €170 billion. Climate change affects not only the economy, but also the health and well-being of Europeans, who increasingly suffer from heat waves; the deadliest natural disaster of 2019 worldwide was the European heatwave, with 2500 deaths.
Our action on climate change adaptation must involve all parts of society and all levels of governance, inside and outside the EU. We will work to build a climate resilient society by improving knowledge of climate impacts and adaptation solutions; by stepping up adaptation planning and climate risk assessments; by accelerating adaptation action; and by helping to strengthen climate resilience globally.
Smarter, swifter, and more systemic adaptation
Adaptation actions must be informed by robust data and risk assessment tools that are available to all – from families buying, building and renovating homes to businesses in coastal regions or farmers planning their crops. To achieve this, the strategy proposes actions that push the frontiers of knowledge on adaptation so that we can gather more and better data on climate-related risks and losses, making them available to all. Climate-ADAPT, the European platform for adaptation knowledge, will be enhanced and expanded, and a dedicated health observatory will be added to better track, analyse and prevent health impacts of climate change.
Climate change has impacts at all levels of society and across all sectors of the economy, so adaptation actions must be systemic. The Commission will continue to incorporate climate resilience considerations in all relevant policy fields. It will support the further development and implementation of adaptation strategies and plans with three cross cutting priorities: integrating adaptation into macro-fiscal policy, nature-based solutions for adaptation, and local adaptation action.
Stepping up international action
Our climate change adaptation policies must match our global leadership in climate change mitigation. The Paris Agreement established a global goal on adaptation and highlighted adaptation as a key contributor to sustainable development. The EU will promote sub-national, national and regional approaches to adaptation, with a specific focus on adaptation in Africa and Small Island Developing States. We will increase support for international climate resilience and preparedness through the provision of resources, by prioritizing action and increasing effectiveness, through the scaling up of international finance and through stronger global engagement and exchanges on adaptation. We will also work with international partners to close the gap in international climate finance.
Background
Climate change is happening today, so we have to build a more resilient tomorrow. The world has just concluded the hottest decade on record during which the title for the hottest year was beaten eight times. The frequency and severity of climate and weather extremes is increasing. These extremes range from unprecedented forest fires and heatwaves right above the Arctic Circle to devastating droughts in the Mediterranean region, and from hurricanes ravaging EU outermost regions to forests decimated by unprecedented bark beetle outbreaks in Central and Eastern Europe. Slow onset events, such as desertification, loss of biodiversity, land and ecosystem degradation, ocean acidification or sea level rise are equally destructive over the long term.
The European Commission announced this new, more ambitious EU Strategy on Adaptation to Climate Change in the Communication on the European Green Deal, following a 2018 evaluation of the 2013 Strategy and an open public consultation between May and August 2020. The European Climate Law proposal provides the foundation for increased ambition and policy coherence on adaptation. It integrates the global goal on adaptation in Article 7 of the Paris Agreement and Sustainable Development Goal 13 action into EU law. The proposal commits the EU and Member States to make continuous progress to boost adaptive capacity, strengthen resilience and reduce vulnerability to climate change. The new adaptation strategy will help make this progress a reality.
Compliments of the European Commission.
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