Understanding the drivers of the current downturn in commercial real estate (CRE) can provide insights into the outlook for the market and potential spillovers to the financial system and wider economy.
The CRE market is facing the simultaneous effects of higher interest rates, falling demand due to a structural shift towards remote working and rising costs from higher sustainability-linked capex requirements. Understanding the role of each factor in driving prices and firms’ profits can provide some insight into how financial stability risks from CRE might evolve over the coming quarters. For example, the pressure from high interest rates could soften with a potential further easing of monetary policy, while structural factors appear unlikely to change. Moreover, spillovers to the financial system – such as deteriorating credit quality in banks’ CRE loan books – and the wider economy could differ, depending on the nature of the market downturn.

 
Chart A
The CRE market downturn has been driven by both monetary policy and falling CRE demand, with the latter likely to persist due to structural change

a) Decomposition of drivers of CRE price growth

b) Impact of monetary, CRE demand and construction supply shocks on GDP

(percentage share of various shocks to house prices dynamics)

(percentage deviation of GDP from initial level)

Sources: ECB (SDW) and ECB calculations.
Notes: Panel a: historical decomposition from a BVAR model based on the approach taken in de Nora et al.* but adapted to examine drivers of CRE price growth. The model is a Bayesian VAR of order 2, fitted on euro area data over the period from Q1 2003 to Q3 2023. The model includes the following endogenous variables: CRE prices, real estate investments, lending to NFCs, NFC income (gross operating surplus), GDP, CPI, lending rates and the euro area shadow rate. Structural shocks are identified via zero and sign restrictions. The chart shows the response to (i) a monetary policy shock triggering an increase of 1 percentage point on the policy rate on impact, (ii) a 3 standard deviation CRE preference shock, and (iii) a 3 standard deviation CRE supply shock. NFC stands for non-financial corporation.
*) de Nora, G., Lo Duca, M. and Rusnák, M., “Analysing drivers of residential real estate (RRE) prices and the effects of monetary policy tightening on RRE vulnerabilities”, Macroprudential Bulletin, ECB, 2022.

Tight monetary policy and adverse CRE demand shocks have been the main factors pushing CRE prices down since the start of 2022 (Chart A, panel a). While the downward pressure exerted by tight monetary policy is expected to decline going forward, the impact of lower CRE demand will likely persist where it is driven by pandemic-induced structural changes in preferences and new remote working practices. By contrast, construction supply shocks have played a relatively less important role in recent years. Even so, falling numbers of new building permits in many countries suggest that construction activity may start to decline in the coming quarters.[1] This is relevant to the extent that a large negative real estate construction supply shock could have particularly severe real economy spillovers, with the BVAR model showing the biggest GDP impact from this shock (Chart A, panel b).

 
Chart B
Asset write-downs have been a primary driver of falling profits among real estate firms; the sector is also seeing falling interest coverage ratios

a) Drivers of real estate firms income

b) Dynamics of key ratios in recent years

(Q1 2015-Q2 2024, percentages)

(Q1 2018-Q2 2024; left graph: percentages, right graph: multiples)

Sources: S&P Global Market Intelligence and ECB calculations.
Notes: Panel b: lines show median firm values and shaded areas show the cross-firm interquartile range. The sample consists of 100 of the euro area’s largest real estate firms and is predominantly made up of landlord firms. The interest coverage ratio is calculated as (total revenue – operating expenses)/net interest expenses.

With falling prices, asset write-downs have been the primary driver of the recent sharp drop in the headline profits of real estate firms. Declining profitability could affect the debt repayment capacity of real estate firms, with spillover effects on the credit quality of banks’ CRE loan books. Decomposing the profits of 100 of the euro area’s largest public real estate firms shows that asset write-downs have played an outsized role in driving recent declines in profits (Chart B, panel a). Like market price fluctuations, asset write-downs are likely caused by both monetary policy and reduced demand for CRE (Chart A, panel a). In light of falling CRE prices, it is important that asset write-downs are recognised to ensure that firms’ balance sheets accurately reflect their financial health. Aggregate asset write-downs posted since the start of 2022 come to just -3.05% of the value of real estate owned by firms prior to monetary tightening, although there is significant variation across firms. Compared with a cumulative market price correction of -11%, this suggests that some firms may need to recognise further write-downs in the coming quarters.[2] Asset write-downs may not immediately affect the resources available to firms to meet debt repayments, meaning that the immediate spillovers to the credit quality of banks’ CRE loan books may be limited. However, this reduction in asset values – and hence collateral values – may still pose challenges to firms when they seek to refinance their debts. Reduced access to funding could force them to deleverage, thus amplifying the CRE demand shock mentioned above and further depressing market prices.
Real estate firms’ revenue growth has not kept pace with their financing costs, which has potential implications for their repayment capacity. Unlike asset write-downs, falling revenues or rising costs will affect the resources available to firms to meet debt repayments. As a result, fluctuations in these factors will have immediate implications for credit quality. For the sample of firms examined, the ratio between revenue and expenses remained broadly stable over the period studied, suggesting that this sample of large firms has not seen capex costs exceeding their rental growth (Chart B, panel b).[3] While rental growth has kept pace with expenses for large firms, financing costs have increased disproportionately. The median real estate firm saw its interest coverage ratio drop from 4x to 2x over the course of the monetary tightening cycle, although with some recovery since the start of 2024 (Chart B, panel b). This will likely have immediate implications for the capacity of firms to meet debt repayments, with clear spillovers to bank and market credit risk. While any potential further monetary easing may reduce pressure on repayment capacity in the coming quarters, firms may still see financing costs rise as the debt that originated during the period of ultra-loose monetary policy matures. Indeed, as of June 2024 20% of loans to euro area real estate firms were due to mature within two years.[4]

This measure and the measure included in the BVAR include both commercial and residential construction.
This figure is calculated as the sum of asset write-downs across firms since the start of 2022 divided by the total value of real estate held by these firms at the end of 2021. Real estate holdings are estimated as total assets less current assets. Differences between dynamics in firms’ write-downs and aggregate market indices may of course also arise from firms holding a disproportionate amount of certain types of asset (e.g. higher quality assets).
However, market intelligence indicates that this problem may be more pronounced in smaller firms which, unfortunately, are not captured in the sample.
The data are taken from AnaCredit.

 
Compliments of the European Central BankThe post ECB | Rents or rates: what is driving the commercial real estate market? first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

By Kristalina Georgieva, Managing Director, IMF | Good morning, and welcome. Let me start by thanking Bert and the Statistics Department for organizing the 12th IMF Statistical Forum on ‘Measuring the Implications of AI on the Economy.’ You always choose a topic that is timely and important—and also fascinating!
It has been just two years since generative AI emerged from the lab and became a tool that anyone with internet access can use. We still feel the excitement of something new and world changing. At the same time, we are all concerned about potential harms.
AI has huge potential to boost growth and efficiency—call centers, for example, have reported productivity gains of 34 percent among new and lower-skilled workers. But AI could also disrupt labor and financial markets. And it could deepen inequality within and among countries, destabilizing societies at a time when many are already very polarized.
To make AI a force for good that boosts inclusive economic growth, we need concerted, coordinated actions by governments, the private sector, and civil society.
And what do we need to inform those actions? Data! Reliable, timely, accurate, actionable data.
For the next two days, you will be exploring both how to measure AI’s impact on the economy, and how AI can help us do our jobs better.
Let me pose a few questions to help guide your discussions:
First, how do we strengthen our statistical systems and frameworks so that countries can better measure the impact of AI on sectors like healthcare, finance, and manufacturing? How do ensure that we capture AI investment and its impact on productivity?
Second, over many years, countries have worked with international organizations such as the IMF to build ethical, strong, and transparent standards and guidelines for collecting, compiling, and disseminating official internationally comparable statistics—all while taking into account privacy concerns.
Are the existing standards and guidelines fit for purpose in an era of widespread adoption of AI?
Third, how can we leverage AI in the production of statistics? We see central banks exploring how GenAI can help them sift petabytes of banking data to better monitor risks and refine forecasts. We see statistical organizations use AI to help classify transactions, transform unstructured data into robust indicators, and improve the accessibility of economic data.
The IMF Statistics Department has recently established the IMF Big Data Center dedicated to supporting the use of Big Data and statistical innovation and has also led the development of StatGPT, an AI assistant that lets users talk to data, significantly reducing the time needed to find, retrieve and use data.
But those are just a few examples. We want to know: How are all of you applying this technology? How can we act together to create and share better analytical tools with policymakers in all countries?
With better data and analysis, policymakers can make better decisions, react more quickly in a crisis, and ultimately design policies that support inclusive growth.
AI has transformative potential for the world economy and for our work—if we can figure out how to measure and use it well. I’m sure you are all up for the challenge!
Thank you.
View original post and video here.
 
Compliments of the International Monetary FundThe post IMF | Opening Remarks at the 12th IMF Statistical Forum: Measuring the Implications of AI on the Economy first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Economic growth remains fragile, while concerns about global trade outlook add to geopolitical and policy uncertainty
High valuations and risk concentration make markets more susceptible to sudden corrections
Policy uncertainty, weak fiscal fundamentals in some countries and sluggish potential growth raise concerns about sovereign debt sustainability
Credit risk vulnerabilities in some euro area households and firms could lead to weaker asset quality for banks and non-bank financial intermediaries if downside risks to growth materialise

The European Central Bank (ECB) sees elevated financial stability vulnerabilities in a volatile environment, according to its November 2024 Financial Stability Review, which was published today. Risks to euro area economic growth have shifted to the downside as inflation has moved closer to 2%, while financial markets have experienced several pronounced but short-lived spikes in volatility in recent months. “The outlook for financial stability is clouded by heightened macro-financial and geopolitical uncertainty together with rising trade policy uncertainty” said ECB Vice-President Luis de Guindos.
While financial markets have proved resilient so far, there is no room for complacency. Underlying vulnerabilities make equity and corporate credit markets prone to further volatility. High valuations and risk concentration, especially in equity markets, increase the odds of sharp adjustments. Should adverse dynamics materialise, non-banks could amplify market stress given their liquidity fragilities, in some cases coupled with high leverage and concentrated exposures.
Despite the decline in sovereign debt-to-GDP ratios after the surge during the pandemic, fiscal fundamentals remain weak in some euro area countries. Sovereign debt service costs are expected to continue rising as maturing debt is rolled over at interest rates that are higher than those on outstanding debt. Elevated debt levels and high budget deficits, coupled with weak long-term growth-potential and policy uncertainty, increase the risk that fiscal slippage will reignite market concerns over sovereign debt sustainability.
High borrowing costs and weak growth prospects continue to weigh on corporate balance sheets, with euro area firms reporting a decline in profits due to high interest payments. The outlook for real estate markets is mixed, with residential real estate prices stabilising, while commercial real estate markets are still stressed because of challenges posed by remote working and e-commerce. Households, by contrast, are benefiting from a strong labour market and have bolstered their resilience by increasing savings and reducing debt.
While the overall increase in credit risks has so far been gradual, small and medium-sized companies and lower-income households could face strains if growth slows by more than is currently expected, which could, in turn, adversely affect the asset quality of euro area financial intermediaries. Losses on commercial real estate exposures are at risk of rising further and could be significant for individual banks and investment funds. In aggregate, however, banks’ ability to absorb further asset quality deterioration continues to be supported by high levels of profitability and by strong capital and liquidity buffers.
To preserve and strengthen financial system resilience in the current uncertain macro-financial environment, it is advisable for macroprudential authorities to maintain existing capital buffer requirements together with borrower-based measures that ensure sound lending standards. In addition, the growing market footprint and interconnectedness of non-bank financial intermediaries calls for a comprehensive set of policy measures to increase the sector’s resilience. Such resilience across the NBFI sector would also help to foster more integrated capital markets. This should enhance financial stability and complement the objectives of the capital markets union, which is aimed at supporting Europe’s productivity and economic growth.
 
Compliments of the European Central BankThe post ECB | Euro area financial stability vulnerabilities remain elevated in a volatile environment first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Governor Hochul Doubled the Local Government Efficiency Grant Program to Help Local Governments Reduce Current and Future Operational Costs
Support for Local Governments Will Help Lower Taxes and Ensure Property Owners Across the State Can Save Money

Governor Kathy Hochul today announced that the popular Local Government Efficiency Grant program has doubled the amount of funds available to municipalities with innovative ideas for streamlining government operations and services to reduce current or future costs, ultimately translating into savings for local property taxpayers. This year’s $8 million initiative provides grants for measures in which two or more local governments team up to apply to plan or implement shared services, consolidations, and dissolutions.
“We are committed to working with our local governments to keep costs down and help New Yorkers save their hard earned money,” Governor Hochul said. “By doubling the Local Government Efficiency Grant to $8 million, we’re reducing current and future county, town and village operational costs and lowering property taxes while also ensuring residents enjoy the services they deserve.”
Secretary of State Walter T. Mosley said, “Incentivizing municipalities to work together is a win-win for both local governments and property taxpayers. We see an excellent return on investment with our Local Government Efficiency program and expanding and doubling the amount to serve communities will help encourage local officials to construct tailor-made solutions that will effectively address current and emerging challenges.”
The LGEG program is comprised of approximately $7.2 million available for implementation grants and $800,000 for planning grants. Implementation grants are capped at $1,250,000 with a maximum of $250,000 for each participating municipality and require a 10% local match, while planning grants are capped at $100,000 with $20,000 per municipality and require a 50% match.
The $8 million is a doubling of the $4 million that has been made available annually to local governments in recent years. With the increase, DOS aims to enhance the impact for local governments facing capacity constraints. This year’s program allows for Regional Projects led by Regional Planning Boards or eligible counties to serve as the leads on projects that involve four or more co-applicants. Additionally, DOS is offering a one-year Qualification Grant of up to $20,000 for Regional Planning Boards and eligible Counties to evaluate and select a project for future LGE funding.
New York State Association of Counties President Benjamin Boykin II said, “The Local Government Efficiency Grant program is vital to counties continued success in reducing local property taxes while maintaining the essential services New Yorkers depend on. Planning and implementing collaborative projects across county and municipal lines is often expensive, but ultimately leads to significant savings for local taxpayers. By doubling the amount of funding available and expanding the scope of eligible projects, New York State and Governor Hochul are empowering local governments to do what we do best—work together to think outside the box and find ways to accomplish more for New Yorkers while asking for less of their hard-earned money.”
New York Association of Towns Executive Director Christopher A. Koetzle said, “The Association of Towns is thrilled that the state has increased the amount of funds available to help local governments pursue more shared services opportunities. Many of our member towns have a long history of collaboration and sharing resources at the local and regional levels. They have always found ways to save taxpayer money without sacrificing services or quality of life. This additional funding will better support their efforts and help them continue to deliver critical, front-line services that remain affordable for the taxpayers.”
New York Association of Regional Councils President Richard Zink said, “With increased funding for the Local Government Efficiency program, we have a unique opportunity to drive meaningful collaboration across our region. These additional resources empower municipalities to streamline services, reduce costs, and improve quality of life for residents. By fostering shared services and strategic partnerships, we’re building a stronger, more resilient regional economy that’s well-prepared for future challenges and opportunities.”
Through the LGEG, DOS is also aiming to assist local governments trying to address emerging threats in addition to current challenges. In this current funding round, Priority Points will be given to: Regional Projects; Regional or Local Projects being implemented are part of a previous LGE planning grant or that was included in a Countywide Shared Services Initiative (CWSSI) plan; or Regional or Local Projects that aim to address:

Information Technology Services (ITS), including Cybersecurity;
Emergency Medical Services (EMS);
Countywide or Multi-County Code Enforcement and Planning;
Water and/or Wastewater Management Systems; or
Climate Change.

The LGEG Request for Applications (RFA) and additional information may be found on the DOS website. RFAs must be submitted by Friday, January 24, 2025 at 4 pm.
Through March 2024, DOS has made 489 LGEG project awards, totaling over $105 million. The estimated long-term savings for local government recipients is nearly $650 million.
Eligible Local Government entities are counties, cities, towns, villages, special improvement districts, fire districts, public libraries, association libraries, public library systems (if they advance a joint application on behalf of member libraries), water authorities, sewer authorities, regional planning and development boards, school districts, and Boards of Cooperative Educational Services (BOCES).
Applications are evaluated based on the potential return on investment (ROI), project need, service delivery benefits, operational changes, local and regional capacity, project readiness (ability to complete the project in 5 years) and the comprehensiveness and specificity of the work plan and budget.
Local Government Efficiency Grants may be used to cover costs integral to project implementation including, but not limited to: legal and consultant services; capital improvements and equipment; and transitional personnel costs not to exceed three years.

 
Compliments of the New York State Governor’s OfficeThe post New York State Governor | Lowering Property Taxes: Governor Hochul Invests $8 Million for Local Government Efficiency Projects That Reduce the Tax Burden for New Yorkers first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

By Luis de Guindos | Meeting the EU’s climate neutrality targets calls for deep structural changes and significant private funding, requiring a healthy financial system. That’s why we’ve tested how resilient banks, investment funds and insurers are to stresses arising during the green transition. ECB Vice-President Luis de Guindos explains the findings.
Achieving a carbon-neutral European Union by 2050 will require a resilient financial sector to provide the funding for the necessary investment. In other words, the financial system needs to be strong enough to finance the green transformation of our economy. The path is expected to be bumpy and there’ll be transition risks along the way. These come about when companies and financial institutions have to adapt their business models and operations to changes in regulations, consumer behaviour or investor preferences – sometimes quite rapidly. To make sure our financial system can cope, the European Commission asked the ECB and the European Supervisory Authorities to use their stress test models to assess the impact of the green transition on the entire euro area financial system.
Our assessment looked at how banks, investment funds, institutions for occupational retirement provision (IORPs) and insurers across the European Union would fare under three different scenarios. The scenario narratives were set by the European Commission and developed by the European Systemic Risk Board. All three assumed the full implementation of the EU’s “Fit-for-55” package, a set of measures that includes the goal of cutting carbon emissions in half by 2030 and becoming carbon neutral by 2050. We also checked the potential for contagion and amplification effects, giving us a truly comprehensive view of what the impact across the financial system might be.[1]
So, what did our analysis tell us?
 
Transition risks and the financial system
The three scenarios of our stress test looked at transition risks and macroeconomic variables over an eight-year horizon. Under the baseline scenario, the package is implemented in an economic environment as projected to evolve in the June 2023 Eurosystem staff macroeconomic projections. But, of course, things might turn out to be more difficult. So a first adverse scenario imagines and models investors abruptly shifting away from “brown” companies – those with environmentally unfriendly business models – leading to a significant fall in the value of their assets. This is known as a “run on brown”. And to make things even more challenging, a second adverse scenario introduces a recession characterised by the standard macroeconomic stress factors such as sharp falls in GDP and real estate prices – on top of the run on brown.
Under the baseline scenario, excluding the mitigating effect of earnings, financial institutions across all sectors suffer moderate losses (Chart 1). These losses come from the increased risk of default by firms that urgently need to invest in reducing their carbon emissions and, as a result, have smaller profits and greater debt. Adding a run on brown to the baseline scenario brings a small increase in losses. This means that shifts in perceived climate risks alone are not a threat to financial stability during the green transition. But the picture worsens considerably when the run on brown coincides with a recession. In this case, losses increase significantly. However, the impact on financial institutions’ capital is expected to be mitigated by factors such as banks’ income, insurers’ liabilities and funds’ cash flows and holdings, which were not included in this assessment.
The good news is that the findings show that the overall stability of the financial system is not at risk under these specific adverse scenarios. However, the substantial losses under the second adverse scenario highlight the need for financial institutions to properly manage climate-related risks. Moreover, a coordinated policy approach to financing the green transition is essential.

 
Chart 1
Financial sector losses under the three scenarios

(aggregate losses over the period 2023-30 as a share of exposures in scope, by financial sector and scenario)

Sources: European Banking Authority, European Insurance and Occupational Pensions Authority, European Securities and Markets Authority and ECB calculations.
Notes: “Exposures in scope” refers to the assets covered for each sector in this exercise. These are 35% of total credit risk exposures and 26% of total market risk exposures for banks, 81% of total investments for insurers, 76% of total investments for IORPs and 77% of total assets for investment funds. IORPs are not included in the model used to assess cross-sectoral amplification. “B” refers to the baseline scenario, “A1” to the first adverse (run-on-brown) scenario and “A2” to the second adverse (run-on-brown plus recession) scenario.

Zooming in on the banking sector, the findings show that banks should be able to continue financing companies during the green transition. That holds for both the baseline scenario and the first adverse run-on-brown scenario (Chart 2, panel a). However, when severely adverse economic conditions are combined with climate-related risks – as modelled by the second adverse scenario – our analysis indicates that loans to these companies could fall by as much as 11% over the eight-year period.[2] This would result from banks trying to restore their solvency position after their balance sheets had taken a hit from bigger losses as well as the recession.
Banks are affected differently in each scenario, with those more exposed to energy-intensive sectors seeing bigger drops in loan volumes because of the run-on-brown effect. Under the two adverse scenarios, banks may need to increase lending to energy-intensive sectors more than to less energy-intensive sectors, so that their corporate customers can meet their green investment needs (Chart 2, panel b).
So, how can public policy help companies going through the green transition get sufficient funding? In our view, policy should take an all-encompassing perspective on how to support firms and sectors. This would be based on where they are in their green innovation cycle and what transition goals they have. It should also involve all financial intermediaries and markets to ensure the funding needs of our economy are met. Financial market segments outside the banking sector, such as venture capital, can be particularly effective when it comes to financing innovative start-up firms and supporting green technology projects.

 
Chart 2
Banks’ financing capacity is resilient but would benefit from targeted policy measures

Panel a) Change in banks’ total outstanding loans to NFCs between 2023 and 2030

Panel b) Green investment needs as a share of new lending to NFCs between 2023 and 2030

Sources: ECB calculations, Banking Euro Area Stress Test (BEAST) projections and the EBA stress test 2023 starting points.
Notes: NFCs stands for non-financial corporations. The box plot shows the 10th, 25th, 50th, 75th and 90th percentiles. The point on the box plot represents the weighted average. “B” refers to the baseline scenario, “A1” to the first adverse (“run-on-brown”) scenario and “A2” to the second adverse (run-on-brown plus recession) scenario.

A cross-sectoral assessment to complete the analysis
Since the different financial sectors are interlinked, the ECB and the European Supervisory Authorities have worked together to complement the sectoral results with a cross-sectoral assessment.[3] This additional analysis considers the possibility that each financial institution’s reaction to the financial stress might trigger contagion and amplify the stress on other financial institutions and sectors. Here, liquidity risks and the reactions they trigger play a significant role.
Under the baseline scenario the amplification effects are contained, but these can lead to losses that are up to 50% greater when the run-on-brown scenario triggers liquidity stress (Chart 1). Amplification effects vary both within and across sectors. Investment funds face greater liquidity stress as a result of redemptions, which could force them into fire sales of assets. This means that investment funds might become the main driver of subsequent losses for all sectors. Insurers are more exposed to this through their holdings of fund shares and depreciated securities, while banks are less exposed on account of their smaller exposures and hedging strategies.
It is crucial to continue monitoring the financing of the green transition in the EU and, more broadly, to keep making further system-wide assessments of financial risks. This work benefits from collaboration between EU institutions. The findings can help shape policies that seek to prevent risks from spreading across the financial system and ensure funding reaches activities that support the green transition.
Coordinated efforts are essential to unlock the capital we need for the green transition in Europe. Policymakers should facilitate this process, and supervisors should watch out for the potential risks that could undermine the EU’s ability to meet its climate change objectives.
Check out The ECB Blog and subscribe for future posts.

 
Compliments of the European Central BankThe post ECB | Can our financial system support the green transition when the going gets tough? first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The Council today adopted new rules on clearing services that revise the European market infrastructure regulation and directive (EMIR). The new rules aim to make the EU clearing landscape more attractive and resilient, to support the EU’s open strategic autonomy and to preserve the EU’s financial stability.
The European Market Infrastructure Regulation (EMIR) lays down rules on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories.
The new rules improve EU clearing services by streamlining and shortening procedures, improving consistency between rules and strengthening CCP supervision. In particular, the new rules will contribute to reducing excessive reliance on systemic CCPs in non-EU countries, by requiring all relevant market participants to hold active accounts at EU CCPs and clear a representative portion of certain systemic derivative contracts within the single market.
 
Next steps
The revised EMIR regulation and directive will be published in the EU’s Official Journal before entering into force 20 days later.
 
Background
Derivatives play an important role in the economy, but they also bring certain risks. This was demonstrated during the 2008 financial crisis, that brought to light the weaknesses in the OTC derivatives markets.
To address the situation, the EU adopted the European market infrastructure regulation (EMIR) in 2012. The aim was to increase transparency in the OTC derivatives markets, mitigate credit risk and reduce operational risk.
On 7 December 2022, the Commission presented a proposal to review European market infrastructure regulation and directive in order to deepen the EU’s capital markets union, improve the existing rules and make the EU’s clearing landscape more attractive.
Adoption by the Council follows an agreement reached with the European Parliament at first reading under the ordinary legislative procedure.
For more information, please contact:

Johanna Store, Press officer, EU COUNCIL

 
Compliments of the Council of the EUThe post Council of the EU | Capital markets union: Council adopts revamped rules for EU clearing services 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 “Les Essentiels des Bernardins”, Paris
It is both an honour and a privilege to address you at the esteemed Collège des Bernardins, a site rich in history and intellectual tradition.
As I stand in this restored medieval college, I am reminded of the profound role that monastic institutions have played in spreading Christian values throughout Europe.
In these environments, ideals of social responsibility flourished through communal living. The principle of “ora et labora” (pray and work) underlined the dignity of labour. And the study of theology and major disciplines of human knowledge contributed to Western thought.
These moral foundations contributed to the emergence of the Church’s social doctrine in the 19th century and the creation of the welfare state.
The welfare state developed in response to rising inequality, hazardous working conditions and urban poverty triggered by the Industrial Revolution. Yet it was the wealth created by this very same Revolution and these new technologies that provided governments with the spending capacity to help the less fortunate.
As tax revenues rose, it became possible to provide people with more social insurance, healthcare and education. To echo the words of German Chancellor Otto von Bismarck – creator of the world’s first welfare state in the 1880s – welfare spending became an expression of “practical Christianity”.[1]
As the years have gone by, Europe has stayed true to this model, combining technological progress with social protection. However, as I outlined in my Camdessus lecture last September, our European way is now under pressure from significant shifts that are taking place.[2]
First, we are living through a period of rapid technological change, driven in particular by advances in digital innovation. And unlike in the past, Europe is no longer at the forefront of progress. Our productivity growth – the key factor driving our long-term prosperity – is diverging from the United States.
Second, we are witnessing a shifting geopolitical landscape, one that is fragmenting into rival blocs, where attitudes towards free trade are being called into question and approaches to regulating the technology sector are diverging among advanced economies.
In this changing landscape, Europe is under growing pressure to redefine its position in order to remain competitive.
In this setting, two principles are critical: adaptation and anticipation.
We must adapt to the changing world around us and make up the ground we have lost in terms of productivity and technology. Otherwise, we will not be able to generate the wealth we will need to meet our rising spending needs to ensure our security, combat climate change and protect the environment.
But we must also anticipate the disruptions that technological and geopolitical shifts will bring – and prepare for them by renewing our social model.
 
Adaptation
At the heart of the European model lies a unique commitment to equity and cohesion.
European economies – more than other advanced economies – strive to ensure that economic growth enhances social wellbeing. The level of public social spending in many European economies exceeds the average of other advanced economies.[3] And this resonates strongly with Europeans. Today, almost nine out of ten citizens consider a social Europe to be important.[4]
Over time, labour market reforms have encouraged people to develop specialised skills.[5] Our highly educated workforce has historically played a key role in driving innovation in Europe, allowing it to gain a competitive edge in high value-added sectors ranging from machinery to luxury goods.
Today, however, two megatrends are challenging our economic model.
First, we are facing a new geopolitical landscape, in which key economic dependencies are turning into geopolitical vulnerabilities. Europe’s economy, more open than others and characterised by a trade-to-GDP ratio exceeding 50%, is now facing pressure in an increasingly inward-looking global environment.
Compared with the United States, Europe is facing much stronger competition from China in its traditional areas of strength.
ECB analysis finds that the share of sectors in which China directly competes with euro area exporters has increased significantly from about one-quarter in 2002 to nearly two-fifths today.[6] At the same time, the EU’s share in world trade is declining, with a notable fall since the onset of the COVID-19 pandemic.[7]
Furthermore, the shifting geopolitical landscape is leading western economies to rethink their attitude towards free trade and adopt divergent approaches to the regulation of competition, technology and digital technologies. These changes will have a varying impact on individual countries’ industrial competitiveness at the global level and will weigh on Europe’s economic growth model.
This brings me to the second trend: Europe is falling behind in emerging technologies that will drive future growth.
While the impact of artificial intelligence (AI) on growth is still uncertain, estimates suggest it could be transformative.[8] But the EU is caught in what has been called a “middle technology trap”. We are specialised in technologies that were mostly developed in the last century. Only four of the world’s top 50 tech companies are European.
One key reason we are lagging behind is because our innovation and financing ecosystems are not suited to developing new advanced technologies.
This is not because we lack talented people and ideas, or because we lack the savings to invest in those ideas. The difficulty stems from a lack of scale in our digital single market and from a lack of capital markets to channel savings to entrepreneurs.
In fact, more than one-third of EU savings sit in cash and low-yielding bank deposits,[9] compared with around one-tenth in the United States. As a result, a majority of tech investment in Europe comes from US venture capitalists, while only a small minority originates from EU-based investors.[10]
The upshot of all this is that our productivity growth in Europe is progressively slowing, which means that our ability to generate income is diminishing. If left unchecked, we will face a future of lower tax revenues and higher debt ratios, which will have serious implications for our financing capacity.
We face a rising old-age dependency ratio which will drive up public spending on pensions.[11] And it is estimated that governments will need to spend in excess of €1 trillion a year to meet our investment needs for climate change, innovation and defence.[12]
If we cannot raise productivity, we risk having fewer resources for social spending. We also risk not having the means to deliver on our other European ambitions. These include enhancing our security by modernising our defence capabilities as well as successfully navigating the green transition to combat climate change.
So, we have to adapt – and we can adapt. All the ingredients are there. Collectively, the EU is a large, rich economy. But we are not acting collectively. Simply unlocking our single market for goods and capital could lead to huge gains. The trade barriers that still exist within the EU represent a shortfall of around 10% of our economic potential.[13]
According to the IMF, internal barriers within Europe are equivalent to a 44% tariff for manufacturing and 110% for services.[14] Imagine the possibilities for innovative companies to grow in Europe if they did not have to contend with those costs.
Moreover, if we were to give EU households better opportunities to invest their savings, up to €8 trillion could be redirected into long-term investments. We would have ample funding to develop innovations and develop and transform the technologies of the future.
 
Anticipation
All this is well known. To be ready, we need to anticipate the changes that are coming now.
First, we must anticipate the impact of technology on people.
This will largely depend on the values that underpin the design of digital technologies and the intentions of the people who use it.
For example, in the case of a broad and unchecked expansion of AI, ECB staff estimate that around one-quarter of jobs in European countries are highly exposed to AI-enabled automation, while a further one-third are moderately exposed.[15]
But unlike previous waves of computerisation, AI is capable of performing complex cognitive tasks such as analysis, decision making and even creative work. As a result, its effects are likely to be more widespread, impacting low and highly-skilled workers alike.
People will be expected to perform new tasks in their current jobs, or move to new jobs as old tasks will become obsolete more quickly. There will be a much greater emphasis on adult learning than we see today to ensure that workers can keep up with technological change.
And there will likely be some social consequences during the transition: the workers who are the quickest to adjust will see outsized gains, which could exacerbate inequality.
So our aim in adapting to digital technology should not solely be to do things faster or more efficiently at the expense of inclusion. Instead, we must prioritise development that serves the common good, not necessarily by expanding social protection but by enhancing individual empowerment and capabilities.
We can do so through a renewed, EU-wide focus on skills. Inclusion depends on everyone having the skills they need to benefit from digitalisation.
Research shows that when workers are given the right skills, the benefits of AI can be more widespread. Less experienced or low-skilled workers can increase their productivity by 35% when using AI, more so even than highly skilled workers.[16]
But currently, a significant portion of Europeans lack basic digital skills.[17] And neither the public nor the private sector is filling the gap.
Participation in adult education and training is relatively low overall. Only around one-third of adults participated in training in 2016 and this rate has barely increased since then. And almost 60% of workers say that the formal digital training offered by their employers is not enough.[18]
So, we will need an overhaul of education, training and adult learning, with the public and private sectors working together to identify skills gaps and find solutions.
The second is anticipating the implications of geopolitical shifts on the way Europe works together.
We can no longer see ourselves as a loose club of independent economies. That perspective is outdated in a world that is fragmenting into geopolitical blocs centred around the largest economies. Today we need to see ourselves as a single, large economy with predominantly shared interests.
This paradigm shift also calls for joining forces in more areas.
We face and will continue to face growing expenditure arising from a changing security environment, ageing populations and the climate transition – challenges that we will only be able to meet together. And if we do not, we will face some difficult choices between adjusting our social model, delivering on our climate ambitions and playing a leading role in global affairs.
By acting as a union to raise our productivity growth, and by pooling our resources in areas where we have a tight convergence of priorities – like defence and the green transition – we can both deliver the outcomes we want and be efficient in our management of public spending.
 
Conclusion
Let me conclude.
Since the dawn of the industrial age, Europe has prided itself on a unique economic model – one that balances technological progress with comprehensive social welfare.
Today, however, Europe is under pressure. The rapid pace of technological change triggered by the digital revolution has left us trailing behind. We need to adapt quickly to a changing geopolitical environment and regain lost ground in competitiveness and innovation. Failure to do so could jeopardise our ability to generate the wealth needed to sustain our economic and social model, which the vast majority of Europeans nevertheless hold dear.
Let me finish with a quote from Marcus Aurelius: “The impediment to action advances action. What stands in the way becomes the way.”
 

Busch, M. (1898), Bismarck: Some Secret Pages of His History, Vol. II, Macmillan, New York, p. 282.
Lagarde, C. (2024), “Setbacks and strides forward: structural shifts and monetary policy in the twenties,”, speech at the 2024 Michel Camdessus Central Banking Lecture organised by the IMF, Washington, D.C., 20 September.
By five to ten percentage points of the OECD average of 21% of GDP in 2022. For further details, see “Compare your country – Expenditure for Social Purposes”.
European Commission (2024), “Abstract – Social Europe”.
Estevez-Abe, M., Iversen, T. and Soskice, D. (2001), “Social Protection and the Formation of Skills: A Reinterpretation of the Welfare State”, in Hall, P.A. and Soskice, D. (eds.) (2001), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford University Press, 30 August.
Based on an analysis of revealed comparative advantage. See Al-Haschimi, A., Emter, L., Gunnella, V., Ordoñez Martínez, I., Schuler, T. and Spital, T. (2024), “Why competition with China is getting tougher than ever”, The ECB Blog, ECB, 3 September.
EU firms have also been experiencing competitiveness losses owing to increased input costs exacerbated by elevated energy prices in Europe compared with other regions.
See, for example, Acemoglu, D. (2024), “The Simple Macroeconomics of AI”, Massachusetts Institute of Technology, 5 April; Briggs, J. and Kodnani, D. (2023), “The Potentially Large Effects of Artificial Intelligence on Economic Growth”, Global Economics Analyst, Goldman Sachs, 26 March. For an overview, see Filippucci, F. et al. (2024), “Should AI stay or should AI go: the promises and perils of AI for productivity and growth”, VoxEU, 2 May.
€11.5 trillion.
55% of tech investment in Europe comes from US venture capitalists and only 15% from EU investors.
Moshammer, E. and Schroth, J. (2024), “Ageing cost projections – new evidence from the 2024 Ageing Report”, Economic Bulletin, Issue 5, ECB.
Boubdallah, O., Dorrucci, E., Hoendervangers, L. and Nerlich, C. (2024), “Mind the gap: Europe’s strategic investment needs and how to support them”, The ECB Blog, ECB, 27 June.
in ‘t Veld, J. (2019), “Quantifying the Economic Effects of the Single Market in a Structural Macromodel”, Discussion Paper Series, No 94, European Commission, February.
International Monetary Fund (2024), “A recovery short of Europe’s full potential”, Regional Economic Outlook for Europe, October
Albanesi, S. et al. (2023), “New technologies and jobs in Europe”, Working Paper Series, No 2831, ECB.
Brynjolfsson, E., Li, D. and Raymond, L.R. (2023), “Generative AI at Work”, NBER Working Paper Series, No 31161, National Bureau of Economic Research, April.
42% and 37% respectively. The EU Digital Decade sets out to ensure that 80% of working age Europeans have basic digital skills by 2030.
See “Nearly half of European workers expect AI to “significantly” impact their jobs by 2024”, Euronews, 13 September 2023.

 
Compliments of the European Central BankThe post ECB | The economic and human challenges of a transforming era first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, the Council gave the final green light to a regulation establishing the first EU-level certification framework for permanent carbon removals, carbon farming and carbon storage in products. This voluntary framework will facilitate and encourage high-quality carbon removal and soil emission reduction activities in the EU, as a complement to sustained emission reductions.
 
Carbon removals and soil emission reductions
The regulation will be the first step in introducing a comprehensive certification framework for carbon removals and soil emission reductions into EU legislation. It will help the EU to achieve its goal of climate neutrality by 2050.
 
The regulation covers the following activities across the EU:

permanent carbon removals that capture and store atmospheric or biogenic carbon for several centuries (e.g. bioenergy with carbon capture and storage, direct air capture with storage)

carbon storage activities that capture and store carbon in long-lasting products for at least 35 years (such as wood-based construction products)

carbon farming activities that enhance carbon sequestration and storage in forests and soils,  or that reduce greenhouse gas emissions from soils, carried out over a period of at least five years (e.g. reforestation, restoring peatlands or wetlands, improved fertiliser use)

 
Certification criteria
Carbon removal activities will have to meet four overarching criteria in order to be certified:

they must bring about a quantified net carbon removal benefit or net soil emission reduction benefit
they must be additional, meaning that they go beyond statutory requirements at the level of an individual operator and they need the incentive effect of the certification to become financially viable
they must aim to ensure long-term storage of carbon while minimising the risk of carbon release
they should do no significant harm to the environment and should be able to result in co-benefits to one or more sustainability goals

In addition, activities eligible for certification will need to be independently verified by third-party certification bodies.
 
Certification schemes
Certification schemes will be in place for operators to prove compliance with the regulation. These will be subject to robust and transparent monitoring, verification and reporting rules to promote trust in the system and ensure environmental integrity. Liability mechanisms will also be in place for operators in order to address any release of captured carbon back into the atmosphere.
 
EU registry
Four years after the entry into force of the regulation, the Commission will establish an electronic EU-wide registry to ensure transparency and full traceability of the so-called certified units, which will be issued to reflect carbon net benefit generated through certified carbon removal and soil emission reduction activities.
 
Next steps
The regulation will now be published in the EU’s Official Journal and enter into force 20 days after its publication. It will then become directly applicable in all EU member states.
 
Background
On 30 November 2022, in an important first step towards the further integration of carbon removal schemes into EU climate policy, the Commission proposed a regulation creating a voluntary EU-wide framework to certify high-quality carbon removals.
The Council adopted its negotiating mandate at Coreper level on 17 November 2023, while the European Parliament reached its position on 21 November 2023. After three rounds of negotiations, the EU co-legislators reached an agreement on the final shape of the regulation on 20 February 2024.
For more information, please contact:

Peristera Dimopoulou, Press Officer, EU COUNCIL PRESS

 
Compliments of the Council of the EUThe post Council of the EU | Council greenlights EU certification framework for permanent carbon removals, carbon farming and carbon storage in products first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Combined measure allows for a deeper understanding of how wealth distribution affects the overall health of economies

Blog post by Henning Ahnert, Francien Berry, Darja Milic, Jorrit Zwijnenburg | Economists monitor income disparities because they can harden into more structural wealth inequalities that concern policymakers. Wider wealth gaps may also impact monetary policy transmission and financial stability.

Accordingly, the European System of Central Banks developed new experimental Distributional Wealth Accounts for the euro area and most European Union countries. Combining wealth information drawn from household surveys with broader economic indicators, the new data offer an integrated picture of wealth across groups that match national accounts figures.
This year’s release also marked a significant advance in addressing the Group of Twenty’s recommendation on household wealth results, as part of the third phase of the Data Gaps Initiative, a G20-led partnership involving the IMF, the Inter-Agency Group on Economic and Financial statistics, the Financial Stability Board, and statistical authorities, working to enhance economic and financial data quality worldwide.
As the Chart of the Week shows, net wealth in the euro area rose 27 percent over the past five years—accompanied by a slight decrease in inequality, partly because homeowners benefited from increasing housing prices. The share of wealth held by the top 10 percent stood at 56 percent in the fourth quarter of 2023, while the bottom half held just 5 percent. By comparison, the top 10 percent on a global basis holds about three-quarters of total wealth, according to the World Inequality Lab.

These Distributional Wealth Accounts far surpass the scope of standard distribution data. They are crucial because they detail not only who owns what—from real estate to savings—but they also align these figures with the broader economic metrics of an entire country. This integration provides more timely estimates and allows for a deeper understanding of how wealth distribution interacts with overall economic health.
Moreover, maintaining consistency across different countries enables more meaningful comparisons and informed policymaking. Essentially, these accounts provide policymakers with a clearer, richer picture of economic trends, helping to tailor policies that address inequality and promote economic fairness.
The G20’s recommendation will broaden this kind of analysis beyond Europe. Thirty-three countries, including 13 in the G20, have joined a new expert group convened by the Organisation for Economic Co-operation and Development to collaborate and develop internationally harmonized wealth distribution estimates. These would complement existing data on income, consumption, and saving, providing a unique and consistent picture of economic inequality across countries.
Harnessing household distributional data helps policymakers foster economic growth that benefits all, and better understand how their policies affect people. And that in turn lays the groundwork for crafting more equitable policies in the future.
—This blog is by Francien Berry and Darja Milic, economists in the IMF Statistics Department, Henning Ahnert, the European Central Bank’s head of financial accounts and fiscal statistics, and Jorrit Zwijnenburg, the acting head of national accounts at the OECD.

View original post here.

 
Compliments of the International Monetary FundThe post IMF | New European Wealth Gauge Helps Policymakers Address Inequality first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Reduced energy excise tax rates in many countries in response to the recent energy crisis led to lower implicit carbon prices in 2023, but the development of new emissions trading schemes should lead to a greater share of emissions being priced in the next five years, according to a new OECD report. 
Pricing Greenhouse Gas Emissions 2024: Gearing Up to Bring Emissions Down tracks how emissions trading systems, carbon taxes, fuel and electricity excise taxes, and subsidies that lower pre-tax prices on emissions or energy products have evolved between 2021 and 2023 across 79 countries, covering approximately 82% of global greenhouse gas (GHG) emissions. The tax rates are for 1 April 2023, while emissions trading schemes implemented throughout 2023 are also included. Fuel excise taxes, which implicitly price carbon, declined after the energy crisis, while there has been an increase in the development of emissions trading systems.
Although the coverage of global greenhouse gas emissions by pricing systems stalled at 42% between 2021 and 2023, governments are preparing for higher carbon prices by expanding existing mechanisms or introducing new ones. Some are also considering cross-border effects and new policies, such as border carbon adjustments.
The report estimates that with 15 new carbon pricing schemes currently under development – mostly emissions trading schemes (ETSs) – coverage of emissions by an ETS or a carbon tax will rise from 27% to 34% over the next five years, bringing total coverage close to 50% of GHG emissions across the 79 economies.
“The recent energy crisis has driven carbon and energy prices downwards. However, looking ahead, we see governments preparing for more ambitious climate action. And as we approach 2030, the expansion of existing carbon mitigation mechanisms and the introduction of new ones offer tremendous opportunity for progress towards our shared objectives,” OECD Secretary-General Mathias Cormann said.

The report, presented today at the OECD’s COP29 Virtual Pavilion, measures carbon prices using the Net Effective Carbon Rates indicator, which is the sum of four components: specific taxes on fossil fuels, carbon taxes, prices of tradeable emission permits, less subsidies on fossil fuels. All four components change the price signal for carbon emissions. The report also measures energy rates through the Net Effective Energy rate that additionally includes electricity taxes and subsidies that apply to energy use.
Download the full report.

 
Compliments of the Organization for Economic Cooperation and DevelopmentThe post OECD | Renewed momentum for emissions trading systems as tax-based carbon pricing stalls post energy crisis first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.