Countries must shift toward fiscal discipline and reforms that raise long-term growth.

Many highly indebted advanced economies face a grim fiscal outlook. Under current policies, the public debt ratios of countries including Belgium, France, the United Kingdom, and the United States are set to deteriorate over the next two decades. They still have room to borrow, but there are limits.
So far, financial markets have been forgiving. But recent tremors suggest that they may become more sensitive to negative news about the fiscal or economic outlook. They may demand higher interest rates even from countries with highly liquid government bond markets, making the job of reducing debt that much harder.
AI-driven productivity growth may slow the increase in debt ratios and reduce the needed adjustment. But the magnitude and timing of this effect are unclear. Population aging and growth declines linked to trade fragmentation and political uncertainty pull in the opposite direction.
What will it take to stabilize debt ratios? In a recent paper with Gonzalo Huertas and Lennard Welslau, we assessed the fiscal adjustment needed in EU countries, the UK, and the US. Using official growth forecasts and market-based projections for interest rates, exchange rates, and inflation, combined with simulated shocks, we generated probability distributions for future debt ratios under different scenarios for the primary balance, which excludes interest payments on the debt.
We considered a 20-year horizon starting in 2024 and divided it into two periods. In the first, a seven-year period, governments raise the primary balance to a level that ensures debt sustainability. In the following, 13-year, period, governments keep the primary balance constant, excluding spending changes driven by an aging society. We aimed to ensure a 70 percent probability that the fiscal adjustment in the first period was large enough to stabilize the debt ratio over the final five years of the 20-year horizon.
Mixed findings
On the positive side, the required long-term primary balance does not look dramatically high in many cases. For example, it is 1.3 percent of GDP for France and the US, 1.8 percent for Belgium and the UK, and 2.5 percent for Italy. On the negative side, however, given large deficits in 2024, substantial adjustments are likely to be needed. About a dozen countries require adjustments of more than 3 percent of GDP; five of those–France, Poland, Romania, the Slovak Republic, and the US–need adjustments of 5 percent relative to 2024.
On paper, almost all EU countries plan adjustments to stabilize the debt ratio. However, several use macroeconomic assumptions that are more optimistic than the EU’s common methodology. Germany’s plan, for example, assumes higher inflation and growth than expert forecasts. If actual growth and inflation turn out lower, Germany’s deficit and debt will end up much higher than it projects.
Moreover, forecasts by the European Commission and the IMF suggest that countries with the biggest adjustment needs are unlikely to deliver the measures needed to stabilize their debt levels. This reinforces doubts about the likelihood of these adjustments.

Historical precedents
While the US and several other advanced economies are unlikely to make fiscal adjustments needed to stabilize debt in the medium term, they may try later. To see how likely this is, we looked at historical precedents: how often countries achieved the required primary balance, the longest period balance was maintained, and how often they made the needed adjustment within seven years.
Our results show that primary balances at the level needed to stabilize debt in several high‑debt advanced economies—and the large adjustments needed to get there from current fiscal positions—are rare. France, for example, would need a primary surplus of 1.3 percent of GDP to stabilize its debt, which has happened only six times in five decades. This does not mean such adjustments are impossible, but history suggests it will be difficult and likely to take longer than the seven years EU fiscal rules envisage.
Policymakers in these economies can take heart from the transformation of what were once considered the euro area’s weakest links. In 2024, Greece posted a primary balance of 4.0 percent, adjusted for swings in the business cycle—well above what is needed to stabilize debt. Portugal needs only a minor adjustment of 0.5 percent of GDP; Ireland’s required adjustment of 1.9 percent is modest, and the country’s debt ratio is exceptionally low, at 39 percent of GDP, far below 122 percent in the US and the UK’s 101 percent.
How did countries that faced severe fiscal crises 15 years ago become examples of discipline today? After the 2008 global financial crisis, financial markets drove them to the edge of collapse, forcing them to accept EU/IMF lending programs. Despite design flaws, these programs’essential fiscal tightening and structural reforms put their economies back on track for sustainable growth. The adjustment was painful and, in the case of Greece, very long-lasting, but it was eventually effective.
The results speak for themselves. With average annual growth between 3.1 percent and 4.2 percent in 2022–25, all three countries exceeded the US pace of 2.6 percent.
The lesson: Fiscal discipline and structural reforms—along with public and private debt restructuring when debt is unsustainable—pay off eventually. Not surprisingly, these reforms and restructurings did not stem from domestic political momentum but were forced on them by market pressure.
Recognize the risks
The question is, How will countries adjust this time? We see several possibilities.
The best outcome would combine growth-enhancing reform—including by implementing the Draghi report’s single-market agenda in the EU—with deep reforms to social security and pension systems. It could also include overhaul of tax systems to raise revenue without discouraging growth. The latter is particularly true for the US—the only Organisation for Economic Co-operation and Development country without a value-added tax.
Unfortunately, this outcome is also politically the most difficult. A more likely path to fiscal consolidation involves a shift in domestic political leadership that prioritize fiscal discipline but not necessarily deep reform. Italy offers an example. Scarred by near disaster in the early 2010s, Italian governments across the political spectrum have kept budgets broadly under control. Italy’s debt ratio of roughly 135 percent of GDP is still high, but its cyclically adjusted primary balance of 0.3 percent of GDP looks far healthier than those of Belgium, France, or the UK.
A hard‑landing scenario could be triggered by a sudden spike in borrowing costs, leading to debt distress. As debt rises, interest rates could also climb, and markets might become more sensitive to news that calls fiscal sustainability into question. Governments might attempt forms of financial repression—for example, encouraging domestic banks or institutions to absorb additional government debt—but such measures have limits. Surprise inflation could temporarily ease fiscal pressures, but persistently higher inflation would eventually drive up nominal interest rates.
Let’s hope that policymakers recognize these risks and act early enough to prevent such an outcome.

 
 
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Blog | Connections to global markets and supplies are a precondition for trade driven development, investments, and jobs. Here, we analyze how the global shipping network has evolved and the impact on countries position in the network over the last two decades.  

Two snapshots of the global liner shipping network: Moving towards more hub-and-spoke connections
The data reviewed here describe scheduled container shipping services between pairs of countries, capturing both the presence of a direct connection and the number of shipping lines operating on each bilateral link. We benefit from a unique dataset, the MDST Container Data Bank1, which comprehensively captures all regular container shipping services, globally, for two full decades. The period has been characterized by a process of consolidation among shipping lines, while also seeing a continued growth of containerized trade.
The analysis compares two snapshots of the network, one from early 2006 and one from early 2026, redrawn using identical methods to permit visual comparison.2 The third chart displays the distribution of the number of direct partners per country in each year
The dataset enables an examination of the number of bilateral connections, and the intensity of those connections, expressed through shipping line counts. It also allows a comparison of how direct connectivity is distributed, and how the network’s structure has shifted.
 
Figure 1. Q1 2006 Liner Shipping Network
(Click on image for full resolution)

Source: Authors, based on data provided by MDST

 
Figure 2. Q1 2026 Liner Shipping Network
(Click on image for full resolution)

Source: Authors, based on data provided by MDST

Network characteristics: What has changed over the last 20 years
The total number of countries included in the global liner shipping network rises from 174 in 2006 to 178 in 2026. Yet the number of direct bilateral connections falls from 2,444 to 2,243. A larger network with fewer direct links results in a lower density: the percentage of country pairs with a direct link decreased from 16.2% to 14.2%.
The  main consequence is that trade between more than four out of five pairs of countries depends on transshipment, and this reliance becomes more pronounced over the two decades, as direct links thin out. For many smaller developing economies and small island states, which already sit at the lower end of the connectivity distribution, this shift heightens their dependence on intermediary hubs for access to global markets.
The average number of direct partners per country falls from 28.1 to 25.2, and the median declines from 22 to 17. These shifts are also visible in the histogram of degree distributions, where the 2026 curve sits to the left of the 2006 curve. More countries have fewer direct partners than they did twenty years earlier.
 
Figure 3. Number of direct connections per country, 2006 and 2026

Source: Authors, based on data provided by MDST

 
The long tail of highly connected countries also shortens. In 2006, the United Kingdom had 117 direct partners, followed by Belgium and the United States. By 2026, the top position is held by Spain with 97, followed closely by the United States, China, and the Netherlands. The underlying cause for these trends is the process of consolidation in liner shipping, including mergers and acquisitions, which, combined with larger vessel sizes, encourages hub-and-spoke operations.
The range between the best and worst connected countries remains high. In both years the least connected countries have only one or two direct partners—these are mostly small island states. For these economies, direct maritime access is limited, and the decline in average connectivity globally is particular concern, as investments and new jobs require access to markets and to supplies.
Competing and connecting: Countries served by the shipping lines
Two different metrics are useful to describe service intensity in the network.
First, at the global level (across all bilateral links), the number of shipping lines per edge captures how intensively each country pair is served. The median remains unchanged at four liner companies, while the global average declines from 9.76 to 8.32 between 2006 and 2026. This combination indicates that the “typical” link is stable, but heavily served routes have lost choice over time, making the overall distribution more uneven.
Second, at the country level, we look at the average number of lines per direct connection for each country. In 2006, a typical country had 6.7 companies per link, with a median of five, but the range was wide: from countries averaging only two operators per route to a few with averages approaching twenty‑four. This reflected large differences in competitive conditions across countries, particularly disadvantaging many small developing economies and small island states. By 2026, this country‑level pattern largely persists, though with lower averages across much of the distribution. Some countries continue to enjoy routes served by many companies, while many others remain reliant on a small number of operators. The persistence of low per‑country averages for less connected economies underscores the continued unevenness of service availability in the global network.
Improving connectivity
A country’s position in the global liner shipping network depends on three key determinants3.

Its domestic cargo base and hinterland: Carriers are more likely to call in a port if there is demand for import and export cargo.
Its geographical position: The closer a country is to the main shipping routes, the less costly it is for the shipping line to deviate and call in an additional port.
Port performance: The time ships and their cargo spend in port is a key consideration for shipping lines to choose a port. Shippers, i.e. the carriers’ clients, have also an interest in short cargo dwell times.

Shipping lines may not only choose to call in a port, but also potentially invest through vertically integrated terminal operators. Once a terminal is operated by a shipping line-associated operator, it is more likely that its sister shipping line or alliance chooses this port – with the collateral that competitors my prefer not to call elsewhere.
The World Bank Group is supporting its clients to improve their position in the global shipping network to ensure that trade-driven development creates the necessary jobs. Performance indicators such as the Container Port Performance Index (CPPI) or the Logistics Performance Indicators (LPI) help identify potential improvements in the time ships and containers spend in port. The Global Supply Chain Stress Index (GSCSI) tracks supply chain stress, including port congestion. And the Port Reform Toolkit (PRT) helps governments and private investors identify options for public-private-partnerships and potential investments in partnership with the World Bank Group.
 

1 The “Containership Databank” provided by MDS Transmodal covers the world’s container carrying fleet of over 6,000 vessels based on known service deployment. Every vessel in service has multiple fields of information including operator, service, route, TEU capacity, service frequency, port rotation and much more. The Containership Databank also includes information about vessels on order and vessels removed from the commissioned fleet. Service deployment of individual vessels in the fleet frequently changes – the Containership Databank tracks these changes and is continually updated. Analyses that are regularly produced to provide advice for clients include: Capacity by operator, route and trade lane; Trends on a consistent quarterly basis since 2006; and Fleet analysis by operator, size, configuration of ships and fuel type.
The Containership Databank is among the sources for global indicators such as the Logistics Performance Indicators (LPI) developed by the World Bank; the Liner Shipping Connectivity Index (LSCI) developed in partnership with UNCTAD; and the Maritime Trade Connectivity Indicator (MTCI) developed in partnership with OECD/ITF.
The data reviewed here describe scheduled container shipping services between pairs of countries, capturing both the presence of a direct connection and the number of shipping lines operating on each bilateral link.
2 The liner shipping network is modelled as a weighted, undirected graph. Nodes represent countries (ISO‑3 codes). An edge exists between two countries if at least one liner shipping company operates a direct bilateral service; edge weight reflects the number of distinct shipping lines serving that pair.
Layout is generated using a force‑directed spring layout (NetworkX spring_layout) with parameters: k = 4.0, iterations = 500, random seed = 42,  node_size = log(degree+1) × 75, weighted_degree = ∑ companies on all adjacent edges. Distances are weighted inversely to edge weights, so country pairs connected by many shipping lines are drawn closer together.
Images generated with Microsoft Copilot Analyst World Bank Group license.
3 Wang and Cullinane 2016; Fugazza and Hoffmann 2017; UNCTAD 2017; Jouili 2019; Ducruet 2020; Hoffmann and Hoffmann 2020; Guerrero et al. 2021; Mishra et al. 2021; Hoffmann and Hoffmann 2021; Wang, Dou, and Haralambides 2022; Hoffmann et al. 2024; Faure and Ducruet 2025; Canbay et al. 2026; Tsantis et al. 2026. 

 
 
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Blog | Tariff hikes are putting European companies under strain at a time when productivity growth is already sluggish. Short-term business sentiment is not the only thing at stake. Tariffs could also dampen business dynamism, a key channel for innovation and long-term growth.

Business dynamism – the constant churn of firms entering the market, growing, contracting and then exiting – is crucial for productivity. Through “creative destruction”, new firms with better technologies and business models take the place of their older, less efficient counterparts. Meanwhile, competition compels incumbent firms to innovate, invest and stay sharp if they want to remain competitive. When this process weakens, productivity slows. This blog post focuses on how the current trade tensions are threatening incumbents in the euro area. Specifically, it looks at their risk of exit and their decisions to scale up or down. It also examines why tariffs matter for productivity and long-term economic growth and what this means for monetary policy.
Do trade tensions pose a risk to the euro area outlook?
Before we delve into the details, let’s take a step back and set the scene.
Last year’s tariff increases are already weighing on the euro area economic outlook.[1] However, beyond the immediate impact on exports lies a deeper concern: if export-oriented firms – which are typically more efficient and innovative – scale back their activity or shut down entirely due to higher tariffs, the economy will lose some of its strongest producers. This will make resource allocation less efficient. It will slow the spread of new technologies. And overall productivity will decline over time.
Uncertainty amplifies these effects. When firms cannot reliably predict conditions of trade, and hence future revenues, they tend to adopt “wait-and-see” strategies. They delay investment. They postpone their expansion plans. And they often shift innovation away from risky frontier research towards safer, more incremental projects. While these strategies may protect firms in the short term, they also slow the pace of technological progress across the economy. A prolonged period of high uncertainty and pressure on profits can therefore weigh on growth for years.
What can the firm-level data tell us?
To understand how firms respond to trade tensions, we need detailed data. Firm-level administrative records – though sometimes delayed and with larger firms over-represented – offer a window into the mechanisms that drive business creation, expansion and exit.
We draw on detailed data for Germany, Spain, France and Italy from 2008 to 2023 to examine how trade tensions affect incumbent businesses based on their exposure to international markets.[2] Exposure is identified by taking sectors whose share of sales to the United States stands above the median within each country. These are industries whose exports to the United States are greater than those of at least half of the other industries in the same country.
Our dataset combines information from Orbis and BACH, covering more than three million firms and around 27 million observations. This robust information allows us to track firm growth and exit patterns. It also enables us to control for firm characteristics, as well as country and sector-specific factors – for instance, the exceptional disruption caused by the COVID-19 pandemic.
To capture swings in global trade tensions, we use a text-based index that counts newspaper mentions of tariffs, trade disputes, retaliation and related topics.[3] Only sharp spikes – significant deviations from historical patterns – are classified as trade shocks. Unsurprisingly, the most notable episode in our sample coincides with the first Trump Administration.
Our results show that trade shocks lowered the chances of firms expanding (Chart 1, panel a) and raised the risk of firms exiting (Chart 1, panel b). These effects were strongest for firms that were heavily exposed to the United States, although the differences between highly export-oriented firms and the rest were moderate, albeit statistically significant.
This matters because the firms that are most exposed to trade with the United States are also, on average, the most productive (Chart 1, panel c): they generate more value added per worker and are often more innovative. When these firms shrink or exit altogether, the economy loses not only jobs, but also some of its most productive capacity and dynamic elements.

Chart 1
Trade shocks and firm performance by exposure to the United States

a) Percentage change in likelihood of job creation

b) Percentage change in likelihood of firm exit

c) Productivity ratio by exposure to trade with the United States

(percentage)

(percentage)

(ratio)

Sources: BvD Electronic Publishing GmbH – a Moody’s Analytics company, Banque de France, European Commission, Durrani (forthcoming) and ECB staff calculations.
Notes: Trade shock residuals with +1 standard deviation from an AR(1) regression for the trade tensions index by Durrani (forthcoming). Low (high) exposure firms in sectors and countries with a share of sales to the United States below (above) the median. Cox proportional hazards estimates controlling for firms’ balance sheets, size, performance, and country and sector effects. Estimates statistically significant at 99%. In panel c, ratio of productivity (value added per employee) between low and high-exposure firms.

Beyond the obvious: supply chains and fragmentation
And yet, the overall impact of trade tensions on productivity may be even larger than might be suggested by firm-level churn alone. Other transmission channels include:

supply chain disruptions and costly reorganisations that prioritise resilience over efficiency;
trade fragmentation, which can reduce the size of export markets and impair economies of scale;
loss of access to key inputs, undermining production efficiency;
reduced technology diffusion, which is particularly harmful for catching-up economies.

All of these channels can slow innovation, erode competitiveness and weaken potential growth.
Why does this matter for monetary policy?
Slower productivity growth can reduce an economy’s potential output and increase inflationary pressures. This is because weaker productivity growth limits how fast an economy can expand without pushing up costs and prices. It also lowers the natural rate of interest consistent with stable inflation. This limits the room for central banks to cut interest rates during downturns. As explained in an earlier ECB Blog, weaker productivity growth can also make an economy more sensitive to financing conditions. Even small rate increases can significantly slow investment and hiring.
In short, rising tariffs and persistent trade tensions affect much more than individual firms. They reshape the macroeconomic landscape in which monetary policy operates – narrowing the room for manoeuvre and making the economy as a whole more vulnerable.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

See, for example, European Central Bank (2025), “US trade policies and the activity of US multinational enterprises in the euro area”, Economic Bulletin, Issue 4
Our dataset includes annual values of firm-level characteristics such as age, number of employees and industry, as well as financial variables (e.g. leverage – the ratio of total liabilities to assets), performance indicators (e.g. revenue growth) and the status of the firms (e.g. new entrant or exit). However, firm entry is substantially underreported in the data, which prevents a rigorous analysis of business creation. This limitation is unlikely to materially affect our analysis, as newly established firms tend to be smaller and less export-oriented. In our sample, the share of new firms exposed to US trade is around 2%, while the share of firms with 10+ years is about 60%.
To capture swings in trade tensions, we use a Durrani (forthcoming) text-based indicator constructed from local newspapers in Germany, Spain France and Italy. Each month, articles related to tariffs and trade tensions are identified using a supervised text classification model. The index is computed as the share of identified articles in total articles for a given month.

 
 
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New category of company that falls between SMEs and large enterprises

EP proposes thresholds of 1,000 employees, €200M in turnover or €172M in total assets to define small mid-caps

New laws seek to boost the competitiveness of EU so-called small “mid-cap” (SMC) enterprises as they grown beyond SME status with targeted measures.

On Wednesday, three EP committees voted to endorse proposals introducing the concept of small mid-cap enterprises (SMCs) and extending to them various exemptions that so far have been available to small and medium enterprises (SMEs). The aim is to avoid cliff-edge situations where a company’s obligations drastically increase when they grow beyond the SME threshold.
MEPs want to see SMCs defined as companies with fewer than 1,000 employees; and either up to €200 million in turnover or up to €172 million in total assets (the Commission proposed 750 employees, €150 million in turnover and €129 million in total assets). At the same time, Parliament wants to ensure that support for SMEs is not diluted, that EU support follows a “think small first” principle, and that the thresholds are reviewed every five years.
Lighter record-keeping obligations for data protection purposes
Under the new law, current SME exemptions from record-keeping obligations under the General Data Protection Regulation (GDPR) would be extended to SMCs when processing data that is not considered high-risk for the subject’s rights. The exemption will not apply to processing sensitive data including biometrics and data on ethnic origin, political opinions, religion, health, or criminal convictions.
Better access to capital markets
The new definition of SMCs in the Markets in Financial Instruments Directive (MiFID) would reduce administrative burdens. It would allow these companies (SMCs) to access SME growth markets and benefit from simpler prospectus disclosure rules, in line with the updated Prospectus Regulation. This would make it easier for SCMs to raise money on capital markets.
An SME Growth Market is a special type of multilateral trading facility created to help small and medium-sized enterprises (SMEs) access public funding, with rules that are adapted to smaller companies.
Simplification measures for batteries and F-gases
Under the Batteries Regulation, SMEs are exempt from certain obligations on battery due diligence policies. To reduce the administrative burden, MEPs want the requirement for economic operators to review, update and make publicly available their due diligence policy to be extended to SMCs and apply every five years or more often if a significant change occurs (instead of every three years as in the Commission’s original proposal).
All importers and exporters of products and equipment containing F-gases are required to register in the F-gas Portal under the EU’s F-gases Regulation, making this burden disproportionate in particular for SMEs and SMCs. MEPs want this registration requirement to be limited to imports for which reporting requirements apply (10 tonnes of CO2 equivalent or more of hydrofluorocarbons or 100 tonnes of CO2 equivalent or more of other fluorinated greenhouse gases) and to exports for which an export limitation exists.
Support for critical infrastructure entities
The package also applies to legislation on the resilience of critical entities, where member states need to support SMC critical entities as they implement the obligations, and to trade defence instruments, access to which should be made easier for SMCs alongside SMEs.
You can read statements by the co-rapporteurs here.
Background
Introducing tailored measures to support SMCs was one of the recommendations of the Draghi report on EU competitiveness, and of the Letta report on the future of the single market.
The two acts voted today form part of the fourth Omnibus package on simplification proposed by the European Commission in May 2025.
Next steps
The economics and civil liberties committees adopted changes to MiFID and the resilience of critical entities directive with 98 in favour, 6 against, and 5 abstentions. Inter-institutional negotiations were authorised with 102 in favour, 6 against, and 1 abstention.
The same committees plus the environment committee adopted changes impacting the GDPR and rules on prospectuses, fluorinated gases, batteries and trade defence instruments with 158 in favour, 9 against, and 10 abstentions. Inter-institutional negotiations were authorised with 166 in favour, 9 against, and no abstentions.
Once the mandates have been endorsed by the EP plenary (planned for March), negotiations with the Council can begin.

 
 
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With a view to boosting EU competitiveness, the Council gave today its final green light to a simplification of the sustainability reporting and due diligence requirements for companies. This legislation simplifies the directives on corporate sustainability reporting (CSRD) and corporate sustainability due diligence (CS3D) by reducing the reporting burden and limiting the trickle-down effect of obligations on smaller companies.
The Omnibus I simplification package reduces complexity and unnecessary barriers, cuts red tape, enhances efficiency and introduces more flexibility for companies that remain subject to its scope with the aim to boost EU competitiveness, especially in a constantly changing geopolitical framework.
“Simplification constitutes a top priority for the Cyprus presidency. With today’s decision, we are delivering on our commitment for a European Union which is more competitive.  Through the package adopted, we are reducing unnecessary and disproportionate burdens on our businesses, with simpler, more targeted and more proportionate rules, both for our companies and our citizens. For a more autonomous Union, which also means a more competitive Union.” – Marilena Raouna, Deputy minister for European affairs of the Republic of Cyprus
Corporate sustainability reporting directive
The CSRD’s scope is narrowed by raising its thresholds to companies with more than 1,000 employees and above €450 million net annual turnover. Regarding third-country undertakings, the updated requirements will apply only to companies with a net turnover above €450 million for the parent undertaking within the EU and above €200 million generated turnover for the subsidiary or branch.
The amending directive also provides for a transition exemption for companies that had to start reporting from financial year 2024 (the so-called ‘wave one’ companies) falling out of scope for 2025 and 2026. It also includes an exemption for certain EU and non-EU financial holding companies from consolidated reporting.
Corporate sustainability due diligence directive
The CS3D’s scope is narrowed by raising its thresholds to companies with more than 5,000 employees and above €1.5 billion net turnover, considering that such large companies have the biggest influence on their value chain and are best equipped to make a positive impact and absorb the costs and burdens of due diligence processes.
On the identification and assessment of adverse impacts, companies can focus on the areas of their chains of activities where actual and potential adverse impacts are most likely to occur. To provide companies withflexibility, when a company has identified adverse impacts equally likely or equally severe in several areas, this company is given the ability to prioritise assessing adverse impacts which involve direct business partners. Companies are also supposed to base their efforts on reasonably available information, which will reduce the trickle-down effect of information requests on smaller business partners.
To provide for a significant burden relief, the obligation for companies to adopt a transition plan for climate change mitigation under the CS3D has been removed.
The updated rules also remove the EU harmonised liability regime and the requirement for member states to ensure that the liability rules are of overriding mandatory application in cases where the applicable law is not the national law of the member state.
When it comes to penalties, businesses will be liable at a national level for failure to apply the rules correctly. The new directive provides for a maximum cap of 3% of the company’s net worldwide turnover, with the Commission issuing the necessary guidelines in this regard.
Finally, the amending directive postpones the CS3D’s transposition deadline by member states into national law by another year, to 26 July 2028. Companies will have to comply with the new measures by July 2029.
Next steps
The text of the legislative act will be published in the EU’s official journal in the coming days and will come into force on the twentieth day after this publication.
Member states will have one year after the entry into force of the directive to transpose its provisions into national legislation except for article 4 on the level of harmonisation, with which they must comply by 26 July 2028 at the latest.
Background
In October 2024, the European Council called on all EU institutions, member states and stakeholders, as a matter of priority, to take work forward, notably in response to the challenges identified in the reports by Enrico Letta (‘Much more than a market’) and Mario Draghi (‘The future of European competitiveness’). The Budapest declaration of 8 November 2024 subsequently called for ‘launching a simplification revolution’, by ensuring a clear, simple and smart regulatory framework for businesses and drastically reducing administrative, regulatory and reporting burdens, in particular for SMEs. On 26 February 2025, as a follow-up to EU leaders’ call, the Commission put forward the so-called ‘Omnibus I’ package, aiming to simplify existing legislation in the field of sustainability.
 
 
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PROTECTING THE U.S. ECONOMY AND NATIONAL INTERESTS: Today, President Donald J. Trump signed a Proclamation imposing a temporary import duty to address fundamental international payments problems and continue the Administration’s work to rebalance our trade relationships to benefit American workers, farmers, and manufacturers.

President Trump is invoking his authority under section 122 of the Trade Act of 1974, which empowers the President to address certain fundamental international payment problems through surcharges and other special import restrictions.

By taking this action, the United States can stem the outflow of its dollars to foreign producers and incentivize the return of domestic production. By increasing its domestic production, the United States can correct its balance-of-payments deficit, while also creating good paying jobs, and lowering costs for consumers.

The Proclamation imposes, for a period of 150 days, a 10% ad valorem import duty on articles imported into the United States.

The temporary import duty will take effect February 24 at 12:01 a.m. eastern standard time.

Some goods will not be subject to the temporary import duty because of the needs of the U.S. economy or in order to ensure the duty more effectively addresses the fundamental international payments problems facing the United States, including:

certain critical minerals, metals used in currency and bullion, energy, and energy products;

natural resources and fertilizers that cannot be grown, mined, or otherwise produced in the United States or grown, mined, or otherwise produced in sufficient quantities to meet domestic demand;

certain agricultural products, including beef, tomatoes, and oranges;

pharmaceuticals and pharmaceutical ingredients;

certain electronics;

passenger vehicles, certain light trucks, certain medium and heavy-duty vehicles, buses, and certain parts of passenger vehicles, light trucks, heavy-duty vehicles, and buses;

certain aerospace products; and

informational materials (e.g., books), donations, and accompanied baggage.

In addition, the following goods will not be subject to the temporary import duty:

all articles and parts of articles that currently are or later become subject to section 232 actions;

USMCA compliant goods of Canada and Mexico; and

textiles and apparel articles that enter duty-free as a good of Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, or Nicaragua under the Dominican Republic-Central America Free Trade Agreement.

In a separate Executive Order, President Trump also reaffirmed and continued the suspension of duty-free de minimis treatment for low-value shipments, including goods shipped through the international postal system, which will also be subject to the temporary import duty imposed under section 122.
In addition to today’s actions, the President has directed the Office of the United States Trade Representative to use its section 301 authority to investigate certain unreasonable and discriminatory acts, policies, and practices that burden or restrict U.S. commerce.

ADDRESSING FUNDAMENTAL INTERNATIONAL PAYMENT PROBLEMS: The United States faces fundamental international payment problems, in particular a large and serious balance-of-payments deficit.

As a result of its loss of domestic production, the United States must import much of what it consumes, sending U.S. dollars out of our own economy and overseas.
A measurement for the U.S. balance-of-payments is the current account, which tracks the three ways a country can make money: (1) selling goods and services overseas, or the “trade balance of goods and services”; (2) return on investment or labor, or the “balance on primary income”; and (3) voluntary transfers, like remittances, or the “balance on secondary income.”
The United States not only runs an overall current account deficit, but also a deficit in each component of the current account.

The annual U.S. goods trade deficit exploded by over 40% during the Biden Administration, reaching $1.2 trillion in 2024.

In 2024, for the first time in more than 60 years, the United States made less on the capital and labor it deployed abroad than foreigners made on the capital and labor they deployed in the United States.

At present, more money is transferred out of the United States through remittances than money is transferred in.

The situation is getting worse.

In 2024, the United States maintained a current account deficit of -4.0% of gross domestic product (GDP), almost double the current account deficit of approximately -2.0% that prevailed between 2013 and 2019, and larger than 2019 to 2024.

As a share of GDP, the 2024 current account deficit represented the biggest annual current account deficit since 2008.

Compounding these challenges is the decline in the U.S. net international investment position.

At the end of 2024, the U.S. net international investment position was $26 trillion, which was 89% of U.S. GDP. This means that if all of the obligations to foreigners that the United States has incurred were to come due today, and even if all of the foreign assets that the U.S. owns could be instantly deployed as payment, the United States would still end up needing to make payments equal to 89% of its annual economic output in order to meet its obligations. This represents the most negative net international investment position of any country on Earth.

If left unaddressed, these fundamental international payment problems can, among other things, endanger the ability of the United States to finance its spending, erode investor confidence in the economy, distress the financial markets, and endanger U.S. economic and national security.

CONTINUING TO UTILIZE TARIFFS TO PROTECT U.S. INTERESTS: Tariffs will continue to be a critical tool in President Trump’s toolbox for protecting American businesses and workers, reshoring domestic production, lowering costs, and raising wages.

The Supreme Court’s disappointing decision today will not deter the President’s effort to reshape the long-distorted global trading system that has undermined the economic and national security of our country, and contributed to fundamental international payment problems.
Since Day One, President Trump has challenged the assumption that the United States must tolerate the distorted and imbalanced global trading system.
The President’s trade policy brought the world to the negotiating table on our terms.

As a result of the President’s tariffs, major U.S. trading partners covering more than half of global GDP have agreed to historic trade and investment deals to open new markets for U.S. exports, promote manufacturing reshoring, and bring reciprocity and balance to our trade relations.

These deals are creating high-paying American jobs, boosting U.S. manufacturing and technological leadership, and will deliver massive returns for American workers and families for decades to come.

In particular, the United States will continue to honor its legally binding Agreements on Reciprocal Trade. The United States expects the same commitment from its trading partners. While the domestic legal authorities to impose future tariffs will change, the overall direction of travel for the United States—reshoring domestic production and expanding market access abroad through a combination of tariffs and deals—will not.

Today’s action will continue to protect the national interests of the United States by addressing the balance-of-payments deficit to further usher in America’s Golden Age.

 
 
 
 
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Bernd Lange, chair of Parliament’s International Trade Committee and standing rapporteur for the US, issued the following statement.

Following a meeting of the committee’s shadow rapporteurs (i.e. political group representatives), Bernd Lange (S&D, DE) said:
“The ruling by the Supreme Court of the United States of 20 February 2026 on the use of the International Emergency Economic Powers Act (IEEPA) is clear and unequivocal. Its implications cannot be ignored, and business as usual is not an option.
A key instrument used on the US side to negotiate and implement the Turnberry Deal is no longer available.
The situation is now more uncertain than ever. This runs counter to the stability and predictability we sought to achieve with the Turnberry Deal.
The proposed replacement for IEEPA, Section 122, applies indiscriminately to all countries exporting to the United States and is imposed on top of the Most Favoured Nation (MFN) rate. As a result, imports from the EU into the US would be subject to an applied rate exceeding the 15% threshold. This, in itself, constitutes a clear departure from the terms of the Turnberry Deal.
Shadow rapporteurs, representing a majority of Members, have agreed that under the current circumstances work on the two Turnberry files should be put on hold until clarity, stability and legal certainty in EU–US trade relations are re-established.
Consequently, the scheduled votes in committee tomorrow will not take place as planned and the shadow rapporteurs will reassess the situation next week.”

 
 
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The European Commission requests full clarity on the steps the United States intends to take following the recent Supreme Court ruling on the International Emergency Economic Powers Act (IEEPA).
The current situation is not conducive to delivering “fair, balanced, and mutually beneficial” transatlantic trade and investment, as agreed to by both sides and spelled out in the EU-U.S. Joint Statement of August 2025.
The Commission will always ensure that the interests of the European Union are fully protected. EU companies and exporters must have fair treatment, predictability, and legal certainty.
A deal is a deal. As the United States’ largest trading partner, the EU expects the U.S. to honour its commitments set out in the Joint Statement – just as the EU stands by its commitments.
In particular, EU products must continue to benefit from the most competitive treatment, with no increases in tariffs beyond the clear and all-inclusive ceiling previously agreed.
Tariffs are taxes, driving up costs for both consumers and businesses, as recent studies clearly confirm.
When applied unpredictably, tariffs are inherently disruptive, undermining confidence and stability across global markets and creating further uncertainty across international supply chains.
The Commission is in close and continuous contact with the U.S. Administration. On Saturday, 21 February, EU Trade Commissioner Maroš Šefčovič spoke with U.S. Trade Representative Jamieson Greer and Commerce Secretary Howard Lutnick.
We will continue to work towards lowering tariffs, as provided for in the Joint Statement. The EU’s priority is to preserve a stable, predictable transatlantic trading environment, while also acting as a global anchor for rules-based trade.
The EU continues to expand our network of comprehensive and ambitious “zero tariff” trade agreements worldwide, and efforts to strengthen the open, rules-based trading system.
 
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FEBRUARY 19, 2026

CB 26-31, BEA 26-09

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $70.3 billion in December, up $17.3 billion from $53.0 billion in November, revised.
December exports were $287.3 billion, $5.0 billion less than November exports. December imports were $357.6 billion, $12.3 billion more than November imports.
The December increase in the goods and services deficit reflected an increase in the goods deficit of $15.7 billion to $99.3 billion and a decrease in the services surplus of $1.6 billion to $29.0 billion.
For 2025, the goods and services deficit decreased $2.1 billion, or 0.2 percent, from 2024. Exports increased $199.8 billion or 6.2 percent. Imports increased $197.8 billion or 4.8 percent.
 
 
 
Compliments of the United States Census Bureau

The post United States Census Bureau | Monthly U.S. International Trade in Goods and Services, December 2025 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Global trade flows were reshaped in 2025 following the introduction of new US tariffs. US import growth weakened sharply, reflecting a strong decline in imports from China. Meanwhile, Chinese exports have surprised to the upside overall, with broad-based growth across destinations outside the United States. A key question is whether this resilience reflects trade diversion in response to the US tariffs, i.e. the reallocation of exports originally destined for one market towards alternative markets, or other adjustment mechanisms, such as rerouting through intermediary countries. However, it may still be too early to assess the full extent of tariff-induced trade redirection, as anticipatory behaviour, implementation lags at customs, shipping delays and other factors can all affect how long it takes for tariff changes to be reflected in observed trade flows. This box reviews developments in Chinese exports in 2025 and provides initial empirical evidence on whether US tariffs have triggered trade diversion.
Chinese export performance remained strong in 2025, although with marked divergence across destination markets. The value of Chinese exports grew by 5.5% in 2025, compared with 4.6% in 2024. While exports to the United States declined by 20%, export growth to all other regions remained robust, increasing by 8% for the euro area, 13% for countries in the Association of Southeast Asian Nations (ASEAN), 7% for Latin America, and 26% for Africa (Chart A, panel a). In value terms, China’s exports to the United States in 2025 were USD 104 billion lower than in 2024 (Chart A, panel b). This decline was broadly comparable with the increase in exports to ASEAN countries. Exports to the euro area rose more moderately, by about USD 32 billion, while exports to Africa expanded by USD 46 billion, a sizeable increase relative to the region’s GDP.

Chart A
China’s nominal exports

a) Annual growth rate
(annual percentage changes; percentage point contributions)

b) 2025 vis-à-vis 2024
(year-on-year changes in USD billions)

Sources: General Administration of Customs of the People’s Republic of China and ECB staff calculations.
Notes: The charts are based on nominal trade data measured in US dollars. The latest observation is for December 2025.

We assess whether US tariffs have led to trade diversion of Chinese exports by capturing variations in tariff exposure across products in a product-level panel model with fixed effects. We carry out a panel regression relating the year-on-year growth rate of Chinese exports at the product level to product-level tariff variation, while controlling for an extensive set of fixed effects that capture product-specific and destination-specific trends.[1] The model is estimated using data on global imports of Chinese products over the period January-September 2025.[2]
Although the US tariffs imposed on Chinese goods had a strong negative direct effect on China’s exports to the United States, evidence of broad-based trade diversion remains limited. Empirical analyses of the 2025 tariff episode are still scarce, and existing assessments rely on early evidence. Our model estimates suggest that the tariffs reduced US imports from China by around 9% (Chart B, panel a), while the observed year-on-year decline in the trade data reached approximately 17% over the first nine months of 2025.[3] This gap suggests that factors other than tariffs, such as heightened policy uncertainty, frontloading of imports ahead of tariff increases, weaker US demand or the slight appreciation of the renminbi against the US dollar, also contributed to the contraction in Chinese exports to the United States. At the same time, evidence of trade diversion effects to other markets is limited. A statistically significant positive effect is identified only for African and ASEAN countries, while the estimated impact on the euro area is modest and statistically insignificant. Disaggregating by product category, the negative effects of US tariffs are most pronounced for capital goods, followed by consumer goods and intermediate goods (Chart B, panel b). At this more granular level, some evidence of trade diversion emerges, particularly for consumer goods, where higher US tariffs on Chinese products are associated with increased exports to other markets.

Chart B
Impact of the 2025 US tariffs on Chinese exports

a) By destination
(percentage deviation between December 2024 and September 2025)

b) By category
(percentage deviation between December 2024 and September 2025)

Sources: Trade Data Monitor and ECB staff calculations.
Notes: The charts show the percentage changes of Chinese exports as a result of the 2025 US tariffs. The impact is calculated by applying the average tariff rate increase observed between the end of 2024 and September 2025, expressed in percentage point differences, to the estimated elasticity of exports with respect to tariffs. On average, US tariffs on Chinese exports rose by 37 percentage points over this period. The grey bars represent 95% confidence intervals around the estimated coefficients, while (*), (**) and (***) denote 10%, 5% and 1% significance levels respectively. The sample of estimation includes data on global imports of Chinese goods between January and September 2025. The latest observation is for September 2025.

The limited but significant Chinese trade diversion toward ASEAN countries following tariffs may reflect broader trade rerouting patterns. Trade rerouting occurs when exports are redirected through intermediary countries but ultimately reach the original destination market. Notably, Chinese exports to ASEAN countries have surged, particularly in intermediate goods used for further processing or assembly (Chart C, panel a). This trend aligns with the increase in US imports from ASEAN countries, which is the only region that contributed positively to US import growth in 2025 overall. Sectoral data also indicate a sharp rise in Chinese export volumes to ASEAN countries, accompanied by declining unit values for most sectors – a pattern consistent with a greater integration of lower-value intermediate inputs into regional production chains (Chart C, panel b). Taken together, these developments suggest that ASEAN-centred supply chains played a role in the adjustment, although the evidence remains preliminary.

Chart C
Chinese export developments, January-November 2024 to January-November 2025

a) By category
(changes in USD billions)

b) By trading partner and sector
(percentage changes)

Sources: Trade Data Monitor and ECB staff calculations.
Notes: Panel a) reflects the changes in total Chinese exports during the first 11 months of 2025 compared with the same period in 2024. Panel b) shows the changes in Chinese export volumes and export unit values (in US dollars) during the first 11 months of 2025 for each trading partner and each sector. The size of the bubbles is proportional to the average corresponding trade value during the same months from 2022 to 2024. The high-tech goods list is based on the European Commission’s definition. The latest observation is for November 2025.

Overall, trade diversion accounts for only a limited role in recent Chinese export dynamics, with other factors playing a more prominent role. While part of the decline in Chinese exports to the United States can be attributed to the new tariffs, thus far there is little evidence that these measures have led to substantial trade diversion towards other markets. Any tariff-related diversion appears modest and confined to a narrow set of products, indicating limited spillovers from US tariffs to third destinations. Instead, the recent strength of Chinese exports to other markets seems to have been driven by trends that predate the latest tariff measures, as evidenced by broad-based export growth across major regions. Several factors underpin these trends. Weak domestic demand has pushed Chinese firms to channel excess capacity abroad, supported by falling export prices, competitiveness gains reinforced by a weak currency, and state-led expansion of manufacturing capacity.[4] Deeper supply chain integration within Asia has also supported exports to regional partners.
References
Al-Haschimi, A., Dvořáková, N., Le Roux, J. and Spital, T. (2025), “China’s growing trade surplus: why exports are surging as imports stall”, Economic Bulletin, Issue 7, ECB.
Amiti, M., Redding, S. J. and Weinstein, D. E. (2019), “The Impact of the 2018 Tariffs on Prices and Welfare”, Journal of Economic Perspectives, Vol. 33, No 4, pp. 187-210.
Cigna, S., Meinen, P., Schulte, P. and Steinhoff, N. (2022), “The impact of US tariffs against China on US imports: Evidence for trade diversion?”, Economic Inquiry, Vol. 60, No 1, pp. 162-173.

We use product data based on the six-digit level of Harmonized System (HS) codes, and combine it with tariff assumptions at the same level of disaggregation. Products exempted from tariffs are retained in the sample.

We replicate the approach by taken Cigna et al. (2022), which builds on that of Amiti et al. (2019). Click here to see the equation that was used.

Trade tensions between the United States and China escalated sharply in early 2025. The United States imposed 10% tariff increases on all Chinese goods in February and March, followed by further hikes that culminated in a peak rate of 125% in April. Following bilateral agreements, tariffs were partially rolled back in May and October. The current effective tariff rate on US imports of Chinese goods stands at 34%.
For details on recent Chinese export developments, see Al-Haschimi et al. (2025).

 
Authors:
• Tajda Spital, Economist, ECB
• Julien Le Roux
 
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