The misalignment with the EU climate transition pathway can lead to material financial, legal and reputational risks for banks. It is therefore crucial for banks to identify, measure and − most importantly − manage transition risks, just as they do for any other material risk writes Frank Elderson, member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB.

Eight years ago in Paris, global leaders reached a landmark agreement, committing to limit the global temperature increase to below the calamitous threshold of two degrees Celsius. Alarmingly, the latest scientific evidence[1] indicates that we are currently on a global heating path of 3°C.[2] Through the risk-based lens of a banking supervisor, this is seriously concerning – the longer we wait to transform our economy, the more disruptive the transition and the greater the risks that will materialise on banks’ balance sheets.[3] It is therefore crucial for banks to identify, measure and − most importantly − manage transition risks, just as they do for any other material risk.
How transition risks affect banks
In the European Union, the Paris Agreement has been transposed into the binding European Climate Law, which requires carbon neutrality by 2050. The commitment to reduce emissions by 55% by 2030 is further reinforced by the EU’s “Fit for 55” strategy. As the economy transitions towards meeting these goals, industries need to adjust how they operate. And since most companies in the EU with high-emitting production facilities rely on bank financing, this also has a significant impact on banks’ balance sheets. For instance, various studies suggest that phasing out fossil fuels to meet the Paris Agreement may very well leave about 80% of fossil fuel assets stranded in the absence of a timely transition[4], which will lead to financial losses for banks that are exposed to companies with those assets. Think about higher CO2 prices for high-emitting steel and cement producers under the reformed EU Emissions Trading System, or the ban on the sale of new petrol and diesel cars from 2035. Companies that do not adjust to these policies and fail to reduce their carbon footprint in a timely manner will face higher risks over time. Hence, misalignment with the EU transition pathway can lead to material financial, legal and reputational risks for banks[5].
To be clear: it is not for us supervisors to tell banks who they should or should not lend to. However, we will continue insisting that banks actively manage the risks as the economy decarbonises. And banks cannot do this without being able to accurately identify transition risks and how they evolve over time.
So how, exactly, can banks do that?
Quantifying transition risks is crucial
The first step is acknowledging the materiality of the risks. Over 80% of euro area banks have already concluded that transition risks have a material impact on their strategies and risk profiles. As a second step, it is crucial to measure transition risks in a forward-looking manner. This is, admittedly, the Achilles’ heel of the exercise considering the relatively carbon-intensive starting point of most economies and the continuous evolution of emission reduction policies. But while quantifying the risks is challenging, it is far from impossible.
To demonstrate how this quantification can be done, today the ECB is publishing a report on “Risks from misalignment of banks’ financing with the EU climate objectives”, where we quantify the most pronounced transition risks in the credit portfolio of the banking sector. We do this through “alignment assessment”, a methodology that is already being developed by banks and regulatory and supervisory authorities. It measures transition risks by comparing the projected production volumes in key economic sectors with the required rate of change to meet given climate objectives. It is a forward-looking assessment that covers a five-year horizon by considering the carbon impact of the production plans of companies in those key sectors. The assessment can be repeated over time, making it possible to measure whether a company is transitioning towards low-carbon production and to what degree the pace of transition is consistent with EU climate policies. The methodology currently includes economic sectors with the most pronounced transition risks that account for 70% of global CO2 emissions.
Key findings from the ECB’s quantification of transition risks
Our analysis of 95 banks covering 75% of euro area loans shows that currently banks’ credit portfolios are substantially misaligned with the goals of the Paris Agreement, leading to elevated transition risks for roughly 90% of these banks. The analysis shows that transition risks largely stem from exposures to companies in the energy sector that are lagging behind in phasing out high-carbon production processes and are late in rolling out renewable energy production.

Chart 1
Net alignment of euro area banks with and without net-zero 2050 commitment

Breakdown by bank, exposure volume and commitment to net zero by 2050
(net alignment in percentages, exposure in EUR billions)

Source: Risks from misalignment of banks’ financing with the EU climate objectives – Assessment of the alignment of the European banking sector, January 2024.

Additionally, 70% of these banks could face elevated litigation risks as they are publicly committed to the Paris Agreement, but their credit portfolio is still measurably misaligned with it[6].It is therefore vital that these banks do more work with their counterparties to ensure the companies they finance do not prevent them from living up to their net-zero commitment. This is more relevant than ever, considering that climate litigation has skyrocketed in recent years. Globally, some 560 new cases have been filed since 2021 and increasingly also targeted at corporates and banks.[7]
Transition planning – the foundation of a transition pathway
Banks are thus significantly exposed to transition risks and generate over 60% of their interest income from counterparties in carbon-intensive sectors.[8] The best thing banks can do is putting in place Paris-aligned transition plans. By this, I mean realistic, transparent, and credible transition plans that banks can and actually do implement in a timely manner. They should include concrete intermediate milestones from now until 2050 and develop key performance indicators that allow their management bodies to monitor and act upon any risks arising from possible misalignment with their transition path.
Banks can leverage on the alignment assessment methodology outlined in our report to advance their transition planning capabilities. Exchanging good practice among regulators, supervisors and the banking industry is essential in mastering the mammoth task of making banks transition risk proof. That is why we published the good practices that we observed in both the climate stress test[9] and the thematic review[10]. For instance, some frontrunner banks have already started to use transition planning tools, including alignment assessment, to measure risks in their credit portfolio stemming from the transition towards a decarbonised economy. Other banks have already started managing transition risks through active client engagement, and by offering transition finance products. These encouraging examples show that while it may be challenging, it is far from impossible.
Transition planning must become a cornerstone of standard risk management, as it is only a matter of time before transition plans become mandatory. In fact, the revised Capital Requirements Directive (CRD VI) includes a new legal requirement for banks to prepare prudential plans to address climate-related and environmental (C&E) risks arising from the process of adjustment towards climate neutrality by 2050. The latest revisions to the Capital Requirements Directive (CRD VI) mandate supervisors to check these plans and assess banks’ progress in addressing their C&E risks. Supervisors are also empowered to require banks to reduce their exposure to these risks and to reinforce targets, measures and actions included in their plans.
Moreover, banks that fall within the scope of European Banking Authority’s Implementing Technical Standards on Pillar 3 disclosures on environmental, social and governance risks will have to disclose the Paris alignment of their credit portfolios by the end of 2024 at the latest. Banks can therefore make use of the methodology set out in our report to meet this disclosure requirement.
Conclusion
The economy needs stable banks particularly as it goes through the green transition. It is in turn crucial for banks to identify and measure the risks arising from the transition towards a decarbonised economy. As ECB Banking Supervision we will continue to play our role in spurring banks to manage the inevitable risks materialising from the transition, just as they would for any other risk. This will ensure the banking system remains resilient and sound in our net‑zero future.

United Nations Environment Programme (2023), Emissions Gap Report 2023: Broken Record – Temperatures hit new highs, yet world fails to cut emissions (again).
Intergovernmental Panel on Climate Change (2023), Climate Change 2023 Synthesis Report – Summary for Policymakers, March.
Emambakhsh, T. et al. (2023), “The Road to Paris: stress testing the transition towards a net-zero economy”, Occasional Paper Series, No 328, ECB, September.
See, for example: Bos, K. and Gupta, J. (2019), “Stranded assets and stranded resources: Implications for climate change mitigation and global sustainable development”, Energy Research & Social Science, Vol. 56, October; Semieniuk, G. et al. (2022), “Stranded fossil-fuel assets translate to major losses for investors in advanced economies”, Nature Climate Change, Vol. 12, pp. 532-538; Welsby, D., Price, J., Pye, S. and Ekins, P. (2021), “Unextractable fossil fuels in a 1.5°C world”, Nature, Vol. 597, pp. 230-234; and Yen-Heng, H.C., Landry, E. and Reilly, J.M. (2023), “An Economy-Wide Framework For Assessing The Stranded Assets Of Energy Production Sector Under Climate Policies”, Climate Change Economics, Vol. 14, No 1.
See, for example: Elderson, F. (2023), “Come hell or high water: addressing the risks of climate and environment-related litigation for the banking sector”, speech at ECB Legal Conference, 4 September; and Network for Greening the Financial System (2023), Climate-related litigation: recent trends and developments, 1 September.
See Chart 1 showing that banks with the highest exposure volume also have a net-zero commitment.
  Financial Times (2024), “ING faces threat of legal action from climate group behind Shell case”, 19 January; Elderson, F. (2023), op cit.
ECB Banking Supervision (2022), 2022 climate risk stress test, July.
ECB Banking Supervision (2022), ECB report on good practices for climate stress testing, December.
ECB Banking Supervision (2022), Good practices for climate-related and environmental risk management – Observations from the 2022 thematic review, November.

 
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The Commission adopted five initiatives to strengthen the EU’s economic security at a time of growing geopolitical tensions and profound technological shifts. The package aims to enhance the EU’s economic security while upholding the openness of trade, investment, and research for the EU’s economy, in line with the June 2023 European Economic Security Strategy.
Today’s proposals are part of a broader three-pillar approach to EU economic security by promoting the EU’s competitiveness, protecting against risks and partnering with the broadest possible range of countries to advance shared economic security interests.
The initiatives adopted today aim at:

further strengthening the protection of EU security and public order by proposing improved screening of foreign investment into the EU;
stimulating discussions and action for more European coordination in the area of export controls, in full respect of existing multilateral regimes and Member States’ prerogatives;
consulting Member States and stakeholders to identify potential risks stemming from outbound investments in a narrow set of technologies;
promoting further discussions on how to better support research and development involving technologies with dual-use potential;
proposing that the Council recommends measures aimed at enhancing research security at national and sector level.

Future EU actions will continue to be informed by the on-going risk assessments and by strategic coordination with Member States to reach a shared understanding of the risks that Europe faces and of the appropriate actions.
Legislative proposal to strengthen foreign investment screening
Foreign investments into the EU benefit the European economy. However, certain foreign investments may present risks to the EU’s security and public order. The Commission has reviewed over 1,200 foreign direct investment (FDI) transactions notified by Member States over the past 3 years under the existing FDI Screening Regulation. Building on this experience and extensive evaluation of the functioning of the current regulation, today’s proposal addresses existing shortcomings and improves the efficiency of the system by:

ensuring that all Member States have a screening mechanism in place, with better harmonised national rules;
identifying minimum sectoral scope where all Member States must screen foreign investments;
extending EU screening to investments by EU investors that are ultimately controlled by individuals or businesses from a non-EU country.

Monitoring and assessment of outbound investment risks
The EU is one of the biggest foreign investors in the world and recognises the importance of open global markets. It also acknowledges the growing concerns regarding outbound investments in a narrow set of advanced technologies that could enhance military and intelligence capacities of actors who may use these capabilities against the EU or to undermine international peace and security.
This is currently neither monitored nor controlled at EU or Member State level. The Commission’s White Paper on Outbound Investments is therefore proposing a step-by-step analysis of outbound investments to understand potential risks linked to them. This analysis will include a three-month stakeholder consultation and a 12-month monitoring and assessment of outbound investments at national level, which will contribute to a joint risk assessment report. Based on the outcome of the risk assessment, the Commission will determine, together with Member States, if and which policy response is warranted.
More effective EU control of dual-use goods exports
Today’s increasingly challenging geopolitical context requires action at EU level to improve the coordination of export controls on items with both civil and defence uses – such as advanced electronics, toxins, nuclear or missile technology – so that they are not used to undermine security and human rights. Today’s White Paper on Export Controls proposes both short and medium-term actions, in full respect of the existing rules at EU and multilateral level. The Commission proposes to introduce uniform EU controls on those items that were not adopted by the multilateral export control regimes due to the blockage by certain members. This would avoid a patchwork of national approaches.
The White Paper also provides for a senior level forum for political coordination and announces a Commission Recommendation in Summer 2024 for an improved coordination of National Control lists prior to the planned adoption of national controls. The evaluation of the EU Dual-Use Regulation is advanced to 2025.
Options to support research and development in technologies with dual-use potential
With a White Paper on options for enhancing support of research and development (R&D) of technologies with dual-use potential, the Commission launches a public consultation. Announced by President von der Leyen in November 2023, the White Paper contributes to the ‘promote’ dimension of the European Economic Security Strategy, aiming at maintaining a competitive edge in critical and emerging technologies with the potential to be used for both civil and defence purposes.
The White Paper reviews current relevant EU funding programmes in the face of existing and emerging geopolitical challenges and assesses whether this support is adequate for technologies with dual-use potential. It then outlines three options for the way forward: (1) going further based on the current set-up, (2) removing the exclusive focus on civil applications in selected parts of the successor programme to Horizon Europe, and (3) creating a dedicated instrument with a specific focus on R&D with dual-use potential. Public authorities, civil society, industry, and academia can have their say in an open public consultation and inform the Commission’s next steps until 30 April 2024.
Enhance research security across the EU
In today’s complex geopolitical context, the openness and borderless cooperation in the research and innovation sector may be exploited and turned into vulnerabilities. Results of international research and innovation cooperation can be used for military purposes in third countries, or in violation of fundamental values. Higher education and research institutions can fall victim to malign influence by authoritarian states.
Against this background, the Commission presents a proposal for a Council Recommendation to provide more clarity, guidance and support to Member States and the research and innovation sector at large. EU action is required to ensure consistency across Europe and to avoid a patchwork of measures. By joining forces at all levels and across the Union we can mitigate the risks to research security and ensure that international research and innovation cooperation is both open and safe. The overall approach follows the principle ‘as open as possible, as closed as necessary’ as regards international research cooperation.
Background
On 20 June 2023, the European Commission and the High Representative published a Joint Communication on a European Economic Security Strategy, to minimise the risks in the context of increased geopolitical tensions and accelerated technological shifts, while preserving maximum levels of economic openness and dynamism. It provides a framework for assessing and addressing – in a proportionate, precise and targeted way – risks to EU economic security, while ensuring that the EU remains one of the most open and attractive destinations for business and investment.
The strategy identified four risk categories to be addressed as a matter of priority: supply chains; physical and cyber-security of critical infrastructure; technology security and technology leakage; weaponisation of economic dependencies or economic coercion.
To address these risks, the Strategy is structured around three pillars:

Promoting the EU’s competitiveness and growth, strengthening the Single Market, supporting a strong and resilient economy, and strengthening the EU’s scientific, technological and industrial bases.
Protecting the EU’s economic security through a range of policies and tools, including targeted new instruments where needed.
Partnering and further strengthening cooperation with countries worldwide who share our concerns and those with which we have common economic security interests.

 
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Workers will be better represented in EU-based multinational companies thanks to new rules for the so-called European Works Councils (EWCs). These Councils ensure that employees are involved in decisions related to transnational issues, like re-structurings. They help workers anticipate and manage changes in the world of work, including labour shortages and new technologies. Around 1,000 EWCs currently represent nearly 11.3 million European employees. While these Councils represent more than half of the eligible workforce, this is still less than a third of the estimated almost 4,000 eligible companies. 
The Commission has proposed the following changes to how European Works Councils work:

Giving employees equal rights to request the creation of a new EWC: exemptions will be removed, potentially allowing 5.4 million additional workers in 320 multinational companies to request the establishment of such a Council.

Ensuring that workers in multinational companies are consulted in a timely and meaningful way on issues which concern them

Making sure EWCs have the necessary resources to do their work
Putting in place terms for a gender-balanced EWC 

The proposed measures will improve transnational information and consultation, companies’ strategic decision-making, and mutual trust between management and workers. They are anticipated to come at a minimal cost for companies, with no negative impact expected on their competitiveness.
 
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Today, the Council formally adopted a regulation to modernise and simplify the structure of fees paid to the European Medicines Agency. The new rules will ensure both adequate funding for the EMA and sufficient support for national competent authorities to undertake their scientific evaluation tasks.
 
“During the last years, the European Medicines Agency and the national competent authorities have worked hard and ceaselessly to ensure safe vaccines and medicines for all EU citizens throughout the COVID-19 pandemic and in its aftermath. The new regulation and the new fee system will further support their operations and tasks.”
Frank Vandenbroucke, Belgian Deputy Prime Minister and Minister for Social Affairs and Public Health
Cost-based fees and sustainable EMA operations
The new regulation:

establishes the transition from a flat-rate to a cost-based fee system
ensures the sustainability of the European regulatory network formed by the EMA and national competent authorities, providing a sound financial basis to support their operations
makes the system more flexible and adaptable to future needs, including provisions on updating fees or adapting fees to changing circumstances
simplifies the existing legislation and merges the content of the two current regulations for pharmacovigilance and non-pharmacovigilance fees into one single legal instrument

Background and next steps
On 13 December 2022, the Commission published a proposal for a regulation revising the existing EMA fee system. After establishing their respective positions, the Council of the European Union and the European Parliament launched negotiations on 5 September and reached a provisional agreement on the final shape of the regulation by the end of the month.
The regulation will now be signed and published in the Official Journal of the EU. It will enter into force on the first day following publication and become applicable on 1 January 2025, repealing the two previous regulations on the EMA fee system.
 
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The Council and Parliament found a provisional agreement on parts of the anti-money laundering package that aims to protect EU citizens and the EU’s financial system against money laundering and terrorist financing.

“This agreement is part and parcel of the EU’s new anti-money laundering system. It will improve the way national systems against money laundering and terrorist financing are organised and work together. This will ensure that fraudsters, organised crime and terrorists will have no space left for legitimising their proceeds through the financial system.”
Vincent Van Peteghem Belgian Minister of Finance

With the new package, all rules applying to the private sector will be transferred to a new regulation, while the directive will deal with the organisation of institutional AML/CFT systems at national level in the member states.
The provisional agreement on an anti-money laundering regulation will, for the first time, exhaustively harmonise rules throughout the EU, closing possible loopholes used by criminals to launder illicit proceeds or finance terrorist activities through the financial system.
The agreement on the directive will improve the organisation of national anti-money laundering systems.
Anti-money laundering regulation
Obliged entities
Obliged entities, such as financial institutions, banks, real estate agencies, asset management services, casinos, merchants – play a central role as gatekeepers in the anti-money laundering and countering the financing of terrorism (AML/CTF) framework as they have a privileged position to detect suspicious activities.
The provisional agreement expands the list of obliged entities to new bodies. The new rules will cover most of the crypto sector, forcing all crypto-asset service providers (CASPs) to conduct due diligence on their customers. This means that they will have to verify facts and information about their customers, as well as report suspicious activity.
According to the agreement, CASPs will need to apply customer due diligence measures when carrying out transactions amounting to €1000 or more. It adds measures to mitigate risks in relation to transactions with self-hosted wallets.
Other sectors concerned by customer due diligence and reporting obligations will be traders of luxury goods such as precious metals, precious stones, jewellers, horologists and goldsmiths. Traders of luxury cars, airplanes and yachts as well as cultural goods (like artworks) will also become obliged entities.
The provisional agreement recognises that the football sector represents a high risk and expands the list of obliged entities to professional football clubs and agents. However, as the sector and its risk is subject to wide variations, member states will have the flexibility to remove them from the list if they represent a low risk. The rules after a longer transition period, kicking in 5 years after entry into force, as opposed to 3 years for the other obliged entities.
Enhanced due diligence
The Council and Parliament also introduced specific enhanced due diligence measures for cross-border correspondent relationships for crypto-asset service providers.
The Council and Parliament agreed that credit and financial institutions will undertake enhanced due diligence measures when business relationships with very wealthy (high net-worth) individuals involve the handling of a large amount of assets. The failure to do so will be considered an aggravating factor in the sanctioning regime.
Cash payments
An EU-wide maximum limit of €10.000 is set for cash payments, which will make it harder for criminals to launder dirty money. Member states will have the flexibility to impose a lower maximum limit if they wish.
In addition, according to the provisional agreement, obliged entities will need to identify and verify the identity of a person who carries out an occasional transaction in cash between €3.000 and €10.000.
Beneficial ownership
The provisional agreement makes the rules on beneficial ownership more harmonised and transparent. Beneficial ownership refers to persons who actually control or enjoy the benefits of ownership of a legal entity (like a company, foundation or trust), although the title or property is in another name.
The agreement clarifies that beneficial ownership is based on two components – ownership and control – which both need to be analysed to identify all the beneficial owners of that legal entity or across types of entities, including non-EU entities when they do business in the EU or purchase real estate in the EU. The agreement sets the beneficial ownership threshold at 25%.
Related rules applicable to multi-layered ownership and control structures are also clarified to make sure hiding behind multiple layers of ownership of companies won’t work anymore. In parallel, data protection and record retention provisions are clarified to make the work of the competent authorities easier and faster.
The agreement provides for the registration of the beneficial ownership of all foreign entities that own real estate with retroactivity until 1 January 2014.
High-risk third countries
Obliged entities will be required to apply enhanced due diligence measures to occasional transactions and business relationships involving high-risk third countries whose shortcomings in their national anti-money laundering and counter-terrorism regimes make them represent a threat to the integrity of the EU’s internal market.
The Commission will make an assessment of the risk, based on the financial action task force listings (FATF, the international standard setter in anti-money laundering). Furthermore, the high level of risk will justify the application of additional specific EU or national countermeasures, whether at the level of obliged entities or by the member states.
Anti-money laundering directive
Beneficial ownership registers
According to the provisional agreement the information submitted to the central register will need to be verified. Entities or arrangements that are associated with persons or entities subject to targeted financial sanctions will need to be flagged.
The directive grants the entities in charge of the registers the power to carry out inspections at the premises of legal entities registered, in case of doubts regarding the accuracy of the information in their possession.
The agreement also establishes that in addition to supervisory and public authorities and obliged entities, among others, persons of the public with legitimate interest, including press and civil society, may access the registers.
In order to facilitate investigations into criminal schemes involving real estate, the text ensures that real estate registers are accessible to competent authorities through a single access point, making available for example information on price, property type, history and encumbrances like mortgages, judicial restrictions and property rights.
The responsibilities of FIUs
Each member state has already established financial intelligence unit (FIU) to prevent, report and combat money laundering and terrorist financing. These FIUs are responsible for receiving and analysing information relevant to money laundering and terrorist financing, notably in the form of reports from obliged entities.
According to the agreement, FIUs will have immediate and direct access to financial, administrative and law enforcement information, including tax information, information on funds and other assets frozen pursuant to targeted financial sanctions, information on transfers of funds and crypto-transfers, national motor vehicles, aircraft and watercraft registers, customs data, and national weapons and arms registers, among others.
FIUs continue to disseminate information to competent authorities tasked with combatting money laundering and terrorist financing, including authorities with an investigative, prosecutorial or judicial role. In cross border cases, FIUs will cooperate more closely with their counterparts in the member state concerned with the suspicious report. The FIU.net system will be upgraded to enable the fast dissemination of cross-border reports.
According to the provisional agreement, applying fundamental rights is confirmed as an integral part of the FIU’s work and taken into account when making decisions.
The agreement sets out a firm framework for FIUs to suspend or withhold consent to a transaction, in order to perform its analyses, assess the suspicion and disseminate the results to the relevant authorities to allow for the adoption of appropriate measures.
Supervisors
According to the agreement, each member state will ensure that all obliged entities established in its territory are subject to adequate and effective supervision by one or more supervisors. Supervisors will apply a risk-based approach.
Supervisors will report to the FIUs instances of suspicions. Similar to provisions in the AMLA regulation, new supervisory measures for the non-financial sector, so-called supervisory colleges, are introduced. AMLA will develop draft regulatory technical standards defining the general conditions that enable the proper functioning of AML/CFT supervisory colleges.
Risk assessment
According to the provisional agreement, both EU and national risks assessments remain an important tool. The Commission will conduct an assessment at EU level of the risks of money laundering and terrorist financing and draw up recommendations to member states on measures that they should follow. Member states will also carry out risk assessments at national level and commit to effectively mitigating the risks identified in the national risk assessment.
Next steps
The texts will now be finalised and presented to member states’ representatives in the Committee of permanent representatives and the European Parliament for approval. If approved, the Council and the Parliament will have to formally adopt the texts before they are published in the EU’s Official Journal and enter into force.
Background
On 20 July 2021, the Commission presented its package of legislative proposals to strengthen the EU’s rules on anti-money laundering and countering the financing of terrorism (AML/CFT). This package consists of:

a regulation establishing a new EU anti-money laundering authority (AMLA) which will have powers to impose sanctions and penalties
a regulation recasting the regulation on transfers of funds which aims to make transfers of crypto-assets more transparent and fully traceable
a regulation on anti-money-laundering requirements for the private sector
a directive on anti-money-laundering mechanisms

Commission proposal on AMLA
Commission proposal on the AML regulation
Commission proposal on the AML directive
Anti-money laundering: Council and Parliament agree to create new authority (press release, 13 December 2023)
Anti-money laundering: Provisional agreement reached on transparency of crypto asset transfers (press release, 29 June 2022)
Fight against money laundering and terrorist financing (background information)

 
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Global growth is set to slow further this year, amid the lagged and ongoing effects of tight monetary policy, restrictive financial conditions, and feeble global trade and investment. Downside risks to the outlook include an escalation of the recent conflict in the Middle East and associated commodity market disruptions, financial stress amid elevated debt and high borrowing costs, persistent inflation, weaker-than-expected activity in China, trade fragmentation, and climate-related disasters. Against this backdrop, policy makers around the world face enormous challenges. Even though investment in emerging market and developing economies (EMDEs) is likely to remain subdued, lessons learned from episodes of investment growth acceleration over the past seven decades highlight the importance of macroeconomic and structural policy actions and their interaction with well-functioning institutions in boosting investment and thus long-term growth prospects. Commodity-exporting EMDEs face a unique set of challenges amid fiscal policy procyclicality and volatility. This underscores the need for a properly designed fiscal framework that, combined with a strong institutional environment, can help build buffers during commodity price booms that can be drawn upon during subsequent slumps in prices. At the global level, cooperation needs to be strengthened to provide debt relief, facilitate trade integration, tackle climate change, and alleviate food insecurity.
Global outlook. Global growth is expected to slow to 2.4 percent in 2024—the third consecutive year of deceleration—reflecting the lagged and ongoing effects of tight monetary policies to rein in decades-high inflation, restrictive credit conditions, and anemic global trade and investment. Near-term prospects are diverging, with subdued growth in major economies alongside improving conditions in emerging market and developing economies (EMDEs) with solid fundamentals. Meanwhile, the outlook for EMDEs with pronounced vulnerabilities remains precarious amid elevated debt and financing costs. Downside risks to the outlook predominate. The recent conflict in the Middle East, coming on top of the Russian Federation’s invasion of Ukraine, has heightened geopolitical risks. Conflict escalation could lead to surging energy prices, with broader implications for global activity and inflation. Other risks include financial stress related to elevated real interest rates, persistent inflation, weaker-than-expected growth in China, further trade fragmentation, and climate change-related disasters. Against this backdrop, policy makers face enormous challenges and difficult trade-offs. International cooperation needs to be strengthened to provide debt relief, especially for the poorest countries; tackle climate change and foster the energy transition; facilitate trade flows; and alleviate food insecurity. EMDE central banks need to ensure that inflation expectations remain well anchored and that financial systems are resilient. Elevated public debt and borrowing costs limit fiscal space and pose significant challenges to EMDEs—particularly those with weak credit ratings—seeking to improve fiscal sustainability while meeting investment needs. Commodity exporters face the additional challenge of coping with commodity price fluctuations, underscoring the need for strong policy frameworks. To boost longer-term growth, structural reforms are needed to accelerate investment, improve productivity growth, and close gender gaps in labor markets.
Regional prospects. Although some improvements in growth are expected in most EMDE regions, the overall outlook remains subdued. Growth this year is projected to soften in East Asia and Pacific—mainly on account of slower growth in China—Europe and Central Asia, and South Asia. Only a slight improvement in growth, from a weak base in 2023, is expected for Latin America and the Caribbean. More marked pickups in growth are projected for the Middle East and North Africa, supported by increased oil xviii production, and Sub-Saharan Africa, reflecting recovery from recent weakness. In 2025, growth is projected to strengthen in most regions as the global recovery firms.
The Magic of Investment Accelerations. Investment powers economic growth, helps drive down poverty, and will be indispensable for tackling climate change and achieving other key development goals in emerging market and developing economies (EMDEs). Without further policy action, investment growth in these economies is likely to remain tepid for the remainder of this decade. But it can be boosted. This chapter offers the first comprehensive analysis of investment accelerations—periods in which there is a sustained increase in investment growth to a relatively rapid rate—in EMDEs. During these episodes over the past seven decades, investment growth typically jumped to more than 10 percent per year, which is more than three times the growth rate in other (non-acceleration) years. Countries that had investment accelerations often reaped an economic windfall: output growth increased by about 2 percentage points and productivity growth increased by 1.3 percentage points per year. Other benefits also materialized in the majority of such episodes: inflation fell, fiscal and external balances improved, and the national poverty rate declined. Most accelerations followed, or were accompanied by, policy shifts intended to improve macroeconomic stability, structural reforms, or both. These policy actions were particularly conducive to sparking investment accelerations when combined with wellfunctioning institutions. A benign external environment also played a crucial role in catalyzing investment accelerations in many cases.
Fiscal Policy in Commodity Exporters: An Enduring Challenge. Fiscal policy has been about 30 percent more procyclical and about 40 percent more volatile in commodity-exporting emerging market and developing economies (EMDEs) than in other EMDEs. Both procyclicality and volatility of fiscal policy—which share some underlying drivers—hurt economic growth because they amplify business cycles. Structural policies, including exchange rate flexibility and the easing of restrictions on international financial transactions, can help reduce both fiscal procyclicality and fiscal volatility. By adopting average advanced-economy policies regarding exchange rate regimes, restrictions on crossborder financial flows, and the use of fiscal rules, commodity-exporting EMDEs can increase their GDP per capita growth by about 1 percentage point every four to five years through the reduction in fiscal policy volatility. Such policies should be supported by sustainable, welldesigned, and stability-oriented fiscal institutions that can help build buffers during commodity price booms to prepare for any subsequent slump in prices. A strong commitment to fiscal discipline is critical for these institutions to be effective in achieving their objectives.
 
The full report can be downloaded here
 
Compliments of the World BankThe post World Bank | Global Economics Prospects Report January 2024 Edition Summary first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

AI will affect almost 40 percent of jobs around the world, replacing some and complementing others. We need a careful balance of policies to tap its potential
Kristalina Georgieva

We are on the brink of a technological revolution that could jumpstart productivity, boost global growth and raise incomes around the world. Yet it could also replace jobs and deepen inequality.
The rapid advance of artificial intelligence has captivated the world, causing both excitement and alarm, and raising important questions about its potential impact on the global economy. The net effect is difficult to foresee, as AI will ripple through economies in complex ways. What we can say with some confidence is that we will need to come up with a set of policies to safely leverage the vast potential of AI for the benefit of humanity.
Reshaping the Nature of Work
In a new analysis, IMF staff examine the potential impact of AI on the global labor market. Many studies have predicted the likelihood that jobs will be replaced by AI. Yet we know that in many cases AI is likely to complement human work. The IMF analysis captures both these forces.
The findings are striking: almost 40 percent of global employment is exposed to AI. Historically, automation and information technology have tended to affect routine tasks, but one of the things that sets AI apart is its ability to impact high-skilled jobs. As a result, advanced economies face greater risks from AI—but also more opportunities to leverage its benefits—compared with emerging market and developing economies.
In advanced economies, about 60 percent of jobs may be impacted by AI. Roughly half the exposed jobs may benefit from AI integration, enhancing productivity. For the other half, AI applications may execute key tasks currently performed by humans, which could lower labor demand, leading to lower wages and reduced hiring. In the most extreme cases, some of these jobs may disappear.
In emerging markets and low-income countries, by contrast, AI exposure is expected to be 40 percent and 26 percent, respectively. These findings suggest emerging market and developing economies face fewer immediate disruptions from AI. At the same time, many of these countries don’t have the infrastructure or skilled workforces to harness the benefits of AI, raising the risk that over time the technology could worsen inequality among nations.

AI could also affect income and wealth inequality within countries. We may see polarization within income brackets, with workers who can harness AI seeing an increase in their productivity and wages—and those who cannot falling behind. Research shows that AI can help less experienced workers enhance their productivity more quickly. Younger workers may find it easier to exploit opportunities, while older workers could struggle to adapt.
The effect on labor income will largely depend on the extent to which AI will complement high-income workers. If AI significantly complements higher-income workers, it may lead to a disproportionate increase in their labor income. Moreover, gains in productivity from firms that adopt AI will likely boost capital returns, which may also favor high earners. Both of these phenomena could exacerbate inequality.
In most scenarios, AI will likely worsen overall inequality, a troubling trend that policymakers must proactively address to prevent the technology from further stoking social tensions. It is crucial for countries to establish comprehensive social safety nets and offer retraining programs for vulnerable workers. In doing so, we can make the AI transition more inclusive, protecting livelihoods and curbing inequality.
An Inclusive AI-Driven World
AI is being integrated into businesses around the world at remarkable speed, underscoring the need for policymakers to act.
To help countries craft the right policies, the IMF has developed an AI Preparedness Index that measures readiness in areas such as digital infrastructure, human-capital and labor-market policies, innovation and economic integration, and regulation and ethics.
The human-capital and labor-market policies component, for example, evaluates elements such as years of schooling and job-market mobility, as well as the proportion of the population covered by social safety nets. The regulation and ethics component assesses the adaptability to digital business models of a country’s legal framework and the presence of strong governance for effective enforcement.
Using the index, IMF staff assessed the readiness of 125 countries. The findings reveal that wealthier economies, including advanced and some emerging market economies, tend to be better equipped for AI adoption than low-income countries, though there is considerable variation across countries. Singapore, the United States and Denmark posted the highest scores on the index, based on their strong results in all four categories tracked.

Guided by the insights from the AI Preparedness Index, advanced economies should prioritize AI innovation and integration while developing robust regulatory frameworks. This approach will cultivate a safe and responsible AI environment, helping maintain public trust. For emerging market and developing economies, the priority should be laying a strong foundation through investments in digital infrastructure and a digitally competent workforce.
The AI era is upon us, and it is still within our power to ensure it brings prosperity for all.
 
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The post IMF | AI Will Transform the Global Economy. Let’s Make Sure It Benefits Humanity.  first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Households’ financial investment increased at annual rate of 1.9% in third quarter of 2023, after 2.1% in previous quarter
Non-financial corporations’ financing grew at broadly unchanged rate of 0.7%
Non-financial corporations’ gross operating surplus increased at annual rate of 2.2%, after 5.9% in previous quarter

Chart 1
Household financing and financial and non-financial investment

(Annual growth rates)

Sources: ECB and Eurostat.

Chart 2
Data for household financing and financial and non-financial investmentNFC gross-operating surplus, non-financial investment and financing

(annual growth rates)

Source: ECB and Eurostat.

Data for NFC gross-operating surplus, non-financial investment and financing
Households
Household gross disposable income increased in the third quarter of 2023 at a lower annual rate of 6.4% (after 8.3% in the second quarter), as the main components grew at lower rates: compensation of employees increased at a rate of 6.6% (after 7.0%), and gross operating surplus and mixed income of the self-employed grew at a rate of 6.2% (after 7.4%). Household consumption expenditure increased at a lower rate of 5.0% (after 6.9%).
Household gross saving rate increased to 14.1% in the third quarter of 2023, compared with 13.9% in the previous quarter.
Household gross non-financial investment (which refers mainly to housing) grew at a lower annual rate of 0.9% in the third quarter of 2023, after 1.4% in the previous quarter. Loans to households, the main component of household financing, increased at a lower rate of 1.0% (after 1.8%).
Household financial investment grew at a lower annual rate of 1.9% in the third quarter of 2023, after 2.1% in the previous quarter. Among its components, currency and deposits increased at a lower rate of 0.5% (after 1.6%), while investment in debt securities increased at a higher rate of 61.6% (after 50.0%). Investment in shares and other equity increased at an unchanged rate of 1.0%. Life insurance investment ceased to grow (0% after 0.6%), while investment in pension schemes grew at a broadly unchanged rate of 2.4%.
Household net worth increased at an annual rate of 2.3% in the second quarter of 2023, after 3.1% in the previous quarter. The deceleration was mainly due to lower valuation gains on non-financial assets. Housing wealth, the main component of non-financial assets, grew at a lower rate of 0.9% (after 2.3%). The household debt-to-income ratio decreased to 88.1% in the third quarter of 2023 from 94.3% in the third quarter of 2022.
Non-financial corporations
Net value added by NFCs increased at a lower annual rate of 5.8% in the third quarter of 2023, after 7.6% in the previous quarter. Gross operating surplus grew at a lower rate of 2.2% after 5.9%, while net property income (defined in this context as property income receivable minus interest and rent payable) increased at a higher rate (31.5% after 0.7%). As a result, gross entrepreneurial income (broadly equivalent to cash flow) increased at a higher rate of 5.4% (after 4.5%).[1]
NFCs’ gross non-financial investment decreased at an annual rate of -9.8% (after increasing by 19.4%) partly due to a strong decrease in other non-financial investments such as inventories.[2] NFCs’ financial investment grew at a lower annual rate of 1.5%, compared with 1.7% in the previous quarter. Among its components, deposits decreased at a more negative rate (-2.3% after -2.0%). Loans granted grew at a lower rate of 2.1% (after 2.9%), while investment in shares and other equity grew at a higher rate of 1.5% (after 0.7%).
Financing of NFCs increased at a broadly unchanged rate of 0.7%, reflecting mainly a lower growth rate of financing via loans (0.9% after 2.5%)[3] and a higher growth rate of equity financing (0.3%, after -0.2%).
NFC’s debt-to-GDP ratio (consolidated measure) decreased to 68.0% in the third quarter of 2023, from 73.7% in the same quarter of the previous year; the non-consolidated, wider debt measure decreased to 126.5% from 136.1%.
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Notes

This statistical release incorporates revisions to the data since the first quarter of 2020.
The annual growth rate of non-financial transactions and of outstanding assets and liabilities (stocks) is calculated as the percentage change between the value for a given quarter and that value recorded four quarters earlier. The annual growth rates used for financial transactions refer to the total value of transactions during the year in relation to the outstanding stock a year before.
The euro area and national financial accounts data of non-financial corporations and households are available in an interactive dashboard.
Hyperlinks in the main body of the statistical release are dynamic. The data they lead to may therefore change with subsequent data releases as a result of revisions. Figures shown in annex tables are a snapshot of the data as at the time of the current release.
The ECB published on 8 January 2024 for the first experimental Distributional Wealth Accounts (DWA), which provides additional breakdowns for the household sector. The release of results for 2023Q3 is planned for end-February 2024.

Gross entrepreneurial income is the sum of gross operating surplus and property income receivable minus interest and rent payable.
Gross non-financial investment is the sum of gross fixed capital formation, changes of inventories, and the net acquisition of valuables and non-produced assets (e.g. licences).
Loan financing comprises loans granted by all euro area sectors (in particular MFIs, non-MFI financial institutions and loans from other non-financial corporations) and by creditors that are not resident in the euro area.

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