The EU-US Task Force on Energy Security met for the 11th time on October 31, 2023, convened by co-chairs Amos Hochstein, Special Presidential Coordinator for Global Infrastructure and Energy Security, and Björn Seibert, Head of Cabinet of European Commission President Ursula von der Leyen, with the participation of Sarah Ladislaw, Special Assistant to the President and Senior Director for Climate and Energy at the US National Security Council, and Ditte Juul Jørgensen, European Commission Director-General for Energy.
The discussion focused on reviewing the diversification of Europe’s natural gas supply sources and the growing liquefied natural gas (LNG) trade between the United States and Europe, with the US now by far the largest supplier of LNG to Europe. The sides also discussed AggregateEU, Europe’s gas demand aggregation and joint purchasing mechanism, which has had success this year enabling European companies to improve their security of supply and negotiate competitive prices.
The discussion also touched on the EU’s concrete steps to further reduce gas demand, including through energy efficiency measures and policy support, expanded heat pump and smart thermostats deployment, increased use of renewable energy, and structural changes in Europe’s industrial demand patterns.
The sides also discussed how the EU has responded collectively and effectively to Russia’s aggression in Ukraine and weaponisation of Europe’s energy supplies, by accelerating the clean energy transition, diversifying supplies, and saving energy. The EU drastically reduced its dependence on Russian fossil fuels, including by: phasing out coal imports; reducing oil imports by 90 percent; and reducing gas imports from 155 billion cubic meters (bcm) in 2021 to around 80 bcm in 2022 and to an estimated 40 to 45 bcm in 2023.
The EU-US Task Force on Energy Security builds on long-standing transatlantic cooperation. It is an essential tool in our transatlantic cooperation to ensure energy security in Europe. As reconfirmed by leaders at the EU-US summit on October 20, 2023, the Task Force will continue to advance the energy transition to climate neutrality and bolster energy security. The Task Force also affirmed its commitment to monitor the energy security situation and reconvene when necessary.
 

Compliments of the European Commission.
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The Commission welcomes today’s agreement by G7 leaders on International Guiding Principles on Artificial Intelligence (AI) and a voluntary Code of Conduct for AI developers under the Hiroshima AI process. These principles and the voluntary Code of Conduct will complement, at international level, the legally binding rules that the EU co-legislators are currently finalising under the EU AI Act. President of the European Commission, Ursula von der Leyen, was among those who subscribed to the G7 leaders’ statement issued by the 2023 Japan G7 presidency.
President von der Leyen, said: “The potential benefits of Artificial Intelligence for citizens and the economy are huge. However, the acceleration in the capacity of AI also brings new challenges. Already a regulatory frontrunner with the AI Act, the EU is also contributing to AI guardrails and governance at global level. I am pleased to welcome the G7 international Guiding Principles and the voluntary Code of Conduct, reflecting EU values to promote trustworthy AI. I call on AI developers to sign and implement this Code of Conduct as soon as possible.”
Ensuring safety and trustworthiness of the technology
The eleven Guiding Principles adopted by the leaders of the seven countries and the EU, which make up the G7, provide guidance for organisations developing, deploying and using advanced AI systems, such as foundation models and generative AI, to promote safety and trustworthiness of the technology. They include commitments to mitigate risks and misuse and identify vulnerabilities, to encourage responsible information sharing, reporting of incidents, and investment in cybersecurity as well as a labelling system to enable users to identify AI-generated content.
Informed by the results of a stakeholder survey, these principles have been jointly developed by the EU with the other G7 members, under the Hiroshima Artificial Intelligence Process. The Guiding Principles have in turn served as the basis to compile a Code of Conduct, which will provide detailed and practical guidance for organisations developing AI. The voluntary Code of Conduct will also promote responsible governance of AI globally. Both documents will be reviewed and updated as necessary, including through inclusive multistakeholder consultations, to ensure they remain fit for purpose and responsive to this rapidly evolving technology. The G7 leaders have called on organisations developing advanced AI systems to commit to the application of the International Code of Conduct. The first signatories will be announced in the near future.
Background
The G7 Hiroshima Artificial Intelligence Process was established at the G7 Summit on 19 May 2023 to promote guardrails for advanced AI systems on a global level. The initiative is part of a wider range of international discussions on guardrails for AI, including at the OECD, the Global Partnership on Artificial Intelligence (GPAI) and in the context of the EU-U.S. Trade and Technology Council and the EU’s Digital Partnerships.
Since first announcing its intention to work on a Code of Conduct at the TTC Ministerial of 31 May 2023, the European Commission actively worked with key international partners in the G7 to develop the principles and the Code of Conduct on AI. These international commitments are consistent with the legally binding rules currently being negotiated as part of the more comprehensive Artificial Intelligence Act (EU AI Act), which will apply in the EU.
The proposal for the EU AI Act will guarantee the safety and fundamental rights of people and businesses, while strengthening AI uptake, investment and innovation across the EU. The AI Act will provide risk-based, legally binding rules for AI systems that are placed on the market or put into service in the Union market.
 
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Remarks by the First Deputy Managing Director, Gita Gopinath at the Ninth IMF-WB-WTO Trade Research Conference
Good morning. It is a pleasure to open the ninth IMF-World Bank-WTO Trade Research Conference.
Let’s begin by taking stock of where we are. World trade growth is historically low, with no signs of improvement. In fact, it is projected to decline from 5.1 percent in 2022 to 0.9 percent in 2023.
Meanwhile, the global trading system is facing several challenges: from geopolitical tensions and fragmentation, to industrial policies, to climate change.
As we prepare to discuss these challenges over the next two days, let me outline what we at the IMF see in the global trade landscape and how the international community can work together toward solutions.
Trade Policies and Rise in Trade Barriers
Weak global trade growth is likely to reflect not only the path of global demand, but also growing trade policy uncertainty and rising trade barriers.
Last year almost 3,000 trade restrictions were imposed—nearly 3 times the number imposed in 2019.
In addition, foreign direct investment is now increasingly driven by geopolitical preference rather than business fundamentals.
This points to a shift toward inward- and alliance-oriented policies, which often are ineffective.
For instance, a recent study by IMF and World Bank economists shows that US imports of Chinese goods subject to the 2018-2019 tariffs have been primarily replaced by exports from Vietnam and Mexico of firms that are intricately linked to China’s supply chains.
Rise in Industrial Policy
Of course, the surge in government intervention is tightly linked to a resurgence in industrial policy. In 2023 alone, the number of industrial policy measures increased nearly sixfold.
Most of that increase is driven by advanced economies, and has largely been motivated by strategic competitiveness, climate, or national security objectives.
Emerging markets have also increased their use of industrial policies, although they have relied less on subsidies and more on trade restrictions such as tariffs and export controls.
While industrial policies can help address market failures, they have historically been costly and often failed.
Many of these policies have an explicit trade policy component. Even in the absence of discriminatory features, industrial policies may still distort trade and FDI patterns, create negative spillovers, and risk retaliation.
According to one study, when the US, China, or the European Union put in place a subsidy measure, there’s a 73% chance that one of the other countries will retaliate within 12 months.
Design matters and practical steps are needed to promote a more common perspective across governments on the use of industrial policies.
Fragmentation
Stepping back, if these trends are not reversed, the risks could be significant.
Research by the IMF, WTO, and others shows that fragmentation could dramatically impact the world economy, costing up to 7 percent of GDP and possibly more for certain countries.
More recent IMF research which looks specifically at the impact of fragmentation on commodities shows the effects can still be sizable. Low-income countries could face long-term GDP losses of 1.2 percent on average, largely stemming from disruptions to agricultural exports. For some countries, especially commodity-dependent economies, losses could exceed 2 percent.
In addition to exacerbating food security concerns, fragmentation could also hinder the global green transition, as some critical rare minerals are highly concentrated. In fact, the three biggest suppliers of minerals account for about 70 percent of global production, on average. When unprecedented global cooperation to fight climate change is needed most, fragmentation threatens to derail our efforts.
Solutions
So, how do we move forward amid these challenges? And how can trade policy help?
First, we must secure the future by promoting trade openness and predictability, in collaboration with our partners at the World Bank and the WTO.
This includes addressing longstanding issues like subsidies and tariffs through strengthened trade rules. It also includes securing open markets in modern areas of the global economy, like services and e-commerce. And we look forward to progress towards the restoration of a dispute settlement system.
Second, we need to build supply chains that are resilient to trade shocks. To do that, countries must incorporate best practices such as greater diversification of input sourcing across countries; improving infrastructure, logistics and information systems; and reducing trade costs.
Third, we need to better understand the impact of countries’ unilateral actions. And we need to have clear-eyed discussions and cooperation to mitigate their spillovers.
Greater efforts to promote transparency, analysis, and dialogue on critical areas like subsidies and other industrial policies would go far to mitigate tensions. That is why this year, the IMF, OECD, World Bank, and WTO launched the Joint Subsidy Platform. This  data portal not only offers countries access to information about the nature, size, and economic impact of subsidies, it is also designed to facilitate dialogue on their appropriate use and design.
Conclusion
It is my sincere hope that the ideas shared here today can contribute to this important agenda.
This conference is a testament to what our institutions can achieve together, and the ways that we can shape global policy debates on critical issues in the global economy.
Thank you.
 
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The United States and the European Union and its Member States, representing nearly 800 million citizens, united by our values and bound together by the most dynamic economic relationship on earth, reaffirm our commitment to a transatlantic partnership that delivers for all our Since the last U.S.-EU Summit in June 2021, the world has changed in unprecedented ways, and we have taken ambitious steps in response. Together, we are working to secure peace, stability, and prosperity regionally and across the world, including in our steadfast support for Ukraine. We are deepening our cooperation to reflect the pressing challenges and opportunities of our time—strengthening our economic security; advancing reliable, sustainable, affordable, and secure energy transitions in our economies and globally; reinforcing multilateralism and international cooperation; and harnessing digital technologies to work for, not against, our shared values of democracy and respect for human rights and the rule of law. We are more united than ever.

A.  TOWARD A MORE SECURE AND STABLE WORLD

 
Situation in the Middle East 

We condemn in the strongest possible terms Hamas and its brutal terrorist attacks across Israel. There is no justification for We affirm Israel’s right to defend itself against these heinous attacks, in line with international law, including international humanitarian law. We will work closely with partners in the region to stress the importance of protecting civilians, supporting those who are trying to get to safety or provide assistance, and facilitating access to food, water, medical care, and shelter. We are concerned by the deteriorating humanitarian crisis in Gaza. It is crucial to prevent regional escalation. We call for the immediate release of all hostages and emphasize our shared view that a two-state solution remains the viable path to lasting peace.

Russia’s War against Ukraine and Support for Regional Stability 

The United States and the European Union remain unwavering in our long-term political, financial, humanitarian, and military support to Ukraine and its people as they defend themselves against Russia’s illegal and unprovoked war of We stand together in calling for Russia to end its brutal war and to withdraw its military forces and proxies and military equipment immediately, completely, and unconditionally from the entire internationally recognized territory of Ukraine. We are committed to achieving the widest possible international support for the key principles and objectives of Ukraine’s Peace Formula. Any initiative for a comprehensive, just, and lasting peace in Ukraine must be based on full respect for Ukraine’s independence, sovereignty, and territorial integrity, within its internationally recognized borders and uphold all the purposes and principles of the United Nations Charter.

We are committed to supporting Ukraine for as long as it takes to defend its sovereignty and territorial integrity. We recognize the urgency of ensuring that Russia does not succeed in collapsing the Ukrainian economy and of intensifying our efforts to help ensure assistance meets Ukraine’s highest priority As co-chairs, along with Ukraine, of the Multi-agency Donor Coordination Platform, we are working together with Ukraine as it develops its Ukraine Plan, embedded in its European path, to incorporate a common set of near-term priority economic, rule- of-law, and democratization reforms and a prioritized and well-coordinated approach to recovery and reconstruction assistance and investment. The United States and the European Union, together with other international donors, will continue to provide Ukraine with financing to help achieve these objectives, including to defend, repair, and rebuild its energy sector aligned with EU standards. We acknowledge Ukraine’s commitment and progress in their reform efforts, and underline the strategic importance of its EU accession process.

Russia must cease its aggression and must bear the legal consequences of all its internationally wrongful acts, including compensation for the damage caused to Ukraine. We are united in our determination to ensure full accountability. In light of the urgency of disrupting Russia’s attempts to destroy the Ukrainian economy and Russia’s continued failure to abide by its international law obligations, the United States and the European Union, together with our allies, are convening our experts to explore options to compensate Ukraine in a timely manner for the loss, injury, and damage resulting from Russia’s We are exploring all possible avenues to aid Ukraine, consistent with our respective legal systems and international law. We are also working together with the global community to address the energy, economic, and food security challenges caused by Russia’s war of choice, which are particularly acute in the most vulnerable developing countries. We condemn Russia’s attempts to block food exports and its attacks on Ukraine’s grain storage and shipment facilities since its withdrawal from the Black Sea Grain Initiative. The EU’s Solidarity Lanes remain instrumental in bolstering global food security.

As part of our efforts to aid Ukraine, in the short term, we will explore how any extraordinary revenues held by private entities stemming directly from immobilized Russian sovereign assets, where those extraordinary revenues are not required to meet obligations towards Russia under applicable laws, could be directed to support Ukraine and its recovery and reconstruction in compliance with applicable laws.

We will deepen our joint work to undermine Russia’s ability to wage its war, and maintain and expand its defense industrial base and capacity. Those who help Russia acquire items or equipment for its defense industrial base are supporting actions which undermine the territorial integrity, sovereignty, and independence of Ukraine. This includes companies supplying certain critical raw materials and high-priority items to Russia, as well as the financial institutions and other entities facilitating such We will target third-country actors who materially support Russia’s war. We will continue to vigorously and jointly enforce our sanctions and export control measures to disrupt circumvention and backfill. Our joint implementation of the G7+ price cap for seaborne Russian-origin crude oil and petroleum products supports energy market stability while diminishing Russia’s ability to finance its illegal war. We intend to act, consistent with our respective legal authorities, where we have evidence indicating violations or deceptive practices related to the price cap policy.

We reaffirm our support for the Republic of Moldova’s territorial integrity and The European Council decided in June to grant the status of candidate country to the Republic of Moldova. We will continue to support Moldova in addressing the challenges it faces as a consequence of the Russian aggression against Ukraine and in reform efforts on its European path.
We remain fully committed to supporting Georgia’s territorial integrity and sovereignty, and its European perspective. We reaffirm our shared commitment to stability in the Western Balkans and our support to the EU perspective of the region. All partners should continue making the reforms required to progress on their European path.  We note the need for Kosovo0F* and Serbia to urgently de-escalate tensions and to swiftly and unconditionally implement the agreement on the path to normalization of their relations and return to the EU-facilitated Dialogue. We remain committed to advancing a lasting peace between Armenia and Azerbaijan based on mutual recognition of sovereignty, inviolability of borders and territorial integrity. We urge Azerbaijan to ensure the rights and security of those who remain in Nagorno-Karabakh as well as for those who wish to return to their homes. We also call for all parties to adhere to the principle of non- use of force and threat of use of force.

Africa 

The United States and the European Union share a common interest in a thriving, peaceful, democratic, and resilient Africa, and welcome the accession of the African Union as a permanent member of the G20. We will work together to continue to enhance synergies in our cooperation with all our African We are committed to promoting the security, stability and prosperity of North Africa. We reaffirm our commitment to tackle common security challenges in the Sahel, including the fight against terrorism, in cooperation with ECOWAS.

Partnerships in the Indo-Pacific 

We reiterate our shared commitment to enhancing coordination and cooperation in support of a free and open Indo-Pacific with the aim of contributing to the stability, security, prosperity and sustainable development of the region, based on the promotion of democracy, rule of law, human rights and international Consistent with our respective Indo-Pacific strategies, we will seek opportunities to enhance practical cooperation in the Indo-Pacific, including through the biannual U.S.-EU Indo-Pacific Consultations. This includes expanding maritime domain awareness, encouraging cooperation on connectivity, responding to foreign information manipulation and interference, increasing coordination on cyber cooperation, and encouraging ongoing efforts to uphold fundamental freedoms and human rights. We reaffirm our unwavering support for ASEAN centrality and unity and our commitment to promoting cooperation in line with the ASEAN Outlook on the Indo-Pacific. We also reaffirm our partnership with Pacific Island countries and reiterate the importance of supporting their priorities and needs in accordance with the Pacific Islands Forum’s 2050 Strategy for the Blue Pacific Continent.

We reiterate our support for international law, in particular as reflected in the United Nations Convention on the Law of the Sea (UNCLOS), and for the peaceful settlement of disputes in accordance with international law, including under UNCLOS dispute settlement mechanism.

* This designation is without prejudice to positions on status, and is in line with UNSCR 1244/1999 and the ICJ Opinion on the Kosovo declaration of independence.
China 

The United States and European Union recall our discussions in other fora, including the G7, on the principles that underpin our relations with China. We stand prepared to build constructive and stable relations with China, recognizing the importance of engaging candidly with and expressing our concerns directly to China. It is necessary to cooperate with China, given its role in the international community and the size of its economy, on global challenges as well as areas of common interest. We call on China to engage with us, including in international fora, on areas such as the climate and biodiversity crisis, addressing vulnerable countries’ debt sustainability and financing needs, global health and pandemic preparedness, and macroeconomic stability.

With a view to enabling sustainable economic relations with China, we will push for a level playing field for our firms and workers. We are not decoupling or turning inwards. At the same time, we recognize that economic resilience requires de-risking and diversifying. In this context, we will invest in our own economic vibrancy and reduce critical dependencies and vulnerabilities, including in our supply chains. We also recognize the necessity of protecting certain advanced technologies that could be used to threaten global peace and security, without unduly limiting trade and We will foster resilience to economic coercion. We will address challenges posed by non-market policies and practices.

We remain seriously concerned about the situation in the East and South China Seas and strongly oppose any unilateral attempts to change the status quo by force or coercion. We underscore the importance of peace and stability across the Taiwan Strait, and encourage the peaceful resolution of cross-Strait There is no change in the one China policy of the United States or of the European Union.

We will keep voicing our concerns about the human rights and forced labor in China, including in Tibet and Xinjiang. With respect to Hong Kong, we call on China to honor its previous commitments with respect to Hong Kong under the Sino-Joint Declaration and the Basic Law.

We call on China to press Russia to stop its war of aggression, and immediately, completely and unconditionally withdraw its troops from Ukraine. We encourage China to support a comprehensive, just and lasting peace based on territorial integrity and the principles and purposes of the UN Charter, including through its direct dialogue with Ukraine.

Strengthening Cooperation on Security and Defence 

We will further strengthen and deepen EU-U.S. cooperation and engagement on security and defence. This could include enhancing practical cooperation in operational theatres of mutual interest. NATO remains the foundation of collective defence for its Allies and essential for Euro Atlantic security. We recognise the value of a stronger and more capable European defence that contributes positively to global and transatlantic security and is complementary to, and interoperable with We welcome the signature of the Administrative Arrangement between the United States Department of Defense and the European Defence Agency.

Partnering with Emerging Economies and Developing Countries 

The United States and the European Union are committed to accelerating progress toward the Sustainable Development Goals and to mobilizing additional financing for development. To this end, we are committed to advancing reforms for better, bigger, and more effective multilateral development banks to address global challenges and countries’ core development needs. This includes the implementation of critical financial reforms and a review of the climate finance architecture to make it more effective and efficient. We commit to raising the level of ambition to deliver more headroom and concessional finance to boost the World Bank’s capacity to support low- and middle-income countries addressing global challenges, with a clear framework for the allocation of scarce concessional resources, and to provide strong support for the poorest The United States and the European Union will step up efforts to deliver substantial contributions to this end.

Given the massive scale of need, greater private capital mobilization must play a significant role in meeting our objectives. We will continue to champion efforts to unlock private capital and will work with G7 partners through respective actions, to scale the Partnership for Global Infrastructure and Investment, including the European Union’s Global Gateway strategy, and mobilize $600 billion in quality infrastructure investments in low- and middle-income countries by Building on the discussions on U.S.-EU collaboration on the Trans-African Corridor and the India-Middle East-Europe Corridor, we are working towards identifying additional regional economic corridors to cooperate on to unlock inclusive and sustainable economic growth.

The United States and the European Union will also continue their efforts to promote digital inclusion and trustworthy information and communication technology and services supply chains around the world and pursue cooperation to develop a common vision and industry roadmap on research and development for 6G wireless communication systems.

B.  STRENGTHENED U.S.-EU ECONOMIC COOPERATION 

The U.S.-EU Trade and Technology Council (TTC) is the key forum for our cooperation on trade and technology matters. We commend the progress made and encourage advancing joint work in the run up to the upcoming TTC ministerial meeting later in 2023.

The United States and the European Union are committed to strengthening the transatlantic marketplace to support decent jobs and economic opportunities with an emphasis on mutually beneficial resilience and sustainability of our supply chains. We will advance the implementation of the Transatlantic Initiative on Sustainable Trade focusing on facilitating mutually beneficial trade across the Atlantic of products and technologies that underpin the transition to a climate- neutral economy.

Building the Sustainable and Resilient Economies of the Future 

The United States and the European Union are deepening our collaboration to address the urgent and interdependent crises of climate change, biodiversity loss and pollution, and urge ambitious action by all other major players. We will work expeditiously to implement the Paris Agreement, halt and reverse the loss of biodiversity globally and protect the ocean. We will intensify our outreach to third countries, notably in view of the 28th UN Climate Change Conference of the Parties (COP28), making every effort to keep a 1.5 degree Celsius limit on global temperature warming within reach. We are committed to working together and with others for COP28 to reach bold commitments to dramatically increase global renewable energy capacity and energy efficiency while supporting a global shift away from unabated fossil fuels, including an end to new unabated coal fired power plants. We will continue to lead efforts to cut methane to support achieving the Global Methane Pledge and look forward to a robust Methane Finance Sprint announcement at COP28.

Together, we will work to build climate neutral, circular, resource efficient and resilient economies, to promote internationally recognized labor rights, and to improve the resilience and sustainability of critical supply We will continue our work to advance the energy transition to climate neutrality and bolster energy security through the Joint Energy Security Task Force and U.S.-EU Energy Council.

We are making bold public investments in our respective economies, and will continue to also expand research collaboration, to ignite a clean industrial revolution and, with it, good jobs, and make our industries more sustainable and We will continue ongoing cooperation toward this end, and work openly and transparently against zero-sum competition to maximize clean energy deployment, including through our Clean Energy Incentives Dialogue.

We have made progress toward a targeted critical minerals  agreement for the purpose  of expanding access to sustainable, secure, and diversified high-standard critical mineral and battery supply chains and enabling those minerals extracted or processed in the European Union to count toward requirements for clean vehicles in the Section 30D clean vehicle tax credit of the Inflation Reduction We look forward to continuing to make progress and consulting with our respective stakeholders on these negotiations in the coming weeks.

Expanding Technology Cooperation and Exchanges 

The United States and the European Union are stepping up our joint efforts to promote an open, free, global, interoperable, reliable, secure, innovative, and competitive digital ecosystem. We are cooperating to manage the risks and harness the benefits of artificial intelligence (AI), working alongside our partners in the G7, OECD, and other multilateral fora. We affirm our continued work through the TTC Joint Roadmap on Trustworthy AI and Risk Management to further guide the development of tools, methodologies, and approaches to AI risk management and trustworthy AI. We confirm our joint intention to endorse a code of conduct for organizations developing advanced AI systems as part of the G7 Hiroshima process in the near We confirm our commitment to use AI for Public Good, particularly in the areas of agriculture, extreme weather prediction, emergency management and response, electric grid optimization, and health and medical research. As new and more advanced AI systems emerge, we plan to build on work done to promote responsible AI and work with industry, civil society, academia, and other stakeholders to enable trustworthy development and uptake of those technologies, and to advance our shared vision of responsible innovation in line with our shared democratic values. We recognize the importance of expanding research collaboration between the European Union and the United States for critical and emerging technologies such as AI, quantum, renewable energy, and other key areas, including by enabling transatlantic research funding activities that allow for both U.S. and EU researcher leadership while considering reciprocity in access to respective U.S. and EU research programmes and ensuring symmetry in managing intellectual property. We commit to working together to finalize an agreement on quantum-related items for the upcoming TTC meetings.

We aim to build a more secure cyberspace together. We endeavor to cooperate to promote high cybersecurity standards to protect consumers and business and decrease vulnerability to cyberattacks. To that end, we commit to work together on achieving mutual recognition for our government-backed cybersecurity labeling programs and regulations for Internet-of-things devices aiming at a Joint CyberSafe Products Action We will work for consumers in Europe and the United States to have an easy and reliable way to assess whether devices they bring into their homes, offices, and schools are secure.

Promoting Rules-Based Trade and Countering Unfair Competition

The United States and the European Union have a shared interest in reforming the WTO so that Members can better achieve the WTO’s foundational objectives and address modern-day imperatives. We will work towards substantial WTO reform by MC13 in 2024 including by conducting discussions with the view to having a fully and well-functioning dispute settlement system accessible to all WTO Members by 2024.

On 31 October 2021, we announced that we would negotiate within two years an arrangement—known as the Global Arrangement on Sustainable Steel and Aluminum (Global Arrangement)—to address non-market excess capacity and emissions intensity of the steel and aluminum industries, including to foster undistorted transatlantic trade. Throughout these two years, we have made substantial progress to identify the sources of non-market excess capacity. We have also achieved a better understanding of the tools to address the emissions intensity of the steel and aluminum We look forward to continuing to make progress on these important objectives in the next two months.

Strengthening Economic Resilience and Economic Security

The United States and the European Union are continuing to cooperate to enhance the resilience of our economies and advance our economic security interests, underpinned by a rules- based system, while preserving an open economy and a global level playing We will de-risk and diversify where we assess there are risks through proportionate, precise and targeted measures to address economic security challenges. We will continue working together to reduce excessive dependencies in critical supply chains, in close cooperation with partner countries. We share concerns about the challenges posed by, among other issues, economic coercion, the weaponization of economic dependencies, and non-market policies and practices. We will continue this work through inter alia the TTC, and with the G7 and other partners to diversify our supply chains and increase our collective preparedness, assessment, deterrence, and response to economic coercion.

We have a shared interest in protecting those advanced technologies that could be used to undermine global peace and security, and are developing our respective economic security toolkits to ensure our companies’ capital, expertise, and innovations will not be used to do Recognizing that outbound investment measures are necessary to complement its existing economic security toolkit, the President of the United States has issued an Executive Order to address risks from outbound investment and is consulting stakeholders on the U.S. rules. The European Union and its Member States are similarly exploring, based on a risk assessment, whether outbound investment measures could complement its existing toolkit. Export control regimes are central to maintain international security and stability, and necessitate cooperation between actors— including in multilateral fora—to ensure our dual-use technology protection ecosystem is continuously improved upon and cannot be exploited. We will cooperate and share lessons as we work to maximize the effectiveness of our economic security toolkit to achieve our shared interest.
Foreign information manipulation and interference is a borderless threat that poses a risk to democratic values, processes, and stability. We will expand collaboration based on common principles, such as dedicated strategies, internal organizational structures, capacity, civil society and multilateral engagement. This cooperation should aim to support like-minded partners in countering foreign information manipulation and interference, including via U.S. and EU coordinated activities, while safeguarding freedom of expression together with partner countries.

Expanding People-to-People Contacts

To preserve the strength and longevity of our transatlantic relationship, the United States and the European Union also endeavour to increase vital people-to-people exchanges. We will work to achieve visa-free travel between all EU Member States and the United States. Together, the United States and the European Union intend to provide additional resources to increase the number of transatlantic academic exchanges. The European Union will increase its funding to the Erasmus+ programme, and will double EU support to the Fulbright-Schuman programme, and across all Fulbright Commissions in EU Member States. The United States plans to increase its funding to all Fulbright Commissions in EU Member States, including the Fulbright-Schuman programme. This collective support will significantly increase the number of transatlantic academic exchanges between our citizens over the next five years.

 
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The Council has adopted a regulation to help the EU and its member states protect themselves from economic coercion by third countries.
The new legislation, known as the Anti-Coercion Instrument (ACI), is meant to serve as a deterrent for third countries targeting the EU or its member states. The aim is to use this legislation to de-escalate and induce the discontinuation of coercive measures in trade and investment through dialogue.
When this is not possible, and as a last resort, the EU will be able to adopt countermeasures such as the imposition of trade restrictions, in the form of, for example, increased customs duties, import or export licences, restrictions on trade in services or access to foreign direct investment or public procurement.
Definition of economic coercion
Economic coercion is defined as a situation where a third country attempts to pressure the EU or a Member State into making a particular choice by applying or threatening to apply, measures affecting trade or investment against the EU or a member state.
Activation of the mechanism
The Council will have significant involvement in the decision-making process, determining the existence of economic coercion.
The European Commission will be given implementing powers in decisions on the EU’s response measures, while ensuring increased involvement of member states in these decisions.
The instrument can be triggered by a wide range of coercive economic practices where a third country applies or threatens to apply a measure affecting trade or investment in order to prevent or obtain the cessation, modification or adoption of a particular act by the Union or a member state. Input from stakeholders will be taken into account when considering activation of the instrument, and businesses are encouraged to come forward with relevant information.
The ACI and any actions which can be taken under the instrument are consistent with the EU’s international obligations and fully grounded in international law.
Next steps
The signing of the regulation is expected to take place on 22 November 2023 and will enter into force 20 days after its publication in the Official Journal of the EU.
Background
The European Commission proposed this legislation on 8 December 2021 at the request of the Council and the European Parliament. The European Parliament’s negotiating mandate was adopted on 19 October 2022, while the Council’s negotiating position was agreed on 16 November 2022. An interinstitutional political agreement was reached on 28 March 2023. On 3 October, the European Parliament green-lighted the regulation. Today’s decision at the Council was adopted as a point without discussion at a meeting of Agriculture and Fisheries EU Ministers.
 
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It was a presentation by Laura Papi, Deputy Director, European Department, IMF given at the Budapest Economic Forum on October 17th 2023.Good morning to all of you. Thank you for the introduction. It is a pleasure to be here today and for the first time at the Budapest Economic Forum. I am honored to have been invited to speak.
Today, I will discuss the outlook for Europe and how we see the risks. Inflation, implications of the geoeconomic fragmentation, and the green transition will be particular areas of focus. I will discuss key policies for securing low inflation and forging a path of higher long-term growth.
Progress has been made in taming inflation and the likelihood of a soft landing has increased, both globally and in Europe.
But downside risks are significant. Policymakers face the risk of persistent and more volatile inflation. We now live in a more shock prone world. And the longstanding slowdown in productivity growth, the geoeconomic fragmentation and the challenges of the green transition cast doubt on whether European economies can return to the pre-pandemic growth trajectory.
These competing challenges and a highly uncertain outlook will test policymakers in Europe.
These themes are pertinent to Hungary, which is facing a difficult macroeconomic environment, with still-high inflation and the longest recession since the mid-1990s.
Let me start with the European Outlook.
Outlook and Near-term challenges
At first glance, the European economy seems to be approaching a relatively benign moment.
The IMF’s baseline forecast anticipates a continued moderation of inflation in Europe and—contrary to initial expectations of recession—modest growth in 2023 and a slight recovery in 2024. We expect that for Europe as a whole 2023 growth will be 1.3 % (2,7 in 2022), picking up to 1.5% next year. Advanced economies are expected to go from 0.7 % to 1.2%, while Emerging European Economies are expected to have a sharper recovery from about 1 to about 3 %.
Aided by easing commodity prices and supply constraints, monetary tightening has cooled headline inflation, providing support to real wages. In most EU countries, the tightening cycle has peaked, with the prospect of an approaching soft landing as growth this year slows but remains in positive territory.
However, there are divergencies across European countries: energy-intensive and manufacturing-oriented economies, such as Germany and Hungary, are performing less well.
And downside risks continue to prevail everywhere.
Headline inflation is falling, but is not expected to return to target until 2025 in many countries, for some even 2026.  Core inflation has been persistently high in many European economies, especially in services. Nominal wages are growing rapidly, outpacing inflation in some economies, especially in Eastern Europe.
As the pandemic and Russia’s war in Ukraine hit European economies, in only 2 years prices increased by 25 percent, as much as over the 5 years following the global financial crisis. In Hungary, inflation reached 25 percent at end- 2022, and prices have increased by 41 percent cumulatively from end-2020 to August 2023. This rapid and massive price shock eroded workers’ purchasing power and left a large real wage gap.
Hence, some wage catch up is reasonable and to be expected. However, we have some concerns.
We have decomposed wage growth into inflation expectations and wage catch up in green, the unemployment gap in red, productivity growth in yellow, and in gray other, that is wage growth in excess of what is to be expected from the factors I just mentioned, which as you can see is growing especially in Central, Eastern, and South-Eastern Europe, CESEE.
The risk is that wage pressures could translate into additional inflation pressures, especially where wage setting is backward-looking, as is the case in many European emerging markets, and hence harm competitiveness.
New IMF research, in our recent World Economic Outlook, also shows that near-term inflation may play a greater role in setting long-term inflation expectations than previously thought. Near-term expectations, in turn, are influenced to a large extent by backward-looking agents, particularly in emerging market economies where such agents are more prevalent. There is also evidence that the pass-through from inflation expectations to inflation tends to be higher when inflation is high.
The strength of the labor market is fundamentally good news.
Vacancy to unemployment ratios stand at record highs and unemployment rates at record lows in most of Europe.
But all of this means additional upward nominal wage pressures are likely and the possibility of a wage-price spiral exists.
Let me be clear: we don’t see wage-price spirals likely in advanced European economies, but the risk in Eastern Europe is not negligible.
Another driver of high inflation has been firms’ profits.
In many countries, in the last couple of years, firms have passed on more than the increase in input prices to consumers. In CESEE too we saw an increase in profits, which have started to fall. Going forward, this is positive in the sense that firms could absorb some wage increases by lower profits. But there is no guarantee that this will continue. In sum, all of these forces put together suggest that we may be experiencing a period of especially sticky price and wage pressures.
Besides the more cyclical factors that I have just discussed, there are some additional risk factors for inflation, which are more structural in nature.
Take geoeconomic fragmentation. We have already experienced big shocks from fragmentation, especially Russia’s war in Ukraine. We could see additional commodity price spikes that feed through to core inflation. More generally greater fragmentation brings more trade restrictions and disruptions of supply chains, continuing to generate negative supply shocks, which will be inflationary.
The pre-pandemic view was that central banks could generally ignore supply shocks as these were believed to be mostly transient. But, the pandemic and war in Ukraine have highlighted how supply shocks can have broad and persistent inflation effects.
Medium-term challenges
Let me turn to the medium- and long-term challenges.
Europe’s medium-term growth prospects have been declining for some time.
Since the 2008 global financial crisis, per capita growth has fallen and we expect growth to remain weak over the medium term.
The pandemic and the energy crisis have resulted in significant scarring to the level of output. And this comes at a time when countries also grapple with the structural shifts from fragmentation, climate and technological change, and demographic pressures.
Fragmentation is a particularly potent economic challenge. The increasing trade restrictions and reconfiguration of supply chains, besides raising production costs, can further dampen Europe’s weak productivity growth.
The economic costs of fragmentation are likely to be substantial. While estimates vary, greater international trade restrictions could reduce global economic output by up to 7 percent over the long term, or some $7 trillion in today’s dollars—equivalent to the combined size of the French and German economies. If technological decoupling is added to the mix, some countries could see losses of up to 12 percent of GDP. And looking just at commodities trade, the IMF estimates that segmentation in the trade of these critical inputs could erase 2 percent from global GDP and up to 3.5 percent from that of emerging Europe.
While reshoring or near-shoring some aspects of production may also present some opportunities to some countries, these are only available if cost competitiveness is preserved, especially on wages.
But let me be clear: economic fragmentation is a negative sum game for the world as a whole.
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Climate change is another major challenge. European countries, like other parts of the globe, are experiencing rapid temperature rises and greater frequency of natural disasters, underscoring the urgency of transitioning to a greener and more climate resilient economy. The green transition holds the promise of being an engine of growth accompanied by greater sustainability and resilience and is one of the key imperatives of our times.
In the short term, though, this may entail significant adjustment costs and benefits spread unevenly across countries, firms, and people. The effects on prices and growth could be uncertain in the short to medium term, depending on how well managed and orderly the adjustment.
Take the auto sector, so important for several countries in Europe including Hungary. IMF research shows that the transition to electric vehicles is already negatively affecting employment in sectors and regions focused on internal combustion engine vehicle production. We are likely to see disruptions in the extensive regional value chains that have been built around supplying the auto industry, which employs 7 percent of the European workforce. This highlights the need to facilitate the relocation of factors of production across sectors.  This transition will have implications for employment, investment, and public policy as countries have to reorient worker training and investment, including in new infrastructure.
Finally, Europe confronts labor supply constraints due to demographics, and capital stocks in emerging Europe are still low.
Policies
I realize that I have laid out a sobering list of near- and long-term challenges. So, what to do about all this?
First, it is critical not to loosen policies prematurely in response to what may be temporary declines in inflation.
In a recent IMF paper, we have looked at 100 inflation shocks and we have seen that in many cases, policies were eased too soon, and inflation reaccelerated: here are some examples of premature celebrations, but there are many more.
Fund research also shows that countries that resolved inflation episodes experienced lower growth in the short term, but not over the medium term.
Naturally, the level and duration of tightness in the monetary policy stance should be calibrated to country specific conditions. This may mean that some central banks keep rates at current levels for some time while others may have to raise them further. While many emerging economies started raising policy rates already in 2021 and by substantial amounts, real rates have remained below the neutral level in some countries. Hungary has now one of the highest real policy rate in Europe.
Given the high cost of erring on the side of monetary policy being too loose, the empirical case for a less contractionary stance should be compelling. Monetary policy should remain restrictive until there is clear evidence of a substantial improvement in the core inflation forecast; a reduction of upward inflation risks which hinges mainly on labor market developments; and the absence of upward movements in inflation expectations. These conditions have not been met in most countries.
The key message is that fighting inflation is difficult in the short-term but pays off later, while delaying the day of reckoning ultimately requires a higher sacrifice in future growth and employment.
In emerging markets, in particular, bringing down inflation once it gets sticky can be very costly and high inflation creates competitiveness problems that EMs can ill afford. Short-term pain for long-term gain.
Second and turning to fiscal policy, our strong recommendation is that all countries step up their efforts to rebuild fiscal buffers while protecting the vulnerable. This means consolidation, starting now and especially in high-debt and high deficit countries. By reducing deficits, fiscal consolidation will complement monetary policy in the fight against inflation. Importantly, it will re-build fiscal space for future shocks and for productivity-enhancing investments, including in green infrastructure, and to face the critical transitions that we are experiencing.
In many emerging economies, there is significant room to mobilize resources and to achieve greater expenditure efficiency through better targeting and better spending prioritization. In many countries, there are opportunities to eliminate tax leakages, exemptions, and inefficiencies. IMF research shows that the potential for revenue mobilization by increasing tax efficiency in emerging European economies is as high as 2 percent of GDP, on average. Many countries still have costly and counter-productive energy subsidies, which run counter to the green transition and reduce energy security, which need to be eliminated. Support can be given in a targeted way at a fraction of the current cost. And with high yields globally, governments should be even more rigorous in their prioritization of public spending and not leave money on the table on the tax front.
Third, structural policies remain crucial for achieving strong, sustainable,  and more evenly distributed growth. With greater prevalence of supply shocks, constrained policy space, and big transitions under way requiring large reallocation of factors of production, policies that can stimulate the supply side and facilitate the necessary adjustments have to take center stage.
Country needs vary and reforms need to be tailored to the specific institutions and initial conditions, but there are some common priorities.

Removing barriers that stand in the way of economic innovation and business dynamism. A strengthened business environment with policies that encourage investment and R&D spending will enhance productivity and competitiveness.
Measures to improve worker training and skills, as well as active labor market policies, will be particularly important to facilitate the green and digital transitions without generating employment losses and to meet the needs of the new economy.
Boosting labor participation will help counter demographic trends and can relieve the tightness in labor markets, and help ease inflation pressures.

In emerging European economies, the need to get structural policies right is particularly important given the urgency of reaccelerating income convergence. To attract inward investment countries should ensure business-friendly environments by strengthening public governance, enhancing skills and infrastructure. In addition, investing in human capital to align education, health, and social protection outcomes with those of advanced economies can help stem the excess flow of emigration.
To address geoeconomic fragmentation, some countries have introduced industrial policies to encourage the establishment of critical industries or to produce key inputs at home citing national security or just reshoring. Industrial policies have a role to play in addressing market failures and externalities, such as in the provision of critical infrastructure or in supporting basic research, an under-provisioned public good by the private sector. But they need to be deployed only narrowly and with care. Costly subsidy races and the use of distortionary tariffs must be avoided, and policies should be coordinated at the multilateral level to avoid beggar-thy-neighbor outcomes.
For the EU, focusing on completing the single market—completing the single services market, the banking union, and the capital markets union—is absolutely vital. Green subsidies should maintain the integrity of the EU’s Single Market and follow a common EU approach. Together with the implementation of the Recovery and Resilience Plans, there reforms are critical to boost the EU’s productivity and competitiveness.
Energy importers should continue to seek to diversify suppliers to avoid the consequences of overdependence on a single source.
International collaboration on climate change, including a global carbon price floor, will reduce emissions and complement domestic policies. The recently published IMF fiscal monitor proposes a practical mix of policies that are feasible and would achieve the climate goals, including also feebates, green subsidies, and regulation standards, combined with transfers to vulnerable workers.
Conclusion
I realize that these challenges, and the proposed solutions, seem daunting. But every journey starts with a single step.
The policies that governments put in place today have important implications for the trajectory of inflation, competitiveness, and growth in the future.
The good news is that tackling inflation now will strengthen resilience and help to buttress competitiveness in the long term.
As inflation is brought under control and fiscal space is rebuilt, European policymakers will be able to seize the opportunities posed by big transitions rather than being a casualty of these structural shifts.
Structural policies that help boost supply, including those at the EU level, ultimately will be the only way of boosting growth and will also alleviate some of the structural inflation pressures.
And all this in turn will play an important role in raising regional growth and in helping emerging economies like Hungary to converge with Europe’s advanced economies.
The IMF remains deeply committed to the region and will continue to support our member countries to foster macroeconomic stability and higher living standards.
Thank you.
 
To reach the slides of the presentation, click here.
 
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The European Commission analysed over 420 foreign direct investments (FDI) into the EU over the past year, according to the Annual Report on FDI Screening released today. In addition, EU Member States blocked 560 requests for exports of dual use goods over the same period. This level of activity demonstrates a clear commitment by the European Commission and Member States to safeguarding European security and public order in times of increased geopolitical tensions.
The number of EU Member States with a screening mechanism has grown from 11 to 21 since the EU’s FDI screening regulation came into force, with more on the way.
As regards dual-use goods (goods which can be used for civil or military purposes), Member States reviewed 38,500 export applications in 2021 for goods worth €45.5 billion. Member States blocked exports on account of security risks in 560 cases, worth a total of €7 billion.
FDI Screening
The third Annual Report on FDI screening shows that the use of the screening mechanism continued to grow in 2022. Its key findings are:

The Commission rapidly completed the assessment of FDI transactions notified by Member States: 87% were assessed in just 15 calendar days, thus ensuring no delays to authorisations by Member States.
The EU mechanism does not restrict the EU’s openness to FDI: of the more than 420 cases screened in 2022, less than 3% led to the Commission issuing an opinion.
The top six sources of FDI into the EU in 2022 were the US, UK, China, Japan, the Cayman Islands and Canada.
Most cases concerned manufacturing (59%), covering a diverse set of industries including energy, aerospace, defence, semiconductors, health, data processing and storage, communication, transport and cybersecurity.

The EU FDI Screening Regulation entered into full application in October 2020. The cooperation mechanism created by the Regulation enables Member States and the Commission to exchange on FDI quickly and efficiently. It has allowed for the prevention of investments posing security or public order risks without restricting the overall flow of foreign investment into the EU. Since the creation of the cooperation mechanism, the Commission has screened more than 1100 foreign direct investments.
The Economic Security Strategy published in July 2023 highlights the need to build a shared understanding of risks to the EU’s economic security and to make better use of existing tools. Against this backdrop, the European Commission is completing an evaluation of the FDI Screening Regulation and a revised Regulation will be proposed before the end of the 2023.
Export Controls
This statistical update on the implementation of the Export Controls Regulation published today by the European Commission complements the 2022 Annual Export Control Report. It provides2021 licensing data collected using a methodology developed on a voluntary basis with Member States, under the previous Dual-Use export control regulation[1]. The update closes a data gap, as the forthcoming 2023 Annual Export Control Report will include 2022 licensing data collected following an updated methodology, in line with the requirement for enhanced transparency under the current Dual-Use export control Regulation (EU) 821/2021.
Background
EU Member States which operate FDI screening regimes are required to notify foreign direct investments to the other Member States and to the European Commission if these investments risk affecting security or public order in more than one Member State or have an impact on strategic projects or programmes of interest to the whole EU. The Commission then analyses the notified investments and where there are concerns, the Commission or other Member States can share them with the notifying Member State, which then takes these into account when deciding on the investment.
 
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The Governing Council of the European Central Bank (ECB) decided yesterday to move to the next phase of the digital euro project: the preparation phase.
This decision follows the completion of the investigation phase launched by the Eurosystem in October 2021 to explore possible design and distribution models for a digital euro. Based on the findings from this phase, detailed in a report published today, the ECB has designed a digital euro that would be widely accessible to citizens and businesses through distribution by supervised intermediaries, such as banks.
The design envisages the digital euro as a digital form of cash that could be used for all digital payments throughout the euro area. It would be widely accessible, free for basic use and available both online and offline. It would offer the highest level of privacy and allow users to settle payments instantly in central bank money. It could be used from person to person, at the point of sale, in e-commerce and in government transactions. No digital payment instrument offers all these features. The digital euro would fill that gap.
The next phase of the digital euro project – the preparation phase – will start on 1 November 2023 and will initially last two years. It will involve finalising the digital euro rulebook and selecting providers that could develop a digital euro platform and infrastructure. It will also include testing and experimentation to develop a digital euro that meets both the Eurosystem’s requirements and user needs, for example in terms of user experience, privacy, financial inclusion and environmental footprint. The ECB will continue to engage with the public and all stakeholders during this phase. After two years, the Governing Council will decide whether to move to the next stage of preparations, to pave the way for the possible future issuance and roll-out of a digital euro.
The launch of the preparation phase is not a decision on whether to issue a digital euro. That decision will only be considered by the Governing Council once the European Union’s legislative process has been completed. The ECB will take into account any adjustments to the design of the digital euro that may become necessary as a result of the legislative deliberations.
“We need to prepare our currency for the future,” said Christine Lagarde, President of the ECB. “We envisage a digital euro as a digital form of cash that can be used for all digital payments, free of charge, and that meets the highest privacy standards. It would coexist alongside physical cash, which will always be available, leaving no one behind.”
The digital euro would make data protection a priority. The Eurosystem would not be able to see users’ personal data or link payment information to individuals. The digital euro would also achieve a cash-like level of privacy for offline payments.
The digital euro would promote resilience, competition and innovation in the European payments sector. It would ensure that there is a pan-European payment solution for the euro area under European governance. It would rely on its own infrastructure, thereby strengthening resilience. And it would provide a platform on which European supervised intermediaries could build pan-European services for their customers, increasing efficiency, reducing costs and fostering innovation.
“As people increasingly choose to pay digitally, we should be ready to issue a digital euro alongside cash,” said Fabio Panetta, ECB Executive Board member and Chair of the High-Level Task Force on a digital euro. “A digital euro would increase the efficiency of European payments and contribute to Europe’s strategic autonomy.”
Digital euro distribution
Users could access digital euro services via their payment service provider’s proprietary app and online interface, or via a digital euro app provided by the Eurosystem. People without access to a bank account or digital devices would also be able to pay with digital euro, for example by using a card provided by a public body such as a post office. Users would also be able to exchange digital euro for cash or vice versa at cash machines.
The Eurosystem envisions a digital euro that would be free for basic use for individuals. A compensation model between intermediaries and merchants would ensure that there are incentives for intermediaries to distribute digital euro, as is the case for other electronic payment instruments, and that there are adequate safeguards against excessive service charges for merchants. The Eurosystem would bear its own costs, including those related to scheme management and settlement processing.
Transparency and close cooperation with stakeholders remain key pillars of the project. The Eurosystem has benefited greatly from feedback from European decision-makers, market participants and potential users, and will continue to engage actively with a wide range of stakeholders. We will also continue to cooperate closely with EU legislators.
 
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The European Commission is carrying out unannounced antitrust inspections at the premises of companies active in the construction chemicals sector in several Member States.
The Commission has concerns that the inspected companies may have violated EU antitrust rules that prohibit cartels and restrictive business practices (Article 101 of the Treaty on the Functioning of the European Union).
The construction chemicals concerned by the inspection are chemical additives for cement and chemical admixtures for concrete and mortar. These are ingredients that are added to cement, concrete and mortar to modify and improve their properties and provide them with specific qualities.
The Commission officials were accompanied by their counterparts from the relevant national competition authorities of the Member States where the inspections were carried out. Today’s inspections were conducted in coordination with the UK Competition and Markets Authority and the Turkish Competition Authority. The Commission has also been in contact with the United States Department of Justice, Antitrust Division.
Unannounced inspections are a preliminary investigatory step into suspected anticompetitive practices. The fact that the Commission carries out such inspections does not mean that the companies are guilty of anti-competitive behaviour nor does it prejudge the outcome of the investigation itself.
The Commission respects the rights of defence, in particular the right of companies to be heard in antitrust proceedings.
There is no legal deadline to complete inquiries into anticompetitive conduct. Their duration depends on a number of factors, including the complexity of each case, the extent to which the undertakings concerned co-operate with the Commission and the exercise of the rights of defence.
Under the Commission’s leniency programme companies that have been involved in a secret cartel may be granted immunity from fines or significant reductions in fines in return for reporting the conduct and cooperating with the Commission throughout its investigation. Individuals and companies can report cartel or other anti-competitive behaviour on an anonymous basis through the Commission’s whistle-blower tool. Further information on the Commission’s leniency programme and whistle-blower tool is available on DG Competition’s website.

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Once a year the ECB publishes a report presenting an overview of developments in the use of the euro by non-euro area residents. The international role of the euro is primarily supported by a deeper and more complete Economic and Monetary Union (EMU), including advancing the capital markets union, in the context of the pursuit of sound economic policies in the euro area. The Eurosystem supports these policies and emphasises the need for further efforts to complete EMU.
Foreword by Christine Lagarde, President, ECB:
Despite a succession of new shocks, the international role of the euro remained resilient in 2022. This was a year that saw the onset of Russia’s war in Ukraine, a rise in economic sanctions and a substantial increase in geopolitical risks – all with potential repercussions for the international monetary system. However, the share of the euro across various indicators of international currency use continued to average close to 20%. The euro remained the second most important currency globally.
This resilience was noteworthy in a context of rising inflationary pressures worldwide – in part owing to war-related energy and food price increases – which led to tighter monetary policies across major economies and higher interest rates on the main international currencies.
But there are developments ahead to monitor for the euro as an international currency. This year’s report discusses the future of the international monetary system following Russia’s invasion of Ukraine, reviewing the available evidence. So far, the data do not show substantial changes in the use of international currencies. However, they do suggest that international currency status should not be taken for granted.
This new landscape increases the onus on European policymakers to create the conditions for the euro to thrive. Its international role is primarily supported by a deeper and more complete Economic and Monetary Union (EMU), including advancing the capital markets union, in the context of the pursuit of sound economic policies in the euro area. The Eurosystem supports these policies and emphasises the need for further efforts to complete EMU. Further European economic and financial integration will be pivotal in increasing the resilience of the international role of the euro in a potentially more fragmented world economy.
The ECB will continue to monitor developments and publish information on the international role of the euro on a regular basis.
Christine Lagarde, President

1 Main findings
This 22nd annual review of the international role of the euro presents an overview of developments in the use of the euro by non-euro area residents. The report covers developments in 2022. This was a year that saw the onset of Russia’s war in Ukraine and a substantial increase in geopolitical risks with potential repercussions for the international monetary system. Rising inflationary pressures globally – in part coming from war-related energy and food price increases – and tighter monetary policies in major economies led to higher interest rates on the main international currencies.
Against this challenging background, a composite index of the international role of the euro remained resilient over the review period (Chart 1). Adjusting for exchange rate valuation effects, the index increased by around 1.3 percentage points. At current exchange rates, it remained largely unchanged. The share of the euro across various indicators of international currency use averaged close to 20%. The euro remained the second most important currency in the international monetary system (Chart 2).

Chart 1
The international role of the euro was resilient in 2022

Composite index of the international role of the euro
(percentages; at current and constant Q4 2022 exchange rates; four-quarter moving averages)

Sources: Bank for International Settlements (BIS), International Monetary Fund (IMF), CLS Bank International, Ilzetzki, Reinhart and Rogoff (2019) and ECB calculations.
Notes: Arithmetic average of the shares of the euro at constant (current) exchange rates in stocks of international bonds, loans by banks outside the euro area to borrowers outside the euro area, deposits with banks outside the euro area from creditors outside the euro area, global foreign exchange settlements, global foreign exchange reserves and global exchange rate regimes. The estimates for the share of the euro in global exchange rate regimes are based on IMF data for the period post-2010; pre-2010 shares were estimated using data from Ilzetzki, E., Reinhart, C. and Rogoff, K. (2019), “Exchange Arrangements Entering the 21st Century: which anchor will hold?”, Quarterly Journal of Economics, Vol. 134, Issue 2, May, pp. 599-646. The latest observation is for the fourth quarter of 2022.

Chart 2
The euro remained the second most important currency in the international monetary system

Snapshot of the international monetary system
(percentages)

Sources: BIS, IMF, Society for Worldwide Interbank Financial Telecommunication (SWIFT) and ECB calculations.
Notes: The latest data for foreign exchange reserves, international debt and international loans are for the fourth quarter of 2022. SWIFT data are for December 2022. Foreign exchange turnover data are as at April 2022. *Since transactions in foreign exchange markets always involve two currencies, shares add up to 200%.

The share of the euro in global official holdings of foreign exchange reserves increased in 2022 by 0.5 percentage points to 20.5%, when measured at constant exchange rates (Table 1). The share of the US dollar declined by more than 2 percentage points, while the share of the renminbi was substantially unchanged. Box 1 examines whether the renminbi could play a stronger role as an international reserve currency despite China’s lack of full financial account openness. A strong dollar and large changes in the price of bonds issued by major economies encouraged official reserve managers to manage their portfolios actively in 2022. Net official purchases of assets denominated in currencies other than the US dollar increased, offsetting valuation effects arising from the dollar’s appreciation – which mechanically raised the share of the US dollar in official reserve portfolios at current exchange rates. Whether inflation developments influenced the decisions of official foreign exchange reserve investors is unclear, as shown by the poor correlation between changes in the share of major currencies in global foreign exchange reserves and inflation rates in the issuing economies. Box 3 discusses how these developments are not exceptional and reflect conventional reserve management strategies by central banks. Interest rates are another factor which can influence the management of reserve portfolios. While interest rates in the euro area returned to positive territory, they remained lower than in other major economies, which could have discouraged rebalancing to euro-denominated assets. Box 2 shows that interest rate differentials are important determinants in the active rebalancing of the government debt portfolios of a sample of US mutual fund managers, much as they influence investment decisions of official reserve managers.[1] Finally, heightened geopolitical risks might have played a role in the investment decisions of official reserve managers in some countries. Special Feature A shows that the accumulation of gold as an official reserve asset was especially strong in countries that are geopolitically close to China and Russia. This may be because such countries are looking to reduce their exposure to the risk of financial sanctions. Higher inflation globally might confound these developments, however, insofar as gold is traditionally seen as a hedge against inflationary risks.
Other indicators of the international role of the euro tracked in this report also point to a noteworthy resilience in the attractiveness of the euro (Table 1). The share of the euro in the outstanding stock of international debt securities increased by more than 1 percentage point to 22.0% in 2022 compared with the previous year, when measured at constant exchange rates. The shares of the euro in the outstanding stocks of international loans and international deposits rose by around 2.4 and 1.5 percentage points, respectively, in 2022. The share of the euro in foreign exchange settlements also increased by almost 3 percentage points to around 38%, when measured at constant exchange rates, over the review period. However, the latest BIS Triennial Survey points to a decline in the share of the euro in global foreign exchange turnover of around 1.8 percentage points since 2019, to 30.5%, owing to the relatively stronger growth of trading in other currencies, such as the US dollar and the renminbi. Box 4 shows that the City of London remained the main venue for foreign exchange trading in euro and that the United Kingdom’s importance for international financial activities in euro did not change materially after Brexit, albeit with a few exceptions. The international role of the euro in foreign currency bond issuance, including the issuance of international green bonds, was substantially stable. Finally, the share of the euro in the invoicing of extra-euro area imports and exports did not change significantly. The impact of Russia’s war in Ukraine on the international role of the euro was particularly visible in the form of a temporary surge in net shipments of euro cash outside the euro area, presumably for precautionary reasons (Box 5). This reversed in the second half of 2022 on the back of higher interest rates and opportunity costs of holding cash (Section 2.5).
As stressed in last year’s edition of this report, the European Union’s economic and financial resilience to the current geopolitical challenges underlines the strength of the international role of the euro. The international role of the euro is primarily supported by a deeper and more complete Economic and Monetary Union (EMU), including advancing the capital markets union, in the context of the pursuit of sound economic policies in the euro area. The Eurosystem supports these policies and emphasises the need for further efforts to complete EMU.
This year’s report includes three special features. The first special feature sheds light on the debate surrounding the future of the international monetary system following Russia’s invasion of Ukraine, reviewing the available evidence. Shortly after the invasion, several packages of sanctions were imposed on Russia, including the freezing of nearly half of the Russian central bank’s foreign exchange reserves and the exclusion of several Russian banks from SWIFT, the dominant financial messaging system for cross-border payments. Some observers noted that these sanctions may encourage countries that are not fully aligned with the United States geopolitically to cut their exposures to the currencies of sanctioning countries, while others were more sceptical and pointed to challenges in moving away from the major international currencies. The special feature shows that evidence of a potential fragmentation of the international monetary system since Russia’s invasion is so far mainly restricted to announcements and specific cases and is not indicative of broader trends. Anecdotal evidence, including official statements, points to the intention of some countries to develop the use of alternatives to the sanctioned currencies, such as the renminbi, the rouble and the Indian rupee, for the invoicing of international trade – notably in commodities. There is also evidence that Russia has been using the Chinese renminbi to a significantly greater extent for international invoicing and cross-border payments in the past few months. However, on the whole, the available data do not show substantial changes in the use of international currencies. One noteworthy development is evidence of diversification into gold by countries that are geopolitically close to China and Russia, perhaps in an attempt to reduce their risk of exposure to sanctions.
The second special feature aims to give a broader perspective to ongoing discussions on the future of the international monetary system and reviews the evidence – both old and new – on how one leading international currency is replaced by another. The conventional historical narrative is that inertia in international currency use is substantial – it takes a long time for a challenger currency to replace the incumbent unit as the presence of network externalities gives rise to lock-in effects. However, one interesting exception is the invoicing of trade by countries neighbouring the euro area, where the euro overtook the US dollar in the space of a few years, i.e. between 1999 – the year of the euro’s creation – and 2019. Two competing hypotheses may explain these developments: a trade shock – in which stronger trade links with the euro area tilted invoicing towards the euro – and an exchange rate volatility shock – in which growing use of the euro as an exchange rate anchor spilled over to invoicing. New evidence from ECB staff research gives support to the first hypothesis, finding that a trade shock is a key determinant of the stronger role of the euro for invoicing international trade in countries neighbouring the euro area. In countries where trade links with the euro area increased, the shock accounts for almost 40% (on average) of the rise in the share of exports invoiced in euro between 1999 and 2019. By contrast, the impact of greater exchange rate stability against the euro is found to be statistically insignificant. Moreover, the estimates point to significant cross-country effects – the fact that countries’ invoicing currency choices are not just impacted by their own trade patterns and exchange rate volatilities, but also by those of their trade partners and competitors. These findings have implications for policy. They suggest that in response to the pandemic shock and the war in Ukraine, the reshoring or “friendshoring” of production chains could lead to stronger regional trade, notably on the European continent and, in turn, to a stronger role of the euro for invoicing international trade, with the caveat that such a reversal in global economic integration would bring other economic costs.
The third special feature looks at the role of international currencies in global finance. It provides insights into determinants of currency choice in cross-border bank lending, including bilateral distance, measures of linkages to the issuer countries through finance, trade and the use of vehicle currencies for trade invoicing. The special feature pinpoints several new facts. It highlights the centrality of the City of London for euro-denominated loans, albeit with tentative signs of adverse Brexit effects. It shows that offshore financial centres play a pivotal role in the international network of cross-border loans denominated in US dollars, which largely reflects lending to non-bank financial intermediaries (such as investment banks, finance companies, mutual funds, pension funds and insurance companies) in the Cayman Islands. Moreover, empirical estimates suggest that euro-denominated loans are driven by gravity effects, pointing to a stronger role of the euro in the immediate vicinity of the euro area, in contrast to US dollar loans which have a more global outreach. Finally, there is evidence that complementarity effects between trade invoicing and bank lending decisions – which are predicted to be significant according to recent theoretical models of international currency use – are stronger for the euro than for the US dollar.

Table 1
The international role of the euro from different perspectives

Summary of data in this report

Sources: BIS, CLS Bank International, Dealogic, IMF, national sources and ECB calculations.
Notes: An increase in the euro nominal effective exchange rate indicates an appreciation of the euro. For foreign exchange trading, currency shares add up to 200% because transactions always involve two currencies.

Box 1
Internationalisation of the renminbi and capital account openness
Prepared by Barry Eichengreen (UC Berkeley), Camille Macaire (Banque de France), Arnaud Mehl, Eric Monnet (Paris School of Economics) and Alain Naef (Banque de France)
Why doesn’t the currency of the second largest economy in the world play a more consequential reserve currency role? The share of the Chinese renminbi in global reserve portfolios, at about 3%, pales in comparison with those of the US dollar (about 60%) and the euro (about 20%).[2] What explains the difference?
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2 Key developments

2.1 Use of the euro as an international reserve and investment currency
The share of the euro in global official holdings of foreign exchange reserves increased in 2022 when measured at constant exchange rates. At the end of 2022, official investors held about €11.4 trillion (USD 12.0 trillion) in foreign exchange reserves. Total foreign exchange reserves declined by more than 7 percentage points, when measured at current exchange rates, compared with the previous year (Table 1). The share of the euro in global official holdings of foreign exchange reserves increased by 0.5 percentage points to 20.5% in 2022 when measured at constant exchange rates (Chart 3). By contrast, the share of the euro remained broadly stable, declining by about 0.1 percentage points, when measured at current exchange rates (Chart 5). Overall, in the past seven years the share of the euro in global official holdings of foreign exchange reserves has remained within a relatively narrow range.

Chart 3
The share of the euro in global official holdings of foreign exchange reserves increased in 2022

Shares of the euro, US dollar and other currencies in global official holdings of foreign exchange reserves
(percentages; at constant Q4 2022 exchange rates)

Sources: IMF and ECB calculations.
Note: The latest observation is for the fourth quarter of 2022.

Interest rates and fixed-income yields on highly-rated euro area government bonds turned positive in 2022, although they remained lower than in other major economies. Interest rate differentials with other major advanced economies widened over the course of 2022, except with Japan. For instance, euro area long-term interest rates remained lower by around 200 basis points compared with the United States and about 150 basis points compared with the United Kingdom, which could have discouraged rebalancing to euro-denominated assets (Chart 4). Box 2 shows how interest rate differentials are important determinants of active rebalancing for US mutual fund managers across currencies within their portfolios of government debt securities,[3] which is consistent with evidence from the literature for official reserve managers.[4]

Chart 4
Average interest rates in the euro area in positive territory but lower than in several advanced economies in 2022

Five-year and one-month interest rate in the major economies in 2022
(percentages)

Sources: Refinitiv Datastream, BIS, S&P Global and ECB calculations.
Note: The five-year government yield for the euro area is calculated as a debt-weighted average of five-year euro area yields of sovereigns with a Standard & Poor’s credit rating of at least AA.

A strong dollar and rising policy interest rates encouraged official reserve managers to manage their portfolios actively in 2022, to a large extent offsetting the valuation effects arising from exchange rate and bond price movements. In 2022 the share of the US dollar – the major global reserve currency – remained stable at around 58.4%, when measured at current exchange rates, although it declined by about 2.2 percentage points at constant exchange rates. Reserve managers sold an estimated USD 293 billion of US dollar assets in the review period. Net purchases of currencies other than the US dollar largely offset the impact of valuation effects stemming from the US dollar’s appreciation – which mechanically raises the share of the US dollar in official reserve portfolios. Net purchases of euro-denominated reserves by official investors reached an estimated €50 billion (USD 53 billion) in the review period.[5] Not only did the share of the euro increase at constant exchange rates but also the share of currencies other than the euro and the US dollar – by about 1.7 percentage points in the review period (Chart 3). In particular, the share of official reserve assets denominated in Japanese yen and pound sterling both increased by 0.5 percentage points, while the share of other major reserve currencies remained broadly stable (Chart 5). These developments are not exceptional and reflect conventional reserve management strategies by central banks. During periods of strong dollar appreciation reserve managers tend to stabilise the composition of their portfolios by selling dollar assets and purchasing assets in other major currencies, such as the euro (Box 3). In addition, foreign exchange interventions aiming at stabilising the exchange rate of the domestic currency against the US dollar or limiting its volatility become more likely when the US dollar appreciates, particularly in emerging markets, explaining net sales of US dollar-denominated reserve assets. According to a regular survey conducted by the investment bank UBS, rising interest rates in the US and inflation represented one of the main concerns for the investment of foreign exchange reserves.[6] The extent to which current inflation developments influenced the decisions of official foreign exchange reserve investors is not entirely clear as shown by the limited correlation between changes in the share of major currencies in global foreign exchange reserves and inflation rates in the issuing economies in 2022 (Chart 6).

Chart 5
Official reserve managers tried to manage their portfolios actively to offset the effects of a strong US dollar

Change in the share of selected currencies in global official holdings of foreign exchange reserves
(percentage points; at current and constant Q4 2022 exchange rates)

Sources: IMF and ECB calculations.

Chart 6
Inflation developments are uncorrelated with changes in the currency composition of foreign exchange reserves

Correlation between changes in the share of selected currencies in global official holdings of foreign exchange reserves and inflation in 2022
(x-axis: annual percentage changes in consumer price indices in 2022; y-axis: percentage point changes in currency shares of foreign exchange reserves, at constant exchange rates)

Sources: IMF and ECB calculations.
Note: The latest observation of the foreign exchange reserve data is for the fourth quarter of 2022.

Box 2
Investment funds and search for yield within the sovereign debt market of highly-rated issuers
Prepared by Tamar den Besten, Marco Graziano[7] and Maurizio Michael Habib
To what extent do investors reallocate their portfolios of safe assets across major currencies in search for higher returns? In previous years, survey evidence suggested that relatively low yields in euro area fixed-income markets might have been a factor in moderating the global appeal of the euro as a reserve and investment currency.[8] The empirical evidence presented in this box indicates that investors tend to reallocate their portfolio of safe assets in response to changes in yields across major currencies.
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Box 3
Valuation effects and rebalancing of official foreign exchange reserves
Prepared by Tamar den Besten, Massimo Ferrari Minesso and Maurizio Michael Habib
Movements in the exchange rates of major reserve currencies as well as in the market prices of securities held by central banks may have a significant impact on the currency composition of official foreign exchange reserves, when measured at current exchange rates. For instance, a broad US dollar appreciation, as was the case in 2022, mechanically increases the share of the US dollar, as other currencies lose value against that currency. Similarly, if yields increase, the market value of bonds falls, leading to a stronger decline in the value of reserve assets denominated in currencies experiencing the largest decreases in bond prices. These developments, as noted by Chinn et al. (2022)[9], confound active reserve management strategies through changes in the value of the underlying assets. This box reviews the evidence of the importance of these valuation effects for the adjustment of currency portfolios by reserve managers against the background of large fluctuations in exchange rates and bond prices seen in the past year.
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2.2 The euro in global foreign exchange markets
The euro remained the second most actively traded currency in global foreign exchange markets after the US dollar. The share of the euro in global foreign exchange settlements increased slightly in 2022, according to data from the CLS system, standing at almost 38% in the fourth quarter of 2022 (Chart 7, panel a) – an increase of almost 3 percentage points from the previous year when measured at constant exchange rates.[10] By contrast, the share of the US dollar decreased by more than 6 percentage points, although the US dollar remained the leading currency in global foreign exchange settlements – being involved in almost 90% of all settlements in the fourth quarter of 2022.[11] Volumes of euro settlements increased by over 20% in the fourth quarter of 2022 compared with the previous year, consistent with trends in the past few years (Chart 7, panel b).
The latest evidence from the Triennial Central Bank Survey of foreign exchange and over-the-counter (OTC) derivatives markets, conducted by the BIS in April 2022, showed that the share of the euro decreased by 1.8 percentage points compared with the previous survey conducted in 2019 (Chart 8, panel a).[12] Global foreign exchange turnover increased by 14% compared with 2019, reaching USD 7.5 trillion. Overall, the US dollar remained the most used currency, being on one side of almost 90% of total OTC transactions, a share that is broadly stable compared with earlier surveys. Meanwhile, the euro was used in 31% of all trades, thereby remaining the second most actively traded currency.[13] Volumes of OTC trade in euro increased by USD 167 billion (or about 8%) relative to 2019, compared with even stronger increases for the US dollar and the Chinese renminbi of USD 830 billion (or about 14%) and USD 241 billion (or about 85%) respectively. The Chinese renminbi thus exhibited the largest increase in market share since the 2019 survey, being on one side of 7% of all trades in 2022 (up from 4% in 2019) to become the fifth most traded currency. The Japanese yen and pound sterling were on one side of 17% and 13% of all trades respectively, largely unchanged compared with the previous survey. Global foreign exchange trading activity involving the euro is concentrated in the United Kingdom, which accounts for more than 42% of total trading, as well as in the United States, the euro area, Hong Kong SAR, Singapore and Switzerland (Chart 8, panel b). Relative to the 2019 survey, euro foreign exchange (FX) trading activity in the United Kingdom contracted by 6 percentage points, standing close to the level prevailing at the time of the 2016 Brexit referendum.

Chart 7
The euro remained the second most important currency in global foreign exchange settlements

Sources: ECB calculations based on CLS Bank International data.
Note: As two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%. The latest observation is for the fourth quarter of 2022.

Chart 8
The share of the euro in global OTC transactions decreased slightly in the latest BIS Triennial Survey compared with the previous survey

Sources: BIS and ECB calculations.
Notes: As two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%. Adjusted for local and cross-border inter-dealer double-counting (i.e. on a “net-net” basis). The data on geographical locations include spot transactions, outright forwards, foreign exchange swaps, currency swaps, options and other products. They are adjusted for local inter-dealer double-counting (i.e. on a net-gross basis) and may differ slightly from national survey data owing to differences in aggregation procedures and rounding. The BIS uses several criteria to determine the location of a foreign exchange transaction, notably the location of the initiating sales desk.

2.3 Use of the euro in international debt and loan markets

2.3.1 The euro in international debt markets
The share of the euro in the stock of international debt securities increased in 2022.[14] When measured at constant exchange rates, the share of the euro in the stock of international debt securities stood at 22%, increasing by 1.2 percentage points in the review period. The share of the euro remains about 8 percentage points lower than its peak in the mid-2000s. By contrast, the share of the US dollar declined by about 1.2 percentage points, although it remains the leading currency in the international debt security markets, accounting for more than 65% of the global stock (Chart 9 and Table A4).

Chart 9
The share of the euro in the stock of international debt securities increased in 2022

Currency composition of outstanding international debt securities
(percentages; at constant Q4 2022 exchange rates)

Sources: BIS and ECB calculations.
Notes: Narrow measure. The latest observation is for the fourth quarter of 2022.

Granular data on international issuance of foreign currency-denominated bonds suggest that the volume of international bond issuance decreased markedly in 2022.[15] In 2022 the total volume of foreign currency-denominated bond issuance contracted by more than USD 700 billion, corresponding to a decline of 30% in relative terms over the review period. This decline occurred amid market concerns about the economic outlook, tighter financial conditions in advanced economies and geopolitical fragmentation risks (Special Feature A). In particular, the issuance of euro-denominated bonds decreased by about 30% in 2022 compared with the previous year, standing at €377 billion (USD 397 billion). However, the share of the euro in foreign currency-denominated bond issuance remained stable, at around 25% (Chart 10, panel a). Issuance of US dollar-denominated bonds (USD 930 billion in 2022) fell more markedly, by around 36% year on year, reducing the share of the dollar in international bond issuance by 5 percentage points.[16] Despite these developments, the US dollar remains by far the leading currency for international issuance of foreign currency-denominated bonds, accounting for more than 57% of total issuance in the review period (Chart 10, panel b). Notably, the share of currencies other than the US dollar and the euro increased to around 17%.

Chart 10
The share of the euro in international issuance of foreign currency-denominatedbonds remained stable in 2022

Sources: Dealogic and ECB calculations.
Note: The latest observation is for end-2022.

The retrenchment in euro-denominated international bond issuance was mainly driven by lower issuance in the United Kingdom, the United States and emerging markets. Issuance of euro-denominated international bonds contracted by 72% among emerging market economies in 2022 and by more than 40% in the United States, the United Kingdom and Japan (Chart 11, panel b). At the same time, in non-euro area EU Member States and other advanced economies, issuance of euro-denominated bonds increased by 6 and 8 percentage points respectively. Issuance of US dollar-denominated bonds in emerging market economies declined by 55% (Chart 11, panel a).[17] The retrenchment might have arisen from higher interest rates and financing costs in advanced economies, combined with heightened volatility in bond markets. This might have in turn dampened demand for foreign currency-denominated debt issued by emerging market economies. The impact of Brexit on the role of the City of London as a centre for the intermediation of foreign currency-denominated funding might also explain the lower issuance of euro and US dollar-denominated debt in the United Kingdom (Box 4).

Chart 11
Issuance of euro and US dollar-denominated bonds declined in emerging market economies in 2022

Sources: Dealogic and ECB calculations.
Note: The latest observation is for end-2022.

International issuance of green bonds also decreased substantially in the review period.[18] In absolute terms, the amount of international green bonds issued in major currencies contracted by about USD 41 billion (Chart 12, panel a). Issuance of green bonds denominated in euro decreased by €11 billion (USD 12 billion) for a total issuance of about €34 billion (USD 36 billion) in 2022. US dollar-denominated issuance also fell from USD 80 billion to USD 59 billion. In relative terms, the shares of euro and US dollar-denominated green bonds remained stable, with the two currencies accounting for about 31% and 51% of total issuance respectively.

Chart 12
International green bond issuance retrenched in 2022, although the share of the euro in total issuance remained stable

Sources: Dealogic and ECB calculations.
Notes: Annual totals are based on the aggregation of individual deals. The latest observation is for end-2022.

2.3.2 The euro in international loan and deposit markets
The share of the euro in the outstanding stock of international loans continued to increase in 2022. Euro-denominated international loans increased by about 2.4 percentage points in the review period, when measured at constant exchange rates (Chart 13 and Table A6).[19] The share of the euro in 2022, at around 19%, is close to its historical peak of about 20% seen in 2005. By contrast, the share of the US dollar in international loan markets continued to decline, although the US dollar remains the leading currency in international loan markets by a large margin, accounting for about 53% of total loans. Geographical distance or complementarities with trade invoicing patterns tend to affect demand for euro-denominated and, to a lesser extent, dollar-denominated international loans (Special Feature C).

Chart 13
The share of the euro in outstanding international loans remained close to historical peaks

Currency composition of outstanding amounts of international loans
(percentages; at constant Q4 2022 exchange rates)

Sources: BIS and ECB calculations.
Notes: The latest observation is for the fourth quarter of 2022. International loans are defined as loans by banks outside the currency area to borrowers outside the currency area.

The share of outstanding international deposits denominated in euro continued to increase in 2022. The share of the euro rose by about 1.5 percentage points over the review period, when measured at constant exchange rates, standing at almost 18% (Chart 14 and Table A7).[20] By contrast, the share of US dollar-denominated deposits declined by about 1.4 percentage points in 2022 as investors reduced holdings of dollar-denominated deposits accumulated as liquid balances during the pandemic.[21] However, despite a marginal decline in 2022, the share of US dollar-denominated international deposits remained close to pre-pandemic levels, at around 52% of total international deposits.

Chart 14
The share of the euro in outstanding international deposits increased further in 2022

Currency composition of outstanding amounts of international deposits
(percentages; at constant Q4 2022 exchange rates)

Sources: BIS and ECB calculations.
Notes: The latest observation is for the fourth quarter of 2022. International deposits are defined as deposits with banks outside the currency area from creditors outside the currency area.

Box 4
Impact of Brexit on the international role of the euro
Prepared by Matthias Rau-Goehring
This box presents an early assessment of the changing role of the City of London for euro-denominated financial activities since Brexit.[22] Since its introduction in 1999, the City of London has been the leading financial centre for the international use of the euro in several market segments.[23] The decision of the United Kingdom in June 2016 to leave the EU was therefore seen as the portent of a potential change in the central role of the City of London for global financial markets.[24] This event was particularly relevant for euro financial activities that benefit from a harmonisation of rules and standards with the EU, such as trading in foreign exchange and OTC derivatives and banking services.[25] Data on these activities thus far, however, show no major shifts in the importance of the City of London for euro-denominated financial market segments, with some exceptions.[26]
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2.4 Use of the euro as an invoicing currency
The share of the euro as an invoicing or settlement currency for extra-euro area trade, in particular services exports, remained broadly stable in 2022. Extra-euro area exports of goods invoiced in euro declined by half a percentage point in 2022 to around 59%, while the share of extra-euro area imports of goods invoiced in euro also dropped by half a percentage point to below 52% (Chart 15, panel a and Table A8). However, such changes remain marginal and, from a long-term perspective, the role of the euro as an invoicing currency for trade in goods remains by and large unchanged. Almost 58% of extra-euro area services exports were invoiced in euro in 2022, down from around 60% in the previous year. The share of exports of services invoiced in euro, similar to the euro-invoiced share of exports of goods, also reached a historical low, continuing the downward trend seen since 2018. Likewise, just below 53% of extra-euro area imports of services were invoiced in euro in 2022, down by about 0.3 percentage points compared with the previous year (Chart 15, panel b).

Chart 15
The share of euro as an invoicing currency of extra-euro area trade in goods and services was broadly stable in 2022

Sources: National central banks and ECB calculations.
Note: The computation of the euro area aggregate is based on the latest observation reported by each Member State.

2.5 Use of euro banknotes outside the euro area
Cumulative shipments of euro banknotes to destinations outside the euro area decreased to a ten-year low in 2022. The value of net registered shipments of euro banknotes to destinations outside the euro area declined by about 11% over the review period, the largest year-on-year decline since the launch of the euro (see Chart 16).

Chart 16
Net extra-euro area shipments of euro banknotes saw an unprecedented decline in 2022

Net monthly shipments of euro banknotes to destinations outside the euro area
(EUR billions; adjusted for seasonal effects)

Source: Eurosystem.
Notes: Net shipments are euro banknotes sent to destinations outside the euro area minus euro banknotes received from outside the euro area. The latest observation is for December 2022.

However, developments in shipments of euro banknotes outside the euro area differed markedly between the first half and second half of 2022. In the first half of the year, the value of net registered shipments of euro banknotes to destinations outside the euro area increased by around 8%. This surge in demand for euro cash was likely caused by the outbreak of Russia’s war in Ukraine which spurred precautionary demand for euro banknotes in a number of central and eastern European countries outside the euro area neighbouring Ukraine (Box 5 on the impact of Russia’s war in Ukraine on foreign demand for euro cash).
In the second half of 2022, net shipments of euro banknotes to destinations outside the euro area decreased markedly as a result of two factors. First, the beginning of monetary policy normalisation by the ECB led to an associated rise in opportunity costs of holding cash and may have encouraged decreases in cash holdings. In anticipation of the increase in ECB policy rates in July 2022, net shipments decreased by around 4% month-on-month – an unprecedented deceleration – followed by significant banknote purchases in the subsequent months. Second, geopolitical developments likely reduced sales of euro banknotes to eastern European countries outside the EU significantly. These countries accounted for 15% of total sales in 2022, compared with almost 30% in 2021 (Chart 17, panel a).

Chart 17
In 2022 euro banknotes were mainly exported to and imported from countries neighbouring the euro area

Source: ECB calculations based on data from international banknote wholesalers.
Note: The data are for 2022.

Box 5
The impact of war: extreme demand for euro cash in the wake of Russia’s invasion of Ukraine
Prepared by Elisabeth Beckmann and Alejandro Zamora-Pérez
Proximity to war boosts foreign and domestic demand for euro cash
Geopolitical conflicts can have a significant impact on the demand for euro cash outside the euro area, as illustrated by Russia’s invasion of Ukraine in February 2022. Chart A, panel a, compares the deviation of demand for euro banknotes from historical averages, both from non-euro area countries (blue line) and from countries within the euro area (dotted grey lines) between January 2021 and May 2022 – immediately after demand returned to near-average levels. In the months before the invasion, foreign demand for euro cash remained below its historical average. However, it rose far above its historical average just after the invasion (in March 2022), to an extent greater than in most euro area countries in that period. This suggests that precautionary motives were a determinant of demand for euro cash from non-euro area countries, mainly driven by high-value denominations (€100 and €200) which are mostly used for store-of-value purposes.[27]
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3 Special features

A Geopolitical fragmentation risks and international currencies
By Tamar den Besten, Paola Di Casola, Maurizio Michael Habib
Shortly after Russia invaded Ukraine, several packages of unprecedented sanctions were imposed on Russia, including the freezing of nearly half of the Russian central bank’s foreign exchange reserves and the exclusion of a number of Russian banks from SWIFT, the dominant financial messaging system used to facilitate cross-border payments. Several observers noted that these sanctions may have far-reaching consequences for the role of the currencies of the sanctioning countries – including the US dollar and the euro – in the international monetary and financial system. According to these observers, countries that are not fully aligned geopolitically with the United States might reduce their exposures to the currencies of sanctioning countries going forward. However, other observers have been more cautious and pointed to challenges involved in diversifying from the major international currencies. This special feature sheds light on this debate by reviewing the available evidence on the effects of geopolitical fragmentation risks on the use of international currencies. It shows that evidence of potential fragmentation in the international monetary system since Russia’s invasion has so far been mainly restricted to announcements and specific cases rather than pointing to broader trends. Anecdotal evidence, including official statements, points to intentions of some countries to develop the use of alternatives to major traditional currencies, such as the Chinese renminbi, the Russian rouble or the Indian rupee for invoicing international trade. There is also evidence that Russia has been using the Chinese renminbi to a significantly greater extent for international invoicing and cross-border payments in the past few months. However, the available data do not show substantial changes in the use of international currencies as yet. One exception is evidence of increased accumulation of gold as an alternative reserve asset, possibly driven by countries geopolitically closer to China and Russia.

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B How is a leading international currency replaced by another? Old versus new evidence
By A. Mehl, M. Mlikota (University of Pennsylvania) and I. Van Robays
This special feature reviews the evidence – both old and new – on how a leading international currency is replaced by another. The conventional historical narrative is that inertia in international currency use is substantial – it takes a long time for a challenger currency to replace the incumbent owing to the existence of network externalities that give rise to lock-in effects. The US dollar remains the leading currency for global trade and finance today, despite the decline in the United States’ share of global output and trade, which testifies to the importance of inertia. However, one interesting exception is the currency invoicing of trade of countries neighbouring the euro area between 1999 – the year of the euro’s creation – and 2019, when the share of the euro increased by more than 20 percentage points on average, at the expense of the US dollar.
Two competing hypotheses may explain these developments: a trade shock – where stronger trade links with the euro area tilt invoicing towards the euro – and an exchange rate volatility shock – where growing use of the euro as an exchange rate anchor spills over to invoicing. Recent evidence from ECB staff research empirically tests the relative importance of these two shocks. The estimates give support to the view that a trade shock is a key determinant of the stronger role of the euro for invoicing international trade in countries neighbouring the euro area. In those countries where trade links with the euro area increased, the shock explains on average almost 40% of the rise in the share of exports invoiced in euro between 1999 and 2019. By contrast, the impact of greater exchange rate stability against the euro is statistically insignificant. Countries’ invoicing currency choices are not just impacted by their own trade patterns and exchange rate volatilities but also by those of their trade partners and competitors. These effects operate mainly via bilateral trade linkages rather than strategic complementarities in export price setting, which underscores the relevance of changes to input-output linkages as determinants of invoicing currency patterns.
These findings have implications for policy. They suggest that, in response to the pandemic shock and the war in Ukraine, reshoring or friendshoring of production chains could lead to stronger regional trade, notably on the European continent. That in turn could strengthen the future role of the euro for the invoicing of international trade.
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C Determinants of currency choice in cross-border bank loans
By Lorenz Emter, Peter McQuade, Swapan Kumar Pradhan (BIS)[28] and Martin Schmitz
Dominant currencies confer important economic, financial and strategic advantages on the issuer, so it is important to understand why some currencies have a more prominent international role than others. This special feature provides insights into various potential determinants of currency choice in cross-border bank lending, such as bilateral distance, measures of financial and trade linkages to issuer countries of major currencies, and invoicing currency patterns. Cross-border bank lending in US dollars, and particularly in euro, is highly concentrated in a small number of countries. The United Kingdom is central in the international network of loans denominated in euro, although there are tentative signs that this role has diminished for lending to non-banks since Brexit, with such loans now possibly booked by newly-established US (or euro area) subsidiaries. Offshore financial centres are pivotal for US dollar loans, reflecting, in particular, lending to non-bank financial intermediaries in the Cayman Islands, possibly as a result of regulatory and tax optimisation strategies of large multinationals and high net worth individuals. An empirical analysis suggests that euro-denominated loans face the “tyranny of distance”, in line with predictions of standard models of trade, as captured by a variety of variables, in contrast to US dollar loans. Complementarities between trade invoicing and bank lending are found for both the euro and the US dollar. Overall, the analysis suggests that the euro tends to be more of a regional currency, while use of the US dollar in cross-border bank lending is global.
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