The European Commission has today put forward two proposals to ensure that citizens and businesses can continue to access and pay with euro banknotes and coins across the euro area, and to set out a framework for a possible new digital form of the euro that the European Central Bank may issue in the future, as a complement to cash.
The euro continues to be a symbol of Europe’s unity and strength. Across the euro area and beyond, for more than two decades, people and businesses have been accustomed to paying with euro coins and banknotes. While 60% of people surveyed would like to continue to have the option to use cash, an increasing number of people are choosing to pay digitally, using cards and applications issued by banks and other digital and financial firms. This trend was accelerated by the COVID-19 pandemic.
To reflect these trends, the Commission has today proposed two mutually supportive sets of measures to ensure that people have both payment options, cash and digital when they want to pay with central bank money:

A legislative proposal on the legal tender of euro cash to safeguard the role of cash, ensure it is widely accepted as a means of payment and remains easily accessible for people and businesses across the euro area.

A legislative proposal establishing the legal framework for a possible digital euro as a complement to euro banknotes and coins. It would ensure that people and businesses have an additional choice – on top of current private options – that allows them to pay digitally with a widely accepted, cheap, secure and resilient form of public money in the euro area (complementing the private solutions that exist today). While today’s proposal – once adopted by the European Parliament and Council – would establish the legal framework for the digital euro, it will ultimately be for the European Central Bank to decide if and when to issue the digital euro.

The Package in detail
Legal tender of euro banknotes and coins
Euro cash is ‘legal tender’ in the euro area. This proposal aims to set out in legislation what that actually means, with a focus on two ‘A’s: acceptance and access. Although acceptance of cash is high on average across the euro area, issues have emerged in some Member States and sectors. Meanwhile, some people have difficulties in accessing cash, for example as a result of closures of ATMs and bank branches.
Today’s proposal aims to safeguard the continued and widespread acceptance of cash throughout the euro area and will also ensure that people have sufficient access to cash to be able to pay in cash if they so wish.
Member States will need to ensure widespread acceptance of cash payments, as well as sufficient and effective access to cash. They will need to monitor and report on the situation and take measures to address any problems identified. The Commission could step in to specify measures if needed.
The proposal will ensure that everyone in the euro area is free to choose their preferred payment method and has access to basic cash services. It will ensure the financial inclusion of vulnerable groups who tend to rely more on cash payments, such as older people.
Digital euro
To adjust to the increasing digitalisation of the economy, the European Central Bank (ECB) – like many other central banks around the world – is investigating the possibility of introducing a digital euro, as a complement to cash. The digital euro would give consumers an alternative European-wide payment solution, in addition to the options that exist today. This means more choice for consumers and a stronger international role for the euro.
Like cash today, the digital euro would be available alongside existing national and international private means of payment, such as cards or applications. It would work like a digital wallet. People and businesses could pay with the digital euro anytime and anywhere in the euro area.
Significantly, it would be available for payments both online and offline, i.e. payments could be made from device to device without an internet connection, from a remote area or underground car park. While online transactions would offer the same level of data privacy as existing digital means of payments, offline payments would ensure a high degree of privacy and data protection for users: they would allow users to make digital payments while disclosing less personal data than they do today when making card payments, just like when paying with cash, and the same as what they disclose when they take cash out of an ATM. Nobody would be able to see what people are paying for when using the digital euro offline.
Banks and other payment service providers across the EU would distribute the digital euro to people and businesses. Basic digital euro services would be provided free of charge to individuals. To foster financial inclusion, individuals who do not have a bank account would be able to open and hold an account with a post office or another public entity, such as a local authority. It would also be easy to use, including for persons with disabilities.
Merchants across the euro area would be required to accept the digital euro, except very small merchants who choose not to accept digital payments (as the cost to set up new infrastructure to accept payments in digital euro would be disproportionate).
The digital euro could also be a solid basis for further innovation, allowing banks to provide innovative solutions to their clients, for example.
The wide availability and use of digital central bank money would also be important for the EU’s monetary sovereignty – particularly if other central banks around the world start developing digital currencies. It is also important against the backdrop of the developing crypto currency market.
Today’s proposal sets out the legal framework and essential elements of the digital euro, which would enable – once adopted by the European Parliament and Council – the European Central Bank to eventually introduce a digital euro that is widely usable and available. It will be for the ECB to decide if and when to issue the digital euro. This project will require significant further technical work by the ECB.
Background
The European Commission has been working closely with the European Central Bank  over the past few years to jointly review at technical level a broad range of policy, legal and technical questions on the digital euro.
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The digital euro is a necessary step to ensure that our monetary system keeps up with digital advances. It will be widely accessible and easy to use while preserving privacy – just like cash.

Our world is changing. Digitalisation has transformed society in ways that would have been difficult to imagine only ten years ago. It is also changing how we make payments: people increasingly want to pay digitally. The COVID-19 pandemic has accelerated this shift.
Central banks around the world are now working on complementing the public money they currently make available – cash – with a digital version of it: a central bank digital currency. In the euro area, the digital euro would offer a digital payment solution that is available to everyone, everywhere, for free.
Cash remains important: it is still the preferred means of making small in-store payments and person-to-person transactions. Most people in the euro area want to keep the option to pay with banknotes and coins. This is why the European Commission and the European Central Bank (ECB) are fully committed to making sure that cash remains fully accepted and available across all 20 countries in the euro area.
But the fact is, using cash for payments is declining in many parts of the world, including Europe. As we move towards a true digital economy, adapting cash to reflect the digital age is the logical next step.
Having both options – a cash euro and a digital euro – would mean that everyone can choose how to pay and no one is left behind in the digitalisation of payments. Crucially, it would offer Europeans the option to pay digitally throughout the euro area, from Dublin to Nicosia and from Lisbon to Helsinki.
For consumers, the digital euro would bring many practical advantages. It would be simple to use and cost-free. No matter where they were in the euro area, people could pay anyone for free with their digital euro, for instance using a digital wallet on their phones. They would not even have to make payments online: they could also pay offline.
Protecting privacy is a vital feature of the digital euro. The ECB would not see users’ personal details or their payment patterns. The offline functionality would also bring a higher degree of data privacy than any other digital payment methods currently available.
A digital euro would also reduce payment-related fees for consumers by spurring competition in Europe. At present, two-thirds of Europe’s digital retail payments are processed by a handful of global companies. Thanks to greater competition, customers and merchants would benefit from cheaper services.
For banks and other payment service providers, the digital euro would act as a springboard for the development of new pan-European payment and financial services, stimulating innovation and making it easier to compete with large, non-European financial and technology firms. It would include safeguards, such as limits on the amount that people could hold, to avoid any substantial outflow of deposits from banks. But users wishing to pay more than the set limit would be able to do so by linking their digital wallet to their bank account.
There are also major strategic advantages to having a digital euro. As the world’s largest single market, Europe cannot afford to remain passive while other jurisdictions move ahead. If other central bank digital currencies were allowed to be used more widely for cross-border payments, we would risk diminishing the attractiveness of the euro – currently the world’s second most-important currency after the US dollar. And the euro could become more exposed to competition from alternatives such as global stablecoins. Ultimately, this could endanger our monetary sovereignty and the stability of the European financial sector.
A digital euro would also enhance the integrity and safety of the European payment system at a time when growing geopolitical tensions make us more vulnerable to attacks to our critical infrastructure. By relying on European infrastructure, the system would be better equipped to withstand disruptions, including cyberattacks and power outages.
We are still only at the start of this exciting new project. The European Commission presents its legal proposal today. This autumn, the ECB will complete its investigation phase on the digital euro’s design and distribution. It will then decide whether to initiate a preparation phase to look at developing and testing the new digital currency.
Central bank money underpins our trust in all forms of money as well as the stability and resilience of our payment system. It is the anchor for Europe’s financial system and monetary union. A digital euro would preserve the role of central bank money, because whatever form it takes – cash or digital – a euro will remain a euro.
Our monetary system, with our common currency at its core, needs to keep up with digital advances. We are committed to ensuring that it does.
This blog post has been published as an op-ed in several European newspapers.
Authors:

Fabio Panetta, Member of the Executive Board of the ECB

Valdis Dombrovskis, Executive Vice-President of the European Commission

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Financial institutions rely on third-party service providers for a range of services, some of which support their critical operations.

These third-party dependencies have grown in recent years as part of the digitalisation of the financial services sector and can bring multiple benefits to financial institutions including flexibility, innovation and improved operational resilience. However, if not properly managed, disruption to critical services or service providers could pose risks to financial institutions and, in some cases, financial stability.
In response to concerns over the risks related to outsourcing and third-party service relationships, the FSB has developed a toolkit for financial authorities and financial institutions as well as service providers for their third-party risk management and oversight. The toolkit aims to:

reduce fragmentation in regulatory and supervisory approaches to financial institutions’ third-party risk management across jurisdictions and different areas of the financial services sector;
strengthen financial institutions’ ability to manage third-party risks and financial authorities’ ability to monitor and strengthen the resilience of the financial system; and
facilitate coordination among relevant stakeholders (i.e. financial authorities, financial institutions and third-party service providers).

This should help mitigate compliance costs for both financial institutions and third-party service providers.
The toolkit, which looks holistically on third-party risk management, comprises:

a list of common terms and definitions to improve clarity and consistency across financial institutions and to improve communication among relevant stakeholders
tools to help financial institutions identify critical services and manage potential risks throughout the lifecycle of a third-party service relationship
tools for supervising how financial institutions manage third-party risks, and for identifying, monitoring and managing systemic third-party dependencies and potential systemic risks

The FSB is inviting comments on this consultative document and the questions set out below. The FSB is holding a virtual outreach event for stakeholders on 21 July 2023 at 13:00-15:00 CEST. Written responses should be sent to fsb@fsb.org by 22 August 2023 with the subject line “Third-Party Risk Management and Oversight”. Responses will be published on the FSB’s website unless respondents expressly request otherwise.
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The Council adopted today an eleventh package of economic and individual restrictive measures intended to strengthen existing EU sanctions and crack down on their circumvention, thereby further eroding Putin’s war machine and his revenues.

Our sanctions are already taking a heavy toll on the Russian economy and on the Kremlin’s ability to finance its aggression. Today’s package increases our pressure on Russia and Putin’s war machine. By tackling sanctions circumvention, we will maximise pressure on Russia by depriving it further of the resources it so desperately needs to allow it to pursue its illegal war against Ukraine.
Josep Borrell, High Representative for Foreign Affairs and Security Policy

The agreed package includes the following measures:
Circumvention tool
In order to address the growing circumvention of EU sanctions, the EU decided to further strengthen bilateral and multilateral cooperation with third countries, and the provision of technical assistance.
Only in those cases where cooperation does not yield the intended results, the EU will take rapid, proportionate and targeted action, which is solely aimed at depriving Russia of the resources which allow it to pursue its war of aggression against Ukraine, in the form of appropriate individual measures addressing the involvement of third-country operators in facilitating circumvention.
The Union will re-engage in a constructive dialogue with the third country in question following the adoption of such individual measures.
In the event that, in spite of individual sanctions and further engagement, circumvention remains substantial and systemic, the EU will have the possibility to take exceptional, last resort measures. In this event the Council may unanimously decide to restrict the sale, supply, transfer or export of goods and technology whose export to Russia is already prohibited – notably battlefield products and technologies – to third countries whose jurisdiction is demonstrated to be at a continuing and particularly high risk of being used for circumvention.
Transit ban
In order to further minimise the risk of sanctions’ circumvention, today’s decision prohibits the transit via the territory of Russia of more goods and technology which may contribute to Russia’s military and technological enhancement or to the development of the defence or security sector, goods and technology suited for use in aviation or space industry and jet fuel and fuel additives, exported from the EU to third countries.
Import-export controls and restrictions
The Council added additional 87 entities to the list of entities directly supporting Russia’s military and industrial complex in its war of aggression against Ukraine. They will be subject to tighter export restrictions concerning dual use goods and technologies.
The list includes four third-country entities manufacturing unmanned aerial vehicles (drones) and providing them to Russia, other third-country entities involved in the circumvention of trade restrictions, and certain Russian entities involved in the development, production and supply of electronic components for Russia’s military and industrial complex.
Furthermore, today’s decision expands the list of restricted items that could contribute to the technological enhancement of Russia’s defence and security sector to include: electronic components, semiconductor materials, manufacturing and testing equipment for electronic integrated circuits and printed circuit boards, precursors to energetic materials and precursors to chemical weapons, optical components, navigational instruments, metals used in the defence sector and marine equipment.
Broadcasting
In order to address the Russian Federation’s systematic, international campaign of media manipulation and distortion of facts aimed at enhancing its strategy of destabilisation of its neighbouring countries – the EU and its member states -, the Council extended the suspension of broadcasting licences to five additional media outlets: RT Balkan, Oriental Review, Tsargrad, New Eastern Outlook and Katehon. These outlets are under the permanent direct or indirect control of the leadership of the Russian Federation and have been used by latter for its continuous and concerted propaganda actions targeted at the civil society in the EU and neighbouring countries, gravely distorting and manipulating facts.
In particular, the propaganda has repeatedly and consistently targeted European political parties, especially during election periods, as well as civil society, asylum seekers, Russian ethnic minorities, gender minorities, and the functioning of democratic institutions in the EU and its member states.
In line with the Charter of Fundamental Rights, these measures will not prevent those media outlets and their staff from carrying out activities in the EU other than broadcasting, e.g. research and interviews.
Roads and ports
The EU extended the prohibition to transport goods into the EU by road to trailers and semi-trailers registered in Russia, including when hauled by trucks registered outside of Russia.
Furthermore, in view of the sharp increase of deceptive practices by vessels transporting crude oil and petroleum products, the Council decided to prohibit access to EU ports and locks to any vessels that engage in ship-to-ship transfers, if the competent authorities have reasonable cause to suspect that the vessel is either in breach of the ban on importing seaborne Russian crude oil and petroleum products into the EU, or is transporting Russian crude oil or petroleum products purchased above the price cap agreed by the Price Cap Coalition.
The same prohibition will apply to vessels when competent authorities have solid reasons to suspect that they illegally interfere, switch off or otherwise disable their navigation system when transporting Russian crude oil and petroleum products in breach of international agreements, rules and standards.
Energy
The temporary derogation granted to Germany and Poland for the supply of crude oil from Russia through the northern section of the Druzhba oil pipeline will end. However, the oil which originates in Kazakhstan or another third country will be able to continue to transit through Russia and imported into the EU via the Druzhba oil pipeline.
Individual listings
In addition to economic sanctions, the Council decided to list a significant amount of additional individuals and entities.
Background
In the European Council conclusions of 23 March 2023, the EU reiterated its resolute condemnation of Russia’s war of aggression against Ukraine, which constitutes a manifest violation of the UN Charter. The EU also reiterated that it remained committed to maintaining and increasing collective pressure on Russia, including through possible further restrictive measures.
The European Council conclusions also underlined the importance and urgency of stepping up efforts to ensure the effective implementation of sanctions at European and national level and its firm commitment to effectively preventing and countering their circumvention in and by third countries.
The EU stands firmly and fully with Ukraine and will continue to provide strong political, economic, military, financial and humanitarian support to Ukraine and its people for as long as it takes.
The relevant legal acts will soon be published in the Official Journal of the EU.
Contact:

Maria Daniela Lenzu, Press Officer | maria-daniela.lenzu@consilium.europa.eu

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Speech by Christine Lagarde, President of the ECB, at the Summit for a new global financing pact in Paris | Paris, 23 June 2023 |
I am truly honoured to be with you here today at this important summit to address the most pressing issue of our time.
Eight years ago in Paris, UN Secretary-General Ban Ki-moon opened the COP21 by stating that “Paris must mark a turning point […]” towards limiting global warming to 1.5 °Celsius.[1]
Today, the window of opportunity to achieve this goal is closing before our eyes: The past eight years have been the warmest on record worldwide[2] and the critical 1.5 C threshold for annual temperatures will likely be exceeded in at least one year before 2027.[3]
Record-breaking droughts, heatwaves and floods are already plaguing the world. They are inflicting suffering and damage on every continent and serve as a mere glimpse into the future. It is everyone’s duty to take every possible step to ensure that the Paris climate goal is reached.
Not only is this a matter of justice for future generations, it is also undoubtedly a matter of justice and responsibility for today’s. Developing nations are already the hardest hit by the impact of global warming. One fact is glaringly evident: developing countries are poised to bear a disproportionate share of the impact. More than 90% of those who have perished owing to extreme weather events during the last half-century lived in these countries, where more than 70% of reported disasters occurred.[4]
The path forward is clear: we must forge ahead with a global transition to ensure our economies are future-proof. This means not only reducing greenhouse gas emissions to net zero and adapting our economies to shield them from climate change, but also tackling the root causes of the severe destruction of nature that is threatening the vital resources we rely on for our survival. ECB research shows that in Europe alone, over 70% of our economy is highly dependent on nature’s ecosystem services[5] – a figure that is likely to be much higher in developing economies.
In taking up this challenge, there are at least three levers we can use to boost the funding needed for a green and just transition on a global scale.
First and foremost, it is up to governments to lead the fight against climate change and honour their commitments to financing the transition.
Developed economies must lead by example and honour the USD 100 billion climate pledge made 14 years ago at COP15 in Copenhagen. Governments should also mobilise private finance by implementing transition policies and creating a sound and stable framework to attract capital flows at the national and global level.
Second, governments can push for reform of the multilateral financial architecture.
The G20 – this year under India’s presidency – can play a key role in unlocking additional funding. The review of the capital adequacy frameworks of multilateral development banks can offer such opportunity. More generally, we must identify and remove public and private barriers to green finance worldwide wherever possible.
Third, central banks around the world can and must, within their mandates, support the greening of the financial system.
The Network for Greening the Financial System, which brings together 127 central banks and supervisors from all around the world, has played a crucial role in accelerating global action and will continue to do so.
We at the ECB have also made it a priority to take account of climate change, because (i) it affects inflation; (ii) it affects our balance sheet; and (iii) it is a financial risk for the banks we supervise. We have adjusted our corporate bond holdings and changed our collateral and risk management to better reflect climate risks and at the same time provide incentives to support the green transition of the economy. As supervisors, we make sure that banks consider climate risks when making business and lending decisions. We also stress test the impact of climate change on the economy and financial stability. Through our advice, analysis and actions, we aim to manage the financial risks stemming from climate change as well as provide evidence to support the need for the transition I just mentioned.
These transformations have occurred within a remarkably short period of just a few years, reflecting the growing momentum of our global collective efforts to combat climate change. Today’s conference is evidence of our shared dedication to ramp up our actions as the window to meet our climate targets narrows.
We can preserve the 1.5 °C threshold through our united efforts. As Sir David Attenborough so eloquently put it, “If working apart we are a force powerful enough to destabilise our planet, surely working together we are powerful enough to save it”.[6] Through our actions, let’s prove him right.
Author:

Christine Lagarde, President of the ECB

Footnotes:
1. Ki-moon, Ban (2015), “Speech to COP21 Leaders’ Summit”, 30 November.
2. World Meteorological Organization (2023), “Past eight years confirmed to be the eight warmest on record”, press release, 12 January.
3. See World Meteorological Organization (2023), Global temperatures set to reach new records in next five years, Press Release Number 17052023, 17 May.
4. World Meteorological Organization (2022), WMO Atlas of Mortality and Economic Losses from Weather, Climate, and Water Extremes (1970–2019), WMO-No 1267, 2022 update.
5. Elderson, F. (2023), “The economy and banks need nature to survive”, The ECB Blog, 8 June.
6. Attenborough, D. (2021), “Address to World Leaders at the Opening Ceremony of COP 26”, 2 November.

Compliments of the European Central Bank.The post ECB Speech | Christine Lagarde: Remarks at the Summit for a new global financing pact first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Advances in technology affect trade and vice versa

Technological change is exciting and scary, empowering us to do more with less work while fueling fears of being replaced. Although it drives economic growth and progress, those who fall behind risk losing their livelihoods.
International trade has a similar impact but generates even greater anxiety. That’s because its benefits are less obvious to people than the gains from innovation, and the domestic workers dealt setbacks by trade associate their losses directly with gains for foreign workers.
When technological change and international trade combine, the impact can be especially potent. The combination accelerates innovation, technology adoption, and economic growth. However, it can also become a polarizing force, both within and between countries.
Geopolitics tends to further intensify emotions. As countries jostle for position on the technological frontier, trade emerges as a vital conduit for the transfer of these game-changing innovations. International commerce accelerates global growth as technology spreads, but it also carries the risk of sharing trade secrets with foreign adversaries.
All these pressures influence policy choices. The effects on workers from trade and technology have historically led to calls for protection, though strengthening the social safety net and helping workers find new jobs are a better long-term strategy than trade barriers. International security threats are being met with calls for industrial policies and export controls, though these may backfire if they distort domestic resource allocation while stimulating investment in strategic products abroad.
In a world that is fragmenting and where technological diffusion is slowing, governments face new policy challenges to stimulate trade, innovation, and growth. Though innovators may aim to “move fast and break things,” policymakers still must protect existing institutions and maintain predictability for investors.
Technology, trade, and development
Technological advances can give rise to new goods, such as electric vehicles; new processes like automation and 3D printing; and new modes of transportation, such as containerization and instant data transmission over the internet. All affect trade and tend to promote development.
The emergence of new goods, such as smartphones and flat-screen TVs, allows innovating countries to displace producers of obsolete goods, in this case flip phones and bulky cathode-ray tube TVs. Overall trade tends to increase as the new goods spur greater demand.
The adoption of new processes can increase production efficiency, which in turn reduces real prices and drives a surge in production and exports from the innovating countries. A concern for developing economies, which tend to specialize in simple stages of production that may be automated, is that demand for their exports will fall. However, research suggests that the scale effects of automation typically result in a greater need for imported parts, even if some of them eventually are domestically produced. In automobile production, for instance, robotization in advanced economies has coincided with an increase in imported parts and components from low-income countries.
Like technological advances in transportation, telecommunications innovation has also played a crucial role in facilitating trade. The internet, for example, enables businesses to find new suppliers and partners located far away. It has also opened up new areas of trade, particularly in digital services.
Trade also influences technological change by creating a larger market with more intense competition. Frontier firms with access to the global market can expand their profits and invest in research and development, leading to more rapid innovation. At the same time, competition from other global leaders gives firms an incentive to remain at the forefront of technological advancement.
The overall effect of trade and technology on development is positive, because new technologies improve productivity and expand trade. Trade also enables new technologies to spread more rapidly around the world, further promoting growth.
However, there are winners and losers from both technological advancement and trade, with those locked into outdated technologies falling behind. As a result, some countries may see certain industries decline, requiring support for workers who lose jobs as technology and trade continue to spread. Similarly, countries that are largely excluded from global markets, because of politics, geography, or infrastructure, will lag further behind the global frontier.
The political response
Historically, trade barriers have often been used to protect industries that are losing competitiveness to foreign counterparts. For instance, in the 1970s and 1980s, technological advancement in Japan led to cheaper and better cars and semiconductors, which prompted the US to manage trade by restricting imports and promoting exports. Intellectual property protection has also been sought primarily by rich countries to protect their companies’ proprietary technologies and profits, rather than to protect national security.
However, in recent years, export controls on scarce materials used in high-tech products, the machines to make them, and even the high-tech goods themselves have become a powerful tool designed to slow technological advancement in foreign countries. These government interventions depress global growth and innovation by design, as trade and the transmission of technology slow down. Reduced exports of high-tech products also mean slower profit growth and less money for high-tech industries to invest in research and development.
New trade restrictions can, moreover, be particularly detrimental to environmental goods and green innovation. The shift to renewables will be quicker if innovation is global and prices fall rapidly. Greater access at lower prices to products such as solar panels and batteries will mean less coal, gas, and oil will be burned.
The way forward
Solving the problem of people left behind because of trade and advances in technology requires a stronger social safety net. Although redistribution policies have often been insufficient to combat the changes that come with economic transformation, there is a clear policy prescription: governments can continue to promote trade and technology and can use the proceeds to support the people and places negatively affected by the changes. Unemployment insurance and retraining programs are critical to keeping trade open and free.
The more complex question going forward is how to leverage trade and technology to address the existential threats we face today, without risking domestic security. From surviving pandemics and natural disasters to adapting to and slowing climate change, innovation to find solutions and international trade and cooperation to share those solutions are arguably the most important tools in mitigation. But they carry security risks.
Consider how trade and technology have shaped recent experiences: COVID vaccines were developed and released worldwide (albeit unevenly) in record time, benefiting from global partnerships in research and production. Semiconductors, the foundation of all electronic devices and machines, are designed largely in the US and produced mostly in Asia. Electric vehicle batteries can’t be produced without cobalt, lithium, and nickel—minerals sourced primarily from Africa and South America.
Unfortunately, geopolitics is shaping the creation and spread of new technologies, with serious consequences for development and climate action. The United States has tariffs on most imports from China and regulates a growing share of exports; China has responded in kind. These tariffs are slowing growth in the two largest global economic engines and hurting global innovation.
The danger of overreach is real, with serious consequences for trade and growth. Rather than taking a broad-brush approach, growth and innovation would benefit from government protection only of products threatened by technology, along with continued expansion and deeper integration with trusted partners.
There is also a danger that policies will backfire. For example, export controls on advanced chips and the tools to produce them could cause the US to lose its formidable edge in design as a result of smaller market share and shifting incentives abroad. If that happens, the policy may ultimately lead to bigger security risks.
The question other countries need to ask is what to do to avoid being caught in the middle of US-China conflict. Fortunately, despite the security risks, most tenets of standard economics still hold. Countries that encourage business entry and expansion with a good investment climate, sound infrastructure, and access to finance will remain at the forefront of innovation. Open trade and predictable policies will continue to push resources into their most productive uses. As some production relocates away from China, countries that adhere to such policies stand to benefit.
All countries must avoid being lured by the false attraction of widespread state intervention. China’s remarkable economic growth over the past 30 years was driven by reforms that stimulated private industry, and growth is now slowing. The private sector in China has been underestimated for many decades, but now the public sector’s ability to steer growth is being overestimated. Rather than protectionism and industrial policies, maintaining predictability, a rules-based system, trade openness, and access to capital are what will keep countries headed in the right direction.
Perhaps the biggest danger of the current trend toward protectionism and industrial policy is that such practices are highly contagious. History has shown repeatedly that tariffs lead to retaliation, breeding ever more tariffs. Similarly, government support for a particular firm or an industry puts foreign competitors at a disadvantage, leading them to lobby for similar support. A world where protectionism and subsidies spiral out of control would be a huge step backward on the path to raising global incomes and solving pressing challenges.
Author:

CAROLINE FREUND is dean and professor of economic policy at the University of California, San Diego, School of Global Policy and Strategy.

Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.
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13 June 2023 |
Today, the OECD’s Forum on Tax Administration (FTA) Pillar Knowledge Sharing Network held its first virtual meeting of what will be a series of peer-to-peer knowledge-sharing events where experts from tax administrations in ‘early implementer’ jurisdictions will offer high-level practical advice and share lessons learned on administrative and implementation aspects of the Two-Pillar Solution.
The first meeting, gathering more than 250 delegates from over 70 countries and jurisdictions, looked at Pillar Two implementation from a change management perspective and how officials are working across policy, operations and technology to prepare for and implement the necessary changes. Further meetings will be held over the course of the year.
The network, which was launched at the recent FTA’s Capacity Building Network (CBN) meeting, aims at supporting developing countries in the implementation of the Two-Pillar Solution. The initiative, developed by the United Kingdom’s HM Revenue and Customs (HMRC), will leverage Canada Revenue Agency’s Knowledge Sharing Platform for Tax Administrations to provide an online channel for tax administrations globally to share knowledge, as well as to address specific questions around Pillar implementation. The new Pillar Knowledge Sharing Network will complement the OECD’s wider strategy for supporting developing countries in implementing Pillar One and Pillar Two through a multifaceted programme including training, guidance and hands-on country engagements.

Commenting on the launch of the Pillar Knowledge Sharing Network, Angela MacDonald, HMRC’s Deputy Chief Executive and Second Permanent Secretary, said “With members of the OECD/G20 Inclusive Framework now taking steps towards the implementation of Pillar Two, HMRC, as Chair of the FTA CBN, is delighted to be launching the Pillar Knowledge Sharing Network to enable tax administrations to share their experiences of administrative implementation in real-time. The Knowledge Sharing Network is an important and timely tool to support the implementation of the Two-Pillar Solution, and an example of what we can achieve when the international tax community pulls together. Providing a peer-to-peer forum will help to ensure that the full benefits of the Pillars can be realised by developing countries.”
The FTA’s Capacity Building Network was established in 2016 to better connect the tax capacity-building efforts of the FTA and its members internally as well as to the work of other international and regional organisations to both mitigate the risks of gaps and overlaps and identify areas where a more co‑ordinated approach could produce mutual and tangible benefits.
The FTA brings together Commissioners and tax administration officials from over 50 OECD and non-OECD countries. It provides governments with internationally recognised expertise and comparative data and analysis to improve tax administration, compliance and certainty. For more information on the FTA, visit https://oe.cd/fta.
Contacts:

Manal Corwin, Director of the OECD CTPA | Manal.Corwin@oecd.org

Achim Pross, Deputy Director of CTPA | achim.pross@oecd.org

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21 June 2023 |

Euro remains second most widely used currency, amid geopolitical risks and high inflation
Euro’s share at around 20% across various indicators of international currency use
Euro’s global appeal linked to stronger Economic and Monetary Union

The international role of the euro was resilient in 2022, with its share across various indicators of international currency use averaging close to 20%. This was one of the main findings in the annual review of the international role of the euro, published today by the European Central Bank (ECB).
Last year was marked by the onset of Russia’s war in Ukraine and heightened geopolitical risks, in a context of rising inflationary pressures. Against that backdrop, the euro remained the second most important currency globally.
“Despite a succession of new shocks, the international role of the euro remained resilient in 2022. This resilience was noteworthy”, said ECB President Christine Lagarde. “However, international currency status should not be taken for granted. This new landscape increases the onus on European policy makers to create the conditions for the euro to thrive”.
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. The share of the euro increased across most other market segments, such as in foreign exchange settlements and in the outstanding stocks of international debt securities, loans and deposits. The international role of the euro in foreign currency-denominated bond issuance, including international green bonds, as well as in invoicing of extra-euro area imports and exports, remained stable.
Looking ahead, the international role of the euro will be primarily supported by a deeper and more complete Economic and Monetary Union, including advancing the capital markets union, in the context of the pursuit of sound economic policies. The Eurosystem supports these policies and emphasises the need for further efforts to complete Economic and Monetary Union.
“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,” said Executive Board member Fabio Panetta.
This year’s interim edition of the report includes three special features. The first sheds light on the future of the international monetary system in the context of Russia’s war in Ukraine. It notes that evidence of potential fragmentation of the international monetary system in the wake of Russia’s invasion is not indicative of broader trends.
The second special feature reviews the evidence on the way in which one leading international currency can be replaced by another, drawing on new ECB staff research into invoicing currency patterns among countries neighbouring the euro area. The third feature looks at the role international currencies play in global finance, and provides insights into determinants of currency choice in cross-border bank lending.

Chart 1
Composite index of the international role of the euro

(percentages; at current and Q4 2022 exchange rates; four-quarter moving averages)

Source: 2023 review of The international role of the euro, p. 3.

Contact:

Alexandrine Bouilhet | Alexandrine.Bouilhet@ecb.europa.eu

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The European Union (EU) has faced a series of unprecedented and unexpected challenges since the adoption of the Multiannual Financial Framework (MFF) in 2020. Barely out of one of the deepest global economic crises in more than a century, Russia’s brutal invasion of Ukraine had huge humanitarian, economic and budgetary consequences.
Migration has picked up after the pandemic, putting strains on Member States’ reception and integration capacities. Under the New Pact on Migration and Asylum, the Union and the Member States will be taking on new responsibilities, which imply additional costs.
The steep acceleration in inflation and interest rates has impacted the Union’s budget, amongst others through a sharp increase in NextGenerationEU funding costs.
Following a series of global supply chain disruptions, the EU is working to increase its open strategic autonomy. Significant investment is needed to foster long-term competitiveness in technologies crucial for Europe’s leadership.
Within its current bounds, the EU budget has powered a strong EU response, by drawing from its limited built-in flexibilities and through extensive reprogramming. Addressing these multiple challenges has pushed the resources of the EU budget to the point of exhaustion, hindering the EU budget’s capacity to address even the most urgent challenges.
Today’s proposals seek to provide for targeted reinforcements in a limited number of priority areas, to ensure that the EU budget can continue to deliver on the most essential objectives. The main elements are:

 A Ukraine facility, based on grants, loans and guarantees, with an overall capacity of €50 billion in the period 2024-2027 to cater for Ukraine’s immediate needs, recovery and modernisation on its path towards the EU.
 A reinforcement of the EU budget to address internal and external dimensions of migration as well as needs arising from the global consequences of Russia’s war of aggression in Ukraine, and to strengthen partnerships with key third countries with €15 billion.
A Strategic Technologies for Europe Platform (STEP) to promote the EU’s long-term competitiveness on critical technologies, in the fields of digital and deep tech, clean tech and biotech. For a quick and effective deployment on the ground, this platform builds on and tops up existing instruments including InvestEU, the Innovation Fund, the European Innovation Council (EIC) and the European Defence Fund, while also introducing new flexibilities and incentives for cohesion funding and the Recovery and Resilience Facility.
An efficient mechanism to cater for the higher NextGenerationEU funding costs due to the unprecedented surge in interest rates. A new special ‘EURI Instrument’ will cover exclusively the costs that come on top of the original projections that were made in 2020.

In addition, the EU administrative capacity will be adjusted to cater for the new tasks that have been decided by the co-legislators since 2020 and to meet inflation-adjusted contractual obligations.
European Commission President von der Leyen said: “Our budget is a key policy tool to respond to the enormous challenges we face collectively. But pressures are increasing. Today we propose a targeted increase in EU spending to provide stable financial support to Ukraine, to finance our action on migration, and to support investments in strategic industries. We are stronger together.”
Areas to be reinforced
1. Long-term support for Ukraine
As part of today’s revision, the Commission is proposing a dedicated Facility to support Ukraine up to 2027. This will come in the form of an integrated and flexible instrument with an overall capacity of €50 billion over 2024-2027. The annual amounts will be defined each year depending on Ukraine’s needs and the evolving situation. This instrument will ensure stable and predictable funding under a framework that contributes to the sustainability of Ukraine’s finances while ensuring the protection of the EU budget.
Underpinned by a Ukraine Plan to be presented by the Government of Ukraine, the Ukraine Facility will support Ukraine’s efforts to sustain macro-financial stability, promote recovery as well as modernise the country whilst implementing key reforms on its EU accession track.
Funding will be provided in the form of loans and non-repayable support (grants and guarantees). The actual split between loans and grants will also be decided annually.
The loan support will be financed by borrowing on financial markets and backed by the headroom of the EU budget. The non-repayable support will be financed through the EU annual budget under a new special instrument, the “Ukraine Reserve” with resources over and above the MFF expenditure ceilings.
2. Managing migration, strengthening partnerships and addressing emergencies
The instability in Europe’s neighbourhood and the humanitarian needs in third countries are deepening. To continue to be able to address internal and external migration challenges and strengthen the EU partnerships with key third countries, the Commission is proposing the following targeted reinforcements to the EU budget.

To provide sufficient funding for managing migration and border control as well as the implementation of the New Pact on Migration, the Commission proposes to provide €2 billion.

To allow the Union to respond to heightened economic and geopolitical instabilities, the Commission proposes to increase the ceiling of Heading 6 (Neighbourhood and the world) with additional €10.5 billion.
To support the Union’s capacity to react to crises and natural disasters the special instrument ´Solidarity and Emergency Aid Reserve´ should be increased with €2.5 billion.

3. Promoting long-term competitiveness via a Strategic Technologies European Platform (STEP)
To support the competitiveness of the EU industry through investments in critical technologies, as announced by President von der Leyen in her State of the Union address of September 2022, the Commission proposes the creation of a new Strategic Technologies for Europe Platform (STEP) with the capacity to generate €160 billion of investments.
STEP will build on existing programmes: InvestEU, Innovation Fund, Horizon Europe, European Defence Fund, Recovery and Resilience Facility, EU4Health, Digital Europe and cohesion funds. In addition, an innovative and dynamic structure will be set up to direct existing funding towards STEP projects and speed up implementation in areas which have been identified as crucial for Europe’s leadership.
Across programmes, the Commission proposes a ‘Sovereignty seal’ enabling better access to funding across EU-funded instruments.
To boost investments in the development and manufacturing of critical digital and deep tech, clean tech and biotech and in their respective value chains, the Commission further proposes to allocate an additional €10 billion to targeted programmes: €3 billion for InvestEU, €0.5 billion to Horizon Europe, €5 billion to the Innovation Fund and €1.5 for the European Defence Fund. These top-ups, together with the cohesion policy and RRF incentives, have the potential to generate around €160 billion investments by European businesses in projects promoting European sovereignty.
Finally, the Commission proposes the creation of a new ‘One-Stop-Shop’ and a dedicated new online Sovereignty Portal to support projects’ promoters and EU countries in their STEP investments supported by the different EU funds.
Next steps
The proposed amendments to the budget, as well as the various legislative proposals presented today, will now be taken forward with the European Parliament and EU Member States in the Council.
To make sure the EU has the necessary resources to continue to address the challenges of today and tomorrow, a timely agreement on the package is essential. The Commission counts on the Spanish Presidency of the Council of the European Union to take work in the Council forward in view of a swift agreement immediately after the summer. The negotiations, including the Parliament’s consent, must be concluded before the end of the year, given that urgent budgetary constraints will already materialise in 2024.
Background
In 2020, the EU agreed its 2021-2027 long-term budget. Together with the NextGenerationEU recovery instrument, it amounts to €2.018 trillion in current prices, making up the largest stimulus package ever financed by the EU. Since 2021, the budget has been instrumental to help repair the economic and social damage caused by the coronavirus pandemic and aid the transition towards a modern and more sustainable Europe.
As part of the agreement on the budget, the Commission committed to present a review of the functioning of the MFF accompanied, as appropriate, by proposals for its revision. The proposal put forward today delivers of this commitment.
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Digitalisation has boosted some European firms’ productivity, but many are still on the digital sidelines. That is a pity as faster digital adoption could make our economies much more productive. This ECB Blog post looks at where and how digitalisation can be a gamechanger.

Digitalisation promised to be a productivity gamechanger, yet we are still facing a “productivity paradox” at the aggregate level. For decades, rapid advances in digitalisation have coincided with a protracted slowdown in aggregate productivity growth.[1] But studies based on micro firm-level data have repeatedly found that digitalisation does improve the productivity of individual firms.[2] Digitalisation might be like other general-purpose technologies in that it could take a while to deliver its potential productivity gains. If adopted successfully it could become a gamechanger, because of the faster and much more wide-ranging use of digital technologies during the COVID-19 pandemic.[3] European policymakers have also made the issue a priority with policies like the EU’s Digital Single Market and Next Generation EU initiative.
We took a closer look at the role of digitalisation in firm-level productivity growth over the past couple of decades.[4] To do this we examined total factor productivity (TFP) at the firm level. TFP is basically the growth in output (production and services) that can’t be explained by the growth in input (labour and capital). It shows how much more productive the existing inputs are. We used data for firms operating in Europe between 2000 and 2019, including 19.3 million firm-level observations containing information from nearly 2.4 million firms.[5]
At first glance, firms in the digital sector are considerably more productive than those in the non-digital sector.[6] The digital sector consists of companies that rely more than others on information and communication technology. This means, for example, that they use more robots, have a higher share of online sales or invest more in computers and software.
Chart 1 displays the interquartile range and the median firm’s TFP level by employment size – in both digital and non-digital sectors. It reveals some interesting facts. First, larger firms are more productive than smaller firms, especially in digital sectors.[7] Second, firms in the digital sector are in general more productive than firms in the non-digital sector regardless of how big they are.

Chart 1
Interquartile range and median firm’s TFP by employment size in digital and non-digital sectors

y axis: total factor productivity, in logarithms; x axis: number of employees

Source: Bureau van Dijk’s Orbis and Anderton et al. (2023)
Notes: Digital and non-digital sectors are defined following Calvino et al. (2018). Digital sectors are those with a high digital intensity in 2013-15

Moreover, firms in the digital sector seem to improve their productivity faster than firms in the non-digital sector. Chart 2 shows the average yearly TFP growth for European firms in the digital and non-digital sectors over five-year periods. It shows that firms in the digital sector consistently have stronger average TFP growth than firms in the non-digital sector. Firms in both sectors were hit by the global financial crisis and by the European sovereign debt crisis. However, while the average TFP growth for firms in the digital sector went down from around 4% per year during the 2003-08 period to 2% per year in 2007-12, firms in the non-digital sector fared worse, with average TFP growth falling from 2% to -0.6% over the same period. It therefore seems that firms in the digital sector were significantly more insulated from the effects of the crises, at least in terms of their productivity dynamics.

Chart 2
Average yearly TFP growth for European firms in digital and non-digital sectors

Percentages

Sources: Bureau van Dijk’s Orbis, and Anderton et al. (2023).
Notes: Average TFP growth rates are weighted by the firms’ employment levels at year t−5 and presented in yearly growth rates.

So, is digitalisation a massive gamechanger? Digital technologies promise large productivity gains through improved production process efficiency and higher rates of automation and robotisation. At first glance, this could have been an explanation for the stronger productivity performance of firms in the digital sector. However, we found that the differences in productivity for the aggregated results above were not primarily due to digitalisation itself but were instead driven by the different characteristics of firms and productivity dynamics in the digital and non-digital sectors. This suggests that digital technologies might not yet be fully operationalised, delaying a new wave of productivity growth.
We use a proxy to identify the impacts of digitalisation, specifically the intensity of digital investment at the country and sector level over time. This is calculated as the ratio between the real investment in digital technologies and the real total investment.[8]
There are additional factors besides digitalisation that could drive TFP in firms: (i) possible catch-up effects of low-productivity firms that need to become more productive over time to survive; (ii) the technological diffusion and adoption of best practices from the most productive firms (i.e. frontier firms) to the remaining ones (i.e. laggard firms); (iii) different firm characteristics such as employment size, age, and financial health; and (iv) the degree of market concentration.[9]
Our analysis confirms that, on average, European firms that invest more in digital technologies will increase their productivity faster. However, we found that a 1% increase in digital investment intensity is only associated with a very modest 0.02 percentage point increase in TFP growth. This suggests that most of the productivity growth gains by firms in the digital sector is driven by other channels. Importantly, not all firms experience the same productivity returns on digital investment. Chart 3 shows the estimated impact of a 1% higher digital investment intensity on the average firm’s TFP growth by its proximity to the productivity frontier (the distance to the group of best-performing companies).[10] It reveals that digitalisation primarily boosts productivity for firms which are already more productive than their peers, while laggard firms are less able to reap the potential productivity gains from digitalisation.[11]

Chart 3
The impact of a 1 percentage point increase in digital investment intensity on firms’ TFP growth by proximity to the productivity frontier

y axis: percentage points; x axis: deciles (1 = lowest, 10 = highest)

Sources: Bureau van Dijk’s Orbis, Eurostat, OECD, and Anderton et al. (2023).
Notes: Dashed lines correspond to the 95% confidence interval.

The results from our analysis suggest that digitalisation can be a productivity gamechanger for some firms, but that it is more of a sideshow for most firms. Bearing that in mind, policymakers should not see digitalisation as a “one-size-fits-all” strategy to boost productivity. Instead, policies that provide incentives to invest and adopt digital technologies are more likely to be successful if targeted towards relatively productive firms and specific innovations that use digital technologies to improve the potential output of the economy. These results are addressed towards the potential impact of digitalisation on firm-level productivity. However, they do not try to assess the benefits of digitalisation from the consumer perspective. For example, if all firms in a given sector become increasingly digital, our results tell us that this investment is likely to benefit the more productive firms in the sector relatively more than their less productive competitors. However, all customers are bound to benefit considerably from this investment, independently of the productivity of the firm they buy from.
The views expressed in each article are those of the authors and do not necessarily represent the views of the European Central Bank and the Eurosystem.
Authors:

Robert Anderston, Research Associate, Observatorie Français des Conjonctures Économiques (OFCE), Sciences Po, France

Vasco Botelho, Senior Economist, ECB

Paul Reimers, Economist, DEUTSCHE BUNDESBANK

Footnotes:
1. We follow Anderton, R. and Cette, G. (2021), “Digitalisation: channels, impacts and implications for monetary policy in the euro area”, ECB Occasional Paper No 266, and define digitalisation in its broad sense. This includes, among other things, a wide range of information and communication technologies, technologies enabling automation and robotisation, and technologies related to the processing and analysis of digital data (including artificial intelligence, machine learning, and quantum computing).
2. For recent examples see Gal, P., Nicoletti, G., Renault, T., Sorbe, S., and Timiliotis, C. (2019), “Digitalisation and productivity: In search of the holy grail – firm-level empirical evidence from EU countries”, OECD Working Paper No 1533, and Cusolito, A.-P., Lederman, D., and Peña, J. (2020), “The effects of digital technology adoption on productivity and factor demand: firm-level evidence from developing countries”, World Bank Policy Research Working Paper No 9333.
3. Amankwah-Amoah, J., Khan, Z., Wood, G., and Knight, G. (2021), “COVID-19 and digitalization: The great acceleration”, Journal of Business Research, Vol. 136.
4. See Anderton, R., Botelho, V., and Reimers, P. (2023), “Digitalisation and productivity: gamechanger or sideshow?”, ECB Working Paper No 2794.
5. The data is taken from Bureau van Dijk’s Orbis. The set of countries included in the analysis comprises Austria, Belgium, Estonia, Finland, France, Germany, Italy, Latvia, Norway, Portugal, Slovenia, Spain, and Sweden.
6. Digital and non-digital sectors are defined following Calvino, F., Criscuolo, C., Marcolin, L., and Squicciarini, M. (2018), “A taxonomy of digital intensive sectors”, OECD Science, Technology and Industry Working Paper No 14. For simplicity, we refer to the set of firms in digital-intensive sectors as the Digital sector and to the set of firms in non-digital-intensive sectors as the Non-digital sector. Mapping this taxonomy to the NACE Rev. 2 sectors, the digital sector comprises: (i) the manufacture of motor vehicles and other transport equipment; (ii) telecommunications; (iii) computer programming and consultancy; (iv) information services; (v) financial services; (vi) professional, scientific and technical activities; (vii) administrative and support services; and (vii) other services.
7. The median large firm with more than 250 employees is 39% more productive than the median micro firm with less than 9 employees in the non-digital sector; and the median large firm is instead 55% more productive than the median micro firm in the digital sector.
8. The investment in digital technologies broadly comprises the investment in information and communication technologies and intellectual property products, which encompass the investment in computer software and databases and also expenditures on research and development. Anderton et al. (2023) also account for the fact that digital investment intensities might have increased driven by the long-term decline in the price of digital technologies. They cater for this channel by considering a second measure of digitalisation measuring the extent to which the digital investment intensity exceeds, or falls short of, what would be expected from declines in the relative price of digital investment. This measure is denoted as ε-residuals.
9. We account also for other common factors via country-sector fixed effects and the business cycles with year fixed effects.
10. The proximity to the frontier is measured at the country-sector-year level. That is, for each year and in a given country and sector, firms are sorted according to their productivity levels. The 5% most productive firms are the productivity frontier. We then compute for all the other firms in the same country, sector, and year, the distance between their TFP level and the average TFP level of these frontier firms. We group these firms by deciles and show the estimated impact of digitalisation on the firms’ TFP growth by decile.
11. It should be noted that for many firms an increasing digital investment is associated with negative productivity returns in the short run. This happens either because firms are not targeting their investments towards productivity-enhancing activities, or because they are not able to fully reap the benefits of digital innovations to become more productive overall.
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