The suspension of import duties, quotas and trade defence measures on Ukrainian exports to the European Union – known as the Autonomous Trade Measures (ATMs) – are in place for another year. This strong testament to the EU’s unwavering support for Ukraine will help alleviate the difficult situation faced by Ukrainian producers and exporters because of Russia’s unprovoked and unjustified military aggression.
The EU is phasing out by 15 September 2023 the exceptional and temporary preventive measures adopted on 2 May 2023 on imports of wheat, maize, rapeseed and sunflower seed from Ukraine under the exceptional safeguard of the Autonomous Trade Measures Regulation. The scope of these measures is further reduced from 17 to 6 tariff lines for the 4 products covered. These temporary and targeted measures were adopted due to logistical bottlenecks concerning these products in Bulgaria, Hungary, Poland, Romania and Slovakia, and on the condition that member states do not maintain any restrictive measures. The phase out will allow for significant improvements to be made to the Solidarity Lanes and to address challenges to get Ukrainian grain out of the country for this harvest.
These measures continue to be necessary for a limited period of time given the exceptional circumstances of serious logistical bottlenecks and limited grain storage capacity ahead of the harvest season experienced in five Member States. As agreed, a Joint Coordination Platform has been set up to coordinate the efforts of the Commission, Bulgaria, Hungary, Poland, Romania and Slovakia, as well as Ukraine to improve the flow of trade between the Union and Ukraine, including transit of agricultural products along corridors. Executive Vice-President Valdis Dombrovskis is leading this process at political level. A first kick-off meeting of this coordination platform took place at technical level on 2 June.
The improvement of Solidarity Lanes will be, therefore, monitored by this export facilitation platform.
In case transit of Ukrainian goods is impeded by unduly burdensome requirements in one or several of the five Member States, the Commission will reassess whether the substantive conditions for imposing these preventive measures remain.
These exceptional and temporary measures fully respect the EU’s strong commitment to support Ukraine and preserve its capabilities to export its grains which are critical to feed the world and keep food prices down, in the face of the challenges posed by the unprovoked Russian aggression against Ukraine and its civilians.
Background
In force since 4 June 2022, the ATMs to liberalise trade with Ukraine have had a positive effect on Ukraine’s trade to the EU. Together with the Solidarity Lanes, the ATMs have ensured that trade flows from Ukraine to the EU have been preserved in 2022 despite the disruptions caused by the war and against the general trend of a strong decrease of Ukraine’s trade overall.
Unilateral and temporary in nature, the ATMs significantly broaden the scope of tariff liberalisation under the EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA) by suspending all outstanding duties and quotas, as well as duties on anti-dumping and safeguard measures on Ukrainian imports in Ukraine’s hour of need.
The exceptional and temporary preventive measures on imports of a limited number of products from Ukraine entered into force on 2 May 2023 and were set to last until 5 June 2023.
The measures concern only four agricultural products – wheat, maize, rapeseed and sunflower seed – originating in Ukraine. They exceptional measures are more targeted in terms of scope and will also not apply to sowing seeds. During this period, these products can continue to be released for free circulation in all the Member States of the European Union other than Bulgaria, Hungary, Poland, Romania and Slovakia. The products can continue to circulate in or transit via these five Member States by means of a common customs transit procedure or go to a country or territory outside the EU.
Compliments of the European Commission.The post EU extends trade benefits for Ukraine first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The Council today took a decisive step towards a modernisation of the EU’s rulebook for asylum and migration. It agreed on a negotiating position on the asylum procedure regulation and on the asylum and migration management regulation. This position will form the basis of negotiations by the Council presidency with the European Parliament.

No member state can deal with the challenges of migration alone. Frontline countries need our solidarity. And all member states must be able to rely on the responsible adherence to the agreed rule. I am very glad that on this basis we agreed on our negotiating position.
Maria Malmer Stenergard, Swedish minister for migration

Streamlining of asylum procedure
The asylum procedure regulation (APR) establishes a common procedure across the EU that member states need to follow when people seek international protection. It streamlines the procedural arrangements (e.g. the duration of the procedure) and sets standards for the rights of the asylum seeker (e.g. being provided with the service of an interpreter or having the right to legal assistance and representation).
The regulation also aims to prevent abuse of the system by setting out clear obligations for applicants to cooperate with the authorities throughout the procedure.
Border procedures
The APR also introduces mandatory border procedures, with the purpose to quickly assess at the EU’s external borders whether applications are unfounded or inadmissible. Persons subject to the asylum border procedure are not authorised to enter the member state’s territory.
The border procedure would apply when an asylum seeker makes an application at an external border crossing point, following apprehension in connection with an illegal border crossing and following disembarkation after a search and rescue operation. The procedure is mandatory for member states if the applicant is a danger to national security or public order, he/she has misled the authorities with false information or by withholding information and if the applicant has a nationality with a recognition rate below 20%.
The total duration of the asylum and return border procedure should be not more than 6 months.
Adequate capacity
In order to carry out border procedures, member states need to establish an adequate capacity, in terms of reception and human resources, required to examine at any given moment an identified number of applications and to enforce return decisions.
At EU level this adequate capacity is 30 000. The adequate capacity of each member state will be established on the basis of a formula which takes account of the number of irregular border crossings and refusals of entry over a three-year period.
Modification of Dublin rules
The asylum and migration management regulation (AMMR) should replace, once agreed, the current Dublin regulation. Dublin sets out rules determining which member state is responsible for the examination of an asylum application. The AMMR will streamline these rules and shorten time limits. For example, the current complex take back procedure aimed at transferring an applicant back to the member state responsible for his or her application will be replaced by a simple take back notification
New solidarity mechanism
To balance the current system whereby a few member states are responsible for the vast majority of asylum applications, a new solidarity mechanism is being proposed that is simple, predictable and workable. The new rules combine mandatory solidarity with flexibility for member states as regards the choice of the individual contributions. These contributions include relocation, financial contributions or alternative solidarity measures such as deployment of personnel or measures focusing on capacity building. Member states have full discretion as to the type of solidarity they contribute. No member state will ever be obliged to carry out relocations.
There will be a minimum annual number for relocations from member states where most persons enter the EU to member states less exposed to such arrivals. This number is set at 30 000, while the minimum annual number for financial contributions will be fixed at €20 000 per relocation. These figures can be increased where necessary and situations where no need for solidarity is foreseen in a given year will also be taken into account.
In order to compensate for a possibly insufficient number of pledged relocations, responsibility offsets will be available as a second-level solidarity measure, in favour of the member states benefitting from solidarity. This will mean that the contributing member state will take responsibility for the examination of an asylum claim by persons who would under normal circumstances be subject to a transfer to the member state responsible (benefitting member state). This scheme will become mandatory if relocation pledges fall short of 60% of total needs identified by the Council for the given year or do not reach the number set in the regulation (30 000).
Preventing abuse and secondary movements
The AMMR also contains measures aimed at preventing abuse by the asylum seeker and avoiding secondary movements (when a migrant moves from the country in which they first arrived to seek protection or permanent resettlement elsewhere). The regulation for instance sets obligations for asylum seekers to apply in the member states of first entry or legal stay. It discourages secondary movements by limiting the possibilities for the cessation or shift of responsibility between member states and thus reduces the possibilities for the applicant to chose the member state where they submit their claim.
While the new regulation should preserve the main rules on determination of responsibility, the agreed measures include modified time limits for its duration:

the member state of first entry will be responsible for the asylum application for a duration of two years
when a country wants to transfer a person to the member state which is actually responsible for the migrant and this person absconds (e.g. when the migrant goes into hiding to evade a transfer) responsibility will shift to the transferring member state after three years
if a member state rejects an applicant in the border procedure, its responsibility for that person will end after 15 months (in case of a renewed application)

Background and next steps
Both pieces of legislation on which the Council reached a general approach are part of the pact on migration and asylum which consists of a set of proposals to reform EU migration and asylum rules. This New Pact on Migration and Asylum from 23 September 2020 was accompanied by a number of legislative proposals. Among them, an asylum and migration management regulation and an amendment to the proposal from 2016 for an asylum procedure regulation.
Contact:

Johannes Kleis, Press officer | johannes.kleis@consilium.europa.eu

Compliments of the European Council, the Council of the European Union.The post Migration policy: EU Council reaches agreement on key asylum and migration laws first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Contribution by Luis de Guindos, Vice-President of the ECB, at Seminar on the Capital Requirements Regulation and Directive (CRR/CRD) | Madrid, 9 June 2023 |
CRR3/CRD6: key last step to fully leverage on the lessons learned from the global financial crisis
It is a great pleasure to take part in this seminar about the outstanding Basel III reforms in Europe.
These rules have been developed and agreed upon at international level by central banks and bank supervisors, in response to the lessons from the global financial crisis.
One important lesson has been that banks tend to downplay their risks using internal models. The core of the 2017 reforms – the output floor – ensures that a limit is established on how much banks can tweak their risk profile using their internal models. This is an essential achievement.
I will focus my remarks today on the fact that we need to protect this achievement, and we need to continue drawing lessons for our EU banking framework, including from the recent episode of bank stress.
Benefits of strong regulation and supervision
The recent episode of stress in the US and Swiss banking sectors reminded us of the importance of strong regulation and strong supervision. It was a wake-up call highlighting the merit of sticking to the agreed standards. There are many lessons that can be drawn from this episode. Let me focus on three in relation to finalising our banking framework, the CRR3 and CRD6.
First, we have seen that a strong regulatory framework eventually pays off. Euro area banks have been remarkably resilient in response to the pandemic, the Russian war and the recent episode of bank stress. Significant banks’ common equity tier one capital ratio stands at 15.3% on average, with liquidity well above regulatory minima. We have also seen improvements in the diversification of funding sources and bank profitability. At the same time, resilience of the euro area banking to the latest episode of stress should not lead to complacency.
Second, we have seen that weakening the regulatory framework can create systemic risks. Pockets of vulnerability can emerge easily, particularly where standards are not applied fully. And these vulnerabilities can quickly grow into broader financial stability risks. In this context, let me comment on the Liquidity Coverage Ratio, the LCR. Some attention has been paid to this element of the Basel framework and whether meeting the LCR would have helped the stressed banks. The LCR should not be considered a tool in isolation to measure and address liquidity and funding risks. To the contrary, the turbulence this spring shows that the Basel framework – which has regulatory and supervisory pillars – needs to be seen and be implemented, in its entirety. For example, in the ECB, the check of regulatory measures such as the LCR is complemented by additional supervisory liquidity risk monitoring.
A third and important lesson from the recent episode is that trust issues can develop and spread more quickly in the digital age. Bank runs can happen faster than in the past. This makes it even more important to have bank managers’ commitment to sound bank business models, because they are a precondition for trust. Bank management matters in establishing trust in business models. We need a tough rulebook which allows supervisors to check and react to bank management-related issues.
Priorities for the Banking Package
Coming to the topic of today, what should we focus on for finalising the EU banking package? Two key priorities emerge from the above learnings.
First, only strong rules will lead to strong banks. I am particularly concerned about those areas where the legislation proposals for the capital requirements regulation (CRR3) would deviate from Basel III – especially on the risk-weights for loans to unrated corporates. These deviations lower the impact of the output floor on banks’ required capital. In fact, on average, all proposed deviations together would more than halve the effect of the introduction of the output floor on banks’ required regulatory capital, and even lower the required regulatory capital for some banks compared to the status quo.
It is of particular concern that in some of the proposals these deviations are even suggested to be made permanent. Watering down the safeguards provided by agreed global standards now would send a detrimental message not only on the future resilience of EU banks, but also regarding the EU’s commitment to international agreements.
A similarly concerning issue is the intention by some trilogue parties to reintroduce prudential filters on the accounting of unrealised losses on government bonds. These have been in place in the EU until the end of 2022 on account of a systemic exemption during the pandemic crisis. They need to be strictly limited to exceptional crises times and now is not the time to reintroduce them.
As a second priority, I call on you to empower and trust prudential authorities. Only strong supervisors can implement strong supervision and exercise the required scrutiny. Here I am concerned about the reluctance to grant the ECB a stronger and more adequate role as a gatekeeper in ensuring that only suitable and experienced managers can take up top positions at banks, especially at large ones. Ensuring that managers are “fit and proper” for their job is key for sound and robust governance. The recent episode of bank stress has shown that culture matters and that banks need to be properly managed, as otherwise trust erodes.
In addition, I am concerned that all proposals still impose freezes on the macroprudential buffers of a bank when the output floor becomes binding. This is allegedly to avoid double-counting of risks. But here again, legislators should trust the macroprudential authorities to ensure that both buffers are calibrated appropriately. Macroprudential buffers cater for system- or sector-wide risk, while the output floor caters for bank-specific risk.
On a positive note, we welcome the inclusion of environmental, social and governance risks more explicitly in banking regulation, as this will grant supervisors more adequate tools to require banks to address these risks more effectively. We also welcome the new rules on third-country branches, which aim to avoid unregulated and unsupervised activities that could pose risks to financial stability in the EU.
Conclusion
Let me conclude. Finalising Basel III in EU legislation is crucial to keep our banks safe in an ever-changing macro-financial environment. We should do so faithfully, without deviations, to underpin our commitment to a resilient banking sector in Europe. I strongly welcome the intention of the Swedish and Spanish Presidencies to finalise CRR3 and CRD6 still this year, to ensure an entry into force on 1 January 2025. Targeting this date will also keep the EU aligned with the plans in other major global jurisdictions, so that we cross the finishing line together after this over ten-year endeavour to strengthen the global banking system. Only by upholding strong regulation and powerful supervision, will we ensure strong and stable banks in the EU.
Compliments of the European Central Bank.The post ECB Speech | Luis de Guindos: EU banking package first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Humanity needs nature to survive, and so do the economy and banks. The more species become extinct, the less diverse are the ecosystems on which we rely. This presents a growing financial risk that cannot be ignored, warns Frank Elderson, member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB.

A thriving nature provides many benefits that sustain human well-being and the global economy. Think of fertile soils, pollination, timber, fishing stocks, clean water and clean air. Unfortunately, intensive land use, climate change, pollution, overexploitation and other human pressures are rapidly degrading our natural resources.[1] This nature loss poses a serious risk to humanity as it threatens vital areas, such as the supply of food and medicines. Such threats are also existential for the economy and the financial system, as our economy cannot exist without nature.[2] Degradation of nature can impair production processes and consequently weaken the creditworthiness of many companies. Central banks and supervisors therefore need to understand how vulnerable the economy and the financial system are to this degradation. This is why the ECB has started looking at the dependence on nature of more than 4.2 million individual companies accounting for over €4.2 trillion in corporate loans.
We assessed how dependent companies and banks in the euro area are on the various benefits that humanity obtains from nature – experts call this concept ecosystem services.[3] Examples of such services are the products that we obtain from ecosystems such as food, drinking water, timber and minerals; protection against natural hazards; or carbon uptake and storage by vegetation. Our preliminary assessment showed that nearly 75 per cent of all bank loans in the euro area are to companies that are highly dependent on at least one ecosystem service. This means that these companies depend on ecosystem services to continue producing their goods or providing their services.[4] If nature degradation continues as now, these companies will suffer and banks’ credit portfolios will become riskier.
How nature-related risks lead to financial risks
There are two main channels via which nature affects companies and banks: physical risks and transition risks. Physical risks may be acute risks, such as increasingly severe natural disasters, or chronic risks, such as dwindling ecosystems. The effects could include falling crop yields owing to a decline in pollinating insects or the degradation of agricultural land. Scarcity of nature’s products could lead to supply side shocks for the pharmaceutical industry or to destinations becoming less attractive for tourism.
Nature loss can also amplify the transition risks of banks and their borrowers. Governments are increasing their efforts to protect the environment: the UN Convention on Biological Diversity set global targets in 2022, including the conservation of at least 30 per cent of the world’s lands, inland waters, coastal areas and oceans.[5] Such government measures could lead to changes in regulation and policy, limiting the exploitation of natural resources or banning certain products that trigger degradation. Technological innovation, new business models and changes in consumer or investor sentiment could also lead to transition risks and transition costs as companies are forced to adapt. Some older business models could disappear, while others might become too expensive and lose market share.
In a landmark study, De Nederlandsche Bank found that Dutch financial institutions alone have €510 billion in exposures to biodiversity risks[6]. In a similar study, the Banque de France found that 42 per cent of the value of securities portfolios held by French financial institutions consists of securities issued by companies dependent on at least one ecosystem service.[7]
Early last year, the Central Banks and Supervisors Network for Greening the Financial System (NGFS) acknowledged that nature-related financial risk should be considered by central banks and supervisors in the fulfilment of their mandates.[8] They should recognise nature as a potential source of economic and financial risk and need to assess the degree to which financial systems are exposed to nature. To that end, the NGFS launched a task force on Biodiversity Loss and Nature-related Risks to explore, develop and harmonise nature-related considerations and efforts.
Economic and financial exposure to ecosystem services
The ECB is currently also studying how much the euro area economy and financial sector are exposed to risks related to ecosystem services. To assess the physical risk, we evaluated to what extent companies financed by euro area banks are dependent on the ecosystem services. The principal assumption behind this assessment is that greater dependence on ecosystem services is likely to result in greater exposure to ecosystem degradation. If nature degradation continues, economic activities dependent on ecosystem services will be affected by issues such as supply chain disruptions impacting prices and ultimately inflation. Moreover, reduced turnover could result in defaults and, as a consequence, to losses for any institutions lending to these companies. This could ultimately lead to financial stability concerns.
Our analysis shows that euro area companies are significantly exposed to several ecosystem services, both directly and via their supply chains.[9] The most important services are mass stabilisation and erosion control (i.e. vegetation cover protecting and stabilising terrestrial, coastal and marine ecosystems), surface and ground water supply, flood and storm protection, and carbon uptake and storage. Indirect dependency via supply chains is particularly significant for sectors such as agriculture, manufacturing and wholesale, and the retail trade.
In the euro area, approximately 72 per cent of companies (corresponding to around three million individual companies) are highly dependent on at least one ecosystem service. Severe losses of functionality in the relevant ecosystem would translate into critical economic problems for such companies. We also found that almost 75 per cent of bank loans to companies in the euro area are granted to companies with a high dependency on at least one ecosystem service (Chart 1). We observed only moderate differences between countries, as indirect supply chain dependencies (yellow bars in Chart 1) offset smaller direct dependencies (blue bars), especially in small and open economies.

Chart 1
Exposure of euro area banks’ loan portfolios to nature-related risks

Share of corporate loans from banks to companies with a high dependency score (greater than 0.7) for at least one ecosystem service. Loans are allocated to the country where the headquarter of the bank is located.

Sources: EXIOBASE, ENCORE, AnaCredit and ECB calculations.
Notes: Share of loans with a high dependency score (greater than 0.7) for at least one ecosystem service. A loan is labelled as highly dependent when the borrowing company has a sufficiently high direct dependency score (blue bar) or sufficiently high dependency when also taking into account possible supply chain linkages (yellow bar).

Conclusion
The preliminary results of our research show that Europe’s economy is highly dependent on ecosystem services and that these risks can spread to the financial system, potentially triggering instability. Therefore, we cannot ignore these risks. We will publish the detailed results of our analysis later this year. The findings will help to fill in blind spots and identify the next steps we must take. The aim is to address the cascading effects of nature degradation and climate change on the economy and financial stability. An integrated approach to climate and nature is critical because they are interconnected and amplify the effects of physical and transition risks. Given the high level of uncertainty regarding impacts, non-linearities, tipping points and irreversibility, gauging nature-related risks is complex. We cannot do this alone. Scientific input is needed to learn more about the transmission channels to our economies.
Our economy relies on nature. Thus, destroying nature means destroying the economy. Preventing the former is in the realm of elected governments as nature policy-makers. We as ECB have to take nature-related risks into account in the pursuit of our mandate.
Author:

Frank Elderson, Member of the Executive Board, ECB

Footnotes:
1. Díaz, S., Settele, J., Brondízio, E.S., Ngo, H.T., Guèze, M., Agard, J., Arneth, A., Balvanera, P., Brauman, K.A., Butchart, S.H.M., Chan, K.M.A., Garibaldi, L.A., Ichii, K., Liu, J., Subramanian, S.M., Midgley, G.F., Miloslavich, P., Molnár, Z., Obura, D., Pfaff, A., Polasky, S., Purvis, A., Razzaque, J., Reyers, B., Roy Chowdhury, R., Shin, Y.J., Visseren-Hamakers, I.J., Willis, K.J. and Zayas, C.N. (eds.) (2019), The global assessment report on biodiversity and ecosystem services – Summary for policymakers, Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) secretariat, Bonn, Germany.
2. Dasgupta, P. (2021), The Economics of Biodiversity: The Dasgupta Review, HM Treasury, London.
3. For the assessment we mainly use the ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) dataset from the Natural Capital Finance Alliance.
4. For a given ecosystem service, ENCORE performs a literature review and interviews experts to attribute a materiality score ranging from very low (0) to very high (1) in a five-step discrete classification. These scores consider how significant the loss of functionality in the production process would be if the ecosystem service were disrupted and how large the consequent financial loss would be. We define a borrower as highly dependent on an ecosystem service if its total materiality score is greater than 0.7. This means that the production process would be disrupted if the ecosystem service were degraded and such disruption is likely to directly affect the financial viability of the company.
5. Convention on Biological Diversity (2022), “Nations Adopt Four Goals, 23 Targets for 2030 In Landmark UN Biodiversity Agreement“, Official CBD Press Release, Montreal, 19 December.
6. De Nederlandsche Bank (2020), “Indebted to nature Exploring biodiversity risks for the Dutch financial sector”
7. Svartzman et al. (2021), “A ‘Silent Spring’ for the Financial System? Exploring Biodiversity-Related Financial Risks in France”, ECB Working Paper Series, No 826.
8. NGFS (2022), “NGFS acknowledges that nature-related risks could have significant macroeconomic and financial implications”, press release, 24 March. As of 29 March 2023, the NGFS membership comprised 125 members and 19 observers.
9. Direct dependency is obtained directly from ENCORE, while the upstream dependency is obtained using the EXIOBASE multi-regional input-output (MRIO) table to track financial flows between countries’ major economic sectors.The post ECB | The economy and banks need nature to survive first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Unemployment has declined since the peak of the pandemic in August 2020, hitting a record low this April. But while more people have jobs, they are working fewer hours on average. In this post for The ECB Blog we shed light on this dichotomy and why it matters for the overall strength of the labour market.

One could look at the euro area labour market and see a success story. After an initial drop at the beginning of the pandemic, employment recovered quickly. Between the fourth quarter of 2019 and the fourth quarter of 2022, the number of people in jobs increased by 2.3%, which is quite impressive given how severe the economic shock was. It means that about 3.6 million more people found work during that time. But that is just one part of the story – a very important one, but one that offers an incomplete picture. It is worth looking behind those headline numbers and analyse how many hours those people in jobs are actually working. In other words, whether they have a full-time job or are working fewer hours than they would actually like. To that end, we distinguish between average hours worked (the average number of hours per worker) and total hours worked (for all people in employment).
Over the period mentioned above, average hours worked declined by 1.6% (Chart 1, LHS). This represents a decline of around six hours per quarter and person since before the pandemic. The decline in average hours worked was particularly large at the onset of the pandemic, when government-supported job retention schemes facilitated the labour market adjustment as workers simply worked fewer hours (the so-called intensive margin). However, three years after the pandemic shock, average hours worked remain significantly subdued relative to employment, dampening the overall growth in total hours worked. But why?

Chart 1
Total hours and average hours worked

A comparison with the United States offers some interesting insights.[1] The two economies had similar adjustments in total hours at the onset of the pandemic (Chart 1). However, there is a stark difference in terms of average hours. While the adjustment in the euro area took place via the intensive margin (i.e. average hours worked) following the widespread use of government-supported job retention schemes[2], the changes in the US labour market did not affect average hours and occurred mostly via lay-offs (i.e. the extensive margin), resulting in much higher unemployment. This is also captured by the different developments in the unemployment rate in the euro area and the United States (see Chart 2). As the recovery took hold and fewer workers remained in job retention schemes, average hours worked in the euro area rebounded. Unlike the broadly stable path of average hours worked in the United States, however, they have stayed persistently below pre-crisis levels.
This naturally poses the question: what is driving the fall in average hours worked in the euro area at a time when many new jobs are created? Several factors stand out as potential explanations and are explored below.

Chart 2
Unemployment (and U7 for the euro area)

Construction and public services work fewer hours
The moderate recovery of hours worked compared to employment varies significantly by sector. The lion’s share of the increase in employment has been in the public[3] and construction sectors: 1.5 percentage points out of 2.3% (Chart 3 – blue bars). This is 65% of the overall increase, even though the two sectors only make up about 30% of total employment.[4] The public sector, in particular, saw a smaller increase in hours worked compared to the strong increase in employment. Chart 3 shows the contributions to total hours worked across all sectors of the euro area economy, including both employment and average hours. Total hours did not increase much compared to pre-pandemic levels in the largest market sectors, such as industry (excluding construction) and market services.

Chart 3
Sectoral contributions to total hours worked

(cumulative growth, Q4 2019-Q4 2022)

Source: ECB staff calculations based on Eurostat data.
Note: Yellow bars refer to the sectoral contribution of average hours worked (AHW) to total hours. Blue bars refer to the contribution of employment growth (EMP) to total hours. The green bar displays the overall contribution from agriculture. Industry-Service* aggregate includes all industries and services expect for construction and public sector.

Labour hoarding
Labour hoarding may have continued to play a role beyond the most acute phase of the pandemic, although for different reasons than during the lockdowns. Average hours recovered substantially in 2021 and early 2022. However, when the economy slowed in the second half of 2022 as a response to the energy price shock and uncertainties relating to the economic fallout from the Russian war of aggression in Ukraine, average hours worked stagnated while employment continued to increase at robust rates. Firms were reluctant to let workers go despite the economic headwinds, especially skilled employees who would be needed in future.[5] Labour hoarding may be rationalised by the current tightness in the labour market, with job vacancy rates at a record high and the unemployment rate at a record low. Around 29% of firms report labour as a factor limiting production, comparing to about 17% before the pandemic (Chart 4).

Chart 4
Labour shortages across sectors

(percentage of firms)

Source: European Commission, Business and Consumer Survey.
Note: Labour shortages are defined as the percentage of firms replying that labour is a factor limiting production.

More workers are on sick leave
While average hours worked increased between the second half of 2021 and 2022, unusually high levels of sick leave have had a significant impact in the euro area. Various national sources from the four largest euro area countries suggest that sick leave has increased by between 10-30% compared to 2021. Most cases are temporary sick leave, meaning that employees remain on the payroll of their employers. Data for Germany suggest that average annual working hours lost due to sick leave increased from 68 to 91 between 2021 and 2022. This is about 1.8% of average hours worked in 2022.[6] Figures from sources for France, Italy and Spain[7] show a similar trend, although to different extent. This has amplified the impact of labour supply constraints at a time of both strong labour demand and easing global supply-chain bottlenecks.
Secular drivers
Pandemic-related factors notwithstanding, average hours worked in the euro area have followed a long-term declining trend driven by demographic factors and persistent reallocation of employment across sectors.[8] Yearly average hours worked declined by 6.8% between 1995 and 2019, from 1,686 to 1,571. The strong increase in part-time employment accounts for 80% of the decline in average hours until 2014. The increased share of women employed accounts for 16% of the decline in weekly hours (women work an average of 32 hours while men average around 39).[9] While a large part of the decline may reflect workers’ preferences – e.g. an increase in leisure time – not all of it may be voluntary. Recent evidence from the ECB Consumer Expectations Survey shows that whereas about 20% of workers would like to work fewer hours, 35% of workers would like to work more. In addition, while the number of part-time workers who wished to work more hours has declined since 2019, there were still about five million at the end of 2022 of which about 28% were low-skilled workers and 43% were middle-skilled workers.
Conclusions
The euro area labour market has shown remarkable resilience during the post-pandemic recovery. This was particularly visible in terms of the record high of more than 165 million people in employment at the end of 2022. The rate of participation in the labour market for some important sociodemographic groups, like women and workers older than 55, still has some room to increase. Moreover, as the inflow of foreign workers continues in the coming years the labour supply should keep on growing. And this will contribute decisively to the growth potential and the economic welfare of the euro area.
The subdued path of average hours worked, however, is dampening the vibrant recovery in headline employment figures and, possibly, adding to current labour scarcity concerns held by many firms. Some of the factors for this are likely to dissipate as the economy normalises following the recent sequence of adverse supply shocks and as current sectoral supply-demand imbalances ease. Hoarding labour may become less attractive for firms faced by rising labour and financial costs, leading to a normalisation of average hours worked. The recent increase in sick leave may revert[10] although it is still too early to say for sure. Other factors like the lower level of average hours worked in the public sector, however, may remain. In any case, the large number of people who wish to work more hours calls for an in-depth revision of potential obstacles in the institutional frameworks of euro area labour markets, which may be hindering individual and social benefits.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
Authors:

Oscar Arce
Agostino Consolo
António Dias da Silva
Matthias Mohr

Compliments of the European Central Bank.
Footnotes:
1. See Box 1 “Comparing labour market developments in the euro area and the United States and their impact on wages” in article “Wage developments and their determinants since the start of the pandemic“, ECB Economic Bulletin, Issue 8/2022.
2. Differently from the Global Financial Crisis, these schemes were widely used across all euro area countries, helping employed workers to keep their employment status even if they worked zero hours.
3. We consider public employment to be all employment in activity sectors O to Q according to the classification used in Eurostat’s EU Labour Force Survey, namely public administration, defence, education, human health and social work activities.
4. Public and construction sectors account for about 25% and 6% of employment, respectively. See “The role of public employment during the COVID-19 crisis”, ECB Economic Bulletin Box, Issue 6/2022.
5. See “Main findings from the ECB’s recent contacts with non-financial companies“, ECB Economic Bulletin, Issue 1/2023.
6. German Institute of Employment Research (IAB).
7. Information from national social security agencies (INSEE for France, INPS for Italy and Seguridad Social for Spain). In France, the number of employees with at least one day of sick leave is reported to have increased by about 11% from 2021 to 2022. The total number of sick leave days in Italy increased by 34% in 2022 compared to the previous year. Information for sick leave in Spain points to a 30% increase in average monthly sick leave per employee in 2022 compared to 2021.
8. See “Hours worked in the euro area”, ECB Economic Bulletin, Issue 6/2021.
9. Eurostat Labour Force Survey data show that between 2002Q2 and 2013Q2 the share of part-time hours increased from 16% to 22%. Since then the share of part-time employment has stabilised, and even decline during the pandemic, meaning that the fall in weekly hours worked comes from full-time employment. The share of women in employment (aged 15-64) increased from 42.7% in 2002Q2 to 46.1% in 2013Q2 and 46.7% in 2022Q2.
10. Regarding the cyclical pattern of sick leave see e.g. Pichler, S. (2015), “Sickness Absence, Moral Hazard, and the Business Cycle”. Health Economics, 24, 692–710.The post ECB | More jobs but fewer working hours first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Keynote speech by Luis de Guindos, Vice-President of the ECB, at the Annual Joint Conference of the European Commission and the European Central Bank on European Financial Integration | Brussels, 7 June 2023 |
It is a great pleasure to be participating in this year’s joint conference on financial integration. This event offers an excellent opportunity to reflect on key developments in the financial sector over the past year and to reassess priorities for advancing the integration, development and safety of the financial system.
Recent developments and the euro area banking sector
In recent months, bank failures in the United States and Switzerland have affected financial markets worldwide. This “real-life stress test” has provided valuable insights and lessons for the euro area banking sector and for our regulatory and supervisory framework.
The European banking sector has proven resilient. And the enhanced regulatory and supervisory framework put in place following the great financial crisis has proven its worth. But it is still incomplete – the Basel III agreement still needs to be transposed into EU banking regulation in a full and timely manner. We cannot be complacent.
During the recent bank failures, deposits were withdrawn much faster than during the great financial crisis. Silicon Valley Bank lost more than USD 40 billion – almost 30% of its deposits – in a single day. The extraordinary speed of deposit withdrawals was driven by the widespread use of online banking and the rapid dissemination of news via social media and was compounded by the highly concentrated customer base.[1] In this ever-faster digital world, banks, supervisors, central banks and legislators need to review the tools for safeguarding liquidity conditions and financial stability.
The turbulence seen in financial markets this spring is a timely reminder of the benefits of strong regulation and supervision. While adequate regulatory standards are the first line of defence against bank failures, they must be supported by a second line of defence in the form of steady, powerful and agile supervision.
Harmonised and effective supervision and an enhanced resolution framework
ECB Banking Supervision has successfully developed and promoted harmonised supervisory practices. It started to closely monitor risks related to rising interest rates when the first signs of inflationary pressures emerged, long before the bank failures in the United States. The European Commission[2] and the European Court of Auditors[3] recently confirmed that the ECB has established itself as an effective and mature supervisory authority, and the ECB has already started to implement their recommendations.
The EU has made considerable progress in crisis management by establishing a robust framework for dealing with banks in financial difficulties. While they are not a direct response to the recent turmoil, we strongly welcome the European Commission’s proposed changes to the crisis management and deposit insurance framework. In particular, we support expanding the scope of the resolution framework to ensure that the failure of small and medium-sized banks can be addressed in a more effective and harmonised way. At the same time, ensuring adequate resolution funding is critical to make resolution feasible for smaller banks. This includes using deposit guarantee schemes to help unlock access to the Single Resolution Fund and introducing a single-tier depositor preference. The proposals form a coherent package which must be preserved in its entirety. We call on the co-legislators to adopt it swiftly, preferably during the current institutional cycle.
The events of this spring have demonstrated the need for effective and agile crisis management frameworks for banks of all sizes. To complete the crisis management toolkit for large banks in the EU, we also need to make progress in other areas, such as liquidity in resolution and a backstop to the Single Resolution Fund.
The missing third pillar of banking union
The large gap in our institutional framework is still the missing third pillar: the European deposit insurance scheme. As long as deposit insurance remains at the national level, the sovereign-bank nexus will continue to be a source of fragmentation in the banking union, as the level of confidence in the safety of bank deposits may differ across Member States. In a crisis, we run the risk of deposit outflows towards other Member States and non-banks, thereby exacerbating systemic liquidity stress. An incomplete banking union is a key vulnerability for the EU banking sector and hampers progress towards greater financial system integration.
Furthermore, as firms broaden their funding sources and diversify away from bank loans, there needs to be a greater focus on financing through marketable debt securities and equity instruments. This lies at the heart of the capital markets union (CMU) project.
Implications for the capital markets union
Completing the CMU is essential for three reasons.
First, the CMU strengthens the resilience of the euro area economy through private risk-sharing.
Deep and integrated capital markets provide opportunities for effective risk-sharing. This is essential for financing the real economy and limiting fluctuations in economic activity. However, recent ECB analysis shows that, while euro area capital market integration has improved over the last 20 years, it remains rather modest.[4]
We must also consider the challenges posed by climate change in the coming years. Enhancing the risk-sharing potential of capital markets will help to further improve the ability of the EU financial system to sustain investment flows during climate-related shocks. This will bolster the EU’s overall resilience to increasingly frequent and intense extreme weather events, which typically hit regions asymmetrically.
Second, further developing EU capital markets boosts innovation, supports long-term growth and enables continued financing of the green transition.
This is of paramount importance as the EU navigates rapid technological change and is faced with an increasingly challenging geopolitical environment. The public sector cannot shoulder all the investment required for the green and digital transitions on its own.[5] Capital markets have a key role to play in allocating the private investment required and in complementing the financing provided by banks.
Equity financing – especially venture and growth capital – plays a central role in funding innovative firms. Given equity investors’ greater risk appetite, a larger share of equity financing may be needed to drive green innovation. ECB research suggests that an economy’s carbon footprint shrinks faster when a higher proportion of its funding comes from equity rather than debt financing.[6]
The EU still lags behind its global peers when it comes to developing venture capital markets. Although it has grown in recent years, EU venture capital relative to GDP is still only a fifth of that of the United States. Public investment at the European level can play an important role in crowding in private investment, while coordinated public-private investment can play a crucial role in kick-starting innovation. Furthermore, the EU and its Member States should strengthen their support for initiatives aimed at providing financing to small and medium-sized enterprises or funding EU-based start-ups and scale-ups.
On the plus side, we are already seeing substantial growth in sustainable finance. Although sustainable finance products still only account for a small share of euro area capital markets[7], assets under management of environmental, social and governance funds have tripled since 2015 while the volume of outstanding green bonds has risen tenfold. Promisingly, green bonds are roughly twice as likely as other European bonds to be held cross-border[8], and investments in environmental, social and governance funds appear to be more stable than those in conventional funds.[9] This incipient evidence suggests that, with the right regulatory framework in place, scaling up green finance will be beneficial in supporting both the low-carbon transition and financial integration in the euro area.
Third, the capital markets union and the banking union are intrinsically linked. More integrated capital markets support cross-border banking activities, while more cross-border holdings would allow banks to diversify, making them more resilient. From issuance to underwriting, banks provide essential services for capital markets. Therefore, a more resilient and integrated banking system also supports the smooth functioning and further integration of capital markets.
Key legislative initiatives to advance capital markets integration
To move forward on the legislative front, we need to finalise the implementation of the Commission’s capital markets union action plan – without compromising on its ambition. This includes implementing proposals such as the consolidated tape, the targeted harmonisation of insolvency rules and the upcoming initiative on the withholding tax framework.
We welcome the recent statement made by the co-legislators in April, in which they committed to finalising CMU legislative initiatives during the current institutional cycle, and the recent agreement on the European Single Access Point. The ESAP will help to mobilise and allocate capital by making it easier for investors to identify suitable firms and projects to invest in. Likewise, the proposed targeted harmonisation of insolvency regimes should make it easier to reallocate resources from failing firms and provide more transparency for cross-border investors. Finally, a more efficient and harmonised withholding tax framework will reduce the burden and costs for investors and facilitate cross-border investment.
Beyond the current institutional cycle and the CMU action plan, EU legislators should also look at structural issues, such as improving the current architecture to enable more consistent and harmonised supervision of markets.
Conclusion
The euro area financial system recently passed a real-life stress test. At the same time, the events of this spring underlined the importance of making decisive progress on the European banking union and capital markets union projects. The financial market turbulence and contagion from the United States and Switzerland would have been far more muted had we been closer to our goals. Completing the banking and capital markets union projects will increase cross-border bank lending and enhance the dynamism of public and private equity markets. Both are key to enhancing integration and stability in the euro area financial system, and they will also ensure that the funding for the green and digital transitions is available to meet the challenges ahead.
Thank you for your attention.
Compliments of the European Central Bank.
Footnotes:
1. Rose, J. (2023), “Understanding the Speed and Size of Bank Runs in Historical Comparison”, Economic Synopses, No 12.
2. Report from the Commission to the European Parliament and the Council on the Single Supervisory Mechanism established pursuant to Regulation (EU) No 1024/2013 (COM/2023/212 final).
3. European Court of Auditors (2023), “EU supervision of banks’ credit risk – The ECB stepped up its efforts but more is needed to increase assurance that credit risk is properly managed and covered”, Special Report, No 12/2023.
Born, A., Bremus, F., Kastelein, W., Lambert, C. and Martín Fuentes, N. (2022), “A deep dive into risk sharing through the capital channel in the euro area – inter- versus intra-regional risk sharing”, Financial Integration and Structure in the Euro Area, ECB, April.
4. The European Commission estimates that an additional €454 billion per year of investment (in 2021 prices) is needed on average from 2021 to 2030 for EU Member States to reach their climate objectives. See European Commission (2021), “Impact assessment report accompanying the Proposal for a Renewable Energy Directive II”, Staff Working Document, Brussels, July.
5. See De Haas, R. and Popov, A. (2019), “Finance and carbon emissions”, Working Paper Series, No 2318, ECB, September; and Popov, A. (2020), “Does financial structure affect the carbon footprint of the economy?”, Financial Integration and Structure in the Euro Area, ECB, March.
6. Assets under management of environmental, social and governance funds represent around 10% of the euro area investment fund sector, while the amount of outstanding green bonds constitutes around 3% of outstanding bonds.
7. Born, A., Giuzio, M., Lambert, C., Salakhova, D., Schölermann, H. and Tamburrini, F. (2021), “Towards a green capital markets union: developing sustainable, integrated and resilient European capital markets”, ECB Macroprudential Bulletin, Issue 15, October.
8. Capotă, L.-D., Giuzio, M., Kapadia, S. and Salakhova, D. (2022), “Are ethical and green investment funds more resilient?”, Working Paper Series, No 2747, November.The post Banking Union and Capital Markets Union: high time to move on first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, the European Commission and the World Health Organization (WHO) have announced the launch of a landmark digital health partnership.
In June 2023, WHO will take up the European Union (EU) system of digital COVID-19 certification to establish a global system that will help facilitate global mobility and protect citizens across the world from on-going and future health threats. This is the first building block of the WHO Global Digital Health Certification Network (GDHCN) that will develop a wide range of digital products to deliver better health for all.
Based on the EU Global Health Strategy and WHO Member States Global Strategy on Digital Health, the initiative follows the 2 December 2022 agreement signed by Commissioner Kyriakides and WHO Director-General Dr Tedros Adhanom Ghebreyesus to enhance strategic cooperation on global health issues. This further bolsters a robust multilateral system with WHO at its core, powered by a strong EU.
This partnership will include close collaboration in the development, management and implementation of the WHO system, benefitting from the European Commission’s ample technical expertise in the field. A first step is to ensure that the current EU digital certificates continue to function effectively.
A global WHO system building on EU legacy
One of the key elements in the European Union’s work against the COVID-19 pandemic has been the digital COVID certificate. To facilitate free movement within its borders, the EU swiftly established interoperable COVID-19 certificates (entitled ‘EU Digital COVID Certificate’ or ‘EU DCC’). Based on open-source technologies and standards it allowed also for the connection of non-EU countries that issue certificates according to EU DCC specifications, becoming the most widely used solution around the world.
From the onset of the pandemic, WHO engaged with all WHO Regions to define overall guidelines for such certificates. To help strengthen global health preparedness in the face of growing health threats, WHO is establishing a global digital health certification network which builds upon the solid foundations of the EU DCC framework, principles and open technologies. With this collaboration, WHO will facilitate this process globally under its own structure with the aim to allow the world to benefit from convergence of digital certificates. This includes standard-setting and validation of digital signatures to prevent fraud. In doing so, WHO will not have access to any underlying personal data, which would continue to be the exclusive domain of governments.
The first building block of the global WHO system becomes operational in June 2023 and aims to be progressively developed in the coming months.
A long-term digital partnership to deliver better health for all
To facilitate the uptake of the EU DCC by WHO and contribute to its operation and further development, the European Commission and WHO have agreed to partner in digital health.
This partnership will work to technically develop the WHO system with a staged approach to cover additional use cases, which may include, for example, the digitisation of the International Certificate of Vaccination or Prophylaxis. Expanding such digital solutions will be essential to deliver better health for citizens across the globe.
This cooperation is based on the shared values and principles of transparency and openness, inclusiveness, accountability, data protection and privacy, security, scalability at a global level, and equity. The European Commission and WHO will work together to encourage maximum global uptake and participation. Particular attention will be paid to equitable opportunities for the participation by those most in need: low and middle-income countries.
Compliments of the European Commission.The post Digital Health: EU Commission and WHO launch landmark digital health initiative to strengthen global health security first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

In 2020, the Commission´s nearly €100 billion SURE instrument designed to protect jobs and incomes affected by the COVID-19 pandemic supported about 31.5 million employees and self-employed people and over 2.5 million businesses. SURE effectively encouraged Member States to set up wide-ranging and ambitious short-time work schemes and similar measures at national level, which allowed firms to retain employees and skills, and supported the self-employed.
Today’s final bi-annual report on the implementation and impact of the SURE instrument shows that it was crucial in both mitigating the impact of the pandemic in 2020 and facilitating the swift economic rebound in 2021, which was faster than in previous crises. SURE – the European instrument for temporary Support to mitigate Unemployment Risks in an Emergency – ended on 31 December 2022.
Overall, a total of €98.4 billion of SURE financial assistance was disbursed to 19 Member States (i.e.  Belgium, Bulgaria, Cyprus, Estonia, Greece, Spain, Croatia, Hungary, Ireland, Italy, Lithuania, Latvia, Malta, Poland, Portugal, Romania, Slovenia, Slovakia and Czechia), close to the maximum SURE envelope of €100 billion. This included additional ‘top-up’ financial assistance of €5 billion that was granted to eight Member States in autumn 2022. Careful monitoring continued in the first months of 2023 to ensure the absorption of all SURE financial assistance, which is now confirmed.
To finance the instrument, the Commission issued social bonds on behalf of the EU, becoming the world’s largest social bond issuer.
Ursula von der Leyen, President of the European Commission, said: “SURE is the EU at its best. The programme helped save millions of jobs during the COVID-19 pandemic and, as importantly, it supported EU businesses retain their workforce. SURE set the path for our recovery plan NextGenerationEU, which broke new ground in a successful, unified, economic European response to the crisis.”
The main findings of the report are:
In 2020:

National policy support measures effectively protected around 1.5 million people from unemployment, with new illustrative simulations provided in this report suggesting that SURE-funded schemes accounted for the bulk of this impact.
SURE supported almost one third of total employment (around 31.5 million employees and self-employed people) and over one quarter of firms (over 2.5 million firms) in the 19 beneficiary Member States.

SMEs were the primary beneficiaries of SURE support.
The most supported sectors were contact-intensive services (accommodation and food services, wholesale and retail trade) and manufacturing.

In 2021:

SURE continued to protect employment in particular in the first half of 2021, when the pandemic continued to have a severe negative impact, supporting around 9 million people (15% of total employment) and over 900,000 firms (15% of firms) in the 15 beneficiary Member States that used SURE in 2021.

In 2022:

There was a clear phasing out of national support measures. In the four Member States that extended support measures until early 2022 there was continued support under SURE for 350,000 people and 40,000 firms.

To date:

All public expenditure under SURE has now been spent.
Almost half of total expenditure was allocated to short-time work schemes, and almost one third allocated to similar measures for the self-employed. Wage subsidy schemes and other similar measures accounted for 12%, while the remaining 5% was spent on health-related measures, which included preventive measures against COVID-19, additional labour costs to recruit and support healthcare workers, and the purchase of healthcare equipment and medication, including vaccines.

Member States have saved an estimated €9 billion in interest payments by using SURE, thanks to the EU’s high credit rating. This adds to the positive effects on social and employment outcomes.

Background
SURE has been a crucial element of the EU’s comprehensive strategy to protect jobs and workers in response to the coronavirus pandemic. SURE provided financial support in the form of loans granted on favourable terms from the EU to Member States to finance national short-time work schemes and other similar measures, in particular for the self-employed, as well as health measures.
The Commission proposed the SURE Regulation on 2 April 2020, as part of the EU’s initial response to the pandemic. It was adopted by the Council on 19 May 2020 as a strong sign of European solidarity, and became available after all Member States signed guarantee agreements on 22 September 2020. The first disbursement took place five weeks after SURE became available.
All of the financial assistance granted under SURE has now been disbursed and spent and no further financial assistance can be granted. Today’s fifth bi-annual report on SURE is therefore also the final monitoring report on SURE. The Commission will continue monitoring the repayment of the loans until all outstanding loans have been repaid.
The Commission issued social bonds to finance the SURE instrument and used the proceeds to provide loans to beneficiary Member States. Borrowing under the SURE programme was instrumental for the growth of the EU into the large scale-sovereign style issuer. The report on SURE also provides the relevant reporting under the EU Social Bond Framework. Further information on these bonds, along with a full overview of the funds raised under each issuance and the beneficiary Member States, is available online here.
Compliments of the European Commission.The post Protecting jobs and workers: Final report confirms SURE was crucial in mitigating impact of pandemic and supporting recovery first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Modern Artificial Intelligence (AI) models often work as opaque decision-making engines (black boxes); reaching conclusions without much transparency or explanations on how a given result is obtained. In an era where AI has become an integral part of our lives, where recruiters, healthcare providers, and other fields, rely on this tool to make decisions impacting individuals, understanding the way AI works is essential.
Could Explainable Artificial Intelligence, or XAI, be a way forward, a potential solution? But, what is XAI, how does it work in practice? What are its benefits, but also its risks, its relationship with data protection? What impact may XAI have in the years to come?
These are some of the questions that our distinguished guest speakers and experts tackled during the EDPS’ Internet Privacy Engineering Network (IPEN) hybrid event, which I had the pleasure of chairing on 31st May.
IPEN, established almost 10 years ago by the EDPS, brings together data protection and technology experts, as well as other pertinent actors, to discuss relevant challenges of embedding data protection and privacy requirements into the development of technologies. The forum generates thought-provoking views, fascinating exchanges, which, like for many others, informs and feeds my own reflections about the narrow relationship between privacy and technology.
This IPEN event on XAI was no exception.
Why XAI?
XAI focuses on developing AI systems that can not only provide accurate predictions and decisions, like other AI systems, but can also offer explanations on how a certain decision or conclusion is reached. In other words, XAI should be able to explain what it has done, what will happen next, and what information has been used to make a decision. With this information, individuals using XAI would be able to understand the reasoning behind an automated decision, and to take the appropriate, and informed, course of action. With XAI, the dynamic changes: users would not simply rely on AI systems to make decisions for them, but would play an integral part in making, or verifying, a decision. To this end, XAI – coupled with human cognition – could play an important role in fostering trust in AI systems, as well as increasing transparency and accountability of AI systems.
XAI, accountability, transparency and data protection: how does it all add up?
How does this all work in practice? How can transparency and accountability really be achieved? It won’t be enough if explanations given by an AI system are very technical – only understandable by a handful of experts.
Effective transparency and accountability, and therefore trust in AI systems, can only really be achieved if information about the underlying behaviour of a system can be explained with truthful and sincere simplicity, and in a clear and concise manner, so that this knowledge can be passed on from the provider to the users of AI systems. Obtaining clear information about the behaviour of AI also has an impact on the ability for its users, such as data controllers and processors, to evaluate the risks that this tool may pose to individuals’ rights to data protection and privacy, to protect them and their personal data.
XAI and its risks
Is it easy to explain AI in a simple, clear and concise way? Well, not really. Making AI understandable and meaningful to everyone is challenging to achieve without compromising on the predictive accuracy of AI. Arguably, one of the risks is that explanations could become subjective, convincing rather than informative, or open to interpretation, context-dependent, some participants shared at the IPEN event. Cultural filters can also play a role. There is probably not one single way to explain what an AI system does, but there are certainly many wrong ways to do so.
Risks to individuals’ privacy and personal data should be considered seriously as well. With XAI, results produced by AI systems may reveal personal information about individuals.
Other risks, shared by our panellists, include the possibility that explanations of AI-assisted decisions may reveal commercially sensitive material about how AI models and systems work. Furthermore, AI models may be exploited by individuals if they know too much about the logic behind their decisions.
XAI needs humans
Now that we have examined some of XIA’s possibilities, its possible impact on data protection, and examples of its benefits, but also risks, how may this field progress?
To advance in the field of AI, Human-AI collaboration is important. Moreover, interdisciplinary collaboration is essential. Experts in computer science, cognitive psychology, human-computer interaction, and ethics must work together to develop robust methodologies, standards and safeguards that promotes a fair AI ecosystem, to empower individuals, giving them control over their information and respecting their privacy.
In this sense, XAI is more likely to succeed if researchers, experts and practitioners in relevant fields adopt, put into practice, and improve AI models with their unique and creative knowledge. Above all, evaluation of these models should focus on people more than on technology.
As highlighted by the European Data Protection Supervisor, Wojciech Wiewiórowski, during the Annual Privacy Forum following the IPEN event: when it comes to XAI and Artificial Intelligence in general, enforcement of appropriate rules and existing EU Regulations, such as the General Data Protection Regulation (GDPR), must be upheld. Protecting individuals’ fundamental rights must come first.
When confronted with powerful AI systems, all human beings, even the clever ones, become somehow vulnerable in relation to the power of the machine. Therefore, we must shape AI to our human. As provided in Recital 4 of the GDPR on data processing, AI should also be designed to serve humankind.
Author:

Lenoardo Cerverna Navas, Director, EUROPEAN DATA PROTECTION SUPERVISOR

Compliments of the European Commission, European Data Protection Supervisor.The post EDPS | Explainable Artificial Intelligence needs Human Intelligence first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Can EU companies be both green and globally competitive?
Tradeable allowances for carbon emissions set important price incentives for companies to become greener. Unfortunately, evidence shows that many companies move carbon intensive production to other regions, meaning their emissions leak abroad. This ECB Blog post investigates how the EU can strike a balance between green goals and competitiveness.
One of the EU’s most powerful tools to fight climate change is the Emissions Trading System (ETS). It sets a cap on greenhouse gas emissions for a number of industries and provides tradeable emissions allowances to companies. As the EU progressively reduces this cap over time, this pushes up prices for the allowances and strengthens the incentives to avoid emissions. There is both good news and bad news about the ETS. It has contributed to reducing emissions in the EU. But we also find evidence that this came at the cost of a reduced competitiveness in Europe and higher emissions elsewhere in the world. We look at the benefits and costs of the trading system and discuss how to avoid the export of carbon intensive production – what the experts call “carbon leakage”.
The ETS does curb emissions
The trading system is helping to cut greenhouse gas (GHG) emissions in the EU. Our analysis shows that its contribution totals an emissions reduction of 2-2.5 percentage points per year.[1] The system is effective in two distinct ways. First, stricter emissions regulations to make production greener reduce emissions faster. As we cannot measure this stringency directly, we use a proxy: the ratio of traded allowances to the total amount of emissions allowances used by industry. In other words, we assume that a stricter ETS regulation that forces companies to emit fewer GHGs leads to more active trading. Emissions from regulated industries fell by about 2 percentage points for each 1 percentage point increase in our proxy before 2013, and somewhat more after the ETS was reformed in that year. The price mechanism was also effective as higher stringency and higher allowance prices led to faster reductions of emissions.
Second, the ETS has a powerful steering role for companies: regulated EU industries have reduced their greenhouse gas emissions more than those industries in the EU that are not subject to the ETS (Chart 1).

Chart 1
Changes in greenhouse gas emissions – ETS-regulated industries vs non-regulated industries in the EU and in other regions
Percentages
Sources: Tonnes of CO2 equivalent greenhouse gas emissions are from the WIOD environmental account providing it for 56 industries and 43 countries plus the rest of the world for the period 2000-2016.
Notes: The blue bar is the average decline in emissions since ETS inception across all countries and sectors (-4.6 percentage points). The red bar depicts the difference in GHG emissions in ETS sectors globally relative to the average decline. The yellow bar shows the difference in emissions in ETS sectors within the EU relative to average change in emissions of ETS industries.

However, these achievements came at a cost. Contrary to earlier research showing limited empirical evidence of carbon leakages[2], we have found substantial evidence that companies shift carbon-intensive activities with heavy emissions from inside Europe to outside the EU. This runs counter to the EU’s efforts to also help reduce emissions globally. Although global emissions by all industries in all regions have declined since 2005 (blue bar), the global emissions by regulated industries rose above their level until 2005 (yellow bar), and this despite the fact that emissions in the very same industries fell markedly within the EU.
Obviously, such carbon leakages are detrimental to the fight against climate change. One way to address this problem is a carbon border adjustment mechanism (CBAM) on imports.[3] This tool is designed to find the best possible trade-off between reducing carbon emissions and keeping Europe’s producers competitive. It aims to avoid businesses transferring production from countries with strict climate policies to ones with laxer policies, and to thereby minimise carbon leakage.[4]
The current revisions to the ETS include a CBAM on imports of carbon-intensive products that are heavily traded with non-EU Member States. These include cement, iron, steel, aluminium, fertilisers and electricity. This border regime will be phased in to protect EU producers from foreign competition operating in unregulated regions. It will force importers to buy emissions allowances in proportion to the emissions embedded in their imports, at the ETS market price. This means that products will face the same carbon pricing regardless of where they come from and where the relevant greenhouse gasses were emitted. By treating all companies equally when supplying the EU market, the CBAM mitigates possible competitiveness losses.
The effects of the trading system on competition vary depending on the location (inside or outside the EU) and ownership (domestic or multinational companies).[5] We found that companies in the EU which source carbon intensive inputs from within the EU face a competitive disadvantage. This disadvantage grows as the share of carbon intensive inputs sourced within the EU increases. In contrast, those companies which manage to source these inputs from elsewhere perform better, arguably owing to cheaper inputs. This improvement is proportional to the amount of outsourced emission-intensive inputs. In other words: the more those companies source carbon-intensive inputs abroad, the more they can produce as they gain market share.[6]
EU companies which are subject to the ETS regulations produce less when they source high-carbon inputs from within the EU, but their production increases when they source them from outside the region. For multinational companies, we see a similar correlation, but the impact of the shift to outside the EU increases rapidly as the price of emissions allowances rises and has topped that of EU domestic companies at current ETS prices (Chart 2).

Chart 2
The effect of shifting purchases of high-emissions inputs from inside to outside the EU
Percentage points
Sources: OECD-AMNE and authors’ estimates.
Notes: The chart depicts the effect on companies’ production of a one percentage point shift of high carbon footprint inputs, across sourcing regions, from inside to outside the EU. For a 10 percentage point shift across regions of high carbon footprint inputs, EU companies expand production by 1 percentage point, compared to a no-shift strategy. This is based on regression analysis (for details see “Benefits and costs of the ETS in the EU, a lesson learned for the CBAM design”). The log value of sectoral production is regressed on country-sector-ownership fixed effects, emission intensity (emissions per euro worth of production), log value of inputs and the four shares of high carbon footprint inputs sourced from Domestic and MNE companies. The coefficients on these four regressors capture the elasticity of sectoral production to emission-intensive inputs depending on the regions in which they originated, e.g. from inside or outside the EU, as well as company ownership. The specification also includes the interaction of these shares with the price paid on allowances in t-1, to capture nonlinearity of the price for allowances. Finally, the specification encompasses deterministic country and industry trends and control for unobserved time heterogeneity. Matching the AMNE and WIOD databases eventually yields 34 sectors and 44 countries (including RoW) spanning the period 2000-16. Regulated (ETS) industries are Coke and refined petroleum products (C19), Basic metals (C24), Other non-metallic mineral products (C23), Electricity, gas, water, waste and remediation (DTE), and Transport and storage (H).

The effectiveness of the ETS in curbing EU greenhouse gas emissions is undeniable. But it comes at the significant cost of making EU companies less competitive, especially those that are domestically owned, as well as triggering carbon leakages. The degree to which EU production is affected depends on a company’s ownership and where it sources emission-intensive inputs. This suggests that some business models with multinational production chains may have more leeway in reorganising and sourcing “dirtier” inputs from outside the EU. The details of the CBAM must be carefully considered to make sure that the new EU environmental legislation prevents this. Based on our analysis we advise that the CBAM be extended to all regulated productions. Our evidence is a call for regulators to carefully establish the terms for the tariff equivalent charged on emissions embedded in imports and for the CBAM industry’s coverage.
Authors:

Justus Böning, PhD Candidate, KU Leuven

Virginia Di Nino, Principal Economist, Economics, Business Cycle Analysis, ECB

Till Folger, Consulatant, TWS Partners

Compliments of the European Central Bank.
Footnotes:
1. See Boning J., Di Nino v., Folger T., 2023, “Benefits and costs of the ETS in the EU, a lesson learned for the CBAM design”, ECB Working Paper No 2764.
2. See Chan, H. S. R., S. Li, and F. Zhang (2013): “Firm competitiveness and the European Union emissions trading scheme”, Energy Policy, 63, 1056-1064; Jaraite, J. and C. Di Maria (2016): “Did the EU ETS Make a Difference? An Empirical Assessment Using Lithuanian Firm-Level Data”, The Energy Journal, 37, 1-23; Koch, N. and H. Basse Mama (2016): “European climate policy and industrial relocation: Evidence from German multinational firms”; Dechezleprétre, A., Gennaioli, R. Martin, M. Muûls, and T. Stoerk (2019):”Searching for Carbon Leaks in Multinational Companies,” CGR Working Paper Series; aus dem Moore, N., P. Grosskurth, and M. Themann (2019): “Multinational corporations and the EU Emissions Trading System: The specter of asset erosion and creeping deindustrialization”, Journal of Environmental Economics and Management, 94, 1-26.
3. See the relevant press release.
4. For a definition of carbon leakage see Climate EU trading emissions “Carbon leakage refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints. This could lead to an increase in their total emissions. The risk of carbon leakage may be higher in certain energy-intensive industries”.
5. Data on gross output by country and sector, the share of emission-intensive inputs and imports in total were obtained from the OECD AMNE database, which categorises companies according to domestic and foreign ownership (see Cadestin, De Backer, Desnoyers-James, Miroudot, Rigo and Ye (2018)).
6. See Boning J., Di Nino v., Folger T., 2023.The post ECB | Stop carbon leakage at the border first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.