The European Commission and the High Representative today published a Joint Communication on a European Economic Security Strategy. This Joint Communication focuses on minimising risks arising from certain economic flows in the context of increased geopolitical tensions and accelerated technological shifts, while preserving maximum levels of economic openness and dynamism.
The proposed strategy sets out a common framework for achieving economic security by promoting the EU’s economic base and competitiveness; protecting against risks; and partnering with the broadest possible range of countries to address shared concerns and interests. The fundamental principles of proportionality and precision will guide measures on economic security.
A more comprehensive approach to risk management
Risks presented by certain economic linkages are evolving quickly in the current geopolitical and technological environment and are increasingly merging with security concerns. This is why the EU must develop a comprehensive approach on commonly identifying, assessing and managing risks to its economic security.
The Strategy proposes to carry out a thorough assessment of risks to economic security in four areas:

risks to the resilience of supply chains, including energy security;
risks to physical and cyber security of critical infrastructure;
risks related to technology security and technology leakage;
risks of weaponisation of economic dependencies or economic coercion.

The Strategy proposes a methodology for this risk assessment. It should be carried out by the Commission and Member States in cooperation with the High Representative, where appropriate, and with input from the private sector. It should be a dynamic and continuous process.
The Strategy also sets out how to mitigate identified risks through a three-pronged approach, namely by:

promoting the EU’s competitiveness, by strengthening the Single Market, supporting a strong and resilient economy, investing in skills and fostering the EU’s research, technological and industrial base;
protecting the EU’s economic security through a range of existing policies and tools, and consideration of new ones to address possible gaps. This would be done in a proportionate and precise way that limits any negative unintended spill-over effects on the European and global economy;
partnering with the broadest possible range of partners to strengthen economic security, including through furthering and finalising trade agreements, reinforcing other partnerships, strengthening the international rules-based economic order and multilateral institutions, such as the World Trade Organization, and investing in sustainable development through Global Gateway.

Next steps
The Communication lays the basis for a strategic discussion with EU Member States and the European Parliament to develop a comprehensive approach to protect the Union’s economic security. The European Council will consider the strategy during its meeting of 29-30 June 2023.
The Communication lays out the following new actions:

develop with Member States a framework for assessing risks affecting the EU’s economic security; this includes establishing a list of technologies which are critical to economic security and assess their risks with a view to devising appropriate mitigating measures;
engage in a structured dialogue with the private sector to develop a collective understanding of economic security and encourage them to conduct due diligence and risk management in light of economic security concerns;
further support EU technological sovereignty and resilience of EU value chains, including by developing critical technologies through Strategic Technologies for Europe Platform (STEP);

review the Foreign Direct Investment Screening Regulation.
explore options to ensure adequate targeted support for research and development of dual-use technologies;

fully implement the EU’s export control regulation on dual use items and make a proposal to ensure its effectiveness and efficiency;
examine, together with Member States, what security risks can result from outbound investments and on this basis propose an initiative by the end of the year;
propose measures to improve research security ensuring a systematic and rigorous enforcement of the existing tools and identifying and addressing any remaining gaps;
explore the targeted use of the Common Foreign and Security Policy (CFSP) instruments to enhance EU economic security including Hybrid and Cyber Diplomacy toolboxes and foreign information manipulation and interference (FIMI) toolbox;
instruct the EU Single Intelligence Analysis Capacity (SIAC) to work specifically on the detection of possible threats to EU economic security;
ensure that the protection and promotion of EU economic security is fully integrated in European Union’s external action and intensify the cooperation with third countries on economic security issues.

Background
Open, rules-based trade have shaped and benefitted the EU since its inception. At the same time, growing geopolitical tensions and greater geostrategic and geoeconomic competition, as well as shocks such as the COVID pandemic and Russia’s war of aggression against Ukraine, have highlighted the risks inherent in certain economic dependencies. Such risks – unless properly managed – can challenge the functioning of our societies, our economies, our strategic interests and our ability to act. A comprehensive Strategy – including joint-up action across internal and external policies and a cohesive set of measures at EU and Member State level – is essential for the EU to assess and manage risks while at the same time maintaining our openness and international engagement.
Compliments of the European Commission.The post An EU approach to enhance economic security, Updated on 20 June 2023 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the Euro50 Group conference on “New challenges for the Economic and Monetary Union in the post-crisis environment” | Luxembourg, 19 June 2023 |
The ECB has taken forceful action in response to the unprecedented surge in euro area inflation. We have embarked on the fastest tightening cycle in our history, raising our key policy rate – the deposit facility rate – from -0.5% to 3.5%, and started reducing the size of our balance sheet.
Our actions are being swiftly transmitted to borrowing conditions, slowing the pace of credit creation. Inflation has started to come down from its historically high level, largely reflecting the sharp drop in energy prices. Underlying inflation has also moderated recently, but it has proven more persistent than expected.
Despite the welcome turn in inflationary developments, the path towards sustained price stability remains uncertain and fraught with risks.
In my remarks today, I will reflect on the outlook for inflation in the euro area. I will first explain the factors that are expected to drive the continued decline in headline inflation under the latest Eurosystem staff projections. I will then describe some risks around the baseline scenario and discuss what these imply for the optimal conduct of monetary policy.
Profit margins expected to absorb rising labour costs
In the June 2023 Eurosystem staff projections, headline inflation is expected to decline notably over the coming months and to gradually converge to levels somewhat above 2% in 2025 (Slide 2, left-hand side).[1]
The projected decline in headline inflation rests, to a significant extent, on a further decline in energy inflation and a marked drop in food inflation, both driven by large base effects (Slide 2, right-hand side). Core inflation is projected to moderate more gradually, from an average of 5.1% this year to 2.3% in 2025, as pipeline pressures recede and the tightening of monetary policy increasingly weighs on economic activity.[2]
Over the near term, disinflation is hence primarily driven by a reversal of the supply-side shocks that had caused the unprecedented surge in inflation (Slide 3, left-hand side). Surveys show that bottlenecks in the global manufacturing sector have by now fully unwound and that input prices have fallen to the lowest level in many years as gas and oil prices have continued their sharp descent.
Softening demand, as reflected in a decline in new orders, should further support the disinflationary impulse in the manufacturing sector, which is particularly sensitive to higher interest rates.
As the energy shock unwinds and supply chains normalise, domestic demand, and wage growth in particular, has become the dominant factor driving recent inflation developments, and is expected to remain so over the projection horizon (Slide 3, right-hand side).
Demand-side shocks tend to be more persistent, especially in the euro area’s institutional environment built on centralised collective bargaining, with wage agreements having an average duration of around two years.[3]
Price pressures in the services sector, where labour costs represent a larger share of total costs, are therefore expected to fade more gradually. The catch-up in wages is assumed to moderate on the back of falling headline inflation, while current high nominal wage growth is expected to be absorbed, to a large extent, by firms’ profit margins, thus breaking the vicious circle between wages and prices.[4]
Firms’ selling price expectations, which have been correlating closely with consumer price inflation over the past two years, corroborate the assumptions underlying the projections (Slide 4, left-hand side).
In the manufacturing sector, the share of firms expecting to raise prices further has fallen back to pre-pandemic levels. In the services sector, the share remains higher but has also been coming down for four consecutive months.
Risks to the inflation outlook tilted to the upside
The baseline scenario of the Eurosystem staff projections is a plausible representation of how inflation could evolve in the absence of further shocks. That said, the outlook for inflation remains highly uncertain.
On the downside, banks may tighten credit standards by more than currently envisaged because of risks to the value of their assets, their exposure to interest rate risk and tighter funding conditions.[5] A re-emergence of financial tensions constitutes another downside risk. Together, such effects could accelerate disinflation in the euro area.
On the upside, risks are broader. Option prices in financial markets suggest that risks to the medium-term inflation outlook remain tilted to the upside (Slide 4, right-hand side).
Three types of upside risks can be distinguished.
Risks of negative supply-side shocks
One is that negative supply-side shocks could continue to hit the euro area and global economy. These risks are particularly pertinent for fossil fuels, like gas and oil, due to the green transition and the war in Ukraine.[6]
There are also other shocks, however, that we know exist but that are difficult to integrate into the baseline, so-called “known unknowns”.
El Niño is a case in point. The US Climate Prediction Center has recently declared that El Niño conditions are now officially present and are expected to gradually strengthen in the northern hemisphere in the winter of 2023/24.[7]
ECB analysis suggests that a one-degree temperature increase during El Niño historically raised global food prices by more than 6% after one year (Slide 5, left-hand side).
El Niño also reinforces the risks of extreme weather events stemming from global warming. Sea surface temperatures in the North Atlantic are currently significantly above their average over the past 40 years (Slide 5, right-hand side).
The war in Ukraine, in particular the heightened uncertainty about the Black Sea grain deal and the flooding caused by the destruction of the dam in the Kherson region, poses further upside risks to food inflation.
New research by the Federal Reserve Bank of St. Louis suggests that food price inflation matters. Among consumer price index components, it was found to be the one with the highest signal-to-noise ratio and hence predictive power for future headline inflation, more than any core inflation component.[8]
Long-lasting damage to the euro area’s supply capacity
The second type of upside risk relates to hysteresis effects.
Shocks, even if transitory, can have persistent effects on economic activity.[9] The global financial crisis of 2008, for example, inflicted sustained income losses on millions of workers who remained excluded from labour markets for many years.[10]
Similarly, the pandemic and the energy price shock after the Russian invasion of Ukraine may cause long-lasting damage to the euro area’s supply capacity.
We are seeing two concerning developments. One is that average hours worked per employee remain below pre-pandemic levels (Slide 6, left-hand side).[11] As a result, despite the strong increase in employment by 3.1%, total hours worked increased by only 1.4% over the same period.[12]
One reason behind the sluggish recovery in average hours worked is the marked increase in sick leaves.[13] In Germany, for example, around 8.5% of all employees insured in the public health system were recorded as being on sick leave at the peak last winter (Slide 6, right-hand side).[14] Insurance funds data suggest that more than 60% of the increase in sick leaves is related to respiratory diseases, including COVID-19.[15]
The second concern is that a notable gap has emerged between actual investment and the investment levels that could have been expected if the economy had evolved along its pre-pandemic growth path (Slide 7, left-hand side). This shortfall significantly predates the tightening of monetary policy.
Supply chain disruptions affecting critical capital goods, such as semiconductor chips, have been one reason why capital accumulation has slowed. As delivery times normalise, these effects should reverse, supported by investments related to the green transition, digitalisation and reshoring of parts of global supply chains.
Other factors may prove more persistent, however. Most notably, uncertainty in the wake of the pandemic and the war in Ukraine remains significant.
The automotive sector is a case in point.
The number of car registrations remains well below pre-pandemic figures, as price level effects and legislative efforts to accelerate the green transition have made many consumers reluctant to purchase new vehicles (Slide 7, right-hand side).[16] Instead, they hold on to their old cars for longer, with the average age of passenger cars having risen to 12 years, from 7 to 8 years not so long ago.
In other words, even as past shocks abate, their broader repercussions may have persistent effects on the future productive capacity of the economy. Indeed, potential output estimates for the euro area have been measurably revised down relative to the pre-pandemic trend.[17]
New research shows that such hysteresis effects may amplify and prolong the rise in inflation caused by transitory supply shocks.[18] The reason is that the fall in investment and the rise in employment required to restore total hours worked tends to weigh on productivity and thereby raise firms’ marginal costs.[19]
This channel is economically relevant. Labour productivity growth, both per employee and per hour, contracted in the first quarter of this year, putting upward pressure on unit labour costs, which is the relevant cost measure for firms (Slide 8).
In the Eurosystem staff projections, these effects are expected to reverse, as labour productivity growth is forecast to rebound strongly in 2024 and 2025. The implied fall in unit labour costs, in turn, is expected to allow firms to absorb the increase in nominal wages in their profit margins.
Should weak productivity growth persist, however, the further increase in unit labour costs raises the probability that firms will pass on parts of the increase in their costs to final consumer prices, setting in motion a perilous wage-price spiral.
Weaker slowdown in aggregate demand
This brings me to the third type of upside risks: aggregate demand may be slowing by less than currently anticipated, implying that fiscal and monetary policy are not sufficiently restrictive.
Fiscal policy is expected to tighten over the projection horizon. However, only about half of the discretionary stimulus provided in response to the pandemic and the energy shock is expected to be reversed by 2025.
Such discretionary measures are leaving fiscal policy accommodative and are not sufficiently offset by efforts to increase public investments that could help reduce medium-term inflationary pressures. In this case, monetary policy must become more restrictive.[20]
Quantifying the level of interest rates necessary to bring inflation back to target in a timely manner is inherently difficult, however, as there is large uncertainty about the effects of monetary policy.
First, within each model there is a large range of plausible outcomes (known as parameter uncertainty). For example, according to a benchmark model from the academic literature, a one percentage point increase in the short-term interest rate could dampen inflation after one year by as little as 0.1 percentage point, or by as much as 0.8 percentage points (Slide 9, left-hand side).[21]
The second source of uncertainty relates to model uncertainty – that is, even the median estimate, which itself is surrounded by large parameter uncertainty, usually differs considerably across different classes of economic models.[22] For example, the estimated impact on inflation in 2025 of the ECB’s policy actions taken since December 2021 ranges from 0.9 to 3.9 percentage points across three of the ECB’s main macroeconomic models (Slide 9, right-hand side).
Expectations are critical for monetary policy transmission
These differences reflect, to a considerable degree, the role that expectations are assumed to play in consumption and investment decisions. Put simply, the more households and firms believe that the past is a good guide for the future, the less powerful monetary policy will be.
Inflation expectations are a case in point. If they are adaptive, meaning they change in response to actual inflation outcomes, inflation will become more persistent, and monetary policy will transmit more slowly.
Carefully analysing how inflation expectations evolve is therefore critical for understanding the strength and speed of policy transmission. At present, the long period of above-target inflation raises concerns about a potential shift in inflation expectations.
The experience over the past ten years suggests that market-based measures of long-term inflation compensation are not always firmly anchored around our 2% target (Slide 10, left-hand side). Before the pandemic, they declined significantly as inflation fell short of our target. About a year ago, they gradually began to move beyond 2%, to currently stand around 2.5%.[23]
Expectations of inflation settling above our 2% target could be an early sign that investor start questioning central banks’ determination to restore price stability.
In a recent survey by Bank of America Merrill Lynch, for example, nearly two-thirds of respondents said that global central banks would accept inflation of 2% to 3% if it helped to avoid a recession, suggesting risks to central banks’ credibility (Slide 10, right-hand side). Nearly a fifth said central banks would accept even higher inflation of 3% to 4%.
For euro area firms, evidence on inflation expectations remains scant. A regular survey among Italian firms conducted by Banca d’Italia suggests that Italian firms generally expect inflation to decline from current high levels, but to be highly persistent and to remain above 5% in 2025 (Slide 11).[24]
Previous rounds of the same survey suggest that expectations of high inflation are not a systematic feature: in 2019, Italian firms expected inflation to settle below 1% two years ahead.[25] That is, firms’ expectations seem to adapt to periods of both low and high inflation, just as those of investors in financial markets.
Inflation expectations of consumers are more readily available from surveys run by various institutions. One main insight from those surveys is that many consumers are inattentive. For example, in the ECB’s Consumer Expectations Survey, a significant share of respondents expects prices to always remain unchanged, both over the short and medium term (Slide 12).
That said, consumer surveys also signal shifts in expectations. Today, for example, less households expect inflation to be at, or close to, 2% over the medium term than on average over the past three years (Slide 12, right-hand side).
Yet, there can be large discrepancies across surveys. In the ECB’s survey, reported inflation expectations for German households three years ahead are currently 2%, while they are 5% in the survey conducted by the Deutsche Bundesbank (Slide 13, left-hand side). Differences of that size complicate the assessment as to whether expectations are anchored or not.
Qualitative data, as collected by the European Commission, are therefore a useful complement for understanding consumers’ inflation perceptions and expectations.[26]
In the past, inflation perceptions tended to closely follow actual inflation trends (Slide 13, right-hand side). Recently, however, an unusual gap has emerged between inflation perceptions and actual inflation.[27] It seems that the recent sharp decline in headline inflation has not yet affected consumers’ perceptions, as they continue to experience inflation as historically high.
The observed shift in inflation expectations can hence reduce the strength of policy transmission.
Structural factors may dampen effects of monetary policy
Structural factors can further dampen the effects of monetary policy, three of which seem quantitatively most relevant.
The first is the rising share of services in economic activity and employment.[28] While the services sector accounted for around half of gross value added during the tightening cycle of the 1970s, it accounts for more than 70% today. Similarly, three jobs out of four are in the services sector.
The shift towards services is likely to affect monetary policy transmission.[29] Because services are less capital-intensive and their prices are, on average, more rigid than in other sectors, changes in interest rates are slower to affect aggregate inflation outcomes.[30]
The second factor relates to the impact of monetary policy on households’ cash flows. The marked increase in the share of household loans with a fixed interest rate currently shields many net borrowers from higher interest rates. At the same time, banks are slow to pass through interest rate increases to deposit rates.
As a result, the aggregate impact of the increase in policy interest rates on household’s net interest income has been fairly limited so far (Slide 14, left-hand side). At the end of last year, the average euro area household has received about €10 less per year in net interest rate income compared with a year earlier. Moreover, interest rate payments as a share of gross disposable income are still a fraction of what they were ten or 15 years ago (Slide 14, right-hand side).
The third factor relates to the labour market.
One of the greatest social benefits of the fiscal and monetary policy response to the pandemic and the war in Ukraine is its impact on the labour market. Employment in the euro area has never been higher, and unemployment never been lower.
Yet, labour demand remains exceptionally strong. The ratio of vacancies to unemployed workers remains close to its historical high (Slide 15, left-hand side). Surveys point to continued employment growth in the coming months.
Put differently, one of the key channels in policy transmission – if not the most important one – is currently not working as usual.[31] Structural factors, such as the rise in sick leave, the higher share of services in value added and a shortage of workers, are contributing to this.
But demand is playing a key role, too. In the services sector, for example, the share of firms reporting demand as a factor limiting business remains close to historical lows.
A tight labour market, in turn, increases the bargaining power of workers in an environment in which wages are already expanding at a historically high pace. If wages increased by more than currently projected, paired with potentially lower productivity, firms would be more likely to pass on higher labour costs to consumer prices.
This risk is corroborated by evidence that, as inflation increases, prices and wages become less sticky – that is, they are adjusted more frequently, as the cost of keeping them unchanged increases (Slide 15, right-hand side).[32]
In such an environment, whether a wage-price spiral will unfold will ultimately depend on the ability and willingness of firms to absorb higher unit labour costs in their profit margins. This, in turn, depends on the economic environment in which firms operate, and hence on monetary policy.
Recent work by Ben Bernanke and Olivier Blanchard has examined the role of labour market tightness for the United States.[33] Their work suggests that unless the ratio of vacancies to unemployed workers falls back below its pre-COVID level, inflation is unlikely to return to target in the next three years.
Policy implications and conclusions
All in all, the risks to the inflation outlook are tilted to the upside, reflecting both supply- and demand-side factors. The question is how monetary policy should take such risks into account. The IMF has recently issued a clear recommendation: if inflation persistence is uncertain, risk management considerations speak in favour of a tighter monetary policy stance.[34]
There are two reasons for this.
First, the costs of protecting the economy from upside risks to inflation are comparatively small, as the policy rate can be brought back to neutral levels faster than if policymakers acted under the assumption of low inflation persistence (Slide 16, left-hand side).
Second, it is very costly to react only after upside risks to inflation have materialised, as this could destabilise inflation expectations and thus require a sharper contraction in output to restore price stability (Slide 16, right-hand side).
A monetary policy stance that errs on the side of determination “insures” against costly policy mistakes caused by inflation being more persistent than expected. Such an approach is called “robust”.[35]
Simple Taylor-type policy rules offer another angle to illustrate the monetary policy implications of underestimating inflation persistence. These rules have well-known limitations, so that their predicted interest rate levels should not be taken at face value. Nevertheless, they yield useful insights about the directional bias of policy when facing inflation uncertainty.
These rules suggest that the optimal interest rate path would have been steeper, and outside the range of paths prescribed by a variety of rules at the time, had we been able to correctly anticipate the future path of inflation in June 2022 (Slide 17, left-hand side).
This also has implications for policy today, as inflation forecast errors correlate strongly over time, as shown by a recent analysis by the Bank for International Settlements (Slide 17, right-hand side).[36] In other words, the fact that we underestimated inflation persistence last year raises the probability that we are also underestimating inflation today.[37]
These findings confirm new research showing that a narrow reliance on projections can lead to large policy mistakes, and that, as a result, giving more weight to observable data, in particular at times of high uncertainty, can improve the quality of policy decisions.[38]
Taken together, this means that we need to remain highly data-dependent and err on the side of doing too much rather than too little. Risks of both a de-anchoring of inflation expectations and weaker monetary policy transmission suggest that there is a limit to how long inflation can stay above our 2% target.
We thus need to keep raising interest rates until we see convincing evidence that developments in underlying inflation are consistent with a return of headline inflation to our 2% medium-term target in a sustained and timely manner.
Thank you.
Compliments of the European Central Bank.
Footnotes:
1. See ECB (2023), Eurosystem staff macroeconomic projections for the euro area.
2. Core inflation is defined as the Harmonised Index of Consumer Prices inflation excluding food and energy.
3. This result is based on the ECB’s experimental wage tracker, covering seven euro area countries (Germany, France, Italy, Spain, the Netherlands, Austria and Greece).
4. See Arce, Ó. et al. (2023), “How tit-for-tat inflation can make everyone poorer”, ECB Blog, 30 March.
5. See also Schnabel, I. (2023), “Monetary and financial stability – can they be separated?”, speech at the Conference on Financial Stability and Monetary Policy in the honour of Charles Goodhart, London, 19 May.
6. See Schnabel, I. (2022), “A new age of energy inflation: climateflation, fossilflation and greenflation”, speech at a panel on “Monetary Policy and Climate Change” at The ECB and its Watchers XXII Conference, Frankfurt am Main, 17 March.
7. This year, Europe saw its second warmest winter on record. The Western Mediterranean faces severe droughts and water levels in major rivers are close to record lows.
8. McCracken, M. and Khánh Ngân, T. (2023), “What Do Components of Key Inflation Measures Say about Future Inflation?”, The Economy Blog, 25 May.
9. For seminal contributions, see Nelson, C. and Plosser, C. (1982), “Trends and random walks in macroeconomic time series: some evidence and implications”, Journal of Monetary Economics, Vol. 10(2), pp. 139-162, and Blanchard, O. and Summers, L. (1986), “Hysteresis and the European unemployment problem”, NBER Macroeconomics Annual 1986, Vol. 1, MIT Press.
10. Yagan, D. (2019), “Employment Hysteresis from the Great Recession”, Journal of Political Economy, Vol.127(5), pp.2505-2558.
11. See also Arce, Ó. et al. (2023), “More jobs but fewer working hours”, ECB Blog, 7 June.
12. Sectoral composition effects can also explain the more moderate recovery in total hours worked. See Arce, Ó. et al. (2023, ibid).
13. Labour hoarding may also have contributed to lower average hours worked.
14. Recorded as being on sick leave on the first day of the month. According to working time accounts of the German Institute of Employment Research, working hours lost per employee therefore increased to 91 hours in 2022 compared with 68 hours in 2021, an increase of around a third. Available evidence from other larger euro area countries is more limited, but also points to increases in sick leaves in 2022. In Italy, the total number of sick leave days increased in 2022 by 34% compared with the previous year. In France, the number of employees with at least one day of sick leave is reported to have increased by about 11% in 2022 compared with 2021. Information for sick leaves in Spain point to an increase of average monthly sick leave per employee by 30% in 2022 compared with 2021.
15. The causes may run deeper, however, and may be more difficult to reverse. In the United States, for example, significant measures are being taken to address the unprecedented mental health crisis facing adults and young people alike. See US Department of Health and Human Services (2023): Fact Sheet: Celebrating Mental Health Awareness Month 2023, 3 May.
16. In February, the European Parliament approved a new law banning the sale of internal combustion engines in cars from 2035 in an effort to become climate-neutral by 2050. As a result, in the second quarter of 2022, registration levels for combustion engine vehicles were 58.4% lower than at the beginning of 2018.
17. See, for example, IMF (2023), “Europe’s Balancing Act: Taming Inflation without a Recession”, Regional Economic Outlook.
18. Fornaro, L. and Wolf, M. (2023), “The scars of supply shocks: Implications for monetary policy”, Journal of Monetary Economics. The analysis also highlights the important role of fiscal policy in ensuring price stability in the face of adverse supply-side shocks.
19. This effect may be compounded by the absence of “creative destruction” during the crisis and increased spending on making supply chains more robust rather than more efficient.
20. The International Monetary Fund calculated that additional fiscal consolidation of 2.5 percentage points of GDP until 2025 would reduce the policy rate required to restore price stability by 30 to 50 basis points. See Krammer, A. (2023), “Working in Concert to Defeat Inflation”, speech in Tivat, Montenegro, 26 May.
21. See Jarociński, M. and Karadi, P. (2022), “Deconstructing Monetary Policy Surprises — The Role of Information Shocks”, American Economic Journal: Macroeconomics, Vol. 12(2), pp. 1–43.
22. See Darracq-Paries et al. (2023), “A model-based assessment of the macroeconomic impact of the ECB’s monetary policy tightening since December 2021”, Economic Bulletin, Issue 3, ECB.
23. While these developments have been dominated by changes in the inflation risk premium, there have also been notable shifts in genuine inflation expectations. Moreover, changes in risk premia are not irrelevant for monetary policy as they may signal an impending shift in the belief of investors.
24. See Banca d’Italia (2023), Economic Bulletin, April. Current high levels could be related to extrapolative behaviour of firms, confirming the relevance of adaptive expectations; see Visco, I. (2023), “Inflation expectations and monetary policy in the euro area”, Robert Mundell Distinguished Address, 23 March. Since the Banque de France started conducting a quarterly survey among firms in 2022, the respondent firms have been expecting inflation three to five years ahead to be 3%.
25. A survey in France finds that while firms’ inflation expectations show a positive bias, it is significantly smaller than that shown by households. See Savignac, F. et al. (2021), “Firms’ inflation expectations: new evidence from France”, NBER Working Paper, No 29376.
26. Inflation perceptions refer to developments over the past 12 months. Inflation expectations refer to developments over the next 12 months. See also Meyler, A. and Reiche, L. (2021), “Making sense of consumers’ inflation perceptions and expectations – the role of (un)certainty”, Economic Bulletin, Issue 2, ECB.
27. The same gap emerges when using qualitative data from the ECB’s Consumer Expectations Survey.
28. See also Cœuré, B. (2019), “The rise of services and the transmission of monetary policy”, speech at the 21st Geneva Conference on the World Economy, 16 May.
29. See Galesi, A. and Rachedi, O. (2018), “Services Deepening and the Transmission of Monetary Policy”, Journal of the European Economic Association, pp. 1-33.
30. Bouakez, H., Cardia, E. and Ruge-Murcia, F. (2014), “Sectoral Price Rigidity and Aggregate Dynamics”, European Economic Review, Vol. 65(C), pp. 1-22.
31. Research based on heterogenous agents finds that the general equilibrium effect of monetary policy on labour demand, and hence disposable income, is significantly stronger than the intertemporal substitution channel. See Kaplan, G. et al. (2018), “Monetary Policy According to HANK”, American Economic Review, Vol. 108(3), pp. 697–743.
32. Borio, C. et al. (2023), “The two-regime view of inflation”, BIS Papers, No 133.
33. Bernanke, B. and Blanchard, O. (2023), “What Caused the U.S. Pandemic-Era Inflation?”, paper prepared for a conference on “The Fed: Lessons learned from the past three years” organised by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.
34. IMF (2023, ibid.), and Schnabel, I. (2022), “Monetary policy and the Great Volatility”, speech at the Jackson Hole Economic Policy Symposium organised by the Federal Reserve Bank of Kansas City, Jackson Hole, 27 August.
35. If uncertainty was predominately related to financial fragility, the outcome might be different. However, while risks to financial stability exist, continued high inflation persistence currently remains the largest risk to price stability in the euro area.
36. Mojon, B., Nodari, G. and Siviero, S. (2023), „Disinflation milestones”, BIS Bulletin, No 75.
37. The BIS analysis shows that forecast errors are not only highly correlated but also tend to be similar in size.
38. De Grauwe, P. and Ji, Y. (2022), “On the use of current and forward-looking data in monetary policy: a behavioural macroeconomic approach”, Oxford Economic Papers, Vol. 75(2), pp. 526–552.The post ECB Speech | Isabel Schnabel: The risks of stubborn inflation first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Commission has today proposed new rules to make withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries (e.g. banks) and Member State tax administrations. This initiative – a key element of the Communication on Business Taxation for the 21st Century, and the Commission’s 2020 Action Plan on the Capital Markets Union – will promote fairer taxation, fight tax fraud, and support cross-border investment throughout the EU.
The term “withholding tax” refers, for example, to the situation where an investor resident in one EU Member State is liable to pay tax on the interest or dividends earned in another Member State. This is often the case for cross-border investors. In such a scenario, in order to avoid double taxation, many EU Member States have signed double taxation treaties, which avoid the same individual or company being taxed twice. These treaties allow a cross-border investor to submit a refund claim for any excess tax paid in another Member State.
The problem is that these refund procedures are often lengthy, costly and cumbersome, causing frustration for investors and discouraging cross-border investment within and into the EU. Currently, the withholding tax procedures applied in each Member State are very different. Investors have to deal with more than 450 different forms across the EU, most of which are only available in national languages. The Cum/Ex and Cum/Cum scandals have also shown how refund procedures can be abused: the tax losses from these practices have been estimated at €150 billion for the years 2000-2020.
Key actions proposed today will make life easier for investors, financial intermediaries and national tax authorities:

A common EU digital tax residence certificate will make withholding tax relief procedures faster and more efficient. For example, investors with a diversified portfolio in the EU will need only one digital tax residence certificate to reclaim several refunds during the same calendar year. The digital tax residence certificate should be issued within one working day after the submission of a request. At present, most Member States still rely on paper-based procedures.

Two fast-track procedures complementing the existing standard refund procedure: a “relief at source” procedure and a “quick refund” system, which will make the relief process faster and more harmonised across the EU. Member States will be able to choose which one to use – including a combination of both.

Under the “relief at source” procedure, the tax rate applied at the time of payment of dividends or interest is directly based on the applicable rules of the double taxation treaty provisions.
Under the “quick refund” procedure, the initial payment is made taking into account the withholding tax rate of the Member State where the dividends or interest is paid, but the refund for any overpaid taxes is granted within 50 days from the date of payment.

These standardised procedures are estimated to save investors around €5.17 billion per year.

A standardised reporting obligation will provide national tax administrations with the necessary tools to check eligibility for the reduced rate and to detect potential abuse. Certified financial intermediaries will have to report the payment of dividends or interest to the relevant tax administration so that the latter can trace the transaction. In particular, large EU financial intermediaries will be required to join a national register of certified financial intermediaries. This register will also be open to non-EU and smaller EU financial intermediaries on a voluntary basis.  Taxpayers investing in the EU through certified financial intermediaries will benefit from fast-track withholding tax procedures and avoid double taxation on dividend payments. The more financial intermediaries register, the easier it will be for tax authorities to process refund requests, regardless of the procedure used.

Next steps
Once adopted by Member States, the proposal should come into force on 1 January 2027.
Background
Today’s proposal is just one of the Commission’s initiatives aimed at simplifying procedures for businesses and fighting abusive tax practices. In December 2022, Finance Ministers adopted the Commission proposal a for Council Directive on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the EU. Moreover, in May 2023, a political agreement was reached on new tax transparency rules for all service providers facilitating crypto-assets transactions for customers residing in the EU. Today’s proposal is also a key element of the Commission’s Action Plan on the Capital Markets Union 2020.
Compliments of the European Commission.The post Fair and simple taxation: better withholding tax procedures will boost cross-border investment and help fight tax abuse first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Some secrets are so secret that no one knows about them. Until recently that described the secrets locked within our DNA. But a key to consumer confidence in the burgeoning genetic testing marketplace is the extent to which people can depend on a company’s promise that “Your secret’s safe with us.” In its first case focused on the privacy and security of genetic information, the FTC alleges that San Francisco-based Vitagene, Inc. – now known as 1Health.io – failed to live up to its promises and unfairly changed material privacy terms without customers’ consent. The proposed settlement and other recent actions send a loud-and-clear message that the FTC is fully committed to the protection of consumers’ health information.
After consumers paid between $29 and $259, sent a saliva sample to Vitagene, and answered an online questionnaire about their health history, family history, and lifestyle, the company provided them with a personalized Health Report. The Report included the customer’s full name and an assessment of their risks for developing a host of health problems.
Using images of locks, keys, and secure clouds, the company’s website was replete with claims about the care with which it promised to handle consumers’ genetic information. Here are just a few of the company’s pledges.

“We use industry standard security practices to store your DNA sample, your test results, and any other personal data you provide.”
“Rock–solid Security. We use the latest technology and exceed industry-standard security practices to protect your privacy.”
“Vitagene collects, processes, and stores your personal information in a responsible, transparent and secure environment that fosters our customers’ trust and confidence.”
“You’re in control of your data.  You can delete your data at any time. This will remove your information from all of our servers.”

“Three of the ways we protect your privacy:  1. Your results and DNA sample are stored without your name or any other common identifying information. 2. Vitagene destroys your physical DNA saliva sample after it has been analyzed. 3. We don’t share your information with any third party without your explicit consent.”

Nice privacy and security talk, but according to the FTC, Vitagene was more talk than action. You’ll want to read the complaint for details, but part of the story started in the cloud. As a component of its IT infrastructure, Vitagene used a well-known cloud service provider for storing confidential information, including consumers’ Health Reports and DNA data. Vitagene allegedly didn’t use built-in measures to secure the information and instead stored it in “buckets” that made it possible for anyone with internet access to see the detailed Reports of nearly 2,400 Vitagene customers. Also accessible: raw genetic data of at least 227 other customers, sometimes identified by first name. While Vitagene promised to “exceed industry-standard security practices,” the FTC says the company didn’t encrypt that data, didn’t restrict access to it, didn’t monitor access, and didn’t inventory it to help ensure its security. The complaint also charges that Vitagene didn’t take steps to ensure that a lab that analyzed many of the DNA samples had a policy in place to destroy them.
What’s more, the complaint alleges that over a two-year period, Vitagene received three separate warnings that it was storing customers’ health and genetic information in a way that made it publicly accessible. Warning #1: a July 2017 message from the cloud service provider that Vitagene had configured its data “to allow read access from anyone on the Internet.” The email included links to an account console and information about how to restrict access. The response from Vitagene: Crickets.
Warning #2 came from a security company that conducted a web app penetration test in November 2018 and “found that uploaded DNA data was being stored . . . without any access controls.” The complaint alleges that Vitagene again failed to rectify the situation.
Warning #3 was a June 2019 email from a security researcher sent to Vitagene’s support inbox. After the researcher contacted the media, the FTC says the company finally investigated its public exposure of customers’ health information. However, because Vitagene hadn’t monitored who had accessed or downloaded the data, it couldn’t determine who else might have seen the information.
Vitagene’s alleged missteps didn’t end there. In 2020, the company changed its privacy policy by retroactively expanding the types of third parties with which it may share consumers’ data to include grocery chains, dietary supplement manufacturers, and the like. And it did that without notifying customers who provided their data under the former, more restrictive privacy policy and getting their consent.
The complaint charges that the company’s promises that it exceeded industry security standards, stored DNA results without identifying information, deleted data at consumers’ request, and saw to it that physical DNA samples were destroyed were false or misleading. What’s more, the FTC alleges that the company’s after-the-fact privacy policy changes about sharing sensitive personal information with third parties was an unfair practice, in violation of the FTC Act. While Vitagene’s original privacy policy stated that a customer’s access or use of the company’s services after the company posted a revised privacy policy meant that the consumer had accepted the revised terms, that language didn’t  excuse Vitagene from its obligation to give notice and get consumers’ consent before making material retroactive changes to its privacy practices. Furthermore, the complaint alleges that Vitagene’s conduct was unfair even though the company has not yet implemented the broader information sharing practices set forth in its revised privacy policies.
To settle the case, 1health.io has agreed to implement a comprehensive information security program, including every-other-year third-party assessments. In addition, a senior executive must certify annually that the company is complying with the terms of the settlement. The proposed settlement also includes a $75,000 financial remedy. Once the settlement appears in the Federal Register, you’ll have 30 days to file a public comment.
What can other companies take from the FTC’s action?
Sensitive health information – including genetic data – requires intensive care.  If your company collects or maintains consumer health information, you’ve raised the bar on the privacy and security standards you must implement. Take particular care to substantiate the promises you make about your data practices. (By the way, if you haven’t read the FTC’s May 2023 Policy Statement on Biometric Information, set aside time now.)
Just because data is in your possession doesn’t mean it’s yours.  Collecting consumers’ data doesn’t mean you’re free to do with it as you please. Consumers have a right to know in advance how you intend to use their information and you have the legal obligation to live up to your representations. That means if you want to change your practices down the road, a bait-and-switch modification to your privacy policy won’t suffice. You’ll need consumers’ affirmative express consent for any new uses of their data.
When it comes to security, keeping your data in the cloud doesn’t mean you can keep your head in the clouds.  The FTC has long said that storing data in the cloud doesn’t give a company a free pass on security. It’s still your responsibility to take reasonable steps to secure your data – for example, by properly configuring cloud security settings and by inventorying and auditing your cloud storage. As the FTC’s Request for Information about cloud computing makes clear, sellers of cloud technology and the companies that use their services share the responsibility to secure consumers’ personal information.
Respond to credible warnings about potential security lapses. The complaint against Vitagene alleges multiple instances in which the company failed to heed alarms others – including the provider of its cloud storage – had sounded about the security of its cloud-based information. Do you have systems in place to make sure those alerts get to the right people and get the immediate attention they deserve?
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The European Commission has informed Google of its preliminary view that the company breached EU antitrust rules by distorting competition in the advertising technology industry (‘adtech’). The Commission takes issue with Google favouring its own online display advertising technology services to the detriment of competing providers of advertising technology services, advertisers and online publishers.
Google is a US multinational technology company. Google’s flagship service is its search engine Google Search. Google also operates other popular services, such as the video streaming platform YouTube or the mobile operating system Android. Google’s main source of revenue is online advertising: (i) it sells advertising space on its own websites and apps; and (ii) it intermediates between advertisers that want to place their ads online and publishers (i.e. third-party websites and apps) that can supply such space.
Advertisers and publishers rely on the adtech industry’s digital tools for the placement of real time ads not linked to a search query, such as banner ads in websites of newspapers (‘display ads’). In particular, the adtech industry provides three digital tools: (i) publisher ad servers used by publishers to manage the advertising space on their websites and apps; (ii) ad buying tools used by advertisers to manage their automated advertising campaigns; and (iii) ad exchanges where publishers and advertisers meet in real time, typically via auctions, to buy and sell display adds.
Google provides several adtech services that intermediate between advertisers and publishers in order to display ads on web sites or mobile apps. It operates (i) two ad buying tools – “Google Ads” and “DV 360”; (ii) a publisher ad server, “DoubleClick For Publishers, or DFP”; and (iii) an ad exchange, “AdX”.

Image courtesy of the European Commission.
Statement of Objections on Google’s practices in adtech
The Commission preliminarily finds that Google is dominant in the European Economic Area-wide markets: (i) for publisher ad servers with its service ‘DFP’; and (ii) for programmatic ad buying tools for the open web with its services ‘Google Ads’ and ‘DV360′.
The Commission preliminarily finds that, since at least 2014, Google abused its dominant positions by:

Favouring its own ad exchange AdX in the ad selection auction run by its dominant publisher ad server DFP by, for example, informing AdX in advance of the value of the best bid from competitors which it had to beat to win the auction.
Favouring its ad exchange AdX in the way its ad buying tools Google Ads and DV360 place bids on ad exchanges. For example, Google Ads was avoiding competing ad exchanges and mainly placing bids on AdX, thus making it the most attractive ad exchange.

Image courtesy of the European Commission.
The Commission is concerned that Google’s allegedly intentional conducts aimed at giving AdX a competitive advantage and may have foreclosed rival ad exchanges. This would have reinforced Google’s AdX central role in the adtech supply chain and Google’s ability to charge a high fee for its service.
If confirmed, those conducts would infringe Article 102 of the Treaty on the Functioning of the European Union (‘TFEU’) that prohibits the abuse of a dominant market position.
The Commission preliminarily finds that, in this particular case, a behavioural remedy is likely to be ineffective to prevent the risk that Google continues such self-preferencing conducts or engages in new ones. Google is active on both sides of the market with its publisher ad server and with its ad buying tools and holds a dominant position on both ends. Furthermore, it operates the largest ad exchange. This leads to a situation of inherent conflicts of interest for Google. The Commission’s preliminary view is therefore that only the mandatory divestment by Google of part of its services would address its competition concerns.
The sending of a Statement of Objections does not prejudge the outcome of an investigation.

Image courtesy of the European Commission.
Background
Article 102 of the TFEU prohibits the abuse of a dominant position. The implementation of these provisions is defined in the Antitrust Regulation (Council Regulation No 1/2003), which can also be applied by the national competition authorities.
On 22 June 2021, the Commission opened formal proceedings into possible anticompetitive conduct by Google in the online advertising technology sector
A Statement of Objections is a formal step in Commission investigations into suspected violations of EU antitrust rules. The Commission informs the parties concerned in writing of the objections raised against them. The addressees can examine the documents in the Commission’s investigation file, reply in writing and request an oral hearing to present their comments on the case before representatives of the Commission and national competition authorities. Sending a Statement of Objections and opening of a formal antitrust investigation does not prejudge the outcome of the investigations.
If the Commission concludes, after the company has exercised its rights of defence, that there is sufficient evidence of an infringement, it can adopt a decision prohibiting the conduct and imposing a fine of up to 10% of the company’s annual worldwide turnover.
Where the Commission, finds that there is an infringement of Article 101 or of Article 102 of the TFEU, it may by decision require the company concerned to bring such infringement to an end. For this purpose, it may impose on them any behavioural or structural remedies which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end. Structural remedies can only be imposed either where there is no equally effective behavioural remedy or where any equally effective behavioural remedy would be more burdensome for the company concerned than the structural remedy.
There is no legal deadline for bringing an antitrust investigation to an end. The duration of an antitrust investigation depends on a number of factors, including the complexity of the case, the extent to which the undertakings concerned cooperate with the Commission and the exercise of the rights of defence.
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EU health ministers have set out the Council’s position on a regulation to modernise and simplify the structure of the fees payable to the European Medicines Agency (EMA) to better reflect the evolving demands and challenges it faces. The general approach approved today will enable the Council to start negotiations with the European Parliament.

The European Medicines Agency and national competent authorities play vital roles in protecting and promoting public and animal health. Today EU health ministers endorsed an approach that will enable this work to continue, supported by a fee system that is modern, straightforward and sufficiently flexible to adapt to future developments.
Jakob Forssmed, Swedish Minister for Social Affairs and Public Health

Aims of the new rules
The proposed regulation aims to update the existing legislation governing fees charged by EMA. It will ensure that fees and remuneration are cost-based, flexible, and ensure adequate funding to guarantee the future sustainability of operations of the EMA while also providing sufficient support to member states’ national competent authorities (NCAs). The proposal also seeks to reduce the complexity of the current legal framework.
Why does EMA’s fee structure need updating?
EMA plays a crucial role in evaluating and supervising medicines, with the wider goal of benefitting human and animal health.
In order to deliver on its mission, the agency needs a sound financial basis to support its operations, yet the existing fee structure is increasingly complex and no longer reflects the nature of the work and challenges involved. It is also necessary to remunerate the fundamental contribution of NCAs in a sustainable way.
The position of the Council
The Council’s general approach maintains the key elements of the Commission’s proposal, including the transition to a cost-based approach. Nevertheless, it fine-tunes the provisions for adjusting EMA’s fees and remuneration, ensuring that NCAs’ costs will be covered.
The general approach also clarifies some of the measures relating to flexibility, which allow for further changes to be made to the fee system at a later date. Specifically, the Council has expanded the role of EMA’s management board updating the fees.
Next steps
Today’s general approach provides the upcoming Spanish presidency of the Council with a mandate to begin negotiations with the European Parliament, with a view to reaching a provisional agreement.
Background
EMA’s existing fee system has been in place for almost two decades, during which time it has become increasingly complex. A recent evaluation of the system identified five key issues, including misalignment of some of the fees with the underlying costs, a lack of remuneration for certain procedural activities, and discrepancies between relevant legal provisions.
On 13 December 2022, the Commission published a proposal for a regulation revising the existing EMA fees system. The proposal has three objectives:

to move from a flat-rate system to a cost-based system for EMA fees
to ensure the sustainability of the European regulatory network formed by the EMA and National Competent Authorities (NCAs)
to simplify existing legislation by merging the content of the two current EMA fee regulations for pharmacovigilance and non-pharmacovigilance fees into one single legal instrument

Health ministers discussed the proposal and the Council’s position at the EPSCO Council on 14 March 2023.
Compliments of the European Council, the Council of the European Union.The post European Medicines Agency: EU Council agrees approach on a more modern and simplified fee structure first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

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.
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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.