Tomorrow, the European Centre for Algorithmic Transparency (ECAT) will be officially inaugurated by the Commission’s Joint Research Centre in Seville, Spain. The inauguration will be marked with a launch event that will be broadcast here.
The event brings together representatives from EU institutions, academia, civil society and industry to discuss the main challenges and the importance at a societal level of having oversight of how algorithmic systems are used. Following a video message by Commissioner for the Internal Market Thierry Breton, the audience will dive into the current and planned work of ECAT, including a preliminary showcase of its potential through live demos.
The role of ECAT under the Digital Services Act
The Digital Services Act imposes risk management requirements for companies designated by the European Commission as Very Large Online Platforms and Very Large Online Search Engines. Under this framework, designated platforms will have to identify, analyse and mitigate a wide array of systemic risks on their platforms, ranging from how illegal content and disinformation can be amplified through their services, to the impact on the freedom of expression or media freedom. Similarly, specific risks around gender-based violence online and the protection of minors online and their mental health must be assessed and mitigated. The risk mitigation plans of designated platforms’ and search engines will be subject to an independent audit and oversight by the European Commission.
ECAT will provide the Commission with in-house technical and scientific expertise to ensure that algorithmic systems used by the Very Large Online Platforms and Very Large Online Search Engines comply with the risk management, mitigation and transparency requirements in the DSA. This includes, amongst other tasks, the performance of technical analyses and evaluations of algorithms. An interdisciplinary team of data scientists, AI experts, social scientists and legal experts will combine their expertise to assess their functioning and propose best practices to mitigate their impact. This will be crucial to ensure the thorough analysis of the transparency reports and risk self-assessment submitted by the designated companies, and to carry out inspections to their systems whenever required by the Commission.
This mission could not be attained without proper research and foresight capacity, which are also inherent to ECAT’s approach. JRC researchers will build on and further advance their longstanding expertise in the field of Artificial Intelligence (AI), which has already been instrumental in the preparation of other milestone pieces of regulation like the AI Act, the Coordinated Plan on AI and its 2021 review. ECAT researchers will not only focus on identifying and addressing systemic risks stemming from Very Large Online Platforms and Very Large Online Search Engines, but also investigate the long-term societal impact of algorithms.
Background
On 15 December 2020, the Commission made the proposal on the DSA together with the proposal on the Digital Markets Act (DMA) as a comprehensive framework to ensure a safer, more fair digital space for all. Following the political agreement reached by the EU co-legislators in April 2022, the DSA entered into force on 16 November 2022. The deadline for platforms and search engines to publish the number of their monthly active users was on 17 February 2023. The Commission is now in process of analysing the publications with a view to designating Very Large Online Platforms and Very Large Online Search Engines, which will have four months from the designation to comply with all DSA obligations and in particular to submit their first risk assessment. By 17 February 2024 the DSA will apply to all intermediary services; by the same date Member States are required to appoint Digital Services Coordinators.
The DSA applies to all digital services that connect consumers to goods, services, or content. It creates comprehensive new obligations for online platforms to reduce harms and counter risks online, introduces strong protections for users’ rights online, and places digital platforms under a unique new transparency and accountability framework. Designed as a single, uniform set of rules for the EU, these rules will give users new protections and businesses legal certainty across the whole single market. The DSA is a first-of-a-kind regulatory toolbox globally and sets an international benchmark for a regulatory approach to online intermediaries.
Compliments of the European Commission.The post DSA enforcement: EU Commission launches European Centre for Algorithmic Transparency first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Statement by Christine Lagarde, President of the ECB, at the forty-seventh meeting of the International Monetary and Financial Committee | IMF Spring Meetings, 14 April 2023 |
Introduction
Since the October meeting, the global economic outlook has improved on the back of a gradual easing of global supply bottlenecks, declining energy prices, and the recovery of the Chinese economy following the lifting of pandemic-related containment measures. Global inflation has also been declining since it peaked in summer 2022, supported by easing supply constraints, as well as by the tightening of monetary policy among advanced economies. However, the recovery prospects for the global economy remain fragile amid continued uncertainty, fuelled by Russia’s unjustified war against Ukraine, and the possibility that pressures in global energy and food markets may reappear, leading to renewed price spikes and higher inflation. Resilient labour markets and strong wage growth, especially in advanced economies, suggest that underlying inflationary pressures remain strong. At the same time, other factors that may accelerate disinflation include: persistently elevated financial market tensions, falling energy prices, and a weakening of demand, owing also in part to a stronger deceleration of bank credit or a stronger than projected transmission of monetary policy.
As inflation is projected to remain too high for too long, the Governing Council of the ECB decided in March to raise the key ECB interest rates by 50 basis points, bringing the total increase since July 2022 to 350 basis points. These increases underline our determination to ensure the timely return of inflation to our two per cent medium-term target. The elevated level of uncertainty reinforces the importance of a data-dependant approach to our policy rate decisions, which will be determined by our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission. The asset purchase programme portfolio has been declining at a measured and predictable pace since March 2023, as the Eurosystem is no longer reinvesting all of the principal payments from maturing securities. Regarding the pandemic emergency purchase programme, the Governing Council intends to reinvest all principal payments from maturing securities purchased under it until at least the end of 2024 and will continue applying flexibility in reinvesting redemptions.
We are monitoring current market tensions closely and stand ready to respond as necessary to preserve price stability and financial stability in the euro area. The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, our policy toolkit fully equips us to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.
Economic activity
Growth in euro area GDP slowed progressively over the course of last year and stagnated in the fourth quarter. Employment growth also slowed in 2022, but remained resilient in the fourth quarter despite the moderation in economic activity, while the unemployment rate remained at a record low level. Survey data into the first quarter of this year suggested some improvement in activity and confidence in the first quarter of 2023. Under the baseline scenario in the ECB staff projections (which were finalised before the emergence of financial market tensions in mid-March 2023), the euro area economy looks set to recover over the coming quarters as the labour market remains strong, supply bottlenecks are resolved, and inflation moderates.
Risks to the growth outlook are tilted to the downside. Persistently elevated financial market tensions could tighten broader credit conditions more strongly than expected and dampen confidence. Russia’s unjustified war against Ukraine and its people continues to be a significant downside risk to the economy and could again push up the costs of energy and food. Euro area growth could also be dragged down if the world economy weakened more sharply than expected. However, if companies can adapt more quickly to the challenging international environment, this, coupled with the fading-out of the energy shock, could support higher growth than currently expected.
Government support measures to shield the economy from the impact of high energy prices should be temporary, targeted, and tailored to preserving incentives to consume less energy. As energy prices fall and risks around the energy supply recede, it is important to start rolling back these measures promptly and concertedly. Falling short of these principles can drive up medium-term inflationary pressures, which would call for a stronger monetary policy response. Moreover, fiscal policies should be oriented towards making economies more productive and gradually reducing high public debt. Finally, countries should implement structural policies for intensifying their efforts to green and digitalise their economies.
Inflation
Euro area headline inflation declined from its October peak, reflecting a drop in energy inflation. Downward base effects, an easing of energy commodity prices, and the impact of government measures to shield consumers from high energy prices all contributed to this decline. By contrast, food and core inflation rates continued to rise, partly as a result of the past surge in energy and other input costs still feeding through to consumer prices. Pent-up demand related to the reopening of the economy and the lagged impact of supply bottlenecks also continue to push prices up. At the same time, employees demanding compensation for the loss in purchasing power amid tight labour markets has translated into higher wage growth, while many firms in sectors facing constrained supply and resurgent demand raised their profit margins.
We expect euro area inflation to continue to fall, as lagged price pressures fade out and tighter monetary policy increasingly dampens demand. However, historically high wage growth, related to tight labour markets and compensation for high inflation, will support core inflation over the projection horizon, as it gradually returns to rates around our target. This outlook remains surrounded by considerable uncertainty, with both upside and downside risks. Stronger than expected pipeline pressures or higher than anticipated increases in wages or profits could drive up inflation, while financial market tensions and falling energy prices could lead to faster disinflation. At the same time, most measures of longer-term inflation expectations currently stand at around two per cent, although they warrant continued monitoring.
Euro area banking sector, non-bank financial sector and financial stability
Euro area banks remain resilient in the current market environment thanks to strong capital and liquidity positions. Since the start of the ECB’s policy rate hiking cycle, euro area bank profitability has been boosted by higher interest margins, while the change in impairments and provisions has been rather muted so far. However, in the current environment of tightening financing conditions including for banks, credit risks have increased, and lending dynamics have substantially weakened, which may weigh on future bank profitability.
The decrease in bank lending to firms has, in general, not been offset by an increased recourse of firms to market-based financing, despite a bout of corporate bond issuance in the fourth quarter of 2022. Looking ahead, the decline in the asset purchase programme portfolio will increase the share of debt issuance that needs to be absorbed by investors. Based on their past behaviour, investment funds appear able to absorb part of such an increase. At the same time, in spite of some reduction in exposure to higher-risk assets, structural vulnerabilities in the non-bank financial sector remain elevated. Risks in that sector may arise especially from liquidity mismatch and leverage, which could adversely affect market conditions should risks materialise. Priority should be given to policies that help build resilience by reducing liquidity mismatch, mitigating risk from non-bank financial sector leverage, and enhancing liquidity preparedness in the broader non-bank financial sector.
International support for Ukraine and most vulnerable countries
We welcome the IMF’s continued support for Ukraine, including the recently approved fully fledged lending arrangement. Together with strong international support, the arrangement will be essential for addressing Ukraine’s immediate financial needs and in catalysing additional financial assistance. We note that all adjustments to the IMF’s lending policies and toolkit are uniformly applicable to those meeting the relevant criteria from the Fund’s broad membership.
In view of rising debt vulnerabilities, support for vulnerable countries remains high on the international agenda. We welcome the first successful conclusion of debt restructuring under the G20-Paris Club Common Framework last year and encourage debt treatments of other applicant countries to be finalised promptly. Efficient creditor coordination and debt transparency remain key.
We note strong demand for Resilience and Sustainability Trust (RST) financing, following its successful launch in late 2022, and welcome the good progress achieved. Initiatives to ensure the resource adequacy of the RST and the Poverty Reduction and Growth Trust should maintain the reserve asset character of claims on the loan and deposit accounts of these trusts. This is essential for contributions made by EU national central banks. However, we note that the channelling of special drawing rights by EU national central banks to multilateral development banks or individual countries would not be compatible with the EU’s legal framework.
Supporting international cooperation and strengthening the global economy
Recent global shocks and geopolitical tensions have advanced the debate about reconfiguring global supply chains. While the increased resilience associated with less complex supply chains is desirable, a less integrated world economy also entails costs. It weakens the diversification of global production and, in particular, the efficient allocation of resources globally, which has an adverse impact on welfare across the world. Geopolitical fragmentation may also affect the global economy via financial channels. The availability of external financing may be impeded, and lower foreign direct investment would hinder the diffusion of technology and thus productivity growth.
All of these developments require our immediate attention; however, we are not losing sight of longer-term challenges and are keeping up our efforts to address the existential crisis of climate change. As part of our action plan to incorporate climate change considerations in our monetary policy framework, we decided to tilt corporate bond holdings towards issuers with better climate performance, through the reinvestment of redemptions starting in October 2022. Our climate-related financial disclosures showed last month that this effort was helping reduce the carbon footprint of our corporate sector portfolios. In addition, we are adjusting the collateral framework, introducing climate-related disclosure requirements, and enhancing risk management practices. Recently, we have also issued statistical indicators for climate-related analysis. Moreover, tackling climate-related and environmental risks is one of the ECB’s key supervisory priorities for 2023-25. Supervisors have set institution-specific remediation timelines for achieving full alignment with supervisory expectations by the end of 2024 and will follow up on the deficiencies identified in stress tests and thematic reviews performed in 2022.
The investigation phase of the digital euro project is on track. In the autumn, we expect to decide on the next project phase, in which the appropriate technical solutions and business arrangements necessary to provide a digital euro would be developed and tested. While a digital euro would focus first on the domestic retail payments market in Europe, we are already discussing at the international level the potential of cross-currency and cross-border payments made in retail central bank digital currency (CBDC). There is agreement that CBDC should eventually contribute to improving cross-border payments. As global work on CBDC accelerates, international cooperation in this field will become even more important.
Compliments of the European Central Bank.The post ECB | Christine Lagarde: IMFC Statement first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Governor Lisa D. Cook at the 2023 Midwest Economics Association 87th Annual Meeting, Cleveland, Ohio | March 31, 2023 |
Thanks to President Kasey Buckles and the program committee for affording me the opportunity to give the C. Woody Thompson Memorial Lecture. It is a pleasure to be back in the Midwest. Before joining the Federal Reserve, I taught economics at Michigan State University, which I chose for its bird’s-eye view of the industrial Midwest. Big 10 rivalries aside, Ohio and Michigan share quite a lot, including many of the same economic concerns and interests.
Today I would like to outline my views on the trajectory of U.S. economic developments and what they imply for the appropriate path of monetary policy.1
This is an especially challenging time to be an economic analyst or policymaker. Recent developments in the banking sector have added to existing uncertainties about recovery from the pandemic shock and developments abroad. In that context, the economic and policy outlook needs to balance data dependence with forward-looking analysis. Recent data show greater momentum in inflation and economic activity, but recent banking developments may suggest greater headwinds for financial conditions and the economy going forward.
The U.S. economy
Assessing the current state of the economy requires revisiting the pandemic and its economic repercussions. From the perspective of the NBER Business Cycle Dating Committee, the 2020 recession was unprecedented. Of the 35 recessions since 1858, only 8 spanned months in the single digits from peak to trough. The one in 2020 was severe, but it spanned only two months from peak to trough and was the shortest recession on record.
However, the pandemic’s economic effects reverberated through 2021 and 2022. Inflation surged during the recovery amid pandemic-induced disruptions to supply, while demand for goods was boosted by a shift away from in-person services, and overall demand was supported by monetary and fiscal policy. Russia’s invasion of Ukraine in February 2022 was a further supply shock to the global economy, driving up prices for energy and other commodities. Last June, U.S. inflation hit a peak of 7 percent as measured by the 12-month change in the personal consumption expenditures (PCE) index.
In response, the Federal Reserve has been using its monetary policy tools to restore price stability by bringing demand into line with still-constrained supply. Over the past year, we have raised the federal funds rate nearly 5 percentage points and have begun to reduce the size of our balance sheet.
As a result, financial conditions have tightened significantly. Borrowing costs have risen, equity prices have declined, and the dollar has appreciated on net.
Interest-sensitive sectors of the economy have slowed. Residential investment subtracted nearly 1 percentage point from gross domestic product growth last year, as housing demand was curtailed by higher mortgage rates. Business fixed investment held up last year but appears to have slowed more recently. Manufacturing activity has slowed in response to tighter financing conditions, the stronger dollar, and some retracement of the pandemic-related shift from services to goods.
As energy prices have moderated and supply disruptions have eased, inflation has started to abate. However, the process of returning inflation to 2 percent has a long way to go and is likely to be uneven and bumpy.
Indeed, the inflation picture is less favorable than it appeared earlier this year. Part of the encouraging disinflation initially observed in the fourth quarter of last year was revised away, while inflation over the first two months of this year came in high.
The inflation data show some persistence. The 3-, 6-, and 12-month changes in February prices for the core PCE index—excluding food and energy—are all around 4-1/2 to 5 percent. Housing services inflation continues at a rapid monthly clip, contributing much more to inflation than it did before the pandemic. Inflation in non-housing core services remains sticky at elevated levels. Even core goods prices rose in January and February, after three months of declines, highlighting the uneven nature of the disinflationary process.
Even so, several factors are likely to contribute to disinflation. Long-term inflation expectations remain well anchored, and shorter-term expectations have retraced much of last year’s rise.2 Rent increases on new leases have slowed sharply over the past six months, which should begin to pull down measured housing-services inflation over the course of this year. Moreover, significant supply of multifamily housing is coming online, which should take further pressure off the rental market.
Core goods inflation should continue converging toward its pre-pandemic trend of slightly negative numbers, as supply chains continue to heal and demand for goods continues to slow. Rebounding automobile production should help prices for new and used cars continue to moderate as cars become more available. More broadly in the economy, profit margins may narrow as buyers become more price sensitive and pull back on spending. Earnings calls from nonfinancial corporations already show increasing awareness of resistance to price increases.
Non-housing core services inflation is a broad category that accounts for more than half of the core PCE index. Inflation in that category looks quite persistent amid strong post-pandemic demand for travel, dining out, and medical care. Disinflation in these services will likely require some combination of slowing demand and further recovery in supply.
One potential avenue of disinflation is that a decline in prices for some goods may help lower related services prices. For instance, an eventual retreat in car prices may feed into lower prices for car insurance, repairs, and rentals, reversing some of their increases over the past two years.
Another potential source of disinflation is that wage growth has moderated somewhat, even as the labor market remains very strong by most measures. Payroll employment growth was extraordinarily robust in January and February, unemployment remains near record lows, and job openings remain very elevated.
Nonetheless, there are some signs that the labor market is softening at the margin. The Federal Reserve Board staff’s measure of private employment using data from the payroll processing firm ADP suggests that job gains slowed in January and February. Job postings from Indeed show a noticeable decline. And the quits rate has retraced more than half of its pandemic-era rise, falling steadily from a 3 percent peak in late 2021 to 2.5 percent in January. That could be significant, as much of the surge in wage growth a year ago may have been driven by outsized wage gains of those changing jobs and by employers raising wages to retain existing workers.
This wage moderation may partly reflect some improvement in labor supply. Labor force participation edged up to 62.5 percent in the most recent data. Prime-age participation is now back to pre-pandemic levels. In addition, new estimates show higher population growth over the past year amid a rebound in immigration.
Over time, there is reason to believe that rising productivity also may aid supply. I see three potential sources of rising productivity growth.
First, increased innovation associated with the spurt of new businesses since the onset of the pandemic may raise productivity. Second, current labor shortages are spurring increased investment in automation that should boost labor productivity over time. Finally, a recent paper by David Autor, Arin Dube, and Annie McGrew suggests another way that the strong labor market could boost productivity.3 They find that faster wage gains for lower-paid workers have come from job-switching to higher-wage firms, which may also be more-productive firms.
Currently, however, supply in the economy continues to be insufficient to meet still-robust demand. Importantly, consumer spending has gained steam this year after slowing late last year. Consumer spending is being supported by robust growth in households’ real disposable income amid strong employment growth. Strong household balance sheets have also supported spending, although lower-income consumers appear to have mostly exhausted their excess savings.
Altogether, the incoming data would suggest a somewhat higher inflation rate for this year and stronger economic growth. However, I am closely watching developments in the banking sector, which have the potential to tighten credit conditions and counteract some of that momentum.
The U.S. banking system is sound and resilient. The Federal Reserve, working with other agencies, has taken decisive actions to protect the U.S. economy and to strengthen public confidence in our banking system. We will continue to closely monitor conditions in the banking system and are prepared to use all our tools, as needed, to keep the system safe and sound.
At the same time, I am monitoring overall financial conditions in the U.S. economy, including indicators of credit availability. I am well aware of the extensive literature linking monetary policy, credit conditions, economic activity, and inflation. Over the past 15 years, that literature came to be roughly a quarter of the syllabus in the macroeconomics class that I taught.
A particular focus over my career, including in my December NBER paper with Matt Marx and Emmanuel Yimfor, is the importance of smaller financial institutions in lending to small and medium-sized firms.4 Those smaller banks over time have developed relevant expertise in small-business lending and have worked to maintain relationships with small firms. Thus, I am attentive to whether recent banking developments will restrain credit to small businesses, which could slow innovation and growth in potential output over time.
Data dependence and monetary policy
Turning to monetary policy, I have said frequently that my approach to policymaking in uncertain times is to be data dependent. And, like everyone, my own research and experiences shape my views on setting that policy. I was at the Council of Economic Advisers during the euro-area crisis, and my work on emerging economies—particularly Russia and some African economies—has taught me how difficult it can be to forecast in highly uncertain environments.
Taking all these lessons into account, I approach all our monetary policy discussions with the same mindset:

Be prepared to adjust the outlook based on incoming data while being humble about our ability to draw firm conclusions and thus not overreacting to a few data points.
Seek out useful data sources, including high-frequency data that may better capture evolving economic developments.
And follow a risk-management approach that considers not only the expected outcomes, but also various risks to the outlook.

Of course, it is tempting to follow the old adage of “never make predictions, especially about the future.” But ultimately, policymaking must be forward-looking, which means relying, at least in part, on forecasts. The challenge is to figure out which models apply. For example, when I began studying banks in the post-Soviet era for my dissertation, I found that the standard models used in normal times and for mature, industrialized economies are less useful in highly uncertain environments.
Since my first FOMC meeting last June, my data-dependent, risk-management approach has led me to support the Fed’s response of frontloading monetary policy tightening to bring inflation under control.
After the swift policy response of the past year, monetary policy is now in restrictive territory. For instance, real interest rates are positive across the yield curve.5
Going forward, I am weighing the implications of stronger momentum in the economy against potential headwinds from recent developments. On the one hand, if tighter financing conditions restrain the economy, the appropriate path of the federal funds rate may be lower than it would be in their absence. On the other hand, if data show continued strength in the economy and slower disinflation, we may have more work to do.
The FOMC has been raising rates in smaller increments as we seek a sufficiently restrictive monetary policy stance to return inflation to 2 percent over time. By taking smaller steps, we can observe economic and financial conditions and consider the cumulative effects of our policy actions.
For the econometricians, this approach is similar to the iterative procedure in maximum likelihood estimation, where large early steps are followed by smaller steps as you approach the local optimum.
In its March policy statement, the FOMC dialed back its forward guidance on the path of the policy rate.6 We shifted from anticipating “ongoing increases” to saying that “some additional policy firming may be appropriate.” I think this communication is appropriate as we seek to calibrate monetary policy to be sufficiently restrictive amid uncertainty about the economic outlook.
Yet what should not be uncertain is our commitment to our dual-mandate goals of maximum employment and price stability. We will do what it takes to bring inflation back to our 2 percent target over time, which will lay the foundation for sustainable strength in the labor market and the U.S. economy.

1. These views are my own and do not necessarily reflect those of the Federal Reserve Board or the Federal Open Market Committee. Return to text

2. As shown, for example, in surveys from the University of Michigan and the Federal Reserve Bank of New York. Return to text

3. See David Autor, Arindrajit Dube, and Annie McGrew (2023), “The Unexpected Compression: Competition at Work in the Low Wage Labor Market,” NBER Working Paper Series 31010 (Cambridge, Mass.: National Bureau of Economic Research, March). Return to text

4. See Lisa D. Cook, Matt Marx, and Emmanuel Yimfor (2022), “Funding Black High-Growth Startups,” NBER Working Paper Series 30682 (Cambridge, Mass.: National Bureau of Economic Research, November). Return to text

5. These real interest rates are based on prices from Treasury Inflation-Protected Securities (TIPS) and inflation swap markets, as well as survey expectations. Return to text

6. See Board of Governors of the Federal Reserve System (2023), “Federal Reserve Issues FOMC Statement,” press release, March 22. Return to text

Compliments of the U.S. Federal Reserve.The post U.S. FED | Speech by Governor Cook on the U.S. economic outlook and monetary policy first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Sanctions and voluntary boycotts have forced Russia to change its international trade since its invasion of Ukraine. The country has reoriented towards the east, away from Europe. This ECB Blog post sheds light on these shifts. It is the third entry in a series about the economic effects of the war.

Russia’s invasion of Ukraine prompted the EU and its partners[2] to impose wide-ranging sanctions on Russia, including banning exports of certain types of machinery and transport equipment to the country.[3] Many European firms and households also scaled down or entirely froze their trade with Russian firms. As the war dragged on, the EU and G7 also imposed bans and price caps on seaborne imports of Russian oil. The result of these actions has been a fundamental change in Russia’s trade relations with the EU and the rest of the world.[4]
Russia was an important euro area trade partner before the war. In 2021, it was the world’s 11th largest economy[5] and accounted for around 3% of goods exported to the euro area and 5% of goods imported from there. It was particularly important in certain strategic sectors: Russia accounted for around a quarter of EU crude oil imports, close to 40% of EU natural gas imports and almost half of EU coal imports. The country’s role in global markets for energy, raw materials and metal industries also make it important at the start of the production process for global value chains, which also affects trade with the euro area via third countries.[6]
As a result of the war and the sanctions, trade between the euro area and Russia has plunged dramatically. It is now at roughly half of pre-war levels (Chart 1). Euro area exports to Russia fell particularly quickly. In the first months of the war, this reflected declines in exports of both sanctioned and non-sanctioned categories of goods. Since then, however, exports of non-sanctioned categories of goods have gone back towards pre-invasion levels,[7] while exports of sanctioned categories of goods remain low.[8] Imports from Russia fell more gradually. Before the war the euro area mainly imported energy from Russia. Those imports have fallen as the EU progressively banned imports of coal (from August 2022), then crude oil (from December 2022) and, most recently, refined oil products (from February 2023).
Russia has also gradually reduced the flows of natural gas to Europe so that, by February 2023, gas imports from Russia to Europe were 90% lower than their historical average.[9] Europe has replaced gas from Russia with pipeline gas from Norway, Algeria and Azerbaijan, while also substantially increasing its imports of liquified natural gas (LNG), which is mainly transported by sea. Russia’s market power in European energy markets has consequently diminished substantially.

Chart 1
Euro area trade with Russia
(Index, February 2022 = 100)

Sources: Eurostat and ECB staff calculations.
Note: Exports from the euro area to Russia and imports to the euro area from Russia measured in volumes, i.e. adjusted for price developments. Last observation: December 2022.

International sanctions have prompted a significant shift in Russia’s trade patterns. At first the aggregate value of Russia’s imports almost halved as all of its trading partners, not just sanctioning countries, reduced their exports. However, those countries that are not imposing sanctions have since increased their exports to Russia again. By the start of 2023 the value of Russia’s imports had risen almost back to pre-war levels (Chart 2).[10] Russia’s global trade has been significantly reorientated: it trade dependencies have shifted, and its suppliers are geographically much less diverse. As of January 2023, China alone provides almost half of Russia’s goods imports.[11]
While Russia has now largely restructured its supply chains and its goods imports have recovered, what remains unclear is whether the new imports are of the same quality as those that were lost. Russian industry relied heavily on high-tech goods from western trading partners before the war. The sanctions imposed on these products have meant that they are either unavailable, have been replaced by low-quality substitutes, or have become much more expensive. This setback will likely weigh on productivity growth in Russia, reducing the economy’s long-term growth prospects.[12]

Chart 2
Russia has become more dependent on China and other eastern countries for its imports

Sources: Trade Data Monitor, national statistical authorities and ECB staff calculations.
Notes: Based on customs data from 51 of Russia’s main trading partners

Russia’s export patterns have also changed substantially. The country still relies heavily on energy exports. Indeed, the volume of Russian exports of oil, its largest export commodity, has actually increased despite EU and G7 sanctions targeting it. This is because Russia has redirected flows from Europe to China and Türkiye as well as to new trading partners in India, Africa and the Middle East. This larger volume of oil is, however, being offered at a significant discount. Urals grade oil, which is Russia’s main export grade to Europe, traded at USD 48 per barrel on average in February, well below the USD 83 average price per barrel of Brent crude, the global benchmark. Russia’s gas exports by pipeline have proved harder to redirect, as they require extensive infrastructure to export to more distant destinations. Having shut its pipelines to Europe, Russia has only been partially able to offset gas exports by increasing pipeline flows to China and selling more LNG to the world market. Overall, Russian gas exports in 2022 were around 25% lower than in 2021.
In short, the sanctions and voluntary boycotts by European firms in response to Russia’s invasion of Ukraine have led to a considerable diversion of Russian trade with the euro area. This has made Russia more dependent on non-sanctioning trade partners, making the country’s economy more fragile overall. It has also been forced to offer discounts on its commodity exports to attract new customers to replace the euro area. The nature of Russian goods trade also means that re-directing its supply chains will likely lead to a squeeze on productivity growth in the country’s economy. The EU has also had to divert trade as a result of the war, in particular commodities trade away from Russia and thus diversifying its external energy dependency.
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:

By Demosthenes Ioannou, Laura Lebastard, Adrian Schmith, Isabel Vansteenkiste [1]

Compliments of the European Central Bank.

We would like to thank Martina Di Sano and Simone Maso for their support in preparing this blog post.

These partners include Australia, Canada, Japan, New Zealand, Norway, Singapore, South Korea, Switzerland, Taiwan, the United States and the United Kingdom.

Since the invasion, the EU has issued nine packages of sanctions against Russia, including sanctions on individuals and restrictions on the media, transport and financial sectors as well as on trade. Initial trade measures targeted goods and products that serve to enhance Russia’s military, transport and technological sectors. More recent restrictions focused on luxury goods (both imported and exported) and other revenue-generating goods exported by Russia, including coal and oil.

For a broader discussion of geopolitical developments and EU policies, see Ioannou, D., and Pérez, J. J. (co-leads) (2023), “The EU’s Open Strategic Autonomy from a central banking perspective. Challenges to the monetary policy landscape from a changing geopolitical environment”, European Central Bank Occasional Paper Series, No 311, International Relations Committee Workstream on Open Strategic Autonomy, March.

As measured by GDP at market exchange rates.

Indirect EU imports from Russia were about three times as high as direct imports in 2018, according to OECD’s Trade in Value Added database 2021.

Non-sanctioned goods represented about 35% of euro area aggregate exports to Russia before the war.

The granularity of data on goods volumes does not allow a differentiation between sanctioned and non-sanctioning goods at the product level. Instead, we differentiate between broader types of goods that are predominantly subject to sanctions (e.g. transport equipment) and types that are left mainly unsanctioned.

This in turn led European energy import prices to surge. See the ECB Blog post by Arce, O., Koester, G. and Nickel, C. (2023), “One year since Russia’s invasion of Ukraine – the effects on euro area inflation”.

See also Borin, A., Conteduca, F. P. and Mancini, M. (2022), “The Real-time Impact of the War on Russian Imports: A Synthetic Control Method Approach” for an account of developments in Russia’s trade patterns since the start of the war.

According to ECB Staff estimates based on customs data from 51 of Russia’s main trading partners.

See, for example, The World Bank “Global Economic Prospects – January 2023” or the Bank of Finland Institute for Emerging Economies “BOFIT Forecast for Russia 2023–2024: An unprecedented fog of uncertainty”.

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The tenth European Union (EU) – United States Energy Council (“Council”) met today in Brussels, chaired by EU High Representative/Vice President Josep Borrell Fontelles, European Energy Commissioner Kadri Simson, US Secretary of State Antony Blinken, and US Deputy Secretary of Energy David M. Turk. Minister Tobias Billström of the Swedish Ministry for Foreign Affairs represented the Presidency of the Council of the European Union.
The EU-US Energy Council is the lead transatlantic coordination forum on strategic energy issues for policy exchange and coordination at political and technical levels. Transatlantic energy cooperation continues to contribute to the stability and transparency of global energy markets by promoting energy diversification and security, endorsing energy efficiency measures, developing technologies contributing to the transition towards net zero emissions by 2050, and through research, innovation, aligned policies, and business cooperation. Accelerating the energy transition, reducing dependence on fossil fuels, and reducing energy consumption are key to strengthening energy security and countering attempts to weaponise energy.
The EU and the United States are strategic partners who remain committed to achieving net zero emissions by 2050, and working jointly with the global community to keep a 1.5 degrees Celsius limit in global temperature rise within reach, while pursuing a just and inclusive energy transition to climate neutrality.
The Council recognised the unprecedented intensification of cooperation, coordination, and exchanges between the two sides in the context of Russia’s war of aggression against Ukraine since the last Ministerial Meeting of the EU-US Energy Council on 7 February 2022. It also recognised the critical role of the Joint Energy Security Task Force set up in March 2022 by Presidents von der Leyen and Biden with the aim of supporting the rapid elimination of the EU’s reliance on Russian fossil fuels by diversifying its natural gas supplies, taking steps to minimise the sector’s climate impact, and reducing the overall demand for natural gas.

Responding to Russia’s Threats to Global Energy Security

The Council reiterated its condemnation in the strongest possible terms of Russia’s illegal, unprovoked, and unjustified war of aggression against Ukraine, which has brought immense suffering and destruction upon Ukraine and its people. The EU and the United States demand that the Russian Federation withdraw all its military forces from the territory of Ukraine within its internationally recognised borders. Russia’s war has also triggered a global food and energy security crisis, with sharp increases in prices, market volatility and a disproportionate impact on the developing world and vulnerable populations. Russia’s actions, including massive attacks on critical infrastructure, have put unprecedented strain on the safety and functioning of Ukraine’s energy systems, including the Zaporizhzhya nuclear power plant, leaving millions of people without electricity, heating, and water, and undermining nuclear safety and security.
The Council reiterated that competitive, liquid, and transparent global energy markets remain critical to ensuring a reliable, sustainable, affordable, and secure energy supply for Europe to serve the transition to climate neutrality. The EU and the United States recognise the growing cyber and physical threats to energy infrastructure and plan to continue related cooperation, including in the context of the synchronisation of the Baltic States’ electricity networks with the Continental European Network. The EU and the United States intend to continue to coordinate bilateral and multilateral responses to keep the global energy markets stable and support the energy transition required to achieve the goals of the Paris Agreement. The two sides reiterated their strong commitment to directly confront, with adequate measures, all efforts to further destabilise the global energy situation and to circumvent sanctions.

Bolstering Energy Security in Ukraine and Moldova

The Council reaffirmed that the future of Ukraine, the Republic of Moldova (hereafter Moldova), and their citizens lies within the European Union and would continue to support Ukraine’s and Moldova’s further integration with the EU. Following the successful synchronisation of Ukraine and Moldova with the EU electricity grid, the Council intends to continue to support Ukraine’s rapid recovery and reconstruction, and support both Ukraine and Moldova by assisting with their long-term economic and clean energy transition. The Council continues to support both countries’ integration with the EU across all energy sectors, including through accelerating the development of energy infrastructure and interconnections. The Council welcomed Ukraine’s and Moldova’s reform efforts towards meeting the objectives underpinning their candidate status for EU membership, and encouraged the countries to continue on this path, notably by ensuring that institutions in the energy sector are transparent, robust, and independent.
The EU, its Member States, and the United States intend to continue providing emergency energy assistance to Ukraine via the support fora set up in 2022, including the G7+ coordination forum and the International Advisory Energy Council for Ukraine, and to other heavily affected countries in the region such as Moldova. The Council acknowledged the important contribution of the Ukraine Energy Support Fund set up by the Energy Community Secretariat and the EU Civil Protection Mechanism coordinated by the European Commission in providing effective and targeted support to counteract attacks against critical energy infrastructure.
The Council condemned Russia’s dangerous actions at Ukraine’s Zaporizhzhya nuclear power plant and underlined its full support for the International Atomic Energy Agency’s work to apply safeguards to assist Ukraine in its effort to manage nuclear safety and security at its nuclear facilities, including its efforts to date to establish a nuclear safety and security protection zone at the Zaporizhzhya power plant. The EU and the United States strongly call on Russia to withdraw its personnel and military equipment from the Zaporizhzya nuclear power plant and return its full control to its rightful owner, Ukraine.
The Council intends to intensify cooperation to reduce dependency on Russia for nuclear materials and fuel cycle services, and supports ongoing efforts by affected EU Member States to diversify nuclear fuel supplies, as appropriate.

Promoting Energy Security Through an Accelerated Energy Transition

In its efforts to strengthen energy security while accelerating the global energy transition, the Council intends to continue coordinating transatlantic policy actions in their respective neighbouring regions.
The EU and the United States intend to coordinate their support for transparent, integrated and competitive energy markets in the Western Balkans, in line with the EU enlargement policy, as well as with the climate objectives and obligations under the Energy Community Treaty. The Council reaffirmed that both sides intend to deepen their cooperation to support regional integration and investments in the development of energy infrastructure to achieve climate neutrality in the Western Balkans, which for the EU will notably include speeding up the uptake of renewables, in view of European integration, and the phasing out of dependency on Russian gas imports as soon as possible.
The Council recognised the importance of energy relations and notably the role of gas and renewable energy supplies to the EU from and through regions such as the South Caucasus, Black Sea, Eastern Mediterranean and North Africa. The pivotal role of reliable energy partners in these regions calls for mutually beneficial cooperation on security of energy supplies as well as enhanced cooperation on critical infrastructure.

Energy Policy, Technology, and Innovation

In light of current pressures caused by Russia’s war in Ukraine, the Council underlined that energy savings, energy efficiency, and the speedy deployment of renewables are key pillars of energy transition. In this regard, the Council underlined the importance of safe and sustainable low-carbon technologies.
The Council welcomed the organisation of a High-Level Business to Business Forum on Offshore Wind in April 2022 and the publication of its report. Further, the Council also welcomed a Business Roundtable that took place on 3 April, which was aimed at facilitating trade and the deployment in the EU and the United States, of energy savings and renewables technology solutions.
The EU and the United States also intend to continue working together to foster energy investments aiding the transition towards climate neutrality in a transparent and mutually reinforcing manner avoiding zero-sum competition at the transatlantic level and around the globe. The Council noted the vital importance of diversifying and securing supply chains for critical minerals and raw materials necessary for the energy transition to net-zero emissions by 2050, and reinforced the value of EU-US collaboration in fora such as the Minerals Security Partnership, the Conference on Critical Materials and Minerals and the International Energy Agency Critical Minerals Working Party. The Council invited its Energy Policy Working Group to explore possible further cooperation areas in view of achieving shared energy and climate objectives.
The Council noted the role that nuclear power can play in decarbonising energy systems in countries that have decided or will decide to rely on nuclear energy. The EU and the United States decided to co-organise a High-Level Small Modular Reactors (SMR) Forum later this year on transatlantic cooperation in the field of SMRs and other advanced nuclear reactors.
The Council intends to continue advancing the reduction of global methane emissions in line with the Global Methane Pledge and the Joint Declaration from Energy Importers and Exporters on Reducing Greenhouse Gas Emissions from Fossil Fuels. The Council intends to promote domestic and international measures for reinforced monitoring, reporting, and verification, as well as transparency, for methane emissions data in the fossil energy sector, such as through the Oil and Gas Methane Partnership 2.0 (OGMP 2.0) standard and the development of a common tool for life cycle analysis (LCA) of methane emissions for hydrocarbon suppliers and purchasers. Building upon the Joint Declaration, the Council intends to work with Joint Declaration members and other countries to develop an internationally aligned approach for transparent measurement, monitoring, reporting, and verification for methane and carbon dioxide emissions across the fossil energy value chain to improve the accuracy, availability, and transparency of emissions data at cargo, portfolio, operator, jurisdiction and basin-level. The Council recognised the International Methane Emissions Observatory as a key independent methane emissions data collector and verifier, and the Council recognised the need to develop effective global schemes to limit leakage, venting, and flaring, such as the mutually beneficial You Collect We Buy. The Council acknowledged the joint progress made on developing international standards for leak detection and quantification of methane emissions. In this respect, the Council welcomes the agreement for cooperation between the two first-of-a-kind centres of excellence, the TotalEnergies Anomaly Detection Initiatives (TADI) of the Pôle d’Etudes et de Recherche de Lacq and the Colorado State University Methane Emission Technology Evaluation Center (METEC). The Council noted its support of other centres of expertise that may wish to join TADI and METEC in their initiative.
The Council endorsed the organisation of joint workshops in 2023 on just transition, energy poverty, and economic and workforce development assistance for communities in transition and communities experiencing environmental hazard exposure.
Building on existing dialogues and frameworks, the Council endorsed the intention of both sides to step up research and innovation cooperation in the fields of i) fusion research by finalising the terms of a new Model Project Agreement and defining the multi-year work plan, and ii) mutual modelling capabilities for climate-neutrality transition pathways by increasing the compatibility and inter-comparability of respective data and models.

Multilateral Cooperation

The Council acknowledged progress on multilateral initiatives and intends to continue discussing strategic topics and coordinating positions ahead of major multilateral events. The strong EU-US relationship has paved the way for more ambitious global climate and energy actions, including at international fora such as climate COPs, G7, G20, International Energy Agency, Clean Energy Ministerial, Mission Innovation, the Partnership for Transatlantic Energy and Climate Cooperation (P-TECC), International Renewable Energy Agency, including through advancing “Just Energy Transition Partnerships” with third countries, and in fusion through both the ITER international agreement and EURATOM research. The EU and the United States intend to intensify joint work towards making energy efficiency a global priority.

Compliments of the European Commission.
The post Joint Statement by the EU and the US following the 10th EU-US Energy Council first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Climate change is a global problem that needs global solutions. As the EU raises its own climate ambition, and as long as less stringent climate policies prevail in many non-EU countries, there is a risk of so-called ‘carbon leakage’. Carbon leakage occurs when companies based in the EU move carbon-intensive production abroad to countries where less stringent climate policies are in place than in the EU, or when EU products get replaced by more carbon-intensive imports.
The EU’s Carbon Border Adjustment Mechanism (CBAM) is our landmark tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries. The gradual introduction of the CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of EU industry.
By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU’s climate objectives are not undermined. The CBAM is designed to be compatible with WTO-rules.
Latest developments
On 13 December 2022, the Council and the European Parliament reached a political agreement on the implementation of the new CBAM.
Key elements
The CBAM will initially apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. With this enlarged scope, CBAM will eventually – when fully phased in – capture more than 50% of the emissions in ETS covered sectors. Under the political agreement, the CBAM will enter into force in its transitional phase as of 1 October 2023.
The gradual phasing in of CBAM over time will allow for a careful, predictable and proportionate transition for EU and non-EU businesses, as well as for public authorities. During this period, importers of goods in the scope of the new rules will only have to report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions), without making any financial payments or adjustments. The agreement foresees that indirect emissions will be covered in the scope after the transitional period for some sectors (cement and fertilisers), on the basis of a methodology to be defined in the meantime. The objective of this transition period is to serve as a pilot and learning period for all stakeholders (importers, producers and authorities) and to collect useful information on embedded emissions to refine the methodology for the definitive period.
Once the permanent system enters into force on 1 January 2026, importers will need to declare each year the quantity of goods imported into the EU in the preceding year and their embedded GHG. They will then surrender the corresponding number of CBAM certificates. The price of the certificates will be calculated depending on the weekly average auction price of EU ETS allowances expressed in €/tonne of CO2 emitted. The phasing-out of free allocation under the EU ETS will take place in parallel with the phasing-in of CBAM in the period 2026-2034.
A review of the CBAM’s functioning during its transitional phase will be concluded before the entry into force of the definitive system. At the same time, the product scope will be reviewed to assess the feasibility of including other goods produced in sectors covered by the EU ETS in the scope of the CBAM mechanism, such as certain downstream products and those identified as suitable candidates during negotiations. The report will include a timetable setting out their inclusion by 2030.
Next steps
The European Parliament and the Council will now have to formally adopt the new Regulation. Once formally adopted by the co-legislators, the final set of rules and methodology for applying the CBAM will be further specified in an implementing act to be adopted by Commission after consulting the CBAM Committee, made up of experts from EU Member States. The CBAM will then enter into force on 1 October 2023 in its transitional phase.
Compliments of the European Commission.
The post EU Commission | Carbon Border Adjustment Mechanism first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

I want to debrief you on a comprehensive day of high-level discussions we had today here in Beijing. I met with President Xi, both in a joint meeting with President Emmanuel Macron and then in a bilateral meeting. I also had a meeting with Prime Minister Li.
Let me start with EU-China relations. It is an extensive and complex relationship that we have. For both of us, this relationship has a significant impact on our prosperity and our security. For China, because the European Union is the first export destination, while China is in the European Union the third export destination. If I give you one concrete figure, this means trade of more than EUR 2.3 billion per day in 2022. At the same time, our trade relationship is increasingly imbalanced. Over the last ten years, the European Union’s trade deficit has more than tripled. It reached almost EUR 400 billion last year. And we discussed that, because this trajectory is not sustainable and the underlying structural issues need to be addressed. I conveyed that European Union businesses in China are concerned by unfair practices in some sectors – unfair practices that impede their access to the Chinese market. For example, if you take the EU agri-food products, they face significant hurdles. Or if you take medical devices as an example, they are being excluded from the market by discriminatory ‘Buy China’ policies. All of these sectors I am speaking about are recognised areas of European excellence. So these sectoral issues are exacerbated by ever-growing requirements imposed by China that apply across the board: be it, for example, increasing pressures to submit to technology transfer; or be it excessive data requirements; or be it insufficient enforcement of intellectual property rights. All this puts European Union companies exporting to China, and also those producing in China, at a significant disadvantage, we discussed that. And we also discussed the fact that this contrasts with the level playing field that all companies operating in the European Single Market benefit from. So against this backdrop, the European Union is becoming more and more vigilant about protecting our interests and ensuring a level playing field.
In addition to these imbalances in our relationship, as you know, the European Union is growing more vigilant about dependencies. Some of these dependencies raise significant risks for us, as does the export of sensitive emerging technologies. Within this context, we all know that this leads to calls by some to decouple from China. I doubt that this is a viable or desirable strategy. I believe that we have to engage in de-risking. This means focusing on specific risks, while appreciating that there is of course a large majority of goods and services, so trade that is un-risky. Of course, different risks require different means to address them: We address the risk of dependencies through the diversification of our trade and investment relations. The risk of leakage of sensitive technologies that could be used for military purposes needs to be addressed through export controls or investment screening. But whatever the instrument we choose is, we wish to resolve the current issues through dialogue. So it is basically de-risking through diplomacy. This is why I called for – and we agreed in – the resumption of the High-Level Economic and Trade Dialogue. I am very glad that we agreed on this. Not only the High-Level Economic and Trade Dialogue, but along with this one also the High-Level Digital Dialogue. These two Dialogues should convene as soon as possible to make progress on all the different files and produce tangible results.
Let me now turn to the geopolitical environment. This visit is taking place in a challenging and increasing volatile context, in particular because of Russia’s war of aggression against Ukraine. China’s position on this is crucial for the Europe Union. As a member of the UN Security Council, there is a big responsibility, and we expect that China will play its role and promote a just peace, one that respects Ukraine’s sovereignty and territorial integrity, one of the cornerstones of the UN Charter. I did emphasise in our talks today that I stand firmly behind President Zelenskyy’s peace plan. I also welcomed some of the principles that have been put forward by China. This is notably the case on the issue of nuclear safety and risk reduction, and China’s statement on the unacceptability of nuclear threats or the use of nuclear weapons. We also count on China not to provide any military equipment, directly or indirectly, to Russia. Because we all know, arming the aggressor would be against international law. And it would significantly harm our relationship.
We also addressed human rights. I expressed our deep concerns about the deterioration of the human rights situation in China. The situation in Xinjiang is particularly concerning. It is important that we continue to discuss these issues. And I therefore welcome that we have already resumed the EU-China Human Rights Dialogue.
Besides Russia’s invasion of Ukraine, there are some areas of convergence and cooperation on specific global issues. In view of the size of our economies, we have a shared responsibility in resolving global issues, for example, first and foremost, to protect the climate and to protect our environment. I particularly welcome the positive role that China has played in delivering the Montreal-Kunming agreement on biodiversity. China has also been a driving force to reach a deal on the High Seas Treaty – this is particularly positive. On the fight against climate change, we want to see China make concrete and ambitious commitments in the run-up to COP28 in Dubai. We discussed this topic too. And I invited China to jointly prepare this COP28, in the context of our joint initiative with Canada. And of course, I would very much welcome if China would be choosing to join the Global Methane Pledge. We need China as an important player. These were the different topics in general that we have discussed and I am now looking forward to answer your questions.
Compliments of the European Commission.
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Rising tensions could trigger cross-border capital outflows and increased uncertainty that would threaten macro-financial stability
Concerns about global economic and financial fragmentation have intensified in recent years amid rising geopolitical tensions, strained ties between the United States and China, and Russia’s invasion of Ukraine.
Financial fragmentation has important implications for global financial stability by affecting cross-border investment, international payment systems, and asset prices. This in turn fuels instability by increasing banks’ funding costs, lowering their profitability, and reducing their lending to the private sector.
Effects on cross-border investment
Geopolitical tensions, measured by the divergence in countries’ voting behavior in the United Nations General Assembly, can play a big role in cross-border portfolio and bank allocation, as we write in an analytical chapter of the latest Global Financial Stability Report .
An increase in tensions between an investing and a recipient country, such as between the United States and China since 2016, reduces overall bilateral cross-border allocation of portfolio investment and bank claims by about 15 percent.
Investment funds are particularly sensitive to geopolitical tensions and tend to reduce cross-border allocations notably to countries with a diverging foreign policy outlook.
Financial stability risks
Geopolitical tensions threaten financial stability through a financial channel. Imposition of financial restrictions, increased uncertainty, and cross-border credit and investment outflows triggered by an escalation of tensions could increase banks’ debt rollover risks and funding costs. It could also drive-up interest rates on government bonds, reducing the values of banks’ assets and adding to their funding costs.
At the same time, geopolitical tensions are transmitted to banks through the real economy. The effect of disruptions to supply chains and commodity markets on domestic growth and inflation could exacerbate banks’ market and credit losses, further reducing their profitability and capitalization. The stress is likely to diminish the risk-taking capacity of banks, prompting them to cut lending, further weighing on economic growth.
The financial and real-economy channels are likely to feed off one another, with the overall effect being disproportionately larger for banks in emerging markets and developing economies, and for those with lower capitalization ratios.

In the longer run, greater financial fragmentation stemming from geopolitical tensions could also roil capital flows and key economic and financial market indicators by limiting the possibilities for international risk diversification, such as by reducing the number of countries in which domestic residents can invest.
How to curb risks
Supervisors, regulators, and financial institutions should be aware of the risks to financial stability stemming from a potential rise in geopolitical tensions and commit to identify, quantify, manage, and mitigate these threats. A better understanding and monitoring of the interactions between geopolitical risks and more traditional ones related to credit, interest rate, market, liquidity, and operations could help prevent a potentially destabilizing fallout from geopolitical events.
To develop actionable guidelines for supervisors, policymakers should adopt a systematic approach that employs stress testing and scenario analysis to assess and quantify transmission channels of geopolitical shocks to financial institutions.
Other steps include:
In response to rising geopolitical risks, economies reliant on external financing should ensure an adequate level of international reserves, as well as capital and liquidity buffers at financial institutions.

Policymakers should strengthen crisis preparedness and management frameworks to deal with potential financial instability arising from heightened geopolitical tensions. Cooperative arrangements between different national authorities should continue to help ensure effective management and containment of international financial crises, including through development of effective resolution mechanisms for financial institutions that operate in multiple jurisdictions.
The global financial safety net—a set of institutions and mechanisms that insure against crises and financing to mitigate their impact—must be reinforced through mutual assistance agreements between countries. These would include regional safety nets, currency swaps, or fiscal mechanisms—and precautionary credit lines from international financial institutions.
In the face of geopolitical risks, efforts by international regulatory and standard-setting bodies, such as the Financial Stability Board and the Basel Committee on Banking Supervision, should continue to promote common financial regulations and standards to prevent an increase in financial fragmentation.

Ultimately, policymakers should be aware that imposing financial restrictions for national security reasons could have unintended consequences for global macro-financial stability. Given the significant risks to global macro-financial stability, multilateral efforts should be strengthened to reduce geopolitical tensions and economic and financial fragmentation.
Authors:

MARIO CATALÁN
Fabio Natalucci
Mahvash S. Qureshi
Tomohiro Tsuruga

—This blog is based on Chapter 3 of the April 2023 Global Financial Stability Report,“Geopolitics and Financial Fragmentation: Implications for Macro-Financial Stability.”
The post IMF | Geopolitics and Fragmentation Emerge as Serious Financial Stability Threats first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Interview with Fabio Panetta, Member of the Executive Board of the ECB, published as an article by Eshe Nelson entitled “Are Big Profits Keeping Prices High? Some Central Bankers Are Concerned.” in The New York Times, 31 March 2023 |
After months of fretting about whether workers’ rising pay would keep inflation uncomfortably high, central bankers in Europe have another concern: large company profits.
Companies that push up their prices above and beyond what is necessary to absorb higher costs could be fueling inflation that central bankers need to combat with higher interest rates, a policymaker at the European Central Bank warned, suggesting that governments might need to intervene in some situations.
Policymakers, long preoccupied with higher pay’s tendency to prompt companies to raise their prices, generating a wage-price spiral, should also be alert to the risks of a so-called profit-price spiral, said Fabio Panetta, an executive board member at the E.C.B. At a conference in Frankfurt last week, he pointed out that in the fourth quarter of last year half of domestic price pressures in the eurozone came from profits, while the other half stemmed from wages.
His concerns have been echoed in recent remarks by the E.C.B.’s president, Christine Lagarde, and the Bank of England governor, Andrew Bailey. Although inflation in Europe has begun to ease from last year’s double-digit peaks, the rates remain far above 2 percent, the target of most central banks.
“There’s a lot of discussion on wage growth,” Mr. Panetta said in an interview this week. “But we are probably paying insufficient attention to the other component of income — that is, profits.”
Profit margins at public companies in the eurozone — measured by net income as a percentage of revenue — averaged 8.5 percent in the year through March, according to Refinitiv, a step down from a recent peak of 8.7 percent in mid-February. Before the pandemic, at the end of 2019, the average margin was 7.2 percent.
There has been a similar phenomenon in the United States, where companies reported wide profit margins last year despite the highest inflation in four decades.
Companies could be increasing prices because of higher input costs (the expenses of producing their goods or services), or because they expect future cost increases, or because they have market power that allows them to raise prices without suffering a loss of demand, Mr. Panetta said. Some producers could be exploiting supply bottlenecks or taking advantage of this period of high inflation, which makes it more challenging for customers to be sure of the cause of price increases.
“Given the situation which prevails in the economy, there could be ideal conditions for firms to increase their prices and profits,” he added.
“I’m not here to pass a judgment on how fair or unfair” price-setting is, Mr. Panetta insisted, but rather to explore all of the causes of inflation. He is a member of the E.C.B.’s six-person executive board that sets policy alongside the governors of the 20 central banks in the eurozone.
There are sectors where “input costs are falling while retail prices are increasing and profits are also increasing,” Mr. Panetta said. “So this is enough to be worried as a central banker that there could be an increase in inflation due to increasing profits.”
The average rate of inflation for the 20 countries that use the euro has been falling for five months — to 6.9 percent over the year through March — but core inflation, which excludes volatile energy and food prices, a measure used by policymakers to assess how deeply inflation is embedding in the economy, has continued to rise.
Central bankers tend to focus on the risk that jumps in pay will lead to persistently high inflation, especially in Europe where wages tend to change more slowly than in the United States. The E.C.B. is even developing new tools to measure changes in wages more quickly.
But this intense focus on wages has provoked some criticism. Mr. Bailey of the Bank of England was called out last year for suggesting workers should show restraint in asking for higher wages.
As inflation persists, attention has turned to corporate profits. There is uncertainty about what will happen as prices for energy and other commodities keep falling: Will companies restrain themselves from raising prices further?
Last week, Ms. Lagarde raised the issue of profits, saying there needed to be fair burden sharing between companies and workers to absorb the hit to the economy and income from higher energy prices.
In Britain, Mr. Bailey told companies to bear in mind when setting prices that inflation was expected to fall. Across the Atlantic, last year Lael Brainard, who was then the vice-chair of the U.S. Federal Reserve, suggested that amid high profit margins in some industries, a reduction in markups could bring down inflation.
In Europe, companies were able to protect their profit margins last year from high inflation more than expected, Marcus Morris-Eyton, a European equities analyst at Allianz Global Investor, said.
“Corporates had more pricing power, at an average level, than most investors expected,” he said.
This year, he expects there will be more variety in profit margins. “The average European company will face far greater margin pressure this year than they did last year,” Mr. Morris-Eyton said. That’s because of higher wage costs but “partly because as input costs have fallen, there is greater pressure from your customers to lower prices.”
Last year, record-breaking profits by energy producers angered consumers who faced high energy bills, while governments spent billions to protect households from some of those costs. But as energy prices have fallen, consumers are still experiencing rising food prices. In the eurozone, the annual rate of food inflation rose to 15.4 percent in March.
“To a certain extent there’s been also an opportunistic move by some big manufacturers to actually increase their prices, sometimes above their own cost increases,” said Christel Delberghe, the director general of EuroCommerce, a Brussels-based organization representing wholesale and retail companies. “It’s kind of a free-riding on a high price environment.”
It’s a factor squeezing retail profits, alongside the rising costs of products they buy and resell and higher cost of operations.
There is a notable disparity in profit margins between food producers and retailers, a traditionally low-margin business. Unilever and Nestlé each reported profit margins in the high teens for 2022, while the French supermarket company Carrefour reported a margin of about 3 percent. Unilever raised prices for its products more than 11 percent last year and Nestlé more than 8 percent, but in both cases the companies said they had not passed on all the effects of higher costs to consumers.
Ms. Delberghe said she feared the blame for higher prices was unfairly going to land on retailers. “We’re extremely worried because indeed there is this perception that prices are going up and that it’s very unfair,” she said. Retail businesses are getting a lot of pushback, including from governments trying to take action to stop price increases in stores.
Mr. Panetta said governments should step in where necessary, in part because their fiscal support programs have helped keep profits high. “If there is a sector in particular where market power is abused or there is insufficient competition, then there should be competition policies that should intervene,” he said.
But it was also a message to companies.
“It should be clear to producers that strategies based on high prices that increase profits and inflation may turn out to be costly for them,” he said.
The cost? Higher interest rates.
Compliments of the European Central Bank.
The post ECB Interview | Are Big Profits Keeping Prices High? Some Central Bankers Are Concerned first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.