Speech by Fabio Panetta, Member of the Executive Board of the ECB, at an event organised by the Centre for European Reform, the Delegation of the European Union to the United Kingdom and the ECB Representative Office in London | London, 16 February 2023 |
It is a pleasure to be with you here in London today.
The energy shock stemming from Russia’s aggression against Ukraine has prolonged and aggravated a sequence of unprecedented supply shocks.[1] These shocks, combined with the reopening of the economy after the pandemic, have driven inflation in the euro area to persistently high levels.[2]
To prevent inflation from becoming entrenched, the ECB tightened its monetary policy stance decisively. We needed to avert second-round effects in the form of a de-anchoring of inflation expectations or a wage-price spiral.
We started to adjust our stance in December 2021[3]. Since July we have increased rates by 300 basis points. We have also started to normalise our balance sheet, which has shrunk by about €1 trillion since its peak. And from March we will reduce our asset purchase programme holdings by an average of €15 billion per month[4].
After this pronounced tightening, we need to carefully reassess the medium-term outlook for inflation and the risks surrounding it. In this respect, risks to the inflation outlook are now more balanced than at the time of our projections in December.
The economic environment is changing. Supply shocks have started to reverse, with energy and food commodity prices receding from their peaks last year and supply bottlenecks easing. It will take time for this to be fully reflected in retail prices across the economy and ultimately in core inflation.
We also face formidable sources of economic and geopolitical uncertainty globally. And major central banks are tightening their monetary policy stance simultaneously, the overall effects of which are difficult to assess.
In the euro area, market rates have increased significantly and bank lending is decelerating sharply. While housing and business investment has already weakened, the effect of our monetary policy impulses on domestic demand will only be felt in full over the coming quarters.
In this setting, I will argue that the ECB should not unconditionally pre-commit to future policy moves. Instead, we need to calibrate our monetary policy in a way that is data-dependent, forward-looking and adaptable to changing developments.
This approach can be best implemented by providing clarity on our monetary policy reaction function and then being guided by that reaction function in our decisions. We should respond to incoming information on the medium-term inflation outlook and the balance of risks surrounding it. And we should keep our policy tight until we see inflation firmly converging back to 2% over our policy horizon, taking into account the lags with which our monetary policy operates.
When we were normalising rates the pace of adjustment was key. But with rates now moving into restrictive territory, it is the extent and duration of monetary policy restriction that matters. By smoothing our policy rate hikes – that is, moving in small steps – we can ensure that we calibrate both elements more precisely in the light of the incoming information and our reaction function.
This framework will allow us to return to our target without undue delay. And it will allow us to do so at minimal cost to the economy and employment, reducing the risk that we tighten too much.
The uncertain economic environment
The current uncertain economic environment makes forecasting inflation particularly challenging.
The medium-term inflation outlook was revised substantially upwards in our staff projections last December. Headline inflation was projected to stand at 3.4% in 2024, before falling to 2% in the third quarter of 2025 (Chart 1). And core inflation was expected to remain above target throughout our horizon, declining to 2.4% on average by 2025. The risks to this outlook were primarily on the upside.

Chart 1
Euro area HICP headline inflation and inflation projections
(annual percentage changes and percentage point contributions)

Source: Eurosystem staff macroeconomic projections for the euro area, December 2022.
Notes: The dashed yellow line denotes projections. The latest observations are for the fourth quarter of 2022.

But key assumptions underpinning economic projections can change quickly. In fact, recent surveys and the latest European Commission forecast see headline inflation significantly below our December projections for 2024.[5] And risks have become more balanced.
Let me now review the key factors making projections difficult in the current environment.
Energy prices
Energy inflation has slowed more than projected in December. As a result, headline inflation is also falling: in January it was well below what we expected in December, driven by the energy component (Chart 2). If the drop in energy prices is sustained, headline inflation may fall below 3% towards the end of the year.

Chart 2
Inflation in the euro area
(annual percentage changes and percentage point contributions)

Sources: Eurostat and ECB calculations.
Note: NEIG stands for “non-energy industrial goods”.

The deceleration in headline inflation is particularly visible from indicators of inflation momentum, which may be more informative than the usual year-on-year inflation rate when inflation is changing rapidly.[6] These indicators are also showing signs of deceleration in core inflation (Chart 3).

Chart 3
Short-run inflation momentum: three-month HICP change, annualised, working-day and seasonally adjusted
(percentage changes)

Sources: Eurostat and ECB.
Note: The latest observation is for December 2022.

Wholesale electricity and gas prices are currently lower than assumed in the December projections, pointing to a continued decline in energy inflation. And wholesale energy prices will affect all inflation components as they remain the largest driver of both goods and services inflation (Chart 4).

Chart 4
Contributions of energy-sensitive components to goods and services inflation in the euro area
(annual percentage changes and percentage point contributions)

Sources: Eurostat and ECB staff calculations.
Notes: The term “energy-sensitive component” reflects items with a share of energy in direct costs above the average share of energy across services items (left-hand panel) and non-energy industrial goods (NEIG) items (right-hand panel). The latest observations are for December 2022

Core inflation has been less affected by the fall in energy prices so far. This is not surprising, as energy typically has a gradual and indirect impact on the price of goods and services through changes in the cost of inputs. For example, the cost of offering goods will over time benefit from lower transportation costs. Similarly, the cost of producing food will benefit from lower fertiliser costs, and the cost of providing hospitality services will benefit from lower heating costs.
Core inflation cannot turn on a dime, and the speed at which lower energy prices will pass through to core inflation is uncertain. If lower energy prices strengthen consumer demand, the pass-through could be slower as firms seize the opportunity to increase margins. At the same time, over the past year we have seen more frequent price adjustments, which could make downward price rigidities less binding. In any case, the direction of core inflation will eventually follow that of headline inflation, just like what happened on the way up.
Lower energy prices will help to temper core inflation through other channels too.
For example, improving terms of trade due to lower energy prices have contributed to the euro’s appreciation both directly[7] and indirectly by supporting the growth outlook (Chart 5). In turn, the appreciation of the euro against the dollar – by 12% from the through in September and 4% since the December projections – further reduces the cost of dollar-denominated commodities and other inputs imported in the euro area[8].

Chart 5
Drivers of the euro-US dollar exchange rate
(cumulative changes since January 2022, percentage changes and percentage point contributions)

Sources: ECB and ECB calculations.
Notes: A decrease denotes a euro depreciation against the US dollar. The decomposition of exchange rate changes is based on an extended two-country Bayesian vector autoregression (BVAR) model including ten-year euro area overnight index swap rate, euro area stock price, EUR/USD, ten-year euro area overnight index swap-US Treasury spread, US stock prices and the relative Citi commodities terms-of-trade index in the euro area compared with the United States. An adverse euro area terms-of-trade shock is assumed to depreciate the euro against the dollar, reduce euro area equity prices, and increase euro area yields and yield spreads against the United States. Identification via sign and narrative restrictions, using daily data. “Dec. projections” refers to the December 2022 Eurosystem staff macroeconomic projections for the euro area. The latest observation is for 10 February 2023.

Moreover, current developments alleviate the concerns that high energy prices could lead to a loss of potential output and thus exacerbate inflationary pressures[9]. I recently argued that this was still a conjecture rather than a fact.[10] But if energy prices continue to fall, potential output will prove more resilient.
In my view, even though we need to be cautious as energy prices are highly volatile, recent developments in energy markets have made the risks surrounding the inflation outlook more balanced.
Fiscal measures
One major factor behind the upward revision to the December inflation projections for 2024-25 was the assessment made by Eurosystem staff about the fiscal measures taken since 2022 to attenuate the impact of the energy shock.
The projections foresaw that the price-based measures – introduced or announced by governments in order to contain changes in consumers’ purchasing power over time – would reduce inflation this year. The projections also reflected the expectation that the bulk of these measures would be withdrawn next year, increasing inflation by 0.7 percentage points in 2024 and generating significant carry-over effects for 2025. And this delayed the moment at which inflation was projected to return to our 2% target, with important implications for our monetary policy decisions. Moreover, according to the projections, most of these measures would not be limited to vulnerable population groups, potentially creating an expansionary impulse for demand.
As I argued recently[11], this risked creating a highly inefficient interaction between monetary and fiscal policies. Fiscal measures that were introduced to protect consumers’ purchasing power might paradoxically trigger a contractionary monetary policy reaction that would hit the real economy, reducing household incomes and increasing the interest bill for governments. This would be like giving with one hand and taking away with the other.
This assessment of the inflationary effects of the fiscal measures is however surrounded by high uncertainty. Discretionary fiscal spending is hard to predict accurately, and the measures could be adjusted to avoid inefficient interactions with monetary policy. Indeed, some governments have announced that they may reduce spending on energy price brakes or move to more targeted income-based measures. Moreover, falling energy prices are likely to imply that energy support measures will be less extensive than foreseen in the December projections. This is also contributing to the rebalancing of risks to inflation.
Wage developments
Another factor that drove up our projections was wage growth. As workers sought compensation for high inflation, we expected wages to accelerate. This robust wage dynamic boosted the baseline projection and the risks surrounding it, as accelerating wages coupled with a tight labour market could raise the spectre of a wage-price spiral.
Wages are still a source of upside risk. In the seven countries covered by the ECB’s wage tracker, recently concluded agreements signal that wage pressures are rising (Chart 6), albeit remaining consistent with the December projections.

Chart 6
Wage developments
(annual percentage changes)

Sources: Left panel: Eurostat, ECB, national sources. The difference between the ECB wage tracker and negotiated wage growth series in 2022 is mostly due to different series of negotiated wage growth for France, with the ECB euro area tracker using wage growth in sectoral negotiations in France. Data on Indeed wage trackers can be found here.
Right panel: Calculations based on micro data on wage agreements provided by Bundesbank, Banco de España, the Dutch employer association AWVN, Oesterreichische Nationalbank, Bank of Greece, Banca d’Italia and Banque de France. Data for FR are based on an updated version of Gautier, E. (2022): “Negotiated wage rises for 2022: the results so far”, Eco Notepad, No 269, Banque de France.
Notes: Euro area aggregate is based on ES, IT, GR, AT, DE, NL and FR.
The latest observations are November 2022 for negotiated wages (excluding NL), fourth quarter of 2022 for the wage trackers.

But so far there is no convincing evidence that inflation expectations are de-anchoring, which is a necessary condition for a wage-spiral to take hold. Survey evidence suggests that consumers expect inflation to moderate over the medium term.[12] And longer-term inflation expectations remain firmly anchored.[13]
The upside movement in wages might reflect a one-off rebalancing in the income distribution between workers and firms. Workers have so far borne the brunt of the “Putin tax”, suffering a large loss of real income while, on balance, firms’ mark-ups remained stable or even increased in some sectors.[14] Ultimately, the “tax” will be absorbed by the factors of production – labour and capital – in proportion to their respective bargaining power in the labour market.
Moreover, lower energy prices limit workers’ loss of real income, thereby containing their drive to seek compensation through higher wages. And lower energy bills reduce input costs, allowing firms to better absorb wage increases without having to raise prices in response. In this way, we could see strong one-off wage growth but limited aggregate “cost-push” effects that raise core inflation.
All in all, higher wage increases do not necessarily signal a persistent divergence from our 2% inflation target. But we cannot rule out that stronger and sustained wage dynamics will take hold if above-target inflation proves to be persistent. I consider this risk broadly unchanged compared with the December projections.
Risks to the growth outlook
The same supply shocks that are rebalancing the risks to inflation are also rebalancing the risks to growth.
Since December, economic activity and labour markets have proven more resilient than expected. And the outlook may improve further as lower energy prices support the economy and economic confidence in the current context of robust job growth. That could reduce the downside pressure on the prices of core goods and services.
These positive developments could be partly counterbalanced by the appreciation of the exchange rate and the tightening of credit conditions observed in recent months. And macro-econometric models may only partially capture the contractionary effects of our sizeable monetary policy tightening.[15]
There is also high uncertainty surrounding the international environment. While the US economy is decelerating, its labour market has recently surprised on the upside. In China, the exit from zero-COVID policy has led to a wave of infections that have adversely affected the economy, but the outlook is expected to improve as the economy reopens. More broadly, global demand and supply remain difficult to predict in view of geopolitical unknowns and the synchronised tightening by major central banks across the world.[16]
In short, the next steps facing monetary policy are anything but obvious.
A data-dependent monetary policy with a clear reaction function
So how should policy respond to this environment?
The benefits of data dependency
There are times when it makes sense to commit to a specific future course of monetary policy action – this is what we call forward guidance. That is the case when the economy faces deflationary risks and interest rates are at their lower bound.[17] And it can also be true when faced with inflationary risks: if the outlook changes rapidly and the monetary stance becomes clearly inappropriate, the commitment to normalise policy rates quickly is key to anchor inflation expectations.[18]
But today we are in a different situation. Monetary policy has already made a sizeable adjustment, and we now face inflation uncertainty in both directions. Moreover, we are not constrained in using interest rates to return to our target.
Forward guidance is therefore unnecessary. In fact, it would be tantamount to tying our own hands at a time when the inflation outlook can change rapidly.
In such circumstances, a truly data-dependent approach to calibrating monetary policy is preferable since it enables us to react nimbly to the incoming data. And it gives us enough time to see how our decisions affect the wider economy – a process that is hard to assess today.
Given the extent and speed of our tightening so far, there is a question mark over just how fast and how strong its effects on the economy will be.
Very early evidence suggests that bank lending rates are increasing more quickly than in previous hiking cycles, in line with the steeper increase in policy rates. And lending to firms and households is decelerating rapidly (Chart 7).

Chart 7
Key macro-financial variables during hiking cycles
(cumulative changes in percentage points for policy and lending rates; index (t=1) for total credit to firms and loans to households for house purchase)

Sources: ECB, Eurostat and ECB calculations.
Notes: The ECB-relevant policy rate is the Lombard rate up to December 1998, the MRO up to May 2014 and the DFR thereafter. Total credit to firms includes borrowing from banks and debt securities issued by non-financial corporations. Monetary financial institution loans to firms and households are adjusted for sales, securitisation and cash pooling. Data for debt securities and private residential investment before 1989 are not available and have been estimated. Latest observations are December 2022 for lending rates and loans, January 2022 for HICP and February 2022 for the DFR.

But given the long lags with which monetary policy is transmitted to the real economy,[19] most of the effects of our tightening are still ahead of us. This means, for example, that the current adjustment in the credit market – involving higher loan rates, as well as tighter lending standards and lower demand for loans to firms and households (Charts 8 and 9) – will likely compress consumption and investment in the coming months.

Chart 8
Changes in credit standards and demand for loans to euro area firms
(net percentages)

Source: Bank Lending Survey (BLS).
Notes: The net percentage for credit standards refers to the difference between the sum of the percentages of banks responding “tightened considerably” and “tightened somewhat” and the sum of the percentages of banks responding “eased somewhat” and “eased considerably”. The net percentage for loan demand refers to the difference between the sum of the percentages of banks responding “increased considerably” and “increased somewhat” and the sum of the percentages of banks responding “decreased somewhat” and “decreased considerably”. Net percentages for the “Other factors” refer to further factors which were mentioned by banks as having contributed to changes in credit standards.
Latest observation: January 2023 BLS.

Chart 9
Changes in credit standards and demand for loans to euro area households for house purchases
(net percentages)

Source: BLS.
Notes: The net percentage for credit standards refers to the difference between the sum of the percentages of banks responding “tightened considerably” and “tightened somewhat” and the sum of the percentages of banks responding “eased somewhat” and “eased considerably”. The net percentage for loan demand refers to the difference between the sum of the percentages of banks responding “increased considerably” and “increased somewhat” and the sum of the percentages of banks responding “decreased somewhat” and “decreased considerably”. Net percentages for the “Other factors” refer to further factors which were mentioned by banks as having contributed to changes in credit standards.
Latest observation: January 2023 BLS.

In the light of this, we increasingly need to consider the risk of overtightening. After many years of low growth, tipping the economy into a full-scale recession could trigger a permanent destruction of productive capacity and harm future employment opportunities, especially for the vulnerable members of society. Even if subsequently corrected, such overtightening would be very costly, given the low flexibility of the European economy.[20]
Overall, monetary policy needs to react forcefully when major shocks hit the economy and push inflation in a clear direction. But when risks are more balanced, a data-dependent approach is a prerequisite to avoiding costly mistakes.
Clarifying the reaction function
For such a data-dependent approach to be effective and avoid exacerbating uncertainty, we need to give some guidance on our future policy. Although we should avoid giving unconditional forward guidance on the policy rate path many months ahead, a meeting-by-meeting approach alone may not suffice. It may leave investors in the dark, having to guess our future moves and focusing on the near term[21].
To deal with this conundrum, we must instead provide investors with a framework for how we evaluate and respond to the incoming information. In other words, we need to clarify our reaction function.
In line with our price stability mandate, our reaction function is informed by the inflation outlook as well as the risks surrounding it. And it is designed to ensure that inflation returns to 2% without undue delay, taking into account the lags with which our monetary policy operates.
A proper understanding of this reaction function can benefit from two important clarifications.
The first is what will contribute to determining our reaction – that is, the set of factors that will affect inflation the most at our medium-term policy horizon[22].
At the global level, the most significant of these factors are energy prices, simply because lower energy prices are crucial for current inflationary pressures to unwind.
As for the domestic economy, a key factor in the coming months will be how rapidly lower energy prices and the associated lower cost pressures for firms are passed on to retail prices. In this respect, we need to carefully monitor mark-ups and wage growth, which could push in the opposite direction; for wages, we need to distinguish one-off adjustments from generalised increases, which could trigger self-sustaining wage-price rises. The conditions in the credit market are also important: we need to assess how fast credit to the economy is contracting and what its effects are on consumption and investment.
Second, we need to clarify how we should react to new information.
Last year, the need to normalise monetary policy quickly from a very accommodative starting point placed emphasis on the pace of rate hikes to prevent inflation becoming entrenched.
But now that we have made a major policy adjustment, the extent and duration of restriction have become increasingly relevant. By smoothing our policy rate hikes – that is, moving in small steps – we can ensure that we calibrate these two elements more precisely, remaining truly data-dependent and avoiding mistakes. This means that we will need to act in a non-mechanical way, keeping a genuine forward-looking approach and avoiding overreacting to individual data points.
We also need to ensure consistency across our tools. It is natural to normalise the size of the balance sheet in a tightening phase, thereby making it “push” in the same direction as our interest rate policy. But we are in unprecedented territory, and the pace of normalisation should be gradual and prudent, with rates remaining the key instrument to steer our monetary stance. There is little reliable experience of balance sheet tightening. It is hard to assess how a contraction of our balance sheet will affect bond markets and financial stability – especially if it happens in conjunction with an abrupt increase in interest rates.
What we do know is that we must preserve the singleness of our monetary policy by ensuring that our policy impulse is transmitted smoothly across all euro area countries. We should remain committed to all our lines of defence, which reinforce each other. First, a measured approach to hikes and balance sheet normalisation. Second, the flexibility embedded in our reinvestments under the pandemic emergency purchase programme. And third, the Transmission Protection Instrument.
Conclusion
Let me conclude.
The energy shock has coincided with the post-pandemic reopening of the economy to result in persistently high inflation in the euro area.
That in turn has increased the risk of a de-anchoring of inflation expectations and inflationary wage-price dynamics. In response, we have tightened our monetary policy decisively to prevent inflation becoming entrenched in the economy.
But as policy rates move more firmly into restrictive territory and the energy shock abates, the risks to the inflation outlook have become more balanced. And the outlook for the economy and inflation has become increasingly uncertain, both globally and in the euro area.
In this environment, we no longer need to overweight upside risks to avoid worst-case scenarios. We now need to take into account the risk of overtightening alongside the risk of doing too little.
A data-dependent calibration of monetary policy – firmly rooted in a clear reaction function – offers the best way forward. It will enable us to clarify our policy intentions, providing markets with the necessary guidance while keeping volatility in check. In parallel, by smoothing our policy moves we ensure that their cost to the economy is minimal.
This doesn’t mean we will not be resolute in the fight against inflation. It means being resolute in the right direction. What we do not want is “to drive like crazy at night with our headlights turned off” – as Italian singer Lucio Battisti once put it.[23]
Thank you.
Author:

Fabio Panetta, Member of the ECB’s Executive Board

Compliments of the European Central Bank.
The post ECB Speech | Monetary policy after the energy shock first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Most countries in the world agreed on a major tax reform in 2021. Now it’s time to follow through with implementation.

The international tax system—shaped by the League of Nations in April 1923—has come under intense pressure in recent years. Globalization, digitalization, and tax competition have made it increasingly hard for countries to raise revenue from multinational companies in an effective, fair, and efficient manner. Following a decade of debate, 138 countries recently agreed to the first major overhaul of the international tax system in a century.
Our new IMF paper assesses the reform and finds that it is a major step in the right direction. But to reap its benefits countries need to implement it, with the optimal policy response depending on each country’s circumstances. Our paper argues that other reform efforts—both international and domestic—should continue, not least so that poorer countries can raise more revenue to meet their development needs.
The reform in a nutshell
The reform was agreed in 2021 by the members of the Organisation for Economic Co-operation and Development/Group of Twenty Inclusive Framework—a body with now 142 members tasked to address international tax avoidance by multinational companies and deal with the tax challenges arising from digitalization of the economy. The reform contains two pillars:

Pillar 1 includes a new method to allocate profits to countries where multinational companies may have significant business but few (or no) local operations. This is increasingly common when firms sell through digital channels. Under the existing system, countries have no right to tax such profits in the absence of a physical establishment such as a warehouse or factory on their territory.
Pillar 2 introduces a global minimum effective tax rate of 15 percent. This is enforced through a set of top-up tax rules. For instance, if a country where operations take place levies taxes below this minimum, then the country where the corporate headquarters are located can collect additional taxes to reach the minimum rate.

Key achievements
The reform breaks with century-old norms. The move toward taxing profits in the destination country—that is, where final consumers are located—marks a paradigm shift, rendering the system more robust to tax base erosion since consumers are less mobile than intangible capital such as patents or technology. Moreover, the simplified allocation of profits by a formula reduces scope for aggressive tax planning. This currently occurs, for instance, when multinational companies manipulate transfer prices of transactions between group entities to shift profits to lower-tax countries—eroding countries’ tax bases and creating tax competition pressures.
The new minimum tax in Pillar 2 addresses this race to the bottom by putting a global floor on rates and raising the prospect of ending the decadelong downward trend in corporate tax rates. It also cuts back on profit shifting into investment hubs. The reduced pressure to compete, including through tax incentives, enables countries to design better domestic policies. Our paper shows that these indirect effects indeed might well yield bigger gains in revenue than the estimates of the direct impact of the reform suggest.
More work to be done
The reform initially has limited coverage. It covers only the largest multinational companies—and in case of Pillar 1, just over 100 firms. Under both pillars, relatively large chunks of profits are excluded. The reform is therefore unlikely to be the end point of change for the international tax system, although there are political and practical advantages to phasing in such a major overhaul.
The reform is still quite complex, creating implementation challenges especially for developing countries. Further simplification will be needed, with work currently under way in areas important to this group of economies, such as simplified approaches to taxing routine marketing and distribution operations.
The additional revenue raised by the reform is welcome, but small (at initially just 0.2 percent of global gross domestic product). Low-income countries that wish to tackle their development needs will therefore need to raise domestic taxes and should not just rely on expected revenue from international tax agreements. We estimate that the reform will boost global revenue by just under 0.2 percent of GDP initially, although reduced tax competition might double the gains in the future.
These estimated revenue gains are nowhere near what developing countries need to meet the sustainable development goals. At the same time, we see the potential for low-income countries to increase their tax revenues by as much as 8 percent of GDP through domestic tax increases, based on estimates of their tax capacity—that is, the amount of tax they could raise based on their economic and demographic characteristics.

One option would be to use the scope created by reduced pressures for low tax rates and tax incentives and introduce a corporate tax system with fewer loopholes. Governments could also consider collecting more from other major taxes—such as the value-added tax, where there is significant untapped potential in many countries. They must also invest urgently in revenue administration—both to reap the full benefits of the reform and to support tax collection more generally.
The global tax agreement is an important step in the right direction, but it is not yet operational. While monitoring and evaluation are critical and further reforms likely, the most important next step is for countries to implement it swiftly.
Authors:

Ruud de Mooij
Alexander Klemm
Christophe Waerzeggers

Compliments of the IMF.
The post IMF | The Unfinished Business of International Business Tax Reform first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, the European Commission has proposed ambitious new CO2 emissions targets for new heavy-duty vehicles (HDVs) from 2030 onwards. These targets will help to reduce CO2 emissions in the transport sector – trucks, city buses, and long-distance buses are responsible for over 6% of total EU greenhouse gas (GHG) emissions and more than 25% of GHG emissions from road transport. These strengthened emissions standards would ensure that this segment of the road transport sector contributes to the shift to zero-emissions mobility and the EU’s climate and zero pollution objectives.
The Commission proposes phasing in stronger CO2 emissions standards for almost all new HDVs with certified CO2 emissions, compared to 2019 levels, specifically:

45% emissions reductions from 2030;
65% emission reductions from 2035;
90% emissions reduction from 2040.

To stimulate faster deployment of zero-emission buses in cities, the Commission also proposes to make all new city buses zero-emission as of 2030.
In line with the European Green Deal and REPowerEU objectives, this proposal will also have a positive impact on the energy transition, by lowering demand for imported fossil fuels and enhancing energy savings and efficiencies in the EU’s transport sector. It will provide benefits for European transport operators and users by reducing fuel costs and total cost of ownership, and ensure a wider deployment of more energy-efficient vehicles. It will also improve air quality, notably in cities, and the health of Europeans.
Moreover, this is a key sector to support the European clean tech industry and boost international competitiveness. The EU is a market leader in the production of trucks and buses and a common legal framework helps to secure that position for the future. In particular, the revised standards provide a clear and long-term signal to guide EU industry investments in innovative zero-emission technologies and boost the rollout of recharging and refuelling infrastructure.
Background
Emissions in the HDV sector have been increasing year-on-year since 2014 with the exception of 2020 due to the COVID-19 pandemic. Especially in the freight sector, emissions are increasing rapidly. This is mainly due to growing road transport demand, which is expected to keep rising in the future. In 2019, freight emissions were 44% higher than emissions from the aviation sector and 37% higher than maritime transport emissions.
The vast majority of heavy-duty vehicles in the EU fleet (99%) currently run on internal combustion engines, fuelled largely by imported fossil fuels such as diesel. This adds to the EU’s energy dependency and current volatility of the energy market.
The current HDV emissions standards date from 2019, but are no longer in line with the EU’s climate objectives. Existing legislation does not provide a sufficiently clear and long-term signal to investors and does not reflect the new reality in the energy sector and the rapid developments in the HDV industry globally. The proposed new CO2 standards are in line with the EU’s increased climate ambitions, the Fit for 55 package and the Paris Agreement.
To support this proposal, investments need to be channelled into zero-emission vehicles and into the recharging and refuelling infrastructure, and the Commission has already proposed the Alternative Fuels Infrastructure Regulation to develop the necessary charging infrastructure to support the green transition of the heavy duty vehicles sector. In particular, the Commission proposed to install charging and fuelling points at regular intervals on major highways: every 60 kilometres for electric charging and every 150 kilometres for hydrogen refuelling. The Commission is working intensively with the co-legislators to finalise the negotiations on these proposals.
Compliments of the European Commission.
The post European Green Deal: Commission proposes 2030 zero-emissions target for new city buses and 90% emissions reductions for new trucks by 2040 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Almost one year after Russia launched its war of aggression against Ukraine, the EU economy entered 2023 on a better footing than projected in autumn. The Winter interim Forecast lifts the growth outlook for this year to 0.8% in the EU and 0.9% in the euro area. Both areas are now set to narrowly avoid the technical recession that was anticipated for the turn of the year. The forecast also slightly lowers the projections for inflation for both 2023 and 2024.
Outlook improves thanks to enhanced resilience
Following robust expansion in the first half of 2022, growth momentum abated in the third quarter, although slightly less than expected. Despite exceptional adverse shocks, the EU economy avoided the fourth-quarter contraction projected in the Autumn Forecast. The annual growth rate for 2022 is now estimated at 3.5% in both the EU and the euro area.
Favourable developments since the Autumn Forecast have improved the growth outlook for this year. Continued diversification of supply sources and a sharp drop in consumption have left gas storage levels above the seasonal average of past years, and wholesale gas prices have fallen well below pre-war levels. In addition, the EU labour market has continued to perform strongly, with the unemployment rate remaining at its all-time low of 6.1% until the end of 2022. Confidence is improving and January surveys suggest that economic activity is also set to avoid a contraction in the first quarter of 2023.
Headwinds, however, remain strong. Consumers and businesses continue to face high energy costs and core inflation (headline inflation excluding energy and unprocessed food) was still rising in January, further eroding households’ purchasing power. As inflationary pressures persist, monetary tightening is set to continue, weighing on business activity and exerting a drag on investment.
The Winter interim Forecast’s projected growth for 2023 of 0.8% in the EU and 0.9% in the euro area is respectively 0.5 and 0.6 pps higher than in the Autumn Forecast. The growth rate for 2024 remains unchanged, at 1.6% and 1.5% for the EU and the euro area, respectively. By the end of the forecast horizon, the volume of output is set to be almost 1 per cent above that projected in the Autumn Forecast.
After peaking in 2022, inflation to ease over the forecast horizon
Three consecutive months of moderating headline inflation suggest that the peak is now behind us, as anticipated in the Autumn Forecast. After reaching an all-time high of 10.6% in October, inflation has decreased, with the January flash estimate down to 8.5% in the euro area. The decline was driven mainly by falling energy inflation, while core inflation has not yet peaked.
The inflation forecast has been revised slightly downwards compared to autumn, mainly reflecting developments in the energy market. Headline inflation is forecast to fall from 9.2% in 2022 to 6.4% in 2023 and to 2.8% in 2024 in the EU. In the euro area, it is projected to decelerate from 8.4% in 2022 to 5.6% in 2023 and to 2.5% in 2024.
Risks to the outlook are more balanced
While uncertainty surrounding the forecast remains high, risks to growth are broadly balanced. Domestic demand could turn out higher than projected if the recent declines in wholesale gas prices pass through to consumer prices more strongly and consumption proves more resilient. Nonetheless, a potential reversal of that fall cannot be ruled out in the context of continued geopolitical tensions. External demand could also turn out to be more robust following China’s re-opening – which could, however, fuel global inflation.
Risks to inflation remain largely linked to developments in energy markets, mirroring some of the identified risks to growth. Especially in 2024, upside risks to inflation prevail, as price pressures may turn out broader and more entrenched than expected if wage growth were to settle at above-average rates for a sustained period.
Background
The Winter 2023 Economic Forecast provides an update of the Autumn 2022 Economic Forecast, which was presented on 11 November 2022, focusing on GDP and inflation developments in all EU Member States.
This forecast crucially hinges on the purely technical assumption that Russia’s aggression of Ukraine will not escalate but will continue throughout the forecast horizon. It is also underpinned by a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 27 January. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 1 February.
The European Commission publishes two comprehensive forecasts (spring and autumn) and two interim forecasts (winter and summer) each year. The interim forecasts cover annual and quarterly GDP and inflation for the current and following year for all Member States, as well as EU and euro area aggregates.
The European Commission’s next forecast will be the Spring 2023 Economic Forecast, scheduled to be published in May 2023.
Compliments of the European Commission.
The post Winter 2023 Economic Forecast: EU economy set to avoid recession, but headwinds persist first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

US historian Gary Gerstle explains how globalization helped entrench neoliberalism while also bringing about its demise

Some moments in US history need decades to be fully grasped—they aren’t bound by the two-, four-, and six-year election cycles. Such periods, called “political orders” by US historian and Cambridge professor of American history Gary Gerstle, author of The Rise and Fall of the Neoliberal Order, are a new way of rethinking political time. The New Deal and the neoliberalism that followed were political orders that shaped US policy—and greatly influenced the global order—from the 1930s to the 2010s.
In a conversation with former IMF official Sunil Sharma, Gerstle discusses how the neoliberal order—committed to releasing capitalism from state-imposed constraints—failed in its promises, the contours of an emerging political order, and what this means for globalization.
SS: Let’s start with the basics—What is a political order?
GG: A political order is a way of rethinking political time. It arises when a political party wins not just one election but several, and develops an enduring appeal in American politics. A political order must be undergirded by a program of political economy that can plausibly claim to promote prosperity and opportunity and connect that program to a vision of the good life that appeals to voters.
A mark of a political order’s success is when it compels the opposition party—the Republicans during the New Deal order, the Democrats during the neoliberal order—to accept the dominant party’s political economy and vision of the good life as its own.
SS: To understand the rise of the neoliberal order, it’s important to understand the preceding New Deal order. What circumstances led to the New Deal?
GG: The New Deal order, lasting from the 1930s to the early 1970s, arose out of a moment in US history where capitalism was substantially unregulated by the state. The levels of unemployment, bankruptcies, poverty, and insecurity were such that many people concluded in the 1930s that capitalism, left to its own devices, was destructive—too prone to depressions and speculations to survive.
The simple but powerful idea of the Democrats’ New Deal order was that a strong interventionist state was necessary to regulate capitalism. This would both stabilize markets and redistribute the wealth via progressive taxation, support for strong unions, an expanded welfare state, and greater educational opportunity. The idea of states regulating markets in the public interest became so compelling that the Republicans, when taking back the presidency in 1952, didn’t roll back the major New Deal programs that had government intervening in the economy. This was a sign that a political order had triumphed.
SS: How did the neoliberal order emerge from the demise of the New Deal order?
GG: New political orders tend to emerge in periods of economic crisis. There was nothing new about neoliberal ideas in the 1970s. But they had been marginal. The economic crisis of the 1970s gave those ideas an opportunity to become mainstream. Keynesianism had dominated economic decision-making for decades; it was a tool kit central to the New Deal order. But those tools were no longer delivering economic prosperity. Unemployment and inflation had both spiked, plunging the economy into crisis. The Democrats were turned out of power, and Ronald Reagan transformed the Republican Party into a free market party. This free market orientation is best understood by the label “neoliberal,” which connotes injecting dynamism into a capitalist economy by freeing markets from state constraints.
The 1970s and 1980s marked the moment of this new political order’s ascent. It triumphed in the 1990s under the Democrat Bill Clinton. When he led the Democrats to power in 1993, he didn’t roll back the Reagan revolution of deregulation. I interpret his actions as signifying the triumph of a new political order—a neoliberal one.
SS: In your book, you discuss how globalization helped entrench the neoliberal order while also bringing about its demise. Can you explain?
GG: Neoliberalism promised that societies adopting free market practices would unlock the secrets to growth in ways that had been denied before. At its best, it imagines a world of peace, where people everywhere are trading, improving their livelihoods, realizing opportunities long denied to them.
Neoliberalism did allow capitalism to become global in ways it hadn’t been since before the First World War. Some of the wealth that had been concentrated in the West, for example, has been redistributed to places that had been denied that wealth. But neoliberalism overlooked the way in which this unleashing of economic power advantages elites who control the levers of capitalist development, deepening inequality. The justification is that economic growth will be so substantial that the difference between rich and poor won’t matter much because all boats will rise.
Neoliberalism’s greatest weakness—not only in the moral but also in the economic sense—was its inability to address economic inequality. Rather, it papered the matter over with promises of dramatic growth and then by coughing up easy credit when that growth failed to materialize.
After the global financial crisis, it was no longer possible to believe that all boats were rising. There were clearly losers as well as winners in the globalization struggle.
SS: How did the global financial crisis delegitimize neoliberalism?
GG: The global financial crisis fractured the neoliberal order, costing it the power and legitimacy that neoliberalism possessed in the 1990s and first decade of the 21st century. That’s not to say that neoliberal policies aren’t still around. But their authority began to be challenged in ways they weren’t during the heyday of the neoliberal order.
Quantitative easing during the financial crisis opened all kinds of possibilities in the US. That was the moment to engage in a massive infrastructural improvement project. President Obama wasn’t able to do that. He was in a sense the last of the neoliberal presidents, operating within the constraints of the neoliberal order. One of the principles of that order is that state intervention in the private economy must be strictly limited.
The course of history might have been quite different had there been a big infrastructure investment in 2009–10 to reboot the economy. The recovery would have flowed more quickly and directly to ordinary people. Had this kind of political leadership emerged sooner in the neoliberal order, the world might have been spared some of the political volatility that has rocked so many countries in the last 10 years.
SS: Given where we are, what are the contours of an emerging political order?
GG: We can see that the Biden administration has a plan for a new political order grounded in a political economy that looks more like the New Deal order than the neoliberal order, one that is trying to make some corrections for the errors of the neoliberal order.
Neoliberalism was mistaken in thinking that markets could be insulated completely from politics. Any set of economic policies, even the ones that encouraged the freest markets, has political and social consequences. For the economic realm to prosper, state involvement is needed at a level that was deemed unacceptable during the neoliberal era. There is a growing recognition that states must intervene in markets to address questions of economic security, opportunity, and welfare. Beneath some of the hubbub of American politics, a new political economy along these lines is indeed taking shape.
SS: How have the pandemic and the war in Ukraine affected the emergence of this new political order?
GG: They both have had a major impact. In the neoliberal heyday, the aim was to have output produced in the cheapest way. It didn’t matter where—as long as transportation was inexpensive and reliable. During the pandemic, goods couldn’t move, or they moved much more slowly and unpredictably. Neoliberalism also presumed a world of peace; few worried about a war obstructing international trade. That world vanished with Russia’s attack on Ukraine and the threats that China is making toward Taiwan. Governments now ask, What goods and services are essential for national security? What resources must every nation have for ensuring that the core needs of its people are met?
Suddenly, it matters where semiconductor chips and pandemic protective gear are produced; so, too, does secure access to rare minerals to build batteries and to energy supplies that can’t be interrupted by war.
National security always has had an economic component to it. What does a nation have to do to make sure that it has what its economy needs? Once you enter that frame of mind, you’re not in a neoliberal world anymore, because now you’re privileging national security over market freedom. This kind of thinking—underway in virtually every nation right now—is profoundly recalibrating the relationship of states to markets, of politics to economics.
SS: What does this mean for the future of globalization?
GG: It doesn’t mean we stop thinking about globalization. It doesn’t mean that countries become islands with no connection to each other. It means a strategic globalization—a globalization where nations can manage the flow of capital, commodities, energy, goods, and supply chains under adverse circumstances.
This points us away from free trade and financial flows, which was the model of globalization under a neoliberal world, and points more in the direction of managed trade and finance for the sake of some national or public interest.
This interview has been edited for length and clarity.

Sunil Sharma is a distinguished visiting scholar at George Washington University’s Elliott School of International Affairs and senior associate, Council on Economic Policies, Zurich, Switzerland.

Compliments of the IMF.
The post IMF | A New Political Order Emerges: Sunil Sharma interviews Gary Gerstle first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, the first baseline reports on the implementation of the Code of Practice are available online, as the first version of the Transparency Centre of the Code of Practice on Disinformation goes live.

30 Signatories of the Code of Practice on Disinformation, including all major online platform signatories (Google, Meta, Microsoft, TikTok, Twitter), have submitted their first baseline reports on the implementation of the commitments they took under the Code of Practice on Disinformation.
Signatories had six months after signing the Code to put in place actions to fulfil the commitments they subscribed to. These baseline reports provide a first state of play of the steps taken to implement commitments and measures under the Code, and a first set of qualitative and quantitative reporting elements covering the first month of implementation.
The Transparency Centre
As of today, citizens can download the full reports or consult them online. The Transparency Centre  is one of the Code’s concrete deliverables, and it aims to ensure that the public receives accurate and timely information about the implementation of the Code. This is a step-change regarding transparency.
The Transparency Centre website has been set up and is maintained by the Signatories. The current version is a very first edition. Signatories should further improve and develop it in the coming weeks to make sure that it is user-friendly, well searchable and kept up to date, in line with the Signatories’ relevant commitments under the Code. The Commission also encourages Signatories to consider additional, new state-of-the art features, as foreseen in the Code, to give the best user experience.
The first baseline reports
The baseline reports follow a common harmonised template consisting of 152 reporting elements (111 qualitative reporting elements, and 42 service level indicators/quantitative indicators) across the Code’s chapters. The harmonised reporting templates – developed with the support of ERGA (European Regulators Group for Audiovisual Media Services) – are a great step ahead for the alignment, reviewability, and accuracy of the signatories’ reporting. Notably, all individual actions and metrics are matched with the commitments and measures of the Code that they implement.
Overall, this first exercise attests of the signatories’ efforts to ensure a timely delivery of complex reports with detailed data. It is the first time that platforms provide such insight into their actions to fight disinformation.
Most major online platforms (Google, Meta, TikTok and Microsoft) demonstrated strong commitment to the reporting, providing an unprecedented level of detail about the implementation of their commitments under the Code, and – for the first time –  data at Member State level. Twitter, however, provides little specific information and no targeted data in relation to its commitments.
Smaller signatories delivered reports along their obligations (proportionate with the size and type of the organisations), with useful information and data, showing their positive engagement and reflecting their active contribution to the Code.
These baseline reports mark an important first step in establishing the monitoring and reporting under the new 2022 Code of Practice, while the methodology and granularity of the data provision needs to be further developed. Signatories provide data for different periods of time, indicating difficulties to pull data for only one month of implementation. This shall be aligned for the next reporting period. As the reports contain certain gaps in data and have some shortcomings in granularity or Member State level data, we expect this to be improved by the next reporting period in line with the Code’s relevant provisions.
The next set of reports from major online platform Signatories are due in July and are expected to provide further insight on the Code’s implementation and more stable data, covering 6 months.
The Commission also expects Signatories to deliver the first set of Structural Indicators for the next reporting exercise in July. Such indicators can provide important insights feeding into the assessment of the implementation of the Code and its impact in reducing the spread of disinformation online.
The Permanent Task-force
The Code’s Permanent Task-force and its subgroups will continue their intense work in 2023. From June 2022, subgroups have been working on implementing the Code and deepening the work in different areas, for instance providing a common list of Tactics, Techniques and Procedures (TTPs), developing the indicator measuring demonetisation efforts, adopting the harmonised templates and establishing the Transparency Centre.
The Subgroups have also fostered exchanges between Signatories, in particular regarding fighting the spread of disinformation in the context of crisis, notably Russia’s war of aggression against Ukraine and COVID-19. In this context, major online platforms also delivered specific dedicated sections in their baseline reports with detailed information on what measures they have taken under the Code to reduce disinformation around these crises. Such targeted exchanges will continue further within the Task-force, with a strong focus on fighting disinformation on Ukraine.
New Signatories and Expressions of Interest to join the Code
The Code remains open for new Signatories to join, and expressions of interest can now be submitted through the Transparency Centre. Since the signature of the Code in June 2022, four additional Signatories joined the 2022 Code, attesting of the Code’s appeal for the sector: Alliance4Europe, Ebiquity plc, the Global Disinformation Index and Science Feedback.
Some examples of data from the reports

Google indicates that in Q3 2022 it prevented more than EUR 13 million of advertising revenues from flowing to disinformation actors in the EU.
MediaMath, a demand-side platform that allows ad buyers better management of programmatic ads, provides an EU overall estimate of EUR 18 million of advertising revenues prevented from funding sites identified as purveyors of disinformation and misinformation.
TikTok reported that in Q3 2022 they removed more than 800,000 fake accounts, while more than 18 million users were following these accounts. They also indicate that the fake accounts removed represent 0.6% of the EU monthly active users.
Meta reported that in December 2022, about 28 million fact-checking labels were applied on Facebook and 1.7 million on Instagram. When it comes to the effectiveness of these labels, Meta indicates that on average, 25% of Facebook users do not forward content after receiving a warning that the content has been indicated as false by fact-checkers. This percentage increases to 38% on Instagram. Meta also provides data on Member State level regarding fact-checking efforts.
Microsoft reported that the news reliability ratings provided under its partnership with Newsguard (itself also a signatory of the Code) were displayed 84,211 times in the Edge browser discover pane to EU users in December 2022
Twitch reported that, to preserve the integrity of their services, between October and December 2022, it blocked 270,921 inauthentic accounts and botnets created on its platform and took action against 32 hijacking and impersonation attempts. Additionally, thanks to collaboration with the Global Disinformation Index (GDI), Twitch successfully removed 6 accounts actively dedicated to promoting QAnon on the platform.
Faktograf, a factchecker from Croatia, within the contract agreements they have in place with major online platforms, published in Croatian language 41 articles in January 2023, and 248 articles in the last 6 months.
Maldita.es, a factchecker from Spain, inspired the creation of UkraineFacts, a debunk database open to fact-checkers from all around the world that resulted in sharing over 5,000 articles related to the war in Ukraine from almost 100 organisations.

Additional data examples from the Crisis section of the reports
On the war of aggression in Ukraine:

Google’s YouTube blocked more than 800 channels and more than 4 million videos related to the Russia/Ukraine conflict since 24 February 2022.
Microsoft Advertising prevented between February and December 2022 about 25,000 advertiser submissions relating to the Ukrainian crisis globally, and removed 2,328 domains.
TikTok, from October to December 2022, 90 videos were fact-checked related to the war, and 29 videos removed a consequence of fact-checking activity.

On COVID-19:

Meta, since the beginning of the pandemic, removed more than 24 million pieces of content globally for violating its COVID-19 misinformation policies across Facebook and Instagram.
Google AdSense, from 1 January 2020 to 30 April 2022, has taken action under the Misrepresentative Content Policy, for harmful health claims on over 31,900 URLs with COVID-19 related content.
TikTok, between October and December 2022, removed in the EU 1802 videos violating their misinformation policy on COVID-19 after being reported, and 1557 proactively.

Compliments of the European Commission.
The post Signatories of the Code of Practice on Disinformation deliver their first baseline reports in the Transparency Centre first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, the Commission has proposed detailed rules to define what constitutes renewable hydrogen in the EU, with the adoption of two Delegated Acts required under the Renewable Energy Directive. These Acts are part of a broad EU regulatory framework for hydrogen which includes energy infrastructure investments and state aid rules, and legislative targets for renewable hydrogen for the industry and transport sectors. They will ensure that all renewable fuels of non-biological origin (also known as RFNBOs) are produced from renewable electricity. The two Acts are inter-related and both necessary for the fuels to be counted towards Member States’ renewable energy target. They will provide regulatory certainty to investors as the EU aims to reach 10 million tonnes of domestic renewable hydrogen production and 10 million tonnes of imported renewable hydrogen in line with the REPowerEU Plan.
More renewables, less emissions
The first Delegated Act defines under which conditions hydrogen, hydrogen-based fuels or other energy carriers can be considered as an RFNBO. The Act clarifies the principle of “additionality” for hydrogen set out in the EU’s Renewable Energy Directive. Electrolysers to produce hydrogen will have to be connected to new renewable electricity production. This principle aims to ensure that the generation of renewable hydrogen incentivises an increase in the volume of renewable energy available to the grid compared to what exists already. In this way, hydrogen production will be supporting decarbonisation and complementing electrification efforts, while avoiding pressure on power generation.
While initial electricity demand for hydrogen production will be negligible, it will increase towards 2030 with the mass rollout of large-scale electrolysers. The Commission estimates that around 500 TWh of renewable electricity is needed to meet the 2030 ambition in REPowerEU of producing 10 million tonnes of RFNBOs. The 10Mt ambition in 2030 corresponds to 14% of total EU electricity consumption. This ambition is reflected in the Commission proposal to increase the 2030 target for renewables to 45%.
The Delegated Act sets out different ways in which producers can demonstrate that the renewable electricity used for hydrogen production complies with additionality rules. It further introduces criteria aimed to ensure that renewable hydrogen is only produced when and where sufficient renewable energy is available (known as temporal and geographic correlation).
To take into account existing investment commitments and allow the sector to adapt to the new framework, the rules will be phased in gradually, and designed to become more stringent over time. Specifically, the rules foresee a transition phase of the requirements on “additionality” for hydrogen projects that will start operating before 1 January 2028. This transition period corresponds to the period when electrolysers will be scaled up and come onto the market. Furthermore, hydrogen producers will be able to match their hydrogen production with their contracted renewables on a monthly basis until the 1 January 2030. However, Member States will have the option of introducing stricter rules about temporal correlation as of 1 July 2027.
The requirements for the production of renewable hydrogen will apply to both domestic producers as well as producers from third countries that want to export renewable hydrogen to the EU to count towards the EU renewables targets. A certification scheme relying on voluntary schemes will ensure that producers, whether in the EU or in third countries, can demonstrate in a simple and easy way their compliance with the EU framework and trade renewable hydrogen within the Single Market.
The second Delegated Act provides a methodology for calculating life-cycle greenhouse gas emissions for RFNBOs. The methodology takes into account greenhouse gas emissions across the full lifecycle of the fuels, including upstream emissions, emissions associated with taking electricity from the grid, from processing, and those associated with transporting these fuels to the end-consumer. The methodology also clarifies how to calculate the greenhouse gas emissions of renewable hydrogen or its derivatives in case it is co-produced in a facility that produces fossil-based fuels.
Following today’s adoption, the Acts will now be transmitted to the European Parliament and the Council, which have 2 months to scrutinise them and to either accept or reject the proposals. At their request, the scrutiny period can be extended by 2 months. There is no possibility for the Parliament or Council to amend the proposals.
Background
In 2020, the Commission adopted a Hydrogen Strategy setting out a vision for the creation of a European hydrogen ecosystem from research and innovation to production and infrastructure, and development of international standards and markets. Hydrogen is expected to play a major role in the decarbonisation of industry and heavy-duty transport in Europe and globally. As part of the ‘Fit for 55′ package, the Commission has introduced several incentives for its uptake, including mandatory targets for the industry and transport sectors.
Hydrogen is also a key pillar of the REPowerEU Plan to get rid of Russian fossil fuels. The Commission has outlined a ‘Hydrogen Accelerator’ concept to scale up the deployment of renewable hydrogen. In particular, the REPowerEU Plan aims for the EU to produce 10 million tonnes and import 10 million tonnes of renewable hydrogen by 2030.
On top of the regulatory framework, the Commission is also supporting the emergence of the hydrogen sector in the EU via Important Projects of Common European Interest (IPCEIs). The first IPCEI, called “IPCEI Hy2Tech“, which includes 41 projects and was approved in July 2022, aims at developing innovative technologies for the hydrogen value chain to decarbonise industrial processes and the mobility sector, with a focus on end-users. In September 2022, the Commission approved “IPCEI Hy2Use“, a second project which complements IPCEI Hy2Tech and which will support the construction of hydrogen-related infrastructure and the development of innovative and more sustainable technologies for the integration of hydrogen into the industrial sector.
Compliments of the European Commission.
The post EU Commission sets out rules for renewable hydrogen first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Novel survey shows how concerned people are about climate change, how they view mitigation polices, and what drives support for climate action

People across the world worry about climate change, but that concern alone doesn’t translate into support for climate mitigation policies.
That’s our finding based on a recent survey designed to better illustrate how people perceive the risks from climate change and their support for government climate actions.
Responses also show that those who were more concerned about climate change tend to be female, more educated, followers of news, and more accepting of government’s role in regulating the economy. Data shows that public transport users and those that rely less on cars are also more concerned about climate change.
Our survey of almost 30,000 people in 28 countries was conducted in July and August by market researcher YouGov. The survey covered advanced and emerging economies and included 20 of the top 25 emitters as well as nine of the 25 countries most exposed to climate change.
This novel survey of climate mitigation beliefs offers policymakers a better understanding of how to address the urgent challenge of climate change. While governments have ambitious goals, the world is not yet on track to contain global warming to 1.5 to 2 degrees Celsius. According to scientists, failing to get emissions on the correct course by 2030 may lock global warming above 2 degrees and risk a catastrophic tipping point at which climate change becomes self-perpetuating.
Our survey shows that providing even small amounts of information on policy efficacy and benefits—including co-benefits, such as improved air quality and better health—can engender greater support. This support, however, may be short-lived if policy tradeoffs are not made explicit, highlighting the importance of ensuring the public understands the relative costs and benefits of available policy options.
Some of the most economically efficient policies, such as carbon pricing based on the content of fuels or their emissions, often face political resistance. Importantly, the survey highlights that climate concern alone doesn’t translate into broad support for carbon pricing policies such as carbon taxes or emissions trading systems.
Carbon pricing is more acceptable when presented along with information about the impact of climate change, how pricing works, and options for using the revenue it generates. Notably, people are more supportive of the policy if the revenues it generates are used to shield economically vulnerable groups from the adverse impact of climate policies.
Subsidizing green investments finds large support across all countries, while opponents often cite concerns about corruption and policy ineffectiveness even as proponents can sometimes fail to recognize the costs associated with these policies for the public budget. This suggests that public spending and investment efficiency matters in enhancing support for greening the economy.
Support for multilateral action
The survey points to broader support for collective action and larger common ground for crafting international agreements than expected. A majority of respondents across all countries think that climate change policy will only be effective if most countries adopt measures to reduce carbon emissions.
Moreover, most respondents in both advanced and emerging market economies think that all countries, not only rich ones, should pay to address climate change. In addition, a large share of respondents in most countries say burden sharing should be based on current rather than historical emissions. The public is likely to back costly climate policies if other countries do so, both because this increases the odds of reaching global net-zero emissions goals and because those efforts resonate as fair.
Knowledge of climate mitigation policies remains patchy, and many people still have no opinion when it comes to supporting or opposing climate policy actions in their country. Here’s how governments can better support the urgent need for green transitions:

Educate the public about the causes and consequences of climate change and the costs of inaction
Talk about the costs of inaction, such as pollution, and the benefits of addressing these, like improvements for air quality, health, and protection of low-income households
Emphasize that the policies work, so the trade-offs are worth it
Underscore the shared spirit of solidarity and need for strong climate policies in a broad range of economies

Authors:

Bo Li
Era Dabla-Norris
Krishna Srinivasan

Compliments of the IMF.
The post IMF | Support for Climate Action Hinges on Public Understanding of Policy first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Governor Christopher J. Waller at the 2023 Arkansas State University Agribusiness Conference, Jonesboro, Arkansas, February 08, 2023 |
Thank you, Bert, and thank you for the opportunity to talk about where the economy is heading, what the Federal Reserve is doing to get inflation back down to our 2 percent goal, and how all that is likely to affect American agriculture.1
The big picture is that the U.S. economy is adjusting well so far to the higher interest rates that are necessary to rein in inflation. But inflation remains quite elevated, and so more needs to be done. Although economic activity slowed in 2022, I expect the Fed will need to keep a tight stance of monetary policy for some time to slow activity further in 2023. That is what I believe is needed to bring demand and supply into better alignment and lower inflation toward the Federal Open Market Committee’s (FOMC) 2 percent target. Some believe that inflation will come down quite quickly this year. That would be a welcome outcome. But I’m not seeing signals of this quick decline in the economic data, and I am prepared for a longer fight to get inflation down to our target.
So, what is my take on the recent data? It looks like the economy grew at a solid pace in the final quarter of the year, the labor market remained tight, and inflation continued to retreat. After adjusting for inflation, personal consumption grew at around a 2 percent rate, though it contracted in the last two months of the year amid some pretty significant headwinds.
One of those headwinds was high inflation, including for food and agricultural products. After accounting for inflation, spending on food consumed at home fell in 2022 after rising strongly in 2020 and 2021, the effect of both large price increases over the past year and the normalization of spending on groceries, which surged when people stayed home during the pandemic and reversed when they returned to restaurants.
Looking forward, I expect personal consumption will grow modestly and price increases will moderate, and I think such outcomes would bode well for the agricultural sector this year. It looks as though economic activity may be moderating further in the first quarter of 2023, but I expect the U.S. economy to continue growing at a modest pace this year, supported by a strong labor market and by encouraging progress in lowering inflation.
Though we have made progress reducing inflation, I want to be clear today that the job is not done. Inflation is still too high relative to the price stability goal of the dual mandate assigned to the Federal Reserve by Congress. The Fed has defined that goal as 2 percent annual inflation, as measured by the change in the price index for personal consumption expenditures, but another yardstick you could use is when high prices for groceries and other things are no longer front page news, and when farmers can worry less about rising costs for fertilizer and other inputs.
That is where we intend to get to, and thus the FOMC last week increased the target range for the federal funds rate by another 25 basis points, to 4-1/2 to 4-3/4 percent. Our intention is to tighten financial conditions, including raising the cost of credit, to dampen demand and spending to further reduce inflation. Of course, we know that higher interest rates pose challenges for farmers and ranchers who must borrow to smooth out the costs and returns from agriculture over the year. But excessive inflation is a larger challenge because it has the potential to become a lasting problem weighing on economic growth, undermining living standards, and hurting consumers, who farmers depend on. That is why I am determined to get the job done, get high inflation off the front pages, and back to being something that households and businesses don’t think too much about when making decisions.
Continued upward pressure on inflation comes, in part, from a very tight labor market. The Job Openings and Labor Turnover Survey for December continued to show that the demand for workers remains robust, with job openings increasing by over 500,000 at the end of last year. Based on last Friday’s initial estimate, we learned that the U.S. economy created a whopping 517,000 jobs in January, 330,000 more than the solid growth that was expected by economic forecasters. Furthermore, the unemployment rate ticked down to 3.4 percent, the lowest level since 1951.
Such employment gains mean labor income will also be robust and buoy consumer spending, which could maintain upward pressure on inflation in the months ahead. For employers, the very strong labor market makes it hard to find and retain workers. One effect of this tightness is seen in wages and other compensation, which ultimately show up in the prices that consumers pay for goods and services. For example, last year the Employment Cost Index (ECI), which tracks movements in labor costs, including both wages and benefits, increased over 5 percent, the highest rate since 1984. We want to see wages grow but at a pace that is consistent with our goal of stable prices.
We have seen some moderation in compensation growth in recent months but not enough. The ECI for hourly compensation for private industry workers increased at an annual rate of 4 percent over the three months ending in December, a step down from the 4.3 percent gain recorded over the three months ending in September and the 6.3 percent increase in June but still a strong increase. More recently, the 12-month change in a narrower measure of labor costs, average hourly earnings, was about 4-1/2 percent in January, continuing its slow deceleration from 5-1/2 percent last summer. The data are moving in the right direction, but I will watch for further slowing because we don’t want excessive wage increases to be a potential source of higher inflation in the future.
So now let’s talk about inflation. I will start with overall inflation and then focus on the different components, including food. I will talk about what those components can tell us about the direction of overall inflation and how I look at the different parts of inflation in my approach to monetary policy.
Figure 1 depicts inflation measured by two common indexes. No matter how one measures it, inflation has been running too hot for too long. “Overall” or “headline” inflation indexes are measured as the rate of increase in the average price level of a broad group of goods and services, called a market basket. Government statistics on the inflation rate will be a function of the specific goods and services included in the market basket. Including a different set of goods and services in the market basket will result in a different overall inflation rate.
Probably the most often-discussed inflation measure in the United States is one based on the consumer price index (CPI). The CPI is widely used as a cost-of-living index to adjust Social Security and other payments. The CPI puts considerable weight on the prices of food, energy, and shelter. These three items account for about 50 percent of the expenditures in the CPI basket.2
A second measure that is frequently watched is the one I mentioned earlier, the personal consumption expenditures (PCE) price index, which places less weight on food, energy and shelter—they make up about 30 percent of the expenditures in the PCE basket. The FOMC chose the PCE index over the CPI for its inflation target in part because it includes a broader set of goods and services in its market basket and is widely believed to better capture changes in the mix of goods and services purchased by consumers.
Monetary policy works with a lag, and after the Federal Reserve started raising interest rates last March, inflation peaked in the middle of 2022 and has been falling gradually since then. Twelve-month PCE inflation hit a high of 7 percent in June but ended the year at 5 percent. By comparison, over the final three months of 2022, headline inflation was much lower, running at an annualized rate of just 2.1 percent. The difference between the three-month and 12-months changes is a signal of ongoing moderation. As has been the case since the summer, falling energy prices are a big reason for lower inflation in the last few months, though food price inflation also moderated in the final few months of 2022.
These improvements are welcome news, but we need to keep them in perspective. As we can see in the figure, though PCE inflation is down from its peak, it is still quite elevated. And while the recent trend is encouraging, the improvements over the past year have been coming in ebbs and flows and it likely will continue this way. I need to be confident that inflation is declining in a sustained manner towards our 2 percent target, so I will need to see continued moderation in inflation before my outlook changes.
So where do I think inflation is heading? You will often hear economists talk about core inflation, which strips out energy and food prices, which tend to be volatile. The core measure is considered a better guide to the direction of future inflation. You might wonder why it is that the Fed doesn’t just target core inflation in measuring progress toward our price stability goal. There are some good reasons for keeping the focus on overall inflation, and in front of an audience of people who pay a lot of attention to food price inflation, I thought I would take a couple minutes to explain why I consider food and all of the components of inflation to be so important in my approach to setting monetary policy.
The argument for stripping out food and energy prices is that they tend to be quite volatile, with big ups and downs tending to equal out over time, and thus do not provide a clear signal of how inflation in these categories will evolve. One can see the recent volatility in figure 2 that reports 12-month rates of inflation for food and energy. Energy prices were decreasing for most of 2020 (they fell 10 percent during that period) but then switched to very large increases in 2021 and the first half of 2022. In mid-2022 we saw energy prices up about 40 percent from the year before. By December, that retraced to less than a 7 percent increase over 2021. And I’m sure I don’t have to tell anyone that food inflation has been quite high relative to its pre-pandemic average. Of course, food prices haven’t increased as much as energy prices, but food inflation has risen notably in 2021 and 2022 and has been running above 10 percent recently, which is unusually high. I know that farmers have been dealing with sharply rising input costs, and that is a significant factor driving up wholesale and retail prices for many food products. As shown in figure 3, inflation for agricultural chemicals, such as fertilizer, skyrocketed in 2021 and continued up in early 2022 and, though this inflation has moderated in recent months, the price level of agricultural chemicals remains very high.
Core inflation, as shown in Figure 4, didn’t rise as much as headline inflation in this recent period of high food and energy price increases, and lately it hasn’t moderated as much. Core inflation stood at 4.4 percent in December, over double the Fed’s 2 percent target for headline inflation. Core inflation includes a measure of housing services, which is what households pay for rent or the equivalent for those who own their homes. Housing services inflation has been stubbornly high for all of 2022 and is a big factor driving up core inflation. There is good reason to believe rents will moderate significantly over this year and so some people have suggested that the focus should be on a “super core” measure of inflation that excludes food, energy, and housing. That would make inflation look not nearly as bad over the last year or two and also likely not show much improvement in the coming months.
But there are a few reasons why I don’t let these stripped-down measures of inflation shape my views of the inflation environment. First, yes, historically food and energy prices have been volatile, and it has not been unusual to see price increases followed by price declines over fairly short periods of time, but that isn’t the recent history. In the last two years, prices for these goods and services have been moving largely in one direction—up—and even the decline in energy prices we saw in the second half of 2022 hasn’t offset the huge increases earlier.
The second reason that I wouldn’t exclude food, energy, and housing prices, or want to move toward a narrower inflation target, is that, by any measure of headline inflation, they constitute a large share of expenses paid by people. Excluding this large share of consumer spending doesn’t give you an accurate picture of what consumers are facing in their everyday lives, and that is a perspective that policymakers should never forget.
The third reason to include, rather than exclude, these prices in considering inflation is that they make up an even larger share of expenses for lower-income people, who have less savings and other means to deal with the ups and downs of their finances and the economy. Recent research indicates that the share of overall spending that lower-income households dedicate to food, energy and housing is about 1.2 times (or 20 percent more) than the share spent by higher-income households. Because of this disparity, when inflation peaked last summer, lower-income households effectively faced inflation that was a percentage point higher than was paid by higher-income households.3
Lastly, and this is really the bottom line, the Fed has stated that its target for inflation is headline PCE prices. So, to meet the Fed’s price stability objective, policymakers are accounting for all the categories of goods and services that affect households.
With that context, let me take a few minutes on each of the three big categories to highlight how they have been moving, and I think there is some good news. Let’s look at each category in the order of how much consumers spend on them each month. Housing services are about 15 percent of the PCE basket. Figure 5 shows how housing inflation has been evolving both when measured on a 12-month basis (left panel) and 3-month basis (right panel). As I just noted, housing inflation has been stubbornly elevated. This is true if you look at inflation over the past year or just at recent months. But high frequency measures of market rents (for new leases by new tenants) have slowed sharply, suggesting an upcoming slowing in the rate of inflation in this part of the PCE basket. Because rents usually don’t change until leases run out, these recent declines in market rent inflation will only show through to the official inflation measure with a delay. So I expect, over time, that housing inflation will move down to be more in line with core inflation.
Turning to food, which represents about 7.5 percent of consumption in the PCE basket, figure 6 shows that the 12-month change in PCE food prices has greatly outpaced that of core PCE inflation over the past couple of years. More recently, we can see that the 3-month change in the PCE price index for food has slowed considerably, which is a good sign. But food inflation is still above the average annual pace of 1.1 percent over the ten years preceding the pandemic. This ongoing elevated food inflation likely reflects passthrough of the past strong increases in food commodity prices, rising labor and fuel costs, as well as supply-chain bottlenecks in packaging and transportation that have limited supplies amid strong demand. For example, as seen in figure 7, spot prices for cattle and soybeans are well above their levels at the onset of the pandemic, likely boosted by the sharply rising input costs farmers have been facing, which I discussed earlier. However, futures prices for these commodities suggest limited movements in these prices through year end. If this plays out, with a slowdown in wage increases that should occur because of tighter monetary policy, this should help continue to moderate food inflation over the next few years.
Finally, let’s turn to energy inflation. Households spend less than 5 percent of their PCE basket on gasoline, electricity, and heating but, as seen in the left panel of figure 8, the energy price index skyrocketed over the past couple of years, reflecting a surge in crude oil prices after the pandemic recession which was exacerbated by Russia’s invasion of Ukraine. Turning to the 3-month change (the right panel) energy prices have been declining sharply recently and we expect them to continue to decline this year, reflecting the path of crude oil futures prices and the expectation that unusually elevated gasoline margins will, on average, decline over the remainder of this year.
So, what do I take away from all this? I think there are practical implications for getting a clear picture of the economy and setting appropriate monetary policy, and also a reminder for me about the trust I bear as a public official.
Most practically, if I had focused on core inflation over the last two years and tended to look past increases for food and energy, and especially for housing, I would have missed an alarming increase in inflation, and reacted more slowly than my Federal Reserve colleagues and I appropriately did to start bringing down inflation. The Federal Open Market Committee raised interest rates more quickly than it had in more than forty years, and I think the progress we have made on inflation shows how important it was to act so urgently.
Just as importantly, excluding those prices would have neglected how much hardship this high inflation has been for many people, especially lower-income individuals and families. High inflation is a very different experience when you are effectively paying a higher rate than others, when a higher share of your expenses and income are spent on necessities, and when you have little in savings to draw on, as lower-income people do. When I talk about how important it is to win this inflation fight, it is partly in recognition of this inescapable reality for many millions of people.
Fortunately, there are signs that food, energy, and shelter prices will moderate this year. An important factor has been the Federal Reserve’s ongoing fight to lower inflation through tighter monetary policy. We are seeing that effort begin to pay off, but we have farther to go. And, it might be a long fight, with interest rates higher for longer than some are currently expecting. But I will not hesitate to do what is needed to get my job done.
Compliments of the U.S. Federal Reserve.
Footnotes:
1. I am grateful to Katia Peneva for assistance in preparing these remarks. These remarks represent my own views, which do not necessarily represent those of my colleagues on the Federal Reserve Board and the Federal Open Market Committee. Return to text
2. Food at home, energy and housing represent 49 percent of the CPI basket, whereas all food, energy and housing are 54 percent of the market basket. Return to text
3. Based on work by Jake Orchard (2022) that matches consumption spending by income with CPI data. See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4033572. Return to text

The post Speech: U.S. FED | The Inflation Rate for Necessities: A Look at Food, Energy and Shelter Inflation first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Trade openness increased after the Second World War, but has slowed following the global financial crisis

The free flow of ideas, people, goods, services, and capital across national borders leads to greater economic integration. But globalization, the trend toward these things moving ever more freely between nations, has seen ebbs and flows over the decades.
Those trends are coming into sharper focus this year as policymakers work to understand and address the prospect of geoeconomic fragmentation, which threatens to undo the integration that has improved the lives and livelihoods of billions of people.
Looking back over a century and a half of data, the main phases of globalization are clearly visible using the trade openness metric—the sum of exports and imports of all economies relative to global gross domestic product.
As the Chart of the Week shows, globalization plateaued in the decade and a half since the global financial crisis. This latest era is often referred to as “slowbalization.”

Each of the chart’s five main periods was characterized by different configurations of economic and financial powers, and different rules and mechanisms for economic and financial ties between countries, as we recently highlighted in a recent IMF staff note that discussed the impact of trade fragmentation as well as technological decoupling.

The Industrialization era was a period when global trade—dominated by Argentina, Australia, Canada, Europe, and the United States—was facilitated by the gold standard. It was largely driven by transportation advances that lowered trade costs and boosted trade volumes.
The Interwar era saw a dramatic reversal of globalization due to international conflicts and the rise of protectionism. Despite the League of Nations push for multilateral cooperation, trade became regionalized amid trade barriers and the breakdown of the gold standard into currency blocs.
The Bretton Woods era saw the United States emerge as the dominant economic power with the dollar, then pegged to gold, underpinning a system with other exchange rates pegged to the greenback. The post-war recovery and trade liberalization spurred rapid expansion in Europe, Japan, and developing economies, and many countries relaxed capital controls. But expansionary US fiscal and monetary policy driven by social and military spending ultimately made the system unsustainable. The United States ended dollar-gold convertibility in the early 1970s, and many countries switched to floating exchange rates.
The Liberalization era saw gradual removal of trade barriers in China and other large emerging market economies and unprecedented international economic cooperation, including the integration of the former Soviet bloc. Liberalization accounted for most of the increase in trade, and the World Trade Organization, established in 1995, became a new multilateral overseer of trade agreements, negotiations and dispute settlement. Cross-border capital flows surged, increasing the complexity and interconnectedness of the global financial system.
The “Slowbalization” that followed the global financial crisis has been characterized by a prolonged slowdown in the pace of trade reform, and weakening political support for open trade amid rising geopolitical tensions.

Authors:

Shekhar Aiyar
Anna Ilyina

Compliments of the IMF.
The post IMF | Charting Globalization’s Turn to Slowbalization After Global Financial Crisis first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.