The international Price Cap Coalition has finalised its work on implementing an oil price cap on Russian seaborne crude oil. EU Member States in the Council have also just approved in parallel its implementation within the EU.
The cap has been set at a maximum price of 60 USD per barrel for crude oil and is adjustable in the future in order to respond to market developments. This cap will be implemented by all members of the Price Cap Coalition through their respective domestic legal processes.
Ursula von der Leyen, President of the European Commission, said, “The G7 and all EU Member States have taken a decision that will hit Russia’s revenues even harder and reduce its ability to wage war in Ukraine. It will also help us to stabilise global energy prices, benefitting countries across the world who are currently confronted with high oil prices.”
While the EU’s ban on importing Russian seaborne crude oil and petroleum products remains fully in place, the price cap will allow European operators to transport Russian oil to third countries, provided its price remains strictly below the cap.
The price cap has been specifically designed to reduce further Russia’s revenues, while keeping global energy markets stable through continued supplies. It will therefore also help address inflation and keep energy costs stable at a time when high costs – particularly elevated fuel prices – are a great concern in the EU and across the globe.
The price cap will take effect after 5 December 2022 for crude and 5 February 2023 for refined petroleum products [the price for refined products will be finalised in due course]. It will enter into force simultaneously across all Price Cap Coalition jurisdictions. The price cap also provides for a smooth transition – it will not apply to oil purchased above the price cap, which is loaded onto vessels prior to 5 December and unloaded before 19 January 2023.
More Information
The EU’s sanctions against Russia are proving effective. They are damaging Russia’s ability to manufacture new weapons and repair existing ones, as well as hinder its transport of material.
The geopolitical, economic, and financial implications of Russia’s continued aggression are clear, as the war has disrupted global commodities markets, especially for agrifood products and energy. The EU continues to ensure that its sanctions do not impact energy and agrifood exports from Russia to third countries.
As guardian of the EU Treaties, the European Commission monitors the enforcement of EU sanctions across the EU.
The EU stands united in its solidarity with Ukraine, and will continue to support Ukraine and its people together with its international partners, including through additional political, financial, and humanitarian support.
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Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, Lustrum Symposium organised by Dutch Financial Law Association | Amsterdam, 1 December 2022 |

“We can’t overstate the importance of European Climate Law and the EU is setting the bar high,” says Executive Board member Frank Elderson. “As a central bank and banking supervisor, our policies will duly take into account the objectives of the Climate Law.”

I am honoured to speak at this 20th anniversary dinner, with so many distinguished lawyers around me. In this setting, I feel quite comfortable dwelling on legal issues for a while.
A topic close to my heart – apart from the law – is the ongoing climate and environmental crises. I am glad that we have long since moved on from the time when only scientists and activists were concerned with this topic. It is now high on policymakers’ agendas, as we saw at the recent United Nations Conference of Parties (COP27) at Sharm el-Sheikh, at which – along with world leaders and a wide range of policymakers and interest groups – the ECB was also represented.
I was struck by one story in particular.[1] The tiny Pacific nation of Vanuatu is badly exposed to cyclones and rising sea levels. To the inhabitants of Vanuatu, climate change is a human rights issue. And, as Vanuatu’s president, Nikenike Vurobaravu, stated, “we are measuring climate change not in degrees of Celsius or tonnes of carbon, but in human lives.”
Vanuatu now plans to ask the UN General Assembly to seek an opinion from the International Court of Justice on the human rights implications of the climate crisis. That opinion could determine the rights of countries most exposed to climate change. It could also touch on the obligations of those most responsible for driving the climate crisis.
Let’s now focus on Europe and the possible implications of these developments in international law for my own institution, the ECB. Under the Paris Agreement adopted at COP21 in 2015, many countries committed to the long-term goal of holding the increase in the global average temperature to well below 2°C above pre-industrial levels.[2]
To fulfil its commitment as one of parties to the Paris Agreement, the EU last year adopted the European Climate Law.[3] The implications of the Climate Law are significant. Before going into why, let me first explain what the Climate Law does.
The Climate Law has three key elements. The first is its objective that the EU reduce its greenhouse gas emissions by at least 55% by 2030, with a new reduction target to be set for 2040. The EU should achieve climate neutrality by 2050 and aim to achieve negative emissions thereafter. The second important element is to ensure that we move towards that objective. The European Commission has established a framework for assessing concrete progress and checking whether national and Union measures are consistent with the objective. It will issue regular reports on the conclusions of these assessments. The third and last element is to ensure that we use the most effective instruments to achieve the objective. The introduction of a European Scientific Advisory Board on Climate Change promotes the idea that all policies should be based on up-to-date scientific insights.
It is hard to overstate the importance of the Climate Law. The EU is setting the bar high. Allow me to quote what the law says about the transition to climate neutrality. It “requires changes across the entire policy spectrum and a collective effort of all sectors of the economy and society […] all relevant Union legislation and policies need to be consistent with, and contribute to, the fulfilment of the climate-neutrality objective while respecting a level playing field”[4].
We are starting to see this happen. From housing to energy and from transport to finance, the EU is introducing reforms to put Europe on track to become the first climate-neutral continent by 2050. So how will the Climate Law affect the ECB? For me, as a member of the ECB’s Executive Board and the Vice-Chair of its Supervisory Board, this question is relevant to both our monetary policy and banking supervision tasks.
This question matters because, in the field of the environment, the ECB is a policy taker, not a policymaker. So what does the ECB need to take from the policy and objectives reflected in the Climate Law? To answer this, we first need to consider whether the ECB is bound by the Climate Law. If so, the ECB would have to take measures towards achieving the climate-neutrality objective.
There is more, though. If the ECB is bound by the law, it would also have to ensure continuous progress in enhancing adaptive capacity, strengthening resilience and reducing vulnerability to climate change. Moreover, it would have to ensure that its policies on adaptation are coherent with and supportive of other such policies in the Union.[5]
That is quite a full plate. So, is the ECB bound by the Climate Law? There are definitely indications that it is. The Climate Law is addressed to “relevant Union institutions and the Member States”. In the European Anti-Fraud Office (OLAF) judgment[6], the European Court of Justice made it clear that, in principle, the ECB is bound by all regulations which bind the Union. There is no distinction to be made between the different institutions, bodies, offices and agencies. All are equal under the law, so to say.
However, the word “relevant” is ambiguous. Does it refer to any institution, where relevant? That would mean that every EU institution should comply with the Climate Law, whenever it develops policy or takes action relevant to the objective of the law. Or does it refer only to those institutions with competence to create policy relevant to achieving the objective of the Climate Law? The ECB would be directly bound by the law under the first interpretation but not under the second.
The Climate Law is not crystal clear on this point. It does not define “relevant institution”. But there are a number of strong indications that the ECB is not a relevant institution under the Climate Law. Let me explain why. The Climate Law does not contain many specific obligations. The law sets out a destination: climate neutrality. It does not tell us how to get there. How we do so will depend on environmental and economic policymaking. This is a Union competence the ECB does not have.
There are further arguments that support this interpretation. If the ECB is deemed to be a relevant institution, then it would have to submit its policies to the Commission for assessment and the Commission would monitor progress. That would be a fundamental change to the ECB’s accountability framework. Under current law, the ECB is only directly accountable to the European Parliament and the European Court of Auditors.[7]
A final reason for this view is institutional. If the ECB were deemed to be a relevant institution within the meaning of the Climate Law, this would be an implicit acceptance that the Council of the EU and the Parliament could set additional objectives for the ECB through the ordinary legislative procedure. However, the ECB’s objectives are laid down in the Treaty on the Functioning of the European Union (TFEU)[8], and their scope cannot be changed by secondary legislation. That would be a violation of the Treaty. Changing the ECB’s objectives requires a special procedure.
The ECB is – it seems – not directly bound by the Climate Law. So, can we ignore it? Not at all. To do so would be a violation of the Treaties. Article 11 of the TFEU provides that environmental protection requirements must be “integrated into the definition and implementation of the Union’s policies and activities”. This imposes an obligation on the ECB to take into account and consider the objectives of the Climate Law when performing its tasks. In addition, Article 11 could be understood as supporting measures which incorporate environmental considerations as secondary aims. This means the ECB could rely on Article 11 to support the climate neutrality dimension of measures falling within its monetary policy or supervisory competences. But it does not go so far as to establish an autonomous competence to adopt environmental measures. In addition, under Article 7 of the TFEU, the activities and policies of the ECB need to be consistent with Union law and therefore also with the Climate Law.
We have diligently assessed how these provisions of the Treaty, together with the Climate Law, affect our tasks, always being guided by and staying within our mandate. The ECB is not an environmental policy institution. The ECB is a central bank and banking supervisor. As such, let me share with you what we have done to reflect these legal requirements in the common fight against the climate crisis within our mandate.
First of all, when defining and implementing monetary policy, we need to take into account environmental protection requirements, such as the climate-neutrality objectives contained in the Climate Law. And that is what we have done. Last year the Governing Council adopted a comprehensive action plan[9] to further incorporate climate change considerations into its monetary policy framework.
There are a number of actions to which the ECB is committed under this plan. Let me now give a very concrete example of how the ECB has taken into account climate change considerations in the context of its corporate sector purchase programme (CSPP).
Under the CSPP, the Eurosystem purchases corporate bonds for monetary policy purposes. Right now we are in the reinvestment phase which means that we are no longer increasing our portfolio but only reinvesting bonds that mature. Up until October 2022, the Eurosystem purchased these bonds in accordance with the “market benchmark”. However, owing to the way the corporate bond market functions, this “market benchmark” has been criticised as leading to the purchase of a larger proportion of bonds from carbon-intensive firms.
Therefore, from October 2022, the ECB started to implement its decision to “tilt” CSPP reinvestments to increase the share of assets from issuers with better climate performance, rather than those with poorer climate performance. There are two main reasons for this decision.
First, the ECB considered this essential in order to effectively pursue its primary objective of maintaining price stability. Given that carbon-intensive issuers are more vulnerable to physical and transition risks arising from climate change, large holdings of bonds from such companies pose higher financial risks to the Eurosystem’s balance sheet, which has an impact on the implementation of its monetary policy.
Second, “tilting” the CSPP also serves the ECB’s secondary objective of supporting the general economic policies in the Union. “Tilting” its corporate bond reinvestments towards “greener” companies enables the ECB to align these reinvestments with the objectives set out in the Climate Law, which form part of those economic policies. This action was assessed as also being conducive, and not prejudicial, to price stability.
More generally, this measure ensures that the CSPP complies fully with the ECB’s obligations under Article 11 TFEU by integrating the objectives of the Climate Law into the definition and implementation of the ECB’s policies and activities.
This is one of the first steps in the ECB’s climate action plan, but the ECB is also looking into other ways to take climate-neutrality objectives into account in its monetary policy – for example, through the collateral that we ask when providing liquidity to banks.
For banking supervision, there are several dimensions that I will briefly discuss. Again, we do not directly apply the Climate Law. The Climate Law does not directly relate to our tasks as a banking supervisor nor does it relate to prudential supervision. Therefore the ECB does not impose an obligation on banks to take the necessary measures to contribute to the achievement of the objectives of the Climate Law. However, we cannot ignore it. Not only because we need to integrate environmental obligations into our policies due to Article 11 TFEU, but also since the law will have prudential implications. Therefore, the Climate Law and its consequences feature in our supervisory assessments, interactions with the banks and measures we take.
Why is that? Banks will be at the forefront of the energy and climate transition, whether they want to be or not. Their clients will face increasing hazards from climate change and environmental degradation as well as increasing regulation. Some clients will have to wind down their operations, others will be stuck with stranded assets. A mandatory energy label has been introduced for real estate[10], affecting the value of banks’ mortgage portfolios. Therefore, the ECB has identified exposure to climate-related and environmental risks as a key risk driver in the Single Supervisory Mechanism (SSM) Risk Map for the euro area banking system.[11] In order to guide banks regarding their risk management, the ECB has published supervisory expectations in its Guide on climate-related and environmental risks.[12] In addition, we have conducted a comprehensive review of banks’ practices related to strategy, governance and risk management on climate risks – the 2022 thematic review. We will continue to set expectations for banks to progressively manage risks on this front. These expectations are certainly not open ended. By the end of 2024, banks need to be in full compliance with all the supervisory expectations we set out in 2020.
Banks need to build their capabilities to withstand climate and environmental risks. We are happy that the Commission and the Council have acknowledged that this needs to have a foundation in prudential regulation as well. In the new banking package, the concept of “transition plans” is important. Under Article 76 of the proposed amendments to the Capital Requirements Directive (CRD VI)[13], a bank’s management board is required to monitor and address environmental risks arising in the short, medium and long term.[14] Banks have to make sure that their business model and strategy are not misaligned with the relevant Union policy objectives towards a sustainable economy and they need to manage potential risks from such misalignments.
Article 11 TFEU, the requirement to integrate environmental requirements into the policies and activities of the Union, plays a role in supervision. The ECB has a duty to integrate the Climate Law’s neutrality objectives into its supervisory policies and activities. However, we have some discretion as to how we do this. After all, the climate neutrality objective affects the ECB’s mandate in many respects and Article 11 TFEU does not prescribe how the ECB should integrate the environmental requirements. Do not expect us to act to regulate or enforce environmental policies. We will stick to our mandate. Our mandate is to keep under control the risks that banks and the financial system are facing, and in that capacity we have to look closely at the risks that are building up in the banking sector as a consequence of the climate crisis.
Lastly, I would like to draw your attention to the work of the Central Banks and Supervisors Network for Greening the Financial System (NGFS). In November 2021 the NGFS published an important report on climate-related litigation[15] which seeks to raise awareness about the growing source of litigation risk for public and private actors not convincingly supporting the climate change transition. Understanding the risks arising from climate-related litigation is clearly crucial for central banks and supervisory authorities, and the NGFS is continuing to monitor this field carefully. It plans to publish a further report next year with an update on the many developments since 2021.
I hope I am leaving you with the right impression. The ECB is not an environmental activist, but rather a prudent realist. It is our job to point out risks, whether they are macroeconomic, macroprudential, microprudential or related to litigation, and to ensure that the financial sector takes them duly into account.
Before I finish, let’s turn back to the brave fight of Vanuatu. You cannot blame Vanuatu’s president for seeking to defend the rights of countries most exposed to the ongoing climate and environmental crisis. Nor can we blame him for wanting to impose obligations on those most responsible for driving the crisis. Vanuatu’s mission is a stark example what the fight against the climate crisis is about. It underpins the task we have on our side. Europe has realistically no other choice than to deliver on the objectives of the Paris Agreement. If we waiver, the costs will only increase both in a moral and financial sense. Speaking as a European citizen, I would like us to be ready for the challenge ahead. As European central banker, supervisor and scholar of the law I will be even more forceful: our mandate requires us to be ready.
Compliments of the European Central Bank.

1. “The looming legal showdown on climate justice”, Financial Times, 10 November 2022.
2. Article 2(1)(a) of the Paris Agreement.
3. Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 (“European Climate Law”) (OJ L 243, 9.7.2021, p. 1).
4. Recital 25 of the European Climate Law.
5. Article 5 of the European Climate Law.
6. Case C-11/00, Commission v ECB, EU:C:2003:395.
7. Article 284(3) TFEU and Article 15.3 of the Protocol on the Statute of the European System of Central Banks and of the European Central Bank.
7. Articles 127(1) and 130 TFEU.
8. “ECB presents action plan to include climate change considerations in its monetary policy strategy”, press release, ECB, 8 July 2021.
9. Currently under revision. See Proposal for a Directive of the European Parliament and of the Council on the energy performance of buildings (recast) COM/2021/802 final.
10. See “ECB Banking Supervision – Assessment of risks and vulnerabilities for 2021”, ECB, 2021.
11. See Guide on climate-related and environmental risks, ECB, November 2020.
12. Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks, and amending Directive 2014/59/EU (COM/2021/663 final).
13. See also Articles 73 and 74 CRD VI.
14. “Climate-related litigation: Raising awareness about a growing source of risk”, NGFS, November 2021.

 
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Today, the EU Commission is proposing new EU-wide rules on packaging, to tackle this constantly growing source of waste and of consumer frustration. On average, each European generates almost 180 kg of packaging waste per year. Packaging is one of the main users of virgin materials as 40% of plastics and 50% of paper used in the EU is destined for packaging. Without action, the EU would see a further 19% increase in packaging waste by 2030, and for plastic packaging waste even a 46% increase.
The new rules aim to stop this trend. For consumers, they will ensure reusable packaging options, get rid of unnecessary packaging, limit overpackaging, and provide clear labels to support correct recycling. For the industry, they will create new business opportunities, especially for smaller companies, decrease the need for virgin materials, boosting Europe’s recycling capacity as well as making Europe less dependent on primary resources and external suppliers. They will put the packaging sector on track for climate neutrality by 2050.
The Commission also brings clarity to consumers and industry on biobased, compostable and biodegradable plastics: setting out for which applications  such plastics are truly environmentally beneficial and how they should be designed, disposed of and recycled.
The proposals are key building blocks of the European Green Deal’s Circular Economy Action Plan and its objective to make sustainable products the norm. They also respond to specific demands of Europeans as expressed at the Conference on the Future of Europe. 
Preventing packaging waste, boosting reuse and refill, and making all packaging recyclable by 2030
The proposed revision of the EU legislation on Packaging and Packaging Waste has three main objectives. First, to prevent the generation of packaging waste: reduce it in quantity, restrict unnecessary packaging and promote reusable and refillable packaging solutions. Second, to boost high quality (‘closed loop’) recycling: make all packaging on the EU market recyclable in an economically viable way by 2030. And finally, to reduce the need for primary natural resources and create a well-functioning market for secondary raw materials, increasing the use of recycled plastics in packaging through mandatory targets.

The headline target is to reduce packaging waste by 15% by 2040 per Member State per capita, compared to 2018. This would lead to an overall waste reduction in the EU of some 37% compared to a scenario without changing the legislation. It will happen through both reuse and recycling.

To foster reuse or refill of packaging, which has declined steeply in the last 20 years, companies will have to offer a certain percentage of their products to consumers in reusable or refillable packaging,  for example takeaway drinks and meals or e-commerce deliveries. There will also be some standardisation of packaging formats and clear labelling of reusable packaging.
To address clearly unnecessary packaging, certain forms of packaging will be banned, for example single-use packaging for food and beverages when consumed inside restaurants and cafes, single-use packaging for fruits and vegetables, miniature shampoo bottles and other miniature packaging in hotels.

Many measures aim to make packaging fully recyclable by 2030. This includes setting design criteria for packaging; creating mandatory deposit return systems for plastic bottles and aluminium cans; and making it clear which very limited types of packaging must be compostable so that consumers can throw these to biowaste.
There will also be mandatory rates of recycled content that producers have to include in new plastic packaging. This will help turn recycled plastic into a valuable raw material – as already shown by the example of PET bottles in the context of the Single-Use Plastics Directive.

The proposal will clear up confusion on which packaging belongs to which recycling bin. Every piece of packaging will carry a label showing what the packaging is made of and in which waste stream it should go. Waste collection containers will carry the same labels. The same symbols will be used everywhere in the EU.
By 2030, the proposed measures would bring greenhouse gas emissions from packaging down to 43 million tonnes compared to 66 million if the legislation is not changed – the reduction is about as much as the annual emissions of Croatia. Water use would be reduced by 1.1 million m3. The costs of environmental damage for the economy and society would be reduced by €6.4 billion relative to the baseline 2030.
Single-use packaging industries will have to invest into a transition, but the overall economic and job creation impact in the EU is positive. Boosting reuse alone is expected to lead to more than 600,000 jobs in the reuse sector by 2030, many of them at local small and medium sized companies. We expect much innovation in packaging solutions making it convenient to reduce, reuse and recycle. Measures are also expected to save money: each European could save almost €100 per year, if businesses translate savings to consumers. 
Clearing up confusion around biobased, biodegradable and compostable plastics
The use and production of biobased, biodegradable and compostable plastics has been steadily increasing. A number of conditions have to be met for these plastics to have positive environmental impacts, rather than exacerbating plastic pollution, climate change and biodiversity loss.
The Commission’s new  framework clarifies in what way these plastics can be part of a sustainable future.
Biomass used to produce biobased plastics must be sustainably sourced, with no harm to the environment and in respect of the ‘cascading use of biomass’ principle: producers should prioritise the use of organic waste and by-products as feedstock. In addition, to fight greenwashing and avoid misleading consumers, producers need to avoid generic claims on plastic products such as ‘bioplastics’ and ‘biobased’. When communicating on biobased content, producers should refer to the exact and measurable share of biobased plastic content in the product (for example: ‘the product contains 50% biobased plastic content’).
Biodegradable plastics must be approached with caution. They have their place in a sustainable future, but they need to be directed to specific applications where their environmental benefits and value for the circular economy are proven. Biodegradable plastics should by no means provide a licence to litter. Also, they must be labelled to show how long they will take to biodegrade, under which circumstances and in which environment. Products that are likely to be littered including those covered by the Single-Use Plastics Directive cannot be claimed to be or labelled as biodegradable.
Industrially compostable plastics should only be used when they have environmental benefits, they do not negatively affect the quality of the compost and when there is a proper biowaste collection and treatment system in place. Industrially compostable packaging will only be allowed for tea bags, filter coffee pods and pads, fruit and vegetable stickers, and very light plastic bags. The products must always specify that they are certified for industrial composting, in line with EU standards.
Next steps
The proposal on packaging and packaging waste will now be considered by the European Parliament and the Council, in the ordinary legislative procedure.
The policy framework on biobased, biodegradable and compostable plastics will guide future EU work on this issue, for example ecodesign requirements for sustainable products, funding programmes and international discussions. The Commission encourages citizens, public authorities and businesses to use this framework in their policy, investment or purchasing decisions.
Background
Goods need packaging to be protected and safely transported, but packaging and packaging waste have a significant impact on the environment and use of virgin materials. The amount of packaging waste is growing, frequently at a faster pace than GDP. Packaging waste increased by more than 20% over the last 10 years in the EU and is forecast to soar by another 19% until 2030, if no action is taken.
Biobased, biodegradable and compostable plastics are emerging in our daily lives as alternatives to conventional plastics. Citizens can find them for example in packaging, consumer goods and textiles as well as other sectors. Since they are called ‘bio’, consumers have the perception that they are necessarily good for the environment. However, this is only true to a certain extent.
Today’s package addressing these issues follows the first Circular Economy package of measures adopted in March 2022. It included the new Regulation on Ecodesign for Sustainable Products, the EU Strategy for Sustainable and Circular Textiles, and proposed new measures to empower consumers and enable them to play a fuller role in the green transition.
Compliments of the European Commission.
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Amid the widespread fallout in crypto markets following the collapse of a major crypto exchange, The ECB Blog takes a look at where we stand with Bitcoin.

The value of bitcoin peaked at USD 69,000 in November 2021 before falling to USD 17,000 by mid-June 2022. Since then, the value has fluctuated around USD 20,000. For bitcoin proponents, the seeming stabilization signals a breather on the way to new heights. More likely, however, it is an artificially induced last gasp before the road to irrelevance – and this was already foreseeable before FTX went bust and sent the bitcoin price to well below USD16,000.
Bitcoin is rarely used for legal transactions
Bitcoin was created to overcome the existing monetary and financial system. In 2008, the pseudonymous Satoshi Nakamoto published the concept. Since then, Bitcoin has been marketed as a global decentralised digital currency. However, Bitcoin’s conceptual design and technological shortcomings make it questionable as a means of payment: real Bitcoin transactions are cumbersome, slow and expensive. Bitcoin has never been used to any significant extent for legal real-world transactions.
In the mid-2010s, the hope that Bitcoin’s value would inevitably rise to ever new heights began to dominate the narrative. But Bitcoin is also not suitable as an investment. It does not generate cash flow (like real estate) or dividends (like equities), cannot be used productively (like commodities) or provide social benefits (like gold). The market valuation of Bitcoin is therefore based purely on speculation.
Speculative bubbles rely on new money flowing in. Bitcoin has also repeatedly benefited from waves of new investors. The manipulations by individual exchanges or stablecoin providers etc. during the first waves are well documented, but less so the stabilising factors after the supposed bursting of the bubble in spring.

Big Bitcoin investors have the strongest incentives to keep the euphoria going.

Big Bitcoin investors have the strongest incentives to keep the euphoria going. At the end of 2020, isolated companies began to promote Bitcoin at corporate expense. Some venture capital (VC) firms are also still investing heavily. Despite the ongoing “crypto winter”, VC investments in the crypto and blockchain industry totalled USD 17.9 billion as of mid-July.
Regulation can be misunderstood as approval
Large investors also fund lobbyists who push their case with lawmakers and regulators. In the US alone, the number of crypto lobbyists has almost tripled from 115 in 2018 to 320 in 2021. Their names sometimes read like a who’s who of US regulators.
But lobbying activities need a sounding board to have an impact. Indeed, lawmakers have sometimes facilitated the influx of funds by supporting the supposed merits of Bitcoin and offering regulation that gave the impression that crypto assets are just another asset class. Yet the risks of crypto assets are undisputed among regulators. In July, the Financial Stability Board (FSB) called for crypto assets and markets to be subject to effective regulation and supervision commensurate with the risks they pose – along the doctrine of “same risk, same regulation”.
However, legislation on crypto-assets has sometimes been slow to ratify in recent years – and implementation often lags behind. Moreover, the different jurisdictions are not proceeding at the same pace and with the same ambition. While the EU has agreed on a comprehensive regulatory package with the Markets in Crypto-Assets Regulation (MICA), Congress and the federal authorities in the US have not yet been able to agree on coherent rules.

The belief that space must be given to innovation at all costs stubbornly persists.

The current regulation of cryptocurrencies is partly shaped by misconceptions. The belief that space must be given to innovation at all costs stubbornly persists. Since Bitcoin is based on a new technology – DLT / Blockchain – it would have a high transformation potential. Firstly, these technologies have so far created limited value for society – no matter how great the expectations for the future. Secondly, the use of a promising technology is not a sufficient condition for an added value of a product based on it.
The supposed sanction of regulation has also tempted the conventional financial industry to make it easier for customers to access bitcoin. This concerns asset managers and payment service providers as well as insurers and banks. The entry of financial institutions suggests to small investors that investments in Bitcoin are sound.
It’s also worth noting that the Bitcoin system is an unprecedented polluter. First, it consumes energy on the scale of entire economies. Bitcoin mining is estimated to consume electricity per year comparable to Austria. Second, it produces mountains of hardware waste. One Bitcoin transaction consumes hardware comparable to the hardware of two smartphones. The entire Bitcoin system generates as much e-waste as the entire Netherlands. This inefficiency of the system is not a flaw but a feature. It is one of the peculiarities to guarantee the integrity of the completely decentralised system.
Promoting Bitcoin bears a reputational risk for banks
Since Bitcoin appears to be neither suitable as a payment system nor as a form of investment, it should be treated as neither in regulatory terms and thus should not be legitimised. Similarly, the financial industry should be wary of the long-term damage of promoting Bitcoin investments – despite short-term profits they could make (even without their skin in the game). The negative impact on customer relations and the reputational damage to the entire industry could be enormous once Bitcoin investors will have made further losses.
Author:

Ulrich Bindseil, Director General, ECB

Jürgen Schaaf, Adviser, ECB

Compliments of the European Central Bank.
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“Check against delivery”
Thank you very much and thank you, Minister Sikela, for your excellent chairmanship and for the strong work of Czech Presidency. Even though if I know your work on the trade track may be over, you continue to work very intensively on energy track.
Our discussions today focussed on three core issues for EU trade policy: World Trade Organisation reform, EU-US trade relations and our ongoing trade support to Ukraine.
The EU is the strongest global champion of a functioning multilateral rulebook. We continue to pursue meaningful reform across three core functions of the WTO, namely dispute settlement, negotiation, and deliberation.
The MC12 Ministerial in June defied expectations by delivering positive, and in some cases, unprecedented results.
We are committed to putting a workable reform plan in place for the next ministerial. And in finding in a lasting fix for a functioning dispute settlement system. Our goal is to have this in place by 2024.
Of course, support from like-minded partners – especially the US – will be critical to achieve these objectives.
Another priority is to reinforce the sustainability and climate agenda by MC13.
We will mark an important milestone in January, when we launch a Trade Ministers Coalition for Climate, together with other WTO Members.
Finally, Ministers today completed the last step of our approval procedure of the Joint Statement Initiative on Services Domestic Regulation.
This agreement represents a milestone for the WTO.
It will help reduce costs of global services trade by more than USD 150 billion every year thanks to simplified regulations and procedures.
Let me turn next to the EU-US trade relationship. Today we especially focused on the upcoming Trade and Technology Council on the 5th of December.
The working groups are working hard to deliver a package of attractive results.
Our EU priorities for the TTC include a stronger focus on trade facilitating initiatives. And we want to see a greater focus on climate change. We plan to announce a “Transatlantic Initiative on Sustainable Trade”.
We want to ramp up cooperation in ways that boost trade and accelerate the green transition in a mutually beneficial way. For example, for the meeting in Maryland we have agreed to work on standards for Megawatt Charging Systems.
We of course also discussed the US Inflation Reduction Act.
Many of the green subsidies provided for in the Act discriminate against EU automotive, renewables, battery and energy-intensive industries. These are serious concerns for the EU, which I, and many of colleagues, have raised repeatedly with our US interlocutors.
These issues are now being discussed in a joint high-level task force.
These are no easy discussions but they must produce concrete solutions.
What we are asking for is fairness.
We want and expect European companies and exports to be treated in the same way in the US as American companies and exports are treated in Europe.
In the current geopolitical context, and keeping in mind our shared green targets, we should be building alliances in these important sectors – be that batteries, renewable energy, or recycling.
The last thing we should be doing is creating unnecessary distractions or potential new disputes.
I also would like to warn against the danger of conflating the Inflation Reduction Act with our broader relationship with the United States.
These are separate tracks.
The US has been a true ally to the EU in shoring up support to Ukraine, among many other issues.
I was in Kiev last Friday. The situation is dramatic, with continuous Russian attacks on vital infrastructure. People are being deprived of water, heat and electricity.
We need deepen and sharpen transatlantic unity in the face of these horrific attacks. And we need the US to maintain its support so that Ukraine can win this war.
Russia’s strategy is to use the cold of winter to bring the Ukrainian people to their knees.
And to sow division in Europe.
This must not happen.
This is why we need to deepen and sharpen transatlantic unity. And we need the US to maintain its support to Ukraine.
Trade Relationship with Ukraine was another item on the agenda.
We are discussing how trade can help Ukraine’s economy at this critical time.
We are working swiftly to integrate Ukraine into the EU’s roaming area.
This would bring immediate benefits to Ukrainian citizens.
We are also accelerating work on an agreement to allow Ukraine and the EU to export our industrial products freely to each other’s markets.
We continue to step up our work beyond our existing trade agreement, the DCFTA.
The Solidarity Lanes, for example, are a real achievement. Since May, they have allowed Ukraine to export more than 33 Mt of goods and to import more than 11 Mt of goods it needs.
We suspended all duties and trade defence measures on Ukraine earlier this year. This has resulted in a significant increase in Ukrainian exports to the EU.
And we intend to propose an extension of this arrangement in early 2023.
Finally, we are working on an ambitious review of the Priority Action Plan for 2023/2024, to accelerate the full implementation of the DCFTA.
In conclusion, we are deploying many trade related-support measures to Ukraine, and have more in the pipeline. A revised Priority Action Plan will be proposed in due time.
Compliments of the European Commission
The post Speech by Executive Vice-President Valdis Dombrovskis at the Trade FAC meeting first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

A new data gaps initiative will play an important role in addressing climate-related data deficit
A famous physicist once said: “When you can measure what you are speaking about, and express it in numbers, you know something about it”.
Nearly 140 years later, this maxim remains true and is particularly poignant for policymakers tasked with addressing climate mitigation and adaptation.
That’s because they face major information gaps that impede their ability to understand the impact of policies—from measures to incentivize cuts in emissions, to regulations that reduce physical risks and boost resilience to climate shocks. And without comprehensive and internationally comparable data to monitor progress, it’s impossible to know what works, and where course corrections are needed.
This underscores the importance of the support of G20 leaders for a new Data Gaps Initiative to make official statistics more detailed, and timely. It calls for better data to understand climate change, together with indicators that cover income and wealth, financial innovation and inclusion, access to private and administrative data, and data sharing. In short, official statistics need to be broader, more detailed, and timely.
The sector where change is needed the most is energy, the largest contributor to greenhouse gas emissions, accounting for around three-quarters of the total.
Economies must expand their renewable energy sources and curb fossil fuel use, but while there’s been a gradual shift in that direction, the pace is still not sufficient. And not only is there a lack of policy ambition in many cases, there also is a lack of comprehensive and internationally comparable data to monitor progress.
To accelerate cuts to emissions, policymakers need detailed statistics to monitor the path of the energy transition and assist them in devising effective mitigation measures that can deliver the fastest and least disruptive pathway toward net zero emissions.
At the same time, countries also need to monitor how mitigation and adaptation measures affect household incomes, consumption, and wealth. How, for example, will rising fossil fuel costs impact vulnerable households? And how should we prioritize investments to address new weather patterns and more frequent climate shocks?
Robust data are vital—because policies must be based on a clear understanding of the broad impacts of climate change, the green transition, and the associated physical, economic, and financial risks.
Encouragingly, the new Data Gaps Initiative argues for G20 economies to go beyond gross domestic product in their national statistics, by capturing a suite of climate indicators and distributional estimates of household income and wealth. This will help policymakers better weigh the distributional implications of policies.
In welcoming the new data gaps initiative, G20 Leaders asked the IMF to coordinate with the Financial Stability Board, the Inter-agency Group on Economic and Financial Statistics, and statistical authorities across the G20 to “begin work on filling these data gaps and report back on progress in the second half of 2023, noting that the targets are ambitious and delivery will need to take into account national statistical capacities, priorities, and country circumstances as well as avoiding overlap and duplication at the international level.”
The initiative will draw on the collective expertise of the international agencies that are coordinating the work as well as on work undertaken by groups such as the Network for Greening the Financial System to develop a common understanding of climate-related financial instruments.
This work is also closely linked to other IMF initiatives such as the IMF’s Climate Indicators Dashboard, which is another statistical initiative to help supply relevant climate-related data for economic analysis. It is also linked to the IMF joint project to provide implementation guidance on G20 high-level principles for taxonomies and other sustainable-finance alignment approaches.
G20 policymakers have recognized that better data is needed to inform the more complex challenges they face. The data gaps initiative will play a key role in addressing this.
— The latest announcements and data releases from the initiative are available here.
Compliments of the IMF.
The post IMF | Bridging Data Gaps Can Help Tackle the Climate Crisis first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

22/11/2022 – The OECD releases today the latest mutual agreement procedure (MAP) statistics covering 127 jurisdictions and practically all MAP cases worldwide. These statistics form part of the BEPS Action 14 Minimum Standard and the wider G20/OECD tax certainty agenda to improve the effectiveness and timeliness of tax-related dispute resolution mechanisms.
The 2021 MAP Statistics* show the following trends:

Significantly more MAP cases were closed in 2021. Approximately 13% more MAP cases were closed in 2021 than in 2020, with both transfer pricing cases (+22%) and other cases (almost +7%) closed being significantly more than in 2020. Competent authorities were able to close more cases in 2021 due to the greater use of virtual meetings, the prioritisation of simpler cases and greater collaboration to solve common issues collectively that could be applied across multiple MAP cases. Further, jurisdictions noted that increases in staff and the experience of these staff are now reflected in their ability to be able to resolve more cases.

Fewer new cases in 2021. The number of new MAP cases opened in 2021 decreased (almost -3%) (see trends since 2016) compared to 2020. This is attributed to a significant decrease in new transfer pricing cases being opened (almost -10.5%), while the number of other cases opened increased (almost +4%) compared to 2020.

Outcomes remain generally positive. Around 75% of the MAPs concluded in 2021 fully resolved the issue both for transfer pricing and other cases (similar to 76% for transfer pricing cases and 74% for other cases in 2020). Approximately 2% of MAP cases were closed with no agreement compared to 3% in 2020.

Cases still take a long time. On average, MAP cases closed in 2021 took 32 months for transfer pricing cases (35 months in 2020) and approximately 21 months for other cases (18.5 months in 2020). Some jurisdictions experienced delays, especially for more complex cases, and the COVID-19 crisis affected the quality of their communication with some treaty partners.

Competent authorities have continued to adapt. MAP continued to be available throughout the pandemic with several actions taken by competent authorities. Jurisdictions noted that, especially towards the end of 2021, there has been an increase in MAP engagement with treaty partners. Further, while jurisdictions welcomed the resumption of face-to-face meetings, the continued use of virtual meetings has allowed for opportunities to progress individual cases in between face-to-face meetings. This hybrid approach is a welcome practice that many jurisdictions continue to apply to expedite MAP resolutions and improve the efficiency and effectiveness of their MAP programmes.

This year’s MAP Awards*, given in recognition of efforts by competent authorities, saw the following winners: Spain and Ireland for the shortest time in closing transfer pricing cases and other cases respectively; Canada for the smallest proportion of pre-2016 cases in end inventory; and Ireland and New Zealand for the most effective caseload management. The award for the pairs of jurisdictions that dealt the most effectively with their joint caseload went to France-United States for transfer pricing cases and to Ireland-Germany for other cases. Finally, the award for the most improved jurisdiction, which also highlights the efforts taken by competent authorities to resolve MAP cases in 2021, went to Germany, which closed an additional 144 cases with positive outcomes (+41% increase) compared to 2020 with increases for both transfer pricing and other cases.
The 2021 MAP Statistics* and the 2021 MAP Awards* were presented during the fourth OECD Tax Certainty Day* where tax officials and stakeholders took stock of the tax certainty agenda and discussed ways to further improve dispute prevention and resolution. MAP Statistics play an important role in the monitoring of BEPS Action 14 Minimum Standard, providing an objective and global frame of reference, as well as a country-specific view, which together allow measurement of progress but also show where further work is needed.
Contact:

Grace Perez-Navarro, Director of the OECD Centre for Tax Policy and Administration | Grace.Perez-Navarro@oecd.org

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

Compliments of the OECD.
The post OECD releases new mutual agreement procedure statistics and country awards on the resolution of international tax disputes first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Blog post by Philip R. Lane, Member of the Executive Board of the ECB |

Identifying the medium-term inflation path in the current environment of high inflation, ongoing energy and pandemic-related shocks and the Russian invasion of Ukraine is a diagnostic challenge. In his ECB Blog post Philip R. Lane, Member of the ECB’s Executive Board, describes some of the key analytical issues involved.

Summary
This blog post describes the diagnostic challenges in identifying the medium-term inflation path in the current environment of high inflation, ongoing energy and pandemic-related shocks and the Russian invasion of Ukraine.[1] It interprets the surge in inflation since the middle of 2021 as the result of extraordinary relative price shocks that, in the presence of downward nominal price and wage rigidities, initially translate into an increase in the inflation rate. These relative price shocks reflect the scale and breadth of the energy shock and the pandemic- and war-related shocks. Under such circumstances, standard measures of contemporaneous underlying inflation may not accurately signal the persistent component of inflation, while forward-looking wage growth trackers may play a useful supplementary role in identifying the medium-term inflation dynamics. Long-term inflation expectations currently appear well anchored at the two per cent target, but a prolonged phase of above-target inflation poses a de-anchoring risk that is addressed by raising interest rates to the levels required to make sure that inflation returns to target in a timely manner.
Read the full blog post here.
Compliments of the European Central Bank.
The post ECB | Inflation Diagnostics first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Luke Heighton on 16 November 2022 |
We’ve done a good amount of monetary policy normalisation, says Chief Economist Philip R. Lane in an interview with Market News. We will continue to raise interest rates until we’ve reached a level that will make sure inflation comes back to our 2% target in a timely manner.
What do you expect December’s Eurosystem growth and inflation projections to show?
The staff projections are going to cover 2023, 2024 and 2025. I think for 2023 the teams involved would have to take into account a number of factors. Number one, inflation is higher now than was expected in the last round. So the starting point for inflation is different compared to the last round. Over the course of the autumn it has become clear that next year energy prices are likely to remain higher than previously expected. Even though a lot of gas has been stored and we’ve had mild weather so far this winter, it’s accepted that, based on the current outlook, the risks about gas supply are also going to be here next year. I think it’s also clear that, at least in some countries, the pass-through of high energy wholesale prices to retail prices is not over. So we will see more of that. And in terms of fiscal policy, it looks like fiscal deficits are wider than foreseen in the September projection. So there is more fiscal support for the economy next year and that has inflation implications.
For the medium term, looking into 2024, 2025, I think there are really two big issues. One is that it’s clear that wages are set to increase more strongly than normal. We already saw in the September projection that there will be several years of nominal wages growing more quickly, because workers have experienced a significant loss in their real wages. We do expect this kind of catch-up process to drive nominal wages higher over several years. And, as we already had in September, there will have to be a kind of reassessment of the wage outlook in the context of the higher inflation rates, the status of the labour market and the fiscal support that is still there.
The other factor that’s going to be relevant for 2024-25 is the feedback loop. There’s been a big jump in the yield curve and it’s starting to pass through to bank lending conditions. Even if this does not have an immediate effect on the economy and on inflation, we would expect to see it kicking in more strongly in 2024 and 2025.
So for those years the forecast will have to balance the fact that inflation has a knock-on effect, for example, on the wage mechanism. But on the other hand, we do have the fact that the financial conditions are far different than what we had going into the September forecast.
A number of Governing Council members have recently expressed worries about second-round effects. How much of a concern, in terms of the inflation outlook, is pay growth?
This year we’ve had a very large increase in the price level, so there’s been a very big drop in living standards. At the same time unemployment in historical terms is quite low. So even if the European economy experiences stagnation or a mild recession later this year and at the start of next year, it still has quite a lot of support for ongoing growth. Even if the energy shock levels out next year – so it’s no longer a source of inflation, and even if globally bottlenecks are easing – so the pressure from global commodity prices and global goods prices also levels off: there’s still going to be an inflation dynamic in 2024-25.
Labour costs are a big fraction of the domestic component of inflation. But then the question is: how long is that going to be for? And as I said earlier on: it’s going to be stronger than the historical average, because workers will be trying to rebuild living standards. But how much and for how long labour costs will contribute to domestic inflation remains open and is a source of high uncertainty. There will be some calculation in the December projections, but month-by-month, quarter-by-quarter, over the next year, this is going to be one of the key issues we’re going to watch. I don’t think we’re going to have a conclusive answer next year.
But there is a very important feedback loop here, which is also relevant for the decisions by firms. We’ve done a good amount of monetary policy normalisation, and we gave a clear signal that we will continue to raise rates until we have reached a level that will make sure inflation comes back to 2 per cent in a timely manner. Firms and workers should understand that price and wage-setting should take place in the context that the more expensive financial conditions will dampen demand next year and in the years after that. Firms should be careful about excessively raising mark-ups, and workers should be careful about what a sustainable wage increase is. There is an important interaction between what we do and how these price and wage decisions are set. Another way of saying this is that firms and workers should fully understand that inflation is going to come down over these years towards our 2 per cent target.
What would you need to see to recommend raising rates by 75 basis points in December? Conversely, what would justify a smaller rate hike?
We said in our recent meetings – and we did so again in October – that we expect to raise rates further. It’s usually neither necessary nor wise to try and jump immediately to your target rate. In December we will make another hike and the scale of it should continue to make progress towards the levels needed. But it’s not necessary to conceive completing that transition in December. Each meeting is different. But one platform for considering a very large hike, such as 75 basis points, is no longer there. When we were at zero, that did not correspond to anyone’s idea of the interest rate level necessary. Going to 1.5 per cent is still below where we need to go. But the more you’ve already done on a cumulative basis, that changes the pros and cons of any given increment. We will have to look at it in terms of the inflation outlook that we have in December and take into account that we are at a different point now, and also to recognise that there are lags in the transmission process.
Would increasing rates above 2 per cent in December offer greater scope to slow the pace of interest rate hikes in the first quarter of 2023?
I am not going to comment on the exact level at any one meeting. Clearly, there’s a connection: the higher the level of the interest rate, the smaller the remaining gap to the target rate. What matters is the level we’re going to arrive at. The exact allocation across different meetings is a secondary issue. But the more we’ve already done, the less we need to do.
How likely is it that the ECB will stop – or pause – the hiking cycle either before or at the point when it begins quantitative tightening (QT)?
I don’t think December is going to be the last rate hike. Trying to jump forward to February, to March, to May or June next year, I think it’s too early to have very strong views at this point. The logic of a pause for the ECB: we’re not at that point. The more relevant argument than whether to pause is to move at the appropriate time to smaller increments. And then, eventually, you get to a point, where, essentially you say: okay, we’re at the level where it’s probably going to be wise to hold at this level for a while but also signal that we will be open to do more if needed, because we are living under high uncertainty.
Then let me come to the second part of your question, about QT. We shouldn’t interconnect the issue so much. What is clear is that you want to make decent progress on raising the policy rate before you start mapping out QT. And by December, we will have made decent progress on that. We said that we will lay out a roadmap, general principles in December. The roadmap will subsequently convert into a more precise plan that will allow for the asset purchase programme (APP) portfolio to decline at a certain pace in the coming months. But I don’t think we’re going to be on a meeting-by-meeting basis interconnecting the interest rate decision with the pace for the next month or two. It should be probably more mechanical than that. I think that’s a pretty basic principle.
By how much would you expect QT to lower the terminal rate of interest?
I wouldn’t approach the question like that, because there’s no scenario in which we keep the APP at its current level. Of course, if you don’t scale down the APP portfolio, the policy rate would have to be higher – there is a substitution effect there. But the market does expect some degree of runoff of the APP, and that is already reflected in the yield curve. So the calibration of the APP schedule has to perform two objectives. One is to contribute to the overall stance by essentially reversing the kind of compression of term premia that quantitative easing (QE) did; and the other is to make sure that this is done in an orderly way, because we have to allow for the market to adjust.
The ECB has said that the expected shallow eurozone recession will not in itself be sufficient to bring inflation back to target. What is the sacrifice ratio that would?
We have to remember where we are. There’s going to be a fairly large reduction in the inflation rates simply through base effects. But even if that reduces the inflation rate, it still leaves the cost of living permanently higher. So the price level is very important for wage dynamics. Going back to the monetary policy issue, we have to think about where inflation is headed in 2024-25 and what the distance is to our 2 per cent target. We also have to take into account what’s already happened. The yield curve is higher, we see adjustments in bond markets and we see bank lending rates going up. More expensive financing conditions will mean a lower level of demand. That will mean a lower level of GDP and a lower level of employment. But the labour market has two margins at the moment: one is unemployment, the other is vacancies. You could have a slowdown in the economy, where one part of adjustment will be fewer vacancies. And with fewer vacancies, wage pressure will go down. And if you don’t have the option to move to a new job, then wage bargaining changes. It could also be the case that firms opt to hold on to workers and there is a degree of labour hoarding. Under those circumstances unemployment may not rise as much as in previous cycles. I would say we would expect unemployment to go up as well, that is true, but in the context of levels that right now are historically quite low.
Your colleague Mr Panetta warned earlier this week that the ECB must be alive to the dangers of excessive tightening, which he said could result in a permanent loss of output in response to persistently lower demand. Do you agree?
We are absolutely clear and we have a primary mandate that we will get to our target in a timely manner. But it has always been the case and always will be the case that we want to do it in a way that minimises the side effects in terms of lower output and higher unemployment. The history of recessions does indicate that they tend to leave a long-term footprint. But what’s also true is that there’s an appreciation that the balancing act requires us to avoid under-tightening. Because if you under-tighten, inflation remains too high for too long, and then in turn you may end up having a bigger recession later on, with a bigger permanent drop in output.
We currently do think that any recession will be mild and short-lived. But you can definitely construct scenarios where that recession gets bigger and longer. And if you have rising credit risk, then you will have financial tightening coming from the decline in the economy, and that will be important. Financial conditions in the euro area also interconnect with financial conditions globally. And with other central banks also tightening, you’d have to think about that spillover. If tightening in the rest of the world leads to lower global inflation pressures, lower commodity prices, lower pressure on tradeable goods prices, then the inflation forecast could improve for international reasons in addition to domestic reasons. This all goes back to why we are taking a meeting-by-meeting approach. We are giving a kind of directional orientation that we have more to do. But in terms of the exact scale of what we need to do, it would be a mistake to be overly fixated in either direction.
How happy are you currently with financial conditions across the eurozone?
What we see this year is a sharp change in the inflation outlook, which in turn led to a sizeable revision in monetary policies around the world. And, of course, the whole financial system is going to take time to absorb that. We would call on everyone to recognise that we’re in a new environment and to manage those risks. I was involved myself in previous reports about what happens if you move away from the low-for-longer environment, so I think that the risk factors are clear. But in terms of where we actually are, I think the adjustment so far has been very much within the lines of reverting to normal rather than creating historically tight conditions.
Has the LDI fiasco in Britain affected your thinking in any way?
Maybe it sends out two signals: I think there’s a clear message for governments everywhere that it’s very important to have fiscal strategies that are clearly anchored in debt sustainability and in making sure debt ratios are on a downward path. Second, we have to be vigilant for pockets of the markets that may have been taken by surprise. But let me again emphasise here that what we have is a kind of smooth adjustment so far to a very different environment.
The European Commission is currently in the process of renegotiating EU fiscal rules. What bearing, if any, does that have for the outlook for monetary policy?
Before the energy shock, this year the Commission would have forecast a pretty big drop in debt and deficit ratios in the coming years. There has been an improvement this year because a lot of the pandemic programmes have been stopped and we’ve seen the recovery in the economy, which has boosted tax revenues. This has allowed a lot of energy programmes to be launched, a lot of which are temporary in nature. One of the big issues, I think, for the coming year, is to make sure that these interventions are temporary and targeted, and are basically embedded in a larger strategy of making sure debt ratios, especially for the high-debt countries, are firmly on a downward path. I think everyone shares this analysis. But what is true is that having fiscal deficits that remain relatively high will support demand in the economy and add to medium-term inflation pressures. Everyone has to really look at this quite carefully, because a lot of the fiscal programmes right now are basically transfers to households or to firms. And the multiplier on transfers is lower than on government consumption or government investment. A lot of people who receive these transfers may just save them, so it’s not clear whether it will result in the same boost to aggregate demand.
Last week the ECB changed its collateral rules, which saw asset swap spreads tighten. How much does this solve the problem?
I think there are three factors here. One is the increase in our securities lending facility. The second is: the German debt management office has also announced measures. And the third is the targeted longer-term refinancing operations (TLTROs) decision we took in October, which will also release collateral back into the system. Of course, we’ll always be attentive to market functioning and collateral scarcity issues. I would mention, also, that governments will still be issuing quite a lot of debt, and we’re not going to be net purchasers, so the amount of collateral coming into the market from that source will also ease pressures.
So there shouldn’t be any need, for example, to issue short-dated paper to relieve a year-end collateral squeeze?
We will always be vigilant, but I think the measures we’ve put in place will be sufficient.
Banks are pushing for the ECB to set up reverse repo operations, yet so far the bank has been hesitant to do so. Why? Is it under consideration?
First, the ECB always thinks about everything all the time, so there’s no informational value in saying something is “under consideration”. The ECB always has a range of options for how it can manage its liquidity but I think the decisions we made last week will suffice. Also, we always have to think about the differences between the euro area, which remains very decentralised, and the American financial system. The Fed has a particular approach, but it’s not necessarily the best approach for us.
Does the lower-than-expected US October inflation print have any bearing on expectations for the eurozone HICP outlook?
One month of data does not constitute a trend, so let’s be cautious about this, we need a longer horizon. But if it turns out to be the case that there is a trend, there are basically two forces behind it. One is a decline in global inflation pressure, which will also benefit the euro area by lowering pressure on import prices. The other element could be a decline in domestic inflation. And we saw that, in fact, services inflation came down as well. That could suggest that the United States is now making progress in its adjustment, and of course that would be good news for the world economy and for us.
The German ZEW survey has just recorded a substantial rebound in expectations, although the outlook is still in negative territory, largely on the back of hopes that inflation will fall in the near future and monetary tightening will not be as severe as initially anticipated. Is this optimism justified?
A lot has been done to preserve energy supplies this winter, whether that’s the filling up of gas storage or many firms – and indeed many households – reducing energy consumption. Clearly, compared to worst-case scenarios, this has led to a degree of confidence building for the near term. On our side, I do think that what we’ve done has helped – in the sense of ending the QE programmes and the by-now sizeable and repeated increases in policy rates – the actions we take demonstrate that there will be downward pressure on inflation.
Then you come to the near term and that’s where we should take into account that there is a lot of inflation pressure remaining in the pipeline, but this differs across countries. In some countries, Spain for example, energy inflation may have come down primarily because a lot of the adjustment happened a year ago. For other countries with longer-term contracts for energy, the pass-through to retail prices is ongoing. Sooner rather than later, the accumulated pass-through will convert into downward pressure on inflation, but let’s see whether the peak turns out to be this side of Christmas or the other.
So we might see, for want of a better word, some choppiness in near-term inflation expectations?
Around March, after the war started, there was a pick-up in consumer expectations. But they have been relatively stable in recent months. They haven’t improved, but they haven’t deteriorated either. I would say that these days my focus is on three levels. Historically, there would have been a kind of differentiation between short term and long term. But actually, I think the medium term is quite important. I do think, by and large, across all types of surveys and market indicators, people believe that over a longer horizon, inflation will get back to 2 per cent. People also understand that in the near term, over the next number of months, inflation is going to be elevated compared to our targets. But the important issue for us is the two-way feedback loop between medium-term expectations. Where do people think inflation will be in 2023, 2024, 2025? That will influence pricing decisions and wage decisions, while also recognising that these medium-term inflation expectations clearly will also be influenced by our decisions.
Across the euro area, corporate profits are soaring at the same time as an increasing number of households and businesses are struggling.
There isn’t a universal message here. In some sectors, where demand was surprisingly strong this year, it is clear that one major source of inflation was not cost increases: it was firms responding to high demand compared to supply by raising mark-ups. A second category is clearly some types of energy firms which are generating windfall profits. There’s a third category of firms which are suffering because they have very high energy bills, demand may not be particularly strong, and for those firms the profit margins are being squeezed. The message here is not so much for those firms but for the firms where mark-ups are currently high. These firms should be paying attention to the macroeconomic situation, to our policy, to the fact that demand conditions will be tighter next year. I am thinking about the tourism industry, for example, or the restaurant industry, all sorts of industries, which benefited from reopening this year. It will be very important to recognise demand conditions will be tighter and it would be a mistake to seek to preserve very high mark-ups in that scenario.
Compliments of the European Central Bank.
 
The post ECB Speech | Policy normalisation to fight inflation first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, the EU Commission has continued its response to the ongoing energy crisis by proposing a Market Correction Mechanism to protect EU businesses and households from episodes of excessively high gas prices in the EU. This complements measures to reduce gas demand and ensure security of supply through diversification of energy supplies. The new mechanism aims to reduce the volatility on European gas markets while safeguarding the security of gas supply.
Following the Russian invasion of Ukraine and weaponisation of energy supplies, natural gas prices have seen unprecedented price peaks across the EU, reaching all-time highs in the second half of August this year. The extreme price spike over almost two weeks in August was highly damaging for the European economy, with contagion effects on electricity prices and an increase in overall inflation. The Commission is proposing to prevent the repetition of such episodes with a temporary and well-targeted instrument to automatically intervene on the gas markets in case of extreme gas price hikes. 
A safety ceiling on gas prices
The proposed instrument consists of a safety price ceiling of €275 on the month-ahead TTF derivatives. The Title Transfer Facility (TTF), which is the EU’s most commonly used gas price benchmark, plays a key role in the European wholesale gas market. The mechanism would be triggered automatically when both of the following conditions are met:

the front-month TTF derivate settlement price exceeds €275 for two weeks;
TTF prices are €58 higher than the LNG reference price for 10 consecutive trading days within the two weeks.

When these conditions are met, the Agency for the Cooperation of Energy Regulators (ACER) will immediately publish a market correction notice in the Official Journal of the European Union and inform the Commission, European Securities and Markets Authority (ESMA) and the European Central Bank (ECB). The following day, the price correction mechanism will enter into force and orders for front-month TTF derivatives exceeding the safety price ceiling will not be accepted. The mechanism can be activated as of 1 January 2023. 
Safeguards to ensure security of supply and market stability
The proposed Council Regulation contains safeguards to avoid disruption to the energy and financial markets. To help avoid security of supply problems, the price ceiling is limited to only one futures product (TTF month-ahead products) so that market operators will still be able to meet demand requests and procure gas on the spot market and over-the-counter. To ensure gas demand does not increase, the proposal requires Member States to notify within two weeks from the activation of the Market Correction Mechanism which measures they have taken to reduce gas and electricity consumption. Once today’s proposal for a Market Correction Mechanism is adopted in Council, the Commission will also propose to declare an EU-alert under the Save Gas for a Safe Winter regulation that was adopted in July, triggering mandatory gas savings to ensure demand reduction. In addition, there will be constant monitoring by ESMA, ECB, the Agency for the Cooperation of Energy Regulators (ACER), the Gas Coordination Group and the European Network of Transmission System Operators for Gas (ENTSO-G).
To react to possible unintended negative consequences of the price limit, the proposal foresees that the mechanism can be suspended immediately at any time. This can happen:

Automatically, with a deactivation, when its operation is no longer justified by the situation on the natural gas market, namely when the gap between the TTF price and the LNG price is no longer met during 10 consecutive trading days.
By a Commission suspension decision when risks to the Union’s security of supply, to demand reduction efforts, to intra-EU flows of gas, or financial stability are identified.

There is also a possibility for the Commission to prevent the activation of the mechanism in case relevant authorities, including the ECB, warn of such risks materialising.
Background
Today’s proposal builds on a wide range of actions the Commission has been taking to tackle the issue of high energy prices over the past year. In Spring 2022, it expanded its Energy Prices Toolbox from October 2021 with the Communication on short-term market interventions and long-term improvements to the electricity market design and the REPowerEU Plan. It also proposed new minimum gas storage obligations and gas demand reduction targets to ease the balance between supply and demand in Europe, and Member States swiftly adopted these proposals before the summer.
Prices increased further over the summer months, which were also marked by extreme weather conditions caused by climate change. In September, the Commission swiftly responded by proposing additional emergency measures to reduce electricity demand and capture unexpected energy sector profits to distribute more revenues to citizens and industry.
On 18 October, the Commission proposed additional measures to address high gas prices specifically and strengthen security of gas supply via joint purchasing, default solidarity to apply in case of emergency, a new pricing reference benchmark for LNG and a temporary collar to prevent extreme spikes in derivatives markets. It also proposed the legal basis for a market correction mechanism to address exceptionally high gas prices in the short term.
Today’s proposal builds upon Article 23 and 24 of the Commission’s 18 October proposal. It responds to the call from the EU Leaders on 20 and 21 October, and follows extensive consultations with the Member States. The Commission was tasked to urgently submit concrete decisions on additional measures to tackle high energy prices, including a temporary dynamic price corridor on natural gas transactions to immediately limit episodes of excessive gas prices, with the necessary safeguards. The proposal for a Market Correction Mechanism contains elements to preserve financial stability, which the Commission considers essential.  Today’s proposal for a Council Regulation is based on Article 122 of the Treaty, to be adopted by a Qualified Majority of Member States. It is designed to be in force for one year but it can be prolonged following a review due by November 2023.
Compliments of the European Commission.
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