Banks must adapt the way they do business to account for climate-related and environmental risks. The ECB Blog takes a fresh look at their progress and the road ahead. This is the first post in a series of climate-related entries on the occasion of COP27.
The economy needs stable banks, especially as it goes through the green transition. As supervisors, our role is to ensure that banks remain prudentially sound, now and long into the future. For this to happen, banks must be able to identify, assess, control and mitigate the inevitable risks materialising from the climate and environmental crises. Although banks have started to do this, there is a long way to go before they are climate change proof. We will therefore continue to scale up our supervisory activities. We expect banks to be able to fully manage their climate-related and environmental risks by the end of 2024.
Today we have published the results of our thematic review on these risks. We have closely examined banks’ strategies, governance and risk management practices. Together with 21 national competent authorities, we assessed 186 banks holding total assets of €25 trillion and took further actions to create the most comprehensive picture of how banks have been dealing with these risks.
The glass is not even half full
Simply put, the glass is filling up slowly but it is not yet even half full. Yes, climate change has made it to the top levels within banks and some first steps have been taken. But there is a difference between talking about steps and beginning to act; and there is an even bigger difference in doing what is needed. Here are three examples of shortcomings in risk identification, strategy and living up to commitments.
First, we detected blind spots at 96% of banks in their identification of climate-related and environmental risks in terms of key sectors, regions and risk drivers. Where banks do assess the risks, they are not yet able to grasp the full magnitude as most do not actively collect granular counterparty and asset-level data. And almost all boards are still unaware of how these risks will develop over time, what precise risk level the bank can accept and what action it will take to rein in excessive risk.
Second, most banks’ strategy documents are full of references to climate change, but actual shifts in revenue sources remain rare. Banks are certainly keen on new forms of sustainable business and have plans to allocate more funds to them soon. Many are also phasing out specific activities, such as thermal coal power generation, and have started discussing the transition with their most carbon-intensive clients. However, it is too often still unclear how these initial steps shelter banks’ business models from the consequences of climate change and environmental degradation in the years to come. For instance, some banks have committed to reaching net-zero emissions by 2050 but fail to define “net zero” and fail to set interim targets. Such targets would allow banks to actively steer towards their commitments. That would bring them closer to reaching their goals on time.
Most banks have thus not yet answered the question of what they will do with clients who may no longer have sustainable revenue sources because of the green transition. In other words, too many banks are still hoping for the best while not preparing for the worst.
Third, more than half of banks have put policy frameworks in place or have made green commitments but have not put them into action. For instance, some banks have policies explaining how to deal with clients engaged in risky activities. However, when assessing real cases, we see that clients – even notorious polluters – have sometimes been exempted from these policies. We also find that certain banks have ignored clear warnings from their own specialists. These banks risk serious repercussions on their balance sheets, particularly where they publicly make “green” claims.
But the glass is slowly filling up
But as I said, the glass is no longer empty and things are getting better. Several good practices have been identified, demonstrating that swift progress is possible. Here are three examples of good practices.
Starting with strategy, we have seen that some banks are already using transition planning tools. This involves using scientific pathways to assess the alignment of their portfolios with the Paris Agreement. These pathways set concrete intermediate targets showing how portfolios must evolve over time to meet longer-term objectives. One of these objectives is reaching net-zero emissions by 2050. The banks take actions when individual clients are not on track to meet the objectives set and address cases where engagement fails. Ultimately, such action can include abandoning client relationships.
Second, we have observed banks that map out data needs for their disclosures, risk management, business objectives and commitments. They collect data from a variety of internal and external sources. The banks tend to favour actual client data, which they collect from a broad customer base via questionnaires. And these banks do not take no for an answer. Instead, they experiment with ways of encouraging customers to fill in the questionnaires. When acquiring data from third-party providers, the banks assess the methodologies used and the quality of the data supplied. In taking this approach, banks ultimately aim to report granular risk indicators to their board, providing a forward-looking view on risk exposures.
Finally, when assessing capital needs, some banks take into account forward-looking climate and environmental factors over a longer time horizon. These assessments cover both physical and transition risks. Frontrunners have even put aside capital specifically to manage material climate-related risks based on the outcome of their capital adequacy assessments.
Some banks are ahead of the pack
So, we see groups of banks leading the way and showing that swift progress is possible. And they are from all “walks of life”: big and small, local and international, specialised and universal, and from a variety of jurisdictions. But time is of the essence. That is why we have given each bank clear timelines. We expect that by the end of 2024 they will be fully aligned with all of our supervisory expectations on these risks.[1] There can be no more questions about responsibilities. Banks must have risks fully measured and priced. Boards need to have set their banks on an unequivocal course to longstanding resilience. In doing so, banks should not limit themselves to reaping the fruits of a greening economy and addressing transition risks. They must also respond to the physical impacts of climate change. Moreover, they must properly handle the risks related to biodiversity loss and broader environmental risk.
We have also told banks the supervisory consequences they face if they fail to meet their climate responsibilities. Deadlines will be closely monitored and, if necessary, enforcement action will be taken.
Laggards need to catch up quickly
Banks need to adjust before it is too late. They must look further into the future and take the necessary actions now to fill the glass. It takes time to fundamentally adapt and design concrete pathways to maintain a resilient business model. These efforts will make each bank and our financial system more resilient and better equipped for an economy that faces the climate and environmental crises while also working through the green transition.
Author:

Frank Elderson, Member of the ECB’s Executive Board

Footnotes:

The ECB has given each supervised entity an individual timeline to meet the climate-related expectations laid down in the 2020 Guide on climate-related and environmental risks by the end of 2024. While there can be exceptions in individual cases, the ECB has communicated its expectation to banks to reach, at a minimum, the following milestones: 1 – In a first step, the ECB expects banks to adequately categorise climate and environmental risks and conduct a full assessment of their impact on the banks’ activities by the end of March 2023, at the latest. 2 – In a second step, and at the latest by the end of 2023, the ECB expects banks to include climate and environmental risks in their governance, strategy and risk management. 3 – In a final step, by the end of 2024 banks are expected to meet all remaining supervisory expectations on climate and environmental risks outlined in 2020, including full integration in the Internal Capital Adequacy Assessment Process and stress testing.

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Tighter credit terms and conditions offered by banks to counterparties, mainly attributed to deterioration in general market liquidity and functioning
Higher maximum amount of funding but shorter maximum maturity against domestic government bonds
Deterioration in liquidity conditions continued for most collateral types
Higher initial margin requirements for most OTC derivative types, especially commodity derivatives

On balance, overall credit terms and conditions tightened over the June-August 2022 review period across all counterparty types. Price terms tightened for all counterparty types, but in particular for banks and dealers, investment funds and hedge funds. Non-price terms tightened for hedge funds and banks and dealers. The overall tightening of credit terms and conditions − mainly attributed to a deterioration in general market liquidity and functioning − continued the trend reported for the previous five quarters and was in line with the expectations expressed in the June 2022 survey. Overall credit terms are expected to tighten further over the September-November 2022 review period. The amount of resources dedicated to managing concentrated credit exposures increased in the June-August 2022 review period, while the use of financial leverage and the availability of unutilised leverage decreased.
In the case of securities financing transactions, the maximum amount of funding offered against collateral in the form of euro-denominated domestic government bonds increased, while the maximum maturity offered decreased. For other types of collateral, respondents reported a mixed picture. Haircuts applied to euro-denominated collateral either increased or remained unchanged, while financing rates/spreads increased for financing secured against all collateral types. The liquidity of most collateral types continued to deteriorate, with the largest percentage of respondents reporting a decrease in the liquidity of high-yield corporate bonds.
Turning to non-centrally cleared over-the counter (OTC) derivatives, initial margin requirements for most OTC derivatives, and especially commodity derivatives, increased during the June-August 2022 review period. While liquidity and trading deteriorated somewhat for credit derivatives referencing corporates or structured credit products as well as commodity derivatives and total return swaps, they remained unchanged for all other OTC derivative types. Respondents also reported an increase in the volume, duration and persistence of valuation disputes for OTC commodity derivatives contracts.
The September 2022 SESFOD survey, the underlying detailed data series and the SESFOD guidelines are available on the European Central Bank’s website, together with all other SESFOD publications.
The SESFOD survey is conducted four times a year and covers changes in credit terms and conditions over three-month reference periods ending in February, May, August and November. The September 2022 survey collected qualitative information on changes between June 2022 and August 2022. The results are based on the responses received from a panel of 27 large banks, comprising 14 euro area banks and 13 banks with head offices outside the euro area.
Contact:

For media queries, please contact William Lelieveldt | William.Lelieveldt@ecb.europa.eu | tel.: +49 69 1344 7316.

Compliments of the European Central Bank.
The post ECB | Results of the September 2022 Survey on credit terms and conditions in euro-denominated securities financing and over-the-counter derivatives markets (SESFOD) first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

High Representative/Vice President Josep Borrell will travel to Latin America, the third time of his current mandate, starting in Uruguay on 24 October and continuing to Argentina from 25 October. His mission aims to further strengthen both bilateral and regional relations, in particular through co-chairing the EU-CELAC Foreign Ministers Meeting which will pave the way for further high-level bi-regional engagement in view of a summit next year.
In Uruguay, the High Representative will meet President Luis Lacalle Pou on 24 October – with press remarks planned at 10:30 GMT-3 – Vice President Beatriz Argimon, as well as Foreign Affairs Minister Francisco Bustillo, following which a joint press statement is planned. HR/VP will also deliver a speech at the IV EU-Uruguay Investment Forum.
In Argentina, HR/VP Borrell will meet Foreign Affairs Minister Santiago Cafiero on 25 October (press remarks planned at 16:30 +/-), and later that day President Alberto Fernandez.
On 26 October, HR/VP will attend the Ministerial meeting of the United Nations Economic Commission for Latin America and the Caribbean and have several bilateral meetings with Foreign Ministers of the Community of Latin American and Caribbean States member countries. On the same day, he will also meet Vice President Cristina Fernández de Kirchner. On 27 October, HR/VP will co-chair the third meeting of EU-CELAC Foreign Ministers together with Argentina’s Minister of Foreign Affairs, Santiago Andres Cafiero, as pro-tempore President of the Community of Latin American and Caribbean States (CELAC). It is the first meeting in this format since 2018. Ministers will discuss ways to strengthen the EU-LAC partnership including through high-level events on shared thematic priorities leading to a bi-regional Summit of Heads of State and Government to take place in 2023. A press point in the context of the CELAC meeting is planned that day. Finally, on 28 October HR/VP will visit Bariloche, to launch the biggest EU initiative on human rights and in support of civil society so far in the country.
Compliments of the European External Action Service.
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The Commission has today adopted a legislative proposal to make instant payments in euro, available to all citizens and businesses holding a bank account in the EU and in EEA countries. The proposal aims to ensure that instant payments in euro are affordable, secure, and processed without hindrance across the EU.
Instant payments allow people to transfer money at any time of any day within ten seconds. This is much faster compared to traditional credit transfers, which are received by payment service providers only during business hours and arrive at the payee’s account only by the following business day, which could take up to three calendar days. Instant payments significantly increase speed and convenience for consumers, for example when paying bills or receiving urgent transfers (e.g. in case of medical emergency). In addition, they help to significantly improve cash flow, and bring cost savings for businesses, especially for SMEs, including retailers. They free up money currently locked in transit in the financial system, the so-called ‘payment float’, which can be used sooner for consumption or investment (almost €200 billion euro are locked on any given day). But at the beginning of 2022, only 11% of all euro credit transfers in the EU were instant. This proposal aims to remove the barriers that prevent instant payments and their benefits to become more widespread.
Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People, said: “Instant payments are fast becoming the norm in many countries. They should be accessible to everyone in Europe too, so that we stay globally competitive and make the most of the innovation opportunities offered by the digital age. People gain with more choice and convenience, businesses gain with better control of their cash flow and lower operational costs. Today’s proposal will strengthen our economy, make it more efficient and help it to grow.”
Mairead McGuinness, Commissioner for financial services, financial stability and Capital Markets Union, said: “Moving from “next day” transfers to “ten seconds” transfers is seismic and comparable to the move from mail to e-mail. Yet today, nearly nine out of ten credit transfers in euro are still processed as traditional ‘slow’ transfers. There is no reason why many citizens and businesses in the EU are not able to send and receive money immediately, the technology to provide for instant payments has been in place since 2017. This facility to send and receive money in seconds is particularly important at a time when bills for households and SMEs are increasing and every cent counts. This initiative will directly benefit EU citizens and businesses.”
The proposal, which amends and modernises the 2012 Regulation on the Single Euro Payments Regulation (SEPA), consists of four requirements regarding euro instant payments:

Making instant euro payments universally available, with an obligation on EU payment service providers that already offer credit transfers in euro to offer also their instant version within a defined period.

Making instant euro payments affordable, with an obligation on payment service providers to ensure that the price charged for instant payments in euro does not exceed the price charged for traditional, non-instant credit transfers in euro.

Increasing trust in instant payments, with an obligation on providers to verify the match between the bank account number (IBAN) and the name of the beneficiary provided by the payer in order to alert the payer of a possible mistake or fraud before the payment is made.

Removing friction in the processing of instant euro payments while preserving the effectiveness of screening of persons that are subject to EU sanctions, through a procedure whereby payment service providers will verify at least daily their clients against EU sanctions lists, instead of screening all transactions one by one.

This proposal will support innovation and competition in the EU payments market, in full conformity with existing rules on sanctions and fighting financial crime. It will also contribute to the Commission’s wider objectives on digitalisation and open strategic autonomy. This initiative aligns with the Commission’s priority of delivering an economy that works for people and creates a more attractive investment environment.
Background
The availability of instant payments and possible related fees vary strongly across Member States, which hinders the rollout of instant transfers in the Single Market. Legislative intervention is therefore necessary to scale up instant euro payments across the EU and unlock their benefits for EU citizens and businesses, especially SMEs. The latter would also benefit from improved cash flow and a greater choice of payment means.
Today’s proposal fulfils a key commitment in the Commission’s 2020 Retail Payments Strategy, which aimed for the full uptake of instant payments in the EU. It takes the form of an amendment to the 2012 Regulation on a Single Euro Payments Area, which already contains general provisions for all euro (SEPA) credit transfers, adding specific provisions for euro (SEPA) instant payments. The proposal contains phased implementation deadlines, differentiated for the different components of the initiative and between euro area and non-euro area Member States, to allow adequate implementation time and full proportionality.
Compliments of the European Commission.
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Joint op-ed on Ukraine Reconstruction Conference by German Chancellor Olaf Scholz and President of the European Commission Ursula von der Leyen
The courage shown by Ukrainians since Russia invaded their country is impressive. Their resilience and steadfastness in the face of this violation of international law are equally impressive. Ultimately, it is because of the courage shown by Ukraine that we will be gathering together on 25 October in Berlin, where we intend to discuss with experts how the international community can best help and support Ukraine with reconstruction.
The shape which that reconstruction takes will determine what kind of country Ukraine will be in the future. Will it be a state based on the rule of law with strong institutions? Will it have a dynamic and modern economy? Will it be a vibrant democracy which is part of Europe? Although we should always be careful when making historical comparisons, what is at stake here is nothing less than the creation of a new Marshall plan for the 21st century. This task will take generations and it must start now.
What can we and our Ukrainian partners learn from past experience of reconstruction? How can such a huge, long-term project be organised and financed? What structures are needed in order to ensure the necessary transparency and the essential confidence of investors? These are some of the questions that we intend to discuss on Tuesday in Berlin with experts and representatives from Europe, the G7, the G20, international organisations, civil society and, above all, Ukraine.
The suffering of the Ukrainians is immeasurable, the victims they mourn every day are numerous, and the impact of Putin’s war on the lives of millions of Ukrainians is deep. What we as a community can do – and have done since the very first day of the war – is to actively and reliably support Ukraine. We have imposed harsh sanctions on Russia. We have supplied weapons, supported the Ukrainian economy and helped people in their everyday lives. We have facilitated access to our internal market for Ukrainian exports and suspended import duties.
And for the time being more than 8 million Ukrainians have found refuge and protection from Putin’s bombs and missiles in Europe. Europe gave them immediate access to the labour market, to schools, medical care and housing. In the G7 and with partners in the G20, we have been fighting the global consequences of the war, including the worldwide hunger, energy and economic crises.
The international community has provided considerable financial support. G7 countries, the European Union and its members have so far provided more than 35 billion euro in emergency aid for Ukraine alone. This money is to help Ukraine meet its immediate financial needs, so that its administration can continue to function despite the war, and so that teachers, the police, doctors and soldiers can be paid and medical care can continue to be provided.
Besides this emergency aid, we need to start thinking today about the reconstruction of the country even though peace seems a long way off. We now need to start rebuilding ruined homes, schools, roads, bridges and infrastructure and restoring power supplies, so that the country can quickly get back on its feet again. For Ukraine needs the prospect of kick-starting its economy as soon as the war is over.
The key is to tackle this major undertaking together. There is agreement on this in the G7 and the European institutions. It is a huge task. The World Bank estimates the damage of the war so far at 350 billion euro. And the destruction goes on, as the most recent attacks in the last few days have shown. Neither Ukraine nor individual partners will be able to foot the bill alone. We must all lend a hand – the EU, the G7 and our partners far and wide. The international financial institutions and leading international organisations should of course be on board. In the long term, it will be important for private investors and companies to invest in Ukraine’s reconstruction too.
The clearer and more transparent the use of the money, the greater will be the willingness to help. We will therefore make sure with our Ukrainian friends that the support reaches the places where it is most needed. Together with our G7 partners and other countries, with the support of international organisations and Ukraine, we intend to lay the foundations for an inclusive donor platform to coordinate the process of immediately restoring destroyed infrastructure and embarking on long-term reconstruction. The joint platform will be the main instrument for cooperation and coordination of European and international support. It is about driving major reconstruction projects and providing technical support. In doing so, we will set the highest standards for transparency, efficiency, auditing and project monitoring.
The European Union has an important role to play here. Since the summer, Ukraine has had EU candidate status. So the road to reconstruction is at the same time Ukraine’s path towards the European Union. This also means making the Ukrainian economy more sustainable and more digital, since that is the economy of the future. It means enforcing the highest rule-of-law standards and setting up effective anti-corruption authorities. Because these are the values which Europe stands for and which will also help gain the trust of investors and donors.
We all agree that supporting Ukraine is not only the right thing to do, it is also in our very own interest. Ukraine is fighting not only for its own sovereignty and territorial integrity, but against Putin’s attempt to shift borders by force and inflict war and destruction on his neighbours. Ukraine is also defending the international rules-based order, the bedrock of our peaceful coexistence and of prosperity worldwide. So in supporting Ukraine, we are building our own future and the future of our common Europe.
Compliments of the European Commission.
The post A Marshall plan for Ukraine: G7 Presidency and European Commission to invite experts to a conference on the reconstruction of the war-torn country first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

It’s been eight months since Russia launched its full-scale aggression against Ukraine. Already a year ago, in autumn last year, the military build-up became obvious, as were efforts to lay the ground for the aggression in the information space.
In the last three months leading up to the invasion of 24 February, EEAS East Stratcom Task Force observed a distinctive spike in disinformation narratives promoted by the Russian (dis)information ecosystem. In outlets known for spreading disinformation, the use of the keyword ‘Nazi’ in relation to Ukraine increased by almost 300%, while the keyword ‘genocide’ spiked by over 500%. In the last 12 months, over 1200 disinformation cases were recorded in the EUvsDisinfo repository – attacking Ukraine, the European Union, its Member States and the whole like-minded community that stood up to Russian aggression and keeps supporting Ukraine.
As the illegal military aggression continues, so do the information manipulation and disinformation campaigns. There are full-fledged disinformation and information manipulation activities ongoing in multiple languages and dozens of platforms, offline and online. It attempts to drive wedges in our society, feed on divisions, create confusion, and divert attention away from Russia’s aggression and its war crimes.
The 24th of October marks the start of the Global Media and Information Literacy Week. The last months have shown even more clearly how big a threat disinformation is, and how crucial it is to defend ourselves against it – also on the individual level. With its multi-tier approach, the EU has been at the forefront of the fight against foreign information manipulation and interference, including disinformation.
Today, East Stratcom Task Force is adding another tool that anyone could use to understand the threat better and to defend themselves against it. The EUvsDisinfo website, the EU’s first project raising awareness of disinformation, has been enriched with a new “Learn” section euvsdisinfo.eu/learn/.
This page explains the mechanisms, tactics, common narratives and actors behind disinformation and information manipulation. It offers insights into the pro-Kremlin media ecosystem, and also explains the philosophy behind foreign information manipulation and interference. The readers can also find easy response technics that anyone can apply, and afterwards they can practice their newly acquired skills through quizzes and games.
“Learn” aims to teach the readers how to judge the relevance and reliability of sources and their content as well as how to report and react to disinformation. These skills, according to the newly released Digital Competencies Framework for Citizens (DigComp 2.2), form part of the digital skills of the XXI century and are essential for informed citizens. The content of the page can be easily translated into practical exercises and case studies to discuss in a classroom.
Visit Learn to find out more.
Contacts:

Peter Stano, Lead Spokesperson for Foreign Affairs and Security Policy | peter.stano@ec.europa.eu

Paloma Hall Caballero, Press Officer for Foreign Affairs and Security Policy | paloma.hall-caballero@ec.europa.eu

Compliments of the European External Action Service, the European Commission.
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Authorities must tighten macroeconomic policies to bring down inflation, while helping vulnerable households and viable firms cope with the energy crisis

As Russia’s war in Ukraine takes a rising toll on Europe’s economies, growth is flagging across the continent, while inflation shows little sign of abating.
Europe’s advanced economies will grow by just 0.6 percent next year, while emerging economies (excluding Türkiye and conflict countries Belarus, Russia, Ukraine) will expand by 1.7 percent, according to projections in our latest World Economic Outlook. That’s down by 0.7 percentage point and 1.1 percentage points, respectively, from July’s projections.
This winter, more than half of the countries in the euro area will experience technical recessions, with at least two consecutive quarters of shrinking output; among these countries, output will fall, on an average, by about 1.5 percent from its peak. Croatia, Poland and Romania will experience technical recessions as well, with an average peak-to-trough output decline of more than 3 percent. Next year, Europe’s output and income will be nearly half a trillion euros lower as compared to the IMF’s pre-war forecasts—a stark illustration of the continent’s severe economic losses from the war.
And while inflation is projected to decline next year, it will stay significantly above central bank objectives, at about 6 percent and 12 percent, respectively, in advanced and emerging European economies.
Growth and inflation could both get worse than these already sobering forecasts. European policymakers have swiftly responded to the energy crisis and built adequate gas storage ahead of the heating season, but further disruptions to energy supplies could lead to more economic pain.
Our scenarios show that a complete shutoff of remaining Russian gas flows to Europe, combined with a cold winter, could result in shortages, rationing and gross domestic product losses of up to 3 percent in some central and eastern economies. On top of these, it could also result in yet another bout of inflation across the continent.
Even without any new energy supply disruptions, inflation could remain higher for longer. Most of the inflation surge so far is driven by high commodity prices—primarily energy, but also food, particularly in the Western Balkan countries. While these prices might remain elevated for some time, there is hope that they will stop increasing and thereby contribute to a steady decline in inflation throughout 2023.
Inflation risks
However, our latest Regional Economic Outlook shows that the pandemic and Russia’s war in Ukraine might have fundamentally altered the inflation process, with rising input and labor shortages contributing notably to the recent high-inflation episode. This suggests there may be less economic slack and, accordingly, more underlying inflationary pressures, than commonly thought across Europe.
These results highlight a risk to our forecasts and those by others that inflation will fall steadily next year. Other wild cards include a de-anchoring of medium-term inflation expectations, or a much sharper acceleration in wages that would trigger an adverse feedback loop between prices and wages.

European policymakers face severe trade-offs and tough policy choices as they address a toxic mix of weak growth and high inflation that could worsen.
In a nutshell, they should tighten macroeconomic policies to bring down inflation, while helping vulnerable households and viable firms cope with the energy crisis. And, in these extraordinarily uncertain times, stand ready to adjust policies in either direction in response to how the situation evolves. This will depend on whether incoming data signal higher inflation, a deepening recession—which would warrant some reconsideration of policy—or both.
Central banks should continue raising policy rates for now. Real interest rates remain generally accommodative, labor markets are projected to be broadly resilient, inflation forecasts are above target, and inflation is still at risk of further increase.
Tightening needed
In advanced economies, including in the euro area, tight monetary policy will likely be needed in 2023 unless activity and employment weaken more than expected, materially bringing down medium-term inflation prospects.
A tighter stance is generally warranted in most emerging European economies, where inflation expectations are not as well anchored, demand pressures are stronger and nominal wage growth is high—often in the double digits.
Continuing to raise policy rates for now is also an insurance policy against risks, including a de-anchoring of inflation expectations or a feedback loop between prices and wages, that would require even stronger and more painful central bank responses down the road.
For example, in advanced European countries, our analysis suggests that if workers and firms start setting wages based on past inflation rather than central bank targets—as was partly the case prior to the 1990s, inflation could be nearly 2 percent higher at the end of next year. Should this happen, policy rates may need to rise by 2 percentage points and output could fall by as much as 2 percentage points more than currently projected. By contrast, if the overall demand declines—more than expected—resulting in deeper recessions and a 2 percentage points increased drop in output, both inflation and required policy rates at the end of next year could be nearly 1.5 percentage points lower than anticipated.
Fiscal policy
Fiscal policy must balance competing objectives. One is the need to rebuild fiscal space and help monetary policy in its fight against inflation. This calls for fiscal consolidation to proceed in 2023 at a faster pace in countries with less fiscal space, greater vulnerability to tighter financial conditions or stronger cyclical positions. This includes most emerging European economies.
But fiscal policy also needs to help mitigate the brutal impact of higher energy prices on people and viable firms. This suggests that the pace of consolidation may have to be slowed for a few months. Higher energy prices have increased European households’ cost of living by some 7 percent on average this year despite the widespread measures taken to ease this burden.
Going forward, it will be important to keep energy-related support temporary to contain fiscal costs, and to maintain the price signals that will foster energy savings. Compared with price interventions, a better option is to support low- and middle-income households through lump-sum rebates on their energy bills. A close alternative is to combine general lump-sum discounts with additional support for the poor through the welfare system, financed by higher taxes for high-income households. Yet another, less efficient alternative is to implement higher tariffs for higher levels of energy consumption; while such an approach is not fully targeted to the vulnerable, it is still a better option than broad price caps.

Finally, steady implementation of reforms that enhance productivity, relieve supply constraints in energy and labor markets, and expand economic capacity remain essential to raise growth and ease price pressures over the medium-term. This includes accelerating the implementation of the 800-billion-euro economic recovery package, the Next Generation EU programs.
Strength, coordination and solidarity pulled Europe out of the COVID-19 crisis. Once again, the task ahead is immense, but if European policymakers muster the spirit of the pandemic response, it can be accomplished.

Author:

Alfred Kammer is the Director of the European Department at the International Monetary Fund

Compliments of the IMF.
The post IMF | Europe Must Address a Toxic Mix of High Inflation and Flagging Growth first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Welcome, and thank you for joining us to discuss topics important to the nation’s economy. This research seminar is part of the Federal Reserve’s series of events called “Toward an Inclusive Recovery.”
Today’s seminar, hosted by the Board of Governors, will focus on how the COVID-19 pandemic affected educational outcomes and the subsequent impact we anticipate for transitions to the labor force. We have invited accomplished researchers to discuss their work—and what practical lessons might be drawn from it—that could help inform community development practice and public policy considerations.
As I am sure you are aware, the pandemic created significant disruptions for our students and the education system. At the onset of the pandemic, steps taken to slow the spread of COVID-19 resulted in widespread closures of businesses and schools. Many, myself included, were immediately concerned about the negative effects on education from changes that included shifting to virtual instruction, lack of access to technology, and changes to the accessibility and provision of childcare. It is critical to consider that access to education at every step along a student’s learning path serves as a pipeline into the labor force and enables future generations of Americans to participate and thrive in our dynamic labor market. The disruption of education throughout the pandemic undoubtedly led to an absence of workers in the labor force, creating a shortage that held back the early economic recovery.
Education outcomes, including learning losses and achievements, take time to measure, aggregate, and analyze. As we enter the fourth academic year affected by the pandemic, data on student performance are becoming more available. Much of this early data confirms our initial concerns. For example, early test scores show that throughout the country nine-year-olds suffered a decline in learning outcomes during the pandemic. But other data also indicate that learning losses were unequal and disproportionately affected low-performing students and low-income students.
It is likely that the sudden shift to online classes contributed to the learning declines. According to the Board’s 2020 Survey of Household Economics and Decisionmaking (the SHED), only 22 percent of parents with children attending virtual classes agreed that their children learned as much as they would have attending classes in person at school. I hope that the return to in-person learning and reopening of schools will enable children to resume normal learning and that academic achievement will rebound.
It seems that even with this return to in-person attendance, many schools are struggling to provide students with the same quality of education as they did pre-pandemic. With the return to onsite education, many schools are confronting challenges that impair their ability to meet the educational needs of students. A number of educators appear to have left the profession, as indicated by the nearly 100,000 more job openings for teachers in July 2022 than before the pandemic.1
Complicating these issues, across the country the return to in-person instruction has been met by an increase in chronic absenteeism, which is defined as a student missing at least 10 percent of school days in a school year. Compared to a typical school year pre-pandemic, 72 percent of U.S. public schools reported an increase in chronic absenteeism among their students during the 2021–22 school year, which is a 39 percent increase over the previous year.2
Missed school typically means missed learning, so chronic absenteeism is a key metric of school performance. It’s likely that these challenges will result in lower graduation rates and possibly less stable employment than would have otherwise been the case.
These outcomes raise difficult questions about how to best respond to the needs of students and educators going forward. For example, how can curricula be adjusted to meet students where they are today, after nearly three years of pandemic-impacted learning? How can we best re-engage the larger proportion of students who may have become disconnected as a result of these pandemic-related disruptions to their education? What does this all mean for the future of the labor force?
In addition to the challenges facing primary and secondary education, higher education was not immune to pandemic disruptions. Like K-12 education, studies show that online instruction reduced the academic performance of college students.3 In addition, we have seen declines in both college enrollment and the rate of first-year college students who continue their education into a second year.4 These declines are most pronounced at community colleges and open-access programs. Some of this decline was due to a supply-induced shortage resulting from colleges unable to offer remote learning options for many technical and vocational programs. The reduction in these “hands-on” programs, such as air-conditioning repair and auto detailing, had a greater impact on male enrollment and may lead to labor supply shortages for some of these skills-based professions.5
Education is the greatest and most effective input into the future of our labor market. In order to have the strongest possible labor force in the future, it is critical to understand and act immediately to address the educational losses experienced during the pandemic. I’m sure there’s much to learn about how these education challenges, both longstanding and more recent, will ultimately affect the job market. That’s a question of particular interest to policymakers, and it’s one of the most important reasons that we host events like this seminar. I look forward to hearing from the experts we have invited here today to discuss ideas to successfully and quickly address academic declines, expand K-12 education options, improve higher education outcomes, and prepare this generation to participate and thrive in the future labor force.
I hope that the research presented today is useful to you in your work. Community development professionals in our audience may consider how the design and implementation of their services can be enhanced. And researchers may encounter ideas that spark new work that can shed further light on these important topics. Thank you so much for joining us.
Compliments of the U.S. Federal Reserve.
1. Bureau of Labor Statistics Job Openings and Labor Turnover Survey. Accessed via FRED. Return to text

2. National Center for Education Statistics, “More than 80 Percent of U.S. Public Schools Report Pandemic Has Negatively Impacted Student Behavior and Socio-Emotional Development,” press release, July 6, 2022. Return to text

3. Michael S. Kofoed, Lucas Gebhart, Dallas Gilmore, and Ryan Moschitto, “Zooming to Class?: Experimental Evidence on College Students’ Online Learning during COVID-19,” Discussion Paper Series No. 14356 (Bonn, Germany: IZA Institute of Labor Economics, May 2021). Return to text

4. Persistence and Retention, Fall 2020 Beginning Postsecondary Student Cohort (PDF), Persistence and Retention Report Series (National Student Clearinghouse Research Center, June 2022). Return to text

5. Diane Whitmore Schanzenbach and Sarah Turner, “Limited Supply and Lagging Enrollment: Production Technologies and Enrollment Changes at Community Colleges during the Pandemic,” NBER Working Paper 29639 (National Bureau of Economic Research, January 2022). Return to text

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