Some experts are sceptical whether monetary tightening and rapid raising of interest rates are an effective tool to tame inflation, which in the euro area is driven mainly by extremely high energy prices, by Russia’s energy blackmail towards those European countries supporting Ukraine against Russian aggression. Are you confident that the European Central Bank (ECB) will manage to curb the record high inflation that reached 10% in September and to get it back to the ECB’s target of 2% over the medium term?
An important part of the inflationary process that we are now facing has been driven by external factors, such as increased energy prices, more expensive raw materials, food, etc. According to our calculations, energy and food prices currently account for two-thirds of inflation in the euro area. However, inflation is also being pushed up by demand for goods and services, as is particularly the case in the Baltic countries. Increased demand can be contained through decisions to normalise monetary policy, while I agree that monetary policy has no influence on energy prices.
Nevertheless, it is very important to avoid second-round effects and prevent inflation being passed on to wages, which would push inflation higher. In order to avoid this, inflation expectations need to remain anchored. Market participants must have confidence in the credibility of the central bank. We will do whatever is necessary to bring inflation back to our 2% target over the medium term.
The OPEC+ alliance, which also includes Russia, recently decided to substantially cut oil production as of November. This has already driven oil prices higher. It is likely that this decision has not made it any easier for the ECB to achieve its goal of bringing inflation down to the target level.
Oil prices are global prices as they depend on producers and the world economic outlook. From an economic perspective, lower oil prices could help reduce inflation and, at the same time, support the economic recovery, thereby facilitating the decisions of policymakers.
What is the state of the euro area economy at the moment?
I think we are going to face a very difficult combination of low economic growth, including the possibility of a technical recession, and high inflation. According to our September projections, inflation will be hovering around 10% until the end of this year and will start to gradually decline in 2023. In this context, monetary policy has to focus on the evolution of inflation, which is what the Governing Council will be looking at when taking decisions. However, the environment will be very challenging and uncertain.
What is your forecast for the euro area’s economic development?
What we considered as our downside scenario in September, is coming closer to the baseline scenario. The current global context, including the monetary policy action, the energy shock and deterioration of the terms of trade, among others, point towards a slowdown of the global economy and, eventually, of the inflation rate as well.
Under the downside scenario from our September projections, the euro area economy would shrink by almost 1% in 2023, while the baseline scenario envisages GDP growth of 0.9%. The difference between the baseline and downside scenarios lies in the evolution of energy supplies from Russia. The assumption under the baseline scenario is that 20% of energy deliveries would continue to be supplied, whereas the downside scenario assumes a total cut-off. Currently, as I have said before, we are getting closer to the downside.
Is it correct that forecast inflation is also higher under the downside scenario?
That’s right. Under the downside scenario, annual inflation is expected to decline from an average rate of 8.4% this year to 6.9% in 2023. Under the baseline scenario, inflation is expected to go down from an average of 8.1% this year to 5.5% in 2023.
Currently the interest rate on the ECB deposit facility is 0.75% in the euro area. What should be the terminal rate to anchor inflation expectations?
That is very difficult to say. We are dependent on the data we receive. There is a very high level of uncertainty. We do not know how the war will develop and what impact it will have on energy prices. All these factors make it very difficult to determine the level of the terminal rate.
We have adopted a prudent stance: our response will depend on how the data evolves in the coming months. In December we will have new projections for inflation and GDP growth that will guide our decisions, despite the high uncertainty.
Historically, average interest rates in advanced economies hovered around 4%. Is this a reality that euro area businesses and mortgage borrowers will face again?
This will depend on various circumstances. Over the last 15 years interest rates have been much lower than that figure and we have had negative interest rates for a long period of time. In my view, structural factors that pushed inflation down in recent times have started to shift. Globalisation is not going to be as intense as it was, and the energy shock can drive inflation higher. So, I think that monetary policy has to adjust to these new structural features that may push inflation upwards when compared to the past decade.
The cost of borrowing for governments has risen dramatically in recent weeks and months. For instance, the Estonian government recently issued ten-year bonds at 4%, despite having among the lowest levels of debt in the euro area. Yields of ten-year government bonds of southern euro area countries fluctuated on average around 3-5%. What is your advice to governments – how should they keep the rising borrowing costs under control?
Fiscal policy has to be supportive of the process of monetary policy normalisation conducted by the ECB. We cannot ignore the fact that inflation is the main problem in the euro area, which is quite obvious in the Baltic countries. Inflation is reducing the purchasing power of households, especially of those that are more vulnerable, and is dampening investment.
Thus, we have to pursue a normalisation of monetary policy. Higher interest rates are needed to try to subdue the rising level of inflation that is clearly above our 2% target over the medium term.
Could you please specify what kind of fiscal policy would be compatible with the anchoring of inflation expectations?
As we are in the process of normalisation of our monetary policy, fiscal policy needs to play a different role than the one played during the pandemic. In the current context, fiscal policy has to be more selective and targeted to support the most vulnerable groups of society. If countries start putting in place indiscriminate measures across the board, the mission of monetary policy will become more challenging and we may be unable to achieve the ultimate goals of reducing dependence on Russian energy and supporting the green transition.
Fiscal policy and monetary policy do not seem to be going hand in hand. The governments of Germany, Lithuania and other euro area countries have chosen the path of subsidising energy prices, which increases their borrowing and budget deficits.
I don’t comment on the policy decisions of any government. But, as a general recommendation, fiscal policy has to be compatible with the process of normalisation of our monetary policy stance. State support has to be temporary and targeted to the most vulnerable groups while facilitating the green transition.
What is your assessment of the policy implemented by the Lithuanian government?
I think that Lithuania is implementing a very prudent fiscal policy. With a public debt ratio of 40% of GDP, Lithuania’s public debt and budget deficit are clearly below the euro area average.
The main problem is inflation, which currently is above 20% – at levels also observed in the other Baltic countries. Disparities in inflation rates among euro area countries will have to be monitored and analysed in detail.
Compliments of the European Central Bank.
The post Interview with Luis de Guindos, Vice-President of the ECB, conducted by Dalius Simenas on 10 October 2022 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Ladies and gentlemen,
It is truly an honour to be here in Harvard Law School. I am coming directly from Washington, where I represented the European Union at meetings of the IMF and World Bank.
I had the chance to meet my American counterparts and ministers from around the world.
At these global gatherings, and others I have attended recently, notably the G20 in Indonesia, there is a sense of upheaval in the air.
The world is clearly changing.
Today I want to share some thoughts with you on why these changes are happening, and how they may play out.
Above all, I want to explain why I believe strong transatlantic leadership is required at this moment. Because without it, the world may change in ways that are contrary to our shared values.
As Harvard students, you are the leaders of tomorrow.
My hope for you is that you may enter the world of work with the same optimism I did when I graduated.
When I was your age, the changes happening in the world seemed overwhelmingly positive.
My generation of Latvians grew up under the rigid restrictions of the Soviet Union.
But as graduates in the early 1990s, we were entering a new reality of freedom and choice. We felt hopeful and confident that our talents and ambitions could achieve their maximal expression in the world.
I hope you will get to experience the same.
But to make sure this happens – to make sure your leadership can achieve its full potential – the leaders of today must fight for our cherished western values of democracy, rule of law, human rights, economic freedom, and tackling climate change.
We must strive for a world order where Harvard Law School’s Motto – “truth, law and justice” – continues to be the guiding light.
If the EU and U.S. fail to lead the way at this crucial moment, truth, law and justice may be overtaken by something far darker.
I am speaking, of course, of Russia’s brutal and illegal invasion of Ukraine, and its profound impact on today’s world.
This is not a regional conflict on the fringes of the European Union. We have entered an existential battle.
Innocent men, women and children are dying because of Putin’s war of choice. In this despot, Europe faces an enemy with nuclear bombs at his fingertips.
The war is causing turmoil across many parts of the globe, with families and businesses facing a global spike in food and energy prices.
There are deep financial and monetary implications.
Russia, and Russia alone, bears the responsibility for these problems.
As the war’s shockwaves ripple across continents, they are causing a profound realignment of international relations, economically and geopolitically.
So far, the democratic world has rallied together in a huge show of solidarity. This unity caught Putin and other autocrats around the world by surprise.
But this war is a test case of our democratic values, and our ability to convince others to stand up against a brutal attack on a sovereign nation.
We are profoundly grateful to the U.S. and our like-minded allies for their support to Ukraine, and coordination on sanctions against Russia.
We now have to focus on reaching beyond our like-minded partners.
First, we need to fight back in the global information war. And we need to invest real resources in this work, both at home and abroad.
At home, we have for many years seen anti-democratic forces, including Russia, meddling in the internal politics of the EU.
By supporting extremist and anti-EU parties. Using lobbyists. Paid thinktanks. Online disinformation and hacking. And we know that this meddling is not limited to Europe. We should take stronger action against this interference.
The European Commission will soon propose a Defence of Democracy Package to protection our democratic sphere from covert foreign influence.
At the global level, we need to dramatically improve our outreach.
Only by working together, across regions and across platforms, can we get the message out that the current food and energy crisis was not caused by Western sanctions, but by Russia’s readiness to game on hunger and starvation.
In a wider sense, we need to invest heavily in alliance-building, particularly with the developing world.
There are many “potentially like-minded” allies out there. To reach them, and get them on board, we need to get out of our comfort zone. In practice, that means doing more to understand and address their needs.
The EU and U.S. share the same view: namely, that the war in Ukraine is a brutal attack on a sovereign democratic nation by an autocratic regime.
But a number of emerging economies and developing countries see this war differently.
Some are taking geopolitical advantage of it, including by increasing trade and cooperation with the aggressor state. Some justify their neutrality by recalling historic injustices.
Take the UN vote in March: Five non-democratic regimes blocked the resolution condemning Russia’s war. But another 35 abstained. This is the middle ground I am talking about. These are the countries we need to persuade.
And we are in a race against the clock. Because non-democratic powers are rushing to form their own alliances against the so-called “declining West”.
Indeed, the most powerful among them already have strong economic and political bonds with the developing world.
The developing world needs to feel that we are there for them and will help them to weather this crisis.
Our action towards them will count more than words.
So what can we do?
We need to be visible on the ground, and engage both at local and global levels.
The EU has for example ramped up its engagement in Africa, both on a bilateral and region-to-region basis.
We need to reform our global institutions so that decision-making works equally well for developed, emerging, and less-developed economies.
The same goes for international financial institutions.
They can deliver more development finance – while in return, developing countries need to ensure they have the correct governance framework in place.
Emerging markets fear the spillovers from our interest rate adjustments, and we are mindful of that.
Good progress is being made on Special Drawing Rights to help vulnerable countries. Voluntary contributions of 80 billion dollars have been pledged towards the global goal of 100 billion dollars.
23 billion comes from the EU . The U.S. has pledged 20 billion dollars, though this still needs to be approved by Congress. It is important that the EU and U.S. continue to show leadership, encouraging more countries to pledge.
We should also keep pushing for the implementation of the Common Framework for Debt Treatment. Almost all G20 members would support the publication of indicative guidelines to provide additional clarity and predictability to eligible countries.
However, opposition from China has so far prevented the guidelines’ adoption.
In parallel, it will be important to continue the international work to strengthen debt transparency, and to address the challenges stemming from collateralised debt transactions.
We also need to help the most vulnerable countries to deal with the war’s spillover effects.
So we welcome the new IMF Food Shock Window to support Ukraine – and other countries. Since it requires more resources, the European Commission will contribute €100 million to the Poverty Reduction and Growth Trust Subsidy Accounts.
Fixing the World Trade Organization is a crucial piece of the puzzle. It needs to be revitalized, updated and reimagined.
The 12th WTO Ministerial took place in June. Against expectations, it succeeded in delivering a number of very significant outcomes.
During this intense week of negotiations in Geneva, we sat down with countries from around the world. There were huge differences of opinion.
But we also saw that results are achievable, because, broadly speaking, most countries still want a functioning rules base for global trade.
They recognize that this remains their best bet for achieving their economic potential.
A reformed WTO must treat everyone the same, which brings me to my next point:
I would like to say a brief word on China.
Its failure to condemn Russia’s barbaric war, and in some cases, outright support for Russia, is influencing the views of EU countries and companies.
But it is also true that, despite the worsening political context, EU-China trade remain robust, and our economies are much more interlinked than is the case with the U.S. and China.
Accordingly, the EU should continue engaging with China with pragmatism and without naivety. We recognise that our trading relationship needs more balance and reciprocity. And working with the U.S., we must place a greater focus on diversification and better risk management.
But we also need to work together on shaping joint responses to global trade and economic challenges, such as disruptions in supply chains, WTO reform, and issues related to food security and the global level playing field.
In a general sense, trade has a crucial role to play to help the EU and U.S. advance our shared geopolitical goals.
By developing rules-based relationships with countries around the world, by incentivizing our companies and investors to make a positive economic impact in these countries, we increase our wider attractiveness and trustworthiness as partners.
The EU and U.S. are committed to the green and digital transformations of our economies.
By supporting and incentivizing similar transformations in partner countries, we can build a greener economy as well as a democratic and trustworthy digital infrastructure.
This can also help to create resilient supply chains, notably for critical raw materials and inputs.
This is why the EU is determined to ramp up its trade outreach, notably to Latin America and the Indo-Pacific.
Last, let me turn to the Transatlantic relationship itself.
The EU-U.S. relationship is the central artery of the world economy. Last year we traded almost one trillion euro’s worth of goods and services. Our supply chains are deeply intertwined.
But our relationship goes far beyond economics. We have aligned views on most global challenges.
We have opened positive new chapters over the past two years. We have put several disputes to bed, and found new, dynamic avenues of cooperation.
The Transatlantic Trade and Technology Council is living proof of this renewal.
This new forum is designed to shape the rules, tools and standards of the future. It is a laboratory of 21st century ideas.
The TTC’s structure is agile enough to address emerging challenges.
We notably achieved rapid cooperation on sanctions against Russia via export controls, and aligning measures on import bans.
We expanded its remit to address global food insecurity and supply chain issues, as well as meeting the challenge of Russia’s information manipulation and interference.
This is necessary. Because technologies will have an increasingly dominant role in future conflicts, in a classical military but also hybrid warfare sense.
The TTC can be the vehicle to address this and other challenges.
Of course, some difficulties remain.
The EU would notably like to see the U.S. fully take our needs on board whenever it is framing policies that impact us. And vice-versa.
For example, while we fully support the aim of the U.S. Inflation Reduction Act to help businesses and society reach climate goals, some of its provisions are very worrying.
Many of the green subsidies provided for in the Act discriminate against EU automotive, renewables, battery and energy-intensive industries.
The IRA privileges U.S. companies over others by offering generous financial incentives. This risks weakening competition and raising prices. I add that EU green subsidies are not designed in such a discriminatory manner.
We cannot afford to waste time and resources on trade disputes and other distractions. There is too much at stake in the wider world.
Ladies and gentlemen, I want to conclude on a more hopeful note.
All the positive changes I have described are achievable.
A better world is possible. A world where you can emerge from this great house of learning and apply your talents to their fullest extent.
But to achieve this better world, we must first stay the course and help Ukraine win the war. And such a victory is within reach.
We must, therefore, not allow division or fatigue to derail us.
It is essential that full bipartisan support from the U.S. continues, for further sanctions against Russia, and funding and military support for Ukraine.
And in Europe, likewise, now is the time to show real resolve.
It will take time, but if we stay united, working together, the EU and U.S. can help to deliver justice for Ukraine.
I view this as our shared duty, because Ukraine made a clear democratic choice to become a modern European state, anchored in Western values.
We must not fail them.
Thank you.
Compliments of the European Commission.
The post Keynote Address by Executive Dombrovskis at Harvard Law School Event on “Power and Alliances: The Transatlantic Partnership in a Changing World” first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

By Friedrich Wenzel Bulst & Sophie De Vinck, DG Competition[1]
Over the last two decades, our lives have become increasingly built on and around digital technologies. As a result, digital markets have become a central focus of competition enforcement. Following a flurry of reporting on the metaverse as the next digital frontier, this piece explores what we may expect from the metaverse and what that could mean for EU competition law enforcement. In particular, it gives a brief overview of a) current conceptions of the metaverse and its main components, b) what competition in the metaverse may look like and c) what challenges may arise for competition law enforcers.
What are the main elements of the metaverse?
The metaverse is many things at once: a buzzword, a vision of the future, a new version of the Internet, and perhaps most of all a concept around which there are still a number of question marks.
What seems clear is that the metaverse is widely understood as a virtual, immersive environment involving people interacting through avatars. While the first seedlings of the metaverse grew in the gaming world and it has a strong social networking component, it may potentially affect all areas of life. For example, it could impact how people interact in the realm of entertainment (e.g. gaming), creativity (e.g. digital fashion), or work (e.g. collaborative engineering) and could also be used to create simulations in various other domains (e.g. for developing industrial prototypes or for training healthcare professionals to experiment surgery in a realistic and safe manner).
Among the building blocks of the metaverse are Virtual Reality (VR), Augmented Reality (AR) and mixed reality, enabling the creation of an artificial environment as well as the combination of digital content with the physical world in a way that feels “real”. Different hardware devices, such as headsets, allow entry to the resulting interactive environment and several, partly novel, mechanisms will likely be used for financial transactions in the metaverse, including blockchain-based smart contracts and non-fungible tokens.
Among the things that we don’t know yet is to what extent the metaverse will live up to its hype. History shows us many examples of technological innovation being proclaimed as revolutionary, but technological changes seem to usually develop iteratively over time. Many of the metaverse’s building blocks are not new – virtual replications of the real world were also what made games such as Second Life popular a couple of decades ago. Whether the “new” iterations of the metaverse – said to provide new levels of creativity, interactivity, entertainment and connectivity – will turn out to be all that is promised (or feared), will depend on the interaction of various economic, socio-cultural, political and technological factors, at the right time and place. It may also be that certain applications of the metaverse (e.g. entertainment) will continue to target a more niche audience whereas others (e.g. the use of the metaverse for simulations in an enterprise environment) could become ubiquitous more rapidly.
In any case, it is important to start thinking about the potential opportunities as well as risks of the metaverse, including from a competition law perspective.
What about competition in the metaverse?
While the elements supporting a metaverse are still coming together, companies are already taking strategic steps, for example through mergers and acquisitions or by hiring a specialised workforce. Their objective is to secure a presence in “their” corner of the metaverse – or, in some cases, to have “their” metaverse be the game-changer in terms of user adoption.
At the outset, these companies include traditional media conglomerates alongside the main digital players and specialised gaming companies, but as the metaverse develops, companies from many corners of the economy are expected to follow. As companies start outlining their plans for the metaverse, it remains to be seen which business models and monetisation strategies could become prevalent. We can expect some revenue generation from the sale of headsets and other hardware, but it seems likely that the main monetisation strategies will centre on e-commerce, advertising and other digital services.  For example, the metaverse is expected to provide new marketing and advertising opportunities through virtual billboards, sponsorship of virtual events or other custom integrations. As the metaverse will further integrate the digital world into consumers’ day-to-day lives, it will generate huge amounts of information on users and their every-day activities. Data use and data monetisation strategies, including in relation to advertising, can, as a result, be expected to become important revenue drivers in a metaverse context.
The nature of competition for and in the metaverse will likely depend on how the metaverse platform(s) and their applications will be structured and how they will interoperate.
At this stage, the openness, mobility and connectivity of users, products and services on and in the metaverse, are often presented as essential characteristics of the metaverse and its competitive environment. But what that will mean in practice, remains to be seen. If one or more metaverse platforms essentially becomes a closed ecosystem, consumers would not be able to travel freely between different metaverse “worlds”. They would for example not be able to bring along virtual goods or services from one metaverse platform to another. This could – with consumers locked into a closed system – lead to the emergence of gatekeepers that control access to a metaverse and its users, similar to the developments observed in a number of core platform services identified in the European Union’s recently agreed Digital Markets Act. Moreover, metaverse markets may benefit from strong network effects and be prone to “tipping”, as businesses and users would tend to benefit from having a critical mass of other users present on the same platform. When this happens, it becomes very difficult for new competitors to break into the market or for existing competitors to expand further.
In such a scenario, the conduct of the company that is essentially controlling access to “its” metaverse may constrain its consumers, business partners and competitors in numerous ways. A metaverse gatekeeper could for example push users to adopt certain services or products by bundling them with “must-have” metaverse hardware or software. They could impose exorbitant prices for accessing the metaverse or some of their metaverse-based offerings. They could engage in exclusive deals with certain third-party providers of metaverse services, reducing consumer choice and limiting competitors’ access to their platform. They could also use their unique insights into user behavior (on the basis of access to certain data) to reinforce their market power inside and outside the metaverse market(s).
These potential competition challenges are not new – many have already been observed in other digital markets and ecosystems. At the same time, as the metaverse is still very much taking shape, there are also opportunities to make sure that certain problems from other digital contexts are not imported into the metaverse. Instead, one could also imagine the metaverse as an open competitive environment, organised on the basis of multiple interoperable worlds, between which users can easily move virtual goods and services in a secure way. This would for example mean that avatars could travel seamlessly from one to the other branded environment, for example meeting up with others to attend a concert in a different metaverse platform, without hitting any virtual walls. It is likely however that this would require extensive collaboration on underlying standards and technology, which in itself, depending on the circumstances, could have a restrictive effect on competition.
What are the challenges for competition law enforcement?
Economic activity is subject to competition law regardless of whether it happens offline or online – even when it happens in a virtual world. Just as companies develop their strategies for the metaverse, authorities will have to be ready to take action if and when appropriate. This includes EU competition law authorities, which continuously follow market and technological developments, including possible challenges that such developments may bring for the functioning of markets. Of course, other regulatory instruments will also be of importance to tackle certain other challenges surrounding the metaverse, including in relation to data protection and privacy, intellectual property or, last but not least, in relation to users’ safety and protection of their fundamental rights. For example, when it comes to wider societal challenges, the Digital Services Act provides tools aiming to ensure a safe metaverse environment where the fundamental rights of its users, such as freedom of expression, are adequately protected. In President von der Leyen’s 2022 State of the Union letter of intent, the metaverse is mentioned as one of the areas to look into in the context of the EU’s Digital Strategy.
To tackle possible metaverse-related competition challenges, the European Commission already disposes of many well-tested tools within traditional competition law enforcement. Our antitrust enforcement and merger control rules are technology-neutral and versatile.
Successfully applying these competition rules to the metaverse will contribute to ensuring that existing and emerging markets – whatever their final shape or form – function well for businesses and consumers alike.
In addition, as regards the broader competitive environment, the Digital Markets Act provides tools to foster contestability in the metaverse should it be at risk, either because relevant services are within its scope or through the provisions that ensure futureproofing of the Act.
These are shared challenges, which will have a worldwide impact and will be of keen interest to regulators on both sides of the Atlantic, as our technology markets are closely connected and interlinked. As such, we may expect that topics relevant to the metaverse will also (continue to) be discussed in specialised fora, both at the global level such as the International Competition Network (ICN) and the OECD, but also bilaterally, for example in the EU-US Trade and Technology Council. In parallel and specifically for competition, the EU-US Joint Technology Competition Policy Dialogue is a track of cooperation between the European Commission, the US Department of Justice and the US Federal Trade Commission, launched in December 2021, which focuses on competition policy matters and enforcement, and increased cooperation in the tech sector. The main objective of the Joint Dialogue is to maximise the impact of the EU and US competition authorities’ enforcement in the technology sector. Such continued cooperation will likely contribute to shaping policy approaches of relevance to the metaverse, for example on platform governance or international standardisation of emerging technologies.
In other words, even if the metaverse is still a concept surrounded by question marks, at least one thing seems clear: There are good reasons for competition law enforcers on both sides of the Atlantic to be actively accompanying technological and market evolutions in this area and to thereby increase the chances that the metaverse will be competitive, innovative and open.
Authors:

Dr. Friedrich Wenzel Bulst, LL.M. (Yale) is head of the antitrust unit responsible for the media sector in the European Commission’s Directorate-General for Competition and an honorary professor at Bielefeld University.
Sophie De Vinck, Ph.D., is a case handler at the antitrust unit responsible for the media sector in the European Commission’s Directorate-General for Competition.

[1] The authors wish to thank Denis Sparas for his valuable input on this article.
Compliments of the Directorate-General for Competition (DG COMP) at the European Commission.
Disclaimer: the information and views expressed do not necessarily reflect an official position of the European Commission.
The post DG COMP | Understanding the metaverse – a competition perspective first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Policy responses to currency depreciation pressures should focus on the drivers of the exchange-rate moves and signs of market disruptions
The dollar is at its highest level since 2000, having appreciated 22 percent against the yen, 13 percent against the Euro and 6 percent against emerging market currencies since the start of this year. Such a sharp strengthening of the dollar in a matter of months has sizable macroeconomic implications for almost all countries, given the dominance of the dollar in international trade and finance.
While the US share in world merchandise exports has declined from 12 percent to 8 percent since 2000, the dollar’s share in world exports has held around 40 percent. For many countries fighting to bring down inflation, the weakening of their currencies relative to the dollar has made the fight harder. On average, the estimated pass-through of a 10 percent dollar appreciation into inflation is 1 percent. Such pressures are especially acute in emerging markets, reflecting their higher import dependency and greater share of dollar-invoiced imports compared with advanced economies.

The dollar’s appreciation also is reverberating through balance sheets around the world. Approximately half of all cross-border loans and international debt securities are denominated in US dollars. While emerging market governments have made progress in issuing debt in their own currency, their private corporate sectors have high levels of dollar-denominated debt. As world interest rates rise, financial conditions have tightened considerably for many countries. A stronger dollar only compounds these pressures, especially for some emerging market and many low-income countries that are already at a high risk of debt distress.
In these circumstances, should countries actively support their currencies? Several countries are resorting to foreign exchange interventions. Total foreign reserves held by emerging market and developing economies fell by more than 6 percent in the first seven months of this year.

The appropriate policy response to depreciation pressures requires a focus on the drivers of the exchange rate change and on signs of market disruptions. Specifically, foreign exchange intervention should not substitute for warranted adjustment to macroeconomic policies. There is a role for intervening on a temporary basis when currency movements substantially raise financial stability risks and/or significantly disrupt the central bank’s ability to maintain price stability.
As of now, economic fundamentals are a major factor in the appreciation of the dollar: rapidly rising US interest rates and a more favorable terms-of-trade—a measure of prices for a country’s exports relative to its imports—for the US caused by the energy crisis. Fighting a historic increase in inflation, the Federal Reserve has embarked on a rapid tightening path for policy interest rates. The European Central Bank, while also facing broad-based inflation, has signaled a shallower path for their policy rates, out of concern that the energy crisis will cause an economic downturn. Meanwhile, low inflation in Japan and China has allowed their central banks to buck the global tightening trend.

The massive terms-of-trade shock triggered by Russia’s invasion of Ukraine is the second major driver behind the dollar’s strength. The euro area is highly reliant on energy imports, in particular natural gas from Russia. The surge in gas prices has brought its terms of trade to the lowest level in the history of the shared currency.

As for emerging markets and developing economies beyond China, many were ahead in the global monetary tightening cycle—perhaps in part out of concern about their dollar exchange rate—while commodity exporting EMDEs experienced a positive terms-of-trade shock. Consequently, exchange-rate pressures for the average emerging market economy have been less severe than for advanced economies, and some, such as Brazil and Mexico, have even appreciated.
Given the significant role of fundamental drivers, the appropriate response is to allow the exchange rate to adjust, while using monetary policy to keep inflation close to its target. The higher price of imported goods will help bring about the necessary adjustment to the fundamental shocks as it reduces imports, which in turn helps with reducing the buildup of external debt. Fiscal policy should be used to support the most vulnerable without jeopardizing inflation goals.
Additional steps are also needed to address several downside risks on the horizon. Importantly, we could see far greater turmoil in financial markets, including a sudden loss of appetite for emerging market assets that prompts large capital outflows, as investors retreat to safe assets.
Enhance resilience
In this fragile environment, it is prudent to enhance resilience. Although emerging market central banks have stockpiled dollar reserves in recent years, reflecting lessons learned from earlier crises, these buffers are limited and should be used prudently.
Countries must preserve vital foreign reserves to deal with potentially worse outflows and turmoil in the future. Those that are able should reinstate swap lines with advanced-economy central banks. Countries with sound economic policies in need of addressing moderate vulnerabilities should proactively avail themselves of the IMF’s precautionary lines to meet future liquidity needs. Those with large foreign-currency debts should reduce foreign-exchange mismatches by using capital-flow management or macroprudential policies, in addition to debt management operations to smooth repayment profiles.
In addition to fundamentals, with financial markets tightening, some countries are seeing signs of market disruptions such as rising currency hedging premia and local currency financing premia. Severe disruptions in shallow currency markets would trigger large changes in these premia, potentially causing macroeconomic and financial instability.
In such cases, temporary foreign exchange intervention may be appropriate. This can also help prevent adverse financial amplification if a large depreciation increases financial stability risks, such as corporate defaults, due to mismatches. Finally, temporary intervention can also support monetary policy in the rare circumstances where a large exchange rate depreciation could de-anchor inflation expectations, and monetary policy alone cannot restore price stability.

For the United States, despite the global fallout from a strong dollar and tighter global financial conditions, monetary tightening remains the appropriate policy while US inflation remains so far above target. Not doing so would damage central bank credibility, de-anchor inflation expectations, and necessitate even more tightening later—and greater spillovers to the rest of the world.
That said, the Fed should keep in mind that large spillovers are likely to spill back into the US economy. In addition, as a global provider of the world’s safe asset, the US could reactivate currency swap lines to eligible countries, as it extended at the start of the pandemic, to provide an important safety valve in times of currency market stress. These would usefully complement dollar funding provided by the Fed’s standing Foreign and International Monetary Authorities Repo Facility.
The IMF will continue to work closely with our members to craft appropriate macroeconomic policies in these turbulent times, relying on our Integrated Policy Framework. Beyond precautionary financing facilities available for eligible countries, the IMF stands ready to extend our lending resources to member countries experiencing balance of payments problems.
Authors:

Gita Gopinath
Pierre-Olivier Gourinchas

Compliments of the IMF.
The post IMF | How Countries Should Respond to the Strong Dollar first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The OECD delivered today a new global tax transparency framework to provide for the reporting and exchange of information with respect to crypto-assets. The Crypto-Asset Reporting Framework (CARF) responds to a G20 request that the OECD develop a framework for the automatic exchange of information between countries on crypto-assets. The CARF will be presented to G20 Finance Ministers and Central Bank Governors for discussion at their next meeting on 12-13 October in Washington D.C, as part of the latest OECD Secretary-General’s Tax Report.
The new transparency initiative, developed together with G20 countries, comes against the backdrop of a rapid adoption of the use of crypto-assets for a wide range of investment and financial uses. Unlike traditional financial products, crypto-assets can be transferred and held without the intervention of traditional financial intermediaries, such as banks, and without any central administrator having full visibility on either the transactions carried out or on crypto-asset holdings. The crypto market has also given rise to new intermediaries and service providers, such as crypto-asset exchanges and wallet providers, many of which currently remain unregulated.
These developments mean that crypto-assets and related transactions are not comprehensively covered by the OECD/G20 Common Reporting Standard (CRS), increasing the likelihood of their use for tax evasion while undermining the progress made in tax transparency through the adoption of the CRS.
“The Common Reporting Standard has been very successful in the fight against international tax evasion. In 2021, over 100 jurisdictions exchanged information on 111 million financial accounts, covering total assets of EUR 11 trillion,” OECD Secretary-General Mathias Cormann said. “Today’s presentation of the new crypto-asset reporting framework and amendments to the Common Reporting Standard will ensure that the tax transparency architecture remains up-to-date and effective.”
In this vein, the CARF will ensure transparency with respect to crypto-asset transactions, through automatically exchanging such information with the jurisdictions of residence of taxpayers on an annual basis, in a standardised manner similar to the CRS.
The CARF will target any digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions. Carve-outs are foreseen for assets that cannot be used for payment or investment purposes and for assets already fully covered by the CRS. Entities or individuals that provide services effectuating exchange transactions in crypto-assets for, or on behalf of customers would be obliged to report under the CARF.
The CARF contains model rules that can be transposed into domestic legislation, and commentary to help administrations with implementation. Over the next months, the OECD will be taking forward work on the legal and operational instruments to facilitate the international exchange of information collected on that basis of the CARF and to ensure its effective and widespread implementation, including the timing for starting exchanges under the CARF.
The OECD has also put forward to the G20 a set of further amendments to the CRS, intended to modernise its scope to comprehensively cover digital financial products and to improve its operation, taking into account the experience gained by countries and business. As with  the CARF, this work will be complemented with an update to the international legal and operational mechanisms for the automatic exchange of information pursuant to the amended CRS, as well as with a coordinated timelines to bring the agreed amendments into effect.
 
Compliments of the OECD.
The post OECD | OECD presents new transparency framework for crypto-assets to G20 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Growth is projected to slow to 2.7% as the war in Ukraine, inflation, and Covid recovery weigh on the world economy.
Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic.
Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation.
To access the World Economic Outlook Report October 2022, visit https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022
Compliments of the IMF.
The post IMF | The IMF cut its 2023 global economic forecast to 2.7% first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

The European Investment Bank (EIB) and the five biggest European national promotional banks met to discuss the progress of existing joint initiatives, such as the Joint Initiative on Circular Economy (JICE), Quick Response — Care for Ukrainian Refugees in Europe, and Fund Marguerite. KfW CEO Stefan Wintels hosted EIB President Werner Hoyer and the other CEOs at the German promotional bank’s Berlin building.
The heads of the respective institutions also exchanged views on the various national and European initiatives for supporting energy sovereignty in Europe.
The leaders attending the meeting were:

Beata Daszynska-Muzyczka, CEO Bank Gospodarstwa Krajowego, BGK – Poland
Dario Scannapieco, CEO CDP Cassa Depositi e Prestiti, CDP – Italy
Laurent Zylberberg, Executive VP Groupe Caisse des Dépôts, CDC – France
Jose Carlos Garcia de Quevedo, CEO, Istituto de Credito Oficial, ICO – Spain
Stefan Wintels, CEO KFW-Bank – Germany
Werner Hoyer, President European Investmentbank (EIB) – EU

€2.9 billion has already been raised for the Quick Response — Care for Ukrainian Refugees in Europe programme launched in Paris this spring. This far exceeds the target of €2 billion.
The Joint Initiative on Circular Economy (JICE) partners reported a total volume of financed projects and programmes of €6.3 billion until the end of 2021. The initiative — launched in Luxembourg in 2019 — supports circular economy projects and programmes in the European Union and has a total volume of €10 billion until 2023.
Compliments of the European Investment Bank – A Member of the EACCNY.The post EIB and the European Union’s largest national promotional banks meet in Berlin to discuss recent initiatives and common challenges in Europe first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Scaling up private capital is crucial to finance vital low-carbon infrastructure projects, particularly in less developed economies
Private climate financing must play a pivotal role as emerging markets and developing economies seek to curb greenhouse gas emissions and contain climate change while coping with its effects.
Estimates vary, but these economies must collectively invest at least $1 trillion in energy infrastructure by 2030 and $3 trillion to $6 trillion across all sectors per year by 2050 to mitigate climate change by substantially reducing greenhouse gas emissions. In addition, a further $140 billion to $300 billion a year by 2030 is needed to adapt to the physical consequences of climate change, such as rising seas and intensifying droughts. This could sharply rise to between $520 billion and $1.75 trillion annually after 2050 depending on how effective climate mitigation measures have been.
Boosting private climate financing quickly is essential, as we detail in an analytical chapter of our latest Global Financial Stability Report. Key solutions include adequate pricing of climate risks, innovative financing instruments, broadening the investor base, expanding the involvement of multilateral development banks and development finance institutions, and strengthening climate information.
Encouragingly, private sustainable finance in emerging market and developing economies rose to a record $250 billion last year. But private finance must at least double by 2030, at a time when investable low-carbon infrastructure projects are often in short supply and funding of the fossil fuel industry has soared since the Paris Agreement.A lack of effective carbon pricing reduces the incentive and ability of investors to channel more funds into climate-beneficial projects, as does a patchy climate information architecture with incomplete climate data, disclosure standards, taxonomies and other alignment approaches.
It’s also unclear whether very large and quickly growing environmental, social, and governance, or ESG, investment flows alone could have a real impact in scaling up private climate finance. In addition to the still-uncertain climate benefits of ESG investing, such scores for companies in emerging market and developing economies are systematically lower than those for advanced counterparts. As a result, ESG-focused investment funds allocate much less to emerging market assets. What’s more, the risks associated with investing in emerging market and developing economy assets are often deemed too high by investors.
Innovative financing instruments can help overcome some of these challenges, together with broadening the investors base to include global banks, investment funds, institutional investors such as insurance companies, impact investors, philanthropic capital, and others.
In larger emerging markets with more-functional bond markets, investment funds—such as the Amundi green bond fund backed by the World Bank’s private-sector financing arm—provide a good example of how to draw in institutional investors such as pension funds. Such funds should be replicated and expanded to incentivize issuers in emerging markets to generate a greater supply of green assets to finance low-carbon projects and attract a wide range on international investors.
For less-developed economies, multilateral development banks will play a key role in financing vital low-carbon infrastructure projects. More climate financing resources should be channeled through such institutions.
An important first step would be to increase their capital base and reconsider approaches to risk appetite via partnerships with the private sector, supported by transparent governance and management oversight.
Multilateral development banks could then make greater use of equity finance—currently only about 1.8 percent of their commitments to climate finance in emerging market and developing economies. And their equity can draw in much larger amounts of private finance, which currently is equal to only about 1.2 times the resources these institutions commit themselves.

An important tool needed to help incentivize private investment is the development of transition taxonomies and other alignment approaches, which identify financial assets that can reduce emissions over time and incentivize firms to transition towards emission reduction goals.
Importantly, they include a focus on innovation in industries like cement, steel, chemicals, and heavy transport that cannot easily cut emissions because of technological and cost constraints. This helps ensure these carbon-intensive industries—those with the greatest potential to reduce greenhouse gas emissions—are not sidelined by investors but rather incentivized to reduce their carbon impact over time.
The IMF is playing an increasingly important role, including through its new Resilience and Sustainability Trust which is intended to provide affordable, long-term financing to help countries build resilience to climate change and other long-term structural challenges. We have pledges totaling $40 billion and staff-level agreements on the first two programs—Barbados and Costa Rica. This trust could catalyze official and private sector investments for climate finance.
The IMF is also promoting the availability of quality climate data and fostering the adoption of disclosure standards and transition taxonomies to create an attractive investment climate.
More broadly, we are helping to strengthen the climate information architecture through the Network for Greening the Financial System and other international bodies to support emerging market and developing economies with climate policies, including carbon pricing. As the move to greater private climate financing takes hold, the Fund will engage partners and promote solutions wherever possible.
Authors:

Torsten Ehlers
Charlotte Gardes-Landolfini
Fabio Natalucci
Ananthakrishnan Prasad

—This blog is based on Chapter 2 of the October 2022 Global Financial Stability Report, “Scaling Up Private Climate Finance in Emerging Market and Developing Economies: Challenges and Opportunities.” The post IMF | How to Scale Up Private Climate Finance in Emerging Economies first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

One single charger for all mobile phones and tablets – beneficial for the environment and for consumers
USB Type-C port will be the new standard for portable devices, offering high-quality charging and data transfers
Buyers will be able to choose whether to purchase a new device with or without a charging device

Following Parliament’s approval, EU consumers will soon be able to use a single charging solution for their electronic devices.
By the end of 2024, all mobile phones, tablets and cameras sold in the EU will have to be equipped with a USB Type-C charging port. From spring 2026, the obligation will extend to laptops. The new law, adopted by plenary on Tuesday with 602 votes in favour, 13 against and 8 abstentions, is part of a broader EU effort to reduce e-waste and to empower consumers to make more sustainable choices.
Under the new rules, consumers will no longer need a different charger every time they purchase a new device, as they will be able to use one single charger for a whole range of small and medium-sized portable electronic devices.
Regardless of their manufacturer, all new mobile phones, tablets, digital cameras, headphones and headsets, handheld videogame consoles and portable speakers, e-readers, keyboards, mice, portable navigation systems, earbuds and laptops that are rechargeable via a wired cable, operating with a power delivery of up to 100 Watts, will have to be equipped with a USB Type-C port.
All devices that support fast charging will now have the same charging speed, allowing users to charge their devices at the same speed with any compatible charger.
Encouraging technological innovation
As wireless charging becomes more prevalent, the European Commission will have to harmonise interoperability requirements by the end of 2024, to avoid having a negative impact on consumers and the environment. This will also get rid of the so-called technological “lock-in” effect, whereby a consumer becomes dependent on a single manufacturer.
Better information and choice for consumers
Dedicated labels will inform consumers about the charging characteristics of new devices, making it easier for them to see whether their existing chargers are compatible. Buyers will also be able to make an informed choice about whether or not to purchase a new charging device with a new product.
These new obligations will lead to more re-use of chargers and will help consumers save up to 250 million euro a year on unnecessary charger purchases. Disposed of and unused chargers account for about 11 000 tonnes of e-waste annually in the EU.
Quote
Parliament’s rapporteur Alex Agius Saliba (S&D, MT) said: “The common charger will finally become a reality in Europe. We have waited more than ten years for these rules, but we can finally leave the current plethora of chargers in the past. This future-proof law allows for the development of innovative charging solutions in the future, and it will benefit everyone – from frustrated consumers to our vulnerable environment. These are difficult times for politics, but we have shown that the EU has not run out of ideas or solutions to improve the lives of millions in Europe and inspire other parts of the world to follow suit”
Press conference
Today, 4 October from 14.30 CEST, the rapporteur will brief journalists on the outcome of the final plenary vote and the next steps. Click here for more information on how to follow.
Next steps
Council will have to formally approve the Directive before it is published in the EU Official Journal. It will enter into force 20 days after publication. Member states will then have 12 months to transpose the rules and 12 months after the transposition period ends to apply them. The new rules would not apply to products placed on the market before the date of application.
Background
In the past decade, Parliament has repeatedly called for the introduction of a common charger. Despite previous efforts to work with industry to bring down the number of mobile chargers, voluntary measures failed to produce concrete results for EU consumers. The legislative proposal was finally tabled by the Commission on 23 September 2021.
Contact:

Yasmina Yakimova, Press Officer | yasmina.yakimova@europarl.europa.eu

Compliments of the European Parliament.The post Long-awaited common charger for mobile devices will be a reality in 2024 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Mutual funds holding hard-to-sell assets but offering daily redemptions can spark volatility and magnify the impact of shocks, especially in periods of market stress
Mutual funds that allow investors to buy or sell their shares daily are an important component of the financial system, offering investment opportunities to investors and providing financing to companies and governments.
Open-end investment funds, as they are known, have grown significantly in the past two decades, with $41 trillion in assets globally this year. That represents about one-fifth of the nonbank financial sector’s holdings.
These funds may invest in relatively liquid assets such as stocks and government bonds, or in less-frequently-traded securities like corporate bonds. Those with less-liquid holdings, however, have a major potential vulnerability. Investors can sell shares daily at a price set at the end of each trading session, but it may take fund managers several days to sell assets to meet these redemptions, especially when financial markets are volatile.
Such liquidity mismatch can be a big problem for fund managers during periods of outflows because the price paid to investors may not fully reflect all trading costs associated with the assets they sold. Instead, the remaining investors bear those costs, creating an incentive for redeeming shares before others do, which may lead to outflow pressures if market sentiment dims.
Pressures from these investor runs could force funds to sell assets quickly, which would further depress valuations. That in turn would amplify the impact of the initial shock and potentially undermine the stability of the financial system.
Illiquidity and volatility
That’s likely the dynamic we saw at play during the market turmoil at the start of the pandemic, as we write in an analytical chapter of the Global Financial Stability Report. Open-end funds were forced to sell assets amid outflows of about 5 percent of their total net asset value, which topped global financial crisis redemptions a decade and a half earlier.
Consequently, assets such as corporate bonds that were held by open-end funds with less-liquid assets in their portfolios fell more sharply in value than those held by liquid funds. Such dislocations posed a serious risk to financial stability, which were addressed only after central banks intervened by purchasing corporate bonds and taking other actions.
Looking beyond the pandemic-induced market turmoil, our analysis shows that the returns of assets held by relatively illiquid funds are generally more volatile than comparable holdings that are less exposed to these funds—especially in periods of market stress. For example, if liquidity dries up the way it did in March 2020, the volatility of bonds held by these funds could increase by 20 percent.
This is also of concern to emerging market economies. A decline in the liquidity of funds domiciled in advanced economies can have significant cross-border spillover effects and increase the return volatility of emerging market corporate bonds.
Now the resilience of the open-end fund sector may again be tested, this time amid rising interest rates and high economic uncertainty. Outflows from open-end bond funds have increased in recent months, and a sudden, adverse shock like a disorderly tightening of financial conditions could trigger further outflows and amplify stress in asset markets.

As IMF Managing Director Kristalina Georgieva said in a speech last year, “policymakers worked together to make banks safer after the global financial crisis—now we must do the same for investment funds.”
How should those risks be curbed?
As we write in the chapter, asset volatility induced by open-end funds can be reduced if funds pass on transaction costs to redeeming investors. For example, a practice known as swing pricing allows funds to adjust their end-of-day price downward when facing outflows. This reduces the incentive for investors to redeem before others. Doing so eases outflow pressures faced by funds in times of stress, and the likelihood of forced asset sales.
But while swing pricing—and similar tools such as antidilution levies, which pass on transaction costs to redeeming investors by charging a fee—can help mitigate financial stability risks, they must be appropriately calibrated to do so, and that’s not the case right now.
The adjustments that funds can make to the end-of-day prices—known as swing factors—are often capped at insufficient levels, especially in times of market stress. Policymakers therefore need to provide guidance on how to calibrate these tools and monitor their implementation.
For funds holding very illiquid assets, such as real estate, calibrating swing-pricing or similar tools may be difficult even in normal times. In these cases, alternative policies should be considered, like limiting the frequency of investor redemptions. Such policies may also be suitable for funds based in jurisdictions where swing pricing cannot be implemented for operational reasons.
Policymakers should also consider tighter monitoring of liquidity management practices by supervisors and requiring additional disclosures by open-end funds to better assess vulnerabilities. Furthermore, encouraging more trading through central clearinghouses and making bond trades more transparent could help boost liquidity. These actions would reduce risks from liquidity mismatches in open-end funds and make markets more robust in times of stress.
Authors:

Fabio Natalucci
Mahvash S. Qureshi
Felix Suntheim

Compliments of the IMF.The post IMF | How Illiquid Open-End Funds Can Amplify Shocks and Destabilize Asset Prices first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.