Għażliet tat-Tfixxija
Paġna ewlenija Midja Spjegazzjonijiet Riċerka u Pubblikazzjonijiet Statistika Politika Monetarja L-€uro Ħlasijiet u Swieq Karrieri
Issortja skont
Mhux disponibbli bil-Malti

The year at a glance

A person wearing a pink jacket and scarf

Description automatically generated

In 2023 the ECB consolidated progress in its fight against inflation in the euro area. The year began with headline inflation still close to record highs. The negative effects of earlier supply and demand shocks, while easing, were still driving up prices. But two key developments paved the way for inflation to decline sharply during the year.

First, the effects of the past shocks began to fade. Energy prices, which had spiked as a consequence of Russia’s unjustified war against Ukraine, fell steeply, and global supply bottlenecks further eased. The drop in energy prices, in particular, accounted for half of the decline in inflation in 2023. Second, the ECB continued to tighten monetary policy, which helped to lower inflation further by dampening demand. Altogether, from January to September, we raised interest rates by an additional 200 basis points.

In doing so, we continued to follow a data-dependent approach to rate decisions given the highly uncertain environment. To calibrate accurately how far rates needed to rise, we introduced three criteria: the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission. By September, we saw the inflation outlook improving and monetary policy being transmitted forcefully. But underlying inflation remained elevated and domestic price pressures were strong.

We decided on this basis that the key ECB interest rates had reached levels that, if maintained for a sufficiently long duration, would make a substantial contribution to the timely return of inflation to our target. At the same time, we committed to holding rates at these levels for as long as necessary, while continuing to follow a data-dependent approach, based on the same criteria, to determine the appropriate level and duration of restriction.

In parallel, we advanced the normalisation of the Eurosystem balance sheet to ensure it remained consistent with our overall stance. It fell by over €1 trillion in 2023, with a large part of this decline due to maturing and early repayments under our targeted longer-term refinancing operations. We also concluded reinvestments under our asset purchase programme as the year progressed. And, in December, we announced the gradual phasing-out of reinvestments under the pandemic emergency purchase programme.

While we were consolidating progress in the fight against inflation, we advanced our work on taking account of climate-related risks within our tasks. In March we published the first climate-related financial disclosures of the Eurosystem’s corporate sector holdings. The carbon intensity of our corporate asset reinvestments fell by around two-thirds in the 12 months from October 2022 when we had started tilting them towards issuers with a better climate performance.

In 2023 we saw considerable progress in another area crucial for our work: payments. We launched our new T2 wholesale payment system in March. T2 contributes to the harmonisation and efficiency of Europe’s financial markets, introducing a new real-time gross settlement system – which replaces the TARGET2 system that had been in operation since 2007 – and streamlining liquidity management of central bank money.

We also launched the preparation phase of the digital euro project. This phase started in November after a fruitful two-year investigation phase, and will lay the foundations for the potential issuance of a digital euro. A digital euro would complement cash, not replace it. Cash remains the most frequently used means of payment among euro area citizens, and a clear majority consider it important to have the ability to pay in cash.

This is in part why the ECB is preparing a new series of euro banknotes – the most tangible, visible symbol of European unity. The Governing Council selected “European culture” and “Rivers and birds” as two potential themes for this new series, based on the outcome of two public surveys carried out in the summer of 2023. Looking ahead, European citizens will have the chance to express their preferences on a shortlist of possible designs, with the ECB expected to decide on the final designs in 2026.

In a year that marked the 25th anniversary of the ECB, we celebrated the arrival of Croatia in the euro area. Croatia’s adoption of the euro in January brought the number of countries in the euro area to 20 – almost double the number when the single currency was first launched. The euro area’s expansion reflects the continued attractiveness of our monetary union in an increasingly unpredictable world. In 2023 people’s support for the euro remained close to record high levels.

All this could not have been done without the hard work and the dedication of ECB staff to our mission: maintaining price stability for the people of the euro area. It is an honour to lead them and this institution.

Frankfurt am Main, April 2024

Christine Lagarde


Year in figures

The euro area labour market was resilient

Inflation in the euro area declined sharply

The euro area unemployment rate averaged 6.5% in 2023, falling from 6.6% in January to 6.5% in March and remaining broadly stable for the remainder of the year.

Headline inflation in the euro area was 2.9% in December 2023, down from 9.2% in December 2022. The decline was increasingly broad-based across components.

The ECB raised its key interest rates further

Euro area bank resilience strengthened further

The ECB raised its key interest rates by a further 200 basis points over 2023, bringing the deposit facility rate to 4%. The tightening of monetary policy was transmitted forcefully to the economy.

The Common Equity Tier 1 ratio of euro area banks stood at 15.6% in the third quarter. This was close to its highest level since the start of European banking supervision and reflected the higher profitability and de-risking of bank portfolios.

Payment preferences

New ECB statistical indicators on climate change

60% of euro area citizens consider having the option to pay in cash important. At the same time, just over half of euro area consumers prefer to pay by card or other electronic payment methods.

The ECB published three new sets of statistical indicators on sustainable finance, carbon emissions and physical risks as part of its broader climate action plan.

25th anniversary of the European Central Bank

Corporate sector portfolio decarbonisation

In 2023 the ECB celebrated its 25th anniversary with the message “The Value of Unity”, allowing the ECB to highlight the success of the single currency and its benefits for the people of Europe.

The carbon intensity of reinvestments decreased by more than 65% in the 12 months that followed the start of tilted reinvestments in October 2022.

1 Inflation declines sharply as the ECB’s monetary policy tightening continues to be transmitted strongly

The global economy fared better in 2023 than initially expected, continuing to expand at a moderate pace. The expansion was driven mainly by economic growth in emerging market economies and the United States, while most other advanced economies were more strongly affected by tight financing conditions and considerable geopolitical uncertainty. Global inflation declined markedly as energy commodity prices fell, while underlying price pressures remained elevated. The euro strengthened in nominal effective terms and against the US dollar.

In the euro area economic growth weakened in 2023. The industrial sector was particularly affected by tighter financing conditions, high input costs and weak global demand, whereas the services sector was initially still supported by lingering effects from the post-pandemic reopening of the economy. While the ECB’s interest rate tightening was transmitted forcefully to economic activity, the labour market remained fairly resilient. Euro area governments continued to wind down support measures adopted in response to the pandemic, energy price and inflation shocks, reversing part of the previous fiscal loosening. Headline inflation declined sharply in the euro area, helped particularly by energy inflation dropping into negative territory as the strong energy price surges of 2022 unwound. Underlying inflation also started to moderate, underpinning a general disinflationary process and reflecting the fading impact of past shocks and the increasing effects of tighter monetary policy. However, domestic price pressures replaced external pressures as the most important inflation drivers, as the labour market supported strong nominal wage developments, with workers seeking compensation for past inflation-induced losses in purchasing power.

1.1 Global economic activity expanded at a moderate pace as headline inflation declined

Global economic growth was moderate in the face of monetary policy tightening and high uncertainty

The global economy continued to expand at a moderate pace in 2023, with growth remaining broadly unchanged from 2022 at 3.5% (Chart 1.1).[1] Although subdued in a historical comparison, growth was higher than expected at the start of the year, supported by strong labour markets and buoyant demand for services despite continued monetary policy tightening.[2] The global economy was driven mainly by activity in emerging market economies and the United States, while in most other advanced economies tight financing conditions and the prolonged effects of geopolitical factors on energy prices weighed more materially on demand. In the United States, the economy was more resilient than expected, on the back of robust domestic demand and a strong labour market. Turmoil in the US financial sector at the beginning of the year did not have a significant macroeconomic impact. In China, an economic rebound at the beginning of the year, following the relaxation of highly restrictive pandemic-related measures in December 2022, was ended by a renewed slump in the housing sector as well as weak domestic and external demand. The Chinese economy nonetheless achieved the government’s stated growth target of around 5%.

Chart 1.1

Global GDP and its composition

a) Global real GDP growth

b) Composition of global growth

(annual percentage changes)

(percentage point contributions)

Sources: ECB, ECB staff calculations and ECB staff macroeconomic projections, March 2024
Notes: “Global GDP” excludes the euro area. The pre-pandemic average is for the period from 2012 to 2019. Values for 2023 are estimates based on available data and the March 2024 ECB staff macroeconomic projections.

Global trade momentum weakened as consumption patterns normalised after the pandemic

Global trade was weak in 2023, as import growth slowed to 1.2%, well below the previous year’s growth rate of 5.5% and the pre-pandemic average of 3.1%.[3] The slowdown reflected three major trends. First, global demand moved back from goods towards services as pandemic-related restrictions were fully phased out. Second, the share of consumption, which is generally less trade-intensive than investment, in domestic demand increased. Finally, emerging market economies, where trade responds less to changes in economic activity, made a larger contribution to global activity in 2023. Despite increasing trade barriers and business survey results suggesting possible value chain relocation, evidence of fragmentation in aggregate trade flows has so far remained limited.

Inflation declined but underlying price pressures remained elevated

Annual headline consumer price index (CPI) inflation across OECD member countries excluding Türkiye declined from high levels during 2023, brought down by lower energy prices. It fell to 3.9% in December, and for the whole of 2023 stood at 5.3%, compared with 7.3% in 2022 (Chart 1.2, panel a). Inflation excluding energy and food also declined, but to a much lesser extent, indicating that underlying price pressures remained strong and broad-based. This was particularly evident in advanced economies, where tight labour markets contributed to high wage growth rates, making services price inflation more persistent (Chart 1.2, panel b).

Chart 1.2

OECD headline and core inflation rates

a) Headline inflation and its main components

b) Inflation in major economies

(annual percentage changes, monthly data)

(annual percentage changes, monthly data)

Sources: National sources via Haver Analytics, OECD and ECB staff calculations.
Notes: EA: euro area. OECD inflation excludes Türkiye and is computed on the basis of national CPIs and annual private final consumption expenditure weights expressed in purchasing power parity terms. Core inflation excludes energy and food. The latest observations are for December 2023.

Energy commodity prices declined as low demand outweighed supply constraints

Energy commodity prices declined throughout 2023 as a result of lower demand. Oil prices fell by 4%, as weak demand for oil from advanced economies outweighed the increase in demand that followed the relaxation of lockdown measures in China. Low oil demand also more than offset the effects of supply cuts by the OPEC+ group as well as the risks to supply from geopolitical factors including the sanctions on Russia and the conflict in the Middle East. The fall in European gas prices was substantially larger, as gas prices continued the decline that started towards the end of 2022 and were reduced by another 58% in the course of 2023. European gas consumption remained below historical norms as a result of lower industrial demand, reduced gas consumption among households and mild weather in the winter months. The stable supply of liquified natural gas (LNG) also allowed European countries to start the heating season with full gas storage. Despite greater stability in the European gas market compared with the previous year, supply risks, such as strikes at Australian LNG terminals, continued to cause periods of high price volatility, illustrating the sensitivity of the European gas market during the transition away from Russian gas imports.

The euro strengthened in nominal effective terms and against the US dollar

The euro strengthened in nominal effective terms (+3.9%) and against the US dollar (+3.4%) on the basis of year-end data, amid notable intra-year fluctuations. The exchange rate dynamics were primarily influenced by evolving market expectations resulting from shifts in monetary policies and volatile economic outlooks. Initially bolstered in the first half of the year by improved macroeconomic conditions in the euro area and a faster pace of monetary policy tightening, the euro started to depreciate against the US dollar in mid-July. The strengthening of the dollar, which was broad-based, was attributed to positive economic data surprises and market expectations of a tighter-for-longer monetary policy stance in the United States. A reassessment of the stance towards the end of the year amid declining inflation rates resulted in a renewed appreciation of the euro. Across major trading partners' currencies, the euro strengthened significantly against the Turkish lira, the Russian rouble, the Japanese yen and the Norwegian krone. However, it weakened against the pound sterling, the Swiss franc and the Polish zloty.

The major risks to the outlook for global economic growth at the end of 2023 included a further escalation of geopolitical tensions, a stronger slowdown in the Chinese economy and more persistent inflationary pressures that would require tighter monetary policy than anticipated. The materialisation of such risks would reduce global economic activity. Moreover, global commodity markets remained very sensitive to supply risks, which in turn could fuel inflation and weigh on global growth in the year ahead.

1.2 Economic activity stagnates in the euro area

Euro area growth weakened as the effects of higher interest rates broadened

Euro area real GDP rose by 0.4% in 2023, having grown by 3.4% in 2022 (Chart 1.3). Growth reflected positive contributions from domestic demand and net trade. Changes in inventories had a dampening impact. By the end of the year output in the euro area was 3.0% above its pre-pandemic level (in the final quarter of 2019) and 1.4% above its level in the first quarter of 2022, when Russia invaded Ukraine. The slowdown in growth in 2023 was largely attributable to the economic repercussions of the war, which had varying effects across countries, reflecting their different economic structures. While the industrial sector was particularly affected by tighter monetary policy, high energy prices and weakening global demand, the services sector held up relatively well, still benefiting from post-pandemic reopening effects. However, towards the end of the year the weakness in growth dynamics broadened as the impact of higher interest rates spread across the various sectors, alongside spillover effects from the weak industrial sector to services.

Chart 1.3

Euro area real GDP

(annual percentage changes; percentage point contributions)

Source: Eurostat.
Note: The latest observations are for 2023.

Consumer spending was geared more towards services than goods

Private consumption growth weakened considerably in 2023. It stagnated in the first half of the year as the continued drop in spending on goods, as captured by retail trade volumes (Chart 1.4), offset the still positive demand for services. In the third quarter private consumption increased, driven by households’ consumption of services, which was boosted by lingering reopening effects, and the rebound in spending on durable goods. Overall spending on goods (including semi-durable and non-durable goods) continued to contract amid tighter financing conditions. Overall, household spending increased by 0.5% in 2023. Real disposable income supported household spending to some extent in 2023 as nominal wage growth increased, inflation slowed down gradually and employment growth remained resilient. Nevertheless, the transmission of tighter financing conditions to the real economy seems to have weighed on household spending, as savings remained elevated.

Chart 1.4

Euro area production and retail trade

(index: June 2022 = 100)

Sources: Eurostat and ECB calculations.
Notes: Retail trade is shown in real terms. The latest observations are for December 2023 for services production, otherwise for January 2024.

Investment was dampened by tighter financing conditions

Non-construction investment growth (a proxy for private non-housing investment) slowed throughout 2023.[4] While the first quarter of the year saw robust growth on the back of easing supply bottlenecks, the quarterly rates of increase gradually declined and investment fell in the fourth quarter, as both domestic and foreign demand weakened, backlogs dissolved, corporate profits slowed and financing conditions tightened. Uncertainty stemming from Russia’s war against Ukraine and the conflict in the Middle East among other factors likely also reduced investment incentives for firms. Nevertheless, abundant profits, ample cash reserves and a decline in indebtedness have on average strengthened corporate balance sheets over past years and contributed – along with funds from the Next Generation EU (NGEU) programme supporting digitalisation and climate-related investment – to some resilience of investment compared with other expenditure components. Overall, non-construction investment grew by 2.9% in 2023.

Construction investment broadly continued to weaken over the course of 2023. The main reason for this was the decline in residential construction investment due to high construction costs, the continued rise in mortgage interest rates and the tightening of bank lending standards, which made it more difficult for households to access finance and dampened demand for residential property. Other areas of construction, such as civil engineering, remained more resilient, supported by public infrastructure investments. At the end of 2023 construction investment was 2.1% above its pre-pandemic level, having fallen by 0.6% overall in 2023.

The euro area goods trade balance returned to surplus in 2023 amid lower prices for imported energy. Export growth remained subdued in a context of weak foreign demand. Manufacturing exports were supported by the easing of supply bottlenecks, while lingering effects from the energy supply shock and the appreciation of the euro in effective terms contributed to export weakness. The subdued export performance extended to services exports in the second half of the year, as support from pent-up demand after the reopening of the global economy was fading. As domestic demand cooled, euro area imports also declined, driven by decreasing intermediate goods imports as firms destocked and energy imports fell. Overall, the contribution from trade to euro area GDP growth was slightly positive in 2023.

Labour market

The euro area labour market remained resilient overall in 2023, although labour market developments and survey indicators at the end of the year pointed towards a cooling down. The unemployment rate averaged 6.5% in 2023; it declined from 6.6% in January to 6.5% in March and remained broadly stable at that level for the rest of the year (Chart 1.5). Total employment and total hours worked held up well amid a stagnating economy, rising in 2023 by 1.4% and 1.6% respectively. Average hours worked increased by only 0.2% in 2023, and in the last quarter of 2023 stood 1.3% below the pre-pandemic level, likely driven by factors such as labour hoarding (i.e. companies holding on to more workers than necessary in downturns) and an increase in sick leave. The labour force participation rate in the age group 15-74 years increased to a level of 65.7% in the fourth quarter of 2023, 1.1 percentage points above its pre-pandemic level. In the second half of the year, labour demand showed some signs of softening, with the job vacancy rate still high but gradually receding from the peak reached in the second quarter of 2022. Overall, while the ECB’s interest rate increases continued to be transmitted forcefully to the economy, total employment and the euro area labour market, which is among the European Union’s objectives to which the ECB can contribute, if this is without prejudice to maintaining price stability, remained relatively resilient.

Chart 1.5

Labour market

(left-hand scale: quarter-on-quarter percentage changes; right-hand scale: percentages)

Sources: Eurostat and ECB calculations.
Note: The latest observations are for January 2024 for the unemployment rate, and for the fourth quarter of 2023 for employment and hours worked.

1.3 Fiscal policy measures in a challenging macroeconomic environment

The euro area budget deficit ratio decreased as governments started to wind down discretionary support measures

The euro area general government deficit ratio continued to decrease in 2023, following a path started at the height of the pandemic (Chart 1.6).[5] The gradual tightening of fiscal policy is also reflected in the fiscal stance, which tightened moderately in 2023 for the third year in a row.[6] However, only slightly over a third of the loosening in 2020 has so far been reversed (Chart 1.6). This means that the cyclically adjusted budget balance remains well below its pre-pandemic level, owing to lasting measures adopted in the context of the pandemic in 2020 and the energy-related support provided from 2022 onwards.

Chart 1.6

Euro area general government balance and fiscal stance

(percentages of GDP)

Sources: Eurosystem staff macroeconomic projections for the euro area, December 2023 and ECB calculations.
Note: The measure of the fiscal stance is adjusted on the revenue side from 2021 by netting out grants from the NGEU Recovery and Resilience Facility as these revenues do not have macroeconomic tightening effects.

A further tightening of the fiscal stance would be appropriate

Seen from the end-2023 perspective, a challenge for fiscal authorities will be how best to reverse this cumulative expansion of the last four years (Chart 1.7) and to reduce debt ratios, particularly given that demographic developments, the green and digital transitions as well as the geopolitical environment will require fiscal room for manoeuvre in the future. The 2024 government budgets pointed towards a continuation of the fiscal tightening cycle at the euro area level. This largely reflected an unwinding of discretionary fiscal measures that had been adopted in response to the energy and inflation shocks. Such measures were estimated to have amounted to over 1% of GDP in 2023, yet only a small part of this was expected to remain in place in 2024. Notably, however, some of the expansionary measures adopted by governments during the pandemic seemed to be of a more long-lasting nature and, on the basis of the 2024 budgets, were not set to expire in the short run. This was the case for increased transfers and subsidies but to some extent also tax reductions.

Chart 1.7

Decomposition of the euro area fiscal stance and discretionary measures

(percentages of GDP)

Sources: Eurosystem staff macroeconomic projections for the euro area, December 2023 and ECB calculations.
Notes: The measure of the fiscal stance is adjusted on the revenue side from 2021 by netting out grants from the NGEU Recovery and Resilience Facility as these revenues do not have macroeconomic tightening effects. “Other measures” mainly relates to measures adopted during the pandemic and their subsequent unwinding.

A further tightening of the fiscal stance also appears appropriate from the viewpoint of monetary policy. As the energy crisis has now largely faded, governments should continue to roll back the related support measures, which is essential to avoid driving up medium-term inflationary pressures. This would otherwise call for tighter monetary policy. Besides rolling back the pandemic and energy-related measures, governments should more generally make progress towards sounder fiscal positions to ensure that public finances are on a sustainable path.

The EU needs a robust and credible framework for economic and fiscal policy coordination

A robust EU framework for economic and fiscal policy coordination and surveillance remains crucial. After extensive discussions, the Council of the European Union agreed in 2023 on a reform of the EU’s economic governance framework, which opened the way for a trilogue between the European Commission, the EU Council and the European Parliament. 2024 will be an important year to transit towards its implementation.[7]

1.4 Headline inflation saw a steep decline throughout the year

Headline inflation in the euro area as measured by the Harmonised Index of Consumer Prices (HICP) was 2.9% in December 2023, a decline of 6.3 percentage points from its level in December 2022. It fell steadily throughout the year, with the disinflationary process also showing up in underlying inflation as the year progressed. In November headline inflation reached a temporary trough of 2.4%, the lowest level in more than two years (sharply down from the peak of 10.6% in October 2022) (Chart 1.8). However, inflation moved slightly higher again in December, owing to the downward effects of energy-related fiscal measures on price levels a year earlier. All major components of inflation saw declines in year-on-year inflation rates over the second half of 2023, reflecting the fading impact of previous cost shocks and weaker demand amid tighter monetary policy. However, year-on-year inflation rates (other than for energy prices) were at year-end still significantly above their longer-term averages, while annualised quarter-on-quarter rates had already moved much closer to such benchmarks. Price dynamics for goods decelerated more swiftly than those for services, as easing supply bottlenecks and input costs took considerable pressure off. Services price inflation rose until mid-year, owing to still strong post-pandemic demand, increasing labour costs, and temporary factors related to fiscal measures. With the reduction in energy and food inflation, the disparities in inflation rates across euro area countries also diminished substantially.

Chart 1.8

Headline inflation and its main components

(annual percentage changes; percentage point contributions)

Sources: Eurostat and ECB calculations.
Note: The latest observations are for December 2023.

Energy inflation dropped sharply while food inflation moderated

Developments in energy prices accounted for more than half of the drop in headline inflation between December 2022 and December 2023. Energy inflation was still high in January 2023, but by year-end had declined by 25.6 percentage points into negative territory. This reflected the unwinding of the strong surges in wholesale energy prices that had taken place in 2022. However, energy inflation remained somewhat volatile, as wholesale energy markets were sensitive to events such as the conflict in the Middle East. Meanwhile, food inflation peaked at 15.5% in March 2023. It then declined substantially throughout the rest of the year, although was still over 6% towards year-end owing to the persistent impact of earlier cost shocks stemming from energy and other inputs, and to higher pressures from unit profits and labour costs.

Underlying inflation started to moderate but remained elevated at year-end

Core inflation – as measured by HICP inflation excluding the volatile components energy and food – continued to increase into the first quarter of the year, but then moderated from a peak of 5.7% to stand at 3.4% in December. This decline was initially driven by non-energy industrial goods inflation, as demand for goods weakened amid tighter financing conditions (see Section 1.2) and accumulated pressures from past supply bottlenecks and high energy costs started to dissipate. Meanwhile, services inflation hovered at high levels until August as a result of still strong demand after the reopening of the economy (for contact-intensive services sectors such as recreation and holidays) as well as rising labour costs, especially given the larger labour share in the cost structure of the services sector compared with manufacturing. Towards the end of the year, however, services inflation also fell somewhat and confirmed the general disinflationary process. Moreover the lagged dynamics in services inflation reflected the fact that many services components typically lag headline inflation (e.g. housing, postal and medical services). All other indicators of underlying inflation also moderated significantly during the year, reflecting the fading impact of past shocks and the increasing impact of tighter monetary policy, yet they continued to span a wide range and most indicators still clearly exceeded pre-pandemic levels.[8]

Labour costs became the most important contributor to domestic inflation later in the year

Growth in the GDP deflator (a reliable measure of domestic price pressures) was on average 6.0% in 2023. This compared with average import price inflation of -2.9%, reflecting the shift from external to domestic drivers of inflation. While profits had still played a prominent role in domestic price pressures at the turn of the year 2022/ 2023 (see Box 2), labour costs gradually became the dominant factor, given strong wage developments and a reduction in labour productivity (Chart 1.9). Annual growth in compensation per employee increased to 5.1% on average in 2023 from 4.5% in 2022, rates substantially above the pre-pandemic (2015-19) average of 1.7%, which was facilitated by still tight labour markets (see Section 1.2). The further strengthening reflected in part workers seeking compensation for past inflation-induced losses in the purchasing power of nominal wages. Growth in negotiated wages rose to 4.5% on average in 2023; the difference compared with actual wage growth implies a still sizeable wage drift component, though lower than in 2021-22.[9] Growth in both compensation per employee and negotiated wages started to edge down towards the end of the year, but their growth levels remained elevated and signalled still high nominal wage pressures going into 2024. This reflected a recovery of real wages rather than evidence of destabilising wage-price dynamics.

Chart 1.9

Euro area compensation per employee

(annual percentage changes; percentage point contributions)

Sources: Eurostat, ECB and ECB calculations.

Longer-term inflation expectations declined slightly, remaining anchored around the ECB’s 2% target

Average longer-term inflation expectations of professional forecasters, which had stood at 2.2% in late 2022, edged down to 2.1% in 2023. Other survey data, such as from the ECB Survey of Monetary Analysts and Consensus Economics, also suggested that longer-term inflation expectations were well anchored around the ECB’s 2% target. A market-based measure of longer-term inflation compensation (the five-year forward inflation-linked swap rate five years ahead) rose to a peak of 2.7% in August, but decreased to 2.3% in late December amid news of lower than anticipated headline inflation and a subdued economic growth outlook (see Section 1.2). In any case market-based measures corrected for risk premia implied “genuine” expectations very close to 2%. On the consumer side, median inflation expectations for three years ahead remained slightly above this at 2.5% in December, possibly reflecting high uncertainty, negative economic sentiment and still high price levels relative to wages.[10]

1.5 Credit and financing conditions tightened strongly as policy rates increased

Lower bond yields despite monetary policy tightening, reflecting a change in expectations towards the end of the year

With inflationary pressures remaining elevated and persistent throughout 2023 (see Section 1.4), the ECB continued to tighten monetary policy decisively until September, and subsequently maintained the key ECB interest rates at restrictive levels, to ensure that inflation returns to the 2% target over the medium term (see Section 2.1). The – risk-free – ten-year overnight index swap (OIS) rate hovered around 3% through most of the year, reaching a peak of 3.3% in October before declining to an average 2.5% in December (Chart 1.10). The decline in the ten-year OIS rate towards the end of the year was due to a sharp drop in financial market interest rate expectations, mostly after inflation came in lower than expected. The drop in expectations was only partially compensated by an increase in the term premium. Long-term government bond yields followed developments in the OIS rate very closely. Their spreads were not significantly affected by the process of normalising the Eurosystem balance sheet (see Section 2.1) and at year-end were virtually the same as in December 2022. The euro area GDP-weighted average of ten-year nominal government bond yields averaged 2.7% in December 2023, 10 basis points below its level a year earlier.

Chart 1.10

Long-term interest rates, and the cost of borrowing for firms and for households for house purchase

(percentages per annum)

Sources: Bloomberg, LSEG and ECB calculations.
Notes: Monthly observations. The euro area ten-year government bond yield is a GDP-weighted average. The indicators for the cost of borrowing are calculated by aggregating short-term and long-term bank lending rates using a 24-month moving average of new business volumes. The latest observations are for December 2023.

Equity markets were supported by lower risk premia

Stock prices increased in 2023, in both the non-financial sector and, particularly, the banking sector. A decline in equity risk premia supported equity prices amid low and falling volatility despite heightened geopolitical tensions. The index of euro area bank stocks was boosted further by expectations of an increase in bank earnings in both the long and short term, with the March banking sector market turbulence in the United States and Switzerland having a sizeable but temporary negative impact. The broad indices of euro area non-financial corporation and bank equity prices ended 2023 around 12% and 23% above their respective end-2022 levels. Corporate bond yields declined and stood, on average, at lower levels in December 2023 than in December 2022 in both the investment grade and high-yield segments, owing to lower risk-free rates combined with a compression of corporate bond spreads.

Broad money and bank intermediation reflected the tightening of monetary policy

Broad money (M3) stagnated, mainly reflecting the tightening of monetary policy. Its annual rate of change was only 0.1% in December, having declined significantly during 2023 and even temporarily reaching negative rates for the first time since the inception of Monetary Union (Chart 1.11). The decline was driven by subdued credit creation, high opportunity costs of holding liquid assets and the reduction in the Eurosystem balance sheet. While bank balance sheets remained robust overall, repayments of funds borrowed under the third series of targeted longer-term refinancing operations and a contraction in the Eurosystem asset portfolios reduced excess liquidity. Bank funding costs increased steeply, although by less than policy rates, as banks turned to more expensive market funding sources and competed more actively for customer deposits by offering higher interest on them.

Bank lending rates increased steeply for firms and households as monetary policy tightened

The transmission of the monetary policy tightening to broader financing conditions remained strong in 2023. As indicated by the euro area bank lending survey, banks tightened their credit standards (i.e. internal guidelines or loan approval criteria) for loans to households and firms substantially further. This was confirmed by the survey on the access to finance of enterprises for firms and the Consumer Expectations Survey for households. Nominal bank lending rates increased steeply again in 2023, reaching their highest levels in almost 15 years. The composite bank lending rate for loans to households for house purchase stood at 4.0% at the end of the year, up by about 100 basis points compared with the end of 2022, and the equivalent rate for non-financial corporations increased by 180 basis points to 5.2%, a rise of almost twice the increase seen for households (Chart 1.10). The increases in lending rates were more rapid and larger than in previous episodes of monetary policy tightening, mostly reflecting the faster and larger policy rate hikes since July 2022. The disparity in lending rates across countries remained contained, indicating that changes in the ECB’s monetary policy were being transmitted to lending rates smoothly across the euro area.

Bank lending to households and firms weakened markedly

Bank lending to households and firms weakened markedly in 2023, on the back of tighter credit conditions (Chart 1.11). Net monthly flows of loans were almost zero in the last three quarters of the year. The annual growth rate of bank loans to households declined, standing at 0.3% in December, mostly reflecting the slowdown in mortgages amid falling house prices for the first year since 2014. The annual growth rate of bank loans to firms also fell, reaching 0.4% in December, and the net flows of overall external financing to firms were at historical lows (Chart 1.12).

Chart 1.11

M3 growth and the growth of credit to firms and households

(annual percentage changes)

Source: ECB.
Notes: Firms are non-financial corporations. The latest observations are for December 2023.

Chart 1.12

Net flows of external financing to firms

(annual flows in EUR billions)

Sources: ECB and Eurostat.
Notes: Firms are non-financial corporations. MFI: monetary financial institution. In “loans from non-MFIs and the rest of the world”, non-monetary financial institutions consist of other financial intermediaries, pension funds and insurance corporations. “MFI loans” and “loans from non-MFIs and the rest of the world” are corrected for loan sales and securitisation. “Other” is the difference between the total and the instruments included in the chart and consists mostly of inter-company loans and trade credit. The latest observations are for the third quarter of 2023. The annual flow for 2023 is computed as a four-quarter sum of flows from the fourth quarter of 2022 to the third quarter of 2023.

Box 1
The macroeconomic implications of climate change

The ECB is working to better understand the macroeconomic consequences of climate change and policies to mitigate its impact, in line with commitments made following the 2020-21 monetary policy strategy review.[11] These efforts are highly relevant to the ECB’s primary mandate to maintain price stability. The complexity of climate change and the non-linear and highly uncertain nature of its effects call for enhanced macroeconomic analysis to limit forecast errors and understand the structural changes climate change is creating in the economy.

Climate change is already affecting euro area inflation. ECB research estimates that the extreme summer heat in 2022 increased food inflation in Europe by around 0.7 percentage points after one year, i.e. in 2023 (Chart A).[12] Services inflation can also be affected by hotter summers, possibly through the impact on food prices and the sensitivity of tourism-related services to temperature.[13] The impact of higher summer temperatures on inflation could be greater in a hotter climate: a heatwave similar to that of 2022 occurring in the climate of 2035 could, in a pessimistic scenario, increase average food price inflation by 1 percentage point. In an optimistic scenario, the effect of a similar heatwave would only be marginally less severe (0.8 percentage points). Increasing temperatures will have a greater impact on regions that are already hotter. This implies different effects on inflation in different euro area countries, which would make the transmission of a single monetary policy more challenging.

Chart A

Increasing impact of heatwaves on food price inflation in Europe

(year of heatwave, percentage points)

Source: Kotz et al. (see footnote 12).
Notes: Impacts estimated with a global panel regression approach, using monthly prices and high-resolution climate data. The bars show the cumulative deviation of food inflation from the baseline projection after 12 months as a result of extreme June, July and August temperatures. The chart is based on combining elasticities of a 1°C increase in temperatures with results from 21 global climate models. Temperatures are based on a summer equivalent to that in 2022 (i.e. in the upper tail of the temperature distribution on the basis of projected future climates) and are retrieved from climate model results under an optimistic emissions scenario (in which the rise in global temperatures would be below 2°C in 2100) and a pessimistic scenario (in which emissions would rise throughout the next century). Impacts could be reduced through ambitious adaptation to warmer climates.

Extreme weather events typically reduce output in the short run, but the total economic impact extends beyond the direct and immediate impacts that would arise, for example, through the destruction of houses, factories and machinery. Examples include disruption in other regions or sectors through supply-chain linkages or impaired infrastructure. Revenue losses in affected sectors and lower output will usually reduce demand for the products and services of other sectors. Another effect is higher uncertainty, which could lead households and businesses to reassess their views on disaster risk and therefore depress spending.

Over longer horizons climate change can also reduce output growth more persistently.[14] For example, reduced snowfall will threaten the viability of many skiing areas in Europe, and some Mediterranean regions may become too hot for summer tourism, although some northern regions may benefit. Yields in agriculture and forestry will likely be depressed by hotter average temperatures. While changing crops can alleviate some of the effects, less predictable temperature and rainfall patterns are also likely to weigh on agricultural output. Higher temperatures above the comfort zone of around 19-22°C – which are likely to occur more frequently in a warmer climate – reduce the productivity of workers.

Adaptation, i.e. adjustment to warmer climates, could help limit macroeconomic impacts. This includes, for example, installing air conditioning to reduce the impact of heat stress on labour productivity, or switching crops to limit agricultural productivity losses. However, such measures will likely have implications for government budgets and fiscal space.[15] Insurance provides a further tool for adaptation, but there is already a substantial climate insurance protection gap in Europe.[16]

Achieving emission reductions to meet the goals of the Paris Agreement and avert more catastrophic global warming requires a wide-ranging structural transformation of the economy. Capital and labour need to be reallocated across and within sectors, and even within individual firms (e.g. car makers will need to switch factories from making combustion engine cars to making battery-powered electric vehicles). The success of that reallocation will depend on the implementation of effective transition policies; the flexibility of markets and in particular the ability of the economy to finance and absorb the substantial capital investment required; the development of decarbonised technologies and the availability of skilled labour to implement them.

Analysis suggesting a benign economic impact of climate policy measures introduced to date is unlikely to capture the full picture.[17] Available model-based assessments of carbon price pathways find only a limited effect on output and inflation.[18] However, the measures included still fall substantially short of meeting the EU’s emission reduction target, and the broader impact of the transition – including effects from strengthened regulation and targets – can be less straightforward to quantify.

The speed of transition critically affects the ultimate economic impact: delaying the transition will require faster and more radical policy changes later on, increasing the probability of stranded assets and higher structural unemployment.[19] Moreover, different transition policies vary in their impact on productivity.[20] Market-based policies – such as carbon taxes – have less impact on the productivity of carbon-intensive firms than non-market-based policies (such as banning certain products or processes).

The competitiveness of the euro area economy is also affected by global choices regarding transition policies. These include higher carbon prices as well as industrial policies such as the recent Inflation Reduction Act in the United States. The EU Emissions Trading System (EU ETS) can trigger “carbon leakage”, i.e. the relocation of economic activity and emissions to regions with laxer emissions requirements. This can be reduced by carefully calibrating the Carbon Border Adjustment Mechanism together with existing carbon leakage prevention mechanisms.[21]

Overall, climate change and mitigation policies affect nearly all aspects of macroeconomic analysis performed by central banks. Key open questions remain, related for example to the way the transition should unfold and the resultant structural changes to the economy; to the macroeconomic impact of extreme weather and risks from accelerated climate change; and to the role of nature capital and ecosystem services.

Box 2
The role of unit profits in recent domestic price pressures

This box focuses on how unit profits contributed to the dynamics of domestic price pressures in 2023 from an accounting perspective.

Domestic price pressures were very strong in 2023 but receded slightly in the course of the year as unit profits declined

Growth in the GDP deflator, which shows a strong co-movement with developments in HICP inflation excluding energy and food (HICPX), can be broken down into the contributions from unit labour costs, unit profits and unit taxes (minus subsidies) (Chart A).[22],[23] Annual growth in the GDP deflator rose significantly further in 2023, to an average of 6.0% from 4.7% in 2022. This contrasts with an average rate over the period from 1999 to 2021 of 1.6%. From a historical high of 6.4% in the first quarter of 2023, the growth figure started to moderate and reached 5.3% in the fourth quarter. Unit profits contributed over several quarters in 2022 and 2023 to the surge in the GDP deflator, accounting for about half or more of its elevated growth rate. This compares with an average contribution of slightly more than one-third over the period 1999 to 2019. The contribution of unit profits then declined strongly during 2023, helping to offset increases in the contribution of unit labour costs over the period.

Chart A

GDP deflator and contributions

(annual percentage changes; percentage point contributions)

Source: Eurostat and ECB calculations.

Exceptional economic developments after the pandemic explain strong unit profit growth in 2022 and early 2023

Unit profits typically move closely with developments in cyclical indicators such as real GDP. They are, moreover, typically affected by marked changes in the terms of trade, for instance owing to large fluctuations in import or oil prices. These features reflect the fact that, when demand is stronger relative to potential output, it is easier for price-setters to raise prices and unit profits without losing market share, while at times of input cost shocks e.g. from energy prices, profits are typically used at least temporarily to avoid passing the full cost increase through to selling prices. The economic weakening over 2022 and 2023, to the extent that it was driven by demand falling relative to supply, and the sharp deterioration of the terms of trade in 2022, related to the surge in import prices, would therefore have both pointed to weaker developments in unit profits than were observed (Chart B). This suggests that other mechanisms and more exceptional factors may have been at play during that period. One source of the strength of unit profits in these years was the supply-demand imbalances in many economic sectors. While supply chain disruptions during the pandemic led to widespread supply constraints, debt-financed government measures limited the impact of the growth slowdown on disposable incomes and contributed to high savings. Such savings and the related pent-up demand boosted demand in many sectors following the reopening after the lockdowns. In such an environment of strong aggregate demand relative to supply, pronounced input cost increases can lead price-setters to raise their prices without necessarily changing their mark-up pricing strategy. This implies a pass-through of input costs and a large contribution of unit profits to domestic price pressures, as recently observed.[24]

Chart B

Unit profits, real GDP and the import deflator

(annual percentage changes)

Source: Eurostat and ECB calculations.
Note: The latest observations are for the fourth quarter of 2023.

As exceptional factors unwound, unit profits realigned with the economic cycle and their typical buffer role

With the fading of supply-demand imbalances after the pandemic and the significant moderation in energy and other input cost pressures in the course of 2023, unit profit growth started to recede and return gradually to more normal levels. The unwinding of supply-demand imbalances made it harder to raise margins without losing market share and contributed to more contained increases in unit profits. The turn in the environment towards more moderate input cost pressures allowed more limited selling price dynamics. This meant that unit profit growth was set to decline even if firms maintained their approach to passing through input cost prices and setting mark-ups. The decline in input cost pressures may have, moreover, made it easier for firms to buffer labour cost pressures. The weaker unit profit developments are also consistent with the relatively weak cyclical economic environment in 2023. Overall, unit profits appear to have resumed their typical buffer role, counteracting a larger pass-through of the high unit labour cost pressures to domestic prices.

2 Monetary policy in restrictive territory

In 2023 the ECB stayed the course in raising key policy interest rates to, and keeping them at, levels sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target. In the first nine months of the year it increased rates by 200 basis points, bringing the deposit facility rate to 4%, as exceptionally high inflationary pressure stemming from high energy costs spread through the economy. High food prices were also a significant contributing factor. In addition, the effects of supply bottlenecks and of pent-up demand linked to the lifting of pandemic-related restrictions were, although easing, still driving up prices, and wage growth picked up. The ECB’s decisions reflected a data-dependent approach and were based on the assessment of the medium-term inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. In the course of the year the available information increasingly showed that the tightening of monetary policy was being forcefully transmitted to the economy. In addition, incoming inflation data indicated that the disinflation process, as signalled especially by the decline in measures of underlying inflation, continued to make progress. Ultimately the Governing Council decided at its October and December meetings to keep the key ECB interest rates unchanged.

The Eurosystem balance sheet continued to contract as part of the monetary policy normalisation that began in 2022, notwithstanding the additional €45 billion contribution from Hrvatska narodna banka’s balance sheet following the adoption of the euro by Croatia on 1 January 2023. The Eurosystem balance sheet reached €6.9 trillion by year-end, a decline of more than €1 trillion in one year and of almost €2 trillion when compared with its peak in mid-2022. The reduction was mainly the result of the maturing and early repayments of long-term funds borrowed by banks under the third series of targeted longer-term refinancing operations (TLTRO III) and was supported by the end of both the full and the partial reinvestment phase in the asset purchase programme (APP), in the periods starting in March and July respectively. In December 2023 the Governing Council decided to advance the normalisation of the Eurosystem balance sheet, expressing its intention to gradually phase out reinvestments under the pandemic emergency purchase programme (PEPP) starting in July 2024. In 2023, following the announcement of December 2022, the Eurosystem worked on the review of its operational framework for steering short-term interest rates, which was concluded in March 2024.

Moreover, the ECB proceeded in 2023 with the gradual removal, initiated in 2022, of its pandemic-related collateral easing measures, and the Hellenic Republic’s credit rating was upgraded to investment grade level. Throughout 2023 the Eurosystem emphasised risk management to ensure efficient policy implementation, including by diversifying the credit assessment sources it accepts. With the key interest rates having been raised to bring down inflation, the ECB incurred losses from negative interest income, which were partly offset by previously established financial buffers. The monetary income of the ECB is expected to increase again in the future, which will support its operational effectiveness.

2.1 Pursuing a restrictive monetary policy to bring inflation back to the 2% target

Inflation was still 8.6% in January, while the economy remained resilient despite mounting challenges

In early 2023 economic growth stagnated in the euro area, after a marked deceleration since mid-2022. However, the economy showed signs of resilience in the face of significant challenges from subdued global economic activity, geopolitical uncertainties owing to Russia’s war against Ukraine and high inflation along with tighter financing conditions. Headline inflation declined in January as a result of lower energy prices but remained high at 8.6%, also in light of high food prices. This was partly due to the pervasive impact of high energy costs across the economy, which also influenced food prices, alongside ongoing – although fading – pandemic-related factors such as supply chain disruptions and pent-up demand. Wage growth was also picking up.

The Governing Council raised rates in February and expressed its intention to raise them further

In light of the medium-term inflation outlook, the Governing Council reaffirmed its intention to pursue a restrictive monetary policy and raised the three key ECB interest rates by 50 basis points at its February meeting. It also said that it intended to raise interest rates by another 50 basis points at its meeting in March, and would then evaluate the subsequent monetary policy path. The Governing Council remained steadfast in raising interest rates at a steady pace to levels sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target. Keeping interest rates at restrictive levels should gradually reduce inflation by dampening demand and pre-empting any sustained upward shift in inflation expectations.

At its February meeting, the Governing Council also established modalities for reducing Eurosystem securities holdings under the APP. This followed on from its December 2022 decision to no longer reinvest the principal payments from maturing securities in full from March onwards, so that the APP portfolio would decrease by a monthly average of €15 billion from March to June 2023, with the subsequent reduction pace to be determined later. Corporate bond reinvestments would be tilted more strongly towards issuers with a better climate performance. While maintaining a focus on the ECB’s price stability objective, this strategy was aimed at taking better account of climate-related financial risk in the Eurosystem balance sheet and gradually decarbonising corporate bond holdings in alignment with the ECB’s secondary objective of supporting the general economic policies in the EU, which include efforts to mitigate the impact of climate change (see Box 8).

US banking sector turbulence fuelled uncertainty in Europe, emphasising the need for a data-dependent approach to rate decisions

In March, amid the banking sector turbulence in the United States and Switzerland, financial market tensions soared and increased uncertainty about the outlook for euro area growth and inflation. In addition, the March ECB staff macroeconomic projections foresaw sustained high inflation levels, particularly in inflation excluding energy and food, although inflation was expected to decrease in the coming years. With inflation projected to remain too high for too long, the Governing Council decided to raise the three key ECB interest rates by 50 basis points. Moreover, the heightened uncertainty emphasised the importance of a data-dependent approach to the Governing Council’s policy rate decisions. It therefore also clarified its “reaction function”, explaining that its policy rate decisions would be guided by three criteria: the inflation outlook in light of incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council also continued to monitor market tensions closely, standing ready to respond as necessary to preserve price stability and contribute to financial stability in the euro area. In the following months, the euro area banking sector proved resilient to the tensions emanating from outside the euro area.

It became increasingly evident that restrictive monetary policy was having a significant impact on euro area financing conditions

As the year advanced, it was increasingly evident that the Governing Council’s restrictive interest rate policy was having a significant impact on the economy. Past rate increases were being transmitted forcefully to euro area monetary and financing conditions – the initial stages of the transmission mechanism – and were gradually having effects across the economy, even though the lags and strength of transmission to the real economy remained uncertain. In April borrowing rates for businesses and mortgages reached their highest levels in over a decade. The resultant decline in credit demand, along with tighter credit standards, led to a progressive slowdown in loan growth. Banks also repaid the largest amount of funds borrowed under TLTRO III in June, causing a significant decline in excess liquidity. This reduction did not hinder the smooth transmission of monetary policy rate changes to risk-free rates in money markets, although an asymmetry emerged in the reaction of the spread between the euro short-term rate (€STR) and the ECB’s deposit facility rate. The spread did not narrow with the liquidity reduction, in contrast to its widening when liquidity had increased (see Box 3).

The Governing Council continued to raise policy rates as underlying price pressures remained high…

Headline inflation declined markedly. It dropped to 6.1% in May from 8.5% in February, with 6.9% in March and 7.0% in April. Nevertheless, while inflation was expected to decline further toward the target, largely driven by the concurrent tightening of financing conditions that was increasingly dampening demand, price pressures were still anticipated to remain too strong for too long. The Governing Council therefore opted for another two consecutive 25 basis point interest rate increases, in May and June respectively.

…stopped APP reinvestments as of July…

After the pace of reinvestment was reduced in March, July marked the end of APP reinvestments. Reinvestments under PEPP were still set to continue until at least the end of 2024. At the same time, developments since the Governing Council’s previous monetary policy meeting supported its expectation that inflation would drop further over the remainder of the year but stay above target for an extended period. On this basis, the Governing Council stayed on course to raise interest rates by an additional 25 basis points in July.

…and returned minimum reserve remuneration to 0%, improving policy efficiency

The Governing Council also decided in July to reduce the remuneration of minimum reserves from the deposit facility rate to 0%. This decision was aimed at maintaining the effectiveness of monetary policy by retaining control over the monetary policy stance while ensuring a full pass-through of interest rate decisions to money markets. It also enhanced policy efficiency by reducing overall interest expenses stemming from reserves while achieving the same degree of monetary restriction.

With inflation in August showing almost no progress from the 5.3% recorded in July, and the inflation outlook in the September ECB staff projections revised upwards for 2023 and 2024, mainly owing to a higher path for energy prices, the Governing Council increased the key ECB rates by another 25 basis points at its September meeting. This brought the cumulative increase over 2023 to 200 basis points and the deposit facility rate to 4% (Chart 2.1).

Chart 2.1

Changes in the key ECB policy rates

(percentage points)

Source: ECB.

…and said that maintaining current policy rate levels for a sufficiently long duration would contribute substantially to the timely return of inflation to the target

However, the economy was expected to remain subdued in the following months, after having stagnated over the first half of the year. The increasing impact of the Governing Council’s tightening measures on domestic demand, coupled with a challenging international trade environment, led ECB staff to significantly lower their economic growth projections in September 2023. Additionally, while underlying price pressures persisted at high levels, most indicators started to ease, and the projected path for inflation excluding energy and food was also revised slightly downwards. On the basis of this updated assessment, the Governing Council also considered that the key ECB interest rates had reached levels that, maintained for a sufficiently long duration, would make a substantial contribution to the timely return of inflation to its target.

October ended the longest period of consecutive rate hikes in the history of the euro

After ten consecutive rate hikes, the Governing Council decided at its October meeting to keep the key ECB interest rates unchanged. From the start of the rate increases in July 2022, the ECB had raised the deposit facility rate from -0.50% to 4% by September 2023. While inflation was still anticipated to remain persistently high owing to robust domestic price pressures, it continued to decrease significantly in September, dropping to 4.3%. This decline was accompanied by an easing in measures of underlying inflation. The increased geopolitical risks arising from October onwards from the conflict in the Middle East also further underscored the importance of the Governing Council's data-dependent approach to determining the appropriate level and duration of restriction in its key policy rates.

Inflation dropped to 2.4% in November

As the year came to a close, inflation continued to decrease, reaching 2.4% in November. At its December meeting, however, the Governing Council assessed that it was likely to temporarily rise again in the near term, owing to base effects. Underlying inflation had eased further. The Eurosystem staff macroeconomic projections suggested that inflation would resume its gradual decline in 2024. At the same time domestic price pressures were seen as remaining elevated, primarily owing to strong growth in unit labour costs.

The Governing Council kept rates unchanged and decided to advance the Eurosystem’s balance sheet normalisation

Against this background, the Governing Council decided at its December meeting to keep its key rates unchanged.

The Governing Council also decided in December to advance the normalisation of the Eurosystem balance sheet. It expressed the intention to reinvest, in full, the principal payments from maturing PEPP securities until mid-2024, before reducing the portfolio by an average €7.5 billion per month until year-end and discontinuing reinvestments thereafter.

2.2 Eurosystem balance sheet developments as monetary policy tightens further

The Eurosystem balance sheet was gradually reduced, with the end of APP reinvestments and the maturing of TLTRO III operations

In 2023 the Eurosystem balance sheet continued the gradual reduction started in 2022 with the normalisation of monetary policy. It declined further as the full and partial reinvestment phases of the APP ended in February and June respectively. Under the PEPP, the Eurosystem continued full reinvestments throughout the year. By the end of 2023 the balance sheet had declined to €6.9 trillion, mainly on account of TLTRO III operations maturing as well as early repayments, and to some extent also as the APP portfolio began to be wound down.

At the end of 2023 monetary policy-related assets on the Eurosystem balance sheet amounted to €5.1 trillion, a decline of €1.2 trillion compared with the end of 2022. Loans to euro area credit institutions accounted for 6% of total assets (down from 17% at the end of 2022) and assets purchased for monetary policy purposes represented 68% of total assets (up from 62% at the end of 2022). Other financial assets on the balance sheet consisted mainly of foreign currency-denominated assets, gold and euro-denominated non-monetary policy portfolios.

On the liabilities side, the overall amount of credit institutions’ reserve holdings and recourse to the deposit facility decreased to €3.5 trillion at the end of 2023 (from €4.0 trillion at the end of 2022) and represented 51% of total liabilities (compared with 50% at the end of 2022). Banknotes in circulation were virtually unchanged at €1.6 trillion and accounted for 23% of total liabilities (up from 20%).

In 2023, following the announcement of December 2022, the Eurosystem worked on the review of its operational framework for steering short-term interest rates, which was concluded in March 2024.

Chart 2.2

Evolution of the Eurosystem’s consolidated balance sheet

(EUR billions)

Source: ECB.
Notes: Positive figures refer to assets and negative figures to liabilities. The line for excess liquidity is presented as a positive figure, although it refers to the sum of the following liability items: current account holdings in excess of reserve requirements and recourse to the deposit facility.

The adoption of the euro by Croatia on 1 January 2023 and the inclusion of Hrvatska narodna banka’s balance sheet in the consolidated balance sheet of the Eurosystem increased the latter’s total assets and liabilities by €45 billion.

APP and PEPP portfolio distribution across asset classes and jurisdictions

The run-off of the asset purchase programmes was well absorbed by the market

The APP comprises four asset purchase programmes: the third covered bond purchase programme (CBPP3), the asset-backed securities purchase programme (ABSPP), the public sector purchase programme (PSPP) and the corporate sector purchase programme (CSPP). The PEPP was introduced in 2020 in response to the pandemic. All asset categories eligible under the APP are also eligible under the PEPP; a waiver of the eligibility requirements was temporarily granted for the PEPP for securities issued by the Hellenic Republic.[25]

In December 2021 the Governing Council confirmed its intention to gradually start the normalisation of its monetary policy, by reducing the pace at which it purchased securities for the PEPP and, subsequently, the APP. It announced the end of net asset purchases under the PEPP, and in March 2022 gave an expected end date for the net purchases under the APP. The Eurosystem ended net purchases under the PEPP as of 1 April 2022 and continued to reinvest (in full) the principal payments from maturing securities purchased under the programme. It ended net purchases under the APP as of 1 July 2022 and began to only reinvest (in full) the principal payments from maturing securities. It then decided to reduce the Eurosystem holdings under the APP at a measured and predictable pace through partial reinvestment of the principal payments from maturing securities between March and June 2023, thereby ensuring that the Eurosystem maintained a continuous market presence under the APP over this period. Finally, the Governing Council confirmed on 15 June 2023 that it would discontinue reinvestments under the APP as of July 2023. For the PEPP, full reinvestments were continued till the end of 2022 and throughout 2023. On 14 December 2023 the Governing Council announced its intention to continue to reinvest, in full, the principal payments from maturing securities purchased under the PEPP during the first half of 2024 and reduce the PEPP portfolio by €7.5 billion per month on average over the second half of 2024, before discontinuing reinvestments under the PEPP at the end of that year. Reinvestment purchases continued to be conducted in a smooth manner and in line with the respective prevailing market conditions.

The size of the APP portfolio remained stable during the full reinvestment phase from July 2022 to February 2023. During the partial reinvestment phase, from March to June 2023, it declined by €60 billion, at an average pace of €15 billion per month, before the full run-off started in July 2023. Overall, APP holdings declined from €3.254 trillion (at amortised cost) at the end of 2022 to €3.026 trillion at the end of 2023. The PSPP accounted for the bulk of these holdings, with €2.403 trillion or 79% of total APP holdings at the end of the year. Under the PSPP, redemptions were in general reinvested in the jurisdiction in which principal repayments fell due. In addition, some national central banks purchased securities issued by EU supranational institutions. The weighted average maturity of the PSPP holdings stood at 7.0 years at the end of 2023, with some variation across jurisdictions. The ABSPP accounted for less than 1% (€13 billion) of total APP holdings at year-end, the CBPP3 for 9% (€286 billion) and the CSPP for 11% (€324 billion). Corporate and covered bond purchases were guided by benchmarks reflecting the market capitalisation of all eligible outstanding corporate and covered bonds respectively. The Eurosystem continued to tilt its corporate securities purchases towards issuers with a better climate performance and published its first climate-related financial disclosures for the corporate securities holdings under the CSPP and PEPP, as well as for its non-monetary policy portfolios – see Section 11.5. Securities purchases under the APP were implemented smoothly throughout the first half of 2023. The partial reinvestment phase and the discontinuation of the purchases were well absorbed by the financial markets and did not cause any major disturbance.

At the end of 2023 PEPP holdings amounted to €1.7 trillion (at amortised cost). Covered bond holdings accounted for less than 1% (€6 billion) of the total, corporate sector holdings for 3% (€46 billion) and public sector holdings for 97% (€1,614 billion).[26] The weighted average maturity of the PEPP public sector securities holdings stood at 7.3 years at the end of 2023, with some differences across jurisdictions.

Redemptions of private sector securities under the APP and PEPP amounted to €80 billion in 2023, while redemptions of public sector securities under the PSPP and PEPP amounted to €438 billion. Reinvestments under the APP and PEPP amounted to €36 billion for private sector securities and €271 billion for public sector securities. Given the large and unevenly distributed redemptions, the public sector reinvestments were smoothed across jurisdictions and across time to ensure a regular and balanced market presence, giving due regard to market price formation and market functioning considerations. This smoothing mechanism led to additional temporary deviations of the PEPP holdings from the allocation in accordance with the Eurosystem capital key, but these were largely reversed by the end of the smoothing period, which is the calendar year in which the redemptions take place.

The assets purchased under the PSPP, CSPP, CBPP3 and PEPP continued to be made available for securities lending to support bond and repo market liquidity. In 2023 repo market conditions improved significantly compared with the previous year, which was reflected in smaller lending volumes.

Developments in Eurosystem refinancing operations

At the end of 2023 the outstanding amount of Eurosystem refinancing operations was €410 billion, representing a decline of €914 billion compared with the end of 2022. This change mainly reflects voluntary early repayments (€312.5 billion) and the maturing of operations (€612.9 billion) under the TLTRO III series. The weighted average maturity of outstanding Eurosystem refinancing operations decreased from around 10.5 months at the end of 2022 to 5.2 months at the end of 2023.

Gradual phasing-out of pandemic collateral easing measures

In March 2022 the ECB announced the gradual phasing-out of pandemic-related collateral easing measures. These measures were a core element of the ECB’s monetary policy response to the pandemic, making it easier for counterparties to access Eurosystem credit operations by increasing the volume of eligible collateral. The central focus of the measures was a temporary reduction in valuation haircuts across all asset classes by a fixed factor of 20% and temporary extensions to the additional credit claim (ACC) frameworks implemented by some national central banks.

The gradual phase-out started in July 2022. In a second step, which took effect from 29 June 2023, the temporary reduction in valuation haircuts for marketable and non-marketable assets was fully phased out by implementing a new haircut schedule, thus marking the return to the ECB’s pre-pandemic risk tolerance level for credit operations.[27]

A third step in the phasing-out of the pandemic collateral easing measures will be a comprehensive review of the ACC framework. Some national central banks terminated their national ACC frameworks in full or in part in the course of 2023 or before.[28] In November 2023, the ECB announced the discontinuation of the eligibility of short-term debt instruments for use as collateral under the Guideline on temporary collateral measures[29], as well as of some specific features of the ACC frameworks. In addition, it decided to reinstate the €25,000 minimum size for domestic credit claims accepted as collateral for domestic use, as well as to extend the validity of the ACC frameworks with their remaining features, until at least the end of 2024. These decisions are to be implemented in the course of 2024.

In September 2023 the relevant credit rating of the Hellenic Republic was upgraded from credit quality step 4 to step 3 on the Eurosystem’s harmonised rating scale (from BB+ to BBB-), positioning all debt instruments issued by the central government of the Hellenic Republic at investment grade level.[30] The debt instruments issued by the central government of the Hellenic Republic, which previously benefited from a waiver included in the Guideline on temporary collateral measures, are therefore as of September 2023 subject to the eligibility criteria under the general collateral framework.

Developments in eligible marketable assets and mobilised collateral

The nominal amount of eligible marketable assets increased by €1.2 trillion in 2023, reaching a level of €18.3 trillion at the end of the year (Chart 2.3). Central government securities continued to be the largest asset class (€9.9 trillion). Other asset classes included corporate bonds (€1.9 trillion), covered bank bonds (€1.8 trillion) and unsecured bank bonds (€2 trillion). Regional government securities (€603 billion), asset-backed securities (€600 billion) and other marketable assets (€1.4 trillion) each accounted for a comparatively small fraction of the eligible assets universe.

Chart 2.3

Developments in eligible marketable assets

(EUR billions)

Source: ECB.
Notes: Asset values are nominal amounts. The chart shows averages of end-of-month data for each period.

Between the adjustment of the interest rates applicable to TLTRO III in November 2022 and the end of 2023, counterparties repaid 80% of their outstanding credit, which was accompanied by a sizable reduction in mobilised collateral of more than €900 billion (Chart 2.4). Following the early repayments between November 2022 and January 2023, counterparties demobilised in particular government bonds, which have a relatively high opportunity cost and can be used in private repo funding. In addition, they demobilised more than €250 billion of covered bonds and asset-backed securities in the course of 2023. The maturity of the TLTRO III operation in June 2023 was also accompanied by a large reduction in mobilised collateral (around €300 billion), which corresponded to 60% of the net credit repaid on that day. However, two-thirds of that drop in mobilised collateral was due to the partial phasing-out of the pandemic collateral easing measures, in particular the phasing-out of certain pools of ACCs in France as well as the reversal of the remaining 10% haircut reduction.

Chart 2.4

Developments in mobilised collateral

(EUR billions)

Source: ECB.
For collateral, the averages of end-of-month data for each period are shown, and values are after valuation and haircuts. For outstanding credit, daily data are used.

2.3 Managing financial risks of monetary policy instruments

The Eurosystem continuously manages the financial risks inherent in the implementation of its monetary policy operations. Its risk management function endeavours to attain risk efficiency, i.e. to achieve monetary policy objectives with the lowest amount of risk.[31]

Losses arose because of interest rate sensitivity mismatches between assets and liabilities

The ECB increased its key interest rates several times in 2023 to bring inflation back to the Governing Council’s medium-term target of 2%. This increased the cost of the liabilities on the balance sheets of Eurosystem central banks, while the income generated on their APP and PEPP securities portfolios and TLTRO III remained low. This resulted in negative interest income, which can be partly offset against financial buffers built up in previous years. If these buffers are fully utilised, any remaining losses are recorded on the balance sheets. However, such losses can be offset with future profits and do not affect the ability of Eurosystem central banks to operate effectively. Over time, the Eurosystem’s asset-liability mismatch is expected to decrease, which will improve its profit and loss accounts.[32]

The main changes to the Eurosystem’s risk management framework in 2023 were a further diversification of its credit assessment sources and a stronger tilting of purchases of corporate sector securities towards issuers with a better climate performance.

Further diversification of credit assessment sources

2023 was marked by the acceptance of additional credit assessment sources within the Eurosystem Credit Assessment Framework (ECAF). The ECAF is a risk management framework employed by the Eurosystem to mitigate the credit risk of assets used in monetary policy operations. It defines the procedures, rules and techniques that ensure the Eurosystem requirement of high credit standards for all eligible assets is met on an ongoing basis. This involves the assessment, acceptance and monitoring of different types of credit assessment source.

The Bank of Greece’s in-house credit assessment system was accepted as a credit assessment source

In April 2023 the Governing Council decided to accept the Bank of Greece’s in-house credit assessment system, which provides assessments of Greek legal entities in the non-financial sector, as a credit assessment source. These assessments can now be used to determine the eligibility of credit claims on Greek non-financial corporations as collateral for Eurosystem credit operations, and valuation haircuts for them. The Bank of Greece’s in-house assessment system is one of nine national central bank credit assessment systems currently accepted by the Governing Council.

Scope Ratings GmbH was accepted as a new external credit rating agency

In November the Governing Council decided to accept Scope Ratings GmbH as an external credit assessment institution (ECAI), following a thorough Eurosystem assessment of the company’s application based on the Eurosystem’s acceptance criteria for ECAIs. The assessment encompassed quantitative and qualitative criteria, as well as any relevant supervisory feedback from the European Securities and Markets Authority. The ratings provided by Scope Ratings will be used together with the ratings of the already accepted ECAIs (DBRS Morningstar, Fitch Ratings, Moody’s and S&P Global Ratings) to determine the eligibility of collateral assets for monetary policy operations, and the valuation haircuts to be applied, once the process of integrating Scope Ratings into the Eurosystem IT infrastructure has been concluded.

Managing risks of the asset purchases in the APP and PEPP

Financial risks of asset purchases continued to be managed on the basis of specific risk control frameworks for each asset class

In 2023 reinvestment of principal payments from maturing securities continued to be conducted for monetary policy purposes under the PEPP and, until the end of June, also under the APP. The financial risks of these programmes are managed on the basis of specific financial risk control frameworks that take into account each programme’s policy objectives and the features and risk profiles of the different asset types purchased. The frameworks consist of eligibility criteria, credit risk assessments and due diligence procedures, pricing frameworks, benchmarks and limits. They applied to net asset purchases and continue to apply to the reinvestment of principal payments from maturing holdings, as well as to the holdings for as long as they remain on the Eurosystem’s balance sheet. The key elements of these frameworks, as summarised in Section 2.3 of the ECB’s Annual Report 2022, Table 2.1, are still valid. For corporate sector securities, the Eurosystem applied a stronger tilting of its reinvestments of principal payments from maturing securities towards issuers with a better climate performance as of the start of partial reinvestment under the APP in March 2023.

Box 3
The evolution of excess liquidity and its impact on the euro unsecured market rate

This box explores the repercussions of the reduction in the Eurosystem balance sheet on the euro money market. The decline in excess liquidity resulting from the balance sheet reduction has not disrupted the pass-through of changes in the key ECB interest rates to unsecured money market rates. However, an asymmetry emerged in 2023 in the reaction of the spread between the euro short-term rate (€STR) and the ECB’s deposit facility rate, which has been less responsive to the reabsorption of excess liquidity than to the earlier injection of liquidity. Preliminary analysis suggests that this phenomenon is likely to be temporary.

The new monetary policy tightening reduced liquidity

Since the deposit facility rate was no longer negative and as a result of the recalibration of the conditions for TLTRO III, excess liquidity declined from €4.4 trillion on 27 July 2022 to €3.3 trillion on 31 December 2023 (Chart A, panel a). The €1.1 trillion reduction occurred primarily through the repayment of €1.7 trillion which had been borrowed by banks under TLTRO III. The maturing of Eurosystem APP holdings also contributed to this decline, with redemptions that were not reinvested absorbing €0.3 trillion. Conversely, the evolution of autonomous factors released €0.9 trillion of excess liquidity back into the system, reflecting a reduction in institutional customers’ non-monetary policy deposits with the Eurosystem. This reduction took place in a gradual manner, after adjustments were made in the remuneration of these deposits.

Lower liquidity has not narrowed the spread between the €STR and the deposit facility rate

Historical data suggests that a significant decline in excess liquidity should result in a narrowing of the spread between the €STR and the deposit facility rate. However, the recent reduction in excess liquidity has not led to a compression of this spread (Chart A, panel b), which widened until the second half of 2022 and then stabilised at around -10 basis points from November 2022 onwards. This departure from historical patterns raises questions about whether it is a temporary phenomenon or a structural shift.

Chart A

Evolution of excess liquidity

a) Excess liquidity and components

b) Excess liquidity and the €STR/deposit facility rate spread

(EUR trillions)

(x-axis: excess liquidity in EUR trillions; y-axis: spread in basis points)

Sources: ECB (market operations database), Bloomberg and Eurosystem calculations.
Note: Panel a): the negative deposit facility rate period ends on 26 July 2022, with the rate moving from -0.50% to 0.00% on 27 July. Panel b): the negative deposit facility rate period (covered by this chart) is from 1 October 2019 to 26 July 2022. The zero deposit facility rate period is from 27 July to 13 September 2022. The positive deposit facility rate period starts on 14 September 2022, when the rate was increased from 0.00% to 0.75%.


The effective deactivation of the two-tier system for the remuneration of banks’ excess reserves in July 2022 resulted in an additional €1 trillion of excess liquidity becoming available for trading (Chart B, panel a). During the period of negative rates and following the introduction of the two-tier system in October 2019, excess liquidity effectively available for trading was lower than the headline figure for excess liquidity, as part of the excess liquidity held with the Eurosystem benefited from a favourable remuneration, i.e. it was exempt from negative interest rates. The end of negative policy rates in July 2022 eliminated this advantage. The release of additional tradable funds bolstered, among other things, banks’ trading in unsecured overnight deposits.

According to the money market statistical reporting (MMSR) dataset, unsecured borrowing rose from a daily average of €120 billion during the negative deposit facility rate period in 2021 and 2022 to €210 billion towards the end of 2023, with the increase involving all counterparty sectors (Chart B, panel b). The return to positive rates and the end of the two-tier system thus led to a notable increase in supply in the unsecured segment.

In a context of excess supply, banks benefited from greater market power in the negotiation of interest rates with customers, as evident in the greater dispersion of rates in their contributions to the calculation of the €STR, with the majority tilting the rate down. While investors supplying funds preferred short maturities since they expected the ECB to raise interest rates, banks had limited appetite for short maturities, which do not provide benefits for regulatory liquidity metrics while being a costly way to increase total balance sheet size. Banks therefore tend to charge a premium to depositors to compensate for the negative effect of such deposits on their leverage ratio. The premium resulted in downward pressure on the €STR, particularly at quarter and year-end reporting dates.

Chart B

Trading activity

a) Tradable excess liquidity and the €STR/deposit facility rate spread

b) Unsecured borrowing by counterparty sector

(left-hand scale: excess liquidity in EUR trillions; right-hand scale: spread in basis points)

(EUR billions)

Sources: ECB (market operations database, MMSR), Bloomberg and Eurosystem calculations.
Note: Panel a): the negative deposit facility rate period ends on 26 July 2022, with the rate moving from -0.50% to 0.00% on 27 July. “Exempt reserves” refers to the portion of excess liquidity exempt from negative remuneration under the two-tier system. Panel b): the positive deposit facility rate period starts on 14 September 2022, when the rate was increased from 0.00% to 0.75%. The turnover reflected in the chart includes all €STR overnight deposits, deposits from non-financial corporations, call accounts and some other residual borrowing with maturities up to one year. MMFs: money market funds; NFCs: non-financial corporations. “Other” includes investment funds (excluding money market funds), pension funds and insurance funds, and residual sectors.

The uncompressed spread may be a temporary phenomenon

In conclusion, the absence of a compression of the spread between the €STR and the deposit facility rate could be a temporary phenomenon as, in a context of excess supply, banks retain market power to negotiate the price of short-term deposits to cover effects on regulatory ratios. A realignment of the €STR and deposit facility rate may still occur, as excess liquidity levels will decline further, which could change the balance of power between cash demand and supply.

3 European financial sector: resilient but operating in a fragile financial stability environment

Banks in the euro area proved to be resilient in 2023, particularly in the face of bank failures in the United States and Switzerland. They benefited from progress made on several fronts, along with continued supervisory engagement. The financial stability environment nonetheless remained fragile as tighter financial conditions challenged the real economy and the financial sector. National authorities continued to implement or tighten macroprudential buffers in order to enhance the strength of the banking sector. Moreover, the regulatory frameworks for banks, as well as for financial infrastructure and innovations, were further improved to increase the long-term resilience of the financial system.

3.1 The financial stability environment in 2023

The financial stability environment in the euro area remained fragile

The financial stability environment in the euro area remained fragile throughout 2023, reflecting a combination of challenges related to high inflation, tighter financial conditions, weaker growth prospects and fresh geopolitical tensions in the Middle East adding to the impact of Russia’s ongoing war against Ukraine. In March 2023 bank failures in the United States and Switzerland triggered a financial shock which was potent but ultimately short-lived, owing to resolute policy action that resulted in financial stability concerns quickly shifting towards other challenges, such as the implications of higher interest rates and downside risks to growth. Rising ECB policy rates continued to gradually drive up funding costs for all sectors of the economy. However, the lengthening of interest rate fixation periods for loans granted in previous years, alongside resilient labour markets and accumulated savings, muted the credit risk implications of higher borrowing costs for borrowers throughout the year. Overall, asset quality of euro area banks remained robust but bank loan losses started to rise, albeit from low levels, and non-bank financial intermediation (NBFI) entities continued to face elevated credit risk associated with higher numbers of rating downgrades in their bond portfolios.

Tighter financial conditions and higher debt servicing costs for households, firms and governments

Euro area sovereigns, having locked in low interest rates in previous years and against the backdrop of the ECB’s Transmission Protection Instrument, saw a broad-based increase in funding costs in 2023, with limited dispersion across countries over the year. However, as governments are faced with having to roll over maturing debt at higher interest rates, their funding costs remain sensitive to the evolution of fiscal fundamentals, notably the risk of fiscal slippage, which could reignite sovereign debt sustainability concerns. At the same time, any unwarranted, disorderly sovereign debt market dynamics can be countered by flexibility in the ECB’s pandemic emergency purchase programme reinvestments and by the ECB’s Transmission Protection Instrument, if the necessary conditions are fulfilled.

Similarly, prior to and during the pandemic, the corporate sector benefited from low interest rates and its earnings held up well in 2023. As the effects of the recovery faded, credit conditions tightened and debt servicing costs went up, corporate vulnerabilities increased. Although generally still low, there was a nascent rise in corporate failures during the year. Real estate firms were particularly vulnerable owing to the ongoing downturn in euro area commercial property market.

The household sector was faced with a deterioration in debt servicing capacity in 2023, owing to rising interest rates and the ongoing correction in residential property markets. The steep increase in borrowing costs from the beginning of the monetary policy tightening cycle clearly had a negative impact on mortgage demand. That notwithstanding, a strong labour market alongside housing supply constraints underpinned an orderly cooling in residential real estate markets. Nevertheless, still elevated valuations suggest that vulnerabilities could materialise if price corrections become disorderly.

Financial markets remained vulnerable to negative surprises

Looking through several episodes of volatility in 2023, the overall pricing in financial markets during the year appeared to be predicated on optimistic expectations about the future macro-financial outlook and was therefore considered to be vulnerable to negative surprises. While risk premia in the corporate bond market seemed to be well aligned with historical patterns, they were significantly compressed in the equity market. The unusually modest reaction of stock prices to rising interest rates was seen as rendering equities vulnerable to abrupt repricing if the adverse effects of the economic slowdown on corporate profitability turned out to be greater than anticipated by investors. Furthermore, market risk sentiment remained highly sensitive to further surprises regarding the outlook for inflation, growth and, by extension, the path of monetary policy.

The Common Equity Tier 1 (CET1) ratio of euro area banks stood at 15.6% in the third quarter of 2023. This was close to its highest level since the start of European banking supervision and reflected the higher profitability and de-risking of bank portfolios. Strong capital and liquidity buffers helped to preserve trust in the euro area banking system during the tensions triggered by bank failures in the United States and Switzerland early in the year. In addition, euro area banks’ return on equity increased further to 10.0%, its highest level in more than a decade, driven by wider net interest margins as yields on assets rose faster than the cost of funding. While bank earnings benefited from these tailwinds, they were likely at risk from three headwinds: (i) the combination of higher inflation, rising debt servicing costs and a deteriorating macroeconomic environment potentially having an adverse impact on bank asset quality, which had already started to materialise with initial signs of rising default rates and payment arrears; (ii) tighter credit standards reducing demand for loans, and flows of new lending declining to their lowest levels since 2015; and (iii) funding costs appearing set to rise, as aggregate deposit rates began to inch up – notably for term deposits – and market funding costs started to become more expensive. Notwithstanding these challenges, the results of the 2023 EU-wide stress test conducted by the European Banking Authority (EBA) confirmed that banks could be expected to remain resilient to severely adverse shocks.

NBFI sector remained vulnerable to liquidity and credit risks

The NBFI sector remained relatively stable in 2023, with continued inflows into sovereign and investment-grade corporate bond funds. This helped to increase the absorption of debt issued by sovereigns and corporates. At the same time, NBFI entities actively reduced their overall credit risk exposure during the year through an ongoing de-risking process, rebalancing their investment portfolios towards comparatively safer assets. Nevertheless, they remained vulnerable to credit risk. Owing to the high level of economic uncertainty and tighter financial conditions, the NBFI sector was potentially at risk from revaluation losses as a result of rating downgrades in bond portfolios, as well as from defaults. It also continued to be exposed to liquidity risk, with cash buffers in equity and bond funds remaining low in the context of tightening financial conditions. Overall, as liquidity holdings across the segments of the NBFI sector remained subdued, there was the risk that sudden investment fund outflows, large margin calls or lapsing insurance policies would lead to forced asset sales. Real estate investment funds were still particularly exposed to revaluation losses and investor outflows, especially given the challenges in the commercial real estate sector. The instability in this segment was particularly concerning, owing to its importance for the real estate sector and its potential to amplify risks to that sector.

Euro area banks, funds and insurers continued to face challenges stemming from climate change in 2023. Cyber risk also required close monitoring. The increasing frequency of major natural disasters as a result of climate change, and the growing magnitude of associated losses also pushed up insurance prices amid only limited availability of insurance against climate-related hazards.[33] This underlined the risk of a greater incidence of climate shocks exacerbating profitability challenges faced by non-life insurers and widening prevailing protection gaps (the proportion of economic losses not covered by insurance), with a potential adverse impact on the macroeconomic situation and financial stability.

3.2 Macroprudential policy: safeguarding financial sector resilience in turbulent macro-financial conditions

National authorities continued to implement or tighten macroprudential buffers

The ECB has the task of assessing macroprudential capital measures proposed by national authorities for banks in countries participating in the Single Supervisory Mechanism. Importantly, it also has the power to apply more stringent capital measures if necessary. The ECB’s close monitoring of national macroprudential policy stances in 2023 did not identify a need for this, as several countries had already implemented new macroprudential measures or tightened existing ones to strengthen the resilience of their banking systems to accumulated vulnerabilities and downside risks.

Preserving financial system resilience and promoting targeted macroprudential policy actions

Macroprudential buffers should be maintained to preserve banks’ resilience in case conditions in the banking sector deteriorate

In 2023 financial stability concerns shifted towards the implications of higher interest rates and downside risks to growth. From a macroprudential perspective, tighter financial conditions drove a continued downturn in the financial cycle, but systemic risks did not materialise. Notably, banks’ capital positions remained strong, although the level of capital headroom varied across banks and countries, and credit supply constraints were not linked to banks’ capital requirements. Looking ahead, higher debt servicing costs and a deteriorating macroeconomic environment could challenge the debt servicing capacity of the non-financial sectors and gradually impair banks’ asset quality. This, together with lower lending volumes and rising funding costs, could have a negative impact on banks’ profitability and resilience.

Against this background, national authorities continued to tighten macroprudential policy 2023 in order to boost the resilience of banks. This was facilitated by banks’ profitability and capital headroom, which remained high on average despite the challenging macro-financial environment. Some national authorities activated the countercyclical capital buffer to address vulnerabilities linked to the build-up of credit risk and to create more macroprudential space in the form of releasable capital buffers. In 2023 eight countries introduced or tightened the countercyclical buffer, bringing the total number of countries that had implemented or announced a positive countercyclical buffer rate to 14 by the end of year. In addition, a total of 11 countries had implemented or announced either a broad or sectoral systemic risk buffer,[34] while banks in ten countries saw an increase in their O-SII buffers, in part owing to the ECB’s revised floor methodology.[35] Finally, 15 countries kept borrower-based measures in place to prevent banks’ excessive risk-taking in lending to households.

The ECB communicated its analysis and views on macroprudential policy topics in 2023. In the macroprudential policy chapters of the May and November issues of its Financial Stability Review, it highlighted the importance of preserving macroprudential buffers in case conditions in the banking sector deteriorate.[36] It also explained why existing borrower-based measures needed to remain in place and continue to act as structural backstops to ensure that lending standards do not deteriorate and that borrowers remain resilient. Furthermore, it suggested that high levels of banking sector profitability could provide an opportunity for some countries to implement additional targeted increases in macroprudential buffers, provided that procyclical effects were avoided. Last but not least, the ECB issued opinions explaining why imposing extraordinary taxes on credit institutions in some countries could have negative implications for financial stability.[37]

Experience from the pandemic suggests that the role of releasable macroprudential buffers should be enhanced

The ECB dedicated one issue of its Macroprudential Bulletin to discussing the possible implementation of a positive neutral rate for the countercyclical buffer. Overall, experience from the pandemic suggests that the role of releasable macroprudential capital buffers needs to be enhanced to effectively address adverse systemic shocks that can occur independently of a country’s position in the financial or economic cycle. By the end of 2023 six countries had already implemented or announced frameworks for setting a positive neutral rate.[38] These frameworks were based on different approaches, which resulted in varying positive neutral rates. Over the medium term, a more harmonised approach towards setting positive neutral rates across banking union countries would seem desirable, as it would enhance consistency and effective policymaking while allowing for sufficient national flexibility. With regard to the NBFI sector, the ECB continued to call for a comprehensive set of policy measures to holistically address vulnerabilities in this sector. These measures should take existing frameworks into account and be rooted in strong international coordination.

Cooperation with the European Systemic Risk Board

The ESRB continued to analyse potential sources of systemic risk and published a recommendation on commercial real estate

In 2023 the ECB provided analytical, statistical, logistical and administrative support to the European Systemic Risk Board (ESRB) Secretariat. Notably, the ECB co-chaired the ESRB’s Instruments Working Group (IWG), Analysis Working Group (AWG) and Task Force on Stress Testing, as well as the ECB/ESRB Project Team on climate risk monitoring. It also co-chaired the agile teams established under the AWG/Macroprudential Analysis Group (MPAG) and the IWG/Macroprudential Policy Group (MPPG) on the impact of higher inflation and rising interest rates on financial stability, and the AWG/MPAG agile team on systemic liquidity.

The ECB also supported the ESRB’s work on: (i) macroprudential tools for cyber resilience;[39] (ii) systemic implications and policy options with regard to crypto-assets and decentralised finance;[40] (iii) monitoring vulnerabilities related to NBFI;[41] (iv) policy options to address risks in corporate debt and real estate investment funds;[42] v) vulnerabilities in the commercial real estate sector, on which the ESRB published a recommendation;[43] and (vi) macroprudential frameworks for managing climate risk.[44] More detailed information can be found on the ESRB’s website and in its Annual Reports.

3.3 Microprudential activities to ensure the safety and soundness of individual banks

Banks remained resilient owing to the progress made in past years and continuous supervisory engagement

Notwithstanding the challenging macroeconomic environment, European banks remained resilient throughout 2023, including in the aftermath of the March turmoil, which was triggered by the failure of some regional banks in the United States and culminated in Europe with the UBS takeover of Credit Suisse overseen by the Swiss authorities. In a dedicated data collection exercise conducted by the ECB and the EBA, banks reported €73 billion of net unrealised losses on debt securities at book value. This was considered a contained amount compared with the figure reported in the United States. Improved asset quality and profitability helped banks withstand the severe economic downturn in the adverse scenario of the ECB’s 2023 stress test. This overall resilience is attributable to banks’ efforts over the years, to their diversified funding and good liquidity environment, and to the ECB’s continuous supervisory engagement, e.g. the work conducted on interest rate risk in the banking book since 2021. In the 2023 Supervisory Review and Evaluation process (SREP), the overall SREP score remained broadly unchanged. The Pillar 2 requirements for CET1 capital were set at 1.2% on average, compared with 1.1% in 2022.

In spite of the SREP results and although European banks showed record profitability in 2023, the ECB sees no room for complacency. The gradually increasing pass-through of its policy rates to bank deposit rates and the broader increase in bank funding costs, as well as a deterioration in asset quality in the real estate sector and other interest rate sensitive sectors, could put the sustainability of high profits at risk. The ECB’s supervisory work remains focused on persistent weaknesses in risk management, governance and internal controls, and on emerging risks.

Supervision became more risk-based and effective

Over the course of 2023, ECB Banking Supervision became more risk-based and effective. On the basis of its internal work and the expert group recommendations, the ECB implemented a new risk tolerance framework empowering supervisors to adapt and prioritise their activities according to the individual situation of the bank under their supervision, rather than applying a one-size-fits-all approach. In the same vein, it introduced a new multi-year assessment framework for the SREP, enabling supervisors to better calibrate the intensity and frequency of their analyses. It also started to develop more timely and forceful escalation processes, building on the full range of supervisory tools, including periodic penalty payments, for instance in the field of climate-related and environmental risks.[45]

Three banks were sanctioned by the ECB in 2023.[46]

In December 2023 the ECB published the supervisory priorities for 2024-2026, which focus on (i) strengthening resilience to immediate macro-financial and geopolitical shocks, (ii) accelerating the effective remediation of shortcomings in governance and the management of climate-related and environmental risks, and (iii) furthering progress in digital transformation and building robust operational resilience frameworks.

As part of its continued efforts to enhance transparency, in 2023 the ECB published (i) its four-step approach to determine the Pillar 2 requirement on a risk-by-risk basis, (ii) the credit risk SREP methodology and market risk SREP methodology for application in the 2024 cycle, and (iii) the Guide to qualifying holding procedures; and in January 2024 it released an updated version of the Supervisory Manual, which was last published in 2018.

In April 2023 the ECB, together with the Single Resolution Board, welcomed a set of legislative changes to the European crisis management and deposit insurance framework that had been proposed by the European Commission.

In October 2023 Claudia Buch was appointed as the new Chair of the Supervisory Board of the ECB, in accordance with the established institutional selection process.

More detailed information can be found on the ECB’s banking supervision website and in the 2023 ECB Annual Report on supervisory activities.

3.4 The ECB’s contribution to EU and international policy initiatives

Several milestones were achieved in improving the regulatory framework

Further progress was made in 2023 on improving the regulatory framework for the financial sector. The main achievements were (i) the agreement on the EU’s implementation of the final Basel III reforms, (ii) the initiatives to tackle climate-related risks, and (iii) the proposal to strengthen the EU’s crisis management and deposit insurance framework. Important headway was also made on regulating crypto-assets and on enhancing market infrastructure regulation, for example with regard to central clearing.

Improving the regulatory framework for banks

Banking regulation work focused on Basel III implementation, the EU’s sustainable finance agenda and crisis management

In 2023 the ECB continued to support the negotiations on the EU banking package, which comprises a set of amendments to the Capital Requirements Regulation (CRR)[47] and the Capital Requirements Directive (CRD)[48] aimed at implementing the final Basel III reforms in the EU. In December the preparatory bodies of the European Parliament and the EU Council endorsed the EU banking package. Adoption of the final CRR and CRD texts is expected by the end of April 2024 once the legal revision has been concluded. The reforms are intended to further bolster the resilience of the EU banking system, especially by increasing the capital needed to cover credit, operational and market risk exposures. They will also enhance the supervisory toolkit, including for addressing climate-related and other sustainability risks.[49] Furthermore, the ECB contributed to the EU sustainable finance agenda, notably by publishing opinions on a directive on corporate sustainability due diligence and a regulation on environmental, social and governance (ESG) rating activities.[50]

The discussions on completing the banking union focused on improving the EU’s crisis management and deposit insurance framework. On 18 April 2023 the European Commission published a legislative proposal aimed at strengthening bank crisis management in the EU and, in particular, at enhancing authorities’ options for handling the failure of smaller and medium-sized banks. The ECB strongly welcomed the legislative package in an opinion[51], stressing the need for better tools and funding options for crisis management. Beyond the proposed legislative package, the ECB called for further steps to complete the banking union. In particular, this requires establishing a European deposit insurance scheme and setting up a European framework for liquidity in resolution.

Finalising a regulatory framework for crypto-assets and anti-money laundering

Important progress was made on regulating crypto-assets and improving the anti-money laundering framework

The ECB continued to support the finalisation and implementation of a regulatory framework for crypto-assets in 2023, at both the European and the international level. Following the entry into force in the EU of the Markets in Crypto-assets Regulation[52] in June, the ECB provided input on a number of technical standards that were coordinated by the European Banking Authority and European Securities and Markets Authority and aimed at implementing the Regulation. At the international level, it contributed to the progress made in international fora such as the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS) and the Committee on Payments and Market Infrastructures (CPMI). Specifically, the FSB finalised its Global Regulatory Framework for Crypto-asset Activities, providing high-level recommendations for regulating crypto-asset activities and markets, and for global stablecoin arrangements. These recommendations were incorporated into the broader G20 roadmap on crypto-assets, which was adopted in October and had also benefited from ECB input. In addition, the ECB supported the work of the BCBS on tightening and clarifying aspects of its standard on banks’ exposures to crypto-assets. In particular, the adjustments tighten the criteria for stablecoins to receive a preferential regulatory treatment.

The ECB also continued to contribute actively to the finalisation of the European Commission’s proposed legislative package on anti-money laundering and countering the financing of terrorism (AML/CFT), including the creation of an EU-level anti-money laundering authority. As outlined in its opinions,[53] the ECB supported close cooperation and information sharing between AML/CFT supervisors and European banking supervision, and more generally, an effective EU regime to counter the misuse of the EU financial system for money laundering and terrorism financing.

Supporting the progress towards the capital markets union and strengthening the NBFI regulatory framework

Continued efforts to advance the capital markets union and regulation of the NBFI sector

Legislative work continued in 2023 on initiatives to deepen the integration of the EU’s capital markets as part of the European Commission’s 2020 capital markets union action plan. During the year the ECB contributed to the public policy debate on the future of the capital markets union in various publications and speeches.[54] In addition, the ECB President, together with the Presidents of the Eurogroup, the European Investment Bank, the European Council and the European Commission published an op-ed on the importance of the capital markets union for channelling Europe’s savings into growth. The ECB also actively participated in Eurogroup discussions on the future of European capital and financial markets, and contributed to the legislative process related to the review of the European Market Infrastructure Regulation.[55]

Furthermore, the ECB continued to highlight the importance of addressing structural vulnerabilities in NBFI and improving the relevant policy framework from a macroprudential perspective. Reviewing recent stress episodes in the NBFI sector, policy implications for the liquidity preparedness and leverage in this sector were discussed in its Financial Stability Review and Macroprudential Bulletin.[56] The ECB was also involved in the FSB’s assessment of the financial stability implications of leverage in NBFI and actively contributed to the ongoing policy work to enhance the resilience of NBFI.[57] With regard to open-ended funds, the ECB contributed to the revision of the FSB’s policy recommendations to address structural liquidity mismatch in such funds.[58]

4 Smooth functioning of market infrastructure and payments

The Eurosystem plays a central role in developing, operating and overseeing market infrastructures and payments. In 2023 the Eurosystem successfully renewed its wholesale payment system and continued developing TARGET Services. With a view to further enhancing integration and innovation in European payments and securities markets, the Eurosystem updated its retail payments strategy and started analysing the potential impact of emerging technologies on the settlement of wholesale financial transactions. In its work on exploring a potential digital euro, the Eurosystem moved from the investigation to the preparation phase.

4.1 TARGET Services

The Eurosystem successfully launched its new T2 wholesale payment system

On 20 March 2023 the Eurosystem successfully launched its new T2 wholesale payment system, replacing the TARGET2 system in operation since November 2007. The T2 system introduces a real-time gross settlement (RTGS) system, a central liquidity management function that optimises liquidity management across all TARGET Services, offering a set of common components that are shared across TARGET Services and extended operating hours. The migration took place between 17 and 20 March 2023, with all banks starting settlement in the new system in a “big bang” approach on Monday, 20 March 2023. The new system complies with the international standard for financial institution message exchange (ISO 20022) and brings significant efficiency gains. Moreover, the new T2 set-up enables market participants to streamline central bank money liquidity management for their euro transactions in wholesale and retail payments, as well as for securities settlement.

Approximately 1,000 banks use T2 to initiate transactions in euro, either on their own behalf or on behalf of their customers. Taking into account branches and subsidiaries, more than 40,000 banks worldwide can be reached via T2. In 2023 on average 409,444 payments per day with an average daily value of €2.2 trillion were processed using T2 and its predecessor TARGET2. This was a 2.9% increase in the daily volume of payments compared with payments made using TARGET2 in 2022.

From 1 January 2023, following Croatia’s accession to the euro area, the Croatian financial community migrated from its national RTGS system to TARGET2/T2. Onboarding of the Croatian market to TARGET Services continued in June with the migration to the TARGET Instant Payment Settlement (TIPS) service and in September, when the Croatian central securities depository (CSD) joined TARGET2-Securities (T2S).

The Croatian CSD was onboarded as part of a wave in which five CSDs successfully joined the T2S platform, including Euroclear Bank, one of the largest CSDs in the world, the Bulgarian National Bank Government Securities Settlement System and Central Depository AD, the other CSD operating in Bulgaria, Središnje klirinško depozitarno društvo d.d. (SKDD) in Croatia and Euroclear Finland. The T2S platform now connects 24 CSDs from 23 European markets, allowing securities settlement in euro and Danish krone. This migration wave was an important development for T2S and the Eurosystem from the operational, business and strategic perspectives. In particular, the successful inclusion of a CSD (Euroclear Finland) that maintains end-investor accounts reconfirms that Eurosystem market infrastructures can support all EU markets and jurisdictions. Additionally, from a business perspective, the migration of Euroclear Bank brings Eurobond instruments directly into T2S and, as of 2024, into the Eurosystem Collateral Management System (ECMS). In 2023, T2S processed on average 699,868 transactions per day with an average daily value of €790.3 billion.

TIPS continued to play an important role in the development of instant payments in euro, with more banks and national communities joining in 2023. The growth in the number of participants in TIPS led to a rise in transaction volumes of more than 127% compared with 2022, with a peak of 28 million instant payments settled in December 2023 (compared with 18.7 million in December 2022). Testing for the connection of Sveriges Riksbank and the Swedish krona to TIPS for instant payments in 2024 was successfully completed. The collaboration between the Eurosystem and Danmarks Nationalbank to connect the Danish krone to TIPS (and T2) in 2025 continued smoothly.

In July 2023 the Eurosystem published a new pricing structure for TIPS that entered into force on 1 January 2024. It ensures that the service operates on a cost recovery basis, without making a profit. At the same time, the pricing of TIPS aims to support the take-up of instant payments in Europe, which is also expected to accelerate, given the legislative proposal put forward by the European Commission to make instant payments in euro available to all citizens and businesses holding a bank account in the EU and in European Economic Area countries.

In addition to the three settlement services (T2, T2S and TIPS), the Eurosystem is developing a new TARGET Service, the ECMS, which will be a unified system for managing the assets used as collateral in Eurosystem credit operations for all euro area jurisdictions. The launch of the ECMS has been moved from April 2024 to November 2024 to give users more time to complete testing of the ECMS functionalities in a stable environment.

4.2 Digital euro project

The ECB launched the preparation phase of the digital euro project

The two-year investigation phase of the digital euro project concluded in October 2023. The stocktake of the work conducted during the investigation phase formed the basis for the ECB Governing Council’s decision to launch the preparation phase. The start of this new phase does not imply a decision on whether to issue a digital euro. That decision can only be considered by the Governing Council after the adoption of the legislative framework for the digital euro at the EU level.

During the investigation phase, the Eurosystem agreed on the high-level design and technical requirements for a digital euro. The work was supported by a prototyping exercise to validate the proposed design from a technical perspective and through focus group research[59] to gain input on the preferences and expectations of potential users. Close and transparent engagement with market participants, other EU institutions and policymakers ensured that all stakeholders could provide their feedback on design and distribution options. Market research on technical aspects showed that there is a sufficiently large pool of European providers able to develop digital euro solutions and that a variety of architectural and technological design options are available.

The first stage of the preparation phase, which started on 1 November 2023, will last two years and will lay the foundations for the potential issuance of a digital euro. During this timeframe, the focus will be on finalising the digital euro rulebook and selecting providers that could potentially develop a digital euro platform and infrastructure. The Eurosystem will also conduct further testing and experimentation, and will continue to consult with all stakeholders – including the public – to ensure that a digital euro meets the highest standards of quality, security, privacy and usability.

Possible subsequent steps will be decided by the Governing Council based on the results of the first stage of the preparation phase and developments in the legislative process.

4.3 Innovation and integration of market infrastructure and payments

The Eurosystem updated its retail payments strategy

In November 2023 the Eurosystem published an update of its retail payments strategy in the light of the significant changes in the payment landscape in the four years since its launch. In particular, Big Tech has increased activities in the payment area, potentially negatively affecting Europe’s strategic autonomy in payments. In addition, Russia’s war against Ukraine underscored the relevance of (cyber) risks to critical infrastructures in Europe, including for payment services. Moreover, considerable progress was made on the digital euro project.

The updated strategy retains its main goals, namely to develop pan-European solutions for payments at the point of interaction (i.e. at the physical point of sale and in the mobile and e-commerce space) and to further strengthen the Single Euro Payments Area (SEPA), primarily through full deployment of instant payments. It also includes a new goal to increase the resilience of retail payments, including by having alternative payment solutions available as a contingency. Finally, the complementarity between the Eurosystem’s retail payments strategy and the digital euro project is also underlined, in particular the various ways in which a digital euro could contribute to meeting the goals of the strategy. For example, a digital euro would offer a pan-European payment solution in itself, while also helping private retail payment solutions achieve a pan-European reach.

Progress was made on financial integration in the area of post-trading

In line with its goal to further European financial market integration in the post-trading area and to contribute to achieving capital markets union, the Eurosystem’s Advisory Group on Market Infrastructures for Securities and Collateral (AMI-SeCo) continued to report on the progress made by AMI-SeCo markets (the European Economic Area and UK and Swiss markets) on compliance with the standards under the T2S Harmonisation Agenda, the Single Collateral management Rulebook for Europe (SCoRE) (which is also necessary for interacting with ECMS), and corporate events standards (including standards on shareholder identification). The overall compliance rate with the T2S harmonisation standards remained at around 90%. The five new CSDs that joined T2S in September 2023 were assessed as having a high level of compliance with the T2S harmonisation standards. The 2023 Corporate Events Compliance Report provided evidence that progress has also been made on compliance with the corporate events standards. In the SCoREBoard report for the second half of 2023, AMI-SeCo noted some delays in progress by stakeholders on complying with the applicable SCoRE standards. In view of the rescheduling of the go-live of the Eurosystem’s ECMS to November 2024, the AMI-SeCo agreed to defer the deadline for compliance with the relevant SCoRE standards.

With a view to identifying remaining barriers to securities post-trade market integration in the EU, AMI-SeCo launched a survey among its members and the members of the National Stakeholder Groups in November 2023. AMI-SeCo also provided input to the European Commission and the European Council on the post-trade aspects of the proposal by the Commission for more efficient cross-border withholding tax procedures and communicated its views on the potential shortening of the standard T+2 securities settlement cycle to the European Securities and Markets Authority (ESMA).

Lastly, the Eurosystem has started analysing the potential impact of emerging technologies, including distributed ledger technology (DLT), on the settlement of wholesale financial transactions (see Box 4).

4.4 Oversight and the role of central bank of issue

Comprehensive assessment of TARGET Services was launched

The safe and efficient functioning of financial market infrastructures (FMIs) and payments in the euro area is an ongoing priority for the Eurosystem in its oversight capacity. In addition, as central bank of issue for the euro, the Eurosystem is involved in cooperative arrangements for FMIs outside the euro area with meaningful euro-denominated activities.

As regards oversight of the Eurosystem’s TARGET Services (see Section 4.1), key priorities included monitoring the T2-T2S consolidation project ahead of its go-live in March 2023 and the onboarding of new markets. Furthermore, comprehensive assessments of T2/TIPS against the Regulation on oversight requirements for systemically important payment systems (SIPS) and of T2S against the CPMI-IOSCO Principles were launched in October 2023.

The Eurosystem also oversees other SIPS, including EURO1, STEP2-T and the MasterCard Clearing Management System (MCMS). In 2023 it focused on finalisation of the first comprehensive assessment of the MCMS against the SIPS Regulation, the launch of new comprehensive assessments of EURO1 and STEP2-T against the SIPS Regulation, assessment of the MCMS against the cyber resilience oversight expectations for financial market infrastructures (CROE) and monitoring of the EURO1 migration to the ISO 20022 standard.

With respect to payment instruments, payment schemes and payment arrangements, in 2023 the Eurosystem reached a major milestone in identifying the payment arrangements to be overseen or monitored under the Eurosystem’s framework for the oversight of electronic payment instruments, schemes and arrangements (PISA framework). In addition to onboarding newly overseen entities under the PISA framework, the Eurosystem conducted a comprehensive assessment of the first group of pan-European schemes and continued its work on card fraud monitoring.

As central bank of issue for the euro, the Eurosystem continued to be involved in cooperative oversight and crisis management arrangements for FMIs with material euro-denominated activities. As regards central counterparties (CCPs), the Eurosystem contributed to assessing risk management changes, proposals for the extension of services, recovery plans and resolution plans. With regard to securities settlement, the Eurosystem continued to give input on the regular evaluation of CSDs under the Central Securities Depository Regulation and to prepare for the future authorisation of entities operating DLT-based market infrastructures under Regulation (EU) No 2022/858 (DLT Pilot Regime Regulation).

In the area of cyber resilience, the review of the Eurosystem cyber resilience strategy for FMIs was finalised, with details on enhancements and revisions to be announced in early 2024. In addition, the ESCB conducted its periodic cyber resilience survey across 80 FMIs in the EU and initiated follow-up with the respective overseers and overseen entities.

The ECB supported various oversight-related global workstreams (for example, on CCP margining practices, FMI safeguards for financial risks unrelated to participant default and stablecoin arrangements), as well as the EU-wide CCP supervisory stress test coordinated by ESMA. The ECB also published an overview of EU CCPs’ initial margin models, continuously monitored the impact of increased market volatility on CCPs and their members and organised, together with the Deutsche Bundesbank and the Federal Reserve Bank of Chicago, the 2023 Joint Conference on CCP risk management to facilitate discussion between the industry, regulatory bodies and academia.

The Eurosystem regularly contributes to developing new EU regulations for FMIs and payments. In particular, in 2023 it provided input to the ECB Opinion on the review of the European Market Infrastructure Regulation. The ECB also actively contributed to preparing secondary legislation for the Digital Operational Resilience Act, notably in the area of threat-led penetration testing being developed in accordance with the European framework for threat intelligence-based ethical red-teaming (TIBER-EU).

Box 4
New technologies for wholesale central bank money settlement

The Eurosystem is analysing the potential impact of emerging technologies, including distributed ledger technology (DLT), on the settlement of wholesale financial transactions. This work is part of the Eurosystem’s efforts to ensure that central banks keep pace with and contribute to digital innovation in payments and securities settlement.

The financial industry is increasingly interested in potential applications of DLT, including for transactions that are currently settled in central bank money. If there is significant adoption of DLT by the industry, central banks may need to take action to safeguard the smooth functioning of payment systems and the role of central bank money as monetary anchor supporting the stability, integration and efficiency of the European financial system.

The Eurosystem has identified four conceptual solutions that could enable central bank money settlement of wholesale transactions where, for example, the securities leg of the transaction is settled using DLT-based infrastructure (Figure A).

Figure A

Conceptual solutions for central bank money settlement of wholesale transactions registered on DLT platforms

Source: See Neuhaus, H. and Plooij, M., “Central bank money settlement of wholesale transactions in the face of technological innovation”, Economic Bulletin, Issue 8, ECB, 2023.
Notes: Blue lines, dots and icons represent central bank money (CeBM). Purple lines, dots and icons represent securities.

The Eurosystem plans to conduct exploratory work on DLT in the form of trials with real central bank money settlement and experiments with mock settlement in a test environment. These will be performed using three Eurosystem solutions enabling central bank money settlement of wholesale financial transactions recorded on DLT platforms: the Trigger Solution provided by the Deutsche Bundesbank, the TIPS Hash-Link solution provided by the Banca d’Italia (both examples of conceptual solution 1), and the Full-DLT Interoperability solution provided by the Banque de France (conceptual solution 2). Market players have been invited to express their interest in participating in trials and experiments planned to take place between May and November 2024. In parallel, the other two conceptual solutions will be further analysed internally within the Eurosystem.

A dedicated market contact group on DLT has been set up to support the Eurosystem’s exploratory work. This group provides expert input and keeps the Eurosystem abreast of advances in the use of DLT and other new technologies in wholesale financial markets.

5 Market operations activities and financial services provided to other institutions

The Eurosystem approved a new framework for the provision of euro liquidity lines to non-euro area central banks in August 2023 and kept in place several liquidity lines with non-euro area central banks, thereby providing a backstop to market-based funding. The ECB continued to offer US dollar operations to euro area counterparties on a regular basis. No ECB interventions took place in the foreign exchange market. The ECB remained responsible for the administration of various financial operations on behalf of the European Union and played a coordinating role in relation to the Eurosystem reserve management services framework.

5.1 Developments in market operations

Euro and foreign currency liquidity lines

The Eurosystem’s swap and repo lines are monetary policy instruments. They help prevent tensions in international funding markets from hampering the effectiveness of euro area monetary policy transmission. Table 5.1 shows the liquidity lines in operation as of 31 December 2023.

In 2023 the ECB continued to provide US dollar liquidity on a weekly basis with a seven-day tenor in coordination with the Federal Reserve System, the Bank of Canada, the Bank of England, the Bank of Japan and the Swiss National Bank (the swap line network). From 20 March to 30 April 2023 the frequency of the seven-day dollar providing operations was increased to daily in a coordinated manner with the central banks of the swap line network. The higher frequency was intended to enhance effectiveness and strengthened the backstop role of the operation in a period of elevated pressure in US dollar funding conditions. Borrowing by euro area counterparties remained limited throughout the year.

Table 5.1

Overview of operational liquidity lines

Non-euro area counterpart

Type of arrangement


Maximum borrowable amount (EUR millions)

Danmarks Nationalbank

Swap line



Sveriges Riksbank

Swap line



Bank of Canada

Swap line



People’s Bank of China

Swap line



Bank of Japan

Swap line



Swiss National Bank

Swap line



Bank of England

Swap line



Federal Reserve System

Swap line



Narodowy Bank Polski

Swap line



Magyar Nemzeti Bank

Repo line



Banca Naţională a României

Repo line



Bank of Albania

Repo line



Andorran Financial Authority

Repo line



National Bank of the Republic of North Macedonia

Repo line



Central Bank of the Republic of San Marino

Repo line



Source: ECB.
Notes: List of central bank liquidity lines that the Eurosystem maintains (as of 31 December 2023). The table does not include repo lines established with non-euro area central banks under the Eurosystem repo facility for central banks (EUREP), for which the ECB did not disclose its counterparties. Under its new framework, the ECB has disclosed all liquidity lines since 16 January 2024.

On 3 August 2023 the Governing Council approved a new framework for the provision of euro liquidity lines to non-euro area central banks, following an in-depth review of the previous framework in place and based on experience in recent years. The new framework came into effect on 16 January 2024 and upholds the role of liquidity lines as monetary policy instruments, retains the fundamental elements of the framework in place so far but streamlines it, and integrates existing repo facilities into a unified permanent framework called EUREP. Swap lines are available to countries of highest creditworthiness or systemic importance from a euro area perspective. Access to a euro liquidity line might differ in normal times from periods of acute, broad-based financial market distress, when the establishment of precautionary lines with a broader set of countries could be warranted. The Governing Council will continue to assess requests for liquidity lines on a case-by-case basis.

Reporting on foreign exchange interventions

The ECB did not intervene in the foreign exchange market in 2023. Since the inception of the euro, the ECB has intervened in the foreign exchange market twice – in 2000 and 2011. Data on foreign exchange interventions are published on a quarterly basis with a delay of one quarter on the ECB’s website and in the Statistical Data Warehouse. The information published in the quarterly table is also recapped in Table 5.2. If there were no foreign exchange interventions in the relevant quarter, this is explicitly stated.

Table 5.2

ECB foreign exchange interventions



Intervention type

Currency pair

Currency bought

Gross amount (EUR millions)

Net amount (EUR millions)

Q3 2000













Q4 2000































Q1 2011







Q1 to Q4 2021







Q1 to Q4 2022







Q1 to Q4 2023







Source: ECB.

The reporting framework covers foreign exchange interventions carried out by the ECB unilaterally and in coordination with other international authorities, as well as interventions “at the margins” within the exchange rate mechanism (ERM II).

5.2 Administration of EU borrowing and lending operations

The ECB processed payments for various EU loan programmes

The ECB is responsible for the administration of accounts and processing of payments relating to the borrowing and lending operations of the EU under the medium-term financial assistance (MTFA) facility[60], the European financial stabilisation mechanism (EFSM)[61], the European instrument for temporary support to mitigate unemployment risks in an emergency (SURE)[62], the Next Generation EU (NGEU) programme[63] and the macro-financial assistance to Ukraine programme (MFA+)[64]. The ECB is also responsible for the administration of certain payments arising in connection with operations under the European Financial Stability Facility (EFSF)[65] and the European Stability Mechanism (ESM)[66] and for processing all payments in relation to the loan facility agreement for Greece[67]. In 2023 the ECB completed its preparations to perform paying agent services for the European Commission, thereby extending the ECB’s current fiscal agent services.

As at 31 December 2023 the total outstanding nominal amount was €200 million under the MTFA facility, €42.8 billion under the EFSM, €98.4 billion under SURE and €39.54 billion under the loan facility agreement for Greece. Finally, in 2023 the ECB processed disbursements and interest payments of NGEU loans and grants to and from various Member States and MFA+ loans to Ukraine.

5.3 Eurosystem reserve management services

A number of Eurosystem national central banks provided services under the ERMS framework

In 2023 a comprehensive set of financial services continued to be offered within the Eurosystem reserve management services (ERMS) framework established in 2005 for the management of customers’ euro-denominated reserve assets. A number of Eurosystem national central banks provide financial services within this framework ‒ under harmonised terms and conditions and in line with market standards ‒ to central banks, monetary authorities and government agencies located outside the euro area, as well as to international organisations. The ECB performs an overall coordinating role, monitors the smooth functioning of the services, promotes changes to improve the framework and prepares related reports for the ECB’s decision-making bodies.

The number of customer accounts reported in the ERMS stood at 273 at the end of 2023, compared with 270 at the end of 2022. The total aggregated holdings (including cash assets and securities holdings) managed within the ERMS framework decreased by approximately 20% in 2023 compared with 2022.

6 Cash remains the most frequently used means of payment among European citizens, with a low level of counterfeiting

Euro banknote circulation has been affected by rises in the ECB’s key interest rates as cash holdings as a store of value decreased. A clear majority of European citizens find it important to have the option to pay in cash. Accordingly, the ECB aims to ensure effective access to and acceptance of cash in the euro area.

The Eurosystem is also committed to ensuring that cash remains as sustainable and environmentally friendly as possible and has assessed the environmental footprint of banknotes as a mean of payment. The preparations for the development of a new series of euro banknotes are an opportunity to make euro banknotes more relatable to all Europeans. The public is therefore consulted throughout the design process.

6.1 Circulation of euro banknotes and ensuring access to and acceptance of cash

Euro banknote circulation has been affected by interest rate increases

At the end of 2023 euro banknote circulation reached 29.8 billion pieces and a total value of €1.57 trillion. The increases in the ECB’s key interest rates since July 2022 have continued to have a dampening effect on holding cash as a store of value, since banknotes do not yield any interest. Accordingly, 2023 was marked by very low annual growth rates of 1.2% and -0.3% in terms of the number and value of banknotes respectively.

Chart 6.1

Number and value of euro banknotes in circulation

(left-hand scale: EUR billions; right-hand scale: billions)

Source: ECB.

To maintain the quality of euro banknotes in circulation as well as trust in them, Eurosystem national central banks processed 25.3 billion euro banknotes and replaced 3.3 billion worn-out banknotes with newly printed ones.

The value of euro coin circulation grew by 3.2% annually to reach €33.5 billion at the end of 2023, equivalent to 148.2 billion euro coins.

In 2022 the ECB conducted a study on payment attitudes of consumers in the euro area, which showed that 60% of citizens consider it important to have the option to pay in cash. To ensure effective access to and acceptance of cash, on 28 June 2023 the European Commission adopted a proposal for a regulation on the legal tender of euro banknotes and coins. In its Opinion on the Commission proposal, the ECB voiced its strong support for establishing clear rules on the mandatory acceptance of euro cash and on refusals of cash acceptance by retailers, for example “no cash” signs at shop entrances. Good access to and acceptance of cash are the key components of the Eurosystem 2030 cash strategy to ensure that euro cash continues to be widely available as an attractive, reliable and competitive means of payment and store of value.

6.2 Study on the environmental footprint of euro banknotes

The Product Environmental Footprint considers the full life cycle of banknotes from raw materials to manufacturing, distribution and disposal

The ECB conducted a Product Environmental Footprint study of euro banknotes to assess the environmental footprint of a person’s yearly cash payments using euro banknotes to ensure that cash remains as sustainable and environmentally friendly as possible.

The findings showed that the footprint of a person’s yearly use of euro banknotes is equivalent to driving eight kilometres by car and accounts for only 0.01% of their total annual environmental impact related to consumption activities.

The Product Environmental Footprint study also explored the progress made so far

Banknotes are reused several times once they are put into circulation. The distribution stage, including energy consumption and transportation, is the main contributor to their environmental footprint. The use of sustainable cotton in banknote paper has reduced the environmental impact of euro banknotes by almost 50% and the overall footprint of paying with euro banknotes by 3.6% compared to using conventional cotton from non-sustainable sources. Further reductions are foreseen once the move to more organic cotton takes place. Extensive research and development are underway to identify alternative waste disposal methods for banknotes, such as recycling and reusing waste material.

6.3 Development of euro banknote counterfeiting

2023 saw one of the lowest levels of counterfeits in proportion to total banknotes in circulation

Some 467,000 counterfeit euro banknotes were withdrawn from circulation in 2023, one of the lowest levels ever in proportion to total banknotes in circulation (Chart 6.2). In 2023, 16 counterfeits were detected per million genuine banknotes in circulation. Despite this very small proportion, the number of counterfeit banknotes increased compared with 2022, when the number of counterfeits was exceptionally low following the COVID-19 pandemic. There is little likelihood of receiving a counterfeit. Most counterfeits are of low quality with no or only very poor imitations of security features. Notes can be checked using the simple “feel, look and tilt” method described on the banknote security features web page and on the websites of the euro area national central banks.

Chart 6.2

Number of counterfeits detected annually per 1 million genuine notes in circulation

Source: ECB.

6.4 Preparations for future euro banknotes

The ECB is preparing to develop a new series of euro banknotes with a view to maintaining their high resilience to counterfeiting and making them as environmentally friendly as possible. This process reflects the Eurosystem’s commitment to cash and is an opportunity to make euro banknotes more relatable to all Europeans.

To ensure that the views of Europeans are reflected in the future design, the public is consulted throughout the redesign process

A multidisciplinary advisory group – with members from all euro area countries – proposed a shortlist of themes based on input from the public. The Governing Council subsequently selected seven themes, and the public was invited to express their preferences. Based on the outcome of two public surveys in summer 2023, the Governing Council selected “European culture” and “Rivers and birds” as two possible themes for future euro banknotes.

A decision on the final designs and when to produce and issue the new banknotes is expected in 2026

In addition, the Governing Council decided to establish an advisory group to propose motifs that could illustrate the selected themes by the end of 2024. After that, a competition will be held to design the new banknotes. European citizens will again have the chance to express their preferences on several design options. The ECB is expected to decide in 2026 on the final designs and on when to produce and issue the new banknotes. Once a decision to produce new banknotes has been taken, it will still be several years before the first banknotes are issued.

7 Statistics

The ECB – assisted by the national central banks (NCBs) – develops, collects, compiles and disseminates a wide range of statistics and data needed to support the ECB’s monetary policy, as well as financial stability-related and other tasks of the European System of Central Banks (ESCB) and the European Systemic Risk Board. These statistics are also used by public authorities, international organisations, financial market participants, the media and the general public, and help the ECB to increase the transparency of its work.

In 2023 the ECB focused on new euro area statistics, namely detailed reporting on external statistics and breakdowns on the loans, currency and deposits component of government debt. The ECB also decided to expand the reporting population for Money Market Statistical Reporting and published new statistics on financial accounts with a breakdown of life insurance and pension entitlements by investment risk. As part of its climate action plan, the ECB published climate-related indicators on its website. In addition, the Eurosystem launched a survey to assess which topics could be included in the scope of the Integrated Reporting Framework.

7.1 New and enhanced euro area statistics and other developments

New details on external statistics were made available to users

In April 2023 the ECB started publishing additional details on external statistics in line with the amended ECB Guideline on external statistics, addressing the needs of users for more detailed cross-border statistics. The new series separate data for investment funds, insurance corporations and pension funds, other financial institutions, non-financial corporations, and combined households and non-profit institutions serving households. They also identify the type of debt instrument employed for direct investment. Additional details are available for debt securities, loans and trade credits and advances, and additional geographic counterparts.

New breakdowns on the loans, currency and deposits of general government debt were published

Furthermore, the ECB started to release new breakdowns for the loans, currency and deposits component of EU Member States’ government debt, which allows for a more thorough evaluation of government financing. While debt securities typically make up the largest share of government debt, loans and deposits are significant components, equivalent to about 16% of euro area GDP in 2022 and 17.5% of total government debt. The data show the various sources of funding and provide a breakdown by creditor category, including commercial banks, multilateral institutions (such as the International Monetary Fund) and the European Union institutions (for example the European Investment Bank).

The ECB decided to expand the reporting population for the euro money market statistics

In April 2023 the ECB decided to expand the reporting population for Money Market Statistical Reporting (MMSR), adding 24 new banks to the 46 banks already reporting. The new MMSR banks will start reporting on 1 July 2024. The data they provide will help make the MMSR data published by the ECB more representative. Data from the new reporting agents will be included in the calculation of the euro short-term rate (€STR) at a later stage to ensure that the newly reported data are of a sufficiently high quality. The expanded reporting population will support the representativeness, robustness and reliability of the benchmark.

The ECB published new statistics on financial accounts with a breakdown of life insurance and pension entitlements by investment risk

Following the amendment of its Guideline on the statistical reporting requirements for quarterly financial accounts, in October 2023 the ECB started publishing new breakdowns for life insurance, annuity entitlements and pension entitlements by allocation of investment risk for all EU Member States and the euro area. These entitlements are substantial components of household financial assets and are recorded in the financial accounts as liabilities of insurance corporations and pension funds (and to a much lesser extent of other sectors). The new data show to what extent households bear the investment risk of the premiums and contributions invested on their behalf.

7.2 Publication of new climate-related statistical indicators

In January 2023 the ECB published a first set of experimental and analytical climate change-related statistical indicators on its website. These indicators were collated in close cooperation with ESCB national central banks and are part of the ECB’s broader climate action plan.

The experimental sustainable finance indicators give an overview of debt instruments with sustainability characteristics that are issued or held by residents in the euro area. They provide information on the proceeds raised to finance sustainable projects and, by extension, the transition to a net-zero economy.

Analytical carbon emission indicators for financial institutions supply information on the carbon-intensity of the securities and loan portfolios of financial institutions and thus help to assess the sector’s role in financing the transition to a net-zero economy and the associated risks. The indicators provide information on banks’ exposure to counterparties with a high dependence on carbon emission-intensive business models.

Analytical indicators on the physical risks in loan and security portfolios assess risks stemming from the impact of climate change-induced natural hazards, such as floods and wildfires, on the performance of loans, bonds and equities. The indicators can be used to compare physical risk across countries, sectors and hazards.

Work continued on all three datasets to further enhance the quality of the data and breakdowns available, including geographical, sectoral and other details.

7.3 Making banks’ data reporting more efficient

The Integrated reporting Framework (IReF) seeks to integrate existing ESCB statistical data requirements for banks as far as possible into a single, standardised reporting framework applicable across the euro area.

The IReF is a first step towards a broader initiative for an integrated reporting system for statistical, prudential and resolution data in the European Union, as requested by the European banking industry and solicited by the European Parliament and the Council. The European Banking Authority, the ECB, the Single Resolution Board and the European Commission work together in an informal coordination group to further promote such integration. In 2023 they discussed the working modalities for a Joint Bank Reporting Committee (JBRC), involving relevant European and national authorities as well as the banking industry. The JBRC is expected to be set up in 2024.

The ESCB is also cooperating closely with the banking industry to optimise reporting and reduce the overall reporting burden via the Banks’ Integrated Reporting Dictionary (BIRD). This is a voluntary and collaborative initiative that brings together the ESCB national central banks and commercial banks. BIRD – which can be accessed free of charge – helps banks to generate statistical, supervisory and resolution-related reporting output that complies with the reporting requirements set out in European legislation. BIRD is an integrated dictionary with redundancy-free content: the concepts underlying reporting obligations are all identified and described once, helping banks to decide which data to extract from their internal systems and how to process them.

One of BIRD’s first deliverables will be to help banks comply with the IReF – a new data collection framework that will apply consistently across all euro area countries. Reporting agents will be able to use BIRD for IReF reporting, as well as other reporting obligations. BIRD will help to reduce banks’ reporting burden and improve the quality of the data reported to the relevant authorities.

Box 5
First release of new Household Distributional Wealth Accounts

New experimental statistics provide quarterly information on households’ wealth distribution in the euro area in line with national accounts.

The new Distributional Wealth Accounts (DWA) published by the ECB provide insight into the distribution of wealth among households in the euro area and euro area countries, consistent with the aggregated quarterly sector accounts (QSA). The new statistics support the economic, monetary and financial stability analyses of the ECB. The DWA is linked to the ECB’s 2021 monetary policy strategy review, which aims to include a systematic assessment of the two-way interaction between income and wealth distributions and monetary policy. The DWA will allow new insights into the monetary policy transmission process. The release follows the recommendations of the G20 Data Gaps Initiative to develop distributional information on household income, consumption, savings and wealth in line with the national accounts.

The method and results have been developed and compiled by the European System of Central Banks. The common approach may be further enhanced at national level, taking into account additional data sources available locally. Some national central banks have already implemented such improvements. The data combine the aggregated QSA with household-level information from the Household Finance and Consumption Survey (HFCS) between 2010 and 2021 and other sources. Results for the quarters after 2021 are estimated using data from the most recent sector accounts and the latest available HFCS wave or the NSI data collected in some countries. The data are compiled quarterly and published five months after the end of each period. Results are available for the euro area, 19 individual euro area countries (all euro area countries except Croatia) and Hungary.

The DWA provide data on net wealth and total assets and liabilities, and their components. Households are broken down into the top five deciles of net wealth and the bottom 50% as well as by employment and housing status. The DWA dataset also includes the Gini coefficient for net wealth, data on median and mean net wealth, the share of net wealth held by the bottom 50%, top 10% and top 5% of households, as well as the debt-to-asset ratio by household net wealth decile.

Chart A

Changes in housing wealth by net wealth decile and share in net wealth by the top 5%, euro area

a) Housing wealth

b) Share in net wealth of top 5%

(EUR trillions)


Source: DWA.

Box 6
Payments statistics ‒ enhanced scope and higher frequency

The amended ECB Regulation on payments statistics came into effect on 1 January 2022. The enhancements compared with the previous legal framework reflect both developments in the payments landscape and relevant changes to EU legislation. The frequency of data collection has also increased from annual to semi-annual and quarterly. The first release of payments statistics data collected under the amended framework took place on 9 November 2023 via the ECB Data Portal. Data were published for all quarters of 2022 and for the first two quarters of 2023, and for the two halves of 2022.

The payment statistics made available on a semi-annual basis now include information on innovative retail payment services, such as payments using mobile devices, contactless payments, e-commerce and new types of payment services as defined in the revised Payment Services Directive (PSD2). A press release is published with each half-yearly dissemination. As part of the enhanced data collection, data in the ECB Data Portal show, among other things, the strong demand for contactless card payments, which in the first half of 2023 accounted for 57% of all card payments in the euro area (Chart A).

Chart A

Share of contactless card payments as a percentage of all card payments in the euro area in the first half of 2023

Source: ECB.

Additionally, data are collected on fraudulent payment transactions, authentication methods for payment transactions and on payment schemes. On a quarterly basis and for the purposes of monitoring cross-border trade, data with a worldwide individual country breakdown are collected on card-based payment transactions, with further breakdowns by merchant category code.

8 ECB research activities

In 2023 ECB research focused, among other things, on assessing inflation developments, monetary transmission, climate change, and structural change. More specifically, the Heads of Research of the European System of Central Banks (ESCB) launched the Research Network on Challenges for Monetary Policy Transmission in a Changing World (ChaMP) aimed at using rich granular datasets to analyse the strength, speed and heterogeneity of monetary transmission channels in the euro area amid unprecedented shocks, structural changes and shifting inflation dynamics. The Household Finance and Consumption Network (HFCN) continued to deliver new insights into the impact of inflation on heterogeneous households across the euro area. The ECB’s Consumer Expectations Survey (CES) is now firmly established as a source of valuable policy and research insights into the formation of household expectations. Climate change continued to be an important topic for ECB research activities. The ECB also collaborated closely with national central banks within the ESCB research clusters, organising annual workshops to discuss the most pressing issues in the different fields of specialisation.

8.1 Update on ESCB research initiatives

The ChaMP Network started work in May 2023

The ChaMP Network started work in May 2023. It is foreseen to last for two years, with a possible extension of one additional year. The Network is structured in two workstreams: transmission of monetary policy via the financial system (WS1) and transmission of monetary policy via the real economy (WS2). The ChaMP Network started with an initial work programme encompassing 180 research projects by over 250 authors from most central banks in the ESCB. The first workshops were held in Brussels on 25 October 2023 (WS2) and in Lisbon on 31 October 2023 (WS1). The WS1 workshop included presentations on the transmission of monetary policy via banks to corporations and households and on the role of non-bank financial intermediaries, while the WS2 workshop focused on the relevance of production networks between firms (for example supply constraints and other shocks) and of structural changes (for example digitalisation, (de)globalisation and climate change) for the transmission of monetary policy. The first in-person meeting of the leadership team took place in Lisbon on 30 October 2023.

The HFCN released the results of the fourth (2021) wave of the Household Finance and Consumption Survey (HFCS) in July 2023. The HFCS is a useful source of household-level information on household finances and consumption for several research projects conducted by HFCN members, the ECB’s Research Taskforce on Heterogeneity and external researchers. These projects include work on the distributional effects of inflation shocks on household balance sheets,[68] differences in holdings of wealth between men and women (the gender wealth gap), measuring income uncertainty using expectations data, the heterogeneity of the effects of the pandemic on household finances, and the new Distributional Wealth Accounts (see Box 5).

8.2 Update on ECB research initiatives

The ECB’s Consumer Expectations Survey (CES) was further developed in 2023, offering fresh household-sector insights for policy analysis and research. The ECB extended the survey’s coverage beyond the initial six countries (Belgium, Germany, France, Italy, the Netherlands and Spain) in the pilot phase to include five additional euro area countries (Austria, Finland, Greece, Ireland and Portugal). The CES proved to be an invaluable policy and research tool for analysing household inflation expectations. Research showed that restrictive monetary policy together with active communication on the role of monetary policy in stabilising future inflation promoted public trust and prevented recent price and cost shocks from becoming entrenched in consumer inflation expectations.[69] The CES was also used to highlight the heterogenous impact of inflation on expectations across households. One important finding is that low-income households were most affected by inflation owing to their exposure to increases in the prices of necessities such as energy and food.

Climate-related research topics remained very prominent in 2023

Climate-related research topics remained very prominent in 2023. Research provided evidence of a disconnect, whereby banks with more extensive environmental disclosures extended more credit to polluting borrowers, without charging higher interest rates or shortening debt maturities.[70] Other work focused on the unintended consequences of carbon taxes. Analysis of the risk of “greenflation” (persistent deviations of inflation from our target stemming from carbon taxes or carbon pricing schemes) suggests that when carbon taxes are increased very slowly, decarbonisation can be achieved without endangering the ECB’s mandate.[71] Other work has shown that carbon pricing mechanisms reduce firms’ carbon emissions but also tilt their investment mix away from green innovation to short-term pollution abatement.[72] The effects of climate change on our understanding of macroeconomic and financial stability were also at the core of the policy panel discussion featured by the “WE_ARE_IN” conference jointly organised with the Centre for Economic Policy Research.

In 2023 ECB staff published 120 papers in the ECB’s Working Paper Series. In addition, more policy-oriented or methodological studies were published in the ECB’s Occasional Paper Series, Statistics Paper Series and Discussion Paper Series. Many of the ECB’s research activities also resulted in publications in renowned academic journals, while 12 articles were released in the ECB’s Research Bulletin targeting a more general audience. Box 7 describes in more detail the results of recent ECB work on the economic dynamics after extreme events – a topic of great importance for both price and financial stability.

8.3 Update on the work of ESCB research clusters

Regular research networks continued coordinating research efforts within the ESCB and maintaining relations with academic researchers. In particular, the ESCB research clusters on “Monetary economics” (Cluster 1), “International macroeconomics, fiscal policy, labour economics, competitiveness and EMU governance” (Cluster 2), “Financial stability, macroprudential regulation and microprudential supervision” (Cluster 3) and “Climate change” (Cluster 4) held workshops on the most pressing issues in their fields. The annual workshop of Cluster 1 in 2023 was postponed and will now be held at Narodowy Bank Polski in Warsaw on 21-22 March 2024. Cluster 2 held its annual workshop at the Bank of England on 16-17 November 2023. It featured five sessions focusing on productivity, labour markets, international macroeconomics, energy shocks, and climate policy and fiscal policy. Cluster 3 ran its annual workshop in Saariselkä, Finland on 23-25 November 2023, focusing on financial stability and financial intermediation. Cluster 4 held its second annual workshop in hybrid format at the ECB on 13-14 November 2023. The topics discussed ranged from the effect of temperature shocks on inflation to the dynamics of biodiversity.

Box 7
Economic dynamics after extreme events – quantifying the financial stability trade-offs for monetary policy during periods of high inflation

Recent research has focused on developing and applying new tools to assess and quantify the link between monetary policy and macroeconomic tail risks. Financial stability conditions and balance sheet capacity in the financial sector play a crucial role for macroeconomic tail risks, in line with an increasing body of evidence identifying financial distress as a strong predictor for near-term downside risks to growth. Furthermore, monetary interventions can affect financial stability in the short term through their immediate impact on the financial sector, both by providing financial intermediaries with liquidity during crises and risking sudden market disorder as rates are hiked and financing conditions tightened.[73]

When inflationary pressures started intensifying in 2022, the world’s major central banks faced a dilemma: rapidly tighten monetary policy at the risk of fuelling financial stress after years of ultra-low interest rates or take a more gradual approach that would protect the financial system and economic activity, but risk above-target inflation becoming entrenched. To quantify this trade-off, an empirical non-linear model that incorporates financial stability conditions can be used to gauge the tail risks to the euro area economy posed by the tightening cycle which began in the third quarter of 2022.[74] The non-linear modelling approach has the advantage of capturing the possibly time-varying feedbacks between monetary policy and the risks of future financial instability. While rare, episodes of financial instability can have devastating macroeconomic consequences, making them acutely relevant to policymakers. As such, tools to assess these tail events can play an important role in informing policymakers aiming to manage macroeconomic risks.

The analysis revealed substantial downside risks to economic growth as of the third quarter of 2022. The model estimates a 10% probability that real GDP in the euro area would decline by more than 3% over the following year. Risks to financial stability were also tilted to the downside, with an elevated probability of stress in the financial system. These risks, driven by the jump in commodity prices and financial market stress following the Russian invasion of Ukraine, had to be balanced with upside risks to inflation, which was well above target.

Policy tightening above market expectations would have amplified short-term downside risks to growth and financial stability. This is because the probability of short-term financial distress is particularly sensitive to monetary policy. In the medium term, however, tighter monetary policy may also dampen financial stability risks by reducing the leverage of the financial system and raising risk premia across financial assets. The model quantifies the effects of tighter monetary policy on higher near-term and lower medium-term risks to the financial system and real economy.

9 ECB legal activities and duties

This chapter deals with the jurisdiction of the Court of Justice of the European Union (CJEU) concerning the ECB, provides information on ECB opinions and cases of non-compliance with the obligation to consult the ECB on draft legislation falling within its fields of competence. It also reports on the ECB’s monitoring of compliance with the prohibition of monetary financing and privileged access.

9.1 Jurisdiction of the Court of Justice of the European Union concerning the ECB

The CJEU put an end to more than a decade of litigation relating to the 2012 restructuring of the Greek public debt by dismissing the appeal on the last pending action for damages against the ECB

In September 2023 the CJEU dismissed the appeal in the last pending action for damages brought against the ECB and the European Union (EU) by holders of Greek sovereign bonds. The appellants were subject to the restructuring of the Greek public debt in 2012 by means of the activation of retrofit collective action clauses.[75] At first instance, the appellants alleged that their forced participation in the restructuring of the Greek public debt was attributable to the ECB and the EU owing to, among other things, the involvement of the ECB and EU in the Eurogroup meetings and their role in the consultation process leading to the activation of retrofit collective action clauses.[76] The General Court found that the ECB and the EU did not act ultra vires and did not commit any breach of the right to property, the free movement of capital or the principle of equal treatment. The General Court also held that several provisions of the Treaty on the Functioning of the European Union invoked by the applicants (including Articles 123 and 127) do not constitute rules of law conferring rights on individuals and therefore cannot give rise to non-contractual liability on the part of either the EU or the ECB. The appeal, which alleged erroneous examination of certain pleas by the General Court, was dismissed by the CJEU in its entirety, thus putting an end to more than a decade of litigation in which the ECB has always prevailed by demonstrating that it acted lawfully.

The CJEU interpreted that the ECB’s minimum standards for checking the fitness of euro banknotes do not apply to cash handlers, such as credit institutions and transporters of funds

In April 2023 the CJEU (Fifth Chamber) delivered its judgment in a preliminary ruling procedure submitted by the Supreme Administrative Court of Lithuania (Case C-772/21). The CJEU interpreted that the ECB’s minimum standards for automated checking of the fitness of euro banknotes by banknote handling machines, referred to in Article 6(2) of ECB Decision (ECB/2010/14) on fitness checking of euro banknotes, do not apply to cash handlers, such as Brink’s Lithuania. In the main proceedings, Brink’s challenged Lietuvos bankas’ decision according to which Brink’s was in breach of the ECB’s minimum standards, as two of its banknote handling machines had failed the fitness test (which was based on such standards). The CJEU determined that the ECB’s minimum standards apply to the manufacturers of banknote handling machines. While cash handlers are not bound by those standards, they remain obliged to remedy a situation where an inspection by a national central bank (NCB) finds that banknote handling machines do not comply with the ECB’s minimum standards. The CJEU also concluded that Member States are precluded from obliging cash handlers to comply with the ECB’s minimum standards, as introducing such an obligation under national law would not respect the EU’s exclusive competence in the area of monetary policy, which includes checking the authenticity and fitness of banknotes.

The CJEU confirmed limits on the judicial review of banking supervisory decisions based on a broad discretion

In May 2023 the CJEU clarified the scope of judicial review from EU courts over the ECB decision adopted in the field of banking supervision on the basis of a discretionary power involving complex technical, economic and financial assessments. The ruling of the CJEU followed an appeal by the ECB against the judgment of the General Court of April 2021 by which it annulled the ECB’s decision refusing to authorise Crédit Lyonnais to exclude from the calculation of its leverage ratio certain exposures deriving from the amounts collected on regulated saving accounts. The General Court considered that the decision was vitiated by a manifest error of assessment because the ECB failed to take into account that those accounts were not subject to a risk of massive withdrawals and, as a consequence, were not exposing the bank to a risk of fire sales. The CJEU, upholding the ECB’s arguments, annulled the judgment of the General Court, ruling that the scope of judicial review from EU courts over ECB decisions adopted on the basis of a discretionary power must be limited and not lead the General Court substituting its own assessment for that of the ECB. That review must only seek to ascertain that the decision is not based on materially incorrect facts or vitiated by a manifest error of assessment or misuse of powers. In the case at hand, the CJEU considered that the General Court substituted its own assessment regarding the risk of fire sales of assets to which the bank was exposed for that of the ECB and, as a consequence, overstepped the limits of judicial review. Giving final judgment in the case, the CJEU dismissed Crédit Lyonnais’s action at first instance in annulment of the contested decision, ruling that the bank failed to demonstrate that the ECB decision was vitiated by a manifest error of assessment.

The Court confirmed that the ECB has exclusive competence to withdraw banking licences, including for serious breaches of national AML/TF legislation

In September 2023 the CJEU[77] dismissed the appeal of Versobank AS against the judgment of the General Court of 6 October 2021, which had rejected the annulment action against the ECB’s decision to withdraw the bank’s authorisation to operate as a credit institution. In this judgment, the CJEU confirmed that the ECB has exclusive competence to withdraw the banking licence of all credit institutions established in participating Member States, regardless of their classification as significant institutions or less significant institutions, including on grounds relating to serious breaches of the national legislation transposing the AML Directive.

9.2 ECB opinions and cases of non-compliance

Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union require that the ECB be consulted on any proposed EU or draft national legislation falling within its fields of competence. All ECB opinions are published on EUR-Lex. In 2023 the ECB adopted 12 opinions on proposed Union legal acts and 35 opinions on draft national legislation.

There were 12 cases of non-compliance with the obligation to consult the ECB on draft legislation

Twelve cases of non-compliance with the obligation to consult the ECB on draft legislation were recorded: two in respect of Union legal acts and ten in respect of national laws. The ECB adopted own initiative opinions in respect of seven of these twelve cases.

The first EU case concerned an EU proposal for a regulation on harmonised rules on fair access to and use of data (Data Act). This case was considered to be clear and important because it concerns, among other things, the scope of access to and use of privately held data by the ECB and the NCBs for a number of defined public interest purposes. The second EU case concerned an EU legislative package proposing the establishment of a European Single Access Point (ESAP) providing centralised access to publicly available information of relevance to financial services, capital markets and sustainability. This case was considered to be clear and important because the establishment of an ESAP is an important milestone in the completion of the capital markets union, which should allow for a more efficient allocation of capital across the Union, contributing to the further development and integration of capital markets.

Two Hungarian non-compliance cases concerned central bank independence and the prohibition of monetary financing. The first Hungarian case concerned a Hungarian law on economic and financial measures, which prohibited certain institutions from purchasing, until 30 June 2023, a Hungarian forint-denominated debt instrument issued by an ESCB national central bank. This case was considered to be clear and important because it impedes the Magyar Nemzeti Bank from independently choosing the necessary means and instruments to conduct an efficient monetary policy and to independently achieve its primary objective of price stability. The second Hungarian case concerned amendments of the Law on the Magyar Nemzeti Bank introducing single foreign currency treasury accounts, which will be managed by the Magyar Nemzeti Bank, to supplement the already existing single Hungarian forint treasury account. This case was considered to be clear and important because it concerns the compliance of the remuneration of the State’s treasury accounts of an NCB with the monetary financing prohibition.

Two Slovak non-compliance cases concerned cash. The first Slovak case concerned a Slovak law on social insurance limiting cash payments for public social insurance contributions. This case was considered to be clear and important owing to the limitation it imposes on the use of cash as a means of payment and the absence of a proportionality assessment of this limitation, taking into account the criteria established by the CJEU in its Hessischer Rundfunk judgment (C-422/19 and C-423/19). The second Slovak case concerned a Slovak law amending the Constitution of the Slovak Republic, which guarantees the issuance of cash as legal tender, further specifies that everyone has the right to make a payment for the purchase of goods and the provision of services using cash as legal tender, guarantees that the acceptance of such payment may only be refused for reasonable or generally applicable reasons, and guarantees the right to perform a cash transaction in a bank or a branch of a foreign bank. This case was considered to be clear and important because the constitutional law guarantees the issuance of cash as legal tender and in this context sets out a general principle of mandatory acceptance of cash and a framework for exemptions in a Member State whose currency is the euro, which are matters falling within the exclusive competence of the ECB and the Union.

Five national non-compliance cases (four non-consultations and one late consultation) relate to special purpose bank tax and levies introduced in response to increased inflation and interest rates. These cases concerned: (1) a Polish law on crowdfunding for business ventures and assistance to borrowers, which introduced the concept of “mortgage holidays” to alleviate the burden on borrowers with outstanding mortgage loans following recent increases in interest rates by Narodowy Bank Polski; (2) a Portuguese law on a measure to temporarily reduce the benchmark Euribor rates by 30% for variable rate mortgage loans, which aims at mitigating the effects of rising interest rates on the residential mortgage market and provide greater predictability for families with variable rate mortgages; (3) a Romanian law on certain fiscal-budgetary measures to ensure the long-term financial sustainability of Romania, which concerns, among other things, the imposition of a turnover tax on credit institutions that are Romanian legal entities or Romanian branches of foreign legal entities; (4) a Slovak law on a special levy on business in regulated industries by (a) extending the scope of the regulated persons that are subject to a special levy to include credit institutions doing business in Slovakia, and (b) imposing a specific levy rate on these credit institutions; and (5) a Latvian law amending the Consumer Protection Law, which provides that during the year 2024 credit institutions will be under an obligation to pay a mortgage borrower protection fee for the benefit of borrowers who fulfil certain conditions. These cases were considered to be clear and important because the laws raise financial stability, prudential supervisory and, in the Latvian, Portuguese and Slovak cases, also monetary policy considerations.

The final national non-compliance case is a Spanish case concerning a law requiring the Banco de España to take the necessary measures to make it possible for investment firms to open accounts with the central bank in order to deposit the funds they receive from their customers. This case was considered to be clear and important because, apart from its direct impact on the operation of payment systems, it might raise issues relating to monetary policy and financial stability.

The ECB adopted 12 opinions on proposed Union legal acts

The ECB adopted 12 opinions on EU legislative proposals, covering topics such as a digital euro; the legal tender of euro banknotes and coins; the reform of economic governance in the Union; the Union’s crisis management and deposit insurance framework; measures to mitigate excessive exposures to third-country central counterparties (CCPs), improve the efficiency of Union clearing markets, and address the treatment of concentration risk towards CCPs and counterparty risk on centrally cleared derivative transactions; instant credit transfers in euro; climate-related matters, including the energy performance of buildings, corporate sustainability due diligence, and the transparency and integrity of environmental, social and governance rating activities; European Union labour market statistics on businesses; and the appointment of a new member of the ECB’s Executive Board.

The ECB adopted 35 opinions on draft national legislation

With regard to opinions on national legislation, which often cover more than one subject, the ECB adopted 19 opinions concerning NCBs; 15 opinions concerning the stability of the financial system; 13 opinions concerning the prudential supervision of credit institutions; seven opinions concerning currency matters and means of payment; five opinions concerning monetary policy instruments and operations and the implementation of monetary policy; and three opinions concerning payment and/or securities settlement systems. The topic of special purpose bank tax and levies introduced in response to increased inflation and interest rates was the subject of seven opinions in the course of 2023.

9.3 Compliance with the prohibition of monetary financing and privileged access

Pursuant to Article 271(d) of the Treaty on the Functioning of the European Union, the ECB is entrusted with the task of monitoring the compliance of the EU national central banks (NCBs) with the prohibitions laid down in Articles 123 and 124 of the Treaty and Council Regulations (EC) Nos 3603/93 and 3604/93. Article 123 prohibits the ECB and the NCBs from providing overdraft facilities or any other type of credit facility to governments and EU institutions or bodies, as well as from purchasing in the primary market debt instruments issued by these institutions. Article 124 prohibits any measure, not based on prudential considerations, which establishes privileged access by governments and EU institutions or bodies to financial institutions. In parallel with the Governing Council of the ECB, the European Commission monitors Member States’ compliance with the above provisions.

The ECB also monitors the EU central banks’ secondary market purchases of debt instruments issued by the domestic public sector, the public sector of other Member States and EU institutions and bodies. According to the recitals of Council Regulation (EC) No 3603/93, the acquisition of public sector debt instruments in the secondary market must not be used to circumvent the objective of Article 123 of the Treaty.

The prohibitions laid down in Articles 123 and 124 of the Treaty were in general respected

The ECB’s monitoring exercise conducted for 2023 confirmed that Articles 123 and 124 of the Treaty were in general respected.

The ECB will continue monitoring the involvement of the Magyar Nemzeti Bank in the Budapest Stock Exchange as the purchase of the majority ownership of the Budapest Stock Exchange by the Magyar Nemzeti Bank in 2015 may still be seen as giving rise to monetary financing concerns.

The Central Bank of Ireland’s final disposal of assets related to the Irish Bank Resolution Corporation during 2023 through sales of long-duration floating rate notes has brought to an end the serious monetary financing concerns that had persisted since 2013.

The financing by NCBs of obligations falling upon the public sector vis-à-vis the International Monetary Fund (IMF) is not considered as monetary financing provided it results in foreign claims that have all characteristics of reserve assets. However, financial donations as provided in previous years by the Nationale Bank van België/Banque Nationale de Belgique and Banque de France via the IMF for debt relief for heavily indebted poor countries did not result in any foreign claims and therefore require corrective measures.

10 The ECB in an EU and international context

The ECB continued to interact closely with its European and international counterparts in 2023. The connection between the ECB and the European Parliament is an essential part of the ECB’s accountability framework. The ECB engaged in regular hearings and correspondence with the Committee on Economic and Monetary Affairs of the European Parliament (ECON). Additionally, the ECB interacted with ECON as part of its ongoing work on a digital euro. At international level, the ECB engaged constructively in dialogue with its G20 partners. It supported, among other things, the Indian Presidency’s initiatives on financial sector regulation, cross-border payments and crypto-assets. The ECB also continued to engage in central bank-relevant discussions on various issues related to the functioning of the International Monetary Fund (IMF), including the review of IMF quotas, adjustments to the IMF’s lending policies and toolkit, and matters surrounding Special Drawing Rights (SDRs) and their channelling.

10.1 The ECB’s accountability

Accountability is an essential counterpart to independence

The ECB was granted independence under the Treaty on the Functioning of the European Union (TFEU). Being independent means that the ECB can take decisions in pursuit of its primary goal of maintaining price stability immune from political influence. However, accountability is an essential counterpart to this independence. The ECB is accountable for its actions to the European Parliament, which represents EU citizens. Fulfilling these accountability obligations is a crucial part of the ECB’s responsibilities. The two-way dialogue between the ECB and the European Parliament allows the ECB to explain its actions and policies to the representatives of EU citizens and to listen to their concerns. Over time this dialogue has evolved beyond the requirements set out in Article 284(3) of the TFEU. To promote continued common understanding and effective cooperation, in June 2023 the President of the ECB and the President of the European Parliament signed an exchange of letters clarifying the accountability arrangements between the ECB and the European Parliament in the area of central banking.

The ECB continued its interactions with EU citizens’ elected representatives

In 2023 the President of the ECB took part in four regular hearings of the ECON Committee and engaged in the plenary debate on the ECB’s 2021 Annual Report in February, following which the European Parliament issued a resolution. In May the Vice-President then presented the ECB’s 2022 Annual Report to the ECON Committee. On the same day, the ECB released its feedback on the input received from the European Parliament as part of its resolution on the 2021 Annual Report. Additionally, in May the ECB hosted the annual visit to the ECB by a delegation of Members of the ECON Committee. In addition, the ECB responded to 27 written questions from Members of European Parliament in the course of the year.

Furthermore, the ECB interacted closely with the ECON Committee in the context of its work on a digital euro. In 2023 the then Executive Board Member Mr Panetta participated in three ad hoc hearings of the ECON Committee to discuss progress made during the digital euro investigation phase, including the topics of user experience, legal tender, and the digital euro legislative process.[78] The ECB also organised staff-level technical seminars with the European Parliament and participated in events organised by Members of the European Parliament to discuss a digital euro.

Support for the euro was close to a record high in 2023

According to the latest Eurobarometer survey conducted in October and November 2023, 79% of euro area respondents support the euro and 43% tend to trust the ECB. The high level of support for the euro is a very positive sign, while the relatively lower level of trust in the ECB shows that the institution needs to continue its efforts to communicate with the public and citizens’ elected representatives. Building public trust will also remain integral for the ECB going forward. As such, the ECB remains committed to actively participating in constructive dialogue with the European Parliament and citizens in the euro area.

10.2 International relations


The G20 operated amid heightened geopolitical tensions and in a difficult global environment, working towards preserving multilateralism

The global economy during India’s G20 Presidency in 2023 continued to be negatively affected by Russia’s war against Ukraine and, in the last quarter, increased uncertainty owing to the conflict in the Middle East. G20 finance ministers and central bank governors were confronted with lower global growth, high inflationary pressures and volatile energy prices. While disagreements among members on geopolitical issues prevented the adoption of communiques at the February and July 2023 meetings, the joint G20 Leader’s Declaration in New Delhi, as well as the decision to admit the African Union as a future permanent member to the G20, highlighted the membership’s efforts to preserve the forum’s effectiveness and inclusiveness. The ECB welcomed and supported the Indian Presidency’s initiatives to improve the regulatory framework in the banking and non-banking sectors, facilitate cross-border payments and reach agreement on a G20 roadmap to contain the risks from crypto-asset ecosystems. The ECB also supported the G20’s efforts to scale up sustainable finance from private and public sources for the global transition towards Net Zero. In view of the digital euro project, the G20 discussions on the design choices and safeguards for central bank digital currencies were also a high priority from the ECB’s perspective.

Policy issues related to the IMF and the international financial architecture

The ECB actively contributed to discussions at the IMF. In 2023 the IMF decided to increase its quota resources, continued to adjust its toolkit and further supported Ukraine

The ECB continued to play an active role in discussions about the international monetary and financial system at the International Monetary Fund (IMF) and in other fora, promoting the central bank perspective in common European positions taken in these fora.[79] In 2023 key topics included the review of IMF quotas, adjustments to the IMF’s lending policies and toolkit, and matters surrounding Special Drawing Rights (SDRs) and their channelling.

On 15 December 2023 the IMF Board of Governors concluded the 16th General Review of Quotas and approved an increase of members’ quotas by 50%, which will bring total IMF quotas to SDR 715.7 billion.[80] The quota increase will be allocated to members in proportion to their existing quota shares. Adjustments to the IMF toolkit were introduced, which also enabled the Fund’s continued support for Ukraine.[81] A 48-month arrangement under the Extended Fund Facility for Ukraine was approved at the end of March 2023.[82] The IMF also further strengthened the preventive role and flexibility of its toolkit by concluding the review of precautionary instruments in October 2023. At the end of 2023 IMF lending remained close to its highest historical levels: the total General Resources Account credit outstanding stood at around SDR 92 billion, with the exposure to the Fund’s largest borrower accounting for one-third of this amount.

Resources were mobilised to help countries in need

In a follow up to the allocation of USD 650 billion of SDRs in 2021 to meet a long-term global need to supplement existing reserves, which also helped countries to deal with the pandemic, efforts to channel SDRs or equivalent resources to further help emerging market economies and low-income countries reached a milestone in June 2023, when the global ambition to mobilise USD 100 billion was met. EU Member States made a major contribution to this effort, accounting for over 31% of commitments. The bulk of the global target is destined for the IMF’s Resilience and Sustainability Trust and Poverty Reduction and Growth Trust. The ECB also continued to support international initiatives to help vulnerable countries tackle rising debt vulnerabilities, in particular implementation of the G20 Common Framework for Debt Treatments.

Box 8
The ECB’s secondary objective in monetary policy

The ECB’s primary objective, maintaining price stability, is established in Article 127(1) of the Treaty on the Functioning of the European Union. The Treaty further stipulates that, “without prejudice to the objective of price stability”, the ECB shall also support the general economic policies in the European Union with a view to contributing to the achievement of the Union’s objectives, as laid down in Article 3 of the Treaty on European Union.[83] This box explains how the secondary objective is considered in the conduct of the ECB’s monetary policy and reporting activities.[84]

How the ECB acts upon its secondary objective in monetary policy decisions

In its monetary policy decisions, the ECB evaluates the proportionality of each measure.[85] This assessment includes an analysis of the benefits and possible side effects of monetary policy measures, including – where relevant – their impact on the ECB’s secondary objective. The analysis considers how these measures interact and balance out over time. In practice, when adjusting its monetary policy instruments, the Governing Council chooses the configuration that best supports the general economic policies in the Union related to growth, employment and social inclusion, and that, with a view to contributing to the Union’s broader objectives, protects financial stability and helps to mitigate the impact of climate change, provided that two configurations of the instrument set are equally conducive and not prejudicial to price stability.[86] For instance, the ECB has been tilting its reinvestments of corporate sector securities towards issuers with a better climate performance since October 2022. This decision was made in order to take better account of climate-related financial risk in the Eurosystem balance sheet and, with reference to the ECB’s secondary objective, to support the green transition of the economy in line with the EU’s climate neutrality objectives.[87]

How the ECB presents the effects of its actions on the secondary objective

The ECB communicates on how it has acted upon its secondary objective as part of its reporting on monetary policy. During monetary policy press conferences and in the detailed accounts of its monetary policy meetings, the ECB provides insights into the relevant factors influencing its monetary policy decisions, including considerations related to its secondary objective. Additionally, regular articles in the Economic Bulletin and the Research Bulletin, as well as dedicated occasional papers, offer in-depth analyses on how monetary policy interacts with crucial areas like the labour market, financial stability and climate change.[88] Furthermore, the ECB – in discharging its accountability and transparency obligations toward the European Parliament and the public – elaborates on how aspects of the secondary objective, such as the interplay between price stability and financial stability or the integration of climate change considerations into monetary policy operations, are being addressed.[89]

In the ECB’s annual reports, the reporting on monetary policy decisions and the underlying analyses of relevance to the secondary objective is integrated across various chapters. Notably, the Annual Report for 2023: (i) provides an update on advances made during 2023 in the ECB’s analytical capacity with regard to climate change in statistics, including new climate-related statistical indicators for sustainable finance, carbon emissions and physical risks (Section 7.2); (ii) recalls that the medium-term orientation of the ECB’s monetary policy allowed for a gradual impact on growth and employment, which are elements of the ECB’s secondary objective (Section 1.2); (iii) recalls that the ECB continued to tilt corporate bond purchases more strongly towards issuers with a better climate performance (Sections 2.1, 2.2 and 2.3) and made climate-related financial disclosures for the corporate securities holdings under the corporate sector purchase programme and the pandemic emergency purchase programme (Section 2.2); (iv) provides a summary assessment of banks and the financial system and elaborates on sources of resilience and fragility for financial stability (Chapter 3) and reports on recent ECB research on quantifying the financial stability trade-offs for monetary policy during periods of high inflation (Box 7); and (v) provides a summary of the ECB’s efforts and progress in climate and environmental work (Section 11.5).

11 Promoting good governance, social and environmental sustainability

The ECB carries out key work on environmental, social and governance (ESG) issues. For a public institution like the ECB, this includes its accountability vis-à-vis European Union (EU) citizens and their elected representatives, communicating and engaging with different audiences, adhering to the highest ethical standards and transparency, empowering employees and promoting their well-being, as well as looking at climate and environmental impacts and risks.

11.1 Updates on environmental, social and governance matters

The ECB continued its work on environmental, social and governance-related topics in 2023

This overview of key ESG developments in 2023 is complemented by other sections of this annual report and additional information available on the ECB’s website (Table 11.1).

Sections 11.2 and 11.3 outline how, as a European institution, the ECB worked towards continuously strengthening its governance frameworks as well as fostering transparency and closeness to citizens in 2023. Section 11.2 outlines the ECB’s efforts to strengthen European and international cooperation in the areas of ethics, integrity and good conduct, thereby also responding to increased public interest in this area.[90] Section 11.3 describes the concerted efforts by the ECB to clearly explain its policies during a period of high inflation, targeting different audiences and addressing people’s concerns about the future of our currency. Section 11.4 lists key developments in 2023 that affected the ECB’s human resources management and provides updates on the appointment of a diversity and inclusion officer and a mediator. Lastly, Section 11.5 covers the ECB’s work on climate-related and environmental topics and provides details on more specialised publications in this area.

Climate-related risks are progressively being integrated into the overall risk framework

The ECB tackles ESG risks as part of its risk management frameworks for financial and non-financial risks, as described in the chapter on risk management in the ECB’s Annual Accounts 2023.

Climate stress testing started in 2022 and has since become a regular exercise. It forms part of the action to progressively integrate climate-related risks into the overall risk framework. In its first climate risk stress test of the Eurosystem balance sheet, the ECB assessed the sensitivity of the Eurosystem’s financial risk profile to climate change and in doing so enhanced the Eurosystem’s climate risk assessment capabilities. The results provided a first estimate of the impact of climate risk on the ECB’s balance sheet.

11.2 Strengthening ethics and integrity

Awareness of ethics and integrity remained a key priority in 2023

The ECB’s Compliance and Governance Office (CGO) is entrusted with setting the appropriate rules on ethics and governance, and monitoring compliance with these. In 2023 new initiatives focused on providing an enhanced training experience to staff, ranging from introductory courses and e-learning programmes for newcomers, to refresher courses for longer-serving staff and tailormade training to address the needs of specific business functions. Various outreach projects were also organised over a period of six to eight weeks around Global Ethics Day, with a view to both drawing ECB staff’s attention to the need to comply with the ethics rules and informing the public of the ECB’s focus on these matters. The CGO continued to upgrade and streamline its processes, facilitate staff access to ethics advice and comply with the ECB’s ethics standards.

Increased awareness in the areas of ethics and integrity and easy access to ethical advice led to a pronounced increase in requests from 1,690 in 2022 to 2,767 in 2023 (Chart 11.1).

The compliance checks, which were conducted with the support of an external audit firm, confirmed the overall adherence of ECB staff members and the ECB members of high-level bodies to the rules on private financial transactions.

Chart 11.1

Overview of requests received from ECB staff in 2023

Source: ECB.

The ECB’s independent Ethics Committee complements the ECB’s governance structure. It provides advice to high-level ECB officials on questions of ethics, mostly concerning private activities and post-mandate gainful employment, and assesses their declarations of interests. In addition, the Ethics Committee monitors European and international developments in the field of ethics and good conduct. It also advises on desirable updates of the ECB’s ethics framework for high-level ECB officials, such as the recent enhancement of the rules on private financial transactions.

The Ethics and Compliance Committee continued to provide support to the national central banks and national competent authorities on the implementation of the Ethics Guidelines adopted in 2021, as well as guidance on a coherent and consistent interpretation of ethics standards across the Eurosystem. In addition, to best leverage and benefit from a diversity of views, the Committee organised sessions on topics of mutual interest, which were attended by over 50 different public institutions and organisations.

At the European level, in 2023 the ECB continued to play an active role in the ongoing interinstitutional negotiations on the establishment of an independent EU ethics body.

At international level, the ECB was closely involved in knowledge-sharing and standard-setting in the Ethics Network of Multilateral Organizations, in both its role as Vice-Chair of the network and through its contributions to meetings and the annual conference. The ECB also contributed to the first review of the EU’s implementation of the United Nations Convention against Corruption.

11.3 Communication and transparency of ECB policy

The ECB faced a challenging communications environment

Falling, but still much too high, inflation and the increasingly tangible effects of the ECB policy tightening on the economy created a challenging communications environment for the ECB in 2023. In times of exceptional uncertainty and a cost-of-living crisis, the focus of ECB communication had to be on reassuring people and businesses about its commitment to bring inflation back to target and convince them that it would be able to do so with the key policy tools at its disposal.

The ECB’s guiding principle for communications was “Explain, Explain, Explain” to help people understand its decisions

The ECB therefore stepped up its monetary policy communication. As monetary policy tightening started to produce its intended effect of dampening demand, it was important to explain the ECB’s decisions, and re-emphasise that its primary mandate is to fight inflation. Alongside multiple public speaking engagements by ECB decision-makers, several posts on The ECB Blog explained how inflation affected real incomes and the importance of governments’ structural policies for tackling inflation, and provided analytical insights on record high labour participation levels. ECB podcasts described the drivers of inflation and, through a dedicated podcast summer school, elaborated on the ECB’s role in keeping prices stable.

Humility in communication to rebuild public trust

At the same time, legitimate questions about why the ECB had failed to foresee the inflation surge and why its macroeconomic projections had been off the mark required answers. The clarity and accuracy of the Eurosystem projections are especially important to anchor expectations and bolster the credibility of ECB policy. Similarly, it was essential to explain the various sources of uncertainty and communicate with a sense of humility as a means of fostering trust.

ECB communications strived to put balance sheet losses of the ECB and Eurosystem central banks into context

In 2023, as a consequence of past monetary policy decisions, notably large-scale asset purchases, the ECB and other central banks across the Eurosystem were confronted with losses on their balance sheets. The ECB made a special effort to explain where central bank profits and losses come from, for instance, via a dedicated explainer. This also allowed the ECB to place those losses in the context of many years of significant profits and to emphasise that its job is to take monetary policy decisions that further its price stability objective, and not to make profits.

Further extraordinary communications efforts in 2023 centred on the future of our currency, both in the form of cash and in a digital form.

The ECB started work on designing the next series of euro banknotes with the help of the European public

The ECB decided that the design of the third series of euro banknotes should include a participatory process involving the wider public. To that end, Europeans across the euro area were invited to participate in an online survey on the themes of the next banknote series and were given a chance to select their preferred design theme from among seven options. More than 365,000 people from across the euro area took part, and their preferences were taken on board in the Governing Council’s decision to select “European culture” and “Rivers and birds” as themes for future banknotes. The communication and outreach around the next series of banknotes reinforced the message that the ECB and the Eurosystem remain committed to cash.

The ECB stressed that cash is here to stay – potentially complemented by a digital euro

Conveying its commitment to cash in 2023 was especially important, because the ECB is preparing for a possible introduction of a digital euro.

In October 2023 the Governing Council decided to close the investigation phase of the digital euro project and move forward to the preparation phase. That step was accompanied by a multi-pronged and multilingual communications campaign, involving a variety of communication channels and products across all euro area countries, including an official LinkedIn page on the digital euro project and a dedicated web page on the digital euro project. The campaign focused on the benefits and importance of introducing a digital euro, privacy concerns, and the legal tender role of both cash and the new digital currency. Beyond communicating to industry stakeholders, policymakers and civil society organisations, in an innovative approach, the ECB also reached out to relevant online content creators. The aim was to encourage digital entrepreneurs active in the field of money and finance to set out the rationale for a digital euro and explain its features to their online followers and subscribers.

Overall, these combined efforts and the ensuing broad media coverage succeeded in publicising the digital euro project and building further understanding. Analysis shows that while, at first, interest in a digital euro was greatest among younger generations of Europeans, awareness and understanding have now spread across all age groups.

2023 was also the year in which the ECB celebrated its 25th anniversary. On that occasion, the ECB organised an event attended by the top representatives of European Union institutions, the ECB’s host country, Germany, and other euro area countries, as well as by former ECB presidents, Jean-Claude Trichet and Mario Draghi. In addition, at the end of 2023 and start of 2024 the ECB, together with other EU institutions, jointly commemorated 25 years of the euro. These historical milestones allowed the ECB to highlight the success of the single currency, its benefits for the people of Europe as a beacon of stability around the world and a symbol of European unity.

Connecting with younger people through the “Stability is our thing” social media campaign

With a view to connecting with younger people in particular, in 2023 the ECB ran the “Stability is our thing” campaign on social media. This aimed to explain in an interactive and personal way core aspects about the ECB and its work: the price stability target, the role of banking supervision and how the ECB’s decisions affect everyday life. The campaign posts were seen 166 million times and reached 43 million young people.

There were more public access requests compared with 2022, including a marked increase for access to documents on institutional and governance topics

Public access to ECB documents is an integral component of the ECB’s transparency policy. It promotes the ECB's openness and enhances its democratic legitimacy.

In 2023 the ECB received more requests (73 requests) for access to documents compared with 2022 (63 requests). Whereas requests continued to cover a wide range of topics, including supervisory issues or high-profile initiatives like the digital euro project, there was a marked increase in requests for access to documents on institutional and governance topics, reflecting greater public interest in such matters.

In line with the ECB’s commitment to transparency, documents released in response to requests for public access were generally made available via the ECB’s Public Register of Documents. Moreover, with a view to enhancing transparency, the ECB prepared an overview of the topics covered in requests for access to documents received by the ECB since 2004.

No findings of maladministration were raised by the European Ombudsman regarding the ECB’s handling of public access requests.

The ECB’s initiatives to support transparency, openness and closeness to citizens were acknowledged through its nomination to the shortlist for the European Ombudsman’s Award for Good Administration 2023 for “helping EU citizens understand monetary policy in times of high inflation”.

11.4 Empowering our people to excel for Europe

In the context of the gradual return to the office from 2022 onwards, the ECB focused on policies and programmes to support work-life balance, staff development and organisational resilience. A new teleworking policy was put in place in January 2023 that supports flexibility for staff and trainees. In 2023 the new virtual learning platform, EUREKA, was made available to institutions across the European System of Central Banks and Single Supervisory Mechanism, providing even more access to learning and mobility opportunities. In line with its objective of establishing a culture of lived inclusion, the ECB appointed a mediator and an HR diversity and inclusion adviser.

Working culture

The ECB launched its new teleworking policy

Following a transition phase in 2022, a new teleworking policy took effect on 1 January 2023. Based on the overall positive experiences during the period of remote working, the new policy provides flexible teleworking options to staff. It allows all ECB staff and trainees to telework up to 110 days per year, subject to compatibility with business needs.

Figure 11.1

Teleworking by ECB staff in 2023

Source: ECB.
Note: Data as at January 2024.

Training was offered to cultivate an enduring culture of mutual respect

The ECB places value on listening to staff and conducted a pulse survey at the beginning of 2023. Survey results showed that staff remained engaged, committed and connected to the work of the ECB. However, there is still work to be done to strengthen working culture. As a follow-up to the survey, the Executive Board championed an initiative to promote an organisational culture in which employees learn to respond effectively to inappropriate behaviour. Interactive workshops were introduced to help strengthen a “speak up” culture and how we all work together.

Talent development

ECB staff took advantage of opportunities for mobility

2023 was an important year for staff mobility in the ESCB and SSM. The ECB’s new learning platform, EUREKA, offered for the first time a centralised view of learning and mobility opportunities across other institutions in the ESCB and SSM. EUREKA promotes knowledge-sharing and collaboration, and is available to ECB staff as well as all ESCB and SSM staff. Under the fifth edition of the Schuman Programme launched in 2023, 41 projects were offered as secondment opportunities, allowing staff exchanges between the ECB, national competent authorities (NCAs) and national central banks (NCBs). The ECB also continued to exchange staff members with several NCAs and European institutions, as part of a dedicated SSM swap programme. By the end of 2023 nine swaps were in place with two NCAs (Banco de España, the French Prudential Supervision and Resolution Authority) and one agency (European Insurance and Occupational Pensions Authority).

The ECB continued to foster leadership and professional growth

The ECB continued its Leadership Growth Programme to develop leadership competencies and increase leadership effectiveness. Furthermore, it organised the last seven cohorts of the Women’s Leadership Programme, a successful programme launched in 2014 aimed at achieving a higher representation of women at the ECB. Another important development opportunity was offered in the form of the Mentoring Portal, which allows staff and trainees to offer mentoring and look for mentors. By the end of 2023 it had recorded nearly 100 mentor-mentee relationships.

Key initiatives were launched as part of the ESCB and SSM learning and development strategy

Further key initiatives were launched as part of the ESCB & SSM Learning & Development Strategy. NCAs and NCBs were onboarded to EUREKA, which provides access to a wide range of ESCB and SSM-wide learning and development opportunities. The flagship Central Banking & Banking Supervision Executive Education Programme was launched in October 2023. Two successful “hackathons” took place in the course of the year with participants from across the ESCB and SSM. The first hackathon took place in February on the topic of decentralised finance and a second one on climate change was held at the ECB’s premises in November.

The ECB increased the traineeship grant

By offering a traineeship programme, the ECB promotes European integration of young graduate students and gives them an opportunity to acquire practical experience and put into practice the knowledge they have acquired during their studies. At the same time, the ECB benefits from trainees’ knowledge of the current state of academic research as well as their enthusiasm and fresh ideas. As of 1 December 2023 the traineeship grant increased to €1,170 per month, and to €2,120 for PhD students having completed at least two years of their PhD studies for traineeship vacancies at that level. Trainees also receive accommodation benefits.

Diversity and inclusion

The ECB continued to foster diversity and inclusion

Mirroring European society and establishing a culture of lived inclusion is a long-term endeavour. To achieve this, the ECB strengthened its institutional basis by supporting its six grass roots diversity and inclusion (D&I) networks and rolling out its inclusion learning programme for staff, teams and leaders. To enable a culture based on inclusion, mutual respect and psychological safety, two new roles were created: as of 2023 the new Mediator prevents and addresses workplace frictions through assisted dialogue, and the new HR D&I Adviser applies a D&I lens to all people and culture topics.

Gender diversity and intersectionality were high on the agenda

Throughout 2023 the ECB kept gender diversity high on its agenda while embracing all facets of diversity and fostering an inclusive culture. This is reflected in EDGE Move & EDGEplus certification, the ECB’s progress on the 2020-2026 gender targets, the introduction of paid parental leave for the co-parent not giving birth, piloting of a traineeship for talent on the autism spectrum, awareness sessions and events on race and ethnicity, allyship, disability and LGBT+ inclusion.

The ECB continued targeted outreach and talent acquisition

Tapping into the best talent of Europe, the ECB joined several career fairs for underrepresented groups, for example Europe’s largest career fair for black and people of colour organised by ADAN (Afro Deutsches Akademiker Netzwerk), the Sticks & Stones careers fair for LGBTIQ+ talent and allies and the herCAREER fair for women’s career advancement. To attract applicants with disabilities, the ECB promoted its vacancies on the myAbility platform. Strengthening its female pipeline and being inclusive of different socioeconomic backgrounds, the ECB continued to offer its ECB Scholarship for Women. In addition, and in a continued show of solidarity and support, the ECB launched a scholarship for 15 Ukrainian students enrolled in a Master’s degree in Ukraine.

Figure 11.2

The ECB workforce in figures

1 Data as at 31 December 2023.
2 Including 56 participants in the Graduate Programme.
3 Employees seconded from a national central bank of the European System of Central Banks, European public institutions/agencies or international organisations.
4 Refers only to permanent staff members and staff with fixed-term positions.
5 Refers to any permanent or temporary horizontal move across divisions or business areas.
6 Refers to any permanent or temporary move to a higher salary band, with or without a recruitment.
7 Refers only to permanent staff members and staff with fixed-term convertible positions.
8 The table shows shares of ECB employees and trainees by nationality, i.e. staff members holding multiple nationalities are counted for each nationality they declare. Totals may exceed 100% due to rounding and double nationalities. The countries are listed using the alphabetical order of the country names in the respective national language.

11.5 Advancing work on environmental and climate-related challenges

Understanding the implications of climate change and the transition needs for the economy and financial sector is essential for the ECB to deliver on its mandate

Climate change is advancing, and the longer we wait to reduce our emissions and to transition to a greener economy, the higher the costs.[91],[92] Despite the progress made, the world is still not on track to limit the global temperature increase to 1.5°C above pre-industrial levels.[93] This means that the risks related to a changing climate and from an abrupt transition are growing, with impacts on monetary policy and the stability of the financial and banking systems. It is therefore essential for the ECB to understand the implications for the economy and financial sector to deliver on its mandate.

That is why the ECB, under the coordination of the climate change centre, continued to work on its climate agenda in cooperation with internal stakeholders and with the Eurosystem via relevant committees and dedicated fora on climate. In 2023 the ECB continued to integrate the objectives and environmental considerations of the European Climate Law into its strategy-setting, projects and policymaking processes.

The ECB published its climate and nature plan for 2024-2025

In the past year the ECB worked on its climate and nature plan for 2024-2025, which outlines the activities it will work on in order to achieve its strategic climate objectives. It also identified three focus areas for action: navigating the transition to a green economy, understanding the increased physical impact of climate change and advancing work on nature-related risks.

Highlights of climate-related work

Concrete advances were made on multiple fronts, covering a wide range of the ECB’s tasks (Figure 11.3).

In monetary policy implementation, the ECB published the first climate-related financial disclosures of the Eurosystem’s corporate sector holdings in March 2023. The carbon intensity of reinvestments decreased by more than 65% in the 12 months that followed the start of tilted reinvestments in October 2022. The Governing Council strengthened the tilting parameter in February, when it decided to reduce the Eurosystem’s holdings of securities. Since the discontinuation of reinvestments under the asset purchase programme in July, tilting continues for the corporate assets in the pandemic emergency purchase programme. The first review of the climate score methodology in October 2023 concluded that the framework had achieved its intended objectives and that its main building blocks would be maintained. The decarbonisation of corporate sector portfolios is expected to continue throughout 2024 on a path that supports the goals of the Paris Agreement. In addition, the Eurosystem continued preparatory work to incorporate climate considerations into its collateral framework and enhance its risk assessment and management.

Figure 11.3

Overview of key climate actions

Source: ECB.

The ECB explored the economic and financial impact of climate change and the implications for its tasks

Extensive analytical work supported the task of informing policymakers, the financial sector and the public about the economic and financial impact of climate change and its implications for the ECB’s tasks.[94] In 2023 the ECB continued to assess the macroeconomic implications of climate change and mitigation policies and, in particular, the impact of green fiscal measures on the Eurosystem/ECB staff projections. A model-based analysis on the economic impact of carbon pricing found modest adverse effects for the economy. Findings from the Survey on the Access to Finance of Enterprises and the Bank Lending Survey indicate that euro area firms are investing in the transition, and that bank lending conditions are tighter for firms with high emissions and no credible plans to transition. On the implications for monetary policy, recent analysis explored the effects of climate change on the monetary policy transmission mechanism and found that, while the transition increases the cost of credit and reduces lending to all firms, its contractionary effect is milder for firms with low emissions and those that commit to decarbonisation. Several research papers investigated the links between a changing climate and inflation, finding that hotter temperatures can increase food inflation, but that demand-side effects from hotter summers can dampen inflation in the longer run, and that the effects are asymmetric across euro area economies (see Box 1). The ECB also advanced its understanding of how climate change affects potential output.

In an effort to improve the availability of climate data, the European System of Central Banks published climate change-related indicators on sustainable finance, greenhouse gas emissions and physical risk (see Section 7.2).

The ECB is working on better understanding climate-related risks to the economy and financial systems, and developing an adequate macroprudential response

The ECB further developed its stress testing methodology to explore the resilience of the wider economy to different transition scenarios and the preparedness of supervised banks to deal with financial and economic shocks stemming from climate risk. In 2023 the ECB led the Network for Greening the Financial System (NGFS) workstream on scenario design and analysis, which published the fourth vintage of its long-term macro-financial climate scenarios. The scenarios provide an initial, common reference for analysing climate risks to the economy and financial system. The framework acknowledges the uncertainty and limitations of climate and economic modelling, for example with regards to tipping points. In collaboration with the European Insurance and Occupational Pensions Authority, the ECB developed policy options to reduce the climate insurance protection gap, given that only one-quarter of climate-related catastrophe losses in the EU are currently insured. The ECB also analysed climate change risks to sovereigns that can have a negative effect on financial stability and fiscal expenditures. The ECB and the European Systemic Risk Board published a report that gathers evidence on the most important financial stability indicators and develops a macroprudential framework for addressing climate risk. The report also suggests that heavy economic dependence on natural ecosystems could exacerbate climate-related financial stability risks.

With regard to ECB banking supervision, although the credit institutions supervised under the Single Supervisory Mechanism made meaningful progress in their climate and environmental-related risk management practices, a number of institutions did not achieve the progress expected for March 2023. The ECB will continue to closely monitor banks’ progress and, if needed, take enforcement actions.[95]

The ECB is working on improving the safety and sustainability of euro banknotes

Over the years the ECB has continuously improved the safety and sustainability of euro banknotes throughout the cash cycle.[96] In 2023 it published the environmental footprint study of euro banknotes as a payment instrument. The future euro banknotes are being developed in line with eco-design principles, meaning that environmental aspects are considered at all stages of the banknote development process (see Section 6.2).

The ECB is analysing and contributing to policy discussions to scale up sustainable finance at EU and international level

Since 2021 ECB staff members have contributed to training courses and multilateral technical workshops with central banking peers and stakeholders outside the European Union. It also participated in numerous working groups and events with central banks and other institutions and fora to advance the climate agenda and profit from regular exchanges. These include the NGFS, the Financial Stability Board, the Basel Committee on Banking Supervision, the European Supervisory Authorities and the European Systemic Risk Board, the Bank for International Settlements, the G7, G20 and the International Monetary Fund.

Innovative research by the ECB investigated nature-related risks, the climate-nature nexus and their impact on the economy

Innovative research on nature-related risks showed that degradation of ecosystems will pose challenges for companies and potentially propagate to banks, as almost 75% of corporate loans in the euro area (nearly €3.24 trillion) are issued to borrowers with a high level of dependency on ecosystem services. Additionally, the ECB explored for the first time transition risks and the climate-nature nexus. Taking into account climate change and land-use change as primary drivers of biodiversity loss, the impact of euro area companies on nature is equivalent to the loss of 582 million hectares of “pristine” habitats worldwide. The research highlights the importance of integrating climate change and nature loss in risk assessment frameworks, as they are inextricably linked.

Work is undergoing to improve the environmental performance of the ECB’s own operations and non-monetary policy portfolios

In March 2023 the ECB started publishing its annual climate-related financial disclosures of its non-monetary policy portfolios in addition to its annual environmental statement, which together give an overview of the ECB’s own operational environmental impacts and the carbon footprint of its financed emissions as well as the related targets.[97] Updated data on the ECB’s environmental performance in 2023 will be made available in the course of 2024.

Box 9
ECB keeping up with innovation

In 2023 the ECB continued to make progress on developing and implementing innovative solutions that enhance the efficiency of its processes. Digital solutions, including artificial intelligence (AI), machine learning, robots and chatbots have been deployed throughout the organisation.

On the central banking side, AI was deployed at the ECB to deepen understanding of price-setting behaviour and inflation dynamics in the European Union (EU). Web scraping and machine learning was applied to assemble a huge amount of real-time data on individual product prices.[98] On the banking supervision side, the SupTech programme initiated in 2019 has provided 14 tools that help supervisors collect and analyse large volumes of quantitative and qualitative data, automatise processes, better collaborate, and use AI to speed up and sharpen supervisory analysis.[99]

Deploying digital projects at the ECB relies on an innovation-friendly ecosystem. Beyond technological solutions, innovation requires a growth mindset, curiosity and close cooperation among all ECB stakeholders. For this purpose, interdisciplinary innovation teams involving IT, knowledge management, central banking and banking supervision have developed innovative approaches to working that facilitate project management, innovation scouting, incubation and knowledge-sharing. Part of this ecosystem, the ECB’s digital document system and information governance policy form a solid foundation for the development of AI by providing a vast resource of structured digitalised documentation. In addition, cooperation with global innovation leaders in public authorities, academia, start-ups and major industry players helps stimulate innovation within the ECB, the Eurosystem and beyond. In particular, the ECB coordinates the actions of the Eurosystem through the Eurosystem’s Innov8 Forum with the BIS Innovation Hub Eurosystem Centre. The latter is a joint venture of the Bank for International Settlements and all Eurosystem central banks. Offices in Frankfurt and Paris were opened in March 2023, hosted and supported by the Deutsche Bundesbank and Banque de France respectively. All members of the Eurosystem Innov8 Forum contribute and share knowledge in the innovation space.

Finally, innovation is strongly promoted by the Executive Board. In February 2023 Executive Board members participated for the first time in an Innovation Forum with a physical “market place-style” format and live and interactive demonstrations of a sample of major ECB innovation projects.

12 Meet our people

On 1 June 1998 the European Central Bank started operating as the central bank for the euro area with a clear mandate to maintain price stability. The ECB’s 25th anniversary in 2023 was an opportunity to celebrate the many achievements of the institution over this period. ECB colleagues who started off at the European Monetary Institute, the precursor to the ECB, and have continued to work for the institution right through to the present day share their personal experiences below. In particular, they describe what it was like to work at a new institution with a start-up feel and how they contributed to many important milestones as the ECB immediately established its place among its peers and evolved over time.

Rita Choudhury, Senior Team Lead Economist-Statistician, Directorate General Statistics

A person smiling at camera

Description automatically generated

My career pathway at the ECB has been remarkably formative. It began with a leap of faith, with a new job in a new country. I joined the ECB at its cusp, as a young Research Analyst in the still-developing Statistics Function. With just a few hundred employees, the ECB needed “all hands on deck”, so we juggled multiple roles. A typical day was diverse: I discussed requirements with policy areas, designed statistical frameworks, programmed code and drafted the occasional speech. With institutional policies still in their infancy, I was also thrilled to see my creative solutions often rapidly deployed.

As the ECB matured, avenues for professional growth opened up. I worked in several different areas within Statistics and was able to deepen my levels of expertise and seniority. Particularly memorable responsibilities included being lead for country visits to our counterpart national central banks and national competent authorities to foster relationships and advise on their reporting preparations as new members of the euro area.

I am now in the newly established Data Office, which aims to optimise institutional data management (including in areas like artificial intelligence) and reports to the Chief Data Officer. I also contribute to the Diversity and Inclusion Forum. These are transversal roles and it is satisfying to work with varied groups and to help shape and influence broader ECB policies.

There have been setbacks, for instance Brexit comes to mind, given the uncertainties it raised about working here but, ultimately, thanks to a dynamic environment, motivated colleagues and continued prospects for development, it is the triumphs that I recall the most.

Dimitrios Koukidis, Principal Vendor Management Specialist, Directorate General Communications

A person in a suit and tie

Description automatically generated

I have strong memories of the build up to the ceremony to mark the inauguration of the ECB in June 1998. I was one of a small team of organisers for this major event. There was great enthusiasm and a sense of camaraderie among the team. This was in the face of all the organisational challenges that go with setting up a new institution that would quickly have to find its feet. For several years afterwards, I enjoyed helping to organise both public and staff events at the ECB as the range and scale of events continued to expand and evolve.

Fast forward to today: I now work in the Language Services Division, after taking up an internal mobility opportunity in 2016. I look after budgeting, procurement and vendor management tasks related to translation and editing, ensuring adequate cover across the 24 official languages of the European Union. These support functions play a crucial role in assisting the ECB to communicate clearly and effectively to expert and non-expert audiences. As is the case across the ECB, we continue to embed the latest technologies. For example, together with my colleagues, I am applying artificial intelligence techniques to help enhance the efficiency of our processes.

Reflecting on this long and exciting journey, I am proud to have done my part in establishing the ECB as a world-class institution that keeps prices stable and the financial system safe for around 350 million people in the euro area. I am also grateful for having been empowered to grow professionally and personally throughout my career at the ECB.

Francesco Mazzaferro, Director, European Systemic Risk Board Secretariat

A person in a suit and tie

Description automatically generated

I can still picture myself as a junior officer, working in the “Changeover Committee”, which – under the auspices of Tommaso Padoa-Schioppa – oversaw the transition of markets from ten national currencies to the euro at midnight on 31 December 1998. On that day, the culmination of everything I had contributed since starting at the European Monetary Institute in mid-1995, I naively thought the work was done. I feared that I risked getting trapped in routine after years of passion. But the following decade I spent in the newly established Directorate General for European and International Relations was to prove me wrong. Thanks to the wider interest in our monetary integration, I was given the opportunity to set up innovative joint technical assistance programmes by the Eurosystem for the benefit of central banks and supervisors in the European Union neighbourhood.

Ten years later, when the ECB became host to the independent European Systemic Risk Board (ESRB) in the wake of the financial crisis, I had the chance to try something new. In early 2010 I was asked to be the project manager to establish the ESRB. A year later I was appointed Head of the ESRB Secretariat. Since then I have genuinely enjoyed every single day working to preserve the resilience of the financial sector in a broad institutional setting alongside the central banks and supervisors at European and national level as well as an exceptional group of colleagues from the ECB and the ESRB member institutions.

Emily Witt, Head of Division, Directorate General Market Operations

A person with blonde hair wearing a black jacket

Description automatically generated

When I joined the European Monetary Institute in 1995, I was among the first hundred colleagues tasked with the preparatory work for the introduction of the euro as the single currency for Europe. In 1998 I quickly learned how the ECB works together with the national central banks. I was thrilled to help coordinate the overall testing and to see that the newly established systems worked well, whether conducting monetary policy operations, executing payments or collecting statistics across Europe.

Encouraged by the ECB’s objective to foster internal mobility, I worked in six different business areas (Payments, IT, HR, Secretariat, Statistics and Markets). This allowed me to increase my knowledge of core aspects of central banking and hone my skills in project management, people management and leadership. I felt stimulated by the exposure to diverse perspectives and thinking styles and was also able to build lasting networks and friendships across Europe.

I am inspired by the ECB’s mission and proud to have contributed to the success of change management initiatives for the benefit of Europe. One such example is the roll-out of our document and records management system, which is key to sharing and distributing information efficiently among colleagues in the national central banks and safeguarding the ECB’s institutional memory.

I am now very happy to be responsible for the Financial Operations Services Division. I like being close to the markets and enjoy the mixture of daily operations and interesting projects that involves cooperating with many different ECB business areas, central banks and external partners. Just recently, we established fiscal and paying agency services for the European Commission.

In my free time, I love reading, cooking and hiking. I am an active member of the ECB’s hiking club, which is a great opportunity to meet colleagues outside of work and to get out into nature in different parts of Europe.

Annual Accounts


Consolidated balance sheet of the Eurosystem as at 31 December 2023


© European Central Bank, 2024

Postal address 60640 Frankfurt am Main, Germany
Telephone +49 69 1344 0
Website www.ecb.europa.eu

All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.

The cut-off date for the data included in this report was 22 March 2024 (exceptions are explicitly indicated).

For specific terminology please refer to the ECB glossary (available in English only).

PDF ISBN 978-92-899-6707-5, ISSN 1725-2865, doi:10.2866/368362, QB-AA-24-001-EN-N
HTML ISBN 978-92-899-6700-6, ISSN 1725-2865, doi:10.2866/646090, QB-AA-24-001-EN-Q

  1. The global economy as referred to in this section of the Annual Report excludes the euro area.

  2. The Eurosystem staff macroeconomic projections in December 2022 projected global growth to slow to 2.6% in 2023.

  3. The pre-pandemic average is measured over the period from 2012 to 2019.

  4. See the box entitled “Intangible assets of multinational enterprises in Ireland and their impact on euro area GDP”, Economic Bulletin, Issue 3, ECB, 2023.

  5. After the cut-off date for this report, official fiscal outcomes for 2023 were released which, in specific countries, point to significantly higher budget deficits than previously estimated.

  6. The fiscal stance reflects the direction and size of the stimulus from fiscal policies to the economy beyond the automatic reaction of public finances to the business cycle. For more details on this concept, see the article entitled “The euro area fiscal stance”, Economic Bulletin, Issue 4, ECB, 2016.

  7. In an opinion issued in July 2023, the ECB welcomed the European Commission’s reform proposals and offered some technical observations and suggestions to further enhance the new framework and ensure it will be more transparent and predictable. See Opinion of the European Central Bank of 5 July 2023 on a proposal for economic governance reform in the Union (CON/2023/20) (OJ C 290, 18.8.2023, p. 17).

  8. For more information on underlying inflation, see the box entitled “Underlying inflation measures: an analytical guide for the euro area”, Economic Bulletin, Issue 5, ECB, 2023.

  9. Wage drift measures deviations of developments in actual wages from developments in negotiated wages, reflecting changes in overtime, bonuses, tight labour markets and other factors.

  10. For more on consumer inflation perceptions and uncertainty, see the box entitled “A closer look at consumers’ inflation expectations – evidence from the ECB’s Consumer Expectations Survey”, Economic Bulletin, Issue 7, ECB, 2022. For recent results of the Consumer Expectations Survey on economic growth expectations, see “Economic growth and labour markets”, ECB, 2024. For more information on consumers’ perceptions of the relationship between inflation and economic conditions, see Candia, B., Coibion, O. and Gorodnichenko, Y., “Communication and the Beliefs of Economic Agents”, NBER Working Paper Series, No 27800, National Bureau of Economic Research, 2020.

  11. See “ECB presents action plan to include climate change considerations in its monetary policy strategy”, press release, ECB, 8 July 2021.

  12. See Kotz, M., Kuik, F., Lis, E. and Nickel, C., “The impact of global warming on inflation: averages, seasonality and extremes”, Working Paper Series, No 2821, ECB, May 2023.

  13. See Ciccarelli, M., Kuik, F. and Martínez Hernández, C., “The asymmetric effects of weather shocks on euro area inflation”, Working Paper Series, No 2798, ECB, March 2023.

  14. See the article entitled “How climate change affects potential output”, Economic Bulletin, Issue 6, ECB, 2023.

  15. See “The climate change challenge and fiscal instruments and policies in the EU”, Occasional Paper Series, No 315, ECB, revised June 2023.

  16. See Christophersen, C. et al., “What to do about Europe’s climate insurance gap”, The ECB Blog, ECB, 24 April 2023.

  17. See the box entitled “Climate-related policies in the Eurosystem/ECB staff macroeconomic projections for the euro area and the macroeconomic impact of green fiscal measures”, Economic Bulletin, Issue 1, ECB, 2023.

  18. See the article entitled “The macroeconomic implications of the transition to a low-carbon economy”, Economic Bulletin, Issue 5, ECB, 2023.

  19. These issues are explored in the climate scenarios published by the Network for Greening the Financial System, a group of 134 central banks and supervisors and 21 observers, to which the ECB and the European System of Central Banks actively contribute.

  20. See Benatti, N., Groiss, M., Kelly, P., Lopez-Garcia, P., “Environmental regulation and productivity growth in the euro area: testing the Porter hypothesis”, Working Paper Series, No 2820, ECB, May 2023.

  21. See Böning, J., Di Nino, V. and Folger, T., “Benefits and costs of the ETS in the EU, a lesson learned for the CBAM design”, Working Paper Series, No 2764, ECB, January 2023.

  22. Unit profits are calculated as gross operating surplus and mixed income divided by real GDP and include a correction for the income of the self-employed. A more encompassing indicator would set gross operating surplus and mixed income in relation to real output, which includes intermediate consumption in addition to GDP. However, real output is not available given a lack of information on intermediate consumption.

  23. The main conceptual differences between the GDP deflator and the HICPX result from the fact that the latter is based on the selling prices of goods and services consumed by households in the categories included whether they are produced domestically or imported, while the former captures the prices of the value added of all products produced by the domestic economy and does not include the contribution from intermediate consumption to final prices. See the box entitled “How have unit profits contributed to the recent strengthening of euro area domestic price pressures?”, Economic Bulletin, Issue 4, ECB, 2023.

  24. See Arce, O., Hahn, E. and Koester, G., “How tit-for-tat inflation can make everyone poorer”, The ECB Blog, ECB, 30 March 2023 and the box entitled “How have unit profits contributed to the recent strengthening of euro area domestic price pressures?”, Economic Bulletin, Issue 4, ECB, 2023.

  25. The waiver was granted at the inception of the PEPP and was in place until September 2023. In that month, the relevant credit rating was upgraded to investment grade level, and the waiver was consequently no longer needed.

  26. The total exceeds 100% as a result of rounding.

  27. The date of entry into force took into account the date of the TLTRO III operation which matured in June.

  28. The impact on collateral of terminating elements of ACC frameworks was especially considerable for Spain, France and Portugal.

  29. Guideline of the European Central Bank of 9 July 2014 on additional temporary measures relating to Eurosystem refinancing operations and eligibility of collateral and amending Guideline ECB/2007/9 (ECB/2014/31)(OJ L 240, 13.8.2014, p. 28).

  30. For an assessment of the financial and economic effects the upgrade to investment grade is expected to have on the Greek economy, see Anastasatou, M., Balfoussia, H., Bragoudakis, Z., Malliaropulos, D., Migiakis, P., Papageorgiou, D. and Petroulas, P., “Effects of a sovereign credit rating upgrade to investment grade on the Greek economy”, Economic Bulletin, No 58, Bank of Greece, 2023, pp. 7-28.

  31. See “The financial risk management of the Eurosystem’s monetary policy operations”, ECB, July 2015.

  32. See the explainer “Profits and losses of the ECB and the euro area national central banks: where do they come from?”, ECB, updated on 19 May 2023.

  33. Only 25% of climate-related catastrophe losses are currently insured in the EU. For further details, see “Policy options to reduce the climate insurance protection gap”, Discussion Paper, ECB and the European Insurance and Occupational Pensions Authority, April 2023.

  34. By the end of 2023 seven countries had introduced or announced a sectoral systemic risk buffer to address risks in the residential real estate sector (Belgium, Germany, Lithuania, Malta, Portugal and Slovenia) and the corporate sector (France).

  35. See “Governing Council statement on macroprudential policies”, ECB, December 2022. In addition, in line with the new floor, higher O-SII buffers became applicable for banks in three countries from 1 January 2024 (Greece, Spain and Italy) and will become applicable in one more country from 1 January 2025 (Slovenia).

  36. See “Financial Stability Review”, ECB, May 2023 and “Financial Stability Review”, ECB, November 2023.

  37. See (i) Lithuania: Opinion of the European Central Bank of 4 April 2023 on the imposition of a temporary solidarity contribution (CON/2023/9); (ii) Italy: Opinion of the European Central Bank of 12 September 2023 on the imposition of an extraordinary tax on credit institutions (CON/2023/26); (iii) Slovenia: Opinion of the European Central Bank of 2 November 2023 on the imposition of a temporary tax on banks (CON/2023/35); (iv) Latvia: Opinion of the European Central Bank of 11 December 2023 on a temporary mortgage loan borrower protection fee payable by credit institutions (CON/2023/42); and (v) Netherlands: Opinion of the European Central Bank of 15 December 2023 on the imposition of a tax on credit institutions (CON/2023/45).

  38. The following countries had introduced or announced a positive neutral rate for the countercyclical buffer at the end of 2023: Ireland (1.5%), Cyprus (0.5%), Latvia (1%), Lithuania (1%), Netherlands (2%) and Slovenia (1%).

  39. See “Advancing macroprudential tools for cyber resilience”, ESRB, February 2023.

  40. See “Crypto-assets and decentralised finance”, ESRB, May 2023.

  41. See “NBFI Monitor”, ESRB, June 2023.

  42. See “Issues note on policy options to address risks in corporate debt and real estate investment funds from a financial stability perspective”, ESRB, September 2023.

  43. See “ESRB issues a recommendation on vulnerabilities in the commercial real estate sector in the European Economic Area”, press release, ESRB, 25 January 2023.

  44. See “Towards macroprudential frameworks for managing climate risk”, ECB and ESRB, December 2023.

  45. See “Powers, ability and willingness to act – the mainstay of effective banking supervision”, speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at House of the Euro, Brussels, 7 December 2023.

  46. Using its power to impose sanctions on supervised credit institutions, the ECB sanctioned Landesbank Hessen-Thüringen Girozentrale and Goldman Sachs Bank Europe for misreporting capital needs, in February 2023 and May 2023 respectively. In August 2023 it sanctioned de Volksbank for miscalculating capital needs.

  47. Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, p. 1).

  48. Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

  49. For a more detailed assessment of the EU banking package and the ECB’s stance, see “Strong rules, strong banks – the banking package”, Annual Report 2022, ECB, May 2023.

  50. See Opinion of the European Central Bank of 6 June 2023 on a proposal for a directive on corporate sustainability due diligence (CON/2023/15) (OJ C, 249, 14.7.2023, p. 3) and Opinion of the European Central Bank of 4 October 2023 on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities (CON/2023/30) (OJ C, C/2023/1354, 01.12.2023).

  51. See Opinion of the European Central Bank of 5 July 2023 on amendments to the Union crisis management and deposit insurance framework (CON/2023/19) (OJ C 307, 31.8.2023, p.19).

  52. Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937 (OJ L 150, 9.6.2023, p.40).

  53. See (i) Opinion of the European Central Bank of 16 February 2022 on a proposal for a regulation establishing the Authority for Anti-Money Laundering and Countering the Financing of Terrorism (CON/2022/4) (OJ C 210, 25.5.2022, p. 5); (ii) Opinion of the European Central Bank of 16 February 2022 on a proposal for a directive and a regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (CON/2022/5) (OJ C 210, 25.5.2022, p.15); and (iii) Opinion of the European Central Bank of 30 November 2021 on a proposal for a regulation to extend traceability requirements to transfers of crypto-assets (CON/2021/37) (OJ C 68, 9.2.2022, p.2).

  54. See Panetta, F., “Europe needs to think bigger to build its capital markets union”, The ECB Blog, ECB, 30 August 2023; “A Kantian shift for the capital markets union”, speech by Christine Lagarde, President of the ECB, at the European Banking Congress, Frankfurt am Main, 17 November 2023; and “Banking Union and Capital Markets Union: high time to move on”, speech by Luis de Guindos, Vice-President of the ECB, at the Annual Joint Conference of the European Commission and the European Central Bank on European Financial Integration, Brussels, 7 June 2023.

  55. See Chapter 4 for further details on the European Market Infrastructure Regulation.

  56. See “Non-banks’ liquidity preparedness and leverage: insights and policy implications from recent stress events”, Financial Stability Review, ECB, May 2023; and “The growing role of investment funds in euro area real estate markets: risks and policy considerations”, Macroprudential Bulletin, ECB, 3 April 2023.

  57. See “The Financial Stability Implications of Leverage in Non-Bank Financial Intermediation”, FSB, 6 September 2023; and “Enhancing the Resilience of Non-Bank Financial Intermediation, Progress Report, FSB, 6 September 2023.

  58. See “Revised Policy Recommendations to Address Structural Vulnerabilities from Liquidity Mismatch in Open-Ended Funds”, FSB, 20 December 2023, and “The growing role of investment funds in euro area real estate markets: risks and policy considerations”, Macroprudential Bulletin, No 20, ECB, April 2023.

  59. For more information, see the focus group findings in the “Study on New Digital Payment Methods”, March 2022 and the “Study on Digital Wallet Features”, March 2023 undertaken as part of the digital euro project.

  60. In accordance with Article 141(2) of the Treaty on the Functioning of the European Union (OJ C 326, 26.10.2012), p. 47, Articles 17, 21.2, 43.1 and 46.1 of the Statute of the ESCB, and Article 9 of Council Regulation (EC) No 332/2002 of 18 February 2002 establishing a facility providing medium-term financial assistance for Member States’ balances of payments (OJ L 53, 23.2.2002, p. 1).

  61. In accordance with Articles 122(2) and 132(1) of the Treaty on the Functioning of the European Union, Articles 17 and 21 of the Statute of the ESCB, and Article 8 of Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial stabilisation mechanism (OJ L 118, 12.5.2010, p. 1).

  62. In accordance with Articles 17 and 21 of the Statute of the ESCB in conjunction with Article 10 of Council Regulation (EU) No 2020/672 of 19 May 2020 on the establishment of a European instrument for temporary support to mitigate unemployment risks in an emergency (SURE) following the COVID-19 outbreak (OJ L 159, 20.5.2020, p. 1).

  63. In accordance with Articles 17 and 21 of the Statute of the ESCB in conjunction with Regulation (EU) No 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

  64. In accordance with Articles 17 and 21 of the Statute of the ESCB in conjunction with Regulation (EU) 2022/2463 of the European Parliament and of the Council of 14 December 2022 establishing an instrument for providing support to Ukraine for 2023 (macro-financial assistance +) (OJ L 322, 16.12.2022, p. 1).

  65. In accordance with Articles 17 and 21 of the Statute of the ESCB in conjunction with Article 3.5 of the EFSF Framework Agreement.

  66. In accordance with Articles 17 and 21 of the Statute of the ESCB in conjunction with Article 5.12.1 of the ESM General Terms for Financial Assistance Facility Agreements.

  67. In the context of the loan facility agreement between the Member States whose currency is the euro (other than Germany and Greece) and Kreditanstalt für Wiederaufbau (acting in the public interest, subject to the instructions of and with the benefit of the guarantee of the Federal Republic of Germany) as lenders and the Hellenic Republic as borrower and the Bank of Greece as agent to the borrower, and pursuant to Articles 17 and 21.2 of the Statute of the ESCB and Article 2 of Decision of the European Central Bank of 10 May 2010 concerning the management of pooled bilateral loans for the benefit of the Hellenic Republic and amending Decision ECB/2007/7 (ECB/2010/4) (OJ L 119, 13.5.2010, p. 24).

  68. See Pallotti, F., Paz-Pardo, G. Slacalek, J., Tristani, O. and Violante, G. L., “Who Bears the Costs of Inflation? Euro Area Households and the 2021-2022 Shock”, Working Paper Series, No 2877, ECB, 2023.

  69. See Ehrmann, M., Georgarakos, D. and Kenny, G., “Credibility gains from communicating with the public: evidence from the ECB’s new monetary policy strategy”, Working Paper Series, No 2785, ECB, February 2023.

  70. See Giannetti, M., Jasova, M., Loumioti, M. and Mendicino, C., “Glossy green banks: the disconnect between environmental disclosures and lending activities”, Working Paper Series, No 2882, ECB, 2023.

  71. See Nakov, A. and Thomas, C., “Climate-conscious monetary policy”, Working Paper Series, No 2845, ECB, 2023.

  72. See Bustamante, M. C. and Zucchi, F., “Carbon trade-offs: how firms respond to emission controls”, Research Bulletin, No 109, ECB, 17 July 2023.

  73. See also Karadi, P. and Nakov, A., “Effectiveness and addictiveness of quantitative easing”. Journal of Monetary Economics, Vol. 117, 2021, pp. 1096-1117, and Van der Ghote, A., “Interactions and Coordination between Monetary and Macroprudential Policies”, American Economic Journal: Macroeconomics, Vol. 13(1), 2021, pp. 1-34.

  74. See also Chavleishvili, S. and Manganelli, S., “Forecasting and stress testing with quantile vector autoregression”, Journal of Applied Econometrics, forthcoming, and Chavleishvili, S., Kremer, M. and Lund-Thomsen, F., “Quantifying financial stability trade-offs for monetary policy: a quantile VAR approach”, Working Paper Series, No 2833, ECB, 2023.

  75. Case C-262/22 P, EU:C:2023:714.

  76. Case T-868/16, EU:T:2022:58.

  77. Case C-803/21 P.

  78. The ECB also kept the ECON Committee informed of the developments in the digital euro project via four written letters from Mr Panetta to the ECON Chair.

  79. The ECB has observer status at the IMF, with a permanent ECB representative at the IMF headquarters in Washington, D. C. The ECB observer participates in selected IMF Executive Board meetings.

  80. Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account, and reviewed at regular intervals.

  81. These adjustments included temporarily increasing access limits (under both the General Resources Account and Poverty Reduction and Growth Trust) and introducing a new Framework for Upper Credit Tranche Financing in situations of exceptionally high uncertainty.

  82. Two subsequent programme reviews were concluded in July and December 2023.

  83. Article 3(3) of the Treaty on European Union provides, inter alia, that the Union shall work for “the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.”

  84. See also European Parliament Resolution on the ECB’s Annual Report 2021 and the ECB’s feedback statement to this Resolution.

  85. Proportionality implies that the ECB’s actions must, first, be suitable for attaining the legitimate objectives of the action at issue and, second, must not go manifestly beyond what is necessary to achieve those objectives. For more information, see Case C-62/14, Peter Gauweiler and Others (EU:C:2015:400) and Case C-493/17, Heinrich Weiss and Others (EU:C:2018:1000).

  86. For more information, see Section 3.3 of the ECB’s monetary policy strategy overview.

  87. For more information on the Eurosystem’s climate-related tilting since October 2022, see Section 11.5.1.

  88. See the Occasional Papers that fed into the ECB’s strategy review.

  89. Coordinators of political groups in the Committee on Economic and Monetary Affairs (ECON Committee) in the European Parliament decide on two topics for each hearing with the ECB President which can be found on the ECON Committee’s website. These topics are addressed by the ECB President in the introductory remarks.

  90. Section 10.1 also outlines the ECB’s fulfilment of its duties as a public institution through its accountability framework and communication to the public.

  91. See “Faster green transition would benefit firms, households and banks, ECB economy-wide climate stress test finds”, press release, ECB, 6 September 2023.

  92. For more detailed information, see Intergovernmental Panel on Climate Change, “Climate Change 2023: Synthesis Report”, 2023 and World Meteorological Organization, “The Global Climate 2011-2020: A Decade of Acceleration”, 5 December 2023.

  93. See the United Nations Environment Programme, “Emissions Gap Report 2023” for more details on the estimate that global warming under current unconditional Nationally Determined Contributions will reach 2.9°C above pre-industrial levels this century.

  94. See the list of ECB publications on climate change. In addition, some ECB research papers were published in major academic journals.

  95. More detailed information can be found on the ECB’s banking supervision website and in the 2023 ECB Annual Report on supervisory activities.

  96. For more information see the ECB web page on “The Eurosystem cash strategy” and the ECB’s environmental statements.

  97. Since 2010 the ECB has run a certified environmental management system to manage the environmental footprint of its own operations, which has recently led to significant gains in energy conservation.

  98. For more information, see the webpage of the Price-setting Microdata Analysis Network (PRISMA) and Moufakkir, M., “Careful embrace: AI and the ECB”, The ECB Blog, 28 September 2023.

  99. See “Technology, data and innovation – shaping the future of supervision”, keynote speech by Elizabeth McCaul, Member of the Supervisory Board of the ECB, at the Supervision Innovators Conference 2023, Frankfurt am Main, 20 September 2023 and “How tech is shaping banking supervision”, The ECB Podcast, 28 September 2023.