The European Central Bank is currently examining the potential usefulness of a digital euro for households and companies and will communicate in October 2023 whether such digital currency will be launched and, if yes, in which form. Next to establishing a permanent access to public money in a more digital world, the digital euro can contribute to a streamlining of existing private digital currencies and payment systems, a more resilient digital payment system, and the preservation of monetary independence. The digital euro can, however, negatively impact the banking system if bank deposits get substituted by digital euro holdings. Research shows that this substitutability leads to an expected decline in profitability of banks which rely relatively much on bank deposits as their funding source. This negative effect can, however, be attenuated by limiting the quantity of digital euros. Moreover, an adequate determination of the supply of digital euros can limit the negative consequences on the banking sector to such extent that the introduction of a digital euro can offer welfare gains.
When facing strong and persistent imported energy price shock, the Belgian economy is weakened by two structural features. First, the transmission of wholesale energy prices to the consumer is quicker and stronger than in the rest of the euro area, as measured by the energy subcomponent of the HICP. Second, Belgium is one of the three small economies of the euro area indexing automatically wages to price inflation. The latter characteristic is supposed to shield (at least partially) workers from the more pronounced loss in purchasing power induced by the first one. However, this is at the cost of a loss of competitiveness. We propose to disentangle the respective effects of each of these Belgian particularities by using a macroeconomic modelling of the Belgian economy within the euro area and proceeding to counterfactual analysis.
The Belgian housing market continued to perform well in recent years despite successive crises. Nevertheless, a weakening of buying and construction activity has been noticeable in recent quarters. This takes place against the backdrop of rising interest rates and is accompanied by lower annual house price growth dynamics. Together with strong nominal income growth among households (a consequence of high inflation, automatic indexation, and robust job creation), the less exuberant house price dynamics put downward pressure on the overvaluation of the Belgian housing market. This was offset by upward pressure due to the rise in interest rates. On balance, the overvaluation, approached from an econometric model, remained between roughly 10-15%. The household debt ratio continued to rise in recent years, although that trend seems to have reversed recently. The headwinds in the housing market will likely result in a further deceleration in the nominal price growth rate in 2023-2024. Given still relatively high general inflation, that implies a house price decline in real terms.
After several years of strongly rising prices, the Belgian housing market cooled in 2022. The indicators for the second half of the year pointed to a decline in the number of transactions and zero growth in house prices. That being said, a sharp decline in house prices currently appears unlikely. This is because the negative impact of higher interest rates is being offset by an array of factors, including the longer terms of new mortgage loans, higher down payments, rising nominal incomes, falling energy prices and a slowdown in housing supply growth. Finally, the repayment burden for new mortgage loans has risen strongly in recent years but declined markedly for existing fixed-rate mortgages thanks to strong income growth.
2022 was a year of surprises, not only for investors but also for economists and politicians. The war in Ukraine unleashed hyperinflation, resulting in rising interest rates. These rising interest rates then caused a sharp drop in the stock- and bond market.
What will it be in 2023? Will it be a continuation of last year’s malaise, or will it clear up so that 2023 will be a good year? Sven Sterckx, member of the Board of Directors of Dierickx Leys Private Bank, provides insight into the bank’s vision of the coming year.
The ECB has published new climate-related indicators for the financial sector, in cooperation with the national central banks. These indicators provide information on the climate risks to which financial institutions are exposed, based on the corporate securities and loans in their portfolios. Indeed, the companies to which banks lend or whose securities they hold emit greenhouse gases and may face physical climate risks, such as flooding. In addition, the indicators estimate the share of green bonds in bank portfolios. In this blog, we explain why these climate-related indicators are important for the financial sector and society as a whole.
We provide a brief overview of the impact that the low‑carbon transition is expected to have on financial markets. First, we summarise the latest research on the pricing of transition risks by financial markets and survey the literature on the greenium of stocks and bonds. Second, we examine the most recent regulatory developments relating to green finance at the European and Belgian levels, and briefly discuss the characteristics of the most‑used standards for green bonds. Finally, we turn to developments on the green bond market in Belgium and three neighbouring countries (Germany, France and the Netherlands). In this regard, we shed light on the supply and demand for these instruments, focusing on the issuance of green bonds by governments, financial institutions, and non‑financial corporations, and the uptake of such bonds by various economic agents (households, non‑financial corporations, monetary institutions, pension funds, and others).
In response to the shifting global political, social and economic landscape and the emergence of new and more serious risks, insurers have been forced to re-examine their role in society and make essential choices. Now more than ever, insurers must play their role as a buffer and safety net that guards against uncertainty. At the same time, the strategic choices they make can help shape the future of society. Increasingly aware of this social responsibility, insurers will be strategically focusing on sustainability and long-term thinking and reaching out to the various government authorities to tackle major challenges in society together. This was the key takeaway from the joint presentation by Philippe Lallemand and Heidi Delobelle, CEO of Ethias and AG Insurance, respectively, at the Financial Forum in Liège on 1 December 2022.
The need to step up coordination around corporate taxation has returned to the forefront in recent years. The underlying article discusses the OECD approach to rethink the international corporate tax framework: the main elements of the two-pillar solution, the resulting tax revenue and other economic effects are discussed as well as some other -more general- reflections on its blueprint. All in all, the article argues that the two-pillar solution will effectively deliver what it was designed to do i.e., to reduce tax competition between countries, to reinstate the link between the place where taxes are paid and the place where value is created and to ensure that large multinationals pay their fair share of tax.
With its just-published ideas for reforming the European fiscal framework, the European Commission (EC) is taking a step in the right direction. Replacing almost all existing complex rules with a norm for spending that is directly impacted by policymakers represents a drastic simplification and sharpens the accountability of policymakers. Integrating fiscal policy, economic reform, investment plans, and, where applicable, macroeconomic stability into a single policy plan with a medium-term focus can enhance policy coordination. By including country-specific public debt reduction requirements in that multi-year plan, considering the sustainability risks of existing public debt, fiscal consolidation objectives and the strengthening of economic growth potential can, in principle, be reconciled. Thus, tricky issues in the current framework are remediated.
But the new way of working would also create new, complex, and sometimes politically charged discussions, with margin for discretionary decisions. The EC's role in the new policy framework is similar to its role in allocating NextGenerationEU support to member states. The EC consolidates and expands that role, inevitably further increasing its political character, with no proposals to strengthen its democratic legitimacy. There are also no proposals for a larger central budget (fiscal capacity) - a necessary cornerstone for a stable currency union. Thus, the EC’s ideas do not bring the missing link for a fully-fledged, stable currency union. They are a step in the right direction, but certainly not the final step.