Financial institutions

Investing in Europe’s green future: green investment needs, outlook and obstacles to funding the gap

01/08/2025 European Central Bank Central banks

The green transition of the EU economy will require substantial investment to 2030 and beyond. Estimates of green investment needs vary between institutions and are surrounded by high uncertainty, but they all point to a requirement for faster and more ambitious action. Green investment will need to be financed primarily by the private sector. While banks are expected to make a key contribution to funding the green transition, capital markets need to deepen further, especially to support innovation financing. Progress on the capital markets union would support the green transition.

The intersection between climate transition policies and geoeconomic fragmentation

01/08/2025 European Central Bank Central banks

Two phenomena are increasingly reshaping the world economy. One is the growing and well-documented importance of climate transition policies that differ across countries. The other is the stark rise of geoeconomic fragmentation (GEF) concerns. While differences in climate transition policies are not new, they could amplify GEF, which is a new, growing risk. Conceptually, GEF is a policy-driven reversal of global economic integration, guided by strategic considerations such as national security, sovereignty, autonomy, or economic rivalry.

What explains the high household saving rate in the euro area?

01/08/2025 European Central Bank Central banks

After rising during the pandemic, the household saving rate in the euro area fell back to its pre-pandemic average by mid-2022. Since then, it has risen again noticeably, in the wake of recent severe economic shocks. Empirical evidence suggests that rising real incomes and high real interest rates, together with negative real wealth effects, have pushed up household savings over the last two years. With these factors likely to persist for some time, the saving rate is expected to remain high in the near term, although it is likely to settle below its current level.

When banks hold back: credit and liquidity provision

01/07/2025 European Central Bank Central banks

Banks are reluctant to tap central bank backup liquidity facilities and use the borrowed funds for loans to the real economy. We show that excessively parsimonious borrowing and lending can arise in a stigma-free model where the banking sector has an incentive to overissue deposits. Banks don’t heed the central bank’s call for more credit to finance investment because they simply ignore the collective gains from stronger activity in their atomistic decisions. Central banks can address this market failure by disintermediating market-based finance.

When banks hold back: credit and liquidity provision

01/07/2025 European Central Bank Central banks

Banks are reluctant to tap central bank backup liquidity facilities and use the borrowed funds for loans to the real economy. We show that excessively parsimonious borrowing and lending can arise in a stigma-free model where the banking sector has an incentive to overissue deposits. Banks don’t heed the central bank’s call for more credit to finance investment because they simply ignore the collective gains from stronger activity in their atomistic decisions. Central banks can address this market failure by disintermediating market-based finance.

Equity financing in a banking crisis: evidence from private firms

01/07/2025 European Central Bank Central banks

To what extent can private firms’ external equity substitute for debt financing in a banking crisis? To answer this question, I use firm-level data and firm-bank linkages to estimate the causal effect of an imported lending cut from a large German bank on firms’ capital structure and real outcomes. The estimates imply that for every 1 euro reduction in debt, private firms in Germany received 0.27 euros of external equity.

Equity financing in a banking crisis: evidence from private firms

01/07/2025 European Central Bank Central banks

To what extent can private firms’ external equity substitute for debt financing in a banking crisis? To answer this question, I use firm-level data and firm-bank linkages to estimate the causal effect of an imported lending cut from a large German bank on firms’ capital structure and real outcomes. The estimates imply that for every 1 euro reduction in debt, private firms in Germany received 0.27 euros of external equity.

Four years into the Next Generation EU programme: an updated preliminary evaluation of its economic impact

01/07/2025 European Central Bank Central banks

NextGenerationEU (NGEU) is the largest ever programme of the EU and aims to support its economic recovery after the pandemic crisis and to modernise economies, with a focus on digital and green transformation. This article provides an updated description of the implementation effort as well as an assessment by ECB staff on the impact on the euro area economy. Based on a variety of models and scenarios, it is estimated that the public expenditures and structural reforms linked to NGEU will have a positive impact on euro area output, while the impact on inflation is expected to be muted.

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