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Achieving maximum long-term growth




Speech by Jean-Claude Trichet, President of the ECB at the Jackson Hole Economic Symposium Panel: Setting priorities for long-term growth

The title of our panel today is Setting Priorities for Long-Term Growth. Given all of our recent struggles to regain our reference growth paths, it may strike some as something of a luxury to think about the long run; central bankers and policy makers have had to devote unprecedented attention to higher-frequency economic developments. Many new lessons have been learned; many policy and institutional innovations have been introduced.
The recent financial crisis has produced a large and persistent downturn in our economies; a downturn, moreover, that threatens our long-run growth potential. It is therefore entirely natural that policy makers do not lose sight of the prerequisites for stable sustainable growth.
This is especially so for most of the advanced economies, including the euro area, characterized (as it has been in recent decades) by declining potential growth rates. In the face of any economic predicament, one should ask oneself two questions – what got us here, and what can get us out? In the wider case of sustainable growth for the euro area, what matters is a commitment to structural reforms and sound macroeconomic policies. In the case of the financial matters, a robust macro prudential and supervisory framework is key. I will address both these issues in my coming remarks.
Likewise, some may consider it unusual to solicit views on matters of long-run growth from the President of a central bank. After all, pick up just about any growth-theory textbook and you’ll find few references to inflation and fewer still to monetary policy. Monetary policy is fundamentally viewed as neutral over the long run.
And indeed, inflation is ultimately a monetary phenomenon. Growth, in turn, is ultimately a real one reflecting, in particular, technology, education and training, capital accumulation, institutional quality.
Nonetheless, monetary-policy institutions can play and have played a fundamental role in supporting long-run, sustainable growth. In many ways, I see a parallel between the theory and practise of monetary-policy making and the shaping of modern growth analysis which emphasises the role of sound/proper institutions.
That achieving high and sustainable growth matters, however, is easy to motivate. On the subject of growth differences across countries, Lucas (1988) memorably wrote: The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.

So let’s start to think: what does drive growth in the long run? In fact, growth theory – much like central banking – has come a long way. As everyone knows, Solow’s work in the late ’50s produced two startling insights. [1] First, that smooth factor substitutability could rid us of the Harrod-Domar boom-bust cycle. This, in fact, paved the way for a proper analysis of sustainable growth. [2] His second insight was that growth was driven not only by factor accumulation but also by technological progress.
Fundamentally, technological progress and innovation are, over the long run, the prime drivers of economic growth and also important reasons for differences in international economic performance, even though demographic differences are also very relevant. Higher growth rates of technical innovation raise output and can lower the non-inflationary rate of unemployment.
But what is technical change? Cracking open the Solovian black box of technical progress has taken us from theories of learning-by-doing, to the impact of R&D on product variety and quality. The latter theories being underpinned by Paul Romer’s reflection on the fact that ideas are fundamentally non rival. [3] This concept, by the way, was not really new. The famous letter of Thomas Jefferson to Isaac McPherson expressed it very clearly in 1813. [4] The bottom line in all of this is that knowledge spillover between open, dynamic economies could benefit everyone. Not surprisingly, these new developments in growth theory came replete with policy prescriptions.
A more recent but allied literature suggested the following: how close an economy is to the technological frontier and whether its institutions facilitate convergence to that frontier are vital considerations. [5] In effect, a laggard country gains by implementing (or jumping to) frontier technologies. [6] But an economy near the frontier – or with an appetite to define that frontier – should increasingly favour innovation over imitation.
Like many close to European policy [7], I find this an attractive framework. Indeed, following World War II, the European economies were remarkably catching up in productivity and technological terms and today are leaders in many fields, in particular as concerns the embedding of technological innovation in manufacturing processes. [8] Yet, there is still an enormous potential to tap, to reform our economies and boost their growth potential and job creation. [9]

Debates about the US versus the euro area have become common place in recent years. To my mind, though, such debates often fall short of a careful, nuanced analysis required. Some international comparisons are indeed informative and yield important insights. Others – given lack of harmonized data, data concept or data unit – are more suspect. The crisis, though, has taught us that growth is only meaningful if it is sustainable and balanced. Growth that is not sustainable but follows boom-bust cycles, carries enormous costs in terms of economic well-being. These costs go far beyond pure GDP numbers; the deepest of these costs is that they, in some cases, put a strain on the fabric of our societies. For that reason alone, sustainability is a key qualification to associate to growth. The second key term is the balance of growth, both in domestic and external terms. Domestically balanced growth implies a broadly acceptable distribution of economic well-being within societies in terms of income and wealth as well as the avoidance of misalignments especially of asset prices; and externally balanced implies the need to avoid excessive international disequilibria.
Since the introduction of the single currency in 1999, the euro area has experienced a per-capita growth rate that, at around 1% a year, is comparable to that in the United States (1.1%). This is the first fact that is often overlooked in international comparisons. In such comparisons, we often look at headline growth numbers; yet, demographics are very different. Adjusted for population growth, there has been virtually no difference between US and euro area growth over the first decade since the introduction of the single currency. The euro area, though, has created more jobs: 14 million compared with 8 million in the US. Further, over recent decades differences in country and state dispersion rates of growth and inflation in the euro area and US are remarkably similar. On employment, moreover, it will be interesting to compare our different evolutions in the coming years. What we all want to avoid is excessively volatile employment where human capital is all too easily lost and inequality deepens.
Table 1 shows a detailed comparison of the euro area with the US over recent decades. This makes the standard growth accounting of contributions into employment and labour productivity. Labour productivity itself can be further decomposed into changes in labour composition, Information and Communication technologies (ICT) and non-ICT usage per hour and (residual) TFP growth. The interest in the distinction between ICT and non-ICT reflects recent evidence that the ICT sector has been strongest where most growth has emerged across the world economy.
Looking over the contributions, we note a significant difference in labour productivity (1.7 for EU13 vs. 2.9 for US). The main drivers in this comparison of labour productivity are ICT capital services per hour (0.4 vs. 1.0) and, perhaps more significantly from our standpoint, economy-wide TFP (0.5 vs. 1.1). Although having said that, there turns out to be quite some heterogeneity among countries,
Moreover, see Table 2 analysing the sectoral decomposition of TFP growth. TFP in the production of goods is slightly larger in the euro area than in the US. Rather, the higher overall TFP growth in the US is driven by stronger TFP growth in services, in particular in distributive trade (0.2 vs 0.5). [10] Although, in passing, we should remember that productivity and technical improvements in Services are plagued by measurement difficulties.
But of course TFP numbers always represent a rough metric. [11] The TFP residual will be contaminated by measurement errors, erroneous assumptions about market structure, or the nature and existence of the aggregative production function. The residual will also be a catch-all of neglected factor utilization, factor quality improvements over time, statistical complications associated in calculating factor rewards (appropriate tax and depreciation allowance for capital income etc).
But the wider perspective is: (1) the services and distributive sector is now a dominant and growing part of the euro area economy’s output (around 60%) and employment share; (2) the Service sector typically more regulated and thus less flexible to changes and open to innovation [12] although certainly recently there has been progress in the deregulation of network industries and progress through the new Services directive; (3) evidence is mixed but the Service sector in general is often thought to have inherently lower productivity and employment generation mechanisms relative to the more open manufacturing sector.

III. Diversity within the United States and the euro area
Allow me, next, to take a closer look at the developments both across US states and euro area Member States.
For the euro area it is very common to look at the level of its constituent countries and focus on the diversity among individual states, because a number of economic policy choices that affect productivity are national.
For the US, this exercise is rarely done. It is often conjectured that relevant policies are federal, and therefore by definition uniform at the level of the federation; and that, as a consequence, differences at the state level play much less a role. In essence, it is therefore often assumed that the US economy would be significantly more homogeneous than the economy of the euro area.
Looking more closely at the regional dispersion across US regions and euro area economies does not confirm this. In fact, the dispersion of many of the key indicators is surprisingly similar.
Let me share with you some findings from our analysis that we started some months ago and begin with inflation. [13] Before the crisis, the dispersion of HICP inflation in euro area countries had remained broadly stable since the late 1990s, at a level similar to the 14 US Metropolitan Statistical Areas. [14] During the crisis we saw a temporary increase in inflation dispersion in the euro area but this has been reversed over the past 12 months. (Chart 1.)
The picture is similar for the dispersion of GDP growth. Before the crisis the dispersion of growth rates was around 2%, in both the euro area and the United States. Dispersion rose somewhat during the crisis in both currency areas but remained broadly in line with pre-crisis patterns overall. [15] (Chart 2.)
Going one step further, investigation of the sources of this growth dispersion in the US and euro area economies reveals parallels even in the root causes of dispersion in economic performance and productivity. On the one hand, both currency areas comprise regions that experienced a significant boom and bust cycle over the past decade. On the other hand, both also contain regions that are facing significant structural challenges of a more long-term nature.
In the United States, for example, Nevada, Arizona, Florida and California experienced increases in house prices that outpaced the national average by a wide margin. The steep house price increases accompanied above average growth in these states. This could probably be explained, at least in part, by the impulse that these states received from the housing-related sectors such as construction, which saw its share in terms of value added increase at the national level during the years of the housing boom. In the crisis, the sharp fall in house prices in Florida and the south-western US states turned boom into bust. These states experienced the harshest recession among the US states. [16]
Similarly, in the euro area some countries experienced asymmetric boom-and-bust cycles. Several euro area countries had higher than average growth in the pre-crisis years. In Ireland and Spain particularly, strong growth was accompanied by strong increases in housing prices.
At the same time, other US states, particularly the former manufacturing powerhouses in the “Great Lakes” region, have seen a long episode of below average growth. Below average performance of the region – and particularly weaker growth rates in the states of Michigan and Ohio – are related to strong reliance on manufacturing. Structural shifts in the US economy towards services have gradually reduced the value added of manufacturing relative to GDP, with implications for areas with a high concentration of companies in manufacturing industries other than information and communications technology. During the crisis, GDP growth in the ”Great Lakes” region, which was below average before the crisis, remained below average.
Similarly, other countries in Europe – Portugal, for example – have experienced growth persistently below the euro area average for the past decade due to structural rigidities that are now being addressed.
Just a few years ago, the low-growth group of countries included Germany – labelled the “sick man of Europe” at that time. Yet Germany is now an example of how big the dividends of reform can be if structural adjustment is made a strategic priority and implemented with sufficient patience.
The effect of the crisis on the different euro area economies follows a similar pattern to those of comparable US states. The countries in the euro area that have been hit hardest are those in which either large asset-bubble driven imbalances unwound or structural problems were left unaddressed before the crisis. Those countries that have yet to implement more far reaching structural reforms also have relatively low growth prospects after the crisis. These relatively low growth rates are linked to a deterioration of competitiveness, driven, for example, by persistent above average unit labour costs.
Precisely as regards the evolution of unit labour costs, that are so important for growth, dispersion both ahead of the crisis and during the crisis was quite similar in the euro area and the United States. (Chart 3.)
At the same time, it is worth noting that both currency areas include regions with persistently above or below average unit labour cost growth. Again leaving aside the countries to join the euro area most recently, here, Greece, Portugal and Ireland, in particular, had progressively lost competitiveness vis-à-vis their main trading partners in the euro area. They are now engaging in catching-up, adjustment strategies. Germany, which had lost competitiveness in the reunification process, by contrast, has been able to restore this competitiveness over the same period of time. (Chart 4.)
Similar persistent losses and gains in unit labour costs are also observed in the United States. Taking a look at the upper and lower bound of the spectrum of US states over the same period as the euro area reveals that some states have experienced large or persistent increases in unit labour costs, currently exceeding the national average by as much as 20%. Other states have been improving their labour cost competitiveness vis-à-vis the national average over the past decade. (Charts 5,6 and 7.) In summary, there are strong indications that economic diversity in the euro area and the United States has not been significantly very different over the past 12 years.
The observation that very large, continental economies of the size of the US or of Europe are probably necessarily diverse should not be reason for complacency. The fact that advanced economies of the size of more than 300 million people have a tendency to be significantly diverse calls for a solid economic governance framework and explains why the ECB Governing Council has been so vocal in this ground since the inception of the euro area.
And this inherent diversity of advanced economies of large size is an additional reason to resolutely engage in the structural reforms that would permit to accelerate the completion of the European single market in all sectors, and to enhance the growth potential of each individual European economy and of the euro area as a whole.

IV. Setting Priorities for Long-Run Growth
Let us get back to our central theme – Setting Priorities for Long-Run Growth. Let me make some suggestions – three to be precise. A first, and overwhelming, priority – notably for the euro area – is the vigorous implementation of structural reforms . A second, but by no means unrelated priority, is the continued attention to external and internal imbalances . A final priority is greater flexibility on the part of policy institutions. Let’s take them one by one, with a particular emphasis on the euro area.
First, structural reforms. We earlier noted the primacy of institutions in modern growth theory. Sound institutions are essential to encourage a flexible, cutting-edge, knowledge-based economy. There is substantial evidence from industry-level studies on regulation as well from firm-level studies on the dynamics of firm performance that confirm the need for such a conducive environment to generate productivity growth. [17]
Douglas North defined institutions as … the rules of the game in a society … the humanly devised constraints that shape human interaction. [18] And being “humanly devised constraints” (rather than exogenous geographical or climactic constraints), their major impact was through the setting of incentives. [19]
And one can see the remaining challenges for many advanced economies as follows:
•    Employment regulation needs to help more proactively outsiders, low-skilled, young and older workers.
•    In Europe, the single market needs to be advanced especially in the area of services. [20]
•    Tax, benefit and pensions systems should not discourage labour participation and create weak incentives for investment and innovation.
•    The distribution of wealth and general economic well-being needs to ensure some acceptable social balance.
Several remedial policy proposals have been suggested and implemented in the recent past. The most well known is the European Council’s Lisbon Strategy for Growth and Jobs, followed by the Europe 2020 Strategy. [21] The latter is the Agenda that the European Union and its Member States have decided to help Europe recover from the crisis and come out stronger, both internally and at the international level. [22] The Agenda sets targets for the European Union in 2020 in terms of employment, research and development, energy and education.
The Agenda puts particular emphasis on structural reforms in the labour and services markets. These two markets are still over-regulated and not directly subject, given their largely non-tradable dimension, to the competitive forces originating from within and outside the single markets. [23] At the EU-level, the necessity and shape of structural reforms is acknowledged, but the gap between awareness and implementation is far from closed.
That said, we would do well to understand why political systems abide distortionary, inefficient structures and resist more efficient alternatives. Do structural reforms imply a J-curve of long-run gain but short run pain that sits ill with the decision making process in our democracies? Do vested interests strategically and systematically block change?
A second priority is vigilance against imbalances. I spoke at the last Jackson Hole symposium of the risks of chronic global imbalances and costs involved in unravelling the excessive private leverage, unsustainable fiscal and trade positions. Establishing more reasonable borrowing, restructuring and strengthening the balance sheets of firms, households and governments in an orderly manner remain key to smooth and continuous global growth. In all this, central banks are not immune. Tensions in financial markets and severe global imbalances deepen uncertainty and, therefore, profoundly challenge monetary-policy setting.
Precisely these dangers underpin the Mutual Assessment Process of the G20 framework. The indicative indicators – agreed in February this year – identify imbalances in public, private and external positions as the key culprits preventing balanced global growth, and a key input in shaping corrective policies. Seen in that light, a country’s economic success should be judged also on these indicators and not only on its last few years’ growth figures.
However, another imbalance – which has gained currency following the financial turbulence – is income imbalances. Naturally, extremes of income inequality and restricted opportunity challenge our values and strain the fabric of our societies.
In short, growth skewed towards the few (or absent for a large minority) risks social tensions, undermines institutions and encourages policy failures of one kind or another. Structural reforms, particularly in the form of re-training, improving job matching, providing flexibility and incentive for job creation and innovation remain the best policy options for encouraging well-balanced growth, and an environment of low and credible inflation the best environment to encourage matters from a central-banking perspective.
Finally, a priority for medium and long-run growth is that our policy institutions remain attuned to an ever-changing landscape. We have seen in recent years the near-Knightian uncertainty policy makers endured and how boldly they responded. The ECB was among the first central banks to react to the outbreak of the financial turmoil in August 2007 in providing liquidity to distressed institutions. Another example of flexibility by ourselves and in the wider central banking community is in the swap agreements with other central banks as an example of internationally co-ordinated means of swiftly responding to the crisis.
Since then, we acted with what I have previously (here in Jackson Hole) called ‘credible alertness’. [24] This includes implementing both non-standard monetary policies and our interest rate policy. Interest rate policy depends on the outlook for price stability. The use of non-standard measures depends on the functioning of the monetary policy transmission and must be commensurate with the level of malfunctioning or disruption of money and financial markets and segments of markets. Our non-standard measures do not in any way impinge upon our capacity to design our monetary policy stance to deliver price stability in the medium term.
Despite all the ups and down of recent years, our key challenge remains as it has always been: to create strong, sustainable, balanced, non-inflationary growth. Credibility and the medium-term orientation in monetary policy allows, where needed, scope and flexibility to address various types of severe shocks. Over the long-term a commitment to price stability anchors expectations, improves the workings of the price mechanism, reduces transaction costs, protects savers and reduces uncertainty. This is what I meant at the outset when I said that the theory and practice of monetary policy making paralleled developments in growth theory – namely, both are now seen to hinge on institutional quality.

Let me conclude. Ultimately growth is driven by technical progress. This is especially important where there are limiting demographic factors. In the euro area, there is ample of scope to realize efficiency gains from existing and prospective technological changes given structural reforms and more vigilant implementation of the existing policy agenda. The remarkable resilience of the German labour market in the last few years [25], where wage moderation and flexible time accounting shielded the economy from excessive job destruction, illustrates admirably the promise of well-structured reforms.
Although there have been improvements in the euro area in recent years, there is still evidence of regulatory and market-based barriers to entry in selected professions which have to be actively corrected.
Structural reforms – re-training, improving job matching, providing flexibility and incentives for job creation and innovation – remain the best policy options for encouraging well-balanced growth, and an environment of low and credible inflation the best environment to encourage matters from a central-banking perspective.
Likewise, alertness against savings and trade imbalances across the global economy is a fundamental concern. Such imbalances – if unchecked or conveniently rationalized away – make our entire, inter-connected economies more fragile and more risk prone. We have seen how rapidly negative financial impulses can transmit through the global economy and pull down economic activity. Alertness means alertness. I have learned whilst discussing global imbalances and financial transmission channels – much of it done here at Jackson Hole – that appropriate improvements in regulation and multilateral surveillance frameworks can yield large gains. We should work hard to maintain momentum.
Acemoglu, D., P. Aghion and F. Zilibotti (2006) Distance to Frontier, Selection, and Economic Growth, Journal of the European Economic Association, 4(1), 37-74.
Arpaia, A. and G. Mourre (2011) Institutions and performance in European labour markets: Taking a fresh look at evidence, Journal of Economic Surveys, forthcoming.
Bayoumi, T., D. Laxton, and P. Pesenti (2004) Benefits and Spillovers of Greater Competition in Europe: A Macroeconomic Assessment. Working Paper 341 (Frankfurt: European Central Bank)
Boysen-Hogrefe, J. and D. Groll (2011) The German Labour Market Miracle, National Institute Economic Review, 214 (1): R38-R50
Burda, M. C. and J. Hunt (2011) What Explains the German Labor Market Miracle in the Great Recession?, NBER Working Paper No. 17187
Crafts, N. (2008) What Creates Multi-Factor Productivity? Paper for the joint ECB, Banque de France and The Conference Board conference “The Creation of Economic and Corporate Wealth in a Dynamic Economy”, Frankfurt, January 2008. Available at
Ebbinghaus, B. and W. Eichhorst (2006) Employment Regulation and Labor Market Policy in Germany, 1991-2005. IZA Discussion Paper 2505, December.
European Central Bank (2006) Competition, Productivity and Prices in the euro area services sector. Task Force of the Monetary Policy Committee of the European System of central Banks. Occasional paper, No. 44.
European Commission (2002) Better Functioning Labor and Product Markets. In European Economy 6/2000, Chapter 3, Brussels: European Commission.
European Commission (2005a) Working for Growth and Jobs: Next Steps in Implementing the Revised Lisbon Strategy. Commission Staff Working Paper 622/2.
European Commission (2005b) Working together for Growth and Jobs. A new start for the Lisbon Strategy. Communication to the Spring European Council.
European Commission (2010) Europe 2020: A European Strategy for Smart, Sustainable and Inclusive Growth. Communication from the Commission to the European Council, arch.
European Council (2010) European Council 17 June 2010 Conclusions, June.
Gerschenkron, A. (1962) Economic backwardness in historical perspective, Belknap Press of Harvard University Press.
Gomes, S., P. Jacquinot, M. Mohr and M. Pisani (2011) Structural reforms and macroeconomic performance in the euro area countries: a model-based assessment, Working Paper 1323 (Frankfurt: European Central Bank)
Gómez-Salvador, R., A. Musso, M. Stocker and J. Turunen (2006) Labour productivity developments in the euro area, Occasional Paper No. 53, European Central Bank.
International Monetary Fund (2004) World Economic Outlook: Advancing Structural Reforms. Washington, April.
Jacobi, L. and J. Kluve (2006) Before and After the Hartz Reforms: The Performance of Active Labour Market Policy in Germany. IZA Discussion Paper 2100, April.
Klump, R., P. McAdam and A. Willman (2007a) Factor Substitution and Factor Augmenting Technical Progress in the US: A Normalized Supply-Side System Approach Review of Economics and Statistics, 89, 1, 183-192.
Klump, R., P. McAdam and A. Willman (2007b) The Long-Term SucCESs of the Neo-Classical Growth Model, Oxford Review of Economic Policy , 23, 1, 94-114.
Kok, W. et al (2004) Facing the Challenge: The Lisbon strategy for growth and employment, European Commission.
La Grandville, O. de. (2009) Economic Growth: A Unified Approach. Cambridge University Press.
Nicoletti, G. and Scarpetta, S. (2003) Regulation, productivity, and growth: OECD evidence, Policy Research Working Paper Series 2944, The World Bank.
North, D. (1981) Structure and Change in Economic History, Norton, 1981.
North, D. (1990) Institutions, Institutional Change and Economic Performance, Cambridge University Press.
Organization for Economic Co-operation and Development (1997) OECD Report on Regulatory Reform. Paris: OECD.
Organization for Economic Co-operation and Development (2003) The Sources of Economic Growth in OECD Countries. Paris: OECD.
Organization for Economic Co-operation and Development (2006) Economic Policy Reforms: Going for Growth. Paris: OECD.
Romer, P. M (1990) Endogenous Technological Change, Journal of Political Economy, 98(5), S71-102.
Sapir, A. et al (2003) An Agenda for a Growing Europe , Available at
Serafini, R., R. Strauch and M. Schiffbauer (2011) The impact of ICT and human capital on TFP – implications for recent EMU and US growth differences. Working Paper forthcoming (Frankfurt: European Central Bank)
Solow, R. M. (1956) A contribution to the theory of economic growth. Quarterly Journal of Economics, 70(1):65-94.
Solow, R. M. (1957) Technical change and the aggregate production function. Review of Economics and Statistics, 39(3):312-320.
Sondermann, D. (2011) Productivity in the Euro Area: Any Evidence of Convergence?, European Central Bank, mimeo.

[1]Solow (1956, 1957).
[2]For contemporary discussions see La Grandville (2009), Klump et al. (2007 a, b).
[3]Romer (1990).
[4]“… He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature …”, Letter of Thomas Jefferson to Isaac McPherson, 13th August 1813.
[5]Acemoglu, Aghion and Zilibotti (2006).
[6]This is the so-called advantage of backwardness, Gerschenkron (1962).
[7]Sapir et al. (2003), Kok (2004).
[8]Gomez-Salvador et al. (2006).
[9]See for example, the discussion in Sondermann (2011).
[10]Note, the share of respective sector grouping’s value-added in total value-added across both countries are quite similar: Goods Production (0.44 for the euro area; 0.36 for the US), Market Services (0.35 for the euro area; 0.42 for the US), and Distributive Trades (0.21 for the euro area; 0.22 for the US).
[11]See for example the discussion in Crafts (2008).
[12]See European Central Bank (2006)
[13]Keynote address by Jean-Claude Trichet, President of the ECB at the “ECB and its Watchers XIII” conference, Frankfurt am Main, 10 June 2011
[14]The use of all US states in the computation of GDP dispersion, in contrast to only 14 US Metropolitan Statistical Areas (MSAs) in the computation of inflation dispersion, is to be explained by data availability. The most recent entries to the euro area have been excluded to avoid breaks in the time series.
[15]The 2010 data for US regions are estimates published by the Bureau of Economic Analysis on 7 June 2011.
[16] The “Industry specialization index” – a measure of the degree to which states are more or less specialized in an industry relative to the nation average – reveals that California, Florida, Arizona and Nevada all witnessed the share of their respective construction sectors increase relative to the national average between 2001 and 2006, followed by the opposite development after 2006.
[17]Nicoletti and Scarpetta (2003), Bartelsman et al. (2005).
[18]North (1990).
[19]North (1981).
[20]For instance, the Service sector accounts for over 70% of GDP but only 20% of intra-EU trade. Some home bias in the provision of Services is inevitable, but such a gap suggests that there are considerable local rents being extracted at consumers’ expense.
[21]For example: European Commission (2002, 2005a, 2005b, 2010), International Monetary Fund (2004), Organization for Economic Co-operation and Development (1997, 2003, 2006).
[22]European Council (2010).
[23]Macroeconomic assessments of the gains that might be realized in the euro area from greater competition and other structural reforms can be found in, for example, Bayoumi et al. (2004), Ebbinghaus and Eichhorst (2006), Jacobi and Kluve (2006), Gomes et al. (2011).
[24]“Monetary Policy and Credible Alertness”, J. C. Trichet, Jackson Hole Symposium, August 2005.
[25]For example, Arpaia, A. and G. Mourre (2011), Boysen-Hogrefe and Groll (2011), Burda and Hunt (2011).
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ISO 20022 migration: full speed ahead despite recent delays, says new Deutsche Bank paper



ISO 20022 migration: full speed ahead despite recent delays, says new Deutsche Bank paper 1

Today, Deutsche Bank has released the third installment in its “Guide to ISO 20022 migration series, which offers a comprehensive update on the industry shift to the de facto global standard for financial messaging: ISO 20022. This paper comes at a critical time for the ISO 20022 migration, with a number of changes to existing timelines and strategies from SWIFT and the world’s major market infrastructures having been announced this year.

The paper explores the latest developments, including SWIFT’s year-long postponement of the migration in the correspondent banking space. The decision meets industry calls for a delay and also provides ample time to build the new central Transaction Management Platform (TMP) – a core feature of SWIFT’s new strategy that will allow the industry to move away from point-to-point messaging and towards central transaction processing.

It also details the wave of action that has been seen by market infrastructures around the world – with many, including the ECB, EBA CLEARING and the Bank of England, announcing revised migration approaches.

“Now more than ever, with shifting timelines and strained resources, it is vital that banks and corporates alike do not view the ISO 20022 migration as just another project that can be put on the back burner,” says Christian Westerhaus, Head of Cash Products, Cash Management, Deutsche Bank. “The delays in the correspondent banking space, and across several market infrastructures, should not be seen as an opportunity for banks to take their foot off the pedal. The journey to ISO 20022 is still moving ahead at speed – and internal projects need to reflect this.”

The Guide also highlights the implementation issues on the migration journey ahead – most notably surrounding interoperability between market infrastructures, usage guidelines and messaging formats. This is achieved through a series of deep dives, case studies, and points of attention drawn from Deutsche Bank’s internal analysis.

 “As this year has proved, nothing is set in stone, “says Paula Roels, Head of Market Infrastructure & Industry Initiatives, Deutsche Bank. “The ISO 20022 migration involves a lot of moving parts and keeping abreast of the latest developments is critical for banks and corporates alike. As the deadlines near, and the ISO 20022 story develops, this series of guides will continue to highlight key points for consideration over the coming years.”

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The Psychology Behind a Strong Security Culture in the Financial Sector



The Psychology Behind a Strong Security Culture in the Financial Sector 2

By Javvad Malik, Security Awareness Advocate at KnowBe4

Banks and financial industries are quite literally where the money is, positioning them as prominent targets for cybercriminals worldwide. Unfortunately, regardless of investments made in the latest technologies, the Achilles heel of these institutions is their employees. Often times, a human blunder is found to be a contributing factor of a security breach, if not the direct source. Indeed, in the 2020 Verizon Data Breach Investigations Report, miscellaneous errors were found vying closely with web application attacks for the top cause of breaches affecting the financial and insurance sector. A secretary may forward an email to the wrong recipient or a system administrator may misconfigure firewall settings. Perhaps, a user clicks on a malicious link. Whatever the case, the outcome is equally dire.

Having grown acutely aware of the role that people play in cybersecurity, business leaders are scrambling to establish a strong security culture within their own organisations. In fact, for many leaders across the globe, realising a strong security culture is of increasing importance, not solely for fear of a breach, but as fundamental to the overall success of their organisations – be it to create customer trust or enhance brand value. Yet, the term lacks a universal definition, and its interpretation varies depending on the individual. In one survey of 1,161 IT decision makers, 758 unique definitions were offered, falling into five distinct categories. While all important, these categories taken apart only feature one aspect of the wider notion of security culture.

With an incomplete understanding of the term, many organisations find themselves inadvertently overconfident in their actual capabilities to fend off cyberthreats. This speaks to the importance of building a single, clear and common definition from which organisations can learn from one another, benchmark their standing and construct a comprehensive security programme.

Defining Security Culture: The Seven Dimensions

In an effort to measure security culture through an objective, scientific method, the term can be broken down into seven key dimensions:

  • Attitudes: Formed over time and through experiences, attitudes are learned opinions reflecting the preferences an individual has in favour or against security protocols and issues.
  • Behaviours: The physical actions and decisions that employees make which impact the security of an organisation.
  • Cognition: The understanding, knowledge and awareness of security threats and issues.
  • Communication: Channels adopted to share relevant security-related information in a timely manner, while encouraging and supporting employees as they tackle security issues.
  • Compliance: Written security policies and the extent that employees adhere to them.
  • Norms: Unwritten rules of conduct in an organisation.
  • Responsibilities: The extent to which employees recognise their role in sustaining or endangering their company’s security.

All of these dimensions are inextricably interlinked; should one falter so too would the others.

The Bearing of Banks and Financial Institutions

Collecting data from over 120,000 employees in 1,107 organisations across 24 countries, KnowBe4’s ‘Security Culture Report 2020’ found that the banking and financial sectors were among the best performers on the security culture front, with a score of 76 out of a 100. This comes as no surprise seeing as they manage highly confidential data and have thus adopted a long tradition of risk management as well as extensive regulatory oversight.

Indeed, the security culture posture is reflected in the sector’s well-oiled communication channels. As cyberthreats constantly and rapidly evolve, it is crucial that effective communication processes are implemented. This allows employees to receive accurate and relevant information with ease; having an impact on the organisation’s ability to prevent as well as respond to a security breach. In IBM’s 2020 Cost of a Data Breach study, the average reported response time to detect a data breach is 207 days with an additional 73 days to resolve the situation. This is in comparison to the financial industry’s 177 and 56 days.

Moreover, with better communication follows better attitude – both banking and financial services scored 80 and 79 in this department, respectively. Good communication is integral to facilitating collaboration between departments and offering a reminder that security is not achieved solely within the IT department; rather, it is a team effort. It is also a means of boosting morale and inspiring greater employee engagement. As earlier mentioned, attitudes are evaluations, or learned opinions. Therefore, by keeping employees informed as well as motivated, they are more likely to view security best practices favourably, adopting them voluntarily.

Predictably, the industry ticks the box on compliance as well. The hefty fines issued by the Information Commissioner’s Office (ICO) in the past year alone, including Capital One’s $80 million penalty, probably play a part in keeping financial institutions on their toes.

Nevertheless, there continues to be room for improvement. As it stands, the overall score of 76 is within the ‘moderate’ classification, falling a long way short of the desired 90-100 range. So, what needs fixing?

Towards Achieving Excellence

There is often the misconception that banks and financial institutions are well-versed in security-related information due to their extensive exposure to the cyber domain. However, as the cognition score demonstrates, this is not the case – dawdling in the low 70s. This illustrates an urgent need for improved security awareness programmes within the sector. More importantly, employees should be trained to understand how this knowledge is applied. This can be achieved through practical exercises such as simulated phishing, for example. In addition, training should be tailored to the learning styles as well as the needs of each individual. In other words, a bank clerk would need a completely different curriculum to IT staff working on the backend of servers.

By building on cognition, financial institutions can instigate a sense of responsibility among employees as they begin to recognise the impact that their behaviour might have on the company. In cybersecurity, success is achieved when breaches are avoided. In a way, this negative result removes the incentive that typically keeps employees engaged with an outcome. Training methods need to take this into consideration.

Then there are norms and behaviours, found to have strong correlations with one another. Norms are the compass from which individuals refer to when making decisions and negotiating everyday activities. The key is recognising that norms have two facets, one social and the other personal. The former is informed by social interactions, while the latter is grounded in the individual’s values. For instance, an accountant may connect to the VPN when working outside of the office to avoid disciplinary measures, as opposed to believing it is the right thing to do. Organisations should aim to internalise norms to generate consistent adherence to best practices irrespective of any immediate external pressures. When these norms improve, behavioural changes will reform in tandem.

Building a robust security culture is no easy task. However, the unrelenting efforts of cybercriminals to infiltrate our systems obliges us to press on. While financial institutions are leading the way for other industries, much still needs to be done. Fortunately, every step counts -every improvement made in one dimension has a domino effect in others.

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Has lockdown marked the end of cash as we know it?



Has lockdown marked the end of cash as we know it? 3

By James Booth, VP of Payment Partnerships EMEA, PPRO

Since the start of the pandemic, businesses around the world have drastically changed their operations to protect employees and customers. One significant shift has been the discouragement of the use of cash in favour of digital and contactless payment methods. On the surface, moving away from cash seems like the safe, obvious thing to do to curb the spread of the virus. But, the idea of being propelled towards an innovative, digital-first, cashless society is also compelling.

Has cashless gone viral?

Recent months have forced the world online, leading to a surge in e-commerce with UK online sales seeing a rise of 168% in May and steady growth ever since. In fact, PPRO’s transaction engine, has seen online purchases across the globe increase dramatically in 2020: purchases of women’s clothing are up 311%, food and beverage by 285%, and healthcare and cosmetics by 160%.

Alongside a shift to online shopping, a recent report revealed 7.4 million in the UK are now living an almost cashless life – claiming changing payment habits has left Britons better prepared for life in lockdown. In fact, according to recent research from PPRO, 45% of UK consumers think cash will be a thing of the past in just five years. And this UK figure reflects a global trend. For example, 46% of Americans have turned to cashless payments in the wake of COVID-19. And in Italy, the volume of cashless transactions has skyrocketed by more than 80%.

More choice than ever before

Whilst the pandemic and restrictions surrounding cash have certainly accelerated the UK towards a cashless society, the proliferation of local payment methods (LPMs) in the UK, such as PayPal, Klarna and digital wallets, have also been a key driver. Today, 31% of UK consumers report they are confident using mobile wallets, such as Apple Pay. Those in Generation Z are particularly keen, with 68% expressing confidence using them[1].

As LPM usage continues to accelerate, the use of credit and debit cards are likely to decline in the coming years. Whilst older generations show an affinity with plastic, younger consumers feel less secure around its usage. 96% of Baby Boomers and Generation X confirmed they feel confident using credit/debit cards, compared to just 75% of Generation Z[2].

Does social distancing mean financial exclusion?

As we hurtle into a digital age, leaving cash in the rearview, there are ramifications of going completely cashless to consider. We must take into consideration how removing cash could disenfranchise over a quarter of our society; 26% of the global population doesn’t have a traditional bank account. Across Latin America, 38% of shoppers are unbanked, and nearly 1 in 5 online transactions are completed with cash. While in Africa and the Middle East, only 50% of consumers are banked in the traditional sense, and 12% have access to a credit card. Even here in the UK, approximately 1.3 million UK adults are classed as unbanked, exposing the large number of consumers affected by any ban on cash.

Even when shopping online – many consumers rely on cash-based payments. At the checkout page, consumers are provided with a barcode for their order. They take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped.

There are also older generations to consider. Following the closure of one in eight banks and cashpoints during Coronavirus, the government faced calls to act swiftly to protect access to cash, as pensioners struggled to access their savings. Despite the direction society is headed, there are a significant number of older people that still rely on cash – they have grown up using it. With an estimated two million people in the UK relying on cash for day to day spending, it is important that it does not disappear in its entirety.

Supporting the transition away from cash

Cashless protocols not only restrict access to goods and services for consumers but also limit revenue opportunity for merchants. While 2020 has provided the global economy with one great reason to reduce the acceptance of cash, the payments industry has billions of reasons to offer multiple options that cater to the needs of every kind of shopper around the world.

Whilst it seems younger generations are driving LPM adoption, it is important that older generations aren’t forgotten. If online shops fail to offer a variety of preferred payment methods, consumers will not hesitate to shop elsewhere. With 44% of consumers reporting they would stop a purchase online if their favourite payment method wasn’t available – this is something merchants need to address to attract and retain loyal customers.

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