The European Central Bank published a conference presentation by Executive Board member Philip R. Lane that maps how the euro area’s trade and financial linkages with the rest of the world affect macroeconomic outcomes and the conduct of monetary policy, with particular attention to global shocks, exchange-rate dynamics and potential trade fragmentation. The material reviews evidence on extra-euro area trade integration, the current account and the euro area net international investment position (with data referenced through the third quarter of 2024), alongside analysis of invoicing currencies and real exchange-rate measures. It also decomposes euro area inflation into global and domestic drivers and quantifies the contributions of energy and supply bottleneck shocks, as well as the role of external factors in staff inflation projection errors (with inflation data referenced through January 2025). On financial spillovers, the presentation breaks down movements in euro area and US short- and long-term nominal risk-free rates using two-country Bayesian VAR and term-structure decompositions (with market data referenced through February 2025), links rate differentials to the USD/EUR exchange rate, and summarises cross-border financial flows and net external monetary flows. Trade fragmentation scenarios ranging from mild to severe decoupling are used to illustrate rising output losses and inflationary effects, with proposed analytical priorities including more granular trade and production-network monitoring, regular business surveys, richer modelling tools and stronger cooperation across Eurosystem national central banks and EU institutions.
European Central Bank 2025-02-21
European Central Bank publishes Lane research presentation on trade fragmentation and international spillovers to euro area inflation and yields
The European Central Bank released a presentation by Executive Board member Philip R. Lane, analyzing the euro area's trade and financial linkages and their impact on macroeconomic outcomes and monetary policy. It examines trade integration, inflation drivers, and financial spillovers, focusing on global shocks and exchange-rate dynamics. It also explores trade fragmentation scenarios and suggests enhanced monitoring and cooperation across Eurosystem national central banks and EU institutions.