Global central banks rallied behind Federal Reserve Chair Jerome Powell on Tuesday, pushing back against a perceived political attack on the independence of the world’s most important financial institution. “We stand in full solidarity with the Federal Reserve System and its Chair Jerome H. Powell,” the officials said in a joint statement. “The independence of central banks is a cornerstone of price, financial and economic stability in the interest of the citizens that we serve. It is therefore critical to preserve that independence, with full respect for the rule of law and democratic accountability.” The statement was signed by European Central Bank President Christine Lagarde on behalf of the ECB’s Governing Council, by Bank of England Governor Andrew Bailey as well as the heads of the Swiss, Swedish, Danish, Australian, Canadian, South Korean and Brazilian central banks. Pablo Hernández de Cos, general manager of the Bank for International Settlements and François Villeroy de Galhau, chair of the Board of Directors of the Bank for International Settlements, also signed the statement. Over the weekend, Powell disclosed that the Fed had been served with grand jury subpoenas by the Department of Justice, raising the threat of a criminal indictment tied to his congressional testimony on the ongoing renovation of the Fed’s Washington headquarters. In what amounted to a dramatic escalation in the standoff between the White House and the central bank, Powell used an unusually direct video message to argue that the legal action is politically motivated and part of a campaign of “intimidation,” designed to push the Fed into cutting interest rates more aggressively. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president,” Powell said in language rare in its starkness for a serving Fed chair. Trump, a longtime critic who has piled personal insults on Powell since his reelection both through ad hoc comments and through his social media feed, denied any role in the investigation. Speaking to NBC News on Sunday, Trump said he was unaware of the probe but added that Powell is “certainly not very good at the Fed, and he’s not very good at building buildings.” The joint statement on Tuesday took a different view. “Chair Powell has served with integrity, focused on his mandate and an unwavering commitment to the public interest,” it said. “To us, he is a respected colleague who is held in the highest regard by all who have worked with him.” Expressions of support for Powell from around the world had already begun on Monday, with Bundesbank President Joachim Nagel telling POLITICO that: “The independence of central banks is a prerequisite for price stability and a great public good. Against this background, the recent developments in the U.S. regarding the Fed chairman are cause for concern.” Bank of France Governor Villeroy de Galhau, meanwhile, had told a  new year event at the ACPR regulator that Powell was “a model of integrity and commitment to the public interest.” POLITICO reported on Monday that the decision to subpoena the Fed had also raised concern among various White House officials, who are concerned that it may trigger volatility in financial markets and complicate efforts to keep the economy on track in an election year. Senior Republican Party lawmakers have also spoken out against the move.

The European Central Bank is preparing for its new digital version of the euro to take the payments market by storm — even though much of the public is unsure it wants anything to do with it. Internal ECB documents show the bank wants the digital euro system to be able to handle more than 50 billion transactions a year from the get-go, central bank officials told POLITICO. Such massive capacity suggests that ECB expects the digital currency to transform the retail payments market, pressuring a key revenue stream for current payment providers: If run at maximum capacity, the digital euro could snatch more than a third of the transactions currently done by payment cards. According to a presentation to the ECB’s governing council by the bank’s digital euro team last month, it needs a system that can handle 50.5 billion transactions annually, two officials said. While that is neither a target nor a forecast, it’s still a striking statement of confidence in the project’s potential. For context, payment cards were used in 84.6 billion transactions worth a total of €3.2 trillion across the eurozone last year, with card issuers and associated services providers taking a commission on most of them. Assuming annual growth of 10 percent as cash continues to lose ground, there could be close to 125 billion card transactions in 2028 — the year currently seen as the earliest possible launch date for the digital currency. At full capacity, the digital euro would thus have a market share of around 40 percent. A large part of payment fees currently goes to companies such as Visa and Mastercard and other fintech firms located outside Europe. The ECB wants the digital euro not just to stop such leakage, but to end Europe’s technological reliance on the infrastructure of U.S. payment giants more broadly, fearful of the shifting geopolitical environment. A whopping two-thirds of card transactions in the euro area are currently settled through international payment schemes and more than half of EU countries rely entirely on non-European solutions. The ECB has never publicly shared any estimates of what market share it expects the digital euro to take, but has always stressed that it has no plans to crowd out private-sector alternatives. The numbers in the presentation suggest the private sector may feel very squeezed. The ECB declined to comment. TAKING OVER, OR NO TAKERS? If the planning for broad and rapid adoption is accurate, consumers may see lower prices and Europe may bolster its strategic autonomy — but the region’s payments providers may see less reason to cheer. Industry bodies such as Payments Europe have warned the digital euro could wreck card-based revenue models, especially if its basic services are offered for free. Widespread use of the digital euro in transactions also suggests that consumers will opt to hold them in electronic wallets, draining deposits from the banking system. Bankers say that could limit the amount they have available to lend to households and business. “The impact on savings and retail banks of the digital euro taking a big chunk of card transactions will depend on the holding limits the ECB imposes, and [on] the underlying business model of the digital currency,” said Diederik Bruggink, senior director of payments, digital finance and innovation at the European Savings and Retail Banking Group. The higher the holding limits allowed for the digital euro and the lower the fees for payments between service providers, the worse it will be for banks, he explained. A large part of payment fees currently goes to companies such as Visa and Mastercard and other fintech firms located outside Europe. | Luong Thai Linh/EPA According to European Banking Authority estimates, fees and commissions account for around 30 percent of net operating income at the continent’s banks, and payment-related fees account for more than a quarter of that. The ECB has argued that the digital euro could offer fresh business opportunities for domestic service providers that are finding it increasingly difficult to compete with international card schemes and mobile payment solutions. Not only can banks serve as wallet providers and create other add-on services, but by embedding digital euro services, banks can retain customers who might otherwise migrate to Big Tech wallets, it argues. The question is whether the public can bring itself to care. After a slow start, recent surveys show awareness and interest may be taking off. A survey by consultants BearingPoint in February showed one-third of respondents across the eurozone would be willing to use the digital euro, a share that seems likely to rise with generational change. But a survey by Payments Europe showed that 56 percent of consumers today are unsure whether they ever would. While no decision on launching a central bank digital currency can be taken without legislation from the European Parliament, the project’s technical development continues to gather momentum. In the same presentation, the digital euro team argued that, should all legislative hurdles be cleared, the ECB governing council should approve close to €1.5 billion to bring the project to life.

U.S. President Donald Trump’s trade war is driving central banks across Europe to support their economies by cutting interest rates — even as it ties the hands of the Federal Reserve.  Central banks in Switzerland, Sweden and — for the first time in five years — Norway have all cut their official interest rates this week, adding to similar moves last month from the European Central Bank and the Bank of England. All five have cut their growth forecasts in recent weeks. The common theme has been that uncertainty over the trade outlook has undermined confidence and depressed activity since Trump’s “Liberation Day” tariff announcement on April 2.    By contrast, the Federal Reserve is still to lower interest rates this year, even though the same factors also weigh on the U.S. economy. That’s because the breadth and scale of Trump’s tariffs appear certain to drive inflation higher in the U.S.  “Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs because someone has to pay for the tariffs,” Fed Chair Jerome Powell told reporters on Wednesday, after the U.S. central bank left the target range for fed funds at 4.25 percent to 4.50 percent. At their meeting, Fed policymakers had revised their forecasts for inflation higher in 2025 and 2026, and signaled that rates would have to stay a little higher for longer as a result. “Our obligation is to keep longer-term inflation expectations well anchored, and to prevent a one-time increase in the price level from becoming an ongoing inflation problem,” Powell said. In that context, Powell stressed that the U.S. economy is still growing at a decent rate, while unemployment, at only 4.2 percent of the workforce, is low enough to let the Fed wait a bit longer before taking action. The Fed’s caution has infuriated Trump, who has called Powell a “numbskull” and warned this week that he “may have to force something” if there is no movement soon.  Jerome Powell stressed that the U.S. economy is still growing at a decent rate, while unemployment is low enough to let the Fed wait a bit longer before taking action. | Shawn Thew/EFE via EPA “We have a stupid person, frankly, at the Fed,” he told reporters outside the White House ahead of the Fed’s decisions on Wednesday. “We have no inflation. We have only success. And I’d like to see interest rates get down.” A DIFFERENT STORY It’s a very different story across the Atlantic, where the first impact of tariffs has been felt on Europe’s export industry. Having rushed to ship products to the U.S. before tariffs took effect, they now face the prospect of a long wait for repeat orders. While central banks are still afraid that the trade war could disrupt global supply chains and add extra costs that would push inflation higher at some stage, right now, that’s a concern for another day. “The economic recovery that began last year has lost momentum,” the Riksbank said on Wednesday, as it cut its key rate by a quarter-point to 2.0 percent.  “Following a strong first quarter, growth is likely to slow again and remain rather subdued over the remainder of the year,” the Swiss National Bank echoed Thursday morning, after taking its key rate down to zero from 0.25 percent.  In Norway, which had held out against cutting interest rates at all since the post-pandemic inflation surge, the central bank said the time had finally come to shift its stance. Norges Bank also said it will probably cut interest rates again in the course of the year.  The Bank of England, meanwhile, left its bank rate unchanged at 4.25 percent on Thursday, but it had already cut it in May, and Governor Andrew Bailey said in a statement that “Interest rates remain on a gradual downward path.”  The European Central Bank also cut its key rate for an eighth time in the last year earlier in June, and analysts expect further cuts from both in the months to come (even if the ECB’s top brass isn’t so sure). And as growth slows, inflation is now heading below where central bankers would like it to be, at least in the short term. The ECB sees it at 1.6 percent next year, before rebounding to its 2.0 percent target in 2027. In Switzerland, inflation has already turned negative on the year, at -0.1 percent in May.  To a large degree, this is because Trump’s policies have eroded confidence in the dollar itself. The greenback has lost nearly 9 percent against major Western currencies such as the euro, pound and Swiss franc this year, making the cost of many of Europe’s imports — especially commodities which, from oil to coffee, are priced in dollars — significantly cheaper in local terms.  “Due to the erratic and chaotic new policy style in the U.S., we have seen stronger European currencies,” said ING economist Carsten Brzeski, calling them an “important driver for disinflationary pressures in Europe.” Indeed, the SNB‘s cut on Thursday aimed directly at reducing the attractiveness of the franc, which global investors see as a “safe haven.”  SNB Chair Martin Schlegel acknowledged at his press conference that he may even have to cut his key rate to below zero again, although he said: “We will not take the decision to go negative lightly.”

AMSTERDAM — The international trading system must do more to address “persistent, unsustainable imbalances,” Bank of England Governor Andrew Bailey said, acknowledging that U.S. concerns over trade distortions may have merit. Speaking exclusively to POLITICO on the fringes of a Foreign Bankers’ Association event in Amsterdam on Tuesday, the incoming chair of the Financial Stability Board said the postwar multilateral trade system “hasn’t necessarily delivered all it needs to deliver” and that a rethink was due. “We have to have a system which does identify where there are persistent, unsustainable balances,” Bailey said.  The comments come just days after a surprise détente between China and the U.S. on the tariff war launched by Donald Trump’s administration on April 2 calmed financial markets’ worst fears about outlook for the world economy. While reiterating his commitment to free trade, Bailey acknowledged that tariffs — long anathema to orthodox central banking — may have served as a necessary wake-up call to reshape the international trading system. “Obviously the U.S. administration feels it’s had to use tariffs to really get this point out there. I think all of us who believe in free trade and believe in multilateralism are happy to say, ‘Look, okay, we sort of get it.’” Bailey went on to tell the gathering of bankers that didn’t mean abandoning the WTO but rather working with the body to make it fit for purpose again. “We’ve got problems in the trade agreements and monitoring of trade agreements,” he said. “What I really hope is that we address these questions in a multinational way, and that we don’t give up on the multilateral system, because that would be a real setback.” Bailey added that reforms must address both persistent macro imbalances and enforcement weaknesses at the micro level. “The origin of persistent imbalances is in fundamental economics, so that’s where you need to start: what’s causing these fundamental systems advances?” he said, adding that the International Monetary Fund had a role to play, not least because there was now “an acceptance by countries that they have to take those things seriously and … take action upon them.” Citing IMF analysis, Bailey also noted that a significant share of new trade restrictions in the past decade had originated in China. “There has to be a way of dealing with these things, rather than just sort of letting them sit there” while the level of tension rises, he told POLITICO. Bailey’s remarks reflect an emerging openness among European monetary authorities to the argument — long pushed by Washington — that existing trade governance frameworks have failed to adjust to a more state-driven global economy. The outgoing chair of the Financial Stability Board, Klaas Knot, echoed Bailey’s points during the panel session. “Whatever you think about the U.S. administration and their communication, they are dead serious about this global imbalances issue,” Knot told the room. “Not every trade balance needs to be in balance, there’s absolutely no economic reason for it. But, on the other side, there can also be an argument that some of the imbalances actually become excessively large. I do think that there is a sort of upper limit beyond which imbalances become counterproductive.” GEOECONOMICS IN FOCUS Asked whether the increasing entanglement of economic and geopolitical objectives such as tariffs or strategic autonomy  — what some have termed “geoeconomics” — poses a threat to central bank independence, Bailey said the trend underlined rather than undermined the case for institutional autonomy. “I don’t believe [geoeconomics] invalidates independence. It underlines why it was so important to have independent central banks,” he said on the sidelines. “Our job is to take difficult decisions in difficult times … I don’t accept that our independence is politicized in any other sense.” In that respect, Bailey said recent interventions by the BoE — such as its temporary and targeted bond-buying during the so-called “LDI crisis” in 2022 — had been misunderstood in some quarters as monetary stimulus, when in fact they were narrowly targeted at market functioning and financial stability. “It was hugely important to say, ‘No, we’re not doing QE.’ This was a limited financial stability intervention. And we sold the gilts as soon as we could.” Bailey acknowledged that the visibility of central banks during periods of volatility has led to more scrutiny and criticism, but rejected any suggestion that the BoE was pursuing political objectives. Both Bailey and Knot rejected the idea that geoeconomics or the pursuit of strategic autonomy would impinge on their mandates. “In the core of our mandate, I think we will always continue to be focused on price stability [in] the medium term,” Knot said. Where such factors would have more of a bearing, however, would be in payments and in addressing supply-side constraints in the global economy. “Many of these private payment solutions are actually heavily dependent on foreign service providers,” said Knot. “If we develop a digital euro, the payment rails that will come with [it] might also offer an alternative to private initiatives to become less dependent on foreign payment service providers.” Bailey, meanwhile, highlighted that over the past five years, central bankers have had to realize that the supply side of the world economy has become less predictable. “That’s where I think we have to take it on board, but we’re not trying to influence it,” he said. DOLLAR STILL KING Despite European governments’ growing focus on strategic autonomy, both Bailey and Knot pushed back against the increasingly popular market view that Trump’s tariff agenda had ruptured the supremacy of the U.S. dollar. “I think there’s a lot more to the dollar’s status as a reserve currency than some of this commentary recognizes, and actually it’s got even more so in recent years,” Bailey said on the sidelines. “I mean, there’s a huge amount of what I call infrastructure that goes with being a reserve currency these days.” As such, he added, the world was nowhere near de-dollarization. “And by the way, I hope we’re not, because it would be quite destabilizing.”  Knot agreed in the panel session that “there is simply no alternative yet for the role that the dollar plays in a number of functions that an international reserve currency fulfils,” adding that the euro was unlikely to supersede it for as long as Europe’s markets remained fragmented along national lines. “If we can’t resolve these issues, then you cannot expect your currency to become an international sort of reserve currency vehicle,” Knot said.

Prices climbed at an unexpectedly slow pace last month, offering a boost to President Donald Trump, whose aggressive trade policies have sparked fears of a resurgence in inflation. The Labor Department on Tuesday reported that prices rose at an annual rate of 2.3 percent, the smallest increase since early 2021. While price growth in so-called core sectors of the economy — which exclude volatile food and energy costs — remained elevated at 2.8 percent, April’s Consumer Price Index contained only scant evidence that Trump’s tariffs have meaningfully driven up the cost of living. “President Trump’s plan to unleash American energy, cut regulations, and slash government waste is working!” The Trump War Room, an organ for the president’s political operation, posted on X after Tuesday’s report. The CPI report will likely bolster the administration’s claims that grim forecasts for the economy have been overblown. Most polls have Trump’s approval rating underwater as voters sour on his economic policies. The report will also amplify Trump’s calls for Federal Reserve Chair Jerome Powell to lower interest rates. Powell and other Fed policymakers have warned that the rapid escalation of import costs may soon cause consumer prices to spike and that the central bank needs to keep inflation at bay. And many economists still expect inflation to rebound in the coming months. Analysts at Citi say they expect the personal consumption expenditures index — the Fed’s preferred inflation gauge — to climb by 3 percent by the end of the year. While that is less than their previous forecast for 3.5 percent inflation, it’s still well above the Fed’s annual target of 2 percent. Even though tariff rates have fallen since the administration negotiated a temporary détente with China, Fed Governor Adriana Kugler said Monday that the administration’s new taxes on imports are still “pretty high” and that she expects inflation to rise and growth to slow soon. So far, that hasn’t happened. Few economists had expected that overall inflation surged last month. But there was broad anticipation that Trump’s levies on Chinese imports, steel and aluminum and certain Canadian and Mexican products had caused prices for apparel, electronics and other consumer goods to spike. If anything, the opposite occurred: The cost of clothing and new cars — two areas that were highly exposed to Trump’s initial levies — both fell. The price of certain electronics and consumer goods, including household furnishings, computers, photographic and audio equipment, did rise last month, but that had little effect on the general cost of goods. The primary driver of April inflation was housing-related, accounting for more than half of the overall monthly increase. “There is some evidence of modest tariff pass-through in the April data, but it was somewhat less widespread than I had expected,” Omair Sharif, the founder of Inflation Insights, said in a client note. Inflation expectations had been increasing even before the bulk of Trump’s tariffs took effect. Consumers now project prices to rise at a rate of 3.2 percent over the next three years, the New York Fed reported Friday. That’s the highest monthly reading since July 2022, around the period when post-pandemic inflation was at its peak. New York Fed President John Williams, speaking at an economic conference in Reykjavik, Iceland, said over the weekend that keeping inflation expectations in check is a “bedrock” of central banking. “Maintaining well-anchored inflation expectations” is critical, Williams said, per Bloomberg. That’s especially true “when uncertainty is very high.”

LONDON — Chancellor Rachel Reeves has warned that Donald Trump’s trade war will have a “profound impact” on the U.K. economy, as she heads to Washington grappling with downgraded domestic growth forecasts. The U.K.’s top finance minister is attending the spring meetings of the International Monetary Fund (IMF) and World Bank, where she will meet G7 finance ministers, including her U.S. counterpart Treasury Secretary Scott Bessent face-to-face for the first time. In comments released ahead of the three-day visit, Reeves said on Tuesday night: “The world has changed, and we are in a new era of global trade. I am in no doubt that the imposition of tariffs will have a profound impact on the global economy and the economy at home.” The IMF slashed its 2025 U.K. growth forecast by 0.5 percent earlier on Tuesday. The revised figure puts Britain’s GDP growth above Japan, France, Italy, Germany, and the Euro area, but behind the U.S. and Canada. In meetings with G20 and European finance ministers Wednesday, and in an address to the world economy summit, “the chancellor will underline the importance of tackling barriers to trade to kickstart economic growth,” according to a U.K. government release. Reeves said she will continue to make the case for “open trade that provides stability for businesses and security for working people.” “We need a world economy that provides stability and fairness for businesses wanting to invest and trade,” the chancellor said. ‘PROTECTING THE NATIONAL INTEREST’ Reeves plans later this week to sit down in person with Treasury Secretary Scott Bessent — now U.S. President Trump’s go-to trade negotiator — in the hope of pushing forward talks to get the U.K. out from under U.S. tariffs. British officials are prioritizing efforts to negotiate down the 25 percent tariffs on cars, steel and aluminum, and looming duties on pharmaceuticals, imposed by the Trump administration. The U.K. has offered to rethink its digital services tax and review enforcement of its online safety and digital competition rules in exchange for a deal. There are also potential concessions on agriculture that could include lowering tariffs on high quality U.S. beef, chicken and pork imports, although food standards remain a red line in London. When British Prime Minister Keir Starmer discussed the deal in a call with Trump over the weekend, he reiterated “the importance of protecting the national interest” in any pact. Reeves has also pledged to “stand up for Britain’s national interest” in the talks. Officials aren’t expecting a breakthrough this week.

BRUSSELS — Battle lines are being drawn between the European Central Bank and the European Commission over whether landmark rules to govern crypto currencies are strong enough to withstand the full force of Donald Trump. The ECB thinks the U.S. president’s lavish support for the American crypto sector risks causing financial “contagion” that could blow up the European economy, according to a policy paper seen by POLITICO. It is demanding an urgent rewrite of laws brought fully into force only four months ago. But in a rebuff, the Commission dismissed the Bank’s alarmist analysis, signaling that it had misunderstood the EU’s own rules, and hit back at what it saw as an unwelcome intrusion into lawmaking. The argument sheds light on how jittery financial policymakers generally are about moves by the Trump administration to “expand the reach of the dollar” via complex financial technology. European officials fret that several major financial market reforms the U.S president has touted will undermine efforts to become strategically independent as the EU tries to revamp its financial sector. They worry it will prompt a flight of assets to the U.S. and entrench fresh risks in the system. This specific clash is about the Markets in Crypto Asset Regulation (MiCA), a landmark law passed in 2023 and heralded as the first regulation worldwide to introduce strong safeguards and consumer protections for cryptocurrency firms. Cryptocurrencies ― digital currencies that can be bought, sold and traded online ― look like being given a new lease on life under Trump, after the industry pumped billions of dollars into his election campaign. STABLE, GENIUS At the heart of the recent scuffle is anxiety regarding a popular kind of a cryptocurrency known as a “stablecoin,” which emulates the stability of major currencies like dollars and euros, unlike more volatile cryptocurrencies like Bitcoin. The majority of these stablecoins are denominated in dollars, and in some countries are already used as an easily accessible alternative to the greenback when local currencies are unreliable. Governments fear they could replace traditional money, undermining national sovereignty and leaving citizens vulnerable to the fortunes of a business with a penchant for disastrous meltdown. In theory, MiCA reduces the risk of foreign-currency-backed stablecoins disrupting the European economy by limiting who can issue them and how much can be issued, while still allowing EU citizens to use them.  But planned reforms in the U.S., including a White House executive order and the drafting of two laws — dubbed STABLE and GENIUS — extend the reach of the American stablecoin industry, with one analysis by British bank Standard and Chartered predicting the supply of dollar-backed tokens could hit $2 trillion by 2028, up from $240 billion today. This has prompted panicked warnings from ECB President Christine Lagarde and its digital payments czar Piero Cipollone. In recent months, both top officials have suggested that the MiCA rules are not strong enough to withstand the effects of a turbocharged U.S. stablecoin industry, worrying that a flood of dollar-denominated assets into Europe could reroute European savings into the U.S. On Thursday, Lagarde said MiCA would have to change, and implied that the unique threat posed by stablecoins was “understood” by the Commission and other EU institutions.  But Lagarde’ s audience did not know that her words came after an acrimonious exchange of barbed research papers earlier this month, which POLITICO can now reveal. FUNDAMENTAL MISREADING The drama began on April 14 when the top financial service officials of EU governments met to discuss the impact of U.S. crypto assets on EU financial stability. Both the central bank and the EU’s executive circulated their own papers on the subject, underscoring the chasm between the institutions’ views on the risks coming from Washington.  The ECB argued that the regulation needs a serious rethink, warning it was  too permissive toward the “multi-issuance” model, in which Europe-based stablecoin issuers pool their resources with issuers in third countries, according to the document. ECB President Christine Lagarde said MiCA would have to change, and implied that the unique threat posed by stablecoins was “understood” by the Commission and other EU institutions. | Kirill Kudryavtsev/AFP via Getty Images The gulf between the institutions’ views turned into a clash during the meeting as EU officials and most governments pushed back against the central bank, according to two diplomats and one EU official, who were granted anonymity to speak freely about private talks.  “The Commission was quite clear that they had different views on this topic” and “not very many [countries] supported the idea that we should now jump the gun and start making quick changes  in [the rules] based on this alone,” one of the diplomats said. The EU official suggested that the ECB’s paper was based on a fundamental misreading of the MiCA regulation, which, the official said, had been designed explicitly to resolve the issues mentioned by the ECB. The official added that it made “no economic sense” for U.S. users to impose redemption requests on European issuers, and that the idea of a traditional “run” on an asset backed one-to-one was “nonsense.” The official also claimed the ECB has recently been hyping the stablecoin menace to bolster political support for its controversial digital euro project, an effort to build a pan-European payment system that, it says, would shield Europe’s financial infrastructure from crypto-assets. Stablecoins denominated in dollars, which are backed primarily by U.S. treasuries, account for 99 percent of the $240 billion market, according to Frankfurt. The central bank fears that allowing dollar-backed stablecoin issuers to offer their product in both the U.S. and the EU could also favor “existing non-EU stablecoin issuers who have already established an oligopolistic market position,” and could trigger a flood of EU investment in U.S. debt, undermining the bloc’s plans to strengthen its own financial market.  In the worst-case scenario, the ECB argued, EU issuers could be forced to redeem foreign-held tokens as well as European ones, risking a “run” on their reserves if either are found to be insolvent and potentially having a knock-on effect on exposed banks.  In its own paper, also seen by POLITICO, the Commission forcefully defended the effectiveness of the rules, even taking into account the planned U.S. reforms, hinting that the central bank was being melodramatic. “The risks arising from such global stablecoins seem to be overstated and are manageable under the existing legal framework,” the Commission said in the document. The EU executive argued that it was still “too early” to judge what effect the U.S. crypto resurgence would have on EU markets. In any case, it said, the MiCA rules already require crypto asset providers to adhere to stricter criteria to operate in the EU market — and have already forced some major players to delist their stablecoins, including the well-known Tether, from exchanges. The Commission acknowledged, however, that those rules do require enforcement.  Still, the EU executive also noted that only a single global stablecoin has been authorized under the new rules so far. The bill allows the central bank itself to block such issuers from operating if “they pose a threat to smooth operation of payment systems, monetary policy transmission or monetary sovereignty,” it said. Rules for banking already offer protection against potential contagion, while redemption rights can be limited to EU holders only, it said.

European leaders may soon be able to take comfort in having one of their own sitting north of the border of the United States. Mark Carney, a former central banker who spent much of the last decade in Europe, is widely expected to win the leadership of Canada’s Liberal Party on Sunday. If so, he will succeed Justin Trudeau as prime minister, who announced in January that he would step down once his party selected a new leader amid his poor polling numbers and internal party disputes. Carney spent the early part of his career at Goldman Sachs, where he worked for 13 years before serving a five-year term as Canada’s central bank governor. But his profile rose to prominence on the continent after he became the Bank of England’s first non-British governor in 2013. Jean-Claude Trichet, the former head of the European Central Bank, told POLITICO that having a foreigner helm a major central bank was “in no way an obvious decision,” but that Carney’s “remarkable” reputation in central banking helped the appointment go through. The man who appointed him then, the U.K.’s former conservative Chancellor of the Exchequer George Osborne, said Carney’s experience on the international stage will serve as an asset both to Canada and leaders in Western Europe as they confront the challenges posed by U.S. President Donald Trump. Trump has threatened to annex Canada and hit the country with massive tariffs. “His primary responsibility will be to the people of Canada, but it’ll definitely help the Western world,” Osborne told POLITICO. “To have someone around the table who’s been there, been in the room … not intimated by a trip to the White House, not intimated by meeting Donald Trump … that person’s Mark Carney,” Osborne said. Roland Lescure, who was France’s industry minister until last September and was briefly discussed as a potential French prime minister, has known Carney for more than a decade after having worked in the financial sector in Canada. Lescure told POLITICO that he was often in touch with Carney while in government, and stressed that the likely new Canadian premier and French President Emmanuel Macron “know each other well,” which “would obviously be a big perk for France-Canada relations.” “He’s a bit of a Canadian Mario Draghi,” Lescure added, comparing Carney to the former Italian European Central Bank chief, a fellow Goldman Sachs alumnus who remains influential in European circles. Carney has referenced Draghi in past speeches and seems aware of the comparisons with another central banker who went on to become his country’s prime minister. In his leadership bid back home, the 59-year-old has positioned himself as an outsider — “not a career politician,” he says. But in England, Carney didn’t shy away from acting like a politician to gain acceptance. Those who know Carney from his time across the Atlantic are confident he is well-suited for the rigor of frontline politics, even though he spent most of his career as a central banker rather than an elected official. “[Carney] tried to connect more broadly to the country and traveled around,” Osborne explained. “He got out on tour, which is what any politician would do but was quite unusual [in his role].” CAN CARNEY CONTINUE? Carney stepped down in 2020, quickly becoming a global leader in pushing banks and investors to take climate change seriously. In his leadership bid back home, the 59-year-old has positioned himself as an outsider — “not a career politician,” he says. | Andrej Ivanov/AFP via Getty Images Seeking distance from Trudeau’s declining popularity, Carney — who advised the Liberals under Trudeau — has emphasized that his advisory work extended beyond Canada. He still bears the scars of the Brexit years as well. He faced criticism from pro-Brexit figures when he warned that leaving the EU threatened the U.K.’s financial stability. Carney has pointed to his experience with Brexit as a warning sign against the dangers of right-wing populism. He could now face someone who fits that label in an election against the leader of the Conservative Party of Canada, Pierre Poilievre. Whether Carney’s international credentials will stand the test of time remains to be seen. His net-zero banking initiative is unraveling with political headwinds blowing in the opposition direction. Key departures include Morgan Stanley and Citi. It’s also unclear how long Carney will remain in office. Opposition parties have vowed to force an election once parliament resumes, and Carney could be tempted to do so himself even sooner. Liberals had braced for disaster in the next race, but Trudeau’s resignation and Trump’s threats against Canada have given the incumbent party new momentum. Polling aggregator 338Canada shows the Liberals trailing the Conservatives by just six points, against a 25-point deficit before Trudeau’s resignation.

FRANKFURT — Germany’s historic turnaround on public spending has sent shockwaves through financial markets, sending the euro and government borrowing costs sharply higher. The euro shook off its usual fears about economic stagnation and Europe’s strategic vulnerability to surge against the dollar in early trading on Wednesday, while the German government’s 10-year borrowing costs leaped by nearly a quarter of a percent to their highest in 17 months, as investors raced to factor in the game-changing impact of hundreds of billions of euros in spending on defense and infrastructure projects.  The moves are a reaction to the announcement late on Tuesday that Germany’s chancellor-in-waiting Friedrich Merz had struck a deal with his prospective coalition partners the Social Democrats (SPD) to effectively bypass a constitutional cap on the budget deficit. That news came on the same day that European Commission President Ursula von der Leyen proposed raising hundreds of billions more to restore Europe’s defense capacity. “Europe and Germany in particular are showing a historically unprecedented responsiveness to revising the fiscal stance,” said George Saravelos, head of global FX strategy at Deutsche Bank.   Prospects of a fiscal “bazooka” pushed the single currency up 0.7 percent against the dollar to 1.0722, the highest since November. Saravelos expects the rally to continue until at least the euro hits 1.10. And while not everyone is that enthusiastic, analysts have quickly dropped predictions that Europe’s weak economic outlook could push the euro down to parity with the greenback this year. Merz’s plans, which will largely exempt defense spending from the so-called debt brake and also include a €500 billion special fund for infrastructure spending over the next 10 years, still have to pass parliament later this month. To this end, Merz and outgoing Chancellor Olaf Scholz will still have to win over the Greens, which is widely expected to happen. WHATEVER IT TAKES “In view of the threats to our freedom and peace on our continent, ‘whatever it takes’ must now also apply to our defense,” Merz said on Tuesday, reviving the phrase of then-European Central Bank President Mario Draghi that proved to be the turning point in Europe’s sovereign debt crisis a decade ago. Tuesday’s deal signaled a radical departure from the obsession with debt sustainability that has characterized German policy since the global financial crisis — and arguably before then. While economists still want to see its small print, they’re in no doubt of its transformative potential. “Pending more clarity on this issue, and being mindful of some execution risk, we believe this is one of the most historic paradigm shifts in German postwar history,” said Robin Winkler, chief economist at Deutsche Bank Research. Berenberg Chief Economist Holger Schmieding welcomed that “Germany is finally taking on the leadership role” and expressed hope that the new government will find the courage to enact the pro-growth supply-side reforms at the same time, to boost private as well as public investment. Christian Democratic Union/SPD deal would allow Germany to finance 4 percent of gross domestic product in debt at any time. | John Macdougal/Getty Images “The can-do attitude shown tonight could lift sentiment and pull in private investment, even before fiscal policy gets going,” added J.P. Morgan economist Greg Fuzesi, who said he expects a “material change” to Germany’s economic outlook after two straight years of recession. NO FREE LUNCH Other things being equal, said Barclays economist Balduin Bippus, the move should reverse the downward pressure that German fiscal policy has put on the euro since 2009, when Angela Merkel introduced the debt brake. However, he added with an eye on the looming trade war with the United States,“what complicates things is that at present all else is not equal — in a rather extreme way.” The imposition of import tariffs by the U.S., and the effect that this may have on the U.S. economy, works “at cross purposes” with the German news, making it harder to say how much higher the euro can go, Bippus said. What is clear is that the brave new world of fiscal largesse will also have a cost. Germany’s borrowing cost surged following the announcement with the yield on the 10-year note rising more than 20 basis points to above 2.7 percent, marking the biggest jump since June 2022. That had the knock-on effect of pulling borrowing costs for all eurozone governments up in parallel. German 30-year yields were on course for their biggest one-day rise since the late 1990s. To some, that’s an alarming reminder of why the debt brake was there in the first place. Friedrich Heinemann, an economist with the ZEW think tank in Mannheim, warned that the reform is going too far and risks debt levels spiraling out of control. He noted that, in total, the Christian Democratic Union/SPD deal would allow Germany to finance 4 percent of gross domestic product in debt at any time. “This would quickly put Germany among the highly indebted countries of the EU, and the debt-to-GDP ratio will reach 100 percent as early as 2034,” Heinemann warned. “Today is the day when the debt brake will become history,” lamented Lars Feld, an adviser to former Finance Minister Christian Lindner, whose opposition to looser fiscal policy sparked the collapse of the last federal government. “Germany will lose its function as a safe haven for bondholders,” Feld said. “Interest rates and inflation will not remain unaffected.”

BRUSSELS ― Conservative leader Friedrich Merz won the German election Sunday and is on track to take the reins of the EU’s largest economy. It’s not yet clear exactly what the new German government will look like — or how far Merz will be able to reshape German politics as he sees fit. It’s likely to be weeks before coalition talks between Merz’s Christian Democratic alliance (CDU/CSU) and other parties reach an agreement and Merz becomes chancellor. Still, one thing looks certain: Merz will take Germany in a different direction from that of current Chancellor Olaf Scholz. It may not even look like the Germany that Angela Merkel, also of the CDU, led for 16 years, until 2021. -------------------------------------------------------------------------------- Early projection 2021 2025 25.7% SPD 24.1% CDU/CSU 14.7% Greens 11.4% FDP 10.4% AfD 8.7% Others 4.9% Left Social Democratic Party of Germany Christian Democratic Union of Germany Alliance 90/The Greens Free Democratic Party Alternative for Germany Others The Left Turnout: 76.35% 28.6% CDU/CSU 20.4% AfD 16.3% SPD 12.3% Greens 8.5% Left 4.9% BSW 4.7% FDP 4.3% Others Christian Democratic Union of Germany/Christian Social Union Alternative for Germany Social Democratic Party of Germany Alliance 90/The Greens The Left Alliance Sahra Wagenknecht Free Democratic Party Others Source: ARD -------------------------------------------------------------------------------- Last month, Merz (unsuccessfully) pushed the German parliament for new migration measures with the support of the far-right Alternative for Germany party. It marked a clear departure from Merkel’s “Wir schaffen das” pledge to take in refugees. And there’s more. From a potential U-turn in Germany’s long-standing policy on nuclear energy and a more hawkish line on China, to plans to reboot the German-French axis to bolster EU trade, Merz could shake up the political landscape of Germany and, in one fell swoop, that of the European Union as a whole. Here’s what a Merz-led Germany means for the EU. -------------------------------------------------------------------------------- Defense Energy Climate Sustainability Mobility Trade Agriculture Central Banking Financial Services Competition Tech Cyber Health -------------------------------------------------------------------------------- Advertisement DEFENSE Two days before the election, Merz issued a stark warning that Europe must be prepared to defend itself without the U.S. “We must prepare for the possibility that Donald Trump will no longer uphold NATO’s mutual defense commitment unconditionally,” Merz said in an interview with a German broadcaster, signaling that Germany may seek nuclear protection from European allies. “We need to have discussions with both the British and the French — the two European nuclear powers — about whether nuclear sharing, or at least nuclear security from the U.K. and France, could also apply to us,” he said. Elsewhere, Merz has promised big and broad policies to scale up Germany’s defense industry, and will be expected to follow through quickly on an earlier pledge to scrap his predecessor’s block on the dispatch of long-range Taurus cruise missiles to Ukraine for strikes on Russian targets. A major theme of his early weeks in the chancellery will be setting out how Berlin plans to raise the cash to expand on the €100 billion fund agreed under the Scholz government to finance an upgrade of the Bundeswehr’s gear and digs. That cash pot has been allocated and will be spent up by 2027 on massive procurement programs, raising questions over how Berlin plans to meet its obligations to NATO — which Merz has promised to do in the future — from the conventional national budget. “The 2 percent target may be pushed up again and then we will have to prepare ourselves for that,” Merz told POLITICO’s Berlin Playbook podcast of plans to further raise the NATO target given Trump has called for a 5 percent target. Select another policy area -------------------------------------------------------------------------------- ENERGY Over the past few years, German energy policy has focused on turbocharging investment in renewable energy, shutting down nuclear reactors and scrambling to secure gas supplies from abroad to replace Russian imports.  Merz’s CDU has similarly vowed to “consistently use renewable energies, all of them.” But his political family, the center-right European People’s Party, is also pushing back against EU green energy targets. Meanwhile, Merz has taken a warmer tone toward nuclear energy than Scholz, which is challenging a long-standing German taboo around atomic power. While the country is unlikely to revive its shuttered reactors, a more lenient nuclear stance from Berlin could help pro-atomic countries persuade Brussels to treat atomic power more like renewables.  Merz has also said he wants to repeal Germany’s hard-fought Building Energy Law, which aims to accelerate a clean heating rollout — offering a potential signal to green skeptics in Europe.  Select another policy area -------------------------------------------------------------------------------- Advertisement CLIMATE A Merz-led government will place less emphasis on climate change than Scholz’s coalition. Merz expressed concern on the campaign trail about the impact of climate policy on business, vowed to put economic growth above all other concerns and led a call to roll back several EU green regulations. But green advocates express confidence that in government Merz’s rhetorical hammer will turn feather duster. Industry, broadly, wants less bureaucracy, but it also wants consistent policy. Industrial stimulus can be used to help companies become greener and more efficient. “That they will not do it in the name of climate policy. Fine. If it’s economic policy for them. Fine,” said Linda Kalcher, executive director of the Strategic Perspectives think tank. Select another policy area -------------------------------------------------------------------------------- SUSTAINABILITY Merz, like Scholz, wants to delay key corporate sustainability reporting rules to boost Germany’s ailing industry. That means it’s pretty much assured that Germany under Merz would back a strong omnibus simplification bill for green rules, a proposal the European Commission is expected to release on Feb. 26. A Merz victory also means the center-right European People’s Party, which dominates the European Parliament and is Merz’s political family, once again has a powerful ally in the EU’s biggest economy. Already, the EPP has pushed hard to water down the EU anti-deforestation rule with the support of groups further to the right (mostly without success thus far). Select another policy area -------------------------------------------------------------------------------- MOBILITY Merz is inheriting an economy in recession that is being further dragged down by a crisis engulfing its automotive sector. He recognizes the problems: high energy and labor costs, and stiff competition in the electric vehicle transition. But he’s been light on the details of how he intends to help automakers. In campaign speeches, he promised to cut red tape and reduce high costs but stopped short of putting support behind reforming Germany’s debt brake, which will keep Merz’s hands tied when it comes to funding such initiatives. Germany’s carmakers are highly dependent on the Chinese market, which led Scholz to acquiesce to Beijing’s wishes, such as lobbying against the made-in-China EV duties. Merz will take a harder line with China and has made clear to automakers that they should not come crawling to him if their Asian investments blow up. Select another policy area -------------------------------------------------------------------------------- TRADE Taking a stronger line on Russia and China and rekindling old friendships with fellow EU leaders: Merz has his work cut out for him if he wants to link the German export economy to global growth hot spots like the Mercosur countries, Mexico or Southeast Asia. Merz recognizes that a functional Franco-German axis can create more trade deals, more certainty for companies and — eventually — a stronger Europe. “We have to overcome our dispute on Mercosur,” Merz told the World Economic Forum in Davos last month, saying he was in regular close contact with French President Emmanuel Macron. The Christian Democrat has also signaled a harder approach to China. Or, at least, he’s admitted the German economy is too dependent on Beijing’s woes and wishes. But just how hawkish Merz’s approach to trade will end up being is likely to be determined by who he ends up with as a coalition partner. Select another policy area -------------------------------------------------------------------------------- Advertisement AGRICULTURE A victory for Merz’s CDU means Berlin will align on agricultural policy with both the largest political bloc in the European Parliament — the European People’s Party led by Bavarian Manfred Weber — and EU Agriculture Commissioner Christophe Hansen. Ahead of negotiations over the future of the EU’s Common Agricultural Policy, Hansen has launched an overhaul of farm policy that would effectively roll back the green agenda of the last term and instead emphasize making farming a more attractive and economically viable occupation. In its campaign platform, Merz’s CDU said it wants a CAP “that serves farmers.” Scholz’s center-left government pushed initiatives to support organic farming and reduce food waste. But it clashed with farmers a year ago over its decision to scrap tax breaks on agricultural diesel. The CDU said it will reinstate the diesel tax break and take broader action to strengthen planning security for farmers. “With the CDU, no farmer will have to protest with his tractor in front of the Brandenburg Gate anymore,” the party said. Select another policy area -------------------------------------------------------------------------------- CENTRAL BANKING Merz’s chancellorship will mark the return of conservative opposition to meddling with Germany’s notorious debt brake, which limits government deficit spending to 0.35 percent a year and is seen by many as the cause of the shoddy state of the country’s infrastructure.  Scholz’s efforts to tamper with the brake caused the collapse of his government, and Merz’s CDU faction is fiercely opposed to any reform — up to a point. Surprisingly enough, Merz himself, during a TV debate earlier this month, intimated openness to some fine-tuning, but not before other solutions are tried. Timid, yes, but revolutionary from a Christian Democrat.  Otherwise, financial markets are broadly skeptical that Merz can do much to stall Germany’s well-documented economic decline, with gross domestic product expected to contract 0.5 percent in 2025. During the race, the choice between the two parties’ economic policies was ultimately “superficial,” ING Global Head of Macro Carsten Brzeski lamented in a note earlier this month, noting that Merz’s plans for tax and spending cuts reflected an almost spiritual faith in free markets — the very same markets that have dealt such a humiliating blow to Germany’s economic prestige.  Merz will also have critical sway over the outcome of a major transnational banking battle that could put EU ideals to the test. When Milanese lender UniCredit made its surprise bid on Germany’s Commerzbank last year, it looked like exactly the kind of cross-border banking consolidation that Mario Draghi was advocating in his landmark report — until Scholz’s government reacted with horror and dreamed up wild schemes to block it. UniCredit CEO Andrea Orcel has since said he will wait on Merz’s position before making another move, but it’s hard to imagine the new leader will be any more keen to give away one of the country’s most prized lenders.  Select another policy area -------------------------------------------------------------------------------- FINANCIAL SERVICES Merz holds the keys to significantly boosting Europe’s defense capabilities in the years to come. As Trump pressures Europe to pony up military spending, many in Brussels are anxiously waiting for Germany to give its blessing for the European Commission to borrow money on behalf of member countries. Highly indebted countries such as France, Italy and Spain who fall short of NATO’s defense spending target argue that receiving “free money” from Brussels is the only way for them to drastically increase military spending without making politically unpopular cuts to other budget areas.  Merz warmed to this idea during the election campaign — and supporters hope that his backing will defeat opposition from frugal allies such as Austria and the Netherlands. There are many less controversial ideas on the table, such as exempting defense from EU spending rules or increasing military funds in the EU’s new multiyear budget that will come into force in 2028. But supporters of common debt argue that none of these will be enough to meet the scale of the challenge alone.  Select another policy area -------------------------------------------------------------------------------- COMPETITION Germany’s industrial giants are flailing and shedding jobs. Merz will be expected to act. His party’s manifesto called for “Made in Germany” champions and for a modern antitrust and competition law “that uses a global market as a benchmark,”  references to the Siemens-Alstom deal to create a European rail champion that was blocked by the EU. Merz is also a fan of cross-border state-funded projects, known as Important Projects of Common European Interest, saying he wants to use such instruments “as effectively as possible in Germany.” The country has been one of the driving forces of several IPCEIs, which have led to the public financing of hydrogen, batteries and cloud infrastructure. He also wants Germany’s national rail company Deutsche Bahn to be streamlined and restructured, with infrastructure and transport separated “to increase competition.” Given the dire state of German rail, this could prove to be a popular move. Select another policy area -------------------------------------------------------------------------------- Advertisement TECH Merz sees digital transformation as the key to Germany’s industrial revival and wants to turn the country into Europe’s tech front-runner. His plan is to earmark 3.5 percent of gross domestic product to research and development by 2030, with a special focus on space, quantum computing, artificial intelligence and cloud technologies. Key proposals include setting up a standalone digital ministry (currently merged with transport) and offering new startups temporary relief from red tape. Merz has also said that bureaucracy in Berlin and Brussels needs to be drastically reduced for Germany to regain its competitive edge. This stance is in line with the center-right views in EU institutions, where a major push to simplify digital rules is underway.  Select another policy area -------------------------------------------------------------------------------- CYBER In the months leading up to the German election, Berlin’s lawmakers looked to toughen up restrictions on (and potentially ban) high-risk vendors — cough, Chinese suppliers like Huawei — to implement the EU’s rules on cybersecurity in critical sectors. With work on the draft law rolling over, Merz will be faced with a decision on whether to crack down on Chinese tech in Germany’s critical sectors. His CDU party said that it wants to maintain close economic relations with China, but also committed to taking steps to protect critical infrastructure and security relevant technology.   The party manifesto also outlined a sweeping change of course in terms of data protection policy, encouraging more “pragmatic” rules that allow data to be used for innovation and growth, as well as law enforcement.  Select another policy area -------------------------------------------------------------------------------- HEALTH A Merz win signals a blow for Germany’s cannabis users, after the CDU leader pledged to reverse last year’s partial decriminalization of the drug. He blames the new policies, which allow adults to possess up to 25 grams of cannabis in public and grow three plants per household, for an increase in drug-related crime.  It could be good news for fans of the EU’s new rules to digitalize European health records, the European Health Data Space. In an attempt to force notoriously analog Germans away from paper files, Merz has suggested that anyone who stores their data in an electronic patient file could receive a discount on health insurance contributions.  Select another policy area -------------------------------------------------------------------------------- Victor Jack, Karl Mathiesen, James Fernyhough, Joshua Posaner, Jordyn Dahl, Koen Verhelst, Douglas Busvine, Ben Munster, Gregorio Sorgi, Aude van den Hove, Mathieu Pollet, Eliza Gkritsi, Ellen O’Regan, Mari Eccles and Hanne Cokelaere contributed to this article.