By contrast, the euro area was more exposed to the energy crisis than the US, given its proximity and higher energy dependence to Russia and especially Russian gas. As long as inflation is largely caused by supply side factors such as energy prices, interest rate hikes cannot address the problem. Hence the ECB reacted when the inflation rate in the projected horizon breached its 2% target and saw signs of infiltration of inflation into demand side factors of the economy. Consequently, the ECB started raising interest rates in July 2022. However, it had started normalising its monetary policy much earlier in 2022 by terminating the PEPP and APP bond purchases. The second main difference relates to the labour market dynamics of the two economies. The US labour market exhibited at a relatively early stage, a greater degree of tightness, evidenced by stronger wage growth in the US than in the euro area. This higher degree of US labour market tightness was another key factor in explaining the medium-term inflationary pressures. By contrast, in the euro area, the pick-up in wage growth is relatively a more recent phenomenon. Characteristically, US labour costs increased by 5.8% in 2022, and almost 12% in the two year period 2020-2022. In the euro area, data until the third quarter of 2022 show that labour costs have increased by 2.8%, with a cumulative growth of 7% over the same period of 2020-2022.
Second, a set of resolutionrelated reforms are intended to limit the consequences to the financial sector if a failure by such an institution still were to occur. Given the limited time on this panel, I will not review in detail the post-crisis comprehensive capital and liquidity framework that the Federal Reserve has put in place. However, from the perspective of addressing too big to fail, it is important to highlight the Federal Reserve rule finalized this year that imposes risk-based capital surcharges on the handful of U.S. global systemically important banking organizations (GSIBs). Under this framework, a GSIB’s riskbased capital surcharge will reflect the degree to which its failure would impact the financial system. In effect, the risk-based capital surcharge confronts each U.S. GSIB with the choice to either reduce its systemic footprint or instead to hold more capital. The policy approach to too big to fail recognizes, of course, that we can reduce but cannot completely eliminate the possibility of a large financial institution’s failure. Therefore, a second aim of our post-crisis reforms has been to limit the adverse consequences that would result if a large financial institution were to fail. That is, large financial firms need to be capable of being successfully resolved without creating unacceptable collateral damage to the rest of the financial system and to the economy.