nep-eec New Economics Papers
on European Economics
Issue of 2006‒06‒24
twenty-one papers chosen by
Giuseppe Marotta
Universita di Modena e Reggio Emilia

  1. Europe’s Hard Fix: The Euro Area By Otmar Issing
  2. Euro-productivity and euro since the 1960s: By GAYLE ALLARD
  3. The euro and its perception in the German population By Bettina Isengard; Thorsten Schneider
  4. On the Role of Stock Market for Real Economic Activity By Boriss Siliverstovs; Manh Ha Duong
  5. Auctioning of EU ETS Phase II allowances: how and why? By Cameron Hepburn; Michael Grubb; Karsten Neuhoff; Felix Matthes; Maximilien Tse
  6. Searching for the EU Social Dialogue Model By Richard B. Freeman
  7. Three dimensions of regional integration process in Europe: an approach by spatial econometrics (In French) By Stéphane VIROL (IERSO-IFReDE-GRES)
  8. Allocation and competitiveness in the EU emissions trading scheme: policy overview By Michael Grubb; Karsten Neuhoff
  9. Europe's Demographic Deficit. By Sinn, Hans-Werner
  10. Competitiveness and the employment relationship in the 21 st Century: By CRISTINA SIMON; GAYLE ALLARD
  11. Who’s Afraid of Tax Competition? Harmless Tax Competition from the New European Member States By Amina Lahreche-Revil
  12. Russian Natural Gas Exports to Europe : Effects of Russian Gas Market Reforms and the Rising Market Power of Gazprom By Eirik Lund Sagen; Marina Tsygankova
  13. Responses to Monetary Policy Shocks in the East and the West of Europe: A Comparison By Marek Jarocinski
  14. Do the elderly reduce housing equity? An international comparison By Maria Concetta Chiuri; Tullio Jappelli
  15. Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions By Andrea Bassanini; Romain Duval
  16. Effectiveness of Bailouts in the EU By Ela Glowicka
  17. International Wealth Effects By Jirka Slacalek
  18. Border Effect Estimates for France and Germany Combining International Trade and Intra-national Transport Flows By Matthias Helble
  19. How "black" is the black sheep compared to all others? Turkey and the EU By Akcomak, Semih; Parto, Saeed
  20. Ireland’s Housing Boom: What has Driven it and Have Prices Overshot? By David Rae; Paul van den Noord
  21. Early Retirement, Social Security and Well-Being in Germany By Axel Börsch-Supan; Hendrik Jürges

  1. By: Otmar Issing (European Central Bank)
    Date: 2006–04–26
  2. By: GAYLE ALLARD (Instituto de Empresa)
    Abstract: How have labor market institutions and welfare-state transfers affected jobs and productivity in Europe? Many studies have tackled this question, with mixed results. This paper proposes an eclectic approach and gives a clearer answer to the issue.
    Keywords: Productivity, Employment protection legislation, unemployment benefits, social spending, welfare state
  3. By: Bettina Isengard (DIW Berlin, German Socio-Economic Panel Study); Thorsten Schneider (Otto-Friedrich-University Bamberg, Chair of Sociology I)
  4. By: Boriss Siliverstovs; Manh Ha Duong
    Abstract: In this study we have addressed the relationship between the stock market, the measure of real economic activity (represented by the real GDP), the economic sentiment indicator, and real interest rate for the five European countries: Germany, France, Italy, the Netherlands, and the UK. We find that even when accounting for expectations, represented by the economic sentiment indicator, the stock market has certain predictive content for the real economic activity. At the same time, the relationship between the economic sentiment indicator and the real activity seems to be more articulated than that between the latter variable and the stock market. We also have shown that the developments in the national stock markets are explained by the common factor shared by all of them. The greater relative importance of the economic sentiment indicator for the real GDP when compared to that of the stock market can be traced to the fact that the real economic activity is still shaped more by the domestic shocks rather than the global ones, i.e. those reflected in the stock market.
    Keywords: Stock market, real activity, economic sentiment indicator
    JEL: E44 G15
    Date: 2006
  5. By: Cameron Hepburn; Michael Grubb; Karsten Neuhoff; Felix Matthes; Maximilien Tse
    Abstract: The European Directive on the EU ETS allows governments to auction up to 10% of the allowances issued in Phase II 2008-2012, without constraints specified thereafter. This paper reviews and extends the long-standing debate about auctioning, in which economists have generally supported and industries opposed greater use of auctioning. The paper clarifies the key issues by reviewing six ‘traditional’ considerations, examines several credible options for auction design, and then proposes some new issues relevant to auctioning. It is concluded that greater auctioning in aggregate need not increase adverse competitiveness impacts, and could in some respects alleviate them, particularly by supporting border-tax adjustments. Auctioning within the 10% limit might also be used to dampen price volatility during 2008-12 and, in subsequent periods, it offers the prospect of supporting a long-term price signal to aid investor confidence. The former is only possible, however, if Member States are willing to coordinate their decision-making (though not revenue raising) powers in defining and implementing the intended pricing mechanisms.
    Keywords: European emission trading, auctions, price floor
    JEL: D44 L10 Q52
    Date: 2006–06
  6. By: Richard B. Freeman
    Abstract: The European Union and the United States operate different variants of market capitalism. The EU model uses social dialogue institutions to help determine economic outcomes, particularly in the labor market, whereas the US relies more on market forces. The theory of competitive markets provides a powerful framework for analyzing market driven economies and for assessing the conditions under which unfettered markets yield desirable outcomes. But there is no comparable framework for analyzing institution driven economies. This paper argues that models of efficient bargaining/the Coase Theorem offer the best framework for analyzing social dialogue economies and for identifying policies and institutional reforms to improve their functioning.
    Date: 2006–06
  7. By: Stéphane VIROL (IERSO-IFReDE-GRES)
    Abstract: Whereas the process of integration economic is accentuated in Europe, regional integration dynamics of space seems to be a crucial issue. Reflexions engaged, in particular through the SDEC, aim at promoting a voluntarist policy of polycentric adjustment of European space. Thus we are led to consider both structuration and regional integration dynamics of this space. An inventive use of the most recent tools of spatial econometrics makes possible to appreciate and to quantify the concerned processes. More particularly, we seek to improve the modelization of the interactions between areas.
    Keywords: Regional Integration of spaces, spatial econometrics, concentration, polycentrism
    JEL: R11 R15 C31 C51
    Date: 2006
  8. By: Michael Grubb; Karsten Neuhoff
    Abstract: The European emissions trading scheme (EU ETS) has an efficient and effective market design that risks being undermined by three interrelated problems: the approach to allocation; the absence of a credible commitment to post-2012 continuation; and concerns about its impact on the international competitiveness of key sectors. This special issue of Climate Policy explores these three factors in depth. This policy overview summarizes key insights from the individual studies in this issue, and draws overall policy conclusions about the next round of allocations and the design of the system for the longer term.
    Date: 2006–06
  9. By: Sinn, Hans-Werner
    Abstract: Due to exceptionally low birth rates, the dynamism of Europe will be lagging behind that of other regions of the world for the time being. The paper assembles a rich body of comparative empirical data to clarify the extent of the demographic problems for the EU countries. It advances the view that the low birth rates in part result from early government interventions in terms of socializing the fruits of human capital investment via the pay-as-you-go pension system. To mitigate the extent of socialization, it considers a policy of freezing the contribution rates within the existing pensions systems, forcing the childless to save and providing an additional tax-financed "child pension" tax to parents.
    Keywords: pension system; birth rate; human capital; demography
    JEL: H55 J1
    Date: 2005
  10. By: CRISTINA SIMON (Instituto de Empresa); GAYLE ALLARD (Instituto de Empresa)
    Abstract: Competitiveness is an often ill-defined concept that is key to economic success. This paper focuses on the links between competitiveness and the employment relationship. It ranks European countries by their specialization in high-technology, skilled labor sectors to yield a competitiveness ranking, and examines workers´ values and attitudes to identify common features of the "competitive" countries.
    Keywords: Employment relationship
  11. By: Amina Lahreche-Revil
    Abstract: This paper investigates the tax sensitivity of foreign direct investment (FDI) in the context of EU enlargement to Eastern European countries. Using two alternative specifications of a gravity equation, it shows that the E25 is heterogeneous as far as FDI location determinants are concerned. However, the results are at odds with usual consensus:while tax differentials do impact on FDI in the EU15, they are shown to have had no impact on the new member states during the period of analysis (1990-2002). Similarly, other factors such as unit labor costs and price-competitiveness fail to explain FDI inflows to the new EU member states. Simulation exercises run on statutory taxation attend to assess empirically the impact of various tax convergence scenarios. They are shown to imply limited changes in FDI inflows, on the basis of FDI flows and tax differentials observed in 2002.
    Keywords: Tax competition; FDI; EU enlargement; Eastern Europe; transition; convergence
    JEL: F21 F36 H25 H87
    Date: 2006–06
  12. By: Eirik Lund Sagen; Marina Tsygankova
    Abstract: Gazprom, the dominant gas company in Russia, is widely believed to be the key supplier of gas to Europe in the foreseeable future. However, there are numerous uncertainties and challenges within the Russian and European gas industry that may alter the allocation of Gazprom´s gas sales between domestic and export markets. In this paper we use both theoretical and numerical models to study potential effects on Russian gas exports from changes in Russian domestic gas prices and the production capacities in 2015. We also investigate whether the liberalization of the European gas markets may provide incentives for Gazprom to induce monopoly power in its export markets. Our main findings suggest that both increased domestic gas prices and sufficient production capacities are vital to maintain Gazprom´s market share in Europe over the next decade. At low domestic prices, Gazprom may even have difficulties to carry out its long-term export commitments. However, if export possibilities are ample due to both lower domestic demand at higher prices and high overall production capacities, a large share of spot trades in Europe may encourage Gazprom to exercise market power in its export markets.
    Keywords: Russia, Natural gas, production capacity, export, Western Europe, price, numerical model
    JEL: F17 D42 Q31 Q38
    Date: 2006
  13. By: Marek Jarocinski (Universitat Pompeu Fabra, Barcelona and CASE - Center for Social and Economic Research, Warsaw)
    Abstract: This paper compares responses to monetary shocks in the EMU countries (in the pre-EMU sample) and in the New Member States (NMS) from Central Europe. The small-sample problem, especially acute for the NMS, is mitigated by using a Bayesian estimation procedure which combines information across countries. A novel identification scheme for small open economies is used. The estimated responses are quite similar across regions, but there is some evidence of more lagged, but ultimately stronger price responses in the NMS economies. This contradicts the common belief that monetary policy is less effective in post-transition economies, because of their lower financial development. NMS also have a probably lower sacrifice ratio, which is consistent with the predictions of both the imperfect information model of Lucas (1973) and the New-Keynesian model of Ball et al. (1988).
    Keywords: monetary policy transmission, Structural VAR, Bayesian estimation, exchangeable prior
    JEL: C11 C15 C33 E40 E52
    Date: 2006–05–17
  14. By: Maria Concetta Chiuri (University of Bari, CSEF and CHILD); Tullio Jappelli (University of Salerno, CSEF and CEPR)
    Abstract: We explore the pattern of elderly homeownership using microeconomic surveys of 17 OECD countries. In most countries the survey is repeated over time, permitting construction of an international dataset of repeated cross-sectional data, merging 59 national household surveys on about 300,000 individuals. We find that ownership rates decline considerably after age 60 in most countries. However, a large part of the decline depends on cohort effects. Adjusting for this, we find that ownership rates fall after age 70 by about half a percentage point per year. Interestingly, ownership trajectories are quite similar in all countries – except Finland and Canada - and are not correlated with a wide set of indicators that we examine.
    Keywords: homeownership, wealth decumulation, aging
    JEL: G2 R2
    Date: 2006–05–29
  15. By: Andrea Bassanini; Romain Duval
    Abstract: This paper explores the impact of policies and institutions on employment and unemployment of OECD countries in the past decades. Reduced-form unemployment equations, consistent with standard wage setting/pricesetting models, are estimated using cross-country/time-series data from 21 OECD countries over the period 1982- 2003. In the “average” OECD country, high and long-lasting unemployment benefits, high tax wedges and stringent anti-competitive product market regulation are found to increase aggregate unemployment. By contrast, highly centralised and/or coordinated wage bargaining systems are estimated to reduce unemployment. These findings are robust across specifications, datasets and econometric methods. As policies and institutions affect employment not only via their impact on aggregate unemployment but also through their effects on labour market participation - particularly for those groups “at the margin” of the labour market, group-specific employment rate equations are also estimated. In the “average” OECD country, high unemployment benefits and high tax wedges are found to be associated with lower employment prospects for all groups studied, namely prime-age males, females, older workers and youths. There is also evidence that group-specific policy determinants matter, such as targeted fiscal incentives. Cet article explore l’impact des politiques et des institutions sur l’emploi et le chômage dans les pays de l’OCDE au cours des dernières décennies. Des équations réduites de taux de chômage, telles que dérivées par exemple d’un modèle de négociations salariales, sont estimées sur un panel de 21 pays de l’OCDE sur la période 1982-2003. Il ressort que, dans le pays « moyen » de l'OCDE, le taux moyen de remplacement des indemnités chômage, le coin fiscalo-social et le degré de réglementation des marchés de produits augmentent le taux de chômage structurel. A contrario, il apparaît qu’un haut degré de centralisation/co-ordination des négociations salariales réduit le chômage structurel. Ces résultats sont robustes à des changements de spécification, d’échantillon et de méthode d’estimation économétrique. Étant donné que les politiques et les institutions affectent l’emploi non seulement via leur impact sur le chômage mais aussi au travers de leurs effets sur la participation au marché du travail –en particulier pour les groupes « à la marge » du marché du travail, des équations d’emploi par groupes sont également estimées. Il ressort que dans le pays « moyen » de l’OCDE, le taux de remplacement des indemnités chômage et le coin fiscalo-social réduisent les perspectives d’emplois de chacun des groupes étudiés, à savoir les hommes de 25 à 55 ans, les femmes, les travailleurs âgés et les jeunes. Certains déterminants spécifiques à chaque groupe jouent également un rôle, en particulier les incitations fiscales ciblées.
    JEL: J38 J58 J68
    Date: 2006–06–09
  16. By: Ela Glowicka
    Abstract: Governments in the EU frequently bail out firms in distress by granting state aid. I use data from 86 cases during the years 1995-2003 to examine two issues: the impact of bailouts on bankruptcy probability and the determinants of bailout policy. I have three main results. First, the estimated discrete-time hazard rate increases during the first four years after the subsidy and drops after that, suggesting that some bailouts only delayed exit instead of preventing it. The number of failing bailouts could be reduced if European control was tougher. Second, governments’ bailout decisions favored public firms, even though public firms did not outperform private ones in the survival chances. Third, subsidy choice is an endogenous variable in the analysis of the hazard rate. Treating it as exogenous underestimates its impact on the bankruptcy probability. <br> <br> <i>ZUSAMMENFASSUNG - (Die Wirksamkeit von Beihilfe in der EU) <br> Europäische Unternehmen, die in Schwierigkeiten geraten sind, werden regelmäßig von den Regierungen in der EU durch Rettungs- und Restrukturierungsbeihilfen (R&R-Beihilfen) unterstützt. Im vorliegenden Paper werden 86 von der Europäischen Kommission überprüfte Fälle von R&RBeihilfen zwischen 1995 und 2003 herangezogen, um zwei Probleme zu untersuchen: die Auswirkung von R&R-Beihilfen auf die Bankrotthäufigkeit und die bestimmenden Faktoren für Subventionspolitik der Regierungen. <br><br> Dabei kommt die Studie zu drei Ergebnissen. Es zeigt sich, dass sich die geschätzte Bankrottwahrscheinlichkeit während der ersten vier Jahre nach der Beihilfe erhöht und danach sinkt. Dies deutet darauf hin, dass einige Beihilfen den Marktaustritt nur verzögern, anstatt ihn zu verhindern. Die Zahl der Firmen, die erfolglos Beihilfe bekommen, könnte durch eine strengere europäische Beihilfekontrolle verringert werden. Das zweite Ergebnis besagt, dass die Regierungen bei der Beihilfevergabe staatliche Unternehmen bevorzugt haben, obwohl staatliche Unternehmen gegenüber den privaten keine bessere Überlebenswahrscheinlichkeit haben. Drittens ist die Beihilfewahl eine endogene Variable in der Analyse der Bankrottwahrscheinlichkeit. Sie als exogen zu behandeln bedeutet, ihre Auswirkung auf die Bankrottwahrscheinlichkeit zu unterschätzen.</i>
    Keywords: AState aid, European Union, Discrete-time hazard, Bivariate probit
    JEL: K2 G3 L5
    Date: 2006–05
  17. By: Jirka Slacalek
    Abstract: This paper presents a detailed investigation of the wealth effect for 16 industrial countries using the recently proposed technique that exploits the sluggishness of consumption growth. I argue that, compared to the widespread cointegration-based methodology, the approach I apply has better theoretical foundations and is more immune to parameter instability. Empirically, this new technique implies smaller magnitude of the wealth effect in the G-8 countries and larger size of the income effect. I also document that the wealth effect tends to be larger in countries with more developed financial markets and has decreased substantially in the last twenty years.
    Keywords: Wealth effect, income effect, consumption dynamics, sticky information
    JEL: E21 E32 C22
    Date: 2006
  18. By: Matthias Helble (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: Since the seminal contribution of McCallum (1995) economists have tried to estimate the border effect for other countries than the US and Canada, but have been confronted with a key data problem: data on regional trade flows are extremely rare. The different approaches put forward to overcome this lack of information have been shown to hinge crucially on certain distance measures. The main purpose of this paper is to develop a method that allows us determining border effects with a high degree of accuracy in the absence of intra-national trade data. We show how to improve the estimation of border effects at the example of France and Germany using data on regional transportation flows. Our results indicate that France trades about eight times more and Germany about three times more with itself than with other EU countries compared to the predictions of the gravity equation.
    Keywords: Border Effect, Gravity Equation, Transport Infrastructure
    JEL: F15
    Date: 2006–01–25
  19. By: Akcomak, Semih (UNU-MERIT); Parto, Saeed (Faculty of Environmental Studies, University of Waterloo)
    Abstract: In this paper we question the validity of the arguments against Turkey's membership of the EU and challenge the political wisdom of excluding Turkey from Europe. First, we argue that fundamental European values are not as uniform as they are made out to be. There are significant differences among the member states and the different European regions on basic values relating to religion and democracy. Second, we argue that many of Turkey's supposed cultural differences with the rest of Europe are in fact unsubstantiated. We support our arguments by analyzing widely available macroeconomic evidence and the data from the European Values Study, 1999 (EVS99).
    Keywords: Turkey, EU, Institutions, Institutional Analysis, Values, EVS
    JEL: A13 Z12 Z13
    Date: 2006
  20. By: David Rae; Paul van den Noord
    Abstract: The Irish housing market is very buoyant. The housing boom is driven by strong economic growth, dynamic demographics and low interest rates. However, large tax advantages and relatively lenient credit policies by banks have also played their part, and prices may have become overvalued. To the extent that high house prices reflect favourable tax treatment, they may lead to economic inefficiencies by drawing excessive resources into residential construction. While a soft landing appears the most likely prospect, a disorderly correction of house prices would pose risks for macroeconomic and possibly financial stability. In this context, one policy lever available to the government would be a phased removal of the tax advantages associated with housing. In addition, banks should remain cautious in their lending and provisioning policies. <P>L’envolée du marché irlandais du logement Le marché de l’immobilier est très dynamique en Irlande. L’essor du logement s’explique par la forte croissance économique, la dynamique démographique et la faiblesse des taux d’intérêt. Cependant, les importants avantages fiscaux et les politiques de crédit relativement libérales des banques ont aussi joué leur rôle et les prix sont désormais peut être surévalués. Dans la mesure où les prix élevés de l’immobilier reflètent un régime fiscal favorable, ils peuvent conduire à des inefficiences économiques en attirant des ressources excessives dans la construction résidentielle. Tandis qu’un atterrissage en douceur apparaît très probable, une correction désordonnée de ces prix ferait peser des risques sur la stabilité macroéconomique, voire financière. Dans ce contexte, un des leviers d’action à la disposition des autorités serait une suppression graduée des avantages fiscaux associés au logement. En outre, les banques devraient être incitées à faire preuve de prudence dans leurs politiques de prêt et de provisionnement.
    Keywords: house prices, property tax, housing markets, marché immobilier, residential construction, construction résidentielle, immobilier, taxe foncière
    JEL: E2 R21 R31
    Date: 2006–06–15
  21. By: Axel Börsch-Supan; Hendrik Jürges
    Abstract: Germans retire early. On the one hand, early retirement is very costly and amplifies the burden which the German public pension system has to carry due to population aging. On the other hand, however, early retirement is also seen as a much appreciated social achievement which increases the well-being especially of those workers who suffer from work-related health problems. This paper investigates the relation between early retirement and well-being using the GSOEP panel data. The general picture that emerges from our analysis is that early retirement as such seems to be related to subjective well-being, in fact more so than normal retirement. Early retirement most probably is a reaction to a health shock. Individuals are less happy in the year of early retirement than in the years before and after retirement. After retirement, individuals attain their pre-retirement satisfaction levels after a relatively short while. Hence, the early retirement effect on well-being appears to be negative and short-lived rather than positive and long. Whether this is an effect of retirement itself or a psychological adaptation to an underlying shock cannot be identified in our data and remains an open research issue waiting for a more objective measurement of health.
    Date: 2006–06

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