nep-eec New Economics Papers
on European Economics
Issue of 2006‒07‒09
twenty papers chosen by
Giuseppe Marotta
Universita di Modena e Reggio Emilia

  1. Innovation and productivity in European industries By Mario Pianta; Andrea Vaona
  2. The reform and implementation of the Stability and Growth Pact By Richard Morris; Hedwig Ongena; Ludger Schuknecht
  3. An empirical analysis of national differences in the retail bank interest rates of the euro area By Massimiliano Affinito; Fabio Farabullini
  4. Launching the NEUQ: The New European Union Quarterly Model, A Small Model of the Euro Area and U.K. Economies By Anna Piretti; Charles St-Arnaud
  5. The tariff-only import regime for bananas in the European Union: Is setting the tariff at right level an impossible mission? By Hervé Guyomard; Chantal Le Mouël; Fabrice Levert; J. Lambana
  6. Optimal Currency Shares in International Reserves: The Impact of the Euro and the Prospects for the Dollar By Elias Papaioannou; Richard Portes; Gregorios Siourounis
  7. Economic Impacts of Immigration: A Survey By Sari Pekkala
  8. How Does EU Enlargement Affect Social Cohesion? By Wolfgang Keck; Peter Krause
  9. Macroeconomic and financial stability challenges for acceding and candidate countries By Adalbert Winkler; Roland Beck
  10. EU-Enlargement and Beyond: A Simulation Study on EU and Russia Integration By Pekka Sulamaa; Mika Widgrén
  11. How Do Trade in Intermediates and Geographical Forces Interact in Determining the Localisation of Industries in Central Eastern European Countries? By Gianfranco De Simone
  12. Innovativity: A Comparison Across Seven European Countries By Pierre Mohnen; Jacques Mairesse; Marcel Dagenais
  13. Total Factor Productivity Estimates: Some Evidence from European Regions By Maria Gabriela Ladu
  14. The Role of FDI in Eastern Europe and New Independent States: New Channels for the Spillover Effect By Irina Tytell; Ksenia Yudaeva
  15. Finland's First 10 Years in the European Union - Economic Consequences By Jaakko Kiander; Antti Romppanen
  16. Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia By Kerstin Bernoth; Guntram Wolff
  17. Entry regulations and labor market outcomes: evidence from the Italian retail trade sector By Eliana Viviano
  18. Investment Incentives in Closely Held Corporations and Finland's 2005 Tax Reform By Seppo Kari; Harri Hietala
  19. Tourism and economic growth at regional level: the cases of Spain and Italy By Isabel Cortés-Jiménez
  20. The Evolution of the Finnish Model in the 1990s: from Depression to High-tech Boom By Jaakko Kiander

  1. By: Mario Pianta (Corresponding author, Università di Urbino); Andrea Vaona (Dipartimento di Scienze economiche (Università di Verona))
    Abstract: The labour productivity impact of innovation is investigated in this paper combining neo-Schumpeterian insights on the variety of innovation, with the importance of industrial structures and firm size; two models are proposed for explaining productivity and export success in European manufacturing industries and firm size classes. The empirical estimates are based on data from the European innovation survey (CIS 2), covering Austria, France, Italy, the Netherlands and the UK, broken down by 22 sectors and for large, medium and small firms. The econometric results, obtained adopting cross-sectional estimation methodologies able to account for unobserved industrial characteristics, show that productivity in Europe relies on product and process innovation, with the support of the efficiency gains provided by a grouped business structures. Conversely, in Italy the introduction of new machinery linked to innovation appears as the key mechanism supporting domestic productivity. When export success is considered, all countries have to rely on an innovation-based model of competitiveness.
    Keywords: Innovation, productivity, export performance, industries
    Date: 2006–06
  2. By: Richard Morris (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Hedwig Ongena (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: Fiscal rules are instrumental for restraining deficit and spending biases in euro area Member States that could threaten the smooth functioning of Economic and Monetary Union (EMU). Ideally, fiscal rules should combine characteristics such as sufficient flexibility to allow for appropriate policy choices with the necessary simplicity and enforceability to actually discipline government behaviour. The Maastricht Treaty and the Stability and Growth Pact established such a rules-based framework for fiscal polices in EMU. However, the implementation of the Pact was less than fully satisfactory. One year ago, the Pact was reviewed and a reformed version adopted which emphasises more flexible rules and procedures, including more explicit room for judgement and discretion than in its original form. While its proponents argued that these revisions would strengthen commitment and implementation of the rules, others emphasised the risk of weakening the EU fiscal framework. A year on from the SGP reform, this paper takes stock of how the EU fiscal rules have evolved and how they have been implemented from the Maastricht Treaty to the present day, including initial experiences with the implementation of the reformed Pact. The first indications are of a smoother and consistent implementation, but with consolidation requirements that are rather lenient while fiscal targets and projections point to only slow and back-loaded progress towards sound public finances in many countries. The assessment of the implementation of the revised rules is therefore mixed. It is of the essence that the provisions of the revised SGP be rigorously implemented in order to ensure fiscal sustainability. JEL Classification: E61, E62, H6.
    Keywords: Stability and Growth Pact, Fiscal policy, Fiscal rules, EMU.
    Date: 2006–06
  3. By: Massimiliano Affinito (Banca d'Italia); Fabio Farabullini (Banca d'Italia)
    Abstract: The availability of new harmonized data on bank interest rates allows a rigorous assessment to be made of cross-country price homogeneity/heterogeneity in euro area retail credit markets. Econometric analysis shows that the banking market is still highly segmented and that the degree of integration in a single country (Italy, taken as a benchmark for integration) is greater than in the euro area. However, national differences can be partially explained by variables reflecting the characteristics of domestic depositors and borrowers (“demand side” regressors, such as risk exposure, disposable income, alternative financing sources, average firm size) and the characteristics of the banking systems (“supply side” regressors, such as banking market concentration, asset and liability structure). The euro area prices appear different because national banking products appear different or because they are differentiated by national factors. Once these factors have been controlled for, many differences disappear.
    Keywords: bank interest rates, convergence, integration
    JEL: E43 E44 G21
    Date: 2006–05
  4. By: Anna Piretti; Charles St-Arnaud
    Abstract: The authors develop a projection model of the euro area and the United Kingdom. The model consists of two country blocks, endogenous to each other via the foreign demand channel. Each country block features an aggregate IS curve, a forward-looking Phillips curve, and an estimated forward-looking monetary policy reaction function. Potential output is estimated by means of a Hodrick-Prescott filter, conditioned by an equilibrium path generated by a structural vector autoregression (Rennison 2003 and Gosselin and Lalonde 2002). The Phillips curve is specified in terms of the output gap, and inflation dynamics are described by the polynomial adjustment cost (PAC) approach, as in Kozicki and Tinsley (2002). The model delivers relatively accurate projections at a variety of forecast horizons and provides a useful tool for policy analysis. The authors’ simulation results suggest that output and inflation exhibit a greater degree of persistence to shocks in the euro area than in the United Kingdom.
    Keywords: Economic models; Business fluctuations and cycles
    JEL: C53 E17 E37
    Date: 2006
  5. By: Hervé Guyomard (INRA-Unité d'économie - [INRA]); Chantal Le Mouël (INRA-Unité d'économie - [INRA]); Fabrice Levert (INRA-Unité d'économie - [INRA]); J. Lambana
    Abstract: The European Union is bound by World Trade organisation agreements to move to a tariff-only import system for bananas no later than 1 january 2006. From that date, imports from non-ACP countries will be subject to a single tariff while ACP country bananas will continue to enter the EU market duty free. This regime will replace the highly contested tariff-rate quota policy in place since 1993. This paper shows that setting the tariff at a level that maintain tha status quo is an impossible mission given uncertainties on quota rates estimates and quota rent distribution
    Keywords: Politique Agricole Commune - PAC - Pays ACP - Banane -
    Date: 2006–07–03
  6. By: Elias Papaioannou; Richard Portes; Gregorios Siourounis
    Abstract: Foreign exchange reserve accumulation has risen dramatically in recent years. The introduction of the euro, greater liquidity in other major currencies, and the rising current account deficits and external debt of the United States have increased the pressure on central banks to diversify away from the US dollar. A major portfolio shift would significantly affect exchange rates and the status of the dollar as the dominant international currency. We develop a dynamic mean-variance optimization framework with portfolio rebalancing costs to estimate optimal portfolio weights among the main international currencies. Making various assumptions on expected currency returns and the variance-covariance structure, we assess how the euro has changed this allocation. We then perform simulations for the optimal currency allocations of four large emerging market countries (Brazil, Russia, India and China), adding constraints that reflect a central bank’s desire to hold a sizable portion of its portfolio in the currencies of its peg, its foreign debt and its international trade. Our main results are: (i) The optimizer can match the large share of the US dollar in reserves, when the dollar is the reference (risk-free) currency. (ii) The optimum portfolios show a much lower weight for the euro than is observed. This suggests that the euro may already enjoy an enhanced role as an international reserve currency ("punching above its weight"). (iii) Growth in issuance of euro-denominated securities, a rise in euro zone trade with key emerging markets, and increased use of the euro as a currency peg, would all work towards raising the optimal euro shares, with the last factor being quantitatively the most important.
    JEL: F02 F30 G11 G15
    Date: 2006–06
  7. By: Sari Pekkala
    Abstract: This survey presents findings from recent empirical studies on economic impacts of immigration with particular emphasis on European and Nordic countries. The survey consists of three parts. First, we look at the extent of immigration as an economic phenomenon in various host countries. The second part deals with the assimilation of immigrant workers in host country labor markets and the use of social benefits by immigrants. Third, the effect of immigration on natives? labor market outcomes is discussed. And finally, we survey studies on the impact of immigration on the host country public sector.
    Keywords: Immigration, assimilation, employment, unemployment, earnings, social benefits, welfare, labor market outcomes, public sector
    JEL: J61 J68 H53 J31 J23
    Date: 2005–03–07
  8. By: Wolfgang Keck; Peter Krause
    Abstract: The enlargement of the European Union in May 2004 by ten new member states bear increasing challenges in creating social cohesion among its citizens and regions. Social cohesion is understood here in a broad sense as a coalescence of European societies in such a way that living conditions and quality of life of its citizens converge. This paper's empirical focus is on the two core life domains that are currently taking center stage in EU policy debates: (1) employment and working conditions and (2) economic resources and social exclusion. The analyses show that the 15 former member states are converging in terms of lliving and work-ing conditions and the situation has improved in all of these countries during the 1990s. With the enlargement the situation becomes more diverse in the enlarged EU. In particular the post-socialist countries have to make great efforts to catch up with their EU counterparts. We can identify three emerging clusters of countries that share empirically very similar living stan-dards. The first, wealthy cluster consists of the old northern European member states. The second, intermediary country group contains the most well-off accession countries and the old Mediterranean member countries with a lower living standard. The third, less developed clus-ter embraces new member states that were former post-communist countries.
    Date: 2006
  9. By: Adalbert Winkler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Roland Beck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This paper – based on a report by a Task Force established by the International Relations Committee (IRC) of the European System of Central Banks (ESCB) – reviews macroeconomic and financial stability challenges for acceding (Bulgaria and Romania) and candidate countries (Croatia and Turkey). In an environment characterised by strong growth and capital inflows, the main macroeconomic challenges relate to the recent pick-up of inflation and the large and widening current account deficits. Moreover, rapid credit growth has been a recent feature of financial development in all countries and thus constitutes the main financial stability challenge. In general, monetary authorities have responded to these challenges by tightening monetary conditions and prudential standards, with concrete measures also reflecting the different monetary and exchange rate regimes in the region. The paper also highlights four specific features of financial development in the countries under review, namely the dominance of banks in financial intermediation, the strong participation of foreign-owned banks, the widespread use of foreign currencies and the strengthening of supervisory frameworks. JEL Classification: E65, G21, G38, O16, P27.
    Keywords: South-East Europe, macroeconomic performance, credit growth, financial stability.
    Date: 2006–07
  10. By: Pekka Sulamaa; Mika Widgrén
    Abstract: This paper examines the economic effects of the opening of the Russian Federation. The analysis carried out in the paper is two-fold. First we simulate the impact of the eastern enlargement of the EU and, second, we analyse how deeper integration between the EU and Russia contributes to this. The analysis is carried out with GTAP computable general equilibrium model. We find that there is a trade-off between the two roads of European integration arrangements. Eastern enlargement seems, even in its very deep form, be beneficial for all EU regions without causing substantial welfare losses outside the Union. EU-Russia integration, on the other hand, has different impact. To be beneficial for Russia free trade between the EU and Russia requires improved productivity in the latter, which may be due to better institutions or increased FDI. This might make the negotiations of the agreement cumbersome and if agreed its implementation difficult.
    Keywords: Integration, Free Trade Agreement, GTAP, EU, Russia
    Date: 2004–12–16
  11. By: Gianfranco De Simone (University of Milan and Centro Studi Luca D'Agliano)
    Abstract: Growing inflows of FDI and the increasing integration Central Eastern European Countries’ firms in International Production Networks set by EU-15 principals have brought to a rise in trade in parts and components. As a consequence, new patterns of localisation of industrial activities in CEECs have been observed. I put forward a general equilibrium model of trade and production which tries to explain cross-country variations of sectoral output on the basis of home market effect, trade in middle products, comparative advantages and market potential. Results coming from the empirical estimation allow me to draw some considerations about the driving forces behind the localisation over the second half of the 1990s of the four sectors in which most of the CEECs’ trade in intermediates with EU-15 is concentrated. I also argue that the proposed framework can be employed to test for the effectiveness of alternative trade theories.
    Keywords: Trade in Parts and Components, International Production Networks, Market Potential, Industry Localisation, Home Market Effect
    JEL: F10 F12 F14 F15
    Date: 2005
  12. By: Pierre Mohnen; Jacques Mairesse; Marcel Dagenais
    Abstract: This paper proposes a framework to account for innovation similar to the usual accounting framework in production analysis and a measure of “innovativity” comparable to that of total factor productivity. This innovation accounting framework is illustrated using micro-aggregated firm data from the first Community Innovation Surveys (CIS1) for seven European countries: Belgium, Denmark, Ireland, Germany, the Netherlands, Norway and Italy for the year 1992. Based on the estimation of a generalized Tobit model and measuring innovation as the share of total sales due to improved or new products, it compares the propensity to innovate, and the innovation intensity conditional and unconditional on being innovative, across the seven countries and low- and high-tech manufacturing sectors. Even with relatively few explanatory variables our innovation framework already accounts for sizeable differences in country innovation intensity. It also shows that differences in innovativity across countries can be nonetheless very large. <P>Nous proposons, dans cette étude, un cadre d’analyse, ou « comptabilité de l’innovation », semblable à celui très généralement utilisé pour la « comptabilité de la croissance », ainsi qu’une mesure de la « productivité des facteurs d’innovation » ou « innovativité » comparable à celle de la productivité totale des facteurs. Nous appliquons ce cadre d’analyse à la comparaison de l’innovation pour sept pays européens – l’Allemagne, la Belgique, le Danemark, l’Irlande, l’Italie, la Norvège et les Pays-Bas –, à partir des données d’entreprises « micro agrégées » de la première enquête communautaire sur l’innovation (CIS1) portant sur l’année 1992. Sur la base d’un modèle Tobit généralisé et en mesurant l’innovation par la part du chiffre d’affaires des entreprises en produits innovants (nouveaux ou améliorés sur les trois années 1990-1992), nous estimons la propension à innover et l’intensité de l’innovation (conditionnellement ou non au fait d’innover) pour les industries manufacturières de haute et basse technologie des sept pays. Bien que disposant de variables explicatives peu nombreuses, nous rendons compte ainsi de différences déjà très significatives d’intensité d’innovation entre pays. Les différences d’innovativité entre pays restent néanmoins très fortes.
    Keywords: Europe, innovation, innovativity, R-D, selectivity, Europe, innovation, innovativité, R-D, sélectivité
    JEL: C35 L60
    Date: 2006–06–01
  13. By: Maria Gabriela Ladu
    Abstract: This paper provides total factor productivity estimates for a sam- ple of 115 European Regions over the period 1976-2000. In particular, a set of Cobb-Douglas production functions is estimated using panel techniques and allowing for heterogeneity across regions. Moreover, on the basis of speci…c panel tests, the paper shows that there is em- pirical evidence which suggests the presence of unit roots in the series and panel cointegration tests are applied to guard against spurious regression.
    Keywords: Total Factor Productivity, Panel Unit Root Test, Panel Cointegration
    JEL: C23 D24 O47 O52
    Date: 2006
  14. By: Irina Tytell (International Monetary Fund); Ksenia Yudaeva (New Economic School/CEFIR)
    Abstract: Policymakers around the world introduce special policies aimed at attracting foreign direct investments (FDI). They motivate their decision by the spillover effect, which FDI have on domestic companies. Empirical literature so far has failed to find any robust evidence of this effect. In this paper, we make an attempt to explain this finding. Using data from Poland, Romania, Russia, and Ukraine, we demonstrate that not all FDI have positive spillover effects on domestic firms. Spillovers are positive only in the case of export-oriented FDI and, more generally, are driven by the more productive foreign companies. Moreover, effects of FDI on domestic firms are not limited to knowledge spillovers: exposure to foreign technologies alters the form of their production functions. Specifically, foreign entry is associated with higher capital intensity and lower labor intensity of domestic firms in relatively more developed countries, such as Poland, while the opposite is the case in the less developed countries, such as Russia. These results are subject to threshold effects: benefits are more likely to materialize once a relatively large stock of foreign capital is accumulated. Absorptive capacity of domestic firms plays a crucial role in reaping the benefits of FDI. Both, knowledge spillovers and production function changes, occur predominantly in the more educated and the less corrupt regions.
    Date: 2005–12
  15. By: Jaakko Kiander; Antti Romppanen
    Abstract: This paper summarizes the economic performance of Finland in 1995?2004 and compares the actual developments to the projections made prior to the EU membership. The paper also assesses the impacts of the structural changes induced by the membership. The most pronounced impact of EU membership was on Finland?s agriculture and food industry. Joining the Common Agriculture meant a total change in the subsidy system and a sharp drop in producer prices. At the same time, agriculture and the food industry became part of the European internal market and the competition that goes with it. In sectors outside of the food chain, the impact of the EU is more difficult to ascertain. It was thought that integration would lead to increased trade in the internal market area. But this has not happened; rather the EU?s share of Finland?s foreign trade has decreased since membership.
    Keywords: Finnish economy, EU membership, integration
    Date: 2006–01–13
  16. By: Kerstin Bernoth; Guntram Wolff
    Abstract: We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. Our model predicts that risk premia contained in government bond spreads should increase in both, the official fiscal position and the expected ”creative” part of fiscal policy. The relative importance of these two signals depends on the transparency of the country. Greater transparency reduces risk premia. The empirical results confirm the hypotheses. Creative accounting increases the spread. The increase of the risk premium is stronger if financial markets are unsure about the true extent of creative accounting. Fiscal transparency reduces risk premia. Instrumental variable egressions confirm these results by addressing potential reverse causality problems and measurement bias.
    Keywords: Risk premia; government bond yields; creative accounting; stock-flow adjustments; gimmickry; transparency
    JEL: G12 E43 E62 H6 F34
    Date: 2006–06
  17. By: Eliana Viviano (Banca d'Italia)
    Abstract: The paper analyzes the relationship between barriers to entry and employment in the Italian retail trade sector. In Italy the opening of large outlets is regulated at the regional level. By using differences-in-differences estimators I study the effects of the rules implemented in Abruzzo and Marche, two otherwise close and similar Italian regions, that adopted very different policies: the first set tight restrictions on the opening of large stores; the second did not impose substantial entry barriers. The results show that entry barriers have a negative and sizeable impact on employment growth. Some evidence is also found that fiercer competition encourages the development of more efficient small retail trade shops. These findings are robust to a number of checks.
    Keywords: entry barriers, employment growth, differences-in-differences estimator
    JEL: J21 J23 K23
    Date: 2006–05
  18. By: Seppo Kari; Harri Hietala
    Abstract: This paper analyses the effects of the recent Finnish income tax reform on the behaviour of a closely held corporation (CHC) and its owners. The main elements of the reform are cuts in corporate and capital income tax rates and the replacement of the current full imputation system by a partial double taxation of distributed profits. Considerable exemptions are applied to relieve the taxation of dividends from CHCs. The analysis indicates that the change in the CHC?s cost of capital depends on the marginal tax rate (MTR) of the owner. In the case of a high-MTR entrepreneur, the cost of capital increases or is retained at the present level while at lower MTRs the cost of capital may well decrease. The latter observation is due to the increase in the tax rate gap between earned income and capital income. Thus the reform does not remove the earlier reported nonneutralities of the Finnish tax system. The reform also improves the position of wage income as a form of compensation. This will cushion the effect of the dividend tax changes on the CHC?s cost of capital.
    Keywords: Capital income taxation, dual income tax, tax reform
    Date: 2006–05–04
  19. By: Isabel Cortés-Jiménez
    Abstract: During the last years several papers provide empirical evidence of the importance of tourism in the economic growth, although always at country level. The main aim of this paper is to analyse the possible relevance of tourism for the regional economic growth in a convergence context. Not only international tourism is analysed but also domestic tourism. This article focuses on two of the most important countries worldwide in tourism terms: Spain and Italy. Some geographical location criteria are also taken into account. Regarding the methodology, Arellano and Bond (1991) estimator for dynamic panel data models and Bruno (2005) finite sample correction are applied. Results reveal that both domestic and international tourism have a significant and positive influence in the regional economic growth although each one appears as crucial in different cases.
    Keywords: economic growth, international tourism, domestic tourism, regions, Spain, Italy
    JEL: C5 R11 O40
    Date: 2006
  20. By: Jaakko Kiander
    Abstract: Finland has recently got much admiration due to economic success reflected in rankings of competitiveness, technology, education and economic growth. This success has largely been embodied in the growth of Nokia group and ICT sector. Yet the economic boom and the success of the Finnish high tech industries is a relatively new phenomenon, starting from the mid-1990s. In fact, the years of good economic performance were preceded by an exceptionally deep recession in the beginning of the 1990s. This paper discusses the roots of the crisis of the Finnish economy, and the factors which helped it to recover and to create the technology-driven growth of the last decade. The focus is both on macroeconomic issues and on institutional change and the role of public policy. The main conclusion of this paper is that the institutional reforms (or the absence of them) seem to have played only minor role in the emergence of unemployment and in the subsequent employment revival in Finland in the 1990s. In addition to the breakthrough of ICT technologies, more traditional macroeconomic factors like changes in monetary policy and exchange rate, and pro-cyclical fiscal policy may have been of great importance. In spite of the severe economic shocks and industrial restructuring, the Finnish political governance and corporatist institutions have remained relatively stable. Political decision making has all the time been largely based on national consensus building like before. The structures of welfare state survived the fiscal crisis of the mid-1990s though the welfare state was forced to go through many small incremental changes, which reduced many entitlements. The central labour market institutions ? strong trade unions with high unionization rate, and centralized incomes policy ? have remained almost intact.
    Keywords: Finland, economic growth, social corporatism, structural change
    JEL: E60 J00 E32 O10 F00
    Date: 2004–12–15

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