nep-eec New Economics Papers
on European Economics
Issue of 2007‒01‒02
twenty-one papers chosen by
Giuseppe Marotta
Universita di Modena e Reggio Emilia

  1. Real-time determinants of fiscal policies in the euro area: Fiscal rules, cyclical conditions and elections By Roberto Golinelli; Sandro Momigliano
  2. The Dilemmas of Tax Coordination in the Enlarged European Union By Jens Brøchner; Jesper Jensen; Patrik Svensson; Peter Birch Sørensen
  3. Welfare Effects of the Euro Cash Changeover By Christoph Wunder; Johannes Schwarze; Gerhard Krug; Bodo Herzog
  4. Euros and Zeros: The Common Currency Effect on Trade in New Goods By Baldwin, Richard; Di Nino, Virginia
  5. Are there Border Effects in the EU Wage Function? By Peter Huber; Michael Pfaffermayr; Yvonne Wolfmayr
  6. The transmission of monetary policy shocks from the US to the euro area By Andrea Nobili; Stefano Neri
  7. The competitive environment of the european electricity sector in the post-kyoto scenarios By JAVIER CARRILLO
  8. Preconditions for a successful implementation of supervisors' prompt corrective action: Is there a case for a banking standard in the European Union? By María J. Nieto; Larry D. Wall
  9. Employment Regulation and Labor Market Policy in Germany, 1991-2005 By Bernhard Ebbinghaus; Werner Eichhorst
  10. Three routes to a pension reform. Politics and institutions in reforming pensions in Denmark, Finland and Sweden. By Kangas, Olli; Lundberg, Urban; Ploug, Niels
  11. Public Education in an Integrated Europe: Studying to Migrate and Teaching to Stay? By Panu Poutvaara
  12. Sources of Real Exchange Rate Fluctuations in Central and Eastern Europe – Temporary or Permanent? By Agnieszka Stazka
  13. How to be Well Shod to Absorb Shocks? Shock Synchronization and Joining the Euro Zone By Natacha Gilson
  14. Central Bank Interventions, Communication and Interest Rate Policy in Emerging European Economies By Balázs Égert
  15. Corporate Tax Policy, Entrepreneurship and Incorporation in the EU By Ruud de Mooij; Gaetan Nicodème
  16. Euro Effects on the Intensive and Extensive Margins of Trade By Harry Flam; Hakan Nordström
  17. Is Training More Frequent When the Wage Premium is Smaller?: Evidence from the European Community By Andrea Bassanini; Giorgio Brunello
  18. Higher Education as a Form of European Integration: How Novel is the Bologna Process? By Anne Corbett
  19. Activation Policies in Germany: From Status Protection to Basic Income Support By Werner Eichhorst; Maria Grienberger-Zingerle; Regina Konle-Seidl
  20. The Swedish External Position and the Krona By Lane, Philip R.
  21. Financial Incentives and the Timing of Retirement: Evidence from Switzerland By Barbara Hanel; Regina T. Riphahn

  1. By: Roberto Golinelli (University of Bologna, Department of Economics); Sandro Momigliano (Bank of Italy, Economic Research Department)
    Abstract: We examine the impact of four factors on the fiscal policies of the euro-area countries over the last two decades: the state of public finances, the European fiscal rules, cyclical conditions and general elections. We rely on information actually available to policy-makers at the time of budgeting in constructing our explanatory variables. Our estimates indicate that policies have reacted to the state of public finances in a stabilizing manner. The European rules have significantly affected the behaviour of countries with excessive deficits. Apart from these cases, the rules appear to have reaffirmed existing preferences. We find a relatively large symmetrical counter-cyclical reaction of fiscal policy and strong evidence of a political budget cycle. The electoral manipulation of fiscal policy, however, occurs only if the macroeconomic context is favourable.
    Keywords: fiscal policy, real-time information, euro-area countries, stabilisation policies, fiscal rules, political budget cycle
    JEL: E61 D72 E62 H60
    Date: 2006–12
  2. By: Jens Brøchner; Jesper Jensen; Patrik Svensson; Peter Birch Sørensen
    Abstract: This study evaluates the economic effects of corporate tax coordination in the enlarged European Union using a computable general equilibrium model and a comprehensive set of scenarios for both a common corporate EU tax base and for full harmonisation of tax bases and tax rates. Our main findings are as follows: (i) Corporate tax coordination can yield modest aggregate welfare gains, but the details of the coordination policies determine outcomes and economic gains cannot be taken for granted. (ii) All scenarios for coordination leave some EU Member States as winners and others as losers. An agreement on tax coordination is therefore likely to require elaborate compensation mechanisms. (iii) The large and diverse country effects suggest that Enhanced Cooperation for a subset of the Member States may be the most likely route towards tax coordination. Coordination among a subset of relatively homogenous Member States will lead to less radical policy changes, but also to smaller gains. (iv) Identifying winners and losers from coordination for the purpose of a compensation mechanism may be problematic, since countries experiencing gains in GDP and welfare tend to lose tax revenues, and vice versa.
    JEL: H77 H87
    Date: 2006
  3. By: Christoph Wunder (University of Bamberg); Johannes Schwarze (University of Bamberg, DIW Berlin and IZA Bonn); Gerhard Krug (Institute for Employment Research (IAB)); Bodo Herzog (German Council of Economic Experts)
    Abstract: Using merged data from the British Household Panel Survey (BHPS) and the German Socio- Economic Panel (SOEP), this paper applies a parametric difference-in-differences approach to assess the real effects of the introduction of the euro on subjective well-being. A complementary nonparametric approach is also used to analyze the impact of difficulties with the new currency on well-being. The results indicate a severe loss in well-being associated with the introduction of the new currency, with the predicted probability that a person is contented with his/her household income diminishing by 9.7 percentage points. We calculate a compensating income variation of approximately one-third. That is, an increase in postgovernment household income of more than 30% is needed to compensate for the rather drastic decline in well-being. The reasons for the negative impact are threefold. First, perceived inflation overestimates the real increase in prices resulting in suboptimal consumption decisions. Second, money illusion causes a false assessment of the budget constraint. Third, individuals have to bear the costs from the conversion and the adjustment to the new currency. Moreover, it is thought that losses are smaller when financial ability is higher. However, the impact of difficulties in using and converting the new currency is rather small, and the initial problems were overcome within one year of the introduction of euro cash.
    Keywords: subjective well-being, euro cash changeover, perceived inflation, difference-in-differences
    JEL: E31 I31
    Date: 2006–12
  4. By: Baldwin, Richard; Di Nino, Virginia
    Abstract: This paper tests whether trade in new goods is partially responsible for the pro-trade effects of the euro and provides a measure of the size of the effect. It works with a very large data set (about 16 million observations) covering twenty countries at the most disaggregated level of trade data that is publicly available. Using predictions from a heterogeneous-firms trade model in a multi-country environment to structure our empirical model, we find that the euro had a positive impact on trade overall. Our findings provide supportive but not conclusive evidence for the new-goods hypothesis. We also determined the pro-trade effect of euro-usage on non-Euroland nations trading with euro-users. We confirmed the absence of trade diversion for non-Eurozone EU members with sizeable overall increase comparable to that of members.
    Keywords: Eurozone trade effects; extensive margin; heterogenous firms; Melitz model
    JEL: F12 F21 F33 F4
    Date: 2006–12
  5. By: Peter Huber; Michael Pfaffermayr; Yvonne Wolfmayr
    Abstract: We estimate a linear approximation of the market potential function for Europe as derived in geography and trade models. Using a spatial econometric estimation approach, border effects are identified by a differential impact of other regions purchasing power, depending on whether two regions are located within the EU15 or outside the EU15. We find that intra EU15-borders have an insignificant but external borders a significant effect on regional wage structures. We illustrate the magnitude of EU external border effects by simulating the enlargement of the EU in May 2004. Our results suggest a large impact of the border for new member states, but a relatively small one for old members.
    Keywords: market potential, border effects, spatial econometrics
    JEL: C21 F10 F12 R12
    Date: 2006
  6. By: Andrea Nobili (Bank of Italy); Stefano Neri (Bank of Italy)
    Abstract: This paper studies the transmission of monetary policy shocks from the US to the euro-area using a two-country structural VAR with no exogeneity assumption. The analysis reveals the following results. First, in response to an unexpected increase in the Federal funds rate, the euro immediately depreciates with respect to the dollar and then appreciates in line with the prediction of the uncovered interest parity condition. Second, there is evidence of a temporary positive spillover to euro-area output in the short run, while a negative effect emerges in the medium run. Third, the contribution of the trade balance channel to the transmission of monetary shocks is negligible. Finally, the degree of pass-through of the exchange rate changes onto euro-area consumer prices is incomplete and small in the short run, while it is close to zero in the medium run.
    Keywords: VAR, Monetary Policy, International transmission
    JEL: C32 E52 F42
    Date: 2006–12
  7. By: JAVIER CARRILLO (Instituto de Empresa)
    Abstract: This paper shows how the uncertainty associated to the absence of a post-Kyoto regime regarding Greenhouse Gas mitigation is affecting investments in mitigation activities in the EU electricity sector and, thus, future emissions levels. Based on a wide survey of EU power companies, the paper identifies the most likely post-Kyoto scenarios considered by these firms and how they are coping with such uncertainty in their current investment decisions. The major conclusion is that the non-existence of a post-Kyoto regime is having a negative effect on current business investment decisions in mitigation activities, increasing risk premiums and financing costs.
    Keywords: Investment decisions, Post-Kyoto scenarios
    Date: 2006–12
  8. By: María J. Nieto; Larry D. Wall
    Abstract: Over the past years, several countries around the world have adopted a system of prudential prompt corrective action (PCA). The European Union countries are being encouraged to adopt PCA by policy analysts who explicitly call for its adoption. To date, most of the discussion on PCA has focused on its overall merits. This paper focuses on the preconditions needed for the adoption of an effective PCA. These preconditions include conceptual elements such as a prudential supervisory focus on minimizing deposit insurance losses and mandating supervisory action as capital declines. These preconditions also include institutional aspects such as greater supervisory independence and authority, more effective resolution mechanisms, and better methods of measuring capital.
    Date: 2006
  9. By: Bernhard Ebbinghaus (MZES, University of Mannheim); Werner Eichhorst (IZA Bonn)
    Abstract: The paper provides an overview of institutional provisions and reforms regarding employment protection, active and passive labor market policies in Germany as well as of actors' responsibilities in these areas. It covers the period between the early 1990s and the most recent Hartz reforms. Empirical data on labor market outcomes with respect to the levels and structures of both employment and unemployment complements this study.
    Keywords: employment protection, active labor market policy, unemployment insurance, Germany
    JEL: J60 J68
    Date: 2006–12
  10. By: Kangas, Olli (the Danish National Institute for Social Research); Lundberg, Urban (Institute for Futures Studies); Ploug, Niels (the Danish National Institute for Social Research)
    Abstract: By analysing pension reforms in three Nordic countries – Denmark, Finland and Sweden that apply different institutional solutions in their old-age security programmes – the paper argues that the political processes that shaped the country-specific pension set-ups in the 1950s and 1960s had important ramifications for the subsequent possibilities to reform these schemes. There is a high degree of inertia both in institutions and in the political reform options. Thus, the analysis shows that the ‘new politics’ were not so new in any of the countries. Furthermore, the three cases accentuate the question: What is a pension reform? The Swedish reform in the late 1990s was ‘big bang’ where everything was changed, the Finns build on piecemeal reforms that gradually changed the whole system, while on the surface, the Danish story is about stability and status quo. However, the Danish policy ‘drift’ changed the basic characteristics of the system in the end.
    Keywords: pension reform; Nordic countries
    JEL: J14 J26
    Date: 2006–09
  11. By: Panu Poutvaara (University of Helsinki and IZA Bonn)
    Abstract: This paper analyzes public provision of internationally applicable and country-specific education, when job opportunities available to those with internationally applicable education are uncertain. Migration provides a market insurance in case labor market opportunities in the home country are poor. An increasing international applicability of a given type of education encourages students to invest more effort when studying. Governments, on the other hand, face an incentive to divert the provision of public education away from internationally applicable education toward country-specific skills. This would mean educating too few engineers, economists and doctors, and too many lawyers.
    Keywords: public education, migration, brain drain and brain gain, European Union, common labor market
    JEL: H52 I28 F22 J24 J61
    Date: 2006–12
  12. By: Agnieszka Stazka
    Abstract: This paper investigates, using the SVAR model of Clarida and Gali (1994), the sources of real exchange rate fluctuations in eight Central and East European new EU member states. Theoretically, one should expect the real exchange rates of Exchange Rate Mechanism II participants to be primarily driven by temporary shocks and those of ERM II “outs” by permanent shocks. Our results reveal an opposite pattern. We conclude that the sources of real exchange rate movements – and the usefulness of nominal exchange rates as shock absorbing instruments – were not the decisive factor behind these countries’ decisions concerning the ERM II participation.
    Keywords: exchange rate fluctuations, Central and Eastern Europe, ERM II, SVAR
    JEL: C32 F31
    Date: 2006
  13. By: Natacha Gilson
    Abstract: This paper examines the demand and supply shocks observed in the present Eurozone member states and those observed in some neighboring countries. The analysis is based on recent data and each Eurozone member country is compared with an aggregate series corresponding to an area made up of the entire Eurozone minus the country being compared. The results of the study confirm that, even when the series are corrected by removing the country being compared, the disturbances observed in large Eurozone countries are well correlated with the disturbances observed in other Eurozone member countries.
    Keywords: shocks, Eurozone, optimal currency area
    JEL: E42 F31 F33
    Date: 2006
  14. By: Balázs Égert
    Abstract: This paper analyses the effectiveness of foreign exchange interventions in Croatia, the Czech Republic, Hungary, Romania, Slovakia and Turkey using the event study approach. Interventions are found to be effective only in the short run when they ease appreciation pressures. Central bank communication and interest rate steps considerably enhance their effectiveness. The observed effect of interventions on the exchange rate corresponds to the declared objectives of the central banks of Croatia, the Czech Republic, Hungary and perhaps also Romania, whereas this is only partially true for Slovakia and Turkey. Finally, interventions are mostly sterilized in all countries except Croatia. Interventions are not much more effective in Croatia than in the other countries studied. This suggests that unsterilized interventions do not automatically influence the exchange rate.
    Keywords: central bank intervention, foreign exchange intervention, verbal intervention, central bank communication, Central and Eastern Europe, Turkey
    JEL: F31
    Date: 2006
  15. By: Ruud de Mooij; Gaetan Nicodème
    Abstract: In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. This paper explores to what extent income shifting from the personal to the corporate tax base can explain these diverging developments. We exploit a panel of European data on firm births and legal form of business to analyze income shifting via increased entrepreneurship and incorporation. The results suggest that lower corporate taxes exert an ambiguous effect on entrepreneurship. The effect on incorporation is significant and large. It implies that the revenue effects of lower corporate tax rates – possibly induced by tax competition -- partly show up in lower personal tax revenues rather than lower corporate tax revenues. Simulations suggest that between 10% and 17% of corporate tax revenue can be attributed to income shifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some 0.2%-points since the early 1990s.
    Keywords: corporate tax, personal tax, entrepreneurship, incorporation, income shifting
    JEL: H25 M13
    Date: 2006
  16. By: Harry Flam; Hakan Nordström
    Abstract: We estimate that the euro has increased trade within the eurozone by about 26 per cent and trade between the eurozone and outsiders by about 12 per cent on average for the years 2002-2005 compared to 1995-1998. The percentage increases were smaller for products that were exported every year during the sample period than for products that were not, indicating significant and substantial effects on the extensive margin of trade. The euro effects were concentrated to semi-finished and finished products, in particular to industries with highly processed products such as pharmaceuticals and machinery.
    JEL: F10
    Date: 2006
  17. By: Andrea Bassanini; Giorgio Brunello
    Abstract: According to Becker [1964], when labour markets are perfectly competitive, general training is paid by the worker, who reaps all the benefits from the investment. Therefore, ceteris paribus, the greater the training wage premium, the greater the investment in general training. Using data from the European Community Household Panel, we compute a proxy of the training wage premium in clusters of homogeneous workers and find that smaller premia induce greater incidence of off-site training, which is likely to impart general skills. Our findings suggest that the Becker model provides insufficient guidance to understand empirical training patterns. Conversely, they are not inconsistent with theories of training in imperfectly competitive labour markets, in which firms may be willing to finance general training if the wage structure is compressed, that is, if the increase in productivity after training is greater than the increase in pay. <BR>Dans la théorie de Becker [1964], lorsque le marché du travail est en concurrence parfaite, seuls les salariéss investissent dans la formation générale, car ils sont les seuls à pouvoir s’approprier les retombées bénéfiques de la formation. Par conséquent, toutes choses égales par ailleurs, plus la prime salariale à la formation est élevée et plus l’investissement en formation est importante. Sur la base des données du Panel Communautaire des Ménages, nous calculons une proxy de la prime salariale à la formation pour des groupes homogènes de salariés et nous trouvons une relation inverse entre cette proxy et l’incidence de la formation hors site, qui concerne, selon toute vraisemblance, des compétences relativement générales. Nos résultats suggèrent que le modèle de Becker ne fournit pas une clé interprétative suffisante pour comprendre les tendances empiriques de la formation. Par contre, la distribution de la formation ne semble pas être en contradiction avec les théories de la formation qui prévoient que, lorsque le marché du travail est en concurrence imparfaite, les entreprises peuvent être disposées à investir en formation si l’augmentation de la productivité qui en découle est supérieure à l’augmentation du salaire.
    JEL: J24 J31 J41
    Date: 2006–12–05
  18. By: Anne Corbett
    Keywords: multilevel governance; institutionalism; Europeanization; educational policy
    Date: 2006–12–18
  19. By: Werner Eichhorst (IZA Bonn); Maria Grienberger-Zingerle (Max Planck Institute for Foreign and International Social Law and Bavarian Ministry of Labor); Regina Konle-Seidl (Institute for Employment Research (IAB))
    Abstract: This paper provides an overview of the sequential shift towards activating labor market and social policy in Germany. It not only shows the changes in the instruments of active and passives labor market policies but also analyzes the implications of this change for the political economy, the governance and the legal structure of a "Bismarckian" welfare state. Our study points at the changes in Germany’s status- and occupation-oriented unemployment benefit regime that has been relinquished for a larger share of dependent population. Unemployment insurance benefit duration is shorter now and newly created basic income support for needy persons is not earnings-related anymore. Pressure on unemployed to take up jobs has increased considerably while more persons than before have access to employment assistance. The paper also aims at a preliminary assessment of the effects of activating labor market policy on labor market as well as social outcomes and sets out probable paths of future adaptation.
    Keywords: activation, unemployment insurance, unemployment assistance, Germany
    JEL: J68
    Date: 2006–12
  20. By: Lane, Philip R. (The Institute for International Integration Studies)
    Abstract: This paper addresses the dynamics of the Swedish external position, with a particular focus on its inter-relation with the external value of the krona. We argue that financial globalisation means that a broader conceptual framework is required, whereby exchange rate fluctuations operate through the ‘valuation channel’ of external adjustment, in addition to the traditional trade balance channel. In the other direction, we highlight that the projected trend for the trade balance is an important influence on the long-term prospects for the krona. Finally, we seek to assess the future direction for the Swedish net foreign asset position by investigating the likely impact of demographic change and shifts in the Swedish position in the world income distribution.
    Keywords: real exchange rate; external adjustment; Sweden
    JEL: F00 F20 F30
    Date: 2006–12–01
  21. By: Barbara Hanel (University of Erlangen-Nuremberg); Regina T. Riphahn (University of Erlangen-Nuremberg and IZA Bonn)
    Abstract: We use reforms in the Swiss public retirement system to identify the responsiveness of retirement timing to financial incentives. A permanent reduction of retirement benefits by 3.4 percent induces more than 70 percent of females to postpone their retirement. The responsiveness of male workers, who undergo a different treatment, is lower.
    Keywords: retirement insurance, incentives, social security, labor force exit, natural experiment, Switzerland
    JEL: J26 H55 J14
    Date: 2006–12

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