nep-eec New Economics Papers
on European Economics
Issue of 2007‒09‒16
eighteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The Case for a European Banking Charter By Martin Cihák; Jörg Decressin
  2. The Breakup of the Euro Area By Barry Eichengreen
  3. Indicators of corporate default : an EU based empirical study By Aaro Hazak; Kadri Männasoo
  4. Europe and Global Imbalances By Gian Maria Milesi-Ferretti; Philip R. Lane
  5. Ensuring Fiscal Sustainability in G-7 Countries By Daniel Leigh; David Hauner; Michael Skaarup
  6. The European Neighbourhood Policy: A Framework for Modernisation? By Marise Cremona; Gabriella Meloni
  7. Some empirical tests on the integration of economic activity between the Euro area and the accession countries By Korhonen , Iikka
  8. Similarity of supply and demand shocks between the Euro area and the CEECs By Fidrmuc, Jarko; Korhonen, Iikka
  9. Convergence of European Transition Economies and the EU: What Do the Data Show? By Sarajevs , Vadims
  10. Integration of the Baltic States into the EU and Institutions of Fiscal Convergence By Kutan, Ali M.; Pautola-Mol , Niina
  11. Growth and Inflation Dispersions in EMU: Reasons, the Role of Adjustment Channels, and Policy Implications By Emil Stavrev
  12. Are the Central and Eastern European transition countries still vulnerable to a financial crisis? Results from the signals approach By Brüggemann , Axel; Linne , Thomas
  13. Accession Countries’ Comparative Advantage in the Internal Market: A Trade and Factor Analysis By Kaitila , Ville
  14. The Endogeneity of optimum currency area criteria, intraindustry trade and EMU enlargement By Fidrmuc , Jarko
  15. A forewarning indicator system for financial crises: the case of six Central and Eastern European countries By Irene Andreou; Gilles Dufrénot; Alain Sand; Aleksandra Zdzienicka-Durand
  16. Financial contagion, interest rates and the role of the exchange rate as shock absorber in Central and Eastern Europe By Habib , Maurizio Michael
  17. Determinants of Inflation in Poland: A Structural Cointegration Approach By Kim , Byung-Yeon
  18. Spatial Agglomeration, Technology and Outsourcing of Knowledge Intensive Business Services Empirical Insights from Italy By Roberto Antonietti; Giulio Cainelli

  1. By: Martin Cihák; Jörg Decressin
    Abstract: Most financial institutions in the European Union (EU) are still based in one country, but a number of large financial institutions (LCFI) have systemic cross-border exposures. The paper explains how, despite much progress, nationally-segmented supervisory frameworks and national accountability for financial stability hinder optimization across borders of banks' operations and efficient and effective LCFI supervision. A full-fledged EU-level prudential regime that operates along-side national regimes--a European Banking Charter (EBC)--could harness market forces to establish a level playing field for financial sector competition, while plugging some significant gaps in Europe's financial stability framework without concentrating excessive powers.
    Date: 2007–07–18
  2. By: Barry Eichengreen
    Abstract: The possibility that the euro area might break up was being raised even before the single currency existed. These scenarios were then lent new life five or six years on, when appreciation of the euro and problems of slow growth in various member states led politicians to blame the European Central Bank for disappointing economic performance. Highly-placed European officials reportedly discussed the possibility that one or more participants might withdraw from the monetary union. How seriously should we take these scenarios? And how significant would be the economic and political consequences? It is unlikely, I argue here, that one or more members of the euro area will leave in the next ten years; total disintegration of the euro area is even more unlikely. While other authors have minimized the technical difficulties of reintroducing a national currency, I suggest that those technical difficulties would be quite formidable. Nor is it certain that the economic problems of the participating member states would be significantly ameliorated by abandoning the euro. And even if there are immediate economic benefits, there would be longer-term political costs.
    JEL: F15 F33
    Date: 2007–09
  3. By: Aaro Hazak; Kadri Männasoo
    Abstract: The present paper contributes to the research on the indicators that provide a warning of company failure by employing micro and macro variables within a framework of survival analysis using a sample of 0.4 million companies from the European Union (EU). The sensitivity of the results is checked using two complementary event definitions - bankruptcy and negative equity. Our results imply that the baseline hazard of a default is a U-shaped function of the time the company has survived. High leverage and a low return on assets appear to be strong predictors of failure. Macroeconomic variables give mixed evidence for old and new member states as well as for the two default definitions
    Keywords: corporate default, bankruptcy, survival analysis
    JEL: G33 C41
    Date: 2007–09–04
  4. By: Gian Maria Milesi-Ferretti; Philip R. Lane
    Abstract: Although Europe in the aggregate is a not a major contributor to global current account imbalances, its trade and financial linkages with the rest of the world mean that it will still be affected by a shift in the current configuration of external deficits and surpluses. We assess the macroeconomic impact on Europe of global current account adjustment under alternative scenarios, emphasizing both trade and financial channels. Finally, we consider heterogeneous exposure across individual European economies to external adjustment shocks.
    Keywords: Working Paper , Financial integration , Capital flows , Europe , Current account balances ,
    Date: 2007–06–28
  5. By: Daniel Leigh; David Hauner; Michael Skaarup
    Abstract: Rising longevity, falling fertility rates, and the retirement of the baby boom generation will substantially raise age-related government spending in most advanced and many emerging market countries. This paper assesses the evolution of fiscal sustainability for each of the G-7 countries using two standard primary gap indicators. The estimated fiscal adjustment required to ensure long-run fiscal sustainability is substantial for all G-7 countries. In particular, ensuring fiscal sustainability would require an average improvement in the primary balance of about 4 percentage points of GDP. While the overall adjustment required to achieve long-run fiscal sustainability in G-7 countries is large, there are significant growth benefits to putting public finances on a sustainable footing in the near term versus delayed adjustment.
    Date: 2007–07–30
  6. By: Marise Cremona; Gabriella Meloni
    Abstract: This Working Paper offers a selection of the papers which were presented during the Workshop on The European Neighbourhood Policy – A Framework for Modernisation?, which was held on 1-2 December 2006 at the European University Institute of Florence under the auspices of the Academy of European Law. In particular, this Working Paper intends to explore from a trans-disciplinary perspective the objectives and instruments which have been devised in the European Neighbourhood Policy (ENP) and to consider in this light the capacity of the policy to promote a fundamental process of modernisation in the target countries. This is done in the conviction that a reconsideration of the coherence between instruments and objectives of the ENP is particularly urgent and it is likely to affect not only the effectiveness of the policy itself, but also the ability of the EU to create a circle of friends around its borders and, ultimately, its position in the international arena. To achieve this task, we have brought together the viewpoints of lawyers, political scientists and economists as they look at the wide range of questions prompted by the ENP. The first part of this volume is devoted to the analysis of the Objectives of the ENP. In this framework, a first paper will scrutinise the expectations from the new policy, then 5 more papers will examine the 3 major articulated objectives of the policy: stability, prosperity and security. The second part of the volume is focused on the Instruments of ENP. In particular, 3 papers will focus on legislative approximation and on the analysis of the tools which have been used in order to promote an unprecedented process of Europeanisation which goes far beyond the European continent. The last 2 papers have been devoted to the consideration of bilateralism-multilateralism and to the scrutiny of solutions which can be envisaged legally to develop the partnership with neighbouring countries in the framework of the ENP.
    Keywords: Europeanization; acquis communautaire; EU-East-Central Europe; security/external
    Date: 2007–08–01
  7. By: Korhonen , Iikka (BOFIT)
    Abstract: This note looks at the correlation of short-term business cycles in the euro area and the EU accession countries. The issue is assessed with the help of vector autoregressive models. There are clear differences in the degree of correlation between accession countries. For Hungary and Slovenia, euro area shocks can explain a large share of variation in industrial production, while for some countries this influence is much smaller. For the latter countries, the results imply that joining the monetary union could entail reasonably large costs, unless their business cycles converge closer to the euro area cycle. Generally, for smaller countries the relative influence of the euro area business cycle is larger. Also, it is found that the most advanced accession countries are at least as integrated with the euro area business cycle as some small present member countries of the monetary union.
    Keywords: optimal currency area; monetary union; EU enlargement
    JEL: E32 F15 F42
    Date: 2007–09–13
  8. By: Fidrmuc, Jarko (BOFIT); Korhonen, Iikka (BOFIT)
    Abstract: We assess the correlation of supply and demand shocks between the countries of the euro area and the accession countries in the 1990s. Shocks are recovered from estimated structural VAR models of output growth and inflation. We find that some accession countries have a quite high correlation of the underlying shocks with the euro area. However, even for many advanced accession countries, the shocks remain significantly more idiosyncratic. Furthermore, many EU countries seem to have a much higher correlation with the core euro area countries than in the previous decades. Continuing integration within the EU seems to have aligned the business cycles of these countries as well.
    Keywords: optimum currency area; EMU; EU enlargement; structural VAR
    JEL: E32 F42
    Date: 2007–09–13
  9. By: Sarajevs , Vadims (BOFIT)
    Abstract: This is an empirical study of the real income convergence among the fifteen European Union members and the eleven transition economies of Central and Eastern Europe. Debates and research on EU enlargement tends to concentrate on normative issues, so empirical studies constitute a small share of published work on the subject. This empirical investigation relies on available data on transition, and employs several econometric techniques including graphic analysis, classical cross-section regression and dynamic panel data estimations. Most estimation methods find positive convergence, but estimated rates of convergence vary considerably.
    Keywords: convergence; enlargement; and dynamic panel
    JEL: C80 O57
    Date: 2007–09–13
  10. By: Kutan, Ali M. (BOFIT); Pautola-Mol , Niina (BOFIT)
    Abstract: This paper evaluates the functioning, suitability, and effectiveness of the Maastricht convergence criteria regarding fiscal policy and the Stability and Growth Pact for the Baltic States. We argue that the Maastricht fiscal targets from the Baltic perspective should be considered as long-term goals as opposed to short-run objectives of fiscal policy. Using the European Commission's approach as well as impulse response and variance decomposition techniques, we assess the fiscal discipline and cyclical sensitivity of each state's budget to changes in output gap. Empirical evidence indicates that Estonia and Latvia have been more successful in maintaining fiscal discipline than Lithuania during 1996-2000. We also observe that the Stability and Growth Pact signed in July 1997 would offer enough room for automatic fiscal stabilizers in Estonia and Latvia, but not necessarily in Lithuania. Policy implications of the findings for future perspectives are also discussed.
    Keywords: EU-enlargement; fiscal policy; Baltic countries
    Date: 2007–09–11
  11. By: Emil Stavrev
    Abstract: This paper's analysis of growth and inflation dispersions in the euro area reveals several findings. First, these dispersions have declined appreciably since EMU; remaining dispersions are small but persistent, relating mainly to country-specific shocks, not differences in the transmission of common shocks. Second, the different behavior of interest rates just before and after the introduction of the euro has contributed significantly to growth dispersions. However, this has been a one-off shock whose effects, particularly on construction, should be declining over time. Third, financial sector integration could do much more to insure countries against shocks and increase consumption smoothing.
    Keywords: Working Paper , Euro Area ,
    Date: 2007–07–17
  12. By: Brüggemann , Axel (BOFIT); Linne , Thomas (BOFIT)
    Abstract: The aim of paper is to analyse the vulnerability of the Central and Eastern European accession countries to the EU as well as that of Turkey and Russia to a financial crisis. Our methodology is an extension of the signals approach. We develop a composite indicator to measure the evolutin of of the risk potential in each country. Our findings show that crises in Central and Eastern Europe are caused by much the usual suspects s in others emerging markets. In particular an overvalued exchange rate. Weak exports and dwindling currency reserves have good precictive power for assessing crisis vulnerabilities.
    Keywords: financial crises; vulnerability indicator; Central and Eastern Europe
    Date: 2007–09–11
  13. By: Kaitila , Ville (BOFIT)
    Abstract: We analyse trade between Central and Eastern European (CEE) countries and the European Union during 1993-1998 using three methods. First, we calculate the share of intra-industry trade to determine the extent to which two countries trade in similar products. Second, we calculate similarity indices to determine the extent to which the structure of the exports of two countries is similar to a third country. Third, we calculate the revealed comparative advantage of CEE countries in the EU internal market and analyse the results in a two-dimensional space showing relative labour-skills and capital-intensity. We also depict how the factor intensity of comparative advantage has changed since 1993. With this last approach, we find that the comparative advantage of various CEE countries have developed in quite different directions. Some countries have evolved comparative advantage in industries requiring much skilled labour, while others have moved in the opposite direction. This differentiation is also reflected in degrees of capital intensity. A few CEE countries have not shifted in this two-dimensional space.
    Keywords: EU; eastern enlargement; comparative advantage; factor intensity
    Date: 2007–09–12
  14. By: Fidrmuc , Jarko (BOFIT)
    Abstract: This paper tests an endogeneity hypothesis of optimum currency area (OCA) criteria (Frankel and Rose, 1998) on a cross-section of OECD countries between 1990 and 1999. The findings indicate that convergence of business cycles relates to intra-industry trade, but has no direct relation between business cycles and bilateral trade intensity. As far as intra-industry trade is positively correlated with trade intensities, this result confirms the OCA endogeneity hypothesis. The endogeneity of OCA linkage criteria implies extensive business cycle harmonization between CEECs and EU countries in the medium term.
    Keywords: optimum currency area; EMU; trade; business cycle; CEECs
    JEL: F15 F41
    Date: 2007–09–12
  15. By: Irene Andreou (GATE CNRS); Gilles Dufrénot (Université Paris 12, GREQAM); Alain Sand (GATE CNRS); Aleksandra Zdzienicka-Durand (GATE CNRS)
    Abstract: We propose a measure of the probability of crises associated with an aggregate indicator, where the percentage of false alarms and the proportion of missed signals can be combined to give an appreciation of the vulnerability of an economy. In this perspective, the important issue is not only to determine whether a system produces true predictions of a crisis, but also whether there are forewarning signs of a forthcoming crisis prior to its actual occurrence. To this end, we adopt the approach initiated by Kaminsky, Lizondo and Reinhart (1998), analyzing each indicator and calculating each threshold separately. We depart from this approach in that each country is also analyzed separately, permitting the creation of a more “custom-made” early warning system for each one.
    Keywords: composite indicator, currency crisis, early warning system
    JEL: F31 F47
    Date: 2007–04
  16. By: Habib , Maurizio Michael (BOFIT)
    Abstract: This paper studies the impact of external factors on daily exchange rates and short-term interest rates in the Czech Republic, Hungary and Poland during the period August 1997 – May 2001. I find that neither exchange rates nor interest rates are influenced by short-term German interest rates. Nevertheless, I show that shocks to emerging-market risk premia had a significant impact on exchange rates in all three Central and Eastern European countries and on interest rates in the Czech Republic. In addition, studying the second moment of the variables, I demonstrate that Czech and Polish exchange rates were affected by ‘volatility contagion’ coming from emerging markets. I find also some partial support for the ‘volatility contagion’ hypothesis on Czech interest rates. These findings shed some doubts on the alleged theoretical ability of a floating exchange rate – such as in the Czech Republic – to absorb external shocks and insulate a country's domestic monetary policy completely. However, the spill-over effect on Czech interest rates might be explained by the ‘managed’ nature of the exchange rate regime, thereby re-establishing some credibility of the theory.
    Keywords: exchange rates; short-term interest rates; volatility; Czech Republic; Hungary; Poland
    Date: 2007–09–11
  17. By: Kim , Byung-Yeon (BOFIT)
    Abstract: Using cointegration and error-correction models, this paper analyses the relative impacts of the monetary, labour and foreign sectors on Polish inflation from 1990 to 1999. Following the development of a theoretical framework, we use a structural system approach in which cointegration relationships are used to derive deviations from steady-state levels. The deviations are interpreted as excess demand pressure on inflation in a given sector and subsequently incorporated in order to determine the short-run dynamics of Polish inflation. The results suggest that the labour and external sectors dominated the determination of Polish inflation during the above period, but their effects have been opposite since 1994. The appreciation of the domestic currency contributed to reducing inflation, while excessive wage increases prevented inflation from decreasing to a lower level. The monetary sector appears not to have exerted influence on inflation, suggesting monetary policy has been passive.
    Keywords: inflation; cointegration; error correction mechanism; Poland
    Date: 2007–09–13
  18. By: Roberto Antonietti (University of Bologna); Giulio Cainelli (University of Bari and CERIS-CNR)
    Abstract: Aim of this paper is to explore the main drivers of outsourcing of knowledge intensive business services by Italian manufacturing firms. While anecdotal and empirical evidence has emphasized labour cost and scale economies as behind firms’ choices to outsource production or service activities, here we focus on spatial agglomeration and technology as important factors. Using microeconomic data on a repeated cross-section of Italian manufacturing firms for the period 1998-2003, we develop a two-stage model in order to avoid selection bias: first, we estimate the determinants of the firm's decision to outsource business-related services; second, we estimate the main factors underlying the intensity and complexity of KIBS outsourcing, expressed by the number of service activities that are externalized. Our results show that labour cost-savings are not relevant in driving the decision to outsource KIBS, but ICT, R&D and location within a dense and technologically developed industrial district have very positive effects.
    Keywords: KIBS, Service Outsourcing, R&D, ICT, Spatial Agglomeration
    JEL: L24 L84 R32 R12
    Date: 2007–07

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