nep-eec New Economics Papers
on European Economics
Issue of 2008‒12‒01
sixteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The political economy under monetary union - has the euro made a difference? By Marcel Fratzscher; Livio Stracca
  2. Economic Integration and Macroeconomic Convergence in the Euro Area By Dino Martellato
  3. Comparing Poverty Indicators in an Enlarged EU By Whelan, Christopher T.; Maitre, Bertrand
  4. Wage Differentials across Sectors in Europe: An East-West Comparison By Magda, Iga; Rycx, Francois; Tojerow, Ilan; Valsamis, Daphné
  5. Writing Clearly: ECB’s Monetary Policy Communication By Martin Cihák; Katerina Smídková; Ales Bulir
  6. Budgetary and external imbalances relationship - a panel data diagnostic. By António Afonso; Christophe Rault
  7. Urban Growth Drivers and Spatial Inequalities: Europe - a case with geographically sticky people By Paul Cheshire; Stefano Magrini
  8. Going NUTS: The Effect of EU Structural Funds on Regional Performance By Becker, Sascha O.; Egger, Peter H.; von Ehrlich, Maximilian; Fenge, Robert
  9. Public and private sector wages - co-movement and causality. By Ana Lamo; Javier J. Pérez; Ludger Schuknecht
  10. Production and Finance in EURACE By Sander Van Der Hoog; Christophe Deissenberg; Herbert Dawid
  11. Structural reforms in Europe and the (in)coherence of institutions By Bruno Amable
  12. Did Active Labour Market Policies Help Sweden Rebound from the Depression of the Early 1990s? By Anders Forslund; Alan B. Krueger
  13. How Politics Influence State-owned Banks - the Case of German Savings Banks By Oliver Vins
  14. The Evolution of the Foreign Direct Investments in Romania By Hagiu, Alina; Avramescu, Tiberiu Cristian
  15. Retirement patterns during the Swedish pension reform By Glans, Erik
  16. Do Temporary Contracts Affect TFP? Evidence from Spanish Manufacturing Firms By Dolado, Juan José; Stucchi, Rodolfo

  1. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Economic and Monetary Union (EMU) has transformed Europe and has created an integrated pan-European economy. Much research has focused on understanding this integration process and what benefits and costs it entails. This paper identifies a political economy channel of EMU as the monetary union implies that member states had to transfer or at least curtail their policy autonomy in several areas, such as monetary policy and fiscal policy. The paper shows that EMU has helped reduce the impact of political shocks on the domestic economy of member states but magnified the transmission of political shocks within the euro area. Equally importantly, economies with a weaker track record in terms of economic and institutional quality exhibited a significantly higher sensitivity to domestic political shocks before EMU, but not thereafter. While this may entail that EMU has brought benefits to countries with a weaker economic and institutional stability by insulating them from adverse political developments at home, a potential drawback is that it may provide weaker market discipline for domestic political stability. JEL Classification: F31; F33; G14.
    Keywords: EMU, political economy, political news, monetary policy, fiscal policy, stock markets, transmission.
    Date: 2008–11
  2. By: Dino Martellato (University Of Venice Cà Foscari)
    Abstract: In this paper I discuss various notions and aspects of integration and macroeconomic convergence, namely economic and monetary integration; real and nominal convergence. The EU has offered a great deal of information about the relation between all these types of integration and macroeconomic convergence. The EU has assumed that monetary integration is a precondition of deep economic integration and it has also assumed that the criteria to be adopted to converge to its own brand of economic and monetary union (EMU) are basically the same needed within the monetary union itself. Judging from the evidence of the first ten years of EMU, the actual relationship between real growth and inflation has turned out to be far from clear; and the paper provides a comparison between statistical evidence and the diverging predictions offered by two standard macroeconomic models.
    Keywords: Inflation, stability, euro zone
    JEL: E12 E41 E52 E63
    Date: 2008
  3. By: Whelan, Christopher T. (ESRI); Maitre, Bertrand (ESRI)
    Abstract: In this paper, using the EU-SILC 2006 data-set, we seek to explore the extent to which a consideration of welfare regime and socio-economic differences in poverty levels and patterns and variation in the consequences of poverty for economic stress can assist us in making informed choices between alternative poverty indicators. Poverty in the EU is normally defined in terms of income thresholds defined at the level of each member state. However, the enlargement of the EU and the consequent widening of the gap in living standards between the richest and the poorest member states has had the consequence that a country such as Ireland perform poorly in comparison with a number of the New Member States (NMS) despite enjoying obvious advantages in terms of material living standards. Such paradoxical findings have produced a number of different but interrelated responses. The first focuses on the limitations imposed by an entirely national frame of reference. An alternative critique takes as its starting point the fact that low income is an unreliable indicator of poverty. In this paper we seek to explore the strength of both critiques by comparing the outcomes associated with measuring being 'at risk of poverty' and consistent poverty at both national and EU levels. Our analysis suggest that it is possible to develop an approach that would allow us to achieve the stated EU objective of assessing the scale of exclusion from minimally acceptable level of standards of living in individual countries while also measuring the extent to which the whole population of Europe is sharing in the benefits of high average prosperity.
    Date: 2008–11
  4. By: Magda, Iga (Polish Ministry of Labour and Social Policy); Rycx, Francois (Free University of Brussels); Tojerow, Ilan (Free University of Brussels); Valsamis, Daphné (Free University of Brussels)
    Abstract: This study compares the structure and determinants of inter-industry wage differentials in Eastern and Western European countries (namely Belgium, Italy, the Netherlands, Norway, Portugal and Spain compared with Latvia, Lithuania, the Czech Republic, Poland and Slovakia). To do so, we use a unique harmonised, linked employer-employee data set, the 2002 European Structure of Earnings Survey. Findings show substantial differences in earnings across sectors in all countries, even when controlling for a wide range of employee, job and employer characteristics. The hierarchy of sectors in terms of wages appears to be quite similar in Eastern and Western European countries. Among high-wage sectors, we find the energy (coke, petroleum, gas, electricity and nuclear power), chemical, financial and computer industries. In contrast, it is in the traditional sectors (wood and cork industry, textile, clothing and leather industry, hotels and restaurants, and retailing) that wages are lowest. Further results suggest that the dispersion of inter-industry wage differentials fluctuates considerably across countries. It is relatively small in Norway and Belgium, large in the Netherlands, Italy, Spain, Poland and the Czech Republic, and very large in Portugal, Latvia, Lithuania and Slovakia. Our findings support the hypothesis of a negative relationship between the dispersion of inter-industry wage differentials and a country's degree of corporatism.
    Keywords: inter-industry wage differentials, collective bargaining, Europe, matched employer-employee data
    JEL: J31 J51
    Date: 2008–11
  5. By: Martin Cihák; Katerina Smídková; Ales Bulir
    Abstract: The paper presents a methodology for measuring the clarity of central bank communication, illustrating it with the case of the European Central Bank (ECB) in 1999-2007. The analysis identifies the ECB's written communication as clear about 95 percent of instances, which is comparable to, or even better than, other central banks for which a similar analysis is available. We also find that the additional information contained in the ECB's Monthly Bulletins helps to improve communication clarity compared to ECB's press releases. In particular, the Bulletins contain useful clarifying information on individual inflation factors and the overall forecast risk; in contrast, the bulletin's communication on monetary shocks has a negative, albeit small, impact on clarity.
    Keywords: European Central Bank , Monetary policy , Central bank policy , External shocks ,
    Date: 2008–10–28
  6. By: António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christophe Rault (Université d’Orléans, LEO, CNRS, UMR 6221, Rue de Blois-B.P.6739, 45067 Orléans Cedex 2, France.)
    Abstract: We assess the cointegration relationship between current account and budget balances, and effective real exchange rates, using recent bootstrap panel cointegration techniques and SUR methods. We investigate the magnitude of the relationship between the two imbalances for each country for the period 1970-2007, and for different EU and OECD country groupings. The panel cointegration tests used allow for within and between correlation, while the SUR results show both positive and negative effects of budget balances on current account balances for several countries. The magnitude of the effects varies across countries, and there is no evidence pointing to a direct and close relationship between budgetary and current account balances. JEL Classification: C23, E62, F32, H62.
    Keywords: budget balance, external balance, EU, panel cointegration.
    Date: 2008–11
  7. By: Paul Cheshire (London School of Economics); Stefano Magrini (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We try to combine theory with empirical analysis to investigate the drivers of spatial growth processes, welfare and disparities in a context in which people are markedly immobile. Drawing on two of our recent papers (Cheshire and Magrini, 2006 and 2008), we review the evidence on the drivers of differential urban growth in the EU both in terms of population and output growth. The main conclusion from our findings is that one cannot reasonably maintain the assumption of full spatial equilibrium in a European context. This has a number of wider implications. It suggests that i. differences in real incomes in Europe - and more generally where populations are relatively immobile - are likely to persist and indicate real differences in welfare; ii. there is no evidence of a unified European urban system but rather of a set of national systems; iii. there are significant but theoretically consistent, differences in the drivers of population compared to economic growth.
    Keywords: Growth, urban system, spatial equilibrium
    JEL: O18 R11 R13
    Date: 2008
  8. By: Becker, Sascha O.; Egger, Peter H.; von Ehrlich, Maximilian; Fenge, Robert
    Abstract: The European Union (EU) provides grants to disadvantaged regions of member states to allow them to catch up with the EU average. Under the Objective 1 scheme, NUTS2 regions with a GDP per capita level below 75% of the EU average qualify for structural funds transfers from the central EU budget. This rule gives rise to a regression-discontinuity design that exploits the discrete jump in the probability of EU transfer receipt at the 75% threshold. Additional variability arises for smaller regional aggregates - so-called NUTS3 regions - which are nested in a NUTS2 mother region. Whereas some relatively rich NUTS3 regions may receive EU funds because their NUTS2 mother region qualifies, other relatively poor NUTS3 regions may not receive EU funds because their NUTS2 mother region does not qualify. We find positive growth effects of Objective 1 funds, but no employment effects. A simple cost-benefit calculation suggests that Objective 1 transfers are not only effective, but also cost-efficient.
    Keywords: Structural funds; Regional growth; Regression discontinuity design; Quasi-randomized experiment
    Date: 2008–11
  9. By: Ana Lamo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Javier J. Pérez (Banco de España, Alcalá 50, E-28014 Madrid, Spain.); Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper looks at public and private sector wages interactions since the 1960s in the euro area, euro area countries and a number of other OECD countries. The paper reports, first, a strong positive annual contemporaneous correlation of public and private sector wages over the business cycle; this finding is robust across methods and measures of wages and quite general across countries. Second, we show evidence of long-run relationships between public and private sector wages in all countries. Finally, causality analysis suggests that feedback effects between private and public wages occur in a direct manner and, importantly also via prices. While influences from the private sector appear on the whole to be stronger, there are direct and indirect feedback effects from public wage setting in a number of countries as well. We show how country-specific institutional features of labour and product markets contain helpful information to explain the heterogeneity across countries of our results on public/private wage leadership. JEL Classification: C32, J30, J51, J52, E62, E63, H50.
    Keywords: government wages, private sector wages, causality, co-movement.
    Date: 2008–11
  10. By: Sander Van Der Hoog (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Christophe Deissenberg (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Herbert Dawid (Dept. of Business Administration - Bielefeld University)
    Abstract: EURACE is a major FP6 STREP project aiming at constructing anexhaustive agent-based model of the European economy, populated by avery large number of sophisticated, autonomous agents. The EURACEmodel, which has an explicit spatial structure, includes all the majormarkets considered in quantitative macroeconomic modelling (consumergoods, investment goods, labour, credit and finance). It offers aunique opportunity for studying, from a new perspective, theempirically observed but theoretically poorly understood link betweenthe real and the financial sphere of a modern economy. After summarilypresenting the main features of EURACE, this paper describes in moredetail the newly developed financial management module thatintermediates between the real and the financial spheres in EURACE. Ina nutshell, this module defines the link between the hiring andinvestment behavior of the firms as a function of the revenues theyobtain by selling their products, of the money they can raise on thecredit and financial markets, of their dividend policy, and othermajor aspects of financial decision-making.
    Keywords: Agent-based macroeconomics; Financial policy; Parallel computing
    Date: 2008–11–18
  11. By: Bruno Amable (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: The aim of this article is to analyse the consequences of some structural reforms on the institutional coherence of OECD countries, particularly Continental Europe, and on their economic performance, particularly employment. Because institutions in developed political economies are interrelated through a complex network of complementarities, institutional change has consequences beyond the area concerned by a reform. This also implies that there are complementarity effects in reforms themselves. A challenge of reform programs is therefore to achieve a new type of complementarities between reformed institutions. The paper presents empirical evidence questioning the compatibility of the ongoing structural reforms in product and labour markets with the existing institutional structures in some OECD countries. The coherence of the flexicurity strategy, i.e. a combination of labour market flexibility and generous welfare state, is also questioned, both from economic efficiency and political economy points of view.
    Keywords: Structural reforms, models of capitalism, flexicurity.
    Date: 2008–07
  12. By: Anders Forslund (Uppsala University); Alan B. Krueger (Princeton University and NBER)
    Abstract: In the early 1990s the Swedish labour market was hit by the worst shock it experienced since the 1930s, with the unemployment rate rising to 10 percent. This development stands out in light of Sweden’s performance in the post-war period. Between the mid 1940s and the crisis of the 1990s, the Swedish unemployment rate oscillated between one percent and just under four percent (Figure 1). Unemployment even remained low in the 1970s despite oil price shocks that led to persistently high unemployment elsewhere in Europe. A natural question is what, if anything, in Swedish institutions and policies explains why Sweden’s unemployment rate did not follow the same pattern as in most western European countries? A factor often mentioned for this envious performance is Sweden’s active labour market policies (cf e.g. Layard, Nickell and Jackman, 1991).
    Date: 2008–03
  13. By: Oliver Vins
    Abstract: This paper is one of the first to analyse political influence on state-owned savings banks in a developed country with an established financial market: Germany. Combining a large dataset with financial and operating figures of all 457 German savings banks from 1994 to 2006 and information on over 1,250 local elections during this period we investigate the change in business behavior around elections. We find strong indications for political influence: the probability that savings banks close branches, lay-off employees or engage in merger activities is significantly reduced around elections. At the same time they tend to increase their extraordinary spendings, which include support for social and cultural events in the area, on average by over 15%. Finally, we find that savings banks extend significantly more loans to their corporate and private customers in the run-up to an election. In further analyses, we show that the magnitude of political influence depends on bank specific, economical and political circumstances in the city or county: political influence seems to be facilitated by weak political majorities and profitable banks. Banks in economically weak areas seem to be less prone to political influence.
    JEL: D72 D78 G21 G28 H70
    Date: 2008–11
  14. By: Hagiu, Alina; Avramescu, Tiberiu Cristian
    Abstract: Last year, Romania ranked among first countries in the region as receiver of foreign direct investments and the positive signals from those who have a hard word to say regarding business community didn’t delay to appear. Prestigious international companies choose Romania, and today our country is already checked out on the international map of success locations as attractive destination for capital placements. You exist as a country, as destination in the business environment when you prove as country and to those from exterior when they look at you, that you can offer, you can assure the premises and the necessary frame for obtaining profit. 2007 proved not only that Romania exists as a country from the point of view of business destinations, but is situated on a much honorable position in front of the big international “players” which grants Romania today maybe the most valuable country rating: the respect. The present policy of foreign direct investments in Romania was conceived for attracting foreign investors. Romania’s economic potential is attractive through the internal market dimension (second market from Central Europe after Poland), through the high level of qualification of labor force, through the importance of existing resources and not in the last place through the proximity from the Occidental Europe countries, which represents the investment sources. The improvements of the business environment, the effects of introducing the unique quote of taxation and the positive attitude of foreign partners toward Romania conduced to the accented increasing of foreign direct investments in the last years. Each foreign investment represents an investment in Romania, in the people of this country, in its capacity to become a credible partner for the international business environment representatives. Investments are those which locate you on the map. It represents the barometer, the “health” of a nation.
    Keywords: evolution; investments; business environment; competitiveness; risk.
    JEL: E22 F21
    Date: 2008–07
  15. By: Glans, Erik (Department of Economics)
    Abstract: The Swedish pension reform of 1999-2003 provides an opportunity to study whether and how important economic incentives are for the timing of retirement. The new pension system provides a much closer link between contributions and benefits than the former system. I study whether the reform has led to delayed retirement by examining the retirement patterns of elderly Swedish workers that were differentially affected by the reform. I use duration analysis with annual data from the LINDA database. Discrete time proportional hazard models are estimated. The results show a remarkable decline in the retirement hazard among latter born cohorts, who were more affected by the reform. This implies that retirement is delayed. Most of the decline occurs among public sector employees.
    Keywords: Retirement; Labour supply; Pension Reform
    JEL: H55 J26
    Date: 2008–11–18
  16. By: Dolado, Juan José (Universidad Carlos III, Madrid); Stucchi, Rodolfo (Inter-American Development Bank)
    Abstract: This paper evaluates the impact of the widespread use of fixed-term contracts in Spain on firms' TFP, via its effect on workers' effort. We propose a simple analytical framework showing that, under plausible conditions, workers' effort depends positively on their perception (for given level of effort) about firms' willingness to convert fixed-term contracts into permanent ones. We test this implication using manufacturing firm level data from 1991 to 2005 by means of nonparametric tests of stochastic dominance and parametric multivariate regression approaches. Our main findings are that high conversion rates increase firm's productivity while high shares of temporary contracts decrease it. Both effects are quantitatively relevant.
    Keywords: temporary workers, workers' effort, firms' TFP
    JEL: C14 C52 D24 J24 J41
    Date: 2008–11

This nep-eec issue is ©2008 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.