nep-eec New Economics Papers
on European Economics
Issue of 2010‒08‒06
fifteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Changes in Functional Income Distribution in Italy and Europe By Antonella Stirati
  2. Why do financial market experts misperceive future monetary policy decisions? By Schmidt, Sandra; Nautz, Dieter
  3. Fiscal Stimulus in a Small Euro Area Economy By Vanda Almeida; Gabriela Lopes de Castro; Ricardo Mourinho Félix; José Ramos Maria
  4. "Endgame for the Euro? Without Major Restructuring, the Eurozone is Doomed" By Dimitri B. Papadimitriou; L. Randall Wray; Yeva Nersisyan
  5. Does Europe Need Its Own Rating Agencies? By Giovanni Ferri; Punziana Lacuitignola
  6. Preparing for Euro Adoption in Poland By Rafal Kierzenkowski
  7. The discontinuous integration of Western Europe's heterogeneous market for corporate control from 1995 to 2007 By Frey, Rainer
  8. Twin deficits and the Feldstein-Horioka puzzle: a comparison of the EU member states and candidate countries By Aristovnik, Aleksander; Djurić, Sandra
  9. Financial stability challenges in EU candidate countries - Financial systems in the aftermath of the global crisis By Thierry Bracke; Éva Katalin Polgár; Kristel Buysse; Desislava Rusinova; Alexandre Francart; Jakob Ekholdt Christensen; Corinna Knobloch; Nikolaos Stavrianou; Pavel Diev; Emidio Cocozza; Jon Frost; Sándor Gardó; David Farelius
  10. Services sectors\' agglomeration and its interdependence with industrial agglomeration in the European Union By Astrid Krenz
  11. Purchasing Power Parity and the European Single Currency: Some New Evidence By Maria Christidou; Theodore Panagiotidis
  12. Non-Standard Employment and Labour Force Participation: A Comparative View of the Recent Development in Europe By Schmid, Günther
  13. Fiscal Policy Reaction to the Cycle in the OECD: Pro- or Counter-cyclical? By Balázs Égert
  14. Is judicial inefficiency increasing the house property market weight in Spain? Evidence at the local level By Juan S. Mora-Sanguinetti

  1. By: Antonella Stirati
    Abstract: The aim of this paper is to contribute to the interpretation of the factors that have led to the fall in the labour share in Europe from a non-orthodox perspective, drawing on Classical and Keynesian traditions. It focuses first on the Italian experience and then extends the analysis to other major countries in the Euro area: Germany, France and Spain. The paper examines the role of relative price changes between business sector services and manufacturing in affecting the labour share and real wages in the two sectors. It then proceeds to historical and statistical analysis of the set of factors that have affected real wage growth in manufacturing and finds that institutional changes, unemployment, employment growth and changes in product per worker in terms of the consumer price index, taken together, explain very well real wage trends between 1962 and 2006 in Italy, Germany and Spain.
    Keywords: Income distribution; Labour share; Real wages; Italian economy; European economies
    JEL: E25 E24 J30
    Date: 2010–07
  2. By: Schmidt, Sandra; Nautz, Dieter
    Abstract: This paper investigates why financial market experts misperceive the interest rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function of the ECB, we use qualitative survey data on expectations about the future interest rate, inflation, and output to discover the sources of individual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's interest rate rule. However, although experts tend to overestimate the impact of inflation on future interest rates, perceptions of monetary policy have become more accurate since clarification of the ECB's monetary policy strategy in May 2003. We find that this improved communication has reduced disagreement over the ECB's response to expected inflation during the financial crisis. --
    Keywords: Central bank communication,Interest rate forecasts,Survey expectations,Panel random coefficient model
    JEL: E47 E52 E58 C23
    Date: 2010
  3. By: Vanda Almeida; Gabriela Lopes de Castro; Ricardo Mourinho Félix; José Ramos Maria
    Abstract: The international economic and financial crisis elicited an intensive debate on fiscal stimulus programmes. Although the topics have been diverse, most of the research is focused on large countries, some of them in autarky. The literature covering small economies is thinner and for those integrated in a monetary union is virtually nonexistent. This paper is a contribution to fill this gap. The discussion draws on a New-Keynesian general equilibrium model introduced in Almeida, Castro and Félix (2008), which features a small euro area economy. Contrary to most of the literature that considers infinitely lived households, the model features stochastic finite lifetime households following Blanchard (1985), which are a source of non-Ricardian behaviour and allow for pinning-down the steady state net foreign asset position endogenously. Since in a small euro area economy monetary policy is not an available business cycle stabilisation tool, the use of fiscal policy to pursue this goal seems the only alternative. The results reveal that permanent government expenditure increases should be avoided, as opposed to temporary stimulus. This outcome is identical to the one obtained in the literature for large economies. Lags in the program implementation and limited credibility can however undermine the objectives of a temporary stimulus. In particular, in financial distress circumstances, under which the stimulus may trigger a hike in the country's risk premium, the effectiveness of the stimulus might be negligible.
    JEL: E62 F41 H62
    Date: 2010
  4. By: Dimitri B. Papadimitriou; L. Randall Wray; Yeva Nersisyan
    Abstract: Critics argue that the current crisis has exposed the profligacy of the Greek government and its citizens, who are stubbornly fighting proposed social spending cuts and refusing to live within their means. Yet Greece has one of the lowest per capita incomes in the European Union (EU), and its social safety net is modest compared to the rest of Europe. Since implementing its austerity program in January, it has reduced its budget deficit by 40 percent, largely through spending cuts. But slower growth is causing revenues to come in below targets, and fuel-tax increases have contributed to growing inflation. As the larger troubled economies like Spain and Italy also adopt austerity measures, the entire continent could find government revenues collapsing. No rescue plan can address the central problem: that countries with very different economies are yoked to the same currency. Lacking a sovereign currency and unable to devalue their way out of trouble, they are left with few viable options—and voters in Germany and France will soon tire of paying the bill. A more far-reaching solution is needed.
    Date: 2010–07
  5. By: Giovanni Ferri (University of Bari); Punziana Lacuitignola (University of Bari)
    Abstract: Monetary unions generally boost financial markets. But European private capital markets have progressed at an unsatisfactory pace even with the euro. What accounts for this? We focus on an increasingly key financial infrastructure: Rating Agencies (RAs). Taking an international perspective, we show that: (i) financial market development increases with the presence of national RAs; (ii) in four studied Asian countries, smaller-sized companies disproportionately hold a rating from national RAs, while disregarding the global RAs (Moody’s, S&P, Fitch). We argue that the absence of European RAs may currently limit the extent of rated companies and financial market evolution in Euroland.
    Keywords: national vs. global credit rating agencies, financial market development
    JEL: G2 G3
    Date: 2010–07
  6. By: Rafal Kierzenkowski
    Abstract: The objective of joining the euro area has become an important priority in the policy agenda of the current government. The paper focuses on the major structural reforms necessary to prepare for euro adoption that should allow a sustainable fulfilment of the Maastricht criteria and maximisation of the ensuing various benefits. These reforms are desirable independent of the effective date of adoption, given the necessity to restore fiscal discipline, maintain price stability and ensure a balanced growth going forward. However, they are even more essential in the run up to euro adoption as the process of real and nominal convergence remains largely incomplete, which requires a substantial strengthening of alternative adjustment mechanisms to domestic interest- and exchange-rate changes. The reforms should aim to create strong institutions to ensure fiscal sustainability and an efficient counter-cyclical rules-based fiscal policy supported by an independent fiscal council; promote flexibility in labour and product markets; and head off the risk of a boom-bust cycle triggered by much lower real interest rates, too rapid credit expansion and overblown perceived permanent income gains. The timing of euro adoption should therefore be determined by the speed of the implementation of reforms; otherwise the outcome of early membership without appropriate preparation may turn out to be difficult and risky. Yet, provided that adequate reforms are implemented, euro adoption should speed up the convergence process. This Working Paper relates to the 2010 OECD Economic Survey of Poland (<P>Préparer l’adoption de l’euro en Pologne<BR>L'objectif que constitue l'entrée dans la zone euro est devenu un objectif important du gouvernement actuel. Cet article est consacré aux principales réformes structurelles nécessaires à la préparation de l'adoption de la monnaie unique, qui devraient permettre à la Pologne de satisfaire durablement aux critères de Maastricht et de maximiser les différents avantages qu'elle en retirera. Ces réformes sont souhaitables indépendamment de la date effective d'entrée dans la zone euro, compte tenu de la nécessité de restaurer la discipline budgétaire, de maintenir la stabilité des prix et de garantir une croissance équilibrée dans l'avenir. Néanmoins, elles sont d'autant plus cruciales à l'approche de l'adoption de la monnaie unique que le processus de convergence réelle et nominale reste dans une large mesure inachevé, ce qui exige un renforcement sensible d'autres mécanismes d'ajustement que les taux d'intérêt et le taux de change domestiques. Ces réformes devraient viser à : mettre en place des institutions fortes garantissant la soutenabilité des finances publiques, ainsi qu'une politique budgétaire anticyclique efficace fondée sur des règles et étayée par un conseil indépendant de politique budgétaire ; à promouvoir la flexibilité du marché du travail et des marchés de produits ; et à neutraliser le risque d'un cycle de forte expansion et de récession déclenchée par des taux d'intérêt réels nettement plus bas, une croissance trop rapide du crédit, et l'impression injustifiée de gains de revenu durables. Le moment d'adoption de l'euro devrait donc être déterminé par le rythme de mise en oeuvre des réformes. Faute de quoi, une entrée prématurée dans la zone euro sans préparation adéquate pourrait se révéler difficile et risquée. Néanmoins, si des réformes adaptées sont instituées, l'adoption de la monnaie unique devrait accélérer le processus de convergence. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Pologne 2010 (
    Keywords: OECD, Poland, fiscal rules, convergence, euro area, Maastricht criteria, labour market flexibility, boom-bust cycle, OCDE, Pologne, règles budgétaires, convergence, zone Euro, critère de Maastricht, flexibilité du marché du travail, cycle d’expansion et de récession
    JEL: E42 E58 E61 E62 P20
    Date: 2010–07–15
  7. By: Frey, Rainer
    Abstract: As, in Europe, many institutional reforms have been undertaken to establish an economic union, it can be expected that the relevance of borders has decreased over time. For the EU 15, we investigate the expected integration process of the market for corporate control - an illustrative market for studying integration issues - over the period from 1995 to 2007. Our gravity regressions show that borders lost relevance from 1995 up to the bursting of the new economy bubble. During this period, the transition from the European Economic Community to the European Union at the end of 1993 and the introduction of the euro may have led to accelerated integration. However, thereafter we find no evidence for further progress driven by institutional factors. On the other hand, geographical distance became less relevant for M&As for the entire time span from 1995 to 2007. The continued lack of full integration is also evidenced by heterogeneity inside Europe. This becomes apparent in differing and continuing bilateral border effects. Country pairs with supposedly liberal capital market thinking, such as the Netherlands, Germany and the UK are found to be divided by relatively small barriers. Hence, a still existing lack of integration in Europe may not be a result of missing institutional reforms. In the Poisson estimations, the results depend neither on the choice of the number of observations nor on the log of aggregated transaction value as the dependent variable; however, the use of the levels is inappropriate. --
    Keywords: Integration,Europe,border effects,bilateral borders,distance,gravity,Poisson,panel,mergers and acquisitions
    JEL: F21 F23 F36 G15 G34 R12
    Date: 2010
  8. By: Aristovnik, Aleksander; Djurić, Sandra
    Abstract: The paper’s main objective is to investigate the empirical link between the fiscal balance and the current account (i.e. the twin deficits phenomenon). The paper focuses on the EU member states and candidate countries which are according to their different (e.g. historical, political, economical and geographical) characteristics divided into two major groups, i.e. old EU member states (EU15) and new EU member states and candidate countries (EU12+3) in the 1995-2008 period. Additionally, the importance of the so-called Feldstein-Horioka puzzle in the considered countries is examined in order to draw some conclusions about the regions’ integration with international capital markets. The empirical results suggest that budget deficits in the EU member states and candidate countries have generally signaled relatively high level of substitutability between private and public savings, implying a relatively low correlation between fiscal and external imbalances. Thus, the empirical results in general reject the validity of the twin deficit hypothesis. Finally, the paper provides evidence of a relatively higher level of capital mobility, especially in the EU12+3 region in the second sub-period (2004-2008).
    Keywords: twin deficits; Feldstein-Horioka puzzle; capital mobility; EU member states; candidate countries; panel data analysis
    JEL: F15 F32 F41 C33 O52
    Date: 2010–07–29
  9. By: Thierry Bracke (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Éva Katalin Polgár (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Kristel Buysse (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Desislava Rusinova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Alexandre Francart (Banque Nationale de Belgique, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Jakob Ekholdt Christensen (Danmarks Nationalbank, Havnegade 5, 1093 Copenhagen K, Danmark.); Corinna Knobloch (Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, D-60431 Frankfurt am Main, Germany.); Nikolaos Stavrianou (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Pavel Diev (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Emidio Cocozza (Banca d’Italia,Via Nazionale 91, I-00184 Rome, Italy.); Jon Frost (De Nederlandsche Bank, Postbus 98, 1000 AB Amsterdam, The Netherlands.); Sándor Gardó (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, POB-61, A-1011 Vienna, Austria.); David Farelius (Sveriges Riksbank, 103 37, Stockholm, Sweden.)
    Abstract: This paper reviews financial stability challenges in the EU candidate countries: Croatia, the former Yugoslav Republic of Macedonia and Turkey. It follows a macro-prudential approach, emphasising systemic risks and the stability of financial systems as a whole. The paper recalls that the economies of all three countries experienced a recession in 2008-09 and shows how this slowed the rapid process of financial deepening that had been taking place since the beginning of the last decade. The deteriorating economic and financial conditions manifested themselves, first and foremost, through a marked deterioration in asset quality. These direct credit risks were compounded by the transformation of exchange and interest rate risks through a widespread use of foreign exchange-denominated or indexed loans and variable or adjustable interest rate loans. Moreover, funding and liquidity risks also materialised to some extent, although fully fledged bank runs were avoided, and none of the countries experienced a sharp reversal in external financing. Overall, the deterioration in asset quality has so far been managed well by the banking systems of the candidate countries, facilitated by large capital buffers, pro-active macro-prudential policies pursued by the authorities both before and during the crisis and the relative stability of exchange rates. Looking ahead, although uncertainties remain high regarding credit quality, the shock-absorbing capacities of the banking systems are fairly robust, as also evidenced by their relative resilience so far. Nevertheless, as the economic recovery sets in, the central banks should return to and possibly reinforce the implementation of measures to avoid a pro-cyclical build-up of credit (asset) boom-bust cycles. Furthermore, given the relevance of foreign-owned banks in two of the three countries, a continued strengthening of home-host cooperation in the supervisory area will be crucial to avoid any kind of regulatory arbitrage. JEL Classification: F32, F41, G21, G28
    Keywords: Europe, banking sector, vulnerability indicators, macro-prudential approach, emerging markets
    Date: 2010–07
  10. By: Astrid Krenz
    Abstract: Services sectors\' agglomeration in the European Union, its development over time, its driving factors and dynamic tendencies will be empirically investigated in this study. Locational gini coefficients are computed taking EU-KLEMS data for 14 European countries covering 22 services sectors over the period from 1970 to 2005. Services sectors\' agglomeration in the European Union decreased over the years between 1970 and 2005. Analysis shows that for most of the services sectors considered agglomeration decreased over time, leading to further dispersion of economic activities. Only the branches of retail trade, other water transport and financial intermediation record a significant increase in agglomeration. Agglomeration tendencies of services sectors can be best explained by Traditional and New Trade Theories, New Economic Geography appears to be not relevant. Theoretical work, incorporating services sectors\' activities in New Economic Geography models, is scarce and as Empirics show there is a justified reason for lack of research in that area. In a further step the interaction between industrial and services sectors\' agglomeration is investigated. Non-stationarity of variables is being checked for and error correction methods or regression in differences is employed. There exist several interactions between services and industrial sectors\' agglomeration in the European Union. In particular, agglomeration in retail trade is positively influenced by an increase in agglomeration in textiles industries over the years between 1970 and 2005. The existence of interaction effects justifies further enhancement of theoretical models. Further, the results are important for understanding agglomeration processes in the EU; interactions between services and industrial sectors are indicative for a highly dynamic region which might attract other activities, as well.
    Keywords: Services, Agglomeration, New Economic Geography, European Integration
    JEL: C50 F12 F14 F15 L80
    Date: 2010–07–05
  11. By: Maria Christidou (Department Of Economics, University Of Macedonia, Thessaloniki, Greece); Theodore Panagiotidis (Department Of Economics, University Of Macedonia, Thessaloniki, Greece; The Rimini Centre for Economic Analysis (RCEA), Italy)
    Abstract: The effect of the single currency on the Purchasing Power Parity (PPP) hypothesis is examined in this study for the 15 EU countries, vis a vis the US dollar, before and after the advent of the euro. Standard as well as nonlinear unit root tests are employed on the time series dimension. Unit root tests reject PPP and the highest half-lives are observed after the introduction of the single currency. Panel unit root (Pesaran, 2007) and stationarity tests (Hadri and Kurozumi, 2008) that take into account cross-sectional dependence are also estimated. The results remain inconclusive as panel stationarity tests fail to support PPP whereas panel unit root tests fail to reject PPP for the whole sample and for the period before the introduction of the single currency.
    Keywords: Purchasing Power Parity, half-life, nonlinear unit roots, panel unit roots, heterogeneity, cross-section dependence
    JEL: F31 F33 G15
    Date: 2010–01
  12. By: Schmid, Günther (WZB - Social Science Research Center Berlin)
    Abstract: This paper presents – in a new way of examination and portrayal – the extent and changes of nonstandard employment relationships (part-time work, fixed-term contracts, and self-employment) in 24 EU member states at two points of time, in 1998 and 2008, on the basis of the European Labour Force Survey. Apart from a detailed statistical description by gender, skills and branches, theoretical considerations explaining the development are also examined and tested in a preliminary way. Finally, the most important results and their challenges to the future labour market policy are emphasised again and discussed. The central outcome is neither the complaint of the eroding 'standard employment relationship' nor of its potential 'precariousness'; it is rather the requirement of increasing variability in employment relations due to rising employment participation of women (work-life-balance), mature aged workers, and persons with restricted work capacities. However, parallel to this development social risks are also spreading over the life course, especially the risk of great income volatility through multiple or long periods of unemployment, changing working times, obsolete skills or restricted work capacities due to ill health. In order to reduce or to avoid new social inequalities, future labour market reforms have to acknowledge this development by establishing new forms of social security or by constituting a more flexible standard employment relationship through adaptations in labour and social law. The contribution ends by providing some suggestions to such reforms.
    Keywords: non-standard employment, labour force participation, flexibility, labour market policy
    JEL: J21 J38 J41 J48 J68
    Date: 2010–07
  13. By: Balázs Égert
    Abstract: This paper analyses the reaction of fiscal policy to the cycle in OECD countries. The results suggest that while overall government balances were counter-cyclical in the past and more so in economic downturns than in upswings, discretionary fiscal policy was neutral on average. However, discretionary fiscal policy appears to react to the cycle in a non-linear fashion: fiscal policy in countries with high public debt and high government deficits tends to be pro-cyclical, while countries that have low public debt and that have surpluses are more likely to conduct a counter-cyclical fiscal policy. The paper also finds that asset prices have a significant impact on government balances.<P>La réaction de la politique budgétaire au cycle dans les pays de l’OCDE : A-t-elle été procyclique ou contracyclique ?<BR>Ce document analyse la réaction de la politique budgétaire au cycle dans les pays de l’OCDE. Les résultats montrent que le solde budgétaire global a été contracyclique dans le passé et encore plus en période de ralentissement économique qu’en période d’expansion, mais que les mesures budgétaires discrétionnaires ont eu en moyenne un caractère acyclique. Ce constat s’explique par les réactions non linéaires au cycle : dans les pays où la dette publique et le déficit budgétaire sont élevés, la politique budgétaire à tendance à réagir de façon procyclique au cycle, alors que dans les pays à faible dette publique et à excédent budgétaire, la politique budgétaire sera plus probablement contracyclique. Comme le montre également ce document, les plans budgétaires ne sont pas extrêmement différents des résultats budgétaires, et les prix des actifs n’ont pas un impact sensible sur le solde budgétaire.
    Keywords: fiscal policy, OECD countries, pro-cyclicality, counter-cyclicality, politique budgétaire, pays membres de l'OCDE, procyclique, contracyclique
    JEL: C33 E32 E62 H30 H60
    Date: 2010–05–06
  14. By: Juan S. Mora-Sanguinetti (Banco de España)
    Abstract: Compared with the rest of the European countries the weight of the house property market in Spain is very high, which is consistent with the weakness of the tenancy market. In this context, it has often been argued that an inefficient judicial system, implying a cumbersome procedure to evict a non-paying tenant or simply needing a long period to execute a decision, may be an important determinant of the tenancy market weakness, as it constrains the effective supply by reducing the profitability of landlords. This research has studied this effect econometrically using a panel data approach and exploiting the differences in the judicial efficiency that exists among the Spanish provinces. After controlling for several other factors, this study concludes that the degree of inefficiency of the judicial system has a positive, although minor, impact on the differences in the property share among provinces in Spain.
    Keywords: judicial efficiency, property market, tenancy market, contract enforcement
    JEL: K40 R21
    Date: 2010–07
  15. By: Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper reviews the background and key policy challenges of the current situation of the Spanish economy. It describes the strengths and weaknesses of Spain's recent long growth cycle, the real and financial imbalances accumulated towards its end, and the troubles faced at the current stage. Particular attention is paid to the developments in private and public sector finances and, specifically, to their implications for the banking sector. Attention is also paid to the political-economy background, especially in regards to the undertaking of structural reforms. It is argued that recent external pressure, partly initiated by unjustified catastrophic expectations about Spain, provides an opportunity for accelerating the reforms needed to resumen strong growth.
    Date: 2010–07

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