nep-eec New Economics Papers
on European Economics
Issue of 2010‒10‒16
sixteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The Sustainability of Public Finanaces and Fiscal Policy Coordination in the EMU By Juergen von Hagen
  2. The EMU sovereign-debt crisis: Fundamentals, expectations and contagion By Michael G. Arghyrou; Alexandros Kontonikas
  3. Milestones of European Integration: Which matters most for Export Openness? By Hiller, Sanne; Kruse, Robinson
  4. European Economic Crisis: Ireland in Comparative Perspective By Niamh Hardiman; Sebastian Dellepiane
  5. Forecasting Private Consumption by Consumer Surveys By Christian Dreger; Konstantin A. Kholodilin
  6. The Global Financial Crisis and its Impact on Emerging Market Economies in Europe and the CIS: Evidence from mid-2010 By Marek Dabrowski
  7. The Future for Eurozone Financial Stability Policy By Karl Whelan
  8. Tax Policy after the Crisis – Monitoring Tax Revenues and Tax Reforms in EU Member States – 2010 Report By European Commission
  9. The Nordic welfare model in a European Perspective By Kuivalainen, Susan; Nelson, Kenneth
  10. Migration pressures and immigration policies : new evidence on the selection of migrants By Avato, Johanna
  11. Cyclical Behavior of Inventories and Growth Projections Recent Evidence from Europe and the United States By Jens R. Clausen; Alexander W. Hoffmaister
  12. Ukraine, the European Union and the International Community: Current Challenges and the Agenda for Overcoming the Stalemate By Vasily Astrov; Robert Havlik; Igor Burakovsky; Grzegorz Gromadzki; Vasyl Yurchyshyn
  13. Sustainable Real Exchange Rates in the New EU Member States: What did the Great Recession Change? By Katerina Smídková; Jan Babecky; Ales Bulir
  14. Adjustment under a Currency Peg: Estonia, Latvia and Lithuania during the Global Finanacial Crisis 2008-09 By Catriona Purfield; Christoph B. Rosenberg
  15. A Great Recession in the UK Labour Market : A Transatlantic Perspective By Smith, Jennifer; Elsby, Michael
  16. Total Factor Productivity Estimates: Some Evidence from European Regions By Maria Gabriela Ladu

  1. By: Juergen von Hagen
    Abstract: The financial crisis of 2007-2009 led to a renewed increase in government deficits and debts in many EU countries, causing a full-fledged fiscal crisis in Greece and severe fiscal pressures in other euro-area countries. This has prompted a series of proposals for improving the fiscal framework of the European Monetary Union, the Excessive Deficit Procedure and the Stability and Growth Pact. The first part of this paper reviews the main properties and developments of that framework until 2007. On that basis, it discusses the recent proposals for reform, which range from marginal improvements of the existing framework to the introduction of an explicit framework for managing fiscal crises in the member states, and the expansion of the scope of policy coordination to address macro economic imbalances and the competitiveness of the member states. We find the proposal of a mechanism for dealing with government default most useful. Attempts to suppress current account imbalances and to target national competitiveness positions would most likely result in serious economic losses and do damage to the internal market of the EU. This would increase the wedge between members and non-members of the euro area.
    Keywords: Excessive Deficit Procedure, Stability and Growth Pact, Sovereign Default, Fiscal Crises
    JEL: F42 H63 H68
    Date: 2010–10
  2. By: Michael G. Arghyrou; Alexandros Kontonikas
    Abstract: We offer a detailed empirical investigation of the European sovereign debt crisis based on the theoretical model by Arghyrou and Tsoukalas (2010). We find evidence of a marked shift in market pricing behaviour from a ‘convergence-trade’ model before August 2007 to one driven by macro-fundamentals and international risk thereafter. The majority of EMU countries have experienced contagion from Greece. There is no evidence of significant speculation effects originating from CDS markets. Finally, the escalation of the Greek debt crisis since November 2009 is confirmed as the result of an unfavourable shift in countryspecific market expectations. Our findings highlight the necessity of structural, competitiveness-inducing reforms in periphery EMU countries and institutional reforms at the EMU level enhancing intra-EMU economic monitoring and policy co-ordination.
    Keywords: euro-area, crisis, spreads, fundamentals, expectations, contagion, speculation.
    JEL: E43 E44 F30 G12
    Date: 2010–09
  3. By: Hiller, Sanne (Department of Economics, Aarhus School of Business); Kruse, Robinson (CREATES)
    Abstract: The European integration process has removed barriers to trade within Europe. We analyze which integration step has most profoundly influenced the trending behavior of export openness. We endogenously determine the single most decisive break in the trend, account for strong cross-country heterogeneity and propose a new measure for the strength of trend breaks. Highly open economies gain from both, monetary and real integration. In sharp contrast, less open economies do not benefit from real integration and even suffer from monetary integration. The major milestones for France, Germany, Italy and the Netherlands are the Euro introduction, the Maastricht Treaty, the Exchange Rate Mechanism I and the merge of EFTA and EEC to the European Economic Area, respectively. Our empirical results have important implications for inner-European economic development, as export openness feeds back into growth, unemployment and income convergence.
    Keywords: European Integration; Export Openness; Trends; Structural Breaks
    JEL: C22 F02 F15 F41
    Date: 2010–07–01
  4. By: Niamh Hardiman (UCD School of Politics and International Relations); Sebastian Dellepiane (UCD School of Politics and International Relations)
    Abstract: The current economic crisis has hit all European countries hard, but some are much more severely affected others. The problems manifest in European peripheral countries, especially Ireland, Spain, and Greece, have roots in domestic policy mistakes. However, the European context of these policy profiles also needs to be taken into account. The creation of the Euro initially yielded large credibility gains for the weaker economies, extending low interest rates across the Eurozone. But it also introduced a set of perverse incentives toward fiscal expansion which were supposed to be managed at domestic level. Weak European coordinating capacity meant there were few effective external disciplines on national decision-making. The sanctions built into the Stability and Growth Pact proved more controversial and therefore less constraining than originally envisaged. The problems accumulating in the weaker economies made them particularly exposed to crisis when the downturn came. The crisis is not merely one of peripheral economies’ policy errors, but extends to the design of European decision-making and the management of monetary union. These issues are explored with reference to the Irish case: the crisis of the Irish and other peripheral economies points to a crisis at the heart of European politics.
    Date: 2010–10–01
  5. By: Christian Dreger; Konstantin A. Kholodilin
    Abstract: Survey-based indicators such as the consumer confidence are widely seen as leading indicators for economic activity, especially for the future path of private consumption. Although they receive high attention in the media, their forecasting power appears to be very limited. Therefore, this paper takes a fresh look on the survey data, which serve as a basis for the consumer confidence indicator (CCI) reported by the EU Commission for the euro area and individual member states. Different pooling methods are considered to exploit the information embedded in the consumer survey. Quantitative forecasts are based on Mixed Data Sampling (MIDAS) and bridge equations. While the CCI does not outperform an autoregressive benchmark for the majority of countries, the new indicators increase the forecasting performance. The gains over the CCI are striking for Italy and the entire euro area (20 percent). For Germany and France the gains seem to be lower, but are nevertheless substantial (10 to 15 percent). The best performing indicator should be built upon pre-selection methods, while data-driven aggregation methods should be preferred to determine the weights of the individual ingredients.
    Keywords: Consumer confidence, consumption, nowcasting, mixed frequency data
    JEL: E21 C22
    Date: 2010
  6. By: Marek Dabrowski
    Abstract: Emerging market economies were major beneficiaries of the economic boom before 2007. More recently, they have become victims of the global financial crisis. Their future development depends, to a large extent, on global economic prospects. Today the global economy and the European economy are much more integrated and interdependent than they were ten or twenty years ago. Every country must recognize its limited economic sovereignty and must be prepared to deal with the consequences of global macroeconomic fluctuations. The statistical data for 2009 provides a mixed picture with respect to the impact of the crisis on various groups of countries and individual economies. On average, Central and Eastern Europe experienced a smaller output decline than the Euro area and the entire EU while the CIS, especially its European part, contracted more dramatically. However, there was a deep differentiation within each country group. Looking globally, richer countries, which are more open to trade and in which the banking sector plays a larger role and which rely more on external financing, suffered more than less sophisticated economies, which are less dependent on trade and credit (especially from external sources). With some exceptions, the previous good growth performance helped rather than handicapped countries in the CEE and CIS regions in the crisis year of 2009. The post-crisis recovery has been rather modest and incomplete. It remains vulnerable to new shocks (like the Greek Fiscal crisis), the danger of sovereign default and other uncertainties. Full post-crisis recovery and increasing potential growth will require far going economic and institutional reforms on both national, regional (e.g., EU) and global levels.
    Keywords: global financial crisis, emerging-market economies, European Union, Economic and Monetary Union, Central and Eastern Europe, Commonwealth of Independent States, sovereign debt crisis, global policy coordination
    JEL: E44 E63 F32 F36 F42 G15 H63
    Date: 2010–10
  7. By: Karl Whelan (University College Dublin)
    Abstract: The past few months have exposed serious problems in relation to Europe’s ability to cope with financial stress. Placing the new Financial Stability funds on a permanent basis, in the form of a new European Monetary Fund will be required if Europe is to deal effectively with the serious debt problems of some Eurozone countries. However, this fund should exist to manage sovereign defaults in an orderly manner, not to prevent them altogether. Bank supervisors also need to publish regular stress tests, change their regulations on the risk weighting of sovereign debt and put new resolution procedures in place. Together, these reforms will allow Europe to deal with future sovereign debt problems without provoking a crisis.
    Date: 2010–09–30
  8. By: European Commission
    Abstract: The report is prepared jointly by DG ECFIN and DG TAXUD of the European Commission. As the previous edition, the report analyses recent trends in tax revenues and tax reforms in EU Member States. A particular focus of this year's edition is on the consequences of the global economic and financial crisis on revenue systems and the need to provide adequate policy responses. Given the size of the budgetary consolidation required after the crisis, a contribution from the revenue side will be necessary in many countries. The report analyses how revenue increases and tax systems in general could be designed in a growth-friendly way and to what extent some of the reforms would entail a need for coordination at the EU level. Moreover, it discusses tax policy issues related to the crisis and contributes to the ongoing discussion on financial sector taxation.
    Keywords: European Union, taxation, tax reforms, financial sector
    JEL: H21 H22 H23 H25 H27 H62
    Date: 2010–09
  9. By: Kuivalainen, Susan (University of Turku. Department of Social Politics and Social Work); Nelson, Kenneth (Stockholm University. Swedish Institute for Social Research (SOFI))
    Abstract: <p> Social assistance and minimum income benefits are important indicators for assessing the very basic objective of social policy, namely to mitigate financial hardship and alleviate poverty. The Nordic countries have succeeded well from a comparative point of view in terms of poverty alleviation. However, last-resort safety-nets are changing. Scattered evidence indicate that Nordic social assistance have become less generous. Perhaps are the Nordic countries becoming more similar to the welfare models of Continental Europe or the United Kingdom? This study analyses central dimensions of Nordic social assistance, such as the generosity, scope and effectiveness of benefits. Data for the empirical analyses are from SaMip and LIS. We show that Finland and Sweden, particularly, have suffered from welfare decline, including less generous and effective benefits.<p>
    Keywords: Nordic welfare; Europe; Social policy; Poverty alleviation; welfare decline; Sweden; Finland
    JEL: D60 I38
    Date: 2010–10–05
  10. By: Avato, Johanna
    Abstract: This paper aims to better understand emigration pressures in migrant sending countries by looking at the determinants of the propensity to migrate at the individual level. The analysis is based on survey data from Albania, Moldova, Egypt and Tunisia collected by the European Training Foundation (ETF) in 2006. Within this context the study focuses on: (i) the self-selection of migrants in terms of skills; and (ii) the impact of selective immigration policies on the migration process. The paper finds that migration pressures, or the intent to migrate, are not subject to any self-selection. However, immigration policies exert a strong out-selection that is likely part of the reasons why positive selection is found in many studies. Further, the study confirms that the European Union (EU) attracts comparatively lower skilled migrants than other destinations.
    Keywords: Population Policies,Voluntary and Involuntary Resettlement,Human Migrations&Resettlements,International Migration,Gender and Development
    Date: 2009–12–01
  11. By: Jens R. Clausen; Alexander W. Hoffmaister
    Abstract: In the United States and a few European countries, inventory behavior is mainly the outcome of demand shocks: a standard buffer-stock model best characterizes these economies. But most European countries are described by a modified buffer-stock model where supply shocks dominate. In contrast to the United States, inventories boost growth with a one-year lag in Europe. Moreover, inventories provide limited information to improve growth forecasts particularly when a modified buffer-stock model characterizes inventory behavior.
    Keywords: Business cycles , Cross country analysis , Europe , Forecasting models , Manufacturing sector , Production growth , United States ,
    Date: 2010–09–14
  12. By: Vasily Astrov (The Vienna Institute for International Economic Studies, wiiw); Robert Havlik (The Vienna Institute for International Economic Studies, wiiw); Igor Burakovsky; Grzegorz Gromadzki; Vasyl Yurchyshyn
    Abstract: Ukraine was confronted with an unprecedented economic and financial crisis during 2008-2009. That crisis has until recently been compounded by a highly unstable political situation. The European Union, Ukraine's neighbours and the international community have been concerned about possible repercussions of these developments on the stability of the whole region. The February 2010 presidential elections brought more political stability and Ukraine's economic situation markedly improved as well. In this context, the Austrian Ministry of Finance and the Vienna Institute for International Economic Studies (wiiw) organized an international expert seminar dealing with these issues in June 2010. The report starts with a summary of deliberations at the Vienna seminar. Next, the background study on the Ukraine's current economic and political situation, prepared for the seminar by wiiw (Vasily Astrov) is presented. The background study is followed by two contributions on future challenges from leading Ukrainian scholars (Igor Burakovsky and Vasily Yurchyshyn). Last but not least, reflections on Ukraine's-EU political and economic relations by Grzegorz Gromadzki, independent expert from Warsaw, are included as well. An extensive annex with recent statistical data on Ukraine is enclosed.
    Keywords: macroeconomics, international trade and investment, public economics, forecasts, European integration, Ukraine
    JEL: E F1 F21 H
    Date: 2010–07
  13. By: Katerina Smídková; Jan Babecky; Ales Bulir
    Abstract: The Great Recession affected export and import patterns in our sample countries, and these changes, coupled with a more volatile external environment, have profound impact on our estimates of real exchange rate misalignments and projections of sustainable real exchange rates. We find that real misalignments in several countries with pegged exchange rates and excessive external liabilities widened relative to earlier estimates. While countries with balanced net trade positions are expected to continue to experience appreciation during 2010-2014, several currencies are likely to require real depreciation to maintain sustainable net external debt. Our estimates point to somewhat larger disequilibria than those of IMF country teams, however, any estimates of equilibrium exchange rates are subject to sizable uncertainty.
    Keywords: Bilateral trade , Currencies , Economic models , Economic recession , European Economic and Monetary Union , Exchange rate regimes , Exports , Foreign direct investment , Imports , Price elasticity , Real effective exchange rates ,
    Date: 2010–08–30
  14. By: Catriona Purfield; Christoph B. Rosenberg
    Abstract: The paper traces the Baltics’ adjustment strategy during the 2008-09 global financial crisis. The abrupt end to the externally-financed domestic demand boom triggered a severe output collapse, bringing per capita income levels back to 2005/06 levels. In response to this shock, the Baltics undertook an internal devaluation that relied on unprecedented fiscal and nominal wage adjustment, steps to preserve financial sector stability as well as complementary efforts to facilitate voluntary private debt restructuring. One-and-half years on, the strategy is making good progress but not yet complete. Confidence in the exchange rate was maintained, the banking system was supported by its parent banks, external imbalances and inflation have largely disappeared, competitiveness is improving, and fiscal deficits are gradually being brought back towards pre-crisis levels. However, amid record levels of unemployment, further reforms are needed to foster a return to more balanced growth, fiscal sustainability, and a healthier banking system.
    Keywords: Baltics , Currency pegs , Debt restructuring , Estonia , Financial crisis , Fiscal policy , Global competitiveness , Global Financial Crisis 2008-2009 , Labor market policy , Latvia , Lithuania , Private sector , Stabilization measures , Wage adjustments ,
    Date: 2010–09–15
  15. By: Smith, Jennifer (Department of Economics, University of Warwick); Elsby, Michael (University of Michigan and NBER)
    Abstract: The increase in unemployment in the United Kingdom that accompanied the Great Recession has been conspicuous by its moderation. The rise in joblessness is dwarfed by the recent experience of the United States, by past recessionary episodes in the U.K. and by the contraction in GDP in the U.K. Increased rates of job loss have played a dominant role in shaping the rise in British unemployment. Unemployment duration has not increased to the levels seen in previous recessions, in contrast to the U.S. where duration substantially exceeds previous peaks. Looking forward, the U.K. labour market appears to have adjusted fully to the shocks that prompted the recession. Signs of reductions in match efficiency witnessed recently in the U.S. are not mirrored in the U.K. In contrast, while long-term unemployment currently remains well below historical levels, recent estimates of job finding rates suggest that it has the potential to rise much further. Thus, a timely recovery in aggregate demand will play an important role in averting persistently high unemployment in the future.
    Keywords: Labour market ; business cycle ; unemployment ; worker flows JEL Classification: E24 ; J6
    Date: 2010
  16. By: Maria Gabriela Ladu (Università degli Studi di Sassari and CRENoS)
    Abstract: This paper analyses the economic performance of European Regions and computes the Total Factor Productivity (TFP) using a panel cointegration approach. The main idea behind this choice is that this approach allows to directly estimate differences across economies in the production function and also to test for the presence of scale economies and market imperfections. In fact, recent studies (de la Fuente, 1995, 1996B, and de la Fuente – Doménech, 2000) show that TFP differences across countries and regions are substantial and highlight the importance of TFP dynamics as crucial in the evolution of productivity.
    Keywords: Total Factor Productivity, Panel Unit Root Test, Panel Cointegration, Fully Modified OLS
    Date: 2010–09–29

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