nep-eec New Economics Papers
on European Economics
Issue of 2011‒01‒16
ten papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. EU Economic Governance: Less Might Work Better Than More By Karl Whelan
  2. Euro area labour markets: different reaction to shocks? By Jan Brůha; Beatrice Pierluigi; Roberta Serafini
  3. Corporate bond spreads and real activity in the euro area - Least Angle Regression forecasting and the probability of the recession By Marco Buchmann
  4. A monthly indicator of employment in the euro area: real time analysis of indirect estimates By Moauro, Filippo
  5. The EU strategy of policy convergence with its neighbours in the area of trade By Patricia Garcia-Duran; Montserrat Millet
  6. The Threat of 'Currency Wars': a European Perspective By Zsolt Darvas; Jean Pisani-Ferry
  7. The minimum liquidity deficit and the maturity structure of central banks' open market operations: lessons from the financial crisis By Jens Eisenschmidt; Cornelia Holthausen
  8. A Positive Framework to Analyze Sovereign Bail-outs within the EMU By Christian Fahrholz; Cezary Wójcik
  9. European Integration and Labour Migration By d'Artis Kancs; Julia Kielyte
  10. The stability and growth pact: lessons from the great recession. By Larch, Martin; Van den Noord, Paul; Jonung, Lars

  1. By: Karl Whelan (University College Dublin)
    Abstract: The European Commission has recently proposed a new package of reforms of the Stability and Growth Pact. The package contains a number of good proposals. In particular, the increased focus on debt ratios is a very positive suggestion though this should be strengthened further. However, some of the other proposals, such as the new principle of prudent fiscal management and the scoreboard for non-fiscal imbalances, are poorly thought out and perhaps unworkable. A smaller number of well-focused proposals may end up working better than this complex, and perhaps overly ambitious, package. And a coherent policy to allow for orderly sovereign defaults in Euro area member states would probably place more pressure, via bond markets, on states to get their fiscal houses in order than would the proposed system of fines.
    Date: 2010–12–31
  2. By: Jan Brůha (Czech National Bank, Na P?íkop? 28, 115 03 Praha 1, Czech Republic.); Beatrice Pierluigi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Roberta Serafini (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: A small labour market model for the six largest euro area countries (Germany, France, Italy, Spain, the Netherlands, Belgium) is estimated in a state-space framework. The model entails, in the long run, four driving forces: a trend labour force component, a trend labour productivity component, a long-run inflation rate and a trend hours worked component. The short run dynamics is governed by a VAR model including six shocks. The state-space framework is convenient for the decomposition of endogenous variables in trends and cycles, for shock decomposition, for incorporating external judgement, and for running conditional projections. The forecast performance of the model is rather satisfactory. The model is used to carry out a policy experiment with the objective of investigating whether euro area countries differ in the labour market adjustment to a reduction in labour costs. Results suggest that, following the 2008-09 recession, moderate wage growth would significantly help delivering a more job-intense recovery. JEL Classification: C51, C53, E17, J21.
    Keywords: Labor market, Forecasting, Kalman filter.
    Date: 2011–01
  3. By: Marco Buchmann (European Central Bank, DG Financial Stability, Financial Stability Assessment Division, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper aims at providing a detailed analysis of the leading indicator properties of corporate bond spreads for real economic activity in the euro area. In- and out-of-sample predictive content of corporate bond spreads are examined along three dimensions: the bonds’ quality, their term to maturity, as well as the forecast horizon at which one intends to predict a change in real activity. Numerous alternative leading indicators capturing macroeconomic and financial conditions are included in the analysis. Along with standard time series forecast models, the Least Angle Regression (LAR) technique is used to build multivariate models recursively. Models built via LAR can be used to produce forecasts and allow one to analyze how the composition and the number of relevant model variables evolve over time. Corporate bond spreads turn out to be valuable predictors for real activity, in particular at forecast horizons beyond one year; Medium risk bond spreads with maturities between 5 and 10 years appear particularly rich in content. The spreads also belong to the group of indicators that implied the highest probability of a recession occurring from a pre-crisis perspective. JEL Classification: E32, E37, E44, G32.
    Keywords: Corporate bond spreads, point and density forecasting, automatic model building, least angle regression.
    Date: 2011–01
  4. By: Moauro, Filippo
    Abstract: The paper presents the results of an extensive real time analysis of alternative model-based approaches to derive a monthly indicator of employment for the euro area. In the experiment the Eurostat quarterly national accounts series of employment is temporally disaggregated using the information coming from the monthly series of unemployment. The strategy benefits of the contribution of the information set of the euro area and its 6 larger member states, as well as the split into the 6 sections of economic activity. The models under comparison include univariate regressions of the Chow and Lin' type where the euro area aggregate is directly and indirectly derived, as well as multivariate structural time series models of small and medium size. The specification in logarithms is also systematically assessed. The largest multivariate setups, up to 49 series, are estimated through the EM algorithm. Main conclusions are the following: mean revision errors of disaggregated estimates of employment are overall small; a gain is obtained when the model strategy takes into account the information by both sector and member state; the largest multivariate setups outperforms those of small size and the strategies based on classical disaggregation methods.
    Keywords: temporal disaggregation methods; multivariate structural time series models; mixed-frequency models; EM algorithm; Kalman filter and smoother
    JEL: C51 C32 C52 C22
    Date: 2010–12–30
  5. By: Patricia Garcia-Duran; Montserrat Millet (Universitat de Barcelona)
    Abstract: The objective of this paper is to ascertain whether the EU is seeking policy convergence with its neighbours in the area of trade by means of EU regulations. For each trade- related topic, we carried out a content analysis of the available official documents to identify the model of relations that has been established between the EU and four neighbouring countries (Morocco, Algeria, Ukraine and Georgia). The findings indicate that Europeanization is the EU strategy in most cases. However, adaptation to European regulations is only a long-term aim. When international regulations exist in a specific area, the EU usually demands the internationalization of a countrys regulations as a first step. When there are no international regulations, the convergence process is established on the basis of bilaterally developed norms. EU strategy also varies depending on the country. Its relations with Algeria are the most particular. We conclude that the EU is promoting policy convergence with its neighbours in the area of trade mainly on the basis of international and bilaterally-developed regulations.
    Keywords: normative power, eu neighbourhood policy, europeanization, eu trade relations
    JEL: F13 F50 F02
    Date: 2011
  6. By: Zsolt Darvas; Jean Pisani-Ferry
    Abstract: The 'currency war', as it has become known, has three aspects: 1) the inflexible pegs of undervalued currencies; 2) recent attempts by floating exchange-rate countries to resist currency appreciation; 3) quantitative easing. Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a 'beggar-thy-neighbour' policy as long as the Fed’s policy is geared towards price stability. Current US inflationary expectations are at historically low levels. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures. The euro’s exchange rate has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before.
    Keywords: currency war, quantitative easing, currency intervention, international monetary system
    JEL: E52 E58 F31 F33
    Date: 2010–12–15
  7. By: Jens Eisenschmidt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Cornelia Holthausen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper studies the relationship between the size of the banking sector’s refinancing needs vis-à-vis the central bank and auction rates in its open market operations in times of financial market stress. In a theoretical model, it is found that marginal rates at central bank auctions may increase if the share of troubled banks becomes too high relative to the total size of the banking sector’s refinancing needs. An empirical analysis then aims at determining the size of open market operations needed to absorb large stress levels in interbank money markets and hence contain central bank auction rates. Finally, the paper analyses effects of the composition of open market operations of different maturities on auction rates. It is found that a too high share of longer-term refinancing induces a rise in auction rates which is undesirable. Therefore, the analysis suggests that there is a lower bound for the amount of liquidity provided through short-term operations. JEL Classification: G01, G10, G21.
    Keywords: central bank, money market, open market operations, financial crisis.
    Date: 2010–12
  8. By: Christian Fahrholz (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Cezary Wójcik
    Abstract: We propose a positive formal framework for analyzing sovereign bail-outs in the context of the European Monetary Union (EMU) with a view to making policy recommendations regarding improvements to the EMU institutional architecture. We build our analysis on a political economic game-theoretic model that allows tracing analytically the dynamics of the political process as well as the conditions and parameters on which the scope and limits of the bail-outs depend. In doing so, we formally take account of the negative externality' problem that has been central to policy debates related to the EMU's institutional design and has played an important role in the recent crisis. Contrary to the existing literature, we do not only focus on the economic aspects of such a negative externality, but also look at where they emanate from and interact with the dynamics of the political formation within the EMU. The analysis suggests that, under the present political-economic set-up of the EMU, the bail-outs were inevitable, i.e. a threat of default by one member must, under identifiable conditions, result in sharing the costs of fiscal adjustment by the rest of the members.
    Keywords: Sovereign debt crisis, bail-out, negative externality, political economics, game theory, euro, EMU
    JEL: E62 F33 H77 C70
    Date: 2011–01–10
  9. By: d'Artis Kancs; Julia Kielyte
    Abstract: The present paper studies how European integration might affect the migration of workers in the enlarged EU. Unlike the reduced-form migration models, we base our empirical analysis on the theory of economic geography à la Krugman (1991), which provides an alternative modelling of migration pull and push factors. Parameters of the theoretical model are estimated econometrically using historical migration data. Our empirical findings suggest that European integration would trigger selective migration between the countries in the enlarged EU. In the Baltics, Lithuania would gain about 7.25% of the total work force. In the Visegrád Four, the share of the mobile labour force would increase the most in Hungary, 8.35%, compared to the pre-integration state. Our predictions for the East-West migration are moderate and lower than those of reduced-form models: between 5.44% (from the Baltics) and 3.61% (from the Visegrád Four) would emigrate to the EU North. Because migrants not only follow market potential, but also shape the region’s market potential, the long-run agglomeration forces are sufficiently weak to make a swift emergence of a core-periphery pattern in the enlarged EU very unlikely.
    Keywords: New economic geography; Market potential; Labour migration; Economic integration.
    JEL: F12 L11 R12 R23
    Date: 2010–07–27
  10. By: Larch, Martin; Van den Noord, Paul; Jonung, Lars
    Abstract: While current instruments of EU economic policy coordination helped stave off a full-scale depression, the post-2007 global financial and economic crisis has revealed a number of weaknesses in the Stability and Growth Pact, the EU framework for fiscal surveillance and fiscal policy coordination. This paper provides a diagnosis of how the SGP faired ahead and during the present crisis and offers a first comprehensive review of the ongoing academic and policy debate, including an account of the reform proposals adopted by the Commission on 29 September 2010. In our view, the current system of EU rules is unbalanced. It consists of (i) very specific provisions on how to conduct fiscal policy making in normal times with no effective enforcement mechanisms, and of (ii) no or extremely tight provisions for really bad economic times, like the Great Recession. A two-pronged approach as outlined in this report is needed to revive the Pact: tighter enforcement, coupled with broader macroeconomic surveillance, in good times and an open window for exceptionally bad times, including a crisis resolution mechanism at the EU level.
    Keywords: Stability and Growth Pact; EU; Europe; the euro; Great Recession; fiscal sovereignty
    JEL: E62 E63 H6
    Date: 2010–11

This nep-eec issue is ©2011 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.