nep-eec New Economics Papers
on European Economics
Issue of 2011‒01‒30
seventeen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. A Mechanism of Inflation Differentials and Current Account Imbalances in the Euro Area By Harashima, Taiji
  2. Are euro area inflation rates misaligned? By Lopez, Claude; Papell, David
  3. Sources of Unemployment Fluctuations in the USA and in the Euro Area in the Last Decade By Antonio Ribba
  4. Could the Stability and Growth Pact Be Substituted by the Financial Markets? By Terezie Výprachtická
  5. Social Representations and Economic Integration in the Mediterranean Area By Paola Cascinelli
  6. Globalization and FDIs: determinants and competition effects in Central and Eastern European Countries By Natalia VECHIU
  7. The Crisis of the Eurozone By Dorothee Bohle
  8. High-Skilled Immigration Policy in Europe By Kahanec, Martin; Zimmermann, Klaus F.
  9. The Impact of International Trade on Labour Markets. The Case of Outward Processing Traffic between the European Union and Central Eastern European Countries By CELI, Giuseppe
  10. Tax-Benefit Systems in Europe and the US: Between Equity and Efficiency By Bargain, Olivier; Dolls, Mathias; Neumann, Dirk; Peichl, Andreas; Siegloch, Sebastian
  11. Training Policy for Youth Unemployed in a Sample of European Countries By CAROLEO, Floro Ernesto; PASTORE, Francesco
  12. The Golden Rule of Public Finance and the Productivity of Public Capital By Terezie Výprachtická
  13. Fiscal Spending Multiplier Calculations based on Input-Output Tables – with an Application to EU Members By Toralf Pusch; A. Rannberg
  14. Tax Competition in an Expanding European Union By Ronald B. Davies; Johannes Voget
  15. The impact of the Eurosystem's covered bond purchase programme on the primary and secondary markets By John Beirne; Lars Dalitz; Jacob Ejsing; Magdalena Grothe; Simone Manganelli; Fernando Monar; Benjamin Sahel; Matjaž Sušec; Jens Tapking; Tana Vong
  16. Regional Disparities in Europe By AMENDOLA, Adalgiso; CAROLEO, Floro Ermesto; COPPOLA, Gianluigi
  17. The Impact of Ireland's Recession on the Labour Market Outcomes of its Immigrants By Barrett, Alan; Kelly, Elish

  1. By: Harashima, Taiji
    Abstract: This paper examines the mechanism of persistent inflation differentials, current account imbalances, and fiscal deficits in the euro area by constructing a multi-country model in which the optimization behaviors of governments as well as those of households, firms, and the European Central Bank are explicitly incorporated. The model indicates that governments can temporarily adhere to their own intrinsic preferences because fiscal policies are not unified in the euro area. This behavior generates problems, such as inflation differentials, and the stability and growth pact does not appear to be sufficiently effective in preventing such deviations. The results in this paper imply that the balance between national sovereignty and economic stability should be shifted more to the side of stability and that the euro area has to become more politically unified. In addition, the inflation differentials provide clear evidence that inflation acceleration is not caused by monetary policies but by government behavior because monetary policies are unified in the euro area whereas fiscal policies are not.
    Keywords: The euro; Monetary union; Inflation; Inflation differential; Current account imbalance; Fiscal deficit; Time preference; The European Central Bank; The stability and growth pact
    JEL: E58 E63 F33 O52 N14
    Date: 2011–01–18
  2. By: Lopez, Claude; Papell, David
    Abstract: We study the behavior of inflation rates among Euro countries. More specifically, we are interested in testing whether and when group convergence dictated by the Maastricht treaty occurs, and we assess the impact of events such as the advent of the Euro and the 2008 financial crisis. Due to the small size of the estimation sample, we propose a new procedure that increases the power of panel unit root tests when used to study group-wise convergence. Applying this new procedure to Euro Area inflation, we find strong and lasting evidence of convergence among the inflation rates soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency. Furthermore, while we find divergence among some of the Euro countries prior to the 2008 financial crisis, the convergence is strengthened after the crisis for all countries except Greece.
    Keywords: groupwise convergence; inflation; euro; 2008 crisis
    JEL: C32 E31
    Date: 2010
  3. By: Antonio Ribba
    Abstract: The aim of this paper is to investigate the role played by macroeconomic shocks in shaping unemployment fluctuations, both in the USA and in the Euro area, in the recent, European Monetary Union, period. The task is accomplished by estimating a VAR model which jointly considers US and European variables. We identify the structural disturbances through sign restrictions on the dynamic response of variables. Our results show that there are real effects of monetary policy shocks and of non-monetary policy, financial shocks in both economic areas. Moreover, a significant role is also exerted by business cycle, adverse aggregate demand shocks. We provide an estimation of the relative importance of the identified structural shocks in explaining the variability of inflation and unemployment. Not surprisingly, in the last decade an important role has been played by financial shocks.
    Keywords: Structural VARs; Euro Area; Monetary Policy; Unemployment
    JEL: C32 E40
    Date: 2010–04
  4. By: Terezie Výprachtická (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper analyzes the role of labor market institutions in explaining developments of shadow economies in European countries. We use several alternative measures of the shadow sector, and we examine effects of labor institutions on shadow sector in two specific regions: new and old European Union member countries, as their respective shadow sectors exhibited a different development in the last decade. In the discussions of the need for fiscal rules and their usefulness in a monetary union researchers have not agreed on whether the financial markets have a sufficiently disciplining effect on the governments, which would mean that the fiscal rules are not necessary. This paper investigates whether the European Union’s main fiscal rule, the Stability and Growth Pact, could be substituted by the financial markets, taking into account also the effects of the latest financial and economic crisis. Our findings suggest that there is certain interaction between the financial markets and the governments’ decisions on the fiscal policies and that this reaction has become stronger after the beginning of the crisis. However, the institutional setup and market conditions in the European Union are such that this interaction is biased and thus we conclude that the Union needs to have fiscal rules.
    Keywords: European Economic and Monetary Union, Stability and Growth Pact, Financial markets, Fiscal rules
    JEL: C23 E44 E62 H62 H74 H87
    Date: 2010–12
  5. By: Paola Cascinelli
    Abstract: Do social representations affect the efficiency of economic policy? To deal with this problem I studied the limited results of European Policy toward the Euro-Mediterranean Free Trade Area. While the classical approach to economic integration explains this failure mainly as a consequence of the political and economical costs perceived by the partners, I paid attention to the role of two adversarial social representations: the clash of civilizations and the encounter of civilizations. Both of them underestimate and overestimate some characteristics of the Mediterranean Area, hindering the comprehension of regional reality, while the interaction between them nullify the possibility of benefit of the EU Mediterranean economic policy.
    Date: 2010–12–15
  6. By: Natalia VECHIU
    Abstract: Globalization and FDIs: determinants and competition effects in Central and Eastern European Countries
    Date: 2010–11
  7. By: Dorothee Bohle
    Abstract: An important tension had been underlying the first decade of the European Monetary Union. On the one hand, governments had embraced a revolutionary prospect when designing its institutions. They called on market forces and supranational institutions to limit popular democracy and scale back the interventionist state. On the other hand, they were unprepared to live up to this prospect. Hence the accumulation of large economic imbalances and their culmination in the Greek crisis and the instability of the Union’s periphery. These developments have given governments pause. With breathtaking speed, elites have agreed on the need for austerity. But it is difficult to see how the current attempt to return to the spirit of Maastricht would fare any better than before. Permanent austerity is fraught with economic irresponsibility and political risks. Europe therefore needs a new political debate about how much it wants to allow markets to determine the fate of its citizens and countries.
    Keywords: EMU; legitimacy
    Date: 2010–10–15
  8. By: Kahanec, Martin (Central European University and IZA); Zimmermann, Klaus F. (IZA, DIW Berlin and Bonn University)
    Abstract: Whether Europe will be able to stand up to its internal and external challenges crucially depends on its ability to manage its internal mobility and inflows of international migrants. Using a unique expert opinion survey, we document that Europe needs skilled migrants, and skill mismatch is to be expected. A review of current immigration policies shows that despite a number of positive recent developments Europe lacks a consistent strategy to address this challenge effectively, paralyzed by the notion of "fortress" Europe, which we argue should be abandoned. Since significant political tensions can be expected between native actors that favor and disfavor further immigration, improving European immigration policies and procedures is a formidable challenge. This task involves the need to improve Europe's image among potential migrants, especially the high-skilled ones.
    Keywords: European Union, Europe, mobility, high-skilled migration, immigration policy
    JEL: F22 J61
    Date: 2010–12
  9. By: CELI, Giuseppe (Dipartimento di Scienze Economiche - Università di Bari)
    Abstract: In this paper we are trying to evaluate the differential impact of Outward Processing Traffic (OPT) flows with respect to the final trade flows on the labour markets of EU countries. In particular, two EU countries are investigated, Germany and Italy, because of their relevance on total EU-CEEC OPT flows and because they embody two different models of outsourcing towards CEECs. The factor content of trade (FCT) analysis conducted at both levels of inter-industry trade and intra-industry trade signals a more relevant impact of OPT flows than final flows. In particular, results suggest that the labour market effects of intra-industry trade flows deriving from the vertical disintegration of production add significantly to the estimated factor market impact of trade.
    Keywords: intra-industry trade; EU-CEEC trade; vertical disintegration; quality differentiation; labour market effects of international trade
    JEL: F14 F15
    Date: 2011–01–18
  10. By: Bargain, Olivier (University College Dublin); Dolls, Mathias (University of Cologne); Neumann, Dirk (University of Cologne); Peichl, Andreas (IZA); Siegloch, Sebastian (IZA)
    Abstract: Whether observed differences in redistributive policies across countries are the result of differences in social preferences or efficiency constraints is an important question that paves the debate about the optimality of welfare regimes. To shed new light on this question, we estimate labor supply elasticities on microdata and adopt an inverted optimal tax approach to characterize the redistributive preferences embodied in the welfare systems of 17 EU countries and the US. Implicit social welfare functions are broadly compatible with the fiction of an optimizing Paretian social planner. Some exceptions due to generous demogrant transfers are consistent with the ignorance of behavioral responses by some European governments and are partly corrected by recent policy developments. Heterogeneity in leisure-consumption preferences somewhat affect the international comparison in degrees of revealed inequality aversion, but differences in social preferences are significant only between broad groups of countries.
    Keywords: social preferences, redistribution, optimal income taxation, labor supply
    JEL: H11 H21 D63 C63
    Date: 2011–01
  11. By: CAROLEO, Floro Ernesto (Dipartimento di Studi Economici - Università degli Studi di Napoli Parthenope); PASTORE, Francesco (Dipartimento di Discipline Giuridiche ed Economiche Italiane Europee e Comparate - Seconda Università degli studi di Napoli)
    Abstract: The aim of this paper is evaluating the impact of training on the employability of young long-term unemployed (18-24) within the EU. The analysis focuses on three countries representing different educational and training systems: Spain and Sweden are examples of a rigid and of a flexible sequential system, respectively; Germany is the best example of a dual educational and training system. Following a new wave in the literature on evaluation of employment policy, the paper attempts a target-oriented approach, as opposed to a programme-oriented approach. The effect of training on the labour market participation of young people is estimated by a multinomial LOGIT model relative to five labour market statuses: unemployment, employment, training, education and inactivity. The impact of the policy is analysed controlling for other important individual determinants, such as human and social capital endowment, the reservation wage and unemployment duration. The estimates provide little evidence in favour of a positive impact of ALMP in Spain and Germany. Only in Sweden the probability to be employed is significantly dependent on participation on training programmes. This result could be also due to the poor targeting of the policy to the weakest groups, especially in Southern European countries. It raises the issue of whether ALMP is a good instrument to fight youth unemployment and suggests a reform of the general education system could be more “effective”.
    Keywords: european employment strategy; youth unemployment; active labour market policy; europe; regional unemployment differentials
    JEL: H24 J24
    Date: 2011–01–18
  12. By: Terezie Výprachtická (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper concentrates on the golden rule of public finance. It reviews the main advantages and disadvantages of the potential implementation of this rule in the European Union. Often the question of the productivity of public capital is at the heart of the rule’s discussions. As this issue has mostly been investigated for the United States, we try to estimate the productivity of public capital using data on the current member states of the European Union. Working both with data on net capital stocks and gross capital formation, we come to the conclusion that there is a cointegrating relationship between capital and output and that this relationship is in most cases positive. However, as there are also other expenditures classified as current spending that have a positive effect on the output in the long run, we argue that the golden rule should not be introduced in the European Union if the current definition of public capital investment does not change for the rule’s purposes.
    Keywords: Golden rule of public finance, European Union, Cointegration, Productivity of capital, Cobb-Douglas production function
    JEL: C23 E22 E62 H52 H62
    Date: 2011–01
  13. By: Toralf Pusch; A. Rannberg
    Abstract: Fiscal spending multiplier calculations have been revived in the aftermath of the global financial crisis. Much of the current literature is based on VAR estimation methods and DSGE models. The aim of this paper is not a further deepening of this literature but rather to implement a calculation method of multipliers which is suitable for open economies like EU member states. To this end, Input-Output tables are used as by this means the import intake of domestic demand components can be isolated in order to get an appropriate base for the calculation of the relevant import quotas. The difference of this method is substantial – on average the calculated multipliers are 15% higher than the conventional GDP fiscal spending multiplier for EU members. Multipliers for specific spending categories are comparably high, ranging between 1.4 and 1.8 for many members of the EU. GDP drops due to budget consolidation might therefore be substantial if monetary policy is not able to react in an expansionary manner.
    Keywords: fiscal spending multiplier calculation, Input-Output calculus, income- expenditure model, European Union, stimulus, consolidation
    JEL: B22 C67 E12 E62
    Date: 2011–11
  14. By: Ronald B. Davies (Ronald B. Davies, School of Economics, University College Dublin, Newman Building (G215), Belfield, Dublin 4, Ireland); Johannes Voget (Johannes Voget, Mannheim University, Oxford University Centre for Business Taxation , CentER Tilburg University. L9,7, 68131 Mannheim, Germany)
    Abstract: This paper empirically examines whether expansion of the EU has increased international tax competition. To do so, we use a market potential weighting scheme to estimate the slope of best responses. We find robust evidence for tax competition. In particular, our estimates suggest that EU membership affects responses with EU members responding more to the tax rates of other members. This lends credence to the above noted concerns.
    Keywords: Tax Competition; Foreign Direct Investment; Spatial Econometrics
    JEL: F1 F2 H2 H7
    Date: 2010–12
  15. By: John Beirne (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Lars Dalitz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Jacob Ejsing (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Magdalena Grothe (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Simone Manganelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Fernando Monar (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Benjamin Sahel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Matjaž Sušec (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Jens Tapking (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Tana Vong (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This paper provides an assessment of the impact of the covered bond purchase programme (hereafter referred to as the CBPP) relative to its policy objectives. The analysis presented on the impact of the CBPP on both the primary and secondary bond markets indicates that the Programme has been an effective policy instrument. It has contributed to: (i) a decline in money market term rates, (ii) an easing of funding conditions for credit institutions and enterprises, (iii) encouraging credit institutions to maintain and expand their lending to clients, and (iv) improving market liquidity in important segments of the private debt securities market. The paper also provides an overview of the investment strategy of the the Eurosystem with regard to the CBPP portfolio. JEL Classification: G12, G14, G21
    Keywords: covered bonds, liquidity, primary market, secondary market
    Date: 2011–01
  16. By: AMENDOLA, Adalgiso (CELPE (Centre of Labour Economics and Economic Policy), University of Salerno, Italy); CAROLEO, Floro Ermesto (Dipartimento di Studi economici - Università degli Studi di Napoli Parthenope); COPPOLA, Gianluigi (CELPE (Centre of Labour Economics and Economic Policy), University of Salerno, Italy)
    Abstract: In the last decades, and particularly in the Nineties, The European Economy has been widely characterised by regional disparities. This paper aims to evaluate if different regional economic structures, such as productive mix and labour market composition, contribute to this disparities and to what extent they prevent the convergence and/or favour divergent clusters of regions. To this purpose we shall apply a multivariate analysis method, named STATIS, to a set of regional characteristic indicators that will allow us to estimate some latent factors which are able to measure the regional differences and their dynamic.
    Keywords: european regional differences; multivariate analysis; STATIS
    JEL: J60 R11 R58
    Date: 2011–01–18
  17. By: Barrett, Alan; Kelly, Elish
    Abstract: In the mid 2000s Ireland experienced a large inflow of immigrants, partly in response to strong economic growth but also in response to its decision to allow full access to its labour market when EU expansion occurred in May 2004. Between 2004 and 2007, the proportion of non-nationals living in Ireland almost doubled, increasing from 7.7 to 13.1 percent. Between 2008 and 2009, Ireland experienced one of the most acute downturns in economic activity in the industrialised world, with a cumulative fall in Gross National Product of close to 14 percent. In this paper, we assess how this downturn has impacted upon the employment outcomes of non-nationals relative to natives. We find huge job losses among immigrants, with an annual rate of job loss of close to 20 percent in 2009, compared to 7 percent for natives. A higher rate of job loss for immigrants is found to remain when we control for factors such as age and education. We also show how an outflow of non-nationals is occurring. The findings have many implications. In particular, the results point to economic vulnerability for immigrants. However, they also point to a potential macroeconomic benefit to Ireland in terms of a flexible labour supply adjustment.
    Keywords: immigrants/immigration/Ireland/recession
    Date: 2010–09

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