nep-eec New Economics Papers
on European Economics
Issue of 2011‒02‒12
eight papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Trichet Bonds To Resolve the European Sovereign Debt Problem By Nicholas Economides; Roy C. Smith
  2. Economic Integration in Europe and Income Divergence over EU Regions (1995 - 2006) By Sunandan Ghosh; Gerrit Faber
  3. Monetary policy and its impact on stock market liquidity: Evidence from the euro zone By Octavio Fernández-Amador; Martin Gächter; Martin Larch; Georg Peter
  4. Evaluating and managing systemic risk in the European Union By Avadanei, Anamaria; Ghiba, Nicolae
  5. Low-Wage Import Competition, Inflationary Pressure, and Industry Dynamics in Europe By Raphael Auer; Kathrin Degen; Andreas Fischer
  6. Does Emigration Benefit the Stayers? The EU Enlargement as a Natural Experiment. Evidence from Lithuania By Benjamin Elsner
  7. Income distribution and the effect of the financial crisis on the Italian and Spanish labour markets By Tindara Addabbo; Anna Maccagnan; Carmen Llorca-Rodríguez; Rosa García-Fernández
  8. Financial constraints and exports: evidence from Portuguese manufacturing firms By Armando Silva

  1. By: Nicholas Economides (Stern School of Business, NYU); Roy C. Smith (Stern School of Business, NYU)
    Abstract: We propose the creation of “Trichet Bonds” as a comprehensive solution to the current sovereign debt crisis in the EU area. “Trichet Bonds,” to be named after the ECB president Jean-Claude Trichet, will be similar to “Brady Bonds” that resolved the Latin American debt crisis in the late 1980s and were named after the then Treasury Secretary Nicholas Brady. Like the Brady Bonds, Trichet Bonds will be new long-duration bonds issued by countries in the EU area that will be collateralized by zero-coupon bonds of the same duration issued by the ECB. The zero-coupon bonds will be sold by the ECB to the countries issuing Trichet Bonds, which will be offered in exchange for outstanding sovereign debt of the countries. The exchange is offered at market value, so current debt holders will experience a “haircut” from par value, and thus the exchange does not involve a “bailout.” However, present holders of sovereign debt will be exchanging low quality bonds with limited liquidity, for higher quality bonds with greater liquidity. Debt holders not accepting the exchange will be at risk of a forced restructuring at a later date at terms less favorable. The effect of the exchange offer, if a threshold of approximately 70% approve it, is to replace old debt with a lesser amount of new debt with longer maturities. The creation of Trichet bonds will result in various advantages both in comparison to the present unstable situation and other proposed solutions. First, the long duration of Trichet bonds will eliminate the immediate crisis caused by short term expiration of significant amounts of debt which is looming over Greece, Ireland, Portugal, Spain and possibly other EU countries. Second, the guarantee of the principal with the zero-coupon ECD bond collateral increases the quality of the Trichet Bonds compared to existing sovereign debt. Third, the market for the new Trichet Bonds will be liquid and likely to trade at appreciating prices as refinancing (roll-over) risk is reduced and time is allowed for economic reforms by the issuing countries (a condition of the ECB) to take effect. In addition, the exchange of existing sovereign debt for Trichet bonds will force many European banks holding the sovereign debt to take the write-offs required, thus making their own balance sheets more transparent. Many European banks are thought to have large holdings of sovereign debt from the “peripheral” countries that have not been marked-to-market, and thus represent sizeable potential losses for the banks when the sovereign debt is ultimately restructured, as we believe it must be over the next few years. Most of the sovereign bank debt likely to be exchanged, however, is held by larger German, French and Swiss banks with the capability (if not necessarily the desire) to take the write-offs required. The overhang of such future losses affects the entire European banking system at a time when it too is being restructured. The ECB, and the European central banks need to identify those banks that are impaired by excessive sovereign holdings and assist them in recapitalization – the sooner the better – but they should also push the larger, stronger banks to accept the exchange offers in the interest of bank transparency and restructuring as well as in resolving the sovereign debt problem. Clearly the two problems – sovereign debt and bank restructuring – are connected. The issuance of Trichet Bonds, will help to resolve both problems by recognizing market realities and offering an easier way out than through a forced, cram-down restructuring once the ailing sovereigns exhaust their ability to repay the existing debt. There are significant advantages to Trichet bonds over other discussed solutions to the sovereign debt problem. One such proposed solution is the issuance of “Euro Bonds” guaranteed by the Eurozone countries or the EU itself for the purpose of redeeming sovereign bonds by market purchases, or by lending the proceeds to the countries involved for them to acquire their debt. Apart from the considerable political obstacles to such a program, the undertaking actually makes it less likely that existing self-interested debt-holders will sell in the market. The implication of the program is that either through market interventions that push prices up, or by the assumption that the program will continue to enable the debt to be retired at par on maturity, debt-holders won’t sell unless the price is pushed high enough to constitute a bailout. The ECB’s current efforts to support the prices of distressed sovereign bonds is currently having this effect, which transfers some, if not all of the cost of resolving the problem to European taxpayers, where increasingly it is resented. The alternative approach, that has only been discussed by market participants, is for a Russian or Argentine solution in which the debt-holders are made a take-it-or-leave-it offer to exchange outstanding debt for new, generally illiquid bonds at an arbitrary price that discourages future investment by the market. Such an approach is understood by the sovereign debt market to constitute a de facto default. Such a default would likely have serious adverse consequences for the Euro and the EU, and may be less likely that a bailout of some kind. The great advantage of Trichet Bonds is that they avoid both bailouts and defaults.
    Keywords: Trichet bonds, sovereign debt, euro, debt restructuring, Greece, Ireland, Portugal, Spain, Italy, Brady bonds
    JEL: G10 G20 G28
    Date: 2011–01
  2. By: Sunandan Ghosh; Gerrit Faber
    Abstract: This paper tests the question whether the integration process in the EU has contributed to the often-observed growing dispersion of income over the regions of the EU, in the presence of convergence between the member states. We do this by introducing price convergence as an indicator of integration and controlling for the concentration of skilled labour and allowing for path dependency. Our main findings are in line with the expectations of the New Economic Geography School in that integration does contribute to the growing regional inequality in the EU. Price convergence is a significant explanatory variable even after the introduction of a time lag in the dependent variable
    Keywords: Economic integration, Regional inequality, European Union
    JEL: F11 F15 F22 R11
    Date: 2010–12
  3. By: Octavio Fernández-Amador; Martin Gächter; Martin Larch; Georg Peter
    Abstract: The recent financial crisis has been characterized by unprecedented monetary policy interventions of central banks with the intention to stabilize financial markets and the real economy. This paper sheds light on the actual impact of monetary policy on stock liquidity and thereby addresses its role as a determinant of commonality in liquidity. To capture effects both at the micro and macro level of stock markets, we apply panel estimations and vector autoregressive models. Our results suggest that an expansionary monetary policy of the European Central Bank leads to an increase of stock market liquidity in the German, French and Italian markets. These findings are robust for seven proxies of liquidity and two measures of monetary policy.
    Keywords: Stock liquidity, monetary policy, euro zone
    JEL: E44 E51 E52 G12
    Date: 2011–02
  4. By: Avadanei, Anamaria; Ghiba, Nicolae
    Abstract: The financial crisis has exposed the weaknesses in national and international economies, the disruption of the financial systems all over the world. The aim of this paper is to point out the importance of systemic risk management in the European Union (EU). Structured on two parts, the study presents the evaluation methods of the systemic risk in the mentioned area and the main proposals for the financial stability reconstruction. To conclude, deep reforms are needed: an adequate financial regulation and supervision, the evaluation of the performance over time, new rules for improving capital and liquidity and a better communication between institutions in order to prevent and neutralize possible distress.
    Keywords: Systemic risk; financial crisis; European Union
    JEL: G32
    Date: 2010–10–20
  5. By: Raphael Auer (Swiss National Bank and Prince); Kathrin Degen (University of Lausanne); Andreas Fischer (Swiss National Bank and CEPR)
    Abstract: What is the impact of import competition from low-wage countries (LWCs) on inflationary pressure in Europe? This paper examines whether labor- intensive exports from emerging Europe, Asia, and other global regions have a uniform impact on producer prices in Germany, France, Italy, Sweden, and the United Kingdom. In a panel covering 110 (4-digit) NACE industries from 1995 to 2008, instrumental variable estimations predict that LWC im- port competition is associated with strong price effects. More specifically, when LWC exporters capture 1% of European market share, producer prices decrease by about 3%. In contrast, no effect is present for import competition from low-wage countries in Central and Eastern Europe. Decomposing the mechanisms that underlie the LWC price effect on European industry, we show that import competition has a pronounced effect on average productivity with only a muted effect on wages or margins. Owing to the exit of firms and the increase in productivity, LWC import competition is shown to have substantially reduced employment in the European manufacturing sector.
    Date: 2011–02
  6. By: Benjamin Elsner (Trinity College Dublin, Department of Economics and the Institute for International Integration Studies)
    Abstract: The eastern enlargement of the European Union in 2004 triggered a large flow of migrant workers from the new member states to the UK and Ireland. This paper analyzes the impact of this migration wave on the real wages in the source countries. I consider the case of Lithuania, which had the highest share of emigrants relative to its workforce among all ten new member states. Using data from the Lithuanian Household Budget Survey and the Irish Census, I find that emigration had a significant positive effect on the wages of men who stayed in the country, but no such effect is visible for women. A percentage point increase in the emigration rate increases the real wage of men on average by 1%. Several robustness checks confirm this result.
    Keywords: Emigration, Labor Mobility, EU Enlargement
    JEL: F22 J61 R23
    Date: 2010–12
  7. By: Tindara Addabbo; Anna Maccagnan; Carmen Llorca-Rodríguez; Rosa García-Fernández
    Abstract: This paper aims at estimating the costs of the current crisis in terms of income distribution and poverty taking into account by means of microsimulation techniques - the change in employment status in Spain and Italy. We construct a micro simulation analysis on the impact of the crisis on unemployment, household income, and inequality using the European Statistics on Income and Living Conditions Surveys, and Labour Force Surveys data for Italy and Spain with reference to different types of households. We consider the effect of joblessness on household income and well-being and the impact of different systems of unemployment benefit on unemployment sustainability. Our focus is not only on the pecuniary dimension of well-being, but also in terms of the costs of limited access to medical and dental treatment and analyses
    JEL: I32 J6 J65
    Date: 2010–12
  8. By: Armando Silva (Instituto Politécnico do Porto, Escola Superior de Estudos Industriais e de Gestão)
    Abstract: This paper analyzes the links between financial constraints and firm export behavior, at the firm level, by using data on Portuguese manufacturing enterprises. Theoretical models of Chaney (2005) and Manova (2010) suggest that credit constraints are detrimental for exports but no model explains consistently why exports could improve firms´ financial health. Previous empirical literature has not yet reached a consensus on these subjects and there is a great heterogeneity in measuring financial constraints and how to assess the causality relationships; results are also quite heterogeneous. Developing a very recent trend, we approximate credit constraints by using a financial score built on eight variables; to assess the effects of exports on the financial status of firms we apply, for the first time to these types of studies, a propensity score matching with difference in differences. This procedure is used to deal with the endogeneity problems, stemming from the fact that new exporters have most likely initial better financial health. We find that firms enjoying better financial health are more likely to become exporters and that new exporters show improvements in their financial situation. These findings have important policy implications as they suggest that public intervention to support exports is clearly justified.
    Keywords: exports, matching, financial constraints, corporate finances
    Date: 2011–02

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