nep-eec New Economics Papers
on European Economics
Issue of 2011‒02‒19
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. How Europe Can Muddle Through Its Crisis By Jacob Funk Kirkegaard
  2. Financing obstacles among euro area firms: Who suffers the most? By Annalisa Ferrando; Nicolas Griesshaber
  3. Perspectives on Single Euro Payments Area adoption in the light of the financial crisis By Avadanei, Andreea
  4. On money and output in the euro area: Is money redundant? By Costas Karfakis
  5. Regional Single Currency Effects on Bilateral Trade with the European Union By Joan Costa-i-Font
  6. "What Happens if Germany Exits the Euro?" By Marshall Auerback
  7. The European Rescue of the Washington Consensus? EU and IMF Lending to Central and Eastern European Countries By Susanne Lütz & Matthias Kranke
  8. Beyond the crisis: EMU and labour market reform pressures in good and bad times By Vassilis Monastiriotis & Sotirios Zartaloudis
  9. "Unit Labor Costs in the Eurozone: The Competitiveness Debate, Again" By Jesus Felipe; Utsav Kumar
  10. Forecasting the term structure of the Euro Market using Principal Component Analysis By Dauwe, Alexander; Moura, Marcelo L.
  11. The European Union in search of political identity and legitimacy: Is more Politics the Answer? By Vivien A. Schmidt
  12. The Economic Crisis as a Trigger of Convergence? Short-time work in Italy, Germany and Austria By Stefano Sacchi; Federico Pancaldi; Claudia Arisi
  13. Cross-border resolution of failed banks in the EU: A search for the second-best policies By Zdenek Kudrna
  14. Wages, Implicit Contracts, and the Business Cycle: Evidence from a European Panel By BELLOU Andriana; KAYMAK Baris

  1. By: Jacob Funk Kirkegaard (Peterson Institute for International Economics)
    Abstract: Europe's financial market contagion is infecting systemically important eurozone members, causing a rise in demands that European policymakers make greater strides toward solutions. While Jacob Funk Kirkegaard believes that the European Union will do "whatever it takes" to save the euro and the eurozone, he argues that powerful political constraints prevent EU leaders from making optimal decisions. Europe can get through the current crisis by producing a compromise among member states in the form of a permanent European Stability Mechanism (ESM) with an option to issue a conditional Eurobond, which would aid eurozone members suffering asymmetric economic shocks in return for taking domestic reforms to return to a sustainable fiscal path. An ESM with a conditional Eurobond option offers a less clear-cut solution than a full fiscal union, a straightforward Eurobond, European Central Bank money-printing, or a breakup of the eurozone.
    Date: 2010–12
  2. By: Annalisa Ferrando (European Central Bank, DG-Economics, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Nicolas Griesshaber (Berlin Graduate School of Social Sciences (BGSS), Unter den Linden 6, 10099 Berlin, Germany.)
    Abstract: In this study we investigate the determinants of financing obstacles using survey data on a sample of around 5000 firms from the euro area countries. This completely new survey – started at the end of 2009 - gives us the opportunity to test whether firm characteristics such as size, age, economic branch, financial autonomy and ownership are valid predictors of financing obstacles also during the recent financial crisis. Our results show that only age and ownership are robust explanatory variables for firms’ perceived financing obstacles while mixed results are found for size and economic branches. JEL Classification: E22, G30, G10, O16, K40.
    Keywords: Financial Crisis, Financing Constraints, Small and Medium-Sized Enterprises, Survey Data.
    Date: 2011–02
  3. By: Avadanei, Andreea
    Abstract: The scope of this article is to point out how the present financial crisis is affecting the European payments landscape and the Single Euro Payments Area implementation. The current unpredictable and very challenging market situation has not fundamentally changed the fact that payment services need to continue modernization in order to become more flexible, agile and adapt in order to comply with its important purpose in society. SEPA is needed to ensure the new modern payment platform that can enable Europe to move beyond basic services, increase payments efficiency, embrace innovation and integrate further services in the trade process. Today, the turbulent market conditions could have the effect of accentuating rather than reducing the business case imperative and momentum to achieving full SEPA implementation.
    Keywords: Single Euro Payments Area; credit crunch; corporate bodies; cash management; financial turmoil
    JEL: D53 E42 G21
    Date: 2010–04–02
  4. By: Costas Karfakis (Department of Economics, University of Macedonia)
    Abstract: The relationship between money and output in the euro area is tested in the context of a two-equation model. An interesting aspect of the empirical analysis is the evidence that the real M3 has a correctly signed and statistically significant impact on business cycle fluctuations, given the real interest rate and foreign output. This finding supports the argument made by proponents of monetarism that the effects of monetary policy actions on the real economy are not fully captured by the short-term real interest rate.
    Keywords: Output gap, real money, real interest rate, simultaneous equations methods.
    JEL: E32 E51 E52 E58
    Date: 2011–01
  5. By: Joan Costa-i-Font
    Abstract: The regional effects of sharing a single currency on bilateral trade with other European Union member states are a contentious question. This paper examines the regional effects on trade of the set up of the euro as a common currency. It takes advantage of a gravity specification of bilateral trade between the seventeen Spanish regions and EU-13 countries over the period 1997-2004 and accounts for two distinct effects depending on the temporal set up of the euro. That is, the exchange rate volatility effect (from exchange rate fixing of national currencies in 1999) is distinguished from the so-called common currency effect (resulting from the issuing of a new currency in 2002). Findings are suggestive of a regional concentration of currency union effects in a few regions, namely those relatively more open to trade, though such effects are found to fade away over time. Trade expansion for the set up of the euro ranges between 45 to 16% depending on the specification, but only the exchange rate volatility effect of a common currency was found significant, pure currency union effects were instead found to be almost negligible.
    Date: 2010–10–01
  6. By: Marshall Auerback
    Abstract: Like marriage, membership in the eurozone is supposed to be a lifetime commitment, “for better or for worse.” But as we know, divorce does occur, even if the marriage was entered into with the best of intentions. And the recent turmoil in Europe has given rise to the idea that the euro itself might also be reversible, and that one or more countries might revert to a national currency. The prevailing thought has been that one of the weak periphery countries would be the first to call it a day. It may not, however, work out that way: suddenly, the biggest euro-skeptics in Europe are not the perfidious English but the Germans themselves.
    Date: 2011–02
  7. By: Susanne Lütz & Matthias Kranke
    Abstract: The latest global financial crisis has allowed the International Monetary Fund (IMF) a spectacular comeback. But despite its notorious reputation as a staunch advocate of restrictive economic policies, the Fund has displayed less preference for austerity in recent crisis lending. Though widely welcomed as overdue, the IMF’s shift away from what John Williamson coined the ‘Washington Consensus’ was met with resistance from the European Union (EU) where it concerned Central and Eastern European (CEE) countries. The situation of hard-hit Hungary, Latvia, and Romania propelled unprecedented cooperation between the IMF and the EU, in which the EU has very actively promoted orthodox measures in return for loans. We argue that this represents a European rescue of the Washington Consensus. The case of Latvia is paradigmatic for the profound disagreements between an austerity-demanding EU and a less austere IMF. The IMF’s stance contradicts conventional wisdom about the organization as the guardian of economic orthodoxy. To solve this puzzle, we shed light on three complementary factors of (non)learning that have shaped the EU’s relations vis-à-vis CEE borrowing countries in comparison to the IMF’s: (1) a disadvantageous institutional setting; (2) vociferous creditor coalitions; (3) the precarious eurozone project.
    Keywords: Latvia
    Date: 2010–05–01
  8. By: Vassilis Monastiriotis & Sotirios Zartaloudis
    Abstract: There is a widespread perception among the public and policy-makers that EMU carries one-way pressures for enhanced flexibility in the labour market. We discuss the theoretical basis of this by examining four mechanisms through which the establishment of the common currency and the functioning of EMU can impact on the labour markets, both within the Eurozone and of the New Member States. We argue that the theory and empirics of the link between EMU and labour market flexibility are not conclusive, leaving room for varying degrees of, and directions for, the (de)regulation of national labour markets. This discretion is partly reflected in the experience of labour market reforms in the Eurozone. An examination of the institutional framework for employment policies in the EU further corroborates the conclusion that EMU does not restrict, but rather puts on the agenda, the active exploration of policy options aimed at strengthening the resilience and adaptability of the European economy as well as its quality, fairness and competitiveness. We argue that this is no different today, during or after the crisis, than it was ‘before it all started’.
    Date: 2010–06–01
  9. By: Jesus Felipe; Utsav Kumar
    Abstract: Current discussions about the need to reduce unit labor costs (especially through a significant reduction in nominal wages) in some countries of the eurozone (in particular, Greece, Ireland, Italy, Portugal, and Spain) to exit the crisis may not be a panacea. First, historically, there is no relationship between the growth of unit labor costs and the growth of output. This is a well-established empirical result, known in the literature as Kaldor's paradox. Second, construction of unit labor costs using aggregate data (standard practice) is potentially misleading. Unit labor costs calculated with aggregate data are not just a weighted average of the firms' unit labor costs. Third, aggregate unit labor costs reflect the distribution of income between wages and profits. This has implications for aggregate demand that have been neglected. Of the 12 countries studied, the labor share increased in one (Greece), declined in nine, and remained constant in two. We speculate that this is the result of the nontradable sectors gaining share in the overall economy. Also, we construct a measure of competitiveness called unit capital costs as the ratio of the nominal profit rate to capital productivity. This has increased in all 12 countries. We conclude that a large reduction in nominal wages will not solve the problem that some countries of the eurozone face. If this is done, firms should also acknowledge that unit capital costs have increased significantly and thus also share the adjustment cost. Barring solutions such as an exit from the euro, the solution is to allow fiscal policy to play a larger role in the eurozone, and to make efforts to upgrade the export basket to improve competitiveness with more advanced countries. This is a long-term solution that will not be painless, but one that does not require a reduction in nominal wages.
    Keywords: Competitiveness; Eurozone; Income Distribution; Unit Labor Costs
    JEL: D31 D33 E25 J30
    Date: 2011–02
  10. By: Dauwe, Alexander; Moura, Marcelo L.
    Date: 2011–10
  11. By: Vivien A. Schmidt
    Abstract: The problems of identity and legitimacy in the EU are significant, but tangentially interconnected. The problems for EU identity derive not solely from the fact that European citizens have not developed much sense of being European because they have not been doing a lot in the EU; it is also that national elites have not been saying much about what the EU has been doing—except in moments of crisis. The problems for legitimacy derive not only from the ways in which the EU works—with more emphasis on ‘output’ for the people and ‘throughput’ with’ the people than ‘input’ by and of the people. It is also that the EU’s development challenges nationally constructed identities at the same time that it alters the traditional workings of national democracy. And this in turn adds to problems for citizen identification with the EU and their perceptions of its legitimacy. So the question is: would politicizing the EU help build more identity and legitimacy? Or would this only increase the problems?
    Keywords: political science; European identity; citizenship; legitimacy; democracy
    Date: 2010–09–15
  12. By: Stefano Sacchi; Federico Pancaldi; Claudia Arisi
    Abstract: In all European countries, emergency policy measures have been introduced in order to counteract the employment consequences of the economic crisis. In the context of variously composed anticrisis packages, many European countries have used Short-Time Work (STW) schemes, that is measures to subsidize a temporary reduction in working time intended to maintain an employment relationship. Countries which already had STW schemes, such as Kurzarbeit in Germany and Austria and the Cassa Integrazione Guadagni (CIG) in Italy, have loosened the eligibility requirements and extended their maximum duration. This paper focuses on the issue whether the economic crisis has spurred any convergence in the use of STW in these three social-insurance countries - Austria, Germany and Italy - or whether policy change has rather occurred in a path-dependent fashion. In order to do so, the paper also adopts a systemic approach, focusing on relationships of complementarity or functional substitution and equivalence among the various schemes comprising income maintenance systems to tackle the risks of partial or total unemployment. In addition to shedding light on a rather under-researched province of contemporary welfare states such as STW, this article also aims to contribute to the debate on the analytical levels in the study of social policy by showing the relevance and potential of adopting an intermediate level of analysis between a regime-centred and a programme-centred approach.
    Keywords: short time work; unemployment compensation; social protection; convergence; path dependence
    JEL: I38 J65 J68
    Date: 2011
  13. By: Zdenek Kudrna
    Abstract: This paper analyzes the reasons for the failure of the multilateral resolution of EU cross-border banks such as Fortis. We argue that the pre-crisis regime based on soft law and voluntary coordination was unable to align the incentives of national authorities acting under the time pressure and uncertainty of a banking crisis. We ask whether this experience induced the Commission to propose reforms that would close the regulatory gap between integrated cross-border banks and national resolution regimes. Although, the Commission proposals submitted within a year of the crisis considered the more radical reform options, such as shifting the regime to the EU level or reorganizing cross-border banks so that they could be resolved on the national level, in the end the Commission supported the traditional reform path of deepening soft law and strengthening pre-crisis governance arrangements. At the same time, the new financing mechanisms introduced to stabilize the Eurozone can pave the way for the introduction of an EU-level bank resolution regime, when the next reform opportunity arises.
    Keywords: political science; European Commission
    Date: 2010–11–15
  14. By: BELLOU Andriana; KAYMAK Baris
    Abstract: This paper examines the cyclical behavior of hours and wages in a unique panel of 11 European countries, and documents signi?cant history dependence in wages. Workers who experience favorable market conditions during their tenure on the job, have higher wages, and work fewer labor hours. Unobserved differences in productivity, such as varying job quality, or match-speci?c productivity are not likely to explain this variation. The results instead point to the importance of contractual arrangements in wage determination. In economies with decentralized bargaining practices, such arrangements resemble self-enforcing insurance contracts with onesided commitment (by the employer). On the other hand, in countries with strong unions and centralized wage bargaining, wage behavior is better approximated by full-commitment insurance contracts.
    Keywords: Business Cycles; Wage Rigidity; Implicit Contracts
    JEL: E32 J31 J41
    Date: 2011–01

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