nep-eec New Economics Papers
on European Economics
Issue of 2011‒07‒02
eight papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Monetary Union, Fiscal Crisis and the Preemption of Democracy By Fritz W. Scharpf
  2. Is the Euro-Area Core Price Index Really More Persistent than the Food and Energy Price Indexes? By José Manuel Belbute
  3. The Greek financial crisis: growing imbalances and sovereign spreads By Heather D. Gibson; Stephan G. Hall; George S. Tavlas
  4. Credit Spead Interdependencies of European States and Banks during the Financial Crisis By Adrian Alter; Yves Stephan Schüler
  5. Sectoral Composition of Foreign Direct Investment and External Vulnerability in Eastern Europe By Yuko Kinoshita
  6. Assessing the sensitivity of inflation to economic activity By Konstantins Benkovskis; Michele Caivano; Antonello D’Agostino; Alistair Dieppe; Samuel Hurtado; Tohmas Karlsson; Eva Ortega; Tímea Várnai
  7. The future of the fence around the European labour market By Kox, Henk L.M.
  8. Why Labour Market Performance Differed Across Countries. The Impact of Institutions and Labour Market Policy By Karl Aiginger; Gerard Thomas Horvath; Helmut Mahringer

  1. By: Fritz W. Scharpf
    Abstract: The European Monetary Union (EMU) has removed crucial instruments of macroeconomic management from the control of democratically accountable governments. Worse yet, it has been the systemic cause of destabilizing macroeconomic imbalances that member states found difficult or impossible to counteract with their remaining policy instruments. And even though the international financial crisis had its origins outside Europe, the Monetary Union has greatly increased the vulnerability of some member states to its repercussions. Its effects have undermined the economic and fiscal viability of some EMU member states, and they have frustrated political demands and expectations to an extent that may yet transform the economic crisis into a crisis of democratic legitimacy. Moreover, present efforts of EMU governments to “rescue the Euro” will do little to correct economic imbalances and vulnerabilities, but are likely to deepen economic problems and political alienation in both, the rescued and the rescuing polities.
    Date: 2011–05
  2. By: José Manuel Belbute (Departamento de Economia, CEFAGE-UE, Universidade de Évora)
    Abstract: The purpose of this paper is to measure the degree of persistence of the overall, core, food and energy Harmonized Indexes of Consumer Prices for the European Monetary Zone (HICP-EAs) and to identify its implications for decision-making in the private sector and in public policy. Using a non-parametric approach, our results demonstrate the presence of a statistically significant level of persistence in four HICP-EAs: headline, core, food and energy. Moreover, contrary to popular belief, the core index does not reflect permanent price changes. We also find evidence that the food and energy price indexes are more volatile and more persistent than the other two price indexes. Our results also show a reduction in persistence for both the headline and the core price indexes after the implementation of the single monetary policy, but not for food and energy. These results have important implications for both the private sector and for policymakers who use the core as a reference price index for their decision-making because the use of this index can lead to an erroneous perception of price movements.
    Keywords: Harmonized Index of Consumption Prices, Core Inflation, Euro Area, Persistence.
    JEL: C14 C22 E31 E52
    Date: 2011
  3. By: Heather D. Gibson (Bank of Greece); Stephan G. Hall (University of Leicester); George S. Tavlas (Bank of Greece)
    Abstract: We discuss the origins of the Greek financial crisis as manifested in the growing fiscal and current-account deficits since euro-area entry in 2001. We then provide an investigation of spreads on Greek relative to German long-term government debt. Using monthly data over the period 2000 to 2010, we estimate a cointegrating relationship between spreads and their long-term fundamental determinants (including a measure of the fiscal situation, competitiveness of the Greek economy, economic activity and oil prices, reflecting the high dependence of the Greek economy on imported energy) and compare the spreads predicted by this estimated relationship with actual spreads. We find that spreads were significantly below what would be predicted by fundamentals from end-2004 up to the middle of 2005; by contrast, since May 2010, actual spreads have exceeded predicted spreads by some 400 basis points.
    Keywords: Greek financial crisis; sovereign spreads
    JEL: E63 G12
    Date: 2011–03
  4. By: Adrian Alter (Department of Economics, University of Konstanz, Germany); Yves Stephan Schüler (Department of Economics, University of Konstanz, Germany)
    Abstract: This study analyzes the relationship between the default risk of several European states and financial institutions during the period June 2007 - May 2010. It investigates how this linkage was impacted by government bailout schemes. We consider sovereign credit default swap (CDS) spreads from seven EU countries (France, Germany, Italy, Ireland, Netherlands, Portugal, and Spain) together with a selection of bank CDS series from these states. Long-run and short-run dependencies between states and their domestic banks are studied within a vector error correction framework and additionally considering generalized impulse responses. Our main findings suggest that in the period preceding government interventions the contagion from bank credit spreads disperses into the sovereign CDS market. After government interventions, sovereign spreads are found relatively more important in the price discovery mechanism of banks’ CDS series. Moreover, the variability in linkages between bank and sovereign CDS spreads can be associated with differences in state support measures accessed by each bank. We suggest that country specific characteristics may explain the noticeable differences in outcomes of government interventions.
    Keywords: credit default swaps, private-to-public risk transfer, cointegration, generalized impulse responses.
    JEL: G18 G21
    Date: 2011–05–15
  5. By: Yuko Kinoshita
    Abstract: In the run up to the global crisis, countries in Central Eastern and Southeastern Europe attracted large capital inflows and some of them built up large external imbalances. This paper investigates whether these imbalances are linked to the sectoral composition of FDI. It shows that FDI in the tradable sectors leads to an improvement of the external balance. We also find that the countries with large market size, good infrastructure, greater trade integration, and educated labor force are more likely to receive more FDI in the tradable sectors.
    Date: 2011–05–31
  6. By: Konstantins Benkovskis (Bank of Latvia, K. Valdemara street 2A, Riga, LV-1050, Latvia.); Michele Caivano (Banca d’Italia, Italy.); Antonello D’Agostino (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Alistair Dieppe (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Samuel Hurtado (Banco de España, Spain.); Tohmas Karlsson (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Eva Ortega (Banco de España, Spain.); Tímea Várnai (National Bank of Hungary, 1054 Szabadság tér 8/9, 1850 Budapest.)
    Abstract: A number of academic studies suggest that from the mid-1990s onwards there were changes in the link between inflation and economic activity. However, it remains unclear the extent to which this phenomenon can be ascribed to a change in the structural relationship between inflation and output, as opposed to a change in the size and nature of the shocks hitting the economy. This paper uses a suite of models, such as time-varying VAR techniques, traditional macro models, as well as DSGE models, to investigate, for various European countries as well as for the euro area, the evolution of the link between inflation and resource utilization and its dependence on the nature and size of the shocks. Our analysis suggests that the relationship between inflation and activity has indeed been changing over time, while remaining positive, with the correlation peaking during recessions. Quantitatively, the link between output and inflation is found to be highly dependent on which type of shocks hit the economy: while, in general, all demand shocks to output imply a reaction of inflation of the same sign, the latter will be less pronounced when output fluctuations are driven by supply shocks. In addition, a sharp deceleration of activity, as opposed to a subdued but protracted slowdown, results in a swifter decline in inflation. Inflation exhibits a rather strong persistence, with a negative impact still visible three years after the initial shock. JEL Classification: E31, E32, E37.
    Keywords: Demand shock, inflation response, macro model, output growth, Phillips curve.
    Date: 2011–06
  7. By: Kox, Henk L.M.
    Abstract: In international forums the EU calls for freedom of movement for goods, services and capital. Freedom of movement of labour - labour migration in other words - is excluded from this claim, certainly in relation to medium- and low-skilled labour. This paper addresses two questions. Firstly, what are the effects of EU's restrictive labour migration policy on welfare within and outside the EU? Both welfare effects are found to be considerable. Secondly, is this policy sustainable over the longer term, say towards 2030? The paper evaluates foreseeable pressures on the fence around the EU labour market, coming from within and from outside the EU. The paper sketches policy options for dealing with the dilemmas that may arise from these pressures.
    Keywords: labour migration; European Union; welfare; immigration policy
    JEL: F22 F16 J61 D45
    Date: 2011–06
  8. By: Karl Aiginger (WIFO); Gerard Thomas Horvath (WIFO); Helmut Mahringer (WIFO)
    Abstract: This paper investigates the performance of labour markets during the recent crisis. While the crisis had started rather simultaneously across regions and countries, the length and deepness finally proved very heterogeneous. Some countries still have not rebounded, in others inflationary pressure has become a severe problem after output had surpassed pre-crisis level by far. The same holds for labour markets: In some countries employment is now above its pre-crisis peak and unemployment stable or falling, in others the unemployment rate is persistently near or above 10 percent. This paper investigates to which extent labour market performance during the crisis depended on 1. macroeconomic conditions prevailing at the start of the crisis, 2. structural characteristics of the economies, and 3. labour market institutions and policy. Labour Market Performance is analysed against these determinants alone and relative to output performance. Specific emphasis is given to cases in which cross country differentials in labour market performance do not go in parallel to output performance. The growth performance in the USA was better than average, the labour market was deeply affected and has still not rebounded. On the other side Germany experienced a steeper output loss, but had a better labour market performance. Output performance as well as labour market performance is measured by a composite indicator summarising several output and labour indicators. It was derived by Principal Component analyses.
    Keywords: financial crisis, cross country performance differences, predictors for crises
    Date: 2011–06–22

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