nep-eec New Economics Papers
on European Economics
Issue of 2011‒07‒27
fifteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. How flexible are real wages in EU countries? A panel investigation By Frigyes Ferdinand Heinz; Desislava Rusinova
  2. Ramifications of Debt Restructuring on the Euro Area: The Example of Large European Economies' Exposure to Greece By Ansgar Belke; Christian Dreger
  3. The Euro-Sting revisited: PMI versus ESI to obtain euro area GDP forecasts By Maximo Camacho; Agustin Garcia-Serrador
  4. How do inflation expectations form? New insights from a high-frequency survey By Gabriele Galati; Peter Heemeijer; Richhild Moessner
  5. Fiscal shocks and budget balance persistence in the EU countries from Central and Eastern Europe By Juan Carlos Cuestas; Karsten Staehr
  6. Fiscal and Monetary Institutions in Central, Eastern and South-Eastern European Countries By Zsolt Darvas; Valentina Kostyleva
  7. Tail Behaviour of the Euro By John Cotter
  8. Impact de la crise sur la croissance potentielle. Une approche par les modèles à composantes inobservables. By Chetouane, Mabrouk; Lemoine, Matthieu; De la Serve, Marie-Elisabeth
  9. Marking-to-Market Government Guarantees to Financial Systems.Theory and Evidence for Europe By Angelo Baglioni; Umberto Cherubini
  10. Quo vadis, Euroland? European Monetary Union between Crisis and Reform By Martin Hellwig
  11. Wavelet multiple correlation and cross-correlation: A multiscale analysis of euro zone stock markets. By Javier Fernández-Macho
  12. Monitoring Child Well-being in the European Union: Measuring cumulative deprivation By Geranda Notten; Keetie Roelen; UNICEF Innocenti Research Centre
  13. Synergies and conflicts between EU policies and the objective of territorial cohesion By Riccardo Crescenzi; Fabrizio De Filippis; Fabio Pierangeli
  14. The Role of Decision-Making Biases in Ireland's Banking Crisis By Lunn, Pete
  15. The substitutability of immigrants and native workers in France: use of a production function By Vincent Fromentin; ; ;

  1. By: Frigyes Ferdinand Heinz (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Desislava Rusinova (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: In this paper we estimate the degree of real wage flexibility in 19 EU countries in a wage Phillips curve panel framework. We find evidence for a reaction of wage growth to unemployment and productivity growth. However, due to unemployment persistence, over time the real wage response weakens substantially. Our results suggest that the degree of real wage flexibility tends to be larger in the central and eastern European (CEE) countries than in the euro area; weaker in downturns than during upswings. Moreover, there exists an inflation threshold, below which real wage flexibility seems to decrease. Finally, we find that part of the heterogeneity in real wage flexibility and unemployment might be related to differences in the wage bargaining institutions and more specifically the extent of labour market regulation in different country groups within the EU. JEL Classification: J31, J38, P5.
    Keywords: real wage flexibility, bargaining institutions, central and eastern Europe, euro area, panel heterogeneity.
    Date: 2011–07
  2. By: Ansgar Belke; Christian Dreger
    Abstract: The Greek government budget situation plays a central role in the debt crisis in the euro area. The debt to GDP ratio is above 150 percent, while the deficit to GDP ratio exceeds 10 percent. To re-establish the Maastricht criteria, respectively, strong consolidation measures need to be implemented, with potential adverse effects on the Greek economy, and further credit requirements. Therefore, a debt conversion might become a reasonable alternative. The aim of this paper is to provide some simulation-based calculations on the expected fiscal costs for the governments in the large European countries Germany, France, Spain and Italy arising from different policy options - among them a potential second Greek rescue package. Under realistic conditions, a debt conversion may be the less costly strategy for Greece and the euro area partner states. A value-added of these calculations lies in a potential transfer to smaller euro area member countries.
    Keywords: Euro area debt crisis, debt conversation, Greece
    JEL: F33 F34 H63
    Date: 2011
  3. By: Maximo Camacho; Agustin Garcia-Serrador
    Abstract: This paper uses an extension of the Euro-Sting single-index dynamic factor model to construct short-term forecasts of quarterly GDP growth for the euro area, as also including financial variables as leading indicators. From a simulated real-time exercise, the model is used to investigate the forecasting accuracy across the different phases of the business cycle. In addition, the model is used to evaluate the relative forecasting ability of the two most watched business cycle surveys for the eurozone, the PMI and the ESI. We show that the latter produces more accurate GDP forecasts than the former. Finally, the proposed model is also characterized by its great ability to capture the European business cycle, as well as the probabilities of expansion and/or contraction periods.
    Keywords: Real-time forecasting, dynamic factor model, eurozone GDP, business cycle
    JEL: E32 C22 E27
    Date: 2011–06
  4. By: Gabriele Galati; Peter Heemeijer; Richhild Moessner
    Abstract: We provide new insights on the formation of inflation expectations - in particular at a time of great financial and economic turmoil - by evaluating results from a survey conducted from July 2009 through July 2010. Participants in this survey answered a weekly questionnaire about their short-, medium- and long-term inflation expectations. Participants received common information sets with data relevant to euro area inflation. Our analysis of survey responses reveals several interesting results. First, our evidence is consistent with long-term expectations having remained well anchored to the ECB's definition of price stability, which acted as a focal point for long-term expectations. Second, the turmoil in euro area bond markets triggered by the Greek fiscal crisis influenced short- and medium-term inflation expectations but had only a very small impact on long-term expectations. By contrast, longterm expectations did not react to developments of the euro area wide fiscal burden. Third, participants changed their expectations fairly frequently. The longer the horizon, the less frequent but larger these changes were. Fourth, expectations exhibit a large degree of timevariant non-normality. Fifth, inflation expectations appear fairly homogenous across groups of agents at the shorter horizon but less so at the medium- and long-term horizons.
    Keywords: inflation expectations, monetary policy, crisis
    Date: 2011–07
  5. By: Juan Carlos Cuestas; Karsten Staehr
    Abstract: This paper analyses the time series properties of the fiscal balance in the 10 EU countries from Central and Eastern Europe. The persistence of shocks in the variable is analysed by means of unit root tests that account for the possibility of non-linearities and structural changes. The results of linear and non-linear unit root tests find only mild evidence in favour of the stationarity hypothesis, with asymmetric effects present in a few cases. After controlling for structural changes in the data generation process, the results point to stochastic stationarity of the series. Thus, in spite of relatively steady headline figures, the public balance processes exhibit substantial instability in the EU countries from Central and Eastern Europe
    Keywords: unit roots, structural breaks, budget balance, EU
    JEL: C32 E24
    Date: 2011–07–13
  6. By: Zsolt Darvas (Bruegel, Institute of Economics - Hungarian Academy of Sciences); Valentina Kostyleva (OECD Public Governance and Territorial Development Directorate)
    Abstract: This paper studies the role of fiscal and monetary institutions in macroeconomic stability and budgetary control in central, eastern and south-eastern European countries (CESEE) in comparison with other OECD countries. CESEE countries tend to grow faster and have more volatile output than non-CESEE OECD countries, which has implications for macroeconomic management: better fiscal and monetary institutions are needed to avoid pro-cyclical policies. The paper develops a Budgetary Discipline Index to assess whether good fiscal institutions underpin good fiscal outcomes. Even though most CESEE countries have low scores, the debt/GDP ratios declined before the crisis. This was largely the consequence of a very favourable relationship between the economic growth rate and the interest rate, but such a favourable relationship is not expected in the future. Econometric estimations confirm that better monetary institutions reduce macroeconomic volatility and that countries with better budgetary procedures have better fiscal outcomes. All these factors call for improved monetary institutions, stronger fiscal rules and better budgetary procedures in CESEE countries.
    Keywords: CESEE countries; Budgetary Discipline Index; budget process; fiscal institutions; budgetary institutions; monetary institutions; macroeconomic stability; econometric analysis; budgetary procedures; fiscal outcomes; fiscal rules.
    JEL: E32 E50 H11 H60
    Date: 2011–06
  7. By: John Cotter (University College Dublin)
    Abstract: This paper empirically analyses risk in the Euro relative to other currencies. Comparisons are made between a sub period encompassing the final transitional stage to full monetary union with a sub period prior to this. Stability in the face of speculative attack is examined using Extreme Value Theory to obtain estimates of tail exchange rate changes. The findings are encouraging. The Euro’s common risk measures do not deviate substantially from other currencies. Also, the Euro is stable in the face of speculative pressure. For example, the findings consistently show the Euro being less risky than the Yen, and having similar inherent risk to the Deutsche Mark, the currency that it is essentially replacing.
    Keywords: Extreme Value Theory; Tail Behaviour; GARCH; The Euro
    JEL: G15 F31
    Date: 2011–07–21
  8. By: Chetouane, Mabrouk; Lemoine, Matthieu; De la Serve, Marie-Elisabeth
    Abstract: Cet article vise à évaluer la croissance potentielle en France, en Allemagne et en zone euro au cours de la période postérieure à la crise de crédit de 2007-2008 jusqu’à l’horizon de prévision 2012. Une telle évaluation joue en effet un rôle central dans celle du déficit structurel et donc dans la définition des plans de consolidation. Après avoir présenté les effets possibles recensés par la littérature de la crise sur la croissance potentielle, nous utilisons pour nos évaluations des modèles à composantes inobservables. Ceux- ci permettent de réconcilier les approches dites traditionnelles, fondées sur l’utilisation d’une fonction de production et les approches statistiques basées sur des méthodes de filtrage. Nos évaluations montrent pour les différentes zones que la crise a eu un impact marqué sur la croissance potentielle dès 2009. En prévision, la croissance potentielle devrait rester atone à l’horizon 2012 pour la France et l’Allemagne, comme pour la zone euro agrégée. La faiblesse de la croissance potentielle s’explique en partie par un net repli de la contribution du facteur travail, notamment en France et en zone euro. Ce repli provient lui- même essentiellement de la montée du Nairu, excepté en Allemagne. L’Allemagne se distingue en effet du reste de la zone euro par une baisse continue du Nairu jusqu’à l’horizon 2012.
    Abstract: This article aims at evaluating potential growth for France, Germany and the euro area during the period from after the 2007-2008 credit crisis until 2012. Such an assessment plays a central role in the determination of the structural deficit and therefore in the definition of consolidation plans. After presenting the possible effects of the crisis on potential growth identified by the literature, we use for our evaluations an unobserved component model. This helps to reconcile the so-called traditional approaches, based on the use of a production function and the statistical approaches based on filtering methods. Our evaluations show for the different areas that the crisis has had a significant impact on potential growth starting in 2009; by 2012, potential growth should remain weak. The low potential growth is caused in part by a sharp decline in labor input, particularly in France and the euro area. This decline stems mainly from an increase of structural unemployment, except in Germany.
    Keywords: Financial crisis; unobserved component models; potential growth; crise financière; modèles à composantes inobservables; croissance potentielle;
    JEL: E31 C32
    Date: 2011
  9. By: Angelo Baglioni (DISCE, Università Cattolica); Umberto Cherubini
    Abstract: We propose a new index for measuring the systemic risk of default of the banking sector, which is based on a homogeneous version of multivariate intensity based models (Cuadras – Augé distribution). We compute the index for 10 European countries, exploiting the information incorporated in the CDS premia of 44 large banks over the period January 2007 – September 2010. In this way, we provide a market based measure of the liability incurred by the Governments, due to the implicit bail-out guarantees they provide to the financial sector. We find that during the financial crisis the systemic component of the default risk in the banking sector has significantly increased in all countries, with the exception of Germany and the Netherlands. As a consequence, the Governments’ liability implicit in the bail out guarantee amounts to a quite relevant share of GDP in several countries: it is huge for Ireland, lower but still important for the other PIIGS (Italy is the least affected within this group) and for the UK. Finally, our estimate is very close to the overall amount of money already committed in the rescue plans adopted in Europe between Octo ber 2008 and March 2010, despite strong cross-country differences: in particular, Germany and Ireland seem to have committed an amount of resources much larger than needed; to the contrary, the Italian Government has committed much less than it should.
    Keywords: bank bail out, Government budget, systemic risk, financial crisis
    JEL: G21 H63
    Date: 2011–07
  10. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This lecture discusses the 2010 crisis of the European Monetary Union and draws some lessons for reform. Crisis resolution has been difficult because the sovereign debt crisis of countries like Greece and Portugal has come together with real-estate and banking crises in countries like Ireland and Spain and bank vulnerability in countries like Germany and France. Failure to disentangle and resolve the different crises prevents a satisfactory approach to the long-term reform of governance of sovereign borrowing and banking. Any such reform must find a substitute for the discipline that exchange rate mechanisms impose on sovereign borrowers and their lenders when the currency is national. Any mechanism for imposing discipline on sovereign borrowers and their lenders must be designed so that enforcement is credible even in a crisis. Recommendations for reform include (i) an inclusion of sovereign exposure from too-big-to-fail concerns in banking in monitoring of fiscal stance, (ii) independence of bank supervisors from their respective political authorities, and (iii) a strengthening of the powers of the European Supervisory Authorities over the national supervisors.
    Keywords: European Monetary Union, sovereign debt crisis, bank supervision
    JEL: G28 F53 F33 F36
    Date: 2011–06
  11. By: Javier Fernández-Macho (EA3 --- UPV/EHU)
    Abstract: Statistical studies that consider multiscale relationships among several variables use wavelet correlations and cross-correlations between pairs of variables. This procedure needs to calculate and compare a large number of wavelet statistics. The analysis can then be rather confusing and even frustrating since it may fail to indicate clearly the multiscale overall relationship that might exist among the variables. This paper presents two new statistical tools that help to determine the overall correlation for the whole multivariate set on a scale-by-scale basis. This is illustrated in the analysis of a multivariate set of daily Eurozone stock market returns during a recent period. Wavelet multiple correlation analysis reveals the existence of a nearly exact linear relationship for periods longer than the year, which can be interpreted as perfect integration of these Euro stock markets at the longest time scales. It also shows that small inconsistencies between Euro markets seem to be just short within-year discrepancies possibly due to the interaction of different agents with different trading horizons. On the other hand, multiple cross-correlation analysis shows that the French CAC40 may lead the rest of the Euro markets at those short time scales.
    Keywords: Euro zone, MODWT, multiscale analysis, multivariate analysis, stock markets, returns, wavelet transform.
    JEL: C32 C87 G15
    Date: 2011–07–14
  12. By: Geranda Notten; Keetie Roelen; UNICEF Innocenti Research Centre
    Abstract: This paper describes and empirically tests a number of candidate measures of cumulative deprivation to monitor child well-being in the EU.The authors posit that the ideal measure should be sensitive to changes in the depth of cumulative deprivation and, given its broad use in the policy community, has an intuitive interpretation. Using the 2007 wave of the EU-SILC data, the authors constructed several measures of cumulative deprivation from a set of 13 deprivation indicators for Germany, France, the Netherlands and the United Kingdom.
    Keywords: child poverty; poverty reduction;
    JEL: C0 C12
    Date: 2011
  13. By: Riccardo Crescenzi; Fabrizio De Filippis; Fabio Pierangeli
    Abstract: The paper looks at the overall structure of the European Union’s regional, agricultural and rural development policies in order to assess their coordination and synergies at the territorial level and their degree of compatibility with the objective of territorial cohesion. The regression analysis - covering the 20-year period 1994-2013, and approximately 90% of total Community expenditure - reveals that the compatibility of the various areas of Community policy in terms of the objectives of territorial cohesion has not progressed in a linear fashion over time. Shifting resources in the Community budget from one policy area to another does not, by itself, appear capable of guaranteeing virtuous paths in terms of territorial cohesion. The increase in the territorial ‘vocation’ of overall Community spending will, therefore, crucially depend upon the definition of appropriate allocative mechanisms and interventions, based upon the characteristics of each region and its ‘local’ needs
    Keywords: Regional Policy, Regional Development, Rural Development, European Union
    JEL: O18 R11 R58
    Date: 2011–07
  14. By: Lunn, Pete
    Abstract: This paper considers Ireland's banking crisis from the perspective of behavioural economics. It assesses whether known biases in judgement and decision-making were instrumental in the development and severity of the crisis. It investigates evidence that key decision-makers, including consumers, businesspeople, bankers and regulators, as well as parties such as civil servants, politicians, academics and journalists, were influenced by seven specific phenomena which have been identified previously via experiments and field studies. It concludes that evidence is consistent with the influence of these established phenomena. Ireland's long boom, rapid financial integration and lack of relevant past experience may have increased the vulnerability of decision-makers to economic and financial reasoning that proved disadvantageous. The analysis has potential implications for attempts to prevent future crises.
    Keywords: Ireland
    Date: 2011–05
  15. By: Vincent Fromentin; (CEREFIGE); ;
    Abstract: This article examines the relationships of substitutability and complementarity between native workers and immigrants in France, depending on skill level, using a translog production function. We analyze the impact of immigrant workers on employment and wages of native workers by taking into account the interrelations between all factors. In general, there is a relationship of complementarity between immigrant workers and native workers, although high and intermediate-skilled migrant workers are respectively substitutable for intermediate and low-skilled native workers.
    Keywords: Immigration, Substitutability, Production Function, Employment, Wages
    JEL: J61 C39 D24
    Date: 2011

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.