nep-eec New Economics Papers
on European Economics
Issue of 2011‒09‒16
sixteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The Global Financial Crisis and the European Integration Project By Patrick Leblond
  2. Money growth and inflation in the euro area: a time-frequency view By António Rua
  3. What is the Risk of European Sovereign Debt Defaults? Fiscal Space, CDS Spreads and Market Pricing of Risk By Joshua Aizenman; Michael M. Hutchison; Yothin Jinjarak
  4. Household Sector Borrowing in the Euro Area: A Micro Data Persective By Ramon Gomez-Salvador; Adriana Lojschova; Thomas Westermann
  5. Reaping the Benefits of Deeper Euro-Med Integration Through Trade Facilitation By Bourdet, Yves; Persson, Maria
  6. A Fiscal Union for the Euro: Some Lessons from History By Michael D. Bordo; Agnieszka Markiewicz; Lars Jonung
  7. Bank Competition in the EU: How Has It Evolved? By Laurent Weill
  8. Sustainable Real Exchange Rates in the New EU Member States: What Did the Great Recession Change? By Jan Babecky; Ales Bulir; Katerina Smidkova
  9. GINI DP 2: Are European Social Safety Nets Tight Enough? Coverage and adequacy of minimum income schemes in 14 EU countries By Francesco Figari; Matsaganis, M.; Holly Sutherland
  10. Debt overhang in emerging Europe ? By Brown, Martin; Lane, Philip R.
  11. Is Monetary Policy in the New EU Member States Asymmetric? By Borek Vasicek
  12. Is this bank ill? The diagnosis of doctor TARGET2 By Ronald Heijmans; Richard Heuver
  13. ideological battles: a strategic analysis of hedge fund regulation in Europe . By Woll, Cornelia
  14. Measuring the Shadow Economy with the Currency Demand Approach - A Reinterpretation of the methodology, with an application to Italy By Guerino Ardizzi; Carmelo Petraglia; Massimiliano Piacenza; Gilberto Turati
  15. The Immigrant/Native Wealth Gap in Germany, Italy and Luxembourg By Thomas Y. Mathä; Alessandro Porpiglia; Eva Sierminska
  16. The paradox of liberalization – Understanding dualism and the recovery of the German political economy By Anke Hassel

  1. By: Patrick Leblond
    Abstract: When the global financial crisis hit the shores of Europe, after crossing the Atlantic, the Eurozone was considered a safe haven. After the first Greek bailout in May 2010, the discourse had now changed completely; the debt crisis was the euro’s fault. As a result, some argued that Greece and eventually other bailed-out member states should abandon the euro and reintroduce their national currencies. If they did not, then countries such as Germany and the Netherlands would give up on supporting them financially, forcing them to abandon the euro anyway. Yet, no such thing has happened. The euro and the European Union are still with us. In fact, European integration has been deepened as a result of the debt crisis. This paper explains why the doomsayers have been wrong on durability of the Eurozone. <P>
    Keywords: Debt crisis, Euro, European integration, European Monetary Union, European Union, Financial crisis.,
    Date: 2011–08–01
  2. By: António Rua
    Abstract: This paper provides new insights on the relationship between money growth and inflation in the euro area over the last forty years. This highly relevant link for the European Central Bank monetary policy strategy is assessed using wavelet analysis. In particular, wavelet analysis allows to study simultaneously the relationship between money growth and inflation in the euro area at the frequency level and assess how it has changed over time. The findings indicate a stronger link between inflation and money growth at low frequencies over the whole sample period. At the typical business cycle frequency range the link is only present until the beginning of the 1980’s. Moreover, there seems to be a recent deterioration of the leading properties of money growth with respect to inflation in the euro area. These results highlight the importance of a regular assessment of the role of money growth in tracking inflation developments in the euro area since such relationship varies across frequencies and over time.
    JEL: C40 E30 E40 E50
    Date: 2011
  3. By: Joshua Aizenman; Michael M. Hutchison; Yothin Jinjarak
    Abstract: We estimate the pricing of sovereign risk for sixty countries based on fiscal space (debt/tax; deficits/tax) and other economic fundamentals over 2005-10. We measure how accurately the model predicts sovereign credit default swap (CDS) spreads, focusing in particular on the five countries in the South-West Eurozone Periphery (Greece, Ireland, Italy, Portugal, and Spain). Dynamic panel estimates of the model suggest that fiscal space and other macroeconomic factors are statistically significant and economically important determinants of market-based sovereign risk. Although the explanatory power of fiscal space measures drop during the crisis, the TED spread, trade openness, external debt and inflation play a larger role. As expectations of market volatility jumped during the crisis, the weakly concavity of creditors’ payoff probably accounts for the emergence of TED spread as a key pricing factor. However, risk-pricing of the South-West Eurozone Periphery countries is not predicted accurately by the model either in-sample or out-of-sample: unpredicted high spreads are evident during global crisis period, especially in 2010 when the sovereign debt crisis swept over the periphery area. We “match” the periphery group with five middle income countries outside Europe that were closest in terms of fiscal space during the European fiscal crisis. We find that Eurozone periphery default risk is priced much higher than the “matched” countries in 2010, even allowing for differences in fundamentals. One interpretation is that the market has mispriced risk in the Eurozone periphery. An alternative interpretation is that the market is pricing not on current fundamentals but future fundamentals, expecting the periphery fiscal space to deteriorate markedly and posing a high risk of debt restructuring. Adjustment challenges of the Eurozone periphery may be perceived as economically and politically more difficult than the matched group of middle income countries because of exchange rate and monetary constraints.
    JEL: E43 F34 F36 H63
    Date: 2011–09
  4. By: Ramon Gomez-Salvador; Adriana Lojschova; Thomas Westermann
    Abstract: This paper uses microdata from the EU-SILC (Statistics on Income and Living Conditions) to generate structural information for the euro area on the incidence of household indebtedness and of the burden to service debt. It distinguishes this incidence according to relevant characteristics such as income, age and employment status, all elements that can be cross-examined in the light of theories such as the life-cycle hypothesis. Overall, income appears as the dominant feature determining the debt status of a household. The paper also examines the evolution of indebtedness and debt service burdens over time and compares it with the US. In general, the results suggest that the macroeconomic implications of indebtedness for monetary transmission and financial stability are not associated with the mean but with the tails of the distribution.
    Keywords: household indebtedness, financial vulnerability, micro survey data, monetary transmission.
    JEL: C42 D12 D14 G21
    Date: 2011–02
  5. By: Bourdet, Yves (Lund University); Persson, Maria (Research Institute of Industrial Economics (IFN))
    Abstract: The current political turmoil in the Arab world has contributed to renewed interest in the Barcelona Process. This paper explores whether deeper integration in the form of trade facilitation – i.e. improved and simplified trade procedures – could be an important part of a reform agenda. Adopting a Southern perspective by focusing on exports from non-EU Mediterranean countries to the EU, we test whether the efficiency of trade procedures affects (i) bilateral volumes of exports, and (ii) the number of products exported. Our findings suggest that trade facilitation could lead to substantially increased export volumes and export diversification.
    Keywords: Barcelona Process; Mediterranean Union; European Union; Deeper Integration; Trade Facilitation; Export volumes; Export Diversification
    JEL: F15 O19 O24
    Date: 2011–08–23
  6. By: Michael D. Bordo; Agnieszka Markiewicz; Lars Jonung
    Abstract: The recent financial crisis 2007-2009 was the longest and the deepest recession since the Great Depression of 1930. The crisis that originated in subprime mortgage markets was spread and amplified through globalised financial markets and resulted in severe debt crises in several European countries in 2010 and 2011. Events revealed that the European Union had insufficient means to halt the spiral of European debt crisis. In particular, no pan-European fiscal mechanism to face a global crisis is available at present. The aim of this study is to identify the characteristics of a robust common fiscal policy framework that could have alleviated the consequences of the recent crisis. This is done by using the political and fiscal history of five federal states; Argentina, Brazil, Canada, Germany and the United States.
    JEL: H10 H70 H73
    Date: 2011–09
  7. By: Laurent Weill (LaRGE Research Center, Université de Strasbourg)
    Abstract: Economic integration on the EU banking markets is expected to favor competition, which should provide economic gains. However, even if there is a commonly accepted view in favor of enhanced bank competition during the last decade, no study has been performed in the 2000s showing this trend. In this paper, we aim to fill this gap by measuring the evolution of bank competition in all EU countries during the 2000s. We estimate the Lerner index and the H-statistic for a sample of banks from all EU countries. We provide evidence of a general improvement in bank competition in the EU, even if cross-country differences are observed in the pattern of the evolution of bank competition. We check whether convergence in bank competition has taken place on the EU banking markets, by applying ? and ? convergence tests for panel data. We show convergence in bank competition. These findings are also observed with standard competition measures (Herfindahl index, profitability indicators). We thus support the view th at bank integration has taken place in the European Union.
    Keywords: banking, competition, European integration
    JEL: G21 F36 L16
    Date: 2011
  8. By: Jan Babecky; Ales Bulir; Katerina Smidkova
    Abstract: The Great Recession affected export and import patterns in our sample of new EU member countries, and these changes, coupled with a more volatile external environment, have a profound impact on our estimates of real exchange rate misalignments and projections of sustainable real exchange rates. We find that real misalignments in several countries with pegged exchange rates and excessive external liabilities widened relative to earlier estimates. While countries with balanced net trade positions may experience sustainable appreciation during 2010–2014, several currencies are likely to require real depreciation to maintain sustainable net external debt.
    Keywords: Foreign direct investment, Great Recession, new EU member states, sustainable exchange rates.
    JEL: F31 F33 F36 F47
    Date: 2011–08
  9. By: Francesco Figari (University of Insubria); Matsaganis, M.; Holly Sutherland (Dept. of Applied Economics, University of Cambridge)
    Abstract: This paper explores and compares the effectiveness of Minimum Income (MI) schemes in protecting persons of working age from poverty in the European Union. Using the European microsimulation model EUROMOD we estimate indicators of coverage and adequacy of MI schemes in 14 EU countries. In terms of coverage, we find that in several countries a significant number of individuals are ineligible for MI even when they fall below a poverty line set at 40 per cent of median income. With respect to adequacy, we show that in certain countries a large fraction of those entitled to MI remain at very low levels of income even when MI benefit is added. Overall, our findings suggest that the clustering of MI schemes in Europe may be more complex than previous literature has hitherto allowed for.
    Date: 2011–06
  10. By: Brown, Martin; Lane, Philip R.
    Abstract: This paper assesses the extent to which debt overhang poses a constraint to economic activity in Emerging Europe, as the region emerges from the recent financial and economic crisis. At the macroeconomic level, it finds that the external imbalance problem for Emerging Europe has been in most cases more one of flows (high current account deficits in the pre-crisis years) rather than large stocks of external debt. A high reliance on equity funding means that net external debt is far lower than net external liabilities. Domestic balance sheets have expanded quite rapidly but sector liabilities remain relatively low compared with advanced economies. With the important exception of Hungary, public debt levels also remain relatively low in Emerging Europe. At the microeconomic level, the potential for debt overhang in the corporate sector is limited to a few countries: Latvia, Lithuania, Estonia, and Slovenia. Due to the low incidence of household debt, hardly any country, except Estonia, seems to face a threat of debt overhang in the household sector. The strong increase in non-performing loans compared with pre-crisis bank profitability suggests that debt overhang in the banking sector is a threat in Ukraine, Latvia, Lithuania, Hungary, Georgia, and Albania. Financial integration of Emerging Europe seems to have contributed to the transmission of the crisis to the region. At the same time, this integration is helping the region in managing the crisis by concerted actions of the major players.
    Keywords: Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Emerging Markets
    Date: 2011–08–01
  11. By: Borek Vasicek
    Abstract: Estimated Taylor rules have become popular as a description of monetary policy conduct. There are numerous reasons why real monetary policy can be asymmetric and estimated Taylor rules nonlinear. This paper tests whether monetary policy can be described as asymmetric in three new European Union (EU) members (the Czech Republic, Hungary, and Poland), which apply an inflation targeting regime. Two different empirical frameworks are used: (i) Generalized Method of Moments (GMM) estimation of models that allow discrimination between sources of potential policy asymmetry but are conditioned by specific underlying relations, and (ii) a flexible framework of sample splitting where nonlinearity enters via a threshold variable and monetary policy is allowed to switch between regimes. We find generally little evidence for asymmetric policy driven by nonlinearities in economic systems, some evidence for asymmetric preferences, and some interesting evidence on policy switches driven by the intensity of financial distress in the economy.
    Keywords: Inflation targeting, monetary policy, nonlinear Taylor rules, threshold estimation.
    JEL: C32 E52 E58
    Date: 2011–07
  12. By: Ronald Heijmans; Richard Heuver
    Abstract: We develop indicators for signs of liquidity shortages and potential financial problems of banks by studying transaction data of the Dutch part of the European real time gross settlement system and collateral management data. The indicators give information on 1) overall liquidity position, 2) the interbank money market, 3) the timing of payment flows, 4) the collateral’s amount and use and 5) bank run signs. This information can be used both for monitoring the TARGET2 payment system and for individual banks’ supervision. By studying these data before, during and after stressful events in the crisis, banks’ reaction patterns are identified. These patterns are translated into a set of behavioural rules, which can be used in payment systems’ stress scenario analyses, such as e.g. simulations and network topology. In the literature behaviour and reaction patterns in simulations are either ignored or very static. To perform realistic payment system simulations it is crucial to understand how banks react to shocks.
    Keywords: behaviour of banks; wholesale payment systems; financial stability
    JEL: D23 E42 E58
    Date: 2011–08
  13. By: Woll, Cornelia (Centre d'études et de recherches internationales)
    Abstract: The highly politicized debate about the recent Alternative Investment Fund Manager (AIFM) Directive of the European Union led many observers to suspect an ideological battle between countries seeking to impose transnational regulation on financial service industries such as hedge funds and liberal market economies insisting on the benefits of market discipline in order to protect their financial centers. The battle that appeared to particularly pit France against the United Kingdom can thus be interpreted as an example of a regulatory paradigm shift in the aftermath of the crisis. This article cautions against such an ideas-centered account of financial regulation and points to the economic interests that drove the French and German agendas. However, contrary to the assumptions of traditional political economy approaches, national preferences were not simply defined by the aggregate of a country’s economic interests. Rather, industry success in shaping government positions on alternative investment regulation crucially depended on how a given industry fit into the government’s overarching geo-political agenda. By highlighting this feedback loop between government strategy and industry lobbying, the paper proposes a strategic analysis of financial regulation, as opposed to accounts that consider positions to be pre-determined by ideas or socio-economic structures.
    Keywords: economic policy;; financial markets;; liberalization;; regulation;
    Date: 2011
  14. By: Guerino Ardizzi (Bank of Italy); Carmelo Petraglia (University of Napoli Federico II); Massimiliano Piacenza (Department of Economics and Public Finance "G. Prato", University of Torino); Gilberto Turati (Department of Economics and Public Finance "G. Prato", University of Torino)
    Abstract: We contribute to the debate on how to assess the size of the shadow economy by proposing a reinterpretation of the traditional Currency Demand Approach (CDA) a là Tanzi. In particular, we introduce three main innovations. First, we take a direct measure of cash transactions (the flow of cash withdrawn from bank accounts relative to total noncash payments) as the dependent variable in the money demand equation. This allows us to avoid using the Fisher equation, overcoming two severe critiques to the traditional CDA. Second, we include among covariates two distinct measures of ‘detected’ tax evasion, in place of the tax burden level. Finally, we control also for a new ‘criminal’ component of the shadow economy, considering money demand for illegal activities like drug dealing and prostitution. We propose an application of this ‘modified – CDA’ to a panel of 91 Italian provinces for the years 2005-2008.
    Keywords: Shadow economy, Currency demand approach, Cash transactions, Evasion, Crime
    JEL: E26 E41 H26 K42 O17
    Date: 2011–09
  15. By: Thomas Y. Mathä; Alessandro Porpiglia; Eva Sierminska
    Abstract: This paper analyses the existence of an immigrant/native wealth gap by using household survey data for Luxembourg, Germany and Italy. The results show that, in all three countries, a sizeable wealth gap exists between natives and immigrants. Towards the upper tail of the wealth distribution the gap narrows to a small extent. This gap persists even after controlling for demographic characteristics, country of origin, cohort and age at migration although cross-country differences exist in the immigration penalty.
    Keywords: household, survey data, wealth gap, immigrants, distribution
    JEL: D31 F22
    Date: 2011–02
  16. By: Anke Hassel
    Abstract: What do the recent trends in German economic development convey about the trajectory of change? Has liberalization prepared the German economy to deal with new challenges? What effects will liberalization have on the coordinating capacities of economic institutions? This paper argues that coordination and liberalization are two sides of the same coin in the process of corporate restructuring in the face of economic shocks. Firms seek labour cooperation in the face of tighter competitive pressures and exploit institutional advantages of coordination. However, tighter cooperation with core workers sharpened insider-outsider divisions and were built upon service sector cost cutting through liberalization. The combination of plant-level restructuring and social policy change forms a trajectory of institutional adjustment of forming complementary economic segments which work under different rules. The process is driven by producer coalitions of export-oriented firms and core workers’ representatives rather than by firms per se.
    Keywords: Varieties of Capitalism, institutional change, labour market, industrial relations
    Date: 2011–09

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.