nep-eec New Economics Papers
on European Economics
Issue of 2011‒10‒09
fifteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Regional Unemployment in the EU before and after the Global Crisis By Enrico Marelli; Roberto Patuelli; Marcello Signorelli
  2. When Europeanization Hits Limited Statehood. The Western Balkans as a Test Case for the Transformative Power of Europe By Tanja A. Börzel
  3. Monetary Policy Preferences of the European Monetary Union and the UK By Philip Arestis; Michail Karouglou; Kostas Mouratidis
  4. A Longer-run Perspective on Fiscal Sustainability By António Afonso; João Tovar Jalles
  5. Asset prices and financial imbalances in CEE countries: macroeconomic risks and monetary strategy By Zoltán Szalai
  6. Debt Sustainability and Financial Crises: Evidence from the GIIPS By Gabriella Legrenzi; Costas Milas
  7. On the Continuation of the Great Moderation:New evidence from G7 Countries By Wenjuan Chen
  8. Learning processes and economic returns in European Cohesion policy By Andrés Rodríguez-Pose; Katja Novak
  9. Do House Prices Impact Consumption and Interest Rate? Evidence from OECD Countries using an Agnostic Identification Procedure By Christophe Andre; Rangan Gupta; Patrick T. Kanda
  10. The Fundamentals of the Portuguese Crisis By João Sousa Andrade; Adelaide Duarte
  11. The end of the "European paradox" By Neus Herranz; Javier Ruiz-Castillo
  12. Openness to Trade, Migration and Foreign Direct Investments of the EU By Stanislav Cernosa
  13. Immigration and Occupations in Europe By Francesco D'Amuri; Giovanni Peri
  14. Ethnic Identity and Labor-Market Outcomes of Immigrants in Europe By Alberto Bisin; Eleonora Patacchini; Thierry Verdier; Yves Zenou
  15. "An Unblinking Glance at a National Catastrophe and the Potential Dissolution of the Eurozone: Greece’s Debt Crisis in Context" By C. J. Polychroniou

  1. By: Enrico Marelli (Department of Economics, Faculty of Economics, University of Brescia, Italy); Roberto Patuelli (Department of Economics, Faculty of Economics-Rimini, University of Bologna, Italy; The Rimini Centre for Economic Analysis (RCEA), Italy); Marcello Signorelli (Department of Economics, Finance and Statistics, Faculty of Political Sciences, University of Perugia, Italy)
    Abstract: In this paper we empirically assess the evolution for the EU regions of both employment and unemployment before and after the Global Crisis. After a review of the literature on the theories and key determinants of regional unemployment, we shall overview the main findings concerning the labour market impact of the Global Crisis. The empirical analysis will initially be carried out at the national level including all EU countries; subsequently, we shall focus on the EU regions (at the NUTS-2 level), in order to detect possible changes in the dispersion of regional unemployment rates after the crisis. Our econometric investigations aim to assess the effect, on labour market performance, of previous developments in regional labour markets time series, as well as the importance of structural characteristics of the labour markets, in terms of the sectoral specialization of the regional economies. In fact, the local industry mix may have played a crucial role in shaping labour market performance in response to the crisis. In addition, we consider further characteristics of the regional labour markets, by including indicators of the level of precarization of labour and of the share of long-term unemployed, as indicators of the efficiency of the local labour markets. From a methodological viewpoint, we exploit eigenvector decomposition-based spatial filtering techniques, which allow us to greatly reduce unobserved variable bias – a significant problem in cross-sectional models – by including indicators of latent unobserved spatial patterns. Finally, we render a geographical description of the heterogeneity influence of past labour market performance over the crisis period, showing that the past performance has a differentiated impact on recent labour market developments.
    Keywords: crisis, employment, unemployment, European Union, NUTS-2, spatial filtering, sectoral composition, spatially heterogeneous parameters
    JEL: C21 R12
    Date: 2011–09
  2. By: Tanja A. Börzel
    Abstract: The EU seeks to transform the domestic structures of the Western Balkan countries in order to foster peace, stability and prosperity in the region ridden by war and ethnic conflict. Unlike in case of the Mediterranean and Newly Independent States, the EU has even offered its South Eastern European neighbors a membership perspective. Whether the golden carrot is big enough, however, to draw the Western Balkans closer to Europe, is still an open question. Croatia has made sufficient progress to successfully conclude accession negotiations in the years to come. The EU rewarded domestic reforms in Macedonia and Montenegro with granting them candidate status, which Serbia is likely to receive in the near future. Albania, by contrast, appears to be more reluctant to engage in the changes necessary to get even with Macedonia and Montenegro. Bosnia Herzegovina and Kosovo, finally, are seriously lagging behind and have not even applied for membership. Can Europeanization approaches account for the differential impact of the EU in the Western Balkans? The paper argues that problems of limited statehood have seriously curbed the transformative power of the EU in the Western Balkans - despite their membership perspective. Not only has the EU exerted less pressure for adaptation on Western Balkan governments. Weak state capacities and ethnic conflicts have reduced both their willingness and capacity to implement the acquis communautaire. Given its lack of experience in state building, the EU is ill-equipped to address these problems. This results in a serious dilemma. On the one hand, the EU has offered the Western Balkans a membership perspective to stabilize the region and overcome problems caused by weak and contested statehood. On the other hand, it is the limited statehood of Western Balkan countries, which undermines their compliance with EU norms and rules.
    Keywords: EU-South-Eastern Europe; EU-South-Eastern Europe; Europeanization; Europeanization
    Date: 2011–09–09
  3. By: Philip Arestis; Michail Karouglou; Kostas Mouratidis (Department of Economics, The University of Sheffield)
    Abstract: This paper estimates central bank policy preferences in the case of the European Monetary Union and of the UK. We do so, by adopting the framework suggested by Cecchetti and Ehrmann (1999), which, however, we extent in two respects. First, we allow policy preferences to be asymmetric by assuming that inflation and output follow a Markov process. Second, following Bean (1998) we introduce dynamics in the supply and demand relationships. In doing so we estimate state-dependent policy frontiers. Empirical results from the static model show that monetary policy in the European Monetary Union and in the UK put a lot of weight on price stability. However, there is evidence of 'price puzzle' especially in the high volatility regime. The price puzzle might be the by-product of frequent realignments in the European Monetary System currency crises in 1992, 1993 and 1995 and of the more recent 2008 financial crisis. Estimates of the optimal policy frontier suggest that although the UK enjoys higher anti-inflatonary credibility, it also faces a higher trade-off between inflation and output variability than the European Monetary Union.
    Date: 2011–09
  4. By: António Afonso; João Tovar Jalles
    Abstract: This paper investigates the sustainability of fiscal policy in a set of 19 countries by taking a longer-run secular perspective over the period 1880-2009. Via a systematic analysis of the stationarity properties of the first-differenced level of government debt, and disentangling the components of the debt series using Structural Time Series Models, we are able to conclude that the solvency condition would be satisfied in mostly all cases since non-stationarity can be rejected, and, therefore, longer-run fiscal sustainability cannot be rejected (Japan and Spain can be exceptions). The same would be true for the panel sample analysis.
    Keywords: fiscal sustainability, government debt, unit roots, breaks, structural time series models Classification-C23, E62, H62
    Date: 2011–08
  5. By: Zoltán Szalai (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: Modern central banks have adopted a ‘risk management’ approach in assessing and presenting risks to macroeconomic stability. This paper seeks to contribute to the improvement of central banks’ current strategies for Central and Eastern European countries, first by assessing the potential size of macroeconomic risks, and secondly by empirically relating these risks to certain selected financial variables. Our results suggest that risks to GDP and the Price Level are significantly higher than commonly supposed based on a normal distribution of their cyclical components. However, relating these risks to the selected financial variables generated mixed results and is rarely significant in economic terms. We conclude that central banks currently risk underestimating the probability of large deviations in GDP and Price Level from their trends. A combination of financial variables and the inclusion of international financial variables could result in more significant results than the ones used separately in this study, when looking for useful indicators of such events.
    Keywords: central bank policy, financial imbalances, GDP-at-risk, CPI-at-risk
    JEL: E44 E52 E58
    Date: 2011
  6. By: Gabriella Legrenzi (Keele University, UK; CESifo, Germany; The Rimini Centre for Economic Analysis (RCEA), Italy); Costas Milas (University of Liverpool, UK; The Rimini Centre for Economic Analysis (RCEA), Italy;, Greece)
    Abstract: We assess the sustainability of the public finances of Greece, Ireland, Italy, Portugal and Spain (GIIPS), allowing for possible non-linearities in the form of threshold behaviour of the fiscal authorities. We provide some evidence of fiscal sustainability when debt gets “too high” relative to a threshold which is not necessarily fixed but varies with the level of debt relative to its recent history and/or the occurrence of a financial crisis.
    Keywords: debt sustainability, financial crisis
    JEL: C20 C50 H30 H50
    Date: 2011–09
  7. By: Wenjuan Chen
    Abstract: This paper employs a Markov regime-switching approach to investigate whether the Great Moderation is over since the start of the late 2000s recession. The results conrm that the recent nancial crisis did cause a simultaneous high-volatility period among the G7 countries. However, the nancial crisis may not mark the end of the Great Moderation. There is strong evidence that each G7 country has again returned to the low-variance state since 2009 or the beginning of 2010.
    Keywords: Output Fluctuations, Financial crisis, Regime switching
    JEL: E20 F01 N10
    Date: 2011–09
  8. By: Andrés Rodríguez-Pose (IMDEA Social Sciences); Katja Novak (Slovenian Government)
    Abstract: This paper evaluates whether the learning mechanisms of the European Cohesion policy have contributed to improve the economic impact of Structural Fund expenditure over time. It intends to show whether the evolution of the policy in response to greater internal monitoring and consultation and external scrutiny and criticism has resulted in a more efficient and better targeted Cohesion policy. This is tested using an econometric model which evaluates the effect of Structural Fund expenditure on the growth of regional GDP per capita – conditional on factor endowments, institutional quality and initial conditions – during the last programming periods for which full sets of data are available (1994-1999 and 2000-2006). The results of the analysis unveil an increase in the effectiveness of the policy in successive periods. This positive association is robust to controlling for the level of development of the country and the relative economic position of a region within a country. The results also show that, when structural factors are taken into consideration, Structural Fund investment tends to yield higher returns in better-off countries and wealthier regions within countries.
    Keywords: Cohesion; regional development; economic growth, GDP per capita; regions; European Union
    Date: 2011–09–30
  9. By: Christophe Andre (Economics Department, Organisation for Economic Co-operation and Development (OECD)); Rangan Gupta (Department of Economics, University of Pretoria); Patrick T. Kanda (Department of Economics, University of Pretoria)
    Abstract: This paper investigates the existence of significant spillovers from the housing sector onto the wider economy for the seven major OECD countries using Uhlig's (2005) agnostic identification procedure. This method allows identifying a housing demand shock in a six-variable VAR model by imposing sign restrictions on the impulse responses of consumer prices, residential investment, real house prices and mortgage loans, while private consumption and nominal interest rate responses are left unrestricted. The results suggest that consumption responds positively and significantly to a house price shock in Canada, France, Japan and the UK. On the other hand, a significant positive delayed response of nominal interest rates follows a house price shock in Germany, Japan, the UK and the US, suggesting that while central banks do not seem to respond instantly and systematically to a housing demand shock, the real repercussions of the latter on the economy tend to translate into higher policy rates after a few quarters.
    Keywords: House Price, Monetary Policy, Consumption, Agnostic Identification
    JEL: C32 E31 E32 E44 E52
    Date: 2011–09
  10. By: João Sousa Andrade (University of Coimbra and GEMF); Adelaide Duarte (University of Coimbra and GEMF)
    Abstract: This paper analyses the fundamentals of the Portuguese crisis. The financial crisis of 2007 worsened and triggered the current Portuguese crisis. We argue that the main problem that the economy is facing is its output stagnation due to a kind of Dutch disease that has created high and increasing levels of indebtedness, low and decreasing levels of saving and has reduced Portuguese competitiveness. Moreover, the existence of a dualist labour market and a new vague of emigration reproduces inefficiency increasing unemployment of younger workers and the supply of human capital abroad funded by the Portuguese taxpayers. Governance problems such as bad public budget governance, lack of transparency and accountability are also at stake and have to be solved to allow the economy to return to its long-run growth path.
    Keywords: Growth, Debt, Saving, Dutch disease, Unemployment, Budget policy.
    JEL: E21 F34 H10 H63
    Date: 2011–09
  11. By: Neus Herranz; Javier Ruiz-Castillo
    Abstract: This paper evaluates the European Paradox according to which Europe plays a leading world role in terms of scientific excellence, measured in terms of the number of publications, but lacks the entrepreneurial capacity of the U.S. to transform this excellent performance into innovation, growth, and jobs. Citation distributions for the U.S., the European Union (EU), and the rest of the world are evaluated using a pair of high- and low-impact indicators, as well as the mean citation rate. The dataset consists of 3.6 million articles published in 1998-2002 with a common five-year citation window. The analysis is carried at a low aggregation level: the 219 sub-fields identified with the Web of Science categories distinguished by Thomson Scientific. The problems posed by international co-authorship and the multiple assignments of articles to sub-fields are solved following a multiplicative strategy. In the first place, we find that, although the EU has more publications than the U.S. in 113 out of 219 sub-fields, the U.S. is ahead of the EU in 189 and 163 sub-fields in terms of the high- and low-impact indicators. In the second place, we verify that using the high-impact indicator the U.S./EU gap is usually greater than when using the mean citation rate.
    Date: 2011–09
  12. By: Stanislav Cernosa
    Abstract: This paper analyses openness to trade, migration and foreign direct investment (FDI) using panel data. The focus is on the relationship between 15 EU countries (EU 15) as destination countries, and 71 trading partner countries which send migrants and receive FDI outflows, where only those predictions are introduced in the extended gravity model which are based on demographic trends of the partner countries and their geographical locations. The results confirm that a unified model successfully explains differences in openness to trade, migration and FDI between the EU 15 and the 12 new EU member countries, candidate countries, and developing countries.
    Keywords: International trade, migration, foreign direct investment, gravity model
    Date: 2011–09–30
  13. By: Francesco D'Amuri (Bank of Italy and ISER, University of Essex); Giovanni Peri (University of California, Davis and NBER)
    Abstract: In this paper we analyze the effect of immigrants on natives' job specialization in Western Europe. We test whether the inflow of immigrants changes employment rates or the chosen occupation of natives with similar education and age. We find no evidence of the first and strong evidence of the second: immigrants take more manual-routine type of occupations and push natives towards more abstract-complex jobs, for a given set of observable skills. We also find some evidence that this occupation reallocation is larger in countries with more flexible labor laws. As abstract-complex tasks pay a premium over manual-routine ones, we can evaluate the positive effect of such reallocation on the wages of native workers. Accounting for the total change in Complex/Non Complex task supply from natives and immigrants we find that immigration does not change much the relative compensation of the two types of tasks but it promotes the specialization of natives into the first type.
    Keywords: immigration, task specialization, European labor markets
    JEL: J24 J31 J61
    Date: 2010–10
  14. By: Alberto Bisin (New York University); Eleonora Patacchini (La Sapienza University of Rome, Einaudi Institute for Economics and Finance (EIEF) and CEPR); Thierry Verdier (Paris School of Economics (PSE) and CEPR); Yves Zenou (Stockholm University, Research Institute of Industrial Economics (IFN), CEPR, IZA and CREAM)
    Abstract: We study the relationship between ethnic identity and labor-market outcomes of non-EU immigrants in Europe. Using the European Social Survey, we find that there is a penalty to be paid for immigrants with a strong identity. Being a first generation immigrant leads to a penalty of about 17 percent while second-generation immigrants have a probability of being employed that is not statistically different from that of natives. However, when they have a strong identity, second-generation immigrants have a lower chance of finding a job than natives. Our analysis also reveals that the relationship between ethnic identity and employment prospects may depend on the type of integration and labor-market policies implemented in the country where the immigrant lives. More flexible labor markets help immigrants to access the labor market but do not protect those who have a strong ethnic identity.
    Date: 2011–01
  15. By: C. J. Polychroniou
    Date: 2011–09

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