nep-eec New Economics Papers
on European Economics
Issue of 2011‒11‒14
twenty papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Fiscal Sustainability, Default Risk and Euro Area Sovereign Bond Spreads Markets By Borgy, V.; Laubach, T.; Mésonnier, J-S.; Renne, J-P.
  2. Real time analysis of euro area fiscal policies: adjustment to the crisis By Paloviita, Maritta; Kinnunen, Helvi
  3. Risk Sharing through Capital Gains By Balli, Faruk; Kalemli-Ozcan, Sebnem; Sørensen, Bent E
  4. Sovereign spreads in the Euro area: Which prospects for a Eurobond? By Favero, Carlo A.; Missale, Alessandro
  5. Causality and contagion in peripheral EMU public debt markets: a dynamic approach By Marta Gómez-Puig; Simón Sosvilla-Rivero
  6. EMU, EU, Market Integration and Consumption Smoothing By Atanas Christev; Jacques Melitz
  7. Risk aversion and Uncertainty in European Sovereign Bond Markets By Fourel, V.; Idier, J.
  8. Does Globalization affect Regional Growth? Evidence for NUTS-2 Regions in EU-27 By Richard Sellner; Wolfgang Polasek
  9. Debt restructuring in the euro area: a necessary but manageable evil? By Zsolt Darvas
  10. "Resolving the Eurozone Crisis--Without Debt Buyouts, National Guarantees, Mutual Insurance, or Fiscal Transfers" By Stuart Holland
  11. How Would EU Corporate Tax Reform Affect US Investment in Europe? By Michael P. Devereux; Simon Loretz
  12. Migration and Regional Convergence in the European Union By Gabriele Tondl; Peter Huber
  13. Modeling the growth effects of regional knowledge production: The GMR-Europe model and its applications for EU Framework Program policy impact simulations By Attila Varga; Péter Járosi; Tamás Sebestyén
  14. A Sectoral Analysis of Italy's Development: 1861 -2010 By Broadberry, Stephen; Giordano, Claire; Zollino, Francesco
  15. The Portuguese Economic Divergence with European Union: A Call for Corporate Strategy in Light of New Economic Geography Principles By Porfírio, José
  17. Can Higher Employment Levels Bring Lower Poverty in the EU? Regression Based Simulations of the Europe 2020 Target By Marx, Ive; Vandenbroucke, Pieter; Verbist, Gerlinde
  18. Creative clusters in Europe: a microdata approach By Rafael Boix Domenech; Luciana Lazzeretti; José Luis Hervàs Oliver; Blanca De Miguel Molina; Borja Trujillo Ruiz
  19. Europe 2020 Strategy, Cohesion Policy and Greek Regions: Are we “smart†enough? By Yiannis Saratsis; Angelos Kotios
  20. The political economy of neo-liberalism in Italy and France. By Bruno Amable; Elvire Guillaud; Stefano Palombarini

  1. By: Borgy, V.; Laubach, T.; Mésonnier, J-S.; Renne, J-P.
    Abstract: This paper develops an arbitrage-free affine term structure model of potentially defaultable sovereign bonds to model a cross-section of eight euro area government bond yield curves since January 1999. The existence of a common monetary policy under European Monetary Union determines the short end of the yield curves, whereas decentralized debt policies drive expected default probabilities and thereby spreads towards Germany, assumed to be free of default risk. The pricing factors are three observable area-wide macroeconomic variables and measures of national fiscal sustainability, which we proxy by expected changes in debt/GDP ratios of the respective countries. Our model explains spreads both before and during the crisis to an impressive extent. The deterioration in public finances was the major driver of the widening in spreads since 2008 through both heightened compensations for default risk and increases in risk premia. We also present perceived probabilities of sovereign default at any maturity and assess their elasticity to shifts in expected changes in debt/GDP ratios.
    Keywords: Government debt, affine term structure models, default risk, yield spreads, fiscal projections.
    JEL: C32 E6 G12 H6
    Date: 2011
  2. By: Paloviita, Maritta (Bank of Finland Research); Kinnunen, Helvi (Bank of Finland)
    Abstract: Using real time data from the OECD and fiscal policy reaction functions, this study explores euro area fiscal policies since the late 1990s. Both discretionary plans for the budget year and policy changes during budget implementation stages are investigated. The main focus is on the fiscal adjustment to the recent financial and economic crisis. The results suggest that during the time of monetary union (EMU) euro area planned fiscal policies have been long-term oriented and counter-cyclical. In the implementation stages new policy decisions have been made in response to unexpected economics developments. We provide evidence that the crisis had a clear impact on discretionary policies. Due to the resultant increase in uncertainty, the crisis spotlighted the impact of cyclical developments on fiscal planning. In the implementation stages, huge forecast errors in connection with planned policy were observed. As a consequence, new decisions were made in order to alleviate the negative impacts of the crisis on euro area economies.
    Keywords: fiscal policy; real time data; planning stage; implementation stage; cyclical sensitivity; economic crisis
    JEL: E32 E62
    Date: 2011–10–14
  3. By: Balli, Faruk; Kalemli-Ozcan, Sebnem; Sørensen, Bent E
    Abstract: We estimate channels of international risk sharing between European Monetary Union (EMU), European Union, and other OECD countries 1992-2007. We focus on risk sharing through savings, factor income flows, and capital gains. Risk sharing through factor income and capital gains was close to zero before 1999 but has increased since then. Risk sharing from capital gains, at about 6 percent, is higher than risk sharing from factor income flows for European Union countries and OECD countries. Risk sharing from factor income flows is higher for Euro zone countries, at 14 percent, reflecting increased international asset and liability holdings in the Euro area.
    Keywords: capital markets; income insurance; international financial integration
    JEL: F21 F36
    Date: 2011–11
  4. By: Favero, Carlo A.; Missale, Alessandro
    Abstract: In this paper, we provide new evidence on the determinants of sovereign yield spreads and contagion effects in the euro area in order to evaluate the rationale for a common Eurobond jointly guaranteed by euro-area Member States. We find that default risk is the main driver of yield spreads, suggesting small gains from greater liquidity. Fiscal fundamentals matter in the pricing of default risk but only as they interact with other countries’ yield spreads; i.e. with the global risk that the market perceives. More important, the impact of this global risk variable is not constant over time, a clear sign of contagion driven by shifts in market sentiment. This evidence points to a discontinuity in the disciplinary role of financial markets. If markets can stay irrational longer than a country can stay solvent, then the role of yield spreads on national bonds as a fiscal discipline device is considerably weakened, and issuing Eurobonds can be economically justified.
    Keywords: contagion; Eurobonds; sovereign debt crisis
    Date: 2011–11
  5. By: Marta Gómez-Puig (Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales); Simón Sosvilla-Rivero (Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales)
    Abstract: Our research aims to analyze the causal relationships in the behavior of public debt issued by peripheral member countries of the European Economic and Monetary Union (EMU), with special emphasis on the recent episodes of crisis triggered in the eurozone sovereign debt markets since 2009. With this goal in mind, we make use of a database of daily frequency of yields on 10-year government bonds issued by five EMU countries (Greece, Ireland, Italy, Portugal and Spain), covering the entire history of the EMU from its inception on 1 January 1999 until 31 December 2010. In the first step, we explore the pair-wise causal relationship between yields, both for the whole sample and for changing subsamples of the data, in order to capture the possible time-varying causal relationship. This approach allows us to detect episodes of contagion between yields on bonds issued by different countries. In the second step, we study the determinants of these contagion episodes, analyzing the role played by different factors, paying special attention to instruments that capture the total national debt (domestic and foreign) in each country.
    Abstract: Nuestra investigación tiene como objetivo analizar las relaciones causales en el comportamiento de la deuda pública emitida por países miembros periféricos de la Unión Económica y Monetaria (UEM), con especial énfasis en los recientes episodios de crisis desatados en los mercados de deuda soberana de la zona euro desde 2009. Con este objetivo, empleamos una base de datos de la frecuencia diaria de los rendimientos de los bonos gubernamentales a 10 años emitidos por cinco países de la UEM (Grecia, Irlanda, Italia, Portugal y España), que abarca toda la historia de la UEM desde su inicio el 1 de enero de 1999 al 31 diciembre de 2010. En la primera etapa, se explora la relación causal por pares entre los rendimientos, tanto para la muestra completa y para submuestras cambiantes de los datos, con el fin de capturar posible relación causal en función del tiempo. Este enfoque nos permite detectar episodios de contagio entre los rendimientos de los bonos emitidos por países distintos. En el segundo paso, se estudian los factores determinantes de estos episodios de contagio, el análisis del papel desempeñado por diferentes factores, prestando especial atención a los instrumentos que capturan la deuda nacional total (doméstica y extranjera) en cada país.
    Keywords: Sovereign bond yields, Causality, Time-varying contagion, Euro area, Peripheral EMU countries, Rendimientos bonos soberanos, Causalidad, Contagio variable en el tiempo, Eurozona, Países periféricos UEM.
    Date: 2011
  6. By: Atanas Christev; Jacques Melitz
    Keywords: Capital market integration, consumption smoothing, currency union, European Monetary Union, European Union
    JEL: F36 F41 E00 G10 A A A A A
    Date: 2011–10
  7. By: Fourel, V.; Idier, J.
    Abstract: Risk aversion and uncertainty are often both at play in market price determination, but it is empirically challenging to disentangle one from the other. In this paper we set up a theoretical model particularly suited for opaque over-the-counter markets that is shown to be empirically tractable. Based on high frequency data, we thus propose an evaluation of risk aversion and uncertainty inherent to the government bond markets in the euro area between 2007 and 2011. We particularly examine the impact of the European Central Bank Securities Markets Programme [SMP] implemented in May 2010 and re- activated in August 2011 to ease the pressure on the European sovereign bond markets. We show how this programme has killed market uncertainty but raised risk aversion for all countries except Greece in a risk-pooling mechanism: this can therefore weaken the impact of market interventions over the long-term.
    Keywords: MES, systemic risk, tail correlation, balance sheet ratios, panel.
    JEL: D40 D81 E58
    Date: 2011
  8. By: Richard Sellner; Wolfgang Polasek
    Abstract: We analyze the influence of newly constructed globalization measures on regional growth for the EU-27 countries between 2001 and 2006. The spatial Chow-Lin procedure, a method constructed by the authors, was used to construct on a NUTS-2 level a complete regional data for exports, imports and FDI inward stocks, which serve as indicators for the influence of globalization, integration and technology transfers on European regions. The results suggest that most regions have significantly benefited from globalization measured by increasing trade openness and FDI. In a non-linear growth convergence model the growth elasticities for globalization and technology transfers decrease with increasing GDP per capita. Furthermore, the estimated elasticity for FDI decreases when the model includes a higher human capital premium for CEE countries and a small significant growth enhancing effect accrues from the structural funds expenditures in the EU.
    Date: 2011–09
  9. By: Zsolt Darvas (Institute of Economics - Hungarian Academy of Sciences, Bruegel)
    Abstract: There are two possible responses to the Greek debt crisis: 'Plan A', continued official lending, for as long as needed, with possible voluntary private sector involvement, and 'Plan B', coercive pre-emptive or post-default restructuring with significant face value reduction in privately-held debt. Both options have risks, but it is necessary to move to Plan B sooner or later. The impact on Greece could be mitigated by foreign bank ownership and proper liquidity support measures. The direct spillover impact on the rest of the euro area seems small. But there is the risk of contagion, which is a serious concern. There is a cautious case for delaying somewhat Plan B in order to prepare for it.
    Keywords: debt restructuring; euro-area crisis; fiscal sustainability; financial interdependence; Lehman Brothers
    JEL: F34 E60 H63
    Date: 2011–06
  10. By: Stuart Holland
    Abstract: One of the reasons for the failure of Europe's governing bodies to resolve the eurozone crisis is resistance to debt buyouts, national guarantees, mutual insurance, and fiscal transfers between member-states. Stuart Holland argues that none of these are necessary to convert a share of national bonds to Union bonds or for net issues of eurobonds--two alternative approaches to the debt crisis that would offset default risk and, by securing the euro as a reserve currency, contribute to more balanced global growth.
    Date: 2011–11
  11. By: Michael P. Devereux; Simon Loretz
    Abstract: This paper examines the likely impact of a proposed formula apportionment system for corporation tax in the EU on the inbound investment of US multinational companies. We pay attention to tax planning strategies that may be employed by US multinationals and investigate whether effective tax rates in Europe of US companies differ from those of European companies. The proposal is for an optional system: we estimate the extent to which both European and US companies would be likely to choose it taking into account their existing structures and future investment incentives. The relative position of US and European companies depends crucially on the taxation of foreign passive income.
    JEL: H25
    Date: 2011–11
  12. By: Gabriele Tondl; Peter Huber
    Abstract: Migration and Regional Convergence in the European Union European migration trends in the last decade have been marked by a number of spectacular changes. In the course of the recent enlargement immigration to some EU15 countries from the CEECs has become remarkable. Nevertheless, the vast majority of the EU27 countries are net immigration countries. In face of the important immigration and the cohesion problem, the question arises whether migration had any effect on unemployment and GDP per capita levels in the 2000s. In this paper we use data from the Eurostat Regio Database and estimate whether EU regions reveal a process of convergence in unemployment and income and whether migration plays a role in this process. We further examine whether migration has a different impact on emigration and immigration regions or in converging and diverging regions. While we cannot find a significant impact of migration on unemployment, migration clearly affects per capita income growth.
    Date: 2011–09
  13. By: Attila Varga; Péter Járosi; Tamás Sebestyén
    Abstract: This paper introduces the Geographic Macro and Regional (GMR) model for NUTS-2 regions of the Euro zone. This model consists of three blocks: the TFP, the SCGE and the MACRO blocks. The model is built for impact analysis of policies targeting intangible assets in the forms of R&D, human capital and social capital. The analysis can be done both at the regional and the EU macroeconomic levels. Policy simulations on the growth impacts of the 6th European Framework Program illustrate the capabilities of the complex model system.
    Date: 2011–09
  14. By: Broadberry, Stephen (London School of Economics; CAGE); Giordano, Claire (Banca d'Italia); Zollino, Francesco (Banca d'Italia)
    Abstract: Italy’s economic growth over its 150 years of unified history did not occur at a steady pace nor was it balanced across sectors. Relying on an entirely new input (labour and capital) database by us built and presented in the Appendix, together with new Banca d’Italia estimates of GDP by sector, this paper evaluates the different labour productivity growth trends within the Italian economy’s sectors, as well as the contribution of structural change to productivity growth. Italy’s performance is then set in an international context: a comparison of sectoral labour productivity growth rates and levels within a selected sample of countries (UK, US, Germany, Japan, India) allows us to better time, quantify and gauge the causes of Italy’s catching-up process and subsequent more recent slowdown. Finally, the paper analyses the proximate sources of Italy’s growth, relative to the other countries, in a standard growth accounting framework, in an attempt also to disentangle the contribution of both total factor productivity growth and capital deepening to the country’s labour productivity dynamics
    Keywords: Labour, productivity, sectoral disaagregation, international comparison growth,accounting
    Date: 2011
  15. By: Porfírio, José (Universidade Aberta)
    Abstract: New Economic Geography (NEG), a new branch of Spatial Economics that was developed at the beginning of the 90s, supports that “peripheral” European Union’s economies (like Portugal, Greece, Ireland or even Spain) are predestined to diverge from the developed European “centers” like France or Germany. This new field of Economics seems to be supporting the incapacity of European structural policies to battle against this divergence trend, and ultimately an inevitable catastrophe of the Single European Currency, and thus, of the European integration project as a whole. The recent evolution of the main EU’s peripheral economies(e.g. Greece, Portugal and Ireland) confirming their divergence trend from the developed core EU’s countries, seems to support these NEG forecasts. However, in our paper we support that, taking into consideration some identified pitfalls of NEG’s principles, and on the other hand, considering the potentialities that may arise from the capacity of enterprises to put in place effective Corporate Strategies (which its related with the need to develop their strategic capabilities), peripheral countries/regions may be able to overcome this apparent fatalness. Thus, more important than just funding is the aptitude of these peripheral economies – through their economic agents’ capabilities – to use these funding and profit from them adequately. This will lead us to support, not just the continuation of the European structural funds’ policies, with the positive impacts arising from the inherent redistribution effects, but also to conclude on the urgent need to develop strategic capabilities of main economic agents of these regions. Using an empirical survey, performed during the transition period of the introduction of the Euro (1999-2001), to companies operating in Portugal, we conclude by demonstrating that the lack of corporate strategic capabilities may well be an important explanation for the present difficult economic situation, explaining most of the existing problems of Portugal and that, only through a real change in the prevailing paradigm, regarding the action of these companies, we may be able in a near future to sustainably overcome the present difficulties.
    Keywords: Economic Development; New Economic Geography; Corporate Strategy; European Union; Peripheral Territories
    JEL: M21 O12 R12
    Date: 2011–03–31
  16. By: Lucian-Liviu Albu
    Abstract: Coming from standard economic growth theory and empirical evidences, we concentrated on the convergence process as a result of structural changes in economy. We investigate the differences among countries in EU in terms of the share in total economy of main sectors. Then, based on the spatial (empirical) distribution of such shares in EU we are proposing a model to estimate a typology of the convergence process in the European area. Taking into account the existing differences among sectors in matter of productivity, there are two versions of the model: considering the share of sectors in total employment and the share of sectors in GDP respectively. Moreover, we developed several modelling schemes that could be useful to improve the strategies oriented to achieve a real convergence in EU and further in Adriatic-Balkans region. In this way, we can obtain simulations from a country or group of countries (European Union, for example) on long term and quantifying the impact of structural changes on the convergence process. Indeed, the actual global crisis seems to influence negatively the convergence process in EU. As a rule, just new adhered countries were more affected by the actual crisis. Today all forecasts are suffering by uncertainty. Thus, further efforts must be allocated to evaluate the negative impact of actual crisis on the convergence process.
    Date: 2011–09
  17. By: Marx, Ive (University of Antwerp); Vandenbroucke, Pieter (University of Antwerp); Verbist, Gerlinde (University of Antwerp)
    Abstract: At the European level and in most EU member states, higher employment levels are seen as key to better poverty outcomes. But what can we expect the actual impact to be? Up until now shift-share analysis has been used to estimate the impact of rising employment on relative income poverty. This method has serious limitations. We propose a more sophisticated simulation model that builds on regression based estimates of employment probabilities and wages. We use this model to estimate the impact on relative income poverty of moving towards the Europe 2020 target of 75 percent of the working aged population in work. Two sensitivity checks are included: giving priority in job allocation to jobless households and imputing low instead of estimated wages. This paper shows that employment growth does not necessarily result in lower relative poverty shares, a result that is largely consistent with observed outcomes over the past decade.
    Keywords: employment growth, poverty, Europe 2020, household work intensity, low pay
    JEL: I32 J21 J68
    Date: 2011–10
  18. By: Rafael Boix Domenech; Luciana Lazzeretti; José Luis Hervàs Oliver; Blanca De Miguel Molina; Borja Trujillo Ruiz
    Abstract: Creative industries are highly concentrated forming clusters. One of the main problems for the identification of clusters of creative industries in Europe is the lack of data, constrained in practice to regions (NUTS 2) and influenced by the heterogeneity in the definition of NUTS across countries. This research uses firm-level data geo-referenced at address level and geostatistical modeling to identify clusters of creative industries in fifteen European countries. The procedure is independent of administrative divisions and national boundaries and allows to produce a precise geography of the clusters of creative industries in Europe.
    Date: 2011–09
  19. By: Yiannis Saratsis; Angelos Kotios
    Abstract: Since the beginning of 2010, European Commission has launched the new strategic framework for Europe, which is now known as the “Europe 2020 Strategyâ€. This new strategy has been set as the successor of the so called “Lisbon-Gothenburg Strategy†which was set in early ’00 as the strategy for Europe in the 21st century. Actually the two strategies have a lot in common. The main driving forces of Europe still remain the same and some rearrangement in the EU-wide strategic targets has been made. Of course the economic crisis that has emerged forced for a new priority that was set in the “EU 2020†strategy, but the main targeting still encompasses the three corners of the well known sustainability triangle, namely economy, environment and society. The setting of a new strategy arises some questions. Why does Europe need a new development strategy? Was the old strategy successful or not? Was every country in Europe adapted in the old strategy properly? Where there any problems in the implementation of the old strategy? What was the overall outcome of the old strategy in EU Level, in each Member State and in the regions of Europe? Is the new strategy better adjusted to cope with the development problems in European, national and regional level? Furthermore, European Commission has already asked MS to comply with the specifications of the “Europe 2020 Strategy†in the planning and implementation of the Cohesion Policy’s programs in the following years (for the remaining of the 2007 – 2013 period and especially for the 2014-2020 period). This article discusses the above questions and tries to find answers on the rationale and prospects of the new strategy. Also, in a second step we give more emphasis in Greece and Greek Regions that have been not well adapted in the “Lisbon Strategy†as shown in the recent 5th Cohesion Report and other studies. Finally, the article closes with policy recommendations regarding the consistency and interaction between the “Europe 2020 Strategy†and Cohesion Policy, and also some policy recommendations for Greek regional policy and Greek regions.
    Date: 2011–09
  20. By: Bruno Amable (Centre d'Economie de la Sorbonne, CEPREMAP et IUF); Elvire Guillaud (Centre d'Economie de la Sorbonne); Stefano Palombarini (LED - Université Paris 8)
    Abstract: There are many apparent similarities between the current political and economic situations of France and Italy. The mainstream view is that at least part of the neo-liberal strategy could be a solution to the economic problems of both variants of the European model of capitalism. However, the difficulties met by the implementation of these strategies by Sarkozy and Berlusconi lead to believe that the success or failure of neo-liberalisation has less to do with its (lack of) macroeconomic merits than with the stability of the socio-political alliances that support it. In this respect, France and Italy are markedly different. This paper shows that even if the "hard core" of the neoliberal social bloc is roughly the same in both countries, this core constitutes a minority of the electorate ; a neoliberal strategy must therefore rely on an extended social coalition, which might not be similar between countries. The Great Recession revealed part of the structural characteristics that set both countries apart. The aim of this article is to show that the consideration of the different socio-political alliances found in each country can help to understand how Italy and France ended up on different economic trajectories.
    Keywords: Institutions, model of capitalism, neoliberal reforms, political crisis.
    JEL: P16 P51 B52
    Date: 2011–09

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