nep-eec New Economics Papers
on European Economics
Issue of 2012‒01‒03
eighteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The public sector pay gap in a selection of Euro area countries By Raffaela Giordano; Domenico Depalo; Manuel Coutinho Pereira; Bruno Eugène; Evangelia Papapetrou; Javier J. Perez; Lukas Reiss; Mojca Roter
  2. Profit dynamics across the largest euro area countries and sectors By Laurent Maurin; Moreno Roma; Igor Vetlov
  3. Why the current account may matter in a monetary union. Lesson from the financial crisis in the Euro area By Francesco Giavazzi; Luigi Spaventa
  4. Rating agencies and sovereign credit risk assessment By Nicolas Véron; Guntram B. Wolff
  5. Taille de pays et stratégie de concurrence fiscale des petits pays. By Nicolas Chatelais
  6. Poland on the road to the euro: How serious is the risk of boom-bust cycles after the euro adoption? An empirical analysis By Agnieszka Stążka-Gawrysiak
  7. Substitution between net and gross settlement systems: A concern for> financial stability? By Ben R. Craig; Falko Fecht
  8. Monetary policy and the flow of funds in the Euro Area By Riccardo Bonci
  9. Oil Exporters to the Euro's Rescue? By Philip K. Verleger
  10. Bank Finance Versus Bond Finance By Fiorella De Fiore; Harald Uhlig
  11. Has Integration Promoted Business Cycle Synchronization in the Enlarged EU? By Nikolaos Antonakakis; Gabriele Tondl
  12. Elasticité des bases fiscales (composées des profits des sociétés)en Europe. By Nicolas Chatelais
  13. Do EU structural funds promote regional employment? Evidence from dynamic panel data models By Philipp Mohl; Tobias Hagen
  14. How Do Credit Supply Shocks Propagate Internationally? A GVAR approach By Eickmeier, Sandra; Ng, Tim
  15. Labor institutions and their impact on shadow economies in Europe By Fialova, Kamila; Schneider, Ondrej
  16. What explains prevalence of informal employment in European countries : the role of labor institutions, governance, immigrants, and growth By Hazans, Mihails
  17. The “China effect” on EU Exports to OECD markets – A focus on Italy By Giorgia Giovannetti; Marco Sanfilippo; Margherita Velucchi
  18. Quality of taxation and the crisis: Tax shifts from a growth perspective By Doris Prammer

  1. By: Raffaela Giordano (Banca d’Italia, Via Nazionale 91, 00184 Roma, Italy.); Domenico Depalo (Banca d’Italia, Via Nazionale 91, 00184 Roma, Italy.); Manuel Coutinho Pereira (Banco de Portugal, R. Francisco Ribeiro 2, 1150-165 Lisboa, Portugal.); Bruno Eugène (Banque Nationale de Belgique, de Berlaimontlaan 14, 1000 Brussels, Belgium.); Evangelia Papapetrou (Bank of Greece, 21 E. Venizelos Avenue, 102 50 Athens, Greece.); Javier J. Perez (Banco de España, Calle Alcalá, 48, 28014 Madrid, Spain.); Lukas Reiss (Oesterreichische Nationalbank, Otto-Wagner-Platz 3, 1090 Vienna, Austria.); Mojca Roter (Banka Slovenije, Slovenska 35, 1505 Ljubljana, Slovenija.)
    Abstract: We investigate the public-private wage differentials in ten euro area countries (Austria, Belgium, France, Germany, Greece, Ireland, Italy, Portugal, Slovenia and Spain). To account for differences in employment characteristics between the two sectors, we focus on micro data taken from EU-SILC. The results point to a conditional pay differential in favour of the public sector that is generally higher for women, at the low tail of the wage distribution, in the Education and the Public administration sectors rather than in the Health sector. Notable differences emerge across countries, with Greece, Ireland, Italy, Portugal and Spain exhibiting higher public sector premia than other countries. JEL Classification: J310, J450, O520.
    Keywords: Wage differentials, public/private sector.
    Date: 2011–12
  2. By: Laurent Maurin (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Moreno Roma (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Igor Vetlov (Bank of Lithuania, Gedimino pr. 6, LT-01103 Vilnius, Lithuania.)
    Abstract: This paper explores the behavior of profits in the four largest euro area countries (Germany, France, Italy and Spain) and the euro area as a whole, while at the same time considering three main sectors (manufacturing, construction and services) in each economy over the period 1988–2010. The paper presents stylized facts about profit developments and, applying a vector autoregressive modeling framework, discusses the sensitivity of profits to four distinctive structural shocks (a demand shock, an employment shock, a wage and price mark-up shocks). In addition, it provides the shock decomposition of historical developments in profits across countries and sectors. JEL Classification: C32, E23, E25.
    Keywords: Profits, sectoral determinants, VARs, impulse responses, historical decomposition.
    Date: 2011–12
  3. By: Francesco Giavazzi; Luigi Spaventa
    Abstract: The current account has always been a neglected variable in the management of the Euro area and in the assessment of its members' performance; so has, as a consequence, the savings-investment balance. This paper first reviews the arguments that explain this attitude and justify, under some conditions and in some cases, the persistence of current account deficits. It then examines some peculiar features of the growth experience under monetary union in four Euro area countries which do not conform to the conventional convergence pattern. Models establishing the optimality of a succession of current account deficits in a catching-up process implicitly assume that the intertemporal budget constraint is satisfied, so that the accumulation of foreign liabilities is matched by future surpluses. In section 3 we first introduce explicitly this constraint in a simple two-period, two-good model and show that its fulfilment requires that growth be driven by an adequate increase of the country's production capacity of traded goods and services. By examining the composition of output and demand we show that this has not been the case in the four countries considered and argue that monetary union has helped relax the necessary discipline. The common monetary policy moreover did nothing to prevent an extraordinary growth of credit that fed the imbalances in the four countries. The paper closes addressing some policy issues related to the future sustainability o the monetray union.
    Date: 2011
  4. By: Nicolas Véron; Guntram B. Wolff
    Abstract: Credit rating agencies (CRAs) have not consistently met the expectations placed on them by investors and policymakers. It is difficult, however, to improve the quality of ratings through regulatory initiatives. In the short term, changes to the CRAsâ?? regulatory environment, in a context of high market uncertainty, may add to market stress. The role of credit ratings in regulation should be reduced but eliminating it entirely would have significant downsides, at least in the short term. The transfer of ratings responsibility to public authorities, including the European Central Bank, is unlikely to be a good alternative because of inherent conflicts of interest. The notion of risk-free sovereign bonds is challenged by the crisis, but the most straightforward way to address this challenge in the euro-area context would be the establishment of a euro-area-wide sovereign bond instrument. This Policy Contribution was prepared as a briefing paper for the European Parliament's Economic and Monetary Affairs Committeeâ??s Monetary Dialogue
    Date: 2011–12
  5. By: Nicolas Chatelais (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we try to understand the economic policies choice of countries in terms of size. According to the case whether a country is large or small, it will have different incentives in the choice of its growth strategy. Theoretically, a large country would prefer use a policy which stimulate its domestic demand while a small country will choose a strategy improving its competitiveness and its attractiveness, because net exports contribute significantly to economic growth. In a monetary union framework, like the euro area, these choices are critical. Thus we highlight the European construction, in particular the Economic and Monetary Union (EMU) is an asymmetric process promoting both small countries and the implementation of non-cooperative growth policies. Among them, we are particularly interested in the introduction of a tax competition as a growth policy in some countries. This policy should be regarded as an opportunist strategy of small countries harmful to the overall growth of the EU.
    Keywords: Country size, free-riding, non-cooperative behaviors, European Union, small countries.
    JEL: E02 E62 F2 H30 H32 H73 H77
    Date: 2011–12
  6. By: Agnieszka Stążka-Gawrysiak (National Bank of Poland, Economic Institute; Warsaw School of Economics)
    Abstract: The goal of this paper is, firstly, to determine which structural characteristics of an economy make it more (or less) prone to macroeconomic booms and busts and, secondly, to empirically assess the risk of a boom-bust cycle in Poland after the euro adoption. We start from identifying booms and busts in private consumption and investment in fourteen “old” EU member states and then we seek to explain the identified boom and bust series using panel probit and pooled probit models. We then use the estimated equations to assess the probability of booms and busts in Poland over the period 2004 to 2009. Our results suggest that credit developments have been the most important driving force of booms and busts in EU-14. The relevance of international capital flows as a boom-bust transmission channel and of the cyclical heterogeneity of countries which undergo a process of monetary integration is also confirmed. We also find evidence that the fiscal channel boils down to a crowding-out effect: a reduction in the general government expenditure “makes room” for a boom in the private expenditure, and the reverse holds for busts. In turn, our results for Poland are inconclusive, which probably means that the models estimated for EU-14 are not adequate to predict the probabilities of booms and busts in this country.
    Keywords: Booms and busts, Poland, EMU enlargement, panel data analysis, probit models
    JEL: E32 E42 E63 C23
    Date: 2011
  7. By: Ben R. Craig; Falko Fecht
    Abstract: While net settlement systems make more efficient use of liquidity than gross settlement systems, they are known to generate systemic risk. What does that tendency imply for the stability of the payments (or financial) system when the two settlement systems coexist? Do liquidity shortages induce banks to settle more transactions in the net settlement system, thereby increasing systemic risk? Or do banks require their counterparties to send payments through the gross settlement system when default risks are high, increasing the need for liquidity and the money market rate but reducing overall systemic risk? This paper studies the factors that drive the relative importance of net and gross settlement systems over the short run, using daily data on transaction volumes from the large- volume payment systems of all euro area countries that have had both a net and a gross settlement system at the same time. Applying a large portfolio of different econometric techniques, we find that it is actually the transaction volumes in gross settlement systems that affect the daily price of liquidity and the credit risk spread in money markets.
    Keywords: Payment systems ; Systemic risk
    Date: 2011
  8. By: Riccardo Bonci (Banca d’Italia, Regional Economic Research, Perugia branch, Via Nazionale 91, 00184 Roma, Italy.)
    Abstract: This paper provides new evidence on the transmission of monetary policy in the euro area, assessing the impact of an unexpected increase of the short-term interest on the lending and borrowing activity of the different economic sectors. We exploit the information content of the flow-of-funds statistics, that provide the most appropriate framework to analyse the flowing of funds from one sector (the lender) to the other (the borrower). We proceed in two steps. First, we estimate a small VAR model for the euro area over the period 1991Q1 to 2009Q2. Then, we extend the benchmark VAR model in order to include the flow-of-funds series and analyse the response of the latter variables to a contractionary monetary policy shock. We find that the policy tightening is followed by a worsening of the budget deficit; firms cut on their demand for bank loans, partially replacing them with inter-company loans, and draw on their liquidity to try to offset the fall of revenues associated with the slowdown of economic activity; households reduce net borrowing and increase precautionary saving in the short run. Consistent with the bank lending channel of monetary policy at work, the interest rate hike is followed by a short-run deceleration of credit growth, mainly driven by the response of banks. JEL Classification: E32, E4, E52, G11.
    Keywords: Monetary policy; flow of funds; credit growth.
    Date: 2011–12
  9. By: Philip K. Verleger (Peterson Institute for International Economics)
    Abstract: Energy-exporting countries have more at risk than any other participant in the world economy if the euro crisis plunges Europe into recession. These countries would likely experience greater losses in 2012 should Europe fail. Oil and natural gas prices would plummet, and the price collapse would likely be larger than the 2008–09 decline. Energy-exporting countries therefore should be working feverishly with the International Monetary Fund (IMF) and the European Union to rescue the euro. They, along with China and other large holders of foreign exchange reserves, should lend to the IMF to help it construct an emergency lending facility with capacity of more than €1 trillion. The fund, administered by the IMF, would be used to buy bonds issued by Greece, Italy, Spain, Portugal, and Ireland. The goal should be to bring interest rates on long-term bonds down to 3 percent. Simultaneously, efforts should be redoubled to fix the economic problems in the troubled nations and restore balance to their budgets. An energy price collapse would increase disruptions in energy-exporting countries, promote economic ills in some consuming nations, such as Canada, and almost certainly start yet a third, even more violent, economic cycle.
    Date: 2011–12
  10. By: Fiorella De Fiore (European Central Bank (ECB) - Directorate General Research); Harald Uhlig (University of Chicago - Department of Economics)
    Abstract: We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose among two alternative instruments of external finance - corporate bonds and bank loans. We characterize the financing choice of firms and the endogenous financial structure of the economy. The calibrated model is used to address questions such as: What explains differences in the financial structure of the US and the euro area? What are the implications of these differences for allocations? We find that a higher share of bank finance in the euro area relative to the US is due to lower availability of public information about firms' credit worthiness and to higher efficiency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP.
    Keywords: Financial structure; agency costs; heterogeneity
    JEL: E20 E44 C68
    Date: 2011–04
  11. By: Nikolaos Antonakakis; Gabriele Tondl
    Abstract: This paper examines whether European integration, manifesting itself in increased trade and FDI linkages, new specializations and economic policy coordination, contributed to the synchronization of business cycles in the enlarged EU. We estimate the effects on bilateral growth rate correlations in 1995-2008 in a simultaneous equations model which permits to model endogenous relationships and unveil direct and indirect effects. Trade and FDI prove to have a strong impact on synchronization, specifically between incumbent and new EU members. More coordinated fiscal policies and, particularly in EU 15, the alignment of monetary policies promoted synchronization. Nevertheless, flexible exchange rates remained important adjustment instruments for the new member states. Increasing manufacturing specialization is not counteracting synchronization. The achieved EU income convergence, a declared objective of EU policy, supported business cycle synchronization.
    Keywords: Business cycles, transmission channel, FDI, trade, monetary union, EU
    JEL: E30 E52 E62 F15 F42 F44
    Date: 2011–12
  12. By: Nicolas Chatelais (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we pursue several goals ; we first check if the downward trend in corporate income tax rates in Europe reflects a strategy of tax competition, and not a "yardstick competition" in neighboring countries. We estimate the scale of fiscal externalities on neighboring countries in terms of taxable domestic resources outflows. Then, we discriminate the European countries according to their size in order to verify the theory of Bucovetsky (1991) and Wilson (1991) which predict a higher elasticity of tax bases in small countries. We use a panel of 25 European countries over the period 1995-2007 using tools from spatial econometrics. We show that the common trend to lower the corporate income tax rate can be partially explained by the existence of fiscal spillovers throw international flows of resources. Tax rates setting behaviors are interdependent and are evidences of tax competition in Europe.
    Keywords: Strategic interactions, tax behaviors, spatial econometrics, European Union, tax competition, small countries, tax base elasticity.
    JEL: E62 F21 F22 F23 H30 H32 H73 H77 R12
    Date: 2011–12
  13. By: Philipp Mohl (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tobias Hagen (Frankfurt University of Applied Sciences, Nibelungenplatz 1, D-60318 Frankfurt am Main, Germany.)
    Abstract: Despite its rather broad goal of promoting “economic, social and territorial cohesion”, the existing literature has mainly focused on investigating the Cohesion Policy’s growth effects. This ignores the fact that part of the EU expenditures is directly aimed at reducing disparities in the employment sector. Against this background, the paper analyses the impact of EU structural funds on employment drawing on a panel dataset of 130 European NUTS regions over the time period 1999-2007. Compared to previous studies we (i) explicitly take into account the unambiguous theoretical propositions by testing the conditional impact of structural funds on the educational attainment of the regional labour supply, (ii) use more precise measures of structural funds for an extended time horizon and (iii) examine the robustness of our results by comparing different dynamic panel econometric approaches to control for heteroscedasticity, serial and spatial correlation as well as for endogeneity. Our results indicate that high-skilled population in particular benefits from EU structural funds. JEL Classification: R11, R12, C23, J20.
    Keywords: EU structural funds, dynamic panel models, spatial panel econometrics, regional employment effects.
    Date: 2011–12
  14. By: Eickmeier, Sandra; Ng, Tim
    Abstract: We study how credit supply shocks in the US, the euro area and Japan are transmitted to other economies. We use the recently-developed GVAR approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983-2009. We experiment with inter-country links that distinguish bilateral trade, portfolio investment, foreign direct investment and banking exposures, as well as asset-side vs. liability-side financial channels. Capturing both bilateral trade and inward foreign direct investment or outward banking claim exposures in a GVAR fits the data better than using trade weights only. We use sign restrictions on the short-run impulse responses to financial shocks that have the effect of reducing credit supply to the private sector. We find that negative US credit supply shocks have stronger negative effects on domestic and foreign GDP, compared to credit supply shocks from the euro area and Japan. Domestic and foreign credit and equity markets respond clearly to the credit supply shocks. Exchange rate responses are consistent with a "flight to quality" to the US dollar. The UK, another international financial centre, is also responsive to the shocks. These results are robust to the exclusion of the 2007-09 crisis episode from the sample.
    Keywords: credit supply shocks; global VAR; international business cycles; sign restrictions; trade and financial integration
    JEL: C3 F15 F36 F41 F44
    Date: 2011–12
  15. By: Fialova, Kamila; Schneider, Ondrej
    Abstract: This paper analyzes the role of labor market institutions in explaining the development of shadow economies in European countries. The analysis uses several alternative measures of the shadow sector, and examines the effects of labor institutions on the shadow sector in two specific regions: new and old European Union member countries, as their respective shadow sectors exhibited a different development in the past decade. Although the share of the shadow economy in gross domestic product averaged 27.5 percent in the new member countries in 1999-2007, the respective share in the old member states stood at 17.9 percent. The paper estimates the effects of labor market institutions on two sets of shadow economy indicators -- shadow production and shadow employment. Comparing alternative measures of the shadow sector allows a more granulated analysis of labor market institution effects. The results indicate that the one institution that unambiguously increases shadow economy production and employment is the strictness of employment protection legislation. Other labor market institutions -- active and passive labor market policies, labor taxation, trade union density, and the minimum wage setting -- have less straightforward and statistically robust effects and their impacts often diverge in new and old European Union member countries. The differences are not robust enough, however, to allow for rejecting the hypothesis of similar effects of labor market institutions in new and old European Union member states.
    Keywords: Labor Markets,Environmental Economics&Policies,Labor Policies,Economic Theory&Research,Debt Markets
    Date: 2011–12–01
  16. By: Hazans, Mihails
    Abstract: This paper looks into institutional and other macro determinants of prevalence of informal dependent employment, as well as informal self-employment, in European countries, using European Social Survey data on work without legal contract in on 30 countries, covering years 2004-2009. Consistently with theoretical predictions, quality of business environment has a significant negative impact on prevalence of both types of informal employment. The share of non-contracted employees is negatively affected by perceived quality of public services and positively related to economic growth. Informal self-employment is positively related to growth in Europe at large, as well as in Eastern and Southern Europe. The level of GDP per capita also has a positive impact on the prevalence of informal employment in Europe at large and within Eastern and Southern Europe, whilst an opposite effect is found in Western and Northern Europe. Other things equal, the share of non-contracted employees in the labor force across European countries increases with the minimum-to-average wage ratio, with union density, with the share of first and second generation immigrants, and with income inequality, but falls with stricter employment protection legislation (EPL) and higher tax wedge on labor. Thus it appears that in Europe at large, labor cost effects of EPL and taxes are weaker than their impact via perceptions of job security and law enforcement, along with tax morale and the income effect. Yet the EPL effect on informality is positive (i.e., cost-related) when either Eastern and Southern Europe or Western and Northern Europe are considered separately. Furthermore, within Western and Northern Europe, the minimum wage effect is negative, whilst within Eastern and Southern Europe, the union effect is negative; in both cases, we offer a supply side explanation.
    Keywords: Labor Markets,Labor Policies,Debt Markets,Economic Theory&Research,Markets and Market Access
    Date: 2011–12–01
  17. By: Giorgia Giovannetti (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Marco Sanfilippo; Margherita Velucchi
    Abstract: This paper analyzes the indirect impact of China on the export performance of major European countries (Italy, France, Germany and Spain) in their main destination markets (OECD countries). Given a strong specialization in manufacturing sector, these EU countries are likely to be at risk from China’s competition, especially in consumer goods. The heterogeneity in the production (and export) structures of EU countries makes Italy, whose productive structure is based on so-called “traditional” sectors, most vulnerable to China’s competitive pressure. Using data for the period 1995-2009, this paper estimates the possible displacement effect at sector level. Results show that there is a considerable variation in different EU countries’ exposure to China’s competition and that, in some sectors the Chinese exports effect is, indeed, strong. This is particularly true for the more recent period, after China has entered WTO and for Italy, both in traditional and more capital intensive sectors.
    Keywords: china, trade, italy, gravity model
    JEL: F10 F14
    Date: 2011
  18. By: Doris Prammer (European Commission)
    Abstract: One aim of consolidation after the crisis on the taxation side is to curb growth as little as possible. Economic literature suggests that some tax systems are more conducive to growth, in particular those relying on consumption, environmental and property taxation. This paper reflects on behavioural responses of economic agents to taxation and reviews the literature on the impact of tax structures on growth. Furthermore, it analyses the tax structure in the EU-27 Member States and assess if the crises has triggered a move towards tax systems more conducive to growth.
    Keywords: financial crisis, tax efficiency, optimal taxation, tax structure, tax shift
    JEL: H11 H21 H26 E62
    Date: 2011–12

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