nep-eec New Economics Papers
on European Economics
Issue of 2012‒03‒08
seventeen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The economy of Spain in the eurozone before and after the crisis of 2008 By Neal, Larry; Garcia-Iglesias, Concepcion
  2. The European Crisis Deepens By Peter Boone; Simon Johnson
  3. The role of money and monetary policy in crisis periods: the Euro area case By Benchimol, Jonathan; Fourçans, André
  4. Inflation convergence in Central and Eastern Europe with a view to adopting the euro By Juan Carlos Cuestas; Luis A. Gil-Alana; Karl Taylor
  5. Determinants of Inflation in the Euro Area: The Role of Labor and Product Market Institutions By Hanan Morsy; Florence Jaumotte
  6. The Impact of EU Membership on the Economic Governance of Spain By Francesc Granell (Professor of International Economic Organisation)
  7. More Pain, No Gain for Greece: Is the Euro Worth the Costs of Pro-Cyclical Fiscal Policy and Internal Devaluation? By Mark Weisbrot; Juan Antonio Montecino
  8. "The European Central Bank and Why Things Are the Way They Are: A Historic Monetary Policy Pivot Point and Moment of (Relative) Clarity" By Robert Dubois
  9. A structural interpretation of the impact of the great recession on the Austrian economy using an estimated DSGE model By Gerhard Fenz; Lukas Reiss; Martin Schneider
  10. The European way out of recession By Bec, F.; Bouabdallah, O.; Ferrara, L.
  11. Causes of the Decline of Economic Growth in Italy and the Responsibility of EURO. A Balance-of-Payments Approach. By Elias Soukiazis; Pedro Cerqueira; Micaela Antunes
  12. Borrowing from thy neighbour: a European perspective on sovereign debt By Miller, Marcus; Rankin, Neil; Zhang, Lei
  13. How do anticipated changes to short-term market rates influence banks' retail interest rates? Evidence from the four major euro area economies By Banerjee, A.; Bystrov, V.; Mizen, P.
  14. Fiscal policy coordination in the EMU: A problem with asymmetry and aggregation By Matti Viren
  15. Do we need fiscal rules? By Catherine Mathieu; Henri Sterdyniak
  16. Bank Funding Structures and Risk: Evidence from the Global Financial Crisis By Francisco F. Vázquez; Pablo Federico
  17. The role of investment banking for the German economy: Final report for Deutsche Bank AG, Frankfurt/Main By Schröder, Michael; Borell, Mariela; Gropp, Reint; Iliewa, Zwetelina; Jaroszek, Lena; Lang, Gunnar; Schmidt, Sandra; Trela, Karl

  1. By: Neal, Larry; Garcia-Iglesias, Concepcion
    Abstract: In common with the other periphery countries that joined the euro-zone in 1998-2000, Spain enjoyed ten years of economic prosperity, essentially debt-financed. The financial crisis of 2008 has revealed deep structural problems in the euro-zone, but also among Spain’s fiscally autonomous regions, which differ from the financial problems faced by the other European periphery countries. But the Spanish problems with de-leveraging suggest further difficulties for the euro-zone as it attempts to implement sterner budgetary controls over member states.
    Keywords: autonomous regions; Balassa-Samuelson effect; de-leveraging; euro; sovereign bonds
    JEL: G15 G18 F33 G01
    Date: 2012–02–20
  2. By: Peter Boone (Peterson Institute for International Economics); Simon Johnson (Peterson Institute for International Economics)
    Abstract: Successive plans to restore confidence in the euro area have failed. A combination of misdiagnosis, lack of political will, and dysfunctional politics across 17 nations have all contributed to the failure so far to stem Europe's growing crisis. Proposals currently on the table also seem likely to fail. Boone and Johnson say the euro area faces two major problems: First, the introduction of sovereign credit risk has made nations and subsequently banks effectively insolvent unless they receive large-scale bailouts. Second, the ensuing credit crunch has exacerbated difficulties in the real economy, causing Europe's periphery to plunge into recession, thus increasing the financing needs of troubled nations well into the future. Five measures are needed to enable the euro area to survive: (1) an immediate program to deal with excessive sovereign debt, (2) far more aggressive plans to reduce budget deficits and make peripheral nations "hypercompetitive" in the near future, (3) supportive monetary policy from the European Central Bank, (4) the introduction of mechanisms that credibly achieve long-term fiscal sustainability, and (5) institutional change that reduces the scope for excessive leverage and consequent instability in the financial sector.
    Date: 2012–01
  3. By: Benchimol, Jonathan (ESSEC Business School); Fourçans, André (ESSEC Business School)
    Abstract: In this paper, we test two models of the Eurozone, with a special emphasis on the role of money and monetary policy during crises. The role of separability between money and consumption is investigated further and we analyse the Euro area economy during three different crises: 1992, 2001 and 2007. We find that money has a rather significant role to play in explaining output variations during crises whereas, at the same time, the role of monetary policy on output decreases significantly. Moreover, we find that a model with non-separability between consumption and money has better forecasting performance than a baseline separable model over crisis periods.
    Keywords: Euro area; Money; DSGE forecasting
    JEL: E31 E51 E58
    Date: 2012–02–01
  4. By: Juan Carlos Cuestas (University of Sheffield); Luis A. Gil-Alana (University of Navarra); Karl Taylor (University of Sheffield)
    Abstract: In this paper we consider inflation rate differentials between seven Central and Eastern Countries (CEECs) and the Eurozone. We focus explicitly upon a group of CEECs given that although they are already member states, they are currently not part of the Economic and Monetary Union (EMU) and must fulfil the Maastricht convergence criteria before being able to adopt the euro. However, this group of countries does not have an opt-out clause and so must eventually adopt the single currency. Hence, considering divergence in inflation rates between each country and the Eurozone is important in that evidence of persistent differences may increase the chance of asymmetric inflationary shocks. Furthermore, once a country joins the Eurozone the operation of a country specific monetary policy is no longer an option. We explicitly test for convergence in the inflation rate differentials, incorporating non-linearities in the autoregressive parameters, fractional integration with endogenous structural changes, and also consider club convergence analysis for the CEECs over the period 1997 to 2011 based on monthly data. Our empirical findings suggest that the majority of countries experience non-linearities in the inflation rate differential, however there is only evidence of a persistent difference in three out of the seven countries. Complementary to this analysis we apply the Phillips and Sul (2007) test for club convergence and find that there is evidence that most of the CEECs converge to a common steady state.
    Keywords: Central and Eastern Europe , euro adoption, inflation convergence, non-linearities
    JEL: E31 E32 C22
    Date: 2012–01
  5. By: Hanan Morsy; Florence Jaumotte
    Abstract: While inflation differentials in a monetary union can be benign, reflecting a catch-up process, or an adjustment mechanism to asymmetric shocks or different business cycles, they may also indicate distortions related to inefficiencies in domestic product and labor markets that amplify or make more persistent the impact of shocks on inflation. The paper examines the determinants of inflation differentials in the euro area, with emphasis on the role of country specific labor and product market institutions. The analysis uses a traditional backward-looking Phillips curve equation and augments it to explore the role of collective bargaining systems, union density, employment protection, and product market regulation. The model is estimated over a panel dataset of 10 euro area countries over the period 1983-2007. Results show that high employment protection, intermediate coordination of collective bargaining, and high union density increase the persistence of inflation. Oil and raw materials price shocks are also more likely to be accommodated by wage increases when the degree of coordination in collective bargaining is intermediate. These results are robust to different estimation methods, model specifications, and outliers. The paper suggests that reforming labor market institutions may improve the functioning of the euro area by reducing the risk of persistent inflation differentials.
    Date: 2012–01–31
  6. By: Francesc Granell (Professor of International Economic Organisation) (Universitat de Barcelona)
    Abstract: Spain was not admitted to the then European Economic Community during the Francos regime for political reasons. Joining the EU on January 1986 was the last and final step forward towards the definitive consolidation of democracy in Spain and the consolidation of the opening of the Spanish Economy. The results over the first twenty five years of membership have translated into an unprecedented boost of modernization and progress. Spain adopted the Acquis Communautaire and received considerable benefits from EU membership, eliminating barriers, following the common policies , re ceiving European funds and adopting the European common currency . From an index of 60 per cent of the European income average in 1986, todays income even after the crisis that started in 2008- is in the range of 105 per cent. The last three years have been different and difficult due to the severe economic and financial crisis. In this context, this paper analyses how the successive Spanish governments organized the economic governance to adapt to the quantitative and qualitative changes registered in the European Integration.
    Keywords: european union- spain relations, european integration, national government expenditure and debt, euro-crisis, european economic and monetary union
    JEL: K33 H12 N94 H50 L74 F36 F15
    Date: 2012
  7. By: Mark Weisbrot; Juan Antonio Montecino
    Abstract: This week the Greek government reached agreement with the European authorities and the IMF for 130 billion euros in lending, as part of a new adjustment package to replace the current IMF program that began in May of 2010. Although the agreement should allow the government to avoid default in March, there are grave doubts as to whether the agreed upon program will lead the country to a point where it returns to growth, has a sustainable debt burden, and can borrow from private markets. The most important problem with the commitments that Greece has made in the past two years is that its fiscal policy is pro-cyclical – that is, the government has been, and is committed to, tightening its budget while the economy is in recession.
    Keywords: greece, euro, europe, devaluation, procyclical, countercyclical, imf,
    JEL: E E6 E5 E52 F F3 F34 F1 F14
    Date: 2012–02
  8. By: Robert Dubois
    Abstract: Not since the Great Depression have monetary policy matters and institutions weighed so heavily in commercial, financial, and political arenas. Apart from the eurozone crisis and global monetary policy issues, for nearly two years all else has counted for little more than noise on a relative risk basis. In major developed economies, a hypermature secular decline in interest rates is pancaking against a hard, roughly zero lower-rate bound (i.e., barring imposition of rather extreme policies such as a tax on cash holdings, which could conceivably drive rates deeply negative). Relentlessly mounting aggregate debt loads are rendering monetary- and fiscal policy-impaired governments and segments of society insolvent and struggling to escape liquidity quicksands and stubbornly low or negative growth and employment trends. At the center of the current crisis is the European Monetary Union (EMU)-a monetary union lacking fiscal and political integration. Such partial integration limits policy alternatives relative to either full federal integration of member-states or no integration at all. As we have witnessed since spring 2008, this operationally constrained middle ground progressively magnifies economic divergence and political and social discord across member-states. Given the scale and scope of the eurozone crisis, policy and actions taken (or not taken) by the European Central Bank (ECB) meaningfully impact markets large and small, and ripple with force through every major monetary policy domain. History, for the moment, has rendered the ECB the world's most important monetary policy pivot point. Since November 2011, the ECB has taken on an arguably activist liquidity-provider role relative to private banks (and, in some important measure, indirectly to sovereigns) while maintaining its long-held post as rhetorical promoter of staunch fiscal discipline relative to sovereignty-encased "peripheral" states lacking full monetary and fiscal integration. In December 2011, the ECB made clear its intention to inject massive liquidity when faced with crises of scale in future. Already demonstratively disposed toward easing due to conditions on their respective domestic fronts, other major central banks have mobilized since the third quarter of 2011. The collective global central banking policy posture has thus become more homogenized, synchronized, and directionally clear than at any time since early 2009.
    Keywords: Eurozone; Monetary Policy; Fiscal Policy; European Central Bank; European Monetary Union; Debt Monetization; Euro; Basel; Sovereign Debt; Credit Default Swaps; Liquidity; Solvency; Deleveraging; LTRO
    JEL: E02 E31 E42 E44 E51 E52 E58 E61 E62 E63 F36 H63
    Date: 2012–03
  9. By: Gerhard Fenz; Lukas Reiss; Martin Schneider
    Abstract: In this paper we present an analysis of the impact of the great recession of the years 2008 and 2009 on the Austrian economy. For this purpose, we utilize the new estimated DSGE model of the OeNB for the Austrian economy within the Euro area. This model is a small open-economy version of Smets & Wouters (2003), where the domestic economy is linked to a highly stylized representation of the rest of the Euro area via trade and financial flows. The model identifies foreign demand and confidence shocks as the main transmission channels. Moreover the risk premium shock contributed significantly to the downturn of the Austrian economy. In contrast price shocks (price markup and raw material shocks) were supportive throughout the crisis. The strong resilience of the Austrian labour market during the crisis and the subsequent upswing is reected in a series of negative technology shocks. JEL classification:
    Date: 2012–01–30
  10. By: Bec, F.; Bouabdallah, O.; Ferrara, L.
    Abstract: This paper proposes a two-regime Bounce-Back Function augmented Self-Exciting Threshold AutoRegression (SETAR) which allows for various shapes of recoveries from the recession regime. It relies on the bounce-back effects first analyzed in a Markov-Switching setup by Kim, Morley and Piger [2005] and recently extended by Bec, Bouabdallah and Ferrara [2011a]. This approach is then applied to post-1973 quarterly growth rates of French, German, Italian, Spanish and Euro area real GDPs. Both the linear autoregression and the standard SETAR without bounce-back effect null hypotheses are strongly rejected against the Bounce-Back augmented SETAR alternative in all cases but Italy. The relevance of our proposed model is further assessed by the comparison of its short-term forecasting performances with the ones obtained from a linear autoregression and a standard SETAR. It turns out that the bounce-back models one-step ahead forecasts generally outperform the other ones, and particularly so during the last recovery period in 2009Q3-2010Q4.
    Keywords: Threshold autoregression, bounce-back effects, asymmetric business cycles.
    JEL: E32 C22
    Date: 2012
  11. By: Elias Soukiazis (Faculty of Economics University of Coimbra and GEMF); Pedro Cerqueira (Faculty of Economics University of Coimbra and GEMF); Micaela Antunes (Department of Economics, Business and Industrial Engineering, University of Aveiro and GEMF)
    Abstract: Some countries of the Euro-zone have experienced a declining economic growth more pronounced in the last recent years, like Italy. The aim of this paper is to investigate the causes of the poor growth performance in Italy and the responsibility of the Euro for this crisis. The theoretical approach applied is based on the balance-of-payments constraint hypothesis (known as Thirlwall’s Law) adapted to include internal and external imbalances. Our empirical analysis shows that both the extended model and the original Thirlwall’s Law over-predict the actual growth in Italy suggesting that there are supply constraints that encumber the economy from growing faster. Another conclusion is that part of the decline in economic growth is explained by the loss of competiveness during the Euro period. A scenarios analysis shows that a budget deficit and public debt discipline aiming at achieving the goals of the Stability Pact are not significant stimulus for faster growth. On the other hand, reducing the import dependence of the components of demand, or reducing the import and increasing the export shares in the economy are the most effective policies for fostering growth in Italy.
    Keywords: Internal and External Imbalances, Import Elasticities of the Components of Demand, Equilibrium Growth Rates, 3SLS System Regressions.
    JEL: C32 E12 H6 O4
    Date: 2012–02
  12. By: Miller, Marcus (University of Warwick); Rankin, Neil (University of York); Zhang, Lei (University of Warwick)
    Abstract: European capital markets show increasing concern about the extent of sovereign debts and their sustainability. Here we explore some insights that the Overlapping Generations (OLG) framework has to offer on such issues. The OLG framework implies, for example, that there is a limit to the amount of debt that may be sustained in a closed economy- with high debt raising interest rates and crowding out capital formation. But capital market integration with less indebted partners allows for a fall in interest rates as a result of borrowing from one's neighbour. Indeed we find that - in equilibrium - most of the debt of a high indebted country will be transferred to partner countries.
    Keywords: debt sustainability, overlapping generations, sovereign default, Euro-zone debt crisis
    Date: 2012
  13. By: Banerjee, A.; Bystrov, V.; Mizen, P.
    Abstract: Much of the literature on interest rate pass through assumes banks set retail rates by observing current market rates. We argue instead that banks anticipate the direction of short-term market rates when setting interest rates on loans, mortgages and deposits. If anticipated rates - captured by forecasts of short-term interest rates or future markets - are important, the empirical specifications of many previous studies that omit them could be misspecified. Including such forecasts requires a detailed consideration of the information in the yield curve and alternative forecasting models. In this paper we use two methods to extract anticipated changes to short-term market rates - a level, slope, curvature model and a principal components model - at many horizons, before including them in a model of retail rate adjustment for four interest rates in four major euro area economies. We find a significant role for forecasts of market rates in determining interest rate pass through; alternative specifications with futures information yield comparable results. We conclude that it is important to include anticipated changes in market rates to avoid misspecification in pass through estimation.
    Keywords: forecasting, factor models, interest rates, pass-through.
    JEL: C32 C53 E43 E44
    Date: 2012
  14. By: Matti Viren
    Abstract: This paper deals with fiscal policy coordination within the European Monetary Union. In the first place, it investigates the potential problems which are caused by cross-country differences in key fiscal parameters and the asymmetric nature of these parameters. In the second section, the pros and cons of policy coordination evaluated using some multi-country estimates as point of reference. The empirical results clearly show that policy coordination within the EMU context is very difficult because of these country differences and asymmetries. Even so, it is shown that policy coordination pays off at least in cases where the countries share the same shocks. Some practical problems of policy coordination and future prospects are also considered in the paper.
    Keywords: Fiscal policy, policy coordination, government deficit, EMU
    JEL: H62 E61 E63
    Date: 2011–12
  15. By: Catherine Mathieu (Observatoire Francais des Conjonctures Economiques); Henri Sterdyniak (Observatoire Francais des Conjonctures Economiques)
    Abstract: The public finances crisis has brought binding fiscal rules proposals back to the forefront. The paper analyses their justifications and specifications, either in a classical or in a Keynesian framework. In the recent period there is no evidence that public deficits were caused by fiscal indiscipline and induced too high interest rates; there is no evidence that economically relevant rules can be designed. The paper provides in analysis of fiscal rules implemented either at country level (like the UK golden rule), or at the EU level (the Stability and Growth Pact). The paper shows that fiscal rules did not work before and during the crisis. The paper discusses the EU project, the New Fiscal Pact, which risks to paralyse fiscal policies and to prevent economic stabilisation. The priority today is not to strengthen public finance discipline but to question economic developments which make public deficits necessary to support output. Keywords :fiscal policy, fiscal rules Classification-JEL : E62
    Date: 2012–02
  16. By: Francisco F. Vázquez; Pablo Federico
    Abstract: This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001–09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border banks were more susceptible to solvency risk due to excessive leverage. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.
    Keywords: Bankruptcy , Banks , Financial crisis , Global Financial Crisis 2008-2009 , Risk management ,
    Date: 2012–01–25
  17. By: Schröder, Michael; Borell, Mariela; Gropp, Reint; Iliewa, Zwetelina; Jaroszek, Lena; Lang, Gunnar; Schmidt, Sandra; Trela, Karl
    Abstract: The aim of this study is to assess the contributions of investment banking to the economy with a particular focus on the German economy. To this end we analyse both the economic benefits and the costs stemming from investment banking. The study focuses on investment banks as this part of banking is particularly relevant for financing companies as well as the development and use of specific products to support the needs of private and professional clients. The assessment of benefits and costs of investment banking has been conducted from a European perspective. Nevertheless there is a focus on the German economy to allow a more detailed analysis of certain aspects as for example the use of derivatives by German companies, the success of M&As in Germany or the effect of securitization on loan supply and GDP in Germany. For comparison purposes other European countries and also the U.S. have been taken into account. The last financial crisis has shown the negative impacts of banks on the financial system and the whole economy. In a study on the contribution of investment banks to systemic risk we quantify the negative side of the investment banking business. In the last part of the study we assess how the effects of regulatory changes on investment banking. All important changes in banking and capital market regulation are taken into account such as Basel III, additional capital requirements for systemically important financial institutions, regulation of OTC derivatives and specific taxes. --
    Date: 2012

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