nep-eec New Economics Papers
on European Economics
Issue of 2012‒04‒10
nine papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The messy rebuilding of Europe By Jean Pisani-Ferry; André Sapir; Guntram B. Wolff
  2. European Fiscal Union: What Is It? Does It Work? And Are There Really 'No Alternatives'? By Fuest, Clemens; Peichl, Andreas
  3. The British opt-out from the European Monetary Union: empirical evidence from monetary policy rules By Stefano d'Addona; Ilaria Musumeci
  4. Sudden stops in the euro area By Silvia Merler; Jean Pisani-Ferry
  5. The role of the IMF in the European debt crisis By Seitz, Franz; Jost, Thomas
  6. Currency movements within and outside a currency union: The case of Germany and the euro area By Seitz, Franz; Rösl, Gerhard; Bartzsch, Nikolaus
  7. A Comparison of Mixed Frequency Approaches for Modelling Euro Area Macroeconomic Variables By Claudia FORONI; Massimiliano MARCELLINO
  8. Structural Reforms and the Potential Effects on the Italian Economy By Barbara Annicchiarico; Fabio Di Dio; Francesco Felici
  9. The impact of state guarantees on banks' debt issuing costs, lending and funding policy By Patrice Muller; Shaan Devnani; Rasmus Flytkjaer

  1. By: Jean Pisani-Ferry; André Sapir; Guntram B. Wolff
    Abstract: The euro crisis and subsequent policy responses have challenged the assumptions underpinning the governance of the euro area, and the relationship between the European Unionâ??s euro- and non-euro countries. The euro policy regime has become increasingly complex and difficult to manage, raising the question of the accountability of decision making to citizens. Complexity also threatens to create frustration for euro area members, which fear that initiatives to strengthen the euro will be hindered, and for non-euro members, which fear that they will be de-facto deprived of their say in decisions of major relevance to them. It is too early to determine if and how policy integration within the euro area will develop beyond its current limited monetary and budgetary remit. Alternative scenarios can be envisaged, from the building of a coherent euro area within the EU, to a fragmentation of the financial market and a generalised â??variable geometryâ??. Policy action should be based on the need to: make room for deeper integration within the euro area, beyond the limited remit envisaged in the Lisbon treaty preserve the integrity of the EU27 and its essential governance arrangementsensure equal treatment in the application of common rules ensure that candidates for euro-area membership have a voice in the definition of its rules balance the requirements of legal clarity, accountability and efficiency with the desirability of experimentation through variable geometry This paper was presented to the Economic and Financial Affairs Ministers of the European Union on 30 March 2012 in Copenhagen.
    Date: 2012–03
  2. By: Fuest, Clemens (University of Oxford); Peichl, Andreas (IZA)
    Abstract: The view is widespread that there are just two options for the future of the Eurozone – either it is complemented by a fiscal union, or it will fall apart. In this paper, we discuss five possible elements of a fiscal union, of which three are in the centre of the current debate on fiscal union in the Eurozone. Second, we argue that the fiscal union will only work if political integration in Europe goes significantly beyond the current state of affairs. Third, we suggest an alternative approach, which places less emphasis on centralised fiscal policy coordination and focuses on financial sector reform, decentralised responsibility for government debt and sovereign debt restructurings in the case of fiscal crises.
    Keywords: Fiscal Union, EU, EMU, Euro, ESM
    JEL: E62 H77 H87
    Date: 2012–03
  3. By: Stefano d'Addona (Department of International Studies, University of Rome 3); Ilaria Musumeci (Department of International Studies, University of Rome 3)
    Abstract: We analyze the current state of monetary integration in Europe, focusing on the United Kingdom’s position regarding the European Monetary Union (EMU). The interest rate decisions of the European Central Bank and the Bank of England are compared through different specifications of the Taylor rule. Comparison of the monetary conduct of these two institutions provides useful guidance in identifying the differences that the British Government claims motivating its refusal to join the EMU. Testing for forward-looking behavior and possible asymmetries in policy responses, we show evidence supporting the opt-out decision taken by the British Government.
    Keywords: Taylor rule; European monetary integration; Regime switching models; Interest rate smoothing
    JEL: E32 E52
    Date: 2012–03–26
  4. By: Silvia Merler; Jean Pisani-Ferry
    Abstract: The single currency was expected to make balance of payments irrelevant between the euro-area member states. This benign view has been challenged by recent developments, especially as imbalances between euro-area central banks have widened within the TARGET2 settlement system. Current-account developments can be misleading as indicators of financial account developments in countries that receive significant official support. Greece, Ireland, Italy, Portugal and Spain experienced significant private-capital inflows from 2002 to 2007-09, followed by unambiguously massive outflows. We show that such reversals qualify as â??sudden stopsâ??. Euro-area sudden-stop episodes were clustered in three periods: the global financial crisis, a period following the agreement of the Greek programme and summer 2011. The timeline suggests contagion effects were present. We find evidence of substitution of the private capital flows with publiccomponents. In particular, weak banks in distressed countries took up a major share of the central bank refinancing. The steady divergence of intra Eurosystem net balances mirrors this. In the short term, TARGET2 imbalances could be addressed by tightening collateral requirements for central bank liquidity. For the longer term, the evidence that the euro area has been subject to internal balance-of-payment crises should be taken as a strong signal of weakness and as an invitation to reform its structures.
    Date: 2012–03
  5. By: Seitz, Franz; Jost, Thomas
    Abstract: This paper gives an overview of the role of the IMF in the European debt crisis. It describes the rescue packages and the involvement of the IMF. The main part discusses the pros and cons of the participation of the IMF in elaborating and monitoring the economic adjustment programs for the countries in crisis. A last section concludes and tries to answer the question whether the Troika model might be suited to solve future international crises. --
    Keywords: IMF,Europe,debt,euro
    JEL: F02 F53 F59
    Date: 2012
  6. By: Seitz, Franz; Rösl, Gerhard; Bartzsch, Nikolaus
    Abstract: In this paper, we analyze the volume of euro banknotes issued by Germany within the euro area with several seasonal methods. We draw a distinction between movements within Germany, circulation outside Germany but within the euro area and demand from non-euroarea countries. Our approach suggests that only about 20% of euro notes issued by Germany are used for transactions in Germany. The rest is hoarded (10%), circulates in other euro area countries (25%) or is held outside the euro area (45%). -- In dem vorliegenden Papier analysieren wir die Emissionen von Euro-Banknoten durch die Deutsche Bundesbank anhand verschiedener saisonaler Ansätze. Wir unterscheiden zwischen der Nachfrage aus Deutschland, der Haltung in anderen Euro-Ländern und Umlauf außerhalb des Euro-Währungsgebiets. Es stellt sich heraus, dass nur ca. 20 % der emittierten Banknoten für Transaktionszwecke in Deutschland gebraucht werden. Der Rest wird aus unterschiedlichen Gründen gehortet (10 %), läuft in anderen EWU-Ländern um (25 %) oder wird außerhalb des Euro-Raums gehalten.
    Keywords: Banknotes,euro,foreign demand,hoarding,transaction balances
    JEL: E41 E42 E58
    Date: 2011
  7. By: Claudia FORONI; Massimiliano MARCELLINO
    Abstract: Forecast models that take into account unbalanced datasets have recently attracted substantial attention. In this paper, we focus on different methods pro- posed so far in the literature to deal with mixed-frequency and ragged-edge datasets: bridge equations, mixed-data sampling (MIDAS), and mixed-frequency (MF) models. We discuss their performance on now- and forecasting the quarterly growth rate of Euro area GDP and its components, using a very large set of monthly indicators taken from Eurostat dataset of Principal European Economic Indicators (PEEI). We both investigate the behavior of single indicator models and combine first the forecasts within each class of models and then the information in the dataset by means of factor models, in a pseudo real-time framework. Anticipating some of the results, MIDAS without an AR component performs worse than the corresponding approach which incorporates it, and MF-VAR seems to outperform the MIDAS approach only at longer horizons. Bridge equations have overall a good performance. Pooling many indicators within each class of models is overall superior to most of the single indicator models. Pooling information with the use of factor models gives even better results, at least at short horizons. A battery of robustness checks high- lights the importance of monthly information during the crisis more than in stable periods. Extending the analysis to a real-time context highlights that revisions do not influence substantially the results.
    Keywords: mixed-frequency data; mixed-frequency VAR; MIDAS; factor models; nowcasting; forecasting
    JEL: E37 C53
    Date: 2012
  8. By: Barbara Annicchiarico (Faculty of Economics, University of Rome "Tor Vergata"); Fabio Di Dio (Consip S.p.A., Macroeconomic Modelling Unit); Francesco Felici (Italian Ministry of Economy and Finance,)
    Abstract: Since the second half of 2011, after a period of prolonged low growth, Italy has found itself at the center of a severe economic crisis. Concerns about the sustainability of its debt burden, along with gloomy growth prospects, have pushed up the cost of government borrowing, exacerbating current economic conditions. At the moment Italy is facing two mounting economic challenges: (i) achieve a rapid fiscal consolidation to restore financial market confidence; (ii) implement structural reforms to strengthen medium-term growth prospects. Using the European Commission's model QUEST III with R&D, adapted to Italy, we quantify the potential effects of a set of interventions inspired to the reform packages currently being undertaken or under discussion and consider different levels of policy effort. Results show that reforms are likely to bring about sizable gains in output, consumption, employment and net foreign assets position and that most of these gains derive from labor market reforms. However, the fiscal austerity plan is likely to severely mitigate the positive effects of the interventions, especially during the earlier phases of the reform process. Most of these losses accrue to liquidity-constraint households who would experience a drop in consumption.
    Keywords: Structural Reforms, Fiscal Consolidation, Simulation Analysis, Italy
    JEL: E10 E60 E47
    Date: 2012–03–29
  9. By: Patrice Muller; Shaan Devnani; Rasmus Flytkjaer
    Abstract: The empirical study carried out by London Economics on behalf of the European Commission analysed the market value of state guarantees given to banks in 2008-10 on banks' issuing costs and whether there were significant differences visible in the balance sheets of banks that used state guarantees and those that refrained from using them. The report presents a comprehensive ex-post evaluation of one of the main tools to restore the functioning of wholesale financial markets after the Lehman bankruptcy. The results of the empirical research suggested that the guarantee schemes were successful in lowering the costs of bond issuance of participating banks while having relatively little distortionary impacts on non-participating banks. Moreover, cross-border spill-over appear to be non-existent.
    Date: 2012–01

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