nep-eec New Economics Papers
on European Economics
Issue of 2012‒06‒25
fifteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Euro area inflation as a predictor of national inflation rates By Antonella Cavallo; Antonio Ribba
  2. Boom-bust cycles, imbalances and discipline in Europe By Enrique Alberola; Luis Molina; Pedro del Río
  3. Market perception of fiscal sustainability: An application to the largest euro area economies By Maximiano Pinheiro
  4. Identifying the Shocks behind Business Cycle Asynchrony in Euroland By Trenkler, Carsten; Weber, Enzo
  5. Assessing uncertainty in Europe and the US - Is there a common factor? By Sauter, Oliver
  6. Rating agencies, self-fulfilling prophecy and multiple equilibria? An empirical model of the European sovereign debt crisis 2009-2011 By Gärtner, Manfred; Griesbach, Björn
  7. From the Stability Pact to ESM - What next? By Claudia M. Buch
  8. "Tax-backed Bonds--A National Solution to the European Debt Crisis" By Philip Pilkington; Warren Mosler
  9. The Euro and the global crises: finding the balance between short term stabilization and forward looking reforms By Joshua Aizenman
  10. The impact of the economic crisis on the EU labour market: a comparative perspective By Pasquale Tridico
  11. Chronic sovereign debt crises in the Eurozone, 2010-2012 By Cristina Arellano; Juan Carlos Conesa; Timothy J. Kehoe
  12. The Unexpected Appearance of a New German Model By Eichhorst, Werner
  13. The Trade-Productivity Nexus in the European Economy By Neil Foster; Roman Stöllinger; Carlo Altomonte; Richard Kneller
  14. Macroeconomic transmission of eurozone shocks to emerging economies By Bilge Erten
  15. An Explanation of the Greek Crisis: "The Insiders - Outsiders Society" By Kollintzas, Tryphon; Papageorgiou, Dimitris; Vassilatos, Vanghelis

  1. By: Antonella Cavallo; Antonio Ribba
    Abstract: The stability of inflation differentials is an important condition for the smooth working of a currency area, such as the European Economic and Monetary Union. In the presence of stability, changes in national inflation rates, while holding Euro-area inflation fixed contemporaneously, should be only transitory. If this is the case, the rate of inflation of the whole area can also be interpreted as a predictor, at least in the long run, of the different national inflation rates. However, in this paper we show that this condition is satisfied only for a small number of countries, including France and Italy. Better convergence results for inflation differentials are, instead, found for the USA.
    Keywords: Inflation differentials, euro area, structural Cointegrated VARs, permanent-transitory decompositions
    JEL: E31 C32
    Date: 2012–05
  2. By: Enrique Alberola (Banco de España); Luis Molina (Banco de España); Pedro del Río (Banco de España)
    Abstract: The fallout from the 2008 financial crisis has been particularly acute in the euro area Member States of the south-western rim and in the new EU Member States, due to their previously accumulated macroeconomic and financial imbalances. The perception that the euro environment provided a solid shield against economic instability shaped the incentives, expectations and actions of agents, markets and policymakers. This, in turn, eroded discipline at all levels: EU-wide surveillance, domestic policies and markets. The empirical analysis of this paper, focused on market discipline, shows that before the crisis credit risk premia neglected fiscal imbalances and hardly reflected external or financial imbalances, in particular in advanced economies. This result is partly explained by the masking effect of the expansionary phase on underlying imbalances. The crisis has shattered the perception of the euro as a safe haven for economic stability, where imbalances do not matter. Moreover, the severity of the crisis has uncovered the fragilities of the institutional framework underpinning the euro and is leading to its reinforcement by means of stronger economic governance and surveillance. Going forward, however, a further two factors may exert a greater impact on the future discipline and stability of the European economies: i) more stringent financing conditions by markets, contingent on fundamentals, although there are doubts on the persistence of this discipline in future expansionary phases; and, above all ii) domestic policymaking conduct that is consistent with the constraints that EMU entails. These three forces could settle the European integration process and EMU on a more solid footing, although the jury is still out.
    Keywords: Financial crisis, fiscal discipline, credit risk, euro area, CDS
    JEL: G01 G15
    Date: 2012–06
  3. By: Maximiano Pinheiro
    Abstract: Debt intolerance may rule out fiscal trajectories which otherwise appear to be sustainable. If fiscal policy lacks credibility, the interest on the sovereign debt may rise sharply and the country may lose market access. Indicators for assessing the market perception of fiscal sustainability should complement the conventional empirical sustainability analysis. I propose an approach for extracting information from sovereign bond data, which provides snapshots of market sentiment. It is based on a multi-borrower default-intensity pricing model, allowing for the cross-section estimation (under a risk-neutral probability measure) of the term-structure of the unobservable default-free interest rates, as well as (for all sovereigns included in the sample) of the probabilities of default (for any horizon deemed relevant) and the associated recovery rates given default. The approach is illustrated by the estimation of the model for Germany, France, Italy and Spain for every Friday from October 2, 2009 to November 25, 2011.
    JEL: C58 G12 H63 H68
    Date: 2012
  4. By: Trenkler, Carsten; Weber, Enzo
    Abstract: This paper investigates which shocks drive asynchrony of business cycles in the euro area. Thereby, it unites two strands of literature, those on common features and on structural VAR analysis. In particular, we show that the presence of a common cycle implies collinearity of structural impulse responses. Several Wald tests are applied to the latter hypothesis. Results reveal that differences in the GDP dynamics in several peripheral countries compared to a euro zone core are triggered by idiosyncratic, and to a lesser extent also world, shocks. Additionally, real shocks prove relevant rather than nominal ones.
    Keywords: Common cycles , euro area , impulse responses , structural VAR , Wald tes
    JEL: C32 E32
    Date: 2012
  5. By: Sauter, Oliver
    Abstract: This paper aims an empirical investigation of uncertainty in the Euro Zone as well as the US. For this purpose I conduct a factor analysis of uncertainty measures starting in 2001 until the end of 2011. I use survey-based data provided by the ECB and the Federal Reserve Bank of Philadelphia as well as the stock market indices VSTOXX and VIX, both measures of implied volatility of stock market movements. Each measure shows an increase in uncertainty during the last years marked by the financial turmoil. Given the rise in uncertainty, the question arises whether this uncertainty is driven by the same underlying factors. For the Euro Zone, I show that uncertainty can be separated into factors of short and long-term uncertainty. In the US there is a sharp distinction between uncertainty that drives stock market and real variables on the one hand and inflation (short and long-term) on the other hand. Combining both data sets, factor analysis delivers (1) an international stock market factor, (2) a common European uncertainty factor and (3) an US-inflation uncertainty factor. --
    Keywords: monetary policy,uncertainty,survey forecast,forecast disagreement,factor analysis
    JEL: C1 E3 E5 E6
    Date: 2012
  6. By: Gärtner, Manfred; Griesbach, Björn
    Abstract: We explore whether experiences during Europe's sovereign debt crisis support the notion that governments faced scenarios of self-fulfilling prophecy and multiple equilibria. To this end, we provide estimates of the effect of interest rates and other macroeconomic variables on sovereign debt ratings, and estimates of how ratings bear on interest rates. We detect a nonlinear effect of ratings on interest rates which is strong enough to generate multiple equilibria. The good equilibrium is stable, ratings are excellent and interest rates are low. A second unstable equilibrium marks a threshold beyond which the country falls into an insolvency trap from which it may only escape by exogenous intervention. Coefficient estimates suggest that countries should stay well within the A section of the rating scale in order to remain reasonably safe from being driven into eventual default.
    Keywords: Eurozone, crisis, sovereign debt, credit spreads, bond yields, rating agencies, multiple equilibria, self-fulfilling prophecy
    JEL: F3 G24 H6
    Date: 2012–06
  7. By: Claudia M. Buch
    Abstract: Europe is struggling with the resolution of the severe debt crisis and is in the process of overhauling its institutional set up. One element of the reform agenda is the European Stability Mechanism (ESM) which is intended to provide liquidity assistance to countries in case financial stability in the Euro Area is at stake. The ESM shall enter into force in July 2012, following ratification of the member states. It will have five instruments at its disposal: direct loans to countries, purchases of assets on the primary or secondary market, contingent credit lines, and funds for bank recapitalization. In this contribution, it is argued that establishing an explicit crisis resolution mechanism is in principle useful. However, the ESM is defined too broadly, and its scope should be limited to the provision of emergency liquidity assistance only under narrowly defined circumstances. Using the option to recapitalize banks might help addressing a potential debt overhang problem. Yet, the current framework has deficiencies in this regard and lacks the necessary backing by complementary institutional reforms, notably a regime for cross-border bank resolution.
    Keywords: Euro Area, ESM
    JEL: E61 E63 F55
    Date: 2012–06
  8. By: Philip Pilkington; Warren Mosler
    Abstract: The root of Europe's sovereign debt crisis can be found in the fact that investors are concerned that countries in the periphery might default, causing them to demand a higher yield on government bonds. What's needed is a way of giving peripheral debt a high degree of safety while allowing peripheral countries to remain users of the euro. A simple solution to this problem would be for peripheral countries to begin issuing a new type of government debt: the "tax-backed bond." Tax-backed bonds would be similar to current government bonds except that they would contain a clause stating that if the country failed to make its payments when due--and only if this happens--the bonds would be acceptable to make tax payments within the country in question. This tax backing would set an absolute floor below which the value of the asset could not fall, assuring investors that the bond is always "money good," leading to lower bond rates and thus ensuring that peripheral countries would not be driven to default.
    Date: 2012–03
  9. By: Joshua Aizenman
    Abstract: This paper analyzes reforms and adjustments in the context of the Euro and the global financial crises. Taking the perspective of the evolutionary approach to institutions, the formation of a new currency area is not unidirectional. The process leading to the euro is an example of a common upbeat and optimistic attitude to the formation of new institutions. Such a Panglossian attitude to policies may reflect built-in fiscal myopia, possibly both at the level of the principal [the policy maker] and of the agents [consumers and households]. Next, the paper reviews the evolution of institutions buffering the stability of unions in the aftermath of crises, where fiscal restraints and the allocation of significant bargaining clout to the Federal Center increase the stability of a union. The paper concludes with an overview of the challenges associated with finding the proper balance between financial integration and financial regulations.
    JEL: F02 F33 F34 F36
    Date: 2012–06
  10. By: Pasquale Tridico
    Abstract: The objective of this paper is to explore why some countries perform better than others in managing the current economic crisis, which started in 2007 in the US financial sector. I will elaborate on this question using the Crisis Management Index, taking into consideration GDP and labour market performance among European Union member states. My findings conclude that countries which performed better during the economic crisis of 2007-2011 are countries which do not have a flexible labour market and have managed to keep stable employment levels. These countries combine a very good mix of economic policies and social institutions oriented to stabilize the level of consumption and the aggregate demand. Coordination mechanisms, higher level of financial regulation and monitoring are also important features of these economies. Clearly, this group of countries identifies better, in the EU, a coordinated market economy model.
    Keywords: Financial crisis; Labour market; EU Crisis management; Comparative studies
    JEL: G10 J10 H12 O57
    Date: 2012–05
  11. By: Cristina Arellano; Juan Carlos Conesa; Timothy J. Kehoe
    Abstract: Two years after the rescue package for Greece provided by the European Union and the International Monetary Fund in May 2010, sovereign debt crises continue to threaten a growing number of countries in the eurozone. We develop a theory for analyzing these crises based on the research of Cole and Kehoe (1996, 2000) and Conesa and Kehoe (2012). In this theory, the need to frequently sell large quantities of bonds leaves a country vulnerable to sovereign debt crisis. This vulnerability provides a strong incentive to the country’s government to run surpluses to pay down its debt to a level where a crisis is not possible. ; A deep and prolonged recession, like those currently afflicting many eurozone countries, creates a conflicting incentive, however, to “gamble for redemption”—to bet that the recession will soon end, to sell more bonds in order to smooth government spending, and, if indeed the economy recovers, to reduce debt. Under some circumstances, this policy is the best that a government can do for the citizens of its country, but it carries a risk: If the recession continues too long, the government either will have to stop increasing its debt or will have to default on its bonds. ; The theory suggests that policies that result in high interest rates on government bonds and high costs of default provide incentives for a government to reduce its debt and avoid sovereign default. On the other hand, policies that result in low interest rates and low costs of default provide incentives for a government to gamble for redemption. We conclude that policy interventions taken to date by the EU and the IMF—by lowering the cost of borrowing and reducing default penalties—have encouraged eurozone governments to gamble for redemption.
    Date: 2012
  12. By: Eichhorst, Werner (IZA)
    Abstract: Most Continental European labour markets and welfare states underwent a substantial transformation over the last two decades moving from a situation of low employment and limited labour market inequality to higher employment, but also more inequality. Germany is a case in point as it exhibits growing employment figures and growing shares of low pay and non-standard work. Furthermore, the German labour market has been remarkably resilient during the recent crisis. How can this be explained? The paper claims that changes in labour market institutions such as unemployment benefits, active labour market policies and employment protection play a major role, but changes in industrial relations at the sectoral level and individual firms' staffing practices are equally important in explaining actual labour market outcomes. Regarding labour market institutions, the pattern found in Germany shows sequences of de- and re-regulatory reforms of employment protection and increasing or decreasing unemployment benefit generosity, both mostly addressing the margins of the labour market, i.e. 'outsiders', and contributing to a growing dualisation of the employment system. The institutional status of 'insiders' was hardly affected by legislative changes. This dualisation trend was reinforced by micro-level dynamics in industrial relations and company employment practices where we can observe growing reliance on mechanisms of internal flexibility for the skilled core work force and increasing use of non-standard types of employment in less specifically skilled occupations.
    Keywords: Germany, employment growth, labor market reforms, dualisation, flexibility
    JEL: J21 J31 J52 J68
    Date: 2012–06
  13. By: Neil Foster; Roman Stöllinger; Carlo Altomonte; Richard Kneller
    Abstract: This FIW Special – International Economics contains a policy report on the relationship between trade and productivity in the European Economy. The reports consists of three chapters which all mainly deal with empirical evidence from firm level but with each chapter focusing on a specific aspect of the trade and productivity nexus. Chapter 1 presents some initial findings on the relationship between exporting and productivity for Austrian exporters in the manufacturing industry. Chapter 2 offers new insights into the relationship between exporting and productivity by introducing the cross-country dimension of the export behaviour and internationalisation strategies of European firms. This kind of analysis became possible due to a recently compiled cross-country firm level data set covering seven European countries. Chapter 3 focuses on the causality between exporting and productivity which is a key question also for economic policy. The chapter summarises existing results on self-selection into exporting and the learning-by-exporting hypothesis but also acknowledges that productivity growth is not only driven by within-firm productivity growth but also the reallocation of resources between firms, the entry and exit of firms as well as shifts of resources between industries.
    Keywords: firm productivity, internationalisation of firms, export premia, export starters, learning-by-exporting
    JEL: F15 F23 D22 L25
    Date: 2012–06
  14. By: Bilge Erten
    Abstract: This paper analyzes the robustness of emerging economies growth performance to a number of external demand shocks using a Bayesian vector autoregressive (BVAR) model with informative priors on the steady state. Using quarterly data from 1993 to 2011 for global financial conditions and external demand variables, it examines the magnitude of the shocks from a deepening Eurozone recession on China, emerging Asia, and emerging Latin America, and the factors that influence the transmission of these shocks. It finds that more than fifty percent of the variation in real GDP growth of Latin American emerging economies is explained by external factors, while it is slightly less than fifty percent for emerging Asia and China. Conditional forecasts of different scenarios indicate that a deepening of the Eurozone recession would create a severe and persistent contraction for emerging economies, depending on the response of the U.S. growth to this shock. Finally, forecasts suggest that a sharp slowdown in China’s growth would have a significant negative impact on emerging economies’ growth, and that the Latin American countries would be more severely hit than the Asian ones.
    Keywords: Eurozone recession, transmission of shocks, Bayesian vector autoregression, emerging economies, growth spillovers
    JEL: F43 F44 F47
    Date: 2012–06
  15. By: Kollintzas, Tryphon; Papageorgiou, Dimitris; Vassilatos, Vanghelis
    Abstract: In this paper we present stylized facts of the Greek economy that characterize the causes and the consequences of its ongoing crisis. Then, we offer an explanation that can account for those causes and consequences. This explanation is based on the view of Greek society as consisting of two groups with conflicting goals:'insiders' and 'outsiders'. Insiders are enjoying rightful and unrighteous benefits and the system is protecting them from their own potentially unlawful behavior, competition and meritocracy. Outsiders are the rest of society. The economic consequence of the 'insiders - outsiders society' is the accumulation of public and foreign debts as well as relatively low overall growth - features that characterize the Greek economy, for some time. Finally, following the insiders- outsiders explanation, we offer policy recommendations for an exit from the crisis and the resumption of growth.
    Keywords: competitiveness; Greek crisis; growth; insiders-outsiders; total factor productivity; twin deficits
    JEL: D72 E62 E65 F34 O43 O52
    Date: 2012–05

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