nep-eec New Economics Papers
on European Economics
Issue of 2012‒07‒01
seventeen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Europe’s Recurrent Employment Problems By Gros, Daniel
  2. On currency misalignments within the euro area By Virginie Coudert; Cécile Couharde; Valérie Mignon
  3. Controversial and novel features of the Eurozone crisis as a balance of payment crisis By Sergio Cesaratto
  4. The Greek Sovereign Debt Crisis: A Conceptual and Empirical Analysis. By Miguel Ramirez; Racha Menhem
  5. The Euro Crisis: Implications for the Internal Market and Harmonisation of Corporate Taxes By Ruding, H. Onno
  6. The Sovereign Debt Crisis: Placing a curb on growth By Brender,Anton; Pisani, Florence; Gagna, Emile
  7. ‘Grexit’: Who would pay for it? By Alcidi, Cinzia; Giovannini, Alessandro; Gros, Daniel
  8. Changes in Inflation Dynamics under Inflation Targeting? Evidence from Central European Countries By Jaromir Baxa; Miroslav Plasil; Borek Vasicek
  9. Immigration, Jobs and Employment Protection: Evidence from Europe before and during the Great Recession By D'Amuri Francesco; Giovanni Peri
  10. An agenda for the European Council: Feasible steps to bring the eurozone back from the precipice By Micossi, Stefano
  11. A European Deposit Insurance and Resolution Fund By Schoenmaker, Dirk; Gros, Daniel
  12. Compositional effects on productivity, labour cost and export adjustments By Zsolt Darvas
  13. Regressivity of environmental taxation: myth or reality? By Katri Kosonen
  14. Output Volatility, Economic Growth, and Cross-Country Spillovers: New Evidence for the G7 Countries By Nikolaos Antonakakis; Harald Badinger
  15. The Role of Income and Immigration Policies in Attracting International Migrants By Ortega, Francesc; Peri, Giovanni
  16. Review of Current Practices for Taxation of Financial Instruments, Profits and Remuneration of the Financial Sector By PriceWaterhouseCoopers
  17. Rethinking Asset Management: From Financial Stability to Investor Protection and Economic Growth By de Manuel, Mirzha; Lannoo, Karel

  1. By: Gros, Daniel
    Abstract: As unemployment climbs to new heights, Europe’s policy-makers are desperately casting about for the few instruments with which the EU can claim to foster growth. After a thorough examination of the facts on the ground, however, this paper finds that the North and the South of the euro area are diverging so much that they need very different policy prescriptions. Moreover, it points out that the two instruments that the EU has at its disposal to address structural problems in the South (the EIB and the Structural Funds) are unlikely to be effective this time. Nevertheless, the paper concludes that the situation is not hopeless and that deep service-sector reforms in Germany would also be helpful to unlock the country’s productivity potential and open its market for the export of services from southern Europe. Opening the German market would yield a ‘double dividend’: not only would Germany benefit, but the South would also have the chance to find jobs for its rather well-educated youth, which right now face only the unhappy choice between unemployment and emigration.
    Date: 2012–05
  2. By: Virginie Coudert; Cécile Couharde; Valérie Mignon
    Abstract: Although nominal parities have been completely fixed within the euro area since the launch of the single currency, real effective exchange rates have continued to vary under the effect of inflation disparities, exhibiting a strong appreciation in the peripheral countries. In this paper, we assess real exchange rate misalignments for euro area countries by using a Behavioral Equilibrium Exchange Rate (BEER) approach on the period 1980-2010. The results show that the peripheral member countries have been suffering from increasingly overvalued exchange rates since the mid-2000s, as their real appreciation has not stemmed from improving fundamentals in terms of productivity or external position. In addition, currency misalignments have been increased on average for all euro area countries since monetary union, while becoming more persistent. More worryingly, our findings highlight different patterns across members, as misalignments have been larger and more persistent in peripheral countries than in core countries.
    Keywords: euro area, real equilibrium exchange rates, misalignments, panel cointegration
    JEL: F31 C23
    Date: 2012
  3. By: Sergio Cesaratto
    Abstract: The European crisis appears as the n-th “this time is different” episode of the financial liberalisation sequence cum fixed exchange rates, capital flows from the centre to the periphery, housing bubble, current account (CA) deficit and indebtedness, default. In the author’s view, although Reinhart and Rogoff (2009) is not a satisfactory account of the history and nature of defaults, their title conveys the sense of a recurring pattern of unfortunate events. In this contribution the author examines some conventional and heterodox explanations that have been given for the nature of the balance of payments (BoP) disequilibrium of the Eurozone (EZ) members in relation also to the presumed German mercantilism. The paper discusses next two different interpretations of the causes of the rise in the sovereign spread of periphery countries: both do not clearly identify the nature of the EZ crisis as a BoP crisis. Finally, it focuses on the novel and controversial features of the EZ BoP crisis compared to previous experiences. These original tracts regard the role of the European Central Bank in refinancing banks in peripheral countries.
    Keywords: European Monetary Union, financial crisis, Germany, neo-mercantilism, Balance of payment, capital flows, sudden stops, TARGET 2, Monetary sovereignty, MMT, Sinn
    JEL: B11 N14 F1 F33
    Date: 2012–05
  4. By: Miguel Ramirez (Department of Economics, Trinity College); Racha Menhem (Department of Economics, Trinity College)
    Abstract: Following the lead of Arghyrou and Kontonikas (2010), this paper presents an endogenous expectations-based model that conceptualizes the ongoing Greek sovereign debt crisis as a currency crisis in disguise. That is, instead of the crisis culminating in a real devaluation of the drachma, it has been diverted to, and erupted in, the bond market where it has significantly raised interest rates, reduced economic growth, and spread it to other weak EMU economies. The empirical results indicate that poor economic fundamentals and international risk did not penalize bond spreads during the pre-crisis period, but are doing so in the crisis period. The estimates suggest that for both the pre-crisis and crisis periods, contagion is generally determined by economic and financial links among countries which, under certain conditions, can spread the crisis in a “fast and furious” manner. The reported estimates also confirm Arghyrou and Tsoukalas’s (2010) theoretical model by showing that an adverse shift in expectations occurred first in November 2009 and then on January 2010, thus significantly increasing bond spreads and slowing economic growth. Finally, the paper extends previous work and presents estimates which indicate that a third adverse shift in expectations took place in May 2010 following the announcement and implementation of the ECB and IMF-sponsored adjustment package. Investors apparently concluded that the draconian austerity measures associated with the latest rescue loan package would actually make economic conditions worse by inducing a self-reinforcing downward spiral in an economy which was already reeling from weak economic fundamentals and high levels of indebtedness.
    Keywords: Akaike Information Criterion (AIC), austerity measures, contagion, currency crisis, European Monetary Union (EMU), expectations, fiscal guarantees, Newey-West HAC methodology, spreads.
    JEL: C22 E44 F33 F34 F41 O52
    Date: 2012–06
  5. By: Ruding, H. Onno
    Abstract: This CEPS Policy Brief looks at the ways in which the euro crisis has impacted the successful functioning of the internal market of the EU and the state of play with respect to the creation of a common consolidated corporate tax base in corporate taxation.
    Date: 2012–05
  6. By: Brender,Anton; Pisani, Florence; Gagna, Emile
    Abstract: To ward off the threat of a worldwide depression that loomed at the end of the 2000s, governments opted to run up substantial fiscal deficits. In doing so, they sowed the seeds of the sovereign debt crisis. Saddled with often high debt burdens and modest growth prospects, developed countries’ governments must now rebalance their budgets. Doing so too rapidly, however, will choke growth. Faced with this dilemma, Japan and the United States have pursued growth policies while the euro area members are quickly trying to rebalance their budgets. This book explores the respective risks associated with these two strategies. It further investigates the consequences for the international monetary and financial system of developing countries’ public debts ceasing to be risk-free.
    Date: 2012–05
  7. By: Alcidi, Cinzia; Giovannini, Alessandro; Gros, Daniel
    Abstract: The eurozone countries are currently sitting on an aggregate exposure to Greece exceeding €300 billion. If the country were to exit the eurozone, it would certainly not be able to service its debt in the short run when the exchange rate overshoots. Over the longer run, however, the exchange rate is likely to return to a longer-run equilibrium and growth is likely to slowly resume closing the output gap. Moreover, exports are likely to grow by more than GDP, thus increasing over time the capacity of the country to service foreign debt. Therefore, the authors conclude, whether or not an exit from the eurozone is followed by default on the official debt depends decisively on the willingness (and ability) of Greece’s European partners to wait and finance the bridge between the short and the long run.
    Date: 2012–05
  8. By: Jaromir Baxa; Miroslav Plasil; Borek Vasicek
    Abstract: The purpose of this paper is to provide a novel look at the evolution of inflation dynamics in selected Central European (CE) countries. We use the lens of the New Keynesian Phillips Curve (NKPC) nested within a time-varying framework. Exploiting a time-varying regression model with stochastic volatility estimated using Bayesian techniques, we analyze both the closed and open-economy version of the NKPC. The results point to significant differences between the inflation processes in three CE countries. While inflation persistence has almost disappeared in the Czech Republic, it remains rather high in Hungary and Poland. In addition, the volatility of inflation shocks decreased quickly a few years after the adoption of inflation targeting in the Czech Republic and Poland, whereas it remains quite stable in Hungary even after ten years' experience of inflation targeting. Our results thus suggest that the degree of anchoring of inflation expectations varies across CE coutries. In addition, we found some evidence that the 'structural' parameters of the NKPC are somewhat related to the macroeconomic environment.
    Keywords: Bayesian model averaging, Central European countries, inflation dynamics, New Keynesian Phillips curve, time-varying parameter
    JEL: C11 C22 E31 E52
    Date: 2012–05
  9. By: D'Amuri Francesco; Giovanni Peri (Department of Economics, University of California Davis)
    Abstract: n this paper we analyze the impact of immigrants on the type and quantity of native jobs. We use data on fifteen Western European countries during the 1996-2010 period. We find that immigrants, by taking manual-routine type of occupations pushed natives towards more "complex" (abstract and communication) jobs. Such positive reallocation occurred while the total number of jobs held by natives was unaffected. This job upgrade was associated in the short run to a 0.6% increase in native wages for a doubling of the immigrants' share. These results are robust to the use of two alternative IV strategies based on past settlement of immigrants across European countries measured alternatively with Census or Labor Force data. The job upgrade slowed, but did not come to a halt, during the Great Recession. We also document the labor market flows behind it: the complexity of jobs offered to new native hires was higher relative to the complexity of lost jobs. Finally, we find evidence that such reallocation was significantly larger in countries with more flexible labor laws and that his tendency was particularly strong for less educated workers.
    Keywords: Immigration, Jobs, Task specialization, Employment Protection Laws, Europe
    JEL: J24 J31 J61
    Date: 2012–06–19
  10. By: Micossi, Stefano
    Abstract: In the run-up to the emergency European Council meeting at the end of June, Stefano Micossi outlines in this Policy Brief the main elements of a realistic and yet incisive policy package, capable of reassuring financial markets and a bewildered public opinion. It is more than Germany has been willing to accept so far but much less than many of the demands it will confront at the Council meeting. More importantly, it only requires a minimum of additional disbursements by the member states, while strengthening risk-sharing for sovereign and banking risks.
    Date: 2012–06
  11. By: Schoenmaker, Dirk; Gros, Daniel
    Abstract: The eurozone is caught in a ‘diabolical loop’ in which weak domestic banking systems damage sovereign fiscal positions and conversely, in which risky sovereign positions disproportionately threaten domestic banking stability. A European-level banking system could go a long way towards breaking this unfortunate loop and stabilising the eurozone. This would require a European safety net for cross-border banks. This paper sketches the building blocks of a European Deposit Insurance Fund. We calculate that such a Fund would amount to €55 billion for the 35 largest European banks. This Fund could be created over ten years through risk-based deposit insurance premiums levied on the top 35 banks. Once fully up and running, the Fund could also deal with the resolution of one or more of these 35 banks. The Fund would then be turned into a European Deposit Insurance and Resolution Fund. The paper aims to promote debate among policy-makers, industry and academia.
    Date: 2012–05
  12. By: Zsolt Darvas
    Abstract: Sectoral shifts, such as shrinkage of low labour productivity and the low-wage construction sector, can lead to apparent increased aggregate average labour productivity and average wages, especially when capital intensity differs across sectors. For 11 main sectors and 13 manufacturing sub-sectors, we quantify the compositional effects on productivity, wages and unit labour costs (ULCs) based and real effective exchange rates (REER), for 24 EU countries. Compositional effects are greatest in Ireland, where the pharmaceutical sector drives the growth of output and productivity, but other sectors have suffered greatly and have not yet recovered. Our new ULC-REER measurements, which are free from compositional effects, correlate well with export performance. Among the countries facing the most severe external adjustment challenges, Lithuania, Portugal and Ireland have been the most successful based on five indicators, and Latvia, Estonia and Greece the least successful. There is evidence of downward wage flexibility in some countries, but wage cuts have corrected just a small fraction of pre-crisis wage rises and came with massive reductions in employment even in the business sector excluding construction and real estate, highlighting the difficulty of adjusting wages downward.
    Date: 2012–06
  13. By: Katri Kosonen (European Commission)
    Abstract: This paper first presents an overview of the various factors that in light of the economic literature should be taken into account in the analysis of tax incidence of environmental taxation. It then explores the main empirical findings, in particular those which make a distinction between the distributional effects of transport-related taxes and those of other environmental taxes. This includes also some less well-known evidence from the Nordic countries. In the final section it presents some recent evidence on the distributional impact of energy taxation in the EU member states included in the impact assessment of the revision of the European Union’s Energy Tax Directive.
    Keywords: European Union; taxation; environmental taxes, redistribution
    JEL: H23
    Date: 2012–06
  14. By: Nikolaos Antonakakis; Harald Badinger
    Abstract: This paper considers the linkages between output growth and output volatility for the sample of G7 countries over the period 1958M2-2011M7, thereby paying particular attention to spillovers within and between countries. Using the VAR-based spillover index approach by Diebold and Yilmaz (2012), we identify several empirical regularities: i) output growth and volatility are highly intertwined, with spillovers taking place into all four directions; ii) the importance of spillovers has increased after the mid 1980s and reached unprecedented levels during the recent financial and economic crisis; iii) the US has been the largest transmitter of output and volatility shocks to other countries. Generalized impulse response analyses point to moderate growth-growth spillovers and sizable volatility-volatility spillovers across countries, suggesting that volatility shocks quintuplicate in the long run. The cross-variable effects turn out negative: volatility shocks lead to lower economic growth, growth shocks tend to reduce output volatility. Our findings underline the increased vulnerability of the G7 countries to destabilizing shocks and their detrimental effects on economic growth, which are sizeably amplified through international spillover effects and the associated repercussions.
    Keywords: Output growth, Output growth volatility, Spillover, Vector autoregression, Variance decomposition, Impulse response OLI paradigm and R&D
    JEL: C32 E32 F41 F43
    Date: 2012–06
  15. By: Ortega, Francesc (Queens College, CUNY); Peri, Giovanni (University of California, Davis)
    Abstract: This paper makes two contributions to the literature on the determinants of international migration flows. First, we compile a new dataset on annual bilateral migration flows covering 15 OECD destination countries and 120 sending countries for the period 1980-2006. We also collect data on time-varying immigration policies that regulate the entry of immigrants for our destination countries over this period. Second, we extend the empirical model of migration choice across multiple destinations developed by Grogger and Hanson (2011) by allowing for unobserved individual heterogeneity between migrants and non-migrants. Our estimates show that international migration flows are highly responsive to income per capita at destination. This elasticity is twice as high for within-EU migration, reflecting the higher degree of labor mobility within the European Union. We also find that tightening of laws regulating immigrant entry reduce rapidly and significantly their flow.
    Keywords: international migration, labor movements, immigration policies
    JEL: F22 E25 J61
    Date: 2012–06
  16. By: PriceWaterhouseCoopers
    Abstract: the Commission has instructed PwC to provide a review of the current tax provisions directed at the Financial Sector and financial instruments. The content of the Study is limited to the questions raised by the Commission in the questionnaires provided and is subject to certain limitations in terms of scoping as agreed by the Commission and detailed below in introduction of the respective Chapters. The Study covers 4 different Chapters, namely: Corporate Taxation of the Financial Sector – Banks, Value-Added Taxation of the Financial Sector, Labour Taxation in the Financial Sector, Taxation of Financial Instruments
    Keywords: European Union; taxation; financial transaction tax; financial activities tax;financial institutions
    JEL: G20 H21 H22 H23 H25 H27
    Date: 2012–06
  17. By: de Manuel, Mirzha; Lannoo, Karel
    Abstract: Fresh prospects are opening for asset managers as Europe seeks to reduce its historical reliance on banking and to promote capital markets. But following the financial crisis, the industry faces a dual challenge: regaining investors’ trust and coping with the post-crisis regulatory reform. Much rides on its ability to make investment funds deliver better results to its investors. Distribution remains the major stumbling block, but action is also needed to promote the contribution of asset management to the real economy and to preserve financial stability. In response to these challenges, CEPS and ECMI formed a Task Force composed of market participants, international experts, regulators and academics who met regularly throughout 2011 to closely examine the workings of the asset management industry and its role in the EU economy. This report draws the link between asset management and several key issues: financial stability, product integrity, investor protection and the real economy. It evaluates the discussions on product integrity in UCITS and ‘shadow banking’, as well as the many legislative proposals that are currently under consideration – including implementation of the alternative investment fund managers Directive (AIFMD), the review of the markets in financial instruments Directive (MiFID II) and packaged retail investment products (PRIPS). In an effort to make these complex issues comprehensible to a broad group of readers, the report combines clear language and straightforward introductions with detailed analysis and technical illustrations.
    Date: 2012–04

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