|
on European Economics |
|
Issue of 2012‒07‒14
fifteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Luigi Bonatti; Andrea Fracasso |
| Abstract: | The first part of this paper describes some peculiar features of the German socio-economic model and argues that there is a widespread consent in Germany on preserving it in the face of global, European and national challenges. Essential components of this model are the export-oriented manufacturing sectors specialized in the production of those capital goods and consumer durables in which Germany has traditionally enjoyed a comparative advantage. Painful reforms were implemented in the first half of the 2000s, a period in which Germany exhibited lower GDP growth than the countries of the euro-periphery (with the exception of Italy) with a view to strengthening the international competitiveness of these sectors and the German ability to penetrate the fast growing emerging markets. The second part of the paper treats the intra-euro imbalances and discusses the thesis according to which the creation of the euro ended up acting as an asymmetric shock that put in motion a process of real divergence between the member countries, exacerbating the historical core-periphery divide. Paradoxically, this divergence was fed by the optimistic conviction that the elimination of the nominal exchange rate as an instrument of adjustment within the euro area would have forced the peripheral European countries with a history of higher price and wage inflation to uniform their price and wage dynamics to the more disciplined core countries like Germany. Indeed, it was this expectation that convinced the financial markets to neglect country-specific default risks, thus leading the interest-rate spreads between core and periphery securities at record low levels. In its turn, the availability of cheap and abundant credit permitted the peripheral countries to postpone the structural reforms necessary for long-lasting convergence in productivity levels and competitiveness, to interrupt the effort aimed at lowering the public debt-GDP ratio, and to expand domestic demand to the benefit of importers and non-tradable sectors of the economy (in particular, of the construction sector). The elimination of significant intra-euro interest differentials facilitated the large capital outflows affecting Germany from the introduction of the euro, which are deemed to be among the main culprit of the stagnant real wages and low growth characterizing the country in the first half of the 2000s. Part three addresses some implications of the crisis that broke up in Europe after that the revelation concerning the true entity of Greece’s public deficit had provoked a drastic change in market sentiment and a more pessimistic assessment of the default risk inherent in the debt of peripheral countries. In particular, this part discusses the economic rationale underlying the popularity among German commentators and public opinion of the moral hazard issue related to the bailing-out of the peripheral countries. This discussion allows us to outline the dilemma faced by the German authorities in dealing with the choice between incurring the relevant costs implied by the virtual renunciation to the no-bailout principle and the dissolution of the euro. To shed some light on the terms of this dilemma, the paper seeks to clarify how the German objective to remain also in the future a leading player in the world economy and to preserve its socio-economic model may be compatible with the political need to accommodate the requests of its stagnating euro-periphery partners and save the euro. The concluding remarks summarize and elaborate more on the implications of the dilemma mentioned above. |
| Keywords: | European imbalances, Macroeconomic divergence and adjustment, Germany; Political economy of structural change, Social market economy. |
| JEL: | F41 F42 F43 F51 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:1207&r=eec |
| By: | Mark Hallerberg |
| Abstract: | This paper reviews developments in Europe from the eve of the introduction of the euro through the euro crisis. The paper begins with a discussion of the tax reform agenda. Although there are differences in the literature on specific taxes, and while European countries vary in their preferred levels of taxation, there is general consensus on the shape reforms should take. The paper then discusses the evolution of tax systems with the overall agenda in mind. It is found that overall revenue levels were broadly stable until just before the crisis, but marginal rates in corporate and top personal income declined almost continuously. During the crisis, however, this trend ended, with countries in the greatest fiscal difficulties raising tax rates and tax burdens. The last section provides a short analysis of why there were reforms in some countries but not others. Key variables include tax competition among member states, partisanship, underlying preferences in the population for redistribution, and the number of partisan veto players. |
| JEL: | H21 H22 H24 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4777&r=eec |
| By: | Francisco de Castro (Banco de España and European Commission); Daniel Garrote (Banco de España) |
| Abstract: | We analyse the impact of government spending shocks on the real effective exchange rate and net exports in the Euro Area within a standard structural VAR framework. We employ a new database that contains quarterly fiscal variables for the Euro Area as a whole. We show that higher government spending leads to real exchange rate appreciation and to a fall in net exports, jointly with lower primary budgetary surpluses, which turns out to be fully consistent with the “twin deficits” hypothesis. The different components of public spending, namely wage and non-wage consumption expenditure, overall public consumption expenditure and public investment, bring about real appreciations. Our results are therefore also consistent both with the home-bias hypothesis of public expenditure and with public investment contributing to generating relative productivity gains in the traded goods sector. Contrary to what is observed in the Euro Area, the real effective exchange rate depreciates in the US in response to higher government spending. This discrepancy can ultimately be explained by the reaction of nominal interest rate spreads and the uncovered interest parity condition. The dissimilar reaction of short-term nominal interest rate spreads is attributed to two factors, namely the role of the US dollar as a "safe haven" currency and the countercyclical behaviour of discretionary government spending in the US. |
| Keywords: | Euro Area; SVAR; fiscal shocks; effective exchange rates; relative prices; twin deficits; fiscal multipliers |
| JEL: | E62 H30 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1224&r=eec |
| By: | Michiel Bijlsma; Shahin Vallée |
| Abstract: | The financial crisis has exposed the need to devise stronger and broader international and regional safety nets in order to deal with economic and financial shocks and allow for countries to adjust. The euro area has developed several such mechanisms over the last couple of years through a process of trial and error and gradual enhancement and expansion. Their overall architecture remains imperfect and leaves areas of vulnerabilities. This paper provides an overview of the recent financial stability mechanisms and their various shortcomings and tries to brush the outline of a more comprehensive safety net architecture that would coherently address the banking, sovereign and external imbalances crises against both transitory and more permanent shocks. It aims to provide a roadmap for further improvements of the current mechanism and the creation of new devices including a banking resolution mechanism and amore powerfulmechanismto provide financial assistance addressing both the sovereign and external dimensions of the shocks thereby reducing the need for the ECB to fill the current void. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:732&r=eec |
| By: | Kilponen , Juha (Bank of Finland Research); Laakkonen, Helinä (Bank of Finland Research); Vilmunen, Jouko (Bank of Finland Research) |
| Abstract: | We study the effects of the ECB monetary policy and the European crisis resolution policies on the 10 year sovereign bond yields of seven European countries. We find that some of the decisions have had significant impact on sovereign bond yields and have succeeded in reducing stress in the financial markets. However, the impact of the same policy decision might have been positive for some countries while negative for others, suggesting that contagion effects may be important. The economically most significant effects on the bond yields have been due to the announcement of ECB's Securities Market Programme. |
| Keywords: | bond markets; policy effects; liquidity; European sovereign debt crisis; monetary policy |
| JEL: | E42 F34 G15 |
| Date: | 2012–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2012_022&r=eec |
| By: | Ginters Buss |
| Abstract: | The paper proposes a new real-time unrevised indicator tracking medium-to-long-term component in the quarterly growth of the euro area GDP. The new indicator is based on recently developed real-time filtration methodology, the multivariate direct filter approach, applied to selected business and consumer survey and share price data. The new indicator is found to have led another established indicator, the Eurocoin, by about three months since mid-2009 and be about coincident with but smoother than the PMI. In addition to the euro area aggregate indicator, the paper presents prototypical indicators for four biggest EU economies – Germany, France, the UK and Italy. Overall, the described filter approach appears to be able to provide somewhat better results in tracking business cycle developments than other widely used approaches. |
| Keywords: | real-time signal extraction, coincident indicator, multivariate direct filter approach |
| JEL: | C13 C32 E32 E37 |
| Date: | 2012–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:201202&r=eec |
| By: | Jonathan Benchimol (Economics Department - ESSEC Business School, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne) |
| Abstract: | We propose a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where a risk aversion shock enters a separable utility function. We analyze five periods, each one lasting twenty years, to follow over time the dynamics of several parameters (such as the risk aversion parameter), the Taylor rule coefficients and the role of this risk aversion shock on output and real money balances in the Eurozone. Our analysis suggests that risk aversion was a more important component of output and real money balance dynamics between 2006 and 2011 than it had been between 1971 and 2006, at least in the short run. |
| Keywords: | Risk aversion; Output; Money; Euro area; New Keynesian DSGE models; Bayesian estimation; |
| Date: | 2012–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-00713669&r=eec |
| By: | Jean-Paul Fitoussi (Observatoire Francais des Conjonctures Economiques); Francesco Saraceno (Observatoire Francais des Conjonctures Economiques) |
| Abstract: | This paper argues that the European Union has gone farther than any other country or institution in internalizing the prescriptions of the Washington Consensus.Embedding neo-liberal principles in the treaties defining its governance,the EU has enshrined a peculiar doctrine within its constitution. We further argue that this "Berlin-Washinghton Consensus" has serious empirical and theoretical flaws, as its reliance on Pareto optimality leads to neglect the crucial links between current and potential growth. We show by means of a simple model that the call for structural reforms as an engine for growth may be controversial, once current and potential output are related. We claim that adherence to the Consensus may go a long way in explaining the poor growth performance of the European economy in the past two decades, because of the constraints that it imposed on fiscal and monetary policies. The same constraints have deepened the eurozone crisis that started in 2007,putting unwarranted emphasis on austerity and reform. Challenging the Consensus becomes a precondition for avoiding the implosion of the euro,and recovering growth. |
| Keywords: | Washington consensus, Neoclassical theory, Austerity, Structural reforms, Fiscal policy, Monetary policy, EU governance, ECB, Stability and growth pact, Fiscal compact |
| JEL: | E02 E32 E58 E62 E63 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1220&r=eec |
| By: | Kulhánek, Lumír |
| Abstract: | Central and Eastern European EU Member States have made considerable progress in the economic transition and integration into the European Union. Nevertheless, the challenges of real convergence will remain relevant for these countries in the medium and long term. This paper focuses on the process of the real economic convergence among the five Central European EU Countries: the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia. We have analysed both β and σ convergence in the period 1995-2011. The Central European EU countries are well positioned to catch up with the EU-15 average, however, the experience of the EU-15 countries shows that convergence cannot be taken for granted. |
| Keywords: | Central European EU Countries; European integration; real convergence; β-convergence; σ-convergence |
| JEL: | O11 E31 F43 O52 |
| Date: | 2012–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39822&r=eec |
| By: | Herbert Brücker (University of Bamberg, IAB Nürnberg, and IZA Bonn); Elke Jahn (IAB Nürnberg, Arhus University, and IZA Bonn); Richard Upward (University of Nottingham) |
| Abstract: | We investigate the labor market effects of immigration in Denmark, Germany and the UK, three countries which are characterized by considerable differences in labor market institutions and welfare states. Institutions such as collective bargaining, minimum wages, employment protection and unemployment benefits affect the way in which wages respond to labor supply shocks, and, hence, the labor market effects of immigration. We employ a wage-setting approach which assumes that wages decline with the unemployment rate, albeit imperfectly. We find that wage flexibility is substantially higher in the UK compared to Germany and, in particular, Denmark. As a consequence, immigration has a much larger effect on the unemployment rate in Germany and Denmark, while the wage effects are larger in the UK. Moreover, the elasticity of substitution between natives and foreign workers is high in the UK and particularly low in Germany. Thus, the preexisting foreign labor force suffers more from further immigration in Germany than in the UK. |
| Keywords: | immigration, unemployment, wages, labor markets, panel data, comparative studies. |
| JEL: | F22 J31 J61 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:nor:wpaper:2012020&r=eec |
| By: | Eleftherios Goulas (Department of Economics, University of Patras, Greece); Athina Zervoyianni (Department of Economics, University of Patras, Greece) |
| Abstract: | We examine the relationship between fiscal deficits and per-capita income growth in a panel of 28 European countries, allowing for perceived risks, in terms of fiscal sustainability, associated with additional government spending. Such risks are proxied by the conditional variability of manufacturing production and stock market returns and by the unconditional variability of two survey-based economic-sentiment indicators. We find evidence of an asymmetric relationship, in that fiscal deficits give rise to adverse growth effects if they coincide with high uncertainty regarding the future prospects of the economy and no significant negative growth effects in the low-uncertainty case. |
| Keywords: | growth, fiscal policy, government budget constraint, uncertainty |
| JEL: | O40 E60 H60 D80 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:52_12&r=eec |
| By: | Grech, Aaron George |
| Abstract: | Successive reforms enacted since the 1990s have dramatically changed Europe’s pensions landscape. This paper tries to assess the impact of recent reforms on the ability of systems to alleviate poverty and maintain living standards, using estimates of pension wealth for a number of hypothetical cases. By focusing on all prospective pension transfers rather than just those at the point of retirement, this approach can provide additional insights on the efficacy of pension systems in the light of increasing longevity. Our estimates indicate that while reforms have decreased generosity significantly, in most countries poverty alleviation remains strong. However, moves to link benefits to contributions have made some systems less progressive, raising adequacy concerns for certain groups. In particular, unless the labour market outcomes of women and of lower-income individuals change substantially over the coming decades, state pension transfers will prove inadequate, particularly in Eastern European countries. Similarly while the generosity of minimum pensions appears to have either been safeguarded by pension reforms, or improved in some cases, these transfers generally remain inadequate to maintain individuals above the 60% relative poverty threshold throughout retirement. Our simulations suggest that the gradual negative impact of price indexation on the relative adequacy of state pensions is becoming even more substantial in view of the lengthening of the time spent in receipt of retirement benefits. The consumption smoothing function of state pensions has declined noticeably, strengthening the need for longer careers and additional private saving. When pressed, policymakers, particularly in Western Europe, seem to have been more willing to sacrifice the income smoothing function of pensions rather than its poverty alleviation function. Policymakers in some counties, notably Germany, France and the UK, have sought to refocus state pension systems towards generating better outcomes for people in the bottom half of the income distribution, probably with the insight that middle- to high-income individuals are possibly in a better position to accommodate the effect of state pension reforms by increasing their private saving. However in some cases, notably in Eastern Europe, results suggest that policymakers may not have fully considered the full impact of their policies on those on low incomes, on those with incomplete careers and on women. |
| Keywords: | Social Security; Public Pensions; Retirement; Poverty; Retirement Policies |
| JEL: | H55 I38 J26 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39851&r=eec |
| By: | Gabriella Legrenzi (Keele University, UK; CESifo, Germany; The Rimini Centre for Economic Analysis (RCEA), Italy); Costas Milas (Liverpool University, UK; The Rimini Centre for Economic Analysis (RCEA), Italy; Eranistis.eu, Greece) |
| Abstract: | We extend previous work on the sustainability of the government's intertemporal budget constraint by allowing for non-linear adjustment of the fiscal variables, conditional on (i) the sign of budgetary disequilibria and (ii) the phase of the economic cycle. Further, our endogenously estimated threshold for the non-linear adjustment is not fixed; instead it is allowed to vary over time and during financial crises. Our analysis presents particular interest within the current economic scenario of financial crises, poor growth and debt crises. Our empirical analysis, applied to the GIPS, shows evidence of a threshold behaviour for the GIPS, that only correct "large" unbalances, which, in the case of Greece and Portugal, are higher than the EGSP criteria. Financial crises further relax the threshold for adjustment: during financial crises, only "very large" budgetary unbalances are corrected. |
| Keywords: | debt sustainability, fiscal adjustment, nonlinear models |
| JEL: | H63 H20 H60 C22 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:54_12&r=eec |
| By: | Stovicek, Klara (European Commission); Turrini, Alessandro (European Commission) |
| Abstract: | This paper proposes a methodology for benchmarking unemployment benefits systems, with a view to assess reform needs and priorities. The methodology permits to assess different dimensions of unemployment benefit systems and to consider alternative relevant benchmarks. Looking at all relevant dimensions allows to better gauge how unemployment benefit systems perform in terms of their multi-faceted objectives (such as income support and stabilisation, incentives to take up work) and to have a more thorough assessment of each objective. Comparisons with alternative benchmarks offer the possibility of assessing against more meaningful country comparators, which take into account similarities in terms of economic fundamentals, institutions and policy settings. The methodology is applied to EU countries and results are discussed. |
| Keywords: | unemployment insurance, unemployment assistance, tax and benefit policies, benchmarking, flexicurity |
| JEL: | J65 J68 H20 H53 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izapps:pp43&r=eec |
| By: | Galo Nuño (European Central Bank); Cristina Pulido (Banco de España); Rubén Segura-Cayuela (Bank Of America Merril Lynch) |
| Abstract: | This paper analyses the long-run growth rates of advanced economies, based on demographic factors. To this end, growth is broken down into two components: growth in productivity (GDP per working-age person) and the projected rate of growth of the working-age population. Productivity is assumed to grow in the long-run at a constant rate equal to that of the technology leader, whereas the demographic projections are those of the United Nations. This simple methodology abstracts from other factors normally considered in the literature on long-term growth, such as the convergence process (we focus on advanced economies) and heterogeneity in participation and employment rates. However, the results do not differ much from those obtained using these other approaches (which are richer, but also more speculative), although the growth rates turn out to be somewhat lower in most cases. They indicate a general deceleration of growth in advanced economies in the coming two decades, due to a slowdown in working-age population growth. Japan, Germany, Italy and Spain face the least favourable growth dynamics in our sample, as these countries face reductions in the size of their workforces. By 2050 France and the United Kingdom could have overtaken Germany to become the largest economies in Europe. In the case of Spain (whose working-age population is expected to peak in 2024) the growth rate of GDP will progressively decline to just below 2% over the following decade. |
| Keywords: | Advanced economies, demography, convergence, endogenous growth. |
| JEL: | E20 O40 O50 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1206&r=eec |