nep-eec New Economics Papers
on European Economics
Issue of 2012‒07‒23
nineteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Bilateral Imbalances in Europe By Berger, Helge; Nitsch, Volker
  2. GDP volatility before and after the euro : the evidence By Jaime Luque; Abderrahim Taamouti
  3. Controlled Dismantlement of the Euro Area in Order to Preserve the European Union and Single European Market By Stefan Kawalec; Ernest Pytlarczyk
  4. The crisis in the Euro zone : did the euro contribute to the evolution of the crisis ? By Lin, Justin Yifu; Treichel, Volker
  5. Consequences of the euro adoption by Central and Eastern European (CEE) countries for their trade flows By Andrzej Cieślik; Jan, Jakub Michałek; Jerzy Mycielski
  6. Integration of European Bond Markets By Charlotte Christiansen
  7. Spread the News: How the Crisis Affected the Impact of News on the European Sovereign Bond Markets By Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Widijanto, Daniel
  8. Euro area and global oil shocks: an empirical model-based analysis By Lorenzo Forni; Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  9. Exchange rate pass-through to import prices in the Euro-area: a multicurrency investigation By Olivier de Bandt; Tovonony Razafindrabe
  10. Interest Rate Pass-Through in the EMU – New Evidence from Nonlinear Cointegration Techniques for Fully Harmonized Data By Ansgar Belke; Joscha Beckmann; Florian Verheyen
  11. Dynamic Stock Market Covariances in the Eurozone By Gregory Connor; Anita Suurlaht
  12. Demographic Pressure in the European Union By Marga Peeters; Loek Groot
  13. Is Collateral Becoming Scarce? Evidence for the euro area By Anouk Levels; Jeannette Capel
  14. The EU and Minimum Income Protection: Clarifying the Policy Conundrum By Frank Vandenbroucke; Bea Cantillon; Natascha Van Mechelen; Tim Goedemé; Anne Van Lancker
  15. Fiscal devaluations in EMU By J.E. Bosca; Rafael Domenech; J. Ferri
  16. Can Portfolio Diversification increase Systemic Risk? Evidence from the U.S and European Mutual Funds Market By Claudio Dicembrino; Pasquale Lucio Scandizzo
  17. The financial impact of Spanish pension reform. A quick estimate By Angel de la Fuente; Rafael Domenech
  18. The Future of Higher Education in Europe: The Case for a Stronger Base in EU Law. By Sacha Garben
  19. In flation Targeting, Credibility and Non-Linear Taylor Rules By Matthias Neuenkirch; Peter Tillmann

  1. By: Berger, Helge; Nitsch, Volker
    Abstract: This paper examines the association between trade and financial linkages among European countries. We find that, with the introduction of the euro, trade imbalances among euro area members widened considerably, even after allowing for permanent asymmetries in trade competitiveness within pairs of countries or in the overall trade competitiveness of individual countries. Moreover, there is a significant relationship between patterns of trade and bilateral financial linkages, especially within the euro area; a surplus of a country in a bilateral trade relationship is typically accompanied by a country’s positive net financial position vis-à-vis the respective partner country.
    Keywords: trade balance, international investment position, euro, EMU, European integration
    Date: 2012–07–01
  2. By: Jaime Luque; Abderrahim Taamouti
    Abstract: The message in this note is that the adoption of the Euro has changed the effect of Eurozone countries’ economic fundamentals on per capital Gross Domestic Product (GDPpc) growth rate volatility (economic uncertainty). Increments in government debt significantly decreased GDPpc growth rate volatility before the Euro, but increased it after. The other fundamentals exhibit less structural change on economic uncertainty. These stylized facts are robust to different measures of GDPpc growth rate volatility and to the exclusion of the recent financial crisis period, and are specific to the Eurozone countries in Europe.
    Keywords: GDPpc growth rate volatility, Euro, Eurozone countries, Economic uncertainty, Government debt, Economic fundamentals
    JEL: E02 E52 F00 F02 F15 F33 F34 F36 F42
    Date: 2012–07
  3. By: Stefan Kawalec; Ernest Pytlarczyk
    Abstract: The Eurozone crisis mobilises an appreciable amount of the attention of politicians and the public, with calls for a decisive defence of the euro, because the single currency’s demise is said to be the beginning of the end of the EU and Single European Market. In our view, preserving the euro may result in something completely different than expected: the disintegration of the EU and the Single European Market rather than their further strengthening. The fundamental problem with the common currency is individual countries’ inability to correct their external exchange rates, which normally constitutes a fast and efficient adjustment instrument, especially in crisis times. Europe consists of nation states that constitute the major axes of national identity and major sources of government’s legitimisation. Staying within the euro zone may sentence some countries – which, for whatever reason, have lost or may lose competitiveness – to economic, social and civilizational degradation, and with no way out of this situation. This may disturb social and political cohesion in member countries, give birth to populist tendencies that endanger the democratic order, and hamper peaceful cooperation in Europe. The situation may get out of control and trigger a chaotic break-up of the euro zone, threatening the future of the whole EU and Single European Market. In order to return to the origins of European integration and avoid the chaotic break-up of the euro zone, the euro zone should be dismantled in a controlled manner. If a weak country were to leave the euro zone, it would entail panic and a banking system collapse. Therefore we opt for a different scenario, in which the euro area is slowly dismantled in such a way that the most competitive countries or group of such countries leave the euro zone. Such a step would create a new European currency regime based on national currencies or currencies serving groups of homogenous countries, and save EU institutions along with the Single European Market.
    Keywords: Eurozone crisis, Internal devaluation, Deflation, Currency devaluation, Euro breakout, Future of Europe
    JEL: E5 F15 F32 N1
    Date: 2012–06
  4. By: Lin, Justin Yifu; Treichel, Volker
    Abstract: The simmering sovereign debt crisis in the Euro Zone represents a looming threat to the recovery of the world economy and could lead to a renewed global financial crisis. The purpose of this paper is to analyze the root causes of the crisis in Europe and assess the extent to which it was driven by the global financial crisis and by factors internal to Europe, notably the adoption of the common currency. Adoption of the euro led to convergence of interest rates in periphery countries to the levels in core countries and, in combination with rising capital inflows owing to greater financial integration, set off a consumption and real estate boom in periphery countries, leading to higher growth and increases in government revenue and spending. The resulting real appreciation led to a loss of competitiveness in periphery countries, adversely affecting export performance and causing rising current account imbalances. While the fiscal position remained manageable before the crisis owing to rising revenue, the recession brought about by the global financial crisis led to the burst of real estate bubbles and a financial sector crisis and to sharply increased budget deficits and worsened debt indicators and triggered the sovereign debt crisis. Core countries, in particular Germany, maintained a competitive edge through wage restraint allowing them to increase exports to periphery countries, while their banks profited from increased lending to non-core countries. In sum, the euro exacerbated intra-European imbalances whose unsustainability became evident in the aftermath of the global financial crisis and triggered the current sovereign debt crisis.
    Keywords: Debt Markets,Currencies and Exchange Rates,Banks&Banking Reform,Access to Finance,Emerging Markets
    Date: 2012–07–01
  5. By: Andrzej Cieślik (Warsaw University, Department of Economics); Jan, Jakub Michałek (Warsaw University, Department of Economics); Jerzy Mycielski (Warsaw University, Department of Economics)
    Abstract: In this paper we estimate the trade effects of the euro adoption in Central European countries using a modified gravity model. In particular, we analyze the ex post implications of accession of Slovenia and Slovakia to the Eurozone. We employ a gravity model that controls for an extended set of trade theory and policy variables. Trade theory variables include both the country size and factor proportion variables. Trade policy variables include the membership in GATT/WTO, CEFTA, OECD, EU and Europe Agreements. The gravity model is estimated using the panel data approach on a sample of CEE countries trading with the rest of the world during the period 1992-2010 using the fixed effects, random effects and Hausman-Taylor estimators. It seems that elimination of exchange rate volatility resulted in trade expansion for the CEE countries but the accession to the Eurozone did not have any significant effects on exports of Slovakia and Slovenia.
    Keywords: Central and Eastern Europe, exports, euro zone
    JEL: F14 F15 F33 F42
    Date: 2012
  6. By: Charlotte Christiansen (Aarhus University and CREATES)
    Abstract: I investigate the time variation in the integration of EU government bond markets. The integration is measured by the explanatory power of European factor portfolios for the individual bond markets for each year. The integration of the government bond markets is stronger for EMU than non-EMU members and stronger for old than new EU members. The integration is weaker for the sovereign debt crisis countries than for other countries. The integration of the EU bond markets is decreasing over time and this appears not to be caused by the recent ?nancial and sovereign debt crisis.
    Keywords: Business Integration, European bond markets, Financial crises; Factor models
    JEL: C23 C58 F36 G01 G12 G15
    Date: 2012–07–10
  7. By: Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Widijanto, Daniel
    Abstract: We investigate how "news" affected domestic interest spreads vis-à-vis Germany and how it propagated to other countries during the recent crisis period, thereby distinguishing between the so-called GIIPS countries and other European countries. We make original use of the Eurointelligence newsflash to construct news variables based on the amount of news that is released on a country on a given date. We find that more news on average raises the domestic interest spread of GIIPS countries since September 2009. In addition, we find that it leads to an increase in the interest spreads of other GIIPS countries. The magnitude of the news effects is related to cross-border bank holdings. A split of news into bad and good news shows that the upward pressure on domestic and foreign interest spreads is driven by bad news. We also find spill-overs of bad news from GIIPS countries onto non-GIIPS countries. However, the magnitude of these spill-overs is substantially smaller than that to other GIIPS countries.
    Keywords: co-movement; Euro-intelligence; GIIPS; interest rate spreads; new variables; non-GIIPS; spill-overs
    JEL: E62 G01 G12 G15 H61 H62
    Date: 2012–07
  8. By: Lorenzo Forni (International Monetary Fund); Andrea Gerali (Bank of Italy); Alessandro Notarpietro; Massimiliano Pisani (Bank of Italy)
    Abstract: We assess the impact of oil shocks on euro-area macroeconomic variables by estimating a new-Keynesian small open economy model with Bayesian methods. Oil price is determined according to supply and demand conditions in the world oil market. We find that the impact of an increase in the price of oil depends upon the underlying sources of variation: when the driver of higher oil prices is an increase in the rest of the world's aggregate demand, both euro-area GDP and CPI inflation increase, whereas negative oil supply shocks and positive worldwide oil-specific demand shocks have stagflationary effects on the euro-area economy. Moreover, the increase in oil prices during the 2004-2008 period did not induce stagflationary effects on the euro-area economy because it was associated with positive aggregate demand shocks in the rest of the world. Similarly, a drop in world aggregate demand helps to explain the recent (2008) simultaneous drop in oil prices, euro-area GDP and inflation - particularly its fuel component.
    Keywords: oil shocks, DSGE modelling, open-economy macroeconomics, Bayesian inference, euro area
    JEL: C11 C51 E32 F41
    Date: 2012–07
  9. By: Olivier de Bandt; Tovonony Razafindrabe
    Abstract: Using a new database of actual import price data, and not unit value indices, for several euro area countries during the period between June 2005 and April 2011, we provide new results on the Exchange Rate Pass Through (ERPT). First, we use a multi-currency approach to distinguish between invoicing strategies across the most important currencies for euro area imports and show that the effective ERPT is primarily driven by the US Dollar ERPT. The firms which invoice in US Dollar (and in Chinese Yuan) are more concerned with demand conditions, while those which invoice in British Pound are more concerned with profit margins. Second, in contrast to several papers in the empirical literature that argue that ERPT is incomplete and its value is declining, we find that short run effective ERPT is incomplete, while long run effective ERPT is complete for a large number of products. Third, we uncover significant heterogeneity across products and countries: ERPT in US Dollar and British Pound appears higher than average for raw materials (e.g. petroleum products) and lower for transformed manufacturing products (chemical, pharmaceutical products and motor vehicles), and ERPT is higher in Spain than in the other euro area countries considered. Fourth, the 2008 global crisis triggered a temporary increase in the effective ERPT.
    Date: 2012
  10. By: Ansgar Belke; Joscha Beckmann; Florian Verheyen
    Abstract: This study puts the monetary transmission process in the eurozone between 2003 and 2011 under closer scrutiny. For this purpose, we investigate the interest rate pass-through from money market to various loan rates for up to twelve countries of the European Monetary Union. Applying different cointegration techniques, we first test for a long-run relationship between loan rates and the Euro OverNight Index Average (EONIA). Based on these findings, we allow for different nonlinear patterns for shortrun dynamics of loan rates. Our investigation contributes to the literature in mainly two ways. On the one hand, we use fully harmonized data stemming from the ECB’s MFI interest rate statistics. In addition, we consider smooth transition models as an extension of conventional threshold models. Our results point to considerable differences in the size of the pass-through with respect to either different loan rates or countries. In the majority of cases, the pass-through is incomplete and the dynamics of loans adjustment are different for reductions and hikes of money market rates.
    Keywords: Interest rate pass-through; EMU; cointegration; ARDL bounds testing; smooth transition models
    JEL: E43 E52 F36 G21
    Date: 2012–07
  11. By: Gregory Connor (Department of Economics Finance and Accounting, National University of Ireland, Maynooth); Anita Suurlaht (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)
    Abstract: This paper examines the short-term dynamics, macroeconomic sensitivities, and longer-term trends in the variances and covariances of national equity market index daily returns for eleven countries in the Euro currency zone. We modify Colacito, Engle and Ghysel?s Mixed Data Sampling Dynamic Conditional Correlation Garch model to include a new scalar measure for the degree of correlatedness in time-varying correlation matrices. We also explore the robustness of the fi?ndings with a less model-dependent realized covariance estimator. We fi?nd a secular trend toward higher correlation during our sample period, and signi?cant linkages between macroeconomic and market-wide variables and dynamic correlation. One notable fi?nding is that average correlation between these markets is lower when their average GDP growth rate is lower or when more of them have negative GDP growth.
    Keywords: : dynamic conditional correlation, multivariate GARCH,international stock market integration, European Monetary Union.
    JEL: C51 C58 G15
    Date: 2012
  12. By: Marga Peeters; Loek Groot
    Abstract: On top of the sovereign debt crisis in the European Union, demographic change is exerting enormous pressure on public finances. We analyse four policy options: lowering pension benefits, increasing labour market participation of the native population, immigration and participation of older people. Our results show that the most publically indebted EU economies face the highest increases in public spending on the retiring baby boom generations over the coming decades. Fortunately for these economies, it turns out that adjusting their labour market participation is easier than for their neighbouring economies within the EU. Increasing labour market participation to 60% keeps several countries largely out of the woods.
    Keywords: Demography, fiscal policy, labour, ageing, European Union.
    JEL: C01 D6 E24 E62 F22 H53 H55 J11 J18 J21 J48 O57
    Date: 2012–07–11
  13. By: Anouk Levels; Jeannette Capel
    Abstract: The global financial crisis has propelled several trends in wholesale financial markets that are causing an increase in the demand for high-quality collateral. On the money market more transactions are now secured instead of unsecured and in OTC derivatives markets CCP clearing for standardized contracts becomes mandatory, raising collateral needs for market participants. Moreover, the Basel III liquidity standards will probably increase banks’ need for high-quality liquid assets. It is not clear in advance whether the supply of collateral will grow and at which rate. On the one hand, many euro area governments now need to finance high budget deficits. While this is not a favourable development, it does imply that more debt instruments will become available as potential collateral. On the other hand, there are concerns about the creditworthiness of several euro area sovereigns which limits the debt’s collateral value. Due to these developments, some market participants expect that collateral will become scarce in the near future, which could impair the smooth functioning of financial markets. This study quantifies the trends in demand for and supply of collateral and concludes that collateral is likely to become scarcer but not scarce in absolute terms. It also discusses the expected economic effects and policy implications of this conclusion.
    Date: 2012–02
  14. By: Frank Vandenbroucke; Bea Cantillon; Natascha Van Mechelen; Tim Goedemé; Anne Van Lancker
    Abstract: Should the EU be involved in the governance of minimum income protection, and if it should, in which role precisely? This question raises a complex policy conundrum. We focus on a proposal by the European Anti-Poverty Network (EAPN) for an EU Framework Directive on Minimum Income Protection, in order to examine three aspects of that policy conundrum: (1) the instrumental relevance of minimum income protection; (2) the unequal burden of the redistributive effort that would be required across the EU if the Union were to impose hic et nunc a minimum income guarantee of 60% or 40% of the median national income in all Member States; and (3) the impact on dependency traps, under the same hypothesis. We illustrate each of these observations empirically, using cross-nationally comparable data on income and living conditions (EU-SILC) and minimum income protection levels (CSB-MIPI). Since a harmonised minimum income scheme requires a significantly greater budgetary effort on behalf of some of the poorer Member States in Eastern and Southern Europe, it raises a complex question about the meaning of solidarity within the EU. Enhanced solidarity within Member States cannot be decoupled from enhanced solidarity among Member States – and vice versa. Simultaneously, the EU should put positive pressure on poorer and richer Member States to gradually improve the overall quality and efficiency of their welfare regimes. In this context, the prospect of gradually and flexibly introducing a more binding EU framework on minimum income protection may become realistic.
    Keywords: convergence, CSB-MIPI, EU-SILC, European Union governance, harmonisatio,n Minimum income protection, Social Europe
    Date: 2012–06
  15. By: J.E. Bosca; Rafael Domenech; J. Ferri
    Abstract: We use a small open economy general equilibrium model to analyse the effects of a fiscal devaluation in EMU. The model has been calibrated for the Spanish economy, that is a good example of the advantages of a change in the tax mix, given that its tax system shows a positive bias in the ratio of social security contributions over consumption taxes. The preliminary empirical evidence for European countries shows that this bias was negatively correlated with the current account balance in the expansionary years previous to the 2009 crisis, where many EMU members accumulated large external imbalances. Our simulations results point to positive significant effects of a fiscal devaluation on GDP and employment similar to the ones that could be obtained with a exchange rate devaluation. However, although the effects in terms of GDP and employment are similar, the composition effects of fiscal and nominal devaluations are not alike. In both cases, there is an improvement in net exports, but the effects on domestic and external demand are quite different.
    Keywords: tax mix, fiscal devaluation, nominal devaluation
    JEL: E62 E47 F31
    Date: 2012–06
  16. By: Claudio Dicembrino (Enel SpA and Faculty of Economics, University of Rome "Tor Vergata"); Pasquale Lucio Scandizzo (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper tests the hypothesis that portfolio diversification can increase the threat of systemic financial risk. The paper provides first a theoretical rationale for the possibility that systemic risk may be increased by the proliferation of financial instruments that lead operators to hold increasingly similar portfolios. Secondly, the paper tests the hypothesis that diversification may result in increasing systematic risk, by analyzing the portfolio dynamics of some of the major world open funds.
    Keywords: portfolio diversification, financial stability, systemic risk, CAPM
    JEL: G01 G11 G32
    Date: 2012–07–11
  17. By: Angel de la Fuente; Rafael Domenech
    Abstract: In this paper we present a preliminary estimate of the financial impact of the recent reform of the Spanish pension system. After updating the projections of pension expenditure constructed in de la Fuente and Domenech (2010) for the period 2008-60, we analyze the impact on this variable of raising the retirement age from 65 to 67 years, extending from 15 to 25 years the period over which wages are averaged to calculate the starting pension and increasing from 35 to 37 the number of contribution years required to obtain a "full pension." Conditional on a series of assumptions about the evolution of employment, productivity and demographics, our estimates suggest that these measures will reduce pension expenditure by up to 1.4 percentage points of GDP once the reforms have been fully implemented in 2027, thereby stabilizing pension expenditure at a bit over 9% of GDP during the transition period and preventing the emergence of a structural deficit in the system before the end of the next decade. On the other hand, the existing uncertainty about the future evolution of the relevant variables suggests that it would be desirable to bring forward in time the introduction of the periodic evaluation of the system (the so-called sustainability factor) so as to have in place a mechanism that can be used to modulate the rhythm and scope of the reform if the system's financial situation requires it before the end of the transitional period.
    Keywords: pension reform, Spain, retirement age
    JEL: H55 J11
    Date: 2012–06
  18. By: Sacha Garben
    Abstract: Under the budgetary strain of the economic crisis, many European governments have introduced spending cuts in higher education. As a consequence, universities increasingly have to rely on tuition fees and private sources of funding to sustain themselves. This development fits in with a broader tendency of treating higher education increasingly as an economic resource and commodity, which is fostered by European-level processes such as most notably the Bologna Process and the Lisbon Strategy. Considering the fundamental importance of these issues, touching upon the core of our views on what an equitable and egalitarian society entails, it is imperative that the decisions that are being taken are democratically legitimate and that the policy makers are accountable for the measures they enact. Therefore, it is worrying that many of the most crucial and influential decisions are taken in intergovernmental contexts and implemented by means of soft law - of which the democratic legitimacy is doubtful. The Bologna Process is an intergovernmental policy forum, participation in which is voluntary and whose decisions are non-binding, suffering from all the accountability defects inherent in international policy making - magnified by its soft law character. The Lisbon/Europe 2020 Strategy does take place within the EU's institutional framework, but is an area where the EU's democratic deficit is particularly worrisome. Therefore, as this contribution shall argue, we need to consider a stronger and more democratic basis for these important policies, if we decide to pursue them. That basis is to be found in EU law.
    Date: 2012–07
  19. By: Matthias Neuenkirch (Philipps-University Marburg); Peter Tillmann (Philipps-University Giessen)
    Abstract: In this paper we systematically evaluate how central banks respond to infl ation deviations from target. We present a stylized New Keynesian model in which agents' infl ation expectations are sensitive to in flation deviations from target. To (re-)establish credibility, optimal monetary policy under discretion is shown to set higher interest rates today if average in flation exceeded the target in the past. Moreover, policy responds non-linearly to past in flation gaps. This is refl ected in an additional term in the central bank's optimal instrument rule, which we refer to as the "credibility loss". Augmenting a standard Taylor (1993) rule with the latter term, we provide empirical evidence for the interest rate response for a sample of nine IT or quasi-IT economies. We find that past deviations from the in flation target are feeding back into the reaction function of seven central banks and that this in fluence is economically meaningful. A deteroriation in credibility forces central bankers to undertake larger interest rate steps (ceteris paribus).
    Keywords: In flation expectations, credibility, reaction function, Taylor rule
    JEL: C32 E31 E43 E52 E58
    Date: 2012

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