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on European Economics |
| By: | Jean Pisani-Ferry; Guntram B. Wolff |
| Abstract: | Systemic banking crises are a threat to all countries whatever their development level. They can entail major fiscal costs that can undermine the sustainability of public finances. More than anywhere else, however, a number of euro-area countries have been affected by a lethal negative feedback loop between banking and sovereign risk, followed by disintegration of the financial system, real economic fragmentation and the exposure of the European Central Bank. Recognising the systemic dimension of the problem, the Euro-Area Summit of June 2012 called for the creation of a banking union with common supervision and the possibility for the European Stability Mechanism to recapitalise banks directly. The findings of this paper were presented at the Informal ECOFIN in Nicosia on 14 September 2012. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polbrf:748&r=eec |
| By: | Gabrisch, Hubert; Pusch, Toralf; Orlowski, Lucjan T |
| Abstract: | This study examines the key drivers of sovereign default risk in five euro area periphery countries and three euro-candidates that are currently pursuing independent monetary policies. We argue that the recent proliferation of sovereign risk premiums stems from both domestic and international sources. We focus on contagion effects of external financial crisis on sovereign risk premiums in these countries, arguing that the countries with weak fundamentals and fragile financial institutions are particularly vulnerable to such effects. The domestic fiscal vulnerabilities include: economic recession, less efficient government spending and a rising public debt. External ‘push’ factors entail increasing liquidity- and counter-party risks in international banking, as well as risk-hedging appetites of international investors embedded in local currency depreciation against the US Dollar. We develop a model capturing the internal and external determinants of sovereign risk premiums and test for the examined country groups. The results lead us to caution against premature fiscal consolidation in the aftermath of the global economic crisis, since such policy might actually worsen sovereign default risk. The model works well for the euro-periphery countries; it is less robust for the euro-candidates that upon a future euro adoption will have to pursue real economy growth oriented policies in order to mitigate a potential increase in sovereign default risk. |
| Keywords: | sovereign default risk; euro area; euro-candidate countries; public debt; liquidity risk; counter-party risk |
| JEL: | E43 E63 G13 |
| Date: | 2012–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41265&r=eec |
| By: | Dritan Gjika; Roman Horvath |
| Abstract: | We examine time-varying stock market comovements in Central Europe employing the asymmetric dynamic conditional correlation multivariate GARCH model. Using daily data from 2001 to 2011, we find that the correlations among stock markets in Central Europe and between Central Europe vis–à–vis the euro area are strong. They increased over time, especially after the EU entry and remained largely at these levels during financial crisis. The stock markets exhibit asymmetry in the conditional variances and in the conditional correlations, to a certain extent, too, pointing to an importance of applying sufficiently flexible econometric framework. The conditional variances and correlations are positively related suggesting that the diversification benefits decrease disproportionally during volatile periods. |
| Keywords: | stock market comovements, Central Europe, financial crisis |
| JEL: | G01 G15 |
| Date: | 2012–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2012-1035&r=eec |
| By: | Ben Cheikh, Nidhaleddine |
| Abstract: | This paper examines the presence of nonlinear mechanism in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using logistic smooth transition models, we explore the existence of nonlinearity with respect to economic activity along the business cycle. Our results provide a strong evidence of nonlinearity in 6 out of 12 EA countries with significant differences in the degree of ERPT between the periods of expansion and recession. However, we find no clear direction in this regime-dependence of pass-through to business cycle. In some countries, ERPT is higher during expansions than in recessions; however, in other countries, this result is reversed. These cross-country differences in the nonlinear mechanism of pass-through would have important implications for the design of monetary policy and the control of inflation in the EA context. |
| Keywords: | Exchange Rate Pass-Through; Inflation; Smooth Transition Regression |
| JEL: | E31 C22 F31 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41179&r=eec |
| By: | Tirole, Jean |
| Abstract: | The debate on the Euro crisis understandably has had a strong short term focus. Avoiding short‐term disaster has been tantamount and the long term sustainability issue sometimes neglected; yet, the institutional failure of the Eurozone forces us to reconsider current arrangements in order to restore credibility and sustainability. The article discusses various paths for the reform of the overall governance, from fiscal management to banking regulation, through the recent proposals to mutualize and repackage part of the Sovereign debts into a supranational one or to introduce joint‐and‐several liability. |
| JEL: | E62 F34 H63 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ner:toulou:http://neeo.univ-tlse1.fr/3214/&r=eec |
| By: | Boris Podobnik; Davor Horvatic; Dror Y. Kenett; H. Eugene Stanley |
| Abstract: | Politicians world-wide frequently promise a better life for their citizens. We find that the probability that a country will increase its {\it per capita} GDP ({\it gdp}) rank within a decade follows an exponential distribution with decay constant $\lambda = 0.12$. We use the Corruption Perceptions Index (CPI) and the Global Competitiveness Index (GCI) and find that the distribution of change in CPI (GCI) rank follows exponential functions with approximately the same exponent as $\lambda$, suggesting that the dynamics of {\it gdp}, CPI, and GCI may share the same origin. Using the GCI, we develop a new measure, which we call relative competitiveness, to evaluate an economy's competitiveness relative to its {\it gdp}. For all European and EU countries during the 2008-2011 economic downturn we find that the drop in {\it gdp} in more competitive countries relative to {\it gdp} was substantially smaller than in relatively less competitive countries, which is valuable information for policymakers. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1209.2813&r=eec |