nep-eec New Economics Papers
on European Economics
Issue of 2012‒10‒13
thirteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Conflicting Claims in Eurozone? Austerity’s Myopic Logic and the Need of a European federal union in a post-Keynesian Eurozone Center-Periphery Model By Botta, Alberto
  2. Building a financial conditions index for the euro area and selected euro area countries: what does it tell us about the crisis? By Eleni Angelopoulou; Hiona Balfoussia; Heather D. Gibson
  3. Europe's single supervisory mechanism and the long journey towards banking union By Nicolas Véron
  4. Measuring Financial Contagion with Extreme Coexceedances By Apostolos Thomadakis
  5. Will Europe's Fiscal Compact Help Avoid Future Economic Crises? By Graham Bird; Alex Mandilaras
  6. Fiscal Federalism in Times of Crisis By Foremny, Dirk; von Hagen, Jürgen
  7. FDI and growth in Europe: the role of territorial capital By Laura Resmini; Laura Casi
  8. Directional forecasting in financial time series using support vector machines: The USD/Euro exchange rate By Plakandaras, Vasilios; Papadimitriou, Theophilos; Gogas, Periklis
  9. Structural and Cyclical Forces in the Labor Market During the Great Recession: Cross-Country Evidence By Luca Sala; Ulf Söderström; Antonella Trigari
  10. Model of Comparative Analysis of the Main Indices of Economic and Social Performance of the European Union Countries By Cezar Mereuta; Lucian-Liviu Albu; Marioara Iordan; Mihaela-Nona Chilian
  11. Information theoretic description of the e-Mid interbank market: implications for systemic risk By Hatzopoulos, V.; Iori, G.
  13. The EU-EFIGE/Bruegel-Unicredit dataset By Carlo Altomonte; Tommaso Aquilante

  1. By: Botta, Alberto
    Abstract: In this paper we analyze the role of the nowadays Eurozone institutional setup in fostering the ongoing peripheral Euro countries’ sovereign debt crisis. According to the Modern Money Theory, we stress that the lack of a federal European government running anti-cyclical fiscal policy, the loss of monetary sovereignty by Euro Member States and the lack of a lender-of-last-resort central bank has significantly contributed to generate, amplify and protract the present crisis. In particular, we present a post-Keynesian Eurozone center-periphery model through which we show how, due to the incomplete nature of Eurozone institutions with respect to a full-fledged federal union, diverging trends and conflicting claims have emerged between center and peripheral Euro countries in the aftermath of the 2007-2008 financial meltdown. We emphasize two points. (i) Diverging trends and conflicting claims among Euro countries may represent a decisive obstacle to reform Eurozone towards a complete federal entity. However, they may prove to be self-defeating in the long run should financial turbulences seriously deepen also in large peripheral countries. (ii) Austerity packages alone do not address the core point of the Eurozone crisis. They could have sense only if included in a much wider reform agenda, whose final purpose is the creation of a federal European government which can run expansionary fiscal stances and of a government banker. In this sense, the unlimited bond-buying program recently launched by the European Central Banks is interpreted as a positive although mild step in the right direction out of the extreme monetarism which has so far shaped Eurozone institutions.
    Keywords: Eurozone debt crisis; Modern money theory; post-Keynesian center-periphery model
    JEL: E02 E12 H63
    Date: 2012–09–30
  2. By: Eleni Angelopoulou (Bank of Greece); Hiona Balfoussia (Bank of Greece); Heather D. Gibson (Bank of Greece)
    Abstract: In this paper we construct Financial Conditions Indices (FCIs) for the euro area, for the period 2003 to 2011, using a wide range of prices, quantities, spreads and survey data, grounded in the theoretical literature. One FCI includes monetary policy variables, while two versions of the FCI without monetary policy are also constructed. This enables us to study the impact of monetary policy on financial conditions – indeed, overall, we find evidence of monetary policy ‘leaning against the wind’. The FCIs constructed fit in well with a narrative of financial conditions since the creation of the monetary union. FCIs for individual euro area countries are also provided, with a view to comparing financial conditions in core and periphery countries. There is evidence of significant divergence both before and during the crisis, which becomes less pronounced when monetary policy variables are included in the FCI. However, the impact of monetary policy on financial conditions appears not to be entirely symmetric across the euro area.
    Keywords: fiscal policy; public debt; financial market; crisis; credit
    JEL: E61 E62 H61 H62 H63 E32
    Date: 2012–07
  3. By: Nicolas Véron
    Abstract: Problems in the banking system are at the core of the current crisis. The establishment of a banking union is a necessary (though not sufficient) condition for eventual crisis resolution that respects the integrity of the euro. The European Commissionâ??s proposal for the establishment of a Single Supervisory Mechanism and related reform of the European Banking Authority (EBA) do not and cannot create a fully-fledged banking union, but represent a broadly adequate step on the basis of the leadersâ?? declaration of 29 June 2012 and of the decision to use Article 127(6) of the treaty as legal basis. The proposal rightly endows the European Central Bank (ECB) with broad authority over banks within the supervisory mechanismâ??s geographical perimeter; however, the status of non-euro area member states willing to participate in this mechanism, and the governance and decision-making processes of the ECB in this respect, call for further elaboration. Further adjustments are also desirable in the proposed reform of the EBA, even though they must probably retain a stopgap character pending the more substantial review planned in 2014. This Policy Contribution was prepared as a briefing paper for the European Parliament Economic and Monetary Affairs Committeeâ??s Monetary Dialogue.
    Date: 2012–10
  4. By: Apostolos Thomadakis (University of Surrey)
    Abstract: This paper tests for contagion firstly, within the Euro Area (EA thereafter), and secondly from the US to the EA. Using 'coexceedances' - the joint occurrences of extreme negative and positive returns in different countries in a given day - I define contagion within regions as the fraction of the coexceedances that cannot be explained by fundamentals (covariates). On the other hand, contagion across regions can be defined as the fraction of the coexceedance events in the EA that is left unexplained by its own covariates but that is explained by the exceedances from the US. Having applied a multinomial logistic regression model to daily returns on 14 European stock markets for the period 2004-2012, I can provide the following summary of the results. Firstly, I found evidence of contagion within the EA. Especially, the EA 10 year government bond yield and the EUR/USD exchange rate fail to adequately explain the probability of coexceedances in Europe. Therefore, these variables are important determinants of regional crashes. In addition, I have observed that negative movements in stock prices follow continuation patterns - coexceedances cluster across time. Secondly, there is no statistically significant evidence of contagion from the US to the EA, in the sense that US exceedances fail to explain high probabilities of coexceedances in the EA. This result holds under a large battery of robustness checks. I would rather interpret this as a normal interdependence between the two markets.
    JEL: C25 G15 F36 E44
    Date: 2012–09
  5. By: Graham Bird (University of Surrey); Alex Mandilaras (University of Surrey)
    Abstract: The eurozone crisis has focused attention on what caused it, how it can be handled and what can be done to avoid future crises. Against this background all but two member states of the European Union have signed a draft treaty, the 'fiscal compact', that seeks to eliminate structural fiscal deficits. This paper critically examines the theoretical logic behind the compact. It also empirically estimates the relationship between fiscal deficits and economic crises in Europe. It concludes that economic crises, measured in terms of output shortfalls, have had little to do with public sector deficits. Private sector deficits and crises in the banking sector appear to be more important. The paper also identifies a number of flaws in the design of the compact and argues that it will do relatively little to ensure that future crises are avoided. The fact that in spite or these reservations the agreement was signed reflects the significance of a particular combination of contemporary political economy factors.
    Date: 2012–09
  6. By: Foremny, Dirk; von Hagen, Jürgen
    Abstract: We study the subnational fiscal adjustment to the Great Recession in a sample of European countries. We find that there are important differences between unitary and federal countries. Subnational governments in federal states reacted to the Great Recession by running larger budget deficits driven by increased spending particularly on social protection and weak revenue performance. In contrast the revenues of subnational governments in unitary states increased during the Great Recession due to larger transfers from central governments. Subnational government deficits increased much less in unitary states as real spending growth fell. In unitary states that fell into a debt crisis after 2009, the central government failed to shield local governments against the adverse macro economic consequences of the Great Recession, forcing them to adjust real spending to falling real revenues. This result suggests that sound public finances at the central level are critical to assure that subnational governments can deliver their allocative functions efficiently in the face of adverse macro economic conditions. In fact, our results call for tighter controls on expenditure growth during goods times and better protection against falling subnational revenues in bad times. We find that the countries that fell into a debt crisis after 2009 are characterized by weaker fiscal discipline at the subnational level already in the decade or so before the Great Recession. This observation suggests that the sustainability of subnational public finances is an important prerequisite for a country to maintain sustainable public finances at the level of general government.
    Keywords: European public debt crisis; fiscal federalism; Great Recession; vertical imbalance
    JEL: H12 H71 H72
    Date: 2012–09
  7. By: Laura Resmini; Laura Casi
    Abstract: In the last years, and particularly since the publication of the famous Barca Report (Barca, 2009), the European Union (EU) is starting to acknowledge the importance of spatially targeted regional policies and to understand how crucial a territorial approach can be in order to achieve desirable social, economic and environmental outcomes. Indeed the increasing complexity in the path to regional growth and development is fostered by globalization and the creation of large integrated areas such as the European Union, where regions need to leverage their territorial capital to compete effectively. In this context we analyse the impact of FDI on growth and development of European regions, discussing the role of different components of territorial capital in determining the intensity and the direction of such an impact. In doing so we start from the assessment of the impact that various types of FDI can have according to the characteristics of the country they come from (Industrialized vs. emerging countries; European vs. non-European countries) and their sector’s affiliation (i.e. low and high tech manufacturing sectors; business services vs. financial services, etc.). Then we inspect the possibility that such an impact may vary with the endowments of different type of territorial capital. In particular, the paper aims at answering to the following research questions: do different levels of agglomeration economies determine different additional FDI induced growth rates? How social capital influences the impact of FDI on the growth of a region? Does relational capital matter in the FDI-growth relationship? In order to answer these research questions, we analyse empirically the impact of different measures of FDI density on regional economic performance, measured as real GVA growth rate, exploiting FDIRegio database and Eurostat data. In order to mitigate possible endogeneity problems and non linearities in the relationship, we use different matching techniques and include various regional controls, such as human capital endowments, past growth rates and agglomeration trajectories, as well as demand and cost factors. Furthermore, in order to identify the territorial capital role in fostering the FDI-growth relationship, we allow such relationship to vary across different types of regions, grouped according to their economic specialization and social capital endowment. The latter is identified through a PCA analysis based on the results of the European Values Study, from the ZACAT - GESIS database
    Date: 2012–10
  8. By: Plakandaras, Vasilios (Democritus University of Thrace, Department of International Economic Relations and Development); Papadimitriou, Theophilos (Democritus University of Thrace, Department of International Economic Relations and Development); Gogas, Periklis (Democritus University of Thrace, Department of International Economic Relations and Development)
    Abstract: In this paper, we present a novel machine learning based forecasting system of the EU/USD exchange rate directional changes. Specifically, we feed an overcomplete variable set to a Support Vector Machines (SVM) model and refine it through a Sensitivity Analysis process. The dataset spans from 1/1/1999 to 30/11/2011; the data of the last 7 months are reserved for out-of-sample testing. Results show that the proposed scheme outperforms various other machine learning methods treating similar scenarios.
    Keywords: Machine Learning; Support Vector Machines; Exchange Rates; Forecasting
    JEL: C52 C59 F31 G17
    Date: 2012–01–27
  9. By: Luca Sala; Ulf Söderström; Antonella Trigari
    Abstract: We use an estimated monetary business cycle model with search and matching frictions in the labor market and nominal price and wage rigidities to study four countries (the U.S., the U.K., Sweden, and Germany) during the financial crisis and the Great Recession. We estimate the model over the period prior to the financial crisis and use the model to interpret movements in GDP, unemployment, vacancies, and wages in the period from 2007 until 2011. We show that contractionary financial factors and reduced efficiency in labor market matching were largely responsible for the experience in the U.S. Financial factors were also important in the U.K., but less so in Sweden and Germany. Reduced matching efficiency was considerably less important in the U.K. and Sweden than in the U.S., but matching efficiency improved in Germany, helping to keep unemployment low. A counterfactual experiment suggests that unemployment in Germany would have been substantially higher if the German labor market had been more similar to that in the U.S.
    JEL: E24 E32
    Date: 2012–10
  10. By: Cezar Mereuta; Lucian-Liviu Albu; Marioara Iordan; Mihaela-Nona Chilian
    Abstract: In the context of current economic and financial crisis a comparative analysis of the main indices of economic and social performance of the EU member states is necessary. In such line of argument, the authors propose, as novelty, an economic power-economic performance matrix as a methodological instrument for monitoring significant discontinuities in the development of the EU member states, able to provide consistent information about some of the threats against the EU economic sustainability. The core idea is to use integrating criteria able to reveal in a clear manner the results of the common efforts of governments, businesses and civil society aiming to improve the economic and social performance of the 27 EU countries. Developing their previous research, the authors propose a model based on 16 criteria grouped into 6 domains, selected on the basis of thorough analyses of the main medium-term determinants of a country’s economic and social performance (referring to overall economic performance, structure of economy, foreign trade efficiency, human development policies, informational society and tourism incomes, as proxy for infrastructure development). The economic power-economic performance matrix built on the basis of such a model for all the EU countries revealed a single net leader, both in terms of economic power and economic performance (Germany), but also high significant negative discrepancies between economic power and economic performance, both among the countries with higher economic power (United Kingdom, Italy, Spain) and among the countries with lower economic power (Greece and Romania). Keywords: economic power, economic performance, integrating criteria, comparative analysis JEL Classification: C18, C43, O47, O52
    Date: 2012–10
  11. By: Hatzopoulos, V.; Iori, G.
    Abstract: We present an empirical analysis of the European electronic interbank market of overnight lending (e-MID) during the years 1999–2009. The main goal of the paper is to explain the observed changes of the cross-sectional dispersion of lending/borrowing conditions before, during and after the 2007–2008 subprime crisis. Unlike previous contributions, that focused on banks’ dependent and macro information as explanatory variables, we address the role of banks’ behaviour and market microstructure as determinants of the credit spreads.
    Keywords: interbank lending; market microstructure; subprime crisis; credit spreads; liquidity management
    Date: 2012
  12. By: Lucian-Liviu Albu
    Abstract: Certainly the current crisis is affecting seriously the convergence process in EU. Starting from the spatial distribution in EU of some fundamental development indicators before the current crisis, we try to estimate the impact of the prolonged crisis. During last years, the less developed countries in EU were the most affected by crisis. Their investment power, as a main factor of improving the GDP growth rate, was primary affected. Moreover, the actual global crisis seems to provoke new changes in the economic growth mechanism. Among macroeconomic correlations, interest rate – investment – growth rate has a fundamental role. In the general process of economic development and in the context of convergence in EU for the post-crisis period, perhaps this relationship will become more studied by economists and policy makers. As empirical starting point, based on data for last years, we are using a 3D representation and its attached so-called geodesic map or contour plot for the correlation interest rate – investment ratio in GDP – annual GDP growth rate, for all 27 members of EU. On this map, as a general rule, we can see that GDP growth rate is higher for smaller values of interest rate and respectively for higher values of investment. Contrary, smaller growth rate corresponds to higher values of interest rate and respectively to smaller values of investment rate. Based on statistical data for last period, we try to build a set of partial models in order to investigate the growth mechanism under the impact of interest rate and respectively of ratio between investment and GDP, in case of EU members and in the same time to verify some hypotheses often used in standard economic literature. By applying such simple models derived from standard ones, in our experiment, we estimated their parameters in case of EU countries. The main two partial models are referring to the impact of investment on GDP growth rate and respectively to the relation between interest rate and investment ratio. Moreover, an equation related to the inflation dynamics was taken into account. Finally, the derived global model demonstrates complex dynamics, moreover supplying solution to estimate the so-called natural rate of interest and other key-parameters for macroeconomic decisions. Keywords: convergence, spatial distribution, investment ratio, growth rate, interest rate, depreciation rate, contour plot. JEL Classification: C31, C53, E22, E27, E43, O11, O47, O52
    Date: 2012–10
  13. By: Carlo Altomonte; Tommaso Aquilante
    Abstract: This paper describes the EU-EFIGE/Bruegel-UniCredit dataset (in short the EFIGE dataset), a database recently collected within the EFIGE project (European Firms in a Global Economy: internal policies for external competitiveness) supported by the Directorate General Research of the European Commission through its 7th Framework Programme and coordinated by Bruegel. â?¢ The database, for the first time in Europe, combines measures of firmsâ?? international activities (eg exports, outsourcing, FDI, imports) with quantitative and qualitative information on about 150 items ranging from R&D and innovation, labour organisation, financing and organisational activities, and pricing behaviour. Data consists of a representative sample (at the country level for the manufacturing industry) of almost 15,000 surveyed firms (above 10 employees) in seven European economies (Germany, France, Italy, Spain, United Kingdom, Austria, Hungary). Data was collected in 2010, covering the years from 2007 to 2009. Special questions related to the behaviour of firms during the crisis were also included in the survey. â?¢ We illustrate the construction and usage of the dataset, capitalising on the experience of researchers who have exploited the data within the EFIGE project. Importantly, the document also reports a comprehensive set of validation measures that have been used to assess the comparability of the surveydata with official statistics. A set of descriptive statistics describing the EFIGE variables within (and across) countries and industries is also provided.
    Date: 2012–10

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