nep-eec New Economics Papers
on European Economics
Issue of 2012‒10‒20
fifteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Euro Area: Single Currency - National Money Creation By Stefan Kooths; Björn van Roye
  2. Measuring Sovereign Bond Spillover in Europe and the Impact of Rating News By Peter Claeys; Borek Vasicek
  3. Bank/sovereign risk spillovers in the European debt crisis By Valerie De Bruyckere; Maria Gerhardt; Glenn Schepens; Rudi Vander Vennet
  4. Coping with Financial Crises: Latin American Answers to European Questions By Eduardo A. Cavallo; Eduardo Fernández-Arias
  5. Fiscal Policy, Banks and the Financial Crisis By Robert Kollmann; Marco Ratto; Werner Roeger; Jan in'tVeld
  6. The federal funds rate and the conduction of the international orchestra By Antonio Ribba
  7. Structural and Cyclical Forces in the Labor Market During the Great Recession: Cross-Country Evidence By Sala, Luca; Söderström, Ulf; Trigari, Antonella
  8. Market microstructure, bank's behaviour and interbank spreads By Gabbi, G.; Germano, G.; Hatzopoulos, V.; Iori, G.; Politi, M.
  9. Fiscal deficits, financial fragility, and the effectiveness of government policies By Kirchner, Markus; van Wijnbergen, Sweder
  10. Bank ratings: What determines their quality? By Hau, Harald; Langfield, Sam; Marqués Ibañez, David
  11. The growth effects of EU cohesion policy: a meta-analysis By Benedicta Marzinotto
  12. On the Volume and Variety of Intra-Bloc Trade in an Expanded European Union By Neil Foster
  13. The safety and soundness effects of bank M&As in the EU: does prudential regulation have any impact? By Jens Hagendorff; María J. Nieto; Larry D. Wall
  14. Work ‘til You Drop: Short- and Longer-Term Health Effects of Retirement in Europe By Sahlgren, Gabriel H.
  15. The German Labour Market: Preparing for the Future By Felix Hüfner; Caroline Klein

  1. By: Stefan Kooths; Björn van Roye
    Abstract: The Eurosystem has been pursuing a crisis management policy for more than four years now. This policy aims primarily at maintaining financial stability in the euro area by providing vast liquidity support to commercial banks that are operating in nationally segmented banking systems. As a side effect, the national central banks substitute money market operations for cross-border capital flows. The national central banks are thus increasingly engaging in substantial balance-of-payments financing, and financial risks are being shifted from investors to European taxpayers via the Eurosystem. Symptomatically, this shows up in exploding TARGET2 positions in the national central banks' balance sheets. The longer this process continues, the stronger the centrifugal forces become that ultimately might break up the single currency. Instead of a fiscal union, a euro-area-wide regulatory approach is required. In addition to establishing a uniform scheme for banking regulation, supervision and resolution, we recommend that contingent convertible bonds (CoCos) be introduced to provide a major source of refinancing for the banking industry. Since CoCos cannot be introduced overnight, national and European banking resolution funds would be needed in the short run. These funds would not rescue banks but they would kick in as soon as a bank's equity is depleted in order to wind up failing banks in a systemically prudent way
    Keywords: Balance-of-payments financing, Target2, Eurosystem, Monetary policy, Financial crisis, Euro area, Financing mechanisms
    JEL: E42 E51 E58 F32 F34
    Date: 2012–08
  2. By: Peter Claeys; Borek Vasicek
    Abstract: Although there is by now strong evidence that sovereign risk premia are driven by a common factor, little is known about the detailed linkages between sovereign bond markets. We employ the VAR method by Diebold and Yilmaz (2009) to analyse the strength and direction of bilateral linkages between EU sovereign bond markets using daily data on sovereign bond yield spreads and a common factor. The forecast-error variance decomposition of this FAVAR indicates a lot of heterogeneity in the bilateral spillover sent and received between bond markets. Spillover is more important than domestic factors for all eurozone countries. The CE countries mostly affect each other. Only Denmark, Sweden and the UK are rather insulated from spillover. The spillover has increased substantially since 2007, despite starting from a high level. We use this framework to measure the impact of sovereign rating news and analyse the dynamic linkages between spreads and the ratings of the main credit rating agencies. We find a two-sided relation between rating news and sovereign risk premia. The spillover of rating news is very heterogeneous, and it is substantially stronger for downgrades at lower grades. The impact is often weaker domestically than on bond spreads of other sovereigns.
    Keywords: Contagion, eurozone, FAVAR, financial crisis, fiscal policy, sovereign bond spreads, sovereign ratings, spillover.
    JEL: C14 E43 E62 G12 H62 H63
    Date: 2012–09
  3. By: Valerie De Bruyckere (Ghent University, Department of Financial Economics); Maria Gerhardt (Ghent University, Department of Financial Economics); Glenn Schepens (Ghent University, Department of Financial Economics); Rudi Vander Vennet (Ghent University, Department of Financial Economics)
    Abstract: This paper investigates contagion between bank risk and sovereign risk in Europe over the period 2006-2011. Since this period covers various stages of the banking and sovereign crisis, it offers a fertile ground to analyze bank/sovereign risk spillovers. We define contagion as excess correlation, i.e. correlation between banks and sovereigns over and above what is explained by common factors, using CDS spreads at the bank and at the sovereign level. Moreover, we investigate the determinants of contagion by analyzing bank-specific as well as country-specific variables and their interaction. We provide empirical evidence that various contagion channels are at work, including a strong home bias in bank bond portfolios, using the EBA’s disclosure of sovereign exposures of banks. We find that banks with a weak capital and/or funding position are particularly vulnerable to risk spillovers. At the country level, the debt ratio is the most important driver of contagion.
    Keywords: Contagion, bank risk, sovereign risk, bank business models, bank regulation, sovereign debt crisis
    JEL: G01 G21 G28 H6
    Date: 2012–10
  4. By: Eduardo A. Cavallo; Eduardo Fernández-Arias
    Abstract: Europe faces challenges reminiscent of Latin American financial crises. The failure of recent liquidity support to normalize the situation in Europe suggests the need to refocus the policy debate on fundamentals: structural reform for growth and, where needed, restructuring to resolve banking crises and the debt overhang. Latin America’s experience yields relevant policy lessons for Europe on those fronts except concerning the use of sharp real devaluations to spearhead recovery: euro-zone countries following suit by reintroducing devalued national currencies would invite catastrophe. Despite this constraint, Europe stands a better chance of navigating the path out of the crisis because it has cooperative mechanisms unavailable in Latin America. European cooperation can provide support for orderly crisis resolution as well as growth and competitiveness within the currency union fold, to the benefit of all members. However, the path is uncharted, and successful regional cooperation will require innovation and political will.
    JEL: E61 F33 F34 F36 F53 G01
    Date: 2012–10
  5. By: Robert Kollmann; Marco Ratto; Werner Roeger; Jan in'tVeld
    Abstract: This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in the macroeconomics literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.
    Keywords: financial crisis; bank rescue measures; fiscal policy
    JEL: E62 E32 G21 H63 F41
    Date: 2012–10
  6. By: Antonio Ribba
    Abstract: In the first thirteen years of EMU, monetary policy choices of the European Central Bank (ECB) in setting the short-term interest rate have followed, systematically, monetary policy decisions made by the Federal Reserve System (Fed). For, despite the presence of variable lags with respect to Fed decisions, turning points of European short-term interest rates have been largely anticipated by movements in the federal funds rate. In this paper we show that, in the context of a bivariate cointegrated system, a clear long-run US dominance emerges. Moreover, the structural analysis reveals that a permanent increase in the federal funds rate causes a permanent one-for-one movement in the eonia rate.
    Keywords: Monetary policy, Identification, Structural Cointegrated VARs;
    JEL: C32 E5
    Date: 2012–10
  7. By: Sala, Luca; Söderström, Ulf; Trigari, Antonella
    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.
    Keywords: Business cycles; Financial crisis; Labor market matching
    JEL: E24 E32
    Date: 2012–10
  8. By: Gabbi, G.; Germano, G.; Hatzopoulos, V.; Iori, G.; Politi, M.
    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
  9. By: Kirchner, Markus; van Wijnbergen, Sweder
    Abstract: Recent macro developments in the euro area have highlighted the interactions between fiscal policy, sovereign debt, and financial fragility. We take a structural macroeconomic model with frictions in the financial intermediation process, in line with recent research, but introduce asset choice and sovereign debt holdings in the portfolio of banks. Using this model, we emphasize a new crowding-out mechanism that works through reduced private access to credit when banks accumulate sovereign debt under a leverage constraint. Our results show that, when banks invest a substantial fraction of their assets in sovereign debt, the effectiveness of fiscal stimulus policies may be impaired because deficit-financed fiscal expansions may tighten financial conditions to such an extent that private demand is crowded out. We also analyze the macroeconomic effectiveness of liquidity support to commercial banks through recapitalizations or loans by the government and the impact of different ways of financing those policies. --
    Keywords: financial intermediation,fiscal policy,sovereign debt
    JEL: E44 E62 H30
    Date: 2012
  10. By: Hau, Harald; Langfield, Sam; Marqués Ibañez, David
    Abstract: This paper examines the quality of credit ratings assigned to banks in Europe and the United States by the three largest rating agencies over the past two decades. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks’ expected default frequencies. Our results suggest that rating agencies assign more positive ratings to large banks and to those institutions more likely to provide the rating agency with additional securities rating business (as indicated by private structured credit origination activity). These competitive distortions are economically significant and help perpetuate the existence of ‘too-big-to-fail’ banks. We also show that, overall, differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities.
    Keywords: conflicts of interest; credit ratings; prudential regulation; rating agencies; sovereign risk
    JEL: E44 G21 G23 G28
    Date: 2012–10
  11. By: Benedicta Marzinotto
    Abstract: We run a standard income convergence analysis for the last decade and confirm an already established finding in the growth economics literature. EU countries are converging. Regions in Europe are also converging. But, within countries, regional disparities are on the rise. At the same time, there is probably no reason for EU Cohesion Policy to be concerned with what happens inside countries. Ultimately, our data shows that national governments redistribute well across regions, whether they are fiscally centralised or decentralised. It is difficult to establish if Structural and Cohesion Funds play any role in recent growth convergence patterns in Europe. Generally, macroeconomic simulations produce better results than empirical tests. It is thus possible that Structural Funds do not fully realise their potential either because they are not efficiently allocated or are badly managed or are used for the wrong investments, or a combination of all three. The approach to assess the effectiveness of EU funds should be consistent with the rationale behind the post-1988 EU Cohesion Policy. Standard income convergence analysis is certainly not sufficient and should be accompanied by an assessment of the changes in the efficiency of the capital stock in the recipient countries or regions as well as by a more qualitative assessment. EU funds for competitiveness and employment should be allocated by looking at each regionâ??s capital efficiency to maximise growth generating effects or on a pure competitive.
    Date: 2012–10
  12. By: Neil Foster (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This paper examines the development of exports within the expanded European Union over the period 2000-2007. The paper addresses the issues of how and why within-bloc exports have developed following accession. The paper shows that exports within CEFTA and within other accession countries have grown more quickly than those between old EU members, but that after accounting for traditional gravity determinants there has been no significant change in this behaviour following accession in 2004. As such, this is likely to reflect a natural realignment of trade patterns following the communist era, as well as the relatively stronger performance of the new entrants when compared with existing EU members. The results also indicate that much of the increase in exports within the accession countries has been due to an increase in the variety of products traded, rather than an increase in the volume of existing products.
    Keywords: trade, intensive and extensive margins, gravity model, EU accession
    JEL: F15
    Date: 2012–06
  13. By: Jens Hagendorff (University of Edinburgh); María J. Nieto (Banco de España); Larry D. Wall (Federal Reserve Bank of Atlanta)
    Abstract: This paper studies the impact of European bank mergers and acquisitions on changes in key safety and soundness measures of both acquirers and targets. We find that capitalization, profi tability and liquidity show signs of statistically and economically significant mean reversion for acquirers. Also, acquirers in cross-border deals tended to perform better when their home country prudential supervisors and deposit insurance funding systems were stricter than the target‘s. For target banks, the most consistent findings from the crosssectional regressions are that stronger supervision and tougher deposit insurance funding regimes tend to result in positive post-merger changes in liquidity and performance
    Keywords: banks, mergers, Europe
    JEL: G21 G34 G28
    Date: 2012–10
  14. By: Sahlgren, Gabriel H. (Research Institute of Industrial Economics (IFN))
    Abstract: Declining fertility rates and increasing life expectancy necessitate a higher labor participation rate among older people in order to sustain pension systems and boost economic growth. At the same time, researchers have only recently begun to pay attention to the health effects of a longer working life, with rather mixed results thus far. Utilizing panel data from eleven European countries, and two distinct identification strategies to deal with endogeneity, we provide new evidence of the health effects of retirement.In contrast to prior research, we analyze both the impact of being retired and the effect of spending longer time in retirement. Using spouses’ characteristics as instruments, while taking precautions to ensure validity, we find a robust, negative impact of being retired and spending longer time in retirement on selfassessed, general, mental and physical health.In addition, we show that the impact on selfassessed health remains similar in models using instruments from previous research while also including individual- and time-fixed effects to remove time-invariant unobserved heterogeneity between individuals as well as common health shocks.Overall, the results suggest that this innovation and the fact that we take lagged effects into account explain the differences in comparison to prior multi-country research using these instruments. While the short-term health impact of retirement in Europe remains uncertain, the medium- to long-term effects appear to be negative and economically large.
    Keywords: Health; Retirement; SHARE; SHARELIFE
    JEL: I10 J14 J26
    Date: 2012–09–27
  15. By: Felix Hüfner; Caroline Klein
    Abstract: The strength of the German labour market response to the financial crisis of 2008-09 demonstrated the benefits of past labour market reforms, which raised work incentives, improved job matching and increased working hour flexibility. Going forward, the government should build on this success and address the remaining challenges which include raising the labour participation of females and older workers (which among other things will necessitate adjustments to the tax and education system) and fostering migration, notably of skilled workers. The significant ageing-related decline in the labour force exemplifies the urgency of further structural reforms in this area. This Working Paper relates to the 2012 Economic Survey of Germany,<P>Le marché du travail en Allemagne : préparer l´avenir<BR>La résilience dont a fait preuve le marché du travail allemand face à la crise financière de 2008-09 témoigne du bien-fondé des réformes passées, qui ont permis d’améliorer les incitations au travail, de garantir une meilleure adéquation entre offres et demandes d’emploi et de renforcer la flexibilité du temps de travail. Les pouvoirs publics allemands doivent s’appuyer sur ce succès pour relever les défis qui subsistent, à savoir augmenter le taux d’activité des femmes et des seniors (ce qui impliquera notamment des ajustements sur le plan de la fiscalité et du système éducatif) et encourager l’immigration, surtout des travailleurs qualifiés. La contraction importante de la main-d’oeuvre sous l’effet du vieillissement de la population témoigne de l’urgence de nouvelles réformes structurelles dans ce domaine. Ce document de travail se rapporte à l’Étude économique de l’OCDE sur l’Allemagne 2012,
    Keywords: unemployment, migration, Germany, labour force participation rates, female employment, labour shortages, older workers, chômage, Allemagne, travailleurs âgés, emploi des femmes, migration, taux d’activité, besoins de main d’oeuvre
    JEL: J11 J21 J22 J24 J26 J61 J63
    Date: 2012–09–13

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