nep-eec New Economics Papers
on European Economics
Issue of 2012‒10‒27
eleven papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Does Euro Area Membership Affect the Relation between GDP Growth and Public Debt? By Christian Dreger; Hans-Eggert Reimers
  2. "The Crisis of Finance-dominated Capitalism in the Euro Area: Deficiencies in the Economic Policy Architecture and Deflationary Stagnation Policies" By Eckhard Hein
  3. Unholy compromise in the Eurozone and how to mend it By Karl Aiginger; Stefano Micossi
  4. Greece’s European Policy Making By Yannis Valinakis
  5. The "Big C": Identifying Contagion By Kristin Forbes
  6. The Endogeneity of Optimum Currency Areas Criteria in the Context of Financial Crisis: Evidence from Time-Frequency Domain Analysis By Svatopluk Kapounek; Jitka Pomenkova
  7. Fiscal Policy, Banks and the Financial Crisis By In''t Veld, Jan; Kollmann, Robert; Ratto, Marco; Roeger, Werner
  8. Greece’s Sovereign Debt Crisis: Retrospect and Prospect By George Alogoskoufis
  9. Unemployment and Spell Duration during the Great Recession in the EU By Carlos Gradín; Olga Cantó; Coral del Río
  10. Nowcasting German GDP: A comparison of bridge and factor models. By Antipa, P.; Barhoumi, K.; Brunhes-Lesage, V.; Darné, O.
  11. Aggregate Earnings and Macroeconomic Shocks: The Role of Labour Market Policies and Institutions By Bassanini, Andrea

  1. By: Christian Dreger; Hans-Eggert Reimers
    Abstract: We analyse the relationship between the debt to GDP ratio and real per capita GDP growth for the euro area members by distinguishing between periods of sustainable and non-sustainable debt. Thresholds are theory-based and depend on the macroeconomic framework. If the interest rate exceeds nominal output growth, primary budget surpluses are required to achieve a sustainable debt ratio. The negative impact of the debt to GDP ratio is particularly strong for non sustainable ratios and especially relevant for the euro area. This suggests that the participation in monetary union might entail an additional risk for its members.
    Keywords: Euro area debt crisis, debt sustainability
    JEL: F43 O11 C23
    Date: 2012
  2. By: Eckhard Hein
    Abstract: In this paper the euro crisis is interpreted as the latest episode in the crisis of finance-dominated capitalism. For 11 initial Euro area countries, the major features of finance-dominated capitalism are analyzed; specifically, the increasing inequality of income distribution and the rising imbalances of current accounts. Against this background, the euro crisis and the economic policy reactions of European governments and institutions are examined. It is shown that deflationary stagnation policies have prevailed since 2010, resulting in massive real GDP losses; some improvement in the price competitiveness of the crisis countries but considerable and persistent current account imbalances; reductions in government deficit-to-GDP ratios but continuously rising trends in gross government debt-to-GDP ratios; a risk of further recession for the euro area as a whole—and the increasing threat of the euro's ultimate collapse. Therefore, an alternative macroeconomic policy approach tackling the basic contradictions of finance-dominated capitalism and the deficiencies of European economic policy institutions and strategies—in particular, the lack of (1) an institution convincingly guaranteeing public debt and (2) a stable and sustainable financing mechanism for acceptable current account imbalances-is outlined.
    Keywords: Finance-dominated Capitalism; Distribution; Financial and Economic Crisis; European Economic Policies
    JEL: E25 E58 E61 E63 E64 E65
    Date: 2012–10
  3. By: Karl Aiginger; Stefano Micossi
    Abstract: This paper reviews the causes of the ongoing crisis in the eurozone and the policies needed to restore stability in financial markets and reassure a bewildered public. Its main message is that the EU will not overcome the crisis until it has a comprehensive and convincing set of policies in place; able to address simultaneously budgetary discipline and the sovereign debt crisis, the banking crisis, adequate liquidity provision by the ECB and dismal growth.
    Keywords: Euro crisis, monetary union, policy coordination
    JEL: E61 E63 F33 F36 F42
    Date: 2012–08
  4. By: Yannis Valinakis
    Abstract: The paper examines the pattern of Greece’s European Union policy making in a historical perspective. It starts by presenting the phases of EU Policymaking of successive Greek governments since the 1980s, and considers the persistent deficiencies of the Greek public administration vis-à-vis EU law transposition and implementation. Then it turns to the different models for EU policymaking and introduces the Finnish case as a successful example. The final section outlines relevant policy proposals, taking into account the changing Greek and Eurozone environment amidst the ongoing crisis.
    Date: 2012–10
  5. By: Kristin Forbes
    Abstract: This paper surveys and assesses the academic literature on defining, measuring, and identifying financial contagion and the various channels by which it can occur. It also includes new empirical analysis of recent trends and causes of contagion, highlighting contagion risks in the euro area. The paper defines “interdependence” as high correlations across markets during all states of the world and “contagion” as the spillovers from extreme negative events. Interdependence has increased dramatically over time, especially within the euro area, even after controlling for global shocks and changes in volatility. Not surprisingly, negative events in one country also quickly affect others. Regression analysis shows that a country is more vulnerable to contagion if it has a more levered banking system, greater trade exposure, weaker macroeconomic fundamentals, and larger international portfolio investment liabilities. Countries are less vulnerable, however, if they have larger international portfolio investment assets (which can provide a buffer against shocks) and are less reliant on debt (versus equity) for international financing. These results have important implications for understanding contagion and for analyzing policies designed to mitigate contagion, especially for the current crisis in the euro area.
    JEL: F0 F1 F15 F2 F3 G01 G15 G2
    Date: 2012–10
  6. By: Svatopluk Kapounek (Department of Finance, Faculty of Business and Economics, Mendel University in Brno); Jitka Pomenkova (Department of Radio Electronics, Faculty of Electrical Engineering and Communication, Brno University of Technology)
    Abstract: The European integration process is theoretically supported by optimum currency area (OCA) theory which originates from debates about fixed versus flexible exchange rates, treating a common currency as the extreme case of a fixed exchange rate. The key issues of theoretical and empirical discussions in recent years are costs and benefits of adopting a common currency. We follow the hypothesis that historically greater integration provides more highly synchronized cycles. However, the commonly used methodological approaches overestimate cyclical co-movements between the time series during the financial crisis. Our contribution is in time series decomposition elimination trend included outliers appears in the years 2007-2010. Classification-JEL: F15, C14
    Keywords: singular value decomposition, wavelet analysis, synchronization, euro area.
    Date: 2012–10
  7. By: In''t Veld, Jan; Kollmann, Robert; Ratto, Marco; Roeger, Werner
    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 macro 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: bank rescue measures; financial crisis; fiscal policy
    JEL: E32 E62 F41 G21 H63
    Date: 2012–10
  8. By: George Alogoskoufis
    Abstract: This paper provides an analysis and assessment of the Greek sovereign debt crisis, and examines alternative solutions to the problem. In order to put the current fiscal predicament of Greece in perspective and discuss how the Greek debt crisis might possibly be resolved, the paper first provides a detailed account of how the sovereign debt of Greece was accumulated and then stabilized relative to GDP. It then proceeds with an account of how the international financial crisis led to a de-stabilization of Greece’s sovereign debt, and with an assessment of the adjustment program currently in operation. We address the question of solvency, and whether the current program is sufficient for the resolution of Greece’s debt crisis. The paper concludes with proposals for tackling the confidence crisis and speeding up the recovery of the Greek economy.
    Date: 2012–01
  9. By: Carlos Gradín; Olga Cantó; Coral del Río
    Abstract: The current economic recession has had unequal consequences on employment depending on the country considered. It is generally accepted that the negative impact of unemployment on individual welfare can be very different depending on its duration. However, conventional statistics on unemployment do not adequately capture to what extent the recession is not only increasing the incidence of unemployment but also its severity in terms of duration in time of ongoing unemployment spells. In this paper, we follow Shorrocks’s (2009a,b) proposal of a duration-sensitive measure of unemployment in order to analyze the different dynamic characteristics of unemployment in a selected group of European Union countries during the current Great Recession. Our results add some evidence on the relevance of incorporating the duration dimension in measuring unemployment and provide a tool for dynamic analysis based on cross-sectional data.
    Keywords: measurement of unemployment, spell duration, European Union
    JEL: D30 D63 I31 J64
    Date: 2012–09
  10. By: Antipa, P.; Barhoumi, K.; Brunhes-Lesage, V.; Darné, O.
    Abstract: Governments and central banks need to have an accurate and timely assessment of Gross Domestic Product's (GDP) growth rate for the current quarter, as this is essential for providing a reliable and early analysis of the current economic situation. This paper presents a series of models conceived to forecast the current German GDP's quarterly growth rate. These models are designed to be used on a monthly basis by integrating monthly economic information through bridge models, thus allowing for the economic interpretation of the data. We do also forecast German GDP by dynamic factor models. The combination of these two approaches allows selecting economically relevant explanatory variables among a large data set of hard and soft data. In addition, a rolling forecast study is carried out to assess the forecasting performance of the estimated models. To this end, publication lags are taken into account in order to run pseudo out-of-sample forecasts. We show that it is possible to get reasonably good estimates of current quarterly GDP growth in anticipation of the official release, especially from bridge models.
    Keywords: GDP forecasting; Bridge models; Factor models.Threshold auto-regression, bounce-back effects, business cycles, inventory investment.
    JEL: C52 C53 E20
    Date: 2012
  11. By: Bassanini, Andrea (OECD)
    Abstract: I examine the effect of labour market policies and institutions on the transmission of macroeconomic shocks to the labour market, using both aggregate and industry-level annual data for 23 OECD countries, 23 business-sector industries and up to 29 years. I find that high and progressive labour taxes and generous unemployment benefits amplify labour income fluctuations. By contrast, statutory minimum wages reduce the difference in the sensitivity of wages to aggregate shocks between low-wage and high-wage industries. Dismissal regulations are found to mitigate the impact of shocks on both earnings and employment. Moreover, this mitigation effect is greater in industries where firms have a greater propensity to make staffing changes through dismissals.
    Keywords: employment fluctuations, business-cycle, EPL, tax wedge, unemployment benefits
    JEL: J21 J31 J60
    Date: 2012–10

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