nep-eec New Economics Papers
on European Economics
Issue of 2012‒12‒06
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 Dreger, Christian; Reimers, Hans-Eggert
  2. Trade Dynamics in the Euro Area: The role of export destination and composition By Peter Wierts; Henk van Kerkhoff; Jakob de Haan
  3. TARGET2 and Central Bank Balance Sheets By Karl Whelan
  4. Market Discipline Under A Politicised Multilateral Fiscal Rule - Lessons from the Stability and Growth Pact Debate By Matthias Bauer; Martin Zenker
  5. Target2 Redux: The simple accountancy and slightly more complex economics of Bundesbank loss exposure through the Eurosystem By Buiter, Willem H.; Rahbari, Ebrahim
  6. The sustainability of monetary unions. Can the Euro survive? By Canofari Paolo; Marini Giancarlo; Piersanti Giovanni
  7. Minor Nuisance Around Foreign Exchange Markets - Lessons from the Stability and Growth Pact Debate By Matthias Bauer; Martin Zenker
  8. Fiscal Sustainability in the Presence of Systemic Banks : the Case of EU Countries. By Agnès Bénassy-Quéré; Guillaume Roussellet
  9. Market-based Eurobonds Without Cross-Subsidisation By Manasa Gopal; Markus Pasche
  10. Will TARGET2-Balances be Reduced again after an End of the Crisis? By Christian Fahrholz; Andreas Freytag
  11. The European Commission’s Scoreboard of Macroeconomic Imbalances – The Impact of Preferences on an Early Warning System By Tobias Knedlik

  1. By: Dreger, Christian; Reimers, Hans-Eggert
    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: Peter Wierts; Henk van Kerkhoff; Jakob de Haan
    Abstract: We investigate to what extent the destination of exports and export composition affect the export performance of euro area countries, using a dataset on exports from euro area countries to their top 20 trade partners for the period 1980-2010. Our analysis shows that European integration has not led to an increase in the share of the core and the northern periphery in the exports of the southern periphery. Our results suggest that a higher share of high tech exports in total exports leads to a higher growth of total exports. Export composition also conditions the effects of the real exchange rate and partner income growth. The effect of the real exchange rate on export growth becomes smaller the higher the share of high tech exports in total exports. The effect of partner income on export growth becomes larger the higher the share of high tech exports in total exports.
    Keywords: trade relations; export composition; euro area
    JEL: F14 F15
    Date: 2012–10
  3. By: Karl Whelan (University College Dublin)
    Abstract: The Eurosystem’s TARGET2 payments system has featured heavily in academic and popular discussions in recent years. Much of this commentary had described the system as being responsible for a “secret bailout” of Europe’s periphery which has led to huge credit risks for the Bundesbank should the euro break up. This paper discusses the TARGET2 system, focusing in particular on how it impacts the balance sheets of the central banks that participate in the system. It concludes that the TARGET2 is largely innocent of the charges that have been levelled against it. Arguments that TARGET2 facilitated a bailout of the periphery or that the system is playing a key role in facilitating peripheral current account deficits turn out to be wide of the mark. Risks to Germany due to the loss of TARGET2-related revenues for the Bundesbank after a euro break-up turn out to relatively small because these revenues are limited and because there are potentially large gains from new seigniorage revenues in this scenario. Many criticisms involving TARGET2 turn out, on closer examination, to be criticisms of the ECB’s core principle of treating credit institutions across the euro area in an equal manner. Proposals that the ECB adopt procedures that discriminate between banks in different countries (or that restrict the operation of payments systems in certain countries) are likely to be incompatible with the continuation of the euro as a common currency.
    Keywords: TARGET2, ECB, Euro Crisis
    JEL: E51 E52 E58
    Date: 2012–11–21
  4. By: Matthias Bauer (Graduate Programme "Global Financial Markets"); Martin Zenker (Graduate Programme "Soziale Marktwirtschaft")
    Abstract: Does a multilateral fiscal rule improve market discipline in a monetary union? This paper studies the impact of political events that systematically undermined the Stability and Growth Pact (SGP) on EMU sovereign default risk for the period 2001 to 2005. For various EMU member countries our findings suggest that credit risk did not increase in the SGP's early years in response to the political undermining of the Pact. Due to the existence of systematic volatility effects we conclude that from its beginning the Pact was not perceived as a credible institution by financial markets. Bond markets have not been the watchdogs the proponents of transparency enhancing fiscal rules frequently claim them to be. Investors did not anticipate any serious consequences arriving from political non-ownership of the Pact and corresponding fiscal leeway on national public finances in the euro zone back then. In this context, policymakers working on a reform of Europe's fiscal framework should abstain from enhancing multilateral fiscal rules lacking political ownership, including the reformed SGP and the new "European Fiscal Compact".
    Keywords: fiscal rules, market discipline, sovereign credit risk, GARCH
    JEL: E62 F55 C22 C58
    Date: 2012
  5. By: Buiter, Willem H.; Rahbari, Ebrahim
    Abstract: This study shows that Target2 net claims are a poor measure of Bundesbank loss exposure, and even more so of German loss exposure to the rest of the Eurozone. This is true even under plausible assumptions about a comprehensive break-up scenario that leaves Germany as the only member of the euro area and the Bundesbank as the sole owner of the ECB. In this implausible scenario, the discrepancy between the Bundesbank’s Target2 net credit balance and its likely loss exposure has two principal sources. First, the 16 national central banks (NCBs) that exit the Eurosystem (which will on balance be net Target2 debtors) and their sovereigns will not automatically walk away completely from their Target2 debts - defaulting on their debts with a zero recovery rate for the Bundesbank. Legally, the Target2 claims are not extinguished by exit from the Eurosystem by the debtor NCBs. Politically and realistically, many of the exiting NCBs would be able and willing to honour their obligations to Target2 in part or even in full. Second, in the comprehensive break-up scenario, future seigniorage revenues of the Bundesbank would likely go up, as it would be left with a larger share (in our example 100 percent) of the ownership of the ECB. Changes in German exposure to the rest of the euro area (or to the periphery) can differ in magnitude and in sign from Bundesbank exposure.
    Keywords: Bundesbank; capital flight; ECB; eurosystem; imbalances; TARGET2
    JEL: E01 E42 E63 F32 F33 F36
    Date: 2012–11
  6. By: Canofari Paolo; Marini Giancarlo; Piersanti Giovanni
    Date: 2012–10
  7. By: Matthias Bauer (Graduate Programme "Global Financial Markets"); Martin Zenker (Graduate Programme "Soziale Marktwirtschaft")
    Abstract: This paper studies the impact of political events that systematically undermined the Stability and Growth Pact (SGP) on the euro's foreign exchange expectation bias for the period 2001 to 2005. Our findings suggest that euro foreign exchange markets were attentive to the political dispute over the enforcement of the SGP's rules. The results indicate that foreign exchange markets anticipated the gradual demise of the SGP. 1) For the expectation bias in euro foreign exchange markets we do not find systematic level effects. 2) Since volatility decreases following "destabilising" political events, we conclude that already in the early years of the SGP regime the demise of the original Pact was anticipated by foreign exchange market participants. The conclusion is that a politicised multilateral fiscal rule does not improve market discipline, which could be a crucial argument against the new "European Fiscal Compact".
    Keywords: fiscal rules, market discipline, FX markets, GARCH
    JEL: E62 F31 F33 C22 C58
    Date: 2012
  8. By: Agnès Bénassy-Quéré (Centre d'Economie de la Sorbonne - Paris School of Economics); Guillaume Roussellet (CREST-ENSAE)
    Abstract: We provide a first attempt to include off-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps à la Blanchard (1990) and Blanchard et al. (1990). We then introduce two alternative measures of implicit off-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies of microeconomic data at the bank level. The second one relies on econometric estimations of the probability and the cost of a systemic banking crisis, based on historical data. The former approach provides an upper evaluation of the fiscal cost of systemic banking crises, whereas the latter one provides a lower one. Hence, we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk.
    Keywords: Fiscal sustainability, tax gap, systemic banking risk, off-balance sheet liabilities.
    JEL: H21 H23 J41
    Date: 2012–11
  9. By: Manasa Gopal (Birla Institute of Technology & Science, Pilani); Markus Pasche (Friedrich Schiller University Jena, School of Economics and Business Admistration)
    Abstract: Most current Eurobond proposals imply substantial cross-subsidisation since some countries partially pay the risk premia for others, thus creating moral hazard and disincentives for fiscal discipline. We suggest, instead, to use standard technologies of financial intermediation like pooling and collateralizing risks. The proposed Eurobond system decreases the costs for all participating nations which is Pareto improving. Since collateral requirements are calculated on individual risk, we eliminate cross-subsidisation. It is essential for the model that a significant fraction of governmental bonds is still issued individually since the model utilizes the risk perception abilities and disciplinating functions of the private capital market. We also discuss institutional issues of possible implementations.
    Keywords: sovereign debt, Eurobond, collateral, pooling, cross-subsidisation
    JEL: E62 E63 H63
    Date: 2012
  10. By: Christian Fahrholz (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Andreas Freytag (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: This article deals with the macro-economics of the Trans-European Automated Re- al-time Gross Settlement Express Transfer System (TARGET2). Originally, the TARGET2 was in-tended to solely function as a monetary arrangement for liquidity issues. It is shown that the TARGET2 contributes to a substantial misallocation of real resources within the Eurozone (EZ). The discussion highlights that there are no tendencies for rebalancing TARGET2-claims and liabilities, but rather a dynamic towards infinite and prolonged TARGET2-imbalances in the form of hysteresis.
    Keywords: XXXXX
    Date: 2012–05–28
  11. By: Tobias Knedlik
    Abstract: The European Commission’s Scoreboard of Macroeconomic Imbalances is a rare case of a publicly released early warning system (EWS). That allows for analyzing the preferences of the involved politicians with regard to the two potential errors of an EWS – missing a crisis and issuing a false alarm. This is done for the first time for EWS in general by using a standard signals approach including a preference-based optimization approach to set thresholds. It is shown that in general, the thresholds of the scoreboard are set low (resulting in more alarm signals) as compared to a neutral stand.
    Keywords: early warning system, scoreboard, preferences, incentives, political economy
    JEL: G01 F47 F53
    Date: 2012–11

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