nep-eec New Economics Papers
on European Economics
Issue of 2013‒02‒03
twelve papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Measuring Sovereign Contagion in Europe By Massimiliano Caporin; Loriana Pelizzon; Francesco Ravazzolo; Roberto Rigobon
  2. Bank/sovereign risk spillovers in the European debt crisis By V. DE BRUYCKERE; M. GERHARDT; G. SCHEPENS; R. VANDER VENNET
  3. The Impact of Market Regulations on Intra-European Real Exchange Rates. By Agnès Bénassy-Quéré; Dramane Coulibaly
  4. Fiscal Space in the Euro zone By Frantisek Hajnovic; Juraj Zeman; Jan Zilinsky
  5. The Importance of Trade and Capital Imbalances in the European Debt Crisis By Andrew Hughes Hallett; Juan Carlos Martinez Oliva
  6. Inflation drivers in new EU members By Martina Alexová
  7. The Mystique Surrounding the Central Bank's Balance Sheet, Applied to the European Crisis By Ricardo Reis
  8. Report No. 49: Skilled Labor Flows: Lessons from the European Union By Kahanec, Martin
  9. Decomposition of trends in youth unemployment – the role of job accessions and separations in countries with different employment protection regimes By Anna Baranowska-Rataj; Iga Magda
  10. The Determinants of International Migration in the European Union: An Empirical Analysis By Ekaterina Sprenger
  11. Markets Evolution After the Credit Crunch By Bianchetti, Marco; Carlicchi, Mattia
  12. Rebuilding Eurozone’s Ground Zero. A review of the Greek economic crisis By Nikos Chrysoloras

  1. By: Massimiliano Caporin; Loriana Pelizzon; Francesco Ravazzolo; Roberto Rigobon
    Abstract: This paper analyzes the sovereign risk contagion using credit default swaps (CDS) and bond premiums for the major eurozone countries. By emphasizing several econometric approaches (nonlinear regression, quantile regression and Bayesian quantile regression with heteroskedasticity) we show that propagation of shocks in Europe's CDS has been remarkably constant for the period 2008-2011 even though a significant part of the sample periphery countries have been extremely affected by their sovereign debt and fiscal situations. Thus, the integration among the different eurozone countries is stable, and the risk spillover among these countries is not affected by the size of the shock, implying that so far contagion has remained subdue. Results for the CDS sample are confirmed by examining bond spreads. However, the analysis of bond data shows that there is a change in the intensity of the propagation of shocks in the 2003-2006 pre-crisis period and the 2008-2011 post-Lehman one, but the coefficients actually go down, not up! All the increases in correlation we have witnessed over the last years come from larger shocks and the heteroskedasticity in the data, not from similar shocks propagated with higher intensity across Europe. This is the first paper, to our knowledge, where a Bayesian quantile regression approach is used to measure contagion. This methodology is particularly well-suited to deal with nonlinear and unstable transmission mechanisms.
    JEL: E58 F34 F36 G12 G15
    Date: 2013–01
    Abstract: This paper investigates contagion between bank risk and sovereign risk in Europe over the period 2006-2011. 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: 2012–12
  3. By: Agnès Bénassy-Quéré (Centre d'Economie de la Sorbonne - Paris School of Economics et CESIfo); Dramane Coulibaly (EconomiX - Université de Paris Ouest)
    Abstract: We study the contribution of market regulations in the dynamics of the real exchange rate within the European Union. Based on a model proposed by De Gregorio et al. (1994a), we show that both product market regulations in montradable sectors and employment protection tend to inflate the real exchange rate. We then carry out an econometric estimation for European countries over 1985-2006 to quantify the contributions of the pure Balassa-Samuelson effect and those of market regulations in real exchange-rate variations. Based on this evidence and on a counter-factual experimient, we conclude that the relative evolution of product market regulations and employment protection across countries play a very significant role in real exchange-rate variations within the European Union and especially within the Euro area, through theirs impacts on the relative price of nontradable goods.
    Keywords: Real exchange rate, Balassa-Samuelson effect, product market regulations, employment protection.
    JEL: F41 J50 L40
    Date: 2013–01
  4. By: Frantisek Hajnovic (National Bank of Slovakia, Research Department); Juraj Zeman (National Bank of Slovakia, Research Department); Jan Zilinsky (University of Chicago)
    Abstract: This paper uses data from 1995 to 2008 to estimate debt limits in the European Union countries derived from the budgetary responses to debt levels before the crisis. Based on work by the IMF (Ostry, 2010), we present our suggested approach and estimate the fiscal reaction functions and the implied critical debt levels of EU governments. Since many countries did not take advantage of the boom years for consolidation, the fiscal space – availability of debt financing – in the euro zone has shrunk, especially in countries where the response to rising debt levels has historically been weak. We conclude by stressing a need for structural changes in budget policy (shifts in the reaction on debt) or risk default in cases where fiscal space was negative or has been squeezed.
    Keywords: fiscal space, fiscal policy, public debt, consolidation, critical debt level, EU
    JEL: E21 E27 C53
    Date: 2012–12
  5. By: Andrew Hughes Hallett (George Mason University); Juan Carlos Martinez Oliva (Peterson Institute for International Economics)
    Abstract: The current debate on the European crisis has highlighted the role of fiscal imbalances in explaining the turmoil that has dominated Europe in the past few years. This paper adopts a different point of view by suggesting that intra-European payments imbalances are crucial for the survival of the Economic and Monetary Union (EMU). Indeed, payment imbalances between the North and South have contributed to the accumulation of large stock of foreign debt, while flows of foreign capital ceased to finance productive investments that might have contributed to debt repayments--being used instead to finance consumption and real estate. The dynamic interplay between current account imbalances and the accumulation of foreign debt reveals that, once the system is driven into disequilibrium by a real exchange rate misalignment, the longer a payments imbalance persists and the harder the eventual adjustment will be. Capital reversals, by shifting portfolio balances, then lead the system toward instability, sovereign default, and the collapse of the exchange rate regime. Replacing private with public creditors can temporarily help us to stay away from the point where the system breaks down. But this is only a temporary expedient because the underlying imbalances will need continuing and increasing financing until equilibrium is restored by other means. One permanent solution is the European Central Bank’s (ECB) official monetary transactions program, if the potential expansions to the central bank’s balance sheet can be tolerated.
    Keywords: external debt, trade space, real exchange rate adjustments, official financing, OMT
    JEL: F32 F41 G12 H63
    Date: 2013–01
  6. By: Martina Alexová (National Bank of Slovakia, Research Department)
    Abstract: This paper focuses on the determinants of inflation for new European Union members during the period from 1996 to 2011. Detecting the drivers of inflation can be essential in designing structural reforms aimed at complementing the main objectives of monetary policy pursued in these countries. We utilize a structural vector error correction model to estimate long run relationships between inflation, mark-up and economic activity incorporating structural factors such as openness of the economy and production and analyse dynamic properties of the models. We find that half of the countries can be characterized by cost-push inflation and the rest by demand side factors. An appropriate monetary strategy to control inflation should accompany ECB monetary strategy in countries belonging to the euro area. The strategy should also maintain a credible currency peg in Lithuania, Latvia and Bulgaria and meet inflation targets in inflation targeting countries in addition with appropriate structural adjustments in labour markets and production capacity.
    Keywords: inflation, long run structural VARs, subset VEC model, mark-up, output gap, deficit, and commodity prices
    JEL: E C
    Date: 2012–12
  7. By: Ricardo Reis
    Abstract: In spite of the mystique behind a central bank's balance sheet, its resource constraint bounds the dividends it can distribute by the present value of seignorage, which is a modest share of GDP. Moreover, the statutes of the Federal Reserve or the ECB make it difficult for it to redistribute resources across regions. In a simple model of sovereign default, where multiple equilibria arise if debt repudiation lowers fiscal surpluses, the central bank may help to select one equilibrium. The central bank's main lever over fundamentals is to raise inflation, but otherwise the balance sheet gives it little leeway.
    JEL: E58 F34
    Date: 2013–01
  8. By: Kahanec, Martin (Central European University and IZA)
    Abstract: Report under the World Bank ASEAN Labor Markets program funded by AusAid, Bonn 2012 (93 pages)
    Date: 2012–12–22
  9. By: Anna Baranowska-Rataj; Iga Magda (Institute of Statistics and Demography, Warsaw School of Economics)
    Abstract: We examine the drivers of youth unemployment in Poland and Spain, countries where youth have a marginalised labour market position. We decompose the trends in unemployment rates in 1990-2011. We disentangle the role of prolonging job search and the impact of dismissals. The contribution of these two factors to the changes in unemployment rates is compared between youth and the reference group of prime-age workers. We show that in both countries, youth had actually higher chances of finding jobs than the prime-age workers during last two decades. However, the probability of job separation among youth was persistently higher. Moreover, the youth job separation risk reacted to recessions much stronger than the prime-age group risk. In Poland the disparity between the impact of job dismissals on changes in unemployment rates among young and prime-age men is relatively lower than in Spain, which could be ascribed to countries’ differential employment protection regimes.
    Keywords: unemployment; job flows; job separations; segmented labour markets
    JEL: J21 J42 J63
    Date: 2013
  10. By: Ekaterina Sprenger (ZBW – Leibniz Information Centre for Economics)
    Abstract: This paper empirically investigates the determinants of migration between 21 developed countries which are members of the EU and the OECD. Using data on migration flows over the period 2000–2009, the paper examines the impact of traditional economic variables such as income and unemployment differentials, geographical and demographic factors. It also examines the effect of cultural differences on the mobility patterns in the EU before and after the 2004 enlargement round.
    Date: 2013–01
  11. By: Bianchetti, Marco; Carlicchi, Mattia
    Abstract: We review the main changes in the interbank market after the financial crisis started in August 2007. In particular, we focus on the fixed income market and we analyse the most relevant empirical evidences regarding the divergence of the existing basis between interbank rates with different tenor, such as Libor and OIS. We also discuss a qualitative explanation of these effects based on the consideration of credit and liquidity variables. Then, we focus our attention on the diffusion of collateral agreements among OTC derivatives market counterparties, and on the consequent change of paradigm for pricing derivatives. We illustrate the main qualitative features of the new market practice, called CSA discounting, and we point out the most relevant issues for market players associated to its adoption.
    Keywords: crisis; liquidity; credit; counterparty; risk; fixed income; Libor; Euribor; Eonia; OIS – Libor basis; yield curve; forward curve; discount curve; single curve; multiple curve; collateral; CSA discounting; no arbitrage; pricing; interest rate derivatives; FRA; swap; OIS; basis swap; forward rate; CDS spread; ECB monetary policy; ISDA
    JEL: E43 G12 G13
    Date: 2012–12–19
  12. By: Nikos Chrysoloras
    Abstract: Despite widespread criticism on its performance, all indicators demonstrate that Greece has achieved impressive fiscal and structural adjustment since its de facto bankruptcy, in May 2010. However, serious implementation problems, the pace and sheer volume of the contractionary measures adopted over the last years, as well as the fact that the burden was unevenly shared, may lead to a social and political crisis, which could threaten the very survival of democracy in the country. Such catastrophe would destabilize the Balkan region and the Eurozone, while it would deal a huge blow to the European unification project. This paper examines the reasons and events that led to Greece’s economic implosion, describes the current predicaments of the country, and – most importantly – explores suggestions for rebuilding the Greek economy on more solid foundations, without tearing society apart in the process.
    Date: 2013–01

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