nep-eec New Economics Papers
on European Economics
Issue of 2013‒03‒23
eighteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. On the time-varying relationship between EMU sovereign spreads and their determinants By António Afonso; Michael G. Arghyrou; George Bagdatoglou; Alexandros Kontonikas
  2. Financial crises and bank funding: recent experience in the euro area By Adrian Van Rixtel; Gabriele Gasperini
  3. Should non-euro area countries join the single supervisory mechanism? By Zsolt Darvas; Guntram B. Wolff
  4. Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises By Thushyanthan Baskaran; Zohal Hessami
  5. Financial shocks and the macroeconomy: heterogeneity and non-linearities By Kirstin Hubrich; Antonello D’Agostino; Marianna Cervená; Matteo Ciccarelli; Paolo Guarda; Markus Haavio; Philippe Jeanfils; Caterina Mendicino; Eva Ortega; Maria Teresa Valderrama; Marianna Valentinyiné Endrész
  6. Reengineering EMU for an Uncertain World By Angel Ubide
  7. Policy Options to Durably Resolve Euro Area Imbalances By Yvan Guillemette; David Turner
  8. The mutating euro area crisis: is the balance between "sceptics" and "advocates" shifting? By Francesco Paolo Mongelli
  9. Trade Intensity and Output Synchronisation: On the Endogeneity Properties of EMU By Guglielmo Maria Caporale; Roberta De Santis; Alessandro Girardi
  10. Business cycle convergence or decoupling? Economic adjustment in CESEE during the crisis By Gächter, Martin; Riedl , Aleksandra; Ritzberger-Grünwald, Doris
  11. The determinants of macroeconomic forecasts and the Stability and Growth Pact By Patricia Martins; Leonida Correia
  12. External competitiveness of EU candidate countries By Lucia Orszaghova; Li Savelin; Willem Schudel
  13. Financial stability analysis: insights gained from consolidated banking data for the EU By Stefano Borgioli; Ana Cláudia Gouveia; Claudio Labanca
  14. Turning point chronology for the Euro-Zone: A Distance Plot Approach. By Peter Martey Addo; Monica Billio; Dominique Guegan
  15. Forecasting the USD/EUR daily and monthly rate with machine learning techniques By Papadimitriou, Theophilos; Gogas, Periklis; Plakandaras, Vasilios
  16. Is Germany the North Star of Labor Market Policy? By Rinne, Ulf; Zimmermann, Klaus F.
  17. Immigration, growth and unemployment: Panel VAR evidence from OECD countries By Ekrame Boubtane; Dramane Coulibaly; Christophe Rault
  18. International Competitiveness: is the reduction of wages a solution? An evaluation of the Portuguese case By Elsa Cristina Vaz; Maria Paula Fontoura

  1. By: António Afonso; Michael G. Arghyrou; George Bagdatoglou; Alexandros Kontonikas
    Abstract: We use a dynamic multipath general-to-specific algorithm to capture structural instability in the link between euro area sovereign bond yield spreads against Germany and their underlying determinants over the period January 1999 – August 2011. We offer new evidence suggesting a significant heterogeneity across countries, both in terms of the risk factors determining spreads over time as well as in terms of the magnitude of their impact on spreads. Our findings suggest that the relationship between euro area sovereign risk and the underlying fundamentals is strongly time-varying, turning from inactive to active since the onset of the global financial crisis and further intensifying during the sovereign debt crisis. As a general rule, the set of financial and macro spreads’ determinants in the euro area is rather unstable but generally becomes richer and stronger in significance as the crisis evolves.
    Keywords: euro area, crisis, spreads, time-series analysis, time-varying relationship.
    JEL: C22 C52 E43 E62 G12
    Date: 2013–02
  2. By: Adrian Van Rixtel; Gabriele Gasperini
    Abstract: This paper provides an overview of bank funding trends in the euro area following the 2007-09 global financial crisis and the euro area crisis. It shows that funding has become segmented along national borders and that secured instruments are much more prevalent than previously. Rising debt retention by euro area banks has accompanied greater dependence on liquidity provided by the ECB.
    Keywords: euro area, financial crisis, bank funding, renationalisation, secured issuance, debt retention
    Date: 2013–03
  3. By: Zsolt Darvas; Guntram B. Wolff
    Abstract: Irrespective of the euro crisis, a European banking union makes sense, including for non-euro area countries, because of the extent of European Union financial integration.The Single Supervisory Mechanism (SSM) is the first element of the banking union. From the point of view of non-euro countries, the draft SSM regulation as amended by the EU Council includes strong safeguards relating to decision-making, accountability,attention to financial stability in small countries and the applicability of national macro-prudential measures. Non-euro countries will also have the right to leave the SSM and thereby exempt themselves from a supervisory decision. The SSM by itself cannot bring the full benefits of the banking union, but would foster financial integration, improve the supervision of cross-border banks, ensure greater consistency of supervisory practices, increase the quality of supervision,avoid competitive distortions and provide ample supervisory information. While the decision to join the SSM is made difficult by the uncertainty about other elements of the banking union, including the possible burden sharing, we conclude that non-euro EU members should stand ready to join the SSM and be prepared for the negotiations of the other elements of the banking union.
    Date: 2013–03
  4. By: Thushyanthan Baskaran (Department of Economics, University of Göttingen, Germany); Zohal Hessami (Department of Economics, University of Konstanz, Germany)
    Abstract: One possible explanation for the European sovereign debt crises is that the European Economic and Monetary Union (EMU) gave rise to consolidation fatigue or even deliberate over-borrowing. This paper explores the validity of this explanation by studying how three decisive stages in the history of the EMU affected public borrowing in EU member states: the signing of the Maastricht treaty in 1992, the introduction of the Euro in 1999, and the suspension of the SGP in late 2003. The methodology relies on difference-in-difference regressions covering 26 OECD countries over the 1975-2009 period. The findings indicate that the first two 'treatments' reduced deficits especially in traditional high-deficit countries. In contrast, the watering down of the original SGP encouraged borrowing in countries which traditionally have had high deficits.
    Keywords: EMU, monetary union, fiscal policy, public deficits
    JEL: F15 F42 H62 H63
    Date: 2013–03–14
  5. By: Kirstin Hubrich (European Central Bank); Antonello D’Agostino (European Stability Mechanism); Marianna Cervená (Magyar Nemzeti Bank); Matteo Ciccarelli (European Central Bank); Paolo Guarda (Banque centrale du Luxembourg); Markus Haavio (Suomen Pankki); Philippe Jeanfils (National Bank of Belgium); Caterina Mendicino (Banco de Portugal); Eva Ortega (Banco de España); Maria Teresa Valderrama (Oesterreichische Nationalbank); Marianna Valentinyiné Endrész (Magyar Nemzeti Bank)
    Abstract: This paper analyses the transmission of financial shocks to the macroeconomy. The role of macro-financial linkages is investigated from an empirical perspective for the euro area as a whole, for individual euro area member countries and for other EU and OECD countries. The following key economic questions are addressed: 1) Which financial shocks have the largest impact on output over the full sample on average? 2) Are financial developments leading real activity? 3) Is there heterogeneity or a common pattern in macro-financial linkages across the euro area and do these linkages vary over time? 4) Do cross-country spillovers matter? 5) Is the transmission of financial shocks different during episodes of high stress than it is in normal times, i.e. is there evidence of non-linearities? In summary, it is found that real asset prices are significant leading indicators of real activity whereas the latter leads loan developments. Furthermore, evidence is presented that macro-financial linkages are heterogeneous across countries – despite persistent commonalities – and time-varying. Moreover, they differ between euro area and other countries. Results also indicate that cross-country spillovers matter. Finally, important non-linearities in the transmission of financial shocks are documented, as the evidence suggests that the transmission differs in episodes of high stress compared with normal times. JEL Classification: E 440, E320, C320
    Keywords: macro-financial linkages, financial shocks, lead-lag relationships, heterogeneity, cross-country spillovers, non-linearities
    Date: 2013–02
  6. By: Angel Ubide (Peterson Institute for International Economics)
    Abstract: The euro area crisis has probably passed the acute phase, but it has entered a chronic and unstable phase of fractured credit markets, too high funding costs, very weak growth, and dim expectations. More austerity and reforms at the national level alone will not be enough to stabilize the euro area. To ensure its sustainability, the euro area needs to be reengineered to restore political solidarity, end the debate on default and exit, strengthen its institutions and launch eurobonds, and refocus cyclical policies towards stabilizing the business cycle. Without these steps, the euro will never be a credible and sustainable monetary union.
    Date: 2013–02
  7. By: Yvan Guillemette; David Turner
    Abstract: A simple econometric framework is presented linking current account balances of euro area countries to intra and extra euro area competitiveness, cyclical positions, fiscal positions and the oil price. The framework is then used to cyclically-adjust observed current account balances and illustrate the scale of the additional adjustments to competitiveness and/or fiscal balances required in the euro area periphery to bring structural current account balances to levels compatible with sustainable net external debt levels. In Spain and Portugal, cost competitiveness relative to the rest of the euro area would need to improve by about 30%, and by more than twice that in Greece. In peripheral countries, a combination of structural reforms to boost productivity and enhance the flexibility of labour markets, ambitious fiscal consolidation and reductions in labour taxes could substantially facilitate the rebalancing process and reduce the extent to which the burden of adjustment is reliant on further prolonged demand weakness. Surplus and/or strong competitiveness countries could help by likewise making labour and product markets more flexible, accepting above-normal inflation for an extended period and boosting demand, perhaps through reduced fiscal austerity.<P>Options de politiques publiques pour réduire durablement les déséquilibres de la zone euro<BR>Un cadre économétrique simple est développé qui lie la balance au compte courant des pays de la zone euro à la compétitivité intra et extra euro, aux positions cycliques, aux positions budgétaires et au prix du pétrole. Ce cadre est ensuite utilisé pour corriger les balances courantes observées pour le cycle économique et pour illustrer la taille des ajustements additionnels à la compétitivité et/ou aux budgets nécessaires dans la périphérie de la zone euro pour amener les comptes courants structurels à des balances compatibles avec des niveaux durables de dette extérieure nette. L’Espagne et le Portugal nécessiteraient une amélioration de leur compétitivité par rapport au reste de la zone euro de l’ordre de 30%, et la Grèce de plus de deux fois cela. Dans la périphérie de la zone euro, une combinaison de réformes structurelles pour stimuler la productivité et améliorer la flexibilité du marché du travail, de consolidation budgétaire ambitieuse et d’allègement de la taxation du travail pourrait faciliter substantiellement le processus de rebalancement et réduire la mesure dans laquelle le poids de l’ajustement repose sur une faiblesse de la demande prolongée. Les pays en surplus ou avec une forte compétitivité pourraient aider en rendant eux aussi les marchés du travail et des produits plus flexibles, en acceptant une inflation plus élevée que normal sur une longue période et en stimulant la demande, peut-être en atténuant l’austérité fiscale.
    Keywords: Greece, Italy, Portugal, Germany, euro area, competitiveness, unit labour costs, current accounts, Spain, Ireland, imbalances, periphery, external debt, Grèce, Italie, Portugal, Allemagne, compétitivité, Espagne, compte courant, Irlande, coûts unitaires, dette extérieure, déséquilibres, périphérie
    JEL: E61 F32 F34 J31
    Date: 2013–03–20
  8. By: Francesco Paolo Mongelli (European Central Bank)
    Abstract: The destructive potential of the sovereign debt crisis of the euro area has been slowly abating since last summer, but still remains considerable. One reason for it is the sheer complexity of the crisis, which brings together several harmful factors, some long-standing, others more recent, like acts of an ever-growing and mutating tragedy. It combines the features of a financial crisis in some countries with those of a balance-of-payment crisis or sluggish growth in another, overlapping group of countries. All these factors have struck Europe before, but never all at the same time, in so many countries sharing a currency, and with limited adjustment mechanisms. Some countries must undertake sizeable stock-flow adjustments, and reinvent parts of their economies. But the crisis also has two additional dimensions, one being flaws in the governance of the euro area, and the other being an erosion of trust in the viability of the euro area itself. Such concerns have led to talk of a “bailout union”, a “permanent transfer union”, or the hegemony of a country, the lack of solidarity or of risk-sharing, the lack of vision, the risks of fiscal or financial dominance, and so on. The aim of this paper is to give expression to some thoughts on the various dimensions of the crisis without claiming to offer a coherent and conclusive view either of the crisis or the future of the euro area. While the crisis is a traumatic wake-up call, it is also a catalyst for change. Understanding the reform efforts under way will help rebalancing the views of sceptics. JEL Classification: F33, F42, N24
    Keywords: Economic and Monetary Union, Euro, Sovereign Crisis, Optimum Currency Area Theory, Governance Reform, Risk-Sharing, and Moral Hazard
    Date: 2013–02
  9. By: Guglielmo Maria Caporale; Roberta De Santis; Alessandro Girardi
    Abstract: Using annual bilateral data over the period 1988-2011 for a panel of 24 industrialised and emerging economies, we analyse in a time-varying framework the determinants of output synchronisation in EMU (European Monetary Union) distinguishing between core and peripheral member states. The results support the specialisation paradigm rather than the endogeneity hypothesis. Evidence is found in the euro period of diverging patterns between the core and the peripheral EMU countries raising questions about the future stability of EMU.
    Keywords: output synchronisation, trade intensity, endogeneity, European Monetary Union (EMU)
    JEL: F10 F15 F17 F4
    Date: 2013
  10. By: Gächter, Martin (BOFIT); Riedl , Aleksandra (BOFIT); Ritzberger-Grünwald, Doris (BOFIT)
    Abstract: We analyze business cycle convergence in the EU by focusing on the decoupling vs. convergence hypothesis for central, eastern and south eastern Europe (CESEE). In a nutshell, we fnd that business cycles in CESEE have decoupled considerably from the euro area (EA) during the financial crisis in terms of both cyclical dispersion (i.e. the deviation of output gaps) and cyclical correlation. The results are mainly driven by smaller countries, which can be explained by the fact that small economies seem to have larger cyclical swings as they are more dependent on external demand, which causes a decoupling in terms of higher output gap deviations from the EA cycle in times of economic crises. At the same time, this does not necessarily affect business cycle synchronization as measured by cyclical correlations, where the strength of the linear relationship of two cycles is measured. However, despite the recent declines in the co-movement, we generally observe high correlation levels of CESEE countries with the EA after their EU accession in 2004. Finally, we find a significant decoupling of trend growth rates between EA and CESEE until the onset of the financial crises. Since the beginning of the crisis, trend growth rates have declined both in CESEE and the EA with the trend growth differential decreasing significantly from about three to below two percentage points in 2011.
    Keywords: business cycles; EMU; CESEE; optimum currency areas
    JEL: E32 E52 F15 F33 F44
    Date: 2013–02–05
  11. By: Patricia Martins; Leonida Correia
    Abstract: This paper identifies the determinants of macroeconomic forecasts (budget balance, public debt and real GDP growth), of the governments of the 15 EU countries. We have used the forecasts of the Stability and Convergence Programmes submitted between 1998/99 and 2008/09 and the European Commission’s. Results show that, in general, economic growth forecasts submitted by European governments are more optimistic than those published by the European Commission. The lack of accuracy of government forecasts is due to “misinformation” regarding the economic situation at the time of their publication. The differences between observed and forecast changes of budget balance and public debt are explained by the output growth forecast errors and the forecasts of the changes in the two fiscal indicators. These forecast changes tend to revise downwards the changes submitted in the previous Program. Therefore, the governments’ “bad intention” seems to result from their lack of commitment to the objectives of previous programs and it explains the recurrent delays in the implementation of their fiscal consolidation plans.
    Keywords: European Union, Stability and Growth Pact, forecast errors
    JEL: E62 H6
    Date: 2013–02
  12. By: Lucia Orszaghova (European Central Bank; Národná banka Slovenska); Li Savelin (European Central Bank); Willem Schudel (European Central Bank)
    Abstract: As the current financial crisis has shown, macroeconomic imbalances such as persistent current account and trade deficits, can seriously undermine a country’s resilience to economic shocks. Maintaining and enhancing external competitiveness has thus become of increasing concern, particularly to European Union (EU) candidate countries whose economic growth models have been challenged in recent years. Drawing on previous studies, this paper assesses developments in the external competitiveness of EU candidate countries between 1999 and 2011. Taking a broad approach to the issue of competitiveness, the paper considers various indicators of both short and long-term competitiveness, including those related to domestic prices and costs, export performance, and institutional and structural issues. In the context of EU integration, comparisons are drawn with developments in the EU12. We find that, during the pre-crisis period, all candidate countries experienced robust export market growth, but also suffered losses in price and cost competitiveness. In terms of export characteristics, progress has been heterogeneous and also fairly slow when compared with the EU12. All candidate countries have increased their number of export products and trading partners, but only a few have been able to export more complex products. As regards structural issues such as corruption and bureaucratic efficiency, all countries have performed quite poorly with the exception of Iceland. JEL Classification: F1, F43, O52, P22
    Keywords: EU candidate countries, external competitiveness, export growth, export specialisation, export product complexity, extensive and intensive margins, intra-industry trade, foreign direct investment, structural characteristics
    Date: 2013–01
  13. By: Stefano Borgioli (European Central Bank); Ana Cláudia Gouveia; Claudio Labanca
    Abstract: This occasional paper explores the Consolidated Banking Data (CBD), a key component of the ECB statistical toolbox for financial stability analysis. We show that non-consolidated, host-country Monetary Financial Institutions (MFI) balance sheet data, which constitutes a key source of input into monetary analysis, are a rather weak proxy for consolidated, home-country data and therefore cannot easily substitute CBD for the purposes of macro-prudential assessment. In addition, it is argued that, notwithstanding the relevance of large banks, medium-sized and small banks must also be taken into account in financial stability analysis, given their relevance in several EU countries and their different business models. A discussion follows on how aggregate data, broken down by bank size, can be used to complement micro data, in particular by signalling where and what to look for, again highlighting the differences between large banks on the one hand and small and mediumsized banks on the other. JEL Classification: C82, G21
    Keywords: Macro-prudential analysis, Consolidated Banking Data, banking indicators
    Date: 2013–01
  14. By: Peter Martey Addo (Centre d'Economie de la Sorbonne et Università di Venezia - Dipartimento di Economia); Monica Billio (Università di Venezia - Dipartimento di Economia); Dominique Guegan (Centre d'Economie de la Sorbonne)
    Abstract: We propose a transparent way of establishing a turning point chronology for the Euro-zone business cycle. Our analysis is achieve by exploiting the concept of recurrence plots, in this case distance plot, to characterize and detect turning points in the business cycle for any economic system. Firstly, we exploit the concept of recurrence plots on the US Industrial Production Index (IPI) series to serve as a beachmark for our analysis since there already exist reference chronology for the US business cycle, provided by the Dating Committee of the National Bureau of Economic Research (NBER). We then use this concept in constructing a turning point chronology for the Euro-zone business cycle. In particular, we show that this approach permits to detect turning points and study the business cycle without a priori assumptions on the statistical properties on the underlying economic indicator.
    Keywords: Recurrence Plots, economic cycles, turning points, Euro-zone.
    JEL: C14 C22 C40 E32
    Date: 2013–03
  15. By: 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); Plakandaras, Vasilios (Democritus University of Thrace, Department of International Economic Relations and Development)
    Abstract: We combine signal processing to the forecasting abilities of machine learning methods by introducing a hybrid Ensemble Empirical Mode Decomposition (EEMD), Multivariate Adaptive Regression Splines (MARS) and Support Vector Regression (SVR) model in order to forecast monthly and daily US/Euro FX rate. After trend extraction for the initial dataset, MARS selects the most informative variables among the plethora included in our data sample which are then fed into an SVR model. The overall process is repeated twice, one for the trend and one for the fluctuation component of all time series. The above implementation proved its superior forecasting abilities in predicting USD/EUR exchange rate compared to various models both on monthly and daily forecasting horizon. Overall the proposed model a) is a combination of empirically proven effective techniques in forecasting time series, b) is data driven, c) relies on minimum initial assumptions and d) provides a structural aspect of the forecasting problem.
    Keywords: Exchange rate forecasting; Support Vector Regression; local learning; feature selection; Ensemble Empirical Mode Decomposition; time series; trend
    JEL: G15
    Date: 2013–03–19
  16. By: Rinne, Ulf (IZA); Zimmermann, Klaus F. (IZA and University of Bonn)
    Abstract: Germany's recovery from an unemployment disease and its resilience to the Great Recession is remarkable. Its success story makes it a showcase for labor policy and labor market reforms. This paper assesses the potential of the German experience as a model for effective, evidence-based policymaking. Flexible management of working time (through overtime and short-time work, time accounts and labor hoarding), social cohesion and controlled unit labor costs, combined with a rigid, incentive-oriented labor policy supported by effective program evaluation, define the characteristics of a strong reference model. Austerity, sometimes seen as core to the German model, is not viewed as a key element.
    Keywords: labor market reforms, labor policy, unemployment, Great Recession, Germany, austerity
    JEL: J68 J21 P52 O57
    Date: 2013–03
  17. By: Ekrame Boubtane (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Dramane Coulibaly (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense); Christophe Rault (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)
    Abstract: This paper examines empirically the interaction between immigration and host country economic conditions. We employ a panel VAR techniques to use a large annual dataset on 22 OECD countries over the period 1987-2009. The VAR approach allows to addresses the endogeneity problem by allowing the endogenous interaction between the variables in the system. Our results provide evidence of migration contribution to host economic prosperity (positive impact on GDP per capita and negative impact on aggregate unemployment, native-and foreign-born unemployment rates). We also find that migration is influenced by host economic conditions (migration responds positively to host GDP per capita and negatively to host total unemployment rate).
    Keywords: Immigration; growth; unemployment; panel VAR
    Date: 2013–02
  18. By: Elsa Cristina Vaz; Maria Paula Fontoura
    Abstract: The purpose of this paper is to analyse, for the case of Portugal, the effectiveness of wage reduction - a current proposal since 2011 to help the country to reverse the high public and external debt - in promoting the efficiency and international competitiveness of the economy. A static multi-sector and single-country general equilibrium model is used and data is collected from the GTAP7 Database. The model allows the measurement of changes by sector. The simulations performed show that extending the reduction of wages already deployed by the government in the public sector to the private sector leads to a positive impact on employment (both skilled and unskilled labour), production and volume of exports in all sectors except those that are R&D intensive, the latter having a low weight in the Portuguese economy. However, it is possible that the positive results in terms of external competitiveness are not sustainable, as the impact on productivity is negative, albeit small, for most sectors. There are also reasons for concern regarding the observed deterioration of the trade balance of most sectors, the exception being the traditional labour intensive sectors, which show good prospects in this respect.
    Keywords: Competitiveness, wages, Stability and Growth Pact; General, Equilibrium Model, Portugal.
    Date: 2013–02

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