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on European Economics |
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Issue of 2013‒04‒13
sixteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Schmidt, Christoph M; Weigert, Benjamin |
| Abstract: | The euro area is experiencing a severe and highly complex crisis. It comprises three problem areas, the difficulties of some highly indebted European sovereigns to ascertain funding at palatable cost, the disconcerting fragility of the European banking system and disappointing growth prospects in the euro area periphery. To make matters even worse, these problems have developed into a systemic crisis of the European Monetary Union (EMU), since observers have apparently developed fundamental doubts over its integrity. To overcome this systemic crisis, it would not be sufficient, if only the stronger euro area economies provided more solidarity, nor would it be sufficient, if only all of Europe adhered to ironclad budgetary discipline from now on. A European Redemption Pact could be a strong political commitment to the EMU and offer a bridge between the proponents of fiscal discipline and structural reform and those governments advocating for more support. This pact would entail two indispensable aspects, the codification of a credible and coherent reform path and a temporary and limited instrument for joint refinancing. |
| Keywords: | debt sustainability; Euro crisis; European redemption pact; financial market regulation; governance of the euro area |
| JEL: | E42 E60 F24 G28 H6 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9414&r=eec |
| By: | Obstfeld, Maurice |
| Abstract: | Because of recent economic crises, financial fragility has regained prominence in both the theory and practice of macroeconomic policy. Consistent with macroeconomic paradigms prevalent at the time, the original architecture of the euro zone assumed that safeguards against inflation and excessive government deficits would suffice to guarantee macroeconomic stability. Recent events, in both Europe and the industrial world at large, challenge this assumption. After reviewing the roots of the euro crisis in financial-market developments, this essay draws some conclusions for the reform of euro area institutions. The euro area is moving quickly to correct one flaw in the Maastricht treaty, the vesting of all financial supervisory functions with national authorities. However, the sheer size of bank balance sheets suggest that the euro area must also confront a financial/fiscal trilemma: countries in the euro zone can no longer enjoy all three of financial integration with other member states, financial stability, and fiscal independence, because the costs of banking rescues may now go beyond national fiscal capacities. Thus, plans to reform the euro zone architecture must combine centralized supervision with some centralized fiscal backstop to finance bank resolution and deposit insurance. |
| Keywords: | banking union; euro crisis; financial stability; trilemma |
| JEL: | E44 F36 G15 G21 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9415&r=eec |
| By: | Gabrisch, Hurbert (Halle Institute for Economic Research); Orlowski, Lucjan (John F. Welch College of Business, Sacred Heart University); Pusch, Toralf (Halle Institute for Economic Research) |
| Abstract: | This study examines the key drivers of sovereign default risk in five euro area periphery countries and three euro-candidates that are currently pursuing independent monetary policies. We argue that the recent proliferation of sovereign risk premiums stems from both domestic and international sources. We focus on contagion effects of external financial crisis on sovereign risk premiums in these countries, arguing that the countries with weak fundamentals and fragile financial institutions are particularly vulnerable to such effects. The domestic fiscal vulnerabilities include: economic recession, less efficient government spending and a rising public debt. External ÔpushÕ factors entail increasing liquidity- and counter-party risks in international banking, as well as risk-hedging appetites of international investors embedded in local currency depreciation against the US Dollar. We develop a model capturing the internal and external determinants of sovereign risk premiums and test for the examined country groups. The results lead us to caution against premature fiscal consolidation in the aftermath of the global economic crisis, since such policy might actually worsen sovereign default risk. The model works well for the euro-periphery countries; it is less robust for the euro-candidates that upon a future euro adoption will have to pursue real economy growth oriented policies in order to mitigate a potential increase in sovereign default risk. |
| Keywords: | Sovereign Default Risk, Euro area, Public Debt, Liquidity Risk, Counter-party Risk. |
| JEL: | E43 E63 G12 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:she:wpaper:2012002&r=eec |
| By: | Alicia Garcia-Herrero; Fielding Chen |
| Abstract: | This paper shows stylized facts on the rather large retrenchment of cross-border lending by Euro-area banks into emerging markets. The clearest case is Asia where Euro-area banks have massively lost market share. The reason, however, is not only related to their retrenching but also to the surge in lending from others banks, especially from Emerging Asia. As a second step, we investigate empirically the determinants of cross-border bank flows with a gravity model and differentiate across Euro-area, US and Asian banks. We find a number of home factors behind the retrenchment in lending. Two are common to all home countries analyzed, namely global risk aversion and trade which, respectively, discourage and foster banks’ overseas lending. Other factors, however, are specific of Euro-area banks, such as the higher cost of funding which is found to discourage lending while poor economic growth tends to foster it. The latter result would indicate that economic weakness of the last few years may have actually cushioned Euro-area banks’ deleveraging from emerging markets. All in all, Euroarea banks’ cross border lending appear to be more dependent on their cycle (both in terms of growth and external cost of funding) when compared with US and Asian banks. |
| Keywords: | cross-border bank lending, emerging markets, Euro area, deleveraging |
| JEL: | F34 G01 O57 C23 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1313&r=eec |
| By: | Fernández-Villaverde, Jesús; Garicano, Luis; Santos, Tano |
| Abstract: | We study the mechanisms through which the adoption of the Euro delayed, rather than advanced, economic reforms in the Euro zone periphery and led to the deterioration of important institutions in these countries. We show that the abandonment of the reform process and the institutional deterioration, in turn, not only reduced their growth prospects but also fed back into financial conditions, prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident. We analyze empirically the interrelation between the financial boom and the reform process in Greece, Spain, Ireland, and Portugal and, by way of contrast, in Germany, a country that did experience a reform process after the creation of the Euro. |
| Keywords: | bubbles; Euro crisis; Financial crisis; political economy |
| JEL: | D72 E0 G15 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9404&r=eec |
| By: | Paulo R. Mota (University of Porto – School of Economics and Business); Abel L. Costa Fernandes (University of Porto – School of Economics and Business); Ana-Cristina Nicolescu (West University of Timisoara – Faculty of Economics and Business Administration) |
| Abstract: | The idea that the present euro-zone sovereign debt crisis was caused by structural weaknesses degenerating into fundamental macroeconomic imbalances in the peripheral countries prevails among economists and politicians alike. We use quarterly data from 2000 to 2011 from the 27 European Union countries to uncover the main factors explaining the debt to GDP ratio dynamics. We also examine three possible determinants of that crisis: i) weak fundamentals; ii) inappropriate fiscal policies adopted by the governments at the beginning of the crisis; iii) unfavorable debt dynamics due to a sharp GDP contraction, coupled with substantial increases in the interest rates on government bonds. Except for the current account to GDP ratio, we fail to find any significant relationship between the fundamentals prior to the financial crisis, and the ensuing dynamics on both public debt to GDP, and interest rates on government bonds. We also reject any association between the initial fiscal policy response to the crisis and the following debt crisis. We conclude that the immediate explanation for the adverse debt dynamics unraveling after 2007 was the sharp GDP contraction which, in turn, induced unfavorable expectations by creditors causing higher interest rates charged on peripheral countries’ debt and a liquidity crisis. |
| Keywords: | eurozone; macroeconomic imbalances; sovereign debt crisis |
| JEL: | H2 H5 H6 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:467&r=eec |
| By: | Lamé, Gildas |
| Abstract: | This paper implements an affine term structure model that accommodates "unspanned" macro risks for the Euro area, i.e. distinct from yield-curve risks. I use a Near-Cointegrated VAR-like approach to obtain a better estimation of the historical dynamics of the pricing factors, thus providing more accurate estimates of the term premium incorporated into the Eurozone's sovereign yield curve. I then look for notable episodes of the monetary cycle where long yields display a puzzling behavior vis-à-vis the short rate in contrast with the Expectation Hypothesis. The Euro-area bond market appears to have gone through its own "Greenspan conundrum".At least three "conundra" episodes can be singled out in the Eurozone between January 1999 and August 2008. The term premium substantially contributed to these odd phenomena. |
| Keywords: | Affine term structure models; Unspanned macro risks; Monetary policy; Expectation Hypothesis; Term Premium; Macroeconomy |
| JEL: | C5 C51 E44 E5 E52 G12 |
| Date: | 2013–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45870&r=eec |
| By: | Reis, Ricardo |
| 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. |
| Keywords: | central bank capital; Eurosystem; seignorage; sovereign debt crisis |
| JEL: | E58 F34 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9326&r=eec |
| By: | Catão, Luis A. V.; Fostel, Ana; Rancière, Romain |
| Abstract: | The recent Eurozone debt crisis has witnessed sharp decouplings in cross-country bond yields without commensurate shifts in relative fundamentals. We rationalize this phenomenon in a model wherein countries with different fundamentals are on different equilibrium paths all along, but which become discernable only during bad times. Key ingredients are cross-country differences in the volatility and persistence of fiscal revenue shocks combined with asymmetric information on country-specific fiscal shocks. Differences in the cyclicality of fiscal revenues affect the option value of borrowing and resulting default risk; unobservability of fiscal shocks makes bond pricing responsive to market actions. When tax revenues are hit by common positive shocks, no country increases net debt and interest spreads stay put. When a common negative revenue shock hits and is persistent, low volatility countries adjust spending while others resort to borrowing. This difference signals a relative deterioration of fiscal outlooks, interest spreads jump and decoupling takes place. |
| Keywords: | Default; Eurozone Debt Crisis; Fiscal Gaps; Information Asymmetry; Perfect Bayesian Equilibrium; Pesistence; Sovereign Debt; Volatility |
| JEL: | E62 F34 G15 H3 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9368&r=eec |
| By: | Fazlioglu S. (GSBE) |
| Abstract: | This study aims at providing an empirical analysis of long-term determinants of sovereign debt yield spreads under European EMU (Economic and Monetary Union) through pairwise approach within panel framework. Panel gravity models are increasingly used in the cross-market correlation literature while to our knowledge, this is the first empirical study employing the method in the bond market literature. Accordingly, sovereign yield spreads are positively related to differential government debt ratio while negatively related to relative economic growth performance, differential liquidity of the individual debt markets as well as governance quality. Moreover, non-linear dynamic panel estimates indicate that markets seem to ignore fundamentals after the emerge of EMU while the very same risk factors are revalued by the markets after the 2008/2009 financial crisis. Furthermore, markets price fiscal indebtedness more among the EMU members than among the non-EMU members. Finally, the results of the dynamic panel model are robust to different estimation techniques such as GMM as well as sample selection. |
| Keywords: | National Debt; Debt Management; Sovereign Debt; |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umagsb:2013007&r=eec |
| By: | Vespignani, Joaquin L.; Ratti, Ronald A |
| Abstract: | There are marked differences in the effect of increases in monetary aggregates in China, Japan and the U.S. on Euro area economic and financial variables over 1999-2012. Increases in monetary aggregates in China are associated with significant increases in the world price of commodities and with increases in Euro area inflation, industrial production and exports. Results are consistent with shocks to China‟s M2 facilitating domestic growth with expansionary consequences for the Euro area economy. In contrast, increases in monetary aggregates in Japan are associated with significant appreciation of the Euro and decreases in Euro area industrial production and exports. Production of goods highly competitive with European goods in Japan and expenditure switching in Japan are consistent with the results. U.S. monetary expansion has relatively small effects on the Euro area over this period compared to results reported in the literature for earlier sample periods. |
| Keywords: | International monetary transmission, China‟s monetary aggregates, Euro area Commodity prices |
| JEL: | E40 E42 E52 E58 |
| Date: | 2013–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45844&r=eec |
| By: | Paula Gracinda Santos (Faculdade de Economia, University of Porto); Ana Paula Ribeiro (Faculdade de Economia, University of Porto, and CEF.UP – Center for Economics and Finance at UP); Vitor Manuel Carvalho (Faculdade de Economia, University of Porto, and CEF.UP – Center for Economics and Finance at UP) |
| Abstract: | From the late 70s onwards, the literature has produced numerous studies, mostly for developing countries, relating exports and economic growth. Since several European Union (EU) countries face strong recessions in the sequence of the economic crisis and the related fiscal consolidation measures, exports emerge as a meaningful source of growth for developed countries with rather stagnant domestic markets. In this context, we assess if and how the product and the destination structures of exports shape the growth dynamics for the EU countries. Using panel data estimation to 23 of the 27 EU members over the period 1995-2010, we find that economic growth is foster through export specialization in high value-added products, such as manufactures and high-technology. Moreover, we find evidence that higher growth is fostered by export diversification across partners while enlarging the portfolio of partners, mainly to less developed and more distant countries, has negative impacts on European growth. Unambiguously, relative concentration of exports should be directed towards higher growth countries. |
| Keywords: | Economic growth; Product structure of exports; Exports’ destination; European Union; Panel data. |
| JEL: | C23 F10 O40 O52 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:479&r=eec |
| By: | Andreea Stoian (Department of Finance, Bucharest University of Economic Studies); Rui Henrique Alves (Faculdade de Economia, Universidade do Porto) |
| Abstract: | The public finance constraints introduced by the Maastricht Treaty have been subject to numerous debates among economists. Balassone and Franco (2000) pointed out, for instance, that the fulfillment of these constraints allows for fiscal discipline and flexibility and excludes any bias from an unsustainable fiscal policy in the long run. But data shows that many of the advanced economies have exceeded the limits for budgetary deficits and public debt since 1993. Therefore, the question on whether fiscal policy is sustainable naturally arises. The aim of this paper is to investigate the achievement of the solvency constraint for the European Union high indebted countries using a simple public debt dynamic model. The required primary surplus is estimated under different scenarios, namely: (i) a baseline that aims at stabilizing public debt; (ii) a 60% of GDP scenario; and (iii) a minimum public debt scenario that differs among the countries under analysis. From results, we try to draw conclusions on what really matters for fiscal sustainability. |
| Keywords: | Fiscal policy, primary balance, public debt, fiscal sustainability, Maastricht Treaty |
| JEL: | E62 H62 H63 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:464&r=eec |
| By: | Hutengs, Oliver; Stadtmann, Georg |
| Abstract: | In recent years youth unemployment rates across Europe soared, causing the European Commission to take actions through initiatives to counter this development. This article examines youth unemployment development in selected CEE countries and compares them to the EU 15. We use Okun's law and estimate age and country specific Okun coefficients for five different age cohorts. Our results show that young people display much higher Okun coefficients than their older peers, thus confirming that young people are more prone to macroeconomic shocks. This result might be a justification for additional governmental intervention and active labour market policies favouring young people. -- |
| Keywords: | Okun's law,labor market,youth unemployment |
| JEL: | E24 F50 C23 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:euvwdp:333&r=eec |
| By: | Evenett, Simon J; Fritz, Johannes; Wermelinger, Martin |
| Abstract: | Access to the fast-growing Chinese economy is prized by policymakers and business people. Concerns that European firms are missing out on the Chinese boom have caused soul-searching in Europe about "competitiveness" and led to accusations of Chinese protectionism. For the first 15 members to join the European Union this paper estimates the factors affecting the share of each country’s exports going to China from 2000 to 2010. China’s growing share of world spending is found to be the most important factor but labour cost differentials within Europe, two forms of commercial diplomacy, and crisis-era murky protectionism by China contributed too. |
| Keywords: | China; commercial diplomacy; competitiveness; European Union; exports; protectionism |
| JEL: | F14 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9391&r=eec |
| By: | Heinemann, Friedrich; Osterloh, Steffen; Kalb, Alexander |
| Abstract: | There is a growing empirical literature studying whether fiscal rules reduce borrowing costs. Nevertheless, it remains an open question whether these rules are effective genuinely or just because they mirror fiscal preferences of politicians and voters. In our analysis of European bond spreads, we shed light on this issue by employing several types of stability preference related proxies. These proxies refer to a country's past stability performance, government characteristics and survey results related to general trust. We find evidence that these preference indicators have an influence on risk premia and dampen the measurable impact of fiscal rules. Yet, the interaction of stability preferences and rules points to a particular potential of fiscal rules in countries with a historically low stability culture. -- |
| Keywords: | fiscal preferences,fiscal rules,debt crisis,bond markets |
| JEL: | H63 E62 G12 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:13016&r=eec |