nep-eec New Economics Papers
on European Economics
Issue of 2013‒04‒27
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Euro area CDS spreads in the crisis: The role of open market operations and contagion By Gerlach, Petra
  2. Origins and prospects of the Euro existential crisis By Luigi Bonatti; Andrea Fracasso
  3. The endless Eurozone crisis, where do we stand? A Classical-Kaleckian overview By Sergio Cesaratto
  4. "On the Franco-German Euro Contradiction and Ultimate Euro Battleground" By Jorg Bibow
  5. Sovereign default swap market efficiency and country risk in the eurozone By Gündüz, Yalin; Kaya, Orcun
  6. Over-indebted Youth: Unemployment and Deleveraging in the Euro Zone By Harald Sander
  7. The Bank Lending Channel and Monetary Policy Rules for European Banks: Further Extensions By Nicholas Apergis; Stephen M. Miller; Effrosyni Alevizopoulou
  8. On the Linkages between Stock Prices and Exchange Rates: Evidence from the Banking Crisis of 2007-2010 By Guglielmo Maria Caporale; John Hunter; Faek Menla Ali
  9. Purchasing Power Parity between the UK and the Euro Area By Giorgio Canarella; Stephen M. Miller; Stephen K. Pollard
  10. On the Stability of Euro Area Money Demand and its Implications for Monetary Policy By Matteo Barigozzi; Antonio Conti
  11. Euroization and cyclical stabilization in Montenegro: an empirical analysis By Sokic, Alexandre; FABRIS, Nikola
  12. The European Welfare State from the Prospect of New EU Member States By Ludek Kouba; Ladislava Grochova
  13. Lessons from the European Spaghetti Bowl By Baldwin, Richard
  14. Bank-lending constraints and alternative financing during the financial crisis: Evidence from European SMEs By Casey, Eddie; O'Toole, Conor

  1. By: Gerlach, Petra
    Abstract: This paper studies euro area CDS spreads during the financial crisis. We examine the impact of the crisis on both commercial banks and sovereigns, and focus on two questions. First, have the ECB's open market operations reduced market stress? It seems that large repo volumes, especially if credited to banks the same day, helped initially, and that the announcement of the Securities Market Programme also calmed markets. Asset purchase volumes do not seem to matter directly. Second, was there contagion among and between banks and sovereigns? We find evidence for both. Interestingly, sovereign CDS spreads appear immune after April 2010. We argue that this might reflect the ECB's efforts to stop contagion during the euro crisis.
    Date: 2013–02
  2. By: Luigi Bonatti; Andrea Fracasso
    Abstract: The current large current account imbalances in the Euro zone reflect persistent diverging trends between the core and the peripheral countries, which were paradoxically reinforced by the very same introduction of the Euro. The reduction in the credit spreads and the increase in capital flows that followed the Euro adoption, permitted to most peripheral countries to fail to uniform their price and wage dynamics, as well as their fiscal policies, to the more disciplined countries. The global financial crisis and the Greek misreporting of budgetary data made the situation precipitate and expose the periphery's deep weakness. Despite some temporary financial assistance from the core countries and the ECB, the long term solution to the situation can only be a rebalancing and real convergence within the Euro zone. Because the core countries are unwilling to accept higher inflation and larger fiscal expenditures, and even less inclined to set up a transfers union, the burden of adjustment will bear on the peripheral countries which will most likely suffer very painful processes of internal devaluation. The long-term future of the Euro, thus, will depend on how the societies and political systems of the Euro periphery will react to the rebalancing process and the sacrifices that this will entail.
    Keywords: European imbalances, Macroeconomic divergence and adjustment, Germany, Political economy of structural change, Social market economy
    JEL: F41 F42 F43 F51
    Date: 2013
  3. By: Sergio Cesaratto
    Abstract: It is not easy to untangle the logic that in the past led to creation of the European Monetary Union (EMU) and that is currently guiding the prevailing Eurozone (EZ) policies. Although lacking the right institutions, which can be seen as the ultimate root of its crisis, the ten years of the EMU could be celebrated in 2008 with some fanfare. The EMU even seemed a success, judged from the point of view of imbalanced growth of some peripheral countries that masked its deflationary stance. This imbalanced growth was the proximate cause of the EZ financial crisis. In the paper we shall review the main causes of the EZ financial crisis, interpreted as a balance of payments crisis; the role of the European payment system TARGET 2 in buffering its violent blast; the Classical-Kaleckian rationale of the German malevolent mercantilism; the inadequate EZ policy measures to respond to the crisis; possible alternative solutions. Unfortunately, rather than pushing towards the creation of a different set of European institutions, the prevailing crisis resolution philosophy resembles a late vindication of the original deflationary Euro-bias.
    Keywords: European Monetary Union, financial crisis, Germany, neo-mercantilism, balance of payment,capital flows, sudden stops, TARGET 2, OMT
    JEL: E11 E12 E42 E58 F32 F33 F34 F36 N24
    Date: 2013–02
  4. By: Jorg Bibow
    Abstract: Highlighting that France and Germany held largely contradicting hopes and aspirations for Europe's common currency, this paper analyzes how the resulting euro contradiction conditioned the ongoing euro crisis as well as current strategies to resolve it. While Germany generally prevailed in hammering out the design of the euro policy regime, the German authorities have failed to see the inconsistency in their policy endeavors: the creation of a model whose workability presupposes that others behave differently cannot be made to work by forcing everyone to behave like Germany. This fundamental misunderstanding has made Germany the main culprit in the euro crisis, but it has yet to face the full consequences of its actions. Germany had sought every protection against the much-dreaded euro "transfer union," but its own conduct has made that very outcome inevitable. Conversely, having been disappointed in its own hopes for the euro, France is now facing the prospect of a lost generation-a prospect, shared with other debtor nations in the union, that has undermined the Franco-German alliance and may soon turn it into the ultimate euro battleground.
    Keywords: Currency Union; Euro Policy Regime; Euro Crisis; Franco-German Partnership; Competitiveness; ECB Policies
    JEL: E02 E42 E58 E61 E65
    Date: 2013–04
  5. By: Gündüz, Yalin; Kaya, Orcun
    Abstract: This paper uses sovereign CDS spread changes and their volatilities as a proxy for the informational efficiency of the sovereign markets and persistency of country risks. Specifically, we apply semi-parametric and parametric methods to the sovereign CDSs of 10 eurozone countries to test the evidence of long memory behavior during the financial crisis. Our analysis reveals that there is no evidence of long memory for the spread changes, which indicates that the price discovery process functions efficiently for sovereign CDS markets even during the crisis. In contrast, both semi-parametric methods and the dual-parametric model imply persistent behavior in the volatility of changes for Greece, Portugal, Ireland, Italy, Spain, and Belgium addressing persistent sovereign uncertainty. We provide evidence of causality from volatility in CDS prices to sovereign risk premiums for these peripheral economies. We furthermore demonstrate the potential spillover effects of spread changes among eurozone countries by estimating dynamic conditional correlations. --
    Keywords: credit default swaps,long memory,sovereign risk,eurozone economies,FIGARCH,dynamic conditional correlation
    JEL: C22 C58 G01 G15
    Date: 2013
  6. By: Harald Sander (Maastricht School of Management & Institute of Global Business & Society, Cologne University of Applied Sciences)
    Abstract: This paper looks at the Euro-zone crisis from the point of view of the Euro-zone youth. Young people in many Euro-zone countries are today confronted with high and persistent unemployment with potentially long-lasting “scarring effects” compromising their present and future well-being. While lower and sustainable public debts are desirable from the point of view of inter-generational justice, it is argued that this objective cannot be achieved by means of front-loaded austerity policies. With long-term negative consequences of short-term austerity it is shown that not only social consideration but also the underlying public debt dynamics in the presence of scarring and other hysteresis effects make a strong case for a gradual growth-oriented approach to deleveraging that carefully aims at balancing short- and long-term costs and benefits while protecting vulnerable young people.
    Keywords: Youth unemployment, scarring effects, hysteresis, debt deleveraging, European Monetary Union, financial crisis
    JEL: E6 F4 H63 J4
    Date: 2012–09
  7. By: Nicholas Apergis (Department of Banking and Financial Management, University of Piraeus); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Effrosyni Alevizopoulou (Department of Banking and Financial Management, University of Piraeus)
    Abstract: The monetary authorities affect the macroeconomic activity through various channels of influence. This paper examines the bank lending channel, which considers how central bank actions affect deposits, loan supply, and real spending. The monetary authorities influence deposits and loan supplies through its main indicator of policy, the real short-term interest rate. This paper employs the endogenously determined target interest rate emanating from the central bank’s monetary policy rule to examine the operation of the bank lending channel. Furthermore, it examines whether different bank-specific characteristics affect how European banks react to monetary shocks. That is, do sounder banks react more to the monetary policy rule than less-sound banks. In addition, inflation and output expectations alter the central bank’s decision for its target interest rate, which, in turn, affect the banking system’s deposits and loan supply. Robustness tests, using additional control variables, (i.e., the growth rate of consumption, the ratio loans to total deposits, and the growth rate of total deposits) support the previous results.
    Keywords: Monetary policy rules, bank lending channel, European banks, GMM methodology
    Date: 2012–04
  8. By: Guglielmo Maria Caporale; John Hunter; Faek Menla Ali
    Abstract: This study examines the nature of the linkages between stock market prices and exchange rates in six advanced economies, namely the US, the UK, Canada, Japan, the euro area, and Switzerland, using data on the banking crisis between 2007 and 2010. Bivariate GARCH-BEKK models are estimated producing evidence of unidirectional spillovers from stock returns to exchange rate changes in the US and the UK, in the opposite direction in Canada, and of bidirectional spillovers in the euro area and Switzerland. Furthermore, causality-in-variance from stock returns to exchange rates changes is found in Japan and in the opposite direction in the euro area and Switzerland, whilst there is evidence of bidirectional feedback in the US and Canada. These findings imply limited opportunities for investors to diversify their assets during this period.
    Keywords: Stock prices, exchange rates, causality-in-variance, cointegration
    JEL: F31 G15 C32
    Date: 2013
  9. By: Giorgio Canarella (Department of Finance, University of Nevada, Las Vegas); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Stephen K. Pollard (Department of Economics, California State University, Los Angeles)
    Abstract: We use the Johansen cointegration approach to assess the empirical validity of the purchasing power parity (PPP) between the UK and the Euro Area, which we represent by Germany, the largest of its members. We conduct the empirical analysis in the context of the global financial crisis that began in 2007 and find that it directly affects the cointegration space. We fail to validate the Johansen and Juselius (1992) original hypothesis that nonstationarity of the PPP associates with the nonstationarity of interest rate differentials to produce a stationary relation. On the other hand, we do not reject PPP. We find that PPP cointegrates with inflation differentials. We also find, contrary to conventional wisdom, that (i) equilibrium adjustment occurs between the German and UK inflation rates, while weak exogeneity exists for the German and UK interest rates and the PPP condition, and (ii) three common trends associated with the German interest rate, the UK interest rate, and the PPP condition “push” the system with the German interest rate and the PPP condition playing dominant roles.
    Keywords: Purchasing Power Parity, Euro Area, Cointegrated VAR.
    JEL: E31 E43 F31 F32
    Date: 2012–08
  10. By: Matteo Barigozzi; Antonio Conti
    Abstract: We revisit the usefulness of long-run money demand equations for the European Central Bank. We first conduct a model evaluation exercise by means of a recent timeóvarying cointegration test. A stable relation for euro area M3 is not rejected by data only when accounting for both a speculative motive, represented by international financial markets, and a precautionary motive, proxied by changes in the unemployment rate. Second, relying on this finding, we propose and estimate a novel time-invariant specification for money demand which allows us (i) to build a leading indicator of stock market busts and (ii) to describe the anomalous behavior of M3 in the last decade. Excess liquidity matters for both financial and price stability.
    Keywords: money demand; timeóvarying cointegration; priceóearnings ratios; unemployment rate; monetary policy
    Date: 2013–04–23
  11. By: Sokic, Alexandre; FABRIS, Nikola
    Abstract: The aim of this paper is to evaluate the importance of the issue of the loss of an independent monetary policy in the case of officially euroized Montenegro. We examine the extent to which the monetary policy of the European Central Bank, which is set according to the economic conditions prevailing in the euro area, has contributed to the stabilisation of the business cycle of unilaterally euroized Montenegro. It is shown that under euroization the ECB monetary policy has been acyclical with respect to Montenegrin inflation and significantly countercyclical with respect to Montenegrin output growth. The comparative analysis with Serbia does not show that keeping an independent monetary policy would have improved the cyclical stabilisation in Montenegro. The pass-through from ECB policy rates to retail interest rates prevailing at commercial banks in Montenegro is shown to depend significantly on the macroeconomic and banking conditions prevailing in Montenegro.
    Keywords: euroisation, dollarization
    JEL: E3 E31 E5 E52
    Date: 2013–04–25
  12. By: Ludek Kouba (Department of Economics, Faculty of Business and Economics, Mendel University in Brno); Ladislava Grochova (Department of Economics, Faculty of Business and Economics, Mendel University in Brno)
    Abstract: The aim of this paper is to analyse and discuss the heterogeneity level between the old and new EU member states in terms of welfare state development. In order to discuss the research questions, we performed the cluster analysis that provides the overall survey of the welfare state development and besides that, the results were divided into four dimensions: demographic, economic, institutional and social. In comparison with the thematic literature, we modified the dimensions, including our original institutional dimension, and added a dynamic point of view. The cluster analysis resulted in the existence of three clusters: Core cluster, Periphery cluster and Eastern cluster. The Eastern cluster is still relatively stable and covers in a total of nine of the ten Central and Eastern European countries that were included in the analysis: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia (hence apart from Slovenia). On the other hand, using the dimensional approach, the CEE countries were grouped together with the old EU member countries, both from the Core cluster and from the Periphery cluster, within the economic and institutional dimensions. Therefore, we conclude that the new EU member countries, nowadays, do not form an internally homogenous group in terms of the features of their welfare state.
    Keywords: Welfare state, CEE countries, new EU member states, cluster analysis
    JEL: H5 C38
    Date: 2013–04
  13. By: Baldwin, Richard (Asian Development Bank Institute)
    Abstract: European economic integration fascinates and inspires for the way it brought peace to a continent torn by violent and long-standing rivalries. The lessons from Europe, however, cannot be applied directly as the degree of the European Union’s supranationality is unthinkable elsewhere. This paper discusses how Europe overcame the specific problem of overlapping free trade agreements (FTAs) with the Pan-European Cumulation System which instituted common rules of origin, regional cumulation of value, and completed the full matrix of bilateral FTAs. After this, Europe had what can be thought of as a “customs union” for rules of origin.
    Keywords: european economic integration; european union; eu; europe; trade; free trade agreements; fta; regional integration; rules of origin
    JEL: F15 F20
    Date: 2013–04–24
  14. By: Casey, Eddie; O'Toole, Conor
    Abstract: The financial crisis has brought to the fore concerns regarding small- and medium-sized enterprises' (SMEs) capacity to access traditional bank lending. Using European firm-level data on SME access to finance since the onset of the financial crisis, we find that bank-lending constrained SMEs are significantly more likely to avail of alternative forms of external finance, controlling for firm-level and country-level characteristics. We then determine the implications that usage of alternative forms of finance can have for certain economically desirable business activities. In particular, we find that using alternative finance substantially reduces the likelihood of business fixed investment. This effect is not evident for business innovation.
    Keywords: data/investment
    Date: 2013–03

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