nep-eec New Economics Papers
on European Economics
Issue of 2013‒05‒05
seventeen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Pure or wake-up-call contagion? Another look at the EMU sovereign debt crisis By Raffaela Giordano; Marcello Pericoli; Pietro Tommasino
  2. Expected sovereign defaults and fiscal consolidations By Werner Roeger; Jan in 't Veld
  3. The European Debt Crisis: How did we get into this mess? How can we get out of it? By Michael C. Burda; ; ;
  4. Linkages between the Eurozone and the South-Eastern European Countries: A Global VAR Analysis By Minoas Koukouritakis; Athanasios Papadopoulos; Andreas Yannopoulos
  5. Economic adjustment in the Baltic Countries By Ardo Hansson; Martti Randveer
  6. Public-private wage differentials in euro area countries: evidence from quantile decomposition analysis By Domenico Depalo; Raffaela Giordano; Evangelia Papapetrou
  7. Transmission Effects in the Presence of Structural Breaks: Evidence from South-Eastern European Countries By Minoas Koukouritakis; Athanasios Papadopoulos; Andreas Yannopoulos
  8. Main results of the Household Finance and Consumption Survey: Italy in the international context By Romina Gambacorta; Giuseppe Ilardi; Andrea Locatelli; Cristiana Rampazzi; Raffaella Pico
  9. Macroeconomic Determinants of the Credit Risk in the Banking System: The Case of the GIPSI By Vítor Castro
  10. Balancing the European Monetary Union - an Impact Analysis on the Return of National Currencies By Anke Mönnig
  11. The cyclically-adjusted budget balance used in the EU fiscal framework: an update By Gilles Mourre; George-Marian Isbasoiu; Dario Paternoster; Matteo Salto
  12. The Effects of Debt Intolerance and Public Debt Sustainability on Credit Ratings: Evidence From European Economies By Ata Ozkaya
  13. Productivity growth in Europe By Dall'Olio, Andrea; Iootty, Mariana; Kaneira, Naoto; Saliola, Federica
  14. Credit supply during a sovereign debt crisis By Marcello Bofondi; Luisa Carpinelli; Enrico Sette
  15. Stochastic public debt projections using the historical variance-covariance matrix approach for EU countries By Katia Berti
  16. Household aggregate wealth in the main OECD countries from 1980 to 2011: what do the data tell us? By Riccardo De Bonis; Daniele Fano; Teresa Sbano
  17. The impact of the French Tobin tax By Leonardo Becchetti; Massimo Ferrari

  1. By: Raffaela Giordano (Bank of Italy); Marcello Pericoli (Bank of Italy); Pietro Tommasino (Bank of Italy)
    Abstract: We test whether the sharp increase in sovereign spreads of euro area countries with respect to Germany after the explosion of the Greek crisis was due to deteriorating macroeconomic and fiscal fundamentals or to some form of financial contagion. Our analysis includes indicators of domestic and external imbalances which were mostly disregarded by previous studies, and distinguishes between investors' increased attention to the variables which ultimately determine the creditworthiness of a sovereign borrower (wake-up-call contagion) and behaviour not linked to fundamentals (pure contagion). We find evidence of wake-up-call contagion but not of pure contagion.
    Keywords: sovereign bond spread, contagion, non-stationary panels.
    JEL: E62 G01 H62
    Date: 2013–04
  2. By: Werner Roeger; Jan in 't Veld
    Abstract: This paper uses a two region DSGE model for the Euro area (periphery vs. core), to analyse the costs of higher sovereign risk premia, the so called 'sovereign risk channel'. We highlight the importance of valuation effects of sovereign bonds in bank balance sheets for the transmission of sovereign default expectations to the private sector. While at the current juncture the fiscal multiplier is larger in the EA periphery, we show that for highly indebted countries in the EA no fiscal consolidation could have more detrimental effects if it leads to expectations of sovereign default. In our view these results provide useful additional information for the debate on fiscal austerity which focusses mainly on the size of the multiplier.
    JEL: E62 E32 E62 G21 H63 F41
    Date: 2013–04
  3. By: Michael C. Burda; ; ;
    Abstract: By any measure, the European Monetary Union and the European Union are in a deep hole. In the summer of 2011 we came uncomfortably close to an uncontrolled sovereign default of an EU country, a member of the European Monetary Union, hardly ten years after the common currency project was launched. In the months that followed, Greece was brought back from the precipice, but by the time of this writing has accumulated sovereign indebtedness of more than €380b or more than 170% of the country’s gross domestic product. By current estimates, more than half of this debt is held by foreigners, and mostly by foreign official institutions. How could a country with less than 2% of EU output be the source of such great concern? Quite simply, because in the meantime Ireland, Portugal, Spain and Italy (which along with Greece, are known as the GIIPs countries, or the PIIGS in less politically correct circles) have all spent significant time at the financial edge, with borrowing costs rising enough to threaten the integrity of the Eurozone banking system, the mechanism of payments, the European Central Bank and the common currency itself. In my view, we are still not out of the hole, even though most recent events may belie that assessment.
    Keywords: Euro sovereign debt, NEURO, European integration
    JEL: F33 F34 E42
    Date: 2013–04
  4. By: Minoas Koukouritakis (Department of Economics, University of Crete, Greece); Athanasios Papadopoulos (Department of Economics, University of Crete, Greece); Andreas Yannopoulos (Department of Economics, University of Crete)
    Abstract: In the present paper we assess the impact of the Eurozone�s economic policies on specific South-Eastern European countries, namely Bulgaria, Croatia, Cyprus, Greece, Romania, Slovenia and Turkey. Since these countries are connected to the EU or the Eurozone and the economic interdependence among them is evolving, we implemented the Global VAR model. Our results indicate that all sample countries, except Turkey, react in a similar manner to changes (a) in the macroeconomic policies of the Eurozone, and (b) in the nominal exchange rate of the euro against the US dollar. There is evidence of linkages among the EU or Eurozone members of the region, and between each of them and the Eurozone.
    Keywords: Monetary Transmission, Global VAR Model, Weak Exogeneity, Impact Elasticities, Generalised Impulse Responses.
    JEL: E43 F15 F42
    Date: 2013–02–08
  5. By: Ardo Hansson; Martti Randveer
    Abstract: Estonia, Latvia and Lithuania stand out for their rapid economic adjustment after the outbreak of the global financial crisis. The reduction of imbalances and vulnerabilities in the Baltic countries has been much faster than that in the euro area countries most affected by the debt crisis. Our analysis seeks to explain these developments by addressing the following questions. First, what explains the recent cyclical pattern of the Baltic economies? Second, what are the similarities and differences between the economic adjustment in the Baltics and that in the euro area countries most affected by the recent debt crisis? And, finally, how successful has the strategy of adjustment been in the Baltic countries? We argue that the primary driving force of the cyclical developments in the Baltic economies has been the change in capital flows. A comparison of the economic adjustment in the Baltic countries with that in the three euro area countries strongly affected by the debt crisis – Ireland, Greece and Portugal – suggests that the main determinant of the speed of adjustment has been the ability of the countries to mitigate the impact of the sudden stop in private sector capital flows. Looking at the pros and cons of rapid and gradual adjustment, we conclude that in the case of the Baltic countries, the strategy of rapid adjustment has overall been a successful response to a very difficult situation
    Keywords: business cycles, economic adjustment, financial crisis, Baltic economies
    JEL: E32 G01 P52
    Date: 2013–04–23
  6. By: Domenico Depalo (Bank of Italy); Raffaela Giordano (Bank of Italy); Evangelia Papapetrou (Bank of Greece)
    Abstract: We evaluate the public-private wage differential in ten euro area countries for men in the period 2004-2007. Using the most recent methodologies on a Mincerian equation, we assess how much of the pay differential between public and private sector workers depends on differences in endowments and how much on differences in the remuneration of such skills. For the first time, we look at the contribution of specific covariates at different quantiles of the wage distribution and decompose the variance into an explained and an unexplained component. We find that the pay gap is often decreasing over the distribution, and it is mostly determined by higher endowments in the upper tail of the wage distribution and by higher returns of such endowments at the low tail, with considerable heterogeneity across countries. We further find that the wage distribution in the public sector is more compressed than in the private sector in some countries but not in all countries. This is the results, for all countries, of more dispersed distributions of endowments in the public sector and of returns in the private sector.
    Keywords: public employment, wage differentials, wage determination.
    JEL: H50 J31 J45 J50
    Date: 2013–04
  7. By: Minoas Koukouritakis (Department of Economics, University of Crete, Greece); Athanasios Papadopoulos (Department of Economics, University of Crete, Greece); Andreas Yannopoulos (Department of Economics, University of Crete)
    Abstract: In this paper, we investigate the monetary transmission mechanism through interest rate and real effective exchange rate channels, for five South-Eastern European countries, namely Bulgaria, Croatia, Greece, Romania and Turkey. Recent unit root and cointegration techniques in the presence of structural breaks in the data have been used in the analysis. The empirical results validate the existence of a valid long-run relationship, with parameter constancy, for each of the five sample countries. Additionally, the estimated impulse response functions regarding the monetary variables and the real effective exchange rate converge and follow a reasonable pattern in all cases.
    Keywords: Monetary Transmission Mechanism, Structural Breaks, LM Unit Root Tests, Cointegration Tests, Impulse Responses.
    JEL: E43 F15 F42
    Date: 2013–02–01
  8. By: Romina Gambacorta (Bank of Italy); Giuseppe Ilardi (Bank of Italy); Andrea Locatelli (Bank of Italy); Cristiana Rampazzi (Bank of Italy); Raffaella Pico (Bank of Italy)
    Abstract: The paper presents the main results of the Eurosystem’s Household Finance and Consumption Survey (HFCS) with an emphasis on the data for Italy in the international context. The paper examines households’ socio-demographic characteristics, assets and income distribution, participation in real and financial assets and indebtedness levels. The results for Italy reveal a mean household gross income below the euro-area average. The concentration of income in Italy is roughly positioned at a median position, while the index of relative poverty is comparatively high. Among the main countries of the euro area, Italy shows the same average level of net worth per capita of Spain and slightly higher levels than those of France and Germany, in line with the high savings rates that characterized Italian households over the last few decades, although this trend has decreased in recent years. Finally, Italy shows the lowest percentage of indebted households.
    Keywords: household wealth, poverty, indebtedness, micro-data
    JEL: D12 D31
    Date: 2013–04
  9. By: Vítor Castro (University of Coimbra, GEMF and NIPE, Portugal)
    Abstract: In this paper, we analyse the link between the macroeconomic developments and the banking credit risk in a particular group of countries – Greece, Ireland, Portugal, Spain and Italy (GIPSI) – recently affected by unfavourable economic and financial conditions. Employing dynamic panel data approaches to these five countries over the period 1997q1-2011q3, we conclude that the banking credit risk is significantly affected by the macroeconomic environment: the credit risk increases when GDP growth and the share and housing price indices decrease and rises when the unemployment rate, interest rate, and credit growth increase; it is also positively affected by an appreciation of the real exchange rate; moreover, we observe a substantial increase in the credit risk during the recent financial crisis period. Several robustness tests with different estimators have also confirmed these results. The findings of this paper indicate that all policy measures that can be implemented to promote growth, employment, productivity and competitiveness and to reduce external and public debt in these countries are fundamental to stabilize their economies.
    Keywords: Credit risk; Macroeconomic factors; Banking system; GIPSI; Panel data.
    JEL: C23 G21 F41
    Date: 2013–03
  10. By: Anke Mönnig (GWS - Institute of Economic Structures Research)
    Abstract: The current state budget crisis in the EU and the numerous futile efforts to solve the problem has brought back the fraction of people that argument in favour of an exit strategy of Germany from the European monetary union (EMU) or even the break-up of the EMU in total. This paper investigates for the case of Germany, whether or not a return to a new deutsche mark would be beneficial. It applies the macro-econometric input-output model INFORGE for this analysis, as it is able to quantify direct and indirect effects on inter-industrial level as well as on the demand and supply sides of the economy. Above that, INFORGE considers sectoral effects which are extremely important for the evaluation of this impact analysis. The quantitative results of the computed projection shows, that a return to a national currency would lower Germany's growth path mainly due to the expected appreciation of the new currency. A second scenario, which assumes a worsening of the crisis within the remaining EMU would intensify the negative implications for Germany. Although the results should be considered with respect to their strong assumptions, consensuses among economists exist that these assumptions might be initiated in case of an EMU break-up. Hence, in the case of Germany, the effort of doing everything to foster the future existing of the monetary union is of utmost importance.
    Keywords: European Monetary Union, projection, impact analysis
    JEL: E2 E5 F4
    Date: 2012
  11. By: Gilles Mourre; George-Marian Isbasoiu; Dario Paternoster; Matteo Salto
    Abstract: The cyclically-adjusted budget balance (CAB) is the backbone of the EU framework of fiscal surveillance, both in its preventive and corrective arms. The concept corresponds to the budget balance prevailing if the economy was running at potential. After correcting for the one-off and temporary measures, it is called structural budget balance and used to assess the fiscal policy stance. The importance of the CAB has been restated forcefully with the recent reform of the European economic governance. This paper aims at methodologically improving the CAB to better measure the reaction of the balance-to-GDP ratio to cyclical conditions. This was achieved by using a more precise concept of the cyclical-adjustment parameter and by updating the decade-old fiscal elasticities underlying the computation of the CAB. This paper reviews and explains in detail these recent improvements and describes the impact thereof on the CAB results.
    JEL: E32 E61 H3 H6
    Date: 2013–03
  12. By: Ata Ozkaya (Galatasaray University Faculty of Economics and Administrative Sciences)
    Abstract: The question whether a government’s fiscal policy is consistent with an intertemporal budget constraint has been motivated a number of empirical studies. The econometric approach focuses on the circumstances under which a government is able to sustain its budget deficits without defaulting on its debt. In this contribution, by linking the different motives on long-run sustainability of public debt, we develop a compact step-wise test algorithm and apply that to the PIIGS countries and United Kingdom. Secondly, we introduce phase-space reconstruction methodology in order to locate the path for debt dynamics, which enables us to observe fiscal policy implications in short and medium-term. We conclude that Greece, Ireland, Portugal are characterized by unsustainable debt policies. For Italy, Spain and United Kingdom, we could not reach clear cut results. For those economies while the outcome of test algorithm indicates the sustainability of debt policy, phase-space examination shows that the reaction of the governments to diverging debt stock GDP ratio cannot be sufficient to stabilize the path for debt dynamics. Last, we measure relative credit ratings of 25 OECD countries, including Turkey and eurozone economies. Our measurement method is based on the fundamentals used for measuring public debt sustainability: GDP per capita, change in Consumer prices (CPI), and GDP ratios of; General government budget balance, General government primary balance, General government gross debt stock, Current account balance, Public foreign currency debt stock. For each country, these seven inter-related criteria are examined during three non-overlapping periods: 2005-2010, 2011 and 2012-2013. We conclude that the countries that have trouble with debt sustainability have overestimated sovereign credit ratings and hence they will eventually be revised.
    Date: 2013–04
  13. By: Dall'Olio, Andrea; Iootty, Mariana; Kaneira, Naoto; Saliola, Federica
    Abstract: This paper tests whether structural or firm-specific characteristics contributed more to (labor) productivity growth in the European Union between 2003 and 2008. It combines the Amadeus firm-level data on productivity and firm characteristics with country-level data describing regulatory environments from the World Bank's Doing Business surveys, foreign direct investment data from Eurostat, infrastructure quality assessments from the Global Competitiveness Report, and credit availability from the World Development Indicators. It finds that among the 12 newest members of the European Union, country characteristics are most important for firm productivity growth, particularly the stock of inward foreign direct investment and the availability of credit. By contrast, among the more developed 15 elder European Union member countries, firm-level characteristics, such as industry, size, and international affiliation, are most important for growth. The quality of the regulatory environment, measured by Doing Business indicators, is importantly correlated with productivity growth in all cases. This finding suggests that European Union nations can realize significant benefits from improving regulations and encouraging inward and outward foreign direct investment.
    Keywords: E-Business,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Microfinance
    Date: 2013–04–01
  14. By: Marcello Bofondi (Bank of Italy); Luisa Carpinelli (Bank of Italy); Enrico Sette (Bank of Italy)
    Abstract: We study the effect of the increase in Italian sovereign debt risk on credit supply on a sample of 670,000 bank-firm relationships between December 2010 and December 2011, drawn from the Italian Central Credit Register. To identify a causal link, we exploit the lower impact of sovereign risk on foreign banks operating in Italy than on domestic banks. We study firms borrowing from at least two banks and include firm x period fixed effects in all regressions to controlling for unobserved firm heterogeneity. We find that Italian banks tightened credit supply: the lending of Italian banks grew by about 3 percentage points less than that of foreign banks, and their interest rates were 15-20 basis points higher, after the outbreak of the sovereign debt crisis. We test robustness by splitting foreign banks into branches and subsidiaries, and then examine whether selected bank characteristics may have amplified or mitigated the impact. We also study the extensive margin of credit, analyzing banks' propensity to terminate existing relationships and to grant new loan applications. Finally, we test whether firms were able to compensate for the reduction of credit from Italian banks by borrowing more from foreign banks. We find that this was not the case, so that the sovereign crisis had an aggregate impact on credit supply.
    Keywords: credit supply, sovereign debt crisis, bank lending channel
    JEL: G21 F34 E44 E51
    Date: 2013–04
  15. By: Katia Berti
    Abstract: Stochastic projections are a powerful tool to feature uncertainty in macroeconomic conditions into the analysis of public debt dynamics. They allow simulating a very large number of debt paths, corresponding to as many shock constellations to the non-fiscal determinants of debt evolution (short- and long-term interest rates, growth rate and exchange rate). Furthermore, random shocks are simulated in a way to reflect the size and the correlation of historical shocks. The specific approach for stochastic projections used here, based on the variance-covariance matrix of historical shocks, further allows defining a "central scenario" (for which we use ECFIN's Autumn 2012 forecasts), around which shocks apply. The paper applies this methodology to 24 EU countries over 2013-17. Cross-country differences in the variance of the debt-to-GDP ratio distributions (reflecting differences in historical volatility of macroeconomic conditions) emerge clearly from the simulations. This shows the importance of allowing for a more comprehensive and country-tailored assessment of downward and upward risks to debt dynamics. This stochastic framework also has the distinctive advantage of allowing for an explicit probabilistic assessment of debt projection results. A closer scrutiny of three EU countries in the case with temporary shocks reveals, for instance, that the most likely outcome for IT over 2013-17 is a decreasing path for the debt ratio (though this is projected to be still higher than 116% with a 50% probability in 2017). For ES, simulations show an increasing path over the projection horizon for all shock constellations, with an 80% probability of a debt ratio greater than 100% in 2017. Finally, for HU, we obtain a 60% probability that the debt ratio stabilises or reaches higher values from 2013 onwards, with a 40% probability of a debt ratio greater than 80% in 2017.
    JEL: E62 H63 C15
    Date: 2013–04
  16. By: Riccardo De Bonis (Bank of Italy); Daniele Fano (University of Rome, Tor Vergata); Teresa Sbano (Pioneer Investments)
    Abstract: This paper analyses aggregate household wealth in Canada, France, Germany, Italy, Japan, Spain, the UK and the US. Building on a new data set for the time span 1980-2011, we discuss the trends in household financial assets in the last thirty years, the reasons for differences across countries, the tendency towards convergence, the economic interpretation of breaks in time series and the effects of the recent financial crisis. We also comment on the evolution of household debt and real assets. In discussing the empirical evidence, the paper summarises some of the recent literature on household wealth.
    Keywords: household wealth and debt; financial systems
    JEL: E01 E21 G20
    Date: 2013–04
  17. By: Leonardo Becchetti (University of Rome "Tor Vergata"); Massimo Ferrari (University of Rome "Tor Vergata"; Poste Italiane)
    Abstract: We analyse the impact of the introduction of the French Tobin tax on volumes, liquidity and volatility of affected stocks with parametric and non parametric tests on individual stocks, difference in difference tests and other robustness checks controlling for simultaneous month-of-the-year and size effects. Our findings document that the tax has a significant impact in terms of reduction in transaction volumes and intraday volatility. The reduction in volumes traded occurs in similar proportion in non taxed small cap stocks.
    Keywords: Financial Transaction Tax; intraday volatility; liquidity, transaction volumes
    JEL: G18 G12 G14
    Date: 2013–03

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