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on European Economics |
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Issue of 2013‒06‒09
eighteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Ben Cheikh, Nidhaleddine |
| Abstract: | This paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus German) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements. |
| Keywords: | Exchange Rate Pass-Through, Inflation, Sovereign spreads, Smooth Transition Regression |
| JEL: | C22 E31 F31 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47308&r=eec |
| By: | Maurice Obstfeld |
| 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 in situations of insolvency. |
| JEL: | E44 F36 G15 G21 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0493&r=eec |
| By: | Zsolt Darvas; Guntram B. Wolff |
| Abstract: | Highlights 1) 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. 2) 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. 3) 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. 4) 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. |
| Keywords: | euro crisis, European banking union, bank supervision, single supervisory mechanism |
| JEL: | G21 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:mkg:wpaper:1305&r=eec |
| By: | Michael Bergman; Michael M. Hutchison; Svend E. Hougaard Jensen |
| Abstract: | This paper discusses the balance between market pressure and fiscal rules in order to keep public finances on a sustainable path. We provide empirical evidence on market assessments of sovereign default risk to economic news, announcements of national austerity programs, EU programs designed to support government finances, and banking fragility emanating from several countries in the euro area affected by the European sovereign debt crisis. We find that, in general, the quality of market signals is an insufficient indicator alone to accurately guide the conduct of fiscal policy, particularly during the crisis period. Therefore, market signals should be used to complement fiscal rules rather than serving as a substitute. |
| JEL: | E62 G12 G14 H60 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0489&r=eec |
| By: | Philip R. Lane |
| Abstract: | We investigate the behaviour of gross capital flows and net capital flows for euro area member countries. We highlight the extraordinary boom-bust cycles in both gross flows and net flows since 2003. We also show that the reversal in net capital flows during the crisis has been very costly in terms of macroeconomic and financial outcomes for the high-deficit countries. Finally, we describe the reforms that can improve macro-financial stability across the euro area. |
| JEL: | E42 F32 F41 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0497&r=eec |
| By: | Michael Ehrmann; Chiara Osbat; Jan Strasky; Lenno Uusküla |
| Abstract: | This paper studies the determinants of the euro exchange rate during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. Among the few factors that are found to have affected changes in exchanges rate levels are policy actions at the EU level and by the ECB. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility was increasing in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions |
| Keywords: | exchange rates, fundamentals, announcements, sovereign debt crises |
| JEL: | E52 E62 F31 F42 G14 |
| Date: | 2013–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2013-3&r=eec |
| By: | Daniel Gros; Cinzia Alcidi |
| Abstract: | A ‘sudden stop’ to (private) capital inflows is usually very disruptive to an economy because it forces an almost immediate reversal in the current account unless the country in question receives substantial balance of payments assistance. The analysis presented in this paper starts from the observation that two groups of European countries, neither of which could use the exchange rate as an adjustment instrument, experienced a sudden stop after the outbreak of the global financial crisis. The first group comprises five euro area member states under financial stress during the euro area debt crisis (“GIIPS”). The second group comprises four newer EU Member States in Central and Eastern Europe (“BELL”). We highlight the differences in the adjustment paths of these two groups and analyse the factors which can explain them. The main finding is that the adjustment was quicker outside EMU than inside. The shock absorbers provided by the financial ‘plumbing’ of the Eurosystem offset much of the reversal in private capital flows and seem to have created an environment in which the pressure for a quick adjustment was much weaker. We also find that the structure of the domestic banking industry plays a key role. Foreign ownership of banks provided a loss absorber in the BELL favouring a quick correction, while the legacy of the banking crisis in some of GIIPS, where foreign ownership of banks was limited, is likely to weight for long time on their still incomplete. |
| JEL: | E20 F32 F36 H60 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0492&r=eec |
| By: | Philip Du Caju; Theodora Kosma; Martina Lawless; Tairi Rõõm |
| Abstract: | The rarity with which firms reduce nominal wages has been frequently observed, even in the face of considerable negative economic shocks. This paper uses a unique survey of fourteen European countries to ask firms directly about the incidence of wage cuts and to assess the relevance of a range of potential reasons for why they avoid cutting wages. Concerns about the retention of productive staff and a lowering of morale and effort were reported as key reasons for downward wage rigidity across all countries and firm types. Restrictions created by collective bargaining were found to be an important consideration for firms in euro area countries but were one of the lowest ranked obstacles in non-euro area countries. The paper examines how firm characteristics and collective bargaining institutions affect the relevance of each of the common explanations put forward for the infrequency of wage cut |
| Keywords: | labour costs, wage rigidity, firm survey, wage cuts, European Union |
| JEL: | J30 J32 J33 J51 C81 P5 |
| Date: | 2013–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2013-2&r=eec |
| By: | Giuseppe Bertola |
| Abstract: | If economic integration fosters expectations of institutional and productivity convergence, then international capital flows should be driven by consumption-smoothing anticipation of future income growth patterns as well as by factor-intensity equalization. In the euro area, financial market integration eased accumulation of international imbalances but does not appear to have resulted in the expected institutional convergence. The resulting crisis casts doubt on the sustainability not only of international imbalances, but also of the current configuration of the European integration process. A robust and coherent European market and policy integration process would require supranational implementation of the behavioral constraints and contingent redistribution schemes that traditionally operate within National socio-economic systems, and have been weakened in recent experience by uncoordinated policy competition. |
| JEL: | E63 F36 F21 F42 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0490&r=eec |
| By: | Dirk Schoenmaker |
| Abstract: | This essay reviews the sequencing of the functions of supervision, resolution, deposit insurance and the fiscal backstop in the Banking Union. All these functions deal with the soundness of individual banks. In the run-up to the 2007-2009 financial crisis, we overlooked the bigger picture of the stability of the wider financial system. This essay puts forward a concrete proposal for conducting macro-prudential policy in the prospective Banking Union. We suggest giving the lead on applying macro-prudential tools in the Banking Union to the ECB to foster a coherent approach, with important input from the national competent authorities to allow for much needed differentiation at the national level. Next, we argue that the ECB should separate the macro-prudential and micro-prudential functions. Otherwise, we may again be bogged down by the details of individual banks (micro), while losing sight of emerging imbalances in the wider financial system (macro). |
| JEL: | E58 G01 G21 G28 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0495&r=eec |
| By: | Tatiana Fic; Ali Orazgani |
| Abstract: | The objective of this paper is to examine the possible implications of the adjustment of global and intra-European imbalances, particularly in terms of the macroeconomic impacts. We design a series of macroeconomic scenarios and look at the impact of global and European shocks (corresponding to various policies aimed at reducing imbalances) on the economies of the biggest world players - the US, China, oil exporting countries, and the EU and its individual members. The methodological approach we adopt is based around a series of simulations using the National Institute’s global macroeconomic model NIGEM. Key findings suggest that while global imbalances may be adjusted either through policies in the US or in China, the adjustment on the Chinese side is somewhat less costly for Europe than the adjustment on the US side. Intra-European imbalances may be reduced through various policies; an appropriate policy mix is probably required. |
| JEL: | F17 F42 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0483&r=eec |
| By: | Bart van Ark; Vivian Chen; Bert Colijn1; Kirsten Jaeger; Wim Overmeer |
| Abstract: | This paper revisits the issue of Europe’s growth slowdown in the light of the developments of the first decade of the 21st century, including the devastating effects from the 2008/09 recession and the subsequent economic and financial crisis on Europe’s growth performance. From a supply side perspective, using a growth accounting approach, there are virtually no signs of even the beginnings of a reversal in the slowing growth trend, which is primarily driven by a weak productivity performance in most European countries. From a demand perspective, using a global value chain-type analysis, it turns out that activities contributing directly or indirectly to production for the global market, account for roughly a quarter of employment as well as a quarter of labour productivity growth in Europe. Projecting growth out to 2025, using growth accounting projections, productivity remains the critical factor for a recovery of Europe’s future growth performance. Large differences between individual European countries have emerged. The paper sketches four possible growth scenarios which describe the possible “states” Europe may find itself in 10-12 years’ time, using a strengthening of supply-side capabilities, including productivity and innovation, and global demand for goods and services at the key dimensions defining the future states of the union. These scenarios provide the setting for a discussion of policy choices for Europe’s growth and competitiveness agenda. |
| JEL: | J24 O11 O47 O52 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0485&r=eec |
| By: | Hans Peter Grüner |
| Abstract: | Europe is going through an unprecedented period of fiscal consolidation and structural economic policy reforms. However, reforms undertaken in times of financial market stress may not be politically viable in the long run if they lack the necessary social balance. This paper studies the distributional consequences of European fiscal consolidation and structural reforms and the scope for further reforms. Suggestions for the efficient bundling of reforms are made. The paper also makes suggestions regarding the strategy of international advice to countries which need structural reforms and it discusses the design of international incentives and a possible role for international mediation. |
| JEL: | D70 H30 P11 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0487&r=eec |
| By: | Dirk Schoenmaker |
| Abstract: | This empirical essay reviews post-crisis integration in banking and insurance. Looking at aggregate data, we find that cross-border banking flows have been reversed, in particular into the CESEE and peripheral counties (Portugal, Ireland and Greece). But data at the individual firm level for banks and insurers indicate that cross-border activities remain persuasive within Europe. This intensity of cross-border activities indicates that the potential for coordination failure among national authorities remains high. Host country supervisors have so far responded by ring-fencing activities in subsidiaries, leading to further fragmentation. This essay argues that if we want to keep the benefits of both the single financial market and financial stability, we need new supranational institutions that encourage integration. The advance to Banking Union with integrated supervision and resolution can provide the necessary policy push for an integrated approach. |
| JEL: | G21 G22 G28 H41 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0496&r=eec |
| By: | Werner Roeger (European Commission); Robert Kollmann (ECARES, Université Libre de Bruxelles a); Marco Ratto (European Commission); Jan in 't Veld (European Commission) |
| Abstract: | A key dimension of fiscal policy during the financial crisis was massive government support for the banking system. The macroeconomic effects of that support have, so far, received little attention in the literature. This paper fills this gap, using a quantitative dynamic model with a banking sector. We estimate the model for a Euro area quarterly dataset. The GDP multiplier of state aid to banks is in the same range as conventional fiscal spending multipliers. Our results suggest that state aid for banks may have a strong positive effect on real activity. Bank state aid multipliers are in the same range as conventional fiscal spending multipliers. Support for banks has a positive effect on investment, while a rise in government purchases crowds out investment. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:764&r=eec |
| By: | Robert Kollmann (ECARES, Université Libre de Bruxelles a) |
| Abstract: | This paper takes a two-country model with a global bank to US and Euro Area (EA) data. The estimation results (based on Bayesian methods) suggest that global banking strengthens the positive international transmission of real economic disturbances. Shocks that originate in the banking sector account for roughly 20% of the forecast error variance of investment, and about 5% of the forecast variance of US and EA GDP. Bank shocks explain 5%-20% of the fall in US and EA real activity, during the Great Recession. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:840&r=eec |
| By: | Neil Foster; Robert Stehrer; Marcel Timmer |
| Abstract: | There has been an ongoing trend towards increasing internationalisation of production over the past two decades or so. This implies that countries become more dependent on demand from foreign countries but also that countries and industries are able to source intermediates from different countries, an activity referred to as ‘offshoring’. Whereas the former aspect means an increasing dependency on foreign markets, the second aspect implies that countries and industries source at lower costs making them more productive and competitive. Using the World Input-Output Database (WIOD) we first provide an overview of these trends over the period 1995-2011 for 40 advanced and emerging countries with a specific focus on the EU as a whole and the individual EU member states. In the second part of the paper we show results from an econometric analysis to explain growth performance, focusing on the impacts of the increasing internationalisation of production. |
| JEL: | E20 F15 F43 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0484&r=eec |
| By: | Spyros Kosmidis |
| Abstract: | Incumbent parties in Southern Europe experienced losses in their electoral support that came along with a series of economic reforms imposed by the EU and the IMF. However, recent theories of accountability would predict lower levels of economic voting given the limited room left for national governments to manoeuvre the economy. To resolve this puzzle, the paper presents and models quarterly vote intention time series data from Greece (2000–2012) and links it with the state of the economy. The empirical results show that after the bailout loan agreement the Greek voters significantly shifted their assignment of responsibility for (economic) policy outcomes from the EU to the national government, which in turn heightened the impact of objective economic conditions on governing party support. The findings have implications for theories linking international structures, government constraints and democratic accountability. |
| Keywords: | Economic Voting; Greek Crisis; EU; Government Constraints; Accountability |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:hel:greese:70&r=eec |