nep-eec New Economics Papers
on European Economics
Issue of 2013‒06‒16
seventeen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Banking Union with a Sovereign Virus: The self-serving regulatory treatment of sovereign debt in the euro area By Gros, Daniel
  2. The Future of the Currency Union By Frankel, Jeffrey
  3. The euro as a proxy for the classical gold standard? Government debt financing and political commitment in historical perspective By Hoffmann, Andreas
  4. Please do not shoot the wrong enemy! By Spanò , Marcello
  5. The Euro-crisis as a catalyst of the Europeanization of public spheres? A cross-temporal study of the Netherlands and Germany By Maurits Meijers
  6. What is European Integration Really About? A Political Guide for Economists By Enrico Spolaore
  7. Ready for euro? Empirical study of the actual monetary policy independence in Poland By Łukasz Goczek; Dagmara Mycielska
  8. How did the Financial Crisis affect the Real Interest Rate Dynamics in Europe? By Aslanidis, Nektarios; Demiralp, Selva
  9. Europe’s austerity budget for 2014-2020 and its rejection by the European Parliament. A short comment over an anti-Keynesian budget By Paolo Pini
  10. Sovereign bond market reactions to fiscal rules and no-bailout clauses: The Swiss experience By Feld, Lars P.; Kalb, Alexander; Moessinger, Marc-Daniel; Osterloh, Steffen
  11. Financial Regulation and Nation State Crisis Management: Evidence from Germany, Ireland and the UK By William Forbes; Sheila Frances O'Donohoe; Jörg Prokop
  12. Sovereign Borrowing for Dubious Reforms: A model with applications on the EMU By Ludwig , Maximilian
  13. The European Crisis in the Context of the History of Previous Financial Crises By Michael D. Bordo; Harold James
  14. Principles of a Two-Tier European Deposit (Re-)Insurance System By Gros, Daniel
  15. The effectiveness of the non-standard policy measures during the financial crises: the experiences of the Federal Reserve and the European Central Bank By Seth B. Carpenter; Selva Demiralp; Jens Eisenschmidt
  16. Taxation trends in the European Union: 2013 edition By European Commission
  17. The rise and fall of universal banking: ups and downs of a sample of large and complex financial institutions since the late ‘90s By Sergio Masciantonio; Andrea Tiseno

  1. By: Gros, Daniel
    Abstract: In many eurozone countries, domestic banks often hold more than 20% of domestic public debt, which is an unsatisfactory situation given that banks are highly leveraged and that sovereign debt is inherently subject to default risk within the euro area. This paper by Daniel Gros finds, however, that the relative concentration of public debt on bank balance sheets is not just a result of the euro crisis, for there are strong additional incentives for banks in some countries to increase their sovereign. His contribution discusses a number of these regulatory incentives – the most important of which is specific to the euro area – and explores ways in which euro area banks can be weaned from massive investments in government bonds.
    Date: 2013–03
  2. By: Frankel, Jeffrey (Harvard University)
    Abstract: This note attempts a concise yet comprehensive overview of the crisis still facing the eurozone, in the areas of competitiveness, fiscal policy, and banking. The euro's founding documents enshrined such principles as fiscal constraints, the "no bailout clause," and assignment to the ECB of the goal of low inflation to the exclusion of monetizing national debts. Those principles have been permanently compromised. On the one hand, German taxpayers cannot be expected to agree to bailouts of profligate euro members without end. On the other hand, if they were to insist on those founding principles, the euro would not survive. It is especially important to recognize that the (predictable) impact of fiscal austerity has been to reduce output in the periphery countries, not raise it, and thereby to raise debt/GDP ratios, not lower them. The leaders have finally taken some steps in the right direction over the last year: movement toward a banking union; more adjustment time for Greece, Portugal and Spain; and ECB bond purchases. But for the countries that are to remain in the euro, much adjustment still lies ahead: more debt-reduction (painful for the creditor North) and more internal devaluation (even more painful for the uncompetitive South). As to a long-run fiscal regime that addresses the now-exacerbated problem of moral hazard, the Fiscal Compact is not enough in itself. Two innovations favored by the author are the red-bonds/blue-bonds proposal and the delegation of forecasting to independent fiscal agencies.
    JEL: F41
    Date: 2013–05
  3. By: Hoffmann, Andreas
    Abstract: [Introduction] In spite of the recent troubles in the euro area, Jesus Huerta de Soto (2012), a famous proponent of the gold standard, argues that the euro should be considered a 'second best to the gold standard' and is worth being preserved. From a classical liberal point of view, he sheds some light on the euros similarities with the gold standard and on some important advantages of the currency union over its alternative, flexible exchange rates in Europe. According to Huerta de Soto (2012), the main advantage of the introduction of the common currency is that - like when 'going on gold' - European governments have given up monetary nationalism. Like the gold standard, the euro limits state power as it prevents national central banks from manipulating exchange rates and inflating away government debt. Currently, he argues, the common currency - like previously the gold standard - forces important reforms and/or spending cuts upon the countries of the euro area that face severe debt and structural problems. In this respect, the euro should be seen as 'a proxy for the gold standard'. In this policy paper, I attempt to address some similarities and differences in the institutional framework of the classical gold standard (1880 - 1912) and the European Monetary Union (EMU) (1999 - ) that affect government debt financing and the way in which countries react to crisis. I argue that - in line with Huerta de Soto (2012) - giving up monetary nationalism and committing to the rules of either the gold standard or EMU initially restricted the scope of state action. Therefore, the euro - like previously the gold standard - provided some (fiscal) policy credibility. Fiscal policy credibility was the main determinant of capital market integration and low government borrowing costs in Europe under both systems. But in contrast to Huerta de Soto (2012), I shall emphasize that neither the gold standard, nor the euro itself force reforms and spending cuts upon countries that face crisis and debt problems. The political commitment to the monetary systems determines the willingness to reform or cut spending and therewith fiscal policy credibility in crisis periods: (...) --
    Date: 2013
  4. By: Spanò , Marcello (University of Insubria)
    Abstract: This work analyses external imbalances across Europe using data on sectorial gross value of assets over sixteen years (1995-2011) in founder countries of the European Union and in the whole Euro area. The empirical analysis strongly supports arguments against the thesis that in Europe sovereign debt is the problem and fiscal austerity the solution. On the contrary, it suggests that the current crisis originates from the growing disproportion of the financial sector compared to real sectors of the economy. This study divides the financial assets generated by the domestic financial companies and by the foreign sector into two aggregates: financial resources channelled to the real domestic sectors and ‘financial assets overhang’ held within the financial and foreign sector. The financial assets overhang, which boosted the relative size of the financial sector across the continent, should be considered as the main source of excess finance to be rigidly constrained.
    Keywords: European union; euro area; sovereign debt; fiscal austerity
    JEL: E50 E60
    Date: 2013–05–27
  5. By: Maurits Meijers
    Abstract: In this paper it is analysed whether the euro-crisis has induced a change in the degree of Europeanization of national public spheres. It is argued that ‘mediatizing politics’ on TV is a prerequisite for the accountability structures of liberal democracies. Examining the degree of Europeanization of public broadcaster news in Germany and the Netherlands in 2008 and 2011 this paper gauges the changes in terms of visibility of European issues and in terms of salience of items on European issues. Moreover it is analysed which news categories predominate, the tone of news items on European issues, and which explicit evaluations of European integration appear – and how these elements are affected by the euro-crisis. Finally, it is shown that although the Europeanization of public spheres increased as the euro-crisis developed, the EU was mostly portrayed negatively, focused predominantly on economic issues and political contestation was hardly visible.
    Date: 2013–06
  6. By: Enrico Spolaore
    Abstract: Europe’s monetary union is part of a broader process of integration that started in the aftermath of World War II. In this “political guide for economists” we look at the creation of the euro within the bigger picture of European integration. How and why were European institutions established? What are the goals and determinants of European Integration? What is European integration really about? We address these questions from a political-economy perspective, building on ideas and results from the economic literature on the formation of states and political unions. Specifically, we look at the motivations, assumptions, and limitations of the European strategy, initiated by Jean Monnet and his collaborators, of partially integrating policy functions in a few areas, with the expectation that more integration will follow in other areas, in a sort of chain reaction towards an “ever-closer union.” The euro with its current problems is a child of that strategy and its limits.
    JEL: F15 F50 F55 H40 H77 N44
    Date: 2013–06
  7. By: Łukasz Goczek (Faculty of Economic Sciences); Dagmara Mycielska (Faculty of Economic Sciences)
    Abstract: The aim of the article is to examine the actual degree of Polish monetary policy independence in the context of joining the Eurozone. It is frequently argued that the main cost of the participation in the EMU, or in any other common currency area, is the loss of monetary policy independence. In contrast, the paper raises the question of the actual possibility of such a policy in a small open economy operating within highly liberalized capital flows and highly integrated financial markets like Poland. Confirmation of the hypothesis concerning incomplete actual monetary independence is essential to the analysis of costs of the Polish accession to the EMU. The main hypothesis of the article is verified using a Vector Error-Correction Mechanism model and several parametric hypotheses concerning the speed and asymmetry of adjustment.
    Keywords: empirical analysis, Eurozone, monetary policy independence, monetary union
    JEL: E43 E52 E58 F41 F42 C32
    Date: 2013
  8. By: Aslanidis, Nektarios; Demiralp, Selva
    Abstract: We investigate the effects of the financial crisis on the stationarity of real interest rates in the Euro Area. We use a new unit root test developed by Peseran et al. (2013) that allows for multiple unobserved factors in a panel set up. Our results suggest that while short-term and long-term real interest rates were stationary before the financial crisis, they became nonstationary during the crisis period likely due to persistent risk that characterized financial markets during that time. JEL codes: E43, C23. Keywords: Real interest rates, Euro Area, financial crisis, panel unit root tests, cross-sectional dependence.
    Keywords: Tipus d'interès, Anàlisi de dades de panel, Crisi financera global, 2007-2009, Eurozona, 33 - Economia,
    Date: 2013
  9. By: Paolo Pini
    Abstract: In April this year the European Parliament in Strasbourg said "no" to the multi-annual budget which Governments of the European Union member Countries had agreed upon in February 2013. The changes may be minimal, but a strong message was sent to governments by the only institution in Europe elected by its citizens. The budget proposal for 2014-2020 (the Multi-annual Financial Framework - MFF) was rejected due to both method and content. To method, because it is a deficit budget which leaves the European Commission with little margin of flexibility for anti-recession measures. To content, because it favours redistributive policies between European countries rather than policies encouraging growth and employment throughout the European Union. It is an austerity budget which is deeply anti-Keynesian in a period of serious economic crisis analogous to the great depression of the 1930s. A policy of growth at a European level is needed in order to cope with the economic depression, yet a policy of rigour and austerity was proposed. That is why it is good that it was rejected by the European Parliament.
    Keywords: European budget; economic crisis; economic policy
    JEL: E6 O52 P16
    Date: 2013–05–03
  10. By: Feld, Lars P.; Kalb, Alexander; Moessinger, Marc-Daniel; Osterloh, Steffen
    Abstract: We investigate the political determinants of risk premiums which sub-national governments in Switzerland have to pay for their sovereign bond emissions. For this purpose we analyse financial market data from 288 tradable cantonal bonds in the period from 1981 to 2007. Our main focus is on two different institutional factors. First, many of the Swiss cantons have adopted strong fiscal rules. We find evidence that both the presence and the strength of these fiscal rules contribute significantly to lower cantonal bond spreads. Second, we study the impact of a credible no-bailout regime on the risk premia of potential guarantors. We make use of the Leukerbad court decision in July 2003 which relieved the cantons from backing municipalities in financial distress, thus leading to a fully credible no-bailout regime. Our results show that this break lead to a reduction of cantonal risk premia by about 25 basis points. Moreover, it cut the link between cantonal risk premia and the financial situation of the municipalities in its canton which existed before. This demonstrates that a not fully credible no-bailout commitment can entail high costs for the potential guarantor. --
    Keywords: Sub-national government bonds,fiscal rules,no-bailout clause,sovereign risk premium
    JEL: E62 G12 H63 H74
    Date: 2013
  11. By: William Forbes (Loughborough University - Business School); Sheila Frances O'Donohoe (Waterford Institute of Technology); Jörg Prokop (University of Oldenburg - Finance and Banking & ZenTra)
    Abstract: We study the unfolding of the credit crisis until 2008, and the diversity of policy responses in Germany, Ireland, and the UK. We show that although the channels through which these three European states manifested financial distress were different, the crisis evoked similar reactions by regulators and national governments. Our conclusion emphasise the role of state regulatory bodies as a primary source of the “rules of the game” in financial markets, and they support several of the policy measures taken in the aftermath of the credit crisis. In particular, we argue that adverse regulatory incentives at a national level require strengthening regulation at the European level, to avoid national capture and a resulting race to the bottom by national financial regulators.
    Keywords: regulation, Europe, banking, financial crisis
    JEL: E44 G01 G18 H11 H12
    Date: 2013–05
  12. By: Ludwig , Maximilian (Hamburg University)
    Abstract: This paper presents a model where governments need loans to finance reforms and may misuse these funds for consumption without immediately exposing this to its lenders. Such a misuse is ultimately followed by a sovereign default, therefore lenders will try to discipline governments in favor of true reforms. This puts a government and its lenders in a sequential game, which has two remarkable properties: First, discipling a government in favor of reforms may work, albeit far from perfect. Second, the game implies jumps in the interest rate as observed in the EMU debt crisis.
    Keywords: Reforms; Sovereign default; Sequential Game; Bail-Out
    JEL: C73 F34 H63
    Date: 2013–05–27
  13. By: Michael D. Bordo; Harold James
    Abstract: There are some striking similarities between the pre 1914 gold standard and EMU today. Both arrangements are based on fixed exchange rates, monetary and fiscal orthodoxy. Each regime gave easy access by financially underdeveloped peripheral countries to capital from the core countries. But the gold standard was a contingent rule—in the case of an emergency like a major war or a serious financial crisis --a country could temporarily devalue its currency. The EMU has no such safety valve. Capital flows in both regimes fueled asset price booms via the banking system ending in major crises in the peripheral countries. But not having the escape clause has meant that present day Greece and other peripheral European countries have suffered much greater economic harm than did Argentina in the Baring Crisis of 1890.
    JEL: E00 N1
    Date: 2013–06
  14. By: Gros, Daniel
    Abstract: There is general agreement that banking supervision and resolution have to be organised at the same level. It is often argued, however, that there is no need to tackle deposit insurance because it is too politically sensitive. This note proposes to apply the principles of subsidiarity and re-insurance to deposit insurance: Existing national deposit guarantee schemes (DGSs) would continue to operate much as before (with only minimal standards set by an EU directive), but they would be required to take out re-insurance against risks that would be too large to be covered by them. A European Reinsurance Fund (EReIF) would provide this reinsurance financed by premia paid by the national DGSs, just as any reinsurance company does in the private sector. The European Fund would pay out only in case of large losses. This ‘deductible’ would provide the national authorities with the proper incentives, but the reinsurance cover would stabilize depositor confidence even in the case of large shocks. Ideally the national DGSs would be responsible also for resolution. Experience has shown banking systems are more stable if deposit insurers are also responsible for resolution. The approach proposed here could thus be also used to design the ‘Single Resolution Mechanism’ (SRM) which is being discussed as a complement to the ‘Single Supervisory Mechanism’ (SSM). It will of course take time to build up the funding for such a reinsurance fund. This approach is thus not meant to deal with legacy problems from the current crisis.
    Date: 2013–04
  15. By: Seth B. Carpenter; Selva Demiralp; Jens Eisenschmidt
    Abstract: A growing number of studies have sought to measure the effects of non-standard policy on bank funding markets. The purpose of this paper is to carry those estimates a step further by looking at the effects of bank funding market stress on the volume of bank lending, using a simultaneous equation approach. By separately modeling loan supply and demand, we determine how non-standard central bank measures affected bank lending by reducing stress in bank funding markets. We focus on the Federal Reserve and the European Central Bank. Our results suggest that non-standard policy measures lowered bank funding volatility. Lower bank funding volatility in turn increased loan supply in both regions, contributing to sustain lending activity. We consider this as strong evidence for a "bank liquidity risk channel", operative in crisis environments, which complements the usual channels of transmission of monetary policy.
    Date: 2013
  16. By: European Commission
    Abstract: This is the seventh issue of 'Taxation Trends in the European Union', an expanded and improved version of a previous publication, 'Structures of the taxation systems in the European Union'. The objective of the report remains unchanged: to present a complete view of the structure, level and trends of taxation in the Union over a medium- to long-term period.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2013–05
  17. By: Sergio Masciantonio (Banca d'Italia); Andrea Tiseno (Banca d'Italia)
    Abstract: We document the development of the major international banks since the late 1990s, analysing balance-sheet data for 27 large and complex financial institutions. We argue that balance-sheet expansion and business line diversification paved the way for the rise of the universal banking model. This model, apparently sound and efficient in the run-up to the crisis, revealed all its shortcomings when the crisis erupted. European banks displayed greater fragilities in their business models. The changed financial and regulatory landscape that followed has challenged this model further. Many proposed remedies to the global financial crisis appear to push for a return to a narrower model for banking activity.
    Keywords: banks, banking crises, financial crises, balance sheets
    JEL: G21 G01
    Date: 2013–06

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