nep-eec New Economics Papers
on European Economics
Issue of 2013‒07‒15
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The impact of sovereign debt exposure on bank lending: Evidence from the European debt crisis By Alexander Popov; Neeltje van Horen
  2. Does bank competition influence the lending channel in the euro area? By Fungácová, Zuzana; Solanko, Laura; Weill, Laurent
  3. Unconventional monetary policy of the ECB during the financial crisis: An assessment and new evidence By Christiaan Pattipeilohy; Jan Willem van den End; Mostafa Tabbae; Jon Frost; Jakob de Haan
  4. Sovereign Debt Markets in Turbulent Times: Creditor Discrimination and Crowding-Out Effects By Fernando Broner; Aitor Erce; Alberto Martín; Jaume Ventura
  5. Economic policy uncertainty in the US: Does it matter for the Euro Area? By Valentina Colombo
  6. Macroeconomic determinants of European stock and government bond correlations: A tale of two regions By Erica R. PEREGO; Wessel N. VERMEULEN
  7. Integration of Central and Eastern European Countries: Increasing EU Heterogeneity? By Petr Rozmahel; Ludek Kouba; Ladislava Grochová; Nikola Najman
  8. A new strategy for the European periphery By Karl Aiginger
  9. (Spillover) Effects of Labour Market Reforms in Germany and France By Claudia Busl; Atilim Seymen
  10. A Realistic Bridge Towards European Banking Union By Nicolas Veron
  11. The economics and empirics of tax competition: A survey By Baskaran, Thushyanthan; Lopes da Fonseca, Mariana
  12. Re-industralising the eurozone By Jean-Luc Gaffard
  13. Banks' Restructuring and Smooth Deleveraging of the Private Sector in Slovenia By Olena Havrylchyk
  14. Testing the Easterlin hypothesis with panel data: The dynamic relationship between life satisfaction and economic growth in Germany and in the UK By Pfaff, Tobias; Hirata, Johannes

  1. By: Alexander Popov; Neeltje van Horen
    Abstract: Using loan-level data, we find that syndicated lending by European banks with sizeable balance sheet exposures to impaired sovereign debt was negatively affected after the start of the euro area sovereign debt crisis. We also observe a reallocation away from foreign (especially US) markets. The overall reduction in lending is not driven by changes in borrower demand and/or quality, or by other types of shocks to bank balance sheets. The slowdown in lending is lower for banks that reduced their debt holdings in the later stages programs.
    Keywords: Sovereign debt; bank lending; international transmission
    JEL: E44 F34 G21 H63
    Date: 2013–06
  2. By: Fungácová, Zuzana (BOFIT); Solanko, Laura (BOFIT); Weill, Laurent (BOFIT)
    Abstract: This paper examines how bank competition influences the bank lending channel in the Euro area countries. Using a large panel of banks from 12 euro area countries over the period 2002-2010 we analyze the reaction of loan supply to monetary policy actions depending on the degree of bank competition. We find that the effect of monetary policy on bank lending is dependent on bank competition: the transmission of monetary policy through the bank lending channel is less pronounced for banks with extensive market power. Further investigation shows that banks with less market power were more sensitive to monetary policy only before the financial crisis. These results suggest that the bank market power has a significant impact on monetary policy effectiveness. Therefore, wide variations in the level of bank market power may lead to asymmetric effects of a single monetary policy.
    Keywords: bank competition; bank lending channel; monetary policy; euro area
    JEL: E52 G21
    Date: 2013–06–25
  3. By: Christiaan Pattipeilohy; Jan Willem van den End; Mostafa Tabbae; Jon Frost; Jakob de Haan
    Abstract: We first sketch how central banks have used unconventional monetary policy measures by using three indicators based on the composition of the balance sheet of eleven central banks. Our analysis suggests that although the ECB’s balance sheet has increased dramatically during the crisis, the non-standard monetary policy measures had only a moderate impact on the composition of the ECB’s balance sheet compared to other central banks, such as the Fed and the Bank of England. Next, we take stock of research analysing the effects of unconventional monetary policy of the ECB after the onset of the crisis. A crucial question is to what extent these measures have been able to affect interest rates, thereby restoring the monetary policy transmission process and supporting the central bank objectives. Finally, we offer new evidence on the effectiveness of the ECB’s unconventional monetary policy measures, i.e. extended liquidity provision (LTRO) and the Securities Market Programme (SMP). Our results suggest that the LTRO interventions in general had a favorable (short-term) effect on government bond yields. Changes in the SMP only had a visible downward effect on bond yields in Summer 2011, when the program was reactivated for Italy and Spain, but this effect dissipated within a few weeks.
    Keywords: unconventional monetary policy; non-standard monetary policy; central bank balance sheet; European Central Bank
    JEL: E40 E50 E58 E60
    Date: 2013–05
  4. By: Fernando Broner; Aitor Erce; Alberto Martín; Jaume Ventura
    Abstract: In 2007, countries in the Euro periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by …financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the Eurozone, and how they may be addressed by policies at the European level.
    Keywords: sovereign debt, rollover crises, secondary markets, economic growth
    JEL: F32 F34 F36 F41 F43 F44 G15
    Date: 2013–06
  5. By: Valentina Colombo (University of Padova)
    Abstract: We investigate the effects of a US economic policy uncertainty shock on some Euro area macroeconomic aggregates with a number of Structural VARs. We model the indicators of economic policy uncertainty recently developed by Baker, Bloom and Davis (2013) jointly with a set of standard indicators of aggregate price and the business cycle for the two above indicated economic areas. According to our SVARs, a one standard deviation shock to US economic policy uncertainty leads to a statistically significant fall in the European industrial production and prices of −0.12% and −0.06%, respectively. The contribution of the US uncertainty shock on the European aggregates is shown to be quantitatively larger than the one exerted by an Euro area-specific uncertainty shock.
    Keywords: Economic policy uncertainty, US-Euro area spillovers, Structural Vector Autoregressions.
    JEL: E32 E52 F42
    Date: 2013–05
  6. By: Erica R. PEREGO (University of Luxembourg, CREA and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Wessel N. VERMEULEN (University of Luxembourg, CREA)
    Abstract: This paper studies the dynamic correlation between stocks, between government bonds and between stocks and bonds within the Euro-zone in the last decade. In order to better understand the development of the financial market we argue that it is necessary to analyse all such relations simultaneously rather than focus at one. We firstly calculate the dynamic correlation for the previous asset classes. Results presented at the asset-region level, i.e. north-stock, north-bonds, south-stocks and south-bonds, visualise the divergence in integration in Europe and highlight the heterogeneity in these markets. Secondly, we study the macroeconomic factors that determine these correlations. We find that, when we allow for regional division, not only cross-asset correlations within regions behave differently from each other, but also cross-assets cross-regions dynamic correlations can be explained with macroeconomic factors such as the relative market uncertainty between countries and balance of payments dynamics.
    Keywords: Currency union, financial markets, time-varying correlation
    JEL: C23 E44 G14 G15
    Date: 2013–05–27
  7. By: Petr Rozmahel; Ludek Kouba; Ladislava Grochová; Nikola Najman
    Abstract: The paper assesses the heterogeneity of an enlarged European Union and discusses the role and contribution of CEECs on the development of this heterogeneity over time. The two central research questions are: What are the factors that distinguish between successful and less successful CEE countries in terms of the EU enlargement? How was heterogeneity in the EU developed in the last decade? Using cluster analysis methods allow the focusing on heterogeneity in the five selected dimensions of interest: Institutions and Governance; Single Market and Openness; Macroeconomic Policies; Symmetry and Convergence; and Competitiveness. We can find that the specific macroeconomic policies followed by CEE countries during the transformation period were less decisive for a successful transition than the level of (non-elite) political stability, the quality of institutional framework, the maturity and compatibility of informal institutions and the initial level of economic development. We also can find substantial convergence in terms of economic indicators in the EU in the period considered but none or a very slow convergence in terms of institutional indicators. The negative consequences of such heterogeneity were strengthened by the crisis. As a consequence the tensions caused by these different speeds of convergence in different fields challenge the long-term sustainability of EMU, and the consequences of this situation should be more intensively discussed in the EU. We also argue that the experience of transition of CEE countries holds valuable lessons for the currently discussed reforms of the southern periphery of Europe. Similarly to the CEECs before their entrance to the EU, the periphery countries need to find a direction to head for in the next 10-15 years. Budgetary savings are inevitable; nevertheless positive long-term visions should be formulated as well.
    Keywords: CEE countries, cluster analysis, European governance, European Monetary Union, European integration, European economic policy, European heterogeneity
    JEL: E63 F15 F42
    Date: 2013–06
  8. By: Karl Aiginger
    Abstract: The southern European periphery suffered a severe setback in its catching-up process versus Western Europe after the financial crisis with GDP dropping by 10% between 2008 and 2012 and unemployment increasing to 20% for Greece, Portugal and Spain. We analyze first the reason for this setback, and then the policy reaction of the national governments and the European partners. Policy reactions mainly focused on restoring price competitiveness. It has important blind spots as far as industrial restructuring, upgrading tourism, making use of globalization and alternative energies, supporting business starts, connecting education, as well as innovation and firm creation are concerned. There is a lack of national ownership of the reforms on the one hand, and a neglect of the European community and the surplus countries on the other hand, that they could support the southern periphery by measures increasing welfare in the community as well as in the surplus countries. Surplus countries profit heavily by the bifurcation of interest rates for government bonds and by capital flows.
    Keywords: southern Europe, periphery, economic reforms, globalization, troika, industrial policy
    JEL: F4 H6 L52 O25 P52 R11
    Date: 2013–02
  9. By: Claudia Busl; Atilim Seymen
    Abstract: In this paper we analyze the (potential) effects of labour market and fiscal policy reforms by heterogeneous European countries—Germany and France—on the domestic and foreign economy. We test the implications of the gains in matching efficiency and reduced unemployment benefits induced by the German Hartz reforms in a two-country RBC model with frictions in the labour market, which replicates the data quite well. We then explore the reform possibilities in the French labour market and their potential (inter)national effects by calibrating the model to recent data. Both home and foreign economies benefit from labour market reforms in the home economy in our framework.
    Keywords: Labour market reforms, search and matching, dynamic stochastic general equilibrium models
    JEL: E24 E61 E65 F42 J38 J63
    Date: 2013–06
  10. By: Nicolas Veron (Peterson Institute for International Economics)
    Abstract: New obstacles to the European banking union have emerged over the last year, but a successful transition is both necessary and possible. European leaders have to acknowledge a sequence of policy changes that must take place before the banking union can be completed. Specifically, in the second half of 2014, the European Central Bank (ECB) will gain supervisory authority over most of Europe’s banking system. This handover is the first of two milestones that will define the eventual success or failure of the banking union project. The second milestone will be a change in the European treaties that will establish the robust legal basis needed for a sustainable union. Together, these two milestones are a bridge that will allow Europe to cross the choppy waters that separate it from a sustainable policy framework.
    Date: 2013–06
  11. By: Baskaran, Thushyanthan; Lopes da Fonseca, Mariana
    Abstract: We survey the theoretical and empirical literature on local and international tax competition in Economics. Based on this survey, we discuss whether EU countries should harmonize tax policies to prevent a race to the bottom. Much of the evidence suggests that tax competition does not lead to significant reductions in tax revenues. Therefore, we conclude that tax coordination is in all likelihood unnecessary to prevent inefficiently low levels of taxation in the EU. But since the evidence against adverse effects of tax competition is not unambiguous, we also discuss whether intergovernmental transfers might be a less invasive means than outright tax harmonization to prevent a race to the bottom. --
    Keywords: Tax competition,Tax coordination,European Union,Fiscal federalism
    JEL: F59 H26 H77
    Date: 2013
  12. By: Jean-Luc Gaffard (Ofce sciences-po, Skema Business school)
    Abstract: Real divergences in economic performances that emerge between countries belonging to the eurozone make it necessary to define an economic policy oriented toward a re-industrialization of some regions in Europe.In a world characterised by irreversibility of investment and imperfection of market information, supply reforms should consist in establishing a framework aimed at supporting both competition and cooperation between the various players of innovation, and thus allowing firms’ strategies to be successful.This requires reconsidering both national and European policies that are growth-enhancing, that is, competition policy, labour policy, regional policy, but also industrial policy that takes the form of large public programmes. However, any change in the industrial landscape in Europe will only be possible if a new macroeconomic policy prevents inappropriate destruction of productive capacities.
    Date: 2013–06
  13. By: Olena Havrylchyk
    Abstract: Slovenia is facing the legacy of a boom-bust cycle that has been compounded by weak corporate governance of state-owned banks. The levels of non-performing loans and capital adequacy ratios compare poorly in international perspective and may deteriorate further, which could require significant bank recapitalisation. Updated bottom-up (i.e. loan by loan) stress tests are needed to evaluate the extent of the problems, as the situation has deteriorated rapidly since a similar exercise was done for the two main stateowned banks in mid-2012. To foster the credibility of the new tests, the main results and underlying assumptions should be made public. The creation of the Bank Asset Management Company (BAMC) should allow recognition of problems by ring-fencing impaired assets, which would create conditions for an orderly resolution of non-viable banks and a rapid privatisation of viable banks. To that end, the process of asset transfer and their management has to be transparent and isolated from political influences by ensuring full independence of the BAMC. To achieve smooth deleveraging of the non-financial sector, viable but distressed enterprises should be restructured while insolvent firms should be swiftly liquidated. The main challenge is to improve inefficient insolvency procedures that are too long and result in low recovery rates. Development of equity markets can also facilitate smoother corporate deleveraging by facilitating equity raising through privatisation and entry of foreign investors. Finally, to prevent future crises, banking supervision should be enhanced further. This Working Paper relates to the 2013 OECD Economic Review of Slovenia (<P>Restructuration des banques et désendettement en douceur du secteur privé en Slovénie<BR>La Slovénie est confrontée à l’héritage d’un cycle expansion-récession dont l’amplitude a été aggravée par la gouvernance médiocre des banques publiques. Les niveaux des prêts non performants et des ratios d’adéquation des fonds propres sont préoccupants dans une optique de comparaison internationale et risquent de se dégrader encore, ce qui obligerait à une recapitalisation importante des banques. Il faut actualiser les tests de résistance prêt par prêt pour évaluer l’étendue des difficultés, car la situation a rapidement empiré depuis la mi- 2012, date à laquelle on a effectué un exercice similaire pour les deux plus grandes banques publiques. Afin que les nouveaux tests soient crédibles, les principaux résultats et les principales hypothèses sous-jacentes devront être rendus publics. La mise en place d’une société de gestion des actifs bancaires (BAMC) devrait permettre de prendre la mesure des problèmes en isolant les actifs dépréciés, ce qui créerait les conditions d’une résolution ordonnée des établissements non viables et d’une rapide privatisation des établissements viables. À cette fin, le transfert des actifs et leur gestion doivent être transparents et tenus à l’écart des influences politiques au moyen de la pleine indépendance de la BAMC. Pour parvenir à un désendettement en douceur du secteur non financier, il conviendra de restructurer les entreprises viables, mais en difficulté, et de liquider promptement celles qui sont insolvables. Le principal défi à relever est l’amélioration des procédures de liquidation qui sont trop longues et qui aboutissent à de faibles taux de recouvrement des créances. Le développement du marché des actions peut aussi faciliter un désendettement en bon ordre des entreprises en favorisant l’augmentation des fonds propres par la privatisation et l’entrée d’investisseurs étrangers. Enfin, pour prévenir de nouvelles crises, il faut renforcer la supervision des banques. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Slovénie 2013 ( nie-2013.htm)
    Keywords: corporate governance, financial regulation, Slovenia, banks, insolvency, Slovénie, régulation financière, gouvernement d'entreprise, banques, insolvabilité
    JEL: G21 G28 G33 G34
    Date: 2013–06–14
  14. By: Pfaff, Tobias; Hirata, Johannes
    Abstract: Recent studies focused on testing the Easterlin hypothesis (happiness and national income correlate in the cross-section but not over time) on a global level. We make a case for testing the Easterlin hypothesis at the country level where individual panel data allow exploiting important methodological advantages. Novelties of our test of the Easterlin hypothesis are a) long-term panel data and estimation with individual fixed effects, b) regional GDP per capita with a higher variation than national figures, c) accounting for potentially biased clustered standard errors when the number of clusters is small. Using long-term panel data for Germany and the United Kingdom, we do not find robust evidence for a relationship between GDP per capita and life satisfaction in either country (controlling for a variety of variables). Together with the evidence from previous research, we now count three countries for which Easterlin's happiness-income hypothesis cannot be rejected: the United States, Germany, and the United Kingdom. -- Die neuere Forschung hat sich darauf konzentriert die Easterlin-Hypothese (Wohlbefinden und Volkseinkommen korrelieren im Querschnitt, aber nicht in der Zeitreihe) auf globaler Ebene zu testen. Unser Artikel liefert Argumente für das Testen der Easterlin-Hypothese auf nationaler Ebene, wo individuelle Paneldaten das Ausschöpfen wichtiger methodologischer Vorteile ermöglichen. Wir erweitern die bisherige Literatur zur Easterlin-Hypothese durch a) Schätzungen mit individuellen fixen Effekten anhand von längerfristigen Paneldaten, b) Verwendung von regionalem BIP pro Kopf mit einer höheren Varianz als nationale BIP-Daten und c) Berücksichtigung von potentiell verzerrten Cluster-Standardfehlern im Fall von wenigen Clustern. Wir verwenden längerfristige Paneldaten für Deutschland und Großbritannien und finden keine robuste Evidenz für einen Zusammenhang zwischen BIP pro Kopf und Lebenszufriedenheit in den beiden Ländern (unter Verwendung von einer Reihe von Kontrollvariablen). Zusammen mit früheren Forschungsergebnissen zählen wir drei Länder in denen die Easterlin-Hypothese nicht verworfen werden kann: die Vereinigten Staaten, Deutschland und Großbritannien.
    Keywords: subjective well-being,economic growth,income,Easterlin hypothesis,Subjektives Wohlbefinden,Wirtschaftswachstum,Einkommen,Easterlin-Hypothese
    Date: 2013

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