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on European Economics |
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Issue of 2013‒07‒28
thirteen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Maria Abascal; Tatiana Alonso; Sergio Mayordomo |
| Abstract: | This paper measures fragmentation in four European financial markets (interbank, sovereign debt, equity, and the CDS market for financial institutions) and develops a new measure of global fragmentation using these markets as inputs. We find that, during the recent crisis, fragmentation in the interbank market has been, on average, higher in the peripheral countries than in the core ones and it has increased particularly during periods of financial stress. Among the most significant factors that contributed to the high fragmentation levels observed are counterparty risk and financing costs (overall factors), and country-specific factors such as banking sector openness, the debt–to-GDP and the relative size of the financial sector. We also study the short-run effect of the ECB programmes and announcements and find a significant decrease in the daily levels of fragmentation immediately after the mplementation of the SMP, 3Y-LTROs and the second CBPP of the ECB as well as key announcements relative to banking union and the OMT. These helped restore investors’ confidence in the euro and confirmed the ECB’s support for tackling the challenges of the European sovereign debt crisis. Nevertheless, additional measures seem to be necessary to guarantee a new process of re-integration and thus a more stable European banking sector. |
| Keywords: | Eurozone, financial fragmentation, Interbank market, Banking Union |
| JEL: | G15 G18 F36 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1322&r=eec |
| By: | Karl Whelan (University College Dublin) |
| Abstract: | The introduction of the euro meant that countries with sovereign debt problems could not use monetisation and devaluation as a way to prevent default. The institutional structures of the euro were also widely thought to prevent a country in difficulties being bailed out by other euro members or having its sovereign debt purchased by the ECB. Despite these restrictions, there was relatively little discussion about sovereign default in pre-EMU debates among economists and financial markets priced in almost no default risk in the pre-crisis years. The crisis has seen bailouts and bond purchases by the ECB but there has also been a sovereign default inside the euro and further defaults seem likely. The introduction of the euro was intended to bring greater stability by ending devaluations triggered by self-fulfilling runs on a currency. While this particular scenario can no longer happen, this paper discusses mechanisms whereby expectations that a country may leave the euro can lead to this outcome occurring. |
| Keywords: | Euro Crisis, Sovereign Default |
| Date: | 2013–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201309&r=eec |
| By: | Gregor von Schweinitz |
| Abstract: | The current European Debt Crisis has led to a reinforced effort to identify the sources of risk and their influence on yields of European Government Bonds. Until now, the potentially nonlinear influence and the theoretical need for interactions reflecting flight-to-quality and flight-to-liquidity has been widely disregarded. I estimate government bond yields of the Euro-12 countries without Luxembourg from May 2003 until December 2011. Using penalized spline regression, I find that the effect of most explanatory variables is highly nonlinear. These nonlinearities, together with flight patterns of flight-to-quality and flight-to-liquidity, can explain the co-movement of bond yields until September 2008 and the huge amount of differentiation during the financial and the European debt crisis without the unnecessary assumption of a structural break. The main effects are credit risk and flight-to-liquidity, while the evidence for the existence of flight-to-quality and liquidity risk (the latter measured by the bid-ask spread and total turnover of bonds) is comparably weak. |
| Keywords: | sovereign bonds, sovereign risk premiums, sovereign debt crisis, semipara-metric regression |
| JEL: | C14 G01 G12 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:10-13&r=eec |
| By: | Gaetano D’Adamo (University of Valencia); Riccardo Rovelli (University of Bologna and IZA) |
| Abstract: | This paper studies the role of the exchange rate regime in the process of price convergence in Europe. During the last decade, a large strand of literature has flourished which studies the importance of the Balassa-Samuelson hypothesis in explaining nominal convergence. However, a general result of this literature is that such hypothesis can only explain a minor part of the excess inflation registered in European catching-up countries, while other factors may be at play. The role of the exchange rate regime in convergence in Europe, however, has so far been overlooked. First, we model the (endogenous) choice of the exchange rate regime and, in a second stage, estimate a Balassa-Samuelson type of regression for each regime. The results show that, for countries which pegged to or adopted the euro, the effect of a 1% increase in dual productivity growth (i.e. the difference between traded and non-traded sector productivity growth) on the dual inflation differential is more than twice as big as that of “flexible” countries. Our results suggest that too early adoption of the euro may per se foster excess inflation in a catching-up country which cannot be accounted for by the process of real convergence. |
| Keywords: | Exchange Rate Regimes, Balassa-Samuelson Effect, Inflation, Euro adoption |
| JEL: | C34 E52 F31 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:eec:wpaper:1314&r=eec |
| By: | Luca Barbone; Grzegorz Poniatowski |
| Abstract: | This paper contributes to the ongoing debate on fiscal consolidation and the questionable effectiveness of the Stability and Growth Pact by addressing the problem of economic governance in the EMU with a game-theoretic principal-agent approach. Following the theory of delegation, we develop a principal-multi agent model where the EMU authorities act as a collective principal that designs contracts for each of two agents that reflect Europe’s ”South” and ”North”. We investigate what happens when agents face hidden-information moral hazard problem and when they are able to coordinate their actions. Bearing in mind the applicability of incentive mechanisms, we discuss the optimal contracts for the principal and each of the agents. We prove that the most efficient solution consists of tailor-made contracts, according to which highly indebted countries must be offered strong incentive mechanisms in the form of substantial penalties but also rewards (e.g., preferential loans). We also stress the importance of taking into account positive spillover effects, which could be facilitated by economic integration and fiscal policy coordination between the EMU Members. |
| Keywords: | Moral Hazard, Principal-Agent, EU Economic Governance, Fiscal Compact |
| JEL: | D82 E61 H60 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:sec:cnstan:0457&r=eec |
| By: | Karl Farmer (Karl-Franzens University of Graz) |
| Abstract: | The pronounced increase in external imbalances in the European Economic and Monetary Union (EMU) during the years running up to 2008 is traditionally explained by financial integration through the common currency. This paper examines in a one-good, two-country overlapping generations' model, with production, capital accumulation and public debt, the effects of financial integration on the net foreign asset positions of initially low-interest and high-interest rate EMU countries. We find that a lower savings rate and government expenditure quota, together with a higher capital production share in the latter can in fact be transformed into the observed external imbalances when interest rates converge. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2013-07&r=eec |
| By: | Cockshott, Paul; Zachariah, David |
| Abstract: | The article attempts of apply econophysics concepts to the Eurozone crisis. It starts by examining the idea of conservation laws as applied to market economies. It formulates a measure of financial entropy and gives numerical simulations indicating that this tends to rise. We discuss an analogue for free energy released during this process. The concepts of real and symbolic appropriation are introduced as a means to analyse debt and taxation. We then examine the conflict between the conservation laws that apply to commodity exchange with the exponential growth implied by capital accumulation and how these have necessitated a sequence of evolutionary forms for money, and go on to present a simple stochastic model for the formation of rates of interest and a model for the time evolution of the rate of profit. Finally we apply the conservation law model to examining the Euro Crisis and the European Stability pact, arguing that if the laws we hypothesise actually hold, then the goals of the stability pact are unobtainable. -- |
| Keywords: | entropy,conservation-law,financial crisis |
| JEL: | G01 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201336&r=eec |
| By: | Ádám Török; Gyöngyi Csuka; Bernadett Kovács; Anita Veres |
| Abstract: | The aim of this study is to consider the main factors affecting the industrial policy in Central and Eastern European Countries (CEECs) by elucidating the issues such as; the connection between competitiveness and industrial policy, innovation, manufacturing, green growth and environment. The objective is to inspire thought in the reader and to highlight the necessity for a new industrial policy, which considers regional differences and specializations in the catching up economies of the CEECs. The ultimate question is what kind of industrial policy development is required in the CEECs in the future that could enable an even more successful catching up, or convergence, with the Western economies. This study includes an analysis of the countries that have been more successful in transition. A measurement was made of the export market shares as well as the industrial structure (primarily in manufacturing). The first step towards accomplishing this task was to examine the export competitiveness of CEECs, the concept of export competitiveness, and the role of exports in competitiveness-oriented growth strategies during the financial crisis. The question was how the effectiveness of policies that enhance export competitiveness could be improved in these countries. The second step was to examine and differentiate the variety of industrial politics in the CEECs, with special emphasis on tools used in order to promote incoming foreign direct investment and technological development. The third step was an assessment of CEECs innovation and R&D policies, and their linkages with competitiveness, for a better understanding of future options in the CEECs. It is outside the scope of this study to formulate a new industrial policy for certain countries since there is a wide variation in the level of development, workforce structure and industrial specialization of the countries examined in this study. Making predictions that are generally applicable to all member countries of the European Union (EU) is not possible in the international economic environment of June 2013. This study highlights that there is a need for a country specific industrial policy for each member country. During the development of industrial policy, the decision makers of each country must make complex decisions which consider all past and current economic factors. It is the intention of this study to inspire deeper, new ways of thinking about industrial policies in the CEECs. |
| Keywords: | Industrial policy, clusters, green growth, innovation, manufacturing, competitiveness, Central and Eastern Europe |
| JEL: | O14 O25 L16 L50 L52 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:feu:wfewop:y:2013:m:7:d:0:i:26&r=eec |
| By: | Serkan Arslanalp; Yin Liao |
| Abstract: | This paper proposes a simple method to estimate contingent liabilities that arise from (implicit and explicit) government guarantees to the banking sector. This method allows us to construct cross-country estimates on potential costs of bank failures. Furthermore, we empirically test whether the contingent liabilities from the banking sector is a significant determinant of sovereign risk based on the data from 32 countries. Our results suggest that a 1% of GDP increase in contingent liabilities is associated with an increase in sovereign CDS spreads of 24 basis points in advanced countries and 75 basis points in emerging economies |
| Keywords: | Contingent Liabilities, Sovereign Risk, Banking Sector |
| JEL: | G13 G21 G38 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-43&r=eec |
| By: | Zsolt Darvas |
| Abstract: | The SME access-to-finance problem is not universal in the European Union and there are reasons for the fall in credit aggregates and higher SME lending rates in southern Europe. Possible market failures, high unemployment and externalities justify making greater and easier access to finance for SMEs a top priority. Previous European initiatives were able to support only a tiny fraction of Europeâ??s SMEs; merely stepping-up these programmes is unlikely to result in a breakthrough. Without repairing bank balance sheets and resuming economic growth, initiatives to help SMEs get access to finance will have limited success. The European Central Bank can foster bank recapitalisation by performing in the toughest possible way the asset quality review before it takes over the single supervisory role. Of the possible initiatives for fostering SME access to finance, a properly designed scheme for targeted central bank lending seems to be the best complement to the banking clean-up, but other options, such as increased European Investment Bank lending and the promotion of securitisation of SME loans, should also be explored. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:785&r=eec |
| By: | Federico Cingano (Bank of Italy); Marco Leonardi (University of Milan and IZA); Julian Messina (World Bank, University of Girona and IZA); Giovanni Pica (Università di Salerno, CSEF and Centro Luca D'Agliano) |
| Abstract: | Employment protection may affect both productivity and capital investment because higher adjustments costs hamper allocative efficiency and may therefore affect both the optimal capital labor input mix and total factor productivity. To estimate the impact of dismissal costs on capital deepening and productivity we exploit a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for bigger firms. We provide evidence that the increase in firing costs induced capital deepening and a decline in total factor productivity in small firms relative to larger firms after the reform. We also find that capital deepening is more pronounced at the low-end of the capital distribution – where the reform arguably hit harder – and among firms endowed with a larger amount of liquid resources, that have more room to react thanks to an easier access to the credit market. Our results also indicate that the EPL reform reduced the probability to access the credit market, possbily because stricter EPL reduces both the value of the firm and the amount of internal resources that the firm can pledge as collateral against lenders. |
| Keywords: | Capital Deepening, Severance Payments, Regression Discontinuity Design, Financial Market Imperfections, Credit Constraints |
| JEL: | J65 G31 D24 |
| Date: | 2013–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:337&r=eec |
| By: | Saul Estrin & Milica Uvalic |
| Abstract: | The paper explores the determination of foreign direct investment (FDI) into the Balkan transition economies – Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Montenegro, Romania and Serbia. Detailed FDI inflows to Southeast Europe (SEE) are analysed to determine the main differences in the volume, timing and sectoral structure of FDI within the region and in comparison to the Central East European countries. A gravity model to all transition economies during 1990-2011 is then estimated to assess whether the factors driving FDI to the Western Balkans are different. They are found to be so; even when size of their economy, distance, institutional quality and prospects of EU membership are taken into account, Western Balkans countries receive less FDI. These issues are of high policy relevance for the Balkan economies and ought to contribute to the current debate on the ‘new growth model’. |
| Keywords: | foreign direct investment; EU-South-Eastern Europe; transition processes |
| Date: | 2013–07–12 |
| URL: | http://d.repec.org/n?u=RePEc:erp:leqsxx:p0064&r=eec |
| By: | Dimitri B. Papadimitriou; Michalis Nikiforos; Gennaro Zezza |
| Abstract: | Employment in Greece is in free fall, with more than one million jobs lost since October 2008--a drop of more than 28 percent. In March, the "official" unemployment rate was 27.4 percent, the highest level seen in any industrialized country in the free world during the last 30 years. In this report, Levy Institute President Dimitri B. Papadimitriou and Research Scholars Michalis Nikiforos and Gennaro Zezza analyze the economic crisis in Greece and offer policy recommendations to restore growth and increase employment. This analysis relies on the Levy Institute's macroeconomic model of the Greek economy (LIMG), a stock-flow consistent model similar to the Institute’s model of the US economy. Based on the LIMG simulations, the authors find that a continuation of austerity policies would decrease GDP and increase unemployment. They find recent International Monetary Fund and European Commission projections for the Greek economy overly optimistic, and recommend a recovery strategy, similar to the Marshall Plan, to increase public consumption and investment—a strategy centered on an expanded direct public-service job creation program. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levysa:sa_jul_13&r=eec |