nep-eec New Economics Papers
on European Economics
Issue of 2013‒08‒16
seven papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. What Does the 1930s’ Experience Tell Us about the Future of the Eurozone? By Crafts, Nicholas
  2. Contagion Dynamics in EMU Government Bond Spreads By Christian Leschinski, Christian; Bertram, Philip
  3. The systemic risk of European banks during the financial and sovereign debt crises By Lamont Black; Ricardo Correa; Xin Huang; Hao Zhou
  4. A Culture Based Theory of Fiscal Union Desirability By Guiso, Luigi; Herrera, Helios; Morelli, Massimo
  5. Eurozone Sovereign Debt Restructuring: promising legal prospects? By Miller, Marcus; Thomas, Dania
  6. Good governance problems and recent financial crises in some EU countries By Gamberger, Dragan; Smuc, Tomislav
  7. ECB monetary policy in the recession: a New Keynesian (old monetarist) critique By Robert L. Hetzel

  1. By: Crafts, Nicholas (University of Warwick)
    Abstract: If the Eurozone follows the precedent of the 1930s, it will not survive. The attractions of escaping from the gold standard then were massive and they point to a strategy of devalue and default for today’s crisis countries. A fully-federal Europe with a banking union and a fiscal union is the best solution to this problem but is politically infeasible. However, it may be possible to underpin the Euro by a ‘Bretton-Woods compromise’ that accepts a retreat from some aspects of deep economic integration since exit entails new risks of financial crisis that were not present eighty years ago.
    Keywords: economic disintegration; Eurozone; financial repression; gold standard; macroeconomic trilemma; political trilemma
    Date: 2013
  2. By: Christian Leschinski, Christian; Bertram, Philip
    Abstract: There is a growing consensus that part of the surge in government bond spreads during the EMU debt crisis can be explained by wake-up-call contagion. Evidence on pure contagion however is very mixed and there are no insights into the dynamics of these effects. As a contribution to fill this gap, we apply the canonical contagion framework of Pesaran and Pick [2007], similar to Metiu [2012], for daily data from January 2002 until May 2013. By adapting the contagion function used by Metiu [2012], we are able to identify the contagion effects originating from each of the crisis countries using a two-stage least squares estimator in a rolling window. This procedure allows us to analyze changes of the contagion coefficients over time. We find that pure contagion appears as early as February 2007 (coinciding with the very first manifestations of the subprime mortgage crisis) which is before the bankruptcy of Lehman Brothers and thus much earlier than the Greek deficit revision. The effects have a stronger impact during the subprime crisis than during the EMU crisis and the main sources of pure contagion effects are Spain, Italy and Ireland whereas Greece plays only a minor role.
    Keywords: contagion, sovereign risk, bond spreads
    JEL: C32 C36 G01 G15
    Date: 2013–08
  3. By: Lamont Black; Ricardo Correa; Xin Huang; Hao Zhou
    Abstract: We propose a hypothetical distress insurance premium (DIP) as a measure of the European banking systemic risk, which integrates the characteristics of bank size, default probability, and interconnectedness. Based on this measure, the systemic risk of European banks reached its height in late 2011 around € 500 billion. We find that the sovereign default spread is the factor driving this heightened risk in the banking sector during the European debt crisis. The methodology can also be used to identify the individual contributions of over 50 major European banks to the systemic risk measure. This approach captures the large contribution of a number of systemically important European banks, but Italian and Spanish banks as a group have notably increased their systemic importance. We also find that bank-specific fundamentals predict the one-year-ahead systemic risk contribution of our sample of banks in an economically meaningful way.
    Date: 2013
  4. By: Guiso, Luigi (EIEF & CEPR); Herrera, Helios (HEC Montreal); Morelli, Massimo (Columbia University)
    Abstract: If voters of different countries adhere to different and deeply rooted cultural norms, the country leaders may fi…nd it impossible to agree on efficient policies especially in hard times. The conformity constraint -political leaders unwillingness or impossibility to depart from these norms - has resulted in lack of timely intervention which has ampli…ed an initially manageable debt crisis for some European countries to the point of threatening the Euro as a single currency. We show the conditions under which the introduction of a fi…scal union can be obtained with consensus and be bene…cial. Perhaps counter- intuitively, cultural diversity makes a fi…scal union even more desirable. Some general lessons can also be drawn on the interaction of cultural evolution and institutional choice.
    Keywords: Conformity constraint, culture, debt crisis, …fiscal union.
    Date: 2013
  5. By: Miller, Marcus (University of Warwick); Thomas, Dania (University of Glasgow)
    Abstract: The Eurozone debt crisis has stimulated lively debate on mechanisms for sovereign debt restructuring. The immediate threat of exit and the breakup of the currency union may have abated; but the problem of dealing with significant debt overhang remains. After considering two broad approaches - institutional versus contractual – we look at a hybrid solution that combines the best of both. In addition to debt contracts with Collective Action Clauses, this includes a key amendment to the Treaty establishing the European Stability Mechanism, together with innovative statecontingent contracts and a Special Purpose Vehicle to market them.
    Keywords: Eurozone
    Date: 2013
  6. By: Gamberger, Dragan; Smuc, Tomislav
    Abstract: This study examines 147 banking crises in the period of 1976-2011 documented by the International Monetary Fund. The countries affected by crises are analysed in respect of publicly available World Bank indicators in the periods of three years before the crises. Machine learning methodology for subgroup discovery is used for the analysis. It enabled identification of five subsets of crises. Two of them are identified as especially useful for the characterization of EU countries affected by the banking crises in the year 2008. Fast growing credit activity is a characteristic for the first subgroup while socioeconomic problems recognized by non-increasing quality of public health are decisive for the second subgroup. Comparative analysis of the EU countries included into the second subgroup and the EU countries affected by the banking crises but not included into this subgroup demonstrated statistically significant differences in respect of World Bank good governance indicator values for the period before the crisis. Control of corruption, rule of law, and government effectiveness are the indicators that are statistically different for these sets of countries. The result is fully in accordance with the Francis's model connecting governance indicators and financial fragility. The significance of the result is in the segmentation of the corpus of countries with banking crises and recognition of connections between banking crises, socioeconomic problems, and governance effectiveness in some EU countries. The conclusions of the study might be useful for the policy makers in stressing that future banking crises prevention should also focus on governance effectiveness, more strict law implementation and especially on measures against corruption. --
    Keywords: banking crises,World Bank indicators,subgroup discovery,good governance
    JEL: H11 J00 C63 E01
    Date: 2013
  7. By: Robert L. Hetzel
    Abstract: Use of the New Keynesian model to identify shocks points to contractionary monetary policy as the cause of the Great Recession in the Eurozone.
    Keywords: Monetary policy ; Recessions ; Keynesian economics
    Date: 2013

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