nep-eec New Economics Papers
on European Economics
Issue of 2013‒09‒13
eight papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The euro area's tightrope walk: debt and competitiveness in Italy and Spain By Zsolt Darvas
  2. Controlled dismantlement of the Eurozone: A proposal for a New European Monetary System and a new role for the European Central Bank By Stefan Kawalec; Ernest Pytlarczyk
  3. International Monetary Transmission to the Euro Area: Evidence from the US, Japan and China By Vespignania, Joaquin L.; Ratti, Ronald A.
  4. Business cycles in EU new member states: How and why are they different? By Marcin Kolasa
  5. Testing for a Break in the Persistence in Yield Spreads of EMU Government Bonds By Sibbertsen, Philipp; Wegener, Christoph; Basse, Tobias
  6. Assessing future sustainability of french public finances By Jérôme Creel; Paul Hubert; Francesco Saraceno,
  7. On the impact of the global financial crisis on the euro area By Ligthart, Jenny; He, Xiaoli; Jacobs, Jan; Kuper, Gerard
  8. Wage leadership models: a country-by-country analysis of the EMU By Gaetano D’Adamo; Mariam Camarero; Cecilio Tamarit

  1. By: Zsolt Darvas
    Abstract: Competitiveness adjustment in struggling southern euro-area members requires persistently lower inflation than in major trading partners, but low inflation worsens public debt sustainability. When average euro-area inflation undershoots the two percent target, the conflict between intra-euro relative price adjustment and debt sustainability is more severe. In our baseline scenario, the projected public debt ratio reduction in Italy and Spain is too slow and does not meet the European fiscal rule. Debt projections are very sensitive to underlying assumptions and even small negative deviations from GDP growth, inflation and budget surplus assumptions can easily result in a runaway debt trajectory. The case for a greater than five percent of GDP primary budget surplus is very weak. Beyond vitally important structural reforms, the top priority is to ensure that euro area inflation does not undershoot the two percent target, which requires national policy actions and more accommodative monetary policy. The latter would weaken the euro exchange rate, thereby facilitating further intra-euro adjustment. More effective policies are needed to foster growth. But if all else fails, the European Central Bankâ??s Outright Monetary Transactions could reduce borrowing costs.
    Date: 2013–09
  2. By: Stefan Kawalec (Capital Strategy Sp. z o. o.); Ernest Pytlarczyk (BRE Bank S.A.)
    Abstract: In Kawalec and Pytlarczyk (2013), we argue that the single European currency constitutes a serious threat to the European Union and the Single European Market,and we propose a controlled dismantlement of the Eurozone. In this paper, we undertake a deeper analysis of the measures which would minimize the risks throughout the process of the Eurozone dismantlement and contribute to rebuilding confidence in the future of Europe. · The dismantlement should be the result of a consensual decision to replace the euro with an alternative system of currency coordination. · The dismantlement should start with the exit of the most competitive countries. In the meantime, the euro should remain the common currency of less competitive countries. · The European Central Bank (ECB) should be preserved as the central bank for all 17 Eurozone member countries, even after some of those countries have replaced the euro with new currencies. In this capacity, the ECB should be in charge of designing,preparing, and implementing the segmentation of the Eurozone as well as managing the new currency coordination system – European Monetary System 2. · The forthcoming EU – USA free trade agreement would build new momentum for economic growth and contribute to restoring confidence in the future of Europe. As of today, neither the member states of the Eurozone nor European institutions such as the European Commission or the ECB have been able to come up with a game-changing proposal such as the Eurozone dismantlement. However, this may change as a result of adverse economic and political developments. One of the potential triggers could be the situation in France. Classification-JEL: E5, E58, F15, F31, G18
    Keywords: Eurozone crisis; Euro breakup; European Central Bank; Dismantlement of the Eurozone; currency coordination; European Monetary System 2.
    Date: 2013
  3. By: Vespignania, Joaquin L. (School of Economics and Finance, University of Tasmania); Ratti, Ronald A. (School of Business, University of Western Sydney)
    Abstract: There are marked differences in the effect of increases in monetary aggregates in China, Japan and the U.S. on Euro area economic and financial variables over 1999-2012. Increases in monetary aggregates in China are associated with significant increases in the world price of commodities and with increases in Euro area inflation, industrial production and exports. Results are consistent with shocks to China’s M2 facilitating domestic growth with expansionary consequences for the Euro area economy. In contrast, increases in monetary aggregates in Japan are associated with significant appreciation of the Euro and decreases in Euro area industrial production and exports. Production of goods highly competitive with European goods in Japan and expenditure switching in Japan are consistent with the results. U.S. monetary expansion has relatively small effects on the Euro area over this period compared to results reported in the literature for earlier sample periods.
    Keywords: International monetary transmission, China’s monetary aggregates, Euro area Commodity prices
    JEL: E52 E58 F31 F42
    Date: 2013–08–05
  4. By: Marcin Kolasa (National Bank of Poland, Warsaw School of Economics)
    Abstract: This paper uses the business cycle accounting framework to investigate the differences between economic fluctuations in Central and Eastern European (CEE) countries and the euro area. We decompose output movements into the contributions of four economic wedges, affecting the production technology, the agents’ intra- and intertemporal choices, and the aggregate resource constraint. We next analyze the observed cross-country differences in business cycles with respect to these four identified wedges. Our results indicate that business cycles in the CEE countries do differ from those observed in the euro area, even though substantial convergence has been achieved after the eastern EU enlargement. The major differences concern the importance of the intraand intertemporal wedges, which account for a larger proportion of output fluctuations in the CEE region and also exhibit relatively little comovement with their euro area counterparts.
    Keywords: business cycle accounting; business cycle synchronization
    JEL: E32 F44
    Date: 2013
  5. By: Sibbertsen, Philipp; Wegener, Christoph; Basse, Tobias
    Abstract: This study tests for a break in the persistence of EMU government bond yield spreads examining data from France, Italy and Spain and using German interest rates as a kind of benchmark. The results reported here provide evidence for breaks between 2006 and 2008. The persistence of the yield spreads against German government bonds has increased signi cantly after this period. This could be a sign of higher sovereign credit risk (and possibly even redenomination risk) caused by the debt crisis in the euro area. We nd long-memory behavior before and after the breakpoints and empirical evidence for positive excess kurtosis and GARCH-e ects when persistence increases.
    Keywords: Testing Uncovered Interest Parity; Fractional integration; Changing persistence
    JEL: C22 E43 G12
    Date: 2013–08
  6. By: Jérôme Creel (Ofce sciences-po,Escp Europe); Paul Hubert (Ofce sciences-po); Francesco Saraceno, (Ofce sciences-po,Luiss school of european political economy Italy)
    Abstract: This paper contributes to the debate on the French public finances'consolidation by investigating the long-term sustainability of France’s fiscal position. We trace the historical trends of government’s tax receipts and expenditures. We find that while the level of public expenditure in France is larger than in the rest of the Euro Area (mostly because of public wages and social benefits), its trend is comparable to its neighbours. Net lending is also under control, thanks to the high levels of taxation, so that we see no real risk of future unsustainability. However, the French tax system is unfair, is not sufficiently progressive, and is too complex. The paper then proceeds to assess the future of France’s public finances on the basis of the current debate on the Euro Area fiscal rules. We report two analyses theoretical and empirical that project the inflation rate and output gap paths for the next twenty years. We finally assess fiscal rules on this ground. The ‘fiscal compact’ fares rather poorly compared to the alternative rules that we assess.
    Keywords: deficits,debts,debt management,fiscal rules,fiscale compact,golden rule
    JEL: E62 E63 H61 H68
    Date: 2013–07
  7. By: Ligthart, Jenny; He, Xiaoli; Jacobs, Jan; Kuper, Gerard (Groningen University)
    Abstract: This paper analyses the impact of the Global Financial Crisis on the Euro area utilizing a simple dynamic macroeconomic model with interaction between monetary policy and fiscal policy. The model consists of an IS curve, a Phillips curve, a term structure relation, a debt accumulation equation and a Taylor monetary policy rule supplemented with a Zero Lower Bound, and a fiscal policy rule. The model is alibrated/estimated for EU-16 countries for the period 1980Q1-2009Q4. The impact of the Global Financial Crisis is studied by means of impulse responses following a combined, prolonged aggregate demand and public debt shock. The simulation mimicking the GFC turns out to work fairly well. However, the required size of the shock is quite large.
    Date: 2013
  8. By: Gaetano D’Adamo (Department of Applied Economics II, University of Valencia); Mariam Camarero (Department of Economics, Universidad Jaume I); Cecilio Tamarit (Department of Applied Economics II, University of Valencia)
    Abstract: According to the theory of wage leadership, if there is free inter-sectorial labor mobility, changes in the level of the wage in the leading sector cause changes in the same direction in other sectors’ wage. Moreover, since the traded sector (i.e. Industry) is affected by international competitive pressure, it should act as the leader, because this would be conducive to wage restraint. We apply a Vector Error Correction Model on four macro sectors (Industry, Services, Construction and the Public Sector) in ten EMU countries to test for wage leadership and wage adaptability. Our results show significant cross-country differences, with the Public Sector acting as the leader in Germany, Belgium and Greece. Countries that recently experienced a construction bubble such as Spain and Ireland show wage leadership of the construction sector. Moreover, in half of the countries, wages in different sectors are, to some extent, set autonomously, which suggests low intersectorial labor mobility. Finally, adjustment after a positive vs. negative shock to the leading sector’s wage, in Mediterranean countries, Ireland and the Netherlands is asymmetric.
    Keywords: Wage Leadership; Cointegrated VAR; Labor Market
    JEL: C32 E62 J51
    Date: 2013–07

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