nep-eec New Economics Papers
on European Economics
Issue of 2013‒10‒11
thirteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Patterns of Convergence and Divergence in the Euro Area By Ángel Estrada; Jordi Galí; David López-Salido
  2. Banking union:a solution to the euro zone crisis ? By Maylis Avaro; Henri Sterdyniak
  3. Current Account Adjustment in the Euro-Zone: Lessons from a Flexible-Price-Model By Christoph Zwick
  4. Financial sector-output dynamics in the euro area: Non-linearities reconsidered By Schleer, Frauke; Semmler, Willi
  5. Banking Union: integrating components and complementary measures By Santiago Fernandez de Lis; Ana Rubio; Jorge Sicilia
  6. Contagion in the interbank network: An epidemiological approach By Toivanen, Mervi
  7. Debt Levels, Debt Composition, and Sovereign Spreads in Emerging and Advanced Economies By Salvatore Dell’Erba, Ricardo Hausmann, Ugo Panizza
  8. Equity returns in the banking sector in the wake of the great recession and the European sovereign debt crisis By Chan-Lau, Jorge A.; Liu, Estelle X.; Schmittmann, Jochen M.
  9. Macroeconomic Imbalances in the EU By Stefan Ederer; Peter Reschenhofer
  10. Lisbon Strategy implementation in 12 New EU Members – multivariate analysis of structural indicators By Magdalena Olczyk
  11. The European Central Bank in the age of banking union By Zsolt Darvas; Silvia Merler
  12. Poland's new golden age : shifting from Europe's periphery to its center By Piatkowski, Marcin
  13. Tax competition in the eurozone: Capital mobility, agglomeration, and the small country disadvantage By Rademacher, Inga

  1. By: Ángel Estrada; Jordi Galí; David López-Salido
    Abstract: We study the extent of macroeconomic convergence/divergence among euro area countries. Our analysis focuses on four variables (unemployment, inflation, relative prices and the current account), and seeks to uncover the role played by monetary union as a convergence factor by using non-euro developed economies and the pre-EMU period as control samples.
    Keywords: macroeconomic convergence, labor markets, competitiveness, inflation differentials, current account imbalances, relative prices
    JEL: E24 F31 O47
    Date: 2013–10
  2. By: Maylis Avaro (ENS Cachan); Henri Sterdyniak (Ofce)
    Abstract: The banking union emerged from the June 2012 European Council as a new project expected to help and solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? The banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, establishing common mechanisms to solve banking crises, and encouraging banks to diversify their activities. The banking union project is based on three pillars: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM) a European Deposit Guarantee Scheme. Each of these pillars raises specific problems. Some are related to the current crisis (can deposits in euro area countries facing difficulties be guaranteed?); some other are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?),some other are related to the EU specificity (is the banking union a step towards more federalism?), the more stringent are related to structural choices regarding the European banking system. The banks' solvency and their ability to lend would primarily depend on their capital ratios, and thus on financial markets' sentiment. The links between the government, firms, households and domestic banks would be cut, which is questionnable. Will governments be able tomorrow to intervene to influence bank lending policies, or to settle specific public banks? An opposite strategy could be promoted: restructuring the banking sector, and isolating retail banking activity from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed because they would not be allowed to run risky activity.Can European peoples leave such strategic choices in the hands of the ECB?
    Keywords: Banking un, Eion, European Construction
    JEL: G21 G28
    Date: 2013–09
  3. By: Christoph Zwick (Karl-Franzens University of Graz)
    Abstract: This paper deals the ongoing current account adjustment process in the southern Euro - area countries. It applies an extended version of the Obstfeld/Rogoff (2005) model to Euro-Zone- imbalances and provides an interpretation of the results. I develop a five-region-version of the model, consisting of a EMU – deficit (GIPS)- and a EMU – surplus region besides the United States, Asia and OPEC. The model also allows for changes in the relative size of the tradable- to the non- tradable sector, induced by changes in the relative prices of tradable- to non-tradable goods. The paper shows the approximated sizes and the directions of price movements, which are implied by the current account adjustment process that started in the GIPS countries after the financial crisis. It argues, that declines in output and employment during the adjustment process follow intuitively from the model results. These output losses result from sticky prices in combination with a limited nominal depreciation of the common currency and the importance of intra-EMU adjustment. The paper further shows that supply-side changes, global rebalancing issues and the time horizon of the rebalancing process have an important impact on the size of the price movements. Despite the discussed weaknesses of the model, the analysis clearly suggests unfinished real effective exchange rate adjustment in Greece, Spain and Portugal implying further negative economic consequences on these economies by the rebalancing process. Italy might be an exception.
    Date: 2013–08
  4. By: Schleer, Frauke; Semmler, Willi
    Abstract: We analyze the feedback mechanisms between economic downturns and financial stress for euro area countries. Our study employs newly constructed financial condition indices that incorporate extensively banking variables. We apply a nonlinear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the financial sector-output linkages. The VSTAR model appears appropriate since it allows for smooth regime changes and asymmetric dynamics. We find that regime-switching takes place rather smoothly which dampens the negative output response after a shock in the financial sector in the selected euro area countries. Moreover, linearity cannot be rejected for all countries over some extensive time period questioning non-linearities in the financial sector-output nexus as unambiguous feature. In particular, we show that the negative effect of financial stress on output typically observed is not always present. This holds specifically for the time before the Lehman collapse, even if this is a model-defined high stress regime. After the collapse, we observe strong amplification mechanisms. This suggests that events leading to a strong economic breakdown are rare but large events and related to financial cycles which exhibit low frequency. --
    Keywords: Vector STAR,financial stress,financial cycle,real economy,regime-switching,euro area
    JEL: E2 E44 G01
    Date: 2013
  5. By: Santiago Fernandez de Lis; Ana Rubio; Jorge Sicilia
    Abstract: The crisis has led to increased financial fragmentation and revealed the link between sovereign and national banking risks, whose persistence over time would be incompatible with the euro. The solution to these problems must be the banking union, which should be constructed at the same time as the current crisis is being resolved. The process will be eventually complemented by the creation of cross-border banks. The process of the banking union does not have an optimal design, it will be long and will generate tensions during the transition period, but it is politically feasible. In the end, we will have a Europe that is much more integrated from the monetary, banking, fiscal and political points of view.
    Keywords: banking union, Europe, supervision, fragmentation
    JEL: F33 F34 F36 G18 G21
    Date: 2013–08
  6. By: Toivanen, Mervi (Financial Markets and Statistics, Bank of Finland)
    Abstract: This paper analyses the importance of individual bank-specific factors on financial stability. First, we use a novel method to model the spreading of the contagion in the interbank network by implementing an epidemiologic model. Actual data on European banks is exploited with simulated scale-free networks. The average contagion affected 70% and 40% of European banks’ total assets in 2007 and in 2010, respectively. Country-level results suggest that French, British, German and Spanish banks are the most contagious ones, whereas banks from Ireland, Greece and Portugal induce only limited negative effects. Secondly, cross-sectional panel estimations are performed to disentangle the leading indicators influencing the level of contagion. Bank clustering, large incoming interbank loans and bank reputation are more prominent explanatory variables than the size or leverage. Finally, central banks’ interventions reduce contagion only slightly.
    Keywords: contagion; banks; Europe; interbank; epidemiology; panel regression
    JEL: C15 G01 G21
    Date: 2013–09–03
  7. By: Salvatore Dell’Erba, Ricardo Hausmann, Ugo Panizza (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper studies the relationship between sovereign spreads and the interaction between debt composition and debt levels in advanced and emerging market countries. It finds that in emerging market countries there is a significant correlation between spreads and debt levels. This correlation, however, is not statistically significant in countries where most public debt is denominated in local currency. In advanced economies, the magnitude of the correlation between debt levels and spreads is about one fifth of the corresponding correlation for emerging market economies. In Eurozone countries, however, the correlation between spreads and debt ratios is similar to that of emerging market countries. The paper also shows that the financial crisis amplified the relationship between spreads and debt levels within the Eurozone but had no effect on the relationship between spreads and debt in standalone countries. Finally, the paper shows that the relationship between debt levels and spreads is amplified by the presence of large net foreign liabilities. This amplifying effect of net foreign liabilities is larger in the Eurozone than in standalone advanced economies. The paper concludes that debt composition matters and corroborates the original sin hypothesis that, rather than being a mere reflection of institutional weaknesses, the presence of foreign currency debt increases financial fragility and leads to suboptimal macroeconomic policies.
    Keywords: Spreads, Public debt, Original Sin, Euro
    Date: 2013–09–27
  8. By: Chan-Lau, Jorge A.; Liu, Estelle X.; Schmittmann, Jochen M.
    Abstract: This study finds that equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis have been driven mainly by weak growth prospects and heightened sovereign risk and to a lesser extent, by deteriorating funding conditions and investor sentiment. While the equity return performance in the banking sector has been dismal in general, better capitalized and less leveraged banks have outperformed their peers, a finding that supports policymakers' efforts to strengthen bank capitalization. --
    Keywords: banks,equity returns,financial crisis,sovereign risk,sovereign debt crisis,economic growth,regulatory capital,panel data econometrics
    JEL: G01 G14 G21
    Date: 2013
  9. By: Stefan Ederer; Peter Reschenhofer
    Abstract: This paper aims to identify different growth patterns in the EU which led to the emergence of macroeconomic imbalances. It provides a detailed statistical picture of the evolution of various macroeconomic variables on the demand as well as on the supply side, before, in and after the financial and economic crisis of 2008/09. It investigates the causes and discusses various ’channels’ which led to macroeconomic imbalances by means of a descriptive analysis of the key determinants of macroeconomic developments, such as wage and price developments, productivity growth etc. Special emphasis is given to developments of the share of labour in national income, the real interest rate and the real exchange rate. The analysis of this data set provides a comprehensive picture of the underlying causes for the specific growth patterns as well as a first assessment of their role in the development of macroeconomic imbalances within the EU. It derives tentative conclusions as to how macroeconomic imbalances can arise in a monetary union and how they can be addressed properly by economic policy.
    Keywords: EU integration, European economic policy, European governance, European Monetary Union, Macroeconomic disequilibria
    JEL: E61 F41
    Date: 2013–09
  10. By: Magdalena Olczyk (Gdansk University of Technology, Gdansk, Poland)
    Abstract: The aim of this article is to identify diversity between the EU-15 and the New Members in their implementation of the Lisbon Strategy in the period 2000-2010. By analyzing a set of structural indicators, we aim to fill a gap in the literature: a lack of publications providing complex evaluation of the implementation of the Lisbon Strategy using measurable indicators. The results of our analyses confirm the hypothesis of a large gap between the EU-15 countries and the 12 New Members in key areas of the Lisbon Strategy. According to rankings given by our taxonomic analyses, a high level of the indicators selected is confirmed only for the EU-15 countries and only three New Members belong to a group presenting the average level of these indicators. This study demonstrates a need for a significant intensification of the EU cohesion policy, which is one of the main tools for achieving the Lisbon Strategy goals.
    Keywords: Lisbon Strategy, Lisbon targets, European Union, multivariate analysis, structural indicators
    JEL: C00 E60 O52 P11
    Date: 2013–09
  11. By: Zsolt Darvas; Silvia Merler
    Abstract: During the crisis the European Central Bankâ??s roles have been greatly extended beyond its price stability mandate. In addition to the primary objective of price stability and the secondary objective of supporting EU economic policies, we identify ten new tasks related to monetary policy and financial stability. We argue that there are three main constraints on monetary policy: fiscal dominance, financial repercussions and regional divergences. By assessing the ECBâ??s tasks in light of these constraints, we highlight a number of synergies between these tasks and the ECBâ??s primary mandate of price stability. But we highlight major conflicts of interest related to the ECBâ??s participation in financial assistance programmes. We also underline that the ECBâ??s government bond purchasing programmes have introduced the concept of â??monetary policy under conditionalityâ??, which involves major dilemmas. A solution would be a major change towards a US-style system, in which state public debts are small, there are no federal bail-outs for states, the central bank does not purchase state debt and banks do not hold state debt. Such a change is unrealistic in the foreseeable future.
    Date: 2013–10
  12. By: Piatkowski, Marcin
    Abstract: The objective of the paper is (i) to help fill the gap in knowledge on the long-term economic history of Poland; (ii) to provide a new perspective to the debate on the economic future of Poland, with a special focus on its historically unprecedented post-transition growth experience; and (iii) to analyze critically long-term growth projections for Poland. The paper argues that (i) Poland has just had probably the best 20 years in its economic history, growing the fastest among all European economies and one of the fastest worldwide; (ii) by 2013, it Poland achieved levels of income, quality of life, and well-being likely never experienced before, including relative to Western Europe, a natural benchmark; and (iii) Poland is well placed to continue converging with the Western European levels of income, permanently moving from the economic periphery of Europe, where it languished for centuries, to the European economic center. The twenty-first century thus promises to become Poland's new Golden Age. The paper calls for further research on the lessons from Poland's successful growth model for other countries in the region and beyond as well as on the long-term implications of the rise of Poland for the future of Europe.
    Keywords: Economic Theory&Research,Emerging Markets,Population Policies,Achieving Shared Growth,Labor Policies
    Date: 2013–10–01
  13. By: Rademacher, Inga
    Abstract: The increasing economic integration among OECD countries since the late 1970s has attracted much attention in tax policy research. Although several studies have tested whether capital mobility induces a race to the bottom in capital taxation, the two approaches - competition and compensation theory - provide diametrically opposed answers to this question. One theory predicts a reduction in taxation, the other a stagnation or increase in taxation. This paper examines the question once again. However, instead of aggregating all OECD countries into one sample, it compares EMU countries - with nearly perfect capital mobility - to non-EMU countries in a difference-in- differences regression. Controlling for market size, I found that the EMU led to a divergence in taxation for small and large countries. Although the reduction in small countries could be explained by competition theory, the increase in large countries is not in line with the conventional theories. I argue that agglomeration forces give large countries an advantage in terms of attracting foreign direct investment (FDI) because of beneficial supply and demand chains. Small countries are disadvantaged in terms of capital attraction, which they counter by reducing capital taxation. -- Die zunehmende wirtschaftliche Integration der OECD-Länder seit den späten 1970er- Jahren ist für die Steuerforschung von großem Interesse. In verschiedenen Studien wurde bereits untersucht, ob Kapitalmobilität zu einer Abwärtsspirale bei der Kapitalbesteuerung führt. Doch die Analysen der beiden Literaturstränge - Wettbewerbs- sowie Kompensationstheorie - kommen zu gegensätzlichen Ergebnissen. Während eine Theorie eine Senkung der Besteuerung prognostiziert, prophezeit die andere eine Stagnation oder einen Anstieg. Dieses Papier untersucht die Frage ein weiteres Mal, erstmalig allerdings auf der Basis eines Vergleichs von EWU-Ländern - mit fast perfekter Kapitalmobilität - und Nicht-EWU-Ländern. Die Difference-in-Differences-Regression zeigt, dass die EWU divergierende Entwicklungen in der Besteuerung kleiner und großer Länder befördert hat. Während die Reduzierung der Besteuerung in kleinen Staaten mit der Wettbewerbstheorie erklärt werden könnte, ist der Anstieg in großen Mitgliedsstaaten nicht mit den herkömmlichen Theorien vereinbar. Die Autorin argumentiert, dass Agglomerationskräfte den großen Mitgliedsstaaten durch günstige Liefer- und Nachfrageketten einen Vorteil im Hinblick auf ausländische Direktinvestitionen verschaffen. Kleine Staaten sind wegen ihrer geringeren Kapitalattraktivität benachteiligt, der sie mit einer Senkung der Kapitalbesteuerung entgegenwirken wollen.
    Date: 2013

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