nep-eec New Economics Papers
on European Economics
Issue of 2013‒10‒25
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. One Money, One Cycle? The EMU Experience By Martin Gächter; Aleksandra Riedl
  2. The fragility of two monetary regimes: The European Monetary System and the Eurozone By Paul De Grauwe; Yuemei Ji
  3. The Net Stable Funding Ratio and banks’ participation in monetary policy operations: some evidence for the euro area By Antonio Scalia; Sergio Longoni; Tiziana Rosolin
  4. "Fool Me Once . . . " Did U.S. investors play it safer in the European debt crisis? By Carol C. Bertaut; Fang Cai; Nyssa Kim
  5. Equity Premia Predictability in the EuroZone By Nuno Silva
  6. The effectiveness of sequences of One-Euro Jobs : is it better to do more One-Euro-Jobs or to wait? By Dengler, Katharina
  7. Reprisals Remembered: German-Greek Conflict and Car Sales during the Euro Crisis By Vasiliki Fouka; Hans-Joachim Voth
  8. Structural Adjustment and Unit Labour Cost Developments in Europe’s Periphery: Patterns before and during the Crisis By Doris Hanzl-Weiss; Michael Landesmann
  9. Crisis, structural reform and the dismantling of the European Social Model(s) By Hermann, Christoph
  10. Bond Spreads and Economic Activity in Eight European Economies By Michael Bleaney; Paul Mizen; Veronica Veleanu
  11. Fiscal Devaluation – Can it Help to Boost Competitiveness? By Isabell Koske
  12. A Global Macro Model for Emerging Europe By Martin Feldkircher
  13. The impact of unconventional monetary policy on the Italian economy during the sovereign debt crisis By Marco Casiraghi; Eugenio Gaiotti; Lisa Rodano; Alessandro Secchi
  14. The UK Productivity and Jobs Puzzle: Does the Answer Lie in Labour Market Flexibility? By Joao Paulo Pessoa; John Van Reenen

  1. By: Martin Gächter; Aleksandra Riedl
    Abstract: The authors examine whether the introduction of the euro had a significantly positive impact on the synchronization of business cycles among members of Economic and Monetary Union (EMU) which might arise due to the lack of country-specific monetary policy shocks in the euro area. Empirical evidence on this relationship is rare so far and suffers from methodical weaknesses, such as the absence of time variability, which is crucial for addressing this issue. Using a synchronization index that is constructed on a year-by-year basis (1993{2011), the authors uncover a strong and robust empirical finding: the adoption of the euro has significantly increased the correlation of member countries' business cycles above and beyond the effect of higher trade integration. Thus, the authors’ results substantially strengthen the conclusion by Frankel & Rose (1998), i.e. a country is more likely to satisfy the criteria for entry into a currency union ex post rather than ex ante. Remarkably, however, this reasoning is even verifed when controlling for the effect of increased trade linkages implied by entering a currency union. JEL classification: E02, E32, E58, F15, F33
    Keywords: Business cycles, EMU, endogeneity, optimum currency areas
    Date: 2013–09–25
  2. By: Paul De Grauwe (LSE; CEPS); Yuemei Ji (University College London)
    Abstract: We analyze the similarities and the differences in the fragility of the European Monetary System (EMS) and the Eurozone. We test the hypothesis that in the EMS the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets while in the Eurozone it was the absence of a lender of last resort in the long-term government bond markets that caused the fragility. We conclude that in the EMS the national central banks were weak and fragile, and the national governments were insulated from this weakness by the fact that they kept their own national currencies. In the Eurozone the roles were reversed. The national central banks that became part of the Eurosystem were strengthened.
    Keywords: government bond markets, interbank money market, interest rate spread, Eurozone, EMS, fragility
    JEL: E42 E52 E58 F33
    Date: 2013–10
  3. By: Antonio Scalia (Bank of Italy); Sergio Longoni (Bank of Italy); Tiziana Rosolin (Bank of Italy)
    Abstract: Based on a review of the analytical underpinnings of the effects of the NSFR on banks’ choices, this paper attempts to relate banks’ strategies to developments in the value of the ratio in the euro area. In spite of a not-so-near implementation date, the evidence is that the NSFR already matters for banks’ choices, and it might be more relevant as a decision variable than alternative leverage indicators. As part of a convergence process towards the 100 per cent threshold, we estimate that the ECB’s 3-year LTROs have raised the available stable funding by €429 billion as of June 2012 for the sample banks with a shortfall and that the NSFR may affect loans to the economy. In view of the phasing-in of the Basel III liquidity standards, the evidence suggests that, when evaluating non-standard monetary policy measures, central banks should also take into account their impact on the fulfilment of the NSFR and the possible cliff effects related to their expiration.
    Keywords: Basel III, liquidity regulation, central bank operations
    JEL: E5 G2
    Date: 2013–09
  4. By: Carol C. Bertaut; Fang Cai; Nyssa Kim
    Abstract: This paper examines U.S. investors’ portfolio investment patterns since the global financial crisis, particularly since the European debt crisis that began in late 2009. The global financial crisis during 2007-2009 was accompanied by an increase in U.S. investors’ home bias. U.S. investors experienced significant valuation losses and pulled back notably from their foreign investment, especially from foreign debt. In contrast, while they have also incurred sizable losses on cross-border investment during the European debt crisis, U.S. investors so far have not shown any increase in home bias, and they have not even pulled back from their long-term investments in Europe. Holdings data show that U.S. investors have continued to invest in European securities, particularly in government debt, but have made little new investment in the financial sector. This continued interest in European securities could owe to the fact that most of U.S. holdings of European debt have been concentrated in dollar-denominated debt issued by core euro area countries and the United Kingdom, which are deemed relatively safe. Changes in the composition of holdings over the past couple years suggest that U.S. investors have behaved in a way that reflects their diversity and differing objectives: while investors reached for higher yields in government debt, there also appears to be some shift toward safer investment in the financial sector.
    Date: 2013
  5. By: Nuno Silva (GEMF/ Faculty of Economics University of Coimbra, Portugal)
    Abstract: In this paper, we studied the equity premium predictability in eleven EuroZone countries. Besides some traditional predictive variables, we have also chosen two other that, to our knowledge, have never been previously used in this literature: the change in the OECD normalized composite leading indicator and the change in the OECD business confidence indicator. The OECD indicators have shown a good performance, in particular during the early stages of the recent financial crisis. We also computed the utility gains that a mean-variance investor would have obtained, if he has used these forecasting variables, and concluded that, for most countries, the utility gains would have been considerable.
    Keywords: Internation stock markets, Equity premia predictability, Asset allocation
    JEL: C22 C53 G11 G17
    Date: 2013–09
  6. By: Dengler, Katharina (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "Many studies have analysed the effectiveness of single active labour market programmes (ALMPs) for welfare recipients in different countries. As empirical evidence reveals that welfare recipients in Germany often participate in multiple programmes, I evaluate the sequential participation of unemployment benefit II (UB-II)-recipients in ALMPs in Germany. My study uses comprehensive, administrative data to control for dynamic selection that arises in the evaluation of sequences. Using a dynamic matching approach and an inflow sample of UB-II-recipients, I analyse the effects of sequences of One-Euro-Jobs and/or UB-II-receipt on labour market outcomes. I focus on two questions: Is participating in two consecutive One-Euro-Jobs compared with receiving UB II for two consecutive periods better for individuals' employment outcomes? Is it more effective to take part in a One-Euro-Job directly after entry into UB II or in a later period? For female participants in One-Euro-Jobs in the first period, especially in West Germany, I find that participating in two consecutive One- Euro-Jobs compared with receiving UB-II-receipt for two consecutive periods better facilitates integration into regular employment. It is also more effective for participants in One-Euro- Jobs in the first period to take part in a One-Euro-Job directly after entry into UB II rather than take part in a One-Euro-Job in a later period, especially for East German men (although not for West German women). However, I also find evidence of so-called programme careers and stepwise integration into regular employment through direct job creation schemes (without One-Euro-Jobs)." (Author's abstract, IAB-Doku) ((en))
    JEL: C31 I38 J68
    Date: 2013–10–09
  7. By: Vasiliki Fouka; Hans-Joachim Voth
    Abstract: During the Greek debt crisis after 2010, the German government insisted on harsh austerity measures. This led to a rapid cooling of relations between the Greek and German governments. We compile a new index of public acrimony between Germany and Greece based on newspaper reports and internet search terms. This information is combined with historical maps on German war crimes during the occupation between 1941 and 1944. During months of open conflict between German and Greek politicians, German car sales fell markedly more than those of cars from other countries. This was especially true in areas affected by German reprisals during World War II: areas where German troops committed massacres and destroyed entire villages curtailed their purchases of German cars to a greater extent during conflict months than other parts of Greece. We conclude that cultural aversion was a key determinant of purchasing behavior, and that memories of past conflict can affect economic choices in a time-varying fashion. These findings are compatible with behavioral models emphasizing the importance of salience for individual decisionmaking.
    Keywords: Consumer boycott, cultural aversion, political conflict, memory, salience, car sales, Euro crisis, German-Greek relations
    JEL: D12 D74 F14 N14 N44
    Date: 2013–10
  8. By: Doris Hanzl-Weiss (The Vienna Institute for International Economic Studies, wiiw); Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Abstract This paper analyses developments in production structures in pre-crisis and during the crisis years in the range of EU ‘peripheral economies’ (i.e. the lower- and medium-income economies in the South and the Centre/East). The emphasis is on the development of the tradable sector (and manufacturing in particular) relative to non-tradable sectors and whether these are reflected in longer-term trade imbalances. Different groups of economies emerge, some with a strong manufacturing base, others with a very weak one. We investigate whether and to which extent structural readjustments took place during the crisis years and also analyse in detail relative unit labour cost (ULC) developments across sectors. A decomposition analysis shows that ULC developments are mainly driven during the crisis by output and employment adjustments (rather than by labour compensation) posing the question of whether capacity contraction effects might make ‘weak economies’ in the EU’s periphery even more ‘trade balance constrained’ in the wake of the crisis.
    Keywords: tradable sector, non-tradable sector, real effective exchange rates, unit labour costs, Europe’s peripheral economies, trade and current account imbalances, structural developments in Europe’s periphery, Central and Southeast Europe
    JEL: J3
    Date: 2013–09
  9. By: Hermann, Christoph
    Abstract: Following ECB-president Draghi's remark that the European Social Model does no longer exist and the crisis can only be overcome through a combination of austerity and structural reform, this paper examines the consequences of austerity measures and structural reforms adopted during the crisis in a number of EU member states. The hypothesis is that the juxtaposition of the end of the European Social Model on the one hand, and austerity and structural reform on the other was well chosen. In fact austerity and the structural reforms amount to a veritable attack on the foundations of the European Social Model. The first part of the essay summarizes the discussion on the European Social Model, while the second part describes and compares major austerity measures and structural reforms adopted during the crisis. The third part discusses the impact of the newly established European Economic Governance structure on national economic and social policies. The fourth part deals with the consequences of austerity and structural reform, including for poverty and inequality. The essay ends with some reflections on the role of solidarity and the future of the European Social Model. --
    Keywords: Economic crisis,European Social Model,Austerity,Inequality,Solidarity
    JEL: H10 H40 H50 I38 J38 J58
    Date: 2013
  10. By: Michael Bleaney; Paul Mizen; Veronica Veleanu
    Abstract: This paper provides a new insight into the relationship between financial market tightness and real activity using a unique new database extracted from Bloomberg to construct a credit spread index from 500 corporate bonds issued in eight European countries. We find that European bond spread measures have a significant negative relationship with four real activity measures at horizons of one quarter to two years ahead. The relationship is robust to inclusion of measures of monetary policy tightness, other leading indicator variables and factors extracted from a large macro dataset, as well as alternative measures of the bond spreads. These results provide strong support for models previously only evaluated on US data. We find that a sub-set of northern European countries have similar sensitivity of real GDP to bond spreads, but others have higher spreads and greater sensitivity to these spreads, which reveals a diverse response in Europe to financial market tightness.
    Keywords: corporate bond spreads, external bond premium, economic activity
  11. By: Isabell Koske
    Abstract: The recent crisis has revealed large differences in external competitiveness between euro area member countries. Since nominal exchange rate devaluation is not an option for members of a currency area, governments in troubled member countries have been considering so-called fiscal devaluation, i.e. a shift from employers’ social security contribution to value added tax, as an alternative means to restore competitiveness. This paper discusses the potential benefits and drawbacks of such a reform and investigates under which circumstances it would have the intended effects. It argues that a fiscal devaluation can have transitory effects, but that any permanent real effects are likely to be small in size. The policy tool can thus not be a substitute for deeper structural reforms of labour, product and financial markets. However, it may be helpful as part of a broader package of reforms. Dévaluation fiscale - peut-elle aider à stimuler la compétitivité ? La crise récente a révélé de grandes différences de compétitivité externe entre les pays membres de la zone euro. Comme la dévaluation du taux de change nominal n'est pas une option pour les membres d'une zone monétaire, les gouvernements des pays membres en difficulté ont examiné la dévaluation fiscale, c'est à dire substitution de la taxe à la valeur ajoutée aux cotisations sociales des employeurs, comme un autre moyen de rétablir la compétitivité. Ce document examine les avantages et les inconvénients d'une telle réforme et analyse les circonstances dans lesquelles il aurait les effets escomptés. Il soutient que la dévaluation fiscale peut avoir des effets transitoires, mais que les effets réels permanents sont susceptibles d'être faibles. Cet outil de politique ne peut donc pas se substituer à des réformes structurelles plus profondes des marchés du travail, des produits et financiers. Toutefois, il peut être utile dans le cadre d'un ensemble plus large de réformes.
    Keywords: value added tax, fiscal devaluation, social security contributions, competitiveness, compétitivité, Dévaluation fiscale, cotisations sociales, taxe à la valeur ajoutée
    JEL: E62 F13 H23
    Date: 2013–10–02
  12. By: Martin Feldkircher
    Abstract: This paper puts forward a global macro model comprising 43 countries and covering the period from Q1 1995 to Q4 2011. Our regional focus is on countries in Central, Eastern and Southeastern Europe (CESEE) and the Commonwealth of Independent States (CIS). Applying a global VAR (GVAR) model, we are able to assess the spatial propagation and the time profile of foreign shocks to the region. Our results show that first, the region’s real economy reacts nearly equally strongly to an U.S. output shock as it does to a corresponding euro area shock. The pivotal role of the U.S.A. in shaping the global business cycle thus seems to partially offset the region’s comparably stronger trade integration with the euro area. Second, an increase in the euro area’s short-term interest rate has a negative effect on output in the long run throughout the region. This effect is stronger in the CIS as well as in Southeastern Europe, while it is comparably milder in Central Europe. Third, the region is negatively affected by an oil price hike, with the exception of Russia, one of the most important oil exporters worldwide. The oil-driven economic expansion in Russia seems to spill over to other – oil-importing – economies in CIS, thereby offsetting the original drag brought about by the hike in oil prices. Finally, our results corroborate the strong integration of advanced economies with the global economy. By contrast, the responses in emerging Europe are found to be more diverse, and country-specifics seem to play a more important role. JEL classification: C32, F44, E32, O54
    Keywords: Global VAR, transmission of international shocks, Eastern Europe, CESEE, great recession, emerging Europe, global macro model, foreign shock
    Date: 2013–09–23
  13. By: Marco Casiraghi (Bank of Italy); Eugenio Gaiotti (Bank of Italy); Lisa Rodano (Bank of Italy); Alessandro Secchi (Bank of Italy)
    Abstract: We assess the impact on the Italian economy of the main unconventional monetary policies adopted by the ECB in 2011-2012 (SMP, 3-year LTROs and OMTs) by following a two-step approach. We evaluate their effects on money market interest rates, government bond yields and credit availability and then map them onto macroeconomic implications using the Bank of Italy quarterly model of the Italian economy. We find that the SMP and the OMTs have been effective in counteracting increases in government bond yields and that the LTROs have had a beneficial impact on credit supply and money market conditions. From a macroeconomic perspective, we find that the unconventional policies have had a large positive effect on the Italian economy, mainly through the credit channel, with a cumulative impact on GDP growth of 2.7 percentage points over the period 2012-2013. To conclude, while the policies did not prevent the Italian economy from falling into recession, they did avoid a more intense credit crunch and a larger output fall than those actually observed.
    Keywords: monetary policy, unconventional monetary measures
    JEL: E52 E58 E44
    Date: 2013–09
  14. By: Joao Paulo Pessoa; John Van Reenen
    Abstract: GDP per worker fell for the five years after 2008 which is unprecedented in post war UK history. In this paper we argue that "capital shallowing" (i.e. the fall in the capital-labour ratio) could be the main reason for this. This is likely to have occurred due to changes in factor prices: a large fall in real wages and increases in the cost of capital. In previous recessions real wages did not fall, but reforms to union strength and welfare have made wages more sensitive to negative demand shocks. This wage flexibility is desirable as it reduces the risks of long-term unemployment building up. After accounting for changes in capital TFP is more similar to earlier recessions and likely to be related to under-utilised resources and misallocation. The fall in labour productivity is therefore likely to reverse if demand improves - e.g. through stronger monetary or fiscal policy stimulus.
    Keywords: productivity, employment, wages, labour market flexibility
    JEL: J2 J3 O52
    Date: 2013–06

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