nep-eec New Economics Papers
on European Economics
Issue of 2013‒11‒02
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Is There any Rebalancing in the Euro Area? By Benjamin Carton; Karine Hervé
  2. Fragmentation and Monetary Policy in the Euro Area By A. J. Al-Eyd; Pelin Berkmen
  3. Patterns of Convergence and Divergence in the Euro Area By Ángel Estrada; Jordi Galí; David López-Salido
  4. Fiscal Consolidation in the Euro Area: How Much Can Structural Reforms Ease the Pain? By Derek Anderson; Ben Hunt; Stephen Snudden
  5. Asian and European Financial Crises Compared By Edwin M. Truman
  6. Convergence and Divergences in the European Economy: Rebalancing and Being Competitive in a Non-optimal Monetary Union By Ferrán Brunet
  7. Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area By Dominic Quint; Pau Rabanal
  8. An Evaluation of the Revenue side as a source of fiscal consolidation in high debt economies By Ritwik Banerjee
  9. What can the EMU’s peripheral countries learn from regional growth? By Karl Aiginger; Matthias Firgo; Peter Huber
  10. Soft budget constraint but no moral hazard? The Dutch local government bailout puzzle By Merkus, Erik; Allers, Maarten
  11. Trade Linkages, Balance Sheets, and Spillovers: The Germany-Central European Supply Chain By Selim Elekdag; Dirk Muir
  12. Governance Structures in Europe By Andreas Sachs
  13. Full Employment: A Distant Dream for Europe By Gill, Indermit; Koettl, Johannes; Packard, Truman
  14. Political, Fiscal and Banking Union in the Eurozone? By Allen, Franklin; Carletti, Elena; Gray, Joanna

  1. By: Benjamin Carton; Karine Hervé
    Abstract: We assess the evolution of real exchange rate misalignments within the euro area from a Fundamental Equilibrium Exchange Rate (FEER) approach. We test the robustness of the results by comparing three different estimations of the output gap. Whatever the output gap assumption, Southern countries were massively overvalued before the euro area crisis. However, the magnitude of the adjustment since is sensitive to the output gap. In particular, Greece has not registered any improvement considering an output gap that captures the financial cycle (10-15 years) instead of the business cycle (5 years). Spain and Portugal have significantly reduced their misalignment but against France and Italy instead of Germany. As a consequence, imbalances in the euro area have not reduced.
    Keywords: Exchange Rates;Current Account Adjustment;Euro Area
    JEL: F31 F32 F36
    Date: 2013–10
  2. By: A. J. Al-Eyd; Pelin Berkmen
    Abstract: The ECB has taken a range of actions to address bank funding problems, eliminate excessive risk in sovereign markets, and safeguard monetary transmission. But euro area financial markets have remained fragmented, driving retail interest rates in stressed markets far above those in the core. This has impeded the flow of credit and undermined the transmission of monetary policy. Analysis presented here indicates that the credit channel of monetary policy has broken down during the crisis, particularly in stressed markets, and that SMEs in these economies appear to be most affected by elevated lending rates.Given these stresses, the ECB can undertake additional targeted policy measures, including through additional term loans, collateral policies, and private asset purchases.
    Keywords: Monetary policy;Euro Area;Capital markets;Sovereign debt;Bond issues;Banks;Interest rates;Credit risk;Monetary transmission mechanism;European Central Bank;Interest rates, fragmentation, monetary policy
    Date: 2013–10–04
  3. 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
    JEL: E24 F31 O47
    Date: 2013–10
  4. By: Derek Anderson; Ben Hunt; Stephen Snudden
    Abstract: The IMF’s Global Integrated Monetary and Fiscal model (GIMF) is used to examine the scope for structural reforms in the euro area to offset the negative impact of fiscal consolidation required to put public debt back on a sustainable path. The results suggest that structural reforms in core countries could quite reasonably be expected to offset the near term negative impact on activity arising from the required fiscal consolidation that uses a plausible mix of instruments to achieve the permanent improvement in the deficit. However, for the periphery, where the required consolidation is roughly twice as large as that required in the core, the results suggest that it would take several years before structural reforms could return the level of output back to its pre-consolidation path.
    Keywords: Fiscal consolidation;Euro Area;Fiscal policy;Fiscal reforms;Labor market reforms;Monetary policy;Fiscal consolidation, Fiscal policy, General equlibrium models, Structural reforms.
    Date: 2013–10–16
  5. By: Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: The European and Asian financial crises are the two most recent major regional crises. This paper compares their origins and evolution. The origins of the two sets of crises were different in some respects, but broadly similar. The two sets of crises also shared similarities in their evolution, but here the differences were more significant. The European crisis countries received more external financial support, despite the fact that they involved more solvency issues while the Asian crises involved more liquidity issues. On balance, the reform programs in the European crises were less demanding and rigorous than in the Asian crises. Partly as a consequence, the negative impacts on the global economy have been larger. Author Edwin M. Truman draws three lessons from this analysis: First, history will repeat itself; there will be other external financial crises. Second, other countries have a stake in appropriate crisis management. Third, the International Monetary Fund (IMF) and other countries were mistaken in treating the European crises as individual country crises rather than as a crisis for the euro area as a whole that demanded policy conditionality on all members of the euro area.
    Keywords: financial crises, Asian financial crises, European financial crises, International Monetary Fund, European Central Bank, crisis management, policy coordination, macroeconomic policies, banking policies
    JEL: F3 F20 F31 F32 F3 F34 F36 F42
    Date: 2013–10
  6. By: Ferrán Brunet
    Abstract: This paper analyzes the structures, tendencies and challenges of the euro zone due to its non-optimal nature. The impact of the euro is asymmetric and contradictory: in the glorious ten first years a miracle and many bubbles appeared in some euro peripheral economies but they collapsed and enter in an inferno, in a trap despite its rescue by the European Union. The European challenges on competitiveness due to the deficits on productivity and competition are concentrated in the periphery. The virtuous euro zone states, reformed and applying ruled policies, have enlarged their competitiveness. The euroimbalances grew changing the convergence into huge divergences. The structural challenges of the European economy were propelled i) by the non-optimal condition of the euro zone, in particular the no movement of workers, the inflexibility of wages and costs and the no banking union; and b) by the European economic governance deficit, in particular the contradiction between a non-optimal monetary union and the divergent state’ fiscal policies. Europe is an anchor… or a torpedo. The euro zone and its member states are rebalancing, deleveraging and adjusting internally the economies, walking to be competitive. The Union is helping on this, reassessing the added value of Europe. Europe is coming to be an optimal currency area. Nevertheless the Union is suffering from two systemic risks: i) economic because of recession, public failure and credit crunch; and ii) institutional because of having no the instruments of his needs, the emerging euroscepticism, and the tendencies to the disintegration both of the Union and of certain member states. Then there is a need for Europe, acute in many countries. And there is a new task for the Union as regulatory quality developer and even as state builder.
    Keywords: Stability, Competitiveness, European Monetary Union, Europe, Economic Policy.
    Date: 2013–03
  7. By: Dominic Quint; Pau Rabanal
    Abstract: In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and financial frictions, and hence both monetary and macroprudential policy can play a role. We find that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads.
    Keywords: Monetary policy;Euro Area;European Economic and Monetary Union;Macroprudential Policy;Credit expansion;Economic models;Monetary Policy, EMU, Basel III, Financial Frictions.
    Date: 2013–10–14
  8. By: Ritwik Banerjee (Department of Economics and Business, Aarhus University)
    Abstract: Unsustainable levels of debt in some European economies are causing considerable strain in the Euro area. Successful debt consolidation in high debt economies is one of the most important important objective for the European policy makers. I use a dynamic general equilibrium closed economy model to compute the dynamic Laffer Curves for Portugal, Ireland, Greece and Spain for different class of taxes. The general equilibrium effects of the interaction of labor tax, consumption tax and capital tax is demonstrated. Location of each economy on its Laffer curve suggests that there exists a scope for considerable revenue generation by raising consumption and labor tax rates but no such possibilities exist for capital tax rate. Thus revenue generation with certain tax rates as instruments, may hold a key to successful and sustained debt reduction.
    Keywords: Laffer Curve, Public Debt, Portugal, Ireland, Greece, Spain
    JEL: E60 E62 H30
    Date: 2013–10–22
  9. By: Karl Aiginger; Matthias Firgo; Peter Huber
    Abstract: The experiences of 259 regions in 21 European countries with within country GDP per capita and labour productivity growth suggest that variables associated with pro-active, growth oriented strategies are consistently more important predictors of successful regional development than variables related to austerity for a range of measures of successful development. Since regions are the only historical examples of restructuring in currency unions, we therefore also argue for a more growth oriented strategy to solve the problems of the European periphery and outline some features of such a strategy.
    Keywords: Convergence, within-country growth, peripheral countries
    JEL: O52 R11 R58
    Date: 2013–10
  10. By: Merkus, Erik; Allers, Maarten (Groningen University)
    Abstract: The fiscal federalism and public choice literatures stress that government bailouts should be avoided as they increase the probability that governments incur unsustainable debt levels or take excessive risk (moral hazard problem). The current problems in the euro area seem to confirm this view. However, in the Netherlands, the law explicitly stipulates that local governments that are unable to balance their books will be bailed out. Surprisingly, this does not seem to create problems. Only few local governments apply for bailout, and the amounts they receive are modest. We analyze the Dutch case and discuss possible explanations for this apparent anomaly. We test empirically if voters punish financial mismanagement in local governments, but find no evidence for this hypothesis.
    Date: 2013
  11. By: Selim Elekdag; Dirk Muir
    Abstract: Germany and the Czech Republic, Hungary, Poland, and Slovakia (the CE4) have been in a process of deepening economic integration which has lead to the development of a dynamic supply chain within Europe—the Germany-Central European Supply Chain (GCESC). Model-based simulations suggest two key policy implications: First, as a reflection of strengthening trade linkages, German fiscal spillovers to the CE4 and more broadly to the rest of the euro area, have increased over time, but are still relatively small. This is explained by the supply chain nature of trade integration: final demand in Germany is not necessarily the main determinant of CE4 exports to Germany. Second, increased trade openness in both Germany and the CE4 implies a greater exposure of the GCESC to global shocks. However, owing to its strong fundamentals—including sound balance sheets and its safe haven status— Germany plays the role of a regional anchor of stability by better absorbing shocks from other trading partners instead of amplifying their transmission across the GCESC.
    Keywords: Trade integration;Germany;Czech Republic;Hungary;Poland;Demand;External shocks;Spillovers;Germany, Czech Republic, Hungary, Poland, Slovakia, vertical integration, vertical specialization, supply chain, fiscal policy, balance sheets, spillovers, DSGE models, financial accelerator.
    Date: 2013–10–14
  12. By: Andreas Sachs
    Abstract: The policy report summarizes the research findings of Area 4. It is structured along milestone 80 (WWWforEurope Working Paper Number 4) which provides a broad perspective on governance in Europe. The additional milestones are grouped according to their focus in three groups which make up the distinct sections. The final section gives an outlook how the findings of the various milestones can be used as an input for the policy formulation phase of the project. A central shortcoming of existing governance structures is the weak integration of the (long-term) oriented Europe 2020 strategy in the (more short-term) oriented procedures summarized under the European Semester. A high level of heterogeneity in the EU, the possibility of spillovers caused by national policies, as well as the difficulty of specifying reform needs at the national level call for an adjustment of existing EU governance which is focused less on procedures and rules and more on a case- and country-specific treatment such that the actual needs at both the national and the EU level are taken into consideration.
    Date: 2013–09
  13. By: Gill, Indermit (World Bank); Koettl, Johannes (World Bank); Packard, Truman (World Bank)
    Abstract: Today, Europe is a continent of low participation, low employment labor markets. Many observers would like to blame poor employment outcomes on the Euro or on austerity. But these are dangerous distractions from real problems that constitute imperatives for structural reform. There are differences across countries, but there is a "European model" of work: almost every European economy has more stringent employment protection and more generous social benefits than peers in North America, Oceania, and East Asia. This has led to low labor force participation and high unemployment, especially among young Europeans. Layered on top of these weak labor markets is the rapid onset of aging; if policies are not changed, Europe will lose about a million workers every year for the next five decades, especially in the 2030s. In short, Europe has to increase both the demand for and supply of labor. To do so, Europeans have to begin viewing competition as a necessary good, not an unnecessary evil. Restructuring unemployment and pension benefits will help to increase participation and reverse the decline of the workforce, but policies that promote competition for jobs and mobility of job-seekers are needed to increase the demand for labor. To get to full employment, Europe has to alter the employment protection laws that give too much power to those with jobs while marginalizing others to the fringes of the economy. Europeans will have to reduce and restructure the generous social benefits that simultaneously discourage young people from searching seriously for work and encourage older workers to quit work too early. Europeans will have to view mobility of workers as a prerequisite of European integration, not just a possible consequence of it. If all this is augmented by reforms to reduce public debt, encourage enterprise and innovation, and stabilize finance, Europe will have a vibrant economy, with high participation and full employment.
    Keywords: European labor markets, segmented labor markets, employment protection, social benefits, labor mobility
    JEL: I38 J08 J21 J24 J32 J42
    Date: 2013–10
  14. By: Allen, Franklin; Carletti, Elena; Gray, Joanna
    Date: 2013

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