nep-eec New Economics Papers
on European Economics
Issue of 2013‒11‒22
fifteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Changes in the Eurozone governance after the crisis and the issue of growth By Schilirò, Daniele
  2. The Euro Area's Tightrope Walk: Debt and Competitiveness in Italy and Spain By Zsolt Darvas
  3. Are there any Animal Spirits behind the Scenes of the Euro area Sovereign Debt Crisis? By Emmanuel Mamatzakis
  4. How to Form a More Perfect European Banking Union By Angel Ubide
  5. Turning point chronology for the Euro-Zone: A Distance Plot Approach. By Peter Martey Addo; Monica Billio; Dominique Guegan
  6. Who gains from nominal devaluation? An empirical assessment of Euro-area exports and imports By Breuer, Sebastian; Klose, Jens
  7. Exchange Rate Regimes and Nominal Wage Comovements in a Dynamic Ricardian Model By Yoshimori Kurokawa; Jiaren Pang Author Name: Yao Tang
  8. Fiscal regimes in the EU. By Afonso, António; Toffano, Priscilla
  9. The intra-day impact of communication on euro-dollar volatility and jumps. By Dewachter, Hans; Erdemlioglu, Deniz; Gnabo, Jean-Yves; Lecourt, Christelle
  10. Greece: Back on track? By Schrader, Klaus; Benécek, David; Laaser, Claus-Friedrich
  11. Scrapping subsidies during the financial crisis: evidence from the Europe. By Leheyda, Nina; Verboven, Frank
  12. Product Market Reforms and Incentives to Innovate in Sweden By Edquist, Harald; Henrekson, Magnus
  13. The 2011 European short sale ban on financial stocks: A cure or a curse? By Félix, Luiz; Kräussl, Roman; Stork, Philip
  14. Assessing the sustainability of pension reforms in Europe By Grech, Aaron George
  15. Recent Reforms of Tax Systems in the EU: Good and Bad News By Gaëlle Garnier; Aleksandra Gburzynska; Endre György; Milena Mathé; Doris Prammer; Savino Ruà; Agnieszka Skonieczna

  1. By: Schilirò, Daniele
    Abstract: The Eurozone countries are still trying to find a way out to the crisis that has affected the European Monetary Union (EMU) since 2010. Sovereign debt crisis, difficulties in the banking system and large current account imbalances have characterized the crisis of the euro, while several countries of Eurozone have entered in a phase of slow and even negative growth. All this have put at risk the sustainability of EMU, leading to a climate of pessimism and distrust about the future of the single currency. The crisis of the Eurozone has shown that a sustainable currency union requires more governance because of the higher degree of economic, financial and fiscal spillovers between euro member countries. However, the crisis has led to significant changes in the institutional framework of EMU and in the economic policies of Eurozone, highlighting above all the role of ECB. The present contribution analyzes these changes in the eurozone governance and discusses whether they are the correct solutions to the crisis, it also focuses on the unresolved issue of growth in the peripheral Eurozone countries.
    Keywords: Eurozone governance, current account imbalances, economic growth, ECB’s monetary policy
    JEL: F15 F32 F33 H63 O40
    Date: 2013–10
  2. By: Zsolt Darvas
    Abstract: 1) 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. 2) 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. 3) 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 Bank’s Outright Monetary Transactions could reduce borrowing costs.
    Keywords: competitiveness adjustment, debt sustainability, euro area, inflation
    JEL: E31 H68
    Date: 2013–10
  3. By: Emmanuel Mamatzakis
    Abstract: This paper reveals the underlying market’s preferences over the on going Euro area sovereign debt crisis. It builds on a loss function with reference to the ‘basis’, the difference between the spread over swap and Credit Default Swap (CDS) for sovereign bonds. This loss function is general and flexible as it nests both a lin-lin and quad-quad functional form. The sample covers those Euro area member states most at risk of default namely: Greece, Portugal, Ireland, Spain and Italy. Results show that market’s preferences for some Euro area countries, in particular Greece, have shifted towards pessimism post the Emergency Financing Mechanism (EFM) and troika. If anything, market’s reading of Euro area debt crisis points to the direction of serious misalignments post EFM and troika fuelled by growing pessimism and thus uncertainty. Having derived market’s preferences, we explore the impact of some specific market characteristics and fiscal rules and fiscal institutions on those preferences. Fiscal rules and institutions appear to improve market’s perception over fiscal sustainability, whilst the 3M Euribor, 3M Eurepo, outstanding debt to GDP, and iTraxx main investment grade index also shape market’s preferences.
    Keywords: Economic Voting; Greek Crisis; EU; Government Constraints; Accountability
    JEL: E43 E44 G00 G01 G10
    Date: 2013–07
  4. By: Angel Ubide (Peterson Institute for International Economics)
    Abstract: The evolving plan for a European banking union falls short of the ideal of an "ever closer union." In fact, the plan's focus on national resolution authorities and funds for insolvent financial institutions, a minimal euro area financing backstop, and costs imposed on creditors of failed banks, could lead to a looser, weaker, and more fragmented banking system. Some aspects of the plan of European leaders will improve the system's soundness, but other aspects could dampen lending in the near term and reduce economic growth. Ubide urges policymakers to focus on making the banking union stronger and more coherent. Troubled banks supervised by the European Central Bank should be covered by a European resolution authority and a European resolution fund to oversee bankruptcy, restructuring, and other reforms. To produce a more united, solid, and stable euro area, the European plan has to lower national barriers to banking, not raise them.
    Date: 2013–10
  5. By: Peter Martey Addo (Centre d'Economie de la Sorbonne et Università di Venezia - Dipartimento di Economia); Monica Billio (Università di Venezia - Dipartimento di Economia); Dominique Guegan (Centre d'Economie de la Sorbonne)
    Abstract: We propose a transparent way of establishing a turning point chronology for the Euro-zone business cycle. Our analysis is achieved by exploiting the concept of recurrence plots, in particular distance plots, to characterize and detect turning points of the business cycle. Firstly, we apply the concept of recurrence plots on the US Industrial Production Index (IPI) series: this serves as a benchmark for our analysis since it already exists a reference chronology for the US business cycle, provided by the Dating Committee of the National Bureau of Economic Research (NBER). We then use this concept to construct a turning point chronology for the Euro-zone business cycle. In particular, we show that this approach permits to detect turning points and study the business cycle without a priori assumptions on the statistical properties of the underlying economic indicator.
    Keywords: Economic cycles, Euro-zone, recurrence plots, turning points
    JEL: C14 C40 E32
    Date: 2013–03
  6. By: Breuer, Sebastian; Klose, Jens
    Abstract: In early 2013 rumors about the Euro-appreciation gained momentum, which may lead to decreases in exports and increases in imports of the member states. Therefore, we investigate the impact of changes in the nominal Euro exchange rate vis-à-vis major currencies on export and import performance of nine different Euro-area-countries. To disentangle the true equilibrium elasticities SURE system error correction models (SSECM) are estimated for nominal exchange rate changes versus the rest of the world or other major currencies. To differentiate between price level changes and changes of the nominal exchange rate, a country's export and import equation is estimated using separately the nominal rate and the relative price/ unit labor cost as regressors. Results of Wald-tests indicate that assuming both variables to have the same influence on exports and imports is misleading. Whether the relative price/ unit labor costs elasticities are high or low depends crucially on which indicator is chosen, while the effect of nominal exchange rate changes can be estimated robustly for all countries in the sample. Especially France and Spain are hit by a Euro appreciation since their exports are highly exchange rate elastic. However, for France, this effect is at least partly offset by an also negative exchange rate elasticity of imports. --
    Date: 2013
  7. By: Yoshimori Kurokawa; Jiaren Pang Author Name: Yao Tang
    Abstract: We construct a dynamic Ricardian model of trade with money and nominal ex- change rate. The model implies that the nominal wages of the trading countries are more likely to exhibit stronger positive comovements when the countries x their bi- lateral exchange rates. Panel regression results based on data from OECD countries from 1973 to 2012 suggest that countries in the European Monetary Union (EMU) ex- perienced stronger positive wage comovements with their main trade partners. When we restrict the regression to the subsample of the EMU countries, we nd a signif- icant increase in wage comovements after these countries joined the EMU in 1999 compared to the pre-euro era. In comparison, when the sample is restricted to the non-EMU countries, we nd no evidence that non-currency union pegs aected the wage comovements.
    Date: 2013–11
  8. By: Afonso, António; Toffano, Priscilla
    Abstract: We assess the existence of fiscal regime shifts in the U.K., Germany, and Italy, using Markov switching fiscal rules. On the basis of a newly built quarterly data set, our results show the existence of fiscal regimes shifts, sometimes coupled with regime switches also regarding monetary developments. While in the UK “active” and “passive” (Leeper, 1991) fiscal regimes are somewhat clearer cut, in Germany fiscal regimes have been overall less active, supporting more fiscal sustainability. For Italy, a more passive fiscal behaviour is uncovered in the run-up to EMU.
    Date: 2013–04
  9. By: Dewachter, Hans; Erdemlioglu, Deniz; Gnabo, Jean-Yves; Lecourt, Christelle
    Abstract: In this paper, we examine the intra-day effects of verbal statements and comments on the FX market uncertainty using two measures: continuous volatility and discontinuous jumps. Focusing on the euro-dollar exchange rate, we provide empirical evidence of how these two sources of uncertainty matter in measuring the short-term reaction of exchange rates to communication events. Talks significantly trigger large jumps or extreme events for approximately an hour after the news release. Continuous volatility starts reacting prior to the news, intensifies around the release time and stays at high levels for several hours. Our results suggest that monetary authorities generally tend to communicate with markets on days when uncertainty is relatively severe, and higher than normal. Disentangling the US and Euro area statements, we also find that abnormal levels of volatility are mostly driven by the communication of the Euro area officials rather than US authorities.
    Date: 2013
  10. By: Schrader, Klaus; Benécek, David; Laaser, Claus-Friedrich
    Abstract: At the turn of the year 2012/2013 the Eurogroup and the European Commission heralded the message that the worst crisis in Greece would be over. According to this message, the Greek government had delivered the promised steps of structural and fiscal reforms and had agreed with a tough timetable for further reforms. The slowdown of negative growth, the falling current account deficit, the reduction of the primary deficit and the various reform laws adopted by the Greek parliament were highlighted as evidence for a positive development in Greece (EU-Commission 2013a: 56). However, an in-depth analysis of Greece's economic development and potentials does not corroborate the image of a country that rises like a phoenix from the ashes (Figure 1). The economic downswing has continued in 2013 whereby it only slightly decelerated - real GDP will contract for the fifth consecutive year, probably by more than 4 %. Even the forecast of a slight growth by 0.6 % in 2014 rests on very optimistic assumptions on the reduction of unit labor costs, the successful liberalization of markets, the stabilization of the commercial banking system and the creation of a business environment convenient for attracting foreign direct investment. Looking at Greece's labor market the impression prevails that not even a faint light can be seen at the end of the tunnel: Mass unemployment will remain at a rate of 25 %, and youth unemployment at the 60 % threshold further exacerbates the labor market crisis. Rising unemployment results from lay-offs in the private sector while the public service and stateowned enterprises have mostly been spared from employment reductions so far. At least the cuts of public service salaries indicate empty treasuries and the austerity policy forced by the international financiers. --
    Date: 2013
  11. By: Leheyda, Nina; Verboven, Frank
    Date: 2013–08
  12. By: Edquist, Harald (Fores); Henrekson, Magnus (Research Institute of Industrial Economics (IFN))
    Abstract: The Swedish economy has developed rapidly since the mid-1990s relative to most comparable countries, in particular relative to almost all other EU-15 countries. We investigate two policy areas that are believed to have been important for the strong economic development in Sweden during the last two decades, namely product market reforms and incentives to innovate. The paper provides a short description of the policy changes that have taken place within these areas since the early 1990s and offers ideas for additional policy reforms that would pave the way for continued successful economic development.
    Keywords: Economic reforms; Entrepreneurship; Innovation; Institutions; Product market regulations; Sweden
    JEL: L53 O31 O52
    Date: 2013–11–13
  13. By: Félix, Luiz; Kräussl, Roman; Stork, Philip
    Abstract: Did the August 2011 European short sale bans on financial stocks accomplish their goals? In order to answer this question, we use stock options' implied volatility skews to proxy for investors' risk aversion. We find that on ban announcement day, risk aversion levels rose for all stocks but more so for the banned financial stocks. The banned stocks' volatility skews remained elevated during the ban but dropped for the other unbanned stocks. We show that it is the imposition of the ban itself that led to the increase in risk aversion rather than other causes such as information flow, options trading volumes, or stock specific factors. Substitution effects were minimal, as banned stocks' put trading volumes and put-call ratios declined during the ban. We argue that although the ban succeeded in curbing further selling pressure on financial stocks by redirecting trading activity towards index options, this result came at the cost of increased risk aversion and some degree of market failure. --
    Keywords: short-selling,ban,financial stocks,implied volatility skew,risk aversion
    JEL: G01 G28
    Date: 2013
  14. By: Grech, Aaron George
    Abstract: Europe’s pensions landscape has changed dramatically since the 1990s. This paper tries to assess better the impact of these changes using a broad social sustainability framework. Pension wealth estimates for a variety of hypothetical cases are used to assess the ability of systems to alleviate poverty and maintain living standards, while setting out how reforms could change future costs and relative entitlements for different generations. By focusing on all prospective transfers rather than those at retirement and by looking into the interaction between entitlements and labour participation, this approach provides additional insights on the impact of reforms. Our estimates suggest that generosity has fallen significantly, but remains strong in many countries. However, moves to link benefits to contributions have raised adequacy concerns for certain groups and strengthened the need for longer careers. Though reforms have helped address fiscal challenges, in many countries pressures remain strong and further reforms are likely.
    Keywords: Social Security; Public Pensions; Retirement; Poverty; Retirement Policies
    JEL: H55 I38 J26
    Date: 2013–10–18
  15. By: Gaëlle Garnier (European Commission); Aleksandra Gburzynska (European Commission); Endre György (European Commission); Milena Mathé (European Commission); Doris Prammer (European Commission); Savino Ruà (European Commission); Agnieszka Skonieczna (European Commission)
    Abstract: This paper reviews to what extent Member States followed the tax policy priorities put forward by the European Commission in the Annual Growth Survey of November 2012: shifting taxation away from labour, broadening tax bases, reducing corporate tax debt bias and improving tax compliance. The ‘good news’ which emerges from the analysis is that overall Member States are making efforts to make tax systems more efficient, competitive and fair; the ‘bad news’ is that the extent of the challenges calls for more action in all the priority areas identified.
    Keywords: European Union, taxation, tax policy, tax reform, VAT, tax fraud, corporate taxation, personal income taxation, environment, research and development
    JEL: H11 H20 H24 H25 H26 H27 H87
    Date: 2013–10

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