nep-eec New Economics Papers
on European Economics
Issue of 2013‒12‒15
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. "Lost at Sea: The Euro Needs a Euro Treasury" By Jorg Bibow
  2. The Determinants of Greek Bond Yields: An Empirical Study Before and During the Crisis By Chionis, Dionisios; Pragidis, Ioannis; Schizas, Panagiotis
  3. "The Continued Relevance of Tax-backed Bonds in a Post-OMT Eurozone" By Philip Pilkington
  4. The European debt crisis and fiscal reaction functions in Europe 2000–2012 By Guido Baldi; Karsten Staehr
  5. Euro Area monetary policy transmission in Estonia By Gertrud Errit; Lenno Uusküla
  6. Financial Shocks and Economic Activity in the Netherlands By Peter Broer; Jürgen Antony
  7. Fear of a two-speed monetary union: what does a basic correlation scatter plot tell us? By Jean-Sébastien Pentecôte
  8. A Vibrant European Labor Market with Full Employment By Ritzen, Jo; Zimmermann, Klaus F.
  9. Household Debt and the European Crisis By Chmelar, Ales
  10. A Sovereign Risk Index for the Eurozone Based on Stochastic Dominance By Elettra Agliardi; Mehmet Pinar; Thanasis Stengos
  11. Bank performance and economic growth: evidence from Granger panel causality estimations By Cândida Ferreira
  12. Conditional Autoregregressive Range (CARR) Based Volatility Spillover Index For the Eurozone Markets By Bayraci, Selcuk; Demiralay, Sercan
  13. A ‘Manufacturing Imperative’ in the EU – Europe's Position in Global Manufacturing and the Role of Industrial Policy By Neil Foster-McGregor; Mario Holzner; Michael Landesmann; Johannes Pöschl; Robert Stehrer; Roman Stöllinger
  14. The New European Framework for Managing Bank Crises By Micossi, Stefano; Bruzzone, Ginevra; Carmassi, Jacopo

  1. By: Jorg Bibow
    Abstract: The euro crisis remains unresolved even as financial markets may seem calm for now. The current euro regime is inherently flawed, and recent reforms have failed to turn this dysfunctional regime into a viable one. Our investigation is informed by the "cartalist" critique of traditional "optimum currency area" theory (Goodhart 1998). Various proposals to rescue the euro are assessed and found lacking. A "Euro Treasury" scheme operating on a strict rule and specifically designed not to be a transfer union is proposed here as a condition sine qua non for healing the euro’s potentially fatal birth defects. The Euro Treasury proposed here is the missing element that will mend the current fiscal regime, which is unworkable without it. The proposed scheme would end the currently unfolding euro calamity by switching policy from a public thrift campaign that can only impoverish Europe to a public investment campaign designed to secure Europe’s future. No mutualization of existing national public debts is involved. Instead, the Euro Treasury is established as a means to pool eurozone public investment spending and have it funded by proper eurozone treasury securities.
    Keywords: Euro Crisis; Currency Union; Fiscal Union; Transfer Union; Cartalism; Lender of Last Resort; European Integration
    JEL: E02 E42 E58 E61 E62 F36 G01
    Date: 2013–11
  2. By: Chionis, Dionisios (Democritus University of Thrace, Department of Economics); Pragidis, Ioannis (Democritus University of Thrace, Department of Economics); Schizas, Panagiotis (Democritus University of Thrace, Department of Economics)
    Abstract: In this paper we try to uncover the determinants of the 10-year Greek bond yield in both pre and post crisis period that caused the unprecedented event, in the recent history, a country, member of the Euro area, not to able to tap the market. In doing so, we employ two major set of variables, market driven and macroeconomic variables, following the recent literature. We find two classes of results. First, debt to GDP ratio, deficit, inflation and unemployment among others, play a more significant role as determinants of the 10-year Greek bond yield during the crisis than had before and second, during the crisis 10years yield is above the price that fundamentals would imply. Moreover, we explicitly test for the impact of speculation on the yield. These results are in line with other empirical studies and shed line to the motion of bond yield in an unprecedented in terms of fiscal consolidation era as it is in Greece.
    Keywords: Sovereign bonds; Macroeconomic fundamentals; Greek Debt Crisis; Eurozone Debt crisis; Unrestricted VAR
    JEL: E43 G12 G14
    Date: 2013–12–05
  3. By: Philip Pilkington
    Abstract: In a policy note published last year by the Levy Institute, Philip Pilkington and Warren Mosler argued that the eurozone sovereign debt crisis could be solved by national governments without the assistance of the European Central Bank (ECB) and without their leaving the currency union, through the issuance of a proposed financial innovation called "tax-backed bonds." These bonds would be similar to standard government bonds except that, should the country issuing the bonds not make its payments, the tax-backed bonds would be acceptable to make tax payments within the country in question, and would continue to earn interest. In the current policy note, Pilkington examines the continued relevance of the bond proposal in light of changes that have taken place with respect to ECB policy since the original proposal was made, as well as the case made by Ireland's finance minister that tax-backed bonds would violate current Irish law (and, by implication, the law in other eurozone countries). He also outlines some changes made to the initial proposal in response to constructive criticisms received since its publication, and briefly notes another area in which the proposal might be utilized—outside the eurozone. His conclusion? That tax-backed bonds remain a valid policy tool, one that can be implemented at the national rather than at the federal level, and a stepping stone to solving the eurozone’s economic problems.
    Date: 2013–12
  4. By: Guido Baldi; Karsten Staehr
    Abstract: After the global financial crisis, some governments in the EU experienced serious debt financing problems, while others were less affected. This paper seeks to shed light on the divergent fiscal performance by assessing the fiscal conduct in the EU countries before and after the outbreak of the crisis. Fiscal reaction functions of the primary balance are estimated for different groups of EU countries using quarterly data for the pre-crisis period 2001–2008 and for the post-crisis period 2009–2012. The pre-crisis estimations reveal some differences in persistence and cyclical reaction between different groups of countries, but generally little feedback from the debt stock to the primary balance. The countries that eventually developed fiscal problems do not stand out. The post-crisis estimations show less counter-cyclicality and much more feedback from the debt stock, and these reactions are particularly pronounced for the countries with severe fiscal problems
    Keywords: fiscal reaction function, global financial crisis, debt crisis, structural break
    JEL: E61 E62 H62 H63
    Date: 2013–07–24
  5. By: Gertrud Errit; Lenno Uusküla
    Abstract: This paper studies the effect of a monetary policy shock in the euro area on the main Estonian economic and financial variables between 2000 and 2012. Using a standard structural vector autoregression (SVAR) model we find strong and persistent effects on Estonian GDP, private consumption, corporate investment and imports. A monetary policy shock has also strong and sluggish effects on the housing loan and consumer credit interest rates. The estimated reaction of Estonian GDP and the GDP deflator-based inflation rate is about four times stronger than the reaction of euro area-wide aggregates. The Estonian money market interest rate (the 3-month Talibor) reacts about twice as strongly as the euro area money market interest rate (the 3-month Euribor). We also show that this finding is sensitive to the inclusion of the data from the years of the recent financial and economic crisis. We conjecture that household interest rates can play an important role in propagating monetary policy shocks in Estonia.
    Keywords: monetary policy, SVAR, Estonia, euro area
    JEL: E32 E52 C32
    Date: 2013–12–09
  6. By: Peter Broer; Jürgen Antony
    Abstract: We analyse the effects of financial shocks on economic development in the euro area and the Netherlands in particular. We develop VAR models that take account of feedback loops between financial-market conditions and the real economy. These feedback loops operate via the aggregated euro-area level and affect the Dutch economy. Our empirical analysis is twofold as we analyse industry as well as GDP level data. Financial shocks are measured as shocks to corporate bond spreads and implied volatility. Bond-spread shocks are found to have direct consequences for real economic development, with a 25 basis points shock giving an effect on industrial production of -0.6% after one year, and -1.35% after four years. A pure volatility shock seems to imply only higher uncertainty about future developments. Applying these figures to the financial crisis of 2008 shows that the model under predicts the negative effects of the crisis.
    JEL: G15 G01 F36
    Date: 2013–12
  7. By: Jean-Sébastien Pentecôte (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie)
    Abstract: I extend the Bayoumi-Eichengreen (1993) approach by extracting new information from a scatter plot of correlation coefficients between shocks in order to better visualize how far a given country is from a monetary union. Indexes of distance and relative strength can be derived from either a nonlinear or a linear combination of correlations in connexion with distinct welfare loss functions. Using quarterly data on ten countries over 1979:I-2011:IV, shocks have become more symmetric within, but also outside, the euro area. Despite less asymmetry in shock asymmetry since 1999, new statistical tests support the idea of a two-speed EMU.
    Keywords: monetary union, euro, shock asymmetry, distance, VAR identification
    Date: 2013–12–11
  8. By: Ritzen, Jo (IZA and Maastricht University); Zimmermann, Klaus F. (IZA and University of Bonn)
    Abstract: We sketch a visionary strategy for Europe in which full employment is quickly regained by 2020, where income inequality is reduced and the economies are more sustainable. We name this scenario "vibrant." It is contrasted with what would happen if present policies continue within the European Union (EU) and its member states. In the vibrant scenario, full employment is regained by more policy attention toward innovation and its underlying research and development (R&D), accompanied by more labor mobility within and between EU countries, in combination with a selective immigration policy based on labor market shortages. The road to full employment is embedded in a landscape with less income inequality and more "greening" of EU member states' economies. We translate the vibrant scenario into policy proposals distinguishing between the role for the EU and that of the member states. We hope these proposals will be included in the election programs for the upcoming 2014 European Parliament elections and in developing the mandate for the new European Commission in December 2014.
    Keywords: employment, labor mobility, innovation, income inequality, competition, labor markets, greening, happiness
    JEL: D31 D33 F55 I23 I24 I25 I28 J11 J18 J21 J31 J64 J83 O31 O38 O52
    Date: 2013–12
  9. By: Chmelar, Ales
    Abstract: The fall in economic output all over Europe since 2008 has had important consequences for household liabilities. Major growth in demand and supply for household credit products has generated an increase in household debt, which contributed to growth rates during the pre-crisis period but – in some countries – became household-debt overhangs and helped inflate asset bubbles. In the run-up to the crisis, long-term economic lessons and theories were often overlooked and signs that the economic situation could worsen were ignored. Although not at the core of the crisis, household debt had important consequences for macroeconomic stability, robustness of growth and the depth of recessions. The last ten years in Europe have demonstrated the typical final stage of a household debt cycle: rapid increase and abrupt retrenchment. Widely varying outcomes across Europe enable us to consider the causes of the rapid growth in household debt and draw theoretical lessons that can help policy-makers and academics devise a coherent regulatory response to avoid extremes of the debt cycle in future.
    Date: 2013–07
  10. By: Elettra Agliardi (Department of Economics, University of Bologna, Italy); Mehmet Pinar (Business School, Edge Hill University, UK); Thanasis Stengos (Department of Economics, University of Guelph, Canada)
    Abstract: We propose a new method to assess sovereign risk index in Eurozone countries using an approach that relies on consistent tests for stochastic dominance efficiency. The test statistics and the estimators are computed using mixed integer programming methods. The ranking of countries is performed together with an analysis of fiscal and external trade risk.
    Keywords: Nonparametric Stochastic Dominance, Mixed Integer Programming; Sovereign Risk; Eurozone
    JEL: C12 C13 C14 C15 G01
    Date: 2013–10
  11. By: Cândida Ferreira
    Abstract: This paper provides empirical evidence on the causality relations between bank performance and economic growth in a panel including 27 European Union member-states from 1996 through to the onset of the 2008 financial crisis. Bank performance is represented not only by the Return on Assets (ROA) and Return on Equity (ROE) ratios but also by bank cost efficiency, measured through Data Envelopment Analysis (DEA). For economic growth, we consider not only the GDP per capita but also the gross fixed capital formation growth. Deploying a panel Granger causality approach, we confirm positive causality running from bank performance to economic growth. However, as regards the opposite causality, running from growth to bank performance, we conclude that economic growth positively contributes to the bank ROA and ROE ratios but not so certainly in the case of the DEA bank cost efficiency.
    Keywords: Bank performance, Economic growth, DEA, Panel Granger causality, European Union.
    JEL: G21 G31 E44 F43 F36
    Date: 2013–12
  12. By: Bayraci, Selcuk; Demiralay, Sercan
    Abstract: : We examine the volatility spillovers among major Eurozone countries employing the Diebold and Yilmaz (2012) model with time-varying conditional ranges generated from conditional autoregressive range (CARR) model of Chou (2005). The empirical findings, based on a data set covering a fifteen year period (1998-2013), suggest a total volatility spillover index in a very high degree. 74.9% of total volatility in the Eurozone markets is attributed to spillover effects from other markets. Moreover, rolling window analysis shows that volatility spillover index is relatively higher during the turmoil periods.
    Keywords: CARR, financial crisis, volatility spillover index, Eurozone
    JEL: C32 G01 G10
    Date: 2013–11–18
  13. By: Neil Foster-McGregor (The Vienna Institute for International Economic Studies, wiiw); Mario Holzner (The Vienna Institute for International Economic Studies, wiiw); Michael Landesmann (The Vienna Institute for International Economic Studies, wiiw); Johannes Pöschl (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw); Roman Stöllinger (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Summary Industrial policies in the EU have markedly shifted towards ‘horizontal’ measures and framework polices. The sustained de-industrialisation of several European economies and a general perception that countries with a strong manufacturing base emerged from the crisis in a strengthened position put the issue of industrial capacities back on the agenda. This process was paralleled by a renewed interest in specific industrial policies targeted at the manufacturing sector. Against this background, this report revisits some of the main arguments in favour of a manufacturing imperative and discusses them in a European context also showing the limitations and caveats of these arguments. It proceeds by identifying the main challenges ahead of European manufacturing given the structural changes that occurred in the EU over the period 1995 to 2011. It also provides an analysis of a number of industrial policy measures that are important in a European context such as state aid by EU Member States, public R&D support for firms and the role of initial vocational training systems as a potential ‘soft’ industrial policy tool. Based on the results of the analysis, the report summarises the policy implications and offers recommendation to master the major structural challenges that lie ahead of European industry.
    Keywords: industrial policy, state aid, innovation support, competitiveness, structural change
    JEL: F13 L52
    Date: 2013–10
  14. By: Micossi, Stefano; Bruzzone, Ginevra; Carmassi, Jacopo
    Abstract: This Policy Brief describes and discusses the proposals for a European Single Resolution Mechanism (SRM) for banks and for a Directive on Bank Recovery and Resolution (BRR). The authors find that the proposals are generally well designed and present a consistent approach, yet there is room for improvement, including the streamlining of procedures for the start of resolution, which now entail much overlap in the powers attributed to the various institutions involved (the Commission, the Single Resolution Board and the European Central Bank). The paper makes a number of key recommendations to facilitate discussions for stakeholders and regulators.
    Date: 2013–11

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