nep-eec New Economics Papers
on European Economics
Issue of 2014‒01‒24
sixteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Towards a Genuine Economic and Monetary Union – Comments on a Roadmap By Ansgar Belke
  2. Competitiveness, Adjustment and Macroeconomic Risk Management in the Eurozone By Peter Spahn
  3. Uncertainty and Episodes of Extreme Capital Flows in the Euro Area By Torsten Schmidt; Lina Zwick
  4. Real Output and Prices Adjustments Under Different Exchange Rate Regimes By Rajmund Mirdala
  5. Exports and Capacity Constraints – A Smooth Transition Regression Model for Six Euro Area Countries By Ansgar Belke; Anne Oeking; Ralph Setzer
  6. Understanding Law-of-One-Price Deviations across Europe Before and After the Euro By Marina Glushenkova; Marios Zachariadis
  7. Time-varying Business Cycles Synchronisation in Europe By Degiannakis, Stavros; Duffy, David; Filis, George
  8. Unbundling the Great European Recession (2009-2013): Unemployment, Consumption, Investment, Inflation and Current Account By Campiglio, Luigi Pierfranco
  9. The Financial and Macroeconomic Effects of the OMT Announcements By Carlo Altavilla; Domenico Giannone; Michele Lenza
  10. On the Self-Fulfilling Prophecy of Changes in Sovereign Ratings By Ingmar Schumacher
  11. Youth Unemployment in Southern Europe By João Leão; Guida Nogueira
  12. Does Output Predict Unemployment? A Look at Okun’s Law in Greece By Costas Karfakis; Konstantinos Katrakilidis; Eftychia Tsanana
  13. Price Jumps on European Stock Markets By Jan Hanousek; Evžen Kočenda; Jan Novotný
  14. Comparing U.S. and European Market Volatility Responses to Interest Rate Policy Announcements By Krieger , Kevin; Mauck, Nathan; Vasquez, Joseph
  15. A crisis not wasted – Institutional and structural reforms behind Norway’s strong macroeconomic performance. By Steigum, Erling; Thøgersen, Øystein
  16. Structural Change in Europe During the Crisis By Peter Havlik

  1. By: Ansgar Belke
    Abstract: The Van Rompuy Report and also additional proposals made by the European Commission outlined steps for a ‘genuine Economic and Monetary Union’. This article explains, assesses and comments on the proposals made. Moreover, it outlines what could be recommendations in order to achieve a ‘genuine Economic and Monetary Union’. For this purpose, details of the Interim Report are systematically evaluated. We also deal with different governance visions emerging from the ongoing euro area crisis and starts from different views of the ‘North and the South’ of the euro area on this issue. This contribution argues that there is an alternative option to the notion of cooperative fiscal federalism involving fiscal union, bailouts and debt mutualisation: competition-based fiscal federalism accompanied by a properly defined banking union. In order to be a successful one, any deal will have to come up with a successful recipe of how to (re-)create trust between European citizens and their elected governments.
    Keywords: banking union; debt mutualisation; EU governance; Euro budget; Eurozone; genuine Economic and Monetary Union; North–South divide; shock absorber
    JEL: F15 G28 E42 E61
    Date: 2013–07
  2. By: Peter Spahn
    Abstract: Gaps in competitiveness, rooted in economic as well as in political factors, characterise postwar European economic history. The eurozone experience showed the emergence of large current account imbalances. The peculiar mixture of financial markets integration and national cycles in wages and prices gave rise to severe macroeconomic instability. The Swan Diagram is used to analyse alternative adjustment policies. Although there are signs of convergence in wage costs, the overall picture of EMU remains somewhat gloomy, requiring the decision between full political union or a renewed gold standard.
    Keywords: Currency union, euro crisis, current account imbalances, wage policy, Swan diagram
    JEL: E50 E58 E63 F32 F34
    Date: 2013–12
  3. By: Torsten Schmidt; Lina Zwick
    Abstract: During the Euro Area crisis huge changes in international capital flows occurred associated with a high level of economic uncertainty. While it is evident that both factors are able to trigger or amplify economic shocks posing a threat for economic activity it is a natural question whether they are related. The aim of this paper is to analyse the link between different measures of uncertainty and episodes of extreme capital flows for the core Euro Area countries using gross capital flows. We find that country-specific risk factors seem to play a more important role than global risk factors. Moreover, country-specific uncertainty seems to be more relevant for foreign direct investors.
    Keywords: Capital flows; uncertainty; Euro Area crisis; sudden stops; retrenchment
    JEL: F32 F21 G01
    Date: 2013–12
  4. By: Rajmund Mirdala
    Abstract: Exchange rate regimes evolution in the European transition economies refers to one of the most crucial policy decision in the beginning of the 1990s employed during the initial stages of the transition process. During the period of last two decades we may identify some crucial milestones in the exchange rate regimes evolution in the European transition economies. due to existing diversity in exchange rate arrangements in the European transition economies in the pre-ERM2 period there seems to be two big groups of countries - “peggers” (Bulgaria, Estonia, Latvia, Lithuania) and “floaters” (Czech republic, Hungary, Poland, Romania, Slovak republic, Slovenia). Despite the fact, there seems to be no real prospective alternative to euro adoption for the European transition economies, we emphasize disputable effects of sacrificing monetary sovereignty in the view of positive effects of exchange rate volatility and exchange rate based adjustments in the country experiencing sudden shifts in the business cycle. In the paper we analyze effects of the real exchange rate volatility on real output and inflation in ten European transition economies. From estimated VAR model (recursive Cholesky decomposition is employed to identify structural shocks) we compute impulse-response functions to analyze responses of real output and inflation to negative real exchange rate shocks. Results of estimated model are discussed from a prospective of the fixed versus flexible exchange rate dilemma. To provide more rigorous insight into the problem of the exchange rate regime suitability we estimate the model for each particular country employing data for two subsequent periods 2000-2007 and 2000-2011.
    Keywords: exchange rate volatility, economic growth, economic crisis, vector autoregression, variance decomposition, impulse-response function
    JEL: C32 F32 F41
    Date: 2013–11–15
  5. By: Ansgar Belke; Anne Oeking; Ralph Setzer
    Abstract: Traditional specifications of export equations incorporate foreign demand as a demand pull factor and the real exchange rate as a relative price variable. However, such standard export equations have failed to explain the export performance of euro area countries during the crisis period. In particular, the significant gains in export market shares in a number of vulnerable euro area crisis countries did not coincide with an appropriate improvement in price competitiveness. This paper argues that, under certain conditions, firms consider export activity as a substitute of serving domestic demand. The strength of the link between domestic demand and exports is dependent on capacity constraints. Our econometric model for six euro area countries suggests domestic demand pressure and capacity constraint restrictions as additional variables of a properly specified export equation. As an innovation to the literature, we assess the empirical significance through the logistic and the exponential variant of the non-linear smooth transition regression model. In the first case, we differentiate between positive and negative changes in capacity utilization and in the second case between small and large changes of the same transition variable. We find that domestic demand developments are relevant for the short-run dynamics of exports when capacity utilization is low. For some countries, we also find evidence that the substitution effect of domestic demand on exports turns out to be stronger the larger is the deviation of capacity utilization from its average value over the cycle.
    Keywords: domestic demand pressure, error correction models, asymmetry, playhysteresis; modeling techniques; switching/spline regression; smooth transition models; exports; sunk costs yields
    JEL: F14 C22 C50 C51 F10
    Date: 2013–08
  6. By: Marina Glushenkova; Marios Zachariadis
    Abstract: We use a panel of thousands of good-level prices before and after the euro in order to compare the determinants and understand the evolution of goods price dispersion across Europe during these two periods. We find that tradeability plays a substantially smaller role in lowering cross-country dispersion after the adoption of the euro as compared to before, and that the role of non-traded inputs in raising price dispersion is also reduced after the euro. We then compare the overall and country-level distributions of law-of-one-price (LOP) deviations at the early and late part of our sample to inform us about the degree of integration across European economies before and after the euro. Our tests reveal that the distributions after the euro are significantly different than those before, consistent with a greater degree of integration. Utilizing our panel to trace the location of individual goods in the distribution of LOP deviations, we ask how the price advantage or disadvantage of individual economies evident in these price distributions has been shifting over time, and whether goods characteristics play a role for the persistence of these LOP deviations. LOP deviations for these goods are highly correlated, on average, over five or ten year horizons, but much less so over twenty-year or longer horizons. These correlations are greater for homogeneous as compared to differentiated goods, and vary across countries. Finally, for the great majority of these European economies and goods, price advantage is typically revealed to be more persistent than price disadvantage.
    Keywords: micro prices, law-of-one-price, euro, integration, price advantage
    Date: 2014–01
  7. By: Degiannakis, Stavros; Duffy, David; Filis, George
    Abstract: The paper investigates the time-varying correlation between the EU12-wide business cycle and the initial EU12 member-countries based on scalar-BEKK and multivariate Riskmetrics model frameworks for the period 1980-2009. The paper provides evidence that changes in the business cycle synchronisation correspond to institutional changes that have taken place at a European level. Business cycle synchronisation has moved in a direction positive for the operation of a single currency suggesting that the common monetary policy is less costly in terms of lost flexibility at the national level. Thus, any questions regarding the optimality and sustainability of the common currency area in Europe should not be attributed to the lack of cyclical synchronisation.
    Keywords: Scalar-BEKK, Multivariate Riskmetrics, time varying correlation, EU business cycle, business cycle synchronisation.
    JEL: C32 E32 F44 O52
    Date: 2013–10–15
  8. By: Campiglio, Luigi Pierfranco
    Abstract: The aim of the paper is to unbundle the main economic variables involved in the European Crisis and clarify their reciprocal relationship. The variable considered are: unemployment, inflation, consumptions, investments and current accounts. We use annual, quarterly and monthly data, until 2012, mid-2013 or an estimate of 2013 for the main European countries. The main results are the following: a) we show an emerging European economic divide, b) we detect a quasi-Okun relationship between investment and unemployment, c) we show the revival of the Phillips curve, especially in Germany, d) we test for the relationship between unemployment and the Government deficit, e) we show the existence of a relationship between unemployment and current account, f) we show how countries with high unemployment rate could bear the burden, g) we unbundle the unemployment-current account relationship, showing first the relationship between unemployment and final consumption, h) and then between final consumption, imports and corrent account, i) we show why a stable and growing inflation differential is not sustainable, but argue that internal devalution is not an effective policy, pushing inflation rates to a worrisome lower level and even outright deflation, l) we argue and show how to implement a more effective policy looking to the inflation differentials of specific products, looking to the case of Italy, m) we analyze the trade relationship between Germany and China, arguing that since the onset of the EMU and the successive membership of China to the WTO a European structural break occurred, with some European countries relying much more on exports rather than domestic demand. A more general issue of sustainability and replicability of the Germany’s export led growth model is raised.
    Keywords: Great Recession, Europe, Germany, Unemployment, Inflation, Consumption, Investment, Current Account.
    JEL: E24 E29 E31 E32 H62
    Date: 2014–01
  9. By: Carlo Altavilla (European Central Bank and CSEF); Domenico Giannone (Université Libre de Bruxelles and ECARES); Michele Lenza (European Central Bank, Université Libre de Bruxelles and ECARES)
    Abstract: This paper evaluates the effects of the 2012 announcements of the ECB’s Outright Monetary Transactions (OMT) programme. Using high frequency data, we find that the OMT announcements decreased the Italian and Spanish two years government bond yields by about two percentage points, while leaving unchanged the bond yields of the same maturity in Germany and France. The results are robust to controlling for all other relevant macroeconomic and financial news released at the time of the announcements. These outcomes are used to calibrate scenarios in a multi-country model describing the macro-financial linkages in France, Germany, Italy and Spain. The scenario analysis suggests that the reduction in bond yields due to the OMT announcements will be associated to a significant increase in real activity, credit and prices in Italy and Spain.
    Keywords: Outright monetary transactions, event study, news, multi-country vector autoregressive model
    JEL: E47 E58 C54
    Date: 2014–01–14
  10. By: Ingmar Schumacher
    Abstract: We empirically investigate the dynamic interactions between sovereign ratings and the macroeconomic environment using a Panel VAR on annual data for European countries from 1996 to 2013. Our results provide evidence for a significcant two-way interaction between the macroeconomic environment and changes in sovereigns' ratings. Thus, rating changes are able to exacerbate a country's boom-bust cycle.
    Keywords: sovereign ratings, Panel VAR, self-fulfilling prophecy
    JEL: E6 C33
    Date: 2014–01–06
  11. By: João Leão (Office for Strategy and Studies (GEE), Portuguese Ministry of Economy; ISCTE- University Institute of Lisbon); Guida Nogueira (Office for Strategy and Studies (GEE), Portuguese Ministry of Economy)
    Abstract: The youth unemployment rate in Europe increased to very high levels after the great recession of 2008, reaching 23% in European Union and 45% in southern European countries. We examine the causes of the high youth unemployment rate which is consistently bigger than the overall unemployment rate. The empirical evidence shows that the youth unemployment rate depends crucially of the level of the overall unemployment rate and on the variation of the unemployment rate.
    Keywords: Keywords: Southern Europe, unemployment, youth unemployment.
    JEL: E24 J64 J13
    Date: 2013–12
  12. By: Costas Karfakis (Department of Economics, University of Macedonia); Konstantinos Katrakilidis (Department of Economics, Aristotle University); Eftychia Tsanana (Department of Economics, Aristotle University)
    Abstract: This paper examines the unemployment-output relationship in Greece, using a dynamic version of Okun’s Law. The Granger causality tests indicate that real output is important to understanding future movements in unemployment. The Okun’s ratio is 3-to-1, implying that one percent increase in unemployment has been associated to a three percent decrease in real output during the last thirteen years. In addition, the response of unemployment to real output is found to be stronger when there is a contraction rather than an expansion of real activity. This empirical fact is consistent with the developments of the Beveridge curve, which illustrate that a significant portion of actual unemployment is structural in nature. Therefore, a fall in unemployment will require not only a pick-up in aggregate demand but also structural reforms in the Greek labour market, which will make the economy competitive and reduce long-term unemployment.
    Keywords: Okun’s Law, real output, unemployment, business cycles, Beveridge curve, VAR model, Granger causality.
    JEL: E24 E32 E37
    Date: 2013–12
  13. By: Jan Hanousek; Evžen Kočenda; Jan Novotný
    Abstract: We analyze the dynamics of price jumps and the impact of the European debt crisis using the high-frequency data reported by selected stock exchanges on the European continent during the period January 2008 to June 2012. We employ two methods to identify price jumps: Method 1 minimizes the probability of false jump detection (the Type-II Error-Optimal price jump indicator) and Method 2 maximizes the probability of successful jump detection (the Type-I Error-Optimal price jump indicator). We show that individual stock markets exhibited differences in price jump intensity before and during the crisis. We also show that in general the variance of price jump intensity could not be distinguished as different in the pre-crisis period from that during the crisis. Our results indicate that, contrary to common belief, the intensity of price jumps does not uniformly increase during a period of financial distress. However, there do exist differences in price jump dynamics across stock markets and investors have to model emerging and mature markets differently to properly reflect their individual dynamics.
    Keywords: European stock markets, price jump indicators, non-parametric testing, clustering analysis, financial econometrics, emerging markets.
    JEL: C14 C58 F37 G15 G17
    Date: 2013–09–15
  14. By: Krieger , Kevin; Mauck, Nathan; Vasquez, Joseph
    Abstract: We examine the response of U.S. (VIX) and German (VDAX) implied volatility indices to the announcement of interest rate policy decisions by the Federal Open Market Committee (FOMC) and the European Central Bank (ECB). We confirm prior findings that VIX declines on FOMC meetings days. We present new findings that indicate that VDAX declines on FOMC meeting days, but is not related to ECB meeting days. VIX is unrelated to ECB meeting days. Taken collectively, our results indicate a prominent position for the FOMC in determining uncertainty levels both domestically and abroad relative to no relation between uncertainty levels and the ECB. JEL
    Keywords: FOMC, ECB, VIX, VDAX, Monetary policy, Volatility spillover
    JEL: E44 E52 E58 F3 G20 G21 G28
    Date: 2014–01–14
  15. By: Steigum, Erling (BI Norwegian Business School); Thøgersen, Øystein (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: This paper draws the line between the Norwegian boom-bust cycle and crises in the late 1980s and early 1990s, the succeeding institutional and structural reforms and the strong macroeconomic performance and stability of the last two decades. The systemic banking crisis and speculative attack on the Norwegian krone in the early 1990s were the last in a series of blows to Norway’s macroeconomic policy regime. In addition to the recession after 1988, the underlying growth potential of the Mainland economy was also weak, despite financial deregulation and the gains in competitiveness. The large oil price fall in the mid-1980s had demonstrated the risk of uncertain oil revenues as an important source of income to the government. The political awareness of an economic crisis paved the way for a series of structural reforms and changes in the macroeconomic policy regime. Some of these reforms were implemented quickly, such as a tax reform, an energy market reform and a new incomes policy framework. In 2001 a new framework for monetary and fiscal policy was put in place, involving a flexible exchange rate and inflation targeting, as well as a new fiscal policy rule designed to facilitate consumption smoothing and a build-up of a sovereign wealth fund. We discuss possible reasons why Norway’s political system has been able to learn from previous policy failures and reach the necessary consensus, and determination, to implement institutional and structural reforms in economic policy.
    Keywords: Norwegian boom-bust cycle; banking crises; attack on the Norwegian krone
    JEL: E60 G10 H60
    Date: 2013–12–17
  16. By: Peter Havlik
    Abstract: This note examines the extent and patterns of structural changes that have occurred in European economies during the recent crisis using some stylised facts on changing output and employment struc-tures at detailed sectoral level. Focusing mainly on the new EU member states, we compare the perform-ance of various European countries by looking at the differentiated impact of the recent crisis on struc-tural shifts in their economy. We start with stylised facts related to output and employment structures at broader sectoral (NACE-2) level and attempt to find out whether there has been a structural convergence (or divergence) of the New EU Member States (NMS) compared to the more advanced ‘old’ EU countries (OMS) during the crisis. Finally, we provide also some policy conclusions related to the future role of the NMS in the economy of an integrated Europe, especially in view of post-crisis growth challenges. The fi-nancial crisis 2008-2011 adversely affected manufacturing industry more than services – particularly in terms of employment – and accelerated structural change in favour of the services sector. The latter ten-dency was more pronounced in the NMS though even here country specific differences were remarkable. The importance of industry in this group of countries remains strong. There has been no EU-wide uniform pattern of structural change; the formulation of industrial policy at EU level – even reaching the 20% target of industry’s share in GDP – is challenging and hardly attainable.
    Keywords: Industry, structural change, European economy, growth, crisis
    JEL: L13 L52 J3
    Date: 2014–01

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