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on European Economics |
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Issue of 2014‒04‒11
seventeen papers chosen by Giuseppe Marotta University of Modena and Reggio Emilia |
| By: | Rantala, Olavi |
| Abstract: | The euro area economic crisis is largely a result of the competitiveness disparity between Germany and the rest of the euro area. The wage moderation in Germany has considerably improved its competitiveness in relation to the rest of the euro area. Wage policy has been deflationary in Germany in the 2000s in the sense that real wage growth has fallen below labour productivity growth. In the rest of the euro area wage policy has been inflationary since real wage growth has exceeded labour productivity growth. The input- output price model implies that due to the lower wage inflation the unit cost of production in industry has grown much less in Germany than in the rest of the euro area. Restoring competitiveness necessitates a clear wage inflation halt in the rest of the euro area in the coming years. |
| Keywords: | Euro crisis, competitiveness |
| JEL: | C67 E64 F16 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:rif:report:23&r=eec |
| By: | Frederic Teulon |
| Abstract: | The euro area is experiencing a sovereign debt crisis; as a result, the foundations of its monetary union have been shattered. This crisis, which is an extension of an international financial crisis, shows that the European Union is not an optimum currency area. Robert Mundell’s work remains an indispensable reference on this subject: a monetary union among greatly different countries and propelled by considerably weak solidarity is problematic. In the present context, the possibilities are limited for permanently improving the situation, for transforming sovereign debts into sustainable ones, and for regaining a higher level of growth. Experience seems to show that a single currency cannot accommodate national budgetary policies and that national policies are hindered by the existence of a single currency in a context of asymmetries. Eventually, a scenario where the euro area would collapse becomes highly probable. This paper puts forward a model of debt sustainability and discusses eight related proposals. |
| Keywords: | European Monetary Union; European Central Bank (EBC); Eurozone; Stability growth pact; Financial crisis; Fiscal policy and debt sustainability; Optimal currency area; Sovereign debt |
| JEL: | E42 E44 G38 |
| Date: | 2014–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-196&r=eec |
| By: | Catherine Mathieu (OFCE); Henri Sterdyniak (OFCE) |
| Abstract: | The economic crisis which started in 2008 led to a strong rise in public debts. The sovereign debt crisis in euro area southern countries breached the unity of the euro area and weakened the ‘single currency’ concept. The paper shows that this situation is not due to a lack of fiscal discipline in Europe, but to drifts in financial capitalism and to an inappropriately designed euro area economic policy framework.Public debts homogeneity needs to be resettled in Europe. European public debts should become safe assets again, and should not be subject to financial markets’ assessment. European Member Statesshould not be requested to pay for past sins through austerity measures, and should not strengthen fiscal discipline through rules lacking economic rationale. The paper deals with recent proposals which have been made to improve euro area governance (redemption fund, Eurobonds, public debt guarantee by the ECB). The paper advocates for a full guarantee of government bonds for the Member States who commit to an economic policy coordination process, which should target GDP growth and coordinated reduction of imbalances. |
| Keywords: | EU fiscal policy; EU governance |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p503i2pp3&r=eec |
| By: | Henri Sterdyniak (OFCE); Maylis Avaro |
| Abstract: | The banking union emerged from the June 2012 European Council as a new project expected to help and solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? The banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, establishing common mechanisms to solve banking crises, and encouraging banks to diversify their activities. The banking union project is based on three pillars: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), a European Deposit Guarantee Scheme. Each of these pillars raises specific problems. Some are related to the current crisis (can deposits in euro area countries facing difficulties be guaranteed?); some other are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?), some other are related to the EU specificity (is the banking union a step towards more federalism?), the more stringent are related to structural choices regarding the European banking system. The banks' solvency and their ability to lend would primarily depend on their capital ratios, and thus on financial markets' sentiment. The links between the government, firms, households and domestic banks would be cut, which is questionnable. Will governments be able tomorrow to intervene to influence bank lending policies, or to settle specific public banks? An opposite strategy could be promoted: restructuring the banking sector, and isolating retail banking activity from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed because they would not be allowed to run risky activity. Can European peoples leave such strategic choices in the hands of the ECB? |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4srjesb4&r=eec |
| By: | IMK Düsseldorf; OFCE Paris; WIFO Wien |
| Abstract: | The German economy achieved only a weak growth performance in 2012. GDP grew by 0.7 % on annual averages and by just 0.4 % over the course of the year. The prospects during the forecast period are mildly optimistic. The global economy will initially pick up only slowly, but the growth dynamic is expected to be stronger next year, boosting German exports. In the wake of the apparent stabilisation of the Euro area, uncertainty will gradually dissipate and investors will increasingly drop their wait-and-see attitude. Private consumption will, moreover, bolster growth in both the current and the coming year. The Institutes forecast GDP growth of 0.9 % on annual averages this year, a figure which understates the underlying dynamic: comparing the fourth quarter of 2013 with that of 2012 growth will reach a very much more substantial 1.9 %. In 2014 GDP growth is expected to be 1.5 %. The unemployment rate will remain more or less unchanged over the two years, at 5.1 % and 5.0 % on ILO definitions and 6.8 and 6.7 % respectively on German national definitions. Medium-term simulations indicate that the German economy is likely to remain constrained by the impact of the euro area crisis for an extended period. There are two main causal channels: German exports to the euro area will continue to be squeezed severely by the austerity policies being pursued across Europe, and even in Germany fiscal policy is expected to be contractionary, dampening the growth of incomes and domestic demand. Growth is expected to average 1.3 % in the years to 2017. Alternative scenarios show that by means of expansionary policies, including a European investment programme, far more favourable results could be obtained in the euro area as a whole and its member states individually than in the baseline scenario.The recession in the crisis-hit countries and the current stagnation in the remaining EMU member states must be overcome and give way to economic growth strong enough to increase capacity utilization and reduce unemployment. The necessary process of deleveraging must continue and public finances be put on a sustainable footing. At the same time, current account imbalances must be reduced and the financial sector stabilised. The current economic policy strategy, consisting first and foremost of fiscal austerity and a monetary policy rendered ineffective by country-specific risks, will almost certainly be unable to generate sustained improvements in these four key areas.A necessary condition for exiting from the crisis is to make monetary policy effective once more by re-establishing confidence in the government bonds of the crisis countries. This must be accompanied by a turnaround in fiscal policy. Fiscal consolidation must occur in such a way that it does not impinge negatively on aggregate demand. The Macro group proposes a European investment offensive. The crisis countries should receive external financing equal to 1 % of current GDP for a period of five years. This should be used to finance public investment and/or support for private investment. Member States with current account surpluses, especially Germany, should implement expansionary fiscal policy measures representing at least 1 % of GDP, such that they play the role of locomotive for the European business cycle. . |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:imk:report:80e-2013&r=eec |
| By: | Stefan Behrendt (Graduate Programme "Global Financial Markets") |
| Abstract: | This paper shall give an overview of the implications to the sectoral balances stemming from the implementation of the Fiscal Compact in the Euro area in 2013. Since there is now a more or less strict limit to deficit spending-absent from cyclical factors-some other sector has to make up for the reduction of the financial deficit of Euro area gov- ernments. While applying sensible estimates on the trajectories of the sectoral balances in the Euro area, I reach the conclusion that the only logical outlet for these (potentially) reduced deficits would be the for- eign sector, reflecting the inability of the private sector to run a sizeable surplus of investments over savings over the long-run. Under the sce- nario described in the paper, the Euro area would run a considerable current account surplus in the foreseeable future. |
| Keywords: | fiscal policy, Fiscal Compact, current account, sectoral balances |
| JEL: | E27 E61 E62 E66 F32 H62 H63 |
| Date: | 2014–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:52-2014&r=eec |
| By: | Gilles Dufrénot (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS, CEPII, Banque de France, Aix-Marseille School of Economics); Anwar Khayat (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS) |
| Abstract: | This paper provides evidence that the European Central Bank (ECB) has adjusted its interest rate since 1999 nonlinearly according to the macroeconomic and financial environment in the euro zone. Its policy function is described by a Taylor rule with regime shifts implying that the stance of reaction to the inflation-gap and output-gap has varied according to the credit risk in the private and sovereign bond markets, the monetary base and past levels of inflation, output and the shocks affecting the European economies. We provide evidence of regimes corresponding to low to high levels of inflation with the possibility of a situation near a zero low bound (ZLB) for the interest rate. We study the implications of such a rule for the economy in a simple new-Keynesian framework and show that it is consistent with several stable long-run steady states equilibria among which one that is consistent with the recent situation of a near liquidity trap in the euro area. We also find that around this liquidity trap steady state the equilibrium is locally determinate for most plausible parameter values. We discuss the issue of moving from a situation of low nominal interest rate to a policy that have been more typically implemented in the past by relying on an analysis of the impact of shocks (supply and demand) to the economy. |
| Keywords: | Nonlinear Taylor rules; multiple steady state equilibria; Euro area. |
| JEL: | C54 E52 E58 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1408&r=eec |
| By: | Österholm, Pär (National Institute of Economic Research); Stockhammar, Pär (National Institute of Economic Research) |
| Abstract: | In this paper, a Bayesian VAR model is used to study the effects of euro area shocks on GDP growth in the small open economy of Sweden. A novel feature is that the new policy uncertainty index of Baker et al.(2013) is introduced in the model. The model behaves well in terms of reasonable impulse response functions. The specific effects of the euro crisis are investigated through a historical decomposition which shows that shocks to euro area GDP growth have been a reasonably important factor for Swedish GDP growth, supporting it during 2010 and holding it back thereafter. Generally, shocks to policy uncertainty have held back Swedish GDP growth during the euro crises. |
| Keywords: | Small open economy; Bayesian VAR; Policy uncertainty index |
| JEL: | C32 F43 |
| Date: | 2014–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nierwp:0134&r=eec |
| By: | Jérôme Creel (OFCE); Mathilde Viennot; Paul Hubert |
| Abstract: | This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes for the money market, sovereign bonds at 6-month, 5-year and 10-year horizons, loans inferior and superior to 1M€ to non-financial corporations, cash and housing loans to households, and deposits, during the financial crisis and in the four largest economies of the Euro Area. We first identify two series of ECB policy shocks at the euro area aggregated level and then include them in country-specific structural VAR. The main result is that only the pass-through from the ECB rate to interest rates has been really effective, consistently with the existing literature, while the transmission mechanism of the ECB rate to volumes and of quantitative easing (QE) operations to interest rates and volumes has been null or uneven over this sample. One argument to explain the differentiated pass-through of ECB monetary policies is that the successful pass-through from the ECB rate to interest rates, which materialized as a huge decrease in interest rates during the sample period, had a negative effect on the supply side of loans, and offset itself its potential positive effects on lending volumes. |
| Keywords: | transmission channels; unconventional monetary policy; pass-through |
| JEL: | E51 E58 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sg18u8h&r=eec |
| By: | Alexander Herzog-Stein; Heike Joebges; Ulrike Stein; Rudolf Zwiener |
| Abstract: | Based on data from Eurostat the Macroeconomic Policy Institute (IMK) regularly analyses the development of labour costs and unit labour costs in Europe. This report presents labour cost trends in the private sector, and disaggregated for private services and manufacturing industry, for a selection of European countries, the Euro Area and the European Union. Additionally, results of a new study investigating the extent of the labour-cost relief for industrial production in Germany associated with the use of intermediate inputs from the service sector are presented. Furthermore, labour cost trends in public services are presented. Next, the development of unit labour costs in Europe and more specifically the relationship between international price competitiveness, export prices, and unit labour costs are investigated.In 2012 hourly labour cost in the German private sector averaged 31.0 euro. Despite a recent normalisation in labour-cost trends in Germany, and an annual rate of change of 2.8 per cent, well above the European average, the German economy is in eighth place in the ranking of EU countries, one place down from the previous year. Hourly labour costs in private services are one fifth lower than in manufacturing industry; in no other European country does the service sector lag manufacturing to such an extent. Due to the use of cheaper intermediate inputs from the service sector, labour costs in the German industry are reduced by eight to ten per. Overall, the picture of a highly competitive German economy is confirmed.In recent years as a consequence of dramatic unit-labour-cost developments the so called European crisis countries regained their price competitiveness. However, German demand for imports remains relatively modest and hence is still a handicap for the ongoing economic adjustment processes in these countries. Therefore wages in Germany need to increase by more than 3 % per annum for an extended period. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:imk:report:88e-2013&r=eec |
| By: | Alberto Botta |
| Abstract: | In this paper, we analyze and try to measure productive and technological asymmetries between central and peripheral economies in the eurozone. We assess the effects such asymmetries would likely bring about on center–periphery divergence/convergence patterns, and derive some implications as to the design of future industrial policy at the European level. We stress that future European Union (EU) industrial policy should be regionally focused and specifically target structural changes in the periphery as the main way to favor center–periphery convergence and avoid the reappearance of past external imbalances. To this end, a wide battery of industrial policy tools should be considered, ranging from subsidies and fiscal incentives to innovative firms, public financing of R and D efforts, sectoral policies, and public procurements for home-produced goods. All in all, future EU industrial policy should be much more interventionist than it currently is, and dispose of much larger funds with respect to the present setting in order to effectively pursue both short-run stabilization and long-run development goals. |
| Keywords: | Center–Periphery Structural Symmetries, EU Industrial Policy |
| JEL: | E12 F15 O25 O52 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_794&r=eec |
| By: | Federico GIRI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali) |
| Abstract: | The aim of this paper is to assess the impact of the interbank market on the business cycle fluctuations. We build a DSGE model with heterogeneous households and banks. Two kind of banks are in the model: Deficit banks which are net borrowers on the interbank market and they provide credit to the real economy. The surplus bank are net lender and they could choose to provide interbank lending or purchase government bonds.;The portfolio choice of the surplus bank is affected by an exogenous shock that modifies the riskiness of the interbank lending thus allowing us to capture the collapse of the interbank market and the fl y to quality mechanism underlying the 2007 financial crisis.;The main result is that an interbank riskiness shock seems to explain part of the 2007 downturn and the rise of the interest rate on the credit market just after the financial turmoil. |
| Keywords: | Bayesan estimation, DSGE model, financial frictions, interbank market |
| JEL: | E30 E44 E51 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:398&r=eec |
| By: | Jean-Luc Gaffard (OFCE) |
| Abstract: | Real divergences in economic performances that emerge between countries belonging to the eurozone make it necessary to define an economic policy oriented toward a re-industrialization of some regions in Europe. In a world characterised by irreversibility of investment and imperfection of marketinformation, supply reforms should consist inestablishing a framework aimed at supporting both botcompetition and cooperation between the various players of innovation, and thus allowing firms’strategies tobesuccessful. This requires reconsidering both national and European policies that are growth-enhancing, that is,competition policy, labour policy, regional policy, but also industrial policythat takes the form of large public programmes. However, any change in the industrial landscape in Europe will only be possible if a new macroeconomicpolicy prevents inappropriate destruction ofproductive capacities |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p50bp1219&r=eec |
| By: | Andersson, Åke E. (Jönköping International Business School); Andersson , David Emanuel (Nottingham University Business School China); Hårsman, Björn (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Daghbashyan, Zara (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology) |
| Abstract: | Unemployment rates differ dramatically across European regions. This paper analyses these differences by integrating institutional and spatial perspectives into a unified theoretical framework. An econometric model is then used to analyse differences among European NUTS2 regions. The results of random-effects models indicate that there are four key factors that explain regional unemployment rates. Flexible labour market regulations and above-average levels of interpersonal trust are institutional factors that reduce unemployment. Accessibility factors such as inter-regional transport connectivity and local access to skilled workers have similarly substantial effects. Whether a region belongs to the Eurozone or not seems to be less important. |
| Keywords: | unemployment; Euro; institutions; accessibility |
| JEL: | R10 R15 R23 R28 |
| Date: | 2014–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0355&r=eec |
| By: | Sabine Stephan; Jonas Löbbing |
| Abstract: | Between 1999 and 2012 the EU intensified its trade relations with countries outside the European Union (third countries). However, the major part (about 60 %) of the EU member states' external trade consists of trade with each other (intra-trade). In past years, the EU has benefited from the catching-up process of the emerging economies - especially China and Russia - and the associated strong demand for capital goods and production facilities. Consequently, China and Russia became more important trading partners for the EU, whereas the US and Japan declined in importance. Unlike EU's foreign trade with countries outside the EU, the foreign trade among EU member states has not yet recovered from the massive slump due to the economic and financial crisis 2008/2009. This is mainly due to the fact that many European countries have followed a strict austerity policy which has severely depressed domestic demand. While it may have longer-run impacts, in the short run the proposed Transatlantic Free Trade Agreement will do little to reverse the relative decline in EU-US trade, much less can it be expected to serve as a stimulus for economic recovery. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:imk:report:83e-2013&r=eec |
| By: | Eichhorst, Werner (IZA); Neder, Franziska (IZA) |
| Abstract: | In all Mediterranean countries youth unemployment has reached alarming record levels. This paper analyses the current situation in France, Greece, Italy, Portugal, and Spain. In all countries school dropout rates are high, returns to education are low and the transition from education to work is problematic and difficult. This is due to a poor working vocational training system, the dualization of the labor market and minimum wages that are set too high. The Great Recession deteriorated the situation of young people, but youth unemployment is mostly structural. To overcome this crisis the overall performance of the labor market has to be improved. |
| Keywords: | vocational training, Europe, Mediterranean countries, youth unemployment |
| JEL: | J21 J23 J24 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izapps:pp80&r=eec |
| By: | Jérôme Creel (OFCE); Paul Hubert; Fabien Labondance |
| Abstract: | This paper aims at establishing the link between economic performance, financial depth and financial stability in the European Union from 1998 to 2011. We use the standard framework – both in terms of variables and econometric method – of Beck and Levine (2004) to estimate these relationships. Our results suggest that the traditional result that financial depth positively influences economic performance (or components of aggregate dynamics like consumption, investment or disposable income) is not confirmed for European countries. Furthermore, we use different measures of financial instability (institutional index, microeconomic indicators, and our own statistical index derived from a Principal Component Analysis) and find that financial instability has a negative effect on economic growth. |
| Keywords: | Financial deppth; Aggregate dynamics; financial stability; banks; non perrforming loans; CISS; Z score ; principal component analysis |
| JEL: | G10 G21 O40 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p5296ie95&r=eec |