nep-eec New Economics Papers
on European Economics
Issue of 2014‒05‒24
thirteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Is it really more dispersed? Measuring and comparing the stress from the common monetary policy in the euro area By Quint, Dominic
  2. The effect of asymmetries in fiscal policy conducts on business cycle correlation in the EU By Petr Rozmahel; Ladislava Grochová; Marek Litzman
  3. Exports and Capacity Constraints: A smooth transition regression model for six euro-area countries By Belke, Ansgar; Oeking, Anne; Setzer, Ralph
  4. Real Effective Exchange Rate Misalignment in the Euro Area: A Counterfactual Analysis By Makram El-Shagi; Axel Lindner; Gregor von Schweinitz
  5. Adjustments in the Eurozone: Varieties of Capitalism and the Crisis in Southern Europe By Anke Hassel
  6. International Capital Flows and the Boom-Bust Cycle in Spain By Jan in’t Veld; Robert Kollmann; Beatrice Pataracchia; Marco Ratto; Werner Roeger
  7. The gravity of foreign news coverage in the EU: does the euro matter? By Fracasso, Andrea; Grassano, Nicola; Vittucci Marzetti, Giuseppe
  8. Searching under the lamp-post: the evolution of fiscal surveillance By Deborah Mabbett & Waltraud Schelkle
  9. Effects of Eurobonds: a stochastic sovereign debt sustainability analysis for Portugal, Ireland and Greece By Joris TIELENS; Bas VAN AARLE; Jan VAN HOVE
  10. Reinforcing Rule of Law Oversight in the European Union By J.H.H. Weiler
  11. Financial stability indicators and public debt developments By Athanasios O. Tagkalakis
  12. The housing market: the impact of macroprudential measures in France By Labonne, Claire; Lecat, Rémy; Avouyi‑Dovi, Sanvi
  13. The Global Economy in 2030: Trends and Strategies for Europe By Gros, Daniel; Alcidi, Cinzia

  1. By: Quint, Dominic
    Abstract: The ECB's one size monetary policy is unlikely to fit all euro area members at all times, which raises the question of how much monetary policy stress this causes at the national level. I measure monetary policy stress as the difference between actual ECB interest rates and Taylor-rule implied optimal rates at the member state level. Optimal rates explicitly take into account the natural rate of interest to capture changes in trend growth. I find that monetary policy stress within the euro area has been steadily decreasing prior to the recent financial crisis. Current stress levels are not only lower today than in the late 1990s, they are also in line with what is commonly observed among U.S. states or pre-euro German Länder. --
    Keywords: euro area,currency union,European Central Bank,ECB,Taylor rule,real natural rate,common monetary policy,monetary policy stress,inflation
    JEL: C22 E53 E58
    Date: 2014
  2. By: Petr Rozmahel; Ladislava Grochová; Marek Litzman
    Abstract: The paper examines the effects of asymmetries in fiscal policy conduct upon the correlation of business cycles in the European Union. In particular the paper estimates the effects of fiscal indiscipline and dissimilarity on business cycle correlation in the period 1996-2012 using a panel of 27 EU countries. The paper pays special attention to Central and Eastern European countries and examines the effects of interactions between fiscal policy measures and the fact that the country has not yet adopted the Euro. The results show a significant and robust negative effect of fiscal indiscipline and dissimilarity upon business cycle correlation in the EU. The paper also provides some evidence for the significance of intra-industry trade as well as of the interactions between fiscal measures and non-Euro area membership. The study provides arguments for fiscal policy harmonisation and fiscal discipline of the Euro area member as well as acceding countries, as undisciplined and dissimilar fiscal policies are shown as sources of business cycle deviations from the average European cycle.
    Keywords: European integration, Euro area, business cycle correlation, fiscal divergence, fiscal irresponsibility, optimum currency area
    JEL: E32 E62 F15
    Date: 2014–05
  3. By: Belke, Ansgar; Oeking, Anne; Setzer, Ralph
    Abstract: The significant gains in export market shares made in a number of vulnerable euro-area crisis countries have not been accompanied by an appropriate improvement in price competitiveness. This paper argues that, under certain conditions, firms consider export activity as a substitute for 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. We find that domestic demand developments are relevant for the short-run dynamics of exports in particular during more extreme stages of the business cycle. A strong substitutive relationship between domestic and foreign sales can most clearly be found for Spain, Portugal and Italy, providing evidence of the importance of sunk costs and hysteresis in international trade.
    Date: 2014–05
  4. By: Makram El-Shagi; Axel Lindner; Gregor von Schweinitz
    Abstract: Were real effective exchange rates (REER) of Euro area member countries drastically misaligned at the outbreak of the global financial crisis? The answer is difficult to determine because economic theory gives no simple guideline for determining the equilibrium values of real exchange rates, and the determinants of those values might have been distorted as well. To overcome these limitations, we use synthetic matching to construct a counterfactual economy for each member as a linear combination of a large set of non-Euro area countries. We find that Euro area crisis countries are best described by a mixture of advanced and emerging economies. Comparing the actual REER with those of the counterfactuals gives sensible estimates of the misalignments at the start of the crisis: All peripheral countries were strongly overvalued, while high undervaluation is only observed for Finland.
    Keywords: REER misalignment; Euro breakup; synthetic matching
    JEL: C22 F41 G14
    Date: 2014–05
  5. By: Anke Hassel
    Abstract: This paper investigates the causes of, and reactions to, the Eurozone crisis, focusing in particular on the institutional foundations of the four Southern European Eurozone countries that have encountered an acute sovereign debt crisis. Applying the basic arguments featured in the Varieties of Capitalism literature, the paper aims to show how the interaction of the institutional set-up of coordinated and mixed market economies, with the effects of the common currency area, can explain both the evolution of the crisis, as well as the reactions to it. This paper interprets the sovereign debt crisis in the Eurozone as the combination of two features: firstly, the architecture of the common currency area, which instituted a common interest rate for widely heterogeneous regional economies, and secondly, the specific institutional foundations of two types of economies participating in the Eurozone, namely coordinated market economies and mixed market economies. Understanding these two factors and their interaction not only helps to explain why the Southern European countries were particularly vulnerable to exploding public debt, but also why, during the on-going resolution of the Eurozone crisis over the last two years, policy makers have persistently preferred austerity over the mutualisation of debt. The compensatory role of the state in mixed-market economies thereby undermines the effectiveness of financial bail-outs for economic growth strategies.
    Keywords: comparative political economy, Varieties of Capitalism, European Monetary Union, institutional analysis
    Date: 2014–05
  6. By: Jan in’t Veld; Robert Kollmann; Beatrice Pataracchia; Marco Ratto; Werner Roeger
    Abstract: We study the joint dynamics of foreign capital flows and real activity during the recent boom-bust cycle of the Spanish economy, using a three-country New Keynesian model with credit-constrained households and firms, a construction sector and a government. We estimate the model using 1995Q1-2013Q2 data for Spain, the rest of the Euro Area (REA) and the rest of the world. We show that falling risk premia on Spanish housing and non-residential capital, a loosening of collateral constraints for Spanish households and firms, as well as a fall in the interest rate spread between Spain and the REA fuelled the Spanish output boom and the persistent rise in foreign capital flows to Spain, before the global financial crisis. During and after the global financial crisis, falling house prices, and a tightening of collateral constraints for Spanish borrowers contributed to a sharp reduction in capital inflows, and to the persistent slump in Spanish real activity. The credit crunch was especially pronounced for Spanish households; firm credit constraints tightened later and more gradually, and contributed much less to the slump.
    Keywords: international capital flows, boom-bust cycle, sudden stop, housing market, financial frictions, Spain, European Monetary Union
    JEL: C11 E21 E32 E62
    Date: 2014–05
  7. By: Fracasso, Andrea; Grassano, Nicola; Vittucci Marzetti, Giuseppe
    Abstract: This work investigates the systemic factors behind cross-country variability in the transnational media coverage of foreign news in the EU in 2010. Using a large dataset on the transnational coverage of news by 148 EU national media, the paper maps the network of EU transnational citations and performs a quantitative assessment of their systemic determinants via the estimation of a gravity model of news. Nine empirical hypotheses are tested. Size and economic development of the target (source) country are positively (negatively) associated with the probability of coverage. Historical, linguistic and economic ties increase this probability. The evidence on the effect of the countries’ participation in the currency union is weak: once the historical levels of trade integration and the effects of the sovereign debt crisis are accounted for, there is no robust evidence of a higher integration of the media spheres within the euro area.
    Keywords: Complex networks, European Union, Eurozone, Gravity model, Media sphere
    JEL: C21 F33 F50 Z10
    Date: 2014–05
  8. By: Deborah Mabbett & Waltraud Schelkle
    Abstract: Fiscal surveillance was developed as a supranational regulatory process to counteract short-termism and deficit biases in government decision-making. With effective monetary policy to stabilize the economy, restraint on the fiscal discretion of national governments was seen as the key to macroeconomic stability. The financial crisis and its aftermath challenge this paradigm. Private debt caused the crisis and monetary policy is so weak that pro-cyclical fiscal retrenchment could worsen fiscal outturns. We argue, contrary to the ‘disciplinarian’ interpretation of the Stability and Growth Pact, that the regulatory process of fiscal surveillance is strongly affected by the potential perversities of fiscal restraint and is therefore resistant to the prescription of austerity. This claim is developed by tracing the technical difficulties encountered by fiscal surveillance since the financial crisis. The crisis has so destabilized expectations of the performance of the economy and the proper scope of government that the statistical and economic norms of surveillance have been undermined. We conclude that the problem with fiscal surveillance is not that the EU inflicts undue fiscal discipline on member states, but rather that the EU institutions are unable to protect member states against bond market panic, and therefore cannot coordinate stabilizing fiscal policies.
    Keywords: stability pact
    Date: 2014–05–07
    Abstract: This paper assesses the impact of Eurobonds on sovereign debt dynamics for selected European member states (Greece, Ireland and Portugal). For each member state, we produce sovereign debt fan charts of (i) a baseline scenario (no Eurobonds) and (ii) a Full-Fledged Eurobond introduction. The key building blocks of our methodology are (i) a debt framework (which embeds the traditional recursive debt equation), (ii) a vector autoregressive model to take into account and parametrise macroeconomic uncertainty and (iii) a fiscal reaction function. Conditional on the absence of moral hazard, we find Eurobonds to be a good instrument to absorb macroeconomic shocks and to diminish uncertainty over future debt forecasts; for Ireland and Portugal, we find debt to be 20 percentage points lower than under our baseline scenario, by 2020.
    Date: 2014–05
  10. By: J.H.H. Weiler
    Abstract: This paper provides a critical overview of options available to the EU to deal with the Rule of Law crisis in some of the Member States. The options it engages with were offered and discussed by a handful of the leading experts in the field and drawing on the critical EUI discussion, the first part of the paper tackles the following questions:1. Why should the EU reinforce the oversight of Member States’ Rule of Law performance?2. Are there sufficient legal bases for such oversight – should a reform of the Treaties be required?3. What kind of procedure could be designed to meet the need of such oversight?4. Which body should be entrusted with the oversight function?The second part provides a word of caution warning of the possible problems related to the EU's involvement with the constitutional core of the Member States
    Keywords: rule of law; democracy
    Date: 2014–03–04
  11. By: Athanasios O. Tagkalakis (Bank of Greece)
    Abstract: This paper investigates the inter-linkages between financial stability and fiscal policy. It analyzes the effect of selected financial stability indicators on the probability of future debt deterioration, controlling for several macroeconomic variables. We find significant evidence that a fragile banking system can put at risk public finances. Weak bank profitability, low asset quality and a weak capital base increase the fragility of the banking system, thus, raising the probability of future fiscal troubles.
    Keywords: E44; E58; G21; G28; E61; E62; H61; H62; E32
    Date: 2014–04
  12. By: Labonne, Claire; Lecat, Rémy; Avouyi‑Dovi, Sanvi
    Abstract: The housing market is a central macroprudential policy concern in France due to the significant proportion of residential property loans in bank balance sheets and the high weight of housing in household wealth. The surge in house prices at the start of the 2000s means we cannot rule out the risk of a bubble or a sharp downward correction, even though prices currently seem to be stabilising. However, if the evolution of house prices does start to pose a threat to financial stability, French authorities have access to a number of macroprudential tools that can be used to modify trends in factors such as the provision of housing loans. Using a model, this article attempts to examine the impact of measures which directly or indirectly influence loan interest rates and maturities, or the size of repayments in relation to household income. The empirical results show that these measures have a significant impact on trends in home lending, but a more limited impact on house prices due to the way variations in lending affect housing supply.
    Keywords: Mortgage loans; Housing; Cost and standard of living; Real estate business;
    JEL: E64 E63 E01 D91 D31
    Date: 2014–04
  13. By: Gros, Daniel; Alcidi, Cinzia
    Abstract: This groundbreaking study concentrates on a set of critical economic factors that will shape future economic growth at the global level and offers a description of the possible evolution of their reach and scope. Our goal in pursuing this research is not to make precise predictions about growth rates or the size of individual economies, but to provide a guide for EU policy-makers by presenting an assessment of the possible implications of such trends for the global economy and the policy challenges they raise for Europe. In an attempt to respond to this need, this study concentrates on a set of critical economic factors that will shape future economic growth at the global level and offers a description of the possible evolution of their reach and scope, which often go beyond the purely economic dimension. Our ultimate goal is to provide a guide for policy-makers by presenting an assessment of the possible implications of such trends for the global economy and the policy challenges they raise for Europe.
    Date: 2014–04

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