nep-eec New Economics Papers
on European Economics
Issue of 2014‒06‒02
sixteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The Euro and the Geography of International Debt Flows By Hale, Galina B; Obstfeld, Maurice
  2. The Impact of News and the SMP on Realized (Co)Variances in the Eurozone Sovereign Debt Market By Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Widijanto, Daniel
  3. What drives the German current account? And how does it affect other EU member states? By In 'T Veld, Jan; Kollmann, Robert; Ratto, Marco; Roeger, Werner; Vogel, Lukas
  4. Sovereign Debt Markets in Turbulent Times: Creditor Discrimination and Crowding-Out Effects By Broner, Fernando A; Erce, Aitor; Martin, Alberto; Ventura, Jaume
  5. International Capital Flows and the Boom-Bust Cycle in Spain By In 'T Veld, Jan; Kollmann, Robert; Pataracchia, Beatrice; Ratto, Marco; Roeger, Werner
  6. Nonlinearities in Sovereign Risk Pricing: The Role of CDS Index Contracts By Delatte, Anne-Laure; Fouquau, Julien; Portes, Richard
  7. One Europe or several? Causes and consequences of the European stagnation By Verspagen H.H.G.; Verspagen H.H.G.; Fagerberg J.
  8. The ECB and the banks: the tale of two crises By Reichlin, Lucrezia
  9. The role of bank lending tightening on corporate bond issuance in the eurozone By Kaya, Orcun; Wang, Lulu
  10. Sovereign credit ratings in the European Union: a model-based fiscal analysis By Polito, Vito; Wickens, Michael R.
  11. Price Effects of Sovereign Debt Auctions in the Euro-zone: The Role of the Crisis By Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Widijanto, Daniel
  12. Euro area structural reforms in times of a global crisis By Sandra Gomes
  13. A high frequency assessment of the ECB Securities Markets Programme By Ghysels, Eric; Idier, Julien; Manganelli, Simone; Vergote, Olivier
  14. Can Europe survive? Ten Commandments for Europe’s Next Ten Years By Hardy Hanappi
  15. Firm heterogeneity in productivity across Europe. What explains what? By Aiello, Francesco; Ricotta, Fernanda
  16. The measurement of international pension obligations - Have we harmonised enough? By Dirk van der Wal

  1. By: Hale, Galina B; Obstfeld, Maurice
    Abstract: Greater financial integration between core and peripheral EMU members had an effect on both sets of countries. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. The result has been asset-price bubbles and collapses in some of the peripheral countries, area-wide banking crisis, and sovereign debt problems. We analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro's introduction, Core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery.
    Keywords: EMU; euro crisis; global imbalances; international banking; international debt
    JEL: F32 F34 F36
    Date: 2014–04
  2. By: Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Widijanto, Daniel
    Abstract: We use realized variances and covariances based on intraday data from Eurozone sovereign bond market to measure the dependence structure of eurozone sovereign yields. Our analysis focuses on the impact of news, obtained from the Eurointelligence newsflash, on the dependence structure. More news raises the volatility of interest rates of financially distressed countries and decreases the covariance of distressed countries' yields with German bond yields, suggesting a flight-to-quality effect. Common news about the euro crisis and news about specific countries itself tend to raise the covariance of yields between distressed countries, indicating potential crisis spill-over effects. However, we do not detect spillover effects from news about third countries to the covariance between other country pairs. Bond purchases by the ECB under its Securities Markets Programme (SMP) mitigate the negative crisis spillovers among the distressed countries and reduce the flight-to-safety from the distressed countries to Germany.
    Keywords: crisis; Eurozone; realized covariances; SMP; sovereign debt; spillovers
    JEL: E62 G01 G12 G15 H63
    Date: 2014–02
  3. By: In 'T Veld, Jan; Kollmann, Robert; Ratto, Marco; Roeger, Werner; Vogel, Lukas
    Abstract: We estimate a three-country model using 1995-2013 data for Germany, the Rest of the Euro Area (REA) and the Rest of the World (ROW) to analyze the determinants of Germany’s current account surplus after the launch of the Euro. The most important factors driving the German surplus were positive shocks to the German saving rate and to ROW demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. The convergence of REA interest rates to German rates due to the creation of the Euro only had a modest effect on the German current account and on German real activity. The key shocks that drove the rise in the German current account tended to worsen the REA trade balance, but had a weak effect on REA real activity. Our analysis suggests these driving factors are likely to be slowly eroded, leading to a very gradual reduction of the German current account surplus. An expansion in German government consumption and investment would raise German GDP and reduce the current account surplus, but the effects on the surplus are likely to be weak.
    Keywords: Current Account; estimated DSGE model; Eurozone crisis; intra-European imbalances; monetary union
    JEL: E3 F21 F3 F4
    Date: 2014–04
  4. By: Broner, Fernando A; Erce, Aitor; Martin, Alberto; Ventura, Jaume
    Abstract: In 2007, countries in the euro periphery were enjoying stable growth, low deficits, and low spreads. Then the Financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the euro zone, and how they may be addressed by policies at the European level.
    Keywords: crowding out; discrimination; economic growth; rollover crises; sovereign debt
    JEL: F32 F34 F36 F41 F43 F44 G15
    Date: 2013–11
  5. By: In 'T Veld, Jan; Kollmann, Robert; Pataracchia, Beatrice; Ratto, Marco; Roeger, Werner
    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: boom-bust cycle; European Monetary Union; financial frictions; housing market; international capital flows; Spain; sudden stop
    JEL: C11 E21 E32 E62
    Date: 2014–05
  6. By: Delatte, Anne-Laure; Fouquau, Julien; Portes, Richard
    Abstract: Is the pricing of sovereign risk linear during bearish episodes? Or can initial shocks on economic fundamentals be exacerbated by endogenous factors that create nonlinearities? We test for nonlinearities in the sovereign bond market of European peripheral countries during the debt crisis and explain them. Our estimates based on a panel smooth threshold regression model during January 2006 to September 2012 show four main findings: 1) Peripheral sovereign spreads are subject to significant nonlinear dynamics. 2) The deterioration of market conditions for financial names changes the way investors price risk of the sovereigns. 3) The spreads of European peripheral countries have been priced above their historical values, given fundamentals, because of amplification effects. 4) Two CDS indices on financial names unambiguously stand out as leading drivers of these amplification effects.
    Keywords: CDS indices; European sovereign crisis; Panel Smooth Threshold Regression Models
    JEL: C23 E44 F34 G12 H63
    Date: 2014–03
  7. By: Verspagen H.H.G.; Verspagen H.H.G.; Fagerberg J. (UNU-MERIT)
    Abstract: The European economy is currently in a slump, the worst since the 1930s. Although this is often seen as a consequence of the financial crisis that hit the capitalist world in 2007-8, we argue that many of the problems that Europe faces today have long-term roots to do with the fact that Europe consists of countries with quite different dynamics and capacities for adapting to changes in the global and European economic environment. We start by comparing Europes growth performance to that of other parts of the world, and then consider some popular but arguably erroneous explanations of the present crisis. Subsequently, we delve into the development of the external balances of various European countries. This leads to the identification of three European archetypes, characterized by different adaptability and performance, i.e., the North, the South and the East. We explore the consequences of globalization and European economic integration for the economic performance of these different country groups. The effects have been quite asymmetric; the Southern countries in particular have benefited little if at all. Finally, we summarize the lessons from the analysis and consider the implications for policy. What is needed is a European growth policy, properly adapted to the different capacities across Europe, that places the welfare of the European population as a whole at the centre. Keywords Euro crisis; economic growth; Europe
    Keywords: International Agreements and Observance; International Organizations; Welfare and Poverty: Government Programs; Provision and Effects of Welfare Programs; Economywide Country Studies: Europe;
    JEL: O52 F53 I38
    Date: 2014
  8. By: Reichlin, Lucrezia
    Abstract: The paper is a narrative on monetary policy and the banking sector during the two recent euro area recessions. It shows that while in the two episodes of recession and financial stress the ECB acted aggressively providing liquidity to banks, the second recession, unlike the first, has been characterized by an abnormal decline of loans with respect to both real economic activity and the monetary aggregates. It conjectures that this fact is explained by the postponement of the adjustment in the banking sector. It shows that euro area banks, over the 2008-2012 period, did not change neither the capital to asset ratio nor the size of their balance sheet relative to GDP keeping them at the pre-crisis level. The paper also describes other aspects of banks’ balance sheet adjustment during the two crises pointing to a progressive dismantling of financial integration involving the inter-bank market since the first crisis and the market for government bonds since the second.
    Keywords: banks; monetary policy; recession
    JEL: E5
    Date: 2013–09
  9. By: Kaya, Orcun; Wang, Lulu
    Abstract: This paper empirically tests the role of bank lending tightening on non-financial corporate (NFC) bond issuance in the eurozone. By utilizing a unique data set provided by the ECB Bank Lending Survey, we capture the pure credit supply effect on corporate external financing. We find that tightened credit standards positively affect the NFC bond issuance: A 1pp increase in banks reporting considerable tightening on loans leads to around a 7% increase in firms' bond issuance in the eurozone. Focusing on a spectrum of aspects contributing to bank credit tightening, we document that banks' balance sheet constraints, as well as the perception of risk lead to significantly higher NFC bond issuance. In addition, we show that stricter lending conditions, such as wider margins, higher collateral requirements and covenants significantly increase NFC bond issuance volumes too. Furthermore, the impact of bank credit tightening on firms' bond issuance is particularly observable in core eurozone countries and not in peripheral countries. This is partially due to the underdeveloped debt capital markets in the peripheral countries. --
    Keywords: Debt Securities,Corporate Financing,Euro Area,Structural Change
    JEL: E44 G23 G32
    Date: 2014
  10. By: Polito, Vito; Wickens, Michael R.
    Abstract: We propose a model-based measure of sovereign credit ratings derived solely from the fiscal position of a country: a forecast of its future debt liabilities, and its potential to use tax policy to repay these. We use this measure to calculate credit ratings for fourteen European countries over the period 1995-2012. This measure identifies a European sovereign debt crisis almost two years before the official ratings of the credit rating agencies.
    Keywords: credit risk; default probability; fiscal policy; sovereign risk
    JEL: E62 H30 H60
    Date: 2013–09
  11. By: Beetsma, Roel; de Jong, Frank; Giuliodori, Massimo; Widijanto, Daniel
    Abstract: Exploring the period since the inception of the euro, we show that secondary-market yields on Italian public debt increase in anticipation of auctions of new issues and decrease after the auction, while no or a smaller such effect is present for German public debt. However, these yield movements on the Italian debt are largely confined to the period of the crisis since mid-2007. We also find that there is some tendency of the yield movements to be larger when the demand for the new issue is smaller relative to its supply. Our results are consistent with a framework in which a small group of primary dealers require compensation for inventory risk and this compensation needs to be higher when market uncertainty is larger. We also find that the secondary-market behaviour of series with a maturity close to the auctioned series, but for which there is no auction, is very similar to the secondary-market behaviour of the auctioned series. These findings support an explanation of yield movements based on the behaviour of primary dealers with limited risk-bearing capacity.
    Keywords: auctions; bid-to-cover ratio; crisis; euro-zone; event study; Germany; Italy; primary dealers; public debt; yield movements
    JEL: G12 G18
    Date: 2013–09
  12. By: Sandra Gomes
    Abstract: The global financial crisis that started in mid-2007 brought back to the monetary policy debate the issue of the zero lower bound on nominal interest rates and the policy options available when this is a binding constraint. Given the significative macroeconomic impact of the crisis it has also brought to the forefront of the discussion ways to revive economic growth. This paper looks at structural reforms as a policy option of economic stimulus for an economy where the zero lower bound binds. We focus in the euro area economy. Our main results show that structural reforms may have positive short run effects that reduce the size of a recession and if coordinated they can drive the euro area out of the zero lower bound. We also show that the short to medium run impact of structural reforms is also crucially dependent on the design of such reforms, namely if the reforms are implemented gradually or not and if the reforms are announced (or perceived) as temporary or permanent. Finally, we show that the zero lower bound does not change significantly the impact of the reforms if the reform is permanent but it does have an important effect if the reform is transitory.
    JEL: E52 F42 F47
    Date: 2014
  13. By: Ghysels, Eric; Idier, Julien; Manganelli, Simone; Vergote, Olivier
    Abstract: Policy impact studies often suffer from endogeneity problems. Consider the case of the ECB Securities Markets Programme. If Eurosystem interventions were triggered by sudden and strong price deteriorations, looking at daily (or weekly) price changes may bias downwards the correlation between yields and the amounts of bonds purchased. Simple regression of daily changes in yields on quantities often give insignificant or even positive coefficients and therefore suggest that SMP interventions have been ineffective, or worse counterproductive. We use high frequency data on purchases of the ECB Securities Markets Programme and sovereign bond quotes to address the endogeneity issues. We propose an econometric model that considers, simultaneously, first and second conditional moments of market price returns at daily and intradaily frequency. Each component of our new econometric model is extended with SMP purchases such that the SMP impact is measured both on yield variations and volatility, and at both daily and intradaily frequency. We find that SMP interventions do not have a significant impact on changes in yields at daily frequency, but when running the same regression with intraday data sampled at 15 minutes interval, we find the expected negative sign. Our empirical investigation reveals also that SMP purchases succeeded in reducing volatility of government bond yields of the countries under the programme. These results are in line with the programme objective of addressing market malfunctioning. Finally, the new econometric model we introduce is of general interest.
    Date: 2013–12
  14. By: Hardy Hanappi (University of Technology Vienna, Austria)
    Abstract: What can political economy say about the immediate future of Europe? This paper tries to provide practical answers. It is structured into proposals for necessary short-term policy measures, a consistent set of mid-term dynamics initiated by these measures, and a few remarks on the long-run vision underpinning and hopefully helping to implement a welfare enhancing future Europe.
    Keywords: European Union, global crisis, evolutionary economic policy
    JEL: F50
    Date: 2013–02
  15. By: Aiello, Francesco; Ricotta, Fernanda
    Abstract: This paper analyses the TFP heterogeneity of a sample of manufacturing firms operating in seven EU countries (Austria, France, Germany, Hungary, Italy, Spain and UK). TFP data refer to 2008. The empirical setting is based on the multilevel modelling which provides two main results. Firstly, we show that TFP heterogeneity is largely due to firm-specific features (85% of TFP variability in the empty-model). Interestingly, we find that some key-drivers of TFP (size, family-management, group membership, innovations and human capital) influence heterogeneity in productivity with the expect sign, but do not, on the whole, absorb much of firm-TFP variance, implying that differences in productivity are due to sizable yet unobservable firm characteristics. Secondly, as far the role of localization is concerned, we demonstrate that country-effect is more influential than region-effect in explaining individual productivity. Net of the country-effect, the localisation in different European regions explains about 5% of TFP firm heterogeneity. When considering the case of three individual countries (France, Italy and Spain), location in different regions explains 4.7% of TFP heterogeneity in Italy, while this proportion is lower (2.9%) in France and higher (7.6%) in Spain.
    Keywords: TFP heterogeneity, firm-behavior, localization, European countries, multilevel model
    JEL: C30 D22 D24 L60 R11 R15
    Date: 2014–05–26
  16. By: Dirk van der Wal
    Abstract: In the domain of pension statistics comparability of pension entitlements across countries improved substantially due to new SNA/ESA recommendations. In the near future, inclusion of unfunded employment related pension schemes in the core accounts or in the supplementary table on pensions will become the standard. This paper analyses pension entitlements for twelve OECD-countries according to the new compilation standards. In spite of constructive European harmonisation efforts, the paper identifies a number of measurement differences that may hamper a fair comparison of pension liabilities.
    Keywords: pensions; pension entitlements; discount rate; national accounts; defined benefit; funding; fair value; public sector pensions; actuarial evaluation
    JEL: G23 H55 H75
    Date: 2014–05

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