nep-eec New Economics Papers
on European Economics
Issue of 2014‒07‒28
ten papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. The dynamics of European financial market integration By G. EVERAERT; L. POZZI
  2. The role of Institutions in explaining wage determination in the Euro Area: a panel cointegration approach By Mariam Camarero; Gaetano D’Adamo; Cecilio Tamarit
  3. Is the Eurozone on the Mend? Latin American Examples to Analyze the Euro Question By Eduardo A. Cavallo; Eduardo Fernández Arias; Andrew Powell
  4. What Should Surplus Germany Do? By Jacob Funk Kirkegaard
  5. Over-optimistic Official Forecasts and Fiscal Rules in the Eurozone By Frankel, Jeffrey A.; Schreger, Jesse M
  6. International yield curve comovements: impact of the recent financial crisis By Simeon Coleman; Kavita Sirichand
  7. Changes in the Response of Fiscal Policy to Monetary Policy in the EMU By Sanchit Arora; Claire Reicher
  8. Labor Market Slack in the United Kingdom By David N. F. Bell; David G. Blanchflower
  9. Does the Calculation Hold? The Fiscal Balance of Migration to Denmark and Germany By Hinte, Holger; Zimmermann, Klaus F.
  10. The EU Services Directive: Gains from Further Liberalization By Emilio Fernández Corugedo; Esther Pérez Ruiz

  1. By: G. EVERAERT; L. POZZI (-)
    Abstract: We investigate financial market integration in Europe with a panel of 16 European and 4 non- European countries over the period 1970:01-2012:10. The theoretical framework considered is an international CAPM for equity excess returns with multiple common factors - a world factor and EU and euro country group factors - augmented with a local country-specific factor. While in the literature it is common practice to use observed variables and proxy’s for the factors, we estimate the ICAPM as a dynamic unobserved factor model with stochastic factor loadings and stochastic volatilities for the factor error terms. A measure for the time-varying degree of integration is calculated for each country with respect to the world and with respect to both country groups. The results suggest that, for all countries, integration has occurred mainly at the global level. The EU has been an additional driving force of financial market integration, especially for the initial EU member states in the 1970s. The contribution of the euro factor to financial market integration has been more important for the peripheral countries from the euro area than for the core economies. We also find that while the Great Recession (2008-2009) has temporarily increased the degree of financial market integration of European countries, no similar e ect can be observed with respect to the ensuing euro area debt crisis (2010-2012).
    Keywords: Financial Markets, Stock Markets, Integration, Dynamic Factor Model, Unobserved Components, State Space, Stochastic Volatility
    JEL: G15 C32
    Date: 2014–03
  2. By: Mariam Camarero (Department of Economics, University Jaume I, Castellón, Spain); Gaetano D’Adamo (Department of Applied Economics II, University of Valencia, Spain); Cecilio Tamarit (Department of Applied Economics II, University of Valencia, Spain)
    Abstract: Over the last 15 years, the evolution of labor costs has been very diverse across EMU countries. Since wages have important second-round effects on prices and competitiveness, and EMU countries do not have the tool of the nominal exchange rate to correct for such imbalances, understanding the determinants of the wage is a matter of increasing concern and debate. We estimate the equilibrium wage equation for the Euro Area over the period 1995-2011 using panel cointegration techniques that allow for cross-section dependence and structural breaks. The results show that the equilibrium wage has a positive relation with productivity and negative relation with unemployment, as expected. We also include institutional variables in our analysis, showing that a more flexible labor market is consistent with long-run wage moderation. Allowing for a regime break, we find that, since 2004, possibly due to increased international competition, wage determination was more strictly related to productivity, and real wage appreciation triggers a drop in the real wage. Furthermore, results point to a wage-moderating role of government intervention and concertation in wage bargaining.
    Keywords: panel cointegration, wage setting, labor market
    JEL: E24 J31 C23
    Date: 2014
  3. By: Eduardo A. Cavallo; Eduardo Fernández Arias; Andrew Powell
    Abstract: Several European countries face challenges reminiscent of those faced by the emerging economies of Latin America. The economic booms in some peripheral Euro-zone countries financed by large capital inflows; the credit and asset price booms and then the busts including Sudden Stops in capital flows; the strong interaction between sovereign debt and domestic banking systems; the role of foreign banks and contagion; and all in the context of a fixed exchange rate, are familiar plotlines for Latin American audiences. For those Euro-zone countries that built up large Euro-denominated external liabilities, Latin America's experience is particularly relevant and worrisome. Still, Europe may be in a better position to navigate a path out of the crisis given cooperative mechanisms that were absent in Latin America, particularly the availability of massive liquidity support. Nonetheless, while such support buys time, it does not guarantee success. This paper argues that reflecting on Latin America's experience provides useful lessons for Europe to improve the chances for a successful resolution.
    Keywords: Financial Crises & Economic Stabilization, Financial Policy, Public debt, Latin America, Financial crisis, Euro, Debt overhang, Banking crisis, Sudden Stops, Real devaluations, Currency union, Fiscal devaluation
    Date: 2014–07
  4. By: Jacob Funk Kirkegaard (Peterson Institute for International Economics)
    Abstract: Germany's large current account surpluses have been criticized as a major cause of slower economic growth in the euro area periphery, especially Greece, Spain, and Italy. Critics repeatedly call on Germany to boost domestic demand and allow wages to rise. This Policy Brief argues that Germany should indeed act to reduce its current account surplus but not for reasons that critics say. Rather the German government should recognize that its large surpluses expose German savers to potential financial losses, bailout costs, and opportunity costs associated with low (negative) domestic real interest rates. Instead of accelerating wage growth in excess of productivity, Germany should increase public investments in the domestic economy and raise its ceiling on public indebtedness.
    Date: 2014–05
  5. By: Frankel, Jeffrey A.; Schreger, Jesse M
    Abstract: Eurozone members are supposedly constrained by the fiscal caps of the Stability and Growth Pact. Yet ever since the birth of the euro, members have postponed painful adjustment. Wishful thinking has played an important role in this failure. We find that governments’ forecasts are biased in the optimistic direction, especially during booms. Eurozone governments are especially over-optimistic when the budget deficit is over the 3 % of GDP ceiling at the time the forecasts are made. Those exceeding this cap systematically but falsely forecast a rapid future improvement. The new fiscal compact among the euro countries is supposed to make budget rules more binding by putting them into laws and constitutions at the national level. But biased forecasts can defeat budget rules. What is the record in Europe with national rules? The bias is less among eurozone countries that have adopted certain rules at the national level, particularly creating an independent fiscal institution that provides independent forecasts.
    Date: 2013
  6. By: Simeon Coleman (School of Business and Economics, Loughborough University); Kavita Sirichand (School of Business and Economics, Loughborough University)
    Abstract: Empirical evidence on international yield comovement is sparse and lacks consensus. Employing a dynamic correlation approach, we show that during the recent global financial crisis euro area yields have ceased to comove with the yields of the other international markets - Canada, UK and US. Some implications of our results are discussed.
    Keywords: Interest rates, comovement
    JEL: E43 F21
    Date: 2014–07
  7. By: Sanchit Arora; Claire Reicher
    Abstract: We study the evolution of the response of scal policy to monetary policy shocks in the EMU in the light of two important events: the signing of the Maastricht treaty in 1992 and the introduction of the EMU in 1999. Based on impulse responses from a panel VAR, we nd that scal and monetary policy acted neutrally toward each other before the Maastricht Treaty; scal and monetary policy acted as substitutes immediately after the Maastricht Treaty; and scal and monetary policy acted as complements after the introduction of the EMU. These results holds for a set of 11 non-EMU countries as well, which indicates that the evolution of the scal response to monetary shocks within the EMU has broadly mirrored global developments. One example of such a global development is the global shift toward lower interest rates and tighter scal policy during the 1990s
    Keywords: monetary policy, scal policy, panel VAR, Maastricht Treaty, EMU
    JEL: E52 E62 E65
    Date: 2014–06
  8. By: David N. F. Bell (University of Stirling, Scotland); David G. Blanchflower (Peterson Institute for International Economics)
    Abstract: This paper examines the amount of slack in the UK labor market. It examines the downward adjustments made by the Monetary Policy Committee (MPC) to both unemployment and underemployment, which in our view are invalid. Without any evidence the MPC in its assessment of the output gap reduces the level of unemployment because of its claim that long-term unemployment has no effect on wages. We produce contrary evidence. The MPC further reduces the level of underemployment in the United Kingdom by half. We present arguments as to why we also think this inappropriate. We set out arguments on why we believe the level of slack is greater than the MPC calibrates. Consistent with that is the fact that real wages in the United Kingdom continue to fall.
    Keywords: wages, underemployment, unemployment
    JEL: J01 J11 J21 J23 J38 J64
    Date: 2014–07
  9. By: Hinte, Holger (IZA); Zimmermann, Klaus F. (IZA and University of Bonn)
    Abstract: Calculating the net fiscal effects of immigration not just for a fiscal year but over the lifespan of immigrant cohorts accentuates the assets and deficits in migration and integration policies and their long-term potential. The less national policies concentrate on a labor migrant selection process according to economic criteria, the higher the risk of generating economic losses or only a reduced surplus. A country comparison of net tax payments and generational accounts for migrants and natives reveals even more clearly that the right mix of migrants will give the best chance to maximize positive and sustainable net fiscal effects to the benefit of society. Similar socio-economic frameworks – as in the western welfare states of Denmark and Germany showcased in this paper – may still result in substantially different economic outcomes of migration. Traditional immigration countries with a long experience in selecting migrants are nonetheless confronted with the need to evaluate and adapt their policies. They may also learn from the results of net fiscal balancing.
    Keywords: socio-economic effects of migration, generational accounting, immigrant selection, integration
    JEL: F22 J61 E61 E62
    Date: 2014–07
  10. By: Emilio Fernández Corugedo; Esther Pérez Ruiz
    Abstract: The EU Services Directive was adopted in 2006 to foster competition in services across Europe. However, progress in liberalizing services has fallen short of expectations due to the article 15 of the Directive, which allows countries to maintain pre-existing restrictions if judged necessary to protect the public interest. Through input output analysis, this paper finds important multiplier effects of greater efficiency services to the rest of the economy. A renewed impulse to the liberalization process could be given by enhancing the advocacy role of national competition authorities in interpreting the notion of public interest underpinning existing regulations.
    Date: 2014–07–01

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