nep-eec New Economics Papers
on European Economics
Issue of 2014‒08‒02
fourteen papers chosen by
Giuseppe Marotta
University of Modena and Reggio Emilia

  1. Lessons from the European Financial Crisis By Marco Pagano
  2. Signalling fiscal stress in the euro area: A country-specific early warning system By Pablo Hernández de Cos; Enrique Moral-Benito; Gerrit B. Koester; Christiane Nickel
  3. The European Monetary Union and Imbalances: Is it an Anticipation Story ? By D. Siena
  4. Foreign exchange reserve diversification and the "exorbitant privilege" By Pietro Cova; Patrizio Pagano; Massimiliano Pisani
  5. A banking union for Europe: making a virtue out of necessity By Maria Abascal; Tatiana Alonso; Santiago Fernandez de Lis; Wojciech Golecki
  6. Property Bubbles and the Driving Forces in the PIGS Countries By Klotz, Philipp; Lin, Tsoyu Calvin; Hsu, Shih-Hsun
  7. On modeling banking risk By Efthymios G. Tsionas
  8. Are Real Estate Banks More Affected by Real Estate Market Dynamics? Evidence from the Main European Countries By Gibilaro, Lucia; Mattarocci, Gianluca
  9. From bismarck to beveridge: the other pension reform in Spain By J. Ignacio Conde-Ruiz; Clara I. González
  10. Evaluating the possible impact of pension reforms on elderly poverty in Europe By Grech, Aaron George
  11. The determinants of vat revenue efficiency: recent evidence from Greece By Athanasios O. Tagkalakis
  12. Does fairness matter for the success of fiscal consolidation? By Georgia Kaplanoglou; Vassilis T. Rapanos; loanna C. Bardakas
  13. The potential of home equity conversion in financing the costs of ageing societies By Schilder, Frans; Conijn, Johan; Kramer, Bert; Rouwendal, Jan
  14. Efficiency of the Services Sector: a Parametric Approach By Gisela Di Meglio; Stefano Visintin

  1. By: Marco Pagano (Università di Napoli Federico II CSEF, EEIF, CEPR and ECGI)
    Abstract: This paper distils three lessons for bank regulation from the experience of the 2009-12 euro-area financial crisis. First, it highlights the key role that sovereign debt exposures of banks have played in the feedback loop between bank and fiscal distress, and inquires how the regulation of banks’ sovereign exposures in the euro area should be changed to mitigate this feedback loop in the future. Second, it explores the relationship between the forbearance of non-performing loans by European banks and the tendency of EU regulators to rescue rather than resolving distressed banks, and asks to what extent the new regulatory framework of the euro-area “banking union” can be expected to mitigate excessive forbearance and facilitate resolution of insolvent banks. Finally, the paper highlights that capital requirements based on the ratio of Tier-1 capital to banks’ risk-weighted assets were massively gamed by large banks, which engaged in various forms of regulatory arbitrage to minimize their capital charges while expanding leverage. This argues in favor of relying on a set of simpler and more robust indicators to determine banks’ capital shortfall, such as book and market leverage ratios. JEL Classification: G01, G21, G28, G33.
    Keywords: bank regulation, euro, financial crisis, sovereign exposures, forbearance, bank resolution, bank capital requirements.
    Date: 2014–07–24
  2. By: Pablo Hernández de Cos (Banco de España); Enrique Moral-Benito (Banco de España); Gerrit B. Koester (Banco Central Europeo); Christiane Nickel (Banco Central Europeo)
    Abstract: The sovereign debt crisis in the euro area has raised interest in early warning indicators, aimed at signalling the build-up of fiscal stress in advance and helping prevent crises by means of a timely counteraction of fiscal and macroeconomic policies. This paper presents possible improvements to enhance existing early warning indicators for fiscal stress, especially for the euro area. We show that a country-specific approach could strongly increase the signalling power of early warning systems. Finally, we draw policy conclusions for the setting-up and application of a system of early warning indicators for fiscal stress.
    Keywords: fiscal policy, studies of particular policy episodes, general outlook and conditions, deficit, surplus, debt, debt management, sovereign debt, international lending and debt problems.
    JEL: E62 E65 E66 H62 H63 F34
    Date: 2014–07
  3. By: D. Siena
    Abstract: This paper investigates the sources of current account imbalances accumulated within the European Monetary Union before the Great Recession. First, it documents that starting in 1996, before the actual introduction of the euro, countries in the euro area periphery experienced increasing current account deficits, appreciating real exchange rates and output growing faster than trends. Then, it develops and estimates a small open economy DSGE model which encompasses a variety of possible unanticipated and anticipated shocks. The main finding is that anticipated reductions in international borrowing costs can explain the observed evidence while productivity increases (anticipated or not) cannot: falling borrowing costs implies appreciation while increasing productivity implies depreciation. Quantitatively, anticipated shocks account for one third of output, half of real exchange rate and two third of current account fluctuations. In particular, anticipated fluctuations in international borrowing costs explain respectively 30 and 40 percent of current account and real exchange rate movements.
    Keywords: Current Account, Business cycles, Anticipated Shocks.
    JEL: E32 F32 F41
    Date: 2014
  4. By: Pietro Cova (Bank of Italy); Patrizio Pagano (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We assess the global macroeconomic implications of different strategies of official reserve management by developing a large scale new-Keynesian dynamic general equilibrium model of the world economy, calibrated on the euro area, the United States, China, Japan and the rest of the world. An increase in global demand for euros would boost euro-area aggregate demand because of the reduction in euro-area interest rates (the main benefit associated with the “privilege” of being a global currency). If the higher demand for euros is associated with lower demand for US dollars, then US economic activity falls because of higher interest rates, which depress domestic aggregate demand, while the external balance improves; countries accumulating reserves continue to run a trade surplus, as exports to the euro-area increase. We also compute welfare gains/costs for all economies.
    Keywords: global imbalances, global currency, dynamic general equilibrium modelling
    JEL: F33 F41 C51 E52
    Date: 2014–07
  5. By: Maria Abascal; Tatiana Alonso; Santiago Fernandez de Lis; Wojciech Golecki
    Abstract: Banking union is the most ambitious European project undertaken since the introduction of the single currency. It was launched in the summer of 2012, in order to send the markets a strong signal of unity against a looming financial fragmentation problem that was putting the euro on the ropes. The main goal of banking union is to resume progress towards the single market for financial services and, more broadly, to preserve the single market by restoring the proper functioning of monetary policy in the eurozone through restoring confidence in the European banking sector. This will be achieved through new harmonised banking rules and stronger systems for both banking supervision and resolution, that will be managed at the European level. The EU leaders and co-legislators have been working against the clock to put in place a credible and effective set-up in record time, amid intense negotiations (with final deals often closed at the last minute) and very significant concessions by all parties involved (most of which would have been simply unthinkable just a few years ago). Despite the fact that the final set-up does not provide for the optimal banking union, we still hold to its extraordinary political value and see its huge potential. By putting Europe back on the right integration path, banking union will restore the momentum towards a genuine economic and monetary union. Nevertheless, in order to put an end to the sovereign/banking loop, further progress in integration is needed including key fiscal, economic and political elements.
    Keywords: European Single Market, European Monetary Union, Banking Union, Banking resolution, Banking supervision, Single rulebook, Financial fragmentation
    JEL: G21 G28 H12 F36
    Date: 2014–07
  6. By: Klotz, Philipp; Lin, Tsoyu Calvin; Hsu, Shih-Hsun
    Abstract: The PIGS countries stand in the spotlight of the current financial crisis in Europe. The boom and bust of the real estate sector was one of the major sources putting these countries into an economic downturn. This paper determines the extent to which these countries experienced property bubbles and sheds light on the role of monetary policy in the formation of bubbles. We draw from Stiglitz’s (1990) theory on asset bubbles and apply the direct capitalization approach through weighted average cost of capital (WACC) to identify real estate bubbles in the period from 1999 to 2012. In the next step we apply VAR and VECM models to investigate short- and long-run dynamics between the monetary policy of the ECB and property bubbles in the PIGS countries. Our findings indicate that Spain and Ireland experienced the largest positive bubble formation, followed by Portugal with a small bubble. In contrast to that, Greece experienced a strong negative bubble. While we find only a very weak short-run relationship between monetary policy and bubble formation in Portugal, we find both, evidence for a long- and short run relationship in the case of Ireland, Greece and Spain. The varying extent of the bubble formation and the differing impact of the monetary policy on the bubble across the PIGS countries can be mainly attributed to characteristics in the domestic financial-, fiscal- and macroprudential-system. This paper provides strong evidence that countries with very low interest rates and low to moderate tax rate as well as high loan-to-value ratios have the potential to experience large property bubbles. Central bank’s policies are crucial to trigger the boom and burst of property bubbles by manipulating the interest rate and availability of lending for house purchase. As this research only covers aggregate data for entire countries, diverging developments within each country are not captured. Future research could contribute to the literature by focusing on property market developments in specific cities or regions.
    Date: 2013
  7. By: Efthymios G. Tsionas (Athens University of Economics and Business)
    Abstract: The paper develops new indices of financial stability based on an explicit model of expected utility maximization by financial institutions subject to the classical technology restrictions of neoclassical production theory. The model can be estimated using standard econometric techniques, like GMM for dynamic panel data and latent factor analysis for the estimation of covariance matrices. An explicit functional form for the utility function is not needed and we show how measures of risk aversion and prudence (downside risk aversion) can be derived and estimated from the model. The model is estimated using data for Eurozone countries and we focus particularly on (i) the use of the modeling approach as an “early warning mechanism”, (ii) the bank- and country-specific estimates of risk aversion and prudence (downside risk aversion), and (iii) the derivation of a generalized measure of risk that relies on loan-price uncertainty.
    Keywords: Financial Stability; Banking; Expected Utility Maximization; Sub-prime crisis; Financial Crisis; Eurozone; PIIGS.
    JEL: G20 G21 C51 C54 D21 D22
    Date: 2014–05
  8. By: Gibilaro, Lucia; Mattarocci, Gianluca
    Abstract: Real estate market trend could affect the value of both the direct exposures in property loans and the real estate collaterals of loans, therefore banks' performance and/or risk could change significantly in the case of real estate market collapse or expansion (i.a. Wheaton, 1999). Indeed, during the recent financial crisis, the real estate was features by a strong decrease in loans with respect to the before crisis period (Ivashina and Sharfstein, 2010). Literature focuses the attention prevalently on the effect of a change in the property prices on the macro-variables and the monetary aggregates (Quigley, 1999). Only few studies look at the effect of the real estate market trend on the banks'lending policy and bank's performance (Davis and Zhu, 2004) taking into account bank's characteristics . In the analysis of the banking features, no evidence is provided on the relationship between real estate market trend and the bank's performance and risk . Moreover, the evidences provided by such studies do not control for the type the bank and the loan purpose.Considering a representative sample of European banks and using the BIS property index for the reference country of the bank, we study the relationship between the property market trend and the bank performance / risk exposure, considering also lagged relationships and testing for any relevant causality relationship.. Following the approach proposed by Eisenbeis and Kwast (1991), we identify real estate banks in our sample and we test for the existence of any significant difference respect to other banks. Moreover, we control the evidences for the pre and post financial crisis period. Results demonstrate that real estate banks do not perform always the worse (the better) during a real estate market downturn (upturn) and the reaction to the market trend is driven also by other features of the bank.
    Date: 2013
  9. By: J. Ignacio Conde-Ruiz (Universidad Complutense de madrid and FEDEA); Clara I. González (Banco de España and FEDEA)
    Abstract: Aging is an unstoppable process and it remains a major challenge for the sustainability of the PAYG pension system in most developed countries, including in Spain. Many countries need to introduce reforms of their pension systems in order to control their expenditure, and in some cases this has already begun. However, there are other sorts of changes to certain parameters that are perceived as secondary, e.g. the different path of minimum and maximum pensions, and the upper and lower caps on contributions. This has significant implications for the distributive structure of the social security system that cannot be readily perceived by the population. That is why some economists in Spain refer to it as the “Silent Reform”. The aim of this paper is to analyse the consequences this type of reform would have in Spain; indeed, it is the first paper to actually quantify and evaluate the potential impact it would have on the country. We have used an accounting model with heterogeneous agents and overlapping generations in order to project pension expenditures up until 2070. The results show that this kind of reform could potentially contain future expenditure and could also change the nature of the pension system from a contributory or Bismarckian-type system into an assistential or Beveridgean-type one. This change could have significant consequences as both systems have different objectives. The paper also shows that the institutional characteristics that make this kind of reform in Spain feasible are also present in most developed countries with Bismarckian pension systems. Therefore, we believe that the lessons learned in this paper on this kind of reform could well prove useful to other countries.
    Keywords: aging population, pension reform, Beveridgean type, Bismarckian type, accounting projection model, overlapping generations
    JEL: H55 J11 J26
    Date: 2014–07
  10. By: Grech, Aaron George
    Abstract: Since the 1990s reforms have changed substantially both the nature of state pension provision and the level of generosity. This article tries to assess the impact of these changes using estimates of pension wealth for a number of hypothetical cases. By focusing on all prospective pension transfers rather than just those at the point of retirement, this approach can provide additional insights, especially on the impact of changes in benefit indexation. These estimates corroborate existing evidence that reforms have decreased generosity significantly. Moves to link benefits to contributions have made systems less progressive, raising adequacy concerns for certain groups. The reforms have, in particular, strengthened the need of ensuring better access to labour markets, of having in place adequate crediting arrangements and minimum pensions.
    Keywords: Social Security; Public Pensions; Retirement; Poverty; Retirement Policies.
    JEL: H55 I38 J26
    Date: 2014–07
  11. By: Athanasios O. Tagkalakis (Bank of Greece)
    Abstract: This paper examines the relationship between VAT revenue and economic activity in Greece by estimating the relationship between tax revenue efficiency and real GDP growth rate. We find a positive and significant relationship between these variables, and show that the responsiveness of tax revenue efficiency to economic activity fluctuations has increased in the recent years. Tax efficiency is affected by changes in the ability to curb tax evasion.
    Keywords: VAT; GDP; tax evasion; Greece.
    JEL: C32 E32 H20 O52
    Date: 2014–05
  12. By: Georgia Kaplanoglou (University of Athens); Vassilis T. Rapanos (University of Athens); loanna C. Bardakas (Bank of Greece)
    Abstract: Does it matter for the success of fiscal consolidation programmes that they are fair? This question has never been empirically addressed despite its profound importance especially since many developed countries have embarked on fiscal consolidation programmes, which in many cases have led to sizeable increases in unemployment and poverty, and are met with public dissatisfaction. Using a data set for 29 OECD countries over the period 1971-2009, we argue that fairness matters, namely that improving the targeting of social transfers and their effectiveness in terms of poverty alleviation, higher public expenditure on training and active labor market policies and programmes like social housing directed to the poor, even decreasing the VAT rate on necessities, improve the success probabilities of consolidation attempts. Introducing such concerns sheds new light on the prevailing view that the successful fiscal adjustments are those that rely on spending-cuts rather than on tax increases. The results of this paper provide empirical evidence that ameliorating the effects of adjustment, by supporting the weaker parts of society, is crucial for the success of fiscal consolidations and argues that "fair fiscal adjustments" may provide the double dividend of enhancing the probability of success of the adjustment and of promoting social cohesion.
    Keywords: fiscal consolidation; success; fairness; expenditure; social transfers
    JEL: D63 E62 H23 H53 H50 H62 I38
    Date: 2014–05
  13. By: Schilder, Frans; Conijn, Johan; Kramer, Bert; Rouwendal, Jan
    Abstract: PurposeThere is increasing debate about how to finance the increasing costs of our ageing societies. Much attention in Europe has recently focussed on the extent to which households would be willing to use home equity conversion products. The question to which extent home equity can contribute in financing the needs of elderly has been left unanswered. This study quantifies to what extent future income of elderly can be increased through home equity conversion for the case of The Netherlands.DesignFor a large sample of households that are either now or in the medium long run eligible for home equity conversion we estimate the amount of home equity that can be converted. We use a stochastic model to annuitize home owners’ potential income from home equity.FindingsThere are some groups of households that may substantially increase income at old age through home equity conversion. In general, however, the additional income generated from conversion is limited. This is the result of a significant asymmetry between real estate and financial markets. In the near future additional income from home equity conversion is further decreased as a result of a cohort effect: the future elderly are more highly leveraged than the current elderly. The outcomes are robust for different model assumptions.Social implicationsThe relatively little additional income to be generated from home equity conversion puts debate about financing welfare state arrangements into new perspective. The current popular idea in The Netherlands that welfare arrangements can be partially paid for by the elderly home owners themselves is proven to be false.
    Date: 2014
  14. By: Gisela Di Meglio (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa) (Department of Foundations of Economic Analysis II (Quantitative Economics)), Instituto Complutense de Analisis Economico (ICAE). Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid)); Stefano Visintin (University of Amsterdam. Amsterdam Institute for Advanced Labour Studies. The Netherlands)
    Abstract: The question if countries are achieving their maximum production given resource allocation is at the very centre of contemporary debates. The issue becomes even more relevant when directed to service activities, due to their cardinal role in modern societies. However, hardly any studies perform cross-country efficiency comparison of service sectors at aggregated level. The paper aims at measuring and comparing technical efficiency of (total and market) services across 16 developed economies during the past three decades. The empirical estimations are performed by means of frontier parametric techniques applied to both panel data and cross-sectional data. Benchmark figures, useful for cross-country comparison and policy analysis, are provided for efficiency scores and for their evolution across time.
    Keywords: Service sector; Efficiency; Parametric methods; Panel data; Benchmarking.
    JEL: C14 D24 L80
    Date: 2014–07

This nep-eec issue is ©2014 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.