nep-eec New Economics Papers
on European Economics
Issue of 2014‒08‒20
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Adjustment in Euro Area Deficit Countries: Progress, Challenges, and Policies By Thierry Tressel; Shengzu Wang; Joong Shik Kang; Jay C. Shambaugh; Jörg Decressin; Petya Koeva Brooks
  2. Lost at Sea:The Euro Needs a Euro Treasury By Jörg Bibow
  4. What Happened in Cyprus? The Economic Consequences of the Last Communist Government in Europe By Athanasios Orphanides
  5. The Euro effects on intermediate and final exports. By Lavinia Rotili
  6. EMU and the Cyclical Behavior of Fiscal Policy: A Suggested Interpretation By Oliver Landmann
  7. Increase in Home Bias and the Eurozone Sovereign Debt Crisis By Camille Cornand; Pauline Gandré; Céline Gimet
  8. Progress Towards External Adjustment in the Euro Area Periphery and the Baltics By Joong Shik Kang; Jay C. Shambaugh
  9. Debt and economic growth in the European Union: what causes what? By Cândida Ferreira
  10. Central bank independence and sovereign debt crisis. Any link? By Kari Heimonen; Aleksandra Maslowska-Jokinen
  11. A Decade of Labour Market Reforms in the EU: Insights from the LABREF Database By Turrini, Alessandro; Koltay, Gabor; Pierini, Fabiana; Goffard, Clarisse; Kiss, Aron
  12. Financial Crises and Contagion Effects between the US and OECD Equity Markets By Ilyes Abid; Khaled Guesmi; Olfa Kaabia; Duc Khuong Nguyen
  13. Economic Uncertainties and their Impact on Activity in Greece compared with Ireland and Portugal By Jan-David Schneider; Claude Giorno
  14. Assessing the Link between Price and Financial Stability By Christophe Blot; Jerome Creel; Paul Hubert; Fabien Labondance; Francesco Saraceno

  1. By: Thierry Tressel; Shengzu Wang; Joong Shik Kang; Jay C. Shambaugh; Jörg Decressin; Petya Koeva Brooks
    Abstract: Imbalances within the euro area have been a defining feature of the crisis. This paper provides a critical analysis of the ongoing rebalancing of euro area “deficit economies†(Greece, Ireland, Portugal, and Spain) that accumulated large current account deficits and external liability positions in the run-up to the crisis. It shows that relative price adjustments have been proceeding gradually. Real effective exchange rates have depreciated by 10-25 percent, driven largely by reductions in unit labor costs due to labor shedding. While exports have typically rebounded, subdued demand accounts for much of the reduction in current account deficits. Hence, the current account balance of the euro area as a whole has shifted into surplus. Internal rebalancing has come with subdued activity—notably very high unemployment in the deficit economies—and made continued adjustment more difficult. To advance rebalancing further, the paper emphasizes the need for: (1) macroeconomic policies that support demand and bring inflation in line with the ECB’s medium-term price stability objective; (2) continued EMU reforms (banking union) to ensure proper financial intermediation; and (3) structural reforms in product and labor markets to improve productivity and support the reallocation of resources to tradable sectors.
    Date: 2014–07–14
  2. By: Jörg Bibow
    Abstract: The euro crisis remains unresolved even as financial markets may seem calm for now. The current euro regime is inherently flawed. Recent reforms have failed to turn the dysfunctional euro regime into a viable one. The investigation is informed by the “cartalist” critique of traditional “optimum currency area” theory (Goodhart 1998). Various proposals to rescue the euro are assessed and found lacking. A Euro Treasury scheme operating on a strict rule and specifically designed not to be a transfer union is proposed here as condition sine qua non for healing the euro’s potentially fatal birth defects. The Euro Treasury proposed here is the missing element that renders sense to the current fiscal regime that is unworkable without it. The proposed Euro Treasury scheme would end the currently unfolding euro calamity by switching policy from a public thrift campaign that can only impoverish Europe to a public investment campaign designed to secure Europe’s future. No mutualization of existing national public debts is involved. Instead, the Euro Treasury is established as a means to pool eurozone public investment spending and have it funded by proper eurozone treasury securities.
    Date: 2013
  3. By: Guglielmo Maria Caporale (Brunel University); Roberta De Santis (Italian National Institute of Statistics); Alessandro Girardi (Italian National Institute of Statistics)
    Abstract: Using annual bilateral data over the period 1988-2011 for a panel of 24 industrialised and emerging economies, we analyse in a time-varying framework the determinants of output synchronisation in EMU (European Monetary Union) distinguishing between core and peripheral member states. The results support the specialisation paradigm rather than the endogeneity hypothesis. Evidence is found in the euro period of diverging patterns between the core and the peripheral EMU countries raising questions about the future stability of EMU.
    Keywords: output synchronisation, trade intensity, endogeneity, European Monetary Union (EMU)
    JEL: F10 F15 F17 F4
    Date: 2013
  4. By: Athanasios Orphanides
    Abstract: This paper reviews developments in the Cypriot economy following the introduction of the euro on 1 January 2008 and leading to the economic collapse of the island five years later. The main cause of the collapse is identified with the election of a communist government in February 2008, within two months of the introduction of the euro, and its subsequent choices for action and inaction on economic policy matters. The government allowed a rapid deterioration of public finances, and despite repeated warnings, damaged the country’s creditworthiness and lost market access in May 2011. The destruction of the island’s largest power station in July 2011 subsequently threw the economy into recession. Together with the intensification of the euro area crisis in the summer and fall of 2011, these events weakened the banking system which was vulnerable due to its exposure in Greece. Rather than deal with its fiscal crisis, the government secured a loan from the Russian government that allowed it to postpone action until after the February 2013 election. Rather than protect the banking system, losses were imposed on banks and a campaign against them was coordinated and used as a platform by the communist party for the February 2013 election. The strategy succeeded in delaying resolution of the crisis and avoiding short-term political cost for the communist party before the election, but also in precipitating a catastrophe right after the election.
    Date: 2014
  5. By: Lavinia Rotili (Sapienza University of Rome)
    Abstract: This paper studies the euro effects on intermediate and final exports taking advantage of the world input-output dataset (WIOD). The originality of this empirical analysis is that it combines one of the most analyzed topics in international economics, the euro trade effects, with the theme of supply chain trade. The main findings are the following: i) the euro has positively affected Eurozone trade with a larger effect on intermediate flows relative to final exports; ii) the intra-area euro effect becomes either negative or not statistically significant when switching from a small sample of advanced economies to a larger group of emerging and developing economies. The paper provides some evidence that the heterogeneity of the euro effects between the small and the large sample can be explained by a missing variable related to the increasing relevance of supply chain connections between European countries.
    Keywords: Euro, supply chain, trade, gravity equation.
    JEL: F1 F15 F2 F33
    Date: 2014–07
  6. By: Oliver Landmann (Institut für allgemeine Wirtschaftsforschung, Universität Freiburg)
    Abstract: Fiscal policy is widely criticized for its failure to act as a stabilizing countercyclical force in the European Monetary Union. Two periods should be distinguished: Prior to the Financial Crisis of 2008, when monetary policy had traction to pursue stability for the aggregate eurozone, fiscal policies failed to contain macroeconomic divergence across the currency area. After the crisis, when interest rates had hit the zero lower bound, widespread fiscal austerity ex‐acerbated the persistent recession. The paper proposes a minimal model of decentralized fiscal policymaking in a monetary union. The model is used to interpret policy behavior in both periods. The analysis points to a pro‐cyclical bias and suggests a need for coordination.
    Keywords: Fiscal Policy, Monetary Union, Multiplier, International Policy Coordination, Monetary‐Fiscal Policy Interaction
    JEL: E5 E6 F41 F42
    Date: 2014–08
  7. By: Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Pauline Gandré (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Céline Gimet (, Institute of Political Studies, CHERPA, EA 4261, Aix-en-Provence, France and GATE Lyon Saint-Etienne, Ecully, F-69130, France)
    Abstract: One of the most striking consequences of the recent episode of sovereign debt market stress in the Eurozone has been the increase in the share of public debt held by the domestic sector in fragile economies. First, we identify the shocks that explain most of the variation in this share in an S-VAR model on a sample of 7 Eurozone countries between 2007 and 2012. Home bias in sovereign debt responds positively to fundamentals and expectations shocks but we find no evidence that the increase in home bias is destabilizing per se. Second, we theoretically model the impact of the previous shocks in a second-generation model of crisis with endogenous home bias in sovereign debt. We derive conditions under which a higher home bias is associated with a change in the government’s decision. Finally, we discuss which case of the model best applies to the distinct countries in our sample during the recent sovereign debt crisis in the Eurozone.
    Keywords: Eurozone, Sovereign debt crises, Home bias, Bayesian panel S-VAR, Second-generation model
    JEL: E4 E5 F3 G15
    Date: 2014
  8. By: Joong Shik Kang; Jay C. Shambaugh
    Abstract: The euro area periphery countries and the Baltic countries, which had large current account deficits in the run-up to the crisis, needed adjustment of relative prices to achieve both internal and external balances. Thus far, tangible progress has been made through lower wages and/or higher productivity relative to trading partners (“internal devaluationâ€), which contributed to narrowing current account deficits and shifting output towards the tradables sector. While some early adjusters cut wages more rapidly followed by productivity improvement, others have only slowly improved productivity largely through labor shedding. This adjustment for most countries has come along with a substantial recession as the unit labor cost improvement has largely come from falling employment and much of the current account improvement from import compression. Going forward, these countries still need to generate growing tradables sector employment and to continue adjustment to prevent imbalances from returning as output gaps close.
    Date: 2014–07–22
  9. By: Cândida Ferreira
    Abstract: This paper contributes to the empirical investigation of the causality relations between real GDP growth and the growth of three debt categories, namely public, foreign and private debt, in the universe of the 28 European Union countries during the past decade. By using panel Granger causality estimations, we find nonstatistically significant causality between foreign debt and economic growth and the limited importance of the causality between private debt and real GDP growth. On the contrary, the results obtained show statistically relevant bidirectional causality relations between public debt and economic growth, and this is true before and after the outbreak of the recent financial crisis. Moreover, there is clear evidence of economic growth’s contribution to the decrease in public debt.
    Date: 2014–05
  10. By: Kari Heimonen (School of Business and Economics, University of Jyvaskyla); Aleksandra Maslowska-Jokinen (Department of Economics, University of Turku)
    Abstract: In this paper we ask if central bank independence could lead to a bad fiscal position of some countries. Introducing autonomous central bank without changing other policy habits could expose the country to greater temptation to borrow money. We think that introducing high degree of CBI creates illusion that these countries are of similar credibility as a borrower. It opens new possibilities to borrow money and to increase consumption, thus leading to greater indebtedness. We analyse if the size of improvement in CBI was connected with country's increase in debt. We hypothesise that some countries could misuse the benefits coming from CBI, would not introduce discipline in other parts of economic policy and not only continue spending but also increase their volumes thanks to wider options for borrowing. Panel data estimations results using EMU-14 confirm our hypotheses. Greater increase in CBI was related to greater increase in debt, both public and private. These results are confirmed with alternative models and varying definitions of central bank independence.
    Keywords: central bank independence, sovereign debt, private debt, sound money, panel data
    JEL: C33 E02 E58 E61
    Date: 2014–07
  11. By: Turrini, Alessandro (European Commission); Koltay, Gabor (European Commission, Directorate Economic and Financial Affairs); Pierini, Fabiana (European Commission, Directorate Economic and Financial Affairs); Goffard, Clarisse (European Commission, Directorate Economic and Financial Affairs); Kiss, Aron (European Commission, Directorate Economic and Financial Affairs)
    Abstract: This paper analyses the determinants and impact of labour market reforms in the European Union over the period of 2000-2011. The source of information on reforms is the LABREF database developed in DG ECFIN of the European Commission in cooperation with the Economic Policy Committee of the ECOFIN Council. The database collects information on measures adopted by EU Member States. Despite limitations of count data on reform events, the evidence permits a number of interesting insights. The 2008 crisis triggered increased policy activity in most policy domains in a large number of EU countries, in particular in domains with macro-structural relevance (employment protection legislation, unemployment benefits, wage setting). Reforms tend to be more frequently carried out in countries characterised by disappointing labour market outcomes and a high initial level of regulation or fiscal burden on labour. Econometric evidence on the effects of selected reforms on aggregate labour market outcomes is broadly supportive of common priors: tax and benefit reforms tend to be followed after a time lag, by improved activity rates and lower unemployment.
    Keywords: labour market, labour market reform, unemployment, financial crisis, European Union
    JEL: J20 J38 J48 J58 J68
    Date: 2014–07
  12. By: Ilyes Abid; Khaled Guesmi; Olfa Kaabia; Duc Khuong Nguyen
    Abstract: In this paper we test for the existence of equity market contagion originating from the United States to OECD markets over the period from 01/01/1990 to 01/11/2010 characterized by several episodes of financial crises. Our empirical analysis relies on the use of an ICAPM model which has three sources of systematic risks (global, regional and currency risk factors) and allows for time-varying market integration. This model also offers the possibility to disentangle simple correlation due to fundamentals and contagion which we define as the excess correlation that is not explained by fundamental factors. Our results show provide strong evidence of contagion effects originating in US equity markets to the OECD equity markets from four regions: European Monetary Union (EMU), Asia-Pacific (AP), Non-European Monetary Union (NEMU) and North America (NA).
    Keywords: Global financial crisis, financial contagion, OECD countries, ICAPM, GJR-DCC-GARCH
    JEL: F30 F36 G12 G15 G20
    Date: 2014–07–24
  13. By: Jan-David Schneider; Claude Giorno
    Abstract: Uncertainty faced by households and firms affects economic activity. The rise in uncertainty since the beginning of the sovereign debt crisis in Greece could be one factor that has contributed to the steep and long-lasting recession. This paper presents a brief empirical analysis quantifying this phenomenon and compares it with developments in Ireland and Portugal. Overall, this analysis shows that the uncertainty impact on growth has been relatively small in Greece between 2008 and 2013, although stronger than in Ireland or Portugal. This quantification appears to be robust to various specification changes of the vector auto regressive models developed for this exercise. This working paper relates to the 2013 Economic Survey of Greece ( Les incertitudes économiques et leur impact sur l'activité en Grèce comparés avec l'Irlande et le Portugal Les incertitudes auxquelles sont confrontés les ménages et les entreprises affectent l’activité économique. La montée des incertitudes depuis le début de la crise de la dette souveraine en Grèce semble avoir été l’un des facteurs qui a contribué à la récession forte et prolongée du pays. Cet article présent une brève analyse empirique qui quantifie ce phénomène et le compare avec les développements enregistrés en Irlande et au Portugal. Au total, cette analyse montre que l’impact de l’incertitude sur la croissance a été relativement modeste en Grèce entre 2008 et 20013, bien que plus fort qu’en Irlande et au Portugal. Cette quantification apparaît robuste aux divers changements de spécifications du modèle vectoriel autorégressif développé pour cet exercice. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Grèce, 2013 (
    Keywords: uncertainty, GDP, Ireland, investment, confidence, Greece, Portugal, private consumption, vector auto regressive model, simulations, activity, modèle vectoriel autorégressif, investissement, Irlande, activité, Portugal, Grèce, confiance, consommation privée, simulation, incertitude, PIB
    JEL: E25 E65
    Date: 2014–07–21
  14. By: Christophe Blot (OFCE - Sciences Po); Jerome Creel (OFCE - Sciences Po, and ESCP Europe); Paul Hubert (OFCE - Sciences Po); Fabien Labondance (OFCE - Sciences Po); Francesco Saraceno (OFCE - Sciences Po, and LUISS)
    Abstract: This paper aims at investigating first the (possibly time-varying) empirical relationship between the level and conditional variances of price and financial stability, and second, the effects of macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J Schwartz's "conventional wisdom" that price stability would yield financial stability. Using simple correlations, VAR and Dynamic Conditional Correlations, we reject the hypothesis that price stability is positively correlated to financial stability. We then discuss about the empirical appropriateness of the "leaning against the wind" monetary policy approach.
    Keywords: Price Stability, Financial stability, DCC-GARCH, VAR
    JEL: C32 E31 E44 E52
    Date: 2013–02–01

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