nep-eec New Economics Papers
on European Economics
Issue of 2014‒08‒25
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Credit Ratings and the Pricing of Sovereign Debt during the Euro Crisis By Joshua Aizenman; Mahir Binici; Michael Mercier Hutchison
  2. On the real effects of financial pressure: Evidence from euro area firm-level employment during the recent financial crisis By Filipa Fernandes; Alexandros Kontonikas; Serafeim Tsoukas
  3. Rating Sovereign Debt in a Monetary Union – Original Sin by Transnational Governance By Finn Marten Körner; Hans-Michael Trautwein
  4. Unhappy families are all alike: Minskyan cycles, Kaldorian growth, and the Eurozone peripheral crises By Alberto Bagnai
  5. Price Level Changes and the Redistribution of Nominal Wealth Across the Euro Area By Adam, Klaus; Zhu, Junyi
  6. Designing a Genuine EMU: Which “Unions” for EU and Eurozone? By Jacques Pelkmans
  7. International Bailouts: Why Did Banks' Collective Bet Lead Europe to Rescue Greece? By E. Mengus
  8. Collateral imbalances in intra-European trade? Accounting for the differences between gross and value added trade balances By Nagengast, Arne J.; Stehrer, Robert
  9. The Swiss franc's honeymoon By Rahel Studer-Suter; Alexandra Janssen
  10. Assessing the Extent of EU-Russia Trade Integration in the Presence of Global Value Chains By Konstantins Benkovskis; Julija Pastusenko; Julia Woerz

  1. By: Joshua Aizenman (University of Southern California, Economic Department); Mahir Binici (Central Bank of Turkey, Banking and Financial Institutions Department); Michael Mercier Hutchison (University of California, Santa Cruz, Economics Department)
    Abstract: This paper investigates the impact of credit rating changes on the sovereign spreads in the European Union and investigates the macro and financial factors that account for the time varying effects of a given credit rating change. We find that changes of ratings are informative, economically important and highly statistically significant in panel models even after controlling for a host of domestic and global fundamental factors and investigating various functional forms, time and country groupings and dynamic structures. Dynamic panel model estimates indicate that a credit rating upgrade decreases CDS spreads by about 45 basis points, on average, for EU countries. However, the association between credit rating changes and spreads shifted markedly between the pre-crisis and crisis periods. European countries had quite similar CDS responses to credit rating changes during the pre-crisis period, but that large differences emerged during the crisis period between the now highly-sensitive GIIPS group and other European country groupings (EU and Euro Area excluding GIIPS, and the non-EU area). We also find a complicated non-linear pattern dependent on the level of the credit rating. The results are robust to the including credit “outlook” or “watch” signals by credit rating agencies. In addition, contagion from rating downgrades in GIIPS to other euro countries is not evident once own-country credit rating changes are taken into account.
    Keywords: CDS Spreads, Credit Ratings, Sovereign Debt, Eurozone
    JEL: F30 G01 G24 H63
    Date: 2013
  2. By: Filipa Fernandes; Alexandros Kontonikas; Serafeim Tsoukas
    Abstract: Using a large panel of unquoted euro-area firms over the period 2003-11, this paper examines the impact of financial pressure on firms’ employment. The analysis finds evidence that financial pressure negatively affects firms’ employment decisions. This effect is stronger during the 2007-2009 financial crisis, especially for firms in the periph-ery area compared to their counterparts in the core European economies. We also find that impact of financial pressure on employment is more potent for firms classified as financially constrained and operating in periphery economies during the financial crisis.
    Keywords: Financial pressure; Firm employment; Euro area; Financial crisis
    JEL: J23 D22 E44 G01
    Date: 2014–08
  3. By: Finn Marten Körner (University of Oldenburg - International Economics & ZenTra); Hans-Michael Trautwein (University of Oldenburg - International Economics & ZenTra)
    Abstract: It is frequently argued that credit rating agencies (CRAs) have acted procyclically in their rating of sovereign debt in the European Monetary Union (EMU). They are believed to have under-rated sovereign risk in the early years of EMU, when integrated financial markets provided easier access to liquidity, and to have contributed to the recent Eurozone debt crisis by over-rating the lack of (individual) monetary sovereignty that EMU entails for its member states. Yet, there is little direct evidence for this so far. While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. We examine the major CRAs’ methodologies for rating sovereign debt and test their ratings for a monetary union bonus in good times and a malus, akin to the ‘original sin’ problem of emerging market countries, in bad times. Using a newly compiled dataset of quarterly sovereign bond ratings from 1990 until 2012, we find some evidence that EMU countries received a rating bonus on euro-denominated debt before the global financial crisis and a large penalty after 2007.
    Keywords: Credit rating agencies, rating methodologies, sovereign debt, monetary union
    JEL: E42 F32 F33 G24 H63
    Date: 2014–06
  4. By: Alberto Bagnai (Department of Economics, Gabriele d'Annunzio University)
    Abstract: It is frequently claimed that the economic and financial crises in the Eurozone peripheral countries depend on different, country-specific causes. In one case the crisis would depend on a real estate bubble (Ireland, Spain), in another on deceitful government manipulating the national accounts (Greece), in still another on corrupted government postponing essential reforms (Italy). While these claims can always be supported by anecdotal evidence, one may wonder whether a unified framework exists that provides a more consistent explanation of the most massive failure in macroeconomic management since 1929. In this paper we try to interpret the Eurozone peripheral crises in the light of the Minskyan cycle theory, and in particular of its recent applications to developing countries crises. A closer look at the pattern of the macroeconomic fundamentals shows that the different Eurozone crises are actually consistent with this unified framework, thereby providing some important lessons to European policy makers.
    Keywords: Eurozone, Financial crisis, Exchange rate regimes, Post-Keynesian economics.
    JEL: E12 F36 G01
    Date: 2013–07
  5. By: Adam, Klaus; Zhu, Junyi
    Abstract: We document the presence of sizable distributional effects from unexpected price level movements in the Euro Area (EA) using sectoral accounts and newly available data from the Household Finance and Consumption Survey. The EA\ as a whole is a net winner of unexpected price level increases, with Italy, Greece, Portugal and Spain being the biggest beneficiaries, and Belgium and Malta being the largest losers. Governments are net winners of inflation, while the household (HH) sector is a net loser. HHs in Belgium, Ireland, Malta and Germany incur the biggest per capita losses, while HHs in Finland and Spain turn out to be net winners of inflation. Considerable heterogeneity exists also within the HH sector: relatively young middle class HHs are net winners of inflation, while older and richer HHs are losers. As a result, wealth inequality for the EA as a whole decreases with unexpected inflation, although in some countries (Austria, Germany and Malta) inequality increases due to presence of relatively few young borrowing HHs. We document that HHs inflation exposure varies systematically across countries, with HHs in high inflation EA countries holding systematically lower nominal exposures. --
    Keywords: inflation,redistribution,Euro Area,household survey
    JEL: E31 D31 D14
    Date: 2014–04
  6. By: Jacques Pelkmans (Senior Fellow at the Centre of European Policy Studies (CEPS), Visiting Professor at the College of Europe)
    Abstract: The initial ‘framing’ (in the summer of 2012) of the ‘genuine EMU’ for the wider public suggested to design an entire series of ‘unions’. So many ‘unions’ are neither necessary nor desirable – only some are and their design matters. The paper critically discusses first the negative fall-out of the crisis for EMU, and subsequently assesses the fiscal and the banking unions as accomplished so far, without going into highly specific technical details. The assessment is moderately positive, although there is ample scope for further improvement and a risk for short-term turbulence once the ECB has finished its tests and reviews. What about the parade of other ’unions’ such as economic union, social union and political union? The macro-economic imbalances procedure (MIP) and possibly the ESRB have overcome the pre-crisis disregard of macro competitiveness. The three components of ‘economic union’ (single market, economic policy coordination and budgetary disciplines) have all been strengthened. The last two ‘unions’, on the other hand, would imply a fundamental change in the conferral of powers to the EU/ Eurozone, with drastic and possibly very serious long-run implications, including a break-up of the Union, if such proposals would be pushed through. The cure is worse than the disease. Whereas social union is perhaps easier to dismiss as a ‘misfit’ in the EU, the recent popularity of suggesting a ‘political union’ is seen as worrisome. Probably, nobody knows what a ‘political union’ is, or, at best, it is a highly elastic notion: it might be thought necessary for reasons of domestic economic reforms in EU countries, for a larger common budget, for some EU tax power, for (greater) risk pooling, for ‘symmetric’ macro-economic adjustment and for some ultimate control of the ECB in times of crisis. Taking each one of these arguments separately, a range of more typical EU solutions might be found without suggesting a ‘political union’. Just as ‘fiscal capacity’ was long an all-or-nothing taboo for shifting bank resolution to the EU level, now solved with a modest common Fund and carefully confined but centralised powers, the author suggests that other carefully targeted responses can be designed for the various aspects where seen as indispensable, including the political say of a lender-of-last-resort function of the ECB. Hence, neither a social nor a political union worthy of the name ought to be pursued. Yet, political legitimacy matters, both with national parliaments and the grassroots. National parliaments will have to play a larger role.
    Keywords: Economic and Monetary Union; Banking Union; Political Union; Financial Crisis
    JEL: E02 O47 N24
    Date: 2014–07
  7. By: E. Mengus
    Abstract: In this paper, I use a two-country model to investigate the incentives which lead one country to take charge of another country's debt. I show that, when direct transfers to residents cannot be perfectly targeted, the first country can be better o_ honoring the second country's liabilities, even if this means paying o_ foreign creditors. Anticipating the ex post rescue, private agents engage in a collective bet on the foreign country's debt, leading to the emergence of a self-fulfilling implicit guarantees in equilibrium. In response to the resulting inefficient outcome, the optimal policy for the rescuing country's government is to restrict domestic exposures to foreign debt ex ante, for example, through a tax on capital outflows. Finally, I argue that these findings can shed light on the European sovereign debt crisis, the interventions of the IMF, the 1790 US federal bailout of states and on the 2008 US financial crisis.
    Keywords: Implicit guarantees, bailouts, capital flows, capital controls.
    JEL: F33 F34 F36 F42
    Date: 2014
  8. By: Nagengast, Arne J.; Stehrer, Robert
    Abstract: One of the main stylised facts that has emerged from the recent literature on global value chains is that bilateral trade imbalances in gross terms can differ substantially from those measured in value added terms. However, the factors underlying the extent and sign of the differences between the two measures have so far not been investigated. Here, we propose a novel decomposition of bilateral gross trade balances that accounts for the differences between gross and value added concepts. The bilateral analysis contributes conceptually to the literature on double counting in trade by identifying the trade flow in which value added is actually recorded for the first time in international trade statistics. We apply our decomposition framework to the development of intra-EU27 trade balances from 1995 to 2011 and show that a growing share of intra-EU bilateral trade balances is due to demand in countries other than the two direct trading partners. The latter accounted for 25% of the total variance of intra-EU gross bilateral trade balances in 2011, which marks a considerable rise from 3% in 1995. A structural decomposition analysis indicates that this evolution was especially due to the rising importance of international production sharing. --
    Keywords: Trade balances,Global value chains,Vertical specialisation,Value added,Input-output tables
    JEL: F1 F2 C67 R15
    Date: 2014
  9. By: Rahel Studer-Suter; Alexandra Janssen
    Abstract: To counter the sharp appreciation of the Swiss franc that set in in the wake of the European sovereign debt crisis, on September 6, 2011, the Swiss National Bank announced to enforce a minimum EUR/CHF exchange rate of CHF 1.20. We find that the simple, though elegant model for the exchange rate within a target zone proposed by Krugman (1991) describes the behavior of the Swiss franc since the inception of this lower bound. Being a prime example of a safe haven currency, the Swiss franc systematically appreciates when global market conditions tighten. But as Krugman's model predicts, the sensitivity of the Swiss franc exchange rate to state variables that indicate such risky times declines as it approaches its lower bound. In particular, the Swiss franc is well described as an S-shaped function of the option prices implied probability for EUR/CHF exchange rate realizations below the lower bound. This state variable not only indicates times of increased global risk, but also quantifies appreciation pressure on the Swiss currency at the lower bound. We conclude that the Swiss franc lower bound helps stabilizing the value of the Swiss currency.
    Keywords: Exchange rate target zone, safe haven currency, volatility smile
    JEL: E52 E58 F31 G01
    Date: 2014–08
  10. By: Konstantins Benkovskis; Julija Pastusenko; Julia Woerz
    Abstract: The present paper analyses trade linkages between EU Member States and Russia taking into account the indirect trade links through global value chains based on data for 2011 from the World Input-Output Database combined with gross flows between Russia and individual EU countries. We base our conclusions on three indicators: gross exports in final use, value added in final use and value added in output. The latter two novel indicators are able to capture direct and indirect links jointly by allocating the full amount of Russia's value added in the EU's final domestic use and output (and vice versa: the EU's value added in Russia's final domestic use and output). In terms of direct export shares, Russia represents the EU's fourth largest trade partner, while the EU is Russia's largest trade partner. The Russian economy is also considerably more dependent on European value added in terms of both final use and producing output than vice versa. However, the degree of integration varies greatly across the EU Member States. For example, the Baltic States are notably more dependent on Russia's value added than vice versa. Moreover, certain economic sectors in the EU are strongly dependent on Russian inputs, such as the energy sector, utilities and air transport.
    Keywords: trade integration, global value chains, Russia, European Union
    JEL: F12 F15 F51
    Date: 2014–08–13

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