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on European Economics |
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Issue of 2014‒12‒03
sixteen papers chosen by Giuseppe Marotta Università degli Studi di Modena e Reggio Emilia |
| By: | Fuest, Clemens; Heinemann, Friedrich; Schröder, Christoph |
| Abstract: | A mechanism to restructure the debt of an insolvent euro country is a missing element in the emerging institutional architecture of the euro area. The introduction of an insolvency procedure for sovereigns faces a dilemma: In the foreseeable future, its introduction would risk pushing Europe back into acute crisis. But the indefinite postponement of reform would impair the credibility of a future regime change. Against this background, this paper reviews arguments and existing blueprints for sovereign insolvency procedures in the euro area and develops a 'Viable Insolvency Procedure for Sovereigns' (VIPS). VIPS avoids any sudden measures which could destabilize the present fragile situation but carefully designs an irreversible transition towards the new regime. The VIPS proposal comprises two pillars: An insolvency procedure for the long run and a credible bridge towards that system. |
| Keywords: | euro area debt crisis,sovereign insolvency procedure |
| JEL: | F34 H12 H63 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:14053&r=eec |
| By: | Pagano, Marco |
| 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. |
| Keywords: | bank regulation,euro,financial crisis,sovereign exposures,forbearance,bank resolution,bank capital requirements |
| JEL: | G01 G21 G28 G33 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:486&r=eec |
| By: | Plamen Iossifov; Jiri Podpiera |
| Abstract: | The synchronized disinflation across Europe since end-2011 raises the question of whether non-euro area EU countries are affected by the undershooting of the euro area inflation target. To shed light on this issue, we estimate an open-economy, New Keynsian Phillips curve, in which we control for imported inflation. Regression results suggest that falling food and energy prices have been the main disinflationary driver. But low core inflation in the euro area has also had a clear and significant impact. Countries with more rigid exchange-rate regimes and higher share of foreign value added in domestic demand have been more affected. The scope for monetary response to low inflation in non-euro area EU countries depends on concerns about financial stability and unanchoring of inflationary expectations, as well as on exchange rate regime and capital flows dynamics. |
| Keywords: | Disinflation;Europe;Euro Area;Inflation targeting;Open economies;Econometric models;Inflation, Central and Eastern Europe, Sweden, United Kingdom, Denmark |
| Date: | 2014–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/191&r=eec |
| By: | Lejsgaard Autrup, Søren; Grothe, Magdalena |
| Abstract: | This paper analyses price formation in medium- to longer-term maturity segments of euro area and US inflation-linked and nominal bond markets around the releases of important economic indicators. We compare the pre-crisis and crisis periods, controlling for liquidity effects observed in financial markets. The results allow us to draw conclusions about the anchoring of inflation expectations in the two currency areas before and during the crisis. We find a somewhat stronger anchoring of inflation expectations in the euro area than in the United States. During the crisis, the degree of anchoring of inflation expectations did not change in the euro area, but it decreased to some extent in the United States. JEL Classification: E44, G12, G01 |
| Keywords: | break-even inflation rates, inflation expectations, inflation markets, macroeconomic announcements, nominal and real bond yields |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141671&r=eec |
| By: | Dolls, Mathias; Fuest, Clemens; Neumann, Dirk; Peichl, Andreas |
| Abstract: | We analyze different alternatives how a common unemployment insurance system for the euro area (EA) could be designed and assess their effectiveness to act as an insurance device in the presence of asymmetric macroeconomic shocks. Running counterfactual simulations based on micro data for the period 2000-13, we highlight and quantify the trade-off between automatic stabilization effects and the degree of cross-country transfers. In the baseline, we focus on a non-contingent scheme covering short-term unemployment and find that it would have absorbed a significant fraction of the unemployment shock in the recent crisis. However, 5 member states of the EA18 would have been either a permanent net contributor or net recipient. Our results suggest that claw-back mechanisms and contingent benefits could limit the degree of cross-country redistribution, but might reduce desired insurance effects. We also discuss moral hazard issues at the level of individuals, the administration and economic policy. |
| Keywords: | European fiscal integration,unemployment insurance,automatic stabilizers |
| JEL: | F55 H23 J65 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:14095&r=eec |
| By: | Guntram B. Wolff |
| Abstract: | This Policy Contribution was prepared for the European Parliament Committee on Economic and Monetary Affairs. All Eurosystem credit operations, including the important open market operations, need to be based on adequate collateral. Liquidity is provided to banks against collateral at market prices subject to a haircut. The Eurosystem adapted its collateral framework during the crisis to accept lower-rated assets as collateral. Higher haircuts are applied to insure against liquidity risk as well as the greater volatility of prices of lower-rated assets. The adaptation of the collateral framework was necessary to provide sufficient liquidity to banks in the euro area periphery in particular. In crisis countries, special emergency liquidity assistance was provided. More than 80 percent of the European Central Bankâ??s liquidity (Main Refinancing Operations and Long Term Refinancing Operations) is provided to banks in five countries (Greece, Ireland, Italy, Portugal and Spain). The changes in the collateral framework were necessary for the ECB to fulfil its treaty-based mandate of providing liquidity to solvent banks and safeguarding financial stability. The ECB did not take on board excessive risks. Alvaro Leandro provided excellent research assistance. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:857&r=eec |
| By: | Kevin Stahler (Peterson Institute for International Economics); Arvind Subramanian (Peterson Institute for International Economics) |
| Abstract: | Prima facie, competitiveness adjustments in the eurozone, based on unit labor cost developments, appear sensible and in line with what the economic analyst might have predicted and the economic doctor might have ordered. But a broader and arguably better--Balassa-Samuelson-Penn (BSP)--framework for analyzing these adjustments paints a very different picture. Taking advantage of the newly released PPP-based estimates of the International Comparison Program (2011), we identify a causal BSP relationship. We apply this framework to computing more appropriate measures of real competitiveness changes in Europe and other advanced economies in the aftermath of the recent global crises. There has been a deterioration, not improvement, in competitiveness in the periphery countries between 2007 and 2013. Second, the pattern of adjustment within the eurozone has been dramatically perverse, with Germany having improved competitiveness by 9 percent and with Greece's having deteriorated by 9 percent. Third, real competitiveness changes are strongly correlated with nominal exchange rate changes, which suggests the importance of having a flexible (and preferably independent) currency for effecting external adjustments. Fourth, internal devaluation--defined as real competitiveness improvements in excess of nominal exchange rate changes--is possible but seems limited in scope and magnitude. Our results are robust to adjusting the BSP framework to take account of the special circumstances of countries experiencing unemployment. Even if we ignore the BSP effect, the broad pattern of limited and lopsided adjustment in the eurozone remains. |
| Keywords: | Eurozone, Competitiveness, Exchange Rates, Monetary Unions |
| JEL: | F31 F41 F42 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp14-10&r=eec |
| By: | Juan Carlos Hatchondo; Leonardo Martinez; Yasin Kursat Onder |
| Abstract: | We quantify gains from introducing non-defaultable debt as a limited additional financing option into a model of equilibrium sovereign risk. We find that, for an initial (defaultable) sovereign debt level equal to 66 percent of trend aggregate income and a sovereign spread of 2.9 percent, introducing the possibility of issuing non-defaultable debt for up to 10 percent of aggregate income reduces immediately the spread to 1.4 percent, and implies a welfare gain equivalent to a permanent consumption increase of 0.9 percent. The spread reduction would be only 0.1 (0.2) percentage points higher if the government uses nondefaultable debt to buy back (finance a “voluntary†debt exchange for) previously issued defaultable debt. Without restrictions to defaultable debt issuances in the future, the spread reduction achieved by the introduction of non-defaultable debt is short lived. We also show that allowing governments in default to increase non-defaultable debt is damaging at the time non-defaultable debt is introduced and inconsequential in the medium term. These findings shed light on different aspects of proposals to introduce common euro-area sovereign bonds that could be virtually non-defaultable. |
| Keywords: | Sovereign debt defaults;Sovereign risk;Debt buyback arrangements;Eurobond markets;Bond issues;Econometric models;sovereign default, sovereign debt, Eurobonds, red bonds, blue bonds, buyback, voluntary debt exchange |
| Date: | 2014–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:14/198&r=eec |
| By: | Franke, Günter; Krahnen, Jan Pieter; von Lüpke, Thomas |
| Abstract: | This essay reviews a cornerstone of the European Banking Union project, the resolution of systemically important banks. The focus is on the inherent conflict between a possible intervention by resolution authorities, conditional on a crisis situation, and effective prevention prior to a crisis. Moreover, the paper discusses the rules for bail-in debt and conversion rules for different layers of debt. Finally, some organizational requirements to achieve effective resolution results will be analyzed. |
| Keywords: | Bank Recovery and Resolution Directive (BRRD),Single Resolution Mechanism (SRM),Bail-in |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:19&r=eec |
| By: | Petra Buzková (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | Basic purpose of a credit default swap (CDS) is to protect its buyer against a default of a reference entity. During the ongoing EMU debt crisis this purpose was questioned when Greek default was postponed continuously and actions of European public authorities gave rise to speculations that Greece could effectively default without CDS protection payment being triggered. In this article we examine whether this development in Greek case influenced CDS price of EMU member states in general, i.e. whether investors’ trust in this instrument decreased. Our presumption is that if there are no uncertainties about the CDS contract conditions, market price of a CDS should be closely related to its modelled risk-neutral fair price. In the first part of the article we use adopted reduced form CDS valuation model to obtain model CDS price which is compared to market CDS price in the second part of the article using two methods: heteroskedasticity- and autocorrelation-robust estimates and Johansen cointegration test. The main finding of this article is that the relationship between market and model CDS price mostly weakened during the crisis. More interestingly, using the first method it weakened in case of all riskier countries such as Portugal, Italy, Ireland, Spain and Belgium and this trend is not confirmed in case of safer countries such as Finland, France, Netherlands and Austria. In both methods we take into account a role of counterparty and liquidity risk and conclude that whereas counterparty risk role increased during the crisis, liquidity risk does not seem to play an important role in CDS market price determination. |
| Keywords: | credit default swap, CDS valuation, reduced form model, debt crisis, robust estimator, Johansen cointegration test |
| JEL: | C22 G01 G12 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2014_15&r=eec |
| By: | Haluk Yener (Department of Business Administration, Istanbul Bilgi University, Turkey); Thanasis Stengos (Department of Economics, University of Guelph, Canada, The Rimini Centre for Economic Analysis, Italy); M. Ege Yazgan (Department of Economics, Kadir Has University, Turkey, The Rimini Centre for Economic Analysis, Italy) |
| Abstract: | The paper involves the analysis of the seeds of the recent debt crisis that occurred in the Eurozone area. For the analysis we use the model of Fleming and Stein (2004). This model has two risk drivers arising from uncertainties in the return on capital and the effective rate of return on net foreign assets. Given the risk drivers, we model the net worth value process of an economy under a stochastic setting and show that opening to the rest of the world by pursuing the growth maximizing leverage strategy is better than remaining closed as that strategy enhances the growth of the net worth process. Second, we provide an extra condition to show when the excessive leverage poses threat to the sustainable growth of an economy. This condition allows us to improve upon the predictive ability of the model introduced by Fleming and Stein (2004). |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:24_14&r=eec |
| By: | Arpaia, Alfonso (European Commission); Kiss, Aron (European Commission, Directorate Economic and Financial Affairs); Turrini, Alessandro (European Commission) |
| Abstract: | The paper sheds light on developments in labour market matching in the EU after the crisis. First, it analyses the main features of the Beveridge curve and frictional unemployment in EU countries, with a view to isolate temporary changes in the vacancy-unemployment relationship from structural shifts affecting the efficiency of labour market matching. Second, it explores the main drivers of job matching efficiency, notably with a view to gauge whether mismatches became more serious across skills, economic sectors, or geographical locations and to explore the role of the policy setting. It emerges that labour market matching deteriorated after the crisis, but with a great deal of heterogeneity across EU countries. Divergence across countries increased. Matching deteriorated most in countries most affected by current account reversals and the debt crisis. The lengthening of unemployment spells appears to be a significant driver of matching efficiency especially after the crisis, while skill and sectoral mismatches also played a role. Active labour market policies are associated with a higher matching efficiency and some support is found to the hypothesis that more generous unemployment benefits reduce matching efficiency. |
| Keywords: | cyclical unemployment, structural unemployment, mismatch |
| JEL: | J23 J24 E32 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izapps:pp91&r=eec |
| By: | Betz, Frank; Hautsch, Nikolaus; Peltonen, Tuomas A.; Schienle, Melanie |
| Abstract: | We propose a framework for estimating network-driven time-varying systemic risk contributions that is applicable to a high-dimensional financial system. Tail risk dependencies and contributions are estimated based on a penalized two-stage fixed-effects quantile approach, which explicitly links bank interconnectedness to systemic risk contributions. The framework is applied to a system of 51 large European banks and 17 sovereigns through the period 2006 to 2013, utilizing both equity and CDS prices. We provide new evidence on how banking sector fragmentation and sovereign-bank linkages evolved over the European sovereign debt crisis and how it is reflected in network statistics and systemic risk measures. Illustrating the usefulness of the framework as a monitoring tool, we provide indication for the fragmentation of the European financial system having peaked and that recovery has started. |
| Keywords: | systemic risk contribution,tail dependence,network topology,sovereignbank linkages,Value-at-Risk |
| JEL: | G01 G18 G32 G38 C21 C51 C63 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:467&r=eec |
| By: | Winkelmann, Lars; Bibinger, Markus; Linzert, Tobias |
| Abstract: | This paper proposes a new econometric approach to disentangle two distinct response patterns of the yield curve to monetary policy announcements. Based on cojumps in intraday tick-data of a short and long term interest rate, we develop a day-wise test that detects the occurrence of a significant policy surprise and identifies the market perceived source of the surprise. The new test is applied to 133 policy announcements of the European Central Bank (ECB) in the period from 2001-2012. Our main findings indicate a good predictability of ECB policy decisions and remarkably stable perceptions about the ECB’s policy preferences. JEL Classification: E58, C14, C58 |
| Keywords: | central bank communication, non-synchronous and noisy high frequency tick-data, spectral cojump estimator, yield curve |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141674&r=eec |
| By: | José Afonso Mendes (Faculdade de Economia, Universidade do Porto); Sandra T. Silva (Faculdade de Economia, Universidade do Porto, CEF.UP); Ester G. Silva (Faculdade de Letras, Universidade do Porto, Instituto de Sociologia, CEF.UP) |
| Abstract: | After a period of convergence where many perceived the country as a success case, Portugal’s economic performance proved to be disappointing in the last decade. In this study we focus on the relationship between technology and economic catching-up in order to answer to two major questions: (i) Has the technological structure of the Portuguese economy been an obstacle for catching up? (ii) What was the role played by the inefficient use of the available resources? Using Data Envelopment Analysis (DEA), we show that over the last few decades the efficiency level of Portugal relative to a sample of 19 OECD countries fell sharply, which resulted in a divergent pattern of the Portuguese economy relative to the technological frontier. |
| Keywords: | Economic growth; Catching-up, Technology, Structural Change, Innovation |
| JEL: | O3 O43 L16 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:545&r=eec |
| By: | Domnisoru, Ciprian |
| Abstract: | The largest decrease in income inequality among EU member states in the recent recession was registered in Romania, a 4.5 point drop in the Gini coefficient between 2007 and 2010. The country experienced a severe economic downturn and some of the toughest austerity measures among EU member states. |
| Keywords: | income distribution, wage differential, social insurance, social protection, economic recession, case study, Romania, EU, répartition du revenu, disparité des salaires, assurance sociale, protection sociale, récession économique, étude de cas, Roumanie, UE, distribución del ingreso, diferencia del salario, seguro social, protección social, recesión económica, estudio de casos, Rumania, UE |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ilo:ilowps:485860&r=eec |