nep-eec New Economics Papers
on European Economics
Issue of 2014‒12‒24
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Migration as an Adjustment Mechanism in the Crisis? A Comparison of Europe and the United States By Julia Jauer; Thomas Liebig; John P. Martin; Patrick Puhani
  2. On the origin of European imbalances in the context of European integration By Carlos A. Carrasco; Patricia Peinado
  3. The "imbalanced balance" and its unravelling: current accounts and bilateral financial flows in the euro area By Alexandr Hobza; Stefan Zeugner
  4. Price Level Changes and the Redistribution of Nominal Wealth Across the Euro Area By Adam, Klaus; Zhu, Junyi
  5. An empirical examination of stock market integration in EMU By Matei, Florin
  6. Investment as the key to recovery in the euro area? By Gros, Daniel
  7. Measuring the Effectiveness of Cost and Price Competitiveness in External Rebalancing of Euro Area Countries: What Do Alternative HCIs Tell Us? By Styliani Christodoulopoulou; Olegs Tkacevs
  8. Fiscal Theory of Price Level By Daly, Hounaida; Smida, Mounir
  9. Economic crisis in the European periphery: An Assessment of EMU Membership and home Policy Effects Based on the Greek Experience By Bitros, George C.; Batavia, Bala; Nandakumar, Parameswar
  10. When does it pay to tax? Evidence from state-dependent fiscal multipliers in the euro area By George Hondroyiannis; Dimitrios Papaoikonomou
  11. Does money matter in the euro area? Evidence from a new Divisia index By Zsolt Darvas
  12. European Business Cycle Synchronization: a Complex Network Perspective By Theophilos Papadimitriou; Periklis Gogas; Georgios-Antonios Sarantitis
  13. In search of the transmission mechanism of fiscal policy in the Euro area By Fève, Patrick; Sahuc, Jean-Guillaume
  14. Assessing The Effects of Public Expenditure Shocks on the Labor Market in the Euro-Area. By Thierry Betti
  15. Carry funding and safe haven currencies: A threshold regression approach By Hossfeld, Oliver; MacDonald, Ronald
  16. The European Financial System in Limelight By Adnan, Noureen; Shahzad, Syed Jawad Hussain
  17. Financialisation and the financial and economic crises: The case of Germany By Detzer, Daniel; Hein, Eckhard
  18. New Tax and Expenditure Elasticity Estimates for EU Budget Surveillance By Robert W.R. Price; Thai-Thanh Dang; Yvan Guillemette
  19. Will Europe’s industry survive the crisis? Competitiveness, employment and the need for an industrial policy By Valeria Cirillo; Dario Guarascio; Mario Pianta

  1. By: Julia Jauer (OECD, Paris); Thomas Liebig (OECD, Paris); John P. Martin (OECD, Paris); Patrick Puhani (Leibniz University of Hannover; CReAM/University College London; IZA/Bonn; SEW/University of St. Gallen)
    Abstract: The question of whether migration can be an equilibrating force in the labour market is an important criterion for an optimal currency area. It is of particular interest currently in the context of high and rising levels of labour market disparities, in particular within the Eurozone where there is no exchange-rate mechanism available to play this role. We shed some new light on this question by comparing pre- and post-crisis migration movements at the regional level in both Europe and the United States, and their association with asymmetric labour market shocks. We find that recent migration flows have reacted quite significantly to the EU enlargements in 2004 and 2007 and to changes in labour market conditions, particularly in Europe. Indeed, in contrast to the pre-crisis situation and the findings of previous empirical studies, there is tentative evidence that the migration response to the crisis has been considerable in Europe, in contrast to the United States where the crisis and subsequent sluggish recovery were not accompanied by greater interregional labour mobility in reaction to labour market shocks. Our estimates suggest that, if all measured population changes in Europe were due to migration for employment purposes – i.e. an upper-bound estimate – up to about a quarter of the asymmetric labour market shock would be absorbed by migration within a year. However, in the Eurozone the reaction mainly stems from migration of third-country nationals. Even within the group of Eurozone nationals, a significant part of the free mobility stems from immigrants from third countries who have taken on the nationality of their Eurozone host country.
    Keywords: Free mobility, migration, economic crisis, labour market adjustment, Eurozone, Europe, United States
    JEL: F15 F16 F22 J61
    Date: 2014–10
  2. By: Carlos A. Carrasco; Patricia Peinado (University of the Basque Country (UPV/EHU))
    Abstract: We study the origin of European imbalances in the context of European integration. As a whole, the European Union and Eurozone have had nearly balanced external accounts. However, member countries have presented divergent positions. We analyse the factors underlying the presence of European external imbalances. Our results reveal the existence of a structural component of the current account. This compononent could be related to the economic structure and the non-price competitive advantages of each country.
    Keywords: current account, Eurpoean imbalances, European integration, competitiveness, catching-up
    JEL: E44 E65 F15 F32 H63
    Date: 2014–10–01
  3. By: Alexandr Hobza; Stefan Zeugner
    Abstract: Based on a new database of bilateral financial flows among euro area countries and their major world partners, this paper explores the role of financial links in the accumulation and then adjustment of current account imbalances in the euro area. The data show that the geography of financial flows can differ quite markedly from trade flow patterns and suggest that the nexus between surpluses in the 'core' with deficits in the periphery went along financial rather than trade interlinkages. In particular, the data document the dominant role of 'core' countries in financing the euro area periphery's current account deficits before the financial crisis. In addition to direct financing, France and the UK acted as important intermediaries of financial flows from elsewhere, particularly outside of the euro area. Most of this financing took the form of debt instruments and increased the vulnerability of the recipient countries. In 2009/10, gross flows in the euro area contracted, while the net flows remained broadly unchanged. France became the periphery's main financier in 2009 and substituted the withdrawn flows from surplus countries, mainly Germany. Only when France reduced its exposure in a hasty asset withdrawal during 2011, the periphery had to rely on large ECB-mediated liabilities in order to refinance its liabilities.
    JEL: F32 F34 F36 F41
    Date: 2014–07
  4. 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 in the EA as a whole. 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 in the EA 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: Euro Area; household survey; inflation; redistribution
    JEL: D14 D31 E31
    Date: 2014–05
  5. By: Matei, Florin
    Abstract: This thesis provides clear empirical evidence that the establishment of the EMU has influenced the stock market integration process within the Euro-area. This is mostly evident across the large four EMU-stock markets: France, Germany, Italy and Netherlands, which appear to be near to perfect integrated after 2001. A considerable influence, but at a lower extent is also found for medium sized markets of Belgium, Finland, Portugal and Spain. Smaller markets such as Greece and Ireland appear to be modestly influenced by the establishment of the EMU, while Austria is the least integrated market within the single currency area. These findings indicate that the stock market integration process remains relatively incomplete for the medium-sized and smaller markets. Thus, the EMU-area cannot yet be considered as a single financial block implying that potential benefits of international portfolio diversification still exist across the EMU countries.
    Keywords: EMU, stock markets, cointegration, DCC
    JEL: C50 F15 G15 O52
    Date: 2014–12
  6. By: Gros, Daniel
    Abstract: Investment has declined in the euro area since the start of the economic and financial crisis, but this does not mean that there is necessarily an ‘investment gap’, explains Daniel Gros in this CEPS Policy Brief. Investment was probably above a sustainable level due to the credit boom before 2007. Moreover, the fall in the euro area’s potential growth - due to a combination of a sharp demographic slowdown and lower total factor productivity (TFP) growth - should also lead to a permanently lower investment rate. Increasing the investment rate might thus be the wrong target for economic policy. The author advises that the aim of economic policy should be to increase consumption, rather than investment overall. Increasing infrastructure investment might be justified in some member countries, but it is not a ‘free lunch’ when efficiency levels are low, which seems to be the case in some of the financially stressed euro area countries.
    Date: 2014–11
  7. By: Styliani Christodoulopoulou (European Central Bank); Olegs Tkacevs (Bank of Latvia)
    Abstract: This study is devoted to examing marginal effects of traditional determinants of exports and imports with a focus on the role of price competitiveness in restoring external balances. It is a first attempt to compare marginal effects of various harmonised competitiveness indicators (HCIs) on both exports and imports of both goods and services across individual euro area countries. We find evidence that the HCIs based on broader cost and price measures have a larger marginal effect (with some exceptions) on exports of goods. Exports of services are sensitive to the HCIs in large euro area countries and Slovakia, where exports of services are also found to be more sensitive to competitiveness indicators based on broader price measures. Imports of goods and imports of services are quite insensitive to the changes in relative prices. Finally, in some cases the measures of the goodness of fit indicate that a large unexplained residual part is present, implying that other non-price related factors might play an important role in driving foreign trade.
    Keywords: real exchange rate, exports, imports, price competitiveness, euro area
    JEL: F14 F31 F41
    Date: 2014–12–01
  8. By: Daly, Hounaida; Smida, Mounir
    Abstract: Lack of coordination between the monetary and fiscal authorities will result in inferior overall economic performance. This paper studies the interactions between monetary and fiscal policies and its effect on the economic performance by using al cointegration tests in the case of Euro Area. This paper examines the causal relationship between output gap, public debt, budget deficit, interest rate and inflation rate, and the impact of monetary policy on public debt management, in Euro Area from 1999Q1 to 2013Q4. The evidence supports the idea that the monetary policy is more stabilizing in its influence on the economic activity than the budget policy. The particular stance of monetary policy affects the capacity of the government to finance the budget deficit by changing the cost of debt service and limiting or expanding the available sources of financing. The result does not let hear strong political coordination in Euro Area, a weak policy stance in one policy area burdens the other area and is unsustainable in the long term.
    Keywords: Monetary policy, Fiscal policy, Euro Area, Policy mix, Public debt, budget deficit.
    JEL: E5 E58 E6 E62 H3
    Date: 2014–11–18
  9. By: Bitros, George C.; Batavia, Bala; Nandakumar, Parameswar
    Abstract: Our objective in this paper is threefold. First, to identify the major common shocks that hit these countries upon entry into the EMU. Second, taking Greece as our case study, to construct a simple macroeconomic model of the policies Greek governments pursued in the presence of these shocks, and to employ its solution so as to highlight the outcomes that were expected to result. From this endeavor, we find that the policies which were put in place led unavoidably to a severe economic crisis and eventual bankruptcy. Finally, in view of these findings and what happened in 2009,we raise and attempt to answer questions like, for example: How can we explain the policies that were adopted in the advent of monetary union shocks? Could they have been anticipated? And if so, why did they escape the attention of the designers of the Maastricht Treaty? The answer to which we are led by the analysis is that the shocks in all these countries were perceived by their governments as opportunities to hold on to their entrenched positions. That this happened, we conclude, reflects a failure in the mechanisms of economic convergence that were embedded in the Maastricht Treaty as well as in the effectiveness of European Union (EU) institutions that were empowered with their enforcement.
    Keywords: Economic crises, economic integration, balance-of payments deficits, budget deficits and indebtedness, structural imbalances
    JEL: E3 F15 F16 F32 F36 H62 H63 L16
    Date: 2014–12–15
  10. By: George Hondroyiannis (Bank of Greece); Dimitrios Papaoikonomou (Bank of Greece)
    Abstract: The impact of fiscal policy on economic growth is investigated within a panel of euro area member states over the period 2004-2011. We mainly consider fiscal impulses identified by (a) changes in the structural primary balance, complemented by evidence from (b) the IMF narrative shocks developed by Devries et al (2011) and (c) a VAR-based measure of unanticipated policy announcements. Aggregate fiscal multipliers are estimated in the region of 0.5, although we find considerable variation depending on the fiscal mix, the degree of openness and the state of the economy. During episodes of recession, tax hikes become significantly more costly in terms of output than expenditure cuts. This appears to be related to increases in the share of hand-to-mouth consumers, proxied by the unemployment rate. Fiscal effects are generally more muted in open economies and during periods of positive growth. Country-specific features in Greece lead to significantly higher estimates, possibly in excess of unity in 2011, reflecting predominantly sizeable revenue effects.
    Keywords: Fiscal multipliers; state-dependence; euro area
    JEL: E62 H22 H50
    Date: 2014–10
  11. By: Zsolt Darvas
    Abstract: Standard simple-sum monetary aggregates, like M3, sum up monetary assets that are imperfect substitutes and provide different transaction and investment services. Divisia monetary aggregates, originated from Barnett (1980), are derived from economic aggregation and index number theory and aim to aggregate the money components by considering their transaction service. No Divisia monetary aggregates are published for the euro area, in contrast to the United Kingdom and United States. We derive and make available a dataset on euro-area Divisia money aggregates for January 2001 – September 2014 using monthly data. We plan to update the dataset in the future. Using structural vector-autoregressions (SVAR), we find that Divisia aggregates have a significant impact on output about 1.5 years after a shock and tend also to have an impact on prices and interest rates. The latter result suggests that the European Central Bank reacted to developments in monetary aggregates. Divisia aggregates reacted negatively to unexpected increases in the interest rates. None of these results are significant when we use simple-sum measures of money. Our findings for the euro area complement the evidence from US data that Divisia monetary aggregates are useful in assessing the impacts of monetary policy and that they work better in SVAR models than simple-sum measures of money.
    Keywords: Divisia index, financial crisis, monetary aggregation, monetary policy, structural VAR
    JEL: C32 C43 C82 E51 E58
    Date: 2014–11–15
  12. By: Theophilos Papadimitriou (Department of Economics, Democritus University of Thrace, Greece); Periklis Gogas (Department of Economics, Democritus University of Thrace, Greece; The Rimini Centre for Economic Analysis, Italy); Georgios-Antonios Sarantitis (Department of Economics, Democritus University of Thrace, Greece)
    Abstract: In this paper we attempt to provide empirical evidence on the issue of business cycle synchronization within Europe. The issue of business cycle convergence is important and very topical as it is a prerequisite for the implementation of an effective and successful monetary policy within a monetary union. We employ for the first time in this context (to the best of our knowledge) Complex Network metrics and we identify the corresponding Minimum Dominating Set of countries in terms of their GDP growth. An obvious focal point for our comparison of business cycle convergence is the adoption of a common currency (the euro) in 1999. By doing so, we reveal the evolution of GDP growth co-movement patterns of European economies before and after the introduction of the euro. The main findings from our empirical analysis provide evidence in favor of macroeconomic convergence after the introduction of the common currency.
    Date: 2014–11
  13. By: Fève, Patrick; Sahuc, Jean-Guillaume
    Abstract: Hand-to-mouth consumers and Edgeworth complementarity between private consumption and public expenditures are two competing mechanisms that were put forward by the literature to investigate the effects of government spending. Using Bayesian prior and posterior analysis and several econometric experiments, we find that a model with Edgeworth complementarity is a better representation for the transmission mechanism of fiscal policy in the euro area. We also show that a small change in the degree of Edgeworth complementarity has a large impact on the estimated share of hand-to-mouth consumers. These findings are robust to a number of perturbations.
    Keywords: Fiscal multipliers, DSGE Models, Hand-to-Mouth, Edgeworth Complementarity, Euro Area, Bayesian Econometrics.
    JEL: C32 E32 E62
    Date: 2014–11–07
  14. By: Thierry Betti
    Abstract: The core of the paper is a medium-scale DSGE model calibrated for the Euro-Area with a detailed fiscal sector including both public consumption and public investment. The financing of the spending can be tax-based or debt-based. In the case of a debt-funded expenditure expansion, I find strong negative multipliers on the unemployment rate for the public consumption shock, around -0.6% at the peak, and more ambiguous results for a public investment shock. In both cases, the effects on the unemployment rate are short-lasting. With a sensitivity analysis exercice, it is shown than the parameters included in households’ preferences do not drammatically change the results in the case of the public consumption shock but the results are very sensitive to these parameters for the public investment shock. Finally, with the introduction of some distortive taxes and assuming that they fund the half of the deficit engendered by public spending expansion, I show that the multipliers little vary little even if the cumulated unemployment fiscal multiplier can become significantly positive with a raise of public investment.
    Keywords: Fiscal multipliers, labor market, DSGE models, preferences, unemployment.
    JEL: E32
    Date: 2014
  15. By: Hossfeld, Oliver; MacDonald, Ronald
    Abstract: In this paper, we analyze which currencies can be regarded as safe haven currencies. Our empirical approach allows us to distinguish between a low- and high stress regime, and to control for the impact of carry trade reversals and other fundamental determinants. We therefore address the question of whether a supposed safe haven currency only appreciates in times of crises because carry trades are unwound, in which the corresponding currency has served as funding currency, or whether it possesses 'true' safe haven qualities; i.e. it provides a hedge against global stock market losses in stressful times even after controlling for the impact of carry trade reversals. The latter issue has largely been brushed aside in the extant literature but has important policy implications for the justification of central bank FX interventions in times of crises. According to the estimation results, two currencies, the Swiss franc and (to a lesser extent) the US dollar qualify as safe haven currencies, and the euro serves as a hedge currency. Results for the yen support its role as a carry funding vehicle, but not necessarily that of a safe haven currency. While the focus is on effective exchange rates, the paper also contains a separate analysis of bilateral euro-based exchange rates, given the euro's prominent role during the euro area sovereign debt crisis.
    Keywords: Nonlinear Regression,Threshold Model,Safe Haven,Carry Trade
    JEL: C32 F31
    Date: 2014
  16. By: Adnan, Noureen; Shahzad, Syed Jawad Hussain
    Abstract: Efficient use of resources depends on better allocation through financial systems. Development of financial systems can be measured through the performance of banks, financial markets and insurance companies. This paper identifies several key attributes to measure the level of financial development in Europe using data from 1990 to 2011. First, an index is constructed by employing the method of Principal Component Analysis to measure the strength of financial systems in European countries. Second, based on relative raking a comparison is made for better interpretation of results in European countries. The top five countries include Switzerland, United Kingdom, Netherlands, Spain and Germany. The results of this study can be helpful to assess the relative strength of European economies and frame future policies to promote efficiency of financial systems.
    Keywords: Europe, Financial systems, Principal component analysis.
    JEL: G15 G21 G23
    Date: 2014–11–24
  17. By: Detzer, Daniel; Hein, Eckhard
    Abstract: This study on Germany examines the long-run changes between the financial and the non-financial sectors of the economy, and in particular the effects of these changes on the macroeconomic developments that have led or contributed to the financial crisis starting in 2007 and the Great Recession in 2008/09. The first part provides some descriptive statistics on real GDP growth, on the growth contributions of the main demand aggregates, and the financial balances of the macroeconomic sectors since the early 1980s, and it classifies the German type of development as 'export-led mercantilist'. The second part examines the effects of an increasing dominance of finance since the early/mid 1990s on income distribution, investment in capital stock, consumption and the current account in more detail. The third part links the longrun developments with the financial and economic crisis and examines the causes of the quick recovery in Germany.
    Keywords: current account imbalances,distribution of income,finance-dominated capitalism,financialisation,financial and economic crisis,Germany,Kaleckian distribution theory,trade balance
    JEL: D31 D33 D43 E25 E61 E63 E64 E65 F40 F43
    Date: 2014
  18. By: Robert W.R. Price; Thai-Thanh Dang; Yvan Guillemette
    Abstract: This paper estimates the elasticities of government revenue and expenditure items with respect to the output gap for European Union (EU) countries. These elasticities are used by the European Commission, as part of the EU fiscal surveillance process, to calculate the semi-elasticity of the budget balance as a percentage of GDP with respect to the output gap. The study updates the earlier 2005 study of OECD economies using the most recent datasets and tax codes, the coverage being confined in this paper to the 28 EU member states, seven of which are not OECD members. The same basic two-step methodology is retained: revenue and expenditure elasticities with respect to the output gap being defined as the product of, first, the elasticities of individual revenue and expenditure items with respect to their bases and, second, the elasticities of these bases with respect to the output gap. A number of refinements and methodological improvements are made relative to the 2005 study. The revisions to individual elasticities relative to the 2005 vintage are significant in a number of cases but do not follow a clear pattern across countries, except for the elasticities of corporate income tax revenue which are revised up in most cases.<P>Nouvelles estimations de l'élasticité des taxes et dépenses pour la surveillance budgétaire de l'UE<BR>Cette étude estime les élasticités des composantes des revenus et des dépenses gouvernementales par rapport à l’écart de production pour les pays de l’Union Européenne (UE). Ces élasticités sont utilisées par la Commission Européenne, dans son processus de surveillance fiscale, pour calculer la semi-élasticité du solde budgétaire en pourcentage du PIB par rapport à l’écart de production. L’étude met à jour la précédente étude de 2005 couvrant les économies de l’OCDE en utilisant les données et les codes des impôts les plus récents, la couverture de l’étude étant confinée aux 28 pays membres de l’UE, dont sept ne sont pas membres de l’OCDE. La même méthodologie en deux temps est retenue : les élasticités des revenus et dépenses par rapport à l’écart de production étant définies comme le produit de, en premier, l’élasticité des composantes individuelles de dépense et de revenu par rapport à leurs bases et, en deuxième, l’élasticité de ces bases par rapport à l’écart de production. Un ensemble d’améliorations méthodologique sont apportés par rapport à l’étude de 2005. Les révisions des élasticités individuelles par rapport à celles de 2005 sont significatives dans nombre de cas, mais ne suivent pas de tendance particulière, exception faite des élasticités de l’impôt sur les bénéfices qui sont révisées à la hausse dans la plupart des cas.
    Keywords: automatic stabilisers, budget elasticity, fiscal surveillance, cyclically adjusted, ajustement cyclique, stabilisateurs automatiques, élasticité budgétaire, surveillance fiscale
    JEL: E62 H30 H60
    Date: 2014–12–11
  19. By: Valeria Cirillo (Department of Statistical Sciences, Sapienza University of Rome); Dario Guarascio (Sapienza University of Rome); Mario Pianta (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo")
    Abstract: This paper examines the state of Europe’s industry and competitiveness in the current crisis and provides the rationale for a new industrial policy at the European level. Section 1 documents the decline of EU industry and the losses in outpud resulting from the crisis started in 2008. Section 2 investigates the issue of competitiveness, an issue at the top of the EU Commission policy agenda. Competitiveness is seen at the heart of economic growth and in the current crisis much of the policy advice from Brussels has focused on ways to restore the competitiveness of weaker countries. Mainstream notions of wage-driven price competitiveness as a determinant of export success of EU countries are not convincing. Rather it is technology, product quality, immaterial capabilities and the characteristics of goods and sectors that are crucial factors explaining the dynamics of productivity and competitiveness in Europe. Section 3 is devoted to the employment dimension. During the recession the job creating potential of product innovation has been lost leaving space to process innovations and job losses that have hit hardest craft and manual workers. A process of skill, job and wage polarisation has characterised the European employment structure leading to increasing inequality and poverty. Not all European countries have been affected in the same way, leading to a cntre-periphery polarisation in terms of unemployment and productivity. Section 4 concludes with a specific proposal for a new European industrial policy that could orient structural change towards enironmental sustainability, ICT applications and health and welfare systems. In these fields the employment impact is likely to be significant also in terms of skills and wages of the workforce.
    Keywords: Competitiveness, Employment, Industrial Policy, Europe
    JEL: J3 L60 O25
    Date: 2014

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