nep-eec New Economics Papers
on European Economics
Issue of 2015‒01‒31
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The identification of fiscal and macroeconomic imbalances - unexploited synergies under the strengthened EU governance framework By Kamps, Christophe ; De Stefani, Roberta ; Leiner-Killinger, Nadine ; Rüffer, Rasmus ; Sondermann, David
  2. Contagion across Eurozone's sovereign spreads and the Core-Periphery divide By Elisabetta Croci Angelini ; Francesco Farina ; Enzo Valentini
  3. TARGET Balances and Macroeconomic Adjustment to Sudden Stops in the Euro Area By Gabriel Fagan ; Paul McNelis
  4. In Search of Growth in a Future with Diminished Expectations. The Case of Austria By Fritz Breuss
  5. Fragmentation in the euro overnight unsecured money market By Hoffmann, Peter ; Manganelli, Simone ; Garcia de Andoain, Carlos
  6. Public Debt and Borrowing. Are Governments Disciplined by Financial Markets? By Afflatet, Nicolas
  7. Collateral Imbalances in Intra-European Trade? By Arne J. Nagengast ; Robert Stehrer
  8. Multidimensional affluence in income and wealth in the eurozone: A cross country comparison using the HFCS By Kontbay-Busun, Sine ; Peichl, Andreas
  9. Exploring the Nexus Between Macro-Prudential Policies and Monetary Policy Measures: Evidence from an Estimated DSGE Model for the Euro Area By Giacomo Carboni ; Christoffer Kok ; Matthieu Darrak Paries
  10. "Is Greece Heading For a Recovery?" By Dimitri B. Papadimitriou ; Michalis Nikiforos ; Gennaro Zezza
  11. Monetary dialogue 2009–2014 : Looking backward, looking forward By Eijffinger, S.C.W.
  12. IMF Multi-Country Report: Housing Recoveries: Cluster Report on Denmark, Ireland, Kingdom of the Netherlands—the Netherlands, and Spain By International Monetary Fund. European Dept.
  13. Is There a Trade-off between Exchange Rate and Interest Rate Volatility? Evidence from an M-GARCH Model By António Portugal Duarte ; João Sousa Andrade ; Adelaide Duarte
  14. The Spanish productivity puzzle in the Great Recession. By Laura Hospido ; Eva Moreno-Galbis
  15. Debt Bias in Corporate Taxation and the Costs of Banking Crises in the EU By Sven Langedijk ; Gaëtan Nicodème ; Andrea Pagano ; Alessandro Rossi
  16. In the wake of the crisis: Pension reforms in eight European countries By Hinrichs, Karl

  1. By: Kamps, Christophe ; De Stefani, Roberta ; Leiner-Killinger, Nadine ; Rüffer, Rasmus ; Sondermann, David
    Abstract: In the light of the lessons learned from the euro area sovereign debt crisis, the EU fiscal and macroeconomic governance framework was overhauled in 2011. Against this background, this paper analyses whether the broadened surveillance of fiscal and macroeconomic indicators under the strengthened governance framework would have facilitated the identification of emerging imbalances, had it been in place before the crisis. The findings suggest that the strengthened governance framework would have given earlier signals about emerging excessive fiscal and macroeconomic imbalances. Euro area countries thus would have been obliged to take preventive and corrective action at an earlier stage, provided that the stricter rules had been effectively implemented. At the same time, the paper concludes that the increased reliance of the EU fiscal governance framework on unobservable magnitudes such as the structural budget balance, which are difficult to measure in real time, will continue to impede the timely identification of underlying fiscal imbalances. It is suggested that the new macroeconomic imbalance procedure could have given earlier indications about the emergence of excessive macroeconomic imbalances, which in turn posed risks for fiscal sustainability. Looking forward, these preliminary findings suggest possible synergies between the, until now largely unrelated, fiscal and macroeconomic governance frameworks. JEL Classification: H3, H6, E02, E61
    Keywords: Macroeconomic Imbalance Procedure, real-time potential output estimates, Stability and Growth Pact, structural balance
    Date: 2014–11
  2. By: Elisabetta Croci Angelini (University of Macerata ); Francesco Farina (University of Siena ); Enzo Valentini (University of Macerata )
    Abstract: This paper investigates the causes of disproportionate increases of sovereign yields with respect to the interest rate on the 10 years German Bund within the Eurozone. Empirical evidence drawn from the BIS dataset on banks' portfolios shows that rapid financial integration, following the launch of the monetary union, resulted in excess exposure of Core countries' banks in the Peripheral countries' financial assets. In order to endogenize the possibility of contagion effects, we conduct econometric estimates through a GVAR model, where each country's spread depends upon all Eurozone countries' spreads. Results show that after the burst of the financial crisis the Core countries' sovereign yields are essentially determined by the international risk aversion, whereas the spreads of Peripheral countries mainly depend on fundamentals, namely the public debt/GDP ratio and the REER values with respect to the Eurozone average. Macroeconomic failures in public finances and competitiveness seem to originate the exceptional increases in sovereign spreads of the Periphery, through a contagion effect which is limited to this group of Eurozone countries.
    Keywords: Monetary union,International risk aversion,Sovereign bond spreads,Contagion
    JEL: E42 F36 F42 G12 H63
    Date: 2014–12
  3. By: Gabriel Fagan (Institute for International Integration Studies, Trinity College Dublin ); Paul McNelis (Graduate School of Business Administration, Fordham University, New York )
    Abstract: This paper examines how membership of a monetary union affects macroeconomic adjustment of Euro Area countries to sudden stops.We focus on a key difference between a standard peg and a monetary union: the availability of external financing from the common centralbank via the TARGET system. For this purpose, we use a modified version of the Mendoza (2010) model which incorporates central bankfinancing, based on an empirical analysis of TARGET flows. Our results show that the availability of such financing greatly mitigates thecollapse in GDP, consumption and investment during sudden stops (relative to a regime in which such financing is not available). However,a welfare analysis shows that TARGET financing only results in modest welfare gains in the affected country, since it exacerbates thetendency towards over-borrowing, leading to an increased incidence of sudden stop episodes.Length: 68 pages
    Keywords: Sudden stops, Target Balances, European Monetary Union
    JEL: E52 E62 F41
    Date: 2014–12
  4. By: Fritz Breuss (WIFO )
    Abstract: The euro area has – in contrast to the USA – still not recovered from the "Great Recession" 2009 and the following euro crisis. Some fear that Europe could embark into a decade of "secular stagnation" like Japan in the recent past. The US success can be attributed to the application of the strategy of the "three arrows": a co-ordinated expansionary fiscal and monetary policy cum permanent structural reforms. In contrast, the euro area has its hands tied by a self-imposed restriction in fiscal policy (new fiscal rules). Thus, the euro area remains as a growth-stimulating strategy only an expansionary monetary policy by the ECB plus "structural reforms" at the member country level. Austria – after the expiring of the hitherto "EU growth bonus" – has also to look for new strategies to stimulate growth by its own. In simulations with a macro-growth model for Austria alternative growth scenarios are analysed: structural reforms to improve efficiency in product und labour markets, investment in knowledge and innovation (R&D), more globalisation, and traditional demand policies (monetary and fiscal). The most promising strategies are more globalisation and structural reforms plus R&D investments. Most of these strategies would stimulate growth without impairing fiscal sustainability.
    Date: 2015–01–07
  5. By: Hoffmann, Peter ; Manganelli, Simone ; Garcia de Andoain, Carlos
    Abstract: This paper examines the degree of fragmentation in the Euro overnight unsecured money market during the period June 2008 – August 2013 using interbank loans constructed from payments data. After controlling for cross-country differences in bank risk, we document several episodes of significant market fragmentation. While non-standard measures such as the provision of long-term liquidity were successful in reducing tensions, considerable signs of market fragmentation remained at the end of the sample period. JEL Classification: G1, E5
    Keywords: financial integration, monetary policy implementation, money markets, sovereign debt crisis
    Date: 2014–12
  6. By: Afflatet, Nicolas (Helmut Schmidt University, Hamburg )
    Abstract: With the announcement to intervene on the financial markets in case of need to keep the Eurozone intact, the ECB has attenuated the pressure of the markets on the endangered peripheral countries of the Eurozone. Critics argue that by eliminating the market’s disciplining interest mechanism, governments in the crisis countries will not carry out reforms and consolidate their budgets. Based on data for the European Union, 2SLS models are tested to investigate if governments react to rising interest rates or deteriorating borrowing conditions. The results are threefold: First, governments do react to rising bond yields on the secondary market by raising their primary surpluses. Second, they also do so when they feel the rising interest rates in their budgets. Third, governments react to changing borrowing conditions but contrary to the expected direction. In case of deteriorating conditions they lower primary surpluses. This is a result of the dominating influence of falling growth rates. These differentiated findings show that the market discipline mechanism only works to a certain extent. For most countries market forces did not suffice to reach sustainable public debt situations. To restore the no-bail-out-rule could be another disciplining mechanism to reach financial sustainability.
    Keywords: Market Discipline Hypothesis; Public Deficits; Public Debt; Sovereign Bond Yields; Eurozone; Public Debt Crisis
    JEL: H60
    Date: 2015–01–12
  7. By: Arne J. Nagengast ; Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw )
    Abstract: 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-EU-27 trade balances from 1995-2011 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.
    Keywords: trade balances, global value chains, vertical specialisation, value added, input-output tables
    JEL: F1 F2 C67 R15
    Date: 2014–07
  8. By: Kontbay-Busun, Sine ; Peichl, Andreas
    Abstract: This paper applies multidimensional affluence measures to a new dataset on income and wealth in 15 Eurozone countries. We start our analysis by examining the income and wealth distributions separately for each country, and extend it to a multidimensional setting by considering the joint distribution of income and wealth. The results indicate that the percentage of households affluent both in income and net wealth are less than 10% except in Cyprus, France, Italy and Slovenia. Investigating the joint distributions of income and net wealth yields that France demonstrates a more homogenous distribution of richness among affluent households compared to the other countries in the sample. Portugal demonstrates a higher concentration of richness in the hands of few compared to most of the other countries in the sample. The degree of countries' affluence rankings differs with respect to the measures of multidimensional affluence considered.
    Keywords: top incomes,multidimensional measurement,richness,wealth,inequality
    JEL: D31 D63 I31
    Date: 2014
  9. By: Giacomo Carboni ; Christoffer Kok (European Central Bank ); Matthieu Darrak Paries
    Abstract: The financial crisis highlighted the importance of systemic risks and of policies that can be employed to prevent and mitigate them. Several recent initiatives aim at establishing institutional frameworks for macro-prudential policy. As this process advances further, substantial uncertainties remain regarding the transmission channels of macro-prudential instruments as well as the interactions with other policy functions, and monetary policy in particular. This paper provides an overview and some illustrative model simulations using an estimated DSGE model for the euro area of the macroeconomic interdependence between macro-prudential instruments and monetary policy.
    Date: 2014
  10. By: Dimitri B. Papadimitriou ; Michalis Nikiforos ; Gennaro Zezza
    Abstract: With the anti-austerity Syriza party continuing to lead in polls ahead of Greece's election on January 25, what is the outlook for restoring growth and increasing employment following six years of deep recession? Despite some timid signs of recovery, notably in the tourism sector, recent short-term indicators still show a decline for 2014. Our analysis shows that the speed of a market-driven recovery would be insufficient to address the urgent problems of poverty and unemployment. And the protracted austerity required to service Greece's sovereign debt would merely ensure the continuation of a national crisis, with spillover effects to the rest of the eurozone--especially now, when the region is vulnerable to another recession and a prolonged period of Japanese-style price deflation. Using the Levy Institute's macroeconometric model for Greece, we evaluate the impact of policy alternatives aimed at stimulating the country's economy without endangering its current account, including capital transfers from the European Union, suspension of interest payments on public debt and use of these resources to boost demand and employment, and a New Deal plan using public funds to target investment in production growth and finance a direct job creation program.
    Date: 2014–12
  11. By: Eijffinger, S.C.W. (Tilburg University, School of Economics and Management )
    Abstract: When comparing the transparency of the ECB now with the transparency of the ECB about one decade ago, we notice that transparency still can be improved in a few ways. In particular the disclosure related to the ways decisions are reached and the disclosure on its policy (what is the envisioned path of policy?) could be improved. We call for action and in particular we suggest to release minutes and voting records, while also engaging in more explicit and concrete forward guidance. At the same time, we call for a reflection on the institutional setup of the ECB. This is less urgent than the reform with respect to transparency, but in the medium term a necessary exercise. We believe that also in the 8th term of the European Parliament, the Monetary Dialogue will have a role in spurring the debate and possibly influencing the ECB, as it has done in the past.
    Date: 2015
  12. By: International Monetary Fund. European Dept.
    Abstract: EXECUTIVE SUMMARY This report examines the experiences of four European countries that have had large house-price declines in recent years. In particular, it examines the experiences of Denmark, Ireland, the Netherlands, and Spain—four countries in which the house-price cycle has been especially large and that share a similar institutional environment (a common monetary policy and the EU’s institutional framework)—with a view to exploring how policies can best support economic recovery in the wake of a house-price bust. The paper draws on and synthesizes related Selected Issues papers that are being or have been drafted as part of the 2014 Article IV consultations with these countries. These countries’ experiences share similarities, but also important differences. Shocks to house prices, unemployment, and bank balance sheets were most severe in Ireland and Spain, reflecting in part a higher amplitude of residential construction. However, the boom- bust cycle has, together with other shocks, left all four countries facing significant output gaps, as well as elevated levels of private-sector debt that pose headwinds for growth. Promoting recovery following a house-price bust requires a multi-pronged strategy. Large house-price busts can leave countries facing wide output gaps, a highly indebted private sector, and weaker bank balance sheets. Addressing these problems simultaneously can be challenging, as efforts often involve trade-offs (e.g., faster deleveraging can widen output gaps). A careful and multi-pronged strategy is thus required to minimize trade-offs and accelerate sustainable recovery. Important progress has been made in this regard in all four countries. Priorities going forward vary across countries, reflecting their specific circumstances. Measures that have assisted or could assist adjustment in at least some of the four countries include the following: (i) supportive macro policies; (ii) tax and pension reforms to ease liquidity constraints; (iii) reforms to financial regulatory and supervisory policies, tax policies, and insolvency procedures to facilitate more efficient restructuring of distressed debt; (iv) increased rental market flexibility (e.g., easing rent controls) to facilitate the conversion of vacant units into rental properties, boost construction of rental units, and facilitate mortgage-to-rent conversions for distressed mortgages; and (v) measures such as dividend restrictions to bolster banks’ ability to support recovery and absorb losses. Reforms can also help reduce risks of a recurrence of the boom-bust cycle. The amplitude of future house-price cycles can be lessened by reforms to (i) reduce fiscal incentives for debt accumulation, (ii) make rental markets more flexible and efficient, and (iii) facilitate the deployment of macroprudential tools to avoid excessive debt accumulation during the upswing. To ensure that such measures do not dampen recovery but instead contribute to it, (i) macroprudential tightening could be gradual, calibrated to the pace of recovery, and offset by other supportive macro policies, as appropriate, and (ii) fiscal savings from reducing incentives for debt accumulation could, if needed, be used for high-multiplier stimulus and/or measures to boost potential output.
  13. By: António Portugal Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal ); João Sousa Andrade (Faculty of Economics, University of Coimbra and GEMF, Portugal ); Adelaide Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal )
    Abstract: One of the main implications of the basic target zone model developed by Krugman (1991) is that there is a trade-off between exchange rate volatility and interest rate differential volatility. Using an M-GARCH model we find evidence that such a trade-off existed, prior to the introduction of the euro, between the exchange rate and the interest rate differential among Portugal and Germany. This result reflects the increased credibility of the Portuguese monetary policy, due mainly to the modernisation of the banking and financial system and to the progress made in the disinflation process under an exchange rate target zone.
    Keywords: Credibility, disinflation, M-GARCH, volatility and target zones.
    JEL: C32 C51 F31 F41 G15
    Date: 2015–01
  14. By: Laura Hospido (Banco de España ); Eva Moreno-Galbis (GRANEM )
    Abstract: While Spain has traditionally underperformed its European peers in terms of labor productivity, the trend reverses after 2007. The evolution of aggregate productivity in Spain during the Great Recession is shaped largely, albeit not exclusively, by the adverse conditions in the labor market. Using a longitudinal sample of Spanish manufacturing and services companies between 1995 and 2012, we show that the recent increase in Spanish aggregate productivity is also responsive to the behavior of total factor productivity (TFP) and to composition effects. By combining the information at firm level on balance sheet items, collective agreements and imports-exports, we are able to establish that a collective agreement at the firm level and access to external markets are positively related to TFP performance during the whole period. In addition, our estimates indicate that firm TFP was negatively correlated to the proportion of temporary workers during the expansionary period, 1995-2007, whereas the sign of that correlation reversed during the crisis, 2008-2012. Finally, we relate this sign reversal to the changing composition of temporary workers in the labor market.
    Keywords: labor productivity, TFP, temporary workers, collective agreements, exporting firms
    JEL: J24 J21 J52
    Date: 2015–01
  15. By: Sven Langedijk (European Commission – Joint Research Center ); Gaëtan Nicodème (European Commission ); Andrea Pagano (European Commission – Joint Research Center ); Alessandro Rossi (European Commission – Joint Research Center )
    Abstract: During the period 2008-2012, EU governments incurred substantial costs bailing out banks. As corporate income taxation (CIT) in most countries still favors debt- over equityfinancing, reducing or eliminating this debt bias would complement regulatory reforms reducing costs of financial crises. To estimate this effect, we use a two-step approach. First, using panel regressions on a dataset of 32,833 bank-year observations we find sizable long-run effects of CIT on leverage in the EU. Second, we simulate the effect of tax reforms on bank losses using a Vasicek-based model with actual banks’ balance sheets to estimate costs of systemic crises for six large EU member states. Even if the tax elasticity of bank leverage is taken at the lower end of the ranges found in recent literature, eliminating the debt bias could lead to reductions of public finance losses in the range of 60 to 90%. The results hold even when considering much smaller effects for banks that are close to the regulatory minimum capital requirement of the Basel III framework. Even when asset portfolio risk is allowed to increase endogenously and considering conservative ranges of the parameter space, we conclude that tax reforms to remove the debt bias can result in very sizable reductions in risks and costs of financial crises.
    Keywords: Debt bias; Systemic crisis; Capital structure; Taxation; Allowance for Corporate Equity; Public finance; Bail out
    JEL: G01 G28 G32 H25
    Date: 2014–10
  16. By: Hinrichs, Karl
    Abstract: The 2008 financial market crisis, followed by the Great Recession and sovereign debt crises in several EU countries have triggered drastic reforms of old-age security systems. They were supposed to ensure the financial viability of public pension schemes in the short and long run and/or to realize notions of intergenerational fairness. Most urgently, however, was regaining room for fiscal manoeuvre and obtaining financial aid from supranational organizations (such as IMF or EU). These pension reforms differ from previous changes with regard to their scope and the political process. (1) They were large, thus causing a substantial and immediate impact on the living conditions of present and future retirees and, sometimes, changed the hitherto pursued policy direction. (2) The post-2008 reforms swiftly passed the legislative process and were implemented at short notice. Hence, they can be considered as "rapid policy changes". This paper analyses pension reforms in eight crisis-shaken EU countries: Greece, Hungary, Ireland, Italy, Latvia, Portugal, Romania, and Spain. It explores both reform contents and circumstances which led to the respective changes or facilitated them. As is shown, the challenges, which those countries were (or still are) confronted with, allowed or enforced alterations that would not have been feasible otherwise, or which would rather not have been initiated by the respective governments with regard to the political consequences. Moreover, cross-national comparison reveals similarities and differences and also sheds light on the social consequences that are already visible today.
    Abstract: Die Finanzmarktkrise von 2008 und in deren Gefolge die Große Rezession sowie Staatsschuldenkrisen in verschiedenen EU-Ländern haben einschneidende Reformen der Alterssicherungssysteme ausgelöst, welche die Finanzierung der Renten kurz- und langfristig sicherstellen und/ oder Vorstellungen von Generationengerechtigkeit realisieren sollen. Dringlicher war es jedoch, den fiskalischen Manövrierspielraum wieder zu erweitern und Kredithilfen von internationalen Geldgebern (IWF, EU) zu erlangen. Diese Rentenreformen unterschieden sich von früheren im Hinblick auf den Umfang und den politischen Prozess. (1) Sie waren groß, zeitigten demzufolge eine signifikante und unmittelbare Wirkung auf die Lebensbedingungen der jetzigen und künftigen Rentenbezieher, und manchmal wurde auch die bis dahin verfolgte Politikausrichtung verändert. (2) Die nach 2008 erfolgten Reformen passierten rasch den Gesetzgebungsprozess und wurden ohne lange Übergangsfristen umgesetzt. In diesem Papier werden die Rentenreformen in acht krisengeschüttelten EU-Ländern betrachtet, nämlich Griechenland, Irland, Italien, Lettland, Portugal, Rumänien, Spanien und Ungarn. Dabei geht es um die Inhalte dieser Reformen und die Umstände, die jeweils zu diesen Veränderungen geführt bzw. sie ermöglicht haben. Gezeigt wird, dass die Herausforderungen, mit denen diese Länder konfrontiert waren (oder sind), einschneidende Veränderungen erlaubten bzw. erzwangen, die ansonsten kaum durchsetzbar gewesen oder in Anbetracht der politischen Konsequenzen von den jeweiligen Regierungen so nicht in Angriff genommen worden wären. Weiterhin werden im Ländervergleich die Gemeinsamkeiten und Unterschiede beleuchtet sowie nach den bislang erkennbaren sozialen Konsequenzen gefragt.
    Date: 2015

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