nep-eec New Economics Papers
on European Economics
Issue of 2015‒02‒16
twenty papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. EU policies addressing current account imbalances in the EMU: An assessment By Dodig, Nina; Herr, Hansjörg
  2. Fiscal Devaluation in a Monetary Union By Engler, Philipp; Tervala, Juha; Ganelli, Giovanni; Voigts, Simon
  3. An Unemployment Insurance Scheme for the Euro Area By Dolls, Mathias; Fuest, Clemens; Neumann, Dirk; Peichl, Andreas
  4. State-of-play in implementing macroeconomic adjustment programmes in the euro area By Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro
  5. Financial Sector and Output Dynamics in the Euro Area: Non-linearities Reconsidered By Schleer, Frauke; Semmler, Willi
  6. Sovereign Credit Risk Co-movements in the Eurozone: Simple Interdependence or Contagion? By Tonzer, Lena; Buchholz, Manuel
  7. Winners and Losers from the euro By Pedro Gomis-Porqueras; Laura Puzzello
  8. Cross-border liquidity, relationships and monetary policy: Evidence from the Euro area interbank crisis By Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José-Luis
  9. From progress to nightmare - European regional unemployment over time By Robert Beyer; Michael Stemmer
  10. The Early Consequences of the Crisis on Fiscal Convergence in the EU By Roberto Censolo; Caterina Colombo
  11. Labour mobility and labour market adjustment in the EU By Alfonso Arpaia; Aron Kiss; Balazs Palvolgyi; Alessandro Turrini
  12. Financial stress transmission in EMU sovereign bond market volatility: A connectedness analysis By Fernando Fernández-Rodríguez; Marta Gómez-Puig; Simón Sosvilla-Rivero
  13. Greece: How to take a turn for the better By Schrader, Klaus; Benček, David; Laaser, Claus-Friedrich
  14. Searching for the source of macroeconomic integration across advanced economies By Uluc Aysun
  15. Law of One Price in the euro area: an empirical investigation using Nielsen disaggregated price data By Dmitry Kulikov
  16. Lenders on the storm of wholesale funding shocks: Saved by the central bank? By Leo de Haan; Jan Willem van den End; Philip Vermeulen
  17. The EU, a Growth Engine? The Impact of European Integration on Economic Growth in Central Eastern Europe By Katja Mann
  18. Smells Like Fiscal Policy? Assessing the Potential Effectiveness of the ECB s OMT Program By Wollmershäuser, Timo; Hristov, Nikolay; Hülsewig, Oliver; Siemsen, Thomas
  19. The German Public and its Trust in the ECB: The Role of Knowledge and Information Search By Neuenkirch, Edith; Hayo, Bernd
  20. The Greek Economy: Which Way Forward? By Mark Weisbrot; David Rosnick; Stephan Lefebvre

  1. By: Dodig, Nina; Herr, Hansjörg
    Abstract: To handle the sovereign debt crisis in general and macroeconomic imbalances in particular the leading EU institutions (the Troika) adopted two broad approaches: The short-term approach is based on enhancing the Stability and Growth Pact and to imposing fiscal austerity on crisis countries. The medium- to long-term strategy consists of internal devaluation via reducing wage costs. Both approaches were combined with structural adjustment programs in the spirit of the Washington Consensus. The Troika's policy implies an asymmetric adjustment process burdening only crisis countries. This led to the shrinking of demand and output in crisis countries comparable to the Great Depression and brought the European Monetary Union to the edge of deflation. Such polices increase the risk of Japan-style deflation with more than one lost decade.
    Keywords: current account imbalances,Euro area economic policies,internal devaluation,austerity
    JEL: E60 E62 F41
    Date: 2015
  2. By: Engler, Philipp; Tervala, Juha; Ganelli, Giovanni; Voigts, Simon
    Abstract: Between 1999 and the onset of the economic crisis in 2008 real exchange rates in Greece, Ireland, Italy, Portugal and Spain appreciated relative to the rest of the euro area. This divergence in competitiveness was reflected in the emergence of current account imbalances. Given that exchange rate devaluations are no longer available in a monetary union, one potential way to address such imbalances is through a fiscal devaluation. We use a DSGE model calibrated to the euro area to investigate the impact of a fiscal devaluation, modeled as a revenue-neutral shift from employers social contributions to the Value Added Tax. We find that a fiscal devaluation carried out in Southern European countries has a strong positive effect on output, but a mild effect on the trade balance of these countries. In addition, the negative effect on Central-Northern countries output is weak.
    JEL: E32 E62 F32
    Date: 2014
  3. By: Dolls, Mathias; Fuest, Clemens; Neumann, Dirk; Peichl, Andreas
    Abstract: The Great Recession and the resulting European debt crisis revived a debate about deeper fiscal integration in the Eurozone. We discuss different alternatives how an unemployment insurance system for the euro area could be designed and run counterfactual simulations based on micro data to analyze the effectiveness of a basic scheme and a benefit extension program to act as an insurance device in the presence of asymmetric macroeconomic shocks. We find that a basic insurance scheme could be implemented with a relatively small annual budget of roughly 61 billion euros over the period 2008-2013. Net benefits would have stabilized incomes in particular in Cyprus, Estonia, Greece, Ireland, Portugal and Spain whereas Austria, Germany and the Netherlands would have been the largest net contributors.
    JEL: F55 H23 J65
    Date: 2014
  4. By: Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro
    Abstract: Two of the four macroeconomic adjustment programmes, Portugal and Ireland s, can be considered a success in the sense that the initial expectations in terms of adjustment, both fiscal and external, were broadly fulfilled. A rebound based on exports has taken hold in these two countries, but a full recovery will take years. In Greece the initial plans were insufficient. While the strong impact of the fiscal adjustment on demand could have been partially anticipated at the time, the resistance to structural reforms was more surprising and remains difficult to cure. The fiscal adjustment is now almost completed, but the external adjustment has not proceeded well. Exports are stagnating despite impressive falls in wage costs. In Cyprus, the outcome has so far been less severe than initially feared. It is still too early to find robust evidence in any country that the programmes have increased the long-term growth potential. Survey-based evidence suggests that structural reforms have not yet taken hold. The EU-led macroeconomic adjustment programmes outside the euro area (e.g. Latvia) seem to have been much stricter, but the adjustment was quicker and followed by a stronger rebound.
    JEL: F32 E62 E22
    Date: 2014
  5. By: Schleer, Frauke; Semmler, Willi
    Abstract: We analyze the feedback mechanisms between economic downturns and financial stress for several euro area countries. Our study employs newly constructed financial condition indices that incorporate banking variables extensively. We apply a non-linear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the link between the financial sector and economic activity. The VSTAR model allows for non-linear dynamics and regime changes between low and high stress regimes. It can also replicate the regime-specific amplification effects shown by our theoretical model. The amplification effects, however, change over time. Specifically after the Lehman collapse, we observe the presence of strong non-linearities and amplification mechanisms for some euro area countries. Thus, these strong amplification effects appear to be related to rare but large events, and to a low-frequency financial cycle. Prior to the financial crisis outbreak we find corridor stability even if the financial sector shock takes place in a high stress regime. More important seems to be the shock propagation over time in the economy. Only with the occurrence of the rare but large events we find strong endogenous feedback loops and a loss of stability as described by the high stress regime of our theoretical model. The economy leaves the corridor of stability and is prone to adverse feedback loops.
    JEL: E20 E44 G01
    Date: 2014
  6. By: Tonzer, Lena; Buchholz, Manuel
    Abstract: Since the onset of the eurozone sovereign debt crisis, credit risk spreads in Europe have diverged. Despite this divergence, credit risk comoves strongly within certain country groups such as the eurozone periphery. We seek to answer what the determinants of the observed pattern of credit risk co-movements are and whether and during which periods sovereign debt markets have been subject to contagion. We proceed in three steps. First, we apply dynamic conditional correlations from a multivariate GARCH model to sovereign CDS spreads of 17 countries over the period 2008 to 2012. Second, we separate periods of simple interdependence from contagion. Third, we analyze the determinants behind credit risk co-movements and the role of contagion using regression analysis. Our results reveal a high degree of co-movements in sovereign credit risk, especially for eurozone countries during the sovereign debt crisis. We find strong evidence for both fundamentals and nonfundamentals based contagion. Similarities in economic fundamentals, cross-country linkages in banking and common market sentiment play a significant role.
    JEL: F30 G01 G15
    Date: 2014
  7. By: Pedro Gomis-Porqueras; Laura Puzzello
    Abstract: This paper estimates the effect of having joined the monetary union on the income per capita of six early adopters of the euro using the synthetic control method. Our estimates suggest that while the income per capita of Belgium, France, Germany and Italy would have been higher without the euro, that of Ireland would have been considerably lower. The Netherlands is estimated would have been as well off without the euro. In addition, we use the insights from the literature on the economic determinants of the costs and benefits of monetary unions to explain these income effects. We find that early euro adopters with a business cycle more synchronized to that of the union, and more open to intra-union trade and migration lost less or gained more from the euro. A key role in the transmission of post-euro income losses across union members has been played by the integration of capital markets.
    Keywords: Monetary Union; Synthetic Control Method; Per Capita Income; euro
    JEL: C21 C23 E65 F33 N14
    Date: 2015–01–22
  8. By: Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José-Luis
    Abstract: We analyze the impact of financial crises and monetary policy on the supply of wholesale funding liquidity, and also on the compositional supply effects through cross-border and relationship lending. For empirical identification, we draw on the proprietary bank-to-bank European interbank dataset extracted from Target2 and also exploit the Lehman and sovereign crisis shocks as well as the main Eurosystem non-standard monetary policy measures. The robust results imply that the crisis shocks lead to worse access, volumes and spreads (in both the overnight and longer-term maturities). The quantitative impact on interbank access and volume is stronger than on spreads. Liquidity supply restrictions are exacerbated for cross- border lending after the Lehman failure; for banks headquartered in periphery countries, the impact is quantitatively stronger in the sovereign debt crisis. Moreover, the interbank market - unlike other credit markets - allows to exploit the price dispersion from different lenders on identical credit contracts, i.e. overnight uncollateralized loans in the same morning for the same borrower. This price dispersion increases massively with the crisis, and even more for riskier borrowers. Cross-border and previous relationship lenders charge higher prices for identical contracts in the crisis. Importantly, this price dispersion substantially decreases when the Eurosystem promises unlimited access to liquidity at a fixed price in October 2008 and announces the 3-year LTRO in December 2011, with economically stronger effects for borrowers in weaker countries.
    Keywords: interbank liquidity,financial crises,monetary policy,credit supply,credit rationing,information asymmetry,euro area,financial globalization
    JEL: E44 E58 G01 G21 G28
    Date: 2014
  9. By: Robert Beyer; Michael Stemmer
    Abstract: We analyze the distribution of regional unemployment in Europe over the last three decades using non-parametric kernel densities and stochastic kernels. In addition, we employ a multi-level factor model to separate European, country, and region-specific unemployment fluctuations. Three phases of distributional change of EU relative unemployment rates are detected: they polarized from 1986 to 1996, converged after the introduction of the Euro and have been polarizing again since the outbreak of the financial crisis, having reached the highest levels ever. We find that European fluctuations account for roughly two fifths of the total variance confirming the existence of a European unemployment cycle. Country fluctuations are equally important, which leaves one fifth to be explained by region-specific movements. German regions are found to respond negatively to the European factor and country movements cause diverse responses in particular in Italy and England. The convergence prior to 2007 can be attributed to country affects and the divergence thereafter both to country and region-specific factors. Finally, we also discuss within country heterogeneity.
    Keywords: unemployment; European regions; distribution dynamics; multi-level factor model
    JEL: R12 R23 C14
    Date: 2015–01
  10. By: Roberto Censolo; Caterina Colombo
    Abstract: This article investigates the early signs of the impact of the 2008 crisis on fiscal convergence within the EU area. Over the 2004-2012 period we compare the convergence pattern before and after the crisis by considering the key fiscal aggregates and the main economic and functional components of total government expenditure. We show that the effects of the 2008 financial crisis have been transmitted differently on the fiscal frame in the EU area, signalling an overall tendency to diverge of the Periphery EU countries from the Core. In particular, it emerges a greater persistence among the Periphery countries of the backlash of the crisis on government budgets, causing a further divergence in the debt positions between Core and Periphery, and disarranging effects on government spending in the Peripheral countries, with crowding out of the productive components of public expenditure.
    Keywords: European Union; fiscal convergence; government spending composition; financial crisis
    JEL: E61 F02 H11
    Date: 2015–02–05
  11. By: Alfonso Arpaia; Aron Kiss; Balazs Palvolgyi; Alessandro Turrini
    Abstract: This paper assesses the role of labour mobility in the EU as an adjustment mechanism. It presents stylised facts on mobility and migration at national and sub-national level, analyses the determinants of mobility flows by means of gravity equations, and studies the dynamic response of mobility to asymmetric demand shocks by means of vector auto regression (VAR) analysis in the vein of Blanchard and Katz (1992). It is found that EU membership increases mobility significantly. Membership in the euro area, while not raising the magnitude of mobility flows per se, is associated with a stronger reaction of labour mobility to unemployment differences across countries. The dynamics of labour mobility in response to asymmetric demand shocks is analysed on country-level data on a panel of EU countries. Results indicate that mobility absorbs about a quarter of the shock within 1 year and about 60 per cent after 10 years. The analysis also shows that the response of migration to shocks has been growing over time, becoming almost twice as important after EMU completion. A version of the VAR model allowing for the analysis of the response of wages indicates that the response of real wages to asymmetric demand shocks has also increased after EMU.
    JEL: C22 C53 E37
    Date: 2014–12
  12. By: Fernando Fernández-Rodríguez (Department of Quantitative Methods in Economics - Universidad de Las Palmas de Gran Canaria); Marta Gómez-Puig (Department of Economic Theory - Universitat de Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: This paper measures the connectedness in EMU sovereign market volatility between April 1999 and January 2014, in order to monitor stress transmission and to identify episodes of intensive spillovers from one country to the others. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yılmaz (2014). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each country and apply panel model techniques to investigate its determinants. Finally, to gain further insights, we examine the timevarying behaviour of net pair-wise directional connectedness at different stages of the recent sovereign debt crisis.
    Keywords: Sovereign debt crisis, Euro area, Market Linkages, Vector Autoregression, Variance Decomposition.
    JEL: C53 E44 F36 G15
    Date: 2015–02
  13. By: Schrader, Klaus; Benček, David; Laaser, Claus-Friedrich
    Abstract: [A new chapter of the Greek crisis?] Already at the turn of the year 2012/2013 the Eurogroup and the European Commission heralded the message that the worst crisis in Greece would be over. According to this message, the Greek government had delivered the promised steps of structural and fiscal reforms and had agreed with a tough timetable for further reforms (EU Commission 2013a: 56). But until attaining the break even point in the Greek tragedy it took one more year: In the course of the year 2014 there were evidence that Greece’s economic situation would turn for the better – highlighted by the first positive growth rate since the beginning of the crisis, a current account surplus and a primary surplus of the Greek state budget as well as progressing structural reforms that improve the conditions of doing business in Greece. The reform and austerity policy of the coalition government supervised by the troika of EU, IMF and ECB seemed to pay off. But the early elections on January 25, 2015, resulting in a landslide victory of the left wing Syriza party challenge the previous fiscal and economic policy of Greece and the policy targets set by the troika. The new political leaders argued during the election campaign that the Greek people have sacrificed enough without benefiting from any improvements by “troika policies”. A return of welfare policies, increased public spending, the correction of reforms and a hair cut would be a more promising policy mix in favor for a recovery of the Greek economy. Against the backdrop of these conflicting perceptions we try to find out how far Greece has already taken a turn for the better. We answer the questions what has been already achieved and what kind of deficits still persist. From our findings we derive what could be appropriate policy tools to overcome the Greek crisis.
    Date: 2015
  14. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: This paper estimates a two-country open economy DSGE model by using U.S. and Euro Area data. The baseline model, where the two regions are linked only through the trade of goods and risk-free bonds, fails to replicate the high cross-regional macro-economic correlation in the data. I search for the determinants of this correlation by recon?guring the model?s shock processes in two ways. First, I include shocks that symmetrically a¤ect each region. Second I allow for the transmission of shocks between the two regions. While both of these changes considerably improve the model?s per-formance along the international dimension, common shocks appear to be the main drivers of cross-regional correlation. Under both speci?cations, comovements of variables are mostly determined by demand and ?nancial shocks. Productivity, cost-push and exchange rate shocks, by contrast, play a limited role.
    Keywords: Macroeconomic integration, DSGE, Bayesian estimation, U.S., Euro Area
    JEL: E32 F41 F42 F44
    Date: 2015–01
  15. By: Dmitry Kulikov
    Abstract: This paper examines the Law of One Price using Nielsen disaggregated price data covering 13 euro area countries and 45 different product categories over the time period 2008 to 2012. The empirical methodology is based on a non-structural log-linear regression with spatial effects in both the geographical and product-variety dimensions, estimated by the Bayesian methods. The models link the relative prices of homogenous products in the sample of euro area countries to four distinct groups of factors: product-specific consumption preferences, country-specific macroeconomic and regional characteristics, volatility of prices and volumes, and spatial effects. The estimated reduced-form Law of One Price models uncover a strong interdependence of relative prices both on the geographical scale and across “similar” product varieties, going beyond the included set of explanatory variables and warranting further empirical investigation.
    Keywords: disaggregated prices, spatial dependence, Bayesian estimation, Law of One Price
    JEL: C21 D40 E31
    Date: 2015–01–20
  16. By: Leo de Haan; Jan Willem van den End; Philip Vermeulen
    Abstract: We provide empirical evidence on banks' responses to shocks in wholesale funding, using data of 181 euro area banks over the period August 2007 to June 2013. Banks' adjustments of loan volumes and lending rates in response to funding liquidity shocks are analysed in a panel VAR framework. The results show that shocks in the securities and interbank markets have significant effects on loan rates and credit supply, particularly of banks in stressed countries. Central bank liquidity has mitigated this effect. Lending to non-financial corporations is more sensitive to wholesale funding shocks than lending to households. Moreover, bank characteristics matter for monetary transmission: loan growth of large banks that are typically more dependent on wholesale funding and of banks with large exposure to government bonds shows relatively stronger responses to wholesale funding shocks.
    Keywords: banking/financial intermediation; financial crisis
    JEL: G21 G32
    Date: 2015–01
  17. By: Katja Mann
    Abstract: This paper investigates how the European integration process of central eastern European countries, which has been taking place since the 1990’s, affects their GDP growth. Based on an augmented Solow model, I estimate a convergence equation for a panel of ten countries over 16 years (1995-2010). In the regression, trade with the other European Union member states as a share of total trade serves as a measure of European integration. I find a small, but significant medium-run growth bonus from integration, which is robust to alternative specifications of the regression equation and of the variables of interest. The results are confirmed by a supplementary analysis at the industry level using a difference-in-difference type of estimation strategy. The paper thus provides an argument in favour of European integration.
    Keywords: European integration, central eastern Europe, economic growth, growth convergence
    JEL: C23 F43 O47 R11
    Date: 2015–01
  18. By: Wollmershäuser, Timo; Hristov, Nikolay; Hülsewig, Oliver; Siemsen, Thomas
    Abstract: This paper explores the potential effectiveness of the ECB s Outright Monetary Transaction (OMT) program in safeguarding an appropriate monetary policy transmission. Since the program aims at manipulating bank lending rates by conducting sovereign bond purchases on secondary markets, a stable relationship between bank lending rates and government bond rates is of prime importance. Using vector autoregressive models with time varying parameters (TVP VAR) we evaluate the stability of this relationship by focusing on the reaction of bank lending rates to movements in government bond rates over the period 2003 2013. Our results suggest that the potential success of OMTs in restoring the monetary transmission mechanism is limited as the link between bank lending rates and government bond rates has substantially weakened since the end of 2008.
    JEL: E42 E43 E58
    Date: 2014
  19. By: Neuenkirch, Edith; Hayo, Bernd
    Abstract: In this paper, we analyse the effects of objective and subjective knowledge about monetary policy, as well as the information search patterns, of German citizens on trust in the ECB. We rely on a unique representative public opinion survey of German households conducted in 2011. We find that subjective and factual knowledge, as well as the desire to be informed, about the ECB foster citizens trust. Specific knowledge about the ECB is more influential than general monetary policy knowledge. Objective knowledge is more important than subjective knowledge. However, an increasing intensity of media usage, especially newspaper reading, has a significantly negative influence on trust. We conclude that the only viable way for the ECB to generate more trust in itself is to spread monetary policy knowledge.
    JEL: D83 E52 E58
    Date: 2014
  20. By: Mark Weisbrot; David Rosnick; Stephan Lefebvre
    Abstract: In the past 6 years the Greek economy has gone through a massive adjustment at a steep price. The economy finally grew in 2014, by 0.6 percent, but the recovery is weak, slow and fragile. This paper argues that prolonged mass unemployment and reduced living standards, brought about by years of recession and budget cuts, are unnecessary, and that a robust recovery is feasible. It presents an alternative macroeconomic scenario with a moderate fiscal stimulus, which brings the economy much closer to full employment over the next five years, with a lower net debt than currently projected by the IMF. This alternative is just one of many possible scenarios, some of which might include debt cancellation, or more help from the European Central Bank in maintaining low interest rates, especially in light of its recently announced quantitative easing program. The current program, which forecasts a weak recovery with many downside risks, as well as continued mass unemployment in the years ahead, should be replaced with policies that offer a much stronger and faster recovery.
    Keywords: greece, greek elections, greek economy, syriza, employment, Europe
    JEL: F F01 F02 F53 F55 E E5 E6
    Date: 2015–01

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