nep-eec New Economics Papers
on European Economics
Issue of 2015‒04‒19
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Fiscal capacity for euro area- towards a bigger EU budget? By Tomasz Rosiak
  2. A Global Projection Model for Euro Area Large Economies By Zoltan Jakab; Pavel Lukyantsau; Shengzu Wang
  3. Bank resolution financing in the banking union By Christos Hadjiemmanuil
  4. Investment in the Euro Area: Why Has It Been Weak? By Bergljot Barkbu; Pelin Berkmen; Pavel Lukyantsau; Sergejs Saksonovs; Hanni Schoelermann
  5. Cross-Border Banking and Business Cycles in Asymmetric Currency Unions By Lena Dräger; Christian R. Proaño
  6. Central and Eastern Europe: New Member States (NMS) Policy Forum, 2014, Staff Report on Cluster Consultations—Common Policy Frameworks and Challenges By International Monetary Fund
  7. Measuring Connectedness of Euro Area Sovereign Risk By Rebekka Gätjen; Melanie Schienle; ;
  8. Sovereign credit risk, liquidity, and ECB intervention: Deus ex machina? By Pelizzon, Loriana; Subrahmanyam, Marti G.; Tomio, Davide; Uno, Jun
  9. Playing by the Rules: Reforming Fiscal Governance in Europe By Luc Eyraud; Tao Wu
  10. EuroMInd-D: A Density Estimate of Monthly Gross Domestic Product for the Euro Area By Tommaso Proietti; Martyna Marczak; Gianluigi Mazzi
  11. Spillovers in the Nordic Countries By Borislava Mircheva; Dirk Muir
  12. The New Normal: A Sector-level Perspective on Productivity Trends in Advanced Economies By Era Dabla-Norris; Si Guo; Vikram Haksar; Minsuk Kim; Kalpana Kochhar; Kevin Wiseman; Aleksandra Zdzienicka
  13. The impact of selected variables on the VAT gap in the Member States of the European Union By Ingrid Majerová
  14. Structural reforms and income distribution By Orsetta Causa; Alain de Serres; Nicolas Ruiz

  1. By: Tomasz Rosiak (Warsaw University)
    Abstract: The European Union has recently implemented one of the biggest reform packages in its history. Developed solutions are designed to (1) strengthen EU’s resilience to shocks and (2) improve its shock absorption capabilities. It seems that so far stress was mainly placed on the first objective. Among the reforms, which satisfied the second objective, the European Stability Mechanism (ESM) plays a key role. However, this is not the only solution. The European Union is also developing a fiscal capacity for the euro area. On the base of a subject literature study, I have developed a model with boundary conditions of fiscal federalism, which then was compared to macroeconomic data for the EU. Results of my findings show that the European Union, and especially the euro area, share a lot of characteristics typical for fiscal federalism. From this point of view, a budget for the euro area seems to be the best form of fiscal capacity. However, it could bring further fragmentation of economic integration process in the EU which probably would not positively contribute towards the stability in the political sphere.
    Keywords: Fiscal capacity, Fiscal federalism, European Union, Euro area, EU Budget
    JEL: E60 E61 E62 E63
    Date: 2015–04
  2. By: Zoltan Jakab; Pavel Lukyantsau; Shengzu Wang
    Abstract: The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. This paper creates a special version of GPM that includes the four largest Euro Area (EA) countries. The EA countries are more vulnerable to domestic and external demand shocks because adjustments in the real exchange rate between EA countries occur more gradually through inflation differentials. Spillovers from tight credit conditions in each EA country are limited by direct trade channels and small confidence spillovers, but we also consider scenarios where banks in all EU countries tighten credit conditions simultaneously.
    Keywords: Economic forecasting;Germany;France;Italy;Spain;Euro Area;Spillovers;General equilibrium models;Global projection model; Euro area; Forecasting
    Date: 2015–03–02
  3. By: Christos Hadjiemmanuil
    Abstract: In early 2012, the Spanish state came under strong market pressure due to its engagement in round after round of large-scale bank bailouts. The country’s joint sovereignbank crisis shed new light on the nature of the euro area’s crisis. European decision-makers were forced to openly recognize the non-fiscal – that is, the banking and monetary – causes of sovereign distress and to accept the need for drastic policy solutions. The policy shift soon took concrete form with the launch of the Banking Union project in June 2012. The principal intention was to break the bank-sovereign link and to relieve the euro area’s weaker economies from the almost impossible burden of having to finance bank bailouts out of national fiscal resources. The mutualization of bailout costs through a common ‘fiscal backstop’ was, in other words, the key objective of the Banking Union as originally conceived. Subsequent policy choices, however, have marked a relaxation, if not partial abandonment, of this objective. The policy approach eventually adopted with regard to resolution financing in the context of the Banking Union’s Single Resolution Mechanism (SRM) is based on the burden-sharing norms of the Bank Recovery and Resolution Directive (BRRD), the instrument harmonizing bank resolution regimes across the EU. This guarantees the legal consistency of resolution frameworks within and outside the euro area. It is less certain, whether the chosen approach can insulate national state finances from the costs of bank bailouts and/or ensure the full equalization of the financial conditions for bank resolution everywhere in the euro area. The sufficiency of the planned common financial instruments is a particular concern.
    JEL: F3 G3
    Date: 2015
  4. By: Bergljot Barkbu; Pelin Berkmen; Pavel Lukyantsau; Sergejs Saksonovs; Hanni Schoelermann
    Abstract: Investment across the euro area remains below its pre-crisis level. Its performance has been weaker than in most previous recessions and financial crises. This paper shows that a part of this weakness can be explained by output dynamics, particularly before the European sovereign debt crisis. The rest is explained by a high cost of capital, financial constraints, corporate leverage, and uncertainty. There is a considerable cross country heterogeneity in terms of both investment dymanics and its determinants. Based on the findings of this paper, investment is expected to pick up as the recovery strengthens and uncertainty declines, but persistent financial fragmentation and high corporate leverage in some countries will likely continue to weigh on investment.
    Keywords: Investment;Euro Area;Cost of capital;Credit;Corporate debt;Econometric models;Cross country analysis;Investment, cost of capital, credit rationing
    Date: 2015–02–19
  5. By: Lena Dräger (Universität Hamburg (University of Hamburg)); Christian R. Proaño (The New School for Social Research)
    Abstract: Against the background of the recent housing boom and bust in countries such as Spain and Ireland, we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a banking sector module along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal con- straint on the bank’s leverage ratio. We illustrate in particular how different lending standards within the monetary union can translate into destabilizing spill-over effects between the regions, which can in turn result in a higher macroeconomic volatility. This mechanism is modelled by letting the loan-to-value (LTV) ratio that banks demand of entrepreneurs depend on either re- gional productivity shocks or on the productivity shock from one dominating region. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the euro area. Additionally, we show the effects of a monetary policy rule augmented by the loan rate spread as in Cúrdia and Woodford (2010) in a two-country monetary union context.
    Keywords: Cross-border banking, euro area, monetary unions, DSGE
    JEL: F41 F34 E52
    Date: 2015–03
  6. By: International Monetary Fund
    Abstract: KEY ISSUES 2014 marked the tenth anniversary of accession to the EU of the first group of Central and Eastern European (CEE) countries. The first NMS Policy Forum was launched in the fall of 2014 as a platform for discussing policy frameworks and issues relevant for non-euro area NMS. It brought together representatives of the six CEE countries that are EU members but are not yet in the euro area - Bulgaria, Croatia, Czech Republic, Hungary, Poland, and Romania (NMS-6), as well as the ECB, the European Commission and the IMF. Discussions focused on four themes: Euro adoption: A once sizeable country risk premium associated with joining the euro area has mostly vanished, as the euro crisis has exposed flaws in the euro area’s institutional framework. Further, the crisis has illustrated both risks and benefits from adoption: monetary autonomy has proven helpful for absorbing shocks, while foreign currency mismatches—that can be much reduced with euro adoption—have shown to be a key vulnerability. Flexible labor markets, fiscal and macro-prudential policy space, and income convergence are prerequisites for successful adoption. Opting into the Banking Union (BU) before euro adoption: The lack of equal (or fully equivalent) treatment of the BU members and non-euro area opt-ins—regarding their role in the Single Supervisory Mechanism (SSM), as well as access to common liquidity and fiscal backstops—makes opting into the BU before euro adoption less attractive. Countries that would benefit most from early opt-in are those that see the BU as a way to enhance the quality and credibility of bank supervision or to gain access to larger industry-funded common backstops. The EU’s fiscal framework and pension reform: In the wake of the crisis, many NMS abolished second pillar pension funds. Further reforms to the EU’s fiscal framework are warranted to remove disincentives for setting up and maintaining second pension pillars and, more generally, for structural reforms. Making the most of the EU single market and EU Services Directive: Structural reforms to strengthen human capital, skills match, labor market efficiency, and foreign investment environment will help NMS to reap full benefits from EU integration. Further liberalization of trade in services will likely benefit the NMS-6 more than other EU members.
    Date: 2015–04–07
  7. By: Rebekka Gätjen; Melanie Schienle; ;
    Abstract: We introduce a methodology for measuring default risk connectedness that is based on an out-of-sample variance decomposition of model forecast errors. The out-of-sample nature of the procedure leads to \realized" measures which, in practice, respond more quickly to crisis occurrences than those based on in-sample methods. The resulting relative and absolute connectedness measures find distinct and complementary information from CDS and bond yield data on European area sovereign risk. The detection and use of these second moment differences of CDS and bond data is new to the literature and allows to identify countries that impose risk on the system from those which sustain risk.
    Keywords: Sovereign risk measurement, variance decomposition, connectedness, CDS and bond spreads, financial and eurozone crisis
    JEL: C32 C58 F34 G01 G18
    Date: 2015–04
  8. By: Pelizzon, Loriana; Subrahmanyam, Marti G.; Tomio, Davide; Uno, Jun
    Abstract: This paper examines the dynamic relationship between credit risk and liquidity in the sovereign bond market in the context of the European Central Bank (ECB) interventions. Using a comprehensive set of liquidity measures obtained from a detailed, quote-level dataset of the largest interdealer market for Italian government bonds, we show that changes in credit risk, as measured by the Italian sovereign credit default swap (CDS) spread, generally drive the liquidity of the market: a 10% change in the CDS spread leads a 11% change in the bid-ask spread. This relationship is stronger, and the transmission is faster, when the CDS spread is above the 500 basis point threshold, estimated endogenously, and can be ascribed to changes in margins and collateral, as well as clientele effects. Moreover, we show that the Long-Term Refinancing Operations (LTRO) intervention by the ECB weakened the sensitivity of the liquidity provision by the market makers to changes in the Italian government's credit risk. We also document the importance of market-wide and dealer-specific funding liquidity measures in determining the market liquidity for Italian government bonds.
    Keywords: Liquidity,Credit Risk,Euro-zone Government Bonds,Financial Crisis,MTS Bond Market
    JEL: G01 G12 G14
    Date: 2015
  9. By: Luc Eyraud; Tao Wu
    Abstract: The paper contributes to the discussions on fiscal governance in Europe. It takes stock of recent reforms, identifies areas for further progress, and discusses a menu of policy options for the medium-term. The issues covered include: (i) the growing complexity of the European framework and ways to simplify it; (ii) the difficulties to measure and implement structural stance indicators; (iii) the challenge of reconciling fiscal sustainability and growth; (iv) the need to enhance coordination in the area of monitoring; and (v) the obstacles to compliance and proposals to strengthen enforcement.
    Keywords: Fiscal policy;European Economic and Monetary Union;Public debt;Fiscal rules;Fiscal reforms;Debt sustainability;
    Date: 2015–03–24
  10. By: Tommaso Proietti (DEF and CEIS, Università di Roma "Tor Vergata"); Martyna Marczak (Department of Economics, University of Hohenheim); Gianluigi Mazzi (Statistical Office of the European Communities, Eurostat)
    Abstract: EuroMInd-D is a density estimate of monthly gross domestic product (GDP) constructed according to a bottom–up approach, pooling the density estimates of eleven GDP components, by output and expenditure type. The components density estimates are obtained from a medium-size dynamic factor model of a set of coincident time series handling mixed frequencies of observation and ragged–edged data structures. They reflect both parameter and filtering uncertainty and are obtained by implementing a bootstrap algorithm for simulating from the distribution of the maximum likelihood estimators of the model parameters, and conditional simulation filters for simulating from the predictive distribution of GDP. Both algorithms process sequentially the data as they become available in real time. The GDP density estimates for the output and expenditure approach are combined using alternative weighting schemes and evaluated with different tests based on the probability integral transform and by applying scoring rules.
    Keywords: Density Forecast Combination and Evaluation; Mixed–Frequency Data; Dynamic Factor Models; State Space Models
    JEL: C32 C52 C53 E37
    Date: 2015–04–10
  11. By: Borislava Mircheva; Dirk Muir
    Abstract: Denmark, Finland, Norway, and Sweden form a tightly integrated region which has strong ties with the euro area as well as some exposure to Russia. Using the IMF’s Global Integrated Monetary and Fiscal model (GIMF), we examine spillovers the region could face, focusing on possible scenarios from the rest of the euro area and Russia, and the fall in global oil prices. We show that the spillovers from these scenarios differ in magnitude and impact, regardless of the high degree of integration among the four Nordic economies. These differences are driven by the fact that Denmark and Finland have no independent monetary policy, and Denmark and Norway are net energy exporters while Finland and Sweden are energy importers. We infer lessons for policy from the outcomes.
    Keywords: Spillovers;Denmark;Finland;Sweden;Norway;Russian Federation;Oil prices;Economic integration;Monetary policy;Fiscal policy;Cross country analysis;General equilibrium models;Spillovers; monetary policy; fiscal policy; dynamic stochastic general equilibrium models; Nordic countries
    Date: 2015–03–27
  12. By: Era Dabla-Norris; Si Guo; Vikram Haksar; Minsuk Kim; Kalpana Kochhar; Kevin Wiseman; Aleksandra Zdzienicka
    Abstract: Total factor productivity growth was stagnant or slowing in many advanced countries even prior to the crisis. This paper documents sector-level productivity patterns across advanced economies prior to the crisis and examines the role of product and labor market rigidities as well as innovation and investments in information technology and human capital in driving productivity differences across sectors and countries. Since productivity payoffs of reforms evolve over time, we also focus on large changes in the structural indicators examine their dynamic impact on productivity, employment, and output. Our results suggest that reform priorities depend on country-specific settings, including the scale of specific policy distortions and the distance from the technology frontier. Productivity gains from reforms are large and materialize predominantly in the medium term, with some important variations across industries and countries.
    Keywords: Total factor productivity;Labor productivity;Economic growth;Fiscal reforms;Developed countries;Productivity, Structural Reforms, Growth, Structural Change
    Date: 2015–03–18
  13. By: Ingrid Majerová (Silesian University in Opava, School of Business Administration in Karvina)
    Abstract: One of the most serious problems of fiscal character is the issue of the tax gap. The tax gap is defined as the amount of tax liability faced by taxpayers that is not paid on time. The tax gap comes from three main areas of non-compliance with the tax law – firstly from underreporting of income, secondly from underpayment of taxes and thirdly from non-filling of returns. The tax evasions in the area of value added tax form one of the largest groups of tax gap. This article describes the current situation in the field of tax gap in selected countries of the European Union, namely the VAT gap. The aim of this paper is to determine a dependence of the VAT gap on three variables, the Corruption Perception Index CPI, GDP growth rate and the basic VAT rate. A method of the regression analysis has been used, performed on data in the years 2000-2011. In spite of the fact that it could be assumed that tax burden will affect the VAT gap the most, the highest dependence was shown in the case of the Corruption Perception Index.
    Keywords: tax gap; value added tax; Corruption Perception Index; GDP growth; VTTL model; regression
    JEL: H26 H32
    Date: 2015–04
  14. By: Orsetta Causa; Alain de Serres; Nicolas Ruiz
    Abstract: This paper provides new empirical evidence on the effects of structural policies on household disposable incomes at different income levels. More specifically, it investigates the extent to which structural policies have differential long-run impacts on GDP per capita and on household incomes at different points of the distribution. One aim is to verify whether policy decisions may face tradeoffs between objectives of economic efficiency and equity. Many growth enhancing structural reforms are found to deliver stronger income gains for households at the lower end of the distribution compared with the average household, an indication that they may reduce inequality in disposable incomes. Such is the case of reducing regulatory barriers to domestic competition as well as to trade and FDI; stepping-up job-search support and activation programmes. Conversely, other reforms involve trade-offs between the efficiency and equity objective. This is the case of the tightening of unemployment benefits for the long-term unemployed, which is found to lift GDP per capita and average household incomes, but also to reduce disposable incomes at the lower end of the distribution.<P>Réformes structurelles et la distribution des revenus<BR>Cette étude presente des nouveaux résultats d’analyse empirique sur les effets des politiques structurelles sur le revenue dispoanible des ménages à differents niveaux de revenu. De manière plus spécifique, elle examine la mesure dans laquelle les politiques strucuturelles ont des impacts differents à long terme sur le PIB par habitant et le revenu des ménages, à différents points de la distribution. Un objectif consiste à vérifier si les choix de politiques impliquent des arbitrages entre les objectifs d’efficacité économique et ceux d’équité. Les résultats indiquent que plusieurs politiques favorables à la croissance entraînent des gains plus élevés pour les ménages qui se trouvent dans le bas de la distribution que pour les ménages situé autour de la moyenne, conduisant ainsi à une baisse des inégalités de revenus disponibles. C’est le cas notamment des mesures visant à réduire les barrières réglementaires à la concurrence domestique ainsi qu’au commerce extérieur et aux investissement étranger, de même que pour celles conduisant à un renforcement de l’aide à la recherche active d’emploi pour les chômeurs. À l’inverse, un resserement des indemnités chômage ciblé sur les chômeurs de longue durée réduit le revenue des ménages les plus modestes tandis qu’il entraîne une hausse du PIB par habitant et du revenu des ménages autour de la moyenne.
    Keywords: structural reforms, income distribution, inequality, cross-country analysis, distribution des revenus, inégalité, réforme structurelle
    JEL: C33 D31 H2 H31 I13 I24 J18 J3 J38 J6
    Date: 2015–04

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