nep-eec New Economics Papers
on European Economics
Issue of 2015‒05‒02
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro Area Government Bonds—Integration and Fragmentation During the Sovereign Debt Crisis By Michael Ehrmann; Marcel Fratzscher
  2. Public opinion and the crisis: the dynamics of support for the euro By Sara B. Hobolt; Christopher Wratil
  3. Monnet's Error? By Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
  4. The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises. By S. Avouyi-Dovi; G. Horny; P. Sevestre
  5. Structural and cyclical determinants of bank interest rate pass-through in Eurozone By Aurélien Leroy; Yannick Lucotte
  6. The euro as an international currency By Agnès Bénassy-Quéré
  7. The legal framework for the European System of Central Banks By Siekmann, Helmut
  8. An holistic approach to ECB asset purchases, the Investment Plan and CMU By Natacha Valla; Jesper Berg; Laurent Clerc; Olivier Garnier; Erik Nielsen
  9. Is deflation good or bad? Just mind the inflation gap By Marco Casiraghi; Giuseppe Ferrero
  10. Insights to the European debt crisis using recurrence quantification and network analysis By Peter Martey Addo
  11. The Impact of the Chinese Exchange Policy on Foreign Trade with the European Union By Ana Cardoso; António Portugal Duarte
  12. Estimating the effects of a credit supply restriction: is there a bias in the Bank Lending Survey? By Andrea Nobili; Andrea Orame
  13. The legality of outright monetary transactions (OMT) of the European system of central banks By Siekmann, Helmut
  14. Banking Union and the governance of credit institutions: A legal perspective By Binder, Jens-Hinrich
  15. Fiscal discretion, growth and output volatility in new EU member countries By Stanova, Nadja

  1. By: Michael Ehrmann; Marcel Fratzscher
    Abstract: The paper analyzes the integration of euro area sovereign bond markets during the European sovereign debt crisis. It tests for contagion (i.e., an intensification in the transmission of shocks across countries), fragmentation (a reduction in spillovers) and flight-to-quality patterns, exploiting the heteroskedasticity of intraday changes in bond yields for identification. The paper finds that euro area government bond markets were well integrated prior to the crisis, but saw a substantial fragmentation from 2010 onward. Flight to quality was present at the height of the crisis, but has largely dissipated after the European Central Bank’s (ECB’s) announcement of its Outright Monetary Transactions (OMT) program in 2012. At the same time, Italy and Spain became more interdependent after the OMT announcement, providing our only evidence of contagion. While this suggests that countries have been effectively ring-fenced, and Italy and Spain benefited from the joint reduction in yields following the OMT announcement, the high current degree of fragmentation poses difficult challenges for policy-makers, since it leads to an unequal transmission of the ECB’s monetary policy to the various countries.
    Keywords: Asset pricing; Financial markets; Interest rates; International financial markets
    JEL: F3 E5 G15
    Date: 2015
  2. By: Sara B. Hobolt; Christopher Wratil
    Abstract: Further integration in the European Union (EU) increasingly depends on public legitimacy. The global financial crisis and the subsequent euro area crisis have amplified both the salience and the redistributive consequences of decisions taken in Brussels, raising the question of how this has influenced public support for European integration. In this contribution, we examine how public opinion has responded to the crisis, focusing on support for monetary integration. Interestingly, our results show that support for the euro has remained high within the euro area; however, attitudes are increasingly driven by utilitarian considerations, whereas identity concerns have become less important. While the crisis has been seen to deepen divisions within Europe, our findings suggest that it has also encouraged citizens in the euro area to form opinions on the euro on the basis of a cost–benefit analysis of European economic governance, rather than relying primarily on national attachments.
    Keywords: crisis; euro; euroscepticism; identity; public opinion
    JEL: N0
    Date: 2015–01–12
  3. By: Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
    Abstract: Entering a currency union without any political union European countries have taken a gamble: will the needs of the currency union force a political integration (as anticipated by Monnet) or will the tensions create a backlash, as suggested by Kaldor, Friedman and many others? We try to answer this question by analyzing the cross sectional and time series variation in pro-European sentiments in the EU 15 countries. The 1992 Maastricht Treaty seems to have reduced the pro-Europe sentiment as does the 2010 Eurozone crisis. Yet, in spite of the worst recession in recent history, the Europeans still support the common currency. Europe seems trapped: there is no desire to go backward, no interest in going forward, but it is economically unsustainable to stay still.
    Keywords: euro; euro crisis; European Union
    JEL: E42
    Date: 2015–04
  4. By: S. Avouyi-Dovi; G. Horny; P. Sevestre
    Abstract: We analyse the dynamics of the pass-through of banks’ marginal cost to bank lending rates over the 2008 crisis and the euro area sovereign debt crisis in France, Germany, Greece, Italy, Portugal and Spain. We measure banks’ marginal cost by their rate on new deposits, contrary to the literature that focuses on money market rates. This allows us to account for banks’ risks. We focus on the interest rate on new short-term loans granted to non-financial corporations in these countries. Our analysis is based on an error-correction approach that we extend to handle the time-varying long-run relationship between banks’ lending rates and banks’ marginal cost, as well as stochastic volatility. Our empirical results are based on a harmonised monthly database from January 2003 to October 2014. We estimate the model within a Bayesian framework, using Markov Chain Monte Carlo methods (MCMC).We reject the view that the transmission mechanism is time invariant. The long-run relationship moved with the sovereign debt crises to a new one, with a slower pass-through and higher bank lending rates. Its developments are heterogeneous from one country to the other. Impediments to the transmission of monetary rates depend on the heterogeneity in banks marginal costs and therefore, its risks. We also find that rates to small firms increase compared to large firms in a few countries. Using a VAR model, we show that overall, the effect of a shock on the rate of new deposits on the unexpected variances of new loans has been less important since 2010. These results confirm the slowdown in the transmission mechanism.
    Keywords: bank interest rates, error-correction model, structural breaks, stochastic volatility, Bayesian econometrics.
    JEL: E43 G21
    Date: 2015
  5. By: Aurélien Leroy; Yannick Lucotte
    Abstract: This paper empirically investigates the evolution and the sources of interest rate pass-through heterogeneity in the Eurozone for a sample of 11 euro area countries over the period 2003M1-2011M12. Considering two harmonized bank retail rates, we first estimate single equation error correction models (ECM) and find an important pass-through heterogeneity, both for household and firm rates, even if results suggest that heterogeneity is not a new phenomenon. On the basis of this result, we then extend our analysis by studying the role played by a large number of structural and cyclical factors on monetary policy transmission. Findings based on a panel ECM approach and a panel interaction VAR framework indicate that financial tensions and fragile economic activity following the crisis are not the only factors that explain the heterogeneous monetary transmission in the euro. The differences of financial market structures across countries, in terms of banking competition and financial market development, also explain a part of this heterogeneity. In terms of policy implications, this means that future reforms promoting a more efficient and homogeneous monetary policy transmission should not only focus on risk factors, but also try to consolidate financial integration.
    Keywords: Interest rate pass-through; Monetary policy transmission; Eurozone; Error correction model; Interacted panel VAR
    JEL: C23 D40 E43 E44 E58
    Date: 2015
  6. By: Agnès Bénassy-Quéré (Paris School of Economics - Centre d'Economie de la Sorbonne)
    Abstract: The euro, in spite of having many of the required attributes put forward by the theoretical literature and past experience, has failed to fulfill all the criteria that would enable it to rival the dollar as an international currency. This does not mean that the euro cannot achieve a status similar to that of the dollar; however, the window of opportunity may not last much more than a decade before the renminbi overtakes the euro. European monetary unification has never explicity sought for its currency to gain an international status. This makes sense insofar as the key elements required for the euro to expand internationally are also those to be pursued internally: GDP growth; a fiscal backing to the single currency; a deep, liquid and resilient capital market; and a unified external representation of the euro area
    Keywords: Currency internationalization; euro
    JEL: F36
    Date: 2015–03
  7. By: Siekmann, Helmut
    Abstract: The paper traces the developments from the formation of the European Economic and Monetary Union to this date. It discusses the fact that the primary mandate of the European System of Central Banks (ESCB) is confined to safeguarding price stability and does not include general economic policy. Finally, the paper contributes to the discussion on whether the primary law of the European Union would support a eurozone exit. The Treaty of Maastricht imposed the strict obligation on the European Union (EU) to establish an economic and monetary union, now Article 3(4) TEU. This economic and monetary union is, however, not designed as a separate entity but as an integral part of the EU. The single currency was to become the currency of the EU and to be the legal tender in all Member States unless an exemption was explicitly granted in the primary law of the EU, as in the case of the UK and Denmark. The newly admitted Member States are obliged to introduce the euro as their currency as soon as they fulfil the admission criteria. Technically, this has been achieved by transferring the exclusive competence for the monetary policy of the Member States whose currency is the euro on the EU, Article 3(1)(c) TFEU and by bestowing the euro with the quality of legal tender, the only legal tender in the EU, Article 128(1) sentence 3 TFEU.
    Keywords: economic and monetary union,euro,monetary policy,economic policy
    Date: 2015
  8. By: Natacha Valla; Jesper Berg; Laurent Clerc; Olivier Garnier; Erik Nielsen
    Abstract: To stimulate and finance investment in Europe the three “policy stars” of Europe need to be aligned: the Capital Markets Union initiative, the €315bn Investment Plan, and the ECB’s €1,100bn asset purchase scheme. They jointly face a unique set of issues. First, the resilience and the cyclical performance of the European bank based system needs to be improved. Second, the “right” markets need to be developed for banks to outsource risks without jeopardising financial stability. Third, cross-border risk-sharing urgently needs to be rebalanced, because it has become, in the wake of the Great Recession, overly reliant on debt instruments as opposed to equity. We argue that to achieve alignment between initiatives, an overall strategic vision could: ? Set an explicit, holistic strategy, ensuring that the instruments in the Investment Plan receive appropriate regulatory treatment within the CMU, and are eligible to the ECB’s purchase programme and collateral. ? Set a strategic objective for the euro area financial structure. It could be a “spare wheel” model where (i) banks would remain predominant (with capital markets as a countercyclical “spare wheel”), and (ii) banks would outsource risk through covered bonds (with untranched securitisation acting as the “spare wheel”). ? Proactively promote equity instruments in all three policy initiatives for more sustainable cross border risk sharing. ? Promote a new business model for “credit assessment” with a value chain featuring the credit information collected by commercial and central banks. ? Re-orientate the ECB’s purchases away from sovereign debt instruments towards the instruments that will finance the Investment Plan, those of the so-called “agencies”, and private sector assets. ? Formally involve NPBs in the Investment Plan, preferably in the equity of the EFSI Fund. ? Improve the governance of public investment ex ante via independent, supra-national investment committees, and ex post via strict disciplinary measures. ? Be pragmatic but tangible in the objectives set for the Capital Markets Union (focus on cross-border insolvencies and improve national business environments).
    Keywords: ECB;Capital Markets Union;cross-border capital flows;policy strategy;securitization;covered bonds;financial structure;Quantitative Easing
    JEL: E42 E44 E52 E58 E61
    Date: 2015–04
  9. By: Marco Casiraghi (Bank of Italy); Giuseppe Ferrero (Bank of Italy)
    Abstract: We explain why the macroeconomic effects of shocks to inflation of the same size, but opposite sign, are not necessarily symmetric. All in all, the costs of deflation and disinflation tend to exceed those of inflation due to the presence of constraints in the economy, namely the zero lower bound on nominal interest rates, downward nominal wage rigidity and borrowing limits. When these constraints are binding, they can prevent monetary policy from closing the inflation gap, labor market from clearing and agents from deleveraging. The impact of a disinflationary shock on the tightness of these constraints depends on the cyclical and structural conditions of the economy. We argue that it would be a mistake to assume that perverse effects can arise only with actual deflation and thus that the classification of deflationary episodes into good (supply-driven) and bad ones (demand-driven) is not only incorrect, but also misleading in terms of policy implications. Empirical evidence for the euro area suggests that the three constraints have become increasingly tight recently.
    Keywords: monetary policy, unconventional monetary measures
    JEL: E31 E52 E58
    Date: 2015–04
  10. By: Peter Martey Addo (Centre d'Economie de la Sorbonne)
    Abstract: The turmoil in the sovereign debt markets in Europe has raised concerns on the usefulness of sovereign credit default swaps and government bond yields in periods of distress. In addressing this issue, we introduce a novel nonlinear approach for the analysis of non-stationary multivariate data based on complex networks and recurrence analysis. We show the relevance of the approach in studying joint risk connections, extracting hidden spatial information, time dependence, detection of regime changes and providing early warning indicators. The feasibility and relevance of the approach in studying systemic risk is discussed. Finally, we share more light on possible extensions and applications of the approach to systemic risk
    Keywords: Sovereign debt crisis; Economic growth; Recurrence networks; Financial stability; Systemic risk
    JEL: C40 E50 G01 G18 G21
    Date: 2015–04
  11. By: Ana Cardoso (Faculty of Economics, University of Coimbra, Portugal); António Portugal Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal)
    Abstract: The aim of this paper is to analyze the impact of the Chinese foreign exchange policy on foreign trade with the European Union. After describing the importance of the exchange rate in an open economy and some of the methodologies employed to calculate its equilibrium value, we examine whether the Chinese competitiveness is due to the existence of misalignment (undervaluation) of its exchange rate, or rather, to other sources of competitiveness. For this purpose, we use a Vector Error Correction (VEC) model to estimate a long-run exports equation. The empirical results indicate that over the past few years, Chinese exports have benefited from an ‘unfair’ competitive advantage resulting from the manipulation of its currency value.
    Keywords: Competitiveness, China, European Union, foreign trade, misalignments, real exchange rate.
    JEL: C39 F10 O24
    Date: 2015–04
  12. By: Andrea Nobili (Bank of Italy); Andrea Orame (Bank of Italy)
    Abstract: In this paper we test for the potential bias in the estimated contribution of a supply restriction on lending to enterprises, as captured by the assessment of credit standards provided by the banks participating in the Eurosystem Bank Lending Survey (BLS banks). For Italy, we combine the information provided by the relatively small panel of large banking groups participating in the Eurosystem survey with the replies obtained from the non-overlapping and wider group of banks participating in the Regional Bank Lending Survey (non-BLS banks) carried out by the Bank of Italy. We find evidence of a limited upward bias in the estimated contribution of a tightening in credit standards from using the information for the BLS-only banks. This outcome mainly reflects a lower estimated sensitivity of lending growth to the considered indicators of a supply restriction for the non-BLS banks. The Eurosystem Bank Lending Survey, therefore, continues to be a timely and important source of information over the credit cycle for policymakers.
    Keywords: supply of credit, banks, Eurosystem BLS, Regional Bank Lending Survey
    JEL: G21 E51 E58
    Date: 2015–04
  13. By: Siekmann, Helmut
    Abstract: In its meeting on 6 September 2012, the Governing Council of the ECB took decisions on a number of technical features regarding the Eurosystem's outright transactions in secondary sovereign bond markets (OMT). This decision was challenged in the German Federal Constitutional Court (GFCC) by a number of constitutional complaints and other petitions. In its seminal judgment of 14 January 2014, the German court expressed serious doubts on the compatibility of the ECB's decision with the European Union law. It admitted the complaints and petitions even though actual purchases had not been executed and the control of acts of an organ of the EU in principle is not the task of the GFCC. As justification for this procedure the court resorted to its judicature on a reserved "ultra vires" control and the defense of the "constitutional identiy" of Germany. In the end, however, the court referred the case pursuant to Article 267 TFEU to the European Court of Justice (ECJ) for preliminary rulings on several questions of EU law. In substance, the German court assessed OMT as an act of economic policy which is not covered by the competences of the ECB. Furthermore, it judged OMT as a - by EU primary law - prohibited monetary financing of sovereign debt. The defense of the ECB (disruption of monetary policy transmission mechanism) was dismissed without closer scrutiny as being "irrelevant". Finally the court opened, however, a way for a compromise by an interpretation of OMT in conformity with EU law under preconditions, specified in detail. Procedure and findings of this judgment were harshly criticized by many economists but also by the majority of legal scholars. This criticism is largely convincing in view of the admissibility of the complaints. Even if the "ultra vires" control is in conformity with prior decisions of court it is in this judgment expanded further without compelling reasons. It is also questionable whether the standing of the complaining parties had to be accepted and whether the referral to the ECJ was indicated. The arguments of the court are, however, conclusive in respect of the transgression of competences by the ECB and - to somewhat lesser extent - in respect of the monetary debt financing. The dismissal of the defense as "irrelevant" is absolutey persuasive.
    Date: 2015
  14. By: Binder, Jens-Hinrich
    Abstract: The creation of the Banking Union is likely to come with substantial implications for the governance of Eurozone banks. The European Central Bank, in its capacity as supervisory authority for systemically important banks, as well as the Single Resolution Board, under the EU Regulations establishing the Single Supervisory Mechanism and the Single Resolution Mechanism, have been provided with a broad mandate and corresponding powers that allow for far-reaching interference with the relevant institutions' organisational and business decisions. Starting with an overview of the relevant powers, the present paper explores how these could - and should - be exercised against the backdrop of the fundamental policy objectives of the Banking Union. The relevant aspects directly relate to a fundamental question associated with the reallocation of the supervisory landscape, namely: Will the centralisation of supervisory powers, over time, also lead to the streamlining of business models, corporate and group structures of banks across the Eurozone?
    Keywords: Banking Union,Single Supervisory Mechanism,Single Resolution Mechanism,Banking Regulation,Bank Corporate Governance
    JEL: G15 G21 G28 K22 K23
    Date: 2015
  15. By: Stanova, Nadja
    Abstract: This paper analyses the link between discretionary fiscal policy and output growth in ten CEE countries. Three aspects are considered: cyclical pattern in the fiscal discretion, contributions to GDP growth, and the link between policy aggressiveness and output volatility. Fiscal discretion is estimated from quarterly data over 2000q1 to 2014q1 using a SVAR model in GDP, net taxes and spending. Decomposition of the GDP suggests that fiscal discretion induced rather small contributions to economic growth. Correlation between fiscal policy aggressiveness and output volatility is weak to moderate positive, notwithstanding whether spending or balance is used as the underlying indicator. The cyclical pattern has identified a mix of pro- and counter-cyclical episodes in the years before the crisis, implying that governments might not have consistently used the good times to create buffers. Overall, this evidence supports the view that policy makers in the CEE countries should mainly rely on rule-based fiscal policy rather than (aggressive) fiscal discretion.
    Keywords: discretionary fiscal policy, cyclicality of fiscal policy, fiscal policy aggressiveness, GDP growth, output volatility, SVAR model
    JEL: C32 E32 E61 E62
    Date: 2015–04

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