nep-eec New Economics Papers
on European Economics
Issue of 2015‒05‒22
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Sovereign debt crisis of euro zone countries By Slawomir Miklaszewicz
  2. Euro Area Government Bonds—Integration and Fragmentation During the Sovereign Debt Crisis By Ehrmann, Michael; Fratzscher, Marcel
  3. Revenue for EMU: A contribution to the debate on Fiscal Union By Anna Iara
  4. Combining Country-Specific Forecasts when Forecasting Euro Area Macroeconomic Aggregates By Jing Zeng
  5. The Protestant Fiscal Ethic: Religious Confession and Euro Skepticism in Germany By Adrian Chadi; Matthias Krapf
  6. Employment and the “Investment Gap”: An Econometric Model of European Imbalances By Luigi Pierfranco Campiglio
  7. A Comparison of Greece and Germany: Lessons for the Eurozone? By Hetzel, Robert L.
  8. Greek Debt Crisis “An Introduction to the Economic Effects of Austerity” By Mantalos, Panagiotis
  9. Coordination and Crisis in Monetary Unions By Aguiar, Mark; Amador, Manuel; Farhi, Emmanuel; Gopinath, Gita
  10. Dispersion of inflation expectations in the European Union during the global financial crisis By Jan Acedanski; Julia Wlodarczyk
  11. Forecasting Euro Area Macroeconomic Variables with Bayesian Adaptive Elastic Net By Sandra Stankiewicz
  12. Europe 2020 Strategy Implementation. Grouping the Countries with the Application of Natural Breaks Method By Adam P. Balcerzak
  13. Causality between credit depth and economic growth: Evidence from 24 OECD countries By Stolbov , Mikhail
  14. Determinants of Chinese Direct Investments in the European Union By Christian Dreger; Yun Schüler-Zhou; Margot Schüller

  1. By: Slawomir Miklaszewicz (Warsaw School of Economics)
    Abstract: The global financial crisis has led to a significant deterioration of the fiscal position of the euro area countries. Measures taken by member states after euro zone crisis led to a considerable worsening in the budget balance and growth of the public debt. Fiscal consolidations resulted in a deepening recession and farther fall of budget revenues, causing additional need for austerity programs, which contributed and contributes to delay in the exit of these countries from the crisis. However, the action taken by the European Central Bank has become the key point for rescuing situation of the most indebted countries. Increase of the European financial system’s liquidity by the ECB, when the euro zone sovereign debt crisis transformed additionally into a liquidity crisis, resulted in a reduction in debt servicing costs and de facto saved some member states from insolvency and the whole eurozone from collapse. The aim of the publication is to examine the fiscal position of the euro area countries and fiscal policy architecture in Europe after the outbreak of the financial and economic crisis stared in 2008. The first part of the publication consists of the analyses of the budgetary situation of euro area countries and complications with the increasing costs of servicing the public debt in the European market affected by the financial liquidity crisis. In the second section the most important changes in the framework of budgetary policies coordination process in the euro zone are presented. The final section describes the role and activities of the European Central Bank in minimising the negative consequences of the debt crisis in the euro zone.
    Keywords: sovereign debt crisis of the euro area, EMU monetary policy, the European Semester, Fiscal Pact, the European Stability Mechanism
    JEL: F43 F36 H63
    Date: 2015–05
  2. By: Ehrmann, Michael; Fratzscher, Marcel
    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: contagion; ECB; European crisis; fragmentation; high-frequency data; identification; integration; policy; sovereign debt
    JEL: E5 F3 G15
    Date: 2015–05
  3. By: Anna Iara (European Commission)
    Abstract: In the wake of the euro area crisis, debate on instruments to deepen economic integration among its members has intensified, among others putting forward a fiscal stabilisation capacity for EMU members. Contributions made so far to further this idea have mostly concentrated on the expenditure side and possible stabilisation properties. This analysis reviews the most important proposals and discusses design choices and institutional conditions to develop the revenue side of such a fiscal instrument
    Keywords: European Union, EMU, fiscal federalism, fiscal integration, EU budget
    JEL: H29 H77 H87
    Date: 2015–03
  4. By: Jing Zeng (Department of Economics, University of Konstanz, Germany)
    Abstract: European Monetary Union (EMU) member countries' forecasts are often combined to obtain the forecasts of the Euro area macroeconomic aggregate variables. The aggregation weights which are used to produce the aggregates are often considered as combination weights. This paper investigates whether using different combination weights instead of the usual aggregation weights can help to provide more accurate forecasts. In this context, we examine the performance of equal weights, the least squares estimators of the weights, the combination method recently proposed by Hyndman et al. (2011) and the weights suggested by shrinkage methods. We find that some variables like real GDP and GDP deflator can be forecasted more precisely by using flexible combination weights. Furthermore, combining only forecasts of the three largest European countries helps to improve the forecasting performance. The persistence of the individual data seems to play an important role for the relative performance of the combination.
    Keywords: Forecast combination, aggregation, macroeconomic forecasting, hierarchical time series, persistence in data
    JEL: C22 C43 C53
    Date: 2015–05–13
  5. By: Adrian Chadi; Matthias Krapf
    Abstract: During the European sovereign debt crisis, most countries that ran into fiscal trouble had Catholic majorities, whereas countries with Protestant majorities were able to avoid fiscal problems. Survey data show that, within Germany, views on theeuro differ between Protestants and Non-Protestants, too. Among Protestants, concerns about the euro have, compared to Non-Protestants, increased during the crisis, and significantly reduce their subjective wellbeing only. We use the timing of survey interviews and news events in 2011 to account for the endogeneity of euro concerns. Emphasis on moral hazard concerns in Protestant theology may, thus, still shape economic preferences.
    Keywords: Protestantism, euro crisis, subjective wellbeing, media coverage
    JEL: E00 I31 L82 Z12
    Date: 2015
  6. By: Luigi Pierfranco Campiglio (DISCE, Università Cattolica)
    Abstract: We specify a VEC model based on six main macroeconomic imbalances to explain the Great European Recession, in Germany, France, Spain and Italy, from 1999 to 2013, estimating their long-term relationships. We focus on employment and unemployment as the main imbalances and identify consumption and investment slumps, prompted by fiscal consolidation, as the causes and current account rebalance and low inflation as the main consequences. Our main results are the following: a) public investment is the main policy instrument which can foster employment, prompting private investment and growth, exports can only partly balance a falling domestic demand; b) the unemployment-current account trade-off is a structural constraint to a lower unemployment level; c) mild deflation set in as a consequence of the consumption slump and oil price decline; d) breaks dates for consumption and inflation thresholds are estimated; and e) Germany successfully passed through the European recession by sharply increasing its exports and reshaping its economic role.
    Keywords: Europe, employment, unemployment, consumption, investment, current account, inflation
    JEL: E21 E22 E24 E31 F32 O52
    Date: 2015–04
  7. By: Hetzel, Robert L. (Federal Reserve Bank of Richmond)
    Abstract: During the Great Recession and its aftermath, the economic performance of Greece and Germany diverged sharply with persistent high unemployment in Greece and low unemployment in Germany. A common explanation for this divergence is the assumption of an unsustainable level of debt in Greece in the years after the formation of the Eurozone while Germany maintained fiscal discipline. This paper reviews the experience of Greece and Germany since the creation of the Eurozone. The review points to the importance of monetary factors, especially the intensification of the recession in Greece starting in 2011 derived from the price-specie flow mechanism described by David Hume.
    JEL: E50
    Date: 2015–04–15
  8. By: Mantalos, Panagiotis (Örebro University School of Business)
    Abstract: We trace the reasons for the negative development of Greek government debt from 1980 to 2014 by studying the deficits of the Greek state under the same period. We also see the Greek debt under the different political regimes. We briefly describe the two bailout programs for Greece and finally we name the amount and Euro states that own the Greek loans. The negative effects of austerity are about 22% less GDP and total household and government consumption and monthly wages; finally, the unemployment rate grew 21%.
    Keywords: Austerity; Consumption; Deficit; Greek Debt Crisis; GDP; Unemployment
    JEL: C22 E62 F33 H63 O40
    Date: 2015–04–02
  9. By: Aguiar, Mark (Princeton University); Amador, Manuel (Federal Reserve Bank of Minneapolis); Farhi, Emmanuel (Harvard University); Gopinath, Gita (Harvard University)
    Abstract: We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over-borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.
    Keywords: Debt crisis; Coordination failures; Monetary union; Fiscal policy
    JEL: E40 E50 F30 F40
    Date: 2015–05–11
  10. By: Jan Acedanski (University of Economics in Katowice); Julia Wlodarczyk (University of Economics in Katowice)
    Abstract: Inflation expectations, both their median and dispersion, are of a great importance to the effectiveness of monetary policy. The goal of this paper is to examine the impact of the global financial crisis on dispersion of inflation expectations in the European Union. Using European Commission’s survey data, we find that in the early phase of the crisis the dispersion dropped rapidly but then, after Lehman Brothers’ collapse, the trend reversed and these fluctuations cannot be explained by movements of inflation rates and other commonly used factors. We also observe that, in the new European Union member states, the initial drop of the dispersion was weaker whereas the subsequent rise was stronger as compared to the old member states.
    Keywords: inflation expectations, survey data, global financial crisis, European Union
    JEL: C33 C42 D84 E31
    Date: 2015–05
  11. By: Sandra Stankiewicz (Department of Economics, University of Konstanz, Germany)
    Abstract: I use the adaptive elastic net in a Bayesian framework and test its forecasting performance against lasso, adaptive lasso and elastic net (all used in a Bayesian framework) in a series of simulations, as well as in an empirical exercise for macroeconomic Euro area data. The results suggest that elastic net is the best model among the four Bayesian methods considered. Adaptive lasso, on the other hand, shows the worst forecasting performance. Lasso is generally better then adaptive lasso, but worse than adaptive elastic net. The differences in the performance of these models become especially large when the number of regressors grows considerably relative to the number of available observations. The results point to the fact that the ridge regression component in the elastic net is responsible for its improvement in forecasting performance over lasso. The adaptive shrinkage in some of the models does not seem to play a major role, and may even lead to a deterioration of the performance.
    Keywords: Elastic net, Lasso, Bayesian, Forecasting
    JEL: C11 C22 C53
    Date: 2015–05–13
  12. By: Adam P. Balcerzak (Nicolaus Copernicus University)
    Abstract: In the year 2015 the European Union reaches the five year period of Europe 2020 strategy implementation. Thus, the aim of the research is to group the European countries based on the level of fulfillment aims of the strategy with the application of natural breaks method. Special consideration was given to the results of New Member States of European Union. As a result in the first part of empirical research a ranking of EU countries with application of zero unitarization method for the year 2004, 2008 and 2013 was made. Based on the rankings the countries were grouped in five classes with natural breaks method. The analysis showed that in spite of economic difficulties in Europe after global financial crisis, from the year 2004 till the year 2013 New Member States had made an important progress in the implementation of Europe 2020 strategy.
    Keywords: Europe 2020 strategy, multivariate analysis, zero unitarization method, natural breaks method
    JEL: C00 E61 O52
    Date: 2015–05
  13. By: Stolbov , Mikhail (BOFIT)
    Abstract: Causality between the ratio of domestic private credit to GDP and growth in real GDP per capita is investigated in a country-by-country time-series framework for 24 OECD economies over the period 1980–2013. The proposed threefold methodology to test for causal linkages integrates (i) lag-augmented VAR Granger causality tests, (ii) Breitung-Candelon causality tests in the frequency domain, and (iii) testing for causal inference based on a fully modified OLS (FMOLS) approach. For 12 of 24 countries in the sample, the three tests yield uniform results in terms of causality presence (absence) and direction. Causality running from credit depth to economic growth is found for the UK, Australia, Switzerland, and Greece. The findings lend no support to the view that financial development shifts from a supply-leading to demand-following pattern as economic development proceeds. The aggregate results mesh well with the current discussion on “too much finance” and disintermediation effects. However, idiosyncratic country determinants also appear significant.
    Keywords: causality; economic growth; financial development; FMOLS; frequency domain
    JEL: C22 E44 G21 O16
    Date: 2015–04–30
  14. By: Christian Dreger; Yun Schüler-Zhou; Margot Schüller
    Abstract: This paper analyses the determinants of Chinese direct investment (DI) in the European Union (EU). Evidence is based on panel Poisson models drawing on two investment monitors for individual projects. We distinguish between the numbers of greenfield investments (GIs) and mergers and acquisitions (M&As). The findings indicate that market size and trade relationships with China are the primary factors driving Chinese DI in the EU. In contrast, more business-friendly institutions do not foster DI. Chinese enterprises might be risk averse, in other words prefer to choose their activities in regions with less competitive markets. The striking difference between GIs and M&As is related to unit labour costs. Higher costs make the host country less attractive for the establishment of new firms, but do not affect the involvement in existing firms. The sectoral dispersion of Chinese DI in the EU has not changed much since the global financial crisis of 2008. Most relevant shifts have occurred in research and development (R&D), where low-income EU countries have gained in attractiveness.
    Keywords: China FDI, Greenfield investments, mergers and acquisitions
    JEL: F21 E22 C25
    Date: 2015

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