nep-eec New Economics Papers
on European Economics
Issue of 2015‒07‒11
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. "The Effects of a Euro Exit on Growth, Employment, and Wages" By Riccardo Realfonzo; Angelantonio Viscione
  2. Lethal lapses: How a positive interest rate shock might stress German life insurers By Feodoria, Mark; Förstemann, Till
  3. Limits to government debt sustainability By Jean-Marc Fournier; Falilou Fall
  4. Multidimensional Affluence in Income and Wealth in the Eurozone: A Cross-Country Comparison Using the HFCS By Kontbay-Busun, Sine; Peichl, Andreas
  5. The QE experience: Worth a try? By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  6. German public finances through the financial crisis By Blömer, Maximilian; Dolls, Mathias; Fuest, Clemens; Löffler, Max; Peichl, Andreas
  7. Macroeconomic uncertainties, prudent debt targets and fiscal rules By Falilou Fall; Jean-Marc Fournier
  8. Small-scale nowcasting models of GDP for selected CESEE countries By Martin Feldkircher; Florian Huber; Josef Schreiner; Julia Woerz; Marcel Tirpak; Peter Toth
  9. Spain’s labour market reforms: the road to employment – or to unemployment? By Laszlo Horwitz; Martin Myant
  10. The TTIP’s impact: bringing in the missing issue By Martin Myant; Ronan O’Brien
  11. 30 Years of Schengen: Internal blessing, external curse? By Ademmer, Esther; Barsbai, Toman; Lücke, Matthias; Stöhr, Tobias
  12. What Broke First? Characterizing Sources of Structural Change Prior to the Great Recession By Hull, Isaiah
  13. "Greece: Conditions and Strategies for Economic Recovery" By Dimitri B. Papadimitriou; Michalis Nikiforos; Gennaro Zezza

  1. By: Riccardo Realfonzo; Angelantonio Viscione
    Abstract: A technical analysis shows that the doomsayers who support the euro at all costs and those who naively theorize that a single currency is the root of all evil are both wrong. A euro exit could be a way of getting back to growth, but at the same time it would entail serious risks, especially for wage earners. The most important lesson we can learn from the experience of the past is that the outcome, in terms of growth, distribution, and employment, depends on how a country remains in the euro; or, in the case of a euro exit, on the quality of the economic policies that are put in place once the country regains control of monetary and fiscal matters, rather than on abandoning the old exchange system as such. It all depends on how a country stays in the eurozone, or on how it leaves if need be.
    Keywords: Currency Crisis; Devaluation; Employment; Euro Exit; Eurozone; Growth; Income
    JEL: F16 F31 F33 G01
    Date: 2015–07
  2. By: Feodoria, Mark; Förstemann, Till
    Abstract: Life insurers typically grant policyholders a surrender option. We demonstrate that the resulting lapse risk could materialise in the form of a "policyholder run" if interest rates were to increase sharply. An inverse stress test based on a unique set of regulatory panel data suggests that German life insurers have become less resistant to an upward interest rate shock in the course of the financial and sovereign debt crisis from 2007 to 2011. Despite the challenges presented by the low-interestrate environment, the situation has not deteriorated since then. In light of the quantitative easing (QE) of monetary policy in the euro area, life insurers may find it difficult to continue this positive trend.
    Keywords: life insurance,interest rate risk,lapse risk,rational policyholder run,inverse stress test
    JEL: G22 G33 C72 C13
    Date: 2015
  3. By: Jean-Marc Fournier; Falilou Fall
    Abstract: The recent euro area sovereign debt crisis has shown the importance of market reactions for the sustainability of debt. The objective of this paper is to calculate endogenous government debt limits given the markets assessment of the probability to default. The estimated primary balance reaction function to growing debt has the “fiscal fatigue” property (a loosening fiscal effort makes the primary balance insufficient to support rising debt) at high debt levels. It is the combination of this feature of the primary balance reaction function with the market interest rate reaction to growing debt that determines the government debt limit beyond which debt cannot be rolled over. An application of this framework to OECD countries over the period 1985 – 2013 shows that current debt limits are high for most of the OECD thanks to particularly low current interest rates. It shows also for some countries that current debt levels are not sustainable without a change in government behaviour as compared to the past. Most importantly, the framework illustrates the state contingent nature of debt limits and therefore the vulnerability of governments to a change in macroeconomic conditions and to market reactions.<P>Les limites à la viabilité de la dette publique<BR>La récente crise de la dette souveraine dans la zone euro a montré l’importance des réactions des marchés pour la viabilité de la dette. L’objectif de ce document est de calculer les limites endogènes de la dette publique compte tenu de l’évaluation que font les marchés de la probabilité de défaut. À de hauts niveaux d’endettement, la fonction de réaction estimée du solde primaire à une dette croissante présente la propriété de « fatigue budgétaire » (c’est-à-dire qu’un relâchement des efforts budgétaires aboutit à un solde primaire insuffisant pour soutenir l’accroissement de la dette). Cette propriété de la fonction de réaction du solde primaire, combinée à la réaction des marchés à l’accroissement de la dette via les taux d’intérêt, détermine la limite de la dette publique au-delà de laquelle celle-ci ne peut plus être refinancée. L’application de ce cadre aux pays de l’OCDE pour la période 1985-2013 montre que les limites actuelles de la dette sont hautes pour la majorité d’entre eux, grâce à des taux d’intérêt particulièrement bas actuellement. Elle montre également que les niveaux d’endettement actuels ne sont pas viables pour un certain nombre de pays. Surtout, ce cadre montre que les limites de la dette sont conditionnées par l’état de l’économie et que par conséquent, les États sont vulnérables à toute évolution de la situation macroéconomique et aux réactions des marchés.
    Keywords: sustainability, fiscal policy, debt, dette, viabilité de la dette publique, politique budgétaire
    JEL: E27 E44 E61 E62 H62 H63 H68
    Date: 2015–07–03
  4. By: Kontbay-Busun, Sine (Dokuz Eylul University); Peichl, Andreas (ZEW Mannheim)
    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, with the exception of Cyprus, France, Italy and Slovenia, less than 10% of households are affluent in both income and net wealth. Investigating the joint distributions of income and net wealth confirms that France demonstrates a more homogenous distribution of richness among affluent households compared to other countries in the sample. Portugal demonstrates a higher concentration of richness in the hands of a few compared to the majority of 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: 2015–06
  5. By: Christophe Blot (OFCE); Jérôme Creel (OFCE); Paul Hubert (OFCE); Fabien Labondance (Centre de REcherches sur les Stratégies Economiques (CRESE))
    Abstract: The ECB has decided to implement large-scale quantitative easing (QE) measures since March 2015 until September 2016. This unconventional monetary policy has had a variety of precedents, in the Japanese, UK and US economies. These experiments have been effective at modifying government and corporate bond yields, mostly in the UK and US and to a lesser extent in Japan. This conclusion is not context-free. The European QE has started in a deflation era which requires more activism and cooperation from the ECB and Euro area governments than in the UK and the US when their central banks embarked in QE. The success of the European QE will also depend substantially on the depreciation of the Euro and will require clear communication by the ECB that it is prepared to accept a large depreciation at least until the inflation rate goes back to its target.
    Keywords: Monetary policy; Quantitative easing
    JEL: E52
    Date: 2015–04
  6. By: Blömer, Maximilian; Dolls, Mathias; Fuest, Clemens; Löffler, Max; Peichl, Andreas
    Abstract: The German experience of the crisis was very different compared to those of most other countries in Europe. Germany was hit by a very strong shock which was relatively concentrated in the exporting, manufacturing industries. In addition, the German labour market was very resilient during the crisis due to earlier labour market reforms and policy instruments facilitating labour hoarding. As a consequence, public finances were only moderately affected and not many policy reforms had to be enacted. This chapter will present the German experience of the financial crisis. We start by presenting the macroeconomic situation and how the crisis unfolded in Germany, before focusing on the situation of public finances. Finally, we analyse the policy responses to the financial crisis.
    Keywords: crisis management,financial crisis,redistribution,budget deficit and debt
    JEL: H12 H23 H32 H60
    Date: 2015
  7. By: Falilou Fall; Jean-Marc Fournier
    Abstract: The sharp rise in debt experienced by most OECD countries raises questions about the prudent debt level countries should target. It also raises questions about the fiscal frameworks needed to reach them and to accommodate cyclical fluctuations along the path towards a prudent debt target. The objective of this paper is to define long-run prudent debt targets for OECD countries and country-specific fiscal rules. To this end, a semi-structural macroeconomic model for OECD countries and primary balance reaction functions are estimated. The shocks derived from these estimations are used to assess uncertainties surrounding the development of macroeconomic variables. The model is simulated up to 2040 to derive the prudent debt target for each country and design country-specific fiscal rules.<P>Incertitudes macroéconomiques, cibles prudentes d'endettement et règles budgétaires<BR>La forte hausse de la dette que connaissent la majorité des pays de l’OCDE interroge sur le niveau prudent d’endettement que les pays doivent cibler. Elle interroge également sur les cadres budgétaires nécessaires pour y parvenir et absorber les fluctuations de la conjoncture tout au long de la trajectoire vers une cible prudente d’endettement. L’objectif de ce document est de définir des cibles prudentes d’endettement pour les pays de l’OCDE et des règles budgétaires propres à chacun d’entre eux. À cet effet, on procède à l’estimation d’un modèle macroéconomique semi-structurel des pays de l’OCDE et de fonctions de réaction du solde primaire. Les chocs calculés à partir de ces estimations servent à évaluer les incertitudes entourant l’évolution de variables macroéconomiques. La simulation est effectuée jusqu’en 2040 pour déduire le niveau d’endettement prudent pour chaque pays et élaborer des règles budgétaires propres à chacun.
    Keywords: fiscal rules, fiscal policy, debt, dette, règle budgétaire, politique budgétaire
    JEL: E27 E61 E62 H62 H68
    Date: 2015–07–03
  8. By: Martin Feldkircher (Oesterreichische Nationalbank); Florian Huber (Oesterreichische Nationalbank); Josef Schreiner (Oesterreichische Nationalbank); Julia Woerz (Oesterreichische Nationalbank); Marcel Tirpak (National Bank of Slovakia, Research Department); Peter Toth (National Bank of Slovakia, Research Department)
    Abstract: In this article, we describe short-term forecasting models of economic activity for seven countries in Central, Eastern and Southeastern Europe (CESEE) and compare their forecasting performance since the outbreak of the Great Recession. To build these models, we use four variants of bridge equations and a dynamic factor model for each country. Given the differences in availability of monthly indicators across countries and the rather short time period over which these indicators are available, we favor smallscale forecasting models. We selected monthly indicators on the basis of expert judgment, correlation analysis and Bayesian model averaging techniques. While our odels generally outperform a purely time-series based forecast for all CESEE countries, there is no single technique that consistently produces the best out-of-sample forecast. To maximize forecasting accuracy, we therefore recommend selecting a country-specific suite of well-performing models for every CESEE economy.
    Keywords: Nowcasting, bridge equations, dynamic factor models, Bayesian model averaging,Central-, Eastern- and South-Eastern Europe
    JEL: C52 C53 E37
    Date: 2015–06
  9. By: Laszlo Horwitz; Martin Myant
    Abstract: This working paper looks at recent structural reforms of the Spanish labour market and evaluates them against the government’s stated objectives to reduce unemployment.
    Keywords: Economic policy, Employment, Flexicurity, Social protection
    Date: 2015–06
  10. By: Martin Myant; Ronan O’Brien
    Abstract: This working paper reviews the findings of the most prominent studies on the economic impact of the Transatlantic Trade and Investment Partnership (TTIP), focussing on those commissioned by the European Commission and by the German government.
    Date: 2015–01
  11. By: Ademmer, Esther; Barsbai, Toman; Lücke, Matthias; Stöhr, Tobias
    Abstract: We take stock of the Schengen Agreement that celebrated its 30th birthday on June 14th, 2015. We argue that the abolition of internal border controls in most European Union member states is rightly considered a blessing to EU citizens. Internally, the Agreement facilitates social and economic interactions without impeding the security of EU citizens. Externally, the Schengen Agreement has also helped to spread liberal norms and promote EU policies across EU borders, whenever Schengen borders prove permeable enough to allow for legal migration or if the relaxation of Schengen visa requirements is used as a carrot to trigger reforms in EU candidate and neighboring countries. The recent humanitarian crisis at the EU borders reveals that the Schengen system still lacks an appropriate joint asylum policy to counterbalance the loss of internal border controls. This weakness may undermine one of the main achievements of European integration. This Policy Brief revisits the accomplishments of 30 years of Schengen. We first ask how Schengen has affected member states and their citizens and which effects it has exerted on non-Schengen states outside of the EU's borders. We subsequently elaborate on appropriate reforms of a communitarized asylum policy that is needed to safeguard the accomplishments of the Schengen Agreement in the future.
    Date: 2015
  12. By: Hull, Isaiah (Research Department, Central Bank of Sweden)
    Abstract: This paper identifies and characterizes episodes of structural change in the 27 years that preceded the Great Recession. This is done by performing Bai-Perron (2003a, 2003b) tests on 61,843 time series that span 34 countries, which collectively accounted for 81% of Gross World Product in 2013. Three major stylized facts are established. First, the rate of structural change increased throughout the early 1990s, stabilized in 2003, and then decreased slowly until 2007. Second, there were three large spikes in the pace of structural change after the 1990-1991 recession: 1993-1994, 2001-2003, and 2007-2009. The latter two overlap with recessions in the U.S. and many other major economies, but the first does not. This spike is associated with structural change in residential investment, consumption, exchange rates, and real estate. Across countries, the degree of structural change is highest in China during this episode. Third, the periods 1993-1994 and 1997-2000 contain heavy structural change in real estate and lending; however, the rate of structural change in house price and construction series was more pronounced in and after 2001.
    Keywords: Great Recession; Macroeconomics; Econometrics; Break Tests; Structural Stability
    JEL: C01 C59 E30 E60 R20
    Date: 2015–06–01
  13. By: Dimitri B. Papadimitriou; Michalis Nikiforos; Gennaro Zezza
    Abstract: The Greek economy has the potential to recover, and in this report we argue that access to alternative financing sources such as zero-coupon bonds ("Geuros") and fiscal credit certificates could provide the impetus and liquidity needed to grow the economy and create jobs. But there are preconditions: the existing government debt must be rolled over and austerity policies put aside, restoring trust in the country's economic future and setting the stage for sustainable income growth, which will eventually enable Greece to repay its debt.
    Date: 2015–05

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