nep-eec New Economics Papers
on European Economics
Issue of 2015‒07‒18
twelve 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 Nina Dodig; Hansjorg Herr
  2. Cheap Talk and the Efficacy of the ECB’s Securities Market Programme: Did Bond Purchases Matter? By De Pooter, Michiel; Rebecca, DeSimone; Martin, Robert F.; Pruitt, Seth
  3. How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices By Heather D. Gibson; Stephen G. Hall,; George S. Tavlas
  4. The Monetary Policy of the European Central Bank (2002-2015) By Stefano Micossi
  5. The Protestant Fiscal Ethic:Religious Confession and Euro Skepticism in Germany By Adrian Chadi; Matthias Krapf
  6. Government Bond Liquidity and Sovereign-Bank Interlinkages By Sören Radde; Cristina Checherita-Westphal; Wei Cui;
  7. Completing the Monetary Union of Europe as mid-term solution of the Euro crisis By Fischer, Justina A.V.; Pastore, Francesco
  8. Fiscal policies in the European Union during the crisis, By Jesus Ferreiro; Catalina Galvez; Ana Gonzalez
  9. Hysteresis and the European Unemployment Problem Revisited By Jordi Galí
  10. Escalating crisis in the eurozone: The case for conditional debt relief for Greece (Statement No. 40) By European Shadow Financial Regulatory Committee (ESFRC)
  11. Survey on economic policies during the crisis By Felipe Serrano; Amaia Altuzarra
  12. Three theses on the Greek crisis By Krahnen, Jan Pieter

  1. By: Nina Dodig (Berlin School of Economics and Law and Institute for International Political Economy (IPE) Berlin, Germany); Hansjorg Herr (Berlin School of Economics and Law and Institute for International Political Economy (IPE) Berlin, Germany)
    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 impose 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. They 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. These polices must be judged as mislead increasing the risk of Japanese disease with more than one lost decade
    Keywords: current account imbalances, Euro area economic policies, internal devaluation, austerity
    JEL: E60 E62 F41
    Date: 2015–01–01
  2. By: De Pooter, Michiel (Board of Governors of the Federal Reserve System (U.S.)); Rebecca, DeSimone (Columbia Business School); Martin, Robert F. (Barclays Capital); Pruitt, Seth (Arizona State University)
    Abstract: In 2010, in response to an ever-worsening fiscal crisis, the ECB began purchasing sovereign debt from troubled euro-area countries through its Securities Market Programme (SMP). This program was designed to improve market functioning and restore the monetary transmission mechanism within the euro area. This paper does not test those ideals. Rather, we test whether SMP purchases systematically lowered peripheral yields and spreads. We find limited evidence of purchase effects but large announcement effects. In addition, on days in which the ECB was believed to have made large purchases, yields moved down, independent of the size of the ECB's purchases or even if the ECB conducted any purchase at all that week. In all, we conclude that the ECB's SMP influenced yields through a confidence channel rather than through any direct purchase effect. In the appendix to this paper we provide a detailed timeline of SMP purchases and market beliefs about purchase timing.
    Keywords: Monetary policy; interest rates; recession; European Central Bank; asset purchases; euro area
    JEL: E20 E43 E52 F44
    Date: 2015–07–06
  3. By: Heather D. Gibson; Stephen G. Hall,; George S. Tavlas
    Abstract: We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks’ equity-prices. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.
    Keywords: euro-area financial crisis; sovereign-bank linkages; banks’ performance; banking stability
    JEL: E3 G01 G14 G21
    Date: 2015–07
  4. By: Stefano Micossi (Director General ASSONIME, Visiting Professor at the College of Europe)
    Abstract: This paper examines the policies pursued by the European Central Bank (ECB) since the inception of the euro. The ECB was originally set up to pursue price stability, with an eye also to economic growth and financial stability as subsidiary goals, once the primary goal was secured. The application of a single monetary policy to a diverse economic area has entailed a pronounced pro-cyclicality in its real economic effects on the eurozone periphery. Later, monetary policy became the main policy instrument to tackle financial instability elicited by the failure of Lehman Brothers and the sovereign debt crisis in the eurozone. In the process, the ECB emerged as the lender of last resort in the sovereign debt markets of participating countries. Persistent economic depression and deflation eventually brought the ECB into the uncharted waters of unconventional policies. That the ECB could legally perform all of these tasks bears witness to the flexibility of the TFEU and its Statute, but its tools and operating procedures were stretched to their limit. In the end, the place of the ECB amongst EU policy-making institutions has been greatly enhanced, but has entailed repeated intrusions into the broader domain of economic policies – not least because of its market intervention policies – whose consequences have yet to be ascertained.
    Keywords: Monetary Policy; European Central Bank; Quantitative easing; Financial and economic crisis
    JEL: E4 E5 F3 O52
    Date: 2015–07
  5. By: Adrian Chadi (Institute for Labour Law and Industrial Relations in the EU, University of Trier); Matthias Krapf (Université de Lausanne)
    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 the euro 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: 2015–06
  6. By: Sören Radde; Cristina Checherita-Westphal; Wei Cui;
    Abstract: Banks in the euro area typically hold a large amount of government debt in their bond portfolios, which are valued both for their low credit risk and high liquidity. During the sovereign debt crisis, these characteristics of government debt were severely impaired in stressed euro area countries. In order to understand the transmission channels of stress from government debt markets to the real economy, we augment a standard dynamic macroeconomic model with a banking sector and a market for government debt characterized by search frictions. A sovereign solvency shock modelled as a haircut on government bonds is introduced to study the interaction of sovereign credit and liquidity risk. As banks react to this shock by rebalancing towards highly liquid short-run assets, such as central bank deposits, demand for government bonds collapses, which endogenously worsens their market liquidity. Thus, a sovereign liquidity risk channel from government bond markets to the real sector emerges. Endogenous government bond liquidity negatively affects the funding conditions of the fiscal sector, tightens financing constraints in the banking sector and lowers investment and output. The model is able to match a number of stylised facts regarding the behaviour of sovereign debt markets during the euro area sovereign debt crisis, such as depressed turnover rates and rising bid-ask spreads.
    Keywords: liquidity frictions; search; sovereign risk channel; sovereign-bank nexus
    JEL: G12 E41 E44 E63
    Date: 2015–07
  7. By: Fischer, Justina A.V.; Pastore, Francesco
    Abstract: This research note discusses the Euro crisis in Greece in light of the referendum of July the 5th. It lays out the social and political costs of a GREXIT, but also of a continuing austerity policy. It proposes a reform policy fostering growth in Greece and discusses the role of conditionality. Finally, the important role of mid-left parties is highlighted.
    Keywords: Europe; Euro; Greece; Germany; IMF; Monetary Union
    JEL: E12 E62 F15 F16 F33 F55 H12 H50 H63 O42 O43
    Date: 2015–07–11
  8. By: Jesus Ferreiro (Department of Applied Economics V, University of the Basque Country UPV/EHU); Catalina Galvez (Department of Applied Economics V, University of the Basque Country UPV/EHU); Ana Gonzalez (Department of Applied Economics V, University of the Basque Country UPV/EHU)
    Abstract: The paper studies the fiscal policies implemented in the European Union countries since the beginning of the current crisis. With this aim in mind, we have analyzed separately the expansionary fiscal policies implemented at the first stage of the crisis and the fiscal consolidation policies that became widespread at the beginning of the current crisis. The content of the national fiscal policies (discretionary measures versus built-in stabilizers, revenue-based versus expenditure-based fiscal policies, the relationship existing between the size of the fiscal impulses-adjustments and the composition of these measures) shows the significant differences between the fiscal policies implemented in the European Union countries.
    Keywords: European Union, fiscal policy, economic crisis.
    JEL: E62 E65 H62 O52
    Date: 2015–02–01
  9. By: Jordi Galí
    Abstract: The unemployment rate in the euro area appears to contain a significant nonstationary component, suggesting that some shocks have permanent effects on that variable. I explore possible sources of this nonstationarity through the lens of a New Keynesian model with unemployment, and assess their empirical relevance.
    Keywords: wage stickiness, New Keynesian model, unemployment ‡uctuations, Phillips curve, insider-outsider model
    JEL: E24 E31 E32
    Date: 2015–06
  10. By: European Shadow Financial Regulatory Committee (ESFRC)
    Abstract: In this statement the European Shadow Financial Regulatory Committee (ESFRC) is advocating a conditional relief of Greek's government debt based on Greece meeting certain targets for structural economic reforms in areas such as its labor market and pensions sector.The authors argue that the position of the European institutions that debt relief for Greece cannot be part of an agreement is based on the illusion that Greece will be able to service its sovereign debt and reduce its debt overhang after implementing a set of fiscal and structural reforms. However, the Greek economy would need to grow at an unrealistig level to achieve debt sustainability soley on the basis of reforms.The authors therefore view a substantial debt relief as inevitable and argue that three questions must be resolved urgently, in order to structure debt relief adequately: First, which groups must accept losses associated with debt relief. Second, how much debt relief should be offered. Third, under what conditions should relief be offered.
    Keywords: Greek crisis,structural reforms,debt sustainability
    Date: 2015
  11. By: Felipe Serrano (Department of Applied Economics V, University of the Basque Country UPV/EHU); Amaia Altuzarra (Department of Applied Economics V, University of the Basque Country UPV/EHU)
    Abstract: The Global Financial Crisis has meant for developed countries to return to an economic situation similar to that experienced during the Great Recession. At the root of the crisis, again, is the financial system. Financial innovation, combined with stringent regulatory failures and with an overly loose monetary policy, allowed to expand private credit disproportionately, fuelling a speculative bubble that, when it burst, generated a demand shock that eventually turn a financial crisis into an economic crisis with lasting consequences. This work attempts to examine the economic policies implemented during the crisis. We focus exclusively on demand policies, with special attention to those implemented in the first phase of the crisis. The economic policy implemented to overcome the crisis has passed through different stages. In the first stage, the strategy was a combination of expansionary monetary and fiscal policies. In the second stage, the fiscal stimuli begin to be withdrawn, while an aggressive monetary policy to stimulate private credit through expanding the money supply is maintained. The third stage is scheduled to start in late 2014. This third phase would be characterized by the end of demand policies and the recovery of supply policies or structural adjustment policies, especially for the case of emerging economies as well as economies of southern Eurozone.
    Keywords: fiscal policy, monetary policy, Eurozone, emerging countries, developed countries, financial crisis
    JEL: E02 E52 E58 E62
    Date: 2015–04–01
  12. By: Krahnen, Jan Pieter
    Abstract: In light of the failed negotiations with Greece, Jan Krahnen argues that an effective reform agenda for Greece can only be designed by the elected government. Fundamental reforms will take time to take full effect and euro area member states will, in the meantime, have to offer Greece a basic level of economic security. Krahnen demands that policy makers and the professional public involved view the Greek crisis as an opportunity to take the next necessary steps to formulate a reform agenda for the European Monetary Union. A community of supranational and non-party researchers and intellectuals could take the initiative and in a structured process develop a trustworthy and realistic concept that drafts the next big step towards a political union of Europe, including elements of a fiscal union.
    Abstract: Mit Blick auf die gescheiterten Verhandlungen mit Griechenland, argumentiert Jan Krahnen im vorliegenden Policy Beitrag, dass eine zielführende Reformagenda nur von der gewählten Regierung Griechenlands formuliert werden kann. Die Euro-Staaten müssten Griechenland für die Zeitdauer einer Restrukturierungszeit eine Grundsicherung zusagen. Die EU-Staaten fordert Krahnen dazu auf, aus der Griechenlandkrise die notwendigen Konsequenzen zu ziehen. Auch die Eurozone brauche eine effektive Reformagenda. Die Verschuldungsdynamik innerhalb der Währungsunion, deren Auswüchse am Beispiel Griechenlands besonders deutlich werden, könne bei fehlendem guten Willen nur durch eine politische Union und eine in sie eingebettete Fiskalunion aufgelöst werden. Krahnen argumentiert, dass ein Weiterverhandeln über Restrukturierungsauflagen aus der derzeitigen verfahrenen Situation nicht herausführen wird. Entscheidend sei, ein mehr oder weniger umfassendes Paket zu schnüren, das Elemente eines teilweisen internationalen Haftungsverbunds mit Elementen eines partiellen nationalen Souveränitätsverzichts verbindet.
    Keywords: Monetary Union,Fiscal Union,Political Union,Währungsunion,Fiskalunion,Politische Union
    Date: 2015

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