nep-eec New Economics Papers
on European Economics
Issue of 2015‒08‒13
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. International liquidity shocks and domestic loan supply in the euro area By Zwick, Lina
  2. Banks Exposures and Sovereign Stress Transmission By Carlo Altavilla; Marco Pagano; Saverio Simonelli
  3. Cross-border banking and business cycles in asymmetric currency unions By Dräger, Lena; Proaño, Christian R.
  4. Hysteresis and the European Unemployment Problem Revisited By Galí, Jordi
  5. Completing the Monetary Union of Europe as Mid-term Solution of the Euro Crisis By Fischer, Justina A.V.; Pastore, Francesco
  6. Reconciling insurance with market discipline: A blueprint for a European fiscal union By Dolls, Mathias; Fuest, Clemens; Heinemann, Friedrich; Peichl, Andreas
  7. Labour Mobility: Is the euro boosting mobility? Labour mobility in Europe during the crisis years By Quitzau, Jörn; Boll, Christina; Leppin, Julian Sebastian
  8. Monetary Policy under the Microscope: Intra-bank Transmission of Asset Purchase Programs of the ECB By L. Cycon; Michael Koetter
  9. Is the European banking system more robust? An evaluation through the lens of the ECB's Comprehensive Assessment By Guillaume Arnould; Salim Dehmej
  10. A capital markets union for Europe: The relevance of banks and markets By Demary, Markus; Diermeier, Matthias; Haas, Heide
  11. Business cycle synchronization of the Visegrad Four and the European Union By Lubos Hanus; Lukas Vacha

  1. By: Zwick, Lina
    Abstract: After two decades of increased financial market integration, particularly driven by the banking sector, during the recent financial crisis capital flows decreased sharply, and especially banking flows were affected. At the same time loan volume in Euro Area countries slowed down, evoking concerns that domestic banks might have restricted their domestic lending activities due to international liquidity shortages. To probe this explanation, this paper analyzes the macroeconomic effects of adverse international liquidity shocks for eleven Euro Area countries between 2003 and 2013 on a quarterly basis. The international liquidity shocks are identified by applying a panel vector autoregressive (VAR) model with sign restrictions. The analysis reveals no significant decline in loan volume after such a shock. Rather, domestic banks presumably react by withdrawing money from abroad, thereby buffering the impact of the sharp decrease of capital inflows on the domestic economy.
    Keywords: international capital flows,Panel VAR,loan supply restrictions,home bias
    JEL: F32 F34 G21
    Date: 2015
  2. By: Carlo Altavilla (European Central Bank and CSEF); Marco Pagano (University of Naples "Federico II", CSEF and EIEF); Saverio Simonelli (University of Naples "Federico II" and CSEF)
    Abstract: The domestic sovereign exposures have amplified the transmission of sovereign stress to the solvency risk of banks and to their lending activity, both during and after the Euro debt crisis. We estimate the magnitude of this amplification mechanism relying on novel ECB monthly data on sovereign exposures and lending policies of 245 euro-area banks from 2007 to 2015. For the median bank in stressed countries, the amplification due to sovereign exposures almost doubled the response of the bank’s CDS premium to the sovereign CDS premium, and the response of its loan rate to the sovereign yield. Moreover, the losses on domestic sovereign holdings associated with a 1-standard-deviation rise of the 10-year sovereign yield account for 9% of the actual drop in total loans in stressed countries. No such amplification effects are detected in non-stressed countries. Finally, both yield-seeking and moral suasion motives appear to have affected banks’ portfolio choices in stressed countries: in response to higher domestic sovereign yields, banks increased their domestic sovereign holdings more if public- than private-owned, domestic- than foreign-owned, and poorly than well-capitalized.
    Keywords: sovereign exposures, sovereign risk, credit risk, bank lending, euro debt crisis
    JEL: E44 F3 G01 G21 H63
    Date: 2015–07–30
  3. By: Dräger, Lena; Proaño, Christian R.
    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 constraint 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 modeled by letting the loanto-value (LTV) ratio that banks demand of entrepreneurs depend on either regional 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,monetary policy
    JEL: F41 F34 E52
    Date: 2015
  4. By: Galí, Jordi
    Abstract: The unemployment rate in the euro area appears to contain a signi…ficant nonstationary component, suggesting that some shocks have permanent e¤ects 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: insider-outsider models; New Keynesian model; unemployment fluctuations; wage Phillips curve
    JEL: E24 E31 E32
    Date: 2015–07
  5. By: Fischer, Justina A.V. (University of Mannheim); Pastore, Francesco (University of Naples II)
    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: IMF, Germany, Greece, Euro, Europe, Monetary Union
    JEL: E12 E62 F15 F16 F33 F55 H12 H50 H63 O42 O43
    Date: 2015–07
  6. By: Dolls, Mathias; Fuest, Clemens; Heinemann, Friedrich; Peichl, Andreas
    Abstract: This contribution develops a blueprint for a European fiscal union. The proposal addresses the shortcomings of most other reform designs which do not offer a solution for insolvent or noncooperative euro countries. We suggest a design which combines fiscal insurance with an orderly procedure to restructure the debt of an insolvent euro member. We show that fiscal insurance and a sovereign insolvency procedure are no contradiction but, on the contrary, mutually enforcing: An effective fiscal insurance helps to limit the stability risks involved in the implementation of an insolvency regime for sovereigns. And vice versa, a well-defined insolvency procedure reduces the danger that a fiscal capacity motivated as an insurance against transitory asymmetric shocks degenerates into a permanent transfer system. Moreover, we show that both elements are a helpful complement for the functioning of the European banking union and the new European fiscal governance.
    Keywords: sovereign insolvency procedure,European unemployment insurance,euro area debt crisis
    JEL: H87 H12
    Date: 2015
  7. By: Quitzau, Jörn; Boll, Christina; Leppin, Julian Sebastian
    Abstract: Workers in Europe have responded to the euro crisis. Cross-border migration flows have changed considerably over recent years. However, the single currency has not yet given mobility within the eurozone a direct, visible boost. Instead, the euro crisis primarily diverted the migration flows from the new EU member states in central and eastern Europe. Instead of heading for Spain, Ireland and Italy, workers from the accession countries are now going to other countries in Europe. Some workers from central and eastern Europe have even returned to their home countries from the countries hit by the euro crisis or moved on to other European states. This redirection of the migration flows from central and eastern Europe after 2007 is playing a much greater role in labour mobility in Europe than direct internal migration from the countries badly affected by the euro crisis to economically stronger eurozone countries. Employment and incomes are the actual drivers of labour mobility in Europe. The currency is not an issue in this regard. People go where the jobs are. In addition, the persistent income gap between the countries of central and eastern Europe and western Europe is acting as a lever initiating migration. The migration balances of the crisis-hit countries have come under pressure from two sources: fast-falling immigration figures coupled with rapidly rising emigration at the same time. A number of previously popular countries for immigration, like Spain, turned into net emigration countries during the crisis. Workers are reacting to the crisis. Migrants from the new member states in central and eastern Europe have proven to be especially mobile. They head for those eurozone countries where the labour market gives them opportunities, and they leave those countries again when the situation on the labour market deteriorates badly. Migrants are increasingly young and well educated. In general, a positive selection can be observed among emigrants, measured by the distribution of education in their home countries. Highly skilled migrants are in some cases buying their job by working below their formal qualifications at the new place of work. At the same time, a job for which they are actually overqualified is the better choice for them, provided this represents the (only) alternative to unemployment in the short run. In addition, the gap between skills offered and those demanded by the labour market widened rapidly during the crisis, especially in the crisis-hit countries but also in the eurozone overall. The skill mismatch implies high structural deficits on the labour markets in the eurozone that cannot be overcome by more labour mobility alone. The rising average age of the population is likely to dampen labour mobility within Europe in the future. This makes it all the more important to address structural reforms in order to boost employment growth in Europe and the eurozone. Mobility within Europe remains a complex phenomenon, driven by a range of factors. For this reason, it is also hard to predict migration flows going forward.
    Abstract: Die Arbeitskräfte in Europa haben auf die Euro-Krise reagiert. In den vergangenen Jahren haben sich die grenzüberschreitenden Wanderungsströme erheblich verändert. Allerdings hat die gemeinsame Währung Euro der Mobilität innerhalb des Währungsraumes bisher keinen direkten und sichtbaren Schub verliehen. Stattdessen hat die Euro-Krise vor allem die Wanderungsströme aus den neuen mittel- und osteuropäischen Mitgliedsstaaten der EU umgelenkt. Statt nach Spanien, Irland und Italien gehen Arbeitskräfte aus diesen Beitrittsländern jetzt in andere Länder Europas. Teilweise sind mittel- und osteuropäische Arbeitnehmer sogar aus den Euro-Krisenländern in ihre Heimatländer zurückgekehrt oder in andere europäische Staaten weitergewandert. Dieses Umlenken der Wanderungsströme aus Mittel- und Osteuropa nach 2007 spielt eine weit größere Rolle für die Mobilität der Arbeitskräfte in Europa als die direkte Binnenwanderung von den Euro-Krisenländern in wirtschaftlich stärkere Euro-Länder. Beschäftigung und Einkommen sind die eigentlichen Triebfedern der Arbeitskräftemobilität in Europa. Auf die Währung kommt es dafür nicht an. Die Menschen gehen dorthin, wo die Jobs sind. Zusätzlich wirkt das nach wie vor bestehende Einkommensgefälle zwischen den mittel- und osteuropäischen Staaten und Westeuropa als Hebel, der Wanderungen in Gang setzt. Die Wanderungsbilanzen der Krisenländer sind durch stark rückläufige Einwanderzahlen bei zugleich stark steigenden Auswanderungen doppelt unter Druck. Einige vormals beliebte Einwanderungsländer wie etwa Spanien haben sich unter der Krise zu Nettoauswanderungsländern entwickelt. Die Arbeitskräfte reagieren auf die Krise. Migranten aus den mittel- und osteuropäischen neuen Beitrittsländern erweisen sich als besonders mobil. Sie streben in diejenigen Mitgliedsländer der Währungsunion, in denen der Arbeitsmarkt ihnen Chancen bietet, und sie wandern aus ihnen wieder aus, wenn sich die Lage am Arbeitsmarkt deutlich verschlechtert. Migranten sind zunehmend jung und gut gebildet. Generell ist eine positive Selektion der Auswanderer, gemessen an der Bildungsverteilung in ihren Heimatländern, zu beobachten. Hoch qualifizierte Migranten erkaufen sich ihren Arbeitsplatz teilweise mit einem Einsatz unterhalb ihrer formalen Qualifikationen am neuen Arbeitsort. Gleichwohl ist ein Job, für den sie eigentlich überqualifiziert sind, für sie die bessere Wahl, sofern dies kurzfristig die (einzige) Alternative zur Arbeitslosigkeit darstellt. Zudem ist in der Krise die Kluft zwischen angebotenen und arbeitsmarktseitig nachgefragten Qualifikationen insbesondere in den Krisenländern, aber auch in der Eurozone insgesamt rapide angestiegen. Der Skill Mismatch weist auf hohe strukturelle Defizite an den Arbeitsmärkten in der Eurozone hin, die durch mehr Mobilität der Arbeitskräfte allein nicht zu beheben sind. Das zunehmende Durchschnittsalter der Bevölkerung dürfte die Arbeitskräftemobilität innerhalb Europas künftig eintrüben. Umso wichtiger ist es, strukturelle Reformen anzugehen, um die Beschäftigungsdynamik in Europa und dem Euroraum weiter zu steigern. Die Mobilität innerhalb Europas bleibt ein komplexes Phänomen, das von einer Vielzahl von Faktoren getrieben wird. Aus diesem Grund sind die Migrationsströme auch künftig schwer vorherzusagen.
    Date: 2014
  8. By: L. Cycon; Michael Koetter
    Abstract: With a unique loan portfolio maintained by a top-20 universal bank in Germany, this study tests whether unconventional monetary policy by the European Central Bank (ECB) reduced corporate borrowing costs. We decompose corporate lending rates into refinancing costs, as determined by money markets, and markups that the bank is able to charge its customers in regional markets. This decomposition reveals how banks transmit monetary policy within their organizations. To identify policy effects on loan rate components, we exploit the co-existence of eurozone-wide security purchase programs and regional fiscal policies at the district level. ECB purchase programs reduced refinancing costs significantly, even in an economy not specifically targeted for sovereign debt stress relief, but not loan rates themselves. However, asset purchases mitigated those loan price hikes due to additional credit demand stimulated by regional tax policy and enabled the bank to realize larger economic margins.
    Keywords: unconventional monetary policy, asset purchase programs, ECB, interest rate channel, internal capital markets
    JEL: G01 G21 E42 E43 E52
    Date: 2015–07
  9. By: Guillaume Arnould (Centre d'Economie de la Sorbonne - Labex Régulation Financière (Réfi)); Salim Dehmej (Centre d'Economie de la Sorbonne - Labex Régulation Financière (Réfi))
    Abstract: The results of the Comprehensive Assessment (CA) conducted by the ECB seem to attest the soundness of the European banking system since only 8 of 130 assessed banks still need to raise €6 billion. However it would be a mistake to conclude that non failing banks are completely healthy. Using data provided by the ECB and the ECB and the EBA after the CA, we assess the capital shortfalls for each banks by considering the transitional arrangements, an implementation of Basel III sovereign debt requirements and an enhancement of the leverage ratio. In addition we show, that if the CA has been a very complex exercise, it is not the best lens through which the soundness of the eurozone banking system should be evaluated. The assumptions used for the Asset Quality Review (AQR) and the stress-tests lead to week scenarios and requirements that undermine the reliability of the results. Finally we show that the low profitability, the massive dividend distribution and the incurred fines, give rise to concern on the ability of eurozone banks to meet the incoming capital requirements
    Keywords: financial stability; stress tests; banking; financial regulation; Basel III
    JEL: G21 G28
    Date: 2015–07
  10. By: Demary, Markus; Diermeier, Matthias; Haas, Heide
    Abstract: The establishment of a Capital Markets Union (CMU) is a high-priority project of the European Commission. CMU should foster additional non-bank sources of finance, mobilize private savings more efficiently and enhance capital market integration. Although more integration is needed, the Commission's proposal misses the role of systemic functions in a CMU. First, banks are important intermediaries specialized in credit relationships and small and medium-sized companies gain from long-term relationships with banks. Second, overcoming financial fragmentation needs sound sovereign debt markets with stable sovereign finances. In a CMU sovereign risks have to be treated adequately in bank regulation. Third, it should be assessed in advance which sources of non-bank finance will be demanded by companies and will become systemic. We recommend an integrated financial supervision for the CMU. Therefore, the European Banking Union should cover all European Union members' systemic relevant banks. In order to mobilize private savings while coping with the CMU's complexity, the EU should foster financial literacy.
    Abstract: Nachdem die europäische Bankenunion 2014 beschlossen wurde, hat Kommissionspräsident Jean-Claude Juncker nun ein neues Projekt vorgeschlagen, das die Finanzmarktintegration in Europa weiter vorantreiben soll: die Kapitalmarktunion. Während sich die Bankenunion auf die Schaffung eines einheitlichen Regelwerks sowie einer zentralen Bankenaufsicht und -abwicklung für den Bankensektor in der Eurozone beschränkt, soll die Kapitalmarktunion Barrieren aus dem Weg räumen, die den Kapitalfluss in der gesamten Europäischen Union bremsen. Im internationalen Vergleich sind Banken in der EU höchst relevant für die Unternehmensfinanzierung. Im Gegensatz dazu finanzieren sich Unternehmen in den USA stärker direkt über Kapitalmärkte und weniger über Banken. Auch wenn die USA kein explizites Vorbild für die Kapitalmarktunion ist, so zeigt sich doch deutlich, dass eine stärkere Rolle der Kapitalmärkte von der Politik favorisiert wird. [...]
    Keywords: financial aspects of economic integration,financial regulation,investment and savings,relationship-banking,sme finance,Banking and Insurance,European Central Bank,European Monetary Union,Banken und Versicherungen,Europäische Währungsunion,Europäische Zentralbank
    JEL: F02 F33 F36 G21 G28 G30 G38
    Date: 2015
  11. By: Lubos Hanus (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic); Lukas Vacha (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic)
    Abstract: In this paper, we map the process of synchronization of the Visegrad Four within the framework of the European Union using wavelet techniques. We show that the relationship of among countries is dynamic and that it varies over time and across frequencies. We study the synchronization applying the wavelet cohesion measure with time-varying weights. This novel approach allows us to study the dynamic relationship among countries from a different perspective than the usual time-domain models. Analyzing monthly data from 1990 to 2014, the results for the Visegrad region show an increasing co-movement with the European Union after the countries began preparing for accession to the European Union. Participation in a currency union possibly increases the co-movement. Furthermore, we find a high degree of synchronization in long-term horizons by analyzing the Visegrad Four and Southern European countries' synchronization with the core countries of the European Union.
    Keywords: business cycle synchronization, time-frequency, wavelets, co-movement, Visegrad Four, European Union
    JEL: E32 C40 F15
    Date: 2015–07

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