nep-eec New Economics Papers
on European Economics
Issue of 2015‒08‒25
ten papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Alternative Interpretations of a Stateless Currency crisis By Sergio Cesaratto
  2. Incorporating Financial Cycles in Output Gap Measures: Estimates for the Euro Area By Pau Rabanal; Marzie Sanjani
  3. The stabilising properties of a European Banking Union in case of financial shocks in the Euro Area By Fritz Breuss; Werner Roeger; Jan in ’t Veld
  4. Ordoliberalism and the macroeconomic policy in the face of the euro crisis By Michal Moszynski
  6. The Innovation Union Scoreboard is flawed: The Case of Sweden – not the innovation leader of the EU – updated version By Edquist , Charles; Zabala-Iturriagagoitia , Jon Mikel
  7. Back to fiscal consolidation in Europe and its dual tradeoff : now or later, through spending cuts or tax hikes ? By Christophe Blot; Jérôme Creel; Bruno Ducoudre; Xavier Timbeau
  8. Asymmetric Unemployment-Output Tradeoff in the Eurozone By Tang, Bo; Bethencourt, Carlos
  9. Sovereign and corporate credit risk: Evidence from the Eurozone By Mascia Bedendo; Paolo Colla
  10. Realized Bank Risk during the Great Recession By Altunbas, Yener; Manganelli, Simone; Marques-Ibanez, David

  1. By: Sergio Cesaratto (University of Siena)
    Abstract: A number of economists holding Keynesian or pragmatic monetarist views warned that political union was a necessary premise for a viable monetary union. Inspired by Goodhart, we name this the Cartalist view. The European currency union was, however, strongly influenced by New Classical Macroeconomics, which gave new strength to older traditions, like ordoliberalism, that back separation of monetary and fiscal policy, legitimizing a Stateless currency. Again like Goodhart, we call this the Metallist view. This distinction is particularly relevant for assessing two alternative perspectives of the nature of the Euro area crisis. On one hand, there are those who argue that the crisis is akin to a traditional balance of payment crisis of the kind typically occurring in fixed exchange rate regimes. On the other, there are those who attribute the crisis to obstacles to more resolute intervention by the European Central Bank (ECB). Accordingly, belated intervention by the ECB led to worsening of the fiscal crisis of peripheral Euro area states, subsequently exacerbated by austerity policies. In this view, a classical balance of payment crisis can be excluded as a cause of the crisis, because Target 2, a payment mechanism analogous to Keynes’s International Clearing Union, protects the Euro area. In this paper, I argue that although a balance of payments crisis cannot exist in a viable sovereign monetary union, it is still conceivable in a flawed, stateless monetary union like the Euro zone, possibly obscured by Target 2. In this regard, I also show that, while timely and resolute ECB intervention would have been appropriate, in the absence of federal institutions (particularly a federal budget controlled by a European democratic parliament), once this intervention finally took place, austerity measures necessarily accompanied it to check moral hazard possibilities of peripheral member countries. I argue that the German neo-mercantilist orientation and the influence of the predominant mainstream credo that monetary policy should be detached from politics and fiscal policy are obstacles to a viable federal union. I also warn about the risk that the Parliament of such a union would be divided according to national rather than ideological/class interests. Virtue out of necessity, Hayek pointed out long-ago that a currency union among different nation-States could only survive with a minimalist federal State.
    Keywords: Europe, Crisis, Target2, ECB, State.
    JEL: E11 F33 N14
    Date: 2015–08
  2. By: Pau Rabanal (IMF); Marzie Sanjani (International Monetary Fund)
    Abstract: During the early 2000s, the euro area periphery countries experienced a credit and house price boom, but with moderate CPI inflation. We suggest a new approach for analyzing the role of credit and house prices in potential output and estimating the output gap. We present a two-country DSGE model for the core and periphery of the euro area, with financial frictions at the household level. We use several macroeconomic variables, including house prices and household credit for each region, to estimate the model. We find that, in the core, the measure of output gap is independent of financial frictions and is similar to that obtained with the Hodrick and Prescott filter, because of the absence of a credit boom. On the contrary, in the periphery, the presence of financial frictions amplify economic fluctuations and the output gap. We also present evidence of the trade-offs faced by the European Central Bank when trying to stabilize two regions in a currency union with divergent economic cycles.
    Date: 2015
  3. By: Fritz Breuss; Werner Roeger; Jan in ’t Veld
    Abstract: This paper analyses the stabilising properties of a European Banking Union in case of financial shocks in the euro area.
    JEL: C54 E12 E32 E42 E63 F41 G21
    Date: 2015–06
  4. By: Michal Moszynski (Nicolaus Copernicus University, Poland)
    Abstract: The global economic crisis and the crisis in the euro zone exposed the deep differences of opinion between German economists and scientists from other European countries and the US. The German approach conceptually differs in the views on the strategies and tools of anti-crisis policy, especially fiscal stimulus in the Keynesian-style, quantitative easing monetary policy of the ECB, the question of financial assistance to Greece and restructuring its debt. The other areas of difference are the approach to the rules in macroeconomic policy, fiscal consolidation, and interpretation of current account surplus. Given the size and performance of German economy it is important to understand the reasons for these opposites, which constitute the research goal of this article. Considerations are based on the thesis that ordoliberal thought still has a strong impact on the practice of macroeconomic policy in Germany and also at European level. The analysis is built on the short overview of ideological foundations of the German social market economy and its most important postulates, which then will be applied for interpretation of intellectual distinctions between economists from Germany and other countries in the theoretical and practical dimensions of economic policy observed in Europe. The methodology includes the critical literature studies and the comparative analysis of macroeconomic policy through the prism of economic thought.
    Keywords: Germany, macroeconomic policy, ordoliberalism, rules, economic order
    JEL: B25 E61 H12
    Date: 2015–08
  5. By: David Amiel (Ecole normale supérieure); Paul-Adrien Hyppolite (Ecole normale supérieure)
    Abstract: What would be the short-term financial consequences of exiting the Euro? This article addresses this issue by focusing on some key strategic non-financial corporations and systemic banking Groups of French nationality. We show that special attention should be paid to the marketable debt under foreign law issued to finance domestic activities which is unlikely to be redenominated in a devalued domestic currency becoming suddenly much more difficult to service. What would be the magnitude of this effect ? Drawing on a new database on debt securities compiled at the firm level and taking into account the nationality of the ultimate issuer, this paper identifies strategic and systemic French companies that would end up, in case of a Euro exit, with unhedged mismatches on their respective consolidated balance sheets, thereby triggering large negative balance sheet effects. These very mismatches would prove to be in fact very similar to currency mismatches faced by many financial and non-financial corporations in emerging economies at the time of the Asian crisis in the late 1990s, with the difference that they would be related to the juridical nature of the contracts instead of the currency of issue. We find that a significant share of the French financial and non-financial private sector finances its domestic activities with Eurodenominated debts under foreign law, which would ultimately remain in Euro and be repaid with a devalued currency if France were to leave the Eurozone. Historical examples support the idea that this “redenomination channel” has been crucial in explaining the successes or failures of exits from monetary unions. The “redenomination issue” played an important role in the 2002 Argentine collapse. On the contrary, some specificities, unlikely to be found in the Eurozone, of the widely-praised exits from the Gold Standard in the 1930s and of the “Velvet Divorce” in 1993 Czechoslovakia explain why this very issue was defused. Hence, the problem of private debt and the difficulties of redenomination appear to be much more formidable than conventional wisdom has long held and this should be kept in mind by policy makers.
    Date: 2015–02–16
  6. By: Edquist , Charles (CIRCLE, Lund University); Zabala-Iturriagagoitia , Jon Mikel (Deusto Business School, Deusto University)
    Abstract: According to the Innovation Union Scoreboard published by the European Commission, Sweden has been, and still is, an innovation leader within the EU and one of the most innovative countries in Europe. In this paper, the performance of the Swedish national innovation system is analyzed using exactly the same data as those employed by the Innovation Union Scoreboard for the years 2014 and 2015. <p> We argue that the Summary Innovation Index provided by the Innovation Union Scoreboard is highly misleading. Instead of merely calculating this Summary Innovation Index, the individual indicators that constitute this composite innovation indicator need to be analyzed in much greater depth in order to reach a correct measure of the performance of innovation systems. We argue that input and output indicators need to be considered as two separate types of indicators and each type should then be measured individually. Thereafter the input and output indicators should be compared to one another, as is normally done in productivity and efficiency measurements. <p> To check whether our approach provides results similar to those of the Innovation Union Scoreboard (or not), we apply it and analyze the relative position of Sweden - appointed the innovation leader of the EU, by the EU. A theoretical background and reasons for selecting the indicators used are also given and a new position regarding Sweden’s innovation performance compared to the other EU countries is calculated. <p> Our conclusion is that Sweden cannot be seen as an innovation leader in the EU. This means in turn that the Innovation Union Scoreboard is flawed and may therefore mislead researchers, policy-makers, politicians as well as the general public – since it is widely reported in the media.
    Keywords: Innovation system; innovation policy; innovation performance; Sweden; indicators; input; output
    JEL: O30 O38 O49 O52
    Date: 2015–08–11
  7. By: Christophe Blot (OFCE - OFCE - Sciences Po); Jérôme Creel (OFCE - OFCE - Sciences Po); Bruno Ducoudre (OFCE - OFCE - Sciences Po); Xavier Timbeau (OFCE - OFCE - Sciences Po)
    Abstract: The European consolidation process has raised a few questions. The most frequent one has been how large are the costs of consolidation and has the Eurozone fiscal stance improved or achieved debt sustainability? Second, do these costs and sustainability depend on the composition (tax vs. spending) of the consolidation process? Third, do risk premia matter? Fourth, which of the two following strategies, backloading vs. frontloading, is superior to the other? The aim of the paper is to shed light on these questions using a multi-country reduced-form model. It considers explicitly that the Eurozone member states are facing a dual trade-off, first between labor market outcomes of consolidation and public debt dynamics and, second, between reducing public expenditures and increasing taxes. The main conclusion is that a tax-based backloaded consolidation is superior to all other strategies, be they spending-based or frontloaded, or both. Introducing risk premia endogenously does not alter the conclusion.
    Date: 2015–03
  8. By: Tang, Bo; Bethencourt, Carlos
    Abstract: This study investigates the asymmetric unemployment-output tradeoff in the Eurozone. Building upon the augmented Okun’s law framework, the relationships between unemployment and output cannot be correctly specified in the static linear, static asymmetric and dynamic linear regressions. By contrast, the nonlinear autoregressive distributed lag (NARDL) model is well-specified and in this case indicates that the nature of Okun’s law is asymmetric. For the Eurozone, the NARDL estimates demonstrate that labour markets quickly respond to cyclical outputs in a short period, while the adjustments towards new equilibrium become weak in the long run. Furthermore, the cross-sectional analysis of long run asymmetries indicates that government spending and trade balance are key factors affecting the asymmetric unemployment-output tradeoff. Thus, these results seem to suggest that, in spite of the fact that member states lack monetary sovereignty, flexible application of fiscal reforms or labour market reforms could help to reduce asymmetric effects.
    Keywords: unemployment-output tradeoff, nonlinear autoregressive distributed lag (NARDL), asymmetry determinants.
    JEL: C22 E32 J64
    Date: 2015–06
  9. By: Mascia Bedendo (Audencia Recherche - Audencia); Paolo Colla (Bocconi University - Bocconi University)
    Abstract: We study the impact of sovereign risk on the credit risk of the non-financial corporate sector in the Eurozone using credit default swap data. We show that an increase in sovereign credit spreads is associated with a statistically and economically significant increase in corporate spreads and, hence, firms' borrowing costs. A deterioration in a country's credit quality affects more adversely firms that are more likely to benefit from government aid, those whose sales are more concentrated in the domestic market, and those that rely more heavily on bank financing. Our findings suggest that government guarantees, domestic demand, and credit markets are important credit risk transmission mechanisms.
    Date: 2015–08
  10. By: Altunbas, Yener (Bangor Business School); Manganelli, Simone (European Central Bank); Marques-Ibanez, David (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In the years preceding the 2007-2009 financial crisis, forward-looking indicators of bank risk concentrated and suggested unusually low expectations of bank default. We assess whether the ex-ante (i.e. prior to the crisis) cross-sectional variability in bank characteristics is related to the ex-post (i.e. during the crisis) materialization of bank risk. Our tailor-made dataset crucially accounts for the different dimensions of realized bank risk including access to central bank liquidity during the crisis. We consistently find that less reliance on deposit funding, more aggressive credit growth, larger size and leverage were associated with larger levels of realized risk. The impact of these characteristics is particularly relevant for capturing the systemic dimensions of bank risk and tends to become stronger for the tail of the riskier banks. The majority of these characteristics also predicted bank risk as materialized before the financial crisis.
    Keywords: Bank risk; business models; Great Recession
    JEL: E58 G15 G21 G32
    Date: 2015–08–04

This nep-eec issue is ©2015 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.