nep-eec New Economics Papers
on European Economics
Issue of 2015‒09‒05
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. What happened to profitability? Shocks, challenges and perspectives for euro area banks By Cheng, Gong; Mevis, Dirk
  2. From Populist Destabilization to Reform and Possible Debt Relief in Greece By William R. Cline
  3. The Euro Crisis: Where to From Here? By Frankel, Jeffrey
  4. The Power of Opinion: More Evidence of a GIPS-Markup in Sovereign Ratings During the Euro Crisis By Steffen Nauhaus
  5. Potential growth in France and the euro area: an overview of the estimation methods By M. LEQUIEN; A. MONTAUT
  6. Cross-Country Report on Inflation: Selected Issues By International Monetary Fund. European Dept.
  7. Wealth Inequality and Homeownership in Europe By Leo Kaas; Georgi Kocharkov; Edgar Preugschat
  8. Differences in Borrowing Behaviour between Core and Peripheral Economies — Economic Environment versus Financial Perceptions By Weiou Wu; Apostolos Fasianos; Stephen Kinsella
  9. Do Swedish Consumer Confidence Indicators Do What They Are Intended to Do? By Assarsson, Bengt; Österholm, Pär
  10. Indicators used in setting the countercyclical capital buffer By Kalatie, Simo; Laakkonen, Helinä; Tölö, Eero
  11. Country Size and Corporate Tax Rate: Rationale and Empirics By Azémar, Céline; Desbordes, Rodolphe; Wooton, Ian
  12. The Turnaround of Swedish Industry: Reforms, Firm Diversity and Job and Productivity Dynamics By Heyman, Fredrik; Norbäck, Pehr-Johan; Persson, Lars
  13. Assessing interdependence among countries' fundamentals and its implications for exchange rate misalignment estimates: An empirical exercise based on GVAR By MARÇAL, Emerson Fernandes; ZIMMERMANN, Beatrice; MENDONÇA, Diogo de Prince; MERLIN, Giovanni

  1. By: Cheng, Gong; Mevis, Dirk
    Abstract: This paper uses a newly constructed dataset including financial statement information of 311 banks in the euro area to analyse the evolution of bank profitability before and after the Global Financial Crisis and the subsequent European crisis. We first document the general trends in the changes in banks' profitability with a particular focus on country and bank heterogeneity. We find that the profitability of banks in different parts of the monetary union was hit by multiple shocks of different nature. Based on this, we then propose an econometric analysis of the drivers behind the evolution of bank profitability by discriminating factors relative to macroeconomic conditions, bank funding and portfolio structures, and new banking regulations in the euro area.
    Keywords: bank, profit, return on asset, bank regulation, bank business model
    JEL: G21 G28 G33 L25
    Date: 2015–08–17
  2. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: Using his European Debt Simulation Model (EDSM), Cline examines whether and to what extent additional debt relief is needed in Greece under the new circumstances. Greece’s debt burden is significantly lower than implied by the ratio of its gross debt to GDP, because of concessional interest rates on debt owed predominantly to the euro area official sector. The IMF’s call for debt relief recognizes the lower interest burden but argues that the gross financing requirement is on track to exceed a sustainable range of 15 to 20 percent. But in the Fund’s June Debt Sustainability Analysis that threshold would not be exceeded until after 2030. A sustainability diagnosis based on such a distant future date would seem at best illustrative rather than definitive. The euro area creditors might, nonetheless, be well advised to provide two types of interest relief: an earmarked portion of interest otherwise due to finance a public works employment program; and additional interest relief to compensate for budget shortfalls caused by growth below plan levels. The sovereign debt situation should be alleviated by carrying out the bank recapitalization directly from the European Stability Mechanism to the banks, rather than through the sovereign as the intermediary. The large increase in the ratio of gross debt to GDP imposed by bank recapitalization is mostly an optical illusion because there would be a corresponding rise in state assets, but this increase could, nonetheless, further erode perceptions of sustainability.
    Date: 2015–08
  3. By: Frankel, Jeffrey (Harvard University)
    Abstract: Germans cannot agree to unlimited bailouts of euro members. On the other hand, if they had insisted on the founding principles (fiscal constraints, "no bailout clause," and low inflation as the sole goal of the ECB), the euro would not have survived the post-2009 crisis. The impact of fiscal austerity has been to raise debt/GDP ratios among periphery countries, not lower them. The eurozone will endure, but through a lost decade of growth. It would help if the ECB further eased monetary policy, which it could do by buying US treasury bonds rather than eurozone bonds. Still needed is a long-run fiscal regime to address the moral hazard problem. Two worthwhile proposals are blue bonds and the delegation of forecasting to independent fiscal agencies.
    JEL: F33 F40
    Date: 2015–03
  4. By: Steffen Nauhaus
    Abstract: This paper examines whether the Big Three credit rating agencies actually played as active a role in the Euro Crisis as previously asserted. On the basis of panel data methods for a set of 11 EMU countries, the analysis reveals significant evidence for an arbitrary markup on the GIPS group of countries across agencies. This markup, which ranges from 1.5 notches for Moody’s to 2.2 notches for S&P, suggests that GIPS countries were treated worse than other EMU members since the start of the Eurozone crisis in 2009, irrespective of economic and institutional fundamentals. A subsequent analysis of the markup’s effect on yield spreads shows that this markup had significant effects on financial markets, leading to risk premiums for these countries of up to 1.6 points.
    Keywords: Rating agencies, sovereign ratings, Eurozone, Euro crisis, debt crisis
    JEL: G24 H63 F34
    Date: 2015
  5. By: M. LEQUIEN (Insee); A. MONTAUT (Insee)
    Abstract: At the end of 2013, the French GDP is only slightly higher than in the pre-crisis peak of 2008. Which part of the loss of activity is definitive? Providing an answer to this question brings to the fore two unobserved variables: potential GDP and output gap. These variables are difficult to estimate, especially on recent years, which calls for several estimation techniques. Four approaches are mobilized here: (A) the usual production function approach with two factors, capital and labor; (B) a variant thereof with a factor production, labor; (C) a multivariate filter improved with economic indicators and (D) a direct estimation of the output gap through a principal component analysis. According to these approaches, potential growth in France would lie between 0.7 % and 1.3% in 2014 and the output gap would be negative, between -2.3 and -3.5 GDP points in 2013, which signals capacity for economic rebound but confirms as definitive most of the loss of activity observed since the crisis. For the euro area, potential growth would stand between 0.2% and 0.7% in 2014 and the demand deficit would be close to the French one. These approaches all have pros and cons. They deliver different readings of the recent past. Thus, approaches (B) and (D) signal a loss of potential GDP concentrated at the time of crisis, followed by a recovery stronger than suggested by the two others approaches.
    Keywords: potential growth, potential output, output gap, production function, employment equation, state space model, principal component analysis, financial crisis
    JEL: C32 E22 E32 E60 O47
    Date: 2014
  6. By: International Monetary Fund. European Dept.
    Abstract: This Selected Issues paper examines the causes and drivers of low inflation in European inflation targeting countries outside the euro area, focusing on the Czech Republic, Poland, Sweden, and Switzerland. It estimates the effects on inflation from the output gap and external factors, including oil price changes, nominal effective exchange rate (NEER) fluctuations, and euro area inflation spillovers. It is observed that external factors have been significant drivers of low inflation recently, though their contributions to inflation and the channels through which they operate vary across countries. Policy responses and options are also discussed, taking into account country-specific circumstances.
    Keywords: Poland;Sweden;Switzerland;Czech Republic;inflation, external factors, core inflation, output gap, disinflation
    Date: 2015–07–14
  7. By: Leo Kaas (Department of Economics, University of Konstanz, Germany); Georgi Kocharkov (Department of Economics, University of Konstanz, Germany); Edgar Preugschat (Technical University Dortmund, Germany)
    Abstract: The recently published Household Finance and Consumption Survey has revealed large differences in wealth inequality between the countries of the Euro area. We find a strong negative correlation between wealth inequality and homeownership rates across countries. We use two decomposition methods to shed more light on this correlation. First, a Gini decomposition by homeownership status shows that the negative relationship is mostly driven by large between-group inequality across owners and renters. Second, to control for other observables, we conduct a detailed counterfactual decomposition of cross-country inequality differences. We confirm the major role for homeownership rates in accounting for the wealth inequality differences. Our analysis suggests that the cross-country variation is mostly driven by differences in the savings behavior of households in the bottom half of the wealth distribution and that those differences in savings are to a large extent channeled through housing wealth.
    Keywords: Wealth Inequality, Homeownership, Housing, Euro Area
    JEL: D31 E21 G11
    Date: 2015–08–27
  8. By: Weiou Wu (University of Limerick); Apostolos Fasianos (University of Limerick); Stephen Kinsella (University of Limerick)
    Abstract: Using the Eurosystem Household Finance and Consumption (HFCS) data, this paper identifies the key differences in borrowing behaviour between core and peripheral nations. As such, we focus on non-collateralized debt such as credit card loans, bank overdrafts and other forms of non-collateralized debt, which reflect daily borrowing behaviour more closely than does mortgage debt. We examine the differences in levels and prevalence of these debts, and break down these differences into two major components: financial perceptions and the economic environment. We aim to explain to what extent these influences contribute to the differences in debt ownership and levels of holding between core and peripheral countries in Europe. We found that differences in financial perceptions do contribute to the differences in debt in a significant way, while the economic environment contributes little to this outcome. Households in the European periphery are much more conducive to debt if they have the same financial perceptions as those in the core countries in Europe.
    Keywords: Household Debt, Counterfactual Decomposition, Demography, Risk Preference and Financial Expectation.
    Date: 2015–08–21
  9. By: Assarsson, Bengt (National Institute of Economic Research); Österholm, Pär (National Institute of Economic Research)
    Abstract: In this paper, we investigate whether the two main consumer confidence indicators available for Sweden – that of the National Institute of Economic Research and that of the European Commission – can nowcast Swedish household consumption expenditure. In a simulated out-of sample nowcast exercise, we find that the consumer confidence indicator of the National Institute of Economic Research appears most useful for this purpose. The root mean square error of the nowcast from the model employing this indicator is the lowest of all the studied models which rely on survey data. The nowcasting performance of the model using the consumer confidence indicator of the European Commission is less impressive; while it outperforms the simplest possible benchmark model, its root mean square error is considerably higher than that of the model relying on the consumer confidence indicator of the National Institute of Economic Research. An implication of our findings is that while the European Commission’s survey programme may have been successful in creating a set of harmonised data for the member countries of the European Union, it is not obvious that the harmonised indicators are the most relevant ones for analysis, nowcasting or forecasting in each country.
    Keywords: Household consumption; Nowcasting
    JEL: E21 E27
    Date: 2015–09–01
  10. By: Kalatie, Simo (Bank of Finland); Laakkonen, Helinä (Bank of Finland); Tölö, Eero (Bank of Finland, Financial Stability and Statistics Department)
    Abstract: According to EU legislation, the national authorities should use the principle of 'guided discretion' in setting the countercyclical capital buffer (CCB), which increases banks' resilience against systemic risk associated with periods of excessive credit growth. This means that the decision should be based on signals from a pre-determined set of early warning indicators, but that there should also be room for discretion, as there is always uncertainty associated with the use of early warning indicators. The European Systemic Risk Board (ESRB) recommends that the authorities use the deviation of the credit-to-GDP ratio from its long term trend value (credit-to-GDP gap) as the primary indicator in setting the CCB. In addition, designated authorities should use in their decision making indicators that measure private sector credit developments and debt burden, overvaluation of property prices, external imbalances, mispricing of risk, and strength of bank balance sheets. Based on an empirical analysis of data on EU countries and a large assortment of potential indicators, we propose a set of suitable early warning indicators for each of these categories.
    Keywords: countercyclical capital buffer; macroprudential policy; early warning indicators
    JEL: G01 G28
    Date: 2015–03–16
  11. By: Azémar, Céline; Desbordes, Rodolphe; Wooton, Ian
    Abstract: This paper investigates whether the differences in corporate tax rates set by countries can be explained, in part, by the size of national home markets. We set up a simple model in which multinational firms within an industry choose where to invest, given the levels of corporation tax rates in each location. This model yields predictions with respect to the influences of the relative size of countries on the differences in corporate tax rates that should arise in equilibrium. We then test these predictions using data from 27 European Union member-states for the period 1981-2005. Consistent with our model, we find that large countries set higher corporate tax rates than their smaller competitors for FDI. Our rationale for the existence of this effect, the market access, withstands the test of alternative explanations.
    Keywords: corporate tax rate; country size; foreign direct investment; tax competition
    JEL: E62 F23 H25
    Date: 2015–08
  12. By: Heyman, Fredrik (Research Institute of Industrial Economics (IFN)); Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: In this paper, we argue that fundamental reforms of the Swedish business sector can explain the remarkable productivity and employment growth that followed the deep economic crisis in Sweden in the early 1990s. In the 1970s and 1980s, Sweden had one of the most regulated business sectors in the developed world. In the 1990s, however, Sweden reformed its labour market, product market, and corporate tax system as well as removed barriers to foreign direct investment (FDI). Our main finding from our institutional and theoretical examination is that the removal of barriers to entry and growth for new and productive firms and the increased rewards for investments in human capital and effort in workplaces were crucial to the success of these reforms. We find support for our thesis using detailed matched plant-firm-worker data. In particular, we observe increased allocative efficiency, measured as increased market share for more productive firms. Moreover, we show that foreign firms substantially contributed to productivity and employment growth during this period, which suggests that the liberalization of FDI was an important factor in the success of the reforms. Finally, we discuss how other countries can benefit from the Swedish experience by examining factors that appear to be specific to Sweden and others that can be generalized to other countries.
    Keywords: Regulations; Allocative efficiency; Productivity; Job dynamics; Matched employer-employee data; Industrial structure and structural change
    JEL: D22 E23 J21 J23 K23 L11 L16 L51
    Date: 2015–09–01
  13. By: MARÇAL, Emerson Fernandes; ZIMMERMANN, Beatrice; MENDONÇA, Diogo de Prince; MERLIN, Giovanni
    Abstract: Exchange rates are important macroeconomic prices and changes in these rates a ect economic activity, prices, interest rates, and trade ows. Methodologies have been developed in empirical exchange rate misalignment studies to evaluate whether a real e ective exchange is overvalued or undervalued. There is a vast body of literature on the determinants of long-term real exchange rates and on empirical strategies to implement the equilibrium norms obtained from theoretical models. This study seeks to contribute to this literature by showing that the global vector autoregressions model (GVAR) proposed by Pesaran and co-authors can add relevant information to the literature on measuring exchange rate misalignment. Our empirical exercise suggests that the estimate exchange rate misalignment obtained from GVAR can be quite di erent to that using the traditional cointegrated time series techniques, which treat countries as detached entities. The di erences between the two approaches are more pronounced for small and developing countries. Our results also suggest a strong interdependence among eurozone countries, as expected
    Date: 2015–03–25

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