nep-eec New Economics Papers
on European Economics
Issue of 2015‒09‒11
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. External debt and real exchange rates’adjustment in the euro area: New evidence from a nonlinear NATREX model By Cécile Couharde; Serge Rey; Audrey Sallenave
  2. German labor market and fiscal reforms 1999 to 2008: Can they be blamed for intra-euro area imbalances? By Gadatsch, Niklas; Stähler, Nikolai; Weigert, Benjamin
  3. The macroeconomic effects of the Euro Area's fiscal consolidation 2011-2013: A Simulation-based approach By Rannenberg, Ansgar; Schoder, Christian; Strasky, Jan
  4. Financial Factors: Implications for Output Gaps By Pau Rabanal; Marzie Taheri Sanjani
  5. Labour Mobility and Labour Market Adjustment in the EU By Arpaia, Alfonso; Kiss, Aron; Palvolgyi, Balazs; Turrini, Alessandro
  6. Financial conditions and economic activity: the potential impact of the targeted longer-term refinancing operations (TLTROS) By Hiona Balfoussia; Heather D. Gibson
  7. The four unions "PIE" on the Monetary Union "CHERRY": a new index of European Institutional Integration By Dorrucci, Ettore; Ioannou, Demosthenes; Mongelli, Francesco Paolo; Terzi, Alessio
  8. Euro Area Policies: Selected Issues By International Monetary Fund. European Dept.
  9. Did the introduction of the euro lead to money illusion? Empirical evidence from Germany By Bittschi, Benjamin; Duppel, Saskia
  10. Towards a fiscal union? On the acceptability of a fiscal transfer system in the eurozone By Hebous, Shafik; Weichenrieder, Alfons J.
  11. Currency Unions and Trade: A Post-EMU Mea Culpa By Reuven Glick; Andrew K. Rose
  12. Financial Fragmentation and Economic Growth in Europe By Schnabel, Isabel; Seckinger, Christian
  13. Critique of accommodating central bank policies and the 'expropriation of the saver' - A review By Bindseil, Ulrich; Domnick, Clemens; Zeuner, Jörg

  1. By: Cécile Couharde; Serge Rey; Audrey Sallenave
    Abstract: In this paper we revisit medium- to long-run real exchange rate determination within the euro area, focusing on the role of external debt. Accordingly, we rely on the NATREX approach which provides an explicit framework of the external debt-real exchange rates nexus. In particular, given the indebtedness levels reached by the euro area economies, we investigate potential non-linearity in real exchange rates dynamics, according to the level of the external debt. Our results evidence that during the monetary union, gross and net external debt positions of the euro area countries have exerted pressures on real exchange rate dynamics within the area. Moreover, we find that, beyond a threshold reached by the external debt, euro area countries are found to be in a vulnerable position, leading to an unavoidable adjustment process. Nevertheless, the adjustment process, while effective, is found to be low and occurs slowly.
    Keywords: Euro area; External debt; NATREX approach; Panel Smooth Transition Regression models; Real exchange rates.
    JEL: C23 F31 O47
    Date: 2015
  2. By: Gadatsch, Niklas; Stähler, Nikolai; Weigert, Benjamin
    Abstract: In this paper, we assess the impact of major German structural reforms from 1999 to 2008 on key macroeconomic variables. By many, these reforms, especially the Hartz reforms on the labor market, are considered to be the root of observed imbalances in the Euro Area. Our simulations within a two-country monetary union DSGE model show that, in terms of German GDP, consumption, investment and (un)employment, the reforms were a clear success albeit the impact on the German current account was only minor. Most importantly, the rest of the Euro Area benefited from positive spillover effects. Hence, our analysis suggests that the reforms cannot be held responsible for the currently observed macroeconomic imbalances within the Euro Area. Further simulations highlight the importance of increased savings preferences in Germany to explain the latter.
    Keywords: Fiscal Policy,Labor Market Reforms,DSGE Modeling,Macroeconomics
    JEL: H2 J6 E32 E62
    Date: 2015
  3. By: Rannenberg, Ansgar (Central Bank of Ireland); Schoder, Christian (Vienna University of Economics and Business); Strasky, Jan (Organisation for Economic Co-operation and Development)
    Abstract: Since 2010, fiscal policy in the Euro Area (EA) turned progressively more restrictive.According to estimates by the European Commission (2012), spending cuts and tax increases accumulated to about 4% of annual Euro Area GDP between 2011 and 2013.The switch to fiscal austerity has been associated with a return of the EA economy to recession. The role of the fiscal consolidation in driving the Euro Area's disappointing economic performance is uncertain and disputed. This paper gauges the impact of this policy employing variants of two DSGE models used for policy analysis by the ECB (the New Area Wide Model, NAWM) and the European Commission (QUEST III). We find that, first, the simulated effect of the Euro Area's fiscal consolidation strongly depends on one's view regarding the expected persistence of the measures anticipated by the agents. If agents believe the measures to be permanent, the consolidation might even have been expansionary due to strong riccardian effects. However, it is plausible to assume that households and firms did not expect the measures to be permanent, and have a finite horizon due to some degree of myopia. We operationalize these concerns by simulating the measures as very persistent but not permanent. In this scenario, which we treat as our baseline, GDP contracts in both models, with the cumulative multiplier of the fiscal consolidation amounting to 0.7 and 1.0 over the 2011-2013 period, respectively. The government debt-to-GDP ratio declines below the non-consolidation case only after one or three years. We then investigate the impact of two plausible enhancements of the degree of financial frictions in the models. First, we add a reasonably parameterised financial accelerator along the lines of Bernanke et al. (1999). As a result, the output contraction becomes considerably bigger. Second, we allow for a plausible crisis-related increase of the share of liquidity constrained households. With both of these enhancements, the debt-to-GDP ratio increases for 4 or 5 years relative to the non-consolidation case. The cumulative multiplier equals 1.3. These results would imply that, in our baseline scenario, fiscal consolidation is responsible for between one third (NAWM) and one half (QUEST III) of the decline of the Euro Area's output gap from the beginning of 2011 until the end of the EA's recent recession in 2013, with the share rising to about 80% in the presence of enhanced financial frictions. Moreover, most of the output costs of fiscal consolidation could have been avoided if it had been postponed until the zero lower bound constraint on monetary policy was no longer binding, and under such conditions the government debt-to-GDP ratio could have been reduced much more quickly.
    Keywords: Fiscal policy simulations, fiscal consolidation, fiscal multiplier, Euro Area
    JEL: E32 E62
    Date: 2015–08
  4. By: Pau Rabanal; Marzie Taheri Sanjani
    Abstract: We suggest a new approach for analyzing the role of financial variables and shocks in computing the output gap. We estimate a two-region DSGE model for the euro area, with financial frictions at the household level, between 2000-2013. After joining the monetary union, a decline in some countries’ borrowing costs contributed to a credit, housing and real boom and bust cycle. We show that financial frictions amplified economic fluctuations and the measure of the output gap in those countries. On the contrary, in countries such as France and Germany, financial frictions played a minor role in output gap measures. 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 unsynchronized economic cycles.
    Date: 2015–07–14
  5. By: Arpaia, Alfonso (European Commission); Kiss, Aron (European Commission, Directorate Economic and Financial Affairs); Palvolgyi, Balazs (European Commission); Turrini, Alessandro (European Commission)
    Abstract: This paper assesses macroeconomic determinants of labour mobility and its role in the adjustment to asymmetric shocks. First, the paper develops stylised facts of mobility at the national and sub-national levels in the EU. Then, it explores the macroeconomic determinants of bilateral migration flows. Econometric evidence suggests that labour mobility increases significantly when a country joins the EU. While euro area membership seems not to be associated with an overall rise in the magnitude of mobility flows, workers do appear more ready to move from countries where unemployment is high to those where it is lower. Thirdly, the paper looks at mobility as a channel of economic adjustment by means of a VAR analysis in the vein of Blanchard and Katz (1992). Results indicate that mobility absorbs about a quarter of an asymmetric shock within 1 year. Movements in response to shocks have almost doubled since the introduction of the euro. Real wages have also become more responsive to asymmetric shocks during the same period.
    Keywords: labour mobility, geographic mobility, migration, gravity, adjustment, asymmetric shocks, optimal currency areas, European Union
    JEL: J61 J64
    Date: 2015–08
  6. By: Hiona Balfoussia (Bank of Greece); Heather D. Gibson (Bank of Greece)
    Abstract: This paper explores the relationship between financial conditions and real economic activity in the euro area as a whole and for Greece in particular. We use a financial conditions index (see Angelopoulou et al., 2014) which is constructed using a wide range of prices, quantities, spreads and survey data in line with theory. We update the indices and use them within a VAR framework to estimate the potential impact of the TLTROs on aspects of economic activity. Our results suggest that financial conditions do have a significant effect on economic activity and thus the TLTROs, to the extent that they are designed to improve financial conditions, will provide a boost to the real economy.
    Keywords: financial conditions; monetary policy; financial crisis; credit; non-standard measures
    JEL: E52 E51 E61 E63 E65
    Date: 2015–07
  7. By: Dorrucci, Ettore; Ioannou, Demosthenes; Mongelli, Francesco Paolo; Terzi, Alessio
    Abstract: This paper presents a European Index of Regional Institutional Integration (EURII), which maps developments in European integration from 1958 to 2014 on the basis of a monthly dataset. EURII captures what we call: (i) the “Common Market Era”, which lasted from 1958 until 1993; and (ii) the first twenty years of the “Union Era” that started in 1994, but gained new impetus in response to the euro area crisis. The paper complements the economic narratives of the crisis with an institutional approach highlighting the remedies to the flaws in the initial design of Economic and Monetary Union (EMU). In fact, since 2010, EMU’s institutional framework has been substantially reformed. While work on EMU’s new governance is still in progress, the broad contours of a “genuine union” have been outlined in the Four Presidents’ Report of December 2012. The report envisages a more effective economic union, a fiscal union, a financial union, and a commensurate political union. The aim of the EURII index is threefold: (i) to provide a tool to synthesise and monitor the process of European institutional integration since 1958 and, in particular, track institutional reforms since 2010; (ii) to expand a previous integration index by showing that monetary unification – which was initially understood as “the cherry on the Internal Market pie” – implied a major discontinuity in the process and nature of European integration, that is, a new “pie on the cherry”; and (iii) to offer a tool for further research, policy analysis and communication. JEL Classification: F33, F42, N24
    Keywords: Economic and Monetary Integration, euro, Financial Deepening and Integration, Four Presidents' Report, Institutions and Governance, Optimum Currency Area, Sovereign Crisis
    Date: 2015–02
  8. By: International Monetary Fund. European Dept.
    Abstract: Euro Area Policies: Selected Issues
    Keywords: Monetary policy;Economic growth;Inflation;Banking sector;Loans;Bank supervision;Fiscal reforms;Selected Issues Papers;Euro Area;debt, investment, unemployment, productivity
    Date: 2015–07–27
  9. By: Bittschi, Benjamin; Duppel, Saskia
    Abstract: Using the introduction of the euro as a natural experiment, we provide economy-wide evidence for money illusion based on declared donations from German administrative income tax data. Our results suggest a magnitude of the money illusion effect between 2.4% and 7.6%. Compared to previous studies on money illusion in the course of the euro currency changeover this effect size is significantly lower. We trace this back to the more comprehensive donation data in our study compared to hitherto studied face-to-face collections, which makes our results less prone to "power of the ask" and social pressure effects.
    Keywords: money illusion,euro introduction,charitable giving,natural experiment
    JEL: D12 E40
    Date: 2015
  10. By: Hebous, Shafik; Weichenrieder, Alfons J.
    Abstract: There is a large, but yet growing debate about the need to complement the European monetary union with a stronger fiscal union. This paper reviews the potential trade-offs between effectiveness, moral hazard problems, and permanent redistribution. In particular, we contribute to the question of how member states may be willing to enter into a stronger fiscal union if the evolution of this union may imply large redistribution under incomplete contracting. We discuss clawback mechanisms that have been suggested in the literature, but conclude that clawbacks are undesirable, as they would essentially destroy the insurance value of a fiscal union. Instead, we propose that a clearly defined exit option as a guarantee against involuntary redistribution can make entry into a stronger fiscal union less risky and hence more attractive for member states.
    Keywords: EMU,Eurozone,European unemployment insurance,fiscal transfers
    JEL: H1 H7
    Date: 2015
  11. By: Reuven Glick; Andrew K. Rose
    Abstract: In our European Economic Review (2002) paper, we used pre-1998 data on countries participating in and leaving currency unions to estimate the effect of currency unions on trade using (then-) conventional gravity models. In this paper, we use a variety of empirical gravity models to estimate the currency union effect on trade and exports, using recent data which includes the European Economic and Monetary Union (EMU). We have three findings. First, our assumption of symmetry between the effects of entering and leaving a currency union seems reasonable in the data but is uninteresting. Second, EMU typically has a smaller trade effect than other currency unions; it has a mildly stimulating effect at best. Third and most importantly, estimates of the currency union effect on trade are sensitive to the exact econometric methodology; the lack of consistent and robust evidence undermines confidence in our ability to reliably estimate the effect of currency union on trade.
    JEL: F15 F33
    Date: 2015–09
  12. By: Schnabel, Isabel; Seckinger, Christian
    Abstract: Using industry data from Eurostat and applying the Rajan-Zingales methodology, we investigate the real growth effects of banking sector integration in the European Union. Our sample stretches from 2000 until 2012 and includes the phase of rapid financial integration before the global financial crisis as well as the following phase of financial fragmentation and bank deleveraging. We find evidence that banking sector integration had a more than four times stronger growth effect during the crisis than in normal times. Growth effects are also stronger in times of domestic bank deleveraging. We conclude that concerns of European policy makers about fragmentation in the European banking sector are justified and that future reintegration is an important building block of future growth perspectives in the European Union.
    Keywords: cross-border lending; economic growth; European Union; financial crisis; financial fragmentation; financial integration; foreign banks; Rajan-Zingales methodology
    JEL: F36 G01 G15
    Date: 2015–09
  13. By: Bindseil, Ulrich; Domnick, Clemens; Zeuner, Jörg
    Abstract: In parts of the German media, with the support of a number of German economists, the ECB’s low nominal interest rate policy is criticised as unnecessary, ineffective and as expropriating the German saver. This paper provides a review of the relevant arguments. It is recalled that returns on savings are anchored to the real rate of return on capital. Good monetary policy tries to avoid being a source of disturbance in itself, and may be able to smooth the effects of temporary external shocks, but beyond that cannot structurally improve the real rate of return on capital. Against this general background, the paper critically analyses a number of recent arguments as to why low interest rate policies could actually be counterproductive. Finally, the paper reviews what can be done about the medium to long-term real rate of return on capital, which remains in any case the basic issue for the saver, focusing on the specific case of Germany. The key policies identified relate to demographics, education, labour markets, infrastructure and technology. Low growth dynamics in the coming decades and correspondingly low real rates of return on investments are not inevitable. JEL Classification: E43, E52, O40
    Keywords: growth, natural rate, real interest rate, zero lower bound
    Date: 2015–05

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.