nep-eec New Economics Papers
on European Economics
Issue of 2016‒02‒12
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Overcoming the Euro Crisis and Prospects for a Political Union By Paul J.J. Welfens
  2. Financial assistance measures in the euro area from 2008 to 2013: statistical framework and fiscal impact By Maurer, Henri; Grussenmeyer, Patrick
  3. Heterogeneity in Returns to Wealth and the Measurement of Wealth Inequality By Fagereng, Andreas; Guiso, Luigi; Malacrino, Davide; Pistaferri, Luigi
  4. Should the ‘outs’ join the European banking union? By Pia Hüttl; Dirk Schoenmaker
  5. Bail-in Expectations for European Banks: Actions Speak Louder than Words By Schäfer, Alexander; Schnabel, Isabel; Weder di Mauro, Beatrice
  6. New and timely statistical indicators on government debt securities By Hartwig Lojsch, Dagmar; Dias, Jorge Diz; Pérez, Asier Cornejo
  7. The QE experience : Worth a try ? By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  8. Sovereign to corporate risk spillovers By Augustin, Patrick; Boustanifar, Hamid; Breckenfelder, Johannes; Schnitzler, Jan
  9. Domestic creditors as last lenders in debt crises: a simple model with multiple equilibria By Pauline Gandré
  10. International Housing Markets, Unconventional Monetary Policy and the Zero Lower Bound By Florian Huber; Maria Teresa Punzi
  11. Public Debt, Economic Growth and the Real Interest Rate:A Panel VAR Approach to EU and OECD Countries By Kazuo Ogawa; Elmer Sterken; Ichiro Tokutsu
  12. Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops By Farhi, Emmanuel; Tirole, Jean
  13. Psychological Costs of Currency Transition: Evidence from Euro Adoption By Otrachshenko, Vladimir; Popova, Olga; Tavares, José
  14. Personal Insolvency Dynamics in Germany and the UK – A SUR-TAR Approach By Eva Arnold; Nadja König
  15. The dynamics of profits and wages: technology, offshoring and demand By Francesco Bogliacino; Dario Guarascio; Valeria Cirillo
  16. Systemic early warning systems for EU15 based on the 2008 crisis By Savas Papadopoulos; Pantelis Stavroulias; Thomas Sager
  17. Household debt in OECD countries: Stylised facts and policy issues By Christophe André

  1. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW); Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: The euro crisis and a new debate about immigration in Europe have undermined support for the EU while the unsolved Greek debt problems as well as the ECB’s quantitative easing policy have raised new crucial policy issues. It is necessary to identify the key issues of Eurozone stabilization and to clarify the economic benefits from monetary integration. As regards the economic welfare analysis of the euro, the new model presented shows the benefits of the euro’s reserve currency position, namely in the framework of a neoclassical growth model with seigniorage based on international reserve holdings. Discounted benefits are about 10 000 € per capita in a stable Euro area. Thus the benefits are bigger than often considered, at the same time one may raise the question of whether the existing institutional setting of the Eurozone is sufficient for achieving long-term stability and prosperity. As regards the envisaged third rescue package for Greece it is emphasized that a haircut of public creditors along with adoption of a Greek capital levy plus privatization efforts are required to achieve debt sustainability and growth. The traditional interpretation of subsidiarity in the EU is found to be misleading and the vertical division of politics is destabilizing.
    Keywords: Potential Output, Innovation, Knowledge Production Function, Macroeconomics, Globalization
    JEL: E23 F02
    Date: 2015–07
  2. By: Maurer, Henri; Grussenmeyer, Patrick
    Abstract: This paper summarises the accounting principles and methodology used by statisticians within the European System of Central Banks (ESCB) to assess the impact on the government’s fiscal position of the assistance measures undertaken to support the financial sector during the financial crisis. It then presents for the euro area and its participating countries the main fiscal impact of these measures for the period 2008-2013. The results are mainly structured around three important questions for the wider public: (i) What is the magnitude of the financial resources needed by governments to provide financial support? (ii) What is the current gain or loss to governments from interventions to support the financial sector? And (iii) How did the guarantees provided by governments to the financing sector change over the period? Finally, the paper discusses further accounting challenges associated with this topic. JEL Classification: H81
    Keywords: bailout measures, capital transfers to the financial sector, change in net financial worth on balance sheet, earmarking and recording imputation, financial needs and estimated loss, impact on government debt and deficit
    Date: 2015–04
  3. By: Fagereng, Andreas; Guiso, Luigi; Malacrino, Davide; Pistaferri, Luigi
    Abstract: Lacking a long time series on the assets of the very wealthy, Saez and Zucman (2015) use US tax records to obtain estimates of wealth holdings by capitalizing asset income from tax returns. They document marked upward trends in wealth concentration. We use data on tax returns and actual wealth holdings from tax records for the whole Norwegian population to test the robustness of the methodology. We document that measures of wealth based on the capitalization approach can lead to misleading conclusions about the level and the dynamics of wealth inequality if returns are heterogeneous and even moderately correlated with wealth.
    Keywords: Heterogeneity; Returns to Wealth; Wealth Inequality
    JEL: E13 E21 E24
    Date: 2016–01
  4. By: Pia Hüttl; Dirk Schoenmaker
    Abstract: Highlights For political reasons, European Union member states’ opinions on joining banking union range from outright refusal to active consideration. The main stance is to wait and see how the banking union develops. The wait-and-see positions are often motivated by the consideration that joining banking union might imply joining the euro. However, in the long term, banking union’s ultimate rationale is linked to cross-border banking in the single market, which goes beyond the single currency. This Policy Contribution documents the banking linkages between the nine ‘outs’ and 19 ‘ins’ of the banking union. We find that some of the major banks based in Sweden and Denmark have substantial banking claims across the Nordic and Baltic regions. We also find large banking claims from banks based in the banking union on central and eastern Europe. The United Kingdom has a special position, with London as both a global and European financial centre. We find that the out countries could profit from joining banking union, because it would provide a stable arrangement for managing financial stability. Banking union allows for an integrated approach towards supervision (avoiding ring fencing of activities and therefore a higher cost of funding) and resolution (avoiding coordination failure). On the other hand, countries can preserve sovereignty over their banking systems outside the banking union. 1. Introduction Banking union, which consists of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM), was a reply to one of the root-causes of the European debt crisis - the sovereign-banking loop. The vicious circle linking the solvency of euro-area countries to the solvency of their banks contributed to the crisis. The sovereign-bank loop works two ways. First, banks hold on their balance sheets large amounts of the bonds of their own governments (Merler and Pisani-Ferry, 2012; Battistini et al, 2014). Consequently, a deterioration of a government’s credit rating would automatically undermine the solvency of that country’s banks. Second, a weakening of a country’s banking system could have implications for the government’s budget because of the potential for a government-financed bank bailout, and because of lower tax revenues resulting from the subsequent economic downturn (Angeloni and Wolff, 2012)1. The euro area fell victim to the sovereign-bank loop because national central banks have given up control over the currency in which their debts are issued, putting the European Central Bank (ECB) in charge. To break the loop, a June 2012 summit of euro-area heads of state and government2 decided to move the responsibility for banking supervision to the euro-area level as a pre-condition for direct bank recapitalisation by the European Stability Mechanism (ESM)3. Moreover, the ECB was substantially exposed to banks because it was forced to provide them with liquidity without having supervisory control. If ex-post rescues are organised at European level, ex-ante supervision should also be moved to European level to minimise the need for such rescues (Goodhart and Schoenmaker, 2009). The essence of banking union is therefore supervision and resolution of banks at supranational level. While euro-area members have been included in all elements of the banking union by default, the SSM also allows non-euro area EU members to participate. For these countries, an important strategic question is if and when they should join part or all of banking union. On this question, opinions differ (Figure 1). Sweden declared in 2014 that it will not join banking union in the foreseeable future, and has not since changed its view substantially4, remaining the United Kingdom's main ally on this issue. By contrast, Denmark's government said in April 2015 that it wants to become part of the banking union, because it views it as being in the interests of its financial sector (Østergaard and Larsen, 2015)5. In central and eastern Europe, the Czech Republic remains sceptical about eventual participation in the banking union, and Hungary and Poland have also adopted wait-and-see approaches6. Bulgaria and Romania are more positive about joining banking union. In July 2014, Bulgaria said it would seek to join banking union after poor supervision led to the collapse of its fourth biggest lender7. Romania too has embraced the idea of joining banking union from early on (Isarescu, 2013). [infogram id="new_map___all_of_europe" prefix="SEh" format="interactive" title="new map - All of Europe"] These wait-and-see positions are often motivated by the consideration that joining banking union might imply joining the euro. However, we argue that in the long-term, banking union’s ultimate rationale is more linked to cross-border banking in the single market, which goes beyond the single currency. Therefore, the debate about whether to opt in to banking union is not necessarily a debate about joining the full package, eg joining both the euro and banking union.
    Date: 2016–02
  5. By: Schäfer, Alexander; Schnabel, Isabel; Weder di Mauro, Beatrice
    Abstract: The declared intention of policy makers is that future bank restructuring should be conducted through bail-in rather than bail-out. Over the past years there have been a few cases of European banks being restructured where creditors were bailed in. This paper exploits these cases to investigate the market reactions of stock prices and credit default swap (CDS) spreads of European banks in order to gauge the extent to which it is expected that bail-in will indeed become the new regime. We find evidence of increased CDS spreads and falling stock prices most notably after the bail-in in Cyprus. However, bail-in expectations appear to depend on the sovereign’s fiscal strength, i.e., reactions are stronger for banks in countries with limited fiscal space for bail-out. Moreover, actual bail-ins lead to stronger market reactions than the legal implementation of bank resolution regimes, supporting the saying that actions speak louder than words.
    Keywords: bail-in; bank restructuring; creditor participation; event study; Single Resolution Mechanism
    JEL: G21 G28
    Date: 2016–01
  6. By: Hartwig Lojsch, Dagmar; Dias, Jorge Diz; Pérez, Asier Cornejo
    Abstract: New monthly statistical indicators on government debt securities for euro area countries have now been developed on the basis of the information contained in the Centralised Securities Database (CSDB), an internal database available to the European System of Central Banks (ESCB). The CSDB is jointly operated by the ESCB and contains timely and high-quality security-by-security reference data on debt securities, equities and investment funds. The new indicators on government debt securities provide an indication of the expected disbursements made for the servicing of issued debt securities together with the associated interest rate (nominal yield), broken down by country, original and remaining maturity, currency and type of coupon rate. This paper describes in detail the newly compiled statistical information and thus contributes to further describing the euro area government bond markets. The new indicators on euro area government debt securities are also highly relevant for policy-making and monetary and fiscal analyses. They indicate that, as at December 2014, the debt service scheduled for such securities in 2015 stood at approximately 15.9% of GDP (€1.6 trillion). This is associated with an average nominal yield on outstanding government debt securities for the euro area as a whole of 3.1% per annum. Both of these indicators have followed a decreasing path in recent periods. The new indicators also reveal some heterogeneity within the euro area: Italy shows the highest debt service and Luxembourg the lowest, while the debt securities issued by Germany have the lowest average nominal yield and Lithuanian ones the highest. JEL Classification: E62, H63, H68
    Keywords: debt securities, euro area, Government debt
    Date: 2015–06
  7. By: Christophe Blot (OFCE); Jérôme Creel (OFCE); Paul Hubert (OFCE); Fabien Labondance (Centre de REcherches sur les Stratégies Economiques)
    Abstract: The ECB has decided to implement large-scale quantitative easing (QE) measures since March 2015 until September 2016. This unconventional monetary policy has had a variety of precedents, in the Japanese, UK and US economies. These experiments have been effective a tmodifying government and corporate bond yields, mostly in the UK and US and to a lesser extent in Japan. This conclusion is not context-free. The European QE has started in a deflation era which requires more activism and cooperation from the ECB and Euro area governments than in the UK and the US when their central banks embarked in QE. The success of the European QE will also depend substantially on the depreciation of the Euro and will require clear communication by the ECB that it is prepared to accept a large depreciation at least until the inflation rate goes back to its target.
    Keywords: Quantitative easing (EQ) measures; Unconventional monetary policy; Depreciation of the Euro
    Date: 2015–04
  8. By: Augustin, Patrick; Boustanifar, Hamid; Breckenfelder, Johannes; Schnitzler, Jan
    Abstract: Using the announcement of the first Greek bailout on April 11, 2010, we quantify significant spillover effects from sovereign to corporate credit risk in Europe. A ten percent increase in sovereign credit risk raises corporate credit risk on average by 1.1 percent after the bailout. These effects are more pronounced in countries that belong to the Eurozone and that are more financially distressed. Bank dependence, public ownership and the sovereign ceiling are channels that enhance the sovereign to corporate risk transfer. JEL Classification: F34, F36, G15, H81, G12
    Keywords: bailout, contagion, credit risk, Greece, risk transmission
    Date: 2016–01
  9. By: Pauline Gandré (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - UCBL - Université Claude Bernard Lyon 1 - UL2 - Université Lumière - Lyon 2 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - ENS Lyon - École normale supérieure - Lyon)
    Abstract: It is widely acknowledged that the ratios of public debt over GDP reached historically high levels in the Euro area during the recent sovereign debt crisis. More unnoticed however is the simultaneous increase in the share of government debt held by residents that has started in late 2008 in most fragile economies of the area. This paper develops a simple theoretical framework, in which multiple equilibria arise, to explain why exogenous increases in the debt level may cause this share to increase, due to distinct expected returns on domestic sovereign debt for domestic and foreign creditors in times of turmoil.
    Keywords: Debt crises, Domestic creditors, Multiple equilibria
    Date: 2015
  10. By: Florian Huber (Department of Economics, Vienna University of Economics and Business); Maria Teresa Punzi (Department of Economics, Vienna University of Economics and Business)
    Abstract: In this paper we propose a time-varying parameter VAR model for the housing market in the United States, the United Kingdom, Japan and the Euro Area. For these four economies, we answer the following research questions: (i) How can we evaluate the stance of monetary policy when the policy rate hits the zero lower bound? (ii) Can developments in the housing market still be explained by policy measures adopted by central banks? (iii) Did central banks succeed in mitigating the detrimental impact of the financial crisis on selected housing variables? We analyze the relationship between unconventional monetary policy and the housing markets by using the shadow interest rate estimated by Krippner (2013b). Our findings suggest that the monetary policy transmission mechanism to the housing market has not changed with the implementation of quantitative easing or forward guidance, and central banks can affect the composition of an investors portfolio through investment in housing. A counterfactual exercise provides some evidence that unconventional monetary policy has been particularly successful in dampening the consequences of the financial crisis on housing markets in the United States, while the effects are more muted in the other countries considered in this study.
    Keywords: Zero Lower Bound, Shadow interest rate, Housing Market, Time-varying parameter VAR
    JEL: C32 E23 E32
    Date: 2016–01
  11. By: Kazuo Ogawa; Elmer Sterken; Ichiro Tokutsu
    Abstract: We investigate the causal relationship between the public debt to GDP ratio and economic growth for 31 EU and OECD countries from 1995 to 2013. A number of studies have tackled this problem, but very few make the transmission mechanism explicit in their analysis. We estimate a panel VAR model that incorporates the long-term real interest rate on government bonds as a vehicle to transmit shocks in both the public debt to GDP ratio and economic growth. We find no causal link from the public debt to GDP ratio to the GDP growth rate, irrespective of the levels of public debt. Rather, we find a causal relation from the GDP growth rate to the public debt to GDP ratio. In high-debt countries, the direct negative impact of economic growth on public debt is enhanced by a rise in the long-term real interest rate, which in turn decreases interest-sensitive demand and leads to a further increase in the public debt to GDP ratio.
    Date: 2016–01
  12. By: Farhi, Emmanuel; Tirole, Jean
    Abstract: The recent unravelling of the Eurozone’s financial integration raised concerns about feedback loops between sovereign and banking insolvency, and provided an impetus for the European banking union. This paper provides a “double-decker bailout” theory of the feedback loop that allows for both domestic bailouts of the banking system by the domestic government and sovereign debt forgiveness by international creditors or solidarity by other countries. Our theory has important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions.
    Keywords: bailouts; feedback loop; shared supervision; sovereign and corporate spreads; sovereign default
    JEL: F34 F36 G28 H63
    Date: 2015–12
  13. By: Otrachshenko, Vladimir; Popova, Olga; Tavares, José
    Abstract: We analyze individual levels of life satisfaction in Slovakia, after that country adopted the Euro, following a spirited debate. We gauge the psychological cost of transition to the new currency by comparing individual life satisfaction, not only before and after Euro introduction, but by comparison with individuals with similar characteristics in the neighboring Czech Republic, which did not adopt the Euro. Both countries were economically and politically integrated for decades, and share similar macroeconomic indicators just before the currency change in Slovakia. We find evidence of substantial psychological costs of currency transition, which are especially important for the old, the unemployed, those with low education and in households with children. We believe these results suggest the importance of information and enlightened debate before a sweeping change in economic context such as the adoption of a new currency.
    Keywords: currency transition; Czech Republic; euro; Slovakia; subjective well-being
    JEL: E52 F55 I31
    Date: 2016–01
  14. By: Eva Arnold (Universität Hamburg (University of Hamburg)); Nadja König (Universität Hamburg (University of Hamburg))
    Abstract: This paper analyses the dynamics of personal insolvencies in Germany and the UK, focusing on the recent recession. These countries are particularly interesting as they are both member countries of the European Union, yet have completely different approaches to deal with overindebted individuals. In Germany unfortunate households who file on their debt are required to undergo a relatively long restructuring period until they eventually receive debt relief, whereas British debtors can choose proceeding out of many alternatives to manage their debt. Even under the official bankruptcy option, debt gets discharged relatively fast. In line with their different insolvency procedures, the two countries also represent two different financial systems: the German system is rather bank-based and the UK system rather market-based. The underlying financial systems already point to different patterns of lending across countries and hence, also to different structures of debt. Specifically, we are interested in the dynamics of petitions and actual insolvencies during the crisis as well as their reaction to exogeneous macroeconomic and financial conditions. The findings suggest that insolvencies are more persistent in the UK than in Germany, i.e. after an external shock it takes longer for insolvencies to return to their previous level in the UK. In both countries, the recent recession has no effect on petitions to default, but it has an effect on actual insolvencies in the UK suggesting that debtors rather opted for official procedures during the recession.
    Keywords: Private Household Debt, Personal Insolvency Laws, Recessions
    JEL: E44 G01 G21 K49
    Date: 2016–02
  15. By: Francesco Bogliacino; Dario Guarascio; Valeria Cirillo
    Abstract: This article explores the impact of innovation, offshoring and demand on profits and wage dynamics. The growing relevance of functional distribution in terms of explaining personal distribution underscores the importance of our results for understanding recent increases in inequality. The empirical analysis performed herein involves a panel of 38 manufacturing and service sectors over four time periods (1995 to 2010) across five European countries (Germany, France, Italy, Spain and United Kingdom). Our identification strategy relies on instrumental variables and recently proposed heteroskedasticity-based instruments (Lewbel, 2012). Additionally, we perform sensitivity analysis to account for omitted variables bias, following the recent theoretical results of Oster (2015). The main results of our study can be summed up in three points. First, it highlights the contrasting effects of R&D and offshoring as wage determinants: the former exerts a positive effect while the latter exert a negative effect. Second, it shows that external demand is a key variable driving profits growth. Third. it provides evidence of noteworthy results stemming from the categorization of workers according to skill level, such as: high-skilled workers are favored by both innovation and offshoring, offshoring exerts downward pressure primarily on low-skilled wages (not on mediumskilled wages as predicted by SBTC) and profits are positively correlated with high-skill wages, negatively correlated with medium-skill wages and not correlated with low-skill wages.
    Keywords: rent; surplus; distribution; inequality; skills; offshoring; R&D
    Date: 2016–03–02
  16. By: Savas Papadopoulos (Bank of Greece); Pantelis Stavroulias (Democritus University of Thrace); Thomas Sager (University of Texas)
    Abstract: Reliable forecasts of an economic crisis well in advance of its onset could permit effective preventative measures to mitigate its consequences. Using the EU15 crisis of 2008 as a template, we develop methodology that can accurately predict the crisis several quarters in advance in each country. The data for our predictions are standard, publicly available macroeconomic and market variables that are preprocessed by moving averages and filtering. The prediction models then utilize the filtered data to distinguish pre-crisis from normal quarters through standard statistical classification methodology plus a proposed new combined method, enhanced by an innovative threshold selection and goodness-of-fit measure. Empirical results are very satisfactory: Country-stratified 14-fold cross validation achieves 92.1% correct classification and 85.7% for both true positive rate and positive predictive value for the EU15 crisis of 2008. Results will be of use to policy makers, investors, and researchers who are interested in estimating the probability of a crisis as much as one and a half years in advance in order to deploy prudential policies.
    Keywords: Banking crisis; financial stability; macroprudential policy; classification methods; goodness-of-fit measures
    JEL: C53 E58 G28
    Date: 2016–01
  17. By: Christophe André
    Abstract: Household debt has risen markedly since the turn of the century and stands at a historically high level in most OECD countries. This paper offers an overview of developments in household debt over the past decades across a large sample of OECD countries, highlighting both common trends and country specificities. It examines the vulnerabilities associated with high household debt for households, the financial system and the wider economy. Finally, it describes the challenges faced by policymakers at the current juncture and outlines responses in terms of monetary, micro and macro-prudential, and housing policies. L'endettement des ménages dans les pays de l'OCDE : Faits stylisés et questions de politique L'endettement des ménages a nettement augmenté depuis le début du siècle et se situe à un niveau historiquement élevé dans la plupart des pays de l'OCDE. Ce document donne un aperçu de l'évolution de l'endettement des ménages au cours des dernières décennies à travers un large échantillon de pays de l'OCDE, soulignant à la fois les tendances communes et les spécificités nationales. Il examine les vulnérabilités associées à un endettement élevé des ménages pour ces derniers, le système financier et l'économie en général. Enfin, il décrit les défis rencontrés par les décideurs politiques dans la conjoncture actuelle et esquisse des réponses en termes de politiques monétaire, micro et macro-prudentielles, et du logement.
    Keywords: monetary policy, housing market, household debt, housing policies, mortgages, financial stability, macroprudential policy, politique macroprudentielle, marchés immobiliers, dette des ménages, prêts hypothécaires, politique du logement, stabilité financière, politique monétaire
    JEL: D14 E21 E52 G21 G28 R21 R31
    Date: 2016–02–10

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