nep-eec New Economics Papers
on European Economics
Issue of 2016‒02‒23
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Real Exchange Rates, Current Accounts and Competitiveness Issues in the Euro Area By Mirdala, Rajmund
  2. Eurosystem debts do matter By Whittaker, John
  3. The European Central Bank’s quantitative easing programme: limits and risks By Grégory Claeys; Alvaro Leandro
  4. Could exit rules be self-enforcing in the EU? The cases of France and Germany By Kappius, Robert; Neumärker, Bernhard
  5. Neoliberalism, trade imbalances and economic policy in the Eurozone crisis By Constantine, Collin; Reissl, Severin; Stockhammer, Engelbert
  6. Systemic risk spillovers in the European banking and sovereign network By Betz, Frank; Hautsch, Nikolaus; Peltonen, Tuomas A.; Schienle, Melanie
  7. Misallocation and Productivity in the Lead Up to the Eurozone Crisis By Dias, Daniel A.; Marques, Carlos Robalo; Richmond, Christine
  8. The unbearable divergence of unemployment in Europe By Tito Boeri; Juan Francisco Jimeno
  9. QE and the Bank Lending Channel in the United Kingdom By Nick Butt; Rohan Churm; Michael McMahon; Arpad Morotz; Jochen Schanz
  10. CoRisk: measuring systemic risk through default probability contagion By Paolo Giudici; Laura Parisi
  11. How is the Irish Fiscal Advisory Council Performing? An Independent Evaluation of the First Years of IFAC By Jonung, Lars; Begg, Iain; Tutty, Michael G.
  12. Which Union for Europe’s Capital Markets? By Lannoo, Karel
  13. An empirical evaluation of macroeconomic surveillance in the European Union By Boysen-Hogrefe, Jens; Jannsen, Nils; Plödt, Martin; Schwarzmüller, Tim
  14. Dynamics of the European sovereign bonds and the identification of crisis periods By Chen, Zhenxi; Reitz, Stefan

  1. By: Mirdala, Rajmund
    Abstract: The lack of nominal exchange rate flexibility in the monetary union induced the growing divergence of trade performance among the member countries. Intra-Eurozone current account imbalances among countries with different income levels per capita fuel discussions on competitiveness channels under common currency. Asynchronous current account trends between North and South of the Euro Area were accompanied by significant appreciations of real exchange rate in the periphery economies originating in the strong shifts in consumer prices and unit labor costs in these countries relative to the countries of the Euro Area core. The issue is whether the real exchange rate is a significant driver of persisting current account imbalances in the Euro Area considering than, according to some authors, differences in domestic demand are more important than is often realized. In the paper we analyze main aspects of current account adjustments in the Euro Area member countries. From estimated VAR model we calculate impulse-response function of the current account to the real exchange rate (REER calculated on CPI and ULC base) and domestic demand shocks and variance decomposition to examine the relative importance of both shocks. Our results indicate that while the prices and costs related determinants of external competitiveness affected imports more significantly than exports, demand drivers shaped current account balances mainly during the crisis period.
    Keywords: current account, real exchange rate, economic crisis, vector autoregression, impulse-response function, variance decomposition
    JEL: C32 F32 F41
    Date: 2015–09
  2. By: Whittaker, John
    Abstract: Since September 2015, the European Central Bank has been publishing Target2 balances of the eurozone national central banks. But this presents an incomplete picture of intra-eurosystem debts because it does not include those arising from the issue of banknotes. The ECB also plays down the importance of Target2 debts as a “normal feature of the decentralised implementation of monetary policy in the euro area”. But if Greece were to leave the euro and its eurosystem debt (currently €114bn) were written off, other eurozone countries would bear the loss, in addition to losses on official loans. There is no effective mechanism for limiting eurosystem debts. And exit risk – the risk that Greece or some other eurozone country with large eurosystem debts will leave the euro – will always be present.
    Keywords: Target2, eurosystem, monetary union, euro banknotes
    JEL: E42 E52 E58 F33
    Date: 2016–02–01
  3. By: Grégory Claeys; Alvaro Leandro
    Abstract: HIGHLIGHTS The European Central Bank (ECB) has made a number of significant changes to the original guidelines of its quantitative easing (QE) programme since the programme started in January 2015. These changes are welcome because the original guidelines would have rapidly constrained the programme’s implementation. The changes announced expand the universe of purchasable assets and give some flexibility to the ECB in the execution of its programme. However, this might not be enough to sustain QE throughout 2017, or if the ECB wishes to increase the monthly amount of purchases in order to provide the necessary monetary stimulus to the euro area to bring inflation back to 2 percent. To increase the programme’s flexibility, the ECB could further alter the composition of its purchases. The extension of the QE programme also raises some legitimate questions about its potential adverse consequences. However, the benefits of this policy still outweigh its possible negative implications for financial stability or for inequality. The fear that the ECB’s credibility will be undermined because of its QE programme also seems to be largely unfounded. On the contrary, the primary risk to the ECB’s credibility is the risk of not reaching its 2 percent inflation target, which could lead to expectations becoming disanchored. EXECUTIVE SUMMARY The European Central Bank (ECB) has made a number of significant changes to the original design of its quantitative easing (QE) programme since the programme started in January 2015. The bank has expanded the list of national agencies whose securities are eligible for the Public Sector Purchase Programme (PSPP); it has changed the issue share limit (ensuring that the Eurosystem will not breach the prohibition on monetary financing), which was originally set at 25 percent, to 33 percent (at least for securities without collective action clauses); it has added regional and local government bonds to the list of eligible assets; it has announced that the programme would continue past September 2016, the previously-announced minimum end-date, to March 2017 “or beyond, if necessary”; and it has declared its intention to reinvest the principal payments on the securities purchased under the programme as they mature. As explained in Claeys et al (2015b), the programme’s original guidelines would have constrained the size and duration of the programme, especially if it was sustained throughout 2017. The changes to the design of the programme announced during 2015 greatly expand the universe of purchasable assets and should therefore delay the point at which limits will be reached. However, the decision to reinvest the principal payments as bonds mature, by increasing the monthly monetary purchase after March 2017, would also lead to the limits being reached sooner. In the same way, a decision by the ECB to increase the amount of PSPP purchases each month, for instance from €44 billion to €64 billion, would also frontload the purchases. In the end, because of the issue share limit, for a given set of securities there will always be a trade-off between larger monthly purchases and a prolonged programme. Further changes to the design of the programme will have to be implemented in order to increase the duration of the programme if the limit is binding in a major country before inflation is on the path towards 2 percent. These could include waiving the issue limit for AAA-rated bonds, or purchasing senior uncovered bank bonds as well corporate bonds. A more radical change could be to move away from an allocation of asset purchases between countries based on the ECB capital keys to an allocation based on the actual size of their outstanding debt. We also discuss the possible financial stability risks of a prolonged and large-scale QE programme, and conclude that the benefits of large-scale asset purchases outweigh their potential risks in terms of financial stability. However, micro- and macro-prudential policies should be used forcefully to prevent such risks from materialising. We also consider the potential effects that a prolonged asset-purchase programme could have on inequality. The increase in inequality observed in many advanced countries in recent decades is a long-term trend and primarily the result of deep structural changes. Our view is that the primary mandate of the ECB is to maintain price stability, and considerations of inequality are not within its purview, unless inequality prevents the transmission of monetary policy in some way. The ECB should therefore focus on fulfilling its price stability mandate by supporting the fragile recovery now taking place in the euro area. This is the best way for monetary policy to contribute to the avoidance of an increase in inequality. The fear that the ECB will lose its credibility solely because it is currently buying a large amount of sovereign bonds appears to be largely unfounded. The primary risk to the ECB’s credibility is the risk of not reaching its inflation target.
    Date: 2016–02
  4. By: Kappius, Robert; Neumärker, Bernhard
    Abstract: [Introduction] Exit rules allow for a temporary or permanent withdrawal from international cooperative regimes. For the ongoing crisis in the European Monetary Union (EMU), such rules are seen as a desirable solution to enhance flexibility in case of economic and political shocks in member countries and to restrict fiscal externalities in the Euro zone. As the EU acts as a union of sovereign countries, politically powerful nations like France or Germany are likely to blockade or circumvent such a rule, if it negatively affects their interest. The underlying strategic problem of self-enforceability is largely neglected with respect to an EU exit rule. This contribution to the political economy of exit and escape rules aims at assessing conditions of voluntary adherence to an exit scheme by all parties of a common currency union such as the EMU. [...]
    Date: 2015
  5. By: Constantine, Collin (Kingston University London); Reissl, Severin (Kingston University London); Stockhammer, Engelbert (Kingston University London)
    Abstract: This paper analyses the causes of the Eurozone crisis. In doing so it carefully surveys authors from different economic schools of thought. The paper discusses competing explanations for European current account imbalances. Remarkably, opposing views on the relative importance of cost developments and of demand developments in explaining current account imbalances can be found in both heterodox and orthodox economics and there is a remarkable variability of policy conclusions. Regarding the assessment of fiscal and monetary policy there is a clearer polarisation, with heterodox analysis regarding austerity as unhelpful and most of orthodox economics endorsing it. We advocate a post-Keynesian view which holds that current account imbalances are not a fundamental cause of the sovereign debt crisis. Rather, the economic policy architecture of the Eurozone, which aims at restricting the role of fiscal and monetary policy, is the key to understanding the crisis in Europe.
    Keywords: Euro crisis; neoliberalism; European economic policy; financial crisis; sovereign debt crisis; current account balance
    JEL: B50 E60
    Date: 2016–02–17
  6. By: Betz, Frank; Hautsch, Nikolaus; Peltonen, Tuomas A.; Schienle, Melanie
    Abstract: We propose a framework for estimating time-varying systemic risk contributions that is applicable to a high-dimensional and interconnected financial system. Tail risk dependencies and systemic risk contributions are estimated using a penalized two-stage fixed-effects quantile approach, which explicitly links time-varying interconnectedness to systemic risk contributions. For the purposes of surveillance and regulation of financial systems, network dependencies in extreme risks are more relevant than simple (mean) correlations. Thus, the framework provides a tool for supervisors, reflecting the market's view of tail dependences and systemic risk contributions. The model is applied to a system of 51 large European banks and 17 sovereigns during the period from 2006 through 2013, utilizing both equity and CDS prices. We provide new evidence on how banking sector fragmentation and sovereign-bank linkages evolved over the European sovereign debt crisis, and how they are reflected in estimated network statistics and systemic risk measures. Finally, our evidence provides an indication that the fragmentation of the European financial system has peaked.
    Keywords: systemic risk contribution,tail dependence,network topology,sovereignbank linkages,Value-at-Risk
    JEL: G01 G18 G32 G38 C21 C51 C63
    Date: 2016
  7. By: Dias, Daniel A. (Board of Governors of the Federal Reserve System (U.S.)); Marques, Carlos Robalo (Banco de Portugal); Richmond, Christine (International Monetary Fund)
    Abstract: We use Portuguese firm-level data to investigate whether changes in resource misallocation may have contributed to the poor economic performance of some southern and peripheral European countries leading up to the Eurozone crisis. We extend Hsieh and Klenow's (2009) methodology to include intermediate inputs and consider all sectors of the economy (agriculture, manufacturing, and services). We find that within-industry misallocation almost doubled between 1996 and 2011. Equalizing total factor revenue productivity across firms within an industry could have boosted valued-added 48 percent and 79 percent above actual levels in 1996 and 2011, respectively. This implies that deteriorating allocative efficiency may have shaved around 1.3 percentage points off the annual GDP growth during the 1996-2011 period. Allocative efficiency deterioration, despite being a widespread phenomenon, is significantly higher in the service sector, with 5 industries accounting for 72 percent of the total variation. Capital distortions are the most important source of potential value-added efficiency gains, especially in the service sector, with a relative contribution increasing over time.
    Keywords: Misallocation; wedges; productivity; firm-level data; financial integration
    JEL: D24 O11 O41 O47
    Date: 2015–09–23
  8. By: Tito Boeri; Juan Francisco Jimeno
    Abstract: Unemployment in Europe is not only “too high”, it is also too different across countries that belong to a monetary union. In this paper we i) document this increasing heterogeneity, ii) try to explain it and iii) draw from our diagnosis indications as to the appropriate set of policies to reduce unemployment and labour market disparities. Our analysis suggests that the divergence in labour market outcomes across Europe is the by-product of interactions between, on the one hand, shocks of varying size and nature, and, on the other hand, country-specific labour market institutions. We argue that EU policy coordination and conditionality during the Great Recession and the euro area debt crisis did not properly take into account these interactions. We also propose a change in the European policy approach for fighting unemployment.
    Keywords: Okun’s Law; institutions; financial shocks
    JEL: J3 J5
    Date: 2015–11
  9. By: Nick Butt (Bank of England); Rohan Churm (Bank of England); Michael McMahon (Centre For Economic Policy Research; Centre For Macroeconomics (CFM); University of Warwick); Arpad Morotz (Bank of England); Jochen Schanz (Bank for International Settlements)
    Abstract: We test whether quantitative easing (QE), in addition to boosting aggregate demand and in ation via portfolio rebalancing channels, operated through a bank lending channel (BLC) in the UK. Using Bank of England data together with an instrumental variables approach, we find no evidence of a traditional BLC associated with QE. We show, in a simple framework, that the traditional BLC is diminished if the bank receives `flighty' deposits (deposits that are likely to quickly leave the bank). We show that QE gave rise to such flighty deposits which may explain why we find no evidence of a BLC.
    Keywords: Monetary policy, bank lending channel, quantative easing
    JEL: E51 E52 G20
    Date: 2015–10
  10. By: Paolo Giudici (Department of Economics and Management, University of Pavia); Laura Parisi (Department of Economics and Management, University of Pavia)
    Abstract: We propose a novel systemic risk measurement model, based on stochastic processes, correlation networks and conditional probabilities of default.For each country we consider three different spread measures, one for each sector of the economy (sovereigns, corporates, banks), and we model each of them as a linear combination of two stochastic processes: a country-specific idiosyncratic component and a common systematic factor. We then build a partial correlation network model, and by combining it with the spread measures we derive the conditional default probabilities of each sector. Comparing them with the unconditional ones, we obtain the CoRisk, which measures the variation in the probability of default due to contagion effects. Our measurement model is applied to understand the time evolution of systemic risk in the economies of the European monetary union, in the recent period. The results show that, overall, the sovereign crisis has increased systemic risks more than the financial crisis. In addition, peripheral countries turn out to be exporters, rather than importers of systemic risk, and, conversely, core countries.
    Keywords: correlation networks, default probabilities, systemic risk, stochastic processes
    Date: 2016–02
  11. By: Jonung, Lars (Department of Economics, Lund University); Begg, Iain (European Institute, London School of Economics and Political Science); Tutty, Michael G. (Irish Fiscal Advisory Council)
    Abstract: This paper presents an independent evaluation of the Irish Fiscal Advisory Council (IFAC) carried out in 2015. IFAC was set up as an independent fiscal institution in 2011 to monitor the fiscal policy of the Irish government. Similar fiscal “watchdogs” have emerged across Europe following the crisis in the euro area. This report presents conclusions and recommendations concerning the performance of IFAC. The focus is on five main issues: the mandate, the financial and human resources, the output, the impact (communication strategy) of IFAC and the relationship between the EU fiscal framework and the Irish framework. A general conclusion is that IFAC has, so far, served the Irish fiscal policy process well. With Ireland having exited its macroeconomic adjustment programme and a return to economic health, IFAC now faces new challenges in keeping Ireland on a sustainable fiscal path.
    Keywords: Ireland; fiscal policy council; independent fiscal agency; fiscal stabilization; fiscal rules and fiscal crisis
    JEL: E62 E63 E65 F42
    Date: 2016–02–08
  12. By: Lannoo, Karel
    Abstract: The call for a Capital Markets Union has been a useful device to raise awareness about the need for more integration in Europe's capital markets. Despite years of harmonising regulation and a single currency, Europe’s capital markets remain fragmented. This Policy Brief calls for targeted measures to overcome fragmentation, through enhanced enforcement, strengthening of the European supervisory authorities, enhanced disclosure and comparability of financial information and the mobilisation savings in EU-wide investment funds.
    Date: 2015–02
  13. By: Boysen-Hogrefe, Jens; Jannsen, Nils; Plödt, Martin; Schwarzmüller, Tim
    Abstract: The EU's macroeconomic surveillance mechanism, namely the Macroeconomic Imbalance Procedure (MIP), is based on the so-called Scoreboard, which comprises a set of indicators that serve as a signalling device for potentially harmful macroeconomic developments. We first evaluate the early warning properties of the Scoreboard indicators with regard to financial crises. We then analyze the role of emerging crisis signals from the Scoreboard for the subsequent steps of the MIP (In-Depth Reviews), in which the gravity of imbalances and policy recommendations are specified. The results of our study help to identify ways to improve the current set-up and ultimately to deliver more transparent and effective policy advice.
    Keywords: Macroeconomic Imbalance Procedure,early warning indicators,signals approach,financial crises
    JEL: E02 E61 C25
    Date: 2015
  14. By: Chen, Zhenxi; Reitz, Stefan
    Abstract: We develop an empirical model of heterogeneous agents to study the dynamics of the European sovereign bonds market. Agents make use of different information from the CDS market and the historical price movements of the sovereign bonds for their trading decisions. Subject to the perceived risk, agents exhibit changing trading behaviors in high risk periods and tranquil times. As a robustness check for the ability of our model to identify crises periods we also run a generalized sup adf test as suggested in Phillips, Shi, and Yu (2015) . Our results indicate that the smooth transition regression framework may provide additional valuable information regarding the timing of crisis events.
    Keywords: sovereign bonds,CDS,heterogeneous agents
    JEL: C32 C5 G15
    Date: 2016

This nep-eec issue is ©2016 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.