nep-eec New Economics Papers
on European Economics
Issue of 2016‒04‒09
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Interest rates, Eurobonds and intra-European exchange rate misalignments: The challenge of sustainable adjustments in the Eurozone By Vincent Duwicquet; Jacques Mazier; Jamel Saadaoui
  2. The Pre-Great Recession Slowdown in Productivity. By G. Cette; J. Fernald; B. Mojon
  3. SME Financing in the EU: Moving beyond one-size-fits-all By Markus Demary; Joanna Hornik; Gibran Watfe
  4. Friends Without Benefits? New EMU Members and the “Euro Effect†on Trade By Alina Mika; Robert Zymek
  5. Growing like Spain: 1995-2007 By Manuel García-Santana; Enrique Moral-Benito; Josep Pijoan-Mas; Roberto Ramos
  6. The speed of the exchange rate pass-through By Bonadio, Barthélémy; Fischer, Andreas M; Sauré, Philip
  7. A proposal to revive the European Fiscal Framework By Grégory Claeys; Zsolt Darvas; Alvaro Leandro
  8. Public investment multipliers in EU countries: Does the efficiency of public sector matter? By Papaioannou, Sotiris
  9. A New Settlement for the UK: A “Leap in the Dark” By Phedon Nicolaides; Roxana Nedelescu (née Sandu); Joanna Hornik; Gibran Watfe; Gil Stein
  10. Study on Structures of Aggressive Tax Planning and Indicators By Ramboll Management Consulting and Corit Advisory
  11. International Financial Flows in the New Normal: Key Patterns (and Why We Should Care) By Matthieu Bussière; Julia Schmidt; Natacha Valla
  12. Real wage cyclicality in the Eurozone before and during the Great Recession: Evidence from micro data By Gregory Verdugo
  13. Deflation risk in the euro area and central bank credibility By Gabriele Galati; Zion Gorgi; Richhild Moessner; Chen Zhou
  14. Union Debt Management By Equiza-Goni, Juan; Faraglia, Elisa; Oikonomou, Rigas
  15. Should the marketing of subordinated debt be restricted/different in one way or the other? What to do in the case of mis-selling? By Götz, Martin R.; Tröger, Tobias
  16. Housing market volatility connectedness among G7 countries By Han Shik Lee; Woo Suk Lee
  17. The evolution of the anchoring of inflation expectations By Ines Buono; Sara Formai
  18. The lack of a European public sphere in the debate on the European sovereign debt crisis By Otto, Kim; Köhler, Andreas
  19. Inclusive labour market: A role for a job guarantee scheme By Klosse, Saskia; Muysken, Joan

  1. By: Vincent Duwicquet (CLERSE - Centre lillois d'études et de recherches sociologiques et économiques - CNRS - Centre National de la Recherche Scientifique - Université Lille 1 - Sciences et technologies); Jacques Mazier (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - Université Sorbonne Paris Cité (USPC) - CNRS - Centre National de la Recherche Scientifique); Jamel Saadaoui (BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The euro crisis shed lights on the nature of alternative adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, it remains very few efficient alternative mechanisms. At the level of the whole eurozone the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. This paper gives a new evaluation of these exchange rate misalignments inside the eurozone, using a FEER approach, and examines the evolution of competitiveness. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and Eurobonds issuance. Three main results are found. Firstly, facing a competitiveness loss in southern countries due to exchange rates misalignments, increasing intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Secondly, the implementation of Eurobonds as a tool to partially mutualize European sovereign debt would have a rather similar positive impact, but with a public debt limited to 70 percent of GDP. Finally, Eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire zone with stabilized current account imbalances. However, the creation of a European institution in charge of the issuance of the Eurobonds would face strong political obstacles.
    Keywords: Euro Crisis, Exchange Rate Misalignments, Eurobonds, Interest Rate
    Date: 2016–03–23
  2. By: G. Cette; J. Fernald; B. Mojon
    Abstract: In the years since the Great Recession, many observers have highlighted the slow pace of productivity growth around the world. For the United States and Europe, we highlight that this slow pace began prior to the Great Recession. The timing thus suggests that it is important to consider factors other than just the deep crisis itself or policy changes since the crisis. For the United States, at the frontier of knowledge, there was a burst of innovation and reallocation related to the production and use of information technology in the second half of the 1990s and the early 2000s. That burst ran its course prior to the Great Recession. Continental European economies were falling back relative to that frontier at varying rates since the mid-1990s. We provide VAR and panel-data evidence that changes in real interest rates have nfluenced productivity dynamics in this period. In particular, the sharp decline in real interest rates that took place in Italy and Spain seem to have triggered unfavorable resource reallocations that were large enough to reduce the level of total factor productivity, consistent with recent theories and firm-level evidence.
    Keywords: Productivity, ICT, Europe, convergence, capital flows, mis-allocation.
    JEL: E23 E32 O47 O52
    Date: 2016
  3. By: Markus Demary (Cologne Institute for Economic Research); Joanna Hornik (College of Europe, Department of European Economic Studies); Gibran Watfe (College of Europe, Department of European Economic Studies)
    Abstract: The proposal for a European Capital Markets Union (CMU) carries large potential economic benefits from enhancing the financing possibilities for Small and Medium-Sized Enterprises (SMEs). By deepening the capital markets and strengthening crossborder integration, the European Commission hopes to stimulate economic growth and boost employment. In this paper, we discuss to what extent these goals can be achieved, in light of the complex business environment of European SMEs. We outline the different types of SMEs in terms of their financing structures as well as the pervasive differences across the EU, concluding that any policy approach must take into account the diversity of the companies’ financing needs and the market realities in the Member States. We argue that the CMU is likely to have a heterogeneous impact, with some types of SMEs and certain regions gaining more than others.
    Keywords: Capital Markets Union, SME financing, European integration
    JEL: O16 F21 E61 G32
    Date: 2016–03
  4. By: Alina Mika; Robert Zymek
    Abstract: We re-visit the evidence about the trade benefits of European Monetary Union (EMU), focusing on the experience of countries which adopted the common currency since 2002. Based on “state of the art†gravity estimations for the period 1992-2013, we reach three main conclusions. First, estimates from an appropriately specified and estimated gravity equation provide no evidence of a euro effect on trade flows among early euro adopters up to the year 2002. Second, this finding is robust to extending the sample period to incorporate data up to 2013, covering five additional euro accessions. Third, while there is no robust evidence of a euro effect, there is evidence that intra-EU trade flows have expanded faster than the global average during the 2002-2013 period. Using the functional form of a theory-consistent gravity equation, we perform pseudo out-of-sample forecasts of trade flows for recent euro joiners. In line with our estimation results, we show that pseudo forecasts of the change in trade flows after euro accession, assuming no euro effect, outperform forecasts based on the expectation of a significantly positive effect. This suggests that euro accession countries should not expect a significant boost to their trade from joining EMU.
    Keywords: euro, trade, gravity, poisson
    JEL: F14 F15 F17 F33
    Date: 2016–02–02
  5. By: Manuel García-Santana; Enrique Moral-Benito; Josep Pijoan-Mas; Roberto Ramos
    Abstract: Spanish GDP grew at an average rate of 3.5% per year during the expansion of 1995-2007, well above the EU average of 2.2%. However, this growth was based on factor accumulation rather than productivity gains as TFP fell at an annual rate of 0.7%. Using firm-level administrative data for all sectors we show that deterioration in the allocative efficiency of productive factors across firms was at the root of the low TFP growth in Spain, while misallocation across sectors played only a minor role. Cross-industry variation reveals that the increase in misallocation was more severe in sectors where government influence is more important for business success, which represents novel evidence on the potential macroeconomic costs of crony capitalism. In contrast, sectoral differences in financial dependence, skill intensity, innovative content, tradability, or capital structures intensity appear to be unrelated to changes in allocative efficiency. All in all, the observed high output growth together with increasing firm-level misallocation in all sectors is consistent with an expansion driven by a demand boom rather than by structural reforms.
    Keywords: TFP, misallocation, Spain
    JEL: D24 O11 O47
    Date: 2016–03
  6. By: Bonadio, Barthélémy; Fischer, Andreas M; Sauré, Philip
    Abstract: This paper analyzes the speed of the exchange rate pass-through into importer and exporter unit values for a large, unanticipated, and unusually 'clean' exchange rate shock. Our shock originates from the Swiss National Bank's decision to lift the minimum exchange rate policy of one euro against 1.2 Swiss francs on January 15, 2015. This policy action resulted in a permanent appreciation of the Swiss franc by more than 11% against the euro. We analyze the response of unit values to this exchange rate shock at the daily frequency for different invoicing currencies using the universe of Switzerland's transactions-level trade data. The main finding is that the speed of the exchange rate pass-through is fast: it starts on the second working day after the exchange rate shock and reaches the medium-run pass-through after eight working days on average. Moreover, we decompose the pass-through by invoicing currencies and find strong evidence that underlying price adjustments occurred within a similar time frame. Our observations suggest that nominal rigidities play only a minor role in the face of large exchange rate shocks.
    Keywords: daily exchange rate pass-through; large exchange rate shock; speed
    JEL: F14 F31 F41
    Date: 2016–03
  7. By: Grégory Claeys; Zsolt Darvas; Alvaro Leandro
    Abstract: Highlights • Pro-cyclical fiscal tightening might be one reason for the anaemic economic recovery in Europe, raising questions about the effectiveness of the EU’s fiscal framework in achieving its two main objectives - public debt sustainability and fiscal stabilisation. • In theory, the current EU fiscal rules, with cyclically adjusted targets, flexibility clauses and the option to enter an excessive deficit procedure, allow for large-scale fiscal stabilisation during a recession. However, implementation of the rules is hindered by the badly-measured structural balance indicator and incorrect forecasts,leading to erroneous policy recommendations. The large number of flexibility clauses makes the system opaque. • The current inefficient European fiscal framework should be replaced with a system based on rules that are more conducive to the two objectives, more transparent, easier to implement and which have a higher potential to be complied with. • The best option, re-designing the fiscal framework from scratch, is currently unrealistic. Therefore we propose to eliminate the structural balance rules and tointroduce a new public expenditure rule with debt-correction feedback, embodied in a multi-annual framework, which would also support the central bank’s inflation target. A European Fiscal Council could oversee the system.
    Date: 2016–03
  8. By: Papaioannou, Sotiris
    Abstract: This study examines whether differences in public sector efficiency are associated with diverging effects of public investment on growth. At first stage, we estimate public investment multipliers for each country of the European Union (EU). Their size varies considerably across countries. Then we construct measures of public sector efficiency which are used in the econometric analysis to study the relationship between public investment and growth. The main result of the econometric analysis is that the efficiency of public sector indeed matters in raising the influence of public investment on growth. This result remains robust to several changes in the econometric specification and to various measures of government efficiency which used as explanatory variables in the econometric estimations.
    Keywords: Public investments, Fiscal multipliers, Public sector efficiency, Economic growth.
    JEL: E62 H30 O40
    Date: 2016–03–22
  9. By: Phedon Nicolaides (Director of Studies and Jan Tinbergen Chair, Department of European Economic Studies, College of Europe); Roxana Nedelescu (née Sandu) (College of Europe, Department of European Economic Studies); Joanna Hornik (College of Europe, Department of European Economic Studies); Gibran Watfe (College of Europe, Department of European Economic Studies); Gil Stein (College of Europe, Department of European Economic Studies)
    Abstract: This paper examines the outcome of the negotiations for a new settlement concerning the United Kingdom’s relationship with the European Union. It reviews the nature and possible consequences of the “substantial changes” that were demanded in the areas of economic governance, competitiveness, sovereignty, and immigration. We argue that the proposed arrangements do not amount to much and can prove harmful to the future of the EU. The paper is a follow-up to our analysis of the initial proposals, available under Bruges European Economic Policy Briefings, 38/2016.
    JEL: O11 F02 E61 H50
    Date: 2016–03
  10. By: Ramboll Management Consulting and Corit Advisory
    Abstract: As a response to the increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and the boundaries of acceptable tax planning, policy makers across OECD, G20 and EU countries have taken steps to ensure that taxation duly takes place where economic value is generated and where the economic activity is actually carried out. In this context, the European Commission sees a strong need to obtain increased knowledge of the tax laws and practices of Member States of the European Union, which may expose particular jurisdictions to aggressive tax planning (ATP). The present study was commissioned with the aim to: 1. Identify model ATP structures; 2. Identify ATP indicators which facilitate or allow ATP; 3. Review the corporate income tax systems of the EU Member States by means of the ATP indicators, in order to identify those tax rules and practices (or lack thereof) that result in Member States being vulnerable to ATP. This study was carried out by Ramboll and Corit Advisory with the support of a network of independent national tax experts. It reviews and assesses the corporate income tax systems of all EU Member States. It identifies weaknesses of the national tax systems in the EU and sets the ground for additional analysis and new policy initiatives
    Keywords: European Union, corporate income tax, BEPS, agressive tax planning, ACE, CCCTB
    JEL: G30 H21 H26
    Date: 2016–01
  11. By: Matthieu Bussière; Julia Schmidt; Natacha Valla
    Abstract: This policy brief documents recent trends in international financial flows, based on a newly assembled dataset covering 40 advanced and emerging countries. Specifically, we compare the period since 2012 with the pre-crisis period and highlight four key stylized facts. First, the “Great Retrenchment” that took place during the crisis has proved very persistent, and world financial flows are now down to half their pre-crisis levels. Second, this fall can predominantly be related to advanced economies, especially those in Western Europe, while emerging markets, except Eastern European countries, have been less severely affected until recently. Third, the global patterns of net flows have also recorded significant changes. Overall, net flows have fallen substantially relative to the years preceding the sudden stop, which is to some extent an expression of the changes registered in the current account. Fourth, not all types of flows have shown the same degree of resilience, resulting in a profound change in the composition of international financial flows: while banking flows, which used to account for the largest share of the total before 2008, have collapsed, FDI flows have been barely affected and now represent roughly 45% of global flows. Portfolio flows stand between these two extremes, and within them equity flows have proved more robust than debt flows, which should help to strengthen resilience and deliver genuine cross-border risk-sharing. Having highlighted these stylized facts, this policy brief turns to possible explanations for and likely implications of these changes, regarding international financial stability issues.
    Keywords: international financial flows;capital controls;macroprudential policy;financial stability;global imbalances
    JEL: F32 F36 F41
    Date: 2016–03
  12. By: Gregory Verdugo (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, OFCE - OFCE - Sciences Po)
    Abstract: We study the response of real wages to the business cycle in eight major Eurozone countries before and during the Great Recession. Average real wages are found to be acyclical, but this reflects, in large part, the effect of changes in the composition of the labour force related to unemployment variations over the cycle. Using longitudinal micro data from the ECHP and SILC panels to control for composition effects, we estimate the elasticities of real wage growth to unemployment increases
    Keywords: Wage adjustment,Wage cyclicality,Great recession,Wage rigidity
    Date: 2016
  13. By: Gabriele Galati; Zion Gorgi; Richhild Moessner; Chen Zhou
    Abstract: This paper investigates how the perceived risk that the euro area will experience deflation has evolved over time, and what this risk implies for the credibility of the ECB. We use a novel dataset on market participants' perceptions of short- to long-term deflation risk implied by year-on-year options on forward inflation swaps. We investigate whether long-term inflation expectations have become de-anchored, by studying whether long-term deflation risk has been affected by changes in oil prices and by short-term deflation risk. Our analysis suggests that the anchoring properties of euro area inflation expectations have weakened, albeit in a still subtle way.
    Keywords: Deflation; inflation expectations; monetary policy; financial crisis
    JEL: E31 E44 E52 E58
    Date: 2016–04
  14. By: Equiza-Goni, Juan; Faraglia, Elisa; Oikonomou, Rigas
    Abstract: We study the role of government debt maturity in a monetary union in the absence of fiscal transfers across countries. Our key finding is that fi scal hedging is only possible when spending represents an aggregate shock in the union. In the case of idiosyncratic disturbances in spending it is not possible to target a portfolio which provides fi scal insurance to the governments: the allocation is one of incomplete financial markets. These implications are in line with the empirical evidence. Using a sample of 5 Euro area countries and historical holding period returns on government debt, we find that fiscal insurance is not signifi cant against country speci fic shocks however, it is signifi cant against aggregate shocks. Our analysis extends the theoretical results of the literature on optimal fiscal policy without state contingent debt to a two country model. We show that in the two country setup and under an incomplete market the optimal tax schedule, consumption and leisure follow a random walk.
    Keywords: Debt Management; Fiscal policy; Government Debt; Maturity Structure; Tax Smoothing
    JEL: E43 E62 H63
    Date: 2016–03
  15. By: Götz, Martin R.; Tröger, Tobias
    Abstract: An important prerequisite for the efficiency of bail-in as a regulatory tool is that debt holders are able to bear the cost of a bail-in. Examining European banks' subordinated debt we caution that households may be investors in bail-in able bonds. Since households do not fulfil the aforementioned prerequisite, we argue that European bank supervisors need to ensure that banks' bail-in bonds are held by sophisticated investors. Existing EU market regulation insufficiently addresses mis-selling of bail-in instruments.
    Keywords: bail-in,BRRD,subordinated debt,EU market regulation
    Date: 2016
  16. By: Han Shik Lee (Department of Economics, Sogang University, Seoul); Woo Suk Lee
    Abstract: This study investigates international linkages among housing markets in the G7 countries, using the connectedness methodology developed in Diebold and Yilmaz (2012). We find that volatility connectedness varies over the business cycle, with a surge during the global financial crisis. We also show that the United States and Italy were major net transmitters of housing market volatility shocks to other countries during the global financial and the European debt crises.
    Keywords: G7, Housing markets, Volatility connectedness
    JEL: C32 R21
    Date: 2016
  17. By: Ines Buono (Bank f Italy); Sara Formai (Bank f Italy)
    Abstract: We investigate the degree of anchoring in inflation expectations for different advanced economies using data from professional forecasters' surveys. We define expectations as anchored when movements in short-run expectations do not trigger movements in expectations at longer horizons. Using time-varying parameter regressions, we provide evidence that anchoring has varied noticeably across economies and over time. In particular, we find that starting from the second half of 2008, inflation expectations in the euro area, unlike in the US and in the UK, have shown signs of a de-anchoring.
    Keywords: anchoring, inflation expectations, nonparametric estimation
    JEL: E31 E52 D84 C14
    Date: 2016–03
  18. By: Otto, Kim; Köhler, Andreas
    Abstract: The present article examines the coverage of the European actors in the Greek national debt crisis in the German daily newspapers 'Die Welt', 'Bild', 'Frankfurter Allgemeine Zeitung', 'Süddeutsche Zeitung' and 'Die Tageszeitung', as well as on the online platform 'Spiegel Online'. The aim is to capture the extent to which the national German media are Europeanized within the context of coverage of the Greek national debt crisis. The study's results show that it is not really possible to speak of a Europeanized national public sphere in Germany as far as the coverage of the Greek national debt crisis is concerned. In the German media, the European debate was portrayed as a bi-national conflict between the German and Greek governments.
    Keywords: Greek national debt crisis,European public sphere
    JEL: H63 H77 Y80
    Date: 2016
  19. By: Klosse, Saskia (Faculty of Law, Maastricht University); Muysken, Joan (UNU-MERIT & SBE, Maastricht University)
    Abstract: In the European labour market there is a clear scope for improvement in activity rates. Moreover, sustainable employment is impeded by the pervasiveness of temporary work, self-employment and part-time work. As a consequence there is a clear role for active inclusion policies, complemented by stimulating macroeconomic policies. However, the implementation of appropriate policies, initiated in 2008, never really took off and stagnated due to the austerity measures enforced after the financial crisis. For that reason we propose to experiment with Job Guarantee (JG) projects. On the one hand, JG projects should provide a macroeconomic stimulus to the economy by employing everybody who is out of work in JG jobs at the minimum wage. On the other hand, JG projects could stop the downward trend in job quality and foster inclusive labour markets by providing quality jobs and sustainable employment. We propose to finance the JG Scheme by redirecting social security (administration) funds, by including JG elements in the European Investment Plan (also known as the Juncker Plan) and to spend part of the € 60 billion which the ECB is injecting each month in the Euro Area on job guarantee projects.
    Keywords: inclusive labour market policies, job guarantee, sustainable employment
    JEL: J48 E60 J21 J68
    Date: 2016–03–03

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