nep-eec New Economics Papers
on European Economics
Issue of 2016‒06‒25
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Sovereign Credit Risk in the Euro Zone By Jamal Ibrahim Haidar
  2. The ECB`s Monetary Policy: stability without "safe" assets? By Silke Tober
  3. Macroeconomic Imbalances and Business Cycle Synchronization. Why Common Economic Governance is Imperative for the Eurozone By Elizaveta Lukmanova; Gabriele Tondl
  4. Is the Greek Crisis One of Supply or Demand? By Yannis M. Ioannides; Christopher Pissarides
  5. A financially stressed Euro area By Kappler, Marcus; Schleer, Frauke
  6. Interest rates, corporate lending and growth in the Euro Area By Gabriele Tondl
  7. Unemployment risk and over-indebtedness By Du Caju, Philip; Rycx, François; Tojerow, Ilan
  8. Offshoring, employment and wages By Bramucci, Alessandro
  9. Challenges for the ECB in Times of Deflation By Francesco Saraceno
  10. Are extremely low interest rates really caused by insufficient growth and inflation rather than by ECB policy? By Eric Dor
  11. Sovereign credit rating determinants: the impact of the European debt crisis By Peter Reusens; Christophe Croux
  12. Multinational Banks and Supranational Supervision By Calzolari, Giacomo; Colliard, Jean-Edouard; Lóránth, Gyöngyi
  13. End of the sovereign-bank doom loop in the European Union? The bank recovery and resolution directive By Covi, Giovanni; Eydam, Ulrich
  14. Real Exchange Rate Misalignment in the Euro Area: Is the Current Development Helpful? By Jan Hajek
  15. Liberals, Socialists, and pork-barrel politics in Greece. By Andrés Rodríguez-Pose; Yannis Psycharis; Vassilis Tselios
  16. How is the European debt crisis affecting islamic equity? challenges in portfolio diversification within the eurozone: A markov switching and continuous wavelet transform analysis By Shakir, Zeeniya; Masih, Mansur
  17. Does one size fit all at all times? The role of country specificities and state dependencies in predicting banking crises By Stijn Ferrari; Mara Pirovano
  18. The Analytics of the Greek Crisis By Gourinchas, Pierre-Olivier; Philippon, Thomas; Vayanos, Dimitri
  19. Why immigration is no reason to leave the EU By Swati Dhingra; Gianmarco Ottaviano; John Van Reenen; Jonathan Wadsworth

  1. By: Jamal Ibrahim Haidar
    Abstract: What is the current state of sovereign credit risk across the Eurozone? Does the recent fiscal crisis extend to other (non-Eurozone) countries? Is Greece the centre of the problem? How did the current fiscal crisis in the Euro area start? Who is behind it? How can it evolve? How can it be addressed? And, is a fiscally challenged country likely to want to leave the Eurozone? This article addresses these questions, argues that a fiscally weak country is better off in the Eurozone than outside it, and finds that a feasible policy tool can be a bailout associated with tough fiscal conditionality. It also shows that sovereign credit risk adjustment in the Eurozone can happen, using various measures, but not without ?fiscal pain?.
  2. By: Silke Tober
    Abstract: The ECB's expansionary monetary policy has positive effects on the euro area economy. Interest rates have declined further, bank lending is improving, and the euro is weaker. However, inflation remains much too low and aggregate demand too weak for the output gap to close rapidly. Further weakening the euro is not a feasible option. A weaker euro would aggravate global imbalances and impact negatively on less-than-robust global growth. Expansionary fiscal policy therefore needs to add to the effects of monetary policy.The euro area, moreover, suffers a key problem that not only impedes monetary policy effectiveness but also constrains fiscal policy and puts the future stability of the euro area at risk: With the decision to give up on the safe-asset quality of euro area sovereign bonds the euro area is losing a fundamental stability anchor.
    Date: 2016
  3. By: Elizaveta Lukmanova (Department of Economics, Vienna University of Economics and Business); Gabriele Tondl (Department of Economics, Vienna University of Economics and Business)
    Abstract: This paper investigates a new category of influential factors on business cycle synchronization (BCS), so far hardly regarded in the BCS literature: It provides an empirical assessment of the impact of macroeconomic imbalances, as monitored by the European Commission by the scoreboard indicators since 2011, on BCS in the Euozone. We use a quarterly data set covering the period 2002-2012 and estimate the direct and indirect effects of macroeconomic imbalances in the pre- and post-crisis period in a simultaneous equations model. Business cycle correlation between EA members is measured by the recently proposed dynamic conditional correlation of Engle 2002 which can better identify synchronous and asynchronous behaviour of BC than the commonly used measures. We find that appearing differences between EA members in the current account, in government deficit and public debt, in private debt and unit labor cost developments have reduced BCS in the EA, even more in the post-crisis period than before. Moreover, these explanatory factors of BCS, generally reinforce each other and are also influenced by other critical macro imbalances. Since BCS is essential in a monetary union, this paper provides clear support that a stronger, common economic governance would be important for the functioning and survival of the Eurozone.
    Keywords: Business cycle synchronization, Macroeconomic imbalances, Monetary union, Euro Area, Simultaneous equations model, Panel data
    JEL: E32 E60 E61 F45 C33
    Date: 2016–06
  4. By: Yannis M. Ioannides; Christopher Pissarides
    Abstract: Greece's "supply" problems have been present since its accession to the European Union in 1981; the "demand" problems caused by austerity and wage cuts have compounded the structural problems. This paper discusses the severity of the demand contraction, examines product market reforms, many of which have not been implemented, and their potential impact competitiveness and the economy, and labor market reforms, many of which have been implemented but due to their timing have contributed to the collapse of demand. The paper argues in favor of eurozone-wide policies that would help Greece recover and of linking reforms with debt relief.
    Date: 2016
  5. By: Kappler, Marcus; Schleer, Frauke
    Abstract: The authors analyze 149 newly compiled monthly time series on financial market stress conditions in the euro area. With the aid of a factor model they find different sources of financial stress which are important for selecting and preparing the appropriate policy response. The existence of a "Periphery Banking Crisis" factor, a "Stress" factor and a "Yield Curve" factor seems to explain the bulk of volatility in recent euro area financial sector data. Moreover, by a real-time forecasting exercise, the authors show that including additional factors - that reflect financial sector conditions - improves forecasts of economic activity at short horizons.
    Keywords: financial stress,dynamic factor models,financial crisis,euro area,forecasting
    JEL: C38 G01
    Date: 2016
  6. By: Gabriele Tondl (Department of Economics, Vienna University of Economics and Business)
    Abstract: The sluggish development of corporate lending has remained the central concern of EU monetary policy makers as it is considered to hinder seriously the resurgence of growth. This paper looks at the development of loans to large corporations vs SMEs in the pre-crisis and post-crisis period and wishes to answer: (i) to which extent do allocated loan volumes actually contribute to output growth? (ii) which factors determine the development of loans, considering above all loan interest rates? and (iii) what causes differences in loan interest levels across the EA? The results indicate that different loan developments in the EA explain very well differences in output development, loans to SMEs contribute even more to output growth than those for large corporations. Loan development itself is negatively influenced by the interest level which differs significantly across EA members, with small loans in addition always being charged an interest premium over large loans. The capitalization of banks, the size of banks and their internationalization play a role as well. A part of the sluggish growth of loans can be explained by the increasing use of alternative financial instruments by large firms. Interest rates in turn are following the ECB interest rate, - but this link has become looser in the post-crisis period, and long term government bond rates. Different risks faced by banks and different bank structures have become important explanatories of interest rates in the post-crisis period.
    Keywords: Corporate lending, Credit market fragmentation, Interest pass-through, Bank lending rates, Finance and growth, Euro Area
    JEL: E40 E43 E44
    Date: 2016–06
  7. By: Du Caju, Philip; Rycx, François; Tojerow, Ilan
    Abstract: We study how unemployment affects the over-indebtedness of households using the new European Household Finance and Consumption Survey (HFCS). First, we assess the role of different labor market statuses (i.e. employed, unemployed, disabled, retired, etc.) and other household characteristics (i.e. demographics, housing status, household wealth and income, etc.) to determine the likelihood of over-indebtedness. We explore these relationships both at the Euro area level and through country-specific regressions. This approach captures country-specific institutional effects concerning all the different factors which can explain household indebtedness in its most severe form. We also examine the role that each country’s legal and economic institutions play in explaining these differences. The results of the regressions across all countries show that the odds of being over-indebted are much higher in households where the reference person is unemployed. These odds ratios remain fairly stable across different over-indebtedness indicators and specifications. Interestingly, we find similar results for secured debt only. Turning to country specific results, the role of unemployment varies widely across countries. In Spain, France or Portugal, for example, the odds ratio for the unemployed group is just below 2, whereas in Austria, Belgium, or Italy the odds ratio is higher than 4. Secondly, we situate the analysis in a macro-micro frame to identify households and countries that are especially vulnerable to adverse macroeconomic shocks in the labor market. For the Euro area, we find that the percentage of households plagued by over-indebtedness increased by more than 10%, suggesting that another unemployment shock could have a major impact on the financial solvency of Euro area households. Finally, the impact of this shock on single-headed households is much higher than on couple-headed ones. JEL Classification: D14, D91, J12
    Keywords: financial fragility, HFCS, household finance, labor market status, over-indebtedness, unemployment
    Date: 2016–05
  8. By: Bramucci, Alessandro
    Abstract: This paper reviews the debate on the economic effect of the international fragmentation of production, also known as "offshoring", and provides a preliminary investigation of the impact of intermediate imported inputs on employment and wages in five European countries (Germany, Spain, France, Italy, the United Kingdom). Data are obtained from the Sectoral Innovation Database (SID) of the University of Urbino, a large database that merges statistical material from various sources (LFS; CIS; WIOD). The first part of this work provides a review of the empirical literature that discusses the economic effects of offshoring on domestic labor demand and wages. The second section of the paper presents offshoring trends and discusses the results of the econometric analysis. Results suggest that offshoring has a general negative impact on employment and wages although more careful examination reveals that high-tech offshoring has a positive effect on wages of medium- and high-skilled workers.
    Keywords: Offshoring,Innovation,Employment,Wages
    JEL: F1 F2
    Date: 2016
  9. By: Francesco Saraceno (OFCE)
    Abstract: This paper assesses the performance of the European Central Bank (ECB) during the crisis that started in 2008. The ECB statute is consistent with a view of the economy that was predominant in the 1990s, a view that postulates a very limited role for discretional policies in managing the business cycle. The ECB had therefore to stretch its mandate on several occasions during the crisis to avoid severe outcomes. It was unable to avoid a slow but inexorable slide of the Eurozone towards deflation and a liquidity trap. To restore robust growth, fiscal policy should be used, and institutions should be redesigned away from the Washington Consensus framework that shaped the Maastricht Treaty. Better rules for fiscal governance and a widening of the ECB mandate are proposed.
    Keywords: Employment policy; Economic recession; Low income; Financial market
    Date: 2015
  10. By: Eric Dor (IESEG School of Management)
    Abstract: To fight deflationary pressures in the euro area, the ECB has been conducting exceptional policies, such as negative interest rates on excess reserves of banks on their accounts at the Eurosystem, or massive purchases of assets, essentially public bonds. The interest rate on the main refinancing operations is 0. Targeted long term refinancing operations are going to allow banks to borrow at potentially negative interest rates from the Eurosystem provided that they lend enough to the private sector. All these measures have pushed long term interest rates downward in the euro area. German public bonds yield negative returns for a whole set of maturities. Interest rates on saving accounts in German banks are extremely low. This policy of extremely low rates has been heavily criticized in Germany. The ECB is accused of exaggeratedly lowering the income of savers and retirees whose revenue partly depends on the return of accumulated wealth.
    Date: 2016–05
  11. By: Peter Reusens; Christophe Croux
    Abstract: This paper compares the importance of different sovereign credit rating determinants over time, using a sample of 90 countries for the years 2002-2015. Applying the composite marginal likelihood approach, we estimate a multi-year ordered probit model for each of the three major credit rating agencies. After the start of the European debt crisis in 2009, the importance of the financial balance, the economic development and the external debt increased substantially and the effect of Eurozone membership switched from positive to negative. In addition, GDP growth gained a lot of importance for highly indebted sovereigns and government debt became much more important for countries with a low GDP growth rate. These findings provide empirical evidence that the credit rating agencies changed their sovereign credit rating assessment after the start of the European debt crisis.
    Keywords: Composite marginal likelihood, Credit rating agencies, European debt crisis, Multi-year ordered probit model, Sovereign credit rating determinants
    Date: 2016–05
  12. By: Calzolari, Giacomo; Colliard, Jean-Edouard; Lóránth, Gyöngyi
    Abstract: We study the supervision of multinational banks (MNBs), allowing for either national or supranational supervision. National supervision leads to insufficient monitoring of MNBs due to a coordination problem between supervisors. Supranational supervision solves this problem and generates more monitoring. However, this increased monitoring can have unintended consequences, as it also affects the choice of foreign representation. Indeed, supranational supervision encourages MNBs to expand abroad using branches rather than subsidiaries, resulting in more pressure on their domestic deposit insurance fund. In some cases, it discourages foreign expansion altogether, so that financial integration paradoxically decreases. Our framework has implications on the design of supervisory arrangements for MNBs, the European Single Supervisory Mechanism being a prominent example.
    Keywords: Banking Union; Cross-border banks; Monitoring; Multinational banks; regulation; Supervision
    JEL: F23 G21 G28 L51
    Date: 2016–06
  13. By: Covi, Giovanni; Eydam, Ulrich
    Abstract: In this paper we examine the relationship between the default risk of banks and sovereigns, i.e. the 'doom-loop'. Specifically we try to assess the effectiveness of the implementation of the new recovery and resolution framework. We use a panel with daily data on European banks and sovereigns ranging from 2008 to 2016. We find that there was a pronounced feedback loop between banks and sovereigns from 2008 to 2014. However, this feedback loop seems to have disappeared after the implementation of the new regulatory framework. This finding is robust across several specifications.
    Keywords: Financial Stability,Sovereign Bailout,Doom Loop,Bank Recovery and Resolution Directive,European Banking Union
    JEL: E58 G01 G18 L51
    Date: 2016
  14. By: Jan Hajek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: We use the behavioral equilibirum exchange rate (BEER) approach to examine the extent of real exchange rate misalignment in the euro area over the period 1980-2014. In a panel data setting, we find significant links between real exchange rates, relative productivity, trade balance and terms of trade. Unlike other papers related to the topic, we go further in the direction of linking the estimated misalignment to inflationary differentials. Our results indicate that a positive 1 percentage point inflationary differential between individual country and the euro area itself translates into 1.7 percentage point increase in overvaluation of the individual country’s real exchange rate. We also show the extent of overvaluation in peripheral countries of the euro area has been increasing since mid-2000s. At the end of observed period this trend partially stopped due to emergence of falling prices in these economies. We discuss implications of such reversal and conclude deflation in peripheral countries of t he euro area might be helpful when restoring its competitiveness.
    Keywords: real exchange rates, misalignment, euro area, panel data, inflationary differentials
    JEL: C21 E31 F31 F45
    Date: 2016–06
  15. By: Andrés Rodríguez-Pose; Yannis Psycharis; Vassilis Tselios
    Abstract: This paper analyses the role of pork-barrel politics in the allocation of public investment expenditures in Greece. It proposes a model which explicitly relates the allocation of public investment to electoral results using a unique dataset covering the period from the restoration of democracy in 1974 until 2009, just before the Great Recession that radically transformed the political panorama of the country. The analysis includes ten legislative periods marked by governments of the two parties that dominated the political arena in Greece: the Liberal and the Socialist Party. The results show that Socialist and re-elected governments applied more expansionary fiscal policies relative to Liberals. The two main parties also used different tactics when it came to pork-barrelling: while the Socialists when in government rewarded/groomed their electoral fiefs, the Liberals invested in areas controlled by the opposition to win over new votes or seats.
    Keywords: Public investment, pork-barrel politics, elections, regional policy, Greece.
    JEL: P16 R1 R12 R42 R58 H54
    Date: 2016–06
  16. By: Shakir, Zeeniya; Masih, Mansur
    Abstract: The European Debt crisis hit hard on the Eurozone, where the market convergence, rigid exchange rates and the single currency based instruments create tight challenges for investors in terms of looking for safer investments and portfolio diversification. Islamic Equity markets in Eurozone provide safety compared to debt based highly volatile derivatives that caused the global financial collapse. Since it is critical to study areas with implications for the portfolio diversification issue for the investors and policy makers from the perspective of Islamic Equity markets, this paper makes the humble effort of filling in the gap in literature. The paper analyses how the Islamic Equity Markets in the Eurozone change in periods of crisis analyzing their regime shift probabilities and durations using Markov- Switching techniques. Overall, the time-variations in market indices suggest that the Islamic Equity markets in Eurozone are not immune to external shocks and they tend to fluctuate with the economic and financial shocks. The study also shows how Islamic Market investors, from Germany’s perspective could find any optimal diversification opportunities inside the Eurozone and shows if there is a need for investing outside the Eurozone to maximize diversification benefits by empirically testing the time-varying and scale dependent volatilities and correlations using the method of Continuous Wavelet Transform. The period covered is from 12 June 2008 till 21 April 2016, with spans of weekly data of S&P Europe 350 Shariah – (S&P Dow Jones Indices) stock index prices changed into returns using logarithmic equations. The results of the study shed light into the area pf portfolio diversification between the studied countries within the Eurozone, showing very little diversification opportunities between the member countries. Overall there is little room for diversification in the highly correlated markets across heterogeneous investment horizons.
    Keywords: International Portfolio Diversification, Eurozone Islamic Equity Markets Stock, Markov Switching, Continuous Wavelet Transform
    JEL: C58 G11
    Date: 2016–06–01
  17. By: Stijn Ferrari; Mara Pirovano (Prudential Policy and Financial Stability, National Bank of Belgium)
    Abstract: Given the indisputable cost of policy inaction in the run-up to banking crises as well as the negative side effects of unwarranted policy activation, policymakers would strongly benefit from earlywarning thresholds that more accurately predict crises and produce fewer false alarms. This paper presents a novel yet intuitive methodology to compute country-specific and state-dependent thresholds for early-warning indicators of banking crises. Our results for a selection of early-warning indicators for banking crises in 14 EU countries show that the benefits of applying the conditional moments approach can be substantial. The methodology provides more robust signals and improves the early-warning performance at the country-specific level, by accounting for country idiosyncrasies and state dependencies, which play an important role in national supervisory authorities’ macroprudential surveillance.
    Keywords: Banking crises, Early warning systems, Country-specific thresholds, State-dependent thresholds
    JEL: C40 E44 E47 E61 G21
    Date: 2016–06
  18. By: Gourinchas, Pierre-Olivier; Philippon, Thomas; Vayanos, Dimitri
    Abstract: We provide an empirical and theoretical analysis of the Greek Crisis of 2010. We first benchmark the crisis against all episodes of sudden stops, sovereign debt crises, and lending boom/busts in emerging and advanced economies since 1980. The decline in Greece's output, especially investment, is deeper and more persistent than in almost any crisis on record over that period. We then propose a stylized macro-finance model to understand what happened. We find that a severe macroeconomic adjustment was inevitable given the size of the fiscal imbalance; yet a sizable share of the crisis was also the consequence of the sudden stop that started in late 2009. Our model suggests that the size of the initial macro/financial imbalances can account for much of the depth of the crisis. When we simulate an emerging market sudden stop with initial debt levels (government, private, and external) of an advanced economy, we obtain a Greek crisis. Finally, in recent years, the lack of recovery appears driven by elevated levels of non-performing loans and strong price rigidities in product markets.
    Keywords: bank-sovereign loop; DSGE model; fiscal contraction; Greek crisis; price rigidities; sovereign default; sudden stop
    JEL: E2 E3 E5 E6 F3 F4
    Date: 2016–06
  19. By: Swati Dhingra; Gianmarco Ottaviano; John Van Reenen; Jonathan Wadsworth
    Abstract: A major argument of Brexit campaigners is that leaving the European Union would give the UK more control over the flow of immigrants, who they claim hurt the jobs and pay of native-born workers. CEP research shows that EU immigration is at worst neutral and at best, an economic benefit of membership.
    Keywords: immigration, EU Referendum, jobs, wages, UK economy, Brexit
    Date: 2016–06

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