nep-eec New Economics Papers
on European Economics
Issue of 2016‒09‒11
twenty-one papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Euro Area Policies; Selected Issues By International Monetary Fund. European Dept.
  2. The IMF’s role in the euro-area crisis: financial sector aspects By Nicolas Véron
  3. Bank Exposures and Sovereign Stress Transmission By Carlo Altavilla; Marco Pagano; Saverio Simonelli
  4. When did inflation expectations in the euro area de-anchor? By Andrea Fracasso; Rocco Probo
  5. In search of the Euro area fiscal stance By Alice Albonico; Alessia Paccagnini; Patrizio Tirelli
  6. Central Banks’ Predictability: An Assessment by Financial Market Participants By Bernd Hayo; Matthias Neuenkirch
  7. A Post-crisis Slump in Europe: A Business Cycle Accounting Analysis By Florian Gerth; Keisuke Otsu
  8. Negative Interest Rate Policy (NIRP); Implications for Monetary Transmission and Bank Profitability in the Euro Area By Andreas Jobst; Huidan Lin
  9. Germany; Financial Sector Assessment Program-Crisis Preparedness, Bank Resolution and Crisis Management Frameworks-Technical Notes By International Monetary Fund. Monetary and Capital Markets Department
  10. A European public sphere in coverage of the Greek sovereign debt crisis in the news programmes of ARD and ZDF By Otto, Kim; Köhler, Andreas
  11. Cross-Country Report on Minimum Wages; Selected Issues By International Monetary Fund. European Dept.
  12. Cleaning-up Bank Balance Sheets; Economic, Legal, and Supervisory Measures for Italy By José Garrido; Emanuel Kopp; Anke Weber
  13. Banking Union and the ECB as Lender of Last Resort By Karl Whelan
  14. Forward Misguidance By Luigi Paciello; Claudio Michelacci
  15. The Dynamics of Sovereign Debt Crises and Bailouts By Francisco Roch; Harald Uhlig
  16. Sovereign Risk and Bank Risk-Taking By Anil Ari
  17. France; Selected Issues By International Monetary Fund. European Dept.
  18. The Role of Fiscal Transfers in Smoothing Regional Shocks; Evidence from Existing Federations By Tigran Poghosyan; Abdelhak S Senhadji; Carlo Cottarelli
  19. The loss of interest for the euro in Romania By Claudiu Albulescu; Dominique P\'epin
  20. Ireland; Selected Issues By International Monetary Fund. European Dept.
  21. Sovereign Risk and Deposit Dynamics; Evidence from Europe By David A. Grigorian; Vlad Manole

  1. By: International Monetary Fund. European Dept.
    Abstract: This Selected Issues paper discusses the impact of workforce aging on productivity in the euro area. The euro area population has aged considerably over the past few decades, and the process is expected to accelerate in the years ahead. At the same time, labor productivity growth in the euro area has been sluggish, posing risks to long-term growth prospects. It is estimated that workforce aging could significantly retard total factor productivity (TFP) growth over the medium to long term. Given current demographic projections from the Organisation for Economic Co-operation and Development, the aging of the workforce in the euro area could lower TFP growth by about 0.2 percentage points each year between 2014 and 2035. Appropriate policies can, however, mitigate the adverse effects of aging.
    Keywords: Aging;Labor productivity;Corporate sector;Debt;Investment;Monetary policy;Negative interest rates;Interest rate policy;Fiscal policy;Economic growth;Selected Issues Papers;Euro Area;
    Date: 2016–07–08
  2. By: Nicolas Véron
    Abstract: Highlights The International Monetary Fund (IMF) played a ground-breaking role in understanding the financial-sector dynamics of the euro-area crisis. It was the first public authority, and one of the first more generally, to acknowledge the role of the bank-sovereign vicious circle as the central driver of contagion in the euro area. It was the first public authority to articulate a clear vision of banking union as an essential policy response, building on its longstanding and pioneering support of banking policy integration in the European Union. At national level, the IMF’s approach to the financial sector was appropriate and successful in Ireland and Spain, more limited in the Greek Stand-By Arrangement, and less compelling in Portugal where vulnerabilities remained when the country exited the programme. The IMF should further integrate financial-sector policy together with fiscal and macroeconomic issues at the core of its operations, and should devote particular effort to adapting its processes and methodologies to the new context of European banking union. Executive Summary Financial sector aspects have pervaded the euro-area crisis, which can be seen as much as a financial sector crisis as a sovereign debt crisis, even though the latter narrative has dominated media coverage and political perceptions. The fragility of sovereigns in the euro area was to a great extent (though not in Greece) the result of large implicit and explicit state guarantees to national banking sectors. The International Monetary Fund made a significant contribution to addressing the euro area’s financial sector challenges. The euro-area crisis exposed the unsustainability of the then-existing European Union banking policy framework. National authorities were ineffective in supervising banks adequately in the run-up to the crisis, and did not manage and resolve financial sector aspects of that crisis in an effective and timely manner. EU institutions, including the European Central Bank (ECB), did not generally have the skills, experience or mandate that would have enabled them to offset the national authorities’ shortcomings. The IMF was thus in a position to make a major positive difference. At the euro-area level, the IMF played a ground-breaking role in understanding the dynamics of the crisis and promoting banking union as an essential policy response. The IMF was the first public authority, and one of the first movers more generally, to acknowledge the role of the bank-sovereign vicious circle as the central driver of contagion in the euro area. It was also the first public authority to articulate a clear vision of banking union as a policy response, building on its longstanding and pioneering support for banking policy integration in the EU. Even though its advocacy on these issues was not entirely consistent and continuous, the IMF can claim some credit for the euro area’s breakthrough decision in mid-2012 to initiate the banking union; this decision was the most important turning point in the entire sequence of crises. In individual countries, the IMF’s approach to the financial sector was appropriate and successful in several, but not all, cases. The Stand-By Arrangement (SBA)-supported programme in Greece preserved short-term financial stability, but many of its financial sector aspects are difficult to assess on a stand-alone basis since it was followed by further IMF assistance (which falls outside the scope of this evaluation). With the Extended Fund Facility (EFF)-supported programme in Ireland, the IMF contributed significantly to the effective resolution of a major banking crisis in that country, and so did the Financial Sector Assessment Programme (FSAP) and subsequent IMF technical assistance in Spain. But the opportunity to clean up the financial sector was missed in the EFF-supported programme for Portugal. The IMF should preserve, update and develop the institutional knowledge it has acquired about the EU financial sector framework. The Fund’s positive contribution to addressing financial sector aspects of the euro area crisis is widely acknowledged by European policymakers, providing a promising basis for future engagement. The IMF should devote particular effort to adapting its processes and methodologies to the new context of banking union, which, for the euro-area countries, makes it increasingly difficult to consider financial sector issues on a national basis. 1 Introduction Financial sector issues, especially those relating to banks, played a central and generally under-recognised role in the euro-area crisis. Poorly controlled risk-taking by European banks throughout the 2000s left the EU banking sector highly vulnerable at the onset of the financial crisis in mid-2007, and the subsequent shocks of 2007-08 left it in a situation of systemic fragility. Unlike in the United States, this fragility was not addressed head-on and was allowed to linger. Europe’s banking problem thus long predated the emergence of the sovereign debt sustainability challenges starting at the end of 2009 (see, for example, Posen and Véron, 2009; Rehn, 2016).
    Date: 2016–08
  3. By: Carlo Altavilla (European Central Bank); Marco Pagano (University of Naples Federico II, CSEF, EIEF, CEPR, and ECGI); Saverio Simonelli (University of Naples Federico II)
    Abstract: Using novel monthly data for 226 euro-area banks from 2007 to 2015, we investigate the causes and effects of banks’ sovereign exposures during and after the euro crisis. First, in the vulnerable countries, the publicly owned, recently bailed out and less strongly capitalized banks reacted to sovereign stress by increasing their domestic sovereign holdings more than other banks, suggesting that their choices were affected both by moral suasion and by yield-seeking. Second, their exposures significantly amplified the transmission of risk from the sovereign and its impact on lending. This amplification of the impact on lending cannot be ascribed to spurious correlation or reverse causality.
    Date: 2016
  4. By: Andrea Fracasso; Rocco Probo
    Abstract: Long-term inflation expectations in the euro area remained well anchored during the global financial crisis and were therefore insensitive to the arrival of economic news. This article investigates the behaviour of expectations in the euro area during the most recent period and finds evidence that the de-anchoring of expectations started in December 2011 and never reversed. This is in line with the more aggressive stance held by the ECB in the following months as well as with the pattern of ECB Professional ForecastersÕ expectations.
    Keywords: Inflation expectations, ECB, Euro area, De-anchoring
    JEL: E31 E52 E58 C22
    Date: 2016
  5. By: Alice Albonico; Alessia Paccagnini; Patrizio Tirelli
    Abstract: This paper investigates the role of fiscal policies over the aggregate EMU business cycle. Previous studies, based on the assumption of non-separability between public and private consumptions, obtain a large public consumption multiplier, a small fraction of non-Ricardian households and, consequently, a relatively small multiplier for public transfers. We provide motivations for assuming separability and, on these grounds, we estimate a relatively large share of non-Ricardian households. As a result, we obtain that both multipliers are large. We also find that, in spite of their potentially strong effects, fiscal policies were substantially muted during the EMU years. This result is confirmed even for the post 2007 period. In fact fiscal policies did not complement the monetary policy stimulus in response to the financial crisis. Further, we cannot detect any substantial aggregate effect of austerity measures. Finally, the post-2007 surge in expenditure-to-GDP ratios was apparently determined by non-policy shocks that reduced output growth.
    Keywords: DSGE; Limited asset market participation; Bayesian estimation; Euro area; Business cycle; Monetary policy; Fiscal policy
    JEL: C11 C13 C32 E21 E32 E37
    Date: 2016–08
  6. By: Bernd Hayo (University of Marburg); Matthias Neuenkirch (University of Trier)
    Abstract: In this paper, we examine the relationship between market participants’ perception of central bank predictability and their assessment of central bank communication skills and success in conveying objectives as well as the importance of transparency-enhancing measures, such as voting records, transcripts or minutes of policy meetings, and conditional interest rate projections. Our analysis is based on a unique dataset of almost 500 market participants worldwide who were asked questions with respect to the performance of the Bank of England, the Bank of Japan, the European Central Bank, and the Federal Reserve. Our results indicate a positive and economically notable relationship between central banks’ ability to convey their objectives and their overall communication skills on the one hand, and market participants’ perception of the banks’ predictability on the other hand, for all four central banks. The dissemination of more specific information does not appear to contribute to better central bank predictability. This raises doubts about the widely-held notion that implementing ever more transparency-enhancing measures will improve central bank predictability.
    Keywords: Central Bank, Communication, Financial Market Participants, Objectives, Predictability, Survey, Transparency
    JEL: E52 E58
    Date: 2016
  7. By: Florian Gerth; Keisuke Otsu
    Abstract: This paper analyses the Post-crisis slump in 29 European economies during the 2008Q1 - 2014Q4 period using the Business Cycle Accounting (BCA) method a la Chari, Kehoe and McGrattan (2007). We find that the deterioration in the efficiency wedge is the most important driver of the European Great Recession and that this adverse shock persists throughout our sample. Moreover, we find that the growth rate of non-performing loans are negatively associated with the decline in efficiency wedges. These findings support the emerging literature on resource misallocation triggered by financial crises.
    Keywords: Great Recession in Europe; Business Cycle Accounting
    JEL: E13 E32
    Date: 2016–09
  8. By: Andreas Jobst; Huidan Lin
    Abstract: More than two years ago the European Central Bank (ECB) adopted a negative interest rate policy (NIRP) to achieve its price stability objective. Negative interest rates have so far supported easier financial conditions and contributed to a modest expansion in credit, demonstrating that the zero lower bound is less binding than previously thought. However, interest rate cuts also weigh on bank profitability. Substantial rate cuts may at some point outweigh the benefits from higher asset values and stronger aggregate demand. Further monetary accommodation may need to rely more on credit easing and an expansion of the ECB’s balance sheet rather than substantial additional reductions in the policy rate.
    Keywords: Negative interest rates;Euro Area;Interest rate policy;Banks;Profits;Monetary transmission mechanism;Unconventional monetary policy instruments;European Central Bank;negative rates, NIRP, unconventional monetary policy, monetary transmission
    Date: 2016–08–10
  9. By: International Monetary Fund. Monetary and Capital Markets Department
    Abstract: This paper analyzes the crisis preparedness and crisis management frameworks for German banks. Banks dominate German financial system and represent one of the largest small- and medium-sized banking segments in the EU. The banking sector is a three-pillar system with a total of nearly 1,800 institutions. Both at the EU level and at domestic German level a range of legal instruments have been adopted that collectively establish a complex framework for bank resolution and crisis preparedness and management in financial sector. The Single Supervisory Mechanism Regulation has conferred specific tasks on the European Central Bank concerning prudential supervision of banks including the adoption of early intervention measures and a requirement that banks prepare recovery plans.
    Keywords: Financial Sector Assessment Program;Banks;Bank resolution;Financial safety nets;Deposit insurance;Crisis prevention;Risk management;Germany;
    Date: 2016–06–29
  10. By: Otto, Kim; Köhler, Andreas
    Abstract: The present study examines news reporting during the Greek national debt crisis in the German television news programmes "Tagesschau" and "heute" and in the special broadcasts "Brennpunkt" on ARD and "ZDF spezial" on ZDF. 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, based on the representation of European actors and events. 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.
    Keywords: Greek national debt crisis,European public sphere
    JEL: H63 H77 Y80
    Date: 2016
  11. By: International Monetary Fund. European Dept.
    Abstract: This paper provides a cross-country report on minimum wages. In the past few years, many countries in Central Eastern and Southeastern Europe (CESEE) have increasingly turned to minimum wage policies. Throughout the region, statutory minimum wages had been in place at least since the early 1990s, but they were typically set at relatively moderate levels and affected relatively few workers. Minimum wages have risen sharply relative to both average wages and labor productivity. Minimum wages often affect relatively more workers in CESEE than in Western Europe. Governments are the key players in the minimum wage determination in CESEE countries.
    Keywords: Minimum wage;Eastern Europe;Wages;Income distribution;Cross country analysis;Article IV consultations;Selected Issues Papers;Latvia;Lithuania;Poland;Romania;minimum wage, minimum wages, minimum wage hikes, workers, labor
    Date: 2016–06–15
  12. By: José Garrido; Emanuel Kopp; Anke Weber
    Abstract: To stabilize and bring down nonperforming loans (NPLs) in the Italian banking system, the Italian authorities have been implementing a number of reforms, aimed among others at speeding up insolvency and enforcement proceedings, strengthening bank corporate governance, cleaning up balance sheets, and facilitating bank consolidation. This paper examines the Italian banking system’s NPL problem, which ties up capital, weighing on bank profitability and authorities’ economic reforms. It argues for a comprehensive approach, encompassing economic, supervisory, and legal measures. The authorities’ reforms are important steps toward this end. The paper describes measures that could further support their actions.
    Keywords: Non-performing loans;Italy;Banks;Balance sheets;Banking sector;Bank supervision;Corporate governance;Bank reforms;Nonperforming loans, corporate restructuring, asset management companies.
    Date: 2016–07–11
  13. By: Karl Whelan
    Abstract: This paper focuses on how the lender of last resort function works in the euro area. It argues that the Eurosystem does not provide a clear and transparent lender of last resort facility and discusses how this has promoted financial instability and has critically undermined free movement of capital in the euro area. Until this weakness in the euro area’s policy infrastructure is fixed, it will be difficult to have a truly successful banking union.
    Keywords: European Central Bank; Lender of last resort; Banking union
    JEL: E58 G21
    Date: 2016–08
  14. By: Luigi Paciello (EIEF); Claudio Michelacci (EIEF)
    Abstract: A central bank announcement of a future reduction in interest rates (Forward Guidance) can be contractionary in the short run, when, as in the European data, the credibility of the central bank is higher among creditors than among debtors. When creditors believe the announcement more than debtors do, the wealth losses that creditors expect to incur are larger than the gains that debtors expect to realize and aggregate net wealth is perceived to fall. Forward Guidance announcements can then misguide the economy towards a contractionary period caused by lack of aggregate demand. This is more likely when financial imbalances are large and when the perceived credibility of the central bank differs substantially among creditors and debtors, as at the time of the ECB announcement in July 2013. By using micro data for Italian provinces, we find that more confidence in the ECB announcement was deflationary in a creditor province while it was inflationary in a debtor one, which is consistent with a misguidance effect. By using an heterogeneous agents sticky prices model calibrated to match micro data on financial imbalances and perceived credibility of the ECB, we find that the announcement was overall deflationary in the Euro Area.
    Date: 2016
  15. By: Francisco Roch; Harald Uhlig
    Abstract: Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a bailout agency, and characterize the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.
    Keywords: Sovereign debt defaults;Financial crises;Euro Area;Debt markets;Private sector;Econometric models;Default, Bailouts, Self-fulfilling Crises, Endogenous Borrowing Constraints, Long-term Debt, OMT, Eurozone Debt Crisis.
    Date: 2016–07–11
  16. By: Anil Ari (University of Cambridge)
    Abstract: In European countries recently hit by a sovereign debt crisis, the share of domestic sovereign debt held by the national banking system has sharply increased, raising issues in their economic and financial resilience, as well as in policy design. This paper examines these issues by analyzing the banking equilibrium in a model with optimizing banks and depositors. To the extent that sovereign default causes bank losses also independently of their holding of domestic government bonds, undercapitalized banks have an incentive to gamble on these bonds. The optimal reaction by depositors to insolvency risk imposes discipline, but also leaves the economy susceptible to self-fulfilling shifts in sentiments, where sovereign default also causes a banking crisis. Policy interventions face a trade-off between alleviating funding constraints and strengthening incentives to gamble. Subsidized loans to banks, similar to the ECB's non-targeted longer-term refinancing operations (LTRO), may eliminate the good equilibrium when the banking sector is undercapitalized. Targeted interventions have the capacity to eliminate adverse equilibria.
    Date: 2016
  17. By: International Monetary Fund. European Dept.
    Abstract: This Selected Issues paper examines the causes and potential remedies for structural unemployment in France. Structural unemployment in France has long been elevated, and appears to have edged up further since the crisis. This reflects both demand and supply factors, including: high labor taxes, wage stickiness, a growing skill gap, hysteresis effects from the crisis years, a lengthy period of elevated economic uncertainty, inactivity traps created by the unemployment and welfare benefit systems, and demographic factors that have pushed up the labor force. The cyclical recovery is projected to bring down the unemployment rate only slowly. Reducing labor tax wedges can increase both output and employment.
    Keywords: Unemployment;Labor market reforms;Minimum wage;Wage bargaining;Banks;Financial sector;Selected Issues Papers;France;
    Date: 2016–07–12
  18. By: Tigran Poghosyan; Abdelhak S Senhadji; Carlo Cottarelli
    Abstract: We assess the extent to which fiscal transfers smooth regional shocks in three large federations: the U.S., Canada, and Australia. We find that fiscal transfers offset 4-11 percent of idiosyncratic shocks (risk-sharing) and 13-24 percent of permanent shocks (redistribution). This fiscal insurance largely operates through automatic stabilizers embedded in a central budget primarily through federal taxes and transfers to individuals, rather than transfers from the central government to state budgets. These results have implications for the design of fiscal risk-sharing mechanisms in the euro area.
    Keywords: Fiscal stabilization;United States;Canada;Australia;Fiscal risk;Regional shocks;Stabilization measures;Fiscal policy;public debt cycles, credit cycles, asset price cycles, duration analysis
    Date: 2016–07–21
  19. By: Claudiu Albulescu (CRIEF); Dominique P\'epin (CRIEF)
    Abstract: We generalize a money demand micro-founded model to explain Romanians' recent loss of interest for the euro. We show that the reason behind this loss of interest is a severe decline in the relative degree of the euro liquidity against that of the Romanian leu.
    Date: 2016–09
  20. By: International Monetary Fund. European Dept.
    Abstract: This Selected Issues paper reviews public expenditure efficiency in Ireland. Evidence suggests that while Ireland is a low spending country, it achieves a generally efficient use of public funds, with some key differences across sectors. Although the overall space for budgetary savings appears limited, further spending efficiency could help contain cost pressures coming from the demographic challenge of an aging population and improve the quality of public services. It could also help rechannel spending toward more productive uses, for instance by increasing public investment relative to current expenditure, and support the competitive position of the Irish economy and its growth potential.
    Keywords: Government expenditures;Health care;Education;Real estate prices;Banking sector;Corporate sector;Productivity;Selected Issues Papers;Ireland;
    Date: 2016–07–28
  21. By: David A. Grigorian; Vlad Manole
    Abstract: The unprecedented expansion of sovereign balance sheets since the global financial crisis has given a new meaning to the term sovereign risk. Developments in Europe since early 2010 presented new challenges for the functioning of private banks in an environment of heightened sovereign risk. This paper uses an innovative way of measuring the perception of sovereign risk and its impact on deposit dynamics during 2006–11. Using an extension of a common market discipline framework, it shows that exposure to sovereign risk may have limited the ability of banks in Europe to attract deposits. The results are robust to inclusion of conventional measures of bank performance and the sector-wide holdings of foreign sovereign debt.
    Keywords: Sovereign risk;Europe;Financial crisis;Banks;Bank deposits;Econometric models;Time series;overeign risk, market discipline, bank deposits, European crisis
    Date: 2016–07–22

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