nep-eec New Economics Papers
on European Economics
Issue of 2016‒11‒20
twenty papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. What Makes a Good "Bad Bank"? The Irish, Spanish and German Experience By Stephanie Medina Cas; Irena Peresa
  2. Explaining the Euro crisis: Current account imbalances, credit booms and economic policy in different economic paradigms By Engelbert Stockhammer; collin constantine; Severin Reissl
  3. Fiscal consolidation in a low inflation environment: pay cuts versus lost jobs By Bandiera, Guilherme; Pappa, Evi; Sajedi, Rana; Vella, Eugenia
  4. Greenfield Foreign Direct Investment and Structural Reforms in Europe: what factors determine investments? By Erik Canton; Irune Solera
  5. Structural reform in Germany By Krebs, Tom; Scheffel, Martin
  6. Post-Brexit FEER By Jamel Saadaoui
  7. Intra-European Labor Migration in Crisis Times By Xavier Chojnicki; Anthony Edo; Lionel Ragot
  8. An analysis of euro area bond maturities and simulation of the introduction of new CACs By Eidam, Frederik
  9. What drives the relationship between bank and sovereign credit risk? By Schnabel, Isabel; Schüwer, Ulrich
  10. Fiscal Policy after the Crisis – Workshop Proceedings By Matteo Salto
  11. “Conditional PPP” and Real Exchange Rate Convergence in the Euro Area By Bergin, Paul R.; Glick, Reuven; Wu, Jyh-Lin
  12. Replacing or supplementing the euro in member states whose currency is the euro By Siekmann, Helmut
  13. Trust in the Central Bank and Inflation Expectations By Dimitris Christelis; Dimitris Georgarakos; Tullio Jappelli; Maarten van Rooij
  14. The Impact of US Uncertainty on the Euro Area in Good and Bad Times: Evidence from a Quantile Structural Vector Autoregressive Model By Rangan Gupta; Chi Keung Marco Lau; Mark E. Wohar
  15. Replacing Judgment by Statistics: Constructing Consumer Confidence Indicators on the Basis of Data-driven Techniques By Alessandro Girardi; Christian Gayer; Andreas Reuter
  16. Sovereign Risk and Bank Risk-Taking By Ari, A.
  17. Forecast combination for euro area inflation: a cure in times of crisis? By Hubrich, Kirstin; Skudelny, Frauke
  18. The optimal conduct of central bank asset purchases By Darracq Pariès, Matthieu; Kühl, Michael
  19. European Unemployment Revisited: Shocks, Institutions, Integration By Bertola, Giuseppe
  20. Macroeconomic Relevance of Insolvency Frameworks in a High-debt Context: An EU Perspective By Jean-Charles Bricongne; Maria Demertzis; Peter Pontuch; Alessandro Turrini

  1. By: Stephanie Medina Cas; Irena Peresa
    Abstract: This paper examines the experience of three asset management companies (AMCs) or "bad banks" established in the euro area following the 2008 global financial crisis. Specifically, it studies NAMA, Sareb and FMS Wertmanagement (FMS). These AMCs were set up to purchase growing nonperforming loans on banks’ balance sheets with the aim of their eventual disposal. The study seeks to identify factors that support an AMC’s success. It also analyses the impact of the European regulatory framework, including the Eurostat rules, State-aid regulations and bank resolution rules, on the AMCs’ design. It also reflects on the way recent changes to EU bank resolution rules now limit the involvement of State aid in AMCs. The study finds that the type of assets transferred and the macroeconomic environment are crucially important for successful asset disposals. The paper also focuses on additional success factors, such as clean asset documentation, a solid valuation process, efficient asset servicing, a strong legal framework and skilled staff. Though challenges remain, the three AMCs have contributed to banking sector stabilisation as they have been undertaken alongside bank restructuring measures. The financial backing of the authorities, decisive in the cases analysed, has however come at a fiscal cost.
    JEL: F39 G01 G28
    Date: 2016–09
  2. By: Engelbert Stockhammer (Kingston University); collin constantine; Severin Reissl
    Abstract: The paper proposes a post-Keynesian analysis of the Eurozone crisis and contrasts interpretations inspired by New Keynesian, New Classical, and Marxist theories. The origin of the crisis is the emergence of a debt-driven and an export-driven growth model, which resulted in a rapid increase in private debt ratios and current account imbalances. The reason the crisis escalated in southern Europe, but not in other parts of the world, lies in the unique dysfunctional economic policy regime of the Euro area. European fiscal rules and the Troika impose fiscal austerity on countries in crisis and the separation of fiscal and monetary spaces has made countries vulnerable to sovereign debt crises and forced them to comply. We analyse the role different paradigms attribute to current account imbalances, fiscal policy and monetary policy. Remarkably, opposing views on the relative importance of cost and demand developments in explaining current account imbalances can be found in both heterodox and orthodox economics. Regarding the assessment of fiscal and monetary policy there is a clearer polarisation, with heterodox analysis regarding austerity as unhelpful and large parts of orthodox economics endorsing it. We conclude that there is a weak mapping between post-Keynesian, New Classical, New Keynesian and Marxist theories and different economic policy strategies for the Euro area, which we label Keynesian New Deal, European Orthodoxy, Moderate Reform and Progressive Exit respectively.
    Keywords: Euro crisis, European economic policy, sovereign debt crisis, current account balance, fiscal policy, quantitative easing
    JEL: B00 E00 E50 E63 F53 G01
    Date: 2016–11
  3. By: Bandiera, Guilherme (European University Institute); Pappa, Evi (European University Institute); Sajedi, Rana (Bank of England); Vella, Eugenia (University of Sheffield)
    Abstract: We construct a model of a monetary union to study fiscal consolidation in the Periphery of the euro area, through cuts in public sector wages or hiring when the nominal interest rate is constrained at its lower bound. Consolidation induces a positive wealth effect that increases demand, as well as a reallocation of workers towards the private sector, which together boost private activity. However, in a low inflation environment, demand is suppressed and the private sector is not able to absorb the additional workers. Comparing the two instruments, cuts in public hiring increase unemployment persistently in this environment, while wage cuts reduce it. Regions with higher mobility of labour between the two sectors are able to consolidate more effectively. Price flexibility is also key at the zero lower bound: for a higher degree of price rigidity in the Periphery, consolidation becomes harder to achieve. Consolidations can be self-defeating when the public good is productive, or a complement to private consumption.
    Keywords: Fiscal consolidation; public wage bill; zero lower bound
    JEL: E32 E62
    Date: 2016–11–11
  4. By: Erik Canton; Irune Solera
    Abstract: Greenfield FDI flows into EU countries account for a non-negligible share of total EU FDI. They create new capital assets and additional production capacity which are important elements to support the transition to a stronger European growth path. This project investigates determinants of Greenfield FDI flows into the EU countries using sectoral data on bilateral greenfield FDI flows and associated job creation for the 2003-2014 period. The dataset covers the 28 EU countries and also includes as country of origin the main non-EU investors. A gravity model explaining FDI from distance indicators and policy variables is built, while controlling for other important factors, employing Heckman two-step selection procedure. The results suggest that the business climate (from World Bank's Doing Business) and product market regulations (from OECD's PMR) are important determinants of greenfield investment in the EU. This project provides additional evidence on the importance of removing unnecessary regulatory barriers to investment and could help in the discussion on the Investment Plan for Europe.
    JEL: C33 C34 E22
    Date: 2016–06
  5. By: Krebs, Tom; Scheffel, Martin
    Abstract: This paper provides a quantitative evaluation of the macroeconomic, distributional, and fiscal effects of three reform proposals for Germany: i) a reduction in the social security tax in the low-wage sector, ii) a publicly financed expansion of full-day child care and full-day schooling, and iii) the further deregulation of the professional service sector. The analysis is based on a macroeconomic model with physical capital, human capital, job search, and household heterogeneity. All three reforms have positive short-run and long-run effects on employment, wages, and output. The quantitative effects of the deregulation reform are relatively small due to the small size of the professional services in Germany. Policy reforms i) and ii) have substantial macroeconomic effects and positive distributional consequences. Ten years after implementation, reforms i) and ii) taken together increase employment by 1.6 percent, potential output by 1.5 percent, real hourly pre-tax wages in the low-wage sector by 3 percent, and real hourly pre-tax wages of women with children by 2.7 percent. The two reforms create fiscal deficits in the short-run, but they also generate substantial fiscal surpluses in the long-run. They are fiscally efficient in the sense that the present value of short-term fiscal deficits and long-term fiscal surpluses is positive for any interest (discount) rate less than 9 percent.
    JEL: E24 E60 J2 J3
    Date: 2016
  6. By: Jamel Saadaoui (BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique, CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)
    Abstract: From the onset of the euro crisis to the Brexit vote, we have assisted to impressive reductions of current account imbalances in peripheral countries of the euro area. These reductions can be the result of either a compression of internal demand or an improvement of external competitiveness. In this paper, we provide new estimates of exchange rate misalignments within the euro area to assess whether peripheral countries have managed to improve their external competitiveness. In order to take into account that business cycles are desynchronized in the euro area, we include the correction of Isard and Faruqee (1998) in the FEER methodology of Jeong et al. (2010a). This approach allows to detect reduction of exchange rate misalignments due to improvement of external competitiveness. Besides, it offers a solution to the problem of over-determination in exchange rate models inspired by the SMIM of Cline (2008). Overall, peripheral countries have managed to reduce their exchange rate misalignments thanks to internal devaluations.
    Keywords: Equilibrium Exchange Rate,Brexit,Internal Devaluation
    Date: 2016–11–09
  7. By: Xavier Chojnicki; Anthony Edo; Lionel Ragot
    Abstract: The question of whether migration can serve as a channel for regional adjustment to asymmetric shocks is crucial in an economic and monetary union. It is of particular interest within the Eurozone where countries do not have flexible exchange rates as an adjustment mechanism. By moving from countries with high unemployment to countries with better employment prospects, intra-European migrants should help countries to adjust to asymmetric shocks and lead to a more efficient allocation of resources within the free migration regime. This policy brief exploits the 2008 economic crisis to investigate how labor market disparities between EU15 countries affected intra-European migration. Our main contributions are threefold. First, over the period 2000-2013, we find that intra-European migration indeed responds to regional differences in employment conditions: a rise in unemployment differences between two EU15 countries fosters migration to the country with the better employment conditions. Second, we find that the 2008 economic crisis led to a strong reallocation of individuals within the EU15 between the southern countries (Greece, Italy, Portugal and Spain) which were the most affected by the crisis and the least affected countries, such as Denmark and the UK. Third, our results indicate that responsiveness to regional employment disparities is far greater among non-EU15 immigrants, compared to European-born people. This finding suggests that the mobility of Europeans within the EU15 could be greater, a hypothesis that is consistent with the higher mobility observed in the United States. Improving cross-country portability of social rights within the EU could thus be a relevant reform to foster intra-EU mobility.
    Keywords: Intra-European Migration;Labor mobility;Regional adjustment;Regional shocks;European Union;Employment;Economic crisis
    JEL: F22 J61 J68
    Date: 2016–10
  8. By: Eidam, Frederik
    Abstract: This paper studies the maturity structure of sovereign debt in the euro area and the penetration of the sovereign debt stock with a new type of collective action clauses (CACs), labeled Creditor Participation Clauses (CPCs). The first section describes the data. The simulation assumptions for the penetration of the sovereign debt stock with newly issued CPC bonds are described in section two. Section three presents the simulation results.
    Date: 2016
  9. By: Schnabel, Isabel; Schüwer, Ulrich
    Abstract: The positive relationship between bank and sovereign credit risk in the Eurozone, the so-called sovereign-bank nexus, is seen as a major threat for the stability of the Eurozone. This paper explores potential bank-level and country-level drivers of this relationship. We find that banks' home bias in their sovereign exposures and their low equity ratios as well as countries' high debt-to-GDP ratios and low perceived government effectiveness are positively related to the sovereign-bank nexus. While these results do not necessarily reflect causal relationships, they suggest that promoting banks' diversification of sovereign exposures could be an effective measure to mitigate the sovereign-bank nexus.
    Keywords: sovereign-bank nexus,home bias,sovereign exposures,CDS spreads
    JEL: G21 G28
    Date: 2016
  10. By: Matteo Salto
    Abstract: This paper presents the proceedings of the annual Public Finance Workshop organised by the Directorate-General for Economic and Financial Affairs in Brussels on 19 January 2016 in relation with the publication of its Public Finance in EMU 2015 Report. After the double-dip recession between 2009 and 2013, growth is gradually returning to the EU and the euro area but it is still subject to downside risks. On the nominal side, both inflation and interest rates remain very low, thereby curtailing the stabilisation function of monetary policy. After years of fiscal consolidation, budget deficits have been reduced significantly in most Member States. Nevertheless, the crisis has taken its toll on the societies of several Member States and left us with the legacy of high public-debt ratios and increased social challenges. The workshop discusses the best options for fiscal policy in such an environment. It was organised in two sessions: Session 1: "Fiscal policy in a low-inflation context", and Session 2: "Fiscal policy after the crisis". The proceedings display the high quality contributions that were presented in each of these sessions and the discussions that followed.
    JEL: C32 C54 E22 E32 E60 E62 F45
    Date: 2016–07
  11. By: Bergin, Paul R. (University of California at Davis); Glick, Reuven (Federal Reserve Bank of San Francisco); Wu, Jyh-Lin (National Sun Yat-Sen University)
    Abstract: While economic theory highlights the usefulness of flexible exchange rates in promoting adjustment in international relative prices, flexible exchange rates also can be a source of destabilizing shocks. We find that when countries joining the euro currency union abandoned their national exchange rates, the adjustment of real exchange rates toward their long-run equilibrium surprisingly became faster. To investigate, we distinguish between differing rates of purchasing power parity (PPP) convergence conditional on alternative shocks, which we refer to as “conditional PPP.” We find that the loss of the exchange rate as an adjustment mechanism after the introduction of the euro was more than compensated by the elimination of the exchange rate as a source of shocks, in combination with faster adjustment in national prices. These findings support claims that flexible exchange rates are not necessary to promote long-run international relative price adjustment.
    JEL: F00 F15 F31
    Date: 2016–10–18
  12. By: Siekmann, Helmut
    Date: 2016
  13. By: Dimitris Christelis (University of Naples Federico II, CSEF, CFS and CEPAR); Dimitris Georgarakos (European Central Bank, CFS and University of Leicester); Tullio Jappelli (Università di Napoli Federico II, CSEF and CEPR); Maarten van Rooij (De Nederlandsche Bank and Netspar)
    Abstract: Using micro data from the 2015 Dutch CentERpanel, we examine whether trust in the European Central Bank (ECB) influences individuals’ expectations and uncertainty about future inflation, and also whether it anchors inflation expectations. We find that higher trust in the ECB lowers inflation expectations on average, and significantly reduces uncertainty about future inflation. Moreover, results from quantile regressions suggest that trusting the ECB increases (lowers) inflation expectations when the latter are below (above) the ECB’s inflation target. These findings hold after controlling for people’s knowledge about the objectives of the ECB. In addition, higher trust in the ECB raises expectations about GDP growth. The findings suggest that a central bank can influence the economy through people’s expectations, even in times when conventional monetary policy tools likely have weak effects.
    Keywords: Inflation expectations, Inflation uncertainty, Anchoring, Trust in the ECB, Subjective Expectations
    JEL: D12 D81 E03 E40 E58
    Date: 2016–11–14
  14. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria); Chi Keung Marco Lau (Newcastle Business School, Northumbria University, UK); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha and School of Business and Economics, Loughborough University, Leicestershire)
    Abstract: We estimate a quantile structural vector autoregressive model for the Euro Area to assess the real effects of uncertainty shocks in expansions and recessions using monthly data covering the period of 1999:02 to 2016:05. Domestic and foreign (US) uncertainty shocks hitting during recessions are found to produce a relatively overall stronger negative impact on output growth than in expansions. Inflation, in general, is unaffected from a statistical perspective. Our results tend to suggest that policymakers need to implement state-dependent policies, with stimulus policies being more aggressive during recessions – something we see from our results in terms of stronger declines in the interest rate during bad times.
    Keywords: Economic Policy Uncertainty, US-Euro Area Spillovers, Quantile Structural Vector Autoregressive Model
    JEL: C32 E32 E60
    Date: 2016–11
  15. By: Alessandro Girardi; Christian Gayer; Andreas Reuter
    Abstract: This article compares the properties of the European Commission's Consumer Confidence Indicator (CCI) for the euro area with three alternative indices which differ from the former in that they (i) consider a richer set of survey questions and (ii) are the result of data-driven statistical techniques, rather than the simple arithmetic mean of the input series. The alternative indicators are shown to perform only slightly better than the CCI in tracking real private consumption growth and to fail to produce significantly better forecasts of expansions and contractions in private consumption, once information from relevant, timely available hard data is controlled for. The conclusions change, however, if the analysis is re-conducted on well-defined subsets of survey questions. Concretely, the application of the alternative construction techniques to a data set which is limited to questions about consumers' personal finances produces an indicator which, combined with relevant macro-economic time series, yields significant improvements in forecasting expansions and contractions in private consumption.
    JEL: C22 C53 E37
    Date: 2016–07
  16. By: Ari, A.
    Abstract: In European countries recently hit by a sovereign debt crisis, banks have sharply raised their holdings of domestic sovereign debt, reduced credit to forms, and faced rising financing costs, raising concerns about economic and financial resilience. This paper develops a general equilibrium model with optimizing banks and depositors to account for these facts and provide a framework for policy assessment. Under-capitalized banks in default-risky countries have an incentive to gamble on domestic sovereign bonds. Unless there is perfect transparency of bank balance sheets, the optimal reaction by depositors to bank insolvency risk leaves the economy susceptible to self-fulfilling shifts in sentiments. In a bad equilibrium, sovereign risk shocks lead to a prolonged period of financial fragility and a persistent drop in output. The model is quantified using Portuguese data and generates similar dynamics to those observed in the Portuguese economy during the debt crisis. Policy interventions face a trade-off between alleviating funding constraints and strengthening incentives to gamble. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria.
    Keywords: Sovereign Debt Crises, Bank Risk-Taking, Financial Constraints
    JEL: E44 E58 F34 G21 H63
    Date: 2016–11–17
  17. By: Hubrich, Kirstin; Skudelny, Frauke
    Abstract: The period of extraordinary volatility in euro area headline inflation starting in 2007 raised the question whether forecast combination methods can be used to hedge against bad forecast performance of single models during such periods and provide more robust forecasts. We investigate this issue for forecasts from a range of short-term forecasting models. Our analysis shows that there is considerable variation of the relative performance of the different models over time. To take that into account we suggest employing performance-based forecast combination methods, in particular one with more weight on the recent forecast performance. We compare such an approach with equal forecast combination that has been found to outperform more sophisticated forecast combination methods in the past, and investigate whether it can improve forecast accuracy over the single best model. The time-varying weights assign weights to the economic interpretations of the forecast stemming from different models. We also include a number of benchmark models in our analysis. The combination methods are evaluated for HICP headline inflation and HICP excluding food and energy. We investigate how forecast accuracy of the combination methods differs between pre-crisis times, the period after the global financial crisis and the full evaluation period including the global financial crisis with its extraordinary volatility in inflation. Overall, we find that forecast combination helps hedge against bad forecast performance and that performance-based weighting outperforms simple averaging. JEL Classification: C32, C52, C53, E31, E37
    Keywords: euro area inflation, forecast combinations, forecast evaluation, forecasting
    Date: 2016–10
  18. By: Darracq Pariès, Matthieu; Kühl, Michael
    Abstract: We analyse the effects of central bank government bond purchases in an estimated DSGE model for the euro area. In the model, central bank asset purchases are relevant in so far as agency costs distort banks asset allocation between loans and bonds, and households face transaction costs when trading government bonds. Such frictions in the banking sector induce inefficient time-variation in the term premia and open up for a credit channel of central bank government bond purchases. Considering first ad hoc asset purchase programmes like the one implemented by the ECB, we show that their macroeconomic multipliers are stronger as the lower bound on the policy rate becomes binding and when the purchasing path is fully communicated and anticipated by economic agents. From a more normative standpoint, interest rate policy and asset purchases feature strong strategic complementarities during both normal and crisis times. In a lower bound environment, optimal policy conduct features long lower bound periods and activist asset purchase policy. Our results also point to a clear sequencing of the exit strategy, stopping first the asset purchases and later on, lifting off the policy rate. In terms of macroeconomic stabilisation, optimal asset purchase strategies bring sizeable benefits and have the potential to largely offset the costs of the lower bound on the policy rate. JEL Classification: C61, E52, G11
    Keywords: banking, DSGE, portfolio optimisation, quantitative easing
    Date: 2016–11
  19. By: Bertola, Giuseppe
    Abstract: This paper painstakingly restores a vintage empirical model of unemployment determination by interacting shocks and institutions, and runs it on recent data featuring dramatic shocks and controversial institutional change. Theoretical insights and empirical results suggest that reforms and capital flows contribute sensible and interrelated explanations for the recent twists and turns of unemployment rates in Europe and elsewhere.
    Date: 2016–11
  20. By: Jean-Charles Bricongne; Maria Demertzis; Peter Pontuch; Alessandro Turrini
    Abstract: The high level of private debt in many EU countries has put a spotlight on the role that insolvency frameworks can play in helping to address debt overhangs and clean bank balance sheets of nonperforming loans. This paper reviews the macroeconomic relevance of insolvency frameworks from an EU perspective, discusses design issues of insolvency regimes and presents the main features of insolvency frameworks in selected EU Member States. It also reviews recently enacted reforms and examines remaining reform priorities from a macroeconomic perspective.
    JEL: D02 E44 F34 G33
    Date: 2016–06

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.