nep-eec New Economics Papers
on European Economics
Issue of 2017‒01‒22
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Real Exchange Rates, Current Accounts and Competitiveness Issues in the Euro Area By Rajmund Mirdala
  2. Synopsis of the Euro Area Financial Crisis By Matthieu Darracq Paries; Pascal Jacquinot; Niki Papadopoulou
  3. Regional business cycles across europe By Eduardo Bandrés; María Dolores Gadea-Rivas; Ana Gómez-Loscos
  4. Austerity and gender wage inequality in EU countries By Perugini, Cristiano; Žarković Rakić, Jelena; Vladisavljević, Marko
  5. The economic impact of East-West migration on the European Union By Kahanec, Martin; Pytlikova, Mariola
  6. Management and Resolution of Banking Crises: Lessons from Recent European Experience By Patrick Honohan
  7. Learning from financial crisis: the experience of Nordic banks By Berglund, Tom; Mäkinen, Mikko
  8. Eurozone Debt Crisis and Bond Yields Convergence: Evidence from the New EU Countries By Minoas Koukouritakis
  9. Long-term growth and productivity projections in advanced countries. By G. Cette; R. Lecat; C. Ly-Marin
  10. De-constitutionalization and majority rule: A democratic vision for Europe By Scharpf, Fritz W.
  11. Money supply and inflation in Europe: Is there still a connection? By Diermeier, Matthias; Goecke, Henry
  12. Capital flows and growth dynamics in Central and Eastern Europe By Karsten Staehr
  13. A global trade model for the euro area By D'Agostino, Antonello; Modugno, Michele; Osbat, Chiara
  14. Brexit and Europe's future: A game theoretical approach By Busch, Berthold; Diermeier, Matthias; Goecke, Henry; Hüther, Michael
  15. The political economy of enforcing fiscal rules By Sebastiaan Wijsman; Christophe Crombez

  1. By: Rajmund Mirdala
    Abstract: The lack of nominal exchange rate flexibility in the monetary union induced the growing divergence of trade performance among the member countries. Intra-Eurozone current account imbalances among countries with different income levels per capita fuel discussions on competitiveness channels under common currency. Asynchronous current account trends between North and South of the Euro Area were accompanied by significant appreciations of real exchange rate in the periphery economies originating in the strong shifts in consumer prices and unit labor costs in these countries relative to the countries of the Euro Area core. The issue is whether the real exchange rate is a significant driver of persisting current account imbalances in the Euro Area considering than, according to some authors, differences in domestic demand are more important than is often realized. In the paper we analyze main aspects of current account adjustments in the Euro Area member countries. From estimated VAR model we calculate impulse-response function of the current account to the real exchange rate (REER calculated on CPI and ULC base) and domestic demand shocks and variance decomposition to examine the relative importance of both shocks. Our results indicate that while the prices and costs related determinants of external competitiveness affected imports more significantly than exports, demand drivers shaped current account balances mainly during the crisis period.
    Keywords: current account, real exchange rate, economic crisis, vector autoregression, impulse-response function, variance decomposition
    JEL: C32 F32 F41
    Date: 2016–12
  2. By: Matthieu Darracq Paries (European Central Bank); Pascal Jacquinot (European Central Bank); Niki Papadopoulou (Central Bank of Cyprus)
    Abstract: The paper is putting forward a structural narrative for the euro area financial crisis and its asymmetric consequences through the monetary union. We conjecture three originating factors to the euro area financial fragmentation and discuss the role of specific financial frictions in transmitting and amplifying them: (i) the macroeconomic spillovers of sovereign market tensions through risky banks, (ii) the adverse real-financial feedback loop from rising corporate default to weak banks and credit supply constraints, (iii) bank deleveraging process at times of unprecedented regulatory overhaul. We develop global DSGE model featuring a sovereign-bank nexus, a granular set of relevant financial frictions. The model is calibrated for 6 regions in order to reflect the financial heterogeneity across the largest countries of the euro area. The counterfactual scenarios show that the interplay between sovereign, bank and corporate solvency risks generated sizeable procyclicality in some jurisdictions of the euro area during the crisis and severely impaired the transmission of the single monetary policy.
    Keywords: DSGE models, banking, nancial regulation, cross-country spillovers, bank lending rates
    JEL: E4 E5 F4
    Date: 2016–12
  3. By: Eduardo Bandrés (UNIVERSITY OF ZARAGOZA AND FUNCAS); María Dolores Gadea-Rivas (UNIVERSITY OF ZARAGOZA); Ana Gómez-Loscos (Banco de España)
    Abstract: Large contractionary shocks such as the Great Recession or the sovereign debt crisis in Europe have rekindled interest in analyzing the overall patterns of business cycles. We study these patterns for Europe both at the national and the regional level. We first examine business cycles’ comovements and then, using Finite Mixture Markov Models, we obtain a dating of the different business cycles and identify clusters among them. We also propose an index to analyze within-country homogeneity. Our main findings are the following: (i) we find evidence of just one cluster amongst the European countries while, at the regional level, there is more heterogeneity and we identify five different groups of European regions; (ii) the groups are characterized as follows: the first contains most of the Greek regions; groups two and three include, in most cases, regions from Germany (plus a couple of regions from southern European countries in group two and some regions of the core countries in group three); group four is populated mainly by regions belonging to northern European countries; and group five is the largest and is composed of the rest of European regions; (iii) we notice that the degree of homogeneity of regional business cycles within countries is quite different; (iv) we also observe that spatial correlation increased during the convergence process towards the introduction of the euro and has taken a big leap with the Great Recession, both at country and regional level. In fact, comovements among regions have mainly increased during the last decade. These results have important implications for policymakers in the design of convergence policies at the European level and also in the design of fiscal policies to reduce regional disparities at the country level.
    Keywords: business cycles, clusters, regions, finite mixtures Markov models
    JEL: C32 E32 R11
    Date: 2017–01
  4. By: Perugini, Cristiano; Žarković Rakić, Jelena; Vladisavljević, Marko
    Abstract: The great recession, and the countercyclical responses by European governments that followed, triggered an extensive wave of fiscal adjustments. The implementation of these austerity measures, although underpinned by a widespread consensus, underwent severe criticism. While their effects on output and employment have been extensively investigated, their impacts on wage inequality have received relatively less attention. In this paper we focus on the consequences of austerity measures on gender wage inequalities. After having described the literature-based conceptual framework of our analysis, we provide empirical evidence on the effects of austerity measures on: (i) the adjusted gender wage gap; and (ii) the patterns of gender horizontal segregation. The analysis covers the group of EU-28 countries in the years from 2010 to 2013. Results show that austerity measures (both tax-based and expenditure-based) impacted significantly on various sides of gender wage inequality, putting at risk the relatively little progress achieved in Europe so far.
    Keywords: austerity, gender wage inequality, gender segregation, EU-28
    JEL: E62 J16 J31 O52
    Date: 2016–12–23
  5. By: Kahanec, Martin (UNU-MERIT, Central European University, and IZA, Bonn); Pytlikova, Mariola (CERGE‐EI, Prague, and VSB‐Technical University, Ostrava)
    Abstract: This study contributes to the literature on destination-country consequences of international migration with investigations on the effects of immigration from new EU member states and Eastern Partnership countries on the economies of old EU member states over the years 1995-2010. Using a rich international migration dataset and an empirical model accounting for the endogeneity of migration flows we find positive and significant effects of post-enlargement migration flows from new EU member states on old member states' GDP, GDP per capita, and employment rate and a negative effect on output per worker. We also find small, but statistically significant negative effects of migration from Eastern Partnership countries on receiving countries' GDP, GDP per capita, employment rate, and capital stock, but a positive significant effect on capital-to-labour ratio. These results mark an economic success of the EU enlargements and EU's free movement of workers.
    Keywords: EU enlargement, free mobility of workers, migration impacts, European Single Market, east-west migration, Eastern Partnership
    JEL: J15 J61 J68 O15
    Date: 2017–01–09
  6. By: Patrick Honohan (Peterson Institute for International Economics)
    Abstract: Several European countries endured severe and costly banking collapses in the past decade. Central banks (both within the euro area and outside) provided extensive liquidity to keep the payments system running smoothly in most—but not all—of these countries. The policy approaches to resolve the banking crises across European countries were remarkably different, reflecting the lack of administrative and legislative preparation for bank resolution. As banking systems that had been allowed to enlarge suffered in the face of the global downturn, the scale of bank failures that swept Europe overwhelmed existing policy structures. Not all the policy choices made seem wise in retrospect; a new policy approach was clearly needed. Along with new institutional arrangements for early warning of systemic instability and a single bank supervisor in the euro area, the European Union has adopted a new policy framework for managing and resolving banking crises in euro area countries. Honohan examines the new regime, which has been in operation since the beginning of 2016, and concludes that despite improvements, more needs to be done to ensure the safety of European financial institutions and prevent future banking crises.
    Date: 2017–01
  7. By: Berglund, Tom; Mäkinen, Mikko
    Abstract: To study whether banks retain their lessons from the experience of a severe financial crisis, we examine the effects of the systemic banking crisis of the early 1990s in three Nordic countries (Finland, Norway, and Sweden). While this crisis largely bypassed the rest of Europe, we hypothesize that banks in the three affected Nordic countries took their crisis experiences to heart and as a result outperformed other European banks during the 2008 global financial crisis. Based on a large panel data set of Nordic and European banks for the period 1994–2010, our findings support our main hypothesis that the Nordic banks learned from the 1990s crisis and adjusted their business models accordingly. Our descriptive analysis of Nordic banks finds evidence of “lessons learned” in such precautions as robust capital cushions, improvements in management efficiency and higher credit quality demands relative to the rest of Europe.
    JEL: G01 G21 G34
    Date: 2016–12–09
  8. By: Minoas Koukouritakis
    Abstract: Long-term bond yields’ convergence between each new EU country and the Eurozone is examined in the present paper, in the framework of the current debt crisis in the Eurozone. As the German dominance was established during the crisis, convergence implies that the long-term bond yield of each new EU country must converge to that of Germany. As shown in this paper, under the conditions of uncovered interest rate parity (UIP) and ex-ante relative purchasing power parity (PPP) long-term bond yield spreads are equal to expected inflation differentials. Thus, evidence of yields’ convergence between a new EU country and Germany can be interpreted as monetary policy convergence of this country to Germany. However, lack of yields’ convergence does not necessarily imply monetary policy divergence with Germany. There is the possibility that a new EU country has achieved monetary policy convergence to Germany, but its yields to diverge with those of Germany. The reason is that the recent debt crisis in the Eurozone might increase the sovereign default risk of this country and thus, led to large and persistent risk premium. Of course, such information has practical implications regarding the evaluation of each new EU country in order to join the Eurozone.1 Hence, a proper evaluation of bond yield linkages or, in other words, monetary policy convergence should take the above arguments into account, especially in the period of the debt crisis. Otherwise, invalid conclusions may be drawn. The empirical literature on interest rate convergence within the EU is extensive, and convergence has been linked to the concepts of unit roots and cointegration in most studies. Among others, Karfakis and Moschos (1990) investigated interest rate linkages between Germany and each of Belgium, France, Ireland, Italy and the Netherlands. Using short rates from the late 1970s to the late 1980s, they found no evidence of long-run interest rates convergence. Evidence against the German leadership hypothesis within the European Monetary System (EMS) for the same period, was also found by Katsimbris and Miller (1993). By including the USA to their sample, they showed that both the US and the German rates have important causal influences on the interest rates of the EMS members. Hafer and Kutan (1994) examined long-run co-movements of short rates and money supplies in a group of five EMS countries from the late 1970s to the early 1990s, and found evidence that implies partial monetary policy convergence. Similar evidence was provided by Kirchgässner and Wolters (1995), who used money market rates from mid-1970s to mid-1990s, and showed that Germany has a strong long-run influence within the EMS. Haug et al. (2000) tried to determine which of the twelve original EU countries would form a successful monetary union based on the nominal convergence criteria of the Treaty on European Union (TEU). Using data from 1979 to 1995, they found that the formation of a successful monetary union would require significant adjustments in fiscal and monetary policies by several of these countries. Camarero et al. (2002) investigated convergence of long-term interest rate differentials for the EU countries in relation to the TEU criterion, using 10-year bond yields from 1980 to mid-1990s. Departing from the literature, they adopted the definitions of long-run convergence of per capital output and catching-up convergence (Bernard and Durlauf, 1995, 1996),2 and accounted for structural breaks in the data using the one-break unit root test of Perron (1997). They showed that six countries satisfied the criterion of long-run convergence, seven countries satisfied the conditions of catching-up convergence, and only Italy did not converge in either sense. Holtemöller (2005) studied the degree of monetary integration to the Eurozone for Greece and the Central and Eastern European EU countries, based on interest rate spreads and ex-post deviations from the UIP. Using interbank rates from mid-1990s to the early 2000s, his evidence implied high degree of monetary integration for Estonia and Lithuania, medium degree of monetary integration for Greece and Slovakia, and low degree of monetary integration for the Czech Republic, Hungary, Latvia, Poland and Slovenia. Jenkins and Madzharova (2008) investigated real interest rate convergence for the original EU countries, using 10-year bond yields from the late 1990s to mid-2000s. Their evidence implied failure of the real interest rate parity, mainly due to inflation rate differences. Gabrisch and Orlowski (2010) departed from cointegration analysis and applied GARCH methodology in order to investigate interest rate convergence for the Czech Republic, Hungary, Poland, Slovakia and Slovenia in relation to the Eurozone yields. They focused on 10-year bond yields from the early to the late 2000s and found evidence of stronger convergence for the Czech Republic, Slovenia, and Poland, in which the macroeconomic fundamentals are solid and the financial markets are stable, and weaker convergence for Hungary and Slovakia. Frömmel and Kruse (2015) studied interest rate convergence by implementing a changing persistence model for Belgium, France, Italy and The Netherlands in relation to Germany as the reference country. Using 3-month treasury bill rates from the early 1980s to the late 2000s, they found evidence of very different convergence periods for the sample countries, and showed that fiscal and monetary policy coordination were the main factors that led to interest rate convergence. Several limitations of the existing studies can be pointed out, which may have affected the reported results. Firstly, most of the aforementioned studies, with the exception of Camarero et al. (2002), did not account for structural shifts in the data. Secondly, the existing studies have not distinguished in a systematic way between stochastic and deterministic trends in the structure of interest rates. This is an important issue because evidence of cointegration between, for example, two interest rates implies the presence of a single common stochastic trend that ties them in the long run. On the other hand, deterministic trends depend on the underlying process that generates the stochastic variables under study. Thus, for two interest rates it is not enough to cointegrate with cointegrating vector (1.-1); it is also required that they are cotrended, so that the deterministic trends cancel out in the differential of the two series. Thirdly, in most of the existing studies, interest rate convergence has been examined without an explicit formal definition of convergence or a data generation process (DGP) for the interest rates. The above omissions make the interpretation of the empirical results less transparent and informative. The present study attempts to deal with these considerations. Firstly, consistent with the Eurozone’s nominal convergence criteria, this study focuses on nominal 10-year bond yields’ convergence between each new EU country and Germany, in the framework of an explicit DGP for bond yields and a new definition of convergence that allows for a constant non-negative deviation in each pair of bond yields. The inclusion of these elements leads to explicit testable cointegration and cotrending restrictions that makes the interpretation of the econometric results more informative and meaningful. Furthermore, under the UIP and PPP conditions, deviations from yields’ parity are equal to expected inflation differentials. Such deviations can be eliminated in the long run, if monetary authorities (or market forces) in each new EU country contribute in establishing common deterministic and stochastic trends with Germany, regarding the long-term yields or expected inflation rates. This case can be interpreted as strong convergence with Germany, which more than satisfies the TEU criterion for yields’ convergence. On the other hand, if the UIP and PPP conditions do not hold due to time-varying stationary risk premia, different tax rates (Mark, 1985) or transactions costs (Goodwin and Grennes, 1994) across countries, yields convergence can be defined broader as weak convergence, in which yields converge to a non-negative constant. If this constant is less than 2%, the TEU criterion is also satisfied. Hence, the empirical results are interpreted in terms of strong or weak monetary policy convergence between each new EU country and Germany. Secondly, I employ the cointegration test developed by Lütkepohl, Saikkonen and Trenkler in several papers noted below, in order to capture possible structural shifts in the data. The omission of such shifts in the data when they actually exist can distort substantially standard inference procedures for cointegration. In this analysis, such shifts cannot be omitted as the current debt crisis in the Eurozone has probably altered the deterministic components of the new EU countries’ yields. In addition, as the deterministic components of yields are assumed to be independent of the stochastic components, the Gonzalo and Granger (1995) methodology for estimating and testing for the common stochastic trend in each pair of yields has been implemented.
    Keywords: debt crisis, yields convergence, structural shifts, cointegration, common trends, cotrending
    JEL: E43 F15 F42
    Date: 2016–09–22
  9. By: G. Cette; R. Lecat; C. Ly-Marin
    Abstract: In this period of high uncertainty about future economic growth, we have developed a growth projection tool for 13 advanced countries and the euro area at the 2100 horizon. This high uncertainty is reflected in the debate on the possibility of a ‘secular stagnation’, fuelled by the short-lived Information and Communication Technology (ICT) shock and the current low productivity and GDP growth in advanced countries. Our projection tool allows for the modelling of technology shocks, for different speeds of regulation and education convergence, with endogenous capital growth and TFP convergence processes. We illustrate the benefits of this tool through four growth scenarios, crossing the cases of a new technology shock or secular stagnation with those of regulation and education convergence or of absence of reforms. Over the 2015-2100 period, the secular stagnation scenario assumes yearly TFP growth of 0.6% in the US, leading to a 1.5% GDP growth trend. The technology shock scenario assumes that the third technological revolution will, in the US, provide similar TFP gains to electricity during the second industrial revolution, leading to a 1.4% TFP trend, to which we add a TFP growth wave peaking in 2040, and thus to an average GDP growth rate of 3% in the US. In non-US countries, GDP growth will depend on the implementation of regulation reforms, the increase in education and on the distance to the country-specific convergence target, namely the US, as well. Over the period 2015-2060, for the euro area, Japan and the United Kingdom, benefits from regulation and education convergence would amount to a 0.1 to 0.4 pp yearly growth rate depending on the initial degree both of rigidity and the TFP distance to the US.
    Keywords: Growth, productivity, long-term projections, structural reforms, innovation, education
    JEL: E21 E22 E32 E44 E63
    Date: 2017
  10. By: Scharpf, Fritz W.
    Abstract: European integration has come to constrain the capacity for democratic political action in EU member states through the judicial constitutionalization of "economic liberties," whereas the capacity for effective political action at the European level is narrowly constrained by the multiple-veto character of the Union's "ordinary legislative procedure." Since both of these constraints have institutional causes, they might be loosened by institutional reforms that shift the competence for negative integration from the sphere of judicial legislation to European political legislation and would allow legislation by majority rule at the European level. In order to ensure democratic legitimacy, however, majoritarian legislation would have to allow national opt-outs.
    Keywords: EU,democracy,legitimacy,consensus,majority,negative integration,liberalization,constitutionalization,Demokratie,Legitimität,Konsens,Mehrheit,negative Integration,Liberalisierung,Konstitutionalismus
    Date: 2016
  11. By: Diermeier, Matthias; Goecke, Henry
    Abstract: Since the outbreak of the European financial and economic crisis in 2008, the monetary policy of the European Central Bank (ECB) has been in crisis mode. The central bankers are attempting to get a grasp on the current low inflation rates and inflation expectations by, among other things, introducing a policy of extreme quantitative easing. The expansion of the Eurosystem's balance sheet was problem-free on this occasion, and the ECB also managed to eventually increase the money supply again. However, ensuring that the growth in the money supply transmutes into higher inflation or inflation expectations has been much more difficult. [...]
    JEL: E31 E52 E58
    Date: 2016
  12. By: Karsten Staehr
    Abstract: This paper assesses the importance of capital flows as measured by the current account balance for the growth dynamics of the EU countries from Central and Eastern Europe. Economic growth in these countries was on average relatively high before the global financial crisis but markedly lower after the crisis. Panel data econometrics using annual data for 1997–2015 points to the contemporaneous current account balance having a sizeable negative effect on annual GDP growth. Estimations using many control variables and instrumental variables suggest that the negative effect is mainly demand driven. Counterfactual simulations show that growth rates in all CEE countries would have been lower in the absence of capital flows, and this applies particularly to the countries with the most disadvantageous starting points
    Keywords: business cycles, output performance, capital flows, current account balance, transition economies
    JEL: P17 P21 P36
    Date: 2017–01–13
  13. By: D'Agostino, Antonello; Modugno, Michele; Osbat, Chiara
    Abstract: We propose a model for analyzing euro area trade based on the interaction between macroeconomic and trade variables. First, we show that macroeconomic variables are necessary to generate accurate short-term trade forecasts; this result can be explained by the high correlation between trade and macroeconomic variables, with the latter being released in a more timely manner. Second, the model tracks well the dynamics of trade variables conditional on the path of macroeconomic variables during the great recession; this result makes our model a reliable tool for scenario analysis. JEL Classification: F17, F47, C38
    Keywords: conditional forecast, euro area, factor models, news, now-cast, trade
    Date: 2016–12
  14. By: Busch, Berthold; Diermeier, Matthias; Goecke, Henry; Hüther, Michael
    Abstract: Following the British decision to leave the European Union, the question arises as to how relations should be conducted going forward. The objective of the negotiations between Great Britain and the EU is to ensure which strategy is best - both for the British and the EU. Another important element is what long and short-term advantages can be obtained. Here, the authors will examine these questions from a game theoretical perspective. In any case, it is evident that the EU will benefit the most from an uncompromising approach to the negotiations in the long term, whatever the benefits in the short term.
    JEL: C72 E65 F13
    Date: 2016
  15. By: Sebastiaan Wijsman; Christophe Crombez
    Abstract: A large literature is focused on governments’ fiscal policy making under the disciplining force of fiscal rules. That literature is devoted to map governments’ incentives for (non)compliance, but widely ignores the role of fiscal rule enforcement. This is remarkable, given the situation in the European Union, where we observe frequent breaches of the fiscal rules in the absence of sanctions. This paper focuses therefore on the incentives of the European Commission as enforcer of the Stability and Growth Pact (SGP) and on how individual governments take these incentives into account. Based on actual cases and literature on international agreements we distinguish rationales which make the Commission lenient. Accordingly, we present a game theoretical model to map the interaction between the Commission and governments under incomplete information. We find that unforeseen fiscal needs stemming from crises or other contingencies enhance enforcement costs for the Commission. Given that crises require additional public expenditures, our model shows that some enforcement costs are welfare enhancing. We also find that governments have an incentive to emphasize the fiscal impact of crises to increase the Commission’s enforcement costs. Moreover, governments might even overstate crises’ fiscal impact to hide other expenditures. In doing so, governments exploit their informational advantage over their budget allocation and crisis solving costs. Finally, we provide examples related to Europe’s migrant crisis and national security to support our theoretical findings.
    Keywords: Fiscal rules, Stability and Growth Pact, enforcement
    Date: 2017–01

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