nep-eec New Economics Papers
on European Economics
Issue of 2017‒01‒29
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Implicit public debt thresholds: an empirical exercise for the case of Spain By Javier Andrés; Javier J. Pérez; Juan A. Rojas
  2. To QE or not to QE? New perspectives of an unconventional way of Eurozone revival after Brexit By Economou, Emmanouel/Marios/Lazaros; Kyriazis, Nikolaos
  3. Trends in the German Income Distribution: 2005/06 to 2010/11 By Martin Biewen; Martin Ungerer; Max Löffler
  4. Is there a Long-Term Relationship among European Sovereign Bond Yields? By Ian Schaeffer; Miguel D. Ramirez
  5. Fiscal and other rules in EU economic governance: helpful, largely irrelevant or unenforceable? By Iain Begg
  6. The "Magic Square" of Economic Policy measured by a Macroeconomic Performance Index By Oliver Picek
  7. Fiscal Sustainability of Macedonia on its path towards the EU By Trenovski, Borce; Tashevska, Biljana
  8. Expert Group on Disparities in a National Accounts Framework: Results from the 2015 Exercise By Jorrit Zwijnenburg; Sophie Bournot; Federico Giovannelli
  9. Is Brexit an opportunity to reform the European Parliament? By Robert Kalcik; Guntram B. Wolff
  10. The Memornada trap and almost fall of the Greek economy By Kyriazis, Nicholas; Economou, Emmanouel/Marios/Lazaros
  11. Trade in value added: Do we need new measures of competitiveness? By Lommatzsch, Kirsten; Silgoner, Maria A.; Ramskogler, Paul
  12. Surviving the perfect storm: the role of the lender of last resort By Nuno Alves; Diana Bonfim; Carla Soares
  13. Open Borders in the European Union and Beyond: Migration Flows and Labor Market Implications By John Kennan
  14. The Impact of Sovereign Ratings on Eurozone SMEs Credit Rationing By Demoussis, Michael; Drakos, Konstantinos; Giannakopoulos, Nicholas

  1. By: Javier Andrés (University of Valencia); Javier J. Pérez (Banco de España); Juan A. Rojas (ESM)
    Abstract: We extend previous work that combines the Value at Risk approach with estimation of the correlation pattern of the macroeconomic determinants of public debt dynamics by means of Vector Auto Regressions (VARs). These estimated models are used to compute the probability that the public debt ratio exceeds a given threshold, by means of MonteCarlo simulations. We apply this methodology to Spanish data and compute time-series probabilities to analyse the possible correlation with market risk assessment, measured by the spread over the German bond. Taking into account the high correlation between the probability of crossing a pre-specifi ed debt threshold and the spread, we go a step further and ask what would be the threshold that maximises the correlation between the two variables. The aim of this exercise is to gauge the implicit debt threshold or «prudent debt level» that is most consistent with market expectations as measured by the sovereign yield spread. The level thus obtained is consistent with the medium-term debt-to-GDP ratio anchor of 60% of GDP.
    Keywords: public debt, early warning indicators, fiscal sustainability
    JEL: H63 H68 E61 E62
    Date: 2017–01
  2. By: Economou, Emmanouel/Marios/Lazaros; Kyriazis, Nikolaos
    Abstract: In the aftermath of the UK referendum on 23 June, 2016 that resulted in a sonorous negative decision regarding the willingness of the British people to remain in the EU, a significant number of alarming questions have emerged. Although Europe should have forged in crises, nowadays, many compromises have to be made in order to maintain the European construction as intact as possible. The question we attempt to answer is whether a new phase of unconventional monetary policy in the form of QE would be appropriate to lessen the threat of an upcoming crisis. This is why we examine Eurozone QE perspectives through the prism of the new without the UK era of the EU in order to highlight the pros and cons of the historical Brexit decision. As new rounds of unconventional monetary policy are believed to be essential for supporting the weaker countries in the European south, perspectives of non-conventional success could alter and optimal policies be substantially reformulated subject to the newly-arising constraints.
    Keywords: Brexit, European Union, Quantitative Easing, Eurozone
    JEL: E02 E51 E52 E58 G2 H1
    Date: 2016–09–21
  3. By: Martin Biewen; Martin Ungerer; Max Löffler
    Abstract: We analyze the potential influence of a number of factors on the distribution of equivalized net incomes in Germany over the period 2005/2006 to 2010/11. While income inequality considerably increased in the years before 2005/2006, this trendwas stopped after 2005/2006. Among many other factors, we consider the role of the employment boom and the development of inequality in wage incomes after 2005/2006. Our results suggest that, despite further increases in wage inequality, inequality in equivalized net incomes did not increase further after 2005/2006 because increased within-year employment opportunities compensated otherwise rising inequality in annual labour incomes. On the other hand, income inequality did not fall in a more marked way after 2005/2006 because also the middle and the upper part of the distribution benefitted from the employment boom. Other factors, such as changing household structures, population aging and changes in the tax and transfer system had no important effects on the distribution. Finally, we find little evidence that the distribution of equivalized net incomes was affected in any important way by the financial crisis and the subsequent great recession.
    Keywords: income inequality, poverty
    JEL: C14 D31 I30
    Date: 2016
  4. By: Ian Schaeffer; Miguel D. Ramirez (Department of Economics, Trinity College)
    Abstract: The integration of financial markets has been a recurring theme in academic and financial research. The majority of the literature has focused on equity markets. Literature on the integration of international bond markets is not as common, specifically regarding that of European bonds since the beginning of the common currency area in 1999. This paper estimates a fixed effects pooled model and then proceeds to undertake panel unit root and cointegration tests to determine the degree of co-movement of European sovereign bond yields. The reported estimates suggest that yields move together over time, thus the benefits of diversification in European government bond portfolios may be limited. The results also have important implications for monetary policy. Given that economic shocks (e.g. inflationary shocks) are transmitted quickly from country to country, then it will complicate the task of monetary policy when it comes to pursuing an independent policy with respect to domestic monetary conditions in the presence of asymmetric economic shocks.
    Keywords: European Monetary Union; Fully modified ordinary least squares (FMOLS); Pairwise Granger Causality tests; Panel unit roots; Panel cointegration; Sovereign bond yields.
    JEL: C23 N23 O52
    Date: 2017–01
  5. By: Iain Begg
    Abstract: EU Member States, particularly in the euro area, have been pushed to adopt more extensive and intrusive fiscal rules, but,what is the evidence that the rules are succeeding?. The EU level Stability and Growth Pact (SGP) has been – and remains – the most visible rule-book, but it has been complemented by a profusion of national rules and by new provisions on other sources of macroeconomic imbalance. Much of the analysis of rules has concentrated on their technical merits, but tends to neglect the political economy of compliance. This paper examines the latter looking at compliance with fiscal rules at EU and Member State levels, and at the rules-based mechanisms for curbing other macroeconomic imbalances. It concludes that politically driven implementation and enforcement shortcomings have been given too little attention, putting at risk the integrity and effectiveness of the rules.
    Keywords: Fiscal rules; European economic governance; Macroeconomic imbalances; Political economy of compliance; Fiscal councils in Europe
    JEL: E61 F42 H11 H61 H77 H81
    Date: 2017
  6. By: Oliver Picek (Department of Economics, New School for Social Research)
    Abstract: The "Magic Square of Economic Policy" highlights four main goals of economic policy: growth, full employment, price stability, and balanced trade. A Macroeconomic Performance Index can be used to assign relative weights to the dierent goals within the Magic Square, giving a single index number per year per country. The legitimacy of the simplest weighting scheme that assigns equal weight to all four goals is discussed. The macroeconomic performance of eleven euro zone area countries is evaluated over time and across countries.
    Keywords: Macroeconomic Policy, Economic Performance, Misery Index, Magic Polygon, Magisches Vieleck, Magisches Viereck, Magic Rectangle, Macroeconomic Imbalances
    JEL: E60 E61 P52 I31 C82
    Date: 2017–01
  7. By: Trenovski, Borce; Tashevska, Biljana
    Abstract: The 2008 global economic crisis exposed the importance of state fiscal intervention, and more than two decades of neoclassic paradigm and a non-fiscal domination paradigm, it brought back fiscal activism and the Keynesian ideas and measures at the top of government agendas. However, drastic worsening of many developed nations’ fiscal state, as a result of a decreased economic activityand of various fiscal packages aimed at the financial sector and the economy as a whole, complemented by budgetary pressures from an aging population, activated debates on the size, sustainability and the consequences of budget deficits and public dept. Recent events, particularly the conditions created by the European debt crisis under which, some EU member states faced difficulties in access to markets, confirmed that the challenges of fiscal sustainability are not only long-term, and are not typical only of developing countries, but are a real problem for developed countries with a growing public debt, stagnant economic growth, unfavorable demographic trends and obligations passed on by the financial sector. This imposed the sustainability of public finances (important for the creation of sufficient fiscal space to tackle future unfavorable macroeconomic shocks and with costs associated with an aging population) as one of the most important macroeconomic subjects for EU member states and candidates, according to its importance in maintaining EU’s stability. The subject of fiscal sustainability is relevant for the Republic of Macedonia which has a relatively low but growing level of public debt, that from the beginning of the crisis until December 2015 grew more than 20pp of GDP and reached 46.5% of GDP (38% of GDP state debt). Estimation of fiscal sustainability is an infallible part of analysis carried out by international financial institutions (IMF, World Bank) in countries of interest, including Macedonia.This is particularly important taking into account the growth tempo of Macedonia’s debt, its structure, and efficiency of fiscal politics, one of the key indicators for assessment of our stability on the path towards the EU. In context of the above, this paper defines the concept of fiscal sustainability, presents the problem’s relevance for developed countries of the European debt crisis case, and lastly, elaborates Macedonia’s fiscal politics, public debt, and fiscal sustainability.
    Keywords: fiscal policy, fiscal sustainability, public debt
    JEL: E61 E62 H5
    Date: 2016
  8. By: Jorrit Zwijnenburg (OECD); Sophie Bournot (OECD); Federico Giovannelli (OECD)
    Abstract: In 2011, an Expert Group was launched to carry out a feasibility study on the compilation of distributional measures of income, consumption and wealth across household groups consistent with national accounts data. This group developed a methodology on the basis of which first experimental results on income, consumption and savings according to income quintiles were compiled and published in 2013. In 2015, the expert group engaged in a second exercise focusing on a more recent year and taking into account a number of adjustments to the methodology used in the previous exercise. This paper describes the sources, methods and results of this second exercise. The results of the exercise show that in general all countries are able to comply with the methodology. Furthermore, countries have micro data available for most of the national accounts items and in case of lacking data, imputations lead to comparable results. However, the results also show that in some cases gaps between the micro aggregates and the national accounts totals are quite substantial, possibly affecting the overall distributional results. Furthermore, more information is needed on how countries link data across various data sources. The experimental results show that Mexico records the highest income and consumption disparities, followed by the United States and Portugal, and that Slovenia records the lowest. The paper also shows that breakdowns into other household groups, such as age group and labour market status reveal very interesting information.
    Keywords: distributional results, households, national accounts
    JEL: C82 D31 E01 E21
    Date: 2017–01–28
  9. By: Robert Kalcik; Guntram B. Wolff
    Abstract: The United Kingdom’s departure from the European Union will have implications for the European Parliament. Seventy-three of its 751 members are elected in the UK. Brexit offers a political opportunity to reform the allocation of seats to member states. The European Parliament is a highly unequal parliament - large countries are underrepresented while small countries are overrepresented. This is desired in the EU treaties. But the EU treaties also emphasise the importance of equality and equal treatment of citizens by EU institutions. Inequality of representation in the European Parliament has been criticised as reducing its democratic legitimacy. The European Parliament itself has called for increased “electoral equality,” or enhanced equality of representation. We explore different options for reform and their implications for equality of representation and distribution of seats to countries. We do so within the constraints set by the EU treaties. One option would be simply to drop the 73 seats currently occupied by MEPs elected in the UK. However, this would increase the inequality of representation in the European Parliament. We also consider other pragmatic options but they would not yield significantly different outcomes. Alternatively, the allocation of MEPs to member states could be reconsidered with a view to reducing the inequality of representation within the constraints set by the EU treaties. We use two measures of inequality and perform a mathematical optimisation. By one measure of inequality of citizens’ representation, the European Parliament would shrink to 639 MEPs. By the other measure, it would shrink to 736 MEPs. Inequality can be reduced by around 25 percent, making the parliament somewhat more comparable to the levels of inequality of representation seen in the British and French national parliaments. The European Parliament would still be twice as unequal, however. We also consider the idea of a transnational list, an option that would require treaty change, and offer an online tool to explore other options that would require treaty change. At a time of a shrinking EU budget and high levels of scepticism about the legitimacy and efficiency of EU institutions, Brexit offers an opportunity to reform the European Parliament to address some of the criticisms. However, we note that only a change to the EU Treaties would enable changes to make the European Parliament comparable to national parliaments in terms of equality of representation.
    Date: 2017–01
  10. By: Kyriazis, Nicholas; Economou, Emmanouel/Marios/Lazaros
    Abstract: We analyse economic and political developments in Greece for the period 2010-2015, after the introduction of the memoranda agreements between Greece, the European Union (EU), the European central Bank (ECB) and the International Monetary Fund (IMF). We suggest that a vicious cycle took place, whereby austerity measures, badly implemented programs, mistakes of economic policy, unwillingness on the part of the Greek governments to implement structural reforms, and political immaturity from both politicians and citizens led to the failure of the memoranda and furthered political instability. We introduce a game theoretical approach as a model for the “European game” played by Greece and the EU and the complex and confused situation and diverging aims among the major participants: Greece, Germany, the USA, France, the Baltic States, Finland, the IMF, etc. as well as a presentation of the June 5th referendum in Greece. We then present our estimations for the sustainability of the public debt, followed by our conclusions.
    Keywords: Memoranda, Greek economic crisis, public debt, debt projection analysis
    JEL: E60 E62 H50 H63 N14
    Date: 2016–04–09
  11. By: Lommatzsch, Kirsten; Silgoner, Maria A.; Ramskogler, Paul
    Abstract: It has been argued that the increasing importance of global value chains necessitates a modification of conventional competitiveness measures. We compile a broad dataset including value added trade, gross exports and conventional and value added based real exchange rates. To sharply focus on external competitiveness, a new price competitiveness indicator is introduced, the TWULC (Trade Weighted Unit Labour Cost indicator). It weights sectorspecific cost trends according to sector shares in exports. Econometric tests for a panel of 38 countries show that the focus on value added trade generally improves the explanatory power of export equations. Value added exports' sensitivity towards real exchange rates is up to four times higher than that of gross exports. Real effective exchange rates focusing on exporting industries and on value added weights yield more robust results across the specifications, but do not systematically outperform the more conventional measures of price or cost competitiveness.
    Keywords: competitiveness,external trade,labour costs
    JEL: F14 J30
    Date: 2016
  12. By: Nuno Alves; Diana Bonfim; Carla Soares
    Abstract: When banks are hit by a severe liquidity shock, central banks have a key role as lenders of last resort. Despite the well-established importance of this mechanism, there is scarce empirical evidence that allows analyzing this key role of central banks. We are able to explore a unique setting in which banks suddenly lose access to market funding due to contagion fears at the onset of the euro area sovereign debt crisis. Using monthly data at the loan, bank, and firm level, we are able to test the role of the central bank in a scenario of imminent collapse. We find that the liquidity obtained from the central bank played a critical role in avoiding the materialization of such a scenario.
    JEL: E44 E5 G21
    Date: 2016
  13. By: John Kennan
    Abstract: In 2004, the European Union admitted 10 new countries, and wages in these countries were generally well below the levels in the existing member countries. Citizens of these newly-admitted countries were subsequently free to take jobs anywhere in the EU, and many did so. In 2015, a large number of refugees from Syria and other broken countries sought to migrate to EU countries (along very dangerous routes), and these refugees were met with fierce resistance, at least in some places. This paper seeks to understand the labor market implications of allowing free migration across borders, with particular reference to the EU. The aim is to quantify the migration flows associated with EU enlargement, and to analyze the extent to which these flows affected equilibrium wages. The main conclusion is that the real wage effects are small, and the gains from open borders are large.
    JEL: E25 F22 J61
    Date: 2017–01
  14. By: Demoussis, Michael; Drakos, Konstantinos; Giannakopoulos, Nicholas
    Abstract: In this study we investigate whether sovereign credit ratings have any discernible impact on credit rationing in Euro zone countries. We utilize firm-level data from the Survey on the Access to Finance of SMEs for the period 2009-2013 conducted by the ECB. A negative association between the rating of sovereign creditworthiness and credit rationing is identified, while credit rationing varies substantially even among countries with the highest quality of sovereign bonds. Credit rationing is lower in sovereigns with high quality ratings and higher in sovereigns near default. These results remain intact when fundamental firm characteristics (e.g. firm’s age and size, sector of economic activity, financial situation etc.) are taken into consideration. This indicates that the interconnection of sovereign debt risk with domestic credit market outcomes is robust.
    Keywords: Credit rationing; Firms; Sovereign debt; Euro zone
    JEL: C35 E51 G2 H63
    Date: 2016

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