nep-eec New Economics Papers
on European Economics
Issue of 2017‒02‒05
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. European banking regulation after the financial crisis: Franco-German conflict of interest during the negotiations on a single resolution fund By Ferber, Tim
  2. Exchange Rate Pass-Through in the Euro Area By Mariarosaria Comunale; Davor Kunovac
  3. Crisis recovery in a country with a high presence of foreign owned companies By Heike Joebges
  4. Foreign direct investment and the relationship between the United Kingdom and the European Union By Randolph Luca Bruno; Nauro Campos; Saul Estrin; Meng Tian
  5. Collateral, Central Bank Repos, and Systemic Arbitrage By Falko Fecht; Kjell G. Nyborg; Jörg Rocholl; Jiri Woschitz
  6. The housing finance system in Italy and Spain: Why did a housing bubble develop in Spain - and not in Italy? By Bulbarelli, Miriam
  7. Growing like Spain: 1995-2007 By Manuel García-Santana; Enrique Moral-Benito; Josep Pijoan-Mas; Roberto Ramos
  8. Asymmetric volatility connectedness on the forex market By Jozef Barunik; Evzen Kocenda; Lukas Vacha
  9. Public capital in the 21st century: As productive as ever? By Jasper de Jong; Marien Ferdinandusse; Josip Funda
  10. America first! What are the job losses for Belgium and Europe? By Hylke Vandenbussche; William Connell Garcia; Wouter Simons; Elena Zaurino
  11. The speed of exchange rate pass-through By Bonadio, Barthélémy; Fischer, Andreas M.; Saure, Philip
  12. The Impact of the 2012 Spanish Labour Market Reform on Unemployment Inflows and Outflows: a Regression Discontinuity Analysis using Duration Models By J. Ignacio García-Pérez; Josep Mestres Domènech
  13. Determinants of Bank Profitability in the Euro Area: Has Anything Changed? By Mariarosa Borroni; Mariacristina Piva; Simone Rossi
  14. Scenarios for potential macroeconomic impact of Brexit on Hungary By László Békési; Zsolt Kovalszky; Tímea Várnai
  15. Will German banks earn their cost of capital? By Dombret, Andreas; Gündüz, Yalin; Rocholl, Jörg
  16. The granularity of Spanish exports By Juan de Lucio; Raúl Mínguez; Asier Minondo; Francisco Requena
  17. The role of public debt managers in contingent liability management By Lerzan Ülgentürk

  1. By: Ferber, Tim
    Abstract: In response to the recent financial crisis, European policymakers put banking regulation in the Eurozone on top of the agenda. In 2016, as part of the newly created European banking union, a mechanism for resolving troubled banks, the Single Resolution Mechanism (SRM), became fully operational for the 19 member states of the euro area. The SRM was established to avoid future involvement of tax payers' money in the resolution of banks. This paper focuses on the negotiations on one of its instruments, the Single Resolution Fund (SRF), a fund of ex-ante contributions of Eurozone banks set up to winding down unviable banks. The SRF proved to be a main conflict issue during the negotiations. Germany and France were pushing for diverging preferences although both countries' banking sectors suffered from the crisis and both governments generally favored a regulatory approach on the European level. I provide an institutionalist explanation for these opposing positions of the two most important Eurozone countries. By drawing on the "Varieties of Capitalism" literature, I explain how the distinct features of these countries' financial and banking systems accounted for their preferences. On the one side, German negotiators sought to preserve the dominant way of bank-based corporate finance by particularly protecting savings and cooperative banks. On the other, the French government was in favor of higher contributions by the banking sector because market-based corporate finance is more prevalent in France. Nevertheless, France aimed at keeping its 'national champions' out as far as possible. This paper has important implications for how to think about preference formation in European financial regulation.
    Date: 2016
  2. By: Mariarosaria Comunale (Bank of Lithuania); Davor Kunovac (Bank of Finland)
    Abstract: In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identification based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer inflation in the euro area.
    Keywords: Exchange rate pass-through, import prices, consumer prices, in?ation, bayesian vector autoregression.
    JEL: C38 E31 F31
    Date: 2017–01–29
  3. By: Heike Joebges
    Abstract: Compared to other euro area countries, Ireland has been one of the countries most heavily hit by the worldwide financial crisis, yet, also one with the strongest and quickest recovery. Foreign controlled affiliates of multinational companies dominate economic activity, attracted by low corporate taxation rates. Low Irish tax rates contribute to downward competition of taxation in the EU and constitute a beggar-thy-neighbour-policy. Effects on Ireland are neither clearly positive: Profits of foreign affiliates do not necessarily stay in the country. A consequence is the huge difference between GNI and GDP: GNI per capita is by about 15 percentage points lower than GDP per capita. Hence, GDP can be misleading, when judging the recovery since the financial crisis. The paper instead concentrates on the development of national income, employment, and wages. Judged by these indicators, the Irish recovery ceases to be successful compared to other crisis countries. The benefits to Irish citizens are nevertheless questionable: GNI decreased stronger than GDP. Even worse are labour market developments since the recent crisis: employment and wages are still to recover, and the wage share decreased by more than 10 %-points.
    Date: 2017
  4. By: Randolph Luca Bruno; Nauro Campos; Saul Estrin; Meng Tian
    Abstract: This paper investigates whether and to what extent foreign direct investment inflows into the United Kingdom are caused by its membership in the European Union (EU). It reports two main sets of econometric estimates: (a) synthetic counterfactual method with annual data for large sample of developing and developed countries over 1970-2014 and (b) gravity estimates using 34 OECD countries bilateral data for 1985-2013. The two sets of estimates strongly concur: EU membership increases FDI inflows by about 30%. This result is robust to changes in specification, country samples, time windows, and the use of different estimators (panel, PPML and Heckman).
    Keywords: foreign direct investment; gravity; SMC; European Union
    JEL: R14 J01 L81
    Date: 2016–10
  5. By: Falko Fecht (Frankfurt School of Finance & Management); Kjell G. Nyborg (University of Zurich, Centre for Economic Policy Research (CEPR), and Swiss Finance Institute); Jörg Rocholl (ESMT European School of Management and Technology); Jiri Woschitz (University of Zurich)
    Abstract: Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks’ liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.
    Keywords: Collateral, repo, systemic arbitrage, central bank, collateral policy, banks, liquidity, interbank market, financial stability, financial fragmentation
    JEL: G12 G21 E42 E51 E52 E58
  6. By: Bulbarelli, Miriam
    Abstract: The international financial crisis, which started in the United States at the end of 2007, hit Europe soon afterwards. Its impact on the old continent has been enormous. A number of country-specific crises were triggered, especially in the European periphery. This essay will focus on two countries, which were affected particularly severely: Spain and Italy. In Spain, the global financial crisis was worsened by the burst of the housing bubble, which had inflated the cost of housing during the early 2000s. In Italy, in contrast, pre-existing problems with the management of high public debt, long-term stagnation in labour productivity and low government credibility made its economy vulnerable to the financial crisis. Though both countries had different experiences dealing with the global crisis, Italian and Spanish structural and economic features are largely comparable and both countries experienced an economic boom since the 2000s, especially in the housing sector. Yet, Italy did not witness a housing boom turning into a bubble and its consequences, a steep correction of housing prices - the "bust" - , whereas Spain is still recovering from it. This paper attempts to analyze the reason for this discrepancy.
    Date: 2016
  7. By: Manuel García-Santana (Universitat Pompeu Fabra); Enrique Moral-Benito (Banco de España); Josep Pijoan-Mas (CEMFI); Roberto Ramos (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: Spanish GDP grew at an average rate of 3.5% per year during the expansion of 1995-2007, well above the EU average of 2.2%. However, this growth was based on factor accumulation rather than productivity gains as TFP fell at an annual rate of 0.7%. Using firm-level administrative data for all sectors we show that deterioration in the allocative efficiency of productive factors across rms was at the root of the low TFP growth in Spain, while misallocation across sectors played only a minor role. Cross-industry variation reveals that the increase in misallocation was more severe in sectors where government infl uence is more important for business success, which represents novel evidence on the potential macroeconomic costs of crony capitalism. In contrast, sectoral di erences in nancial dependence, skill intensity, innovative content, tradability, or capital structures intensity appear to be unrelated to changes in allocative eciency. All in all, the observed high output growth together with increasing firm-level misallocation in all sectors is consistent with an expansion driven by a demand boom rather than by structural reforms.
    Keywords: TFP, misallocation, Spain.
    JEL: D24 O11 O47
    Date: 2016–03
  8. By: Jozef Barunik (Institute of Economic Studies, Charles University Institute of Information Theory and Automation, The Czech Academy of Sciences); Evzen Kocenda (Institute of Economic Studies, Charles University); Lukas Vacha (Institute of Economic Studies, Charles University Institute of Information Theory and Automation, The Czech Academy of Sciences)
    Abstract: We show how bad and good volatility propagate through the forex market, i.e., we provide evidence for asymmetric volatility connectedness on the forex market. Using highfrequency, intra-day data of the most actively traded currencies over 2007-2015 we document the dominating asymmetries in spillovers that are due to bad, rather than good, volatility. We also show that negative spillovers are chiefly tied to the dragging sovereign debt crisis in Europe while positive spillovers are correlated with the subprime crisis, different monetary policies among key world central banks, and developments on commodities markets. It seems that a combination of monetary and real-economy events is behind the positive asymmetries in volatility spillovers, while scal factors are linked with negative spillovers.
    Keywords: volatility, connectedness, spillovers, semivariance, asymmetric effects, forexmarket
    JEL: C18 C58 E58 F31 G15
    Date: 2017–01
  9. By: Jasper de Jong; Marien Ferdinandusse; Josip Funda
    Abstract: The global financial crisis and the euro area sovereign debt crisis that followed induced a rapid deterioration in the fiscal positions of countries across the globe. In the ensuing fiscal adjustment process, public investments were severely reduced in many countries. How harmful is this for growth perspectives? Our main objective is to find out whether the importance of public capital for long run output growth has changed in recent years. We also aim to provide information on the relevance of international spillovers of public capital. To these ends, we expand time series on public capital stocks for 20 OECD countries as constructed by Kamps (2006) and estimate country-specific recursive VARs. Results show that the effect of public capital shocks on economic growth has not increased in general, although results differ widely between countries. This suggests that the current level of public investments generally does not pose an immediate threat to potential output. Of course, this could change if low investment levels are sustained for a long time. We furthermore provide some tentative evidence of positive spillovers of public capital shocks between European countries.
    Keywords: Public capital stock; economic growth,; spillovers
    JEL: E22 E62 H54
    Date: 2017–01
  10. By: Hylke Vandenbussche; William Connell Garcia; Wouter Simons; Elena Zaurino
    Abstract: This report is the first to estimate employment effects of looming American protectionism under US president Trump. We study the economic impact of a tightening of US trade policy on Belgium and on every EU member state, which we refer to as “America First” or “Trumpit” (like “Brexit”). Our estimates of EU job losses are based on the interconnectedness of an EU country with the US economy. We do this by taking into account the inter‐sectoral linkages between sectors within a country and between EU countries using sectoral input‐output data (World Input Output Database, WIOD). Thus, we consider EU jobs involved in direct EU exports to the US, as well as EU jobs corresponding to indirect exports from Europe to the US. Our study covers both exports of goods and services and accounts for services used as an input in goods. Our estimates are based on domestic value added rather than gross export values, since EU jobs are a function of domestic value added only. For Belgium, job losses of Trumpit range between 1200 and 5000 job losses, depending on the US tariff increase. Similarly, for the EU, job losses range between 50,000 and 240,000 jobs that will be lost depending on the US tariff scenario. For the EU, we find that the export value that will be lost ranges between 5% to 24 %, depending on the extent of the US import tariff increase. This corresponds to European GDP losses that range between 0.1 % to 0.4% of total EU GDP.
    Date: 2017
  11. By: Bonadio, Barthélémy (University of Michigan); Fischer, Andreas M. (Swiss National Bank and CEPR); Saure, Philip (Swiss National Bank)
    Abstract: On January 15, 2015, the Swiss National Bank terminated its minimum exchange rate policy of one euro against 1.2 Swiss francs. This policy shift resulted in a sharp, unanticipated and permanent appreciation of the Swiss franc by more than 11% against the euro. We analyze the exchange rate pass-through into import unit values of this shock at the daily frequency using Swiss transaction-level trade data. Our key findings are twofold. First, for goods invoiced in euro the pass-through is immediate and complete. This finding is consistent with no systematic nominal price adjustment in this subset of goods. Second, for goods invoiced in Swiss francs the pass-through is partial and very fast: it starts on the second working day after the exchange rate shock and reaches the medium-run pass-through after eight working days on average. We interpret the latter finding as evidence that nominal rigidities unravelled quickly in the face of a large exchange rate shock.
    JEL: F14 F31 F41
    Date: 2016–09–01
  12. By: J. Ignacio García-Pérez (Department of Economics, Universidad Pablo de Olavide); Josep Mestres Domènech (CaixaBank Research)
    Abstract: This paper studies the impact of the 2012 Spanish labour market reform on the probability of exiting and entering unemployment using a regression discontinuity approach based on duration models. The 2012 reform modified important aspects of hiring and dismissal procedures in Spain and, by doing that, affected the probability of exiting both unemployment and employment. Comparing labour market performance before and after February 2012 and using a competing risk duration model for the exit from both unemployment and employment, we find that the reform has helped employment creation in two ways. First, it has increased the likelihood of exiting from unemployment to employment by making the monthly transition to permanent employment to increase from 1.7% to 2.6%, on average, for the first six months in unemployment. Secondly, it has reduced the probability of dismissal for workers on a temporary contract around 11%, probably because firms used newly introduced internal flexibility measures in order to adjust the workforce, instead of using dismissals. The direct transition from temporary to permanent positions is also eased by the reform. Finally, we do not find any significant effect of the reform on the dismissal patterns for permanent workers. These findings point to a positive effect of the reform in dampening the widespread segmentation of the Spanish labour market, although the impact is so far small which means that more effort will be needed in order to substantially reduce the strong duality of this labour market.
    Keywords: labour reform, discontinuity design, unemployment hazard rate, employment hazard rate.
    JEL: J41 J64 C41
    Date: 2017–02
  13. By: Mariarosa Borroni (Dipartimento di Scienze Economiche e Sociali, Università Cattolica); Mariacristina Piva (Dipartimento di Scienze Economiche e Sociali, Università Cattolica); Simone Rossi (Dipartimento di Scienze Economiche e Sociali, Università Cattolica)
    Abstract: During the recent financial crisis bank profitability has become an element of strong concern for regulators and policymakers; in fact, both self-financing strategies and capital increases - necessary to provide a higher level of capitalization - rely on the ability of a bank to generate profits. However, the determinants of bank profitability, which seemed to be unequivocally identified by previous literature, appear to have changed under the effect of regulatory and competitive dynamics. We test this hypothesis on commercial, cooperative and saving banks, employing a random effect panel regression on a dataset comprising bank-level data and macroeconomic information (covering the period 2006-2013) for nine countries of the Euro area. Our findings suggest that after a period of "irrational exuberance" in which credit growth and high leverage were seen as proper and fast ways to boost profitability, a sound financial structure and a wiser and objective credit portfolio management have become the main drivers to ensure higher returns.
    Keywords: Financial crisis, Bank profitability, Euro Area
    JEL: G01 G21 L25
    Date: 2016–11
  14. By: László Békési (Magyar Nemzeti Bank (Central Bank of Hungary)); Zsolt Kovalszky (Magyar Nemzeti Bank (Central Bank of Hungary)); Tímea Várnai (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: The purpose of this paper is to illustrate the economic impact mechanism of the secession of Great Britain from the European Union (Brexit) on the Hungarian economy, and to quantify the domestic growth risks. Several international studies have dealt with this topic using partial analysis and model based simulations, but only partial analyses are available regarding the Hungarian economy. Our analysis provides a broader picture by using the new macroeconomic forecast model of the MNB. Upon determining the exogenous assumptions in our simulations we relied on the central bank experts’ broad knowledge. The applied model handles the wealth heterogeneity in the decision making processes of the households and the corporate sector. This feature makes the model suitable for explaining prolonged after-crisis recovery and the role of the financial accelerator feedback mechanism. In the course of illustrating the economic impact mechanism we show the main channels through which Brexit can spread over to Hungarian economic growth. Besides the primary channels, our analysis includes the secondary channel effects increasingly in the spotlight: we investigate the shock resilience ability of the financial system, and analyze the potential room for manoeuvre for fiscal policy.
    Keywords: Macroeconomic modelling, Simulation, Alternative Scenarios, Brexit, Economic Outlook
    JEL: E27 E66
    Date: 2017
  15. By: Dombret, Andreas; Gündüz, Yalin; Rocholl, Jörg
    Abstract: In recent years, the German banking sector has overcome major challenges such as the global financial crisis and the European debt crisis. This paper analyses a recent development as a particular determinant of the future outlook for the German banking sector. Interest rates are at historically low levels and may remain at these levels for a considerable period of time. Such levels pose a specific challenge to banks which are heavily dependent on interest income, as is the case for most German banks. We consider different interest rate scenarios and analyse the extent to which they cause a further narrowing of the interest rate margin. Our results indicate that a projected decline in this margin will result in no more than 20% of German banks earning a cost of capital of 8% by the end of this decade. This decline is somewhat alleviated by the fact that German banks can apply a special feature of German accounting standards by using hidden and open reserves.
    Keywords: German banking sector,low interest period,profitability,hidden and open reserves
    JEL: G21 G28
    Date: 2017
  16. By: Juan de Lucio (Universidad Nebrija. Calle de Santa Cruz de Marcenado, 27, 28015, Madrid (Spain).); Raúl Mínguez (Universidad Nebrija. Calle de Santa Cruz de Marcenado, 27, 28015, Madrid (Spain).); Asier Minondo (Deusto Business School, University of Deusto, Camino de Mundaiz 50, 20012 Donostia - San Sebastián (Spain). Research aliate of Instituto Complutense de Estudios Internacionales.); Francisco Requena (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).)
    Abstract: Using data for the universe of exporters, we show that few firms dominate exports in Spain. For example, in 2015 half of Spanish exports were accounted by the top 200 firms. This concentration has not changed substantially over the period 1997-2015. The dominance of few firms, a phenomenon denoted as granularity, is larger in exports than in sales or employment. Granularity also defines the specialization of Spanish exports. If top exporters disappeared, Spain would lose revealed comparative advantage in industries accounting for 26% of Spanish exports. Finally, granularity explains around one-third of the fluctuation of Spanish exports.
    Keywords: exports, granularity, superstars, Spain, firm-level data
    JEL: F1 F10 F23
    Date: 2017–01
  17. By: Lerzan Ülgentürk
    Abstract: Contingent liabilities are major sources of fiscal risks due to the uncertain financial commitments they involve. Their effective management, therefore, is essential for increasing stability and predictability in public finance. This paper explores the role of public debt managers in contingent liability management based on the results of a background OECD survey and the information provided by seven task force countries. The results indicate that there are certain roles and responsibilities assumed by the public debt managers in this field, while the degree of involvement differs widely across countries. We also observed that the debt management offices’ (DMOs) involvement is more prominent in the management of government credit guarantees, while contingent liabilities arising from Public Private Partnerships (PPPs) and government sponsored insurance programmes appear to be outside the domain of public debt managers in most cases. Drawing on leading country practices and lessons from the past, this paper advises public debt managers on possible motives and areas of involvement.
    Keywords: contingent liabilities, fiscal risk, government credit guarantees, government insurance programmes, public debt management, public private partnerships
    JEL: G18 H63 H81
    Date: 2017–02–02

This nep-eec issue is ©2017 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.