nep-eec New Economics Papers
on European Economics
Issue of 2017‒05‒07
eighteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia
  1. Financial Markets and Debt Crisis in European Union: Preventing spillover effects of financial crisis between EU periphery and the eurozone By Radosevic, Dubravko
  2. The aggregate and country-speci c e ectiveness of ECB policy: evidence from an external instruments (VAR) approach By Lucas Hafemann; Peter Tillmann
  3. Crisis recovery in a country with a high presence of foreign owned companies By Heike Joebges
  4. Credit Misallocation During the European Financial Crisis By Fabiano Schivardi; Enrico Sette; Guido Tabellini
  5. Internal devaluation in currency unions: the role of trade costs and taxesAbstract: This paper studies export adjustment to negative shocks in currency unions. I consider the hitherto ignored role of trade costs and taxes in internal devaluations, which have been brought to the fore of international policy during the recent euro periphery crisis. Trade costs can limit the pass-through of internal devaluation on export prices. Using data on export prices †on the dock†, I document that higher trade costs are associated with a lower reduction of export prices relative to domestic prices in the euro periphery. Furthermore, VAT (in theory trade neutral, but in practice much higher on tradables) hikes prevent the required shift of resources towards tradables. I show that the real exchange rate (RER) adjustment was heavily affected by indirect tax hikes, by comparing headline RER and tax-adjusted RER. I then build a standard New Keynesian small open economy model with sticky wages and prices, incorporating trade costs and indirect taxes (allowing for VAT imperfections), and show that both these frictions, but especially trade costs, can be quantitatively crucial in affecting export growth, more so than either product markups or wage rigidity. I apply the model to data for Greece, the least successful of the euro periphery ï¬ scal devaluation programs, and show that it can account for the most salient features of the data; trade costs explain the failure to substantially raise exports, and taxes the initial small fall in exports. JEL Classification: F32, F33, F41, F45 By Petroulakis, Filippos
  6. The global decline in the labour income share: is capital the answer to Germany’s current account surplus? By Bennet Berger; Guntram B. Wolff
  7. Who Voted for Brexit? A Comprehensive District-Level Analysis By Sascha O. Becker; Thiemo Fetzer; Dennis Novy
  8. Exchange Rate Bands of Inaction and Hysteresis in EU Exports to the Global Economy – The Role of Uncertainty By Ansgar Belke; Dominik Kronen
  9. Home sweet home: the home bias in trade in the European UnionAbstract: This study examines the home bias in trade in goods and services within the European Union. Using the newest release of the World Input Output database, available for the years 2000-2014, the effect is estimated using gravity regressions. The trade-reducing effect of borders is found to be sizeable. It is greater for trade in services than for goods, though the former declined more markedly throughout the period. The paper extends current literature by demonstrating and analysing the variation in the bias across Europe. The border effect is larger in Central and Eastern Europe than in other parts of the continent. The differences in the effect can be largely explained by the depth of a country’s integration with the European Union. The number of years passed since a country joined the EU has a signiï¬ cant impact on the bias. The longer a country has been in the EU, the lower its home bias, with the ï¬ rst years of membership having the largest (in absolute terms) effect. JEL Classification: F02, F15, F14 By Mika, Alina
  10. Debt sustainability analysis for euro area sovereigns: a methodological frameworkAbstract: The euro area sovereign debt crisis has highlighted the importance of reducing public debt levels and building up sufficient fiscal buffers during normal and good times. It has also reaffirmed the need for a thorough debt sustainability analysis (DSA) to act as a warning system for national policies. This paper introduces a comprehensive DSA framework for euro area sovereigns that could be used for analysis of fiscal risks and vulnerabilities. Specifically, this framework consists of three main building blocks: (i) a deterministic DSA, which embeds debt simulations under a benchmark and various narrative shock scenarios; (ii) a stochastic DSA, providing for a probabilistic approach to debt sustainability; and (iii) other relevant indicators capturing liquidity and solvency risks. The information embedded in the three main DSA blocks can be summarised in a heat map, which can provide guidance on the overall assessment of risks to debt sustainability. This method reflects the need to have a broad-based assessment, cross-checking information and perspectives from various sources with a view to deriving a robust debt sustainability assessment. JEL Classification: E62, H62, H63, H68 By Warmedinger, Thomas; Checherita-Westphal, Cristina; Drudi, Francesco; Setzer, Ralph; De Stefani, Roberta; Bouabdallah, Othman; Westphal, Andreas
  11. On the future of EMU: Targeted reforms instead of more fiscal integration By Matthes, Jürgen; Iara, Anna
  12. Scarcity effects of QE: A transaction-level analysis in the Bund market By Schlepper, Kathi; Riordan, Ryan; Hofer, Heiko; Schrimpf, Andreas
  13. Instability, imprecision and inconsistent use of equilibrium real interest rate estimates By Beyer, Robert; Wieland, Volker
  14. External financing and economic activity in the euro area: Why are bank loans special? By Aldasoro, Iñaki; Unger, Robert
  15. International Expansion and Riskiness of Banks By Irene Sanchez Arjona; Ester Faia; Gianmarco Ottaviano
  16. Suitable or non-suitable? An investigation of Eurozone SME access to market-based finance By Bongini, Paola; Ferrando, Annalisa; Rossi, Emanuele; Rossolini, Monica
  17. Effectiveness of the European semester: Explaining domestic consent and contestation By Maatsch, Aleksandra
  18. Fiscal space on the Eurozone periphery: The case of Spain By Jorge Uxo; Ignacio Àlvarez; Eladio Febrero
  1. By: Radosevic, Dubravko
    Abstract: When the financial crisis revealed weaknesses in eurozone governance, EU responded with new prevention and crisis resolution governance structure and counter-cyclical policies. A new surveillance procedure for the prevention and correction of macroeconomic imbalances, the so called Macroeconomic Imbalance Procedure (MIP). The EC has recognized the existence of excessive imbalances that requires strong and comprehensive policy measures to undertake significant adjustments. International competitiveness indicators and policy instruments are the most important for correction of external imbalances. This is also one of the major challenges in the euro zone – the symmetric adjustment of the intra – euro area competitiveness divergences and external imbalances. For non – euro area EU members, monetary strategies and exchange rate policies are highly important instruments of adjustment process. Spillover effects of financial crisis in EU periphery (non – EMU economies) could be damaging for the eurozone economies. The European economic governance mechanisms are inconsistent with specific position of the non - euro area countries of the EU. The aim of this policy paper is to analyze European economic governance for non – euro area members. Our reform proposals are based on the two basic areas of improvements in European economic governance for non – EMU members of the EU: (a) new approach to the European Semester, and (b) new financial assistance facilities for non – euro area countries, in order to reduce contagion risk in EU.
    Keywords: European Union debt crisis, European economic governance, EU conditionality, European Semester, spill – over effects, external adjustment mechanisms, crisis mechanisms for non – EMU economies, Brexit, Italy’s banking crisis, ECB, Target 2
    JEL: B5 B50 E60 E61 F30 F33 F36 F4 F42 H1 H12
    Date: 2016–12–11
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:78613&r=eec
  2. By: Lucas Hafemann (Justus-Liebig-University Giessen); Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: This paper studies the transmission of ECB monetary policy, both at the aggregate euro area and the country level. We estimate a VAR model for the euro area in which monetary policy shocks are identified using an external instrument that refl ects policy surprises. For that purpose we use the change in German bunds at meeting days of the Governing Council. The identified monetary policy shock is then put into country-specific local projections in order to derive country-specific impulse responses. We find that (i) the transmission is very heterogeneous, both across channels and across countries, (ii) policy is transmitted through spreads, yields and the exchange rate, but less through banks and the stock market, and (iii) the strength of the transmission depends on structural characteristics of member countries, among them are current account balanced, debt to GDP levels, and the strength of banking systems.
    Keywords: Euro area, VAR, external instrument, local projections, monetary transmission
    JEL: E52 E32 E44
    Date: 2017
    URL: http://d.repec.org/n?u=RePEc:mar:magkse:201720&r=eec
  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
    URL: http://d.repec.org/n?u=RePEc:imk:wpaper:175-2017&r=eec
  4. By: Fabiano Schivardi; Enrico Sette; Guido Tabellini
    Abstract: Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2004-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks were less likely to cut credit to non-viable firms. (ii) Credit misallocation increased the failure rate of healthy firms and reduced the failure rate of non viable firms. (iii) Nevertheless, the adverse effects of credit misallocation on the growth rate of healthier firms were negligible, and so were the effects on TFP dispersion. This goes against previous in uential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest. Keywords: Bank capitalization, zombie lending, capital misallocation JEL classification number: D23, E24, G21
    Date: 2017
    URL: http://d.repec.org/n?u=RePEc:igi:igierp:600&r=eec
  5. Internal devaluation in currency unions: the role of trade costs and taxesAbstract: This paper studies export adjustment to negative shocks in currency unions. I consider the hitherto ignored role of trade costs and taxes in internal devaluations, which have been brought to the fore of international policy during the recent euro periphery crisis. Trade costs can limit the pass-through of internal devaluation on export prices. Using data on export prices †on the dock†, I document that higher trade costs are associated with a lower reduction of export prices relative to domestic prices in the euro periphery. Furthermore, VAT (in theory trade neutral, but in practice much higher on tradables) hikes prevent the required shift of resources towards tradables. I show that the real exchange rate (RER) adjustment was heavily affected by indirect tax hikes, by comparing headline RER and tax-adjusted RER. I then build a standard New Keynesian small open economy model with sticky wages and prices, incorporating trade costs and indirect taxes (allowing for VAT imperfections), and show that both these frictions, but especially trade costs, can be quantitatively crucial in affecting export growth, more so than either product markups or wage rigidity. I apply the model to data for Greece, the least successful of the euro periphery ï¬ scal devaluation programs, and show that it can account for the most salient features of the data; trade costs explain the failure to substantially raise exports, and taxes the initial small fall in exports. JEL Classification: F32, F33, F41, F45
    By: Petroulakis, Filippos
    Keywords: current account adjustment, euro crisis, internal devaluation, trade costs
    Date: 2017–04
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172049&r=eec
  6. By: Bennet Berger; Guntram B. Wolff
    Abstract: This paper links the major divergences between the three largest euro-area countries in terms of unit labour costs and current accounts, to the broader debate on labour income shares. The authors show that Germany, like the United States and Japan, has experienced a significant decline in the share of national income that goes to labour. At the same time, labour shares in France and Italy have increased since the beginning of monetary union, breaking a trend that had persisted for several decades. The capital intensity of production has increased much more significantly in France and Italy, while in Germany the capital-to-GDP ratio has stagnated and the net public capital stock has fallen. Our data suggests that capital and labour have been complements.
    Date: 2017–04
    URL: http://d.repec.org/n?u=RePEc:bre:polcon:20285&r=eec
  7. By: Sascha O. Becker; Thiemo Fetzer; Dennis Novy
    Abstract: On 23 June 2016, the British electorate voted to leave the European Union. We analyse vote and turnout shares across 380 local authority areas in the United Kingdom. We find that exposure to the EU in terms of immigration and trade provides relatively little explanatory power for the referendum vote. Instead, we find that fundamental characteristics of the voting population were key drivers of the Vote Leave share, in particular their education profiles, their historical dependence on manufacturing employment as well as low income and high unemployment. At the much finer level of wards within cities, we find that areas with deprivation in terms of education, income and employment were more likely to vote Leave. Our results indicate that a higher turnout of younger voters, who were more likely to vote Remain, would not have overturned the referendum result.
    Keywords: political economy, voting, referendum, migration, austerity
    JEL: D72 N44 R23 Z13
    Date: 2017–04
    URL: http://d.repec.org/n?u=RePEc:cep:cepdps:dp1480&r=eec
  8. By: Ansgar Belke; Dominik Kronen
    Abstract: This paper estimates the role of policy and exchange rate uncertainty shocks for EU countries’ exports to the world economy. We examine the performance of the four biggest economies, namely Germany, France, Italy and the UK, under policy and exchange rate uncertainty in ex-ports to some of the most important global export destinations (United States, Japan, Brazil, Russia, and China). For this purpose, we apply a non-linear model, where suddenly strong spurts of exports occur when changes of the exchange rate go beyond a zone of inaction, which we call “play” area – analogous to mechanical play. We implement an algorithm describing path-dependent play-hysteresis into a regression framework. The hysteretic impact of real exchange rates on exports is estimated based on the period from 1995M1 to 2015M12. Looking at some of the main export destinations of our selected EU member countries, the United States, Japan and some of the BRICs (Brazil, Russia and China), we identify significant hysteretic effects for a large part of the EU member countries’ exports. We find that their export activity is characterized by “bands of inaction” with respect to changes in the real exchange. To check for robustness we estimate export equations for limited samples (a) excluding the recent financial crisis and (b) excluding the period up to the burst of the dotcom bubble and September 11th. In addition, we employ an economic policy uncertainty variable and an ex-change rate uncertainty variable as determinants of the width of the area of weak reaction of exports. Overall, we find that those specifications which take uncertainty into account display the best goodness of fit, with economic policy uncertainty dominating exchange rate uncer-tainty. In other words: the option value of waiting dominates the real exchange rate effect on the EU member countries’ exports.
    Keywords: export demand, global economy, hysteresis, policy uncertainty, BRICs, play-hysteresis, real exchange rate, switching/spline regression
    JEL: F14 C51
    Date: 2017–05
    URL: http://d.repec.org/n?u=RePEc:rmn:wpaper:201705&r=eec
  9. By: Mika, Alina
    Keywords: border effect, European Union, gravity, trade
    Date: 2017–04
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172046&r=eec
  10. By: Warmedinger, Thomas; Checherita-Westphal, Cristina; Drudi, Francesco; Setzer, Ralph; De Stefani, Roberta; Bouabdallah, Othman; Westphal, Andreas
    Keywords: euro area, fiscal policy, fiscal risks. JEL classification:, public debt, sovereign debt sustainability analysis
    Date: 2017–04
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbops:2017185&r=eec
  11. By: Matthes, Jürgen; Iara, Anna
    Abstract: According to a dominant narrative, the recent crisis has allegedly shown that EMU is not sustainable without fiscal risk sharing. We identify two major hazards associated with this view. First, trust in EMU governance could unduly erode despite major recent achievements, notably if further fiscal integration should prove elusive. Second, the debate on further fiscal integration could distract from additional reforms needed to prevent financial cycles in the future. In contrast, we suggest that a limited set of reforms (mostly focusing on the financial sector) would suffice to make EMU sustainable.
    JEL: F45 E02 G28
    Date: 2016
    URL: http://d.repec.org/n?u=RePEc:zbw:iwkrep:172016&r=eec
  12. By: Schlepper, Kathi; Riordan, Ryan; Hofer, Heiko; Schrimpf, Andreas
    Abstract: This paper investigates the scarcity effects of quantitative easing (QE) policies, drawing on intra-day transaction-level data for German government bonds, purchased under the Public Sector Purchase Program (PSPP) of the ECB/Eurosystem. This paper is the first to match high-frequency QE purchase data with high-frequency inter-dealer data. We find economically significant price impacts at high (minute-by-minute) and low (daily) frequencies, highlighting the relevance of scarcity effects in bond markets. Asset purchase policies are not without side effects, though, as the induced scarcity has an adverse impact on liquidity conditions as measured by bid-ask spreads and inter-dealer order book depth. We further show that the price impact varies greatly with market conditions: it is considerably higher during episodes of illiquidity and when yields are higher.
    Keywords: Quantitative Easing,European Central Bank,Scarcity Channel,Bond Market Liquidity,High-Frequency Data
    JEL: E52 E63 G11 G12 H63
    Date: 2017
    URL: http://d.repec.org/n?u=RePEc:zbw:bubdps:062017&r=eec
  13. By: Beyer, Robert; Wieland, Volker
    Abstract: The current debate on monetary and fiscal policy is heavily influenced by estimates of the equilibrium real interest rate. In particular, this concerns estimates derived from a simple aggregate demand and Phillips curve model with time-varying components as proposed by Laubach and Williams (2003). For example, Summers (2014a) refers to these estimates as important evidence for a secular stagnation and the need for fiscal stimulus. Yellen (2015, 2017) has made use of such estimates in order to explain and justify why the Federal Reserve has held interest rates so low for so long. First, we re-estimate the U.S. equilibrium rate with the methodology of Laubach and Williams (2003). Then, we build on their approach and the modifications proposed in Mésonnier and Renne (2007) and Garnier and Wilhelmsen (2009) to provide new estimates for the United States, the euro area and Germany. Third, we subject these estimates to a battery of sensitivity tests. Due to the great uncertainty and sensitivity that accompany these equilibrium rate estimates, the observed decline in the estimates is not a reliable indicator of a need for expansionary monetary and fiscal policy. Yet, if these estimates are employed to determine the appropriate monetary policy stance, such estimates are better used together with the consistent estimate of the level of potential output.
    Date: 2017
    URL: http://d.repec.org/n?u=RePEc:zbw:imfswp:110&r=eec
  14. By: Aldasoro, Iñaki; Unger, Robert
    Abstract: Using a Bayesian vector autoregression (BVAR) identified with a mix of sign and zero restrictions, we show that a restrictive bank loan supply shock has a strong and persistent negative impact on real GDP and the GDP deflator. This result comes about even though flows of other sources of financing, such as equity and debt securities, expand strongly and act as a "spare tire" for the reduction in bank loans. We show that this result can be rationalized by a recently revived view of banking, which holds that banks increase the nominal purchasing power of the economy when they create additional deposits in the act of lending. Consequently, our findings indicate that a substitution of bank loans by other sources of financing might have negative macroeconomic repercussions.
    Keywords: bank loans,Bayesian VAR,credit creation,ECB,euro area,external financing,financing structure
    JEL: E30 E40 E50 G20 G30
    Date: 2017
    URL: http://d.repec.org/n?u=RePEc:zbw:bubdps:042017&r=eec
  15. By: Irene Sanchez Arjona; Ester Faia; Gianmarco Ottaviano
    Abstract: We exploit an original dataset on European G-SIBs to assess how expansion in foreign markets affects their riskiness. We find a robust negative correlation between foreign expansion and bank risk (proxied by various individual and systemic risk metrics). Given individual bank riskiness, banks' expansion reduces the average riskiness of the banks' pool (between effect). Moreover, foreign expansion of any given bank reduces its own risk (within effect). Diversification, competition and regulation channels are all important. Expansion in destination countries with different business cycle co-movement, stricter regulations and higher competition than the origin country decreases a bank's riskiness.
    Keywords: banks risk, systemic risk, global expansion, competition, diversification, regulation
    JEL: F32 G21
    Date: 2017–04
    URL: http://d.repec.org/n?u=RePEc:cep:cepdps:dp1481&r=eec
  16. By: Bongini, Paola; Ferrando, Annalisa; Rossi, Emanuele; Rossolini, Monica
    Abstract: The present paper provides in-depth analysis of SME access to capital markets among Eurozone countries. First, we detect the factors - at the firm and country level - that are able to influence the likelihood of SME access to market-based finance. Second, we construct an index of what we call "market suitability",, i.e., a score that can be measured at the dimensional, sectoral and national level, which provides the percentage of firms potentially fit for market-based finance. Our results highlight that a few Eurozone countries seem to have deployed the "potential" for capital market financing, while there exists a large percentage of unexploited potential for firms fit for market-based finance. It should also be highlighted that overall business conditions - measured by GDP growth, the degree of development of domestic financial markets, and the quality of the legal and judicial enforcement system - greatly influence a firm's market suitability. In the period under consideration (2000-2014), macro factors tended to reduce the likelihood of SME access to market-based finance in most countries in our sample
    Keywords: Eurozone; market-based finance; SMEs
    JEL: G10 G32 L25 L26
    Date: 2017–04
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:12006&r=eec
  17. By: Maatsch, Aleksandra
    Abstract: Do parliamentary parties politicize compliance within the European Semester? If so, which conflict lines organize parliamentary debates? In order to address these questions, this discussion paper analyses national parliamentary participation in two budgetary cycles of the European Semester (2014 and 2015) in Austria, France, Germany, and Ireland. While in France and Germany, compliance within the European Semester has been subject to strong politicization, this has not been the case in Austria and Ireland. Moreover, strong politicization coincided with the contestation of country-specific recommendations among the parliamentary parties. The empirical analysis established that strong formal powers in budgetary matters constitute an important prerequisite allowing parliamentary parties to articulate their contestation. However, the willingness to comply depends most directly on whether the content of country-specific recommendations is coherent with the economic preferences of a political party, not the government-opposition cleavage.
    Keywords: European economic governance,the European Semester,national parliaments,politicization,compliance,europäische Wirtschaftspolitik,das Europäische Semester,nationale Parlamente,Politisierung,compliance
    Date: 2017
    URL: http://d.repec.org/n?u=RePEc:zbw:mpifgd:176&r=eec
  18. By: Jorge Uxo; Ignacio Àlvarez; Eladio Febrero
    Abstract: On the one hand, every official document about fiscal policy in Spain, and most orthodox academic papers argue that Spain has no "fiscal space" and that it should apply resolute actions to assure budget consolidation. On the other hand, Spain also had the second highest unemployment rate in the Eurozone in 2015: 21% of the active population. A rapid decline in that rate would require a higher fiscal impulse to sustain higher economic growth rates. This IMK working paper addresses this dilemma, presenting two alternative scenarios for the next years analyzing their impact on unemployment and fiscal sustainability. The first scenario represents a firm commitment to budget consolidation, while in the second the government uses the fiscal instrument to stimulate domestic demand and ensures a GDP growth rate target. The second scenario is based on an application of an "imperfect" balanced budget multiplier, proposing a combination of discretionary increases in both public expenditure and revenue. The main conclusion is that the end of fiscal austerity is feasible and perfectly compatible with fiscal finances sustainability for Spain. In addition some more general topics are discussed: the difference between the "functional finance" and the "sound finance" approaches to fiscal policy; the possibility of a Balanced Budget expansion; a discussion of the concept of "fiscal space"; and the inadequacy of European fiscal rules.
    Keywords: Fiscal Policy, Fiscal Space, Functional Finance, Balance Budget Multiplier, Spain
    JEL: E61 E62
    Date: 2017
    URL: http://d.repec.org/n?u=RePEc:imk:wpaper:176-2017&r=eec
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