nep-eec New Economics Papers
on European Economics
Issue of 2017‒08‒06
seventeen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Financial Repression in the European Sovereign Debt Crisis By Becker, Bo; Ivashina, Victoria
  2. Is Europe disintegrating? Macroeconomic divergence, structural polarization, trade and fragility By Claudius Graebner; Philipp Heimberger; Jakob Kapeller; Bernhard Schuetz
  3. Labour market adjustments and reforms in Greece during the crisis: microeconomic evidence from the third wave of the wage dynamics By Theodora Kosma; Evangelia Papapetrou; Georgia Pavlou; Christina Tsochatzi; Pinelopi Zioutou
  4. On secular stagnation and low interest rates: demography matters By Ferrero, Giuseppe; Gross, Marco; Neri, Stefano
  5. Why is it so hard to reach the EU’s ‘poverty’ target? By Zsolt Darvas
  6. Propagation of economic shocks from Russia and Western European countries to CEE-Baltic countries: a comparative analysis By Nazmus Sadat Khan
  7. Effects of euro area monetary policy on institutional sectors: the case of Portugal By António Afonso,; Jorge Silva
  8. Breaking Badly: The Currency Union Effect on Trade By Douglas L. Campbell; Aleksandr Chentsov
  9. Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD Countries By Stockhammer, Engelbert; Wildauer, Rafael
  10. The political economy of income distribution: industry level evidence from 14 OECD countries By Guschanski, Alexander; Onaran, Özlem
  11. Le Portugal et l`Euro By João de Sousa Andrade
  12. Deep and Not Comprehensive? What the WTO rules permit for a UK-EU Trade Agreement By Emily Lydgate; L Alan Winters
  13. The Changing International linkages of Switzerland: An Overview By Tille, Cédric
  14. A ternary-state early warning system for the European Union By Savas Papadopoulos; Pantelis Stavroulias; Thomas Sager; Etti Baranoff
  15. Identifying asymmetric effects of labor market reforms By Gehrke, Britta; Weber, Enzo
  16. Price effects of sovereign debt auctions in the Euro-zone : The role of the crisis By Beetsma, R.M.W.J.; Giuliodori, M.; de Jong, F.C.J.M.; Widijanto, D.
  17. On the determinants of NPLS: lessons from Greece By Evangelos Charalambakis; Yiannis Dendramis; Elias Tzavalis

  1. By: Becker, Bo; Ivashina, Victoria
    Abstract: At the end of 2013, the share of government debt held by the domestic banking sectors of Eurozone countries was more than twice the amount held in 2007. We show that increased domestic government bond holdings generated a crowding out of corporate lending. We find that loan supply was depressed by these domestic sovereign bonds only during the crisis period (2010-11). The pattern also holds across firms with different relationship banks within a given countries. These findings suggest that sovereign bond holdings negatively impact private capital formation. We show that direct government ownership, as well as government influence through banks' boards of directors, are among the channels used to influence banks.
    Keywords: Credit cycles; financial repression; Sovereign debt
    JEL: G21 G28 G30
    Date: 2017–07
  2. By: Claudius Graebner (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria); Philipp Heimberger (Vienna Institute for International Economic Studies); Jakob Kapeller (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria); Bernhard Schuetz (Department of Economics, Johannes Kepler University Linz)
    Abstract: This paper analyses economic developments in the Eurozone over the period 1999-2016 by developing a theoretical framework that traces divergent path developments across Eurozone countries to the times before the financial crisis. We argue that macroeconomic divergence between core and periphery countries is driven by 'structural polarization' in industrial structures: the emergence of export-driven growth in the core and debt-driven growth in the periphery is linked to the micro level of technological capabilities and firm performance. Pushing for convergence within Europe requires the simultaneous implementation of three intertwined policy programs: coordinated macroprudential financial regulation, active industrial policies aiming at a catching-up process in terms of innovative activity and technological capabilities for firms in the European periphery, and progressive re-distributional policies.
    Keywords: Polarization, European Monetary Union, industrial policy, financial regulation, growth trajectories
    Date: 2017–07
  3. By: Theodora Kosma (Bank of Greece); Evangelia Papapetrou (Bank of Greece); Georgia Pavlou (Bank of Greece); Christina Tsochatzi (Bank of Greece); Pinelopi Zioutou (Bank of Greece)
    Abstract: The recession that followed the global financial crisis and the sovereign debt crisis resulted in large falls in output and rises in unemployment across Europe. In this context, many countries implemented significant reforms of their labour market. In order to analyse the impact of labour market reforms and, in particular, to investigate, how firms adjusted to the shocks affecting them, the European System of Central Banks (ESCB) conducted a third wave of the Wage Dynamics Network (WDN3) survey in 2014-15. This paper describes the main findings of the Greek WDN3 survey. The results show that the decline in economic activity, during the period 2010-2013, had a significant negative impact on Greek firms’ activity. Greek firms reacted to the shocks affecting them by adjusting both labour input and wages and reforms seem to have made it easier for this adjustment to take place.
    Keywords: Survey data; wage adjustment; employment adjustment; labour market reforms
    JEL: E24 J30 J50
    Date: 2017–06
  4. By: Ferrero, Giuseppe; Gross, Marco; Neri, Stefano
    Abstract: Nominal and real interest rates in advanced economies have been decreasing since the mid-1980s and reached historical low levels in the aftermath of the global financial crisis. Understanding why interest rates have fallen is essential for both monetary policy and financial stability. This paper focuses on one of the factors that have been put forward in the literature within the secular stagnation view: adverse demographic developments. The main conclusion that we draw from our empirical, panel equation system-based assessment is that these developments have exerted downward pressures on real short- and long-term interest rates in the euro area over the past decade. Moreover, building on the European Commission projections for dependency ratios until 2025, we illustrate that the foreseen structural change in terms of age structure of the population may dampen economic growth and continue exerting downward pressure on real interest rates also in the future. JEL Classification: C32, E52, J11
    Keywords: demographic developments, monetary policy, real interest rates, secular stagnation
    Date: 2017–07
  5. By: Zsolt Darvas (Bruegel and Corvinus University of Budapest and Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences)
    Abstract: The European Union’s Lisbon strategy goal of tackling poverty was a notable failure, while the Europe 2020 strategy’s poverty target is out of reach. Both strategies were based on variants of the ‘at risk of poverty’ indicator, which has an inappropriate and misleading name. We demonstrate theoretically and empirically by cross-section, time series and panel cointegration evidence, that the ‘at risk of poverty’ indicator essentially measures income inequality, not poverty. Our calculations show that even after taking into account the positive impact that expected economic growth should have on material deprivation and low work intensity, the Gini coefficient of income inequality would have to fall by 3.5 points in each EU country if the Europe 2020 poverty target is to be reached, which is implausible. Huge differences between national poverty thresholds make the EU-wide poverty aggregate pointless. We approximate the EU-wide distribution of income and use it calculate EU-wide poverty indicators. The political agreement between EU member states expressed the goal of reducing poverty, not inequality. There are good reasons to aim for lower income inequality, but a political agreement would be needed to set an inequality goal and corresponding policies.
    Keywords: Europe 2020, EU-wide distribution of income, income inequality, poverty measurement
    JEL: D31 E37 I32
    Date: 2017–06
  6. By: Nazmus Sadat Khan
    Abstract: What is the relative importance of Russia and Western European countries on Central and East European and Baltic (CEE-Baltic) countries? This paper tries to address this geo-politically important question by quantifying and comparing the spillover effects of a growth and trade shocks coming out of Russia and three major Western European countries (i.e. Germany, France and Italy) on ten CEE-Baltic countries. It uses a global vector autoregression (GVAR) model with quarterly data from 2003Q1-2015Q3. In constructing the foreign variables, a time varying trade weight is used instead of a fixed weight in order to take account of the financial crisis of 2007-08 and the recent economic sanctions on Russia. The results show that growth spillover effects are strong in the region. However, shocks to Russia have higher and persistent spillover effects on CEE-Baltic countries compared to shocks to Western European countries. Spillover effects of growth shocks also show that Russia is affected more by Western European countries than the other way round. Trade balance shocks on the other hand do not play an important role in this transmission process.
    Keywords: economic growth, spillover e ects, global vector autoregression, Central and East European countries
    JEL: C32 F43 O47
    Date: 2017–07
  7. By: António Afonso,; Jorge Silva
    Abstract: We study the effects of the euro area monetary policy on the institutional sectors in Portugal during the period 2000:4-2015:4. Our results show that the single monetary policy affected some variables that are proxies for the funding of each institutional sector of the economy: general government, other monetary financial institutions, non-financial corporations, households and the external sector. The period of the economic and financial adjustment programme influenced all institutional sectors, and financial integration in the euro area had an effect on the funding for the economy: there was a reduction of long term-to-GDP ratio, external funding to the Portuguese other MFIs, and new loans to households Key Words: monetary policy, euro area, Portugal, non-conventional instruments, institutional sectors, financial integration
    JEL: C20 E44 E52 E62 G01
    Date: 2017–07
  8. By: Douglas L. Campbell (New Economic School (NES)); Aleksandr Chentsov (New Economic School)
    Abstract: As several European countries debate entering, or exiting, the Euro, a key policy question is how much currency unions (CUs) affect trade. Recently, Glick and Rose (2016) confirmed that currency unions increase trade on average by 100%, and that the Euro has increased trade by a still-large 50%. In this paper, we find that the apparent large impact of CUs on trade is driven by other major geopolitical events correlated with CU switches, including communist takeovers, decolonization, warfare, ethnic cleansing episodes, the fall of the Berlin Wall and the whole history of European integration. We find that moving from robust standard errors to multi-way clustered errors alone reduces the t-score of the Euro impact by 75%. Looking at individual CUs, we find that in no cases does the time series evidence support a large trade effect, and that the effect breaks particularly badly once we find suitable control groups. Overall, we find that intuitive controls and omitting the CU switches coterminous with war and missing data render the trade impact of the Euro and all CUs together statistically insignificant.
    Keywords: The Euro, Currency Unions and Trade, Gravity Regressions for Policy Analysis
    JEL: F15 F33 F54
    Date: 2017–06
  9. By: Stockhammer, Engelbert (Kingston University London); Wildauer, Rafael (Kingston University London)
    Abstract: The past decades have witnessed a strong increase in household debt and high growth of private consumption expenditures in many countries. This paper empirically investigates four explanations: First, the expenditure cascades hypothesis argues that an increase in inequality induced lower income groups to copy the spending behaviour of richer peer groups and thereby drove them into debt (‘keeping up with the Joneses’). Second, the housing boom hypothesis argues that increasing property prices encourage household spending and household borrowing due to wealth effects, eased credit constraints and the prospect of future capital gains. Third, the low interest hypothesis argues that low interest rates encouraged households to take on more debt. Fourth, the financial deregulation hypothesis argues that deregulation of the financial sector boosted credit supply. The paper tests these hypotheses by estimating the determinants of household borrowing using a panel of 11 OECD countries (1980-2011). Results indicate that real estate prices and low interest rates were the most important drivers of household debt. In contrast the data does not support the expenditure cascades hypothesis as a general explanation of debt accumulation across OECD countries. Our results are consistent with the financial deregulation hypothesis, but its explanatory power for the 1995-2007 period is low.
    Keywords: household debt; income distribution; property prices
    JEL: D31 E12 E51
    Date: 2017–08–01
  10. By: Guschanski, Alexander; Onaran, Özlem
    Abstract: This article presents an econometric estimation of the determinants of the wage share, using sectoral data for 14 OECD countries for the period 1970- 2014. We present estimations for the wage share of high- and low-skilled workers and within manufacturing and service industries. We augment sectoral data with input-output tables and union density data to obtain detailed estimations of the effect of technological change, globalisation and bargaining power on the wage share. We find a significant negative effect of globalisation and we discover offshoring to emerging markets to be a robust driver of this process. Technological change had an impact which differs by skill group, but theoretical issues and lack of robustness of the results cast doubt on the hypothesis of skill-biased technological change as a key factor in the overall decline in the wage share. Furthermore, we find a robust effect of institutional factors such as union density and minimum wages on the wage share, lending strong support to the political economy approach to functional income distribution.
    Keywords: wage share; income distribution; union density; technology; offshoring
    JEL: E25 J50
    Date: 2017–07–31
  11. By: João de Sousa Andrade (CeBER and Faculty of Economics of the University of Coimbra)
    Abstract: The European economic and monetary integration of Portugal should be analyzed from a historical perspective, taking into account not only economic but also political aspects. Despite its colonial heritage, Portugal is a country of emigrants in which Europe holds a very important part. Portuguese people have a European feeling they do not forget a dictatorship that has lasted almost half a century. The incomes of Portuguese are nowadays much higher as also the level of fixed capital - especially in infrastructure - and human capital than before European integration. The recent economic problems of the Portuguese economy are the result of imbalances that developed during the years after the Democratic Revolution. The absence of more appropriate policies for a monetary zone with a fixed exchange rate and with financial shocks caused by the reduction of interest rates and the massive entry of structural funds is responsible for the poor performance of the Portuguese economy after 2002 At present the banking crisis and public debt does not allow the exit of the Euro. But in spite of this constraint Portuguese governments and the great majority of the political parties envisage a deeper integration on the monetary union.
    Keywords: Emigration, dictatorship, democracy, public debt, real exchange rate, Euro.
    JEL: E31 E42 N10
    Date: 2017–07
  12. By: Emily Lydgate (UK Trade Policy Observatory, University of Sussex); L Alan Winters (UK Trade Policy Observatory, University of Sussex)
    Abstract: WTO rules prohibit Free Trade Areas (FTAs) that provide tariff-free access or services liberalisation in only one or a few sectors. In this sense, a narrow, sectoral approach to concluding an FTA between the EU and the UK would contravene WTO law. However, assuming the EU and the UK were able to agree a substantially broad tariff-free FTA, WTO rules would not prevent them from moving further to maintain the bulk of the benefits of the Customs Union and the Single Market in a few key sectors. They could establish customs union-like conditions by coordinating external tariffs in some sectors and agreeing on relaxed Rules of Origin (RoOs) administered lightly and Single Market-like access could be approximated through sectoral Mutual Recognition Agreements. Such an approach would enable continued deep integration, whose desirability has been signalled on both sides. It would fall short of current market access levels even in the selected sectors and, in the case of tariff coordination, re-create some of the limits to an independent trade policy that Brexit aimed to remove. If the trade-off were deemed desirable, however, the approach could be reconciled with WTO rules including the ‘Most Favoured Nation’ requirement that equal treatment be awarded to all WTO Member States.
    Keywords: Free Trade Agreements; WTO; Brexit; European Union
    JEL: F15 F13
    Date: 2017–07
  13. By: Tille, Cédric
    Abstract: Over the last decade, the economic linkages between Switzerland and the rest of the world have been transformed. First, merchanting and the chemical industry account for an increasing share of international trade, with chemicals exports expanding robustly in recent years despite the European crisis and the strong Swiss franc. Second, the nature of international financial integration has changed. While private investors drove Switzerland's financial flows and net foreign assets before the financial crisis, the foreign reserves accumulation by the Swiss National Bank has been playing a major role since. Third, asset prices and foreign exchange movements led to substantial capital losses in foreign assets which fully absorbed the surplus on the current account. Finally, the crisis has weakened the role of foreign trade as an engine of growth and narrowed it across sectors.
    Keywords: current account; external investment position; Globalization; Switzerland
    JEL: F1 F4
    Date: 2017–07
  14. By: Savas Papadopoulos (Bank of Greece); Pantelis Stavroulias (Democritus University of Thrace); Thomas Sager (University of Texas); Etti Baranoff (Virginia Commonwealth University)
    Abstract: The global financial crisis of 2007-2008 focused the attention of financial authorities on developing methods to forecast and avoid future financial crises of similar magnitude. We contribute to the literature on crisis prediction in several important ways. First, we develop an early warning system (EWS) that provides 7-12 quarters advance warning with high accuracy in out-of-sample testing. Second, the EWS applies region-wide to the leading economies in the European Union. Third, the methodology is transparent – utilizing only publicly available macro-level data and standard statistical classification methodology (multinomial logistic regression, discriminant analysis, and neural networks). Fourth, we employ two relatively novel methodological innovations in EWS modeling: ternary state classification to guarantee a minimum advance warning period, and a fitting and evaluation criterion (the total harmonic mean) that prioritizes avoiding classification errors for the relatively infrequent events of most interest. As a consequence, a policymaker who uses these methods will enjoy a high probability that future crises will be signaled well in advance and that warnings of crisis will not be false alarms.
    Keywords: Banking crisis; financial stability; macroprudential policy; classification methods; goodness-of-fit measures
    JEL: C53 E58 G28
    Date: 2017–04
  15. By: Gehrke, Britta (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Weber, Enzo (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "This paper investigates whether the effects of structural labor market reforms depend on the business cycle. Based on search and matching theory, we propose an unobserved components approach with Markov switching to distinguish the effects of structural reforms that increase the flexibility of the labor market in recession and expansion. Our results for Germany and Spain show that reforms have substantially weaker expansionary effects in the short-run when implemented in recessions. In consequence, reforms are unlikely to mitigate the impact of crisis in the short-run. From a policy perspective, these results highlight the costs of introducing reforms in recessions." (Author's abstract, IAB-Doku) ((en))
    JEL: C32 E02 E32 J08
    Date: 2017–07–31
  16. By: Beetsma, R.M.W.J. (Tilburg University, School of Economics and Management); Giuliodori, M.; de Jong, F.C.J.M. (Tilburg University, School of Economics and Management); Widijanto, D.
    Abstract: We show that new public debt issues cause an auction cycle for Italian secondary-market debt, but not for German debt. The cycle is mainly observed for the crisis period since mid-2007 and is larger when the crisis, as measured by yield volatility and CDS spreads of primary dealers, is more intense. Volatility seems to be the main driving factor. The cycle is also present in secondary-market series with maturities close to the auctioned series. Our findings are consistent with the theory of primary dealers’ limited risk-bearing capacity. There is also weak evidence of spill-overs from foreign auctions to domestic markets.
    Date: 2016
  17. By: Evangelos Charalambakis (Bank of Greece); Yiannis Dendramis (University of Cyprus); Elias Tzavalis (Athens University of Economics and Business)
    Abstract: We investigate the relationship between non-performing loans (NPLs) and their fundamentals, mainly bank and macroeconomic variables. This is done based on aggregate portfolio loans in the Greek economy. Greece constitutes an interesting case to study the factors determining NPLs, given the pervasive recessionary conditions that have characterized it since the outbreak of its sovereign debt crisis in 2010. We suggest a new econometric framework to study the above relationship which extends the SUR (seemingly unrelated regressions) framework to allow for a common break in its slope coefficient of unknown date. We show that the deterioration in the macroeconomic conditions (captured by very high rates of unemployment) and political uncertainty constitute key factors explaining the sharp rise of NPLs of the Greek banking sector after the first quarter of 2012. With the exception of bank profitability, we find that bank specific variables associated with bank capitalization and liquidity risk seem to determine NPLs only under normal economic conditions.
    Keywords: NPLs; break point; bank-specific variables; macroeconomic conditions
    JEL: C22 G01 G21
    Date: 2017–03

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