nep-eec New Economics Papers
on European Economics
Issue of 2017‒11‒12
twenty-one papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The time is right for a European Monetary Fund By André Sapir; Dirk Schoenmaker
  2. Understanding Rating Movements in Euro Area Countries By Jan Bruha; Moritz Karber; Beatrice Pierluigi; Ralph Setzer
  3. The Failure of ECB Monetary Policy from a Mises-Hayek Perspective By Gunther Schnabl
  4. Brexit: The Economics of International Disintegration By Thomas Sampson
  5. The Heterogeneous Impact of Brexit: Early Indications from the FTSE By Ronald B. Davies; Zuzanna Studnicka
  6. Dissecting long-term Bund yields in the run-up to the ECB's Public Sector Purchase Programme By Lemke, Wolfgang; Werner, Thomas
  7. Assessing the Sustainability of External Imbalances in the European Union By António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek
  8. Fiscal Consolidation in a Low Inflation Environment: Pay Cuts versus Lost Jobs By Guilherme Bandeira; Evi Pappa; Rana Sajedi; Eugenia Vella
  9. Inequality and Poverty in Greece:Changes in Times of Crisis By Eirini Andriopoulou; Alexandros Karakitsios; Panos Tsakloglou
  10. Competition and credit procyclicality in European banking By Aurélien Leroy; Yannick Lucotte
  11. Would a Euro's Depreciation Improve the French Economy? By Magnani, Riccardo; Piccoli, Luca; Carré, Martine; Spadaro, Amedeo
  12. A Complementary Tool to Monitor Fiscal Stress in European Economies By Stéphanie Pamies Sumner; Katia Berti
  13. Real exchange rate misalignments in the euro area By Fidora, Michael; Giordano, Claire; Schmitz, Martin
  14. Forecasting models for non-performing loans in the EU countries By Karsten Staehr; Lenno Uusküla
  15. Monetary Policy Crisis Management as a Threat to Economic Order By Andreas Freytag; Gunther Schnabl
  16. Total factor productivity growth in Central and Eastern Europe before, during and after the Global Financial Crisis By Natalja Levenko; Kaspar Oja; Karsten Staehr
  17. Tracing European structured finance counterparty networks By Amzallag, Adrien; Blau, Maximilian L.
  18. Varieties of capitalism, quality of government, and policy conditionality in Southern Europe:Greece and Portugal in comparative perspective By Christos J. Paraskevopoulos
  19. The Impact of Financial Sector Support on the Public Finances in Ireland and the EU By Hickey, Rónán; Kane, Linda; Smyth, Diarmaid
  20. Asymmetric wage adjustment and employment in European firms By Petra Marotzke; Robert Anderton; Ana Bairrao; Clémence Berson; Peter Tóth
  21. Policy Evaluation by the Synthetic Control Approach: The Case of the Swiss Franc By Nicole Aregger; Jessica Leutert

  1. By: André Sapir; Dirk Schoenmaker
    Abstract: The issue The creation of the European Stability Mechanism (ESM) and the banking union were instrumental in stemming the euro-area sovereign crisis. However, both remain incomplete. While the ESM reduces the risk of sovereign debt crises, it still lacks an instrument to deal in an orderly way with insolvency crises. This makes the no-bailout clause of the Maastricht Treaty toothless. Two of the banking union’s pillars – common European supervision by the European Central Bank and common European resolution by the Single Resolution Fund – are up and running. But the third, common European deposit insurance, is still missing. Furthermore, the governance of the ESM is wanting. Decisions to provide financial assistance are taken by unanimity, preventing swift crisis response when it is needed. Policy challenge The re-election of Chancellor Merkel and the election of President Macron create a new momentum for strengthening the euro area’s crisis framework. There is agreement to turn the ESM into a European Monetary Fund (EMF). We propose to design this EMF as part of a broader risk-sharing and market-discipline agenda. Risk sharing would come from the increased capacity of the EMF to intervene early in a sovereign or banking crisis and to act as a fiscal backstop to a complete banking union that includes European deposit insurance. Market discipline of sovereigns would come from the reduced exposure of banks to their home sovereigns and from a newly-established debt restructuring mechanism. The proposed transformation of the ESM into an EMF should be viewed as part of a wider institutional reform of the fiscal dimension of the euro area.
    Date: 2017–10
  2. By: Jan Bruha; Moritz Karber; Beatrice Pierluigi; Ralph Setzer
    Abstract: This paper investigates the link between sovereign ratings and macroeconomic fundamentals for a group of euro area countries that recorded rating downgrades during the euro area sovereign debt crisis. We apply an elaborated econometric estimation technique, based on a Bayesian ordered probit model, to understand how the decisions of rating agencies can be explained by economic developments. The estimated model reproduces historical ratings by using a small number of economic and institutional variables which seem to effectively summarize the large number of criteria used by Moody's, Standard & Poor's and Fitch in their assignment of sovereign ratings. Our results suggest that the size of the downgrades observed since the start of the sovereign crisis has been broadly in line with the deterioration of economic fundamentals for most countries.
    Keywords: Euro area crisis, panel probit model, sovereign debt, sovereign rating
    JEL: C25 G24 H63 H68
    Date: 2017–10
  3. By: Gunther Schnabl
    Abstract: The paper analyses the common European monetary policy based on a Mises-Hayek overinvestment framework, which is combined with the theory of optimum currency areas. It shows how since the turn of the millennium a too expansionary monetary policy contributed to unsustainable overinvestment booms in the periphery of the European Monetary Union, and more recently in Germany, dependent on the national fiscal policy stances. It is argued that the ECB´s ultra-loose monetary policy as a crisis therapy puts a drag on long-term growth by conserving distorted economic structures. To preserve political stability a timely exit from the ultra-expansionary monetary policy is postulated.
    Keywords: Hayek, Mises, European Monetary Union, European Central Bank, monetary overinvestment theory, optimum currency areas, fiscal policy, asymmetric shocks, secular stagnation
    JEL: E52 E58 F42 E63
    Date: 2017
  4. By: Thomas Sampson
    Abstract: This paper reviews the literature on the likely economic consequences of Brexit and considers the lessons of the Brexit vote for the future of European and global integration. Brexit will make the United Kingdom poorer because it will lead to new barriers to trade and migration between the United Kingdom and the European Union. Plausible estimates put the costs to the United Kingdom at between 1 and 10 percent of income per capita. Other European Union countries will also suffer economically, but their estimated losses are much smaller. Support for Brexit came from a coalition of less-educated, older, less economically successful and more socially conservative voters. Why these voters rejected the European Union is poorly understood, but will play an important role in determining whether Brexit proves to be merely a diversion on the path to greater international integration or a sign that globalization has reached its limits.
    Keywords: Brexit, European Union, trade agreements, quantitative trade models, globalization
    JEL: F10 F50
    Date: 2017
  5. By: Ronald B. Davies; Zuzanna Studnicka
    Abstract: The UK’s decision to leave the EU is surrounded by several studies simulating its potential effects. Alternatively, we examine expectations embodied in stock returns using a two-part estimation process. While most firms’ prices fell, there was considerable heterogeneity in their relative changes. We show that this heterogeneity can be explained by the firm’s global value chain, with heavily European firms doing relatively worse. For firms with few imported intermediates, this was partially offset by a greater Sterling depreciation. These changes were primarily in the first two days and highly persistent. Understanding these movements gives a better understanding Brexit’s potential effects.
    Keywords: global value chain, event study, Brexit
    JEL: F15 F23 G14
    Date: 2017
  6. By: Lemke, Wolfgang; Werner, Thomas
    Abstract: Starting in summer 2014, markets began to build up expectations that the European Central Bank (ECB) would embark on large-scale sovereign bond purchases. The ECB’s Public Sector Purchase Programme (PSPP) was eventually announced on 22 January 2015 and purchases started in March. Both during the run-up phase to the PSPP announcement day and for the day itself, German government bond yields declined significantly. Using an affine term structure model, we evidence that the yield declines are almost fully attributable to a decline in the term premium as opposed to the expectations component. This speaks in favour of the conjecture that the PSPP transmits to long-term yields mainly via a portfolio re-balancing channel rather than a (policy rate) signalling channel. The results prove robust against changing the number of factors in the model, the estimation sample and the estimation approach. JEL Classification: E43, E52
    Keywords: large-scale asset purchases, term premia, term structure of interest rates
    Date: 2017–10
  7. By: António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek
    Abstract: We assess the sustainability of the current account (CA) balance, net international investment position (NIIP) and net external debt (NED) in a sample of EU countries using two complementary approaches. First, we employ both time-series and panel-data stationarity tests of current account balance-to-GDP ratios as well as cointegration tests of exports and imports of goods and services. Second, we assess the level of trade balance that stabilizes the NIIP and the NED. We find that there is sustainability of the CA balance mainly in a few surplus countries whereas there is more concern about the sustainability of the NIIP or NED in countries with a credit position than in countries with a debit position. Both approaches are consistent with each other given the relationship between flows and stocks, the existence of important structural breaks, and valuation effects via the exchange rate.
    Keywords: current account, exports, imports, net foreign assets, unit roots, structural breaks, cointegration, error-correction, cross-sectional dependence European Union.
    JEL: C22 C23 F32 F34 F36 F41
    Date: 2017–09
  8. By: Guilherme Bandeira (Bank of Spain); Evi Pappa (European University Institute); Rana Sajedi (Bank of England); Eugenia Vella (Department of Economics, University of Sheffield)
    Abstract: We construct a model of a monetary union to study fiscal consolidation in the Periphery of the Euro area, through cuts in public sector wages or hiring when the nominal interest rate is constrained at its lower bound. Consolidation induces a positive wealth effect that increases demand, as well as a reallocation of workers towards the private sector, which together boost private activity. However, in a low inflation environment, demand is suppressed and the private sector is not able to absorb the additional workers. Comparing the two instruments, cuts in public hiring increase unemployment persistently in this environment, while wage cuts can reduce it. Regions with higher mobility of labor between the two sectors are able to consolidate more effectively. Price flexibility is also key at the zero lower bound: for a higher degree of price rigidity in the Periphery, consolidation becomes harder to achieve. Consolidations can be self-defeating when the public good is productive.
    Keywords: Fiscal Consolidation, Public Wage Bill, Zero Lower Bound
    JEL: E32 E62
    Date: 2017–08
  9. By: Eirini Andriopoulou; Alexandros Karakitsios; Panos Tsakloglou
    Abstract: The Greek crisis was the deepest and longest ever recorded in an OECD country in the postwar period. The output declined by over a quarter, the disposable income by more than 40%, while the unemployment rate exceeded 27%. This paper explores the effects of the crisis on the level and the structure of aggregate inequality and poverty using the data of EU-SILC for the period 2007-2014. The results show that inequality rose but the magnitude of the change varies across indices. The recorded increases are larger when the indices used are relatively more sensitive to changes close to the bottom of the income distribution. Unlike claims often made in the public discourse, the elderly improved their relative position in the income distribution while there was substantial deterioration in the relative position of the enlarged group of the unemployed. The contribution of disparities between educational groups to aggregate inequality declined while that of disparities between socio-economic groups rose. All poverty indicators suggest that poverty increased substantially, especially when “anchored” poverty lines are used. Substantial changes are observed regarding the structure of poverty. Despite an increase in the population share of households headed by pensioners, their contribution to aggregate poverty declined considerably, with a corresponding increase in the contribution of households headed by unemployed persons. These changes are starker when distribution-sensitive poverty indices are utilised.
    Keywords: Greece, inequality, poverty, decomposition analysis
    Date: 2017–10
  10. By: Aurélien Leroy; Yannick Lucotte
    Abstract: This paper empirically assesses the effects of competition in the financial sector on credit procyclicality by estimating both an interacted panel VAR (IPVAR) model using macroeconomic data and a single-equation model with bank-level European banking data. The findings of these two empirical approaches highlight that an exogenous deviation of actual GDP from potential GDP leads to greater credit fluctuation in economies where both competition among banks and competition from non-bank financial institutions or direct finance (proxied by the fi- nancial structure) are weak. According to the financial accelerator theory, if lower competition strengthens the cyclical behavior of financial intermediaries, it follows that these "endogenous developments in credit markets work to amplify and propagate shocks to the macroeconomy" (Bernanke et al., 1999). Furthermore, since credit booms are closely associated with future financial crises (Laeven and Valencia, 2012), our results can also be read as evidence that greater competition in the financial sphere reduces financial instability, which is in line with the competition-stability view denying the existence of a trade-off between competition and stability
    Keywords: credit cycle, business cycle, bank competition, interacted panel VAR
    JEL: E32 E51 G20 D40 C33
    Date: 2017–11–09
  11. By: Magnani, Riccardo (University of Paris 13); Piccoli, Luca (University of the Balearic Islands); Carré, Martine (Université Paris-Dauphine); Spadaro, Amedeo (Paris School of Economics)
    Abstract: In this paper, we use a Micro-Macro model to evaluate the effects of a euro's depreciation on the French economy, both at the macro and micro level. Our Micro-Macro model consists of a Microsimulation model that includes an arithmetical model for the French fiscal system and two behavioral models used to simulate the effects on consumption behavior and labor supply, and a multisectoral CGE model which simulates the macroeconomic effects of a reform or a shock. The integration of the two models is made using an iterative (or sequential) approach. We find that a 10% euro's depreciation stimulates the aggregate demand by increasing exports and reducing imports which increases production and reduces the unemployment rate in the economy. At the individual level, we find that the macroeconomic shock reduces poverty and, to a lesser extent, income inequality. In particular, the decrease in the equilibrium wage, determined in the macro model, slightly reduces the available income for people who have already a job, while the reduction in the level of unemployment permits to some individuals to find a job, substantially increasing their income and, in many cases, bringing them out of poverty.
    Keywords: exchange rates, microsimulation, CGE models
    JEL: F40 C63 C68
    Date: 2017–10
  12. By: Stéphanie Pamies Sumner; Katia Berti
    Abstract: This paper presents an indicator of fiscal distress for European economies based on a multivariate regression analysis (logit modelling, the L1 indicator) and on a recently updated dataset of fiscal stress episodes. This indicator presents some interesting features: relying on a parsimonious set of variables that have been tested for their conditional statistical significance, it exhibits an overall satisfactory insample performance. In line with Berti et al. (2012), this indicator confirms the importance of monitoring macro-financial variables to assess countries' vulnerabilities to fiscal distress. It also provides some evidence that the change in the public debt ratio is an important predictor of fiscal distress events, while the level of public debt would particularly matter when combined with macrocompetitiveness imbalances. Our analysis suggests that the L1 indicator could be used as a complementary tool to the Commission S0 indicator to monitor prospective fiscal risks, building on the respective strengths of the two approaches, while compensating for their limitations.
    JEL: E62 E65 F34 H62 H63
    Date: 2017–06
  13. By: Fidora, Michael; Giordano, Claire; Schmitz, Martin
    Abstract: Building upon a Behavioural Equilibrium Exchange Rate (BEER) model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses whether both the size and the persistence of real effective exchange rate misalignments from the levels implied by economic fundamentals are affected by the adoption of a single currency. While real misalignments are found to be smaller in the euro area than in its main trading partners, they are also more persistent, although the reactivity of real exchange rates to past misalignments increased, and therefore the persistence decreased, after the global financial crisis. In the absence of the nominal adjustment channel, an improvement in the quality of regulation and institutions is found to reduce the persistence of real exchange rate misalignments, plausibly by removing real rigidities. JEL Classification: E24, E30, F00
    Keywords: equilibrium exchange rate, monetary union, real effective exchange rate, regulation
    Date: 2017–11
  14. By: Karsten Staehr; Lenno Uusküla
    Abstract: This paper estimates panel data models that use macroeconomic and macrofinancial variables to forecast the ratio of non-performing loans to total loans. The panels consist of either all EU countries or various subgroups, and the time sample is 1997Q4 to 2017Q1. The estimations show that macroeconomic and macro-financial variables have important roles in forecasting nonperforming loans. The ratio of non-performing loans exhibits substantial persistence and higher GDP growth, lower inflation and lower debt are robust leading indicators of the ratio of lower non-performing loans. The current account balance and real house prices are important indicators for Western Europe but are less important for Central and Eastern Europe
    Keywords: non-performing loans, forecasting, financial stability
    JEL: E44 E47 G21
    Date: 2017–11–09
  15. By: Andreas Freytag; Gunther Schnabl
    Abstract: The paper analyses the effects of the monetary policy crisis management of the European Central Bank on the economic order of Germany. It is argued that in post-war Europe the German social market economy as designed by Eucken (1952) and Müller-Armack (1966) has been a core element of growth, welfare, social cohesion and political stability in Germany and Europe as a whole. It is shown that the monetary policy rescue measures of the European Central Bank have undermined the constitutive principles of the German social market economy, what has considerably contributed to the erosion of (productivity) growth and welfare in Germany and Europe. As the outcome is crumbling social cohesion and growing political instability, a timely exit from ultra-expansionary monetary policy is postulated.
    Keywords: economic order, social market economy, Soziale Marktwirtschaft, Germany, Walter Eucken, Alfred Müller-Armack, monetary policy, crisis management
    JEL: B20 B25
    Date: 2017
  16. By: Natalja Levenko; Kaspar Oja; Karsten Staehr
    Abstract: This paper conducts growth accounting for 11 EU countries from Central and Eastern Europe for the years 1996–2016. Its contributions include the estimation of new capital stock series, adjustment for the utilisation of the capital stock and a time-varying elasticity of output to capital. Before the crisis, growth in total factor productivity (TFP) was the main contributor to output growth in Slovenia, Hungary and Slovakia, while capital deepening was more important in the Czech Republic, Croatia and Poland. During the global financial crisis the contributions of TFP and capital growth differed markedly across the countries, reflecting the very diverse dynamics of the crisis. After the crisis the contribution of TFP growth has been negligible in all of the sample countries coinciding with generally weak output growth. The results are generally robust to changes in estimation methods and parametrisations, but some assumptions are critical for the results.
    Keywords: growth accounting, capital stock, perpetual inventory method, total factor productivity, global financial crisis, Central and Eastern Europe
    JEL: F43 O47
    Date: 2017–11–09
  17. By: Amzallag, Adrien; Blau, Maximilian L.
    Abstract: Asset-backed securities (ABSs) and covered bonds (CBs) are structured finance instruments that require a range of key services, which may be provided by many firms. However, despite the prevalence of structured finance instruments in Europe, the network between issuers and service providers has to date remained unexplored. This paper traces and describes these connections, using a new database covering the majority of public ABSs and CBs outstanding between August 2008 and March 2017. It appears that ABS and CB issuers are highly reliant on affiliated counterparties (“close links”) to provide the above-mentioned key services, especially when programmes are larger and/or are retained by the issuer for use as collateral with the Eurosystem. When only “non-close links” across banking groups are considered, instances of reliance on just a few service providers have gradually decreased in number, with a more balanced system developing over time. The paper finds similar results for networks based on the use of securities as Eurosystem collateral. These findings help demonstrate the importance of the Eurosystem’s risk management framework for ABSs and CBs, and support the orientation of recent regulatory efforts at the European level. JEL Classification: G32, D85, G21, G23
    Keywords: asset-backed securities, collateral, covered bonds, financial regulation, network analysis, structured finance
    Date: 2017–11
  18. By: Christos J. Paraskevopoulos
    Abstract: This paper, drawing primarily on the Varieties of Capitalism (VoC) theoretical approach to political economy and the institutional theory of Europeanisation with emphasis on the Quality of Government (QoG) approach, examines possible variation between Greece and Portugal, in terms of their responses to pressures from Europeanisation before the crisis, as well as to MoU conditionality during the crisis. The empirical evidence seems to vindicate the fundamental assumptions of the VoC approach about the impact of variation among member states of the Eurozone, in terms of models of capitalism/political economy, on the crisis in Greece and Portugal. However, QoG is identified as key explanatory variable for variation in adaptation/adjustment capacity between the two countries, especially during the crisis. Additionally, there seems to be no evidence that cultural aspects, such as the level of social trust/ capital, can account for variation in adaptation performance between the two countries during the crisis.
    Keywords: Varieties of Capitalism; Quality of Government; Social Capital/Trust; Conditionality; MoUs; Critical Junctures; Southern Europe; Greece; Portugal
    Date: 2017–10
  19. By: Hickey, Rónán (Central Bank of Ireland); Kane, Linda (Central Bank of Ireland); Smyth, Diarmaid (Central Bank of Ireland)
    Abstract: Drawing on a pan-European database, this Letter takes a comprehensive look at the direct impact that financial sector support measures had on the fiscal position in Ireland from 2008 to 2016. At end-2016, it is estimated that these support measures added approximately €58 billion (21 per cent of GDP and 31 per cent of GNI*) to the stock of gross government debt, a figure which vastly exceeds the impact of the crisis in the EU. The final cost of the support on the public finances will depend on how various banking positions are unwound and the cumulative cost of servicing the related borrowing. Securing the best possible return on remaining banking investments and managing the transition to lower and more sustainable levels of public debt will remain a key challenge going forward.
    Date: 2017–10
  20. By: Petra Marotzke (Deutsche Bundesbank); Robert Anderton (European Central Bank, University of Nottingham); Ana Bairrao; Clémence Berson (Banque de France); Peter Tóth (Národná banka Slovenska)
    Abstract: We explore the impact of wage adjustment on employment with a focus on the role of downward nominal wage rigidities. We use a harmonised survey dataset, which covers 25 European countries in the period 2010-2013. These data are particularly useful given the firm-level information on the change in economic conditions and collective pay agreements. Our findings confirm the presence of wage rigidities in Europe: first, collective pay agreements reduce the probability of downward wage adjustment; second, wage responses to demand developments are asymmetric with a weaker downward response. Further, estimation results point to a negative effect of downward nominal wage rigidities on employment at the firm level.
    Keywords: Wage rigidity, Employment, Demand shocks
    JEL: J23 J30
    Date: 2017–10
  21. By: Nicole Aregger; Jessica Leutert
    Abstract: In this paper, we analyse the effect of unconventional monetary policies on the EUR/CHF exchange rate. We apply the synthetic control approach to four events defining a change in the Swiss National Bank's monetary policy during the 2009 to 2011 period before the introduction of the exchange rate floor. We provide evidence that in some periods the EUR/CHF exchange rate shares common factors not only with other exchange rates, but in particular with other safe assets. It is thus possible to construct a counterfactual exchange rate by assigning weights to other exchange rates or safe assets. The synthetic control approach finds major effects for the March 2009 and August 2011 announcements. The methodology seems less appropriate to evaluate the spring 2010 foreign exchange interventions.
    Date: 2017–11

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