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

  1. Beyond the Juncker and Schäuble visions of euro-area governance By Guntram B. Wolff
  2. Eurosystem’s asset purchases and money market rates By W. Arrata; B. Nguyen; I. Rahmouni-Rousseau; M. Vari
  4. Sweden; Financial Sector Assessment Program-Technical Note-Crisis Readiness, Management, and Resolution By International Monetary Fund
  5. European Monetary Union reform preferences of French and German parliamentarians By Blesse, Sebastian; Boyer, Pierre C.; Heinemann, Friedrich; Janeba, Eckhard; Raj, Anasuya
  6. Fiscal Consolidation Programs and Income Inequality By Brinca, Pedro; Ferreira, Miguel; Franco, Francesco; Holter, Hans; Malafry, Laurence
  7. Monetary policy communication: Evidence from Survey Data By Neda Popovska – Kamnar
  8. Household Credit, Global Financial Cycle, and Macroprudential Policies: Credit Register Evidence from an Emerging Country By Mircea Epure; Irina Mihai; Camelia Minoiu; José-Luis Peydró
  9. Why is Europe engaged in an inter- dependence war, and how can it be stopped? By Luciano Andreozzi; Roberto Tamborini
  10. Economic Effects of Brexit on the European Economy By Gabriel Felbermayr; Clemens Fuest; Jasmin Katrin Gröschl; Daniel Stöhlker
  11. Wages and employment by skill level in Southern and Eastern Europe during the crisis By Croci Angelini, Elisabetta; Farina, Francesco; Valentini, Enzo
  12. Abolishing the Wealth Tax. A Case Study for Germany By Alena Bachleitner
  13. Sovereign Risk Contagion By Arellano, Cristina; Bai, Yan; Lizarazo, Sandra
  14. National Fiscal Stimulus Packages And Consolidation Strategies In A Monetary Union By Christoph Bierbrauer
  15. Spain; Financial System Stability Assessment By International Monetary Fund
  16. Provisioning policies for non-performing loans: How to best ensure a "clean balance sheet"? By Wahrenburg, Mark
  17. It’s not austerity. Or is it? Assessing the effect of austerity on growth in Europe, 2010-15 By Matteo Fragetta; Roberto Tamborini
  18. Markup Heterogeneity, Export Status and the Establishment of the Euro By Sarah Guillou; Lionel Nesta

  1. By: Guntram B. Wolff
    Abstract: The issue Two diametrically opposed visions of the euro-area architecture have been put forward. European Commission president Jean-Claude Juncker favours a model that puts the Commission at the centre of fiscal policy decision-making. The former German finance minister Wolfgang Schäuble argues that fiscal surveillance should be centred on a reformed European Stability Mechanism. Juncker’s proposal would over-emphasise the Commission when fiscal policy making is national and would unduly mix the roles of Commission and Council. Schäuble, by contrast, neglects the fact that national fiscal policy matters for the euro area not only for sustainability reasons but also because of the provisioning of public goods, stabilisation policy and effects on inflation and growth. This Policy Brief does not discuss the completion of banking union, which is essential for a stable euro area. Policy challenge Fiscal policy making in the euro area will remain a difficult balancing act between national politics and European interests. Departing from both Juncker’s and Schäuble’s proposals, the Eurogroup should be developed into a Eurosystem of fiscal policy (EFP) as the centre of euro-area fiscal governance. The Eurogroup should have a permanent, full-time president, with a mandate to represent the interests of the whole euro area, and who will report regularly to the European Parliament. The Commission would make fiscal policy recommendations to member states; fiscal rules would be reformed. Political, and in some cases market, pressure would increase on countries that fail to comply with recommendations. Ultimate responsibility for debt will remain national. The European Stability Mechanism should become a permanent fire brigade to manage sovereign debt crises, including possible restructurings in extreme cases. Finally, the EU budget should be reformed to focus on European public goods and on a stabilisation function.
    Date: 2017–12
  2. By: W. Arrata; B. Nguyen; I. Rahmouni-Rousseau; M. Vari
    Abstract: Some Euro area money market rates have been standing below the deposit facility rate since 2015, which coincided with the start of the Eurosystem’s public sector purchase program (PSPP). In this paper, we explore empirically the interactions between the PSPP and short term secured money market rates (repo rates). We document different channels through which asset purchases may affect the various segments of the Euro area repo market. Using proprietary data from the PSPP purchases and transactions made on the repo market for specific securities (“special”), our results show that the PSPP has contributed to push down repo rate, in particular prior to January 2017. On average, purchasing 1% of a bond outstanding is associated with a decline in its repo rate of -0.78 bps.
    Keywords: specialness, repo market, asset purchases, money market.
    JEL: E52 E58 G10
    Date: 2017
  3. By: Jamel Saadaoui
    Abstract: From the onset of the euro crisis to the Brexit vote, we have witnessed impressive reductions of current account imbalances in peripheral countries of the euro area. These reductions can be the result of either a compression of internal demand or an improvement in external competitiveness. In this paper, we compute exchange rate misalignments within the euro area to assess whether peripheral countries have managed to improve their external competitiveness. After controlling for the reduction of business cycle synchronization within the EMU, we find that peripheral countries have managed to reduce their exchange rate misalignments thanks to internal devaluations. To some extent, these favourable evolutions reflect improvements in external competitiveness. Nevertheless, these gains could only be temporary if peripheral countries do not improve their non-price competitiveness, their trade structures and their international specializations in the long run.
    Keywords: Internal Devaluation, Equilibrium Exchange Rate, External Competitiveness.
    JEL: F31 F32 F44
    Date: 2017
  4. By: International Monetary Fund
    Abstract: ince the 2011 FSAP, Sweden’s financial safety net and crisis management frameworks, including bank resolution and contingency planning, have improved. In response to the FSAP and the overhaul of pertinent European Union (EU) rules, Sweden has enacted a host of new legislation, introduced a resolution regime for credit institutions and certain investment firms, established a national resolution authority and a Financial Stability Council (FSC), held financial crisis simulation exercises, and revised its deposit insurance system (DIS) allowing it to fund resolution measures.
    Keywords: Europe;Sweden;
    Date: 2017–10–05
  5. By: Blesse, Sebastian; Boyer, Pierre C.; Heinemann, Friedrich; Janeba, Eckhard; Raj, Anasuya
    Abstract: This study analyzes results from an original survey of members of the French and German parliaments (Assemblée Nationale, Sénat and Bundestag) on economic policies and institutions of the Eurozone. We find that French politicians are significantly more supportive of Eurobonds, a European unemployment insurance scheme, and an active monetary policy by the ECB than German politicians. At the same time, there are significant differences along party lines, which are often quantitatively more important than differences in nationality. Left-leaning members of parliaments are in favor of new policy instruments at the European or Eurozone level, but are skeptical about the fiscal constraints of the Fiscal Compact. There is widespread consensus across parties and countries that more investment at national levels is warranted.
    Keywords: EMU reforms,policy preferences,elite survey,members of national parliament,comparative politics
    JEL: E60 E62 F15 H60
    Date: 2017
  6. By: Brinca, Pedro (Center for Economics and Finance); Ferreira, Miguel (Nova School of Business and Economics); Franco, Francesco (Nova School of Business and Economics); Holter, Hans (Department of Economics); Malafry, Laurence (Dept. of Economics, Stockholm University)
    Abstract: Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive relationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, including the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labor supply responses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers, which is quite similar to that in the data.
    Keywords: Fiscal Consolidation; Income Inequality; Fiscal Multipliers; Public Debt; Income Risk
    JEL: E21 E62 H31 H50
    Date: 2017–11–27
  7. By: Neda Popovska – Kamnar (National Bank of the Republic of Macedonia)
    Abstract: This paper summarizes the results of a Survey on Monetary policy Communication conducted among central banks in Central Eastern and South-Eastern Europe and the euro area. The main objective of this Survey was to draw evidence on the level of transparency and communication strategies of the central banks. The results of the Survey reveal that today the central banks pay much attention to the proper transparency and provide significant information about their decisions and policy making process. The overall conclusion of the Monetary policy communication Survey is that the communication and the transparency of the 15 central banks included in the Survey is on satisfactory level. Still, there is always a room for improvement, especially in the area of introducing forward guidance by the central banks and more “proactive ways” of communication with the public.
    Keywords: survey data, central banks, monetary policy, communication, transparency
    JEL: E52 E58 E66
    Date: 2017
  8. By: Mircea Epure; Irina Mihai; Camelia Minoiu; José-Luis Peydró
    Abstract: We analyze the effects of macroprudential policies on local bank credit cycles and interactions with international financial conditions. For identification, we exploit the comprehensive credit register containing all bank loans to individuals in Romania, a small open economy subject to external shocks, and the period 2004-2012, which covers a full boom-bust credit cycle when a wide range of macroprudential measures were deployed. Although household leverage is known to be a key driver of financial crises, to our knowledge this is the first paper that employs a household credit register to study leverage and macroprudential policies over a full economic cycle. Our results show that tighter macroprudential conditions are associated with a significant decline in household credit, with substantially stronger effects for FX loans than for local currency loans. The effects on FX loans are higher for: (i) ex-ante riskier borrowers proxied by higher debt-service-to-income ratios and (ii) banks with greater exposure to foreign funding. Moreover, tighter macroprudential policy has stronger dampening effects on FX lending when global risk appetite is high and foreign monetary policy is expansionary. Finally, quantitative effects are in general larger for borrower rather than lender macroprudential policies. Overall, the results suggest that macroprudential policies are effective in mitigating bank risk-taking in household lending over the local bank credit and global financial cycles, and therefore have important implications for policy and bank risk management.
    Keywords: macroprudential policies, global financial cycle, cross-border spillovers, household credit, bank loans
    JEL: E58 F0 F40 G21 G28 D14
    Date: 2017–12
  9. By: Luciano Andreozzi; Roberto Tamborini
    Abstract: There is large evidence that European countries, the EMU in particular, are engaged in an interdependence war, i.e. non-cooperative policies with huge social and economic costs due to mutual negative externalities. In this regard, the EMU as a supranational institution with the overarching end to generate and distribute collective benefits from integration and policy coordination seems off the mark. We present a policy game between two interdependent countries showing that the causes and consequences of interdependence wars lye in non-cooperative strategies dictated by the national social preferences over "good" but costly policy choices embedded into the government's policy function. By means of the model we examine what supranational policy regimes may achieve a Pareto improvement. Among the latter, one that we call "Europe", minimises the additive loss function of the two countries. The thrust of our analysis is that the supranational regimes which do not take national preferences into account, dubbed "technocratic regimes", are dominated, so that the single alternative is between Europe and "exit" for the non-cooperative regime. An important result is that Europe is the Pareto-dominant regime only within a limited range of asymmetry between countries' social preferences. The paper concludes with some political-economic implications for the reform of the EMU.
    Keywords: European Economic and Monetary Union, policy games, design of supranational institutions
    JEL: F55 D78
    Date: 2017
  10. By: Gabriel Felbermayr; Clemens Fuest; Jasmin Katrin Gröschl; Daniel Stöhlker
    Date: 2017
  11. By: Croci Angelini, Elisabetta; Farina, Francesco; Valentini, Enzo
    Abstract: Occupations and sectors are the two fundamental dimensions of structural change. From the evolution of the high/low-skill employment levels and wage ratio, we can understand which sectors have been undertaking a process of technical change. By using Eu-Silc database we investigate four “Southern Europe” countries (Italy, Spain, Greece, Portugal), three “Eastern Europe” countries (Poland, Hungary, Bulgaria), UK and Austria. Our analysis shows that the crisis seems to have radically changed the behavior of economies and sectors. It emerges that Poland behaves in a similar way to Austria (with a growing role of technology and Skill Biased Technical Change), while in Hungary the economic system seems to be restructuring as Iberian countries.
    Keywords: Technical change,Labour,Skill premium,Country studies
    JEL: O33 O47 P51
    Date: 2017
  12. By: Alena Bachleitner
    Abstract: Since the 1990ies several countries abolished the wealth tax, but surprisingly few scholars investigated the effects empirically. Motivated by the theoretical literature, this study estimates the effect of the abolition of the net wealth tax in Germany in 1997 on the household saving rate. The use of the Synthetic Control Method allows using variables on aggregate level instead of microeconometric panel data, to estimate the effect of abolishing the net wealth tax. As a result, the analysis shows that the abolition of the net wealth tax had a clear positive effect on the German household saving rate. After three years, the saving rate was found to be about 3 percentage points higher than it would have been without the measure. Robustness checks support the results. These findings suggest that empirically the substitution effect dominated.
    Keywords: Wealth Tax, Abolition of Wealth Tax, Germany, Synthetic Control Method
    Date: 2017–12–05
  13. By: Arellano, Cristina (Federal Reserve Bank of Minneapolis); Bai, Yan (University of Rochester); Lizarazo, Sandra (International Monetary Fund)
    Abstract: We develop a theory of sovereign risk contagion based on financial links. In our multi-country model, sovereign bond spreads comove because default in one country can trigger default in other countries. Countries are linked because they borrow, default, and renegotiate with common lenders, and the bond price and recovery schedules for each country depend on the choices of other countries. A foreign default increases the lenders' pricing kernel, which makes home borrowing more expensive and can induce a home default. Countries also default together because by doing so they can renegotiate the debt simultaneously and pay lower recoveries. We apply our model to the 2012 debt crises of Italy and Spain and show that it can replicate the time path of spreads during the crises. In a counterfactual exercise, we find that the debt crisis in Spain (Italy) can account for one-half (one-third) of the increase in the bond spreads of Italy (Spain).
    Keywords: Sovereign default; Bond spreads; Renegotiation; European debt crisis
    JEL: F30 G01
    Date: 2017–11–13
  14. By: Christoph Bierbrauer (Hochschule Darmstadt)
    Abstract: We present a two-country New Open Economy Macroeconomics model of a currency union featuring an overlapping generations structure of the Blanchard (1985)-Yaari (1965) type as well as monopolistic frictions and staggered adjustment in the goods and labor market. We allow for public investment and distortionary taxation. We study the effects of fiscal policy measures such as public spending, tax cuts targeted to households and public investment as suggested by the European Commission (2008). In particular, we explore the effects of fiscal policy as a function of the financing decision of the implementing government. We find that the impact of fiscal measures on national variables as well as the spillovers depend on the assumed degree of household myopia and again, the financing decision of the government. However, the introduction of a complex fiscal sector which enables the government to choose between alternative financing schemes is an important determinant of the effects of fiscal expansions on key macroeconomic variables such as, output and consumptions. Thus, modeling a complex fiscal sector on both sides of the budgets is crucial for the results and therefore the effectiveness of fiscal stimulus packages.
    Keywords: Overlapping generations; New open economy macroeconomics; Public Debt; Decentralized fiscal policy; Monetary union
    JEL: E62 F33 F41 H31 H50 H63
    Date: 2017–11–22
  15. By: International Monetary Fund
    Abstract: Spain’s banking system has been steadily progressing since the last FSAP. The authorities have made a significant reform effort. Together with the economic recovery, and support by the European Central Bank’s (ECB) accommodative policies, the banking system has strengthened its solvency and advanced in reducing nonperforming loans (NPLs). It is critical to keep the reform process moving and to build on the advances made during 2012–16. The four areas where momentum must endure are (i) accelerated cleanup of legacy bank assets, (ii) further improvement in bank profitability and capitalization, (iii) rigorous management of interest rate and liquidity risks; and (iv) reform of the institutional framework for financial oversight.
    Date: 2017–10–06
  16. By: Wahrenburg, Mark
    Abstract: New provisioning rules introduced by IFRS 9 are expected to reduce the procyclicality of provisioning. Heterogeneity among banks in the procyclicality of provisioning may not only reflect the formal accounting rules, but also variation in discretionary provisioning policies. This paper presents empirical evidence on the heterogeneity of provisioning procyclicality among significant banks that are directly supervised by the ECB. In particular, this paper finds that provisioning is relatively procyclical at banks that have i) high loans-to-assets ratios, ii) high shares of non-interest income in total operating income, iii) low capitalization rates, and iv) low total assets. Supervisory guidance provided to banks on how to implement IFRS 9 has mostly been of a qualitative nature, and may prove inadequate to prevent an undesirably wide future variation in provisioning among EU banks.
    Keywords: IFRS 9,provisioning rules,EU banks
    Date: 2017
  17. By: Matteo Fragetta; Roberto Tamborini
    Abstract: While the debate over the relationship between austerity and growth in Europe has been lively and intense, systematic and rigours empirical analysis has remained underdeveloped. With this econometric study of a panel of European countries and the US from 2010 to 2015, we have sought to fill this gap. In particular, our study is organised as a "test" of the "it’s not austerity" hypothesis, i.e. that austerity cannot be regarded as the explanatory variable of the post-crisis poor growth in Europe. To this end, we have articulated this hypothesis in four control variables of the growth-austerity relationship accounting for external competitiveness, the sovereign debt crisis, the general efficiency of the economy, and the composition effect of aus- terity between (less) expenditure and (more) taxation. As further control variable we have also considered one-year official forecasts of austerity. Austerity has been identified as a year-to-year increase in the structural primary balance relative to potential GDP. Upon estimating a static relationship using year-to-year changes in the variables with two methods (two-way fixed effects and Pesaran’s PCCE (2006)), and a dynamic one, aimed at capturing longer-run effects, with the Arellano-Bond difference panel estimator, our main conclusion is that the "it’s not austerity" hypothesis does not pass our test. The austerity coefficient is significant in all estimated relationships (except one) with the "Keynesian" theoretical sign, i.e. a negative ef- fect on GDP growth in a range between 0.7 and 0.9 in the static specification and slightly lower in the dynamic one. On the other hand, the evidence also indicates that austerity cannot be regarded as the single negative factor impinging on growth in the panel under examination. The general efficiency of the economy has also played a role, but what emerges as the more significant co-determinant is the increase in the debt/GDP ratio, with an effect on growth comparable to austerity (or larger in some specifications). However, this fact should be reconsidered carefully, because the "excess austerity" hypothesis may be corroborated, according to which it is growth-depressing austerity which causes the debt/GDP ratio to grow, hypothesis enhanced by the finding that the real value of debt and its real interest rate are both non-significant.
    Keywords: EMU, fiscal consolidation, panel time series
    JEL: E62 C33
    Date: 2017
  18. By: Sarah Guillou (OFCE Sciences Po. Paris); Lionel Nesta (Université Côte d'Azur; GREDEG CNRS; OFCE Sciences Po. Paris; SKEMA Business School)
    Abstract: We investigate the effects of the establishment of the euro on the markups of French manufacturing firms. Merging firm-level census data with customs data, we estimate time-varying firm-specific markups and distinguish between eurozone exporters from other firms between 1995 and 2007. We find that the establishment of the euro has had a pronounced pro-competitive impact by reducing firm markups by 14 percentage points. By reducing export costs, the euro represented an opportunity for eurozone exporters to increase their margins relative to other firms. Quantile regressions show that the euro has led to a reduction in the variance of markups.
    Keywords: Markups, Heterogeneity, Euro, Competition, Export Destination
    JEL: C5 D43 L16 L60
    Date: 2017–11

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