nep-eec New Economics Papers
on European Economics
Issue of 2018‒01‒01
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Macroeconomic implications of oil price fluctuations: a regime-switching framework for the euro area By Holm-Hadulla, Fédéric; Hubrich, Kirstin
  2. Fiscal Consolidation Programs and Income Inequality By Pedro Brinca; Miguel H. Ferreira; Francesco Franco; Hans A. Holter; Laurence Malafry
  3. A macro approach to international bank resolution By Dirk Schoenmaker
  4. Why are banks not recapitalized during crises? By Matteo Crosignani
  5. East versus West on the European Populism Scale By Raicho Bojilov; Jonas A. Gunnarsson; Gylfi Zoega
  6. Economic Integration and the Non-tradable Sector: The European Experience By Sophie Piton
  7. Credit Growth and Economic Recovery in Europe After the Global Financial Crisis By Sergei Antoshin; Marco Arena; Nikolay Gueorguiev; Tonny Lybek; John Ralyea; Etienne B Yehoue
  8. Capital inflows, crisis and recovery in small open economies By Hamid Raza; Gylfi Zoega; Stephen Kinsella
  9. When Losses Turn Into Loans: The Cost of Undercapitalized Banks By Laura Blattner; Luisa Farinha; Francisca Rebelo
  10. Can the Adoption of the Euro in Croatia Reduce the Cost of Borrowing? By Davor Kunovac; Nina Pavić
  11. Capital and liquidity buffers and the resilience of the banking system in the euro area By Budnik, Katarzyna; Bochmann, Paul
  12. Trends in African migration to Europe: Drivers beyond economic motivations By Giménez-Gómez, José-Manuel; Yabibal Mulualem Walle; Zergawu, Yitagesu Zewdu
  13. Indebtedness in the EU: a drag or a catalyst for growth? By Mika, Alina; Zumer, Tina
  14. Delay determinants of European Banking Union implementation By Koetter, Michael; Krause, Thomas; Tonzer, Lena
  15. Estimating the Trade and Welfare Effects of Brexit. A Panel Data Structural Gravity Model By Harald Oberhofer; Michael Pfaffermayr
  16. Five years after the Liikanen Report: What have we learned? By Götz, Martin; Krahnen, Jan Pieter; Tröger, Tobias

  1. By: Holm-Hadulla, Fédéric; Hubrich, Kirstin
    Abstract: We investigate whether the response of the macro-economy to oil price shocks undergoes episodic changes. Employing a regime-switching vector autoregressive model we identify two regimes that are characterized by qualitatively different patterns in economic activity and inflation following oil price shocks in the euro area. In the normal regime, oil price shocks trigger only limited and short-lived adjustments in these variables. In the adverse regime, by contrast, oil price shocks are followed by sizeable and sustained macroeconomic fluctuations, with inflation and economic activity moving in the same direction as the oil price. The responses of inflation expectations and wage growth point to second-round effects as a potential driver of the dynamics characterising the adverse regime. The systematic response of monetary policy works against such second-round effects in the adverse regime but is insufficient to fully offset them. The model also delivers (conditional) probabilities for being (staying) in either regime, which may help interpret oil price fluctuations – and inform deliberations on the adequate policy response – in real-time. JEL Classification: E31, E52, C32
    Keywords: inflation, inflation expectations, oil prices, regime switching models, time-varying transition probabilities
    Date: 2017–12
  2. By: Pedro Brinca (Nova School of Business and Economics, Universidade Nova de Lisboa; Center for Economics and Finance, Universidade do Porto); Miguel H. Ferreira (Nova School of Business and Economics, Universidade Nova de Lisboa); Francesco Franco (Nova School of Business and Economics, Universidade Nova de Lisboa); Hans A. Holter (Department of Economics, University of Oslo); Laurence Malafry (Department 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: 2017–12
  3. By: Dirk Schoenmaker
    Abstract: In the aftermath of the Great Financial Crisis, regulators have rushed to strengthen banking supervision and implement bank resolution regimes. While such resolution regimes are welcome to reintroduce market discipline and reduce the reliance on taxpayer-funded bailouts, the effects on the wider banking system have not been properly considered. This paper proposes a macro approach to resolution, which should consider (i) the contagion effects of bail-in, and (ii) the continuing need for a fiscal backstop to the financial system. For bail-in to work, it is important that bail-inable bank bonds are largely held outside the banking sector, which is currently not the case. Stricter capital requirements could push them out of the banking system. The organisation of the fiscal backstop is crucial for the stability of the global banking system. Single-point-of-entry resolution of international banks is only possible for the very largest countries or for countries working together, including in terms of sharing the burden of a potential bank bailout. The euro area has adopted the latter approach in its Banking Union. Other countries have taken a stand-alone approach, which leads to multiple-point-of-entry resolution of international banks and contributes to fragmentation of the global banking system.Creation-Date: 2017-10 JEL Classification: G01, G21, G28
    Keywords: bank resolution, international banking, single point of entry, multiple point of trilemma, banking union
    Date: 2017–11
  4. By: Matteo Crosignani
    Abstract: I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction of bank credit supply, and the prolonged fragility of the financial sector. JEL Classification: E44, F33, G21, G28
    Keywords: Bank Capital, Sovereign Crises, Risk-Shifting, Government Bonds, Bank Credit
    Date: 2017–11
  5. By: Raicho Bojilov (Ecole Polytechnique); Jonas A. Gunnarsson (University of Iceland); Gylfi Zoega (University of Iceland; Birkbeck, University of London; CESifo)
    Abstract: We study a sample of individuals in 20 European countries that includes eight East European countries in order to identify whether these eight countries differ from the Western countries in the popularity of right-wing populist parties once we have controlled for personal attributes. The results show variation among the East European countries while as a whole they are not distinct from Western Europe. In particular, in Hungary and Poland populist right-wing parties enjoy greater support once account is taken of personal attributes. We discuss the reasons for this finding. When it comes to the personal identities, we find that a right-wing identity, a negative view of immigrants, not being satisfied with democracy, being negative on homosexuality, and mistrust in both the national and the European parliament seem to be the factors heavily correlated with voting for a right-wing populist party in Europe. Men are more likely to vote for a right-wing populist party as are the old and the less educated. Having experienced unemployed also increased the probability of voting for these parties.
    Keywords: Populist right-wing parties, survey evidence.
    JEL: P16 Z18
    Date: 2017–11
  6. By: Sophie Piton
    Abstract: From the introduction of the Euro up to the 2008 global financial crisis, macroeconomic imbalances widened among Member States. This divergence took the form of strong differences in the dynamics of unit labor costs. This paper asks why this happened. Is it the result of distortionary public spending, or the consequence of economic integration? To answer this question, this paper builds a theoretical framework that is able to provide a decomposition of unit labor costs growth into various effects of economic integration and policy intervention. Using a novel dataset, it then measures the contribution of each effect to the dynamics of unit labor costs in 12 countries of the Euro area from 1995 to 2014. Results show that trade and financial integration are significant drivers of unit labor costs divergence. Before the global financial crisis, in Greece and Portugal for example, trade and financial integration explain up to 20% of the increase in unit labor costs relative to core countries. On the contrary, distortionary public spending plays a minor role.
    JEL: F41 O41 O47 O52
    Date: 2017–12–05
  7. By: Sergei Antoshin; Marco Arena; Nikolay Gueorguiev; Tonny Lybek; John Ralyea; Etienne B Yehoue
    Abstract: This paper reviews the empirical relationships between credit growth, economic recovery, and bank profitability in Europe after the global financial crisis (GFC). We find that the post-GFC recoveries in Europe have been weaker than previous recoveries, with the “double-dip” recessions in 2011–12 in many countries and the worldwide reach of the GFC explaining the underperformance. Bank lending has been subdued as well, but this appears to have only held back the recovery relatively moderately. A 10 percent increase in bank credit to the private sector is associated with a rise of 0.6–1 percent in real GDP and 2–2½ percent in real private investment. These relationships have not changed significantly during and after the GFC. Loan quality, customer deposits, bank equity price index, and bank capital appear to be closely linked to bank lending. As expected, bank profitability is positively and significantly influenced by credit growth, but this relationship has weakened after the GFC.
    Date: 2017–11–17
  8. By: Hamid Raza (Aalborg University, Denmark); Gylfi Zoega (University of Iceland; Birkbeck, University of London); Stephen Kinsella (Kemmy Business School, University of Limerick, Ireland)
    Abstract: We compare two small open economics, Iceland and Ireland, that experienced a capital inflow through their banking systems in the period preceding the 2008 financial crises but differ in their currency arrangements. Both countries have mostly recovered from their respective crises, but the differences in the way their economies adjusted are interesting. The evidence suggests that changes in the real exchange rate served as the adjusting mechanism for Iceland’s current account while in Ireland domestic demand compression served as the main adjustment mechanism. We also explore the adjustment to the crisis in three other Eurozone economies and find that they were similar to the one in Ireland.
    Keywords: sudden stop, real exchange rates, demand compression.
    JEL: F32
    Date: 2017–11
  9. By: Laura Blattner; Luisa Farinha; Francisca Rebelo
    Abstract: We provide evidence that a weak banking sector has contributed to low productivity growth in the aftermath of the European sovereign debt crisis. An unexpected increase in capital requirements for a subset of Portuguese banks in 2011 provides a natural experiment to study the effects of reduced bank capital adequacy on productivity. Using detailed administrative data from the Bank of Portugal, we show that affected banks respond not only by cutting back on lending but also by increasing their underreporting of loan losses, which inflates reported capital, and by reallocating credit to firms in financial distress with prior underreported losses. To establish these results, we develop a method to detect the underreporting of losses using detailed loan-level data. We argue that this credit reallocation is consistent with distorted lending incentives arising either from the attempt to avoid the recognition of underreported losses, or from gambling on risky firms in response to an expected government bailout. We then show that the credit reallocation affects firm-level investment and employment. Finally, we translate the firm-level changes into aggregate productivity. This partial equilibrium exercise suggests that the credit reallocation driven by the regulatory intervention accounts for 20% of the decline in productivity in Portugal in 2012.
    JEL: G21 G38 E51 D24 O47
    Date: 2017–12–04
  10. By: Davor Kunovac (The Croatian National Bank, Croatia); Nina Pavić (The Croatian National Bank, Croatia)
    Abstract: The paper analyses the impact of euro adoption on the reduction of borrowing costs of EU member states. The results of the analysis point to the existence of a "euro premium" – after controlling for the dynamics in the macroeconomic fundamentals of particular countries and the market sentiment, member states of the monetary union have, on average, lower borrowing costs and higher credit ratings than other EU member states. In order to draw attention to the significance that the results could have for bank interest rates in Croatia in the event of euro adoption, a simple VAR model is used to demonstrate that there is a statistically significant transmission of the changes in government borrowing costs to interest rates on bank loans.
    Keywords: euro, borrowing costs, CDS premium, credit rating, Croatia
    JEL: E42
    Date: 2017–11
  11. By: Budnik, Katarzyna; Bochmann, Paul
    Abstract: How do capital and liquidity buffers affect the evolution of bank loans in periods of financial and economic distress? To answer this question we study the responses of 219 individual banks to aggregate demand, standard and unconventional monetary policy shocks in the euro area between 2007 and 2015. Banks’ responses are derived from a factor-augmented VAR, which relates macroeconomic aggregates to individual bank balance sheet items and interest rates. We find that banks with high capital and liquidity buffers show a more muted response in their lending to adverse real economy shocks. Capital and liquidity buffers also affect bank responses to monetary policy shocks. High bank capitalisation reduces the degree to which banks increase the average duration of loans to the non-financial corporate sector, while high bank liquidity strengthens the positive response to policy easing of both longand short-term loans to the non-financial corporate sector. The latter findings substantiate the relevance of interactions between prudential controls and monetary policy. JEL Classification: E51, E52, G21
    Keywords: capital requirements, liquidity requirements, macroprudential policy, monetary policy
    Date: 2017–12
  12. By: Giménez-Gómez, José-Manuel; Yabibal Mulualem Walle; Zergawu, Yitagesu Zewdu
    Abstract: The current migration and refugee crisis in Europe requires an understanding of the different migration drivers beyond the well-known economic determinants. In this paper, we view migration from a broader human security perspective and analyze the determinants of regular and irregular migration flows from Africa to Europe for the period 1990-2014. Our results show that, in addition to economic determinants, a combination of push and pull factors influence the migration decisions of individuals. In particular, rising political persecution, ethnic cleansing, human rights violations, political instability and civil conflicts in African source countries are all significantly associated with increased migration flows into European destination countries. Therefore, our results underscore the need for the EU and European countries to collaborate with the source countries, not only in terms of supporting economic development in the source countries, but also in promoting human security: human rights, democracy, peace and social stability.
    Keywords: international migration,asylum seeker,refugee crisis,human security,Poisson Pseudo-Maximum Likelihood
    JEL: F22 O15
    Date: 2017
  13. By: Mika, Alina; Zumer, Tina
    Abstract: We study the relationship between debt and growth in EU countries in the years 1995-2015. We investigate the debt-growth nexus in two alternative empirical set-ups: the traditional cross-county panel regressions and mean group estimations. We find evidence of a positive long-run relationship between private sector indebtedness and economic growth, and a negative relationship between public debt and long-run growth across EU countries. However, the more immediate impact of private sector debt on growth is found to be negative, and positive for the public sector debt. We find no conclusive evidence for a common debt threshold within EU countries, neither for the private nor for the public sector, but some indication of a non-linear effect of household debt. JEL Classification: O47, N14, H60
    Keywords: cross-sectional dependence, debt, European Union countries, panel, threshold
    Date: 2017–12
  14. By: Koetter, Michael; Krause, Thomas; Tonzer, Lena
    Abstract: To safeguard financial stability and harmonise regulation, the European Commission substantially reformed banking supervision, resolution, and deposit insurance via EU directives. But most countries delay the transposition of these directives. We ask if transposition delays result from strategic considerations of governments conditional on the state of their financial, regulatory, and political systems? Supervisors might try to protect national banking systems and local politicians maybe reluctant to surrender national sovereignty to deal with failed banks. Alternatively, intricate financial regulation might require more implementation time in large and complex financial and political systems. We therefore collect data on the transposition delays of the three Banking Union directives and investigate observed delay variation across member states. Our correlation analyses suggest that existing regulatory and institutional frameworks, rather than banking market structure or political factors, matter for transposition delays.
    Keywords: single rulebook,political economy,transposition delays
    JEL: C41 F30 F55 G15 G18
    Date: 2017
  15. By: Harald Oberhofer (WIFO); Michael Pfaffermayr (WIFO)
    Abstract: This paper proposes a new panel data structural gravity approach for estimating the trade and welfare effects of Brexit. The suggested Constrained Poisson Pseudo Maximum Likelihood Estimator exhibits some useful properties for trade policy analysis and allows to obtain estimates and confidence intervals which are consistent with structural trade theory. Assuming different counterfactual post-Brexit scenarios, our main findings suggest that UK's exports of goods to the EU are likely to decline within a range between 7.2 percent and 45.7 percent (EU's exports to UK by 5.9 percent to 38.2 percent) six years after the Brexit has taken place. For the UK, the negative trade effects are only partially offset by an increase in domestic goods trade and trade with third countries, inducing a decline in UK's real income between 1.4 percent and 5.7 percent under the hard Brexit scenario. The estimated welfare effects for the EU are negligible in magnitude and statistically not different from zero.
    Keywords: Constrained Poisson Pseudo Maximum Likelihood Estimation, Panel Data, International Trade, Structural Gravity Estimation, Trade Policy, Brexit
    Date: 2017–12–19
  16. By: Götz, Martin; Krahnen, Jan Pieter; Tröger, Tobias
    Abstract: The publication of the Liikanen Group's final report in October 2012 was surrounded by high expectations regarding the implementation of the reform plans through the proposed measures that reacted to the financial and sovereign debt crises. The recommendations mainly focused on introducing a mild version of banking separation and the creation of the preconditions for bail-in measures. In this article, we present an overview of the regulatory reforms, to which the financial sector has been subject over the past years in accordance with the concepts laid out in the Liikanen Report. It becomes clear from our assessment that more specific steps have yet to be taken before the agenda is accomplished. In particular, bail-in rules must be implemented more consistently. Beyond the question of the required minimum, the authors develop the notion of a maximum amount of liabilities subject to bail-in. The combination of both components leads to a three-layer structure of bank capital: a bail-in tranche, a deposit-insured bailout tranche, and an intermediate run-endangered mezzanine tranche. The size and treatment of the latter must be put to a political debate that weighs the costs and benefits of a further increase in financial stability beyond that achieved through loss-bearing of the bail-in tranche.
    Keywords: financial stability,banking separation,prohibition of proprietary trading,banking and treasury functions,bail-in,MREL,TLAC
    JEL: G18 G21 G28 K22 K23
    Date: 2017

This nep-eec issue is ©2018 by Giuseppe Marotta. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.