nep-eec New Economics Papers
on European Economics
Issue of 2018‒02‒12
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Portugal and the Euro By António Mendonça
  2. Has the Grexit news affected euro area financial markets? By Wildmer, Gregori; Agnese, Sacchi
  3. Some Unpleasant Euro Arithmetic By Guillaume Gaulier; Vincent Vicard
  4. Institutional diversity in the Euro area : Any evidence of convergence? By Pérez-Moreno, Salvador; Bárcena-Martín, Elena; Ritzen, Jo
  5. Is there a trade-off between free capital mobility, financial stability and fiscal policy flexibility in the EMU? By Canale, Rosaria Rita; de Grauwe, Paul; Foresti, Pasquale; Napolitano, Oreste
  6. A short-term forecasting model for the Spanish economy: GDP and its demand components By Ana Arencibia Pareja; Ana Gómez Loscos; Mercedes de Luis López; Gabriel Pérez Quirós
  7. Economic integration, foreign investment and international trade: the effects of membership of the European Union By Bruno, Randolph Luca; Campos, Nauro; Estrin, Saul; Tian, Meng
  8. An Empirical Analysis of Macroeconomic Resilience: The Case of the Great Recession in the European Union By Jan Bruha; Oxana Babecka Kucharcukova
  9. Credit shocks and the European labour market By Katalin Bodnár; Ludmila Fadejeva; Marco Hoeberichts; Mario Izquierdo Peinado; Christophe Jadeau; Eliana Viviano
  10. Inequality and Structural Reforms: Methodological Concerns and Lessons from Policy By Caterina Astarita; Gaetano D'Adamo
  11. NAWRU Estimation Using StructuralLabour Market Indicators By Atanas Hristov; Christophe Planas; Werner Roeger; Alessandro Rossi
  12. The Recent Reform of the Labour Market in Italy: A Review By Dino Pinelli; Roberta Torre; Lucianajulia Pace; Laura Cassio; Alfonso Arpaia
  13. Evaluating Medium Term Forecasting Methods and their Implications for EU Output Gap Calculations By Kieran Mc Morrow; Werner Roeger; Valerie Vandermeulen
  14. R&D tax credits and their macroeconomic impact in the EU: an assessment using QUEST III By Miguel Sanchez-Martinez; Cristiana Benedetti-Fasil; Peder Christensen; Nicolas Robledo-Bottcher
  15. The peculiar first semester of 2012 By Antonio S. Pinto Barbosa; Luis Catela Nunes
  16. GDP-linked Bonds: Some Simulations on EU Countries By Nicolas Carnot; Stéphanie Pamies Sumner

  1. By: António Mendonça
    Abstract: This paper is divided in two parts. In the first part, we present some data of the Portuguese economy aiming to capture some of its main long trends and the way it reacts to the introduction of the single currency in Europe. Since Portugal follow a similar path with Spain in what concerns the European economic integration process, we developed a comparative analysis between the two Iberian countries trying to capture some dynamics that can aid to understand the different ways how the two economies reacted to the introduction of the euro and, in this phase of the economic integration in Europe, how they suffered the 2007-2008 international crisis and reacted to its effects. To evaluate and compare the two countries paths we use some fundamental macroeconomic indicators as, output and employment, investment, external accounts, budget balances and government debts. The comparison with Europe's average economic performance is also present, trying to understand which country follow a more “European path”. In the second part, we concentrate on the euro system crisis trying to give some contributes to the ongoing discussion about the role and effectiveness of the euro as an internal adjustment variable. Not only in terms of the pre-creation of the better conditions for the European economy to respond to cyclical and structural crisis processes, but also in terms of dealing with the developments of the real crisis process that explode in Europe in 2007-2008 and gave origin to what was called the “sovereign debt crisis” that deeply harmed the most week economies, like Portugal but also like Spain. In particular, we discuss the issue of the effectiveness versus the exhaustion of monetary policy followed by the ECB in response to the Eurozone effects of the global economic and financial crisis.
    Keywords: Portugal, Spain, Euro, Financial Crisis, Unconventional Monetary Policy.
    JEL: E50 E52
    Date: 2018–02
  2. By: Wildmer, Gregori (European Commission – JRC); Agnese, Sacchi (Sapienza University of Rome)
    Abstract: This paper investigates whether rumours about Greek exit from the euro area have spilled over into other European countries’ sovereign bond yields. Our empirical analysis is based on more than 64,000 daily news items on Grexit between December 2014 and October 2015. We build a Grexit intensity index based on the daily change of Grexit news items to capture policy uncertainty about the euro area break-up. Our results suggest that higher intensity of Grexit news drives up government bond yields in peripheral countries (Italy, Portugal, and Spain, excluding Ireland), but that there are no effects on core countries. The asymmetric reaction to Grexit news seems to support a more general ‘market-based fiscal disciplining’ mechanism at work in monetary unions.
    Keywords: Grexit; financial markets; government bond; news; euro area; GARCH
    JEL: E43 E62 G12 G14
    Date: 2017–12
  3. By: Guillaume Gaulier; Vincent Vicard
    Abstract: Current estimates of misalignments in real effective exchange rates show that euro area imbalances are still large: Germany exhibits a 20 percentage point undervaluation compared to the rest of the euro area (EA). Within a monetary union, rebalancing requires price adjustments through differentials in inflation rates. The rebalancing process therefore involves a 2 percentage point higher inflation in Germany than in the rest of the EA over a decade, or a 1 pp over two decades. It also requires above 2% inflation in surplus countries to meet the 2% ECB inflation target. At the current pace, rebalancing is a 20 year process and requires sustained very low inflation rates in the rest of the euro area.
    Keywords: Current account imbalances;Euro area;Exchange rates misalignments
    JEL: E31 F32
    Date: 2018–01
  4. By: Pérez-Moreno, Salvador (University of Malaga); Bárcena-Martín, Elena (University of Malaga); Ritzen, Jo (UNU-MERIT, Maastricht University)
    Abstract: The institutional characteristics of the 19 Euro countries, such as Government efficiency or undue influence or corporate ethics, have diverged in the period 2006-2015. This endangers the sustainability of the EMU, as institutional characteristics are an important element of competitiveness. We find that the overall inequality in the state of institutions across the EMU, as measured by the Gini coefficient, increased. The institutional changes across Euro area countries are linked both to the differences in the intensity of the financial and economic crisis (likely to have a two-way causality) as well as the policy responses in terms of fiscal consolidation applied. The empirical findings tend to support the call for structural reforms enhancing institutional quality in order to shorten the institutional gap between 'core' and 'periphery' Euro area countries.
    Keywords: institutions, convergence, beta-convergence, inequality, Euro area, competitiveness
    JEL: O43 O47 O52
    Date: 2017–10–04
  5. By: Canale, Rosaria Rita; de Grauwe, Paul; Foresti, Pasquale; Napolitano, Oreste
    Abstract: The recent dynamics characterizing the Eurozone economy suggest the existence of a new policy trilemma faced by its member countries. According to this policy trilemma, there is a trade-off between free capital mobility, financial stability and fiscal policy flexibility. In this paper, we analyze the foundations of such a trade-off and, based on the data for 11 Eurozone countries, present an empirical investigation on the existence of the trilemma. The results highlight the existence of the trade-off, with some differences between member countries. The existence of this trilemma in the Eurozone provides arguments for implementing centralized financial supervision together with fiscal and monetary reforms that should strengthen the currency union.
    Keywords: EMU; policy trilemma; Eurozone; free capital mobility; fiscal policy; financial stability; financial crisis
    JEL: C21 C23 E61 F41
    Date: 2018–02–01
  6. By: Ana Arencibia Pareja (Banco de España); Ana Gómez Loscos (Banco de España); Mercedes de Luis López (Banco de España); Gabriel Pérez Quirós (Banco de España)
    Abstract: This document describes the key aspects of the extended and revised version of Spain-STING (Spain, Short-Term Indicator of Growth), which is a tool used by the Banco de España for the short-term forecasting of the Spanish economy’s GDP and its demand components. Drawing on a broad set of indicators, several dynamic factor models are estimated. These models allow the forecasting of GDP, private consumption, public expenditure, investment in capital goods, construction investment, exports and imports in a consistent way. We assess the predictive power of the GDP and its demand components for the period 2005- 2017. With regard to the GDP forecast, we find a slight improvement on the previous version of Spain-STING. As for the demand components, we show that our proposal is better than other possible time series models.
    Keywords: business cycles, spanish economy, dynamic factor models.
    JEL: E32 C22 E27
    Date: 2018–02
  7. By: Bruno, Randolph Luca; Campos, Nauro; Estrin, Saul; Tian, Meng
    Abstract: This paper investigates the importance of economic integration in simultaneously fostering foreign direct investment (FDI) and international trade. These have rarely been analyzed jointly using contemporary econometric methods. We estimate the effect of European Union (EU) membership on FDI inflows and trade using annual bilateral data from 34 OECD countries over 1985–2013. We find that EU membership increases FDI inflows by on average 28%. We jointly estimate the impact of EU membership on trade and FDI and find that they are substantial, with the one on trade larger than the one on FDI, in the order of double
    Keywords: special economic integration effects; foreign direct investment; international trade; European Union; gravity model
    JEL: F17 F21 F36
    Date: 2017–11–01
  8. By: Jan Bruha; Oxana Babecka Kucharcukova
    Abstract: In this paper, we analyse macroeconomic developments in European economies since the Great Recession. We present evidence that macroeconomic developments in the EU countries can be classified into latent classes. Countries in a given class exhibit a similar pattern of economic and labour market developments during and after the crisis. We then present evidence that the latent classes of countries differ in terms of quality of institutions and regulation. Based on this, we conclude that quality of institutions and regulation are crucial for the resilience of countries to shocks. The most important country characteristics associated with a quick recovery after the initial shock are low protection of temporary contracts, political stability, regulatory quality and pre-crisis fiscal space. On the other hand, other types of employment protection and generosity of unemployment benefits seem to not influence resilience.
    Keywords: Great Recession, institutions, regulation, resilience
    JEL: C14 E02 E65
    Date: 2017–12
  9. By: Katalin Bodnár (Central Bank of Hungary and European Central); Ludmila Fadejeva (LatvijaS Banka); Marco Hoeberichts (De Nederlandsche Bank); Mario Izquierdo Peinado (Banco de España); Christophe Jadeau (Banque de France); Eliana Viviano (Bank of Italy)
    Abstract: More than five years after the start of the Sovereign debt crisis in Europe, its impact on labour market outcomes is not clear. This paper aims to fill this gap. We use qualitative firm-level data for 24 European countries, collected within the Wage Dynamics Network (WDN) of the ESCB. We first derive a set of indices measuring difficulties in accessing the credit market for the period 2010-13. Second, we provide a description of the relationship between credit difficulties and changes in labour input both along the extensive and the intensive margins as well as on wages. We find strong and significant correlation between credit difficulties and adjustments along both the extensive and the intensive margin. In the presence of credit market difficulties, firms cut wages by reducing the variable part of wages. This evidence suggests that credit shocks can affect not only the real economy, but also nominal variables.
    Keywords: credit difficulties, labour input adjustment, intensive margin
    JEL: D53 E24 E44 G31 G32
    Date: 2017–12
  10. By: Caterina Astarita; Gaetano D'Adamo
    Abstract: Income inequality became more and more prominent in the academic and policy debate in recent years and particularly since the economic downturn. Inequality, indeed, may have long-term effects on (potential) growth and macroeconomic stability, reinforcing existing inequalities and reducing opportunities, skills development and social and occupational mobility. Structural reforms, i.e. labour and product market reforms and tax-benefit systems reforms, are one of the main tools available for public interventions aimed at boosting growth while not being detrimental to equality. In this context, DG ECFIN of the European Commission organised two workshops held on the 16th of May and the 19th of June 2017 aimed at enriching the existing knowledge of the relationship between structural reforms and inequality and taking place at a time where Europe discusses the social dimension, notably the European Pillar of Social Rights as proposed by the Commission and proclaimed at the Social Summit in Gothenburg. The first workshop focused on the methodological issues whilst the second one focused on policy evidence of the impact of structural reforms on inequality. These proceedings take stock of the discussions held in the workshops, in order to contribute to the growing debate on how to better take into account distributional effects when formulating policy advice.
    JEL: C2 C3 C53 C61 C68 D1 D2 D3 D4 E6 H2 H3
    Date: 2017–12
  11. By: Atanas Hristov; Christophe Planas; Werner Roeger; Alessandro Rossi
    Abstract: The use of unobserved component models to estimate the NAWRU has been strongly criticized due to some excessive pro-cyclicality at the sample end, especially in the neighbourhood of turning points. To address this criticism, the European Commission now uses a model-based approach where the information set is augmented with a structural indicator of the labour market to which the NAWRU is supposed to converge in a certain number of years. The resulting NAWRU estimates mixes information about the business cycle and the labour market characteristics. The application to the EU Member States shows that besides moderating pro-cyclicality, this approach also reduces the first revision to the one- and two-year-ahead forecasts of the NAWRU in four-fifth of the countries considered.
    JEL: E31 E32 J0 O4
    Date: 2017–10
  12. By: Dino Pinelli; Roberta Torre; Lucianajulia Pace; Laura Cassio; Alfonso Arpaia
    Abstract: Italy undertook a major reform of the labour market in 2014-2015 (Jobs Act). This paper provides a compendium of the key changes introduced. The analysis shows that the Jobs Act has contributed to bringing Italian labour market institutions more closely into line with international benchmarks and with the principles of flexicurity. Employment protection legislation for permanent contracts has been brought into line with that of major European partners, although it remains more restrictive than the OECD average. The focus of passive labour market policies has shifted from job to worker protection, which will facilitate the reallocation of workers to more productive occupations. The designed strengthening of active labour market policies would improve job matching and reduce structural unemployment, but thorough implementation remains the key factor for achieving this critical goal. Extending the new rules on employment protection legislation also to existing permanent contracts and the strengthening of the collective bargaining framework could be considered as a follow up to the recent reform. Flanking measures to open product markets and reform the public sector are crucial to deliver the entire potential impact of the reform.
    JEL: J08 E24
    Date: 2017–12
  13. By: Kieran Mc Morrow; Werner Roeger; Valerie Vandermeulen
    Abstract: This paper sheds light on two specific, but interlinked, questions – firstly, how do the EU's, medium term actual GDP growth rate forecasts compare, in terms of accuracy and biasedness, with those of the EU's Member States, in their annual Stability and Convergence Programme (SCP) updates; and secondly, should medium term forecasts be allowed to influence the short run output gap and structural balance calculations used in the EU’s fiscal surveillance procedures. Regarding the first question, the paper concludes that the EU's medium term forecasts are equally as good, and arguably better, than those of the SCP's both with respect to accuracy and biasedness. Regarding the second question, due to the relatively rapid loss in forecast accuracy as the time horizon lengthens; the paper suggests that using more forecast information should be avoided in the output gap and structural balance calculations. Extending the forecast horizon to be used in the output gap calculations could exacerbate an existing optimistic bias with respect to the supply side health of the EU’s economy, thereby enlarging the risk of procyclicality problems, especially in the upswing phase of cycles, where most of the large fiscal policy errors tend to occur.
    JEL: C10 E60 O10
    Date: 2017–10
  14. By: Miguel Sanchez-Martinez (European Commission - JRC); Cristiana Benedetti-Fasil (European Commission – JRC); Peder Christensen (European Commission - JRC); Nicolas Robledo-Bottcher (European Commission - JRC)
    Abstract: R&D tax credits are currently used by 25 Member States as a means to stimulate R&D investment and, ultimately, economic growth and employment. This paper is a first attempt to provide an in-depth analysis of the structural economic factors that, other things equal, affect or condition the potential macroeconomic impacts of expanding (or start implementing) R&D tax credit schemes. The analysis is based on the European Commission's QUEST III semi-endogenous growth model. Our main conclusion is that, while the short and medium-term impacts of increased R&D tax credits on Member States' GDP and other macroeconomic aggregates are overall significantly positive, there remains space to substantially improve the cost-effectiveness of these policies.
    Keywords: R&D tax credits, innovation, economic growth, macroeconomic modelling
    Date: 2017–12
  15. By: Antonio S. Pinto Barbosa; Luis Catela Nunes
    Abstract: Portugal was subjected in 2011 to one of the most stringent austerity packages implemented during the crisis, a package known as the troika program. The interpretation of the effects of this program gave space to a vivid confrontation between two opposing views. The Keynesian view stressed the contractionary effect on the economy and is well documented in the data that show a deterioration in the basic macro indicators. We believe, however, that the austerity package might have simultaneously provided an important and less often acknowledged ingredient to the recovery of the economy, namely an increase in the investors' confidence as expressed by a sustained decline in the yields in financial markets. This German view seems, therefore and to some extent, also present in the portuguese macro adjustment. JEL codes:
    Date: 2018
  16. By: Nicolas Carnot; Stéphanie Pamies Sumner
    Abstract: The economic and fiscal outlook has recently improved for European economies, raising the odds that high public debts inherited from the crisis will be gradually wound down in line with EU fiscal rules. This will however take time and future debt trajectories remain exposed to significant uncertainties. In this context, this paper explores some implications of GDP-linked bonds (GLBs), an instrument for national debt management that has recently sparked growing interest. Based on the data and tools of the Commission Debt Sustainability Monitor, our results suggest significant potential benefits from GLBs in reducing debt uncertainties for all European economies. These benefits would be notably large in countries characterised by medium-to-high debt, high macroeconomic volatility and limited alternative tools to smoothen shocks. A risk premium would not eliminate the debt-stabilisation benefits brought by GLBs. The fall in the probability of explosive debt paths could also reduce the premium demanded by investors on conventional bonds in high-debt countries. The issuance of a fraction of GLBs can however be no substitute for pursuing sound economic and budgetary policies curbing national debts.
    JEL: H63 F34 E62
    Date: 2017–12

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