nep-eec New Economics Papers
on European Economics
Issue of 2018‒05‒14
fifteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Private and public risk sharing in the euro area By Cimadomo, Jacopo; Furtuna, Oana; Giuliodori, Massimo
  2. Do Unit Labor Costs Matter? A Decomposition Exercise on European Data By Sophie Piton
  3. Structural change in times of increasing openness: assessing path dependency in European economic integration By Claudius Graebner; Philipp Heimberger; Jakob Kapeller; Bernhard Schuetz
  4. Symmetry and Convergence in Monetary Unions By Nauro F. Campos; Corrado Macchiarelli
  5. The impact of the ECB asset purchases on the European bond market structure: Granular evidence on ownership concentration By Martijn Boermans; Viacheslav Keshkov
  6. Credit shocks and the European labour market By Katalin Bodnár; Ludmila Fadejeva; Marco Hoeberichts; Mario Izquierdo Peinado; Christophe Jadeau; Eliana Viviano
  7. The happy few: cross-country evidence of the euro effect on trade By Salvador Gil-Pareja; Rafael Llorca-Vivero; José Antonio Martínez-Serrano
  8. The Impact of Brexit on the British Pound/Euro Exchange rate By Arthur Korus; Kaan Celebi
  9. Why an EU Referendum? Why in 2016? By Becker, Sascha O.; Fetzer, Thiemo
  10. Does Monetary Policy Influence Banks' Perception of Risks? By Simona Malovana; Dominika Kolcunova; Vaclav Broz
  11. On Barriers to Technology Adoption, Appropriate Technology and Deep Integration (with implications for the European Union) By Mercenier, Jean; Voyvoda, Ebru
  12. Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis By Sebnem Kalemli-Ozcan; Luc Laeven; David Moreno
  13. Why Did EU Banks Change Their Business Models in Last Years and What Was the Impact of Net Fee and Commission Income on Their Performance? By Karolina Vozkova
  14. Legal tender in the euro area By Siekmann, Helmut
  15. Sovereign Money Reforms and Welfare By Philippe Bacchetta; Elena Perazzi

  1. By: Cimadomo, Jacopo; Furtuna, Oana; Giuliodori, Massimo
    Abstract: This paper investigates the contribution of private and public channels for consumption risk sharing in the EMU over the period 1999-2015. In particular, we explore the role of financial integration versus international financial assistance for private consumption smoothing in this set of countries. In addition, we present a time-varying test which allows estimating how risk sharing has evolved since the start of the EMU, and in particular during the recent crisis. Our results suggest that, whereas in the early years of the EMU only about 40% of country-specific output shocks were smoothed, in the aftermath of the euro zone’s sovereign debt crisis about 65% of these shocks were absorbed, therefore reducing consumption growth differentials across countries. This progressive improvement of the shock-absorption capacity is due to a higher financial integration, but also to the activation of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) channelling official loans to distressed euro zone economies. We also show that cross-border holdings of equities and debt seem to be more effective than cross-border bank loans in isolating households from country-specific shocks, therefore contributing to consumption smoothing. JEL Classification: C23, E62, G11, G15
    Keywords: financial integration, international financial assistance, risk sharing, time-variation
    Date: 2018–05
  2. By: Sophie Piton (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    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 labour 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 labour 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 labour costs in 12 countries of the Euro area from 1995 to 2014. Results show that trade and financial integration are significant drivers of unit labour costs divergence. Before the global financial crisis, in Greece and Portugal for example, trade and financial integration explain up to 30% of the increase in unit labour costs relative to core countries. On the contrary, distortionary public spending plays a minor role. These results suggest that, in peripheral economies, increasing unit labour costs reflect more the process of real convergence than fiscal profligacy.
    Keywords: economic integration,productivity,structural change,non-tradable sector,macroeconomic imbalances,capital flows,growth accounting,Euro area
    Date: 2018–05
  3. By: Claudius Graebner (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria); Philipp Heimberger (Vienna Institute for International Economic Studies); Jakob Kapeller (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria); Bernhard Schuetz (Department of Economics, Johannes Kepler University Linz)
    Abstract: This paper analyzes the dynamics of structural polarization and macroeconomic conver- gence vs. divergence in the context of European integration, where the latter is understood primarily as an increase in economic and financial openness. In the process of estimating the dynamic effects of openness shocks on 26 EU countries, we develop a taxonomy of Euro- pean economies that consists of core, periphery, financialized and Eastern European catch-up economies. As these four country groups have responded in a distinct way to the openness shocks imposed by European integration, we argue that the latter should be seen as an evolutionary process that has given rise to different path-dependent developmental trajectories. These trajectories relate to the sectoral development of European economies and the evolution of their technological capabilities. We propose a set of interrelated policy measures to counteract structural polarization and to promote macroeconomic convergence in Europe.
    Keywords: structural change, economic integration, european union
    Date: 2018–02
  4. By: Nauro F. Campos; Corrado Macchiarelli
    Abstract: This paper has three main objectives, namely to (a) propose a new framework that can support placing countries along a core-periphery continuum (beyond the more common binary treatment as either core or periphery), (b) to construct a continuous dynamic theory-based measure (the first, to the best of our knowledge) illustrating the use of this framework for a set of European countries using yearly data from 1960 to 2015, and (c) provide a first preliminary assessment, based on endogenous Optimal Currency Area (OCA) theory, of the main potential explanatory factors of the dynamics of this measure over time and across countries. Our main finding is that this new measure allows us to identify sets of countries on the basis of not only its level but also in terms of its dynamic behaviour. Using the Phillips-Sul procedure, we show the emergence a newer set of core countries (composed by Austria, Belgium, Germany, France, Italy and Netherlands), a mixed set of countries (namely Denmark, Sweden, Greece, Spain and the UK), and a set of deep-rooted periphery countries (Finland, Ireland, Norway, Portugal, and Switzerland). There are valuable lessons from the dynamics of this measure. It increases for core countries (which confirms endogenous OCA predictions), remains worrisomely constant for a periphery, and varies substantially for the intermediate set of countries. Spain (Sweden and Greece) becomes consistently more (less) core over time, Denmark’s remains constant and the UK moves in and out of the core over time. Our panel estimates on a specification suggested by endogenous OCA theory imply that euro membership and more flexible product market regulations (or trade openness) make countries more likely to be in the core.
    Keywords: Symmetry, Convergence, Euro, EMU, European Union, Core-Periphery, SVAR
    JEL: E3 F4
    Date: 2018–03
  5. By: Martijn Boermans; Viacheslav Keshkov
    Abstract: This study investigates the impact of the Eurosystem's Public Sector Purchase Programme (PSPP) on the micro market structure of sovereign bonds. In particular, we analyze how the PSPP affected the ownership concentration of PSPP-eligible bonds. In line with portfolio rebalancing models we hypothesize that the entry of relatively new and dominant investor will unevenly displace certain investors who are willing to rebalance their portfolios, thus reducing the dispersion of holdings in the market. Using detailed security-by-security holdings data, we estimate a difference-in-differences model with a matched control group. We find that the announcement of the PSPP did not affect the ownership concentration of sovereign bonds. However, during the implementation phase the asset purchases increased the ownership concentration of the eligible sovereign bonds relative to the control group, potentially due to asymmetric portfolio rebalancing. We argue that quantitative easing had market distortionary effects and our results may explain the growing concerns for bond scarcity, market liquidity dry-ups and price spikes in the European sovereign bond market.
    Keywords: quantitative easing; portfolio rebalancing; market concentration; ECB; PSPP; securities holdings statistics; unconventional monetary policy
    JEL: G11 E52 E58
    Date: 2018–04
  6. By: Katalin Bodnár; Ludmila Fadejeva; Marco Hoeberichts; Mario Izquierdo Peinado; Christophe Jadeau; Eliana Viviano
    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: 2018–04
  7. By: Salvador Gil-Pareja (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).); Rafael Llorca-Vivero (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).); José Antonio Martínez-Serrano (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).)
    Abstract: This paper investigates the EMU effect on trade by member country and direction of trade flows. The empirical analysis uses a recent econometric development, which allows us the estimation of gravity equations dealing with heteroskedastic residuals and zero bilateral trade flows on a large span of data (across both countries and periods). Our results, robust to using alternative samples and EU time-trends, suggest that, while there is no evidence of an aggregate EMU effect, some few countries have benefited from sharing the euro. In particular, for Spain and Portugal, this is the case for both exports and import flows. By contrast, the EMU has had a negative effect on import flows in the Netherlands and Malta, while we find a negative impact for exports from Greece.
    Keywords: EMU, exports, imports, HDFE PPML, gravity equation.
    JEL: F14
    Date: 2018–03
  8. By: Arthur Korus (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)); Kaan Celebi (Frankfurt University of Applied Sciences)
    Abstract: Using event-study techniques we investigate the impact of Brexit-related events on the spot exchange rate of the British pound against the euro. We want to find out whether Brexit-related news, including the Brexit referendum itself, has an impact on the Pound sterling/Euro exchange rate. By splitting our Brexit-related events into ‘good’ Brexit news and ‘bad’ Brexit news, we find an impact of Brexit news on the British pound/Euro exchange rate. Bad Brexit news is associated with a depreciation of the British pound against the euro whereas ‘good’ Brexit news appreciates the Pound sterling against the euro. Furthermore, our empirical results suggest that market participants display a delayed reaction to bad and good Brexit news, respectively. Additionally, it seems that the impact of bad Brexit news on the spot exchange rate of the British pound against the euro is more persistent than the effect of good Brexit news.
    Keywords: spot exchange rate, Brexit, event-study
    JEL: C32 F31 G14
    Date: 2018–04
  9. By: Becker, Sascha O. (University of Warwick); Fetzer, Thiemo (University of Warwick)
    Abstract: The outcome of the UK’s Brexit Referendum has been blamed on political factors, such as concerns about sovereignty, and economic factors such as migration, and trade integration. Analyses of the cross-sectional referendum voting pattern cannot explain how anti-EU sentiment built up over time. Since UKIP votes in the 2014 EU Parliament elections are the single most important predictor of the Vote Leave share, understanding the rise of UKIP might help to explain the role of political and economic factors in the build-up of Brexit. This paper presents new stylized facts suggesting that UKIP votes in local, national and European elections picked up dramatically in areas with weak socio-economic fundamentals, but only after 2010, at the expense of the Conservatives, and partly also Labour. The timing suggests that the Government’s austerity measures might have been a crucial trigger that helped to convert economic grievances into UKIP votes, putting increasing pressure on the Conservatives to hold the EU Referendum.
    Keywords: : Political Economy, Austerity, Globalization, Voting, EU JEL Classification: R23, D72, N44, Z13
    Date: 2018
  10. By: Simona Malovana (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Dominika Kolcunova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Vaclav Broz (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: This paper studies the extent to which monetary policy may affect banks' perception of credit risk and the way banks measure risk under the internal ratings-based approach. Specifically, we analyze the effect of different monetary policy indicators on banks' risk weights for credit risk. We present robust evidence of the existence of the risk-taking channel in the Czech Republic. Further, we show that the recent prolonged period of accommodative monetary policy has been instrumental in establishing this relationship. Finally, we obtain comparable results by extending the analysis to cover all the Visegrad Four countries. The presented findings have important implications for the prudential authority, which should be aware of the possible side-effects of monetary policy on how banks measure risk.
    Keywords: Banks, financial stability, internal ratings-based approach, risk-taking channel
    JEL: E52 E58 G21 G28
    Date: 2018–01
  11. By: Mercenier, Jean; Voyvoda, Ebru
    Abstract: Based on two strands of research, namely ‘barriers to technology adoption’ and ‘appropriate technology’, we propose a formal reappraisal of ‘deep integration’, a broad concept often used in trade policy discussions. We then evaluate the 2004-7 EU enlargement wave utilizing this operational reappraisal. More specifically, we first estimate, using 2007 data, total labor productivity (TLP) in the 27 EU member states, and show that in all but a few sectors, new member states clearly stand below the lower envelope technology frontier of the older members in their use of skilled and unskilled labor. We interpret this as being the result of past barriers to technology adoption that are likely to be removed by the integration process into the EU, with these new counties’ TLP shifting to the incumbent members’ lower envelope. We then explore the potential effects on all 27 EU member states of this ‘deep integration’ experiment using a calibrated intertemporal multisectoral general equilibrium model. Our main finding is that, for most parameter configurations, workers’ welfare in incumbent member countries is not negatively impacted despite the rather drastic improvement in competitiveness experienced by new members.
    Keywords: Barriers to technology adoption, appropriate technology, technological upgrading, deep integration, European integration, calibrated general equilibrium
    JEL: D58 E23 F12 J31 O14 R13
    Date: 2018–04–25
  12. By: Sebnem Kalemli-Ozcan; Luc Laeven; David Moreno
    Abstract: We quantify the role of financial factors that have contributed to sluggish investment in Europe in the aftermath of the 2008–2009 crisis. Using a big data approach, we match the firms to their banks based on banking relationships in 8 European countries over time, obtaining over 2 million observations. We document four stylized facts. First, the decline in investment in the aftermath of the crisis can be linked to higher leverage, increased debt service, and having a relationship with a weak bank—once we condition on aggregate demand shocks. Second, the relation between leverage and investment depends on the maturity structure of debt: firms with a higher share of long-term debt have higher investment rates relative to firms with a lower share of long-term debt since the rollover risk for the former is lower and the latter is higher. Third, the negative effect of leverage is more pronounced when firms are linked to weak banks, i.e., banks with high exposure to sovereign risk. Firms with higher shares of short-term debt decrease investment more relative to firms with lower shares of short-term debt even both set of firms linked to weak banks. This result suggests that loan evergreening by weak banks played a limited role in increasing investment. Fourth, the direct negative effect of weak banks on the average firm’s investment disappears once demand shocks are controlled for, although the differential effects with respect to leverage and the maturity of debt remain.
    JEL: E22 E32 E44 F34 F36 G32
    Date: 2018–04
  13. By: Karolina Vozkova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: This paper contributes to the current literature dealing with the drivers of bank business model changes by analyzing the relationship between fee and commission income share and banks’ performance in terms of profitability, risk and risk-adjusted profitability in the European Union. We apply System Generalized Method of Moments on a unique data set of 329 EU banks in 2005-2014 period. We did not find any diversification benefits by increasing the fee income share based on which we conclude that increase in fee income share observed during last years in EU banks was driven mainly by external factors like increased competition rather than by internal reasons. As expected higher reliance on equity financing and better quality of provided loans enhance banks’ performance. Finally, bank business strategy and macroeconomic factors are crucial in the determination of banks’ performance.
    Keywords: bank, fee and commission income, profitability, risk
    JEL: C23 G21 L25
    Date: 2018–02
  14. By: Siekmann, Helmut
    Abstract: With the increasing pressure to abolish cash and the moves to restrict its use, the regulation of legal tender in the primary law of the EU has gained enhanced attention. The core provision is Article 128 TFEU which contains the rules on the issue of banknotes and coins. The author analyzes the terms currency, money, cash, and legal tender in a legal context.
    Date: 2018
  15. By: Philippe Bacchetta; Elena Perazzi
    Abstract: A monetary reform is submitted for vote to the Swiss people in 2018. The Sovereign Money Initiative proposes that all sight deposits should be controlled by the Swiss National Bank (SNB) and that the SNB could distribute its additional resources. While a sovereign money reform would clearly a ect the structure of the banking sector, it would also have macroeconomic implications, in particular because it transfers resources from banks to the central bank. The objective of this paper is to analyze these macroeconomic implications using a simple infinite-horizon open-economy model calibrated to the Swiss economy. While we consider several policy experiments, we find that there is a key trade-o between a reduction in distortionary labor taxes and an increase in the opportunity cost of holding money. However, in the proposed Swiss reform it is this latter cost that dominates and we find that the reform unambiguously lowers welfare.
    Date: 2018–04

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