nep-eec New Economics Papers
on European Economics
Issue of 2018‒09‒10
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. "Twenty Years of the German Euro Are More than Enough" By Joerg Bibow
  2. Macroeconomic Independence and Optimum Currency Area in the Eurozone: An Alternative Assessment By Simeon Nanovsky
  3. Is Hard Brexit Detrimental to EU Integration? Theory and Evidence By Irena Mikolajun; Jean-Marie Viaene
  4. There is an alternative: A two-tier European currency community By Scharpf, Fritz W.
  5. The unemployment impact of product and labour market regulation: Evidence from European countries By Céline Piton
  6. The Human Side of Austerity: Health Spending and Outcomes During the Greek Crisis By Roberto Perotti
  7. The Greek crisis: A story of self-reinforcing feedback mechanisms By Katarina Juselius; Sophia Dimelis
  8. Foreign Expansion, Competition and Bank Risk By Ester Faia; Sebastien Laffitte; Gianmarco Ottaviano
  9. The European Social Welfare Function Shaped on a Difference Principle: A Normative Rawlsian Approach in Favour of Fiscal Union By Klaudijo Klaser
  10. Delphic and Odyssean monetary policy shocks: Evidence from the euro-area By Filippo Ferroni
  11. The German anti-Keynes? On Walter Eucken's macroeconomics By Feld, Lars P.; Köhler, Ekkehard A.; Nientiedt, Daniel
  12. Should we care about central bank profits? By Francesco Chiacchio; Grégory Claeys; Francesco Papadia
  13. International trade under attack: what strategy for Europe? By Sébastien Jean; Philippe Martin; André Sapir

  1. By: Joerg Bibow
    Abstract: This paper reviews the performance of the euro area since the euro's launch 20 years ago. It argues that the euro crisis has exposed existential flaws in the euro regime. Intra-area divergences and the corresponding buildup of imbalances had remained unchecked prior to the crisis. As those imbalances eventually imploded, member states were found to be extremely vulnerable to systemic banking problems and abruptly deteriorating public finances. Debt legacies and high unemployment continue to plague euro crisis countries. Its huge current account surplus highlights that the euro currency union, toiling under the German euro and trying to emulate the German model, has become very vulnerable to global developments. The euro regime is flawed and dysfunctional. Europe has to overcome the German euro. Three reforms are essential to turn the euro into a viable European currency. First, divergences in competitiveness positions must be prevented in future. Second, market integration must go hand in hand with policy integration. Third, the euro is lacking a safe footing for as long as the ECB is missing a federal treasury partner. Therefore, establishing the vital treasury/central bank axis that stands at the center of power in sovereign states is essential.
    Keywords: Euro; Euro Crisis; Banking Crisis; Debt Crisis; Monetary Policy; Lender of Last Resort; Fiscal Policy
    JEL: E30 E44 E58 E61 E62 F34
    Date: 2018–08
  2. By: Simeon Nanovsky (Nazarbayev University)
    Abstract: This paper attempts to investigate the degree of macroeconomic autonomy among the 12 original members of the eurozone. We develop a new measure of macroeconomic independence based on the concept of the desired policy interest rate each country would have chosen if it had retained its own currency and independent monetary policy. If it is detached from the centrally imposed policy rate and the two behave differently, we take it as an indication that the country should be constrained by the common central bank and has low degree of macroeconomic independence (MAI).We find that the original twelve members have indeed enjoyed varying degrees of MAI. Austria, France, Germany, Italy, and Luxembourg retain highest degree of MAI while Ireland, Greece, and Spain seem to have suffered from the lowest degree of MAI. The newly proposed MAI performs well as an OCA index, if not better than existing indices. On the one hand, so called the ?core? countries show up as those that have maintained high MAI. On the one hand, the ?periphery? countries have retained low MAI in the currency union.
    Keywords: eurozone, optimum currency area, monetary independence
    JEL: F00 E40 E52
    Date: 2018–07
  3. By: Irena Mikolajun; Jean-Marie Viaene
    Abstract: In the struggle between the forces of free trade and the restrictive influence of insularism the latter recently seems to have the upper hand. This is illustrated by the referendum of June 23, 2016 where the United Kingdom (UK) voted to leave the European Union (EU). In this paper we evaluate the consequences of this event for EU integration. In particular, we analyze how the extent of EU economic integration would change once the UK leaves the Union. To that end we develop an integration benchmark that consists of the steady state production equilibrium characterized by arbitrage pricing and perfect factor mobility. We apply metrics to measure the distance between this benchmark and the data. We find that the integration in the EU is incomplete and its trend is non-linear while Brexit would not bring negative consequences to its development..
    Keywords: Brexit, regional integration, Euclidean distance, factor mobility, arbitrage pricing, reflected geometric Brownian motion
    JEL: E13 F15 F21 F40 O11 O53 O54
    Date: 2018
  4. By: Scharpf, Fritz W.
    Abstract: The performance of EMU member economies is shaped by different and structurally entrenched "growth models" whose success depends on specific macro-regimes - restrictive for export-led growth, accommodating for demand-led growth. These two types of models cannot be equally viable under a uniform macro regime, and their divergence threatens the stability of the EMU. The present attempt to enforce structural convergence in the euro¬zone appears economically ineffective and lacks democratic legitimacy on the national and the European level. Assuming that complete integration in a democratic federal state is presently unattainable, the paper presents the outline of a more flexible European Currency Community that would include a smaller and more coherent EMU and the member states of a revised "Exchange Rate Mechanism II" (ERM) whose currencies are flexibly linked to the euro. It would restore the external economic viability of autonomous domestic policy choices, and it would protect its members against speculative currency fluctuations.
    Keywords: autonomy,currency coordination,EMS,EMU,ERM,EU,legitimacy,Autonomie,EWS,EWU,Legitimität,Währungskoordination,WKM
    Date: 2018
  5. By: Céline Piton (Economics and Research Department, National Bank of Belgium and PhD candidate at the ULB)
    Abstract: This paper provides a robust estimation of the impact of both product and labour market regulations on unemployment using data for 24 European countries over the period 1998-2013. Controlling for country-fixed effects, endogeneity and various covariates, results show that product market deregulation overall reduces unemployment rate. This finding is robust to all specifications and in line with theoretical predictions. However, not all types of reforms have the same effect: deregulation of State controls and in particular involvement in business operations tends to push up the unemployment rate. Labour market deregulation, proxied by the employment protection legislation index, is detrimental to unemployment in the short run while a positive impact (i.e. a reduction of the unemployment rate) occurs only in the long run. Analysis by sub-indicators shows that reducing protection against collective dismissals helps in reducing the unemployment rate. The unemployment rate equation is also estimated for different categories of workers. While men and women are equally affected by product and labour market deregulations, workers distinguished by age and by educational attainment are affected differently. In terms of employment protection, young workers are almost twice as strongly affected as older workers. Regarding product market deregulation, highly-educated individuals are less impacted than low- and middle-educated workers.
    Keywords: unemployment, Structural reform, Product market, labour market, regulation, employment
    JEL: E24 E60 J48 J64 L51
    Date: 2018–06
  6. By: Roberto Perotti
    Abstract: The Greek crisis was the most severe in postwar Europe; its budget cuts were the deepest. Among the components of the budget, health spending was hit particularly hard, declining by more than one third in just five years. This paper has two goals: establish the facts about health inputs, outputs and outcomes during the Greek crisis, and explore the connection between budget cuts and health outcomes. Health spending and inputs were very high in Greece before the crisis: in several dimensions, even after the budget cuts were implemented health spending and inputs were still at or near the top of the European countries; in other cases they merely went back to the European average. Nevertheless, budget cuts so deep and so sudden are unlikely to merely cut into inefficiencies and overcapacities. I highlight several areas in which a comparative quantitative analysis suggests that budget cuts might have had an appreciable effects on the health of the population.
    JEL: E62 H51 I18
    Date: 2018–08
  7. By: Katarina Juselius (Department of Economics, University of Copenhagen); Sophia Dimelis (Athens University of Economics and Business)
    Abstract: While there seems to be a well established consensus about the underlying causes to the Greek crisis, less is known about internal and external transmission mechanisms that ultimately caused unemployment to increase rapidly over this period. Motivated by the structural slumps theory in Phelps (1994), the paper attempts, therefore, to uncover the dynamic mechanisms behind prices, interest rates, and external imbalances that contributed to the severity and the length of the crisis. We find that the strongly increasing real bond rate and unemployment rate together with an persistently appreciating real exchange rate and a deterioration of competitiveness in the eurozone have contributed to persistently growing structural imbalances in the Greek economy. As the lack of confidence in the Greek economy grew steadily, the scene was set for a monumental structural slump. We find strong evidence of (i) a Phillips curve relation with a non-constant natural rate being a function of relative costs and the real exchange rate; (ii) a vicious circle of strongly increasing bond rate and unemployment rate; and (iii) a relation associating confidence with the development of relative costs and the real exchange rate. Over the crisis period, all variables exhibited self-reinforcing feedback adjustment somewhere in the system except for inflation rate. Unemployment took the burden of adjustment when the bond rate sky rocketed, competitiveness deteriorated, and confidence fell.
    Keywords: Greek crisis, unemployment, CVAR analysis, structural slumps, non-constant natural rate, self-reinforcing adjustment
    JEL: C32 E24 E31 E65
  8. By: Ester Faia; Sebastien Laffitte; Gianmarco Ottaviano
    Abstract: Using a novel dataset on the 15 European banks classified as G-SIBs from 2005 to 2014, we find that the impact of foreign expansion on risk is always negative and significant for most individual and systemic risk metrics. In the case of individual metrics, we also find that foreign expansion affects risk through a competition channel as the estimated impact of openings differs between host countries that are more or less competitive than the source country. The systemic risk metrics also decline with respect to expansion, though results for the competition channel are more mixed, suggesting that systemic risk is more likely to be affected by country or business models characteristics that go beyond and above the differential intensity of competition between source and host markets. Empirical results can be rationalized through a simple model with oligopolistic/oligopsonistic banks and endogenous assets/liabilities risk.
    Keywords: banks risk-taking, systemic risk, geographical expansion, gravity, diversification, competition, regulatory arbitrage
    JEL: G21 G32 L13
    Date: 2018–08
  9. By: Klaudijo Klaser
    Abstract: Why might the European member states seek for Fiscal Union? Coordination, macro-stability purposes and provision of (European) public goods are certainly goals of paramount importance for the implementation of Fiscal Union at European level. However, there is an equally important component of moral-normative nature embodied in the constitution of any fiscal system: reallocation of resources. The core of the paper is the idea that Rawls’ social contract theory can provide some insights about the implementation of European Fiscal Union in the re-allocative perspective. The reasoning put forward in the paper shows how the current European framework can be essentially considered an appropriate object of Rawls’ theory of domestic justice since the European Union holds those two descriptive elements which are sufficient and necessary to raise redistributive issues, to apply Rawls’ pure procedural justice and then to derive a difference principle at European level: a) the mutually advantageous cooperation among its members and b) a set of formal institutions which constitute a basic structure. The European difference principle prescribes to redistribute resources in order to maximize the expectations of the most disadvantaged European citizen(s). A corollary of this conclusion is that the actual redistribution according to similar scheme is achievable by means of Fiscal Union at European level.
    Keywords: difference principle, European integration, European Union, Fiscal Union, John Rawls
    JEL: D30 E62 F55
    Date: 2018
  10. By: Filippo Ferroni (Chicago FED)
    Abstract: We use euro intraday data to identify monetary policy surprises in the euro area. We find that communication right after the Governing Council meetings convey information that moves the yield curve far out. Moreover, the nature of information revealed via this communication changed over time. Until 2013, unexpected variations in future interest rates were positively correlated with changes in market-based measure of inflation expectations consistent with news on future macroeconomic conditions. That negative correlation disappeared roughly when forward guidance on future rates started to be given by the Governing Council. We use sign restrictions on the joint reaction of expected interest rates and inflation rates to the announcements to disentangle two types of monetary policy surprises: one about the future state of the economy (Delphic); the other about the future stance of the monetary authority (Odyssean). We find that a surprise that lowers future interest rates does not engineer a boom. By contrast, a surprise that lowers future interest rates because it signals future accommodation does.
    Date: 2018
  11. By: Feld, Lars P.; Köhler, Ekkehard A.; Nientiedt, Daniel
    Abstract: Germany's approach to solving the Eurozone crisis is supposedly based on the ideas of Walter Eucken (1891-1950), the founder of ordoliberalism. In this and other contexts, Eucken's work has been described as being in direct opposition to that of John Maynard Keynes. Our paper aims to clarify and differentiate the relationship between the two scholars by making two main points. First, we show that Eucken supported a proto-Keynesian stimulus programme at the height of the Great Depression, the so-called Lautenbach plan of 1931. Second, we critically examine Eucken's description of 'full employment policy', a strategy with obvious parallels to Keynesian economic policy. Additionally, the paper maintains that when comparing Eucken and Keynes, more emphasis should be given to the fact that the former favours a rule-based rather than discretionary approach to policy-making.
    Keywords: Ordoliberalism,Eurozone Crisis,Monetary Policy,Fiscal Policy,History of Economic Thought
    JEL: B31 D78 E63
    Date: 2018
  12. By: Francesco Chiacchio; Grégory Claeys; Francesco Papadia
    Abstract: Central banks are not profit-maximising institutions; their objectives are rather of macroeconomic nature. The European Central Bank’s overriding objective is price stability. Nevertheless, there are three good reasons to conclude that it is preferable for central banks to achieve profits rather than to record losses. First, taxpayers endow central banks with large amounts of resources and one should be worried if this amount of resources did not produce any income. In a way, the efficient use by the central bank of the financial resources with which it is endowed is as relevant as the efficient use of the human resources at its disposal. Second, financial strength could affect the ability of monetary authorities to fulfil their mandates. In particular there is the fear that a central bank incurring systematic losses and ending up with negative capital would find it difficult to effectively pursue its macroeconomic objective. Third, profitable operations might be an indication that central banks are implementing the right policies - to achieve profits the central bank must purchase assets when they are undervalued and sell when they are overvalued, thus stabilising their prices. Overall, the Eurosystem has so far respected the principle of it being better to realise profits than losses. The accounts of the ECB, indeed of the entire Eurosystem, show that it generates a fairly stable profit flow. Monetary operations, ie refinancing operations, and securities purchases contribute substantially to these profits. This conclusion is confirmed by measuring the financial results of past purchases of foreign exchange and more recent purchases of securities from a mark-to-market perspective, instead of an accounting perspective. In the specific case of the Public Sector Purchase Programme (PSPP) this was because the coupons on the securities more than offset the capital losses - overall the Eurosystem has bought securities under the PSPP programme at prices higher than current ones. The considerations that might justify purchase operations, like the PSPP or other similar interventions, are very complex and require careful judgement. Once their macroeconomic desirability is established, however, the ECB has the necessary financial strength to implement them safely.
    Date: 2018–08
  13. By: Sébastien Jean; Philippe Martin; André Sapir
    Abstract: This policy contribution was prepared for the French Conseil d’Analyse Économique. The multilateral trading system is seriously threatened by the country which has been its main inspirer, the United States. The US position is focused on bilateral trade imbalances presumably resulting from unbalanced trade policies, but it is flawed. Not only does it make little sense given the existence of global value chains, but it also misses its target - what matters most are aggregate trade surpluses and deficits, which depend above all on the differential between domestic investment and savings, and little on trade policy. This Policy Contribution first analyses the economic consequences of a full-scale trade war. Our estimates show that it would have a permanent effect of a similar magnitude on the GDP per capita of the three major global powers (the European Union, the United States and China) of around 3 percent to 4 percent of GDP, as big as the effect of the Great Recession of 2008-09. The impact would be much more damaging for small countries. By contrast, the EU is partly protected by the size of its internal market. In addition, the short-term effects would be even greater because of the negative supply and demand shock the global economy would be subjected to. For this reason, the EU must engage resolutely in a strategy of defence of trade multilateralism. We recommend combining the adoption of firm and credible retaliatory measures in response to the current attacks with an offer of multilateral or plurilateral negotiations on legitimate issues - macroeconomic imbalances, institutional design of dispute settlement at the World Trade Organisation (WTO), reciprocity of commitments and updating of rules on subsidies, state-owned enterprises and intellectual property rights. However, considering how difficult plurilateral and multilateral negotiations with the US administration are, Europe needs a plan B. In the short term, this requires, for instance, coordinating a club of countries in order to identify and implement strategies to circumvent US blocking of the WTO at the Appellate Body level. In addition, we recommend pursuing an ambitious policy of trade agreements. The expected economic gains are modest. But trade agreements can play an additional role of insurance policies in case of full-scale trade war and can be used as leverage on other non-trade issues. Therefore, these agreements should change and address two main concerns about globalisation - environmental protection with the issue of global warming and problems related to tax evasion and optimisation. We therefore recommend making the signing of trade agreements conditional on the adoption of the OECD’s action plan to combat erosion of the tax base and the implementation of the Paris Climate Agreement. We put forward progressive monitoring and sanction measures to ensure effective implementation.
    Date: 2018–08

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