nep-eec New Economics Papers
on European Economics
Issue of 2018‒09‒17
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Differences in wage determination in the Eurozone By Mariam Camarero; Gaetano D’Adamo; Cecilio Tamarit
  2. Macroeconomic Adjustment in the Euro Area By Alessio Terzi
  3. High public debt in euro-area countries: comparing Belgium and Italy By André Sapir
  4. How demanding and consistent is the 2018 stress test design in comparison to previous exercises? Banking union scrutiny By Haselmann, Rainer; Wahrenburg, Mark
  5. The Trade Effects of the Brexit Announcement Shock By Douch, Mustapha; Edwards, T.Huw; Soegaard, Christian
  6. When Losses Turn into Loans: The Cost of Undercapitalized Banks By Blattner, Laura; Farinha, Luisa; Rebelo, Francisco
  7. Fiscal policy and the real exchange rate: Some evidence from Spain By Oscar Bajo-Rubio; Burcu Berke; Vicente Esteve
  8. The fiscal impact of 30 years of immigration in France: an accounting approach By Ndeye Penda Sokhna; Lionel Ragot; Xavier Chojnicki
  9. Testing for Inflation Convergence among European Union Countries:A Panel Approach By Maria Tsafa-Karakatsanidou; Stilianos Fountas
  10. A new governance architecture for European financial markets? Towards a European supervision of CCPs By Friedrich, Jan; Thiemann, Matthias
  11. Closing ranks between prevention and management of systemic crises: A proposal to couple the ESRB with the ESM By Thomasius, Sebastian

  1. By: Mariam Camarero (Jaume I University. Department of Economics, Av. de Vicent Sos Baynat s/n, E-12071 Castellón, Spain); Gaetano D’Adamo (University of Valencia, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, Spain); Cecilio Tamarit (University of Valencia, INTECO Joint Research Unit. Department of Applied Economics II. PO Box 22.006 - E-46071 Valencia, Spain)
    Abstract: This paper estimates a simple equilibrium wage equation for a subset of Eurozone countries over the period 1995-2015 using panel cointegration methods that account for cross-country heterogeneity and allow for structural breaks. Results show that the equilibrium wage has been affected by a structural change contemporaneous to the international financial crisis. Moreover, it has different determinants across euro area countries, among which two relatively distinct groups can be identified. In particular, the wage equation in Germany, Austria, Belgium, the Netherlands and Finland is more homogeneous and seem to respond more to macroeconomic conditions than in the group composed of Italy, Spain, Portugal, France and Ireland. This result is highly policy relevant in the context of a single monetary policy, as it may explain the diverging behavior of wages across the Eurozone and also be a potential source of asymmetric shocks and/or asymmetric response to a common shock.
    Keywords: panel cointegration, wage setting, labor market, productivity, real exchange rate
    JEL: E24 C23
    Date: 2018–09
  2. By: Alessio Terzi (Center for International Development at Harvard University)
    Abstract: Macroeconomic adjustment in the euro area periphery was more recessionary than pre-crisis imbalances would have warranted. To make this claim, this paper uses a Propensity Score Matching Model to produce counterfactuals for the Eurozone crisis countries (Greece, Portugal, Ireland, Cyprus, Spain) based on over 200 past macroeconomic adjustment episodes between 1960-2010 worldwide. At its trough, between 2010 and 2015 per capita GDP had contracted on average 11 percentage points more in the Eurozone periphery than in the standard counterfactual scenario. These results are not dictated by any specific country experience, are robust to a battery of alternative counterfactual definitions, and stand confirmed when using a parametric dynamic panel regression model to account more thoroughly for the business cycle. Zooming in on the potential causes, the lack of an independent monetary policy, while having contributed to a deeper recession, does not fully explain the Eurozone’s specificity, which is instead to be identified in a sharper-than-expected contraction in investment and fiscal austerity due to high funding costs. Reading through the overall findings, there are reasons to believe that an incomplete Eurozone institutional setup contributed to aggravate the crisis through higher uncertainty.
    Keywords: macroeconomic adjustment, financial crisis, Eurozone, growth, propensity score matching
    Date: 2018–02
  3. By: André Sapir
    Abstract: During the 1970s and 1980s, Belgium and Italy accumulated huge amounts of public debt. In the early 1990s, at the time of the Maastricht Treaty, public debt reached a peak of nearly 140 percent of GDP in Belgium and nearly 130 percent in Italy. After Maastricht, both countries made major fiscal efforts in order to qualify for membership of the euro. When the euro was launched in 1999, public debt had been brought down substantially in the two countries, to roughly 110 percent of GDP. At the time Belgium and Italy were also identical in another respect - GDP per capita. Today the situation is very different. The level of public debt is 130 percent of GDP in Italy against only 100 percent in Belgium. Worse, in GDP per capita terms, Italy is now 20 percent poorer than Belgium. No wonder Italians are dissatisfied with their lot. This Policy Contribution looks at the evolution of public debt in Belgium and Italy since 1990 and seeks to explain the contrasting evolution in the two countries in the run-up to the introduction of the euro, during the early years of the euro and since the beginning of the crisis. It finds that, after substantial fiscal efforts during a relatively brief period before the launch of the euro, Italy’s efforts tailed off, while Belgium continued to consolidate its debt at an impressive pace. Italy also did too little to improve its growth performance, which lagged significantly behind Belgium’s and that of all other euro-area countries. When the crisis hit the two countries, Italy was therefore much more vulnerable to market sentiment than Belgium, especially when the sovereign debt crisis spread from Greece to other euro-area countries. Italy responded to the onslaught of markets with austerity measures, which made matters worse, sending GDP growth into negative territory and increasing the debt-to-GDP ratio. Politics has been central to the contrasting debt dynamics in the two countries. Bad domestic politics prior to Maastricht were responsible for the huge accumulation of public debt in Belgium and Italy up to the early 1990s. Maastricht brought fiscal discipline to both countries, but the constraint proved more binding on Belgium than on Italy once the two countries joined the euro. During the crisis, Belgium fared better than Italy because its political class displayed an absolute commitment to debt sustainability and to euro membership that was at times lacking in Italy.
    Date: 2018–09
  4. By: Haselmann, Rainer; Wahrenburg, Mark
    Abstract: We provide an assessment of the design and calibration of the 2018 EU-wide stress test. The adverse scenario for the 2018 stress test is more severe than for previous stress tests in terms of the assumed GDP decline in the EU area. However, the test is less severe in terms of the losses that banks are expected to incur under the scenario. The adverse scenario has a highly asymmetric impact on different European countries, such that countries with a high degree of trade openness are affected considerably more. It seems unlikely that the assumed scenario constitutes the most plausible threat scenario for the EU economy. Since banks use heterogeneous models to forecast the stress scenario impact on loan losses and since the EBA does not publish its own respective benchmark parameters, the public cannot fully assess the true severity of the test in terms of its impact on banks' capital. We argue that both the lack of transparency and the heterogeneity of banks' practices to forecast stress scenario induced losses considerably weaken the credibility of the stress test and limit its usefulness in supporting market discipline among European banks.
    Keywords: Banking union,European banks,Stress test
    Date: 2018
  5. By: Douch, Mustapha (Aston University, UK); Edwards, T.Huw (Loughborough University, UK); Soegaard, Christian (University of Warwick, UK.)
    Abstract: The unexpected vote for Leave in the Brexit referendum of June 2016 has introduced a classic case of a ‘renegotiation period’ for trade agreements, where no formal barriers have been imposed, but trade is affected by policy uncertainty. We analyse the effects upon bilateral trade between the UK and 14 EU and 14 non-EU trading partners, using a Synthetic Control Method (SCM), with the Brexit vote seen as a country-specific treatment effect upon the United Kingdom. Our main findings are that, after the exchange rate changes, UK exports have been lower than those of the ’synthetic Britain’, with only a modest difference between exports to EU and to non-EU countries. Robustness checks suggest that this is not attributable to short-term sluggishness in responding to a fall in Sterling. Imports from the EU have declined a little, while those from non-EU countries have if anything declined more. However, there is some evidence that UK consumers may be turning towards Commonwealth countries.
    Keywords: Anticipation ; policy uncertainty ; Brexit ; synthetic control method
    JEL: F02 F13 F15
    Date: 2018
  6. By: Blattner, Laura (Stanford University); Farinha, Luisa (Bank of Portugal); Rebelo, Francisco (Boston College)
    Abstract: We provide evidence that a weak banking sector contributed to low productivity following the European debt crisis. An unexpected increase in capital requirements provides a natural experiment to study the effects of reduced capital adequacy on productivity. Affected banks respond by cutting lending but also by reallocating credit to distressed firms with underreported loan losses. We develop a method to detect underreported losses using loan-level data. We show that the credit reallocation leads to a reallocation of production factors across firms. We find that the resulting factor misallocation accounts for 20% of the decline in productivity in Portugal in 2012.
    JEL: D24 E44 E51 G21 G28 O47
    Date: 2018–06
  7. By: Oscar Bajo-Rubio (Department of Economics, Universidad de Castilla-La Mancha, 13071 Ciudad Real, Spain); Burcu Berke (Department of Economics, Niğde Ömer Halisdemir University, 51240 Niğde, Turkey); Vicente Esteve (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia, Spain)
    Abstract: The factors influencing the real exchange rate are an important issue for a country’s price competitiveness, which is especially relevant to those countries belonging to a monetary union. In this paper, we analyse the relationship between fiscal policy and the real exchange rate for the case of Spain. In particular, we explore how changes in government spending, differentiating between consumption and investment, can affect the long-run evolution of the real exchange rate vis-à-vis the euro area. The distinction between two alternative definitions of the real exchange rate, based on consumption price indices and export prices, respectively, will also prove to be relevant for the results.
    Keywords: Real exchange rate, Government consumption, Government investment
    JEL: E62 F31 F41
    Date: 2018–08
  8. By: Ndeye Penda Sokhna; Lionel Ragot; Xavier Chojnicki
    Abstract: This article aims to evaluate the net contribution of immigration to the public finances of France between the late 1970s and the early 2010s. We developed an accounting method that disaggregates the primary deficit into the specific contributions of immigrant population and native population. We show that the net contribution of immigrants is generally negative over a relatively long period, but remains at an extremely low level (+/-0:5% of the french GDP, reduced to +/-0:2%, with the exception of 2011). The relatively negligible effect of immigrants on the public accounts is explained by a favourable demographic structure offsetting their lower net individual contribution. However, the 2008 financial crisis has significantly degraded the economic condition of immigrants. The net per capita contribution of EU immigrants has significantly declined since 2000 and is now similar to values from third country immigrants.
    Keywords: International Migration, Public Finances, Social Protection
    JEL: E62 F22 H62
    Date: 2018
  9. By: Maria Tsafa-Karakatsanidou (Department of Economics, University of Macedonia); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: This paper attempts to test for inflation convergence in a sample of twenty-four European Union countries. To tackle this issue, first- and second-generation panel unit root and stationarity tests are employed so as to provide evidence of inflation convergence before and after the launch of the single currency, the euro. We also test for and then allow for cross-sectional dependence. In general, the findings reveal that conditional inflation convergence exists for all panels under study. The estimation of half lives shows that the evidence for faster speed of convergence applies for the new member states followed by the core countries and the old member states.
    Keywords: Inflation Convergence, EU, Maastricht Criteria, Panel data.
    JEL: C33 E3 F33
    Date: 2018–09
  10. By: Friedrich, Jan; Thiemann, Matthias
    Abstract: Does the new European outlook on financial markets, as voiced by the EU Commission since the beginning of the Capital Market Unions imply a movement of the EU towards an alignment of market integration and direct supervision of common rules? This paper sets out to answer this question for the case of common supervision for Central Counterparties (CCPs) in the European Union. Those entities gained crucial importance post-crisis due to new regulation which requires the mandatory clearing of standardized derivative contracts, transforming clearing houses into central nodes for cross-border financial transactions. While the EU-wide regulatory framework EMIR, enacted in 2012, stipulates common regulatory requirements, the framework still relies on home-country supervision of those rules, arguably leading to regulatory as well as supervisory arbitrage. Therefore, the regulatory reform to stabilize the OTC derivatives market replicated at its center a governance flaw, which had been identified as one of the major causes for the gravity of the financial crisis in the EU: the coupling of intense competition based on private risk management systems with a national supervision of European rules. This paper traces the history of this problem awareness and inquires which factors account for the fact that only in 2017 serious negotiations at the EU level ensued that envisioned a common supervision of CCPs to fix the flawed system of governance. Analyzing this shift in the European governance architecture, we argue that Brexit has opened a window of opportunity for a centralization of supervision for CCPs. Brexit aligns the urgency of the problem with material interests of crucial political stakeholder, in particular of Germany and France, providing the possibility for a grand European bargain.
    Keywords: Brexit,Capital Markets Union,Central Counterparties,EMIR,European Supervisory Architecture,regulatory arbitrage,supervisory arbitrage
    Date: 2018
  11. By: Thomasius, Sebastian
    Abstract: On the occasion of related proposals by the European Commission and the Eurogroup, this paper proposes to entrust the ESM with the hosting of the ESRB in the medium term. The novel proposal aims at strengthening the macro-prudential expertise of the ESM and at enhancing the independence of the ESRB. Following a brief summary of related proposals, the main rationales and the key elements of the proposal are presented in detail.
    Keywords: financial stability,macroprudential policy and supervision,financial crisis prevention and resolution,conflict of interest,euro area
    JEL: E44 G28 H11 E58
    Date: 2018

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