nep-eec New Economics Papers
on European Economics
Issue of 2018‒11‒12
sixteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Varieties of Capitalism and post-Keynesian economics on Eurocrisis By Engelbert Stockhammer; Syed Mohib Ali
  2. Euro area unconventional monetary policy and bank resilience By Fernando Avalos; Emmanuel C Mamatzakis
  3. Bank to sovereign risk spillovers across borders: evidence from the ECB’s Comprehensive Assessment By Breckenfelder, Johannes; Schwaab, Bernd
  4. Sovereign Risk and Asset Market Dynamics in the Euro Area By Erica Perego
  5. The evolution of spanish total factor productivity since the global financial crisis By Chenxu Fu; Enrique Moral-Benito
  6. The German Labor Market during the Great Recession: Shocks and Institutions By Gehrke, Britta; Lechthaler, Wolfgang; Merkl, Christian
  7. The Rise and Fall of the Natural Interest Rate By Gabriele Fiorentini; Alessandro Galesi; Gabriel Pérez-Quirós; Enrique Sentana
  8. UK services exports in the aftermath of the Brexit announcement shock By Douch, Mustapha; Edwards, T.Huw; Soegaard, Christian
  9. What went wrong with Italy, and what the country should now fight for in Europe By Sergio Cesaratto; Gennaro Zezza
  10. Size of the banking sector: implications for financial stability By Jan Kakes; Rob Nijskens
  11. A better European Union architecture to fight money laundering By Joshua Kirschenbaum; Nicolas Véron
  12. Study and Reports on the VAT Gap in the EU-28 Member States: 2018 Final Report By Grzegorz Poniatowski; Mikhail Bonch-Osmolovskiy; José María Durán-Cabré; Alejandro Esteller-Moré; Adam Œmietanka
  13. Pro-rich Inflation in Europe: Implications for the Measurement of Inequality By Güner, Eren; Weichenrieder, Alfons
  14. Taxation trends in the European Union: 2018 edition By European Commission
  15. Though this be madness: A game-theoretic perspective on the Brexit negotiations By Pitsoulis, Athanassios; Schwuchow, Soeren
  16. Institutional and economic determinants of regional public debt in Spain By Mar Delgado-Téllez; Javier J. Pérez

  1. By: Engelbert Stockhammer; Syed Mohib Ali
    Abstract: The 2008 global financial crisis that began in the US housing sector mutated into a sovereign debt crisis and an economic depression for countries in southern Europe, threatening the very existence of the Eurozone. The paper contrasts analyses of the eurocrisis based on the Varieties of Capitalism (VoC) approach and post-Keynesian analysis. The VoC analysis has argued that the eurocrisis is ultimately a crisis of incompatible institutional settings, in particular wage bargaining institutions, tied together in a monetary union. The Mediterranean Market Economies lack the institutional capacities to restrain wage growth. The Coordinated Market Economies (in northern Europe) have managed to maintain modest wage growth and inflation because export-oriented sectors play the role of wage leader. Post-Keynesian analysis has interpreted the crisis as the outcome of the unsustainable growth models and neoliberal policies in Europe; i.e. a neo-mercantilist export-led demand regime in the North and a debt-driven demand regime in the South and the EMU policies of financial deregulation that accompanied European economic integration. What is specific to the Euro area is the absence of adequate central fiscal stabilization or effective lender of last resort facility for the member countries. The ECB was hesitant in its unconventional monetary policy and began buying government bonds of countries under pressure only at a late stage of the crises. The imbalances resulted in a full blown sovereign debt crisis. We argue that the VoC analysis has important shortcomings as it focuses excessively on labour market institutions and that the post-Keynesian approach integrates financial factors and economic policy in explaining the crisis.
    Keywords: Varieties of Capitalism, Post-Keynesian economics, Eurocrisis
    JEL: B00 E02 E12 E60 G01 P50
    Date: 2018–10
  2. By: Fernando Avalos; Emmanuel C Mamatzakis
    Abstract: This paper examines whether euro area unconventional monetary policies have affected the loss-absorbing buffers (that is the resilience) of the banking industry. We employ various measures to capture the effect of the broad array of programmes used by the ECB to implement balance sheet policies, while we control for the effect of conventional and negative (or very low) interest rate policy. The results suggest that, above and away from the zero-lower bound, looser interest rate policy tends to weaken our measure of euro area banks' loss-absorbing buffers. On the contrary, further lowering interest rates near and below the zero lower bound seems to strengthen (or weaken less) such buffers, which points towards non-linearities arising in the vicinity of the lower bound. Moreover, balance sheet easing policies enhance bank level resilience overall. However, unconventional monetary policies seem to have increased the fragility of banks in the member states hardest hit by the 2011 sovereign debt crisis. In fact, the evidence presented in this paper suggest that the resilience gains of unconventional monetary policies have accrued mostly to banks headquartered in the so-called core euro area countries (Austria, Belgium, Finland, France, Germany, Luxembourg and Netherlands). Finally, unconventional monetary policies seem to have enhanced more the resilience of banks that were relatively stronger, i.e. that were in the higher deciles of the distribution of loss-absorbing buffers.
    Keywords: unconventional monetary policy, ECB, asset purchases, loss-absorbing buffer
    JEL: G21 E52 E43
    Date: 2018–11
  3. By: Breckenfelder, Johannes; Schwaab, Bernd
    Abstract: We study spillovers from bank to sovereign risk in the euro area using difference specifications around the European Central Bank’s release of stress test results for 130 significant banks on October 26, 2014. We document that following this information release bank equity prices in stressed countries declined. Surprisingly, bank risk in stressed countries was not absorbed by their sovereigns but spilled over to non-stressed euro area sovereigns. As a result, in non-stressed countries, the co-movement between sovereign and bank risk increased. This suggests that market participants perceived that bank risk is shared within the euro area. JEL Classification: C68, F34
    Keywords: bank-sovereign nexus, Comprehensive Assessment, European Central Bank, risk spillovers, stress test
    Date: 2018–11
  4. By: Erica Perego
    Abstract: This paper studies the behavior of euro area asset market co-movements during the period 2010-2014, through the lens of a DSGE model. The economy is a two-country world consisting of a core and a periphery and featuring an international banking sector, international equity markets, home bias in sovereign bond holdings, and sovereign default. The periphery is buffeted by a sovereign risk shock, whose process is estimated from the data. The model accounts successfully for the divergence in core-periphery correlations between stock and sovereign bond returns. The simulation results indicate that the sovereign risk shock explains 50% of the increase in sovereign and loandeposit spreads, and 8% of the decrease in global output during the sovereign debt crisis.
    Keywords: Currency Union;International Financial Markets;Sovereign Risk;General Equilibrium
    JEL: F41 F44 G15
    Date: 2018–11
  5. By: Chenxu Fu (CEMFI); Enrique Moral-Benito (Banco de España)
    Abstract: Total factor productivity (TFP) is considered the key determinant of long-term and sustainable economic growth. The dismal evolution of TFP characterized the Spanish economy since the foundation of the Eurozone until the outbreak of the Global Financial Crisis [see García- Santana et al. (2016)]. This article provides an anatomy of the recent evolution of Spanish TFP using both aggregate- and micro-level data available until 2016. Three conclusions emerge from our findings: i) while TFP growth remained subdued during the crisis, a TFP revival is taking place over the last years; ii) this pattern is mostly driven by the rise and fall of the capital-to-labor ratio (capital deepening) while the role of labor productivity is more muted, and iii) an across-the-board increase in firms’ capital-to-labor ratios accounts for most of the TFP decline during the first years of the crisis, while the subsequent TFP revival is explained by the reallocation of resources towards firms with low capital deepening.
    Keywords: Spain, firm level data, TFP, misallocation.
    JEL: D24 O11 O47 E44 G21 L25
    Date: 2018–10
  6. By: Gehrke, Britta (University of Erlangen-Nuremberg); Lechthaler, Wolfgang (Kiel Institute for the World Economy); Merkl, Christian (University of Erlangen-Nuremberg)
    Abstract: This paper analyzes Germany's unusual labor market experience during the Great Recession. We estimate a general equilibrium model with a detailed labor market block for post-unification Germany. This allows us to disentangle the role of institutions (short-time work, government spending rules) and shocks (aggregate, labor market, and policy shocks) and to perform counterfactual exercises. We identify positive labor market performance shocks (likely caused by labor market reforms) as the key driver for the "German labor market miracle" during the Great Recession.
    Keywords: Great Recession, search and matching, DSGE, short-time work, fiscal policy, business cycles, Germany
    JEL: E24 E32 E62 J08 J63
    Date: 2018–09
  7. By: Gabriele Fiorentini (Università di Firenze); Alessandro Galesi (Banco de España); Gabriel Pérez-Quirós (Banco de España); Enrique Sentana (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r* accurately when either the IS curve or the Phillips curve is flat. In those empirically relevant situations, a local level specification for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.
    Keywords: Natural rate of interest, Kalman filter, observability, demographics.
    JEL: E43 E52 C32
    Date: 2018–07
  8. By: Douch, Mustapha (Aston University, Lloyds Banking Centre); Edwards, T.Huw (Loughborough University); Soegaard, Christian (University of Warwick)
    Abstract: We analyse the impact of the Brexit announcement shock on UK exports of commercial services, using a synthetic control method (SCM) to create a counter-factual based upon other countries' exports. Our analysis shows that UK export performance in this critical sector has been below the counterfactual since the referendum by over 7 per cent. This indicates that policy uncertainty is a ecting exports even in sectors which are not normally subject to tariffs by the EU.
    Keywords: Anticipation ; policy uncertainty ; Brexit ; synthetic control method
    JEL: F02 F13 F15
    Date: 2018
  9. By: Sergio Cesaratto; Gennaro Zezza
    Abstract: In this paper we briefly review the evolution of the Italian economy in the post-war period, discussing the shift from a first period when fiscal policy was targeted – among other things – at full employment, to a later period when controlling inflation through a “foreign discipline” became the main policy target. We review critically the literature on the Italian productivity slowdown, suggesting that it neglects the role of aggregate demand, and of labor market reforms, on productivity. Finally, we discuss Eurozone imbalances, suggesting that Eurozone institutions adopt new rules to keep the interest rate low enough to make public debt sustainable, while using fiscal policy to stimulate growth
    Keywords: Italy; stagnation; Eurozone; imbalances
    JEL: E44 E52 E62
    Date: 2018–10
  10. By: Jan Kakes; Rob Nijskens
    Abstract: The recent global financial crisis has revived discussions about the optimal 7 size of financial systems, particularly the banking sector. Indeed, several economies with a large banking sector relative to GDP, such as Iceland and Ireland, were hit hard during the crisis. At the same time, however, countries with small, domestically oriented banking sectors, such as those in Greece, Italy and Portugal, also turned out to be vulnerable. These recent experiences suggest that the relationship between banking sector size and financial stability is not clear-cut. This study explores the nexus between banking sector size and financial stability for 38 advanced and emerging economies, by assessing the correlation between the size of the banking system and a number of systemic risk indicators. These indicators correspond to the intermediate objectives for financial stability policy, which have been developed by the European Systemic Risk Board (ESRB, 2013). In addition, we present case studies of Ireland and Greece, two economies with, respectively, a large and a small banking sector that were both hit hard after the global financial crisis.
    Date: 2018–10
  11. By: Joshua Kirschenbaum; Nicolas Véron
    Abstract: A series of banking scandals in multiple European Union countries including Cyprus, Denmark, Estonia, Latvia, Malta, the Netherlands and the United Kingdom has underlined the shortcomings of the European Union’s anti-money laundering (AML) regime. Many of these cases have involved staggering sums, with billions of dollars laundered through accounts at one bank. The impact of the EU’s AML shortcomings has been further underlined by changing geopolitics and by the new reality of European banking union. The EU legal framework combines a strong, enforceable single market with national AML supervision of banks and other financial and non-financial firms in which the mechanisms to ensure EU-wide supervisory consistency are insufficient. This combination fosters a vicious circle of erosion of supervisory effectiveness in those member states where money launderers tend to concentrate their activity, which undermines the integrity of the entire European system. The imperative of establishing sound supervisory incentives to fight illicit finance effectively demands a stronger EU-level role in AML supervision. We recommend a unitary architecture centred on a new European AML Authority that would work on the basis of deep relationships with national authorities such as financial intelligence units and law enforcement agencies. The new authority should have high standards of governance and independence, publish all its decisions and be empowered to impose sufficiently large fines to deter malpractice. It would also act as a catalyst for further EU harmonisation of the AML legal regime.
    Date: 2018–10
  12. By: Grzegorz Poniatowski; Mikhail Bonch-Osmolovskiy; José María Durán-Cabré; Alejandro Esteller-Moré; Adam Œmietanka
    Abstract: In this Report, the Authors present the new Value Added Tax (VAT) Gap estimates for 2016, as well as updated estimates for 2012-2016. In addition to the analysis of the Compliance Gap, this Report examines the Policy Gap in 2016 as well as the contribution that reduced rates and exemptions made to the theoretical VAT revenue losses. Moreover, the Report contains an econometric analysis of VAT Gap determinants, which is a novelty introduced from this year’s Study.
    Keywords: consumption taxation, VAT, tax fraud, tax evasion, tax avoidance, tax gap, tax non-compliance, policy gap
    JEL: H24 H26
    Date: 2018
  13. By: Güner, Eren; Weichenrieder, Alfons
    Abstract: This paper studies the distributional consequences of a systematic variation in expenditure shares and prices. By using European Union Household Budget Surveys and Harmonized Index of Consumer Prices data, we construct household-specific price indices and reveal the existence of a pro-rich inflation in Europe. Particularly, over the period 2001-15, the consumption bundles of the poorest deciles in 25 European countries have on average become 10.5 percentage points more expensive than those of the richest decile. We find that ignoring the differential inflation across the distribution underestimates the change in the Gini (based on consumption expenditure) by up to 0.03 points. Cross-country heterogeneity in this change is large enough to affect the ranking of the countries in inequality measures.
    Keywords: Inequality,Gini,EU countries,income dependent inflation
    JEL: D31
    Date: 2018
  14. By: European Commission
    Abstract: This report contains a detailed statistical and economic analysis of the tax systems of the Member States of the European Union, plus Iceland and Norway, which are Members of the European Economic Area. The data are presented within a unified statistical framework (the ESA2010 harmonised system of national and regional accounts), which makes it possible to assess the heterogeneous national tax systems on a fully comparable basis.
    Keywords: European Union, taxation
    JEL: H23 H24 H25 H27 H71
    Date: 2018–07
  15. By: Pitsoulis, Athanassios; Schwuchow, Soeren
    Abstract: On June 19, 2017 the European Union and the British government officially commenced negotiations on the terms of the British exit from the union. The dominant view among most economic policy analysts and commentators seems to be that the cards are clearly stacked against Britain and that the high-handed behaviour of the British representatives is, at best, either a bluff or, at worst, a sign of a loss of reality. In this paper we develop a formal model to show how this uncertainty regarding the preferences and strategy of the British side may affect the dynamic of the negotiations and may lead to unanticipated outcomes.
    Keywords: Brexit,game theory,madman strategy,trembling-hand perfection
    JEL: D78 E65 H12
    Date: 2018
  16. By: Mar Delgado-Téllez (Banco de España); Javier J. Pérez (Banco de España)
    Abstract: We analyze from an empirical point of view the evolution and determinants of Spanish regional public debt. Spain offers an interesting case study because of its high level of fiscal decentralization, implemented gradually during the past four decades, the parallel entry into force of a number of national fiscal rules in that period, and the heterogeneity of its regions, both in terms of economic fundamentals and some institutional features. Our main findings are the following: i) regional governments’ fiscal policies reacted to public debt increases, on average, over the sample of study; ii) fiscal rules played a limited role in controlling debt surges, being only marginally effective in some instances, like high debt situations; iii) a higher degree of regional fiscal co-responsibility tends to be linked to more subdued debt dynamics; iv) market-disciple indicators have encouraged some discipline at the regional level, and v) regional non-standard (commercial) debt surges present explanatory power on the standard measure of public debt.
    Keywords: regional public debt, fiscal rules, fiscal federalism, market discipline
    JEL: H6 E62 C53
    Date: 2018–07

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