nep-eec New Economics Papers
on European Economics
Issue of 2018‒12‒17
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. On the impact of the launch of the euro on EMU macroeconomic vulnerability By Florian Morvillier
  2. Impact of Italy’s Draft Budget on Growth and Fiscal Solvency By Olivier J Blanchard; Álvaro Leandro; Silvia Merler; Jeromin Zettelmeyer
  3. Europe's Search for a Safe Asset By Jeromin Zettelmeyer; Álvaro Leandro
  4. Adjustment dynamics and business cycle heterogeneity in the EMU: Evidence from estimated DSGE models By Giovannini, Massimo; Hohberger, Stefan; Ratto, Marco; Vogel, Lukas
  5. Banks, debt and risk: assessing the spillovers of corporate taxes By Fatica, Serena; Heynderickx, Wouter; Pagano, Andrea
  6. New European Banking Governance and Crisis of Democracy: Insights from the European post-socialist periphery By Piroska, Dóra; Podvršič, Ana
  7. Short-time work in the Great Recession: firm-level evidence from 20 EU countries By Lydon, Reamonn; Mathä, Thomas Y.; Millard, Stephen
  8. The third pillar of the Investment Plan for Europe: The RHOMOLO assessment By Martin Christensen; Andrea Conte; Filippo Di Pietro; Patrizio Lecca; Giovanni Mandras; Simone Salotti
  9. International Food Commodity Prices and Missing (Dis)Inflation in the Euro Area By Gert Peersman
  10. Fan charts around GDP projections based on probit models of downturn risk By David Turner; Thomas Chalaux; Hermes Morgavi
  11. Pull factors for Chinese FDI in East Central Europe By Agnes Szunomar
  12. Irexit: Making the Worst of a Bad Situation By Ronald B. Davies; Joseph Francois
  13. Further evidence of the relationship between social transfers and income inequality in OECD countries By Giorgio d'Agostino; Luca Pieroni; Margherita Scarlato

  1. By: Florian Morvillier
    Abstract: This paper aims at investigating the role played by the euro’s inception on external imbalances and macroeconomic vulnerability of the eurozone. To this end, we estimate a panel VAR model over the pre-euro (1980-1998) and EMU (1999-2016) periods for eleven eurozone members. Our findings show that with the adoption of the single currency, current account vulnerability to demand and currency misalignments shocks increases significantly. The correction of external imbalances within the euro area also becomes more difficult because of the disparition of a slow-growth process and devaluations as adjustment tools.
    Keywords: Global imbalances, current account, output gap, exchange-rate misalignments, panel VAR.
    JEL: F32 F31 C33
    Date: 2018
  2. By: Olivier J Blanchard (Peterson Institute for International Economics); Álvaro Leandro (Peterson Institute for International Economics); Silvia Merler (Bruegel); Jeromin Zettelmeyer (Peterson Institute for International Economics)
    Abstract: A bitter standoff is under way between Italy’s new government and the European Commission over the Commission’s objections to Italy’s proposed expansionary budget for 2019. In this Policy Brief, the authors look at the merits of fiscal expansion, concluding that Italy’s budget is unlikely to stimulate growth and may well depress it. But they argue that the budget is not likely to have a dramatic impact on fiscal solvency. Absent a significant recession, Italy’s debt-to-GDP ratio of over 130 percent will be roughly unchanged in the next few years. To reduce its debt-to-GDP ratio, Italy will need to offset its fiscal expansion eventually, an adjustment that seems feasible. The analysis in this Policy Brief has two main policy implications. First, Italy would have fared better with a roughly fiscally neutral budget, which would have led to lower interest rates and probably to higher growth and employment while still allowing the government to pursue some of its social objectives. Second, even if the government decides to stick to its deficit plan, a crisis is not a foregone conclusion. At current government bond spreads, and in the absence of additional shocks to output, the government can probably achieve some of its goals and maintain debt sustainability. But further doubts, triggered by unrealistic claims or budgetary slippages, could lead to unmanageable spreads and a serious crisis, including involuntary exit from the eurozone.
    Date: 2018–11
  3. By: Jeromin Zettelmeyer (Peterson Institute for International Economics); Álvaro Leandro (Peterson Institute for International Economics)
    Abstract: This Policy Brief surveys and evaluates the recent debate on euro area safe assets by comparing a proposal to create sovereign bond–backed securities (SBBS) with a broad set of alternatives—some with an extensive history, others very recent. It reaches two main conclusions. First, SBBS mostly do not deserve the criticism that they have attracted. Indeed, they do well compared to most alternatives. At the same time, some of these alternatives could be superior in some respects. These include the widely discussed option to issue common euro area bonds financed by member state contributions or a common tax, in addition to less well-known proposals, such as the idea to create a senior, publicly-owned financial intermediary that would issue a euro area bond backed by a diversified portfolio of sovereign debt purchased at face value (“E-bonds”). However, none of the alternatives surveyed in this paper dominates SBBS entirely. Common euro area bonds financed by member state contributions, a common tax, or the proceeds of a sovereign wealth fund would require new revenue commitments, new institutions, or both. E-bonds would require some public money and would lead to some, albeit limited, redistribution across member states. They would also have a greater impact on national bond markets. That said, E-bonds are a serious alternative to SBBS that deserve a more thorough evaluation.
    Date: 2018–10
  4. By: Giovannini, Massimo (European Commission – JRC); Hohberger, Stefan (European Commission – JRC); Ratto, Marco (European Commission – JRC); Vogel, Lukas (European Commission)
    Abstract: The paper reviews adjustment dynamics in the EMU on the basis of estimated DSGE models for four large EA Member States (DE, FR, IT, ES). We compare the response of the four countries to identical shocks and find a particularly strong response of employment and wages in ES, a high sensitivity of IT to investment-related shocks, and a comparatively strong impact of global shocks on the DE economy. We also perform counterfactual exercises that apply the estimated shocks and parameters for ES to DE, FR, and IT. The counterfactual simulations suggest that differences in shocks have been important for GDP growth differentials, and together with structural differences also contributed to differences in employment fluctuations across the four countries considered.
    Keywords: Estimated DSGE; adjustment dynamics; business cycles; EMU; counterfactuals
    JEL: E32 F41 F44
    Date: 2018–11
  5. By: Fatica, Serena (European Commission – JRC); Heynderickx, Wouter (European Commission – JRC); Pagano, Andrea (European Commission – JRC)
    Abstract: Using bank balance sheet data, we find evidence that leverage and asset risk of European multinational banks in the crisis and post-crisis period is affected by corporate taxes in their host country as well as by the tax rates in all the jurisdictions where the banking group operates. Then, we evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk. We show that the degree of coordination in implementing the hypothetical tax reform matters. In particular, a coordinated elimination of the tax advantage of debt would significantly reduce systemic losses in the event of a severe banking crisis. By contrast, uncoordinated tax reforms are not equally beneficial. This is because national tax policies generate spillovers through cross-border bank activities and tax-driven strategic allocation of debt and asset risk across group affiliates.
    Keywords: Corporate tax, Debt bias, Debt shifting, Multinational banks, Leverage
    JEL: E32 F41 F44
    Date: 2018–11
  6. By: Piroska, Dóra; Podvršič, Ana
    Abstract: In this article, we argue that the post-crisis banking governance framework of the European Union, not only severely constrains peripheral member states’ governments in their policy choices, but more profoundly rearranges their government institutions in a way to restrict sovereign banking policy formation. Furthermore, amending the most dominant narratives of the EU’s impact on national banking policy, which point either at the role of the Economic and Monetary Union, or the Banking Union, we argue that it is also and most profoundly the organization of the Single Market and the various changes made to its architecture that influence EU member states’ banking policy. Finally, and most importantly, building on the case study of the post-crisis bank restructuring in Slovenia we reinvigorate the debate on the contribution of economic policy to the crisis of democracy in the EU by demonstrating the strong effect of the European banking governance on decreasing democratic oversight of banking policy in member states.
    Keywords: Slovenia, banking, state aid, fiscal policy, central bank, Banking Union
    JEL: E58 E62 F55
    Date: 2018–11–21
  7. By: Lydon, Reamonn; Mathä, Thomas Y.; Millard, Stephen
    Abstract: Using firm-level data from a large-scale European survey among 20 countries, we analyse the determinants of firms using short-time work (STW). We show that firms are more likely to use STW in case of negative demand shocks. We show that STW schemes are more likely to be used by firms with high degrees of firm-specific human capital, high firing costs, and operating in countries with stringent employment protection legislation and a high degree of downward nominal wage rigidity. STW use is higher in countries with formalised schemes and in countries where these schemes were extended in response to the recent crisis. On the wider economic impact of STW, we show that firms using the schemes are significantly less likely to lay off permanent workers in response to a negative shock, with no impact for temporary workers. Relating our STW take-up measure in the micro data to aggregate data on employment and output trends, we show that sectors with a high STW take-up exhibit significantly less cyclical variation in employment. JEL Classification: C25, E24, J63, J68
    Keywords: crisis, firms, recession, short-time work, survey, wages
    Date: 2018–12
  8. By: Martin Christensen (European Commission - JRC); Andrea Conte (European Commission - JRC); Filippo Di Pietro (European Commission - JRC); Patrizio Lecca (European Commission - JRC); Giovanni Mandras (European Commission - JRC); Simone Salotti (European Commission - JRC)
    Abstract: The Investment Plan for Europe aims at removing obstacles to investment, providing visibility and technical assistance to investment projects, and at making smarter use of financial resources. The Investment Plan is made up of three pillars: the European Fund for Strategic Investment (EFSI); the European Investment Advisory Hub and the European Investment Project Portal; and the removal of regulatory barriers to investment. Policy simulations using the RHOMOLO dynamic CGE model show positive aggregate macro-economic effects of the EFSI. This Policy Insight contains the result of an additional set of RHOMOLO simulations aimed at quantifying the macroeconomic impact of the legislative proposals contained in the third pillar of the Investment Plan. The EU GDP is expected to be 1.5% higher by 2030 thanks to the removal of barriers to investment in the areas of the Capital Markets Union, the Single Market Strategy, the Digital Single Market, and the Energy Union. This entails the creation of about one million of jobs across the entire EU.
    Keywords: rhomolo, region, growth, investment plan for europe, third pillar, capital markets union, single market strategy, energy union, digital single market, modelling
    JEL: C54 C68 E62
    Date: 2018–11
  9. By: Gert Peersman
    Abstract: This paper examines the causal effects of shifts in international food commodity prices on euro area inflation dynamics using a structural VAR model that is identified with an external instrument (i.e. a series of global harvest shocks). The results reveal that exogenous food commodity price shocks have a strong impact on consumer prices, explaining on average 25%- 30% of inflation volatility. In addition, large autonomous swings in international food prices contributed significantly to the twin puzzle of missing disinflation and missing inflation in the era after the Great Recession. Specifically, without disruptions in global food markets, inflation in the euro area would have been 0.2%-0.8% lower in the period 2009-2012 and 0.5%-1.0% higher in 2014-2015. An analysis of the transmission mechanism shows that international food price shocks have an impact on food retail prices through the food production chain, but also trigger indirect effects via rising inflation expectations and a depreciation of the euro.
    Keywords: food commodity prices, inflation, twin puzzle, euro area, SVAR-IV
    JEL: E31 E52 Q17
    Date: 2018
  10. By: David Turner; Thomas Chalaux; Hermes Morgavi
    Abstract: This paper describes a method for parameterising fan charts around GDP growth forecasts of the major OECD economies as well as the aggregate OECD. The degree of uncertainty – reflecting the overall spread of the fan chart – is based on past forecast errors, but the skew – reflecting whether risks are tilted to the downside – is derived from a probit model-based assessment of the probability of a future downturn. This approach is applied to each of the G7 countries separately, with combinations of variables found to be useful in predicting future downturns at different horizons up to 8 quarters: at short horizons of 2-4 quarters, a flattening or inverted yield curve slope, recent sharp falls in house prices, share prices or credit; at longer horizons of 6-8 quarters, sustained strong growth in house prices, share prices and credit; and at all horizons, a tight labour market and rapid growth in OECD-wide (or in some cases euro-wide) house prices, share prices or credit. The in-sample fit of the probit models appears reasonably good for all G7 countries. The predicted probabilities from the probit models provide a graduated assessment of downturn risk, which is reflected in the degree of skew in the fan chart. Fan charts computed on an out-of-sample basis around pre-crisis OECD forecasts published in June 2008 encompass the extreme outturns associated with the Global Financial Crisis for five of the G7 countries. A weakness of the approach is that, although it predicts a clear majority of past downturns, it will not predict atypical downturns. For example, in the current conjuncture, it is unlikely that current concerns about risks associated with Brexit, an escalation of trade tensions or spillovers from emerging markets would be picked up by the models. At the same time, a severe downturn triggered by such atypical events might be more severe if more typical risk factors are also high.
    Keywords: downturn, economic forecasts, fan charts, recession, risk, uncertainty
    JEL: E01 E17 E58 E65 E66
    Date: 2018–12–11
  11. By: Agnes Szunomar (Institute of World Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences)
    Abstract: Chinese companies have increasingly targeted East Central European (ECE) countries in the past one and a half decades. This development is quite a new phenomenon but not an unexpected one. On one hand, the transformation of the global economy and the restructuring of China’s economy are responsible for growing Chinese interest in the developed world, including the European Union. On the other hand, ECE countries have also become more open to Chinese business opportunities, especially after the global economic and financial crisis with the intention of decreasing their economic dependency on Western (European) markets. In ECE, China can benefit a lot from the EU’s core and peripheral type of division. For China, the region represents dynamic, largely developed, less saturated markets, new frontiers for export expansion, new entry points to Europe and cheap but qualified labour. This adds up to less political expectations, less economic complaints, less protectionist barriers and less national security concerns in the ECE region compared to the Western European neighbours.
    Keywords: FDI, internationalisation, Chinese MNEs
    JEL: F21 F23 O53 P33
    Date: 2018–11
  12. By: Ronald B. Davies; Joseph Francois
    Abstract: Relative to the rest of the EU, Ireland is especially vulnerable to the fallout from Brexit, both economically and politically. With increasing frustration over the reaction from Brussels, some are suggesting that an Irish exit from the EU would benefit the nation. A key argument for this is that it would allow for reintegration with the UK, thus preserving one of its largest trading partners. Using a structural general equilibrium model, we estimate that such a move would worsen the impacts of Brexit by as much as 250%, with low-skill workers disproportionately affected. This is due to the fact that while the UK is one of Ireland's single-nation trading partners, when compared to the EU27 as a group, it is much smaller.
    Keywords: Irexit; Brexit; Computable General Equilibrium
    JEL: F13 F17 F53
    Date: 2018–07
  13. By: Giorgio d'Agostino (Roma Tre University, Italy); Luca Pieroni (University of Perugia, Italy); Margherita Scarlato (Roma Tre University, Italy)
    Abstract: In this paper, we have revised the estimates of the effects of social transfers on income inequality. We have accounted for reverse causality using an instrumental variable derived via a theoretical model, which identifies the main driver of social transfers from the interaction between the electoral system and the coalition or party winning the election, and have estimated, in the OECD countries, that a 1\% increase in the share of social transfers reduces income inequality by one-half of a percentage point. This result appears to be robust to different components of expenditure, alternative model specifications and falsification tests. Only countries with a high corruption level appear to violate this empirical regularity. Our estimates show that bureaucratic inefficiencies caused by corruption are responsible for the lack of benefit of social transfers on economic inequality.
    Keywords: Welfare policy, social spending, income inequality, instrumental variable estimation.
    JEL: H53 I38 C26
    Date: 2018–11

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