nep-eec New Economics Papers
on European Economics
Issue of 2019‒04‒01
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Baltic Integration and the Euro By Ljungberg, Jonas
  2. Revisiting the euro's trade cost and welfare effects By Felbermayr, Gabriel; Steininger, Marina
  3. Impact of the Brexit vote announcement on long-run market performance By Wael Bousselmi; Patrick Sentis; Marc Willinger
  4. Can an ageing workforce explain low inflation? By Benoit Mojon; Xavier Ragot
  5. Independent Monetary Policy Versus a Common Currency: A Macroeconomic Analysis for the Czech Republic Through the Lens of an Applied DSGE Model By Jan Bruha; Jaromir Tonner
  6. Labor shares in the EU - sectoral effects and the role of relative prices By Istvan Konya; Judit Kreko; Gabor Oblath
  7. Tariffs, Domestic Import Substitution and Trade Diversion in Input-Output Production Networks: how to deal with Brexit By Raffaele Giammetti
  8. The impact of lending standards on default rates of residential real estate loans By Gaudêncio, João; Mazany, Agnieszka; Schwarz, Claudia
  9. Concentration, market power and dynamism in the euro area By McAdam, Peter; Petroulakis, Filippos; Vansteenkiste, Isabel; Cavalleri, Maria Chiara; Eliet, Alice; Soares, Ana
  10. Globalization, Job Tasks and the Demand for Different Occupations By Heyman, Fredrik; Sjöholm, Fredrik
  11. The Procyclicality of Banking: Evidence from the Euro Area By Huizinga, Harry; Laeven, Luc
  12. Whatever it takes: what’s the impact of a major nonconventional monetary policy intervention? By Alcaraz, Carlo; Claessens, Stijn; Cuadra, Gabriel; Marqués-Ibáñez, David; Sapriza, Horacio
  13. The Impact of Economic and Financial Crises on Unemployment Rate in European Union By Jianu, Ionuț
  14. Stress testing household balance sheets in Luxembourg By Giordana, Gaston; Ziegelmeyer, Michael
  15. Immigration and Right-Wing Populism: Evidence from a Natural Experiment By Mehic, Adrian
  16. From Microeconomic Favoritism to Macroeconomic Populism By Gilles Saint-Paul
  17. Does foreign bank branch activity affect lending behavior? By Oskar Kowalewski; ;
  18. The China syndrome affects banks: the credit supply channel of foreign import competition. By Sergio Mayordomo; Omar Rachedi
  19. The Return of Economic Nationalism in Germany By Jeromin Zettelmeyer

  1. By: Ljungberg, Jonas (Department of Economic History, Lund University)
    Abstract: Which have been the consequences of the euro for integration and economic performance in the Baltic Sea region? After the collapse of the Soviet Union, the three Baltic states and Poland have been rapidly catching-up with Western Europe. The Great Recession became a great setback for the former, while less so for Poland. A difference is the monetary policy: the Polish zloty depreciated in the critical moment of the crisis, while currency boards with the aim of joining the euro bestowed appreciation for the Baltics and Finland. Contrary to the purpose, monetary integration has not fostered integration in trade, and the share of the Eurozone in Baltic trade has stagnated. A comparison with other countries in the Baltic Sea region suggests that the euro provides “the golden fetters” of our time. Emigration, also a kind of integration, has become a safety valve with severe social and economic consequences for the Baltic states.
    Keywords: economic growth; integration; exports; EMU; Baltic Sea region; exchange rates
    JEL: E39 E42 F14 F15 F43 N14
    Date: 2019–03–20
  2. By: Felbermayr, Gabriel; Steininger, Marina
    Abstract: When, about twenty years ago, the Euro was created, one objective was to facilitate intra-European trade by reducing transaction costs. Has the Euro delivered? Using sectoral trade data from 1995 to 2014 and applying structural gravity modeling, we conduct an ex post evaluation of the European Monetary Union (EMU). In aggregate data, we find a significant average trade effect for goods of almost 8 percent, but a much smaller effect for services trade. Digging deeper, we detect substantial heterogeneity between sectors, as well as between and within country-pairs. Singling out Germany, and embedding the estimation results into a quantitative general equilibrium model of world trade, we find that EMU has increased real incomes in all EMU countries, albeit at different rates. E.g., incomes have increased by 0.3, 0.6, and 2.1 percent in Italy, Germany, and Luxembourg, respectively.
    Keywords: Euro,Trade,General Equilibrium,Quantitative Trade Models,European Union
    JEL: F15 F17 N74
    Date: 2019
  3. By: Wael Bousselmi (CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz]); Patrick Sentis (MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UM3 - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM - Université de Montpellier); Marc Willinger (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier)
    Abstract: We examine how the Brexit announcement influenced the long-run market performance of British and European listed firms. Using daily data and a sample composed of 3,015 European listed firms (805 UK and 2,210 non-UK), we find that, over a 12-month horizon, the Brexit announcement negatively affected the long-run market performance of UK firms (regardless of their business activities) and European non-British (non-UK hereafter) firms that conduct most of their business activities within the British area. We also provide evidence that, after the Brexit announcement, analysts' earnings forecasts and the realized accounting decreased and the return volatility increased for UK firms
    Keywords: financial market,event study,Brexit,buy-and-hold,macroeconomic news
    Date: 2018–12–14
  4. By: Benoit Mojon; Xavier Ragot
    Abstract: Why is wage inflation so weak in spite of the recent sharp reduction in unemployment? We show that this may be due to an ongoing change in the composition of the labor supply. Indeed, the participation rate of workers aged between 55 and 64 has increased steadily over the last decade, from a third to above a half on average across OECD countries. This is most likely the consequence of ageing and the reform of pensions. We show that the participation rate of workers aged 55 to 64 contributes to explain why wage inflation has remained weak over the last five years. Our second result is that Phillips curves are alive and well. When exploiting the cross-country variance of the data, wage inflation remains highly responsive to domestic unemployment rates, including after the Great Recession.
    Keywords: low inflation, ageing economy, Phillips curve
    JEL: E5 J3
    Date: 2019–03
  5. By: Jan Bruha; Jaromir Tonner
    Abstract: The goal of this paper is to contribute to the understanding of the macroeconomic costs and benefits of euro adoption by the Czech economy through the lens of the CNB's official structural macroeconomic model - called g3. To do so, we perform simulations using the g3 model and a modification thereof with a fixed nominal exchange rate and with the policy rate given by the ECB. First, we compare the unconditional volatilities of selected macro variables implied by the two models. Second, we use the g3 model to filter the historical data to identify the structural shocks that affected the Czech economy in the past ten years, and we then use the modified model to simulate the counterfactual outcome of what would have happened to the Czech economy if the euro had been adopted in the past. Our results indicate that euro adoption would have had positive effects on the levels of macroeconomic variables at the cost of an increase in nominal volatility.
    Keywords: DSGE model, euro, monetary policy
    JEL: E47 E52 F47
    Date: 2018–12
  6. By: Istvan Konya (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, University of Pécs and Central European University); Judit Kreko (Central European University and Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences); Gabor Oblath (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences)
    Abstract: The paper studies the labor share among countries of the European Union, with a particular attention to newer member states of Central and Eastern Europe (CEEU). After discussing methodological issues in the computation of the labor share, we present various stylized facts at the country level, and also for broad sectors within the aggregate economy. We find that CEEU countries typically have lower labor shares, both in the aggregate and at the sectoral level. Structural change, while quite pronounced among the CEEU economies, plays only a minor role in the evolution of the labor share. The exception is agriculture, which for some countries have a sizable impact on the level and dynamics of the labor share - partly because of important measurement problems. We also document links between productivity, the relative prices of consumption and investment, and the labor share. In particular, we find that a significant part of the difference in conventionally measured labor shares between the more developed EU countries and less developed CEEU countries can be attributed to differences in relative prices. We discuss possible explanations, and show that given reasonable assumptions, a simple two-sector model is able to account for the main findings.
    Keywords: labor share, development, labor productivity, relative prices, European Union
    JEL: E24 J30 O11
    Date: 2019–01
  7. By: Raffaele Giammetti (Universita' Politecnica delle Marche)
    Abstract: This paper challenges and complements existing studies on the economic impact of Brexit providing a discussion of the UK's decision to leave the EU and how it will affect international trade networks and value-added. Using the World Input-Output Database, we develop a multi-sector inter-country model that allows us to identify all the channels through which the economic effects of Brexit would propagate. The inclusion of global value chains and indirect Brexit effects in the model leads to estimates that diverge with the results of the main literature. Indeed our findings, suggest that Brexit could be risky and costly not only for the UK but also for many EU countries. Furthermore, building on the Dietzenbacher and Lahr (2013) method of hypothetical expansion, we develop a second model and present the first empirical analysis on the consequences of domestic import substitution and trade diversion policies in Input-Output schemes. We found that allowing sectors and countries to partly substitute foreign products, leads to significantly lower losses for both macro-regions. In the second model, the UK and EU27 would lose, at worst, the 0.05 and 0.5 percent of value-added, respectively.
    Keywords: Brexit, trade barriers, tariffs, input-output analysis, value chains, import substitution, production networks.
    JEL: C67 R15 F13 F14 O21
    Date: 2019–03
  8. By: Gaudêncio, João; Mazany, Agnieszka; Schwarz, Claudia
    Abstract: This paper analyses the impact of lending standards for residential real estate (RRE) loans on default rates, using a novel loan-level dataset from the European DataWarehouse (EDW) that covers eight euro area countries. To the best of the authors’ knowledge, this paper is the first to use, for this purpose, a consistent set of loan-level data on loans originated in multiple euro area countries. Previous literature has used either national loan-level data, which does not allow for cross-country comparisons, or aggregate cross-country data. The dataset is first explored through an extensive descriptive analysis and this is followed by static probit regressions. The findings confirm the key influence of lending standards – in particular, loan-to-value and loan-to-income ratios at origination, original loan maturity and borrower employment status – on loan default rates. The impact of other variables, such as interest rate fixation and payment type, varies depending on the country of loan origination. These results are particularly relevant for microprudential supervisors in their ongoing assessment of banks’ credit policies. The highlighted country specificities should be taken into account in macroprudential policymaking. JEL Classification: C25, G21
    Keywords: default probability, lending standards, loan-level data, loan defaults, residential real estate
    Date: 2019–03
  9. By: McAdam, Peter; Petroulakis, Filippos; Vansteenkiste, Isabel; Cavalleri, Maria Chiara; Eliet, Alice; Soares, Ana
    Abstract: We examine the degree of market power in the big four countries of the euro area using macro and firm-micro data. We focus on three main indicators of market power in and across countries: namely, the concentration ratios, the markup and the degree of economic dynamism. For the macro database we use the sectoral data of KLEMs and for the micro data we use a combination of Orbis and iBACH (dating from 2006 onwards). We find that, in contrast to the situation in the US, market power metrics have been relatively stable over recent years and – in terms of the markup specifically – marginally trending down since the late 1990s, driven largely by Manufacturing. In terms of the debate as to the merits of market concentration, we find (relying on results for Manufacturing) that firms in sectors which exhibit high concentration, but are categorized as ‘high tech’ users, generally have higher TFP growth rates. By contrast, markups tend to display a bi-modal distribution when looked at through the lens of high concentration and high tech usage. These results would tend to confirm that the rise in market power documented for other economies is not obviously a euro area phenomenon and that welfare and policy analysis of market concentration is inevitably complex. JEL Classification: D2, D4, N1, O3
    Keywords: euro area, market power, micro-macro data
    Date: 2019–03
  10. By: Heyman, Fredrik (Research Institute of Industrial Economics (IFN)); Sjöholm, Fredrik (Department of Economics, Lund University)
    Abstract: Globalization has increased in recent decades, resulting in structural changes of production and labor demand. This paper examines how the increased global engagement of firms affects the structure of the workforce. We find that the aggregate distribution of occupations in Sweden has become more skilled between 1997 and 2013. Moreover, firms with a high degree of international orientation have a relatively skilled distribution of occupations and firms with low international orientation have a relatively unskilled distribution of occupations. High- and low-skilled occupations have increased in importance whereas middle-skilled occupations have declined with a resulting job polarization. We also discuss and analyze the role played by new technology and automatization.
    Keywords: Occupations; Job polarization; Globalization; Multinational enterprises; Exporter; Automatization
    JEL: F10 F16 F23
    Date: 2019–03–25
  11. By: Huizinga, Harry; Laeven, Luc
    Abstract: Loan loss provisions in the euro area are negatively related to GDP growth, i.e., they are procyclical. Loan loss provisions tend to be more procyclical at larger and better capitalized banks. The procyclicality of loan loss provisions can explain about two-thirds of the variation of bank capitalization over the business cycle. We estimate that provisioning procyclicality in the euro area is about twice as large as in other advanced economies. This difference reflects a larger procyclicality of provisioning in euro area countries already prior to euro adoption, and the divergent growth experiences of euro area countries following the global financial crisis.
    Keywords: financial institutions; financial regulation; procyclicality
    JEL: G20
    Date: 2019–03
  12. By: Alcaraz, Carlo; Claessens, Stijn; Cuadra, Gabriel; Marqués-Ibáñez, David; Sapriza, Horacio
    Abstract: We assess how a major, unconventional central bank intervention, Draghi’s “whatever it takes” speech, affected lending conditions. Similar to other large interventions, it responded to adverse financial and macroeconomic developments that also influenced the supply and demand for credit. We avoid such endogeneity concerns by focusing on a third country and comparing lending conditions by euro area and other banks to the same borrower. We show that the intervention reversed prior risk-taking – in volume, price, and loan credit ratings – by subsidiaries of euro area banks relative to local and other foreign banks. Our results document a new effect of large central banks’ interventions and are robust along many dimensions. JEL Classification: E51, G21, F34
    Keywords: credit conditions, spillovers, unconventional monetary policy
    Date: 2019–03
  13. By: Jianu, Ionuț
    Abstract: This paper aims at clustering the European Union member states into two groups of countries (country-groups with inclusive institutions / extractive institutions) and, depending on them, to assess the impact of financial shocks on unemployment during 2003-2017 period, given that the unemployment was the main channel by which the economic and financial crisis influenced the social developments in the European Union. In order to achieve the objective of the paper, I used panel Panel Estimated Generalized Least Squares method for both clusters, this being weighted by Period SUR option to remove ex-ante the possible inconveniences of the model. The quality of institutions wasn't used yet as a clustering criterion for unemployment assessments and this approach can bring a real value added in this research area. The results show that the institutios quality are a relevant explanatory factor for economic and social development. This assessment also confirm the lower resilience of labour markets at the effects of the economic and financial crisis in the member states with extractive institutions.
    Keywords: unemployment,financial shocks,crisis,dummy,youth
    Date: 2018
  14. By: Giordana, Gaston; Ziegelmeyer, Michael
    Abstract: This paper uses representative individual household data from Luxembourg to evaluate how severe economic conditions could affect bank exposure to the household sector. Information on household income, expenses and liquid assets are used to calculate household-specific probabilities of default (PD), aggregate bank exposure at default (EAD) and aggregate bank loss given default (LGD). The exercise is repeated with scenarios combining severe but plausible shocks to real estate prices, bonds and stocks, household income and interest rates. Compared to the no-shock baseline, the LGD rises by a multiple of eight, reaching 4.2% of total bank exposure to the household sector. The high-stress scenario also generates a relatively high percentage of defaults among socio-economically disadvantaged households. Our main conclusion is that bank losses appear to be quite sensitive to financial stress, despite three mitigating factors in Luxembourg: indebted households tend to hold liquid assets that can help smooth shocks, household leverage tends to decline rapidly once mortgages have been serviced several years, and loan-to-value ratios at origination appear not to be excessive. JEL Classification: D10, D14, E44, G01, G21
    Keywords: financial stability, HFCS, household finance
    Date: 2019–03
  15. By: Mehic, Adrian (Department of Economics, Lund University)
    Abstract: Between the 2014 and 2018 Swedish parliamentary elections, the vote share of the anti-immigration Sweden Democrats increased significantly. To evaluate the possibility of a causal link between immigration and the right-wing populist vote, this paper uses data from a nationwide policy experiment, under which refugees are allocated randomly to every municipality in the country, creating exogenous variation in the number of refugees between municipalities. Overall, I find a positive and significant impact of immigration on the anti-immigration vote. In areas with strong anti-immigration sentiments during the 1990s refugee wave, the effect is magnified significantly. However, when considering immigration of a particular refugee group dominated by young men, the relationship is considerably weaker. I show that this is because immigration of young men has a balancing effect on the right-wing populist vote among immigration-friendly voter groups.
    Keywords: immigration; right-wing populism; natural experiment
    JEL: D72 J15 P16
    Date: 2019–03–19
  16. By: Gilles Saint-Paul (New York University Abu Dhabi, 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: Why would people support policies that are macroeconomically unsound, in that they are more likely to lead to such events as sovereign crises, balance of payments crises, and the like? This may arise if decisive voters are likely to bear a lower fraction of the costs of the crisis, while bene.tting from the short-run gains associated with those policies, such as greater public expenditure or lower taxes. I first discuss an illustrative model based on Saint-Paul et al. (2017), based on the assumption that in a crisis, not everybody can access his or her entitlement to publicly provided goods, a feature labelled "favoritism". If the decisive voter is relatively favored in this rationing process, then people are more likely to finance public expenditure by debt, the greater the degree of favoritism. Furthermore, favoritism and the likelihood of a crisis raises the level of public spending. Next, I consider the choice between electing a "populist" who reneges on anonymity when allocating the public good, even in normal times, and a "technocrat" who sticks to anonymity, and does all it takes to balance the budget. I show that the support for the populist is greater, (i) the greater the likelihood of default, (ii) the more depressed the macroeconomic environment, (iii) the greater the inherited level of public debt and (iv) the lower the state's fiscal capacity. I then argue that the model helps understanding some episodes in French pension reform. Some occupational groups supported unsustainable reductions in the retirement age because they expected that other workers would bear a higher proportion of the burden of future adjustment. Finally, using a panel of countries, I provide evidence in favor of some of the predictions of the model. As predicted, favoritism raises public debt, budget de.cits, and public spending. It also raises the likelihood of a fiscal crisis through its effect on public debt. Furthermore, "populists" are more likely to conquer power, the higher the degree of debt and budget deficits, and the higher the level of government spending.the latter finding being consistent with the model's prediction on the effect of fiscal capacity.
    Keywords: Political economy,Fiscal crises,Favoritism,Entitlements,Public debt,Inequality,State capacity
    Date: 2019–03
  17. By: Oskar Kowalewski (IESEG School of Management (LEM-CNRS-UMR 9221)); ;
    Abstract: In this study, we examine the effects of foreign branch activity on commercial banks in the Central, Eastern, and Southeastern European countries for the period 1995-2015. We show that more foreign bank branches are present in countries that have higher taxes and regulatory restrictions on bank activity. The increased activity of bank branches negatively a ects foreign-owned bank lending, and to a lesser extent, that of state-owned banks. We attribute this finding to the fact that branches and foreign-owned banks compete for the same type of clients, namely, multinational corporations. The branch e ect seems to be larger for corporate loans than for consumer loans, which confirms our assumptions. Moreover, we find that the negative effect is stronger for foreign banks owned by multinational banks than by non-bank entities.
    Keywords: foreign bank branch, lending, subsidiary, crisis, developing markets, EU Firm performance
    Date: 2019–03
  18. By: Sergio Mayordomo (Banco de España); Omar Rachedi (Banco de España)
    Abstract: We study the effect of rising Chinese import competition in the early 2000s on banks’ credit supply policies. Using bank-firm-level data on the universe of Spanish corporate loans, we exploit heterogeneity across banks in the exposure of their loan portfolios towards firms competing with Chinese imports. Exposed banks rebalanced their loan portfolios by cutting the supply of credit to firms affected by Chinese competition, while raising their lending towards non-exposed sectors. This portfolio reallocation depressed further the economic activity of firms competing with Chinese imports
    Keywords: trade shock, credit register, banks’ portfolio reallocation, bank loans, real effects
    JEL: G21 G32
    Date: 2019–03
  19. By: Jeromin Zettelmeyer (Peterson Institute for International Economics)
    Abstract: Germany’s new National Industrial Strategy 2030, unveiled by Economy Minister Peter Altmaier in February 2019, advocates an aggressive industrial policy. Although it stays clear of the virulent economic nationalism of the 1930s and the protectionism of President Donald Trump, its tone and much of its content are unmistakably nationalist. Zettelmeyer concludes that three of Altmaier’s five proposals—attempting to further raise the German share of manufacturing, restricting non-EU imports of intermediate goods, and promoting national champions in Germany and the European Union—are bad policies. The two remaining ideas—preventing some foreign takeovers and ramping up state support for certain technologies—are somewhat easier to justify, based on either market failures or the risk of technological dependence on foreign companies susceptible to political interference. But even in these areas, the specific policies proposed may well do more harm than good.
    Date: 2019–02

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