nep-eec New Economics Papers
on European Economics
Issue of 2019‒11‒11
eleven papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Sectoral Reallocations, Real Estate Shocks and Productivity Divergence in Europe: a Tale of Three Countries By Thomas Grjebine; Jérôme Héricourt; Fabien Tripier
  2. Financial Cycles in Europe: Dynamics, Synchronicity and Implications for Business Cycles and Macroeconomic Imbalances By Amat Adarov
  3. Towards more feasible sovereign debt restructurings in the euro area By Frederik Eidam; Friedrich Heinemann
  4. Time-Varying Price Discovery in Sovereign Credit Markets By Massimo Guidolin; Manuela Pedio; Alessandra tosi
  5. The Distributional Impact of Labour Market Reforms: A Model-Based Assessment By Werner Roeger; Janos Varga; Jan in't Veld; Lukas Vogel
  6. The Surprising Sluggishness of French Exports: Reviewing Competitiveness and its Determinants By Charlotte Emlinger; Sébastien Jean; Vincent Vicard
  7. Risk Management for Sovereign Debt Financing with Sustainability Conditions By Zenios, Stavros A.; Consiglio, Andrea; Athanasopoulou, Marialena; Moshammer, Edmund; Gavilan, Angel; Erce, Aitor
  8. Fiscal Episodes in the EMU: Elasticities and Non-Keynesian Effects By António Afonso; Frederico Silva Leal
  9. The impact of central bank liquidity support on banks’ balance sheets By de Haan, Leo; Holton, Sarah; van den End, Jan Willem
  10. Tangible and Intangible Assets in the Growth Performance of the EU, Japan and the US By Amat Adarov; Robert Stehrer
  11. Convergence, productivity and debt: the case of Hungary By Daniel Baksa; Istvan Konya

  1. By: Thomas Grjebine; Jérôme Héricourt; Fabien Tripier
    Abstract: The creation of the European Monetary Union (EMU) in 1999 was expected to become a catalyst for real convergence in Europe. Far from being the case, real divergence increased from the early 1990s as evidenced by low productivity growth in the "periphery" of the Euro area relative to "core" countries. This report investigates the role of sectoral reallocation in this divergence, focusing on three archetypal countries: France, Germany, and Spain. Using the EU-KLEMS database of sectoral Total Factor Productivity (TFP), we first show that sector reallocations have been at the origin of productivity losses in the considered countries and contributed significantly to this divergence. Second, we investigate how the substantially diverging real estate prices between these countries could explain those sectoral reallocations. More specifically, when access to external finance is restricted due to financial frictions, real estate assets may be used as collateral by borrowers to relax these constraints and increase investments. Real estate shocks turn out to be a strong driver of productivity divergence, causing the lag of Spain behind Germany before the Great Recession and that of France afterwards. For comparison purpose, we also shed light on the role of sectoral reallocation in the UK productivity puzzle.
    Date: 2019
  2. By: Amat Adarov (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: Using dynamic factor models and state-space techniques we quantify financial cycles for twenty European countries over the period 1960Q1–2015Q4 capturing imbalances across credit, housing, bond and equity markets. The paper documents the existence of slow-moving and persistent financial cycles for all countries in the sample, many of which also exhibit high cross-country synchronicity. Spillover analysis points at the significant role the global financial cycle and a common latent region-specific factor, the European financial cycle, play in shaping national financial market dynamics. Estimations using Bayesian panel VAR models to assess interactions between external and internal macroeconomic imbalances suggest that financial cycles are an important driver of business cycles and public debt dynamics, with much stronger shock transmission observed in the euro area and systemic European economies. Disclaimer Research for this paper was financed by the Anniversary Fund of the Oesterreichische Nationalbank (Project No. 17044). Support provided by Oesterreichische Nationalbank for this research is gratefully acknowledged.
    Keywords: financial cycles, macroeconomic imbalances, financial stability, business cycles, financial spillovers, panel VAR, Bayesian VAR
    JEL: E44 F32 G15 F4
    Date: 2019–10
  3. By: Frederik Eidam; Friedrich Heinemann
    Abstract: Over the last year, exchanges that were initiated by the ZEW’s SEEK-conference on ‘regulating sovereign debt restructuring in the eurozone’ resulted in vivid discussions on more feasible sovereign debt restructurings in the euro area. This policy report, edited by Frederik Eidam and Friedrich Heinemann, summarizes these discussions by collecting several contributions on different aspects of the topic. Founded in different perspectives, contributors sometimes provide different conclusions, or highlight different choice options and their underlying trade-offs. However, common to all authors is the aim to increase the resilience of the European Monetary Union and to contribute on the debate on the European reform agenda.
    Date: 2019
  4. By: Massimo Guidolin; Manuela Pedio; Alessandra tosi
    Abstract: We analyze the time-varying nature of the price discovery process in the sovereign debt market over the sample period January 2006 – September 2015. In particular, we test whether the cointegration relationship that should tie bond and CDS spreads together holds over the entire sample. In addition, we investigate which (if any) of the two markets leads the price discovery in each of a number of sub-samples. We focus on ten European countries (Portugal, Italy, Ireland, Greece, Spain, Netherland, Germany, France, Austria, and Belgium), the UK, and the US. We find that while for all the peripheral countries but Greece the CDS and bond spreads show a long-run equilibrium relationship over the full sample, this is not the case for core European countries, the UK, and the US. Moreover, when the cointegration relationship fails to hold, none of the two markets appears to lead the price discovery process.
    Keywords: Treasury bond spreads, credit default swaps, sovereign credit risk, vector error correction
    JEL: C32 E52 E43
    Date: 2019
  5. By: Werner Roeger; Janos Varga; Jan in't Veld; Lukas Vogel
    Abstract: This paper studies the effects of labour market reforms on the functional distribution of income in a DSGE model (Roeger et al., 2008) with skill differentiation, in which households supply three types of labour: low-, medium- and high-skilled. The households receive income from labour, tangible capital, intangible capital, financial wealth and transfers. We trace how structural reforms in the labour market affect these different types of income. The quantification of labour market reforms is based on changes in structural indicators that significantly reduce the gap of the EU average income towards the best-performing EU countries. We find a general trade-off between an increase in employment for a particular group and the income of the average group member relative to income per capita. Reforms that increase employment of low- and medium-skilled workers imply a trade-off between employment and wages in the low- and medium-skilled group, due to the increase in the skill-specific supply of labour. Capital owners generally benefit from labour market reforms, with an increasing share in total income. This can be attributed to limited entry into the final goods production sector, underlining the importance of product market reforms in addition to labour market reforms.
    Keywords: labour market reforms, dynamic general equilibrium modelling, income distribution, inequality
    JEL: C33 D58 E25 J20
    Date: 2019
  6. By: Charlotte Emlinger; Sébastien Jean; Vincent Vicard
    Abstract: The large deterioration in France’s current account balance during the euro’s first decade was mainly due to its poor export performances. Although there have been no more market share losses since 2012, French export growth lags behind that of our European partners. Given that labor cost have grown more slowly in France than in Germany since 2011, the sluggishness of French export performance appears surprising. To date, however, the rebalancing of labor costs under way only represents between a quarter and a third of the divergence observed between 1999 and the crisis. Moreover, whether through social contribution exemptions in France or Germany’s introduction of a minimum wage, the relative decrease has mainly concerned low wage brackets, which have little influence on exports. Such limited “catch-up” is symptomatic of the difficulty that the Eurozone has in implementing coordinated rebalancing policies across its Member States. The absence of any marked improvement in French export performances remains difficult to explain by traditional determinants. French specialisation has moved away from Germany’s to become closer to Italy’s, but this does not seem to have been particularly problematic. The hypothesis of a hysteresis effect, according to which the decline in French industrial production is at the origin of an inability to gain back export market shares, is not confirmed analysis. The unquestionable deterioration in non-price competitiveness remains a valuable explanation, but it is difficult to relate it to clearly identified causes, whether as regards quality or investment. Investment statistics suggest that France does not suffer from a lack of R&D expenditures in comparison with its principal neighbours; on the contrary, their level contrasts with the relative decline in manufacturing output. This finding raises the question of how far R&D activities have a ripple effect on French manufacturing. This aspect is even more important if one considers that France’s economy is characterised by the major role played by its multinationals, whose activities abroad have grown more rapidly than those of other large Eurozone countries. The resulting foreign direct investment revenues do much to explain that France has a near equilibrium current account. In this respect, the French economy suffers more from a loss of industrial production sites than from any lack of competitiveness.
    Date: 2019
  7. By: Zenios, Stavros A. (University of Cyprus); Consiglio, Andrea (University of Palermo); Athanasopoulou, Marialena (European Stability Mechanism); Moshammer, Edmund (European Stability Mechanism); Gavilan, Angel (Banco de España); Erce, Aitor (Banco de España)
    Abstract: We develop a model of debt sustainability analysis with optimal financing decisions in the presence of macroeconomic, financial and fiscal uncertainty. We define a coherent measure of refinancing risk, and trade off the risks of debt stock and flow dynamics, subject to debt sustainability constraints and endogenous risk and term premia. We optimize both static and dynamic financing strategies, compare them with several simple rules and consol financing to demonstrate economically significant effects of optimal financing, and show that the stock-flow tradeoff can be critical for sustainability. We quantify the minimum refinancing risk and the maximum rate of debt reduction that a sovereign can achieve given its economic fundamentals, and extend the model to identify optimal timing for debt flow adjustments that allow the sovereign to go beyond these limits. We put the model to the data on three real-world cases: a representative euro zone crisis country, a low-debt country (Netherlands) and a high-debt country (Italy). These applications illustrate the use of the model in informing diverse policy decisions on sustainable public finance. The model is part of the European Stability Mechanism toolkit to assess debt sustainability and repayment capacity of member states in the context of financial assistance.
    Keywords: sovereign debt; sustainability; debt financing; optimization; stochastic programming; scenario analysis; conditional Value-at-Risk; risk measures
    JEL: C61 C63 D61 E3 E47 E62 F34 G38 H63
    Date: 2019–06–01
  8. By: António Afonso; Frederico Silva Leal
    Abstract: We estimate short- and long-run elasticities of private consumption for fiscal instruments, using a Fixed Effects model for the 19-euro area countries during the period of 1960-2017, to assess how fiscal elasticities vary during fiscal episodes. According to the results, positive “tax revenue” elasticities indicate that consumers have a Ricardian behaviour, whereby they perceive an increase in taxation to be a sign of future government spending. “Social benefits” appear to have a non-keynesian effect on private consumption. In addition, using a narrative approach to identify fiscal consolidations, it is seen that private consumption continues to exhibit a non-keynesian response to tax increases, both in the short and long-run, and “other expenditures” have a recessive impact during “normal times”. Furthermore, “social benefits” are more contractionary in consolidations than in both expansions and “normal times”. Additionally, after the launch of the EMU, expansionary fiscal consolidations became harder to observe, and “other expenditure” and “investment” lost their non-keynesian role.
    Date: 2019
  9. By: de Haan, Leo; Holton, Sarah; van den End, Jan Willem
    Abstract: We empirically analyse the relationship between longer term central bank liquidity support and banks’ balance sheet ratios, using difference-in-differences panel regressions and propensity score matching on a large sample of banks in the euro area. The research question is whether the liquidity operations, which were introduced to prevent disorderly deleveraging, can also be linked to unintended changes in banks’ funding policies and asset allocations. The results show that unconditional and conditional refinancing operations are associated with different developments on banks’ balance sheets. Unconditional longer-term refinancing operations went together with higher maturity transformation by banks in stressed countries, and also more carry trades, i.e. banks borrowing more while increasing their holdings of government bonds. In contrast, refinancing operations that were conditional on banks’ lending were not associated with such carry trades, highlighting the benefits of conditionality attached to long-term refinancing operations. JEL Classification: E51, G21, G32
    Keywords: banking, central bank liquidity, financial intermediation
    Date: 2019–11
  10. By: Amat Adarov (The Vienna Institute for International Economic Studies, wiiw); Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: This paper discusses new results using the EU KLEMS 2019 Release focussing on the role of ICT and intangibles assets employing a growth accounting framework and an econometric analysis. The EU KLEMS 2019 data covers most EU Member States, the US and Japan, forty detailed industries according to NACE Rev. 2 (ISIC Rev. 4) along with nine aggregated industries and spans over the period 1995-2017. In particular, intangible assets outside the boundaries of the national accounts are taken into account. The data are used to study total factor productivity, labour and capital productivity developments in a comparative cross-country and cross-industry dimension with an emphasis on the role of capital investments. Inter alia, the analysis studies the implications of various asset types and particularly the role of ICT and intangible capital, as well as changes in labour services and the composition thereof, as drivers of value added and labour productivity growth. Significant differences in the underlying growth contributions between the pre-crisis and post-crisis periods in growth performances are highlighted. Disclaimer A comparative analysis based on the EU KLEMS Release 2019 The paper is written as part of the project ‘Industry level growth and productivity data with special focus on intangible assets’ under the Service Contract No. ECFIN-116-2018/SI2.784491 financed by the European Commission, DG ECFIN. We would like to thank Dale Jorgenson and participants of the Asian KLEMS conference (14-15 October 2019, Bejing) for useful comments.
    Keywords: EU KLEMS, growth accounting, tangible and tangible assets, ICT and non-ICT capital, productivity and growth
    JEL: C82 D24 O47
    Date: 2019–10
  11. By: Daniel Baksa (Institute for Capacity Development, International Monetary Fund and Central European University); Istvan Konya (Institute of Economics, Centre for Economic and Regional Studies, and University of Pécs and Central European University)
    Abstract: We study the role of productivity convergence and financial conditions in the recent growth experience of Hungary. We build a stochastic, small-open economy growth model with productivity convergence, capital accumulation and external borrowing. Using empirically identified processes for productivity and the external interest premium, we simulate the effects of two unexpected, permanent changes on Hungarian growth. The first change is the sharp productivity slowdown starting in 2006, and the second is the tightening of external financial conditions starting in 2009. Simulating our model, we show that the empirically identified productivity and interest premium processes - along with the two unexpected permanent changes and regular i.i.d. productivity and interest premium innovations – capture the main medium-run dynamics of the Hungarian economy both before and after the global financial crisis. Running counterfactuals, we also find that the observed slowdown in GDP per capita growth was mostly driven by productivity, while the tightening of external financing conditions is important to understand investment behavior and the net foreign asset position.
    Keywords: economic growth, convergence, productivity, interest premium, Hungary
    JEL: E13 E22 F43 O47
    Date: 2019

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