nep-eec New Economics Papers
on European Economics
Issue of 2020‒10‒19
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. Brexit and the Euro By Nauro Campos; Corrado Macchiarelli
  2. An assessment of the Phillips curve over time: evidence for the United States and the euro area By Marente Vlekke; Martin Mellens
  3. Bank competition and credit risk in the Euro area, 2005-2017: Is there evidence of convergence? By Maria Karadima; Helen Louri
  4. Close Encounters of the European Kind: Economic Integration, Sectoral Heterogeneity and Structural Reforms By Campos, Nauro F.; Eichenauer, Vera Z.; Sturm, Jan-Egbert
  5. The European Union's response to the coronavirus emergency: an early assessment By Tobias Tesche
  6. Financial drivers of the euro area business cycle: a DSGE-based approach By Hirschbühl, Dominik; Krustev, Georgi; Stoevsky, Grigor
  7. Macroprudential policy, monetary policy and Eurozone bank risk By Elien Meuleman; Rudi Vander Vennet
  8. German Public Banks, Financial Competition, and Crisis: Institutional Change in German Banking and Financial Vulnerability Before the Global Financial Crisis By Eichacker, Nina
  9. It’s not about the money! EU funds, local opportunities, and the Brexit vote By Riccardo Crescenzi; Marco Di Cotaldo; Mara Guia
  10. The Effect of Brexit on UK Productivity: Synthetic Control Analysis By Farid, Moatazbellah
  11. The case for central bank independence: a review of key issues in the international debate By Dall’Orto Mas, Rodolfo; Vonessen, Benjamin; Fehlker, Christian; Arnold, Katrin
  12. Chronic Excess Capacity and Unemployment Hysteresis in EU Countries. A Structural Approach By Federico Bassi
  13. 'The politicisation of transatlantic trade in Europe: Explaining inconsistent preferences regarding free trade and the TTIP By Aleksandra Sojka; Jorge Díaz-Lanchas; Frederico Steinberg

  1. By: Nauro Campos; Corrado Macchiarelli
    Abstract: The year 2019 marks the 20th anniversary of the euro as well as Brexit, the expected exit of the United Kingdom from the European Union. This paper examines the relationship between Brexit and the stability of the euro area. We look at stability from the perspective of the distance between core and periphery groups of countries which, we show, is mainly determined by the level of synchronization of economic activity among them. We provide new evidence that the UK economy, since 1990, has become significantly more integrated with the EU economy. The UK moved from being in the periphery before 1990 to being in the core afterwards. We also provide evidence that the level of business cycles synchronization of the UK economy with the EU has had the highest, among all countries, variability over time. We conclude with some policy implications from Brexit for the stability of the euro area.
    Keywords: European Monetary Union, Eurozone, Core-periphery
    Date: 2020–03
  2. By: Marente Vlekke (CPB Netherlands Bureau for Economic Policy Analysis); Martin Mellens (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: We assess the stability of the coefficient on the unemployment gap in various linear dynamic Phillips curve models. We allow the coefficient on the unemployment gap and the other variables in our model to be time-varying, so that we can monitor the importance of the Phillips curve over time. We compare the effects of different measures for inflation and inflation expectations on our estimation results. In our analysis, we use state space methods and adopt a practical approach to Bayesian estimation with feasible testing and diagnostic checking procedures. Empirical results are presented for the United States and the five largest euro area economies. Our main conclusion is that in the United States the Phillips curve for headline inflation has remained empirically relevant over the years while there are periods when its impact has been low. For measures of core inflation we find a declining Phillips curve. In the euro area the strength of the relationship differs per country and over time, but has overall been weak and volatile in the past three decades. For both the United States and the euro area countries, we find little evidence of the “anchored expectations"-hypothesis.
    JEL: C18 C32 C52 E24 E31
    Date: 2020–09
  3. By: Maria Karadima; Helen Louri
    Abstract: Consolidation in euro area banking has been the major trend post-crisis. Has it been accompanied by more or less competition? Has it led to more or less credit risk? In all or some countries? In this study, we examine the evolution of competition (through market power and concentration) and credit risk (through non-performing loans) in 2005-2017 across all euro area countries (EA-19), as well as core (EA-Co) and periphery (EA-Pe) countries separately. Using Theil inequality and convergence analysis, our results support the continued existence of fragmentation as well as of divergence within and/or between core and periphery with respect to competition and credit risk, especially post-crisis, in spite of some partial reintegration trends. Policy measures supporting faster convergence of our variables would be helpful in establishing a real banking union.
    Keywords: Banking competition, credit risk, NPLs, Theil index, convergence analysis
    Date: 2020–04
  4. By: Campos, Nauro F. (University College London); Eichenauer, Vera Z. (ETH Zurich); Sturm, Jan-Egbert (ETH Zurich)
    Abstract: This paper addresses two main questions: (a) Has European integration hindered the implementation of labour, financial and product market structural reforms? (b) Do the effects of these reforms vary more across sectors than across countries? Using more granular reform measures, longer time windows and a larger sample of countries than previous studies, we confirm that the euro triggered product but neither labour nor financial market reforms. Differently from previous studies, we find that: (a) the Single Market has similar effects to the euro, and (b) sectoral heterogeneity appears less important in explaining the economic impacts of reforms than country heterogeneity.
    Keywords: Euro, Single Market, structural reforms, european integration, sectoral heterogeneity
    JEL: F4 N1 N4 O4
    Date: 2020–09
  5. By: Tobias Tesche
    Abstract: This article provides an assessment of the EU institutions’ response to the coronavirus pandemic. It contends that it followed the new intergovernmental tendency to empower de novo bodies like the European Stability Mechanism, the European Investment Bank and the European Central Bank. The European Central Bank’s early and unconstrained action structured European politics. Its pandemic emergency purchase programme ensured that euro area member states were able to maintain market access and lowered the financial attractiveness of the subsequently created instruments to tackle the corona crisis. The European Commission was relegated to the role of ‘cheerleader of European solidarity’. It partially redeemed itself by creating a new temporary loan-based instrument to support national short-term work schemes and by proposing a large-scale recovery instrument termed ‘Next Generation EU’.
    Keywords: Coronavirus crisis, pandemic emergency politics, COVID-19, euro area, EU
    Date: 2020–06
  6. By: Hirschbühl, Dominik; Krustev, Georgi; Stoevsky, Grigor
    Abstract: We estimate a modified version of the “Financial Business Cycles” model originally developed by Iacoviello (2015) in order to investigate the role played by financial factors in driving the business cycle in the euro area. In the model, financial shocks such as borrower defaults, collateral shocks and credit supply effects amplify economic downturns by reducing the flow of credit from banks to the real sector. In this novel application to the euro area, we introduce capital reallocation inefficiency, an innovation to the original set-up which allows for more realistic effects of entrepreneur defaults on economic activity. Our results suggest that financial factors, as captured by this model, played a smaller role in the euro area throughout the double-dip recession than in the United States during the 2008-09 global financial crisis. In a scenario on second-round effects implied by potential NFC loan losses due to the COVID-19 pandemic, we find large financial amplification risks to real economic activity. JEL Classification: E32, E44, E47
    Keywords: Bayesian estimation, DSGE, financial frictions, housing
    Date: 2020–10
  7. By: Elien Meuleman; Rudi Vander Vennet (-)
    Abstract: We investigate the impact of macroprudential policy on the risk and return profile of Eurozone banks between 2008 and 2018, conditioning on the stance of monetary policy. Using local projections, we find that a tightening in macroprudential policy increases financial stability by curbing credit growth and increasing the resilience of the banks. With respect to the policy mix, we show that tight macroprudential and monetary policies reinforce each other. But even when monetary policy is accommodating, macroprudential policy is found to be effective in deterring excessive bank risk taking. However, we also document adverse consequences for bank franchise values.
    Keywords: Euro Area banks, macroprudential policy, monetary policy, inverse propensity score matching, local projections, bank risk profile
    JEL: C23 E52 E61 G21 G28
    Date: 2020–08
  8. By: Eichacker, Nina
    Abstract: This paper asks why Landesbanks, public banks designed to provide credit to German firms in regions underserved by private banks, embraced risky asset and liability balances in the years before the Global Financial Crisis, and subsequently lost billions of dollars in write-downs after the US subprime mortgage bubble burst in 2007. It argues that the German government’s decisions to eliminate protections for Landesbanks increased competitive pressure for public banks, increased the propensity for those banks to adopt risky strategies in order to maximize profits. These actions by Landesbanks and large private banks exposed German households and firms to greater risk and financial vulnerability, and indirectly exposed European financial systems to subprime mortgage risk. It uses balance sheet analysis for different sectors of German finance to show that Landesbanks and Germany’s large private banks adopted higher risk asset and liabilities, engaged in more international activity, and shifted from lending to security acquisition while competing for profits, while Sparkassen, small public savings banks, did not adopt such risky strategies, and successfully shielded German households and small businesses from credit market spillovers following the Global Financial Crisis. The paper contributes nuance to debates about whether public banks are beneficial institutions to promote, and shows that Landesbanks’ failures stemmed from external pressures for them to increase their profits, which increased financial and economic instability in Germany and beyond.
    Date: 2020–09–24
  9. By: Riccardo Crescenzi; Marco Di Cotaldo; Mara Guia
    Abstract: Growing Euroscepticism across the European Union (EU) leaves open questions as to what citizens expect to gain from EU Membership and what influences their dissent for the EU integration project. This paper looks at EU Structural Funds, one of the largest and most visible expenditure items in the EU budget, to test the impact of EU money on electoral support for the EU. By leveraging the Referendum on Brexit hold in the United Kingdom, a spatial RDD analysis offers causal evidence that EU money does not influence citizens’ support for the EU. Conversely, the analysis shows that EU funds contribute to mitigate Euroscepticism only where they are coupled with tangible improvements in the local labour market conditions. In order to gain support from its citizens, the European Union needs to produce tangible impacts, generating opportunities at the local level where these are felt the most by voters.
    Keywords: Europe, EU funds, Cohesion Policy, Brexit, Euroscepticism, RDD
    Date: 2019–10
  10. By: Farid, Moatazbellah
    Abstract: In this paper I analyse the effect of Brexit on UK labour productivity and its components using a synthetic control methodology. My results show that the Brexit vote had a negative impact on labour productivity, causing GDP per hour worked to decrease by 2.4% by 2019 in comparison to the absence of Brexit. The two components of labour productivity are GDP and hours worked. I find that the decrease in the GDP is more than the increase in hours worked per person, causing the labour productivity to decline
    Keywords: Brexit, Labour productivity, Productivity puzzle, Synthetic control method
    JEL: E24 E65 F13 O47
    Date: 2020–09–21
  11. By: Dall’Orto Mas, Rodolfo; Vonessen, Benjamin; Fehlker, Christian; Arnold, Katrin
    Abstract: This Occasional Paper analyses how significant expansions in central banks’ mandates, roles and instruments can result in challenges to the independence of monetary policy. The paper reviews, in particular, some of the key challenges to central bank independence brought about by the global financial crisis (GFC) of 2007 and assesses their impact on the de jure and de facto independence of selected central banks around the world in the past few years. It finds that although the level of de jure (legal) central bank independence did not deteriorate, the level of de facto (actual) independence of the central banks of some of the largest economies in the world may have weakened. The paper presents counterarguments to the key critiques raised against central banks due to their policy response during the GFC, and concludes that the case for central bank independence is as strong as ever. JEL Classification: B1, B2, C4, E3, E4, E5, E6, K3, N1, N2
    Keywords: central bank independence, central bank mandate, financial stability, global financial crisis, price stability
    Date: 2020–10
  12. By: Federico Bassi (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: We develop a structural method for identifying the unobservable rate of capacity utilization in 14 EU countries, by simultaneously estimating the coefficients of a production function, an investment function, a labor productivity function and an unemployment function. Our results provide evidence of chronic underutilization of productive capacity and hysteresis in unemployment, especially after the 2008’ financial crisis. We show that our series of the rate of capacity utilization are significant predictors of capacity accumulation, productivity growth and unemployment rates. Moreover, they predict inflation as efficiently as the DG ECFIN series of capacity utilization and output gaps.
    Keywords: Capacity utilization, Potential GDP, Output gap, Hysteresis.
    JEL: C51 E22 E32
    Date: 2020–10
  13. By: Aleksandra Sojka; Jorge Díaz-Lanchas; Frederico Steinberg
    Abstract: The Transatlantic Trade and Investment Partnership (TTIP) generated an unprecedented public contestation across Europe. In this paper, we focus on the sources of such backlash in European public opinion. Previous studies of this issue have analysed opinions on free trade and the specific agreement separately. However, not accounting for their correlated character could lead to biased conclusions about their determinants. To address this, we apply an innovative empirical approach and construct a set of bivariate probit models to calculate joint probabilities for the different configurations of support and opposition. We validate that attitudes toward free trade and the TTIP have similar but not identical foundations. Inconsistent preferences are rooted in individual values, EU attitudes, and political cues, as well as treaty partner heuristics. Our innovative empirical approach offers an improved understanding of trade attitudes within EU’s multilevel context.
    Keywords: trade liberalisation, free trade, public opinion, trade agreements, TTIP
    Date: 2020–01

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