nep-eec New Economics Papers
on European Economics
Issue of 2021‒04‒26
thirteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. On Optimal Currency Areas and Common Cycles: Are the Acceding Countries Ready to Join the Euro? By Louisa Grimm; Sven Steinkamp; Frank Westermann
  2. The Euro Crisis in the Mirror of the EMS: How Tying Odysseus to the Mast Avoided the Sirens but Led Him to Charybdis By Corsetti, G; Eichengreen, B; Hale, G; Tallman, E
  3. On selling sovereigns held by the ECB to the ESM: Institutional and economic policy implications By Avgouleas, Emilios; Micossi, Stefano
  4. The Core, the Periphery, and the Disaster: Corporate-Sovereign Nexus in COVID-19 Times By Ruggero Jappelli; Loriana Pelizzon; Alberto Plazzi
  5. How do inequalities affect the natural interest rate, and how do they impact monetary policy? Comparing Germany, Japan and the US By Rafael Mariam Camarero; Gilles Dufrénot; Cecilio Tamarit
  6. Home Bias in Sovereign Exposure and the Probability of Bank Default - Evidence from EU Stress Test Data By Dominik Meyland; Dorothea Schäfer
  7. “Nowcasting and forecasting GDP growth with machine-learning sentiment indicators” By Oscar Claveria; Enric Monte; Salvador Torra
  8. Weekly Economic Activity: Measurement and Informational Content By Philipp Wegmüller; Christian Glocker; Valentino Guggia
  9. Uncertainty about exchange rates affects import prices in the Euro Area By Blagov, Boris
  10. Regional convergence in CEE before and after the Global Financial Crisis By Smirnykh, Larisa; Wörgötter, Andreas
  11. Labour market responses to the Covid-19 crisis in the United States and Europe By Gros, Daniel; Ounnas, Alexandre
  12. Dating the euro area business cycle: an evaluation By Claudia Pacella
  13. Green Bonds: the Sovereign Issuers' Perspective By Raffaele Doronzo; Vittorio Siracusa; Stefano Antonelli

  1. By: Louisa Grimm; Sven Steinkamp; Frank Westermann
    Abstract: The former EU president Jean-Claude Junker has proposed that all countries of the European Union should also adopt the euro as their currency and recent research has shown that countries currently pursuing this goal indeed fulfill the classical Optimal Currency Area (OCA) criterion of positively correlated shocks with the European Monetary Union (EMU). We illustrate, however, that not only the correlation of shocks but also a common impulse response pattern over time is needed for a currency area to be optimal. We test this additional OCA criterion using the concept of a common serial correlation test. The test clearly rejects the notion that the potentially acceding countries share a common cyclical response pattern with the EMU aggregate – except for Sweden. Instead, the business cycles in most of the other countries exhibit only a very weak form of codependence.
    Keywords: codependent business cycles, serial correlation, common feature, European monetary integration, seasonality, optimum currency area
    JEL: C32 E32 F36
    Date: 2021
  2. By: Corsetti, G; Eichengreen, B; Hale, G; Tallman, E
    Abstract: Why was recovery from the euro area crisis delayed for a decade? The explanation lies in the absence of credible and timely policies to backstop financial intermediaries and sovereign debt markets. In this paper we add light and color to this analysis, contrasting recent experience with the 1992–3 crisis in the European Monetary System, when national central banks and treasuries more successfully provided this backstop. In the more recent episode, the incomplete development of the euro area constrained the ability of the ECB and other European institutions to do likewise.
    Keywords: Financial crisis, Currency crisis, Euro, European Monetary System, Economics
    Date: 2020–04–01
  3. By: Avgouleas, Emilios; Micossi, Stefano
    Abstract: A repetition of austerity policies of the early 2010s is not consistent with maintaining adequate growth and sovereign debt sustainability in the post-pandemic environment, argue the authors of this CEPS Policy Insight. Likewise, a debt restructuring process with deep haircuts will just upset the fragile state of the markets and create a run on the debt of the most vulnerable member states, forcing the ECB to buy even more debt. Common policies are thus required to keep the sovereigns acquired by the ECB with its Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) programmes out of financial markets for an indefinite period. The European Stability Mechanism (ESM) can offer the appropriate instrument by purchasing the ECB-held sovereign debt and issuing own liabilities to fund the purchases. The programme could develop gradually, over several years, to ensure the smooth rollover of expiring securities. As the purchases would be funded by the ESM’s own liabilities, backed by the sovereign holdings, ESM debt would become the long- sought-after European safe asset. The authors argue that this ESM action could be conducted without an ESM Treaty change. It would be premised on the legal framework of the revised Article 14 (precautionary financial assistance). The ESM could then gradually evolve into a debt management agency for the euro area. The transfer of much of ECB sovereign holdings to the ESM would restore monetary policy independence and ease any frictions in this field, thereby allowing EU policymakers’ focus to shift to the completion of the European Banking Union. This paper follows up on a CEPS Policy Insight of October 2020, in which Stefano Micossi argued that the increase in sovereign indebtedness under way in the euro area should be managed through collective policy actions.
    Date: 2021–03
  4. By: Ruggero Jappelli (Goethe University, Frankfurt; Leibniz Institute for Financial Research SAFE); Loriana Pelizzon (Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice); Alberto Plazzi (Swiss Finance Institute; Universita' della Svizzera italiana)
    Abstract: We study how the COVID-19 pandemic reshaped the relation between corporate and sovereign credit risk in the cross-section of countries in the European Union. Surprisingly, the outbreak triggered higher elasticity of corporate to sovereign CDS spreads in core countries, which realigned to that of peripheral countries, with lower fiscal capacity, for which the impact of the pandemic on the elasticity was essentially muted. During the pandemic, we observe systematic departures of actual CDS from those implied by a standard structural model of default for larger firms in core EU countries with budgetary slackness. We interpret this evidence in light of a disaster-risk asset pricing model with bailout guarantees and defaultable public debt. Based on the model and a synthetic control method, we show that CDS-implied risk-adjusted bailout guarantees over the medium term were about three times larger in the Core than in the Periphery.
    Keywords: COVID-19, Credit Risk, Sovereign Risk, Fiscal Capacity, Bailout
    JEL: F65 G01 G15
    Date: 2021–04
  5. By: Rafael Mariam Camarero (University Jaume I and INTECO, Department of Economics, Campus de Riu Sec, E-12080 Castellón (Spain)); Gilles Dufrénot (Corresponding author: AMSE and CEPII. email:; Cecilio Tamarit (University of València and INTECO, Department of Applied Economics II, PO Box 22006 E-46071 Valencia, Spain)
    Abstract: In this paper we analyze how growing income/wealth inequality and the functional income distribution inequality have contributed to the sustained low potential growth observed in the industrialized economies during the last two decades, a period that includes the Great Recession (GR). Growing inequality may constitute a drawback for the recovery of these economies, especially after the Great Pandemic (GP). To this aim, we modify the semi-structural model originally proposed by Holston, Laubach and William, by considering the effects of several types of inequalities. We jointly estimate potential growth and the natural interest rates. We show that the latter can substantially modify the time path of the real interest rate that prevails when economies are at full strength and inflation is stable.
    Keywords: Potential growth; Inequality; Natural interest rate; G7; State-space model
    JEL: E62 E52 E21 C32
    Date: 2021–04
  6. By: Dominik Meyland; Dorothea Schäfer
    Abstract: Since the European debt crisis economists and politicians discuss intensively the sovereign-bank nexus. The high activity in sovereign bond issuance required to mitigate the burden of the Covid19 crisis will rather intensify this debate than calm it down. Surprisingly, however, we still have only limited knowledge about the impact of a home bias in sovereign exposure on bank stability. This paper provides a new way to use European stress test data to study this relationship. In addition, we explore the effect on a bank’s probability of default if the existing capital requirement privilege for EU sovereign exposures were abolished. Our results support the conceptual idea behind the nexus theory. Interestingly, the effect of a home bias on bank stability is contingent on the home country’s solvency. If the home country is sufficiently solvent, investments in home sovereign bonds may improve bank stability. The findings clearly support the benefits of additional CET1 capital buffers. Regulation focusing on the home bias should account for heterogeneous effects depending on the home country’s solvency.
    Keywords: Home bias, sovereign bonds, bank stability, equity requirements, financial regulation
    JEL: G21 G28 K15
    Date: 2021
  7. By: Oscar Claveria (AQR-IREA, University of Barcelona); Enric Monte (Polytechnic University of Catalunya); Salvador Torra (Riskcenter-IREA, University of Barcelona)
    Abstract: We apply the two-step machine-learning method proposed by Claveria et al. (2021) to generate country-specific sentiment indicators that provide estimates of year-on-year GDP growth rates. In the first step, by means of genetic programming, business and consumer expectations are evolved to derive sentiment indicators for 19 European economies. In the second step, the sentiment indicators are iteratively re-computed and combined each period to forecast yearly growth rates. To assess the performance of the proposed approach, we have designed two out-of-sample experiments: a nowcasting exercise in which we recursively generate estimates of GDP at the end of each quarter using the latest survey data available, and an iterative forecasting exercise for different forecast horizons We found that forecasts generated with the sentiment indicators outperform those obtained with time series models. These results show the potential of the methodology as a predictive tool.
    Keywords: Forecasting, Economic growth, Business and consumer expectations, Symbolic regression, Evolutionary algorithms, Genetic programming. JEL classification: C51, C55, C63, C83, C93
    Date: 2021–02
  8. By: Philipp Wegmüller; Christian Glocker (WIFO); Valentino Guggia
    Abstract: We construct a composite index to measure real activity of the Swiss economy on a weekly frequency. The index is based on a novel high-frequency data-set capturing economic activity across distinct dimensions over a long-time horizon. An adequate adjustment of raw data prior to deriving the latent factor is crucial for obtaining precise business cycle signals. By means of a real-time evaluation, we highlight the importance of our proposed adjustment procedure: first, our weekly index significantly outperforms a comparable index without adjusted input variables; secondly, the weekly index outperforms established monthly indicators in nowcasting GDP growth. These insights should help improve recently developed high-frequency indicators.
    Keywords: Business cycle index, Dynamic factor model, High-frequency data, Nowcasting
    Date: 2021–04–14
  9. By: Blagov, Boris
    Abstract: RWI research shows that monetary policy should take uncertainty about exchange rate fluctuations into account. When aiming at price stability, central banks closely monitor exchange rates. Their level is known to influence prices, since many product components are sourced internationally. An RWI study suggests that central bankers should also take the level of uncertainty about future exchange rates into account when aiming at price stability. The study finds that in the Euro Area, importers bear the main burden of the uncertainty. Mainly affected are countries like Germany, Italy, and the Netherlands, whose industries rely heavily on intermediate goods imports. When uncertainty increases, importers buy less goods to lower the risk. Consequently, prices for intermediate goods fall.
    Date: 2021
  10. By: Smirnykh, Larisa; Wörgötter, Andreas
    Abstract: In this study we analyze the convergence of GDP per capita from 2000 to2013 (current prices and euro exchange rates) for eight countries (Czech Republic, Slovakia, Slovenia, Hungary, Poland, Estonia, Latvia and Lithuania) of the European Union (CEE8). Some convergence indicators are also calculated for the CEE8 as a whole. The main purpose of this study is to shed some light on the impact of the Global Financial Crisis (GFC) on regional convergence in advanced emerging countries, like the CEE8. The main result of random effects panel regressions for unconditional beta-convergence is that significant convergence is found for the whole period from 2000-2013, but not for sub-periods on either end of the sample, except for Hungary and Poland. This means, that convergence in most CEECs is only significant if the GFC is included in the estimation period. The role of capital regions for the convergence process is an item for future research.
    Date: 2021
  11. By: Gros, Daniel; Ounnas, Alexandre
    Abstract: Labour markets have reacted very differently to the Covid-19 crisis. In the US, the impact on unemployment rates was rapid across all states. They increased sharply in March and April 2020 and recovered steadily thereafter. In Europe, by contrast, unemployment increased far less, and the adjustment was more gradual. This difference in unemployment responsiveness is most likely a consequence of the widespread use of short-term work schemes in Europe, given that the transatlantic differences in hours worked overall are much smaller than for unemployment. Using data from US states and EU member states, an econometric analysis of the impact of the restrictions (lockdowns) implemented by governments to contain the spread of the virus reveals that in the case of the US, unemployment appears to have been driven mostly by the aggregate shock generated by the pandemic as it played out between March and November 2020. In the EU, unemployment showed little variation. The Non-Pharmaceutical Interventions (NPIs) used in different US states and EU countries, as can be demonstrated through a regression analysis, did not always have significant effects on unemployment.
    Date: 2021–04
  12. By: Claudia Pacella (Bank of Italy)
    Abstract: In this paper we study the business cycle dating formulated by the CEPR committee for the euro area. We first compare recessions as defined by the CEPR to those obtained using alternative methodologies (e.g. Bry-Boschan algorithm) and we find that the CEPR dating is not fully in line with other dating rules that are based only on GDP dynamics, thus confirming that the committee considers a broader set of variables. We then evaluate the classification of economic activity in recessions and expansions; the underlying business cycle is either based on a single variable or estimated as a latent factor that captures the comovements of several macroeconomic series. We find that the CEPR chronology is more consistent with the estimated common factor than with what is implied by methods solely based on GDP. Finally, we analyze which real variables drive the classification of economic activity by the CEPR and we find that the properties of the CEPR chronology are mainly related to the dynamics of demand components, especially final consumption, and employment.
    Keywords: business fluctuations, cycle, factor models
    JEL: E32 C38
    Date: 2021–04
  13. By: Raffaele Doronzo (Bank of Italy); Vittorio Siracusa (Bank of Italy); Stefano Antonelli (Bank of Italy)
    Abstract: This paper aims at providing an assessment of green bonds from the perspective of sovereign issuers. After a brief depiction of green bonds’ features, we describe the market evolution, present the EU regulatory framework and identify the main benefits and costs for sovereign issuers. We focus on the financial performance of these securities in primary and secondary markets. First, we compare the yields at issuance of sovereign green bonds with non-green bonds of the same issuer with the same maturity. Then we analyse the secondary market performance of green bonds issued by France, Belgium, Ireland and the Netherlands, and we do not find, any remarkable price difference between green and conventional bonds, even after controlling for their different degree of liquidity. Nevertheless, this should not discourage Sovereigns from entering the market since the reason for issuing these securities does not simply hinge upon short-term financial convenience. Green bonds can actually help Sovereigns to mitigate environmental risks and to cope with the intergenerational trade-off in climate-related policies.
    Keywords: green bonds, public debt, debt management
    JEL: H23 H63 Q56
    Date: 2021–03

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