nep-eec New Economics Papers
on European Economics
Issue of 2022‒04‒11
nineteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The Effects of Natural Disasters on Price Stability in the Euro Area By John Beirne; Yannis Dafermos; Alexander Kriwoluzky; Nuobu Renzhi; Ulrich Volz; Jana Wittich
  2. Unconventional Monetary Policy in the Euro Area. Impacts on Loans, Employment, and Investment By António Afonso; Francisco Gomes Pereira
  3. Planned Fiscal Consolidation and Under-Estimated Multipliers: Revisiting the Evidence and Relevance for the Euro Area By Daniel Gros; Alessandro Liscai; Farzaneh Shamsfakhr
  4. How Have the Euro Area and U.S. Labor Market Recoveries Differed? By Thomas Klitgaard
  5. On the optimal design of a financial stability fund By Árpád Ábrahám; Eva Cárceles-Poveda; Yan Liu; Ramon Marimon
  6. On the design of a european unemployment insurance system By Árpád Ábrahám; João Brogueira de Sousa; Ramon Marimon; Lukas Mayr
  7. A general equilibrium analysis of the economic impact of the post-2006 EU regulation in the services sector By Javier Barbero; Manol Bengyuzov; Martin Christensen; Andrea Conte; Simone Salotti; Aleksei Trofimov
  8. Improving government quality in the regions of the EU and its system-wide benefits for Cohesion policy By Javier Barbero; Martin Christensen; Andrea Conte; Patrizio Lecca; Andrés Rodríguez-Pose; Simone Salotti
  9. The ripple effects of large-scale transport infrastructure investment By Damiaan Persyn; Javier Barbero; Jorge Díaz-Lanchas; Patrizio Lecca; Giovanni Mandras; Simone Salotti
  10. Effects of Policy Mix on European Regional Convergence By Ignacio Sacristán López-Bravo; Carlos San Juan Mesonada
  11. Capital Flows and the Eurozone's North-South Divide By Karsten Kohler
  12. Calibrating the countercyclical capital buffer for Italy By Pierluigi Bologna; Maddalena Galardo
  13. The Future of Taxation in changing labour markets By Michael Christl; Ilias Livanos; Andrea Papini; Alberto Tumino
  14. Forecasting Inflation in France: an Update of MAPI By Youssef Ulgazi; Paul Vertier
  15. How to Limit the Spillover from the 2021 Inflation Surge to Inflation Expectations? By Lena Dräger; Michael J. Lamla; Damjan Pfajfar
  16. Effects of a supply chain regulation: Survey-based results on the expected effects of the German Supply Chains Act By Kolev, Galina V.; Neligan, Adriana
  17. Trade Liberalization, Collective Bargaining and Workers: Wages and Working Conditions By Bastien Alvarez; Gianluca Orefice; Farid Toubal
  18. The economic returns of circular economy practices By Antonioli, Davide; Ghisetti, Claudia; Mazzanti, Massimiliano; Nicolli, Francesco
  19. “There is No Planet B", but for Banks “There are Countries B to Z": Domestic Climate Policy and Cross-Border Bank Lending By Emanuela Benincasa; Gazi Kabas; Steven Ongena

  1. By: John Beirne (Asian Development Bank Institute); Yannis Dafermos (Department of Economics, SOAS University of London); Alexander Kriwoluzky (German Institute for Economic Research (DIW Berlin)); Nuobu Renzhi (Capital University of Economics and Business); Ulrich Volz (Department of Economics, SOAS University of London); Jana Wittich (German Institute for Economic Research (DIW Berlin))
    Abstract: This paper investigates the impact of natural disasters on price stability in the euro area. We estimate panel and country-specific structural vector autoregression (VAR) models by combining estimated damages of disaster events with monthly data for the Harmonised Index of Consumer Prices (HICP) for all euro area countries over the period 1996-2021. Besides estimating the effect on overall headline inflation, we examine effects on its 12 main sub-indices and further sub-categories of food price inflation. This allows us to disentangle differences in the direction and strength of price effects across consumption categories. Our results suggest significant positive effects of natural disasters on overall headline inflation, with diverging results at the sub-index level. Positive inflation effects are particularly pronounced for prices of food and beverages, while negative effects prevail for other sub-indices. Our country-specific results suggest heterogenous inflation effects of natural disasters across different countries. A key implication of our findings is that climate change is likely to make it increasingly difficult for the European Central bank to achieve its inflation target.
    Keywords: Natural disasters; climate; inflation; monetary policy; European Central Bank
    JEL: E31 E52 Q54
    Date: 2021–11
  2. By: António Afonso; Francisco Gomes Pereira
    Abstract: Using a difference-in-differences identification strategy on a micro panel at the bank and firm level, we study the transmission effectiveness of ECB’s large-scale asset purchasing programs programs (i.e. APP and PEPP) in the Euro area. Our findings show: first, balance sheet composition of banks is an important determinant of monetary policy transmission. We tested this hypothesis by showing that banks more exposed to government debt securities had higher loan growth than less exposed banks after the APP announcement. By extension, this could lead to heterogeneous economic impacts depending on the geographical location of exposed banks. For the PEPP, contrary to the APP, we did not find a portfolio-rebalancing channel for banks that were more exposed to government debt securities. Second, using balance sheet data on corporates, we verify that firms that borrowed more increased employment and fixed capital investment, albeit to a lesser degree than before the APP announcement. Furthermore, our sample shows that corporations in countries with banks more exposed to government debt securities had higher borrowing growth and fixed capital growth versus countries with less exposed banks.
    Keywords: unconventional monetary policy, difference-in-differences, euro area, employment, investment.
    JEL: C23 D22 E52 E58 G11 G20
    Date: 2022–03
  3. By: Daniel Gros; Alessandro Liscai; Farzaneh Shamsfakhr
    Abstract: The Great Financial Crisis caused a deep recession and led to very large public deficits. When financial market tensions erupted, many European countries were forced to reduce their deficits. This ‘austerity’ is often credited with the disappointingly slow recovery during the years after the financial crisis. One reason for such a slow recovery could have been that the impact of a reduction in the fiscal deficits is larger than anticipated during a recession, especially if it is accompanied by financial market tensions. At the height of the financial crisis and in its immediate aftermath, this might not have been properly taken into account.
    Date: 2022
  4. By: Thomas Klitgaard
    Abstract: The initial phase of the pandemic saw the euro area and U.S unemployment rates behave quite differently, with the rate for the United States rising much more dramatically than the euro area rate. Two years on, the rates for both regions are back near pre-pandemic levels. A key difference, though, is that U.S. employment levels were down by 3.0 million jobs in 2021:Q4 relative to pre-pandemic levels, while the number of euro area jobs was up 600,000. A look at employment by industry shows that both regions had large shortfalls in the accommodation and food services industries, as expected. A key difference is the government sector, with the number of those jobs in the euro area up by 1.5 million, while the government sector in the United States shed 600,000.
    Keywords: labor market; United States; euro area; employment; unemployment rate; public sector; government; leisure; hospitality; pandemic; recovery; COVID-19; job retention schemes
    JEL: J21 J00
    Date: 2022–03–30
  5. By: Árpád Ábrahám; Eva Cárceles-Poveda; Yan Liu; Ramon Marimon
    Abstract: We develop a model of a Financial Stability Fund (Fund) for a union of sovereign countries. By contract design, the Fund never has expected undesired losses while, being default-free, a participant country has greater ability to borrow and share risks than using sovereign debt financing. The Fund contract also provides better incentives for the country to reduce endogenous risks. These efficiency gains arise from the ability of the Fund to offer long-term contingent financial contracts, subject to limited enforcement (LE) and moral hazard (MH) constraints as part of the contingencies. We develop the theory (welfare theorems, with a new price decentralization) and quantitatively compare the constrained-efficient Fund economy with an incomplete markets economy with default. In particular, we characterize how prices and allocations differ, when the two economies are subject to exogenous productivity and endogenous government expenditure shocks. In our economies, calibrated to the euro area 'stressed countries', substantial welfare gains are achieved, particularly in times of crisis. The Fund is, in fact, a risk-sharing, crisis prevention and resolution mechanism, which transforms participant countries’ defaultable sovereign debts into union’s safe assets. In sum, our theory can help to improve current official lending practices and, eventually, to design an European Fiscal Fund.
    Keywords: fiscal unions, recursive contracts, Debt Contracts, partnerships, limited enforcement, moral hazard, debt restructuring, Debt Overhang, sovereign fund
    JEL: E43 E44 E47 E63 F34 F36
    Date: 2022–03
  6. By: Árpád Ábrahám; João Brogueira de Sousa; Ramon Marimon; Lukas Mayr
    Abstract: We study the welfare effects of both existing and counter-factual European unemployment insurance policies using a rich multi-country dynamic general equilibrium model with labour market frictions. The model successfully replicates several salient features of European labor markets, in particular the cross-country differences in the flows between employment, unemployment and inactivity. We find that mechanisms like the recently introduced European instrument for temporary support to mitigate unemployment risks in an emergency (SURE), which allows national governments to borrow at low interest rates to cover expenditures on unemployment benefits, yield sizable welfare gains, contradicting the conventional classical view that costs of business cycles are small. Furthermore, we find that a harmonized benefit system that features a one-time payment of around three quarters of income upon separation is welfare improving in all Eurozone countries relative to the status quo.
    Keywords: labour markets, Unemployment Insurance, job creation, job destruction, risk-sharing, Economic Monetary Union
    JEL: J6 E2
    Date: 2022–03
  7. By: Javier Barbero (European Commission - JRC); Manol Bengyuzov (European Commission - DG GROW); Martin Christensen (European Commission - JRC); Andrea Conte (European Commission - JRC); Simone Salotti (European Commission - JRC); Aleksei Trofimov (European Commission - DG GROW)
    Abstract: This study uses both econometric and modelling techniques to quantify the macroeconomic impact of regulatory reforms removing barriers in the European Single Market for services that have taken place in the European Union between 2006 and 2017. It also provides scenario analyses of the impact of a number of hypothetical additional reforms aimed at further reducing regulatory restrictions. The results of the modelling simulations indicate that the regulatory reforms implemented between 2006 and 2017 will result in discounted cumulative gains of 2.1% of GDP by the year 2027. Furthermore, ambitious additional reforms from 2017 onwards would generate an additional growth potential of 2.5% of GDP by 2027. Combining the realised and potential gains would result in a cumulative gain in GDP of 4.65% and a rise in employment of more than 300,000 full time equivalents by 2027. More conservative hypotheses on the additional reforms from 2017 onwards would lead to a GDP cumulative gain of 3.22% by 2027.
    Keywords: rhomolo, region, growth, Services regulation, general equilibrium modelling, Single Market
    JEL: C68 R13
    Date: 2022–02
  8. By: Javier Barbero (European Commission - JRC); Martin Christensen (European Commission - JRC); Andrea Conte (European Commission - JRC); Patrizio Lecca (PBL); Andrés Rodríguez-Pose (London School of Economics); Simone Salotti (European Commission - JRC)
    Abstract: We quantify the general equilibrium effects on economic growth of improving the quality of institutions at the regional level in the context of the implementation of the European Cohesion Policy for the European Union and the UK. The direct impact of changes in the quality of government is integrated in a general equilibrium model to analyse the system-wide economic effects resulting from additional endogenous mechanisms and feedback effects. The results reveal a significant direct effect as well as considerable system-wide benefits from improved government quality on economic growth. A small 5% increase in government quality across European Union regions increases the impact of Cohesion investment by up to 7% in the short run and 3% in the long run. The exact magnitude of the gains depends on various local factors, including the initial endowments of public capital, the level of government quality, and the degree of persistence over time.
    Keywords: government quality, cohesion, economic growth, public investment, regions, EU
    JEL: C68 O17 R13 R15
    Date: 2022–02
  9. By: Damiaan Persyn (University of Gottingen); Javier Barbero (European Commission - JRC); Jorge Díaz-Lanchas (Universidad Pontificia Comillas); Patrizio Lecca (PBL); Giovanni Mandras (European Commission - JRC); Simone Salotti (European Commission - JRC)
    Abstract: We analyse the general equilibrium effects of an asymmetric decrease in transport costs, combining a large scale spatial dynamic general equilibrium model for 267 European NUTS 2 regions with a detailed transport model at the level of individual road segments. As a case study we consider the impact of the road infrastructure investments in Central and Eastern Europe in the context of the EU cohesion policy programme. Our analysis suggests that the decrease in transportation costs benefits the regions targeted by the policy via substantial increases in GDP and exports compared to the baseline, and small increases in population. The geographic information embedded in the transport model leads to relatively large predicted benefits in peripheral countries such as Greece and Finland who hardly receive funds, but whose trade links cross Central and Eastern Europe and thus profit from the investments there. The richer, Western European non-targeted regions also enjoy a higher GDP after the investment in the East, but these effects are smaller. Thus, the policy reduces interregional disparities. There are rippled patterns in the predicted spillovers of the policy. In non-targeted countries, regions trading more intensely with regions where the investment is taking place on average benefit more compared to other regions within the same country, but also compared to neighbouring regions across an international border. Using regression analysis we uncover that regions which import intermediate inputs from Central and Eastern Europe enjoy the largest spillovers. These regions become more competitive and expand exports locally, at the detriment of other regions in the same country.
    Keywords: transport infrastructure; economic geography; computable general equilibrium modelling.
    JEL: C68 R11 R13 R15 R41
    Date: 2022–02
  10. By: Ignacio Sacristán López-Bravo; Carlos San Juan Mesonada
    Abstract: This paper analyses the impact of the fiscal-monetary policy mix on the convergence on per capita income of the least developed regions (Objective 1) of the European Union (EU 28) during the implementation of the three European Structural and Investment Funds (ESIF) programmes between 2000 and 2020. The Solow-Swan growth model with control variables allows us to assess the absorption capacity of regions in the different phases of the economic cycle. The empirical results show the effectiveness of EU Regional and Cohesion Policy. However, the combination of fiscal and monetary policy shows an impact that is asymmetric, depending on the region. Thus, a policy mix of fiscal restraint and monetary expansion would boost growth in all regions, but would slow down the convergence process in Objective 1 regions.
    Date: 2022
  11. By: Karsten Kohler
    Abstract: The paper offers a monetary perspective on the role of capital flows in the Eurozone's north-south divide. It argues that finance-centric narratives in Comparative Political Economy rightly emphasise financial instability in the periphery, but that the role of capital flows therein requires clarification. The paper draws on post-Keynesian monetary theory, coherent accounting, and balance-of-payments data to make three main points. First, the focus on the financial account as a driver of current accounts should be abandoned in favour of an analysis of gross capital flows. Gross flows need not stem from excess savings in core countries and can be independent from trade flows. Second, speculative portfolio flows into bond markets and foreign direct investment into real estate are causally more important than interbank flows in driving financial instability. Third, rising spreads in the periphery during the Eurozone crisis and the outbreak of the pandemic were not triggered by balance-of-payments problems but by a reversal of speculative flows in government bond markets. The argument suggests that Comparative Political Economy should dedicate more attention to institutions that render peripheral countries particularly susceptible to speculative capital flows into asset markets.
    Keywords: Gross capital flows, balance-of-payments, current account imbalances, Eurozone crisis, sudden stop, comparative political economy, post-Keynesian macroeconomics
    JEL: E12 F32 F36 F41 O57
    Date: 2022–03
  12. By: Pierluigi Bologna (Bank of Italy); Maddalena Galardo (Bank of Italy)
    Abstract: While the setting of the countercyclical capital buffer (CCyB) is not an automatic decision, insights from indicators, such as the credit-to-GDP gap, are a starting point to inform the policy decision. This paper identifies an optimal rule to map the credit-to-GDP gap adjusted to the guide to set the CCyB. We follow two alternative procedures. First, we apply the criteria suggested by the Basel Committee on Banking Supervision, (BCBS), obtaining 3 percentage points of the adjusted gap as the activation threshold and 8 percentage points as the maximum. Then we depart from the BCBS approach by proposing a procedure based on the maximization of the area under the receiver operating characteristic curve (AUROC), which suggests 1 and 9 percentage points as the minimum and maximum thresholds, respectively. We also explore whether the CCyB, had it been in place, would have mitigated the repercussions of the Great Financial Crisis for the Italian banking system. Based on a stylized exercise, the full release of the CCyB at the outbreak of the crisis would have freed around 40 billion of capital, a value close to the total amount of banks' credit provisions during the three following years.
    Keywords: macroprudential policy, CCyB, buffer calibration, credit cycle
    JEL: E32 G21 G28
    Date: 2022–03
  13. By: Michael Christl (European Commission - JRC); Ilias Livanos (European Centre for the Development of Vocational Training (CEDEFOP)); Andrea Papini (European Commission - JRC); Alberto Tumino (European Commission - JRC)
    Abstract: This paper provides a first assessment of the fiscal and distributional consequences of the ongoing structural changes in the labour markets of EU Member States, mostly driven by technological progress and ageing. Cedefop 2020 Skill forecasts, EUROSTAT population projections and the forecast on pension expenditures from the 2021 Ageing Report depict a scenario of an ageing population, an inverted U-shaped unemployment trend and potentially polarising labour markets, the latter mostly driven by a surge in high-skill occupations. This analysis makes use of the microsimulation model EUROMOD and reweighting techniques to analyse the fiscal and distributional impacts of these trends, given the current tax-benefit policies. The results suggest that the macro trends will increase pressure on government budgets. The analysis also shows evidence of the capacity of the current tax-benefit systems to counterbalance the increases in income inequality and poverty risks triggered by the expected future labour markets developments.
    Keywords: income distribution, budget, deficit, job polarisation, population ageing
    JEL: J11 J21 H68
    Date: 2022–03
  14. By: Youssef Ulgazi; Paul Vertier
    Abstract: In this paper, we present an updated version of the reference model used at Banque de France to forecast inflation: MAPI (Model for Analysis and Projection of Inflation). While the conceptual framework of the model remains very close to its initial version, our update takes stock of three different factors. First, since the previous version of the model, the underlying nomenclature used at the European level (ECOICOP) to define some of the main aggregates was changed, therefore requiring a careful review of the relevance of initial equations. Second, in the context of the modification in 2019 of the main semi-structural macroeconomic model used for the macroeconomic projections at Banque de France (FR-BDF), it aims at harmonizing the iterations between MAPI and FR-BDF. Finally, large variations in the wage variables in the midst of the sanitary measures related to the Covid-19 pandemics pushed us to use different concepts of wage and compensation variables. At the crossroads of these considerations, we update the model extending the estimation window, correcting specifications and input variables whenever relevant. The resulting model is an up-to-date, simplified and more parsimonious version of the initial model, entailing a stronger harmonization with the central macroeconomic model FR-BDF. It still involves significant pass-through of wages, oil and exchange rate to HICP.
    Keywords: Forecasting, Inflation, Time Series
    JEL: E37 C32 E31 C53
    Date: 2022
  15. By: Lena Dräger (Leibniz University Hannover); Michael J. Lamla (Leuphana University of Lüneburg and ETH Zurich, KOF Swiss Economic Institute); Damjan Pfajfar (Board of Governors of the Federal Reserve System)
    Abstract: By providing numerical inflation projections. Many central banks currently face inflation well above their targets and with that the challenge to prevent spillovers on inflation expectations. We study the effect of different communication about the 2021 inflation surge on German con-sumers’ inflation expectations using a randomized control trial. We show that information about rising inflation increases short- and long-term inflation expectations. This initial increase in expectations can be mitigated using information about inflation projections, where numerical information about professional forecasters’ projections seems to reduce inflation expectations by more than policymaker’s characterization of inflation as a temporary phenomenon.
    Keywords: Short-run and long-run inflation expectations, inflation surge, randomized control trial, survey experiment, persistent or transitory inflation shock
    JEL: E31 E52 E58 D84
    Date: 2022–02
  16. By: Kolev, Galina V.; Neligan, Adriana
    Abstract: The European Commission is planning a new regulation for mandatory human rights and environmental due diligence (Due Diligence Directive) as part of the Sustainable Corporate Governance initiative. The longawaited EU proposal is expected to have requirements that go far beyond the German Act on Due Diligence in Supply Chains (the so-called Lieferkettensorgfaltspflichtengesetz), which was regarded as a possible blueprint for a European solution. The present paper contributes to the debate on an EU due diligence regulation by presenting results of a recent survey conducted by the German Economic Institute (IW) on the potential impact of the already adopted German Act on Due Diligence in Supply Chains. It highlights both the positive effects and the undesirable side effects in the form of adjustments to value chains, product prices, etc. that German companies expect from the introduction of this German regulation. The results from the survey indicate that the introduction of a due diligence regulation is costly and should also consider the expected negative effects. The high costs of compliance are likely to motivate many companies to withdraw their activity from (mostly developing) countries with weak governance with devastating consequences for the jobs they created in the past, the production standards they brought and the capital they invested. Therefore, the new EU regulation should be carefully introduced and only target companies where evidence is available about misuse of weak production standards in third countries. It is important that the level of regulation by no means is higher than the level of regulation by the German Act on Due Diligence in Supply Chains.
    JEL: F18 Q56 Q01
    Date: 2022
  17. By: Bastien Alvarez; Gianluca Orefice; Farid Toubal
    Abstract: Using large scale data on Eastern European workers, we show significant and sizable deteriorations of their wages and working conditions in regions that faced large tariff liberalization and strong erosion of collective bargaining over the process of accession to the European Union. Import tariffs liberalization reduces workers' wages. The deterioration of working conditions is mostly driven by increased labor demand due to the improvement of Eastern countries' international market access. The erosion of collective bargaining worsens wages and working conditions.
    Keywords: Trade Liberalization;Working Conditions;Wages;Labor Market Institutions;Eastern Europe;E.U. Enlargement
    JEL: F15 F16 J30 J51 J81
    Date: 2022–04
  18. By: Antonioli, Davide; Ghisetti, Claudia; Mazzanti, Massimiliano; Nicolli, Francesco
    Abstract: Assessing the economic consequences of sustainable production choices aimed at reducing environmental negative externalities is crucial for policy making, in light of the increasing interest and awareness experienced in the recent EU policy packages (Circular Economy package; European Green Deal and Recovery Fund to support sustainable transition). This assessment is one of the goal of the current work, which tries to provide new empirical evidence on the economic returns of such choices, drawing on previous literature on the underlying determinants of greener production choices, which are stated to differ from standard technological innovations as they are subject to a knowledge and an environmental externality. Using an original dataset on about 3000 Italian manufacturing firms we provide evidence on the relations among innovations related to the Circular Economy concept and economic outcome in the short run. The evidence shows that in the short run it is difficult to obtain economic gains, especially for the SMEs.
    Keywords: Livestock Production/Industries, Production Economics
    Date: 2022–02–22
  19. By: Emanuela Benincasa (Swiss Finance Institute; University of Zurich - Department of Banking and Finance); Gazi Kabas (University of Zurich); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))
    Abstract: We document that lenders react to domestic climate policy stringency by increasing cross-border lending. We use granular fixed effects to control for loan demand and an instrumental variable strategy to establish causality. Consistent with regulatory arbitrage, the positive effect decreases in borrowers’ climate policy stringency and is absent if the borrower country has a higher stringency. Furthermore, climate policy stringency decreases loan supply to domestic borrowers with high carbon risk while increasing loan supply if such borrowers are abroad. Our results suggest that crossborder lending can enable lenders to exploit the lack of global coordination in climate policies.
    Keywords: Cross-Border Lending, Climate Policy, Regulatory Arbitrage, Syndicated Loans
    JEL: G21 H73 Q58
    Date: 2022–04

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