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on European Economics |
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Issue of 2024‒10‒28
fifteen papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | Philipp Heimberger (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | This paper is about fiscal consolidation measures (i.e. tax hikes and government spending cuts motivated by a desire to reduce the fiscal deficit and public debt) in euro area (EA) countries. The focus is on analysing the growth effects of fiscal adjustments as well as their implications for debt sustainability assessments. I discuss the size and composition of fiscal consolidation by distinguishing three periods the run-up to the EA, when governments faced the Maastricht criteria for joining the monetary union (1992-1998); before and during the recession triggered by the global financial crisis (1999-2009); and the euro crisis (with a specific focus on the 2011-2013 period). The empirical evidence on the growth effects of fiscal consolidation shows that while fiscal adjustments are contractionary, the negative growth effects were particularly strong and persistent during the euro crisis. With regard to the austerity outlook, I show that, beginning in 2025, EA countries are set to implement fiscal consolidations over multiple years so as to meet reformed EU fiscal rules. The adjustment requirements for some member countries are large in historical comparison. The paper argues that the framework for debt sustainability analysis at the heart of the reformed EU fiscal rules downplays the domestic growth impacts of fiscal adjustments and ignores cross-country spill-overs that magnify domestic growth effects. In all likelihood, the reformed framework underestimates the negative growth effects of fiscal consolidation. I conclude that implementing the multi-year fiscal adjustments required to meet EU fiscal rules may not reduce public debt ratios across the EA’s member countries, as the European Commission expects, and that the economic and political implications of austerity may complicate the governance of a fragile EA. |
| Keywords: | Fiscal policy, fiscal consolidation, fiscal multiplier, growth, public debt, euro area |
| JEL: | H30 H63 O47 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:wii:wpaper:253 |
| By: | Fructuoso Borrallo (BANCO DE ESPAÑA); Lucía Cuadro-Sáez (BANCO DE ESPAÑA); Corinna Ghirelli (BANCO DE ESPAÑA); Javier J. Pérez (BANCO DE ESPAÑA) |
| Abstract: | This paper challenges the prevailing assumption that the intensification of the weather phenomena known as El Niño and La Niña generally exert upward and downward pressures, respectively, on international food commodity prices that, in turn, affect consumer prices even in distant jurisdictions such as Europe. As regards the first point, we show that there are nuances that have to do with composition effects (the type of commodity) and sample periods (more recent decades present a different frequency of weather events, with producers having adopted mitigation strategies over time), in such a way that the impact is weaker nowadays and, in some cases, may even change sign (for some commodities, depending on the period of reference). With regard to the second point, and focusing on consumer price inflation in the euro area and its four largest constituent countries (Germany, France, Italy, and Spain), we show that it is crucial to account for the mitigating and sample-period-specific role of domestic agricultural policies (in the euro area, the European Union’s Common Agricultural Policy, CAP). To carry out our analysis, we construct a detailed database for the 1970–2023 period and use a local projections empirical framework. Among other results, we show that when using a sample period that starts at the time of the creation of the euro area (in the late 1990s), an intensification of El Niño actually decreases euro area headline inflation by about 0.3 percentage points (pp) after 12 months, while La Niña increases it by 0.6 pp over the same horizon. We explain our results on the basis of the aforementioned factors: composition effects, sample periods, and the CAP. |
| Keywords: | El Niño, La Niña, food prices, euro area inflation |
| JEL: | C32 F62 F64 O13 Q54 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2432 |
| By: | Di Nino, Virginia; Aprigliano, Valentina |
| Abstract: | We use inflation and income growth expectations from the ECB Consumer Expectations Survey to measure the subjective expected pass-through of inflation to income in the main euro area countries. By aggregating consumers’ responses to probabilistic questions, we obtain significantly higher estimates of the pass-through than those obtained from micro data. Our methodology allows one to examine how the pass-through varies along the probability distribution of expected inflation, which turns out to be particularly large for moderate inflation expectations. We find significant heterogeneity in the inflation pass-through across countries, ages and income groups, consistent with different wage and pension indexation regimes. JEL Classification: C10, C22, E31, E66 |
| Keywords: | consumer expectations survey, price-wage spiral, regression across quantiles, subjective probability forecasts aggregation |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242986 |
| By: | Matteo Barigozzi; Claudio Lissona; Lorenzo Tonni |
| Abstract: | We present and describe a new publicly available large dataset which encompasses quarterly and monthly macroeconomic time series for both the Euro Area (EA) as a whole and its ten primary member countries. The dataset, which is called EA-MD-QD, includes more than 800 time series and spans the period from January 2000 to the latest available month. Since January 2024 EA-MD-QD is updated on a monthly basis and constantly revised, making it an essential resource for conducting policy analysis related to economic outcomes in the EA. To illustrate the usefulness of EA-MD-QD, we study the country specific Impulse Responses of the EA wide monetary policy shock by means of the Common Component VAR plus either Instrumental Variables or Sign Restrictions identification schemes. The results reveal asymmetries in the transmission of the monetary policy shock across countries, particularly between core and peripheral countries. Additionally, we find comovements across Euro Area countries' business cycles to be driven mostly by real variables, compared to nominal ones. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.05082 |
| By: | Dimitrios Bakas (Nottingham Business School, Nottingham Trent University (UK) and Rimini Centre for Economic Analysis (RCEA) (USA)); Ioanna Konstantakopoulou (Centre for Planning and Economic Research (Greece)); Athanasios Triantafyllou (IESEG School of Management, Univ. Lille (France)) |
| Abstract: | This paper examines the validity of the tourism-led economic growth hypothesis for the Euro Area economies. We employ linear and nonlinear autoregressive distributed lag cointegration approaches to examine the symmetric and asymmetric effects of tourism on economic growth. Furthermore, we control for the presence of structural breaks in the time series which account for the recent financial and debt crises in the Euro Area. The results support the positive impact of tourism on economic growth for most of the Euro Area economies and are robust to alternative tourism measures. The findings indicate that an asymmetric impact exists both in the long and the short run. Positive and negative shocks of tourism and real exchange rate result to very different effects, in the sign and magnitude, on economic growth. |
| Keywords: | Tourism-Led Growth Hypothesis; Euro Area; ARDL; Nonlinear ARDL; Structural Breaks |
| JEL: | E00 F00 C32 L83 O10 O11 Z32 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:awm:wpaper:20 |
| By: | Gergely Hudecz; Alexandre Lauwers; Yasin Mimir; Graciela Schiliuk |
| Abstract: | Geoeconomic fragmentation is on the rise amidst heightened geopolitical tensions and a surge in inward-looking policies to strengthen economic and national security. Focusing on trade and capital flows, this paper takes a closer look at the implications of geoeconomic fragmentation for the ASEAN+3 and euro area regions, respectively. Both regions exhibit high degrees of trade openness that expose them to repercussions from geoeconomic fragmentation. Our analysis shows that overall ASEAN+3 trade values remain stable, but trade patterns have shifted. While China's exports have been affected by trade tensions with the United States, ASEAN exports have benefited from the region’s “connector” role. From the European perspective, we document an increase in the euro area’s financial exposures to geopolitically distant countries over the last two decades, and our analysis points to the vulnerability of capital flows to geopolitical risks. Regional financing arrangements should stand ready to support members as they navigate the risks of geoeconomic fragmentation, adapting tools and policies as necessary in line with their mandates. This paper is prepared jointly by staff from AMRO and the ESM. |
| Date: | 2024–10–07 |
| URL: | https://d.repec.org/n?u=RePEc:stm:dpaper:23 |
| By: | Witte, Niklas |
| Abstract: | The results of this paper provide empirical evidence that regulatory capital ratios drive bank Credit Default Swaps (CDS) and that markets react more to changes in capital requirements if implemented via direct adjustments to Pillar 1 risk weights than imposed as a percentage of Risk-Weighted Assets (RWAs) under Pillar 2. In other words, market discipline on bank capital adequacy is sensitive to the composition of the capital requirement stack. Therefore, this paper contributes novel insights to existing research on the market relevance of regulatory capital ratios, on the functioning of the Basel framework, and on market discipline along with its relationship with Pillar 1 and Pillar 2 capital requirements. The findings are relevant in light of the continuous discussions around the capital regulation for Interest Rate Risk in the Banking Book (IRRBB) and other Pillar 2 risks because they suggest that risks are more disciplined by markets if they are reflected in regulatory capital ratios via RWAs. Moreover, the results suggest that further regulatory alignment within the EU can impact the comparability of regulatory capital ratios and affect pricing decisions. In the first empirical step, the research investigates the drivers of CDS and identifies a significant relationship between CDS spreads and regulatory capital ratios. In the second step, the paper researches a quasi-natural experiment based on an event in the EU banking sector. In 2018, the Swedish supervisory authority changed the implementation approach of a risk weight floor on Swedish mortgages by shifting it from Pillar 2 to Pillar 1 while keeping total capital requirements stable. To assess if this merely technical regulatory adjustment triggered an unexpected reaction by markets, a two-step system Generalised Method of Moments (GMM) regression is applied to a sample of CDS spreads of 21 European banks between 2014 and 2020. JEL Classification: F36, G12, G21, G28 |
| Keywords: | bank default risk, banking regulation, capital requirements, European integration, funding costs, IRRBB, market discipline |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242988 |
| By: | Natalie Dvorakova; Tomas Sestorad |
| Abstract: | This paper examines the drivers of the post-pandemic surge in inflation in four small open economies: Czechia, Hungary, Poland, and Slovakia. For this purpose, a Bayesian structural vector autoregressive model with sign-zero restrictions and block exogeneity is employed. The results show that both foreign demand and foreign supply shocks have contributed significantly to inflation in the post-2020 period across countries, alongside notable contributions from domestic factors explaining differences among economies. Specifically, supply-side shocks are identified as the primary domestic factor across all countries, whereas domestic demand shocks were much less influential. Exchange rate shocks were pronounced in Hungary only, while monetary policy shocks have had a minimal impact on inflation since 2022 in all the countries considered. Additionally, we provide decompositions of core inflation, highlighting the predominance of domestic factors. |
| Keywords: | Bayesian VAR, extraordinary events, inflation, sign-zero restrictions, small open economies |
| JEL: | C32 E31 E32 E52 F41 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2024/5 |
| By: | Sandra Eickmeier; Luba Petersen |
| Abstract: | Central banks, including the European Central Bank (ECB), are increasingly involved in climate-related initiatives. This study uses a June 2023 survey of German households to gauge public support for the ECB’s climate engagement. Our findings reveal that 69% of households report increased trust in the ECB due to its climate actions, with most noting a mild boost in trust. These households primarily value the ECB’s broader scope and concern. A minority, comprising 17% and 20% respectively of all households, express concerns about potential compromises to price stability or independence. In contrast, a larger group (23% of all households) believes that the ECB’s climate efforts help the institution better achieve its core objectives. Additionally, our analysis of an information intervention reveals that the ECB’s climate actions have minimal effect on overall household inflation expectations. Finally, an internal survey of central bankers reveals that while they accurately gauge the ECB’s climate activities’ effect on households’ trust, they tend to overestimate their impact on inflation expectations. In sum, our results indicate public endorsement of the ECB’s climate-related endeavors. |
| Keywords: | central bank trust, central bank credibility, inflation expectations, cli-mate change, green policies, survey, central bank communication, uncertainty |
| JEL: | E7 E59 C93 D84 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-62 |
| By: | Kevin Lefebvre; Pauline Wibaux |
| Abstract: | Faced with growing competition and geopolitical tensions, major economies worry about the risks associated with over-reliance on the Chinese economy. Using detailed product-level import data, we compare both large countries’ trade dependencies and the extent to which they supply their trading partners with products they depend on. China stands out for its low number of dependent products. While the United States and the European Union have a similar number of trade dependencies, this number is larger for Japan. The sources of dependencies are common to all four countries, and lie in four sectors: chemicals, electronics, pharmaceuticals and the steel industry. The EU is heavily exposed to China: 61% of its import dependencies come from that country. This potential vulnerability is partially offset by the fact that the EU is China’s leading supplier for a fourth of its 47 import-dependent products. China is three times as exposed to the EU as it is to the US. The EU dependence on China increased between 2019 and 2022 owing to both an increase in the number of European dependencies on China and a reduction in the number of Chinese dependencies on the EU. |
| Keywords: | Import Dependencies;Geo-economics;European Union |
| JEL: | F5 F14 F15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cii:cepipb:2024-47 |
| By: | Rhea Ravenna Sohst; Alessio Fusco; Philippe Van Kerm |
| Abstract: | We provide evidence on the relative differences in the disposable incomes of native and foreign-born households in 21 European countries using EU-SILC data for 2008, 2013 and 2018. Using influence function regression, we derive the contribution of foreign-born households to host country indicators of income inequality and polarization. Individuals living in foreign-born households tend to be over-represented in the lower tails of the income distribution. Although there is heterogeneity in the incomes of foreign-born households, their generally disadvantaged positions tend to push national income inequality upward. This pattern persists in many countries, albeit mitigated in magnitude, when we account for the differences in socio-demographic characteristics. The effect on the Foster-Wolfson index of polarization is more mixed, with immigrants in many countries showing no significant contribution to polarization. Using tools adapted from meta-analysis, we find a strong association between welfare regimes and the contribution of immigrant households to inequality and polarization. |
| Keywords: | migration; inequality; Europe; bi-polarization; EU-SILC; RIF regressions; meta-analysis |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:irs:cepswp:2024-06 |
| By: | Magdalena Olczyk; Marjan Petreski |
| Abstract: | This study explores the differential impacts of global value chain (GVC) participation on foreign direct investment (FDI)-related job creation in EU-27, emphasizing the role of sector-specific and regional factors. The study is based on a rich set of project-level data on FDI-generated jobs. It utilizes a labor demand function estimated through GMM estimator to account for endogeneity. Results indicate that forward GVC participation significantly boosts FDI-related job creation by enhancing domestic value-added and production capacity. However, this effect is moderated by sector-specific characteristics such as productivity or wages. Conversely, backward GVC participation, characterized by reliance on foreign inputs, generally reduces FDI-generated jobs due to lower domestic labor requirements and diminished competitiveness. Despite this, the negative impact of backward GVC participation on employment becomes less significant when regional diversification is considered, highlighting the importance of regional factors like infrastructure and skilled labor. The study also finds that the impact of GVC participation on employment varies with EU membership status and sectoral characteristics, with old EU member states and high-tech sectors benefiting more from forward GVC integration. In contrast, new EU member states and low-tech sectors face greater challenges, particularly with backward GVC participation. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.04160 |
| By: | Alienor Cameron; Maria Garrone |
| Abstract: | To reach its 2050 objective of carbon neutrality, the European Union (EU) must continue to step up its climate efforts, while ensuring the competitiveness of its industries is not harmed. The EU Emission Trading Scheme (ETS) is at the core of the bloc's industrial decarbonization efforts. This paper explores this topic by digging into whether there is a causal relationship between industrial firms' emission intensity and their economic and financial performance. We construct a dataset covering around 1, 200 industrial firms covered by the EU ETS' third phase and estimate a novel indicator of volume-based emission intensities for these firms. Applying an IV approach to a within-firm panel model, we find that firms' emission intensity is negatively related to their corporate performance, and that this does not depend on the competitive environment they operate in. |
| Keywords: | EU ETS, heavy industry, emission intensity, corporate performance. |
| JEL: | D22 H23 L51 Q58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2024-26 |
| By: | Vincenzo Lanzetta; Cristina Ponsiglione |
| Abstract: | The European Union Regional Innovation Scoreboard (EURIS) is currently and broadly used for the definition of regional innovation policies by European policymakers; it is a regional innovation measuring tool for the analysis of each specific innovation indicator, from which it is possible to analyze the overtime evolution of each regional innovation indicator; according to the importance of the European Union Regional Innovation Scoreboard for innovation policy purposes, we state that European regional policymakers need integrative and synergistic methodological tools, with respect to the EURIS one, for innovation policy purposes. Thus, we highlight the need to integrate the current methodology of the European Regional Innovation Scoreboard with a Factorial K-means (FKM) tool for clustering purposes, and with a neural network (NN) tool for performing what-if policy analyses. We claim that our proposed FKM-NN tool could be used, by regional innovation policymakers, as a very effective synergistic instrument of the European Union Regional Innovation Scoreboard. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.13316 |
| By: | Jan De Loecker (KU Leuven and CEPR); Catherine Fuss (National Bank of Belgium, Economics and Research Department); Nathan Quiller-Doust (KU Leuven); Leonard Treuren (KU Leuven) |
| Abstract: | We separately observe variable input expenditure and expenditure on fixed inputs in novel firm-level data covering the Belgian manufacturing sector over the last decades. This permits a deeper investigation of two potential drivers of the globally observed widening gap between firms’ revenue and variable input expenditure: technology and market power. Across the board, cost structures have become less reliant on variable input expenditure over time, while expenditure on fixed inputs or overhead costs has increased in prominence. We relate these changes in firms’ cost structures to performance measures and document that markups and gross profit rates increase substantially as the role of variable costs in production diminishes. Profit rates net of fixed input expenditure also increase, but by substantially less than gross profit rates. Our results suggest that technological change can explain a considerable portion of the widening gap between revenue and variable input expenditure, but that markups increase by more than necessary to break even, and that this phenomenon operates remarkably similarly across different firms and industries. |
| Keywords: | Intermediate goods and services; Fixed cost; Markups; Technology. |
| JEL: | D2 D4 L1 O14 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbb:reswpp:202410-459 |