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on European Economics |
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Issue of 2025–09–15
sixteen papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | Hellenkamp, Detlef |
| Abstract: | The 2025+ regulatory agenda presents the European banking sector with a significant convergence of complex requirements, including the finalisation of Basel III (CRR III/CRD VI), the Digital Operational Resilience Act (DORA), the Markets in Crypto-Assets Regulation (MiCAR), the new Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) package with the establishment of the AMLA, and the ongoing implementation of ESG regulations (CSRD/ESRS, EU Taxonomy). The results of this work show that, despite the undeniable need to strengthen the resilience and integrity of the sector, the aggregated regulatory complexity, the considerable implementation costs and potential normative inconsistencies constitute substantial challenges for the competitiveness and innovative capacity of institutions. In particular, interactions in the context of digital transformation, ensuring regulatory proportionality and handling large volumes of data in compliance with data protection regulations require precise calibration in the sense of differentiated and coherent (‘smarter’) regulation. The supervisory priorities of the European Central Bank (ECB) and the European Banking Authority (EBA) reflect these challenges and require far-reaching. The outlook points to a persistently high regulatory dynamic that will be increasingly characterised by the need to systematically manage the complex interactions between financial stability-related objectives, technological innovation capability and sustainability-oriented requirements. |
| Keywords: | AI-Act, AML/CFT-Paket (AMLA), Aufsichtspriorität, Basel III (CRR III/CRD VI), CSRD, Digitalisierung, Digital Operational Resilience Act (DORA), Digitale Transformation, ESG-Regulierung, ESRS, Markets in Crypto-Assets Regulation (MiCAR), Proportionalität, RegTech, Smart-Regulation, SupTech |
| JEL: | G21 G28 K23 |
| Date: | 2025–04–26 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125915 |
| By: | Adrian Ifrim; Robert Kollmann; Philipp Pfeiffer; Marco Ratto; Werner Roeger |
| Abstract: | Based on an estimated two-region dynamic general equilibrium model, we show that the persistent productivity growth differential between the Euro Area (EA) and rest of the world (RoW) has been a key driver of the EA trade surplus since the launch of the Euro. A secular decline in the EA's spending home bias and a trend decrease in relative EA import prices account for the stability of the EA real exchange rate, despite slower EA output growth. By incorporating trend shocks to growth and trade, the analysis departs from much of the open-economy macroeconomics literature which has focused on stationary disturbances. Our results highlight the relevance of non-stationary shocks for the analysis of external adjustment. |
| Keywords: | global growth divergences, trade balance, real exchange rate, estimated DSGE model, Euro Area, demand and supply shocks, persistent growth shocks |
| JEL: | F4 F3 E2 E3 C5 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-50 |
| By: | Michael B. Devereux; Ippei Fujiwara; Camilo Granados |
| Abstract: | This paper explores the relationship between economic growth and the real exchange rate, specifically focusing on the convergence in price levels in Eastern European countries. While these countries have had significant convergence in GDP per capita (relative to the EU average) since the 1990s, convergence in real exchange rates for these countries stalled after the EU crisis. Using a standard theoretical framework, we estimate the main drivers of real exchange rates and show that a combination of productivity growth (Balassa-Samuelson effects) and labor market distortions help explain real exchange rate trends. We develop a structural two-country model that provides a rich decomposition of the long run determinants of the real exchange rate. Simulations based on observed sectoral productivities and labor market wedges show that the model can accurately account for the historical path of Eastern European real exchange rates, both before and after the EU crisis. |
| JEL: | F40 F41 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34183 |
| By: | Zájac, Jan (University of Bristol); Paczos, Wojtek (Cardiff Business School, Cardiff University; Institute of Economics, Polish Academy of Sciences) |
| Abstract: | Using panel data for 92 banks in 11 CEE countries over 2006–2020, we investigate how joining the euro affects bank profitability. Overall the effect is statistically indistinguishable from zero, but in tranquil periods euro membership lowers returns. Higher capital ratios and larger size raise profitability, whereas greater liquidity and loan intensity reduce it. |
| Keywords: | Banks profitability; Euro adoption; Central & Eastern Europe |
| JEL: | F36 G21 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:cdf:wpaper:2025/17 |
| By: | Paul, Arindam; Sahoo, Dukhabandhu; Mohapatra, Souryabrata; Behera, Manash Kumar |
| Abstract: | Amidst the growing issues of global warming and non-inclusiveness, inclusive green growth (IGG) has become an aspiration for all countries. Countries worldwide, including those in the European Union (EU), are transitioning from non-renewable to renewable energy to preserve the environment. However, there is currently a lack of comprehensive research investigating the nexus between energy transition and IGG. This paper aims to explore the impact of energy transition on IGG in 25 EU countries from 1995–2021. We develop composite indices for both IGG and renewable energy transition targeted to EU economies and employ advanced econometric approaches such as the pooled mean group-autoregressive distributed lag (PMG-ARDL) model, Driscoll-Kraay standard errors (DKSE) method, feasible generalised least square (FGLS) method, panel corrected standard errors (PCSE) method, to uncover relevant associations. The PMG-ARDL deals with potential endogeneity and simultaneously provides short-run and long-run estimates, while the DKSE, FGLS, and PCSE methods provide consistent outcomes in the presence of cross-sectional dependence, autocorrelation, and heteroscedasticity among the error terms. Results indicate that the renewable energy transition hampers IGG in the short run but fosters it in the long run in the EU economies. Additionally, financial development and internet access enhance IGG, whereas government expenditure, inflation, and economic globalisation have negative impacts. The findings suggest that EU countries should stimulate investment by public-private partnerships in renewable energy technologies and promote the use of renewable energy to make their economic growth green and inclusive. |
| Keywords: | Energy transition, Inclusive green growth, European Union, Panel analysis |
| JEL: | C23 N34 O44 Q30 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125807 |
| By: | Wentong Chen; Mr. Fazurin Jamaludin; Florian Misch; Alex Pienkowski; Mengxue Wang; Zeju Zhu |
| Abstract: | This paper studies domestic monetary policy transmission in European countries with a significant share of lending and deposits in foreign currency, referred to as ‘euroized economies’. We find that the impact of domestic monetary policy shocks on both inflation and GDP diminishes with the degree of euroization across countries: the effects are twice as high in non-euroized countries compared to countries in our sample with the highest level of euroization. We further examine the exchange rate, credit and interest rate transmission channels, which are typically less effective in euroized economies. We show that domestic monetary policy has at best limited effects on the exchange rate. In addition, during the post-pandemic monetary tightening episodes, an increase in foreign-currency loans often softened the decline in overall credit growth, and rates of foreign-currency loans have followed the ECB policy rate rather than the domestic ones. By contrast, our analysis suggests that the pass-through to interest rates of domestic currency loans is similar across countries with different levels of euroization. |
| Keywords: | Monetary policy transmission; Euroization; Emerging markets |
| Date: | 2025–09–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/177 |
| By: | von Daniels, Laura |
| Abstract: | The United States (US) and European Union (EU) are at risk of entering a full-blown trade war. Three months ago, on "Liberation Day", US President Donald Trump imposed high import tariffs on almost all countries, including the EU. He then suspended them at short notice to negotiate with over 90 of the affected trading partners. At the beginning of July, when the tariffs were due to come into force, Trump again postponed the tariffs on the EU and other countries by an additional month. In a letter to the EU, Trump threatened higher tariffs, namely 30 per cent, from 1 August. This back and forth shows that Member States must prepare for an escalation of the conflict - one that could go far beyond tariffs and even jeopardise the security of the EU. |
| Keywords: | USA, EU, Germany, Donald Trump, European Commission, Federal Government, tariff policy, tariff dispute, tariff war, trade war, trade instruments, tariffs, import tariffs, "reciprocal tariffs", ACI, Anti-Coercion Instrument, security of the EU, Nato, Greenland |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:swpcom:324886 |
| By: | Kerstin Bernoth |
| Abstract: | This paper investigates the effectiveness of the European Central Bank’s (ECB) communication in shaping market expectations and real economic outcomes. Using a transformer-based large language model (LLM) fine-tuned to ECB communication, the tone of monetary policy statements from 2003 to 2025 is classified, constructing a novel ECB Communication Stance Indicator. This indicator contains forward-looking information beyond standard macro-financial variables. Identified communication shocks are distinct from monetary policy and central bank information shocks. A structural Bayesian VAR reveals that hawkish communication signals favorable economic prospects, raising output, equity prices, and inflation, but also increases bond market stress. These findings highlight communication as an independent and effective tool of monetary policy, while also underscoring the importance of carefully calibrating tone to balance market expectations, and financial stability. |
| Keywords: | Monetary Policy, Central Bank Communication, Text Sentiment, Transformerbased Large Language Model, Bayesian Vector Autoregression, Local Projections |
| JEL: | C32 E43 E47 E52 E58 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2137 |
| By: | Hellenkamp, Detlef |
| Abstract: | The European, and in particular the German, banking sector is in a phase of profound structural transformation that is characterised by the simultaneous impact and interaction of several macro-structural drivers. Advancing digitalisation - particularly through artificial intelligence (AI) and distributed ledger technology (DLT) - ESG integration as a strategic and regulatory imperative, a tightening regulatory framework (including Basel IV, DORA, EU AI Act, MiCA), demographic changes and intensified competition from digital players and changing customer behaviour are presenting banks with profound challenges. This discussion paper explains the impact of these drivers on business models, risk management, operational resilience, regulatory adjustment requirements and the strategic positioning of banks in the German and European context. It shows that the simultaneous management of these transformations - under conditions of increased complexity and rising demands on capital, technology and personnel - requires integrated management approaches and far-reaching organisational adjustments.In particular, the focus is on: the strategic use of AI, taking into account ethical and regulatory limits, the anchoring of ESG in risk management and product strategy, the impact of Basel IV regulations on the capital structure, and the relevance of demographic shifts for customer interfaces, HR strategies and sales models. The work concludes with the formulation of strategic imperatives for banks as an approach to a future-oriented, resilient and competitive realignment. |
| Keywords: | Strukturwandel Bankwesen; Digitalisierung Banken; KI-Bankwesen; ESG-Banken; Regulierung Banken; DORA (Digital Operational Resilience Act; Tokenisierung Finanzsektor; Risikomanagement Banken; DLT-Banken; Cybersicherheit Banken |
| JEL: | G21 G28 Q33 |
| Date: | 2025–05–07 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125913 |
| By: | Umberto Collodel |
| Abstract: | This paper develops a novel method to simulate financial market reactions to European Central Bank (ECB) press conferences using a Large Language Model (LLM). We create a behavioral, agent-based simulation of 30 synthetic traders, each with distinct risk preferences, cognitive biases, and interpretive styles. These agents forecast Euro interest rate swap levels at 3-month, 2-year, and 10-year maturities, with the variation across forecasts serving as a measure of market uncertainty or disagreement. We evaluate three prompting strategies, naive, few-shot (enriched with historical data), and an advanced iterative 'LLM-as-a-Judge' framework, to assess the effect of prompt design on predictive performance. Even the naive approach generates a strong correlation (roughly 0.5) between synthetic disagreement and actual market outcomes, particularly for longer-term maturities. The LLM-as-a-Judge framework further improves accuracy at the first iteration. These results demonstrate that LLM-driven simulations can capture interpretive uncertainty beyond traditional measures, providing central banks with a practical tool to anticipate market reactions, refine communication strategies, and enhance financial stability. |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2508.13635 |
| By: | Halkos, George; Aslanidis, Panagiotis-Stavros |
| Abstract: | The present report assesses the Greek inclusive wealth over 1990–2020 using the Inclusive Wealth Index (IWI), decomposing human, produced, and natural capital and benchmarking against the EU-28. The results show that the produced capital expanded markedly but plateaued after the financial crisis of 2008. Furthermore, the human capital per capita remains ~46% below the EU average, reflecting gaps in education, ICT and managerial skills, labour productivity, and the effects of brain drain and regional disparities. Essentially, the natural capital has been pressured by biodiversity loss, deforestation, marine pollution, and limited circular-economy uptake. Overall, these dynamics place Greece in the lower-middle tier of EU countries for inclusive wealth, therefore, the report outlines priorities to close the gap. The proposed policies target, one the one hand on human capital, by strengthening tertiary and vocational pathways, fostering innovation and university and industry linkages, expanding female employment, enhancing ICT skills, and rebuilding institutional trust. On the other hand on natural capital, through strategies on sustainable forest and land management, marine ecosystem protection, circular-economy incentives, and recognition of socio-cultural ecosystem services to support conservation and eco-tourism. To conclude, the improvement of human and natural capitals is pivotal for long-term wellbeing, intergenerational equity, and alignment with the EU sustainability agenda. |
| Keywords: | Inclusive wealth; beyond GDP; sustainable development; Greece. |
| JEL: | E01 O44 Q01 Q50 Q56 |
| Date: | 2025–08–27 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:125927 |
| By: | E. Marrocu; R. Paci; L. Serafini |
| Abstract: | This paper investigates the impact of digital and green programmes within Smart Specialisation Strategies on regional productivity growth across European regions. It examines the combined influence of digital and green priorities (Twin Transition) and how their effects vary according to regions' initial economic conditions. The analysis reveals a U-shaped relationship - the Twin Transition is positively and significantly associated with productivity growth in low-productivity regions, whereas regions with intermediate productivity levels exhibit weaker or even negative associations. Conversely, high-productivity regions experience modest yet stabilising effects. These findings highlight the significance of the middle-income trap and the need for context-sensitive policy design. |
| Keywords: | Green policies;Digital policies;Twin Transition;Smart Specialisation Strategy;regional economic growth;european regions |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:cns:cnscwp:202510 |
| By: | Karlye Dilts Stedman; Andrew Hanson |
| Abstract: | Using high frequency data, we find that spillovers to the U.S. yield curve from the European Central Bank increased following the Global Financial Crisis, and strengthened when the U.S. normalized policy out of sync with other advanced economies. These spillovers were amplified by a contemporaneous waning in the ”convenience” of Treasuries. This provides evidence for a portfolio balance channel of transmission that is time-varying based on the non-pecuniary characteristics of Treasuries. We rationalize these facts using a two-country model of preferred habitat investors, where time-varying price-elasticity of demand for Treasuries gives rise to time-varying spillovers. |
| Keywords: | treasuries; Convenience yield; monetary policy; international spillovers; quantitative easing; quantitative tightening; preferred habitat |
| JEL: | E44 E52 F42 G12 |
| Date: | 2025–09–04 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedkrw:101728 |
| By: | Pauline Bucciarelli; Vincent d'Herbemont |
| Abstract: | The transition towards low-carbon and digital technologies is set to profoundly reshape metals markets, particularly those required for battery manufacturing. Amid growing geoeconomic fragmentation, this shift is accelerating the implementation of public policies aimed at securing supply and strengthening the resilience of strategic technology value chains. In this context, we explore the design of the recently adopted Critical Raw Materials Act (CRMA) in the European Union, focusing on the feasibility of its reshoring targets for battery-grade lithium.By integrating the entire lithium value chain into an Integrated Assessment Model, we analyse the interplay between lithium supply, demand, and recycling within decarbonisation scenarios. Our findings suggest significant challenges in meeting the CRMA targets without reducing industrial demand. We show that sufficiency strategies could help achieve these benchmarks, while cutting European lithium imports by at least 44% between 2030 and 2050 and reducing cumulative final demand by 1.2 Mt, a 46% decrease relative to current policy trajectories.More broadly, our analysis highlights sufficiency as a lever to reconcile ecological ambition with supply security, notably by enhancing the robustness of the lithium value chain. Finally, we recommend shifting the CRMA’s recycling benchmark towards an end-of-life recycling rate, as it is better suited to the dynamics of the lithium market. |
| Keywords: | Critical raw materials; Lithium; Integrated assessment model (IAM); Low-carbon scenarios; Sufficiency |
| JEL: | Q32 Q38 C61 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-36 |
| By: | Berlemann, Michael; Hinze, Jörg |
| Abstract: | Die deutsche Wirtschaft stagnierte insgesamt im 1. Halbjahr 2025; das deutsche Bruttoinlandsprodukt sank im 2. Quartal um 0, 3 %, wie es im ersten gestiegen war. Dabei spielten Sondereffekte (Vorziehen von Produktion und Exporten ins erste Quartal aufgrund der erwarteten US-Zölle und mildes Winterwetter) eine Rolle, zudem hat die neue Regierung erst im Mai ihre Arbeit aufgenommen und die Wirtschaft hat zunächst deren Reformvorhaben abgewartet. Nachdem die Koalitionsparteien schon vor Amtsantritt der Regierung die Verschuldungsmöglichkeiten für die Bereiche Infrastruktur und Verteidigung stark erweitert hatte, hat sie inzwischen auch erste Maßnahmen zur Verbesserung der Standortbedingungen eingeleitet. Dies sollte die bisherige Zurückhaltung bei Investoren lockern und künftig für Wachstumsimpulse sorgen. Der private Konsum stützt seit geraumer Zeit die Konjunktur. Weiter dämpfende Einflüsse kommen jedoch von Exportseite, denn trotz des "Zoll-Deals" mit den USA sind die Zölle auf US-Exporte nun höher als in der Vor-Trump-Ära. Insgesamt werden künftig aber die positiven die negativen Impulse überwiegen, sodass für den weiteren Verlauf dieses Jahres mit einer allmählichen Wiederbelebung der Wirtschaft zu rechnen ist, die sich im nächsten Jahr dann verstärkt fortsetzt. Das HWWI rechnet unverändert für 2025 im Jahresdurchschnitt mit einem Wirtschaftswachstum von ¼ % und für 2026 mit 1 ½ %. Die Inflationsrate für die Verbraucherpreise entsprach in den vergangenen beiden Monaten mit 2, 0 % der Stabilitätsmarke. Die sogenannte Kernrate hält sich allerdings weiterhin bei rund 2 ¾ %. Mit nachlassendem Druck seitens der Lohn- und Arbeitskosten dürfte sich aber die Inflationsrate bei 2 % stabilisieren. Die Risiken für diese Prognose bleiben angesichts vielfältiger geopolitischer Spannungen hoch. Auch wenn ein "Zoll-Deal" mit den USA zustande gekommen ist, so ist er doch unzuverlässig; Trump drohte bereits bei geringeren als erwarteten EU-Investitionen in den USA mit Zöllen von 35 %. Von der neuen Regierung ist die wirtschaftspolitische Wende eingeleitet, aber trotz der Sondervermögen für Infrastruktur und Verteidigung zeichnen sich zunehmend Finanzierungsengpässe für weitere Reformmaßnahmen und Meinungsverschiedenheiten zur Steuer- und Sozialpolitik unter den Koalitionspartnern ab. |
| Abstract: | The German economy stagnated overall in the 1st half of 2025; German gross domestic product fell by 0.3% in the 2nd quarter, as it had risen in the first. Special effects (bringing forward production and exports to the first quarter due to expected US tariffs and mild winter weather) played a role in this, and the new government only took up its work in May and the economy initially waited for its reform plans. After the coalition parties had already greatly expanded the debt possibilities for the infrastructure and defence sectors before the government took office, it has now also introduced the first measures to improve the location conditions. This should ease the previous reluctance of investors and provide growth impetus in the future. Private consumption has been supporting the economy for some time. However, further dampening influences come from the export side, because despite the "tariff deal" with the USA, tariffs on US exports are now higher than in the pre-Trump era. Overall, however, the positive impulses will outweigh the negative impulses in the future, so that a gradual revival of the economy is to be expected for the rest of this year, which will then continue to intensify next year. The HWWI continues to expect economic growth of 1/4 % on average for 2025 and 1 1/2 % for 2026. The inflation rate for consumer prices was 2.0% in the past two months, in line with the stability mark. However, the so-called core rate remains at around 2 3/4%. However, as pressure from wage and labour costs eases, the inflation rate is expected to stabilise at 2%. The risks to this forecast remain high in view of a wide range of geopolitical tensions. Even if a "customs deal" with the USA has been reached, it is still unreliable; Trump has already threatened to impose tariffs of 35% on lower-than-expected EU investments in the US. The new government has initiated the economic policy turnaround, but despite the special funds for infrastructure and defense, there are increasing financing bottlenecks for further reform measures and differences of opinion on tax and social policy among the coalition partners. |
| Keywords: | Wirtschaftsprognose, Wirtschaftslage, Deutschland |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:hwwifo:324878 |
| By: | António Afonso, Joshua Jablonowski; Joshua Jablonowski |
| Abstract: | This paper investigates fiscal sustainability and the prevailing fiscal regime in the Federal Republic of Germany. Using annual data from 1950 to 2023, the long-term relationship between the primary balance and government debt is estimated using a single-equation error correction model (SECM). The results from this long-term analysis do not support the hypothesis of fiscal sustainability, and the SECM proves inconclusive in identifying a dominant fiscal regime, showing a statistically insignificant long-run coefficient and bidirectional Granger causality. Moreover, with the local projections method on quarterly data from 2002 to 2023, this impulse response analysis reveals a clear Money-Dominant (MD) regime. A discretionary positive shock to the primary balance leads to a significant a decrease in real government debt, a result consistent with the MD regime. These findings suggest that while Germany’s long-run fiscal framework is ambiguous, its policy dynamics in the 21st century have been characterised as sustainable fiscal practices. |
| Keywords: | Fiscal Sustainability; Fiscal Theory of the Price Level; Local Projection. |
| JEL: | C12 C22 E31 E62 E63 H63 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03922025 |