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on European Economics |
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Issue of 2025–10–13
twelve papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | Alessandra Cepparulo; Vito Ernesto Reitano |
| Abstract: | This Economic Brief analyses the euro area fiscal stance, i.e. the impulse that national and the EU budgets provide to the euro area economy, with a focus on the 2024-2026 period. Overall, after significant expansion in 2020-2023, the euro area fiscal stance turned contractionary in 2024, driven by lower capital transfers mainly due to the phase-out of large tax credits for housing renovations in Italy. Compliance with the recommended net expenditure paths would entail a slightly contractionary fiscal stance for the euro area in 2025 and 2026. However, the higher defence spending, including under the flexibility granted via the national escape clause, is expected to lead to a less restrictive fiscal stance |
| Keywords: | Fiscal policy coordination, fiscal rules, fiscal stance, inflation, business cycles, automatic stabilisers, fiscal forecast, sovereign debt sustainability, euro area. |
| JEL: | E61 E62 H50 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:euf:ecobri:085 |
| By: | Beschin, Anna; Paredes, Joan; Polichetti, Gaetano; Renault, Théodore |
| Abstract: | This paper contributes to the literature on the price Phillips curve by exploiting subnational regional data from 11 euro area countries. Beyond controlling for aggregate fluctuations common across euro area regions, our approach accounts for country-specific dynamics, including national inflation expectations, thereby addressing key limitations in previous studies. Our results suggest that the Phillips curve in the euro area is relatively flat, but statistically significant. Furthermore, we provide novel evidence on potential nonlinearities in the price Phillips curve and highlight the critical role of properly accounting for country-specific factors such as inflation expectations. These findings provide new insights for the conduct of monetary policy and underscore the value of regional data in euro area macroeconomic analysis. JEL Classification: E24, E30, E31 |
| Keywords: | heterogeneity, non-linearity, price Phillips curve, regional data |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253133 |
| By: | Pablo Garcia (BANQUE CENTRALE DU LUXEMBOURG); Pascal Jacquinot (EUROPEAN CENTRAL BANK); Crt Lenarcic (BANKA SLOVENIJE); Kostas Mavromatis (DE NEDERLANDSCHE BANK); Niki Papadopoulou (EUROPEAN CENTRAL BANK); Edgar Silgado-Gómez (BANCO DE ESPAÑA) |
| Abstract: | We explore the macroeconomic effects of climate policies promoting the green energy transition in the euro area using an extended version of the Euro Area and Global Economy (EAGLE) model. The model differentiates between brown and green energy sectors and incorporates carbon taxes and brown capital income taxes. We analyze scenarios with unilateral and globally coordinated carbon taxes, with and without revenue redistribution to green firms and financially constrained households. Carbon taxes act as negative supply shocks, raising inflation and lowering output, while subsidies to green energy firms reduce green energy prices, supporting the transition and easing recessions. Redistribution to constrained households boosts consumption but does not accelerate the green transition. Taxes on brown capital income lower both inflation and output by acting as demand shocks. Recycling revenue from this tax to subsidize green capital investment strengthens the shift to green energy and moderates economic contractions. Global coordination of carbon taxes delivers only modest additional macroeconomic effects compared with unilateral action, as substitution in energy use outweighs international spillovers. Sensitivity analyses confirm the robustness of these findings under alternative assumptions about price rigidity, substitution elasticities and monetary policy. |
| Keywords: | climate policy, carbon taxation, fiscal policy, monetary policy, euro area, DSGE modeling |
| JEL: | C53 E32 E52 F45 H30 Q48 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2537 |
| By: | Benjamin Mosk; Nander de Vette |
| Abstract: | This paper investigates the phenomenon of financial fragmentation within the euro area and focuses on its implications for bond market stability. A three-step approach is used to assess the sensitivity of credit risk premiums to identified global risk shocks, distinguishing between regimes of higher and lower fragmentation. First, a time-varying indicator of euro area financial fragmentation is constructed on the basis of a principal component analysis of sovereign yield changes. The indicator reflects the extent to which yields across different country groupings—often characterized by differing structural and financial market conditions—move in opposite directions. Second, we construct a series of identified global risk shocks using a signrestricted Bayesian vector auto-regression model applied to a set of financial market variables. Third, we assess bond market stability/fragility in terms of the responsiveness of credit risk premiums to global risk shocks, using a non-linear panel local projections method, distinguishing between regimes of higher and lower fragmentation. We find that during times of elevated fragmentation, both sovereign CDS premiums and corporate option-adjusted spreads react more strongly to a given global risk shock. This elevated sensitivity appears across both country groupings, suggesting that in the higher-fragmentation regime, bond markets are more vulnerable throughout the euro area. These findings indicate that efforts to strengthen financial integration could contribute to greater bond market resilience. |
| Keywords: | financial fragmentation; credit risk premiums |
| Date: | 2025–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/194 |
| By: | Konrad Kuhmann (Latvijas Banka) |
| Abstract: | Bank lending is a key factor in the transmission of monetary policy to the real economy. Using granular loan data on the euro area, I analyze how bank specialization interacts with the effects of monetary policy on credit. I first document that bank lending in the euro area is characterized by a substantial degree of specialization. That is, banks tend to be over-exposed to borrowers in certain industries and of certain size. I also find that higher specialization is generally associated with more favorable lending conditions. Most importantly, banks partly insulate their preferred borrowers from the consequences of monetary policy. In particular, they adjust interest rates and lending relatively less strongly for borrowers from groups in which they specialize. My findings suggest that bank specialization is relevant for the aggregate and distributional consequences of monetary policy. |
| Keywords: | Bank specialization, Bank lending, Monetary policy, AnaCredit |
| JEL: | E51 E52 G21 |
| Date: | 2025–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:ltv:wpaper:202506 |
| By: | Yi-Li Chien; Zhengyang Jiang; Matteo Leombroni; Hanno Lustig |
| Abstract: | We compute the cross-country transfers that result from unconventional monetary policy in the Eurozone. The ECB funds the expansion of its aggregate balance sheet mostly by issuing bank reserves and cash in core countries. The national central banks (NCBs) in periphery countries then borrow from the core NCBs at below-market rates to fund the asset purchases and bank lending. In addition, NCBs in the periphery lend more to their own banks at below-market rates. To compute the cross-country transfers, we compare the resulting cross-country distribution of NCB income to a counterfactual scenario without the ECB and without non-marketable intra-Eurozone debt. We document significant and persistent transfers from the core to the periphery. |
| JEL: | E42 E52 F33 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34311 |
| By: | Marina Diakonova (BANCO DE ESPAÑA); Corinna Ghirelli (BANCO DE ESPAÑA); Javier J. Pérez (BANCO DE ESPAÑA) |
| Abstract: | Political polarization—broadly defined as the growing ideological distance between political parties or their supporters—has become an increasingly prominent feature of both U.S. and European political discourse. While it is often associated with legislative dysfunction, existing measures tend to conflate polarization with its consequences. This paper proposes a narrative-based, cross-country approach to separately measure ideological polarization and legislative gridlock. Using dictionary-based analysis of national press coverage in France, Germany, Spain, and Italy, we construct two high-frequency indices: a Political Polarization Index, capturing the extent of ideological division, and a Legislative Gridlock Index, capturing evidence of policy stalling. Our results show that polarization has increased significantly in Europe since the Global Financial Crisis, though its institutional consequences vary by country: while France and Germany show a close link between polarization and gridlock, Spain and Italy present more nuanced patterns, likely reflecting differences in political institutions and reform trajectories. |
| Keywords: | political polarization, policy gridlock, fiscal policy uncertainty, textual analysis, Europe |
| JEL: | D72 D74 H3 P16 |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2533 |
| By: | Cara Dabrowski (The Vienna Institute for International Economic Studies, wiiw); Philipp Heimberger (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | Public investment can support geoeconomic policy goals by strengthening economic resilience through the creation of public assets and by fostering domestic sources of economic growth. This paper presents new evidence on how public investment affects output, unemployment, private investment and public debt in the 27 EU member countries. Using forecast errors based on archival data to identify public investment shocks, we find that expansionary shocks (a) have favourable effects on output and unemployment in the short to medium run; (b) do not crowd out private investment; and (c) do not jeopardise public debt sustainability. Even though fiscal consolidation pressures linked to EU fiscal rules are high, promoting public investment may be critical – not only for economic development, but also to advance geostrategic goals in energy, infrastructure and resilience. |
| Keywords: | Public investment, growth, unemployment, public debt |
| JEL: | E32 D84 F02 Q41 Q43 Q48 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:wii:pnotes:pn:99 |
| By: | García-Miralles, Esteban; Freier, Maximilian; Riscado, Sara; Brusbārde, Baiba; Cochard, Marion; Cornille, David; Dicarlo, Emanuele; Delgado-Téllez, Mar; Fadejeva, Ludmila; Flevotomou, Maria; Henne, Florian; McIndoe-Calder, Tara; Pidkuyko, Myroslav; Roter, Mojca; Savignac, Frédérique; Kastelec, Andreja Strojan; Leventi, Chrysa; Mazzon, Alberto; Abela, Glenn; Boyd, Laura; Debattista, Ian; Dolls, Mathias; Harrer-Bachleitner, Alena; Jászberényi-Király, Viktor; Lay, Max; Lehtonen, Laura; Mastrogiacomo, Mauro; Moser, Mathias; Nevicky, Martin; Peichl, Andreas; Tuzikas, Vaidotas; Ventouris, Nikos; Wemans, Lara |
| Abstract: | This paper presents a comprehensive characterization of “fiscal drag”—the increase in tax revenue that occurs when nominal tax bases grow but nominal parameters of progressive tax legislation are not updated accordingly—across 21 European countries using a microsimulationapproach. First, we estimate tax-to-base elasticities, showing that the progressivity built in each country’s personal income tax system induces elasticities around 1.7–2 for many countries, indicating a potential for large fiscal drag effects. We unpack these elasticities to show stark heterogeneity in their underlying mechanisms (tax brackets or tax deductions and credits), across income sources (labor, capital, self-employment, public benefits), and across the individual income distribution. Second, we extend the analysis beyond these elasticities to study fiscal drag in practice between 2019 and 2023, incorporating observed income growth and legislative changes. We quantify the actual impact of fiscal drag and the extent to which government policies have offset it, either through indexation or other reforms. Our results provide new insights into the fiscal and distributional effects of fiscal drag in Europe, as well as useful statistics for modeling public finances. JEL Classification: D31, H24, E62 |
| Keywords: | bracket creep, indexation, inflation, personal income tax |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253136 |
| By: | Quinet, Alain; Jaravel, Xavier; Schularick, Moritz; Zettelmeyer, Jeromin |
| Abstract: | • In diesem Papier formulieren wir fünf Leitprinzipien für die europäische Aufrüstung. Die europäische Aufrüstung sollte (i) innovationsgetrieben sein, um die technologischen Fähigkeiten, die Wettbewerbsfähigkeit und das Produktivitätswachstum Europas zu stärken; (ii) auf einem schnellen Hochfahren industrieller Kapazitäten sowohl im Hoch- als auch im Niedrigtechnologiebereich abzielen; (iii) auf quantitativen Zielvorgaben für FE-Ausgaben und den Ausbau unbemannter autonomer Systeme beruhen; (iv) unabhängige europäische Fähigkeiten neben der NATO aufbauen, um die Abhängigkeit von zunehmend unzuverlässigen amerikanischen Ressourcen zu verringern; (v) die militärische Unterstützung für die Ukraine substanziell ausweiten, da eine siegreiche Ukraine kurzfristig der günstigste Weg für mehr Sicherheit in Europa darstellt. • Zentrale Schritte dorthin sind die Schaffung eines europäischen Verteidigungsbinnenmarktes, der Abbau nationaler Fragmentierung und der Aufbau gemeinsamer europäischer Verteidigungskapazitäten. |
| Abstract: | • We present five guiding principles for European rearmament. Europe's rearmament should be (i) innovation-driven to support European technological capabilities, competitiveness, and productivity growth; (ii) aim for a rapid increase in production capacities for a high-low mix of military capabilities; (iii) rely on quantitative goalpost for R&D expenditures and an unmanned autonomous systems; (iv) build on independent European capabilities alongside NATO to reduce dependence on increasingly unreliable American assets; (v) substantially increase military support for Ukraine as the cost-efficient way towards European security in the short-run. • The central steps are the creation of a European defense single market, the reduction of national fragmentation, and the development of joint European defense capabilities. |
| Keywords: | Europa, Verteidigung, Gemeinsamer Markt, Beschaffung, Europe, defense, single market, procurement |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkpb:327993 |
| By: | Zhengyang Jiang; Hanno Lustig; Stijn Van Nieuwerburgh; Mindy Z. Xiaolan |
| Abstract: | In a monetary union, the risk-free rate cannot adjust to country-level fiscal positions, leaving only default spreads and convenience yields to respond. Empirically, we find that convenience yields explain a large share of the variation in Eurozone sovereign bond yields. Eurozone sovereign bonds earn larger convenience yields when their governments run larger surpluses. Since convenience yields generate substantial seigniorage revenue from debt issuance, our estimates imply economically large fiscal costs from low convenience yields for peripheral countries in the Eurozone. |
| JEL: | E42 F33 G15 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34307 |
| By: | Brandtjen, Roland |
| Abstract: | This study investigates the formation of European identity across European regions between 2019 and 2024. Drawing on Self-Categorization and Social Identity Theory, European identity (EI) is conceptualized as a collective identity rooted in shared democratic values, human rights, and the rule of law, rather than common language or ethnicity. A multilingual survey was conducted using snowball sampling across EU members, microstates, and autonomous territories. The analysis reveals significant regional disparities in EI, with stronger affiliations in regions more integrated into EU structures and weaker identification in areas with greater autonomy or historical detachment. Demographic variables such as age, gender, income, and education show weak correlations with EI. However, professional roles consistently emerge as a stronger predictor, particularly in public service and internationally engaged occupations. Notably, education often correlates negatively suggesting critical engagement with supranational governance. Temporal and regional variations underscore the fluid and context-dependent nature of identity formation. It highlights the importance of institutional, cultural, and occupational factors in shaping EI and suggest that efforts to foster cohesion should focus on professional and educational environments. This research contributes to the discourse on European integration and identity politics, offering empirical insights into how identities evolve in response to shifting societal landscapes. |
| Keywords: | European Identity, Regional Variation, Multilingual Survey, Demographic Correlates, Virtual Snowball Sampling |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iubhbm:327997 |