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on European Economics |
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Issue of 2026–01–05
fourteen papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | Tommaso Gasparini; Aymeric Ortmans; Arthur Saint-Guilhem |
| Abstract: | We present a new “financial impulse index” (FII) for the euro area that aggregates changes in key financial variables based on their impact on real GDP growth. The FII suggests that financial impulse has now returned close to neutral. <p> Nous présentons un nouvel « indice d’impulsion financière » (IIF) pour la zone euro qui agrège les évolutions de variables financières-clés en fonction de leur impact sur la croissance du PIB en volume. L’IIF suggère que l’impulsion financière est désormais redevenue presque neutre dans la zone euro. |
| Date: | 2025–11–12 |
| URL: | https://d.repec.org/n?u=RePEc:bfr:econot:417 |
| By: | Ursel Baumann; Annalisa Ferrando; Dimitris Georgarakos; Yuriy Gorodnichenko; Timo Reinelt |
| Abstract: | Using data from the euro area SAFE, a novel survey of firms’ inflation expectations including a randomized controlled trial (RCT), we show that firms’ inflation expectations exhibit significant heterogeneity, challenging the predictions of full-information rational expectations models. At the same time, we document that firms update beliefs rationally but under incomplete information, with geographic location playing a dominant role in shaping expectations. Firms extrapolate from regional and national inflation to form euro area inflation expectations. A basic “Lucas island” model calibrated to euro area data replicates key empirical moments and highlights the structural “pass-through” from national to aggregate expectations. Our findings underscore challenges in anchoring inflation expectations in a heterogeneous monetary union. |
| Date: | 2025–12–15 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:102218 |
| By: | Anna Balestra (Dipartimento di Politica Economica, DISCE, & International Peace Science Center (IPSC), Università Cattolica del Sacro Cuore, Milano, Italy); Raul Caruso (Dipartimento di Politica Economica, DISCE, & International Peace Science Center (IPSC), Università Cattolica del Sacro Cuore, Milano, Italy); Sara Mombelli (Sapienza University of Rome, Italy - International Peace Science Center (IPSC), Università Cattolica del Sacro Cuore, Milano, Italy) |
| Abstract: | This paper investigates the determinants of defense burden sharing among EU member states from 1980 to 2024. Using a dataset that combines established factors with historical and institutional indicators, we analyze how structural features shape national share of total EU military expenditure. Fixed-effects panel regressions, complemented by fractional logit and probit models, reveal that economic features, colonial legacy, constitutional complexity, and technological sophistication systematically influence defense contributions among non-leader states. In addition, we show that France, Germany and the United Kingdom behave as structural leaders whose commitments remain high and largely insensitive to domestic conditions, thereby masking key relationships in full-sample estimations. The results provide a comprehensive account of the drivers of defense effort and highlight the asymmetric foundations of collective defense in Europe. |
| Keywords: | defense burden sharing, military spending, institutions, H2O random forest, European Union |
| JEL: | C23 F50 H56 O52 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ctc:serie5:dipe0054 |
| By: | Wieland, Volker |
| Abstract: | A large share of euro area member states is highly indebted. On average, their debt ratios have experienced a strong and continued upward trend that needs to be reversed. The debt sustainability analysis in the new fiscal rules provides great flexibility to member states but exhibits weaknesses with regard to transparency, robustness and credibility. Stress testing needs to be enhanced and applied to the adjustment period. This document was provided/prepared by the Economic Governance and EMU Scrutiny Unit at the request of the ECON Committee. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:333883 |
| By: | Wieland, Volker; Hegemann, Hendrik |
| Abstract: | The euro area experienced an unprecedented surge of inflation in 2021 and 2022 followed by a decline in 2023 and 2024. The ECB raised policy rates too late. Simple rules would have prescribed an earlier response. The policy easing since summer 2024, however, is quite in line with such rules. This experience provides a number of lessons that could lead to improvements in the policy strategy that is currently under review. The current level of policy rates appears appropriate. However, there are some important upside risks to inflation. This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 20 March 2025. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:333884 |
| By: | Tervala, Juha; Puonti, Päivi |
| Abstract: | Abstract Finland’s public finances are chronically in deficit, and the debt-to-GDP ratio continues to rise. The current government has already implemented substantial consolidation measures, and future governments will need to continue them. Research literature shows that fiscal consolidation weakens economic growth in the short term, but the magnitude of the effect depends crucially on the structure, timing, and composition of the measures. According to international evidence, public investment has large output effects, while the impacts of public consumption and transfers are smaller. The impact of taxation varies, but in high-tax countries such as Finland, it can be significant. In Finland’s case, euro area membership and a high tax burden amplify the negative short-term effects of consolidation, while demographic ageing partly mitigates them. The adverse effects can be reduced by emphasising expenditure-based adjustment, directing cuts to inefficient spending, protecting growth-supporting expenditures (such as education, R&D, and infrastructure), and pursuing gradual adjustment. Structural reforms that raise employment and wage policies that strengthen cost competitiveness further support the success of consolidation. The research provides strong evidence that the sustainability of public finances can be secured if well-designed fiscal adjustments, structural reforms, and wage policies that support competitiveness are implemented simultaneously. |
| Keywords: | Fiscal policy, Fiscal consolidation, Fiscal multiplier, Public debt, Finland |
| JEL: | E62 E63 H30 |
| Date: | 2025–12–16 |
| URL: | https://d.repec.org/n?u=RePEc:rif:briefs:170 |
| By: | Inmaculada C. Alvarez; Javier Barbero; Luis Orea; Andres Rodriguez-Pose |
| Abstract: | Most studies of institutional quality and regional growth assume uniform effects across territories. However, this may mask crucial regional heterogeneity, with direct policy implications. We use a latent class framework applied to 230 EU regions over 2009-2017 to identify institution-driven regional parameter groups, and to examine both average effects and catching-up effects associated with changes in the institutional environment. We demonstrate that institutional quality generates highly variable returns to investment in physical capital and innovation. Nordic and Central European regions show highest returns to physical capital and R&D investment, whereas less-developed regions benefit most from education spending. Crucially, we find that improving government quality not only raises average returns but also promotes territorial cohesion. By contrast, regional autonomy shows limited impact on returns. Our findings challenge the one-size-fits-all approach to cohesion policy and indicate that cohesion policy should explicitly promote institutional improvements in addition to capital deployment. |
| Keywords: | Institutional quality, European funds, investment, regional development |
| JEL: | O43 E61 H54 R11 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:egu:wpaper:2537 |
| By: | Hegemann, Hendrik; Wieland, Volker |
| Abstract: | This study reviews new perceptions of an imminent decline of the international role of the US dollar and implications for the euro. It considers developments in international reserves, invoicing, debt and payment systems. Strengths and weaknesses of the US and euro area economies are discussed along with new policy initiatives and proposals. The study concludes that a quick decline of the US dollar or a shift towards a multipolar currency system with similarly important reserve currencies is highly unlikely. For the foreseeable future, the euro's role is likely to remain one of primarily regional importance. This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 6 October 2025. |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:imfswp:333885 |
| By: | Filippo Bontadini; Valentina Meliciani; Maria Savona; Ariel Wirkierman |
| Abstract: | The aim of this paper is to quantitatively assess the propagation of supply shocks across European regions, triggered by the COVID-19 pandemic and diffused through Global Value Chains (GVCs). By taking advantage of the cross-country variation in policy responses to the pandemic, as well as the heterogeneity in regional productive structures, we document how downstream transmission of shocks via GVC-induced backward linkages yields differences in terms of regional resilience. By combining and adapting datasets at the NUTS2 level, classifying EU regions according to the risk of falling into a development trap, and embedding inter-regional, inter-industry indicators in a regression model estimated with a local projection method, we show that regional responses of real value added to foreign (i.e., inter-country) and domestic (i.e., intra-country yet inter- and intra-regional) shocks are far from homogeneous. The nuanced picture emerging from our findings warns against withdrawing from GVCs as an attempt to insulate from foreign shocks, as this might hamper the very forces that allow dynamic regions to withstand them. |
| Keywords: | global value chains, inter-regional connectivity, regional economic resilience, COVID-19 pandemic supply shocks, regional development trap risk |
| JEL: | C32 C67 F62 R11 R15 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12316 |
| By: | Stefano Caselli, Marta Zava |
| Abstract: | The study examines the structure, functioning, and strategic implications of financial ecosystems across four European countries—France, Sweden, the United Kingdom, and Italy—to identify institutional best practices relevant to the ongoing transformation of Italy’s financial system. Building on a comparative analysis of legislation and regulation, taxation, investor bases, and financial intermediation, the report highlights how distinct historical and institutional trajectories have shaped divergent models: the French dirigiste system anchored by powerful state-backed institutions and deep asset management pools; the Swedish social-democratic ecosystem driven by broad household equity participation, tax efficient savings vehicles, and equity-oriented pension funds; and the British liberal model, characterized by deep capital markets, strong institutional investor engagement, and globally competitive listing infrastructure. In contrast, Italy remains predominantly bank-centric, with fragmented institutional investment, limited retail equity participation, underdeveloped public markets, and a structural reliance on domestic banking channels for corporate finance. |
| Keywords: | financial ecosystems; capital markets; institutional investors; household savings; taxation; IPO markets; SME finance; European financial integration; Savings and Investments Union. |
| JEL: | G10 G18 G23 G28 O16 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp25261 |
| By: | Andrea Ciaccio; Francesco Moscone; Elisa Tosetti |
| Abstract: | In this paper we investigate the causal impact of the European Union Emissions Trading System, a cap-and-trade scheme limiting greenhouse gas emissions of firms, on their environmental performance. Although previous studies have focused primarily on the effect of the emission cap imposed by the policy, we argue that the trading mechanism creates complex interdependencies among firms that can change the policy's intended effects. We develop a novel Difference-in-Differences approach that disentangles the direct causal effects of the scheme on regulated firms from the indirect spillover effects arising from trading among firms. By incorporating potential interference between treated units, our methodology allows a more comprehensive assessment of the policy's overall effectiveness. Monte Carlo simulations show that our proposed estimators perform well in finite samples, confirming the reliability of our approach. To assess the direct and indirect effects of the scheme, we construct a novel database on emissions of European industrial sites by matching information on treated plants from the European Commission's Community Independent Transaction Log with emission data from the European Pollutant Release and Transfer Register for the years from 2001 to 2017. We find that the scheme reduced emissions only for non-trading plants, but such reduction is entirely offset when accounting for spillovers from trading plants, thus suggesting that the trading mechanism neutralizes the environmental benefits of the policy. Our findings have important implications for the design of future environmental policies and the ongoing evaluation of cap and trade policies. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.15377 |
| By: | Kamila Borsekova; Samuel Korony; Andres Rodriguez-Pose |
| Abstract: | The importance of institutions and innovation for regional development is well established. How these two factors interact under different historical legacies and urban-regional contexts remains, however, insufficiently understood. This paper identifies which combinations of institutional and innovation indicators most effectively classify regions into distinct developmental archetypes, revealing critical thresholds that redirect regional trajectories. Employing decision-tree analysis on 233 EU NUTS-2 regions, we analyse 15 indicators spanning institutional quality, technological readiness, business sophistication, and innovation. This methodology uncovers non-linear relationships that traditional approaches cannot capture. The findings demonstrate that institutional quality acts as a necessary condition for innovation-led growth. High-performing regions, predominantly in Western and Northern Europe, benefit from robust institutions and strong innovation outputs. Many lower-performing regions, particularly in Central and Eastern Europe, exhibit innovation potential but are constrained by governance deficits. By integrating institutional and innovation indicators within a single analytical framework, we underscore how addressing governance and innovation in tandem can result in balanced and sustainable growth across Europe. |
| Keywords: | regional development, institutions, innovation, decision tree modelling, regional competitiveness |
| JEL: | O18 O43 R11 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:egu:wpaper:2538 |
| By: | Tervala, Juha; Puonti, Päivi |
| Abstract: | Abstract The chronic fiscal deficits of Finland and the continuous increase of the public debt-to-GDP ratio are likely to require further fiscal consolidation through cuts of public expenditure and increases of taxation. Although contractionary fiscal consolidation measures reduce the level of GDP in the short term, their effects may vary across categories of expenditure and taxation. The prolonged weakness of economic growth has further undermined the sustainability of the public finances of Finland, which in turn highlights the need for consolidation measures that minimise the losses of output. This literature review examines fiscal multipliers as support for the design of growth-friendly consolidation strategies. This analysis pays special attention to the impact of Finland’s economic structure on the size of fiscal multipliers, with the objective of producing policy-relevant evidence. |
| Keywords: | Fiscal consolidation, Fiscal policy, Fiscal multiplier, Fiscal sustainability, Macroeconomic policy |
| JEL: | E62 E63 H30 |
| Date: | 2025–12–16 |
| URL: | https://d.repec.org/n?u=RePEc:rif:report:171 |
| By: | Degiannakis, Stavros; Delis, Panagiotis; Filis, George |
| Abstract: | The aim of the current study is to assess the households’ inflation inequality in Greece not only across different income groups but also across other households’ social and economics characteristics, such as, occupational status and household composition, among others, for a more recent period, which is that of 2009 – 2022. The picture that emerges from our results is that there are important inflation differences across different categories of households. More specifically, we find that the main discrepancies are evident at the different household income categories with the poorer household experiencing significant higher inflation. Other factors that lead to inflation gap across households include the size of the household, the profession of the lead member of the household, as well as, the composition of the household. Policy implications of these results are also discussed. |
| Keywords: | Household-level inflation, inflation inequality, Greece. |
| JEL: | D12 D31 D63 E31 |
| Date: | 2025–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:127227 |