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on European Economics |
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Issue of 2026–07–13
eighteen papers chosen by Simon Sosvilla-Rivero, Instituto Complutense de Análisis Económico |
| By: | Bondarenko, Yevheniia; Kang, Nayeon; Lewis, Vivien; Rottner, Matthias; Schüler, Yves |
| Abstract: | Geopolitical risk is a major concern for the euro area, yet widely used measures largely reflect a US perspective. We introduce a geopolitical risk indicator tailored to the euro area using local European news sources. Shocks to this index have significant recessionary and inflationary consequences in the euro area, effects that would be missed when relying on the corresponding US-based measure. We estimate that the Russo-Ukrainian War imposed substantial output losses and inflationary pressures on the euro area in 2022. Combining structural scenario analysis with end-of-sample nowcasting, we show that euro area prospects are highly sensitive to future developments in geopolitical risk. We complement these analyses with two news-based measures of sanctions intensity and shortages for the euro area. |
| Keywords: | Euro area; geopolitical risk; Inflation; Sanctions; Shortages |
| JEL: | E32 F42 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21409 |
| By: | Lena Dräger; Michal Marenčák; Giang Nghiem; Maritta Paloviita |
| Abstract: | This paper examines cross-country differences in consumer expectations about macroeconomic outcomes and mortgage borrowing conditions within a monetary union. Using harmonized microdata from the ECB Consumer Expectations Survey for eleven euro area countries, we document significant national disparities. By sequentially adding a rich set of consumer- and country-specific macro controls to pooled regressions with country fixed effects, we find that these factors account for much, but not all, of the cross-country heterogeneity in expectations. These remaining differences likely reflect unobserved country-specific factors, highlighting the need for country-tailored monetary policy communication to effectively stabilize consumer expectations. |
| Keywords: | country heterogeneity, expectations, consumer expectations survey |
| JEL: | E31 E52 D30 D84 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12725 |
| By: | Dermot P. Coates (Head of the Irish Government Economic and Evaluation Service (IGEES)) |
| Abstract: | This paper examines the evolving role of State Aid within the European Union’s Single Market, with a focus on the expansion of the Important Projects of Common European Interest (IPCEI) instrument. While State Aid is generally restricted due to its potential to distort competition, recent economic and geopolitical pressures have prompted a more flexible approach across the EU. The analysis examines how successive crises, from COVID 19 to supply chain disruption and the green and digital transitions, have reshaped EU industrial policy and intensified the use of IPCEIs alongside other instruments, to address market failures and support breakthrough innovation. Using EU State Aid expenditure data, the paper highlights widening divergences in State Aid between larger and smaller Member States and assesses the implications for competitiveness and the cohesion of the level playing field. The study evaluates Ireland’s limited engagement with IPCEIs to date, the fiscal constraints shaping participation of smaller countries, and recent policy commitments aimed at increasing involvement. It argues that while IPCEIs present significant opportunities for technological innovation, they also carry risks of market fragmentation and an emerging subsidy race. The paper concludes by outlining policy options to strengthen Ireland’s strategic positioning within an evolving EU State Aid landscape. |
| Keywords: | Competition, Competitiveness, Subsidies, State Aid, Single Market, European Union, Ireland |
| JEL: | E02 F02 F13 H25 H32 |
| Date: | 2026–06–23 |
| URL: | https://d.repec.org/n?u=RePEc:ucd:wpaper:202602 |
| By: | Jan Kakes; Anna Samarina |
| Abstract: | This paper investigates the pass-through of market rates to bank deposit rates in the euro area, using bank-level data from July 2007 to March 2025. We employ local projections and an errorcorrection model to analyze the dynamics of pass-through over time, across interest rate regimes, and among countries, as well as explore its potential drivers. The results show that pass-through is significant but uneven. It is stronger for term and corporate deposits than for demand and household deposits. The effectiveness of pass-through diminishes in a lowinterest- rate environment and varies across countries. Structural features of the banking sector and bank balance sheet characteristics also shape transmission. Specifically, banks operating in more concentrated markets exhibit lower pass-through. In addition, banks with larger liquidity buffers, stronger capitalization, and greater reliance on deposit funding adjust deposit rates less. Lastly, higher customer switching frequency and higher payment account fees are associated with stronger pass-through for household demand deposits. |
| Keywords: | deposit rates; market rates; pass-through; euro area; zero lower bound; bank competition |
| JEL: | G21 G10 E43 E52 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:865 |
| By: | Lena Draeger (Leibniz University Hannover); Michal Marencak (National Bank of Slovakia); Giang Nghiem (Leibniz University Hannover); Maritta Paloviita (Bank of Finland) |
| Abstract: | This paper examines cross-country differences in consumer expectations about macroeconomic outcomes and mortgage borrowing conditions within a monetary union. Using harmonized microdata from the ECB Consumer Expectations Survey for eleven euro area countries, we document significant national disparities. By sequentially adding a rich set of consumer- and country-specific macro controls to pooled regressions with country fixed effects, we find that these factors account for much, but not all, of the cross-country heterogeneity in expectations. These remaining differences likely reflect unobserved country-specific factors, highlighting the need for country-tailored monetary policy communication to effectively stabilize consumer expectations. |
| JEL: | E31 E52 D30 D84 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:svk:wpaper:1141 |
| By: | Christopher Johns; Aaron Mehrotra; Fabrizio Zampolli |
| Abstract: | Using high-frequency euro area monetary policy shocks and panel local projections for the period 2001-2020, this paper examines how macroeconomic variables respond based on the level and the maturity structure of public debt. The results show that public debt plays a significant role in influencing monetary policy transmission. Higher public debt is associated with a weaker response of prices and inflation expectations to tighter monetary policy, while output declines at least as much as in low-debt economies. The maturity structure of debt also matters in a non-linear way: debt at intermediate maturities is associated with weaker effects, whereas debt at very short and long maturities is associated with stronger effects. Fiscal responses indicate a lack of contemporaneous fiscal backing, as primary balances tend to deteriorate following monetary tightening. Finally, for non-euro area European economies, the paper introduces a novel dataset on public debt maturity profiles and shows that spillovers from euro area monetary policy depend on the maturity structure in the receiving economy. |
| Keywords: | monetary policy transmission, government debt, debt maturity, policy spillovers |
| JEL: | E31 E52 E62 E63 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1365 |
| By: | Buyukyazici, Duygu; Brossard, Olivier; Boschma, Ron |
| Abstract: | The transition towards a circular economy (CE) represents not only an economic shift but also a profound social and institutional transformation that redefines production, consumption, and policy. This study provides the first macro-level empirical assessment of the CE transition across European regions over the last two decades. It then examines how regional regulative, normative, and cultural–cognitive institutions shape regional CE performance, while also accounting for key confounding factors, including EU cohesion funds, regional autonomy, and the EU Circular Economy Action Plan (CEAP). The results reveal strong spatial and temporal heterogeneity, as well as distinct effects across institutional dimensions. Regulative institutions exhibit the most consistent positive association across and within countries. Normative institutions matter most within major regions, while cultural–cognitive institutions provide more modest support for CE efforts. Importantly, the combination of all institutional pillars is associated with the largest gains in circularity. EU cohesion funds significantly support CE progress, while the post-2015 results suggest that the CEAP reshaped the relative importance of institutional pillars. Overall, the findings highlight the importance of coordinated institutional frameworks and targeted policy support in advancing the regional CE transition. |
| Keywords: | circular economy; circular transition; institutions; sustainability; regions |
| JEL: | Q01 Q50 R11 |
| Date: | 2026–08–31 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:138908 |
| By: | Jaume Freire González; Arlet Vila-Bagaria |
| Abstract: | We evaluate the effectiveness of the European Union Emissions Trading System (EU ETS). Using a staggered difference-in-differences design exploiting variation in adoption timing across countries and phases from 1990–2022, our estimates suggest that the EU ETS is associated with substantial reductions in emissions overall—especially among early participants—although effectiveness varied across cohorts and regions. Later entrants (2008, 2013) showed weaker effects, but disaggregated estimates revealed notable regional reductions. Phase III reforms—tighter caps and expanded auctioning—enhanced performance, cutting emissions by 24MtCO2 annually by 2020. Overall, the EU ETS has become more effective as its design matured but remains insufficient to meet EU's emissions 2030 targets. |
| Keywords: | carbon markets, climate policy, differences-in-differences, EU Emissions Trading System |
| JEL: | D62 H23 L50 Q52 Q54 Q58 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:bge:wpaper:1581 |
| By: | Antonín Hořčica (Faculty of Economics, University of South Bohemia in České Budějovice) |
| Abstract: | Addressing the gap in regional sustainability monitoring in the EU, this study assesses the applicability of composite sustainability indicator families at the NUTS 2 level and de-velops a methodology for regional variants of the Human Development Index (HDI) family. Nine indicator families were systematically assessed against four applicability criteria: communicability, relationship to GDP, sustainability dimension coverage, and territorial applicability. The HDI family emerged as the only methodologically sound basis for the NUTS 2 sustainability assessments. Four regional indices (R-HDI, R-IHDI, R-GDI, and the planetary pressures-adjusted R-PHDI) were derived from Eurostat and EDGAR data and piloted on 84 NUTS 2 regions across six Central European countries (V4, Germany, Austria) for 2000-2024. Functional data analysis with global envelope tests confirmed that conclu-sions about convergence depend on indicator choice: statistically significant V4 vs DE+AT differences under R-HDI (p = 0, 001) disappeared following environmental adjustment via R-PHDI (p = 0, 487), with emission-intensive regions substantially penalised. The R-IHDI and R-GDI required methodological compromises owing to the absence of microdata at the NUTS 2 level. This study presents the first systematic derivation and empirical application of the full HDI family at EU NUTS 2 level. |
| Keywords: | sustainability indicators, NUTS regions, Human Development Index, functional data analy-sis, European Union, regional development |
| JEL: | C14 Q01 R11 R58 |
| Date: | 2026–05–12 |
| URL: | https://d.repec.org/n?u=RePEc:boh:wpaper:02_2026 |
| By: | Alice Albonico; Guido Ascari; Qazi Haque; Kostas Mavromatis; Andra Smadu |
| Abstract: | We develop and estimate an open economy DSGE model for the euro area where global energy prices and the exchange rate jointly determine domestic inflation, because imported energy, priced in foreign currency, enters both consumption and production. Energy and exchange-rate disturbances account for the bulk of short-run volatility in headline euro area inflation, with energy price shocks driving most of the post-pandemic surge. Because energy and non-energy goods are poor substitutes, an adverse energy price shock raises import values, deteriorating the trade balance and depreciating the real exchange rate through the net-foreign-asset and UIP channels. The exchange-rate channel strengthens monetary transmission and improves the short-run inflation-output trade-off relative to a non-energy economy. Optimal policy can exploit this channel rather than looking through energy price shocks. The case for looking through such shocks becomes stronger when the central bank assigns a greater weight to output gap stabilization and prices become stickier. |
| Keywords: | Monetary policy, Inflation, Energy, Bayesian estimation. |
| JEL: | E52 E31 E32 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:577 |
| By: | Gökhan Ider; Malte Rieth |
| Abstract: | We examine the aggregate effects of government spending and tax changes in a monetary union. We show theoretically that government consumption and government investment shocks have multipliers above 1, and consumption tax and income tax shocks have multipliers below 1. We test the predictions on quarterly euro area data, identifying the four fiscal shocks in a panel structural vector autoregression through time fixed effects and cross-country heteroskedasticity. Both spending shocks have multipliers above 1, and both tax shocks have multipliers below 1. The analysis suggests that spending policy stabilizes output more efficiently than tax policy in a monetary union. |
| Keywords: | Fiscal policy, general equilibrium model, structural vector autoregressions, government spending, taxes, panel data, euro area |
| JEL: | C32 E32 E62 F45 H20 H50 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2170 |
| By: | Mr. Luis Brandão-Marques; Mr. Damien Capelle; Mr. Diego A. Cerdeiro; Adriano Fernandes; Alexandra Fotiou; Yueling Huang; Claire Li; Rui Mano; Mr. Alberto Musso; Ese Onokpasa; Mr. Richard Varghese; Maryam Vaziri |
| Abstract: | Persistent fragmentation and limited depth in EU financial markets constrain firm growth, innovation, and cross-country risk sharing. This Staff Discussion Note documents policy-induced barriers that impede cross-border bank lending and suppress the scale of venture capital, alongside broader real-sector frictions that restrict the amount of investable projects. Obstacles examined in the Note include heterogeneity in banking regulation and safety nets (notably deposit insurance), as well as insolvency regimes, and rules limiting the provision and allocation of risk capital by pension funds and insurers. Financial reforms could raise long-run EU GDP by about 3 percent, with two-thirds from deeper banking integration and the remainder from reducing cross-border barriers to and expanding the supply of risk-capital. In addition, these financial reforms would magnify by an additional percentage point of GDP the gains from a broader set of domestic structural reforms that improve business dynamism and innovation. Smaller EU economies and younger firms benefit disproportionately. |
| Keywords: | Banking union; capital markets union; cross-border banking; venture capital; capital allocation; firm growth; risk-sharing |
| Date: | 2026–06–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfsdn:2026/002 |
| By: | Michael Peneder |
| Abstract: | Amid widening gaps in innovation and productivity growth, growing geopolitical tensions, and high ambitions for green and digital transitions, industrial policy has re-emerged as a central pillar of European strategy. This paper traces its evolution from post-war sectoral interventions through decades of market-led deregulation, to the current integrated approach embodied in the EU's Competitiveness Compass and supporting instruments. It argues for a development perspective centred on the economy's capacity to adapt and innovate. Organised around three complementary pillars of evolutionary change, this involves fostering novelty through innovation policies, accumulating productive resources (including human capital and infrastructure) and shaping the selection environment through regulation and market integration. The paper examines key policy instruments, including Important Projects of Common European Interest (IPCEIs), FDI-screening and the Carbon Border Adjustment Mechanism (CBAM). Key challenges and limitations include the persistent fragmentation and weak coordination between member states, inadequate funding mechanisms, and mounting conflict between competitive and protectionist approaches. An integrated approach is advocated, leveraging the Single Market, rule-based governance, and Europe's institutional diversity in order to scale up successful strategies, securing long-term competitiveness and strategic autonomy. |
| Keywords: | Industrial policy, Competitiveness, Transformation |
| Date: | 2026–03–30 |
| URL: | https://d.repec.org/n?u=RePEc:wfo:wpaper:y:2026:i:726 |
| By: | Betz, Felix; Bofinger, Peter; Dix, Jonas; Streit, Leonie |
| Abstract: | One of the central challenges in identifying the causal effects of monetary policy is the inherent endogeneity of its conduct. This paper introduces a novel identification strategy that leverages LLMs to detect monetary policy shocks from newspaper coverage following European Central Bank (ECB) policy decisions. Based on a dataset of 7, 620 articles from eleven major European newspapers, we classify each policy decision as unexpectedly restrictive, unexpectedly expansionary, or as expected. The resulting narrative-based surprise series captures immediate post-announcement perceptions and shows a close alignment with established High Frequency Identification (HFI) measures with notable exceptions during times of financial turmoil. We subsequently analyze the potential influence of the information effect on our series and find that the majority of identified surprises are unlikely to be driven by information effects. |
| Keywords: | Monetary policy shocks; Natural language processing; Large Language Models |
| JEL: | E52 E58 C88 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21390 |
| By: | Crowley, Meredith A.; Domenech Palacios, Mar; Faraglia, Elisa; Giannitsarou, Chryssi; Havemeister, Lea |
| Abstract: | Geopolitical uncertainty alters the incentives of firms to organise their corporate structure across borders, creating a distinct margin of adjustment in response to policy risk. We study this margin using the Brexit referendum as a quasi-natural experiment. We combine firm level data on parent-subsidiary links for UK and EU firms between 2011 and 2021 with measures of Brexit-related uncertainty and study changes in foreign subsidiary formation at the extensive margin. Following the referendum, there was an increase in the number of subsidiary formation from the UK into the EU, while the number of EU firms that expanded with subsidiaries into the UK dropped. UK firms establishing their first EU subsidiary after the referendum were systematically weaker ex ante than comparable firms that did so before the referendum. Increased Brexit-related uncertainty is associated with increased foreign subsidiary formation from the UK into the EU, driven primarily by small firms, alongside suggestive evidence of decreased domestic subsidiary incorporation by UK firms. We interpret these findings as evidence of a 'precautionary' foreign direct investment channel, operating through changes in the corporate structures of firms in response to geopolitical uncertainty. |
| Keywords: | Brexit; geopolitical uncertainty; foreign subsidiary |
| JEL: | F21 F23 G32 F15 D22 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21312 |
| By: | Consonni, Niccolo; Magerman, Glenn |
| Abstract: | We develop a Strategic Dependency Index (SDI) to quantify the welfare cost of product-level import price shocks. Unlike existing empirical indicators based on concentration metrics and ad hoc thresholds, the SDI is derived from a structural cost-of-living framework, and allows for additive decomposability across products, source countries and destination countries. We apply the SDI to the EU27, and estimate trade elasticities, love-for-variety parameters, and origin-destination- specific taste shifters using highly disaggregated 8-digit product-level trade data over 2002–2021, instrumenting for prices and expenditure shares to address endogeneity. Three sets of findings emerge. First, the products generating the largest welfare losses are petroleum oils, liquefied natural gas, iron ores, and selected basic metals. Their strategic relevance stems from the interaction of both low substitutability across sources and large expenditure shares. Second, strategic dependency varies sharply across EU member states even for the same product, driven by fundamentally different channels — high substitution elasticities in some countries versus large expenditure shares in others — implying that uniform EU-wide policy responses may fail to address the heterogeneous sources of vulnerability. Third, the suppliers contributing most to aggregate welfare exposure do not coincide with the geopolitical rivals dominating policy discourse: China, the USA, and Russia do not lead the SDI ranking. The SDI provides a tractable, theory-consistent framework for evaluating targeted policy interventions aimed at reducing strategic trade exposure. |
| JEL: | F11 F13 F14 D12 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21328 |
| By: | Eichengreen, Barry; Mehl, Arnaud; Vansteenkiste, Isabel |
| Abstract: | This paper assesses whether recent global developments have created an opportunity for the euro to expand its international role. Progress in the euro’s internationalization has been mixed — falling short of optimists’ hopes of dethroning the dollar while exceeding skeptics’ predictions of failure. Though the euro has not surpassed the combined global share of its legacy currencies, it has outperformed earlier challengers to the dollar, such as the Deutsche mark and Japanese yen at their peak internationalization in the 1990s, and it remains significantly ahead of the renminbi today. Recent developments in the U.S — concerns over its economic stability, growth prospects, and reliability as a global partner — have intensified scrutiny of the dollar’s safe haven status, potentially creating an opportunity for the euro to gain ground globally. To capitalize on this opening, Europe must strengthen its economic foundations, conclude new trade agreements and enhance its cross-border payment infrastructure with key trading partners, so as to bolster trade invoicing in euro. Fostering pan-European markets for equities, corporate bonds, and securitizations would boost liquidity and scale, enhancing the euro’s appeal as a global financing and investment currency. And establishing a unified euro-denominated safe asset to finance public goods such as defense, while bolstering Europe’s geopolitical credibility, would be critical to achieving these goals. |
| Keywords: | International monetary system; Geoeconomics |
| JEL: | F30 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:21265 |
| By: | Alan Wm. Wolff (Peterson Institute for International Economics) |
| Abstract: | In this Policy Brief, Wolff argues that the European Union must step up to lead the world trading system at a moment of historic disruption. With the United States retreating into a power-based approach to trade and China relying heavily on state intervention, Wolff contends that the European Union--the world's largest trader--has both the capacity and the responsibility to fill the void. Drawing on the spirit of postwar institution-building at Bretton Woods, he sets out a strategic roadmap for EU trade policy to 2050: defending the World Trade Organization's rules-based framework; pursuing closer alignment with members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); expanding trade rules to cover climate, artificial intelligence, and food security; and resisting trade coercion through collective action. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:iie:pbrief:pb26-11 |