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on European Economics |
| By: | Honkapohja, Seppo (Bank of Finland Research) |
| Abstract: | The paper provides an overview of the sovereign debt crisis. I first consider the build-up of the crisis.I then discuss policy choices when a financial crisis erupts and assess the adjustment processes in the crisis countries, including alternatives to policies of austerity. Finally I take up institutional improvements that can help in resolving the current crisis and avoiding a future one. These include the banking union and the strengthened Stability and Growth Pact and related institutional rules. Current high levels of public and private debt together with still weak bank balance sheets are a major unsolved problem. |
| Keywords: | financial crisis; sovereign debt; European integration |
| JEL: | E62 E65 F36 |
| Date: | 2013–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2013_012&r=eec |
| By: | Pinar Yesin (Swiss National Bank) |
| Abstract: | Foreign currency loans to the unhedged non-banking sector are remarkably prevalent in Europe and create a significant exchange-rate-induced credit risk to European banking sectors. In particular, Swiss franc (CHF)-denominated loans, popular in Eastern European countries, could trigger simultaneous bank failures if depreciation of the domestic currencies prevents borrowers from servicing the loans. Foreign currency loans thus pose a systemic risk from a “common market shock” perspective. The author uses a novel dataset of foreign-currency loans from 17 countries for 2007-11 (collected by the Swiss National Bank) and builds on the method suggested by Ranciere, Tornell, and Vamvakidis (2010) to quantify this systemic risk. The author finds that systemic risk is substantial in the non-euro area, while it is relatively low in the euro area. However, CHF-denominated loans are not the underlying source of the high systemic risk: Loans denominated in other foreign currencies (probably to a large extent in euros) contribute significantly more to the systemic risk in the non-euro area than CHF-denominated loans. Furthermore, systemic risk shows high persistence and low volatility during the sample period. The author also finds that banks in Europe have continuously held more foreign-currency-denominated assets than liabilities, indicating their awareness of the exchange-rate-induced credit risk they face. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:1306&r=eec |
| By: | Viren, Matti (Bank of Finland Research) |
| Abstract: | This paper deals with the problems of assessing the effects of fiscal policy in the European Monetary Union. Here, we face wide cross-country differences in key fiscal parameters, some of which may also be vary over time (business cycle). Moreover, these effects may also depend on trade spillover effects and thus on the extent of policy coordination. Our empirical analyses make use of data for 15 EU countries, mainly for the period 1970-2011. The results clearly indicate that fiscal multipliers are not constant across countries and time, being much larger during economic recessions. By contrast, the policy coordination-effects appear to be more homogenous, although it turns out that small countries may benefit more from coordination. |
| Keywords: | fiscal policy; policy coordination; government deficit; EMU |
| JEL: | E61 E63 H62 |
| Date: | 2013–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2013_011&r=eec |
| By: | Cahuc, Pierre (Ecole Polytechnique, Paris); Carcillo, Stéphane (OECD); Rinne, Ulf (IZA); Zimmermann, Klaus F. (IZA and University of Bonn) |
| Abstract: | France and Germany are two polar cases in the European debate about rising youth unemployment. Similar to what can be observed in Southern European countries, a "lost generation" may arise in France. In stark contrast, youth unemployment has been on continuous decline in Germany for many years, hardly affected by the Great Recession. This paper analyzes the diametrically opposed developments in the two countries to derive policy lessons. As the fundamental differences in youth unemployment are primarily resulting from structural differences in labor policy and in the (vocational) education system, any short-term oriented policies can only have temporary effects. Ultimately, the youth unemployment disease in France and in other European countries has to be cured with structural reforms. |
| Keywords: | labor policy, labor market institutions, Great Recession, youth unemployment, minimum wages, demographic trends, vocational education and training, employment protection |
| JEL: | J24 J38 J68 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7490&r=eec |
| By: | Sophie-Charlotte Meyer (University of Wuppertal); Ronald Schettkat (University of Wuppertal) |
| Abstract: | Analyzing prices of truly homogenous consumer goods sold in Euroland, we find significant price convergence after the Euro cash changeover in 2002. The deviation of national log prices from the mean log price of the same product is much narrower with the Euro than before. We observe Sigma and Beta convergence, i.e. prices do not differ systematically between countries. Our result is in contrast to some other findings stating divergence rather than convergence but which do not control perfectly for heterogeneity of products. Because of information and transportation costs arbitrage is unlikely to occur in consumer items and reasons for convergence must therefore be sought in competition and advantages on the supplier’s side. If suppliers would minimize menu costs, price for the same item should be identical, which we do not observe. |
| Keywords: | convergence, price setting, law of one price, Euro, homogenous products |
| JEL: | D4 E31 F36 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bwu:schdps:sdp13005&r=eec |
| By: | Oehler-Sincai, Iulia Monica |
| Abstract: | In the present case study, our main objective is to bring to the forefront the main factors that led to the double-dip recession of the Cypriot economy. We analyze determinants such as “tax haven” status, interlinks with the Greek economy, spillovers originating in the Euro Area as a whole (through the debt crisis) and Greece in particular. In spite of the fiscal reform of 2002 and the new fiscal system in force since the 1st of January 2003, Cyprus continued to be a “tax haven”. Its high investment attractiveness spurred the “Cyp-Rus” relations, boosted an outsized banking sector (representing 800% of Cyprus GDP in 2010-2011) and generated an unsustainable proportion between the real and the “virtual” economy. Besides, the public sector became larger than required by such a small economy, its share in the total yearly value added being close to one quarter. Taking into consideration all these factors, we conclude that the „W”-shaped recession of the Cypriot economy is a sui generis one and the questioning of its “fiscal paradise” status is even more acute than in the case of countries such as Luxembourg or Liechtenstein. |
| Keywords: | Cyprus, financial contagion, tax haven, Cyp-Rus, Cyprus-Greece, recession, euro zone, debt crisis |
| JEL: | E44 F21 F33 F44 H81 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48214&r=eec |
| By: | Albinowski, Maciej; Ciżkowicz, Piotr; Rzońca, Andrzej |
| Abstract: | We contribute to the new, albeit fast-growing empirical literature on the determinants of trust in central banks. Like in most other studies we use panel data models based on the Eurobarometer survey on trust in the European Central Bank. Firstly, we confirm the main conclusion from previous studies that the trust in the ECB has suffered from the crisis’ outburst. Moreover, households perceive the ECB’s responsibility for the occurrence of the crisis to go beyond the responsibility of other institutions. This finding casts some doubt on the central bank’s ability to manage expectations in a country having been hit by a severe negative demand shock, while this ability is precondition of the central banks’ power to boost aggregate demand when its interest rates are at the zero lower bound. Secondly (and most importantly), in addition to previous studies, we examine the links between the trust in the ECB and its policy. Our main result is that when households have pessimistic expectations, aggressive cuts in interest rates have an adverse effect on their trust in central bank. This result is in accordance with the ‘lack-of-confidence shock’ hypothesis developed by Schmitt-Grohé and Uribe (2012) and go against the ‘fundamental shock’ hypothesis which would imply positive effects of aggressive cuts for trust in the ECB. These findings are robust to changes in the estimation method, the definition of the lack of confidence shock, control variables and countries under consideration. We also show that it cannot be easily rejected as spurious |
| Keywords: | trust in central banks, zero lower bound, lack-of-confidence shock, Eurobarometer, panel data |
| JEL: | C23 E58 H12 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48242&r=eec |
| By: | Oberhofer, Harald; Vincelette, Gallina A |
| Abstract: | This paper builds on the analysis of job creation developed in World Bank (2013) to provide an empirical investigation of the industry and firm-specific determinants of the job creation process in eleven new European Union (EU11) economies. It relies on the Amadeus dataset of firms during 2002-2009. The main results indicate that during the years prior to the global financial crisis, traditional industries were crucial for the net creation of jobs in EU11. However, traditional industries were the ones most severely affected by the financial crisis. By contrast, services firms were less vulnerable to the economic downturn. At the firm level, small and young firms registered the highest employment growth rates. The empirical results also indicate that more productive firms tended to be less vulnerable to economic downturns. Moreover, the results demonstrate that the perceived quality of the business climate by the EU11 enterprises is correlated with not only the firms'employment growth, but also their productivity. In the post-crisis period, poor business restrictions were negatively associated with the creation of jobs. All these findings hold for the group of high-growth firms that disproportionately accounted for the creation of new jobs in the EU11 economies. |
| Keywords: | Labor Markets,Microfinance,Small Scale Enterprise,Environmental Economics&Policies,Labor Policies |
| Date: | 2013–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6533&r=eec |
| By: | Pierluigi Balduzzi (Boston College); Emanuele Brancati (University of Rome, Tor Vergata); Fabio Schiantarelli (Boston College; IZA) |
| Abstract: | We test whether banks' financial market valuations have an impact on the decisions of their client firms. We investigate this transmission channel using data on Italian banks and firms during the 2006-2011 period. Italian banks experienced two large shocks: the 2007-2009 financial crisis and, perhaps more importantly, the 2010-2012 sovereign debt crisis. The Italian case is particularly interesting because Italian firms are predominantly small and privately held, and rely heavily on bank debt. Hence, most Italian firms are unable to cushion shocks to the cost and availability of bank lending by resorting to capital markets. We take advantage of a newly available data set covering a representative sample of over 3,000 firms and containing information on the identity of the bank(s) each firm has a relationship with. We measure banks' financial market conditions with the level and volatility of their CDS spread and with the level and volatility of their stock market valuations. We find robust evidence that--after controlling for common and firm-specific demand effects--a worsening of banks' financial market conditions leads younger and smaller firms to invest, hire, and borrow less: for example, a one-standard deviation increase in a bank's CDS spread decreases the investment activity of a client firm at the 10th percentile of the age distribution, and a five-year-old firm by 0.5 standard deviations. We conclude that financial market volatility has real effects even for privately held firms, and that the banking system is an important channel through which these effects take place. |
| Keywords: | Financial market shocks, banks, credit-default swaps, volatility, investment, employment, lending |
| JEL: | D92 G21 |
| Date: | 2013–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:824&r=eec |
| By: | Skupnik, Christoph |
| Abstract: | According to the welfare magnet hypothesis, migrants with a high likelihood of claiming benefits cluster in the most generous welfare systems. After the introduction of the freedom of movement for Eastern European workers, EU-15 countries can thus be expected to reduce public benefits in order to avoid becoming welfare magnets. However, OECD data on benefits do not support the prediction of a race to the bottom in protection levels. Using data from the EU-LFS 2004 to 2011, I analyze the determinants of migration flows and find that, in contrast to theory, welfare state variables do not significantly affect migration flows when controlling for temporary political restrictions of the freedom of movement (2+3+2 rule). This explains why the pressure to modify national welfare spending is small. Furthermore, evidence is found that the restrictions completely offset the incentive effects of work-related pull factors and thereby hamper an efficient allocation of labor across national borders. -- |
| Keywords: | Determinants of migration flows,EU enlargement,welfare magnet |
| JEL: | F2 H2 J2 J5 J6 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:20138&r=eec |
| By: | Callan, Tim (Economic and Social Research Institute, Dublin); Nolan, Brian (University College Dublin); Keane, Claire (ESRI, Dublin); Savage, Michael (Economic and Social Research Institute, Dublin); Walsh, John R. (ESRI, Dublin) |
| Abstract: | Ireland is one of the countries most severely affected by the Great Recession. National income fell by more than 10 per cent between 2007 and 2012, as a result of the bursting of a remarkable property bubble, an exceptionally severe banking crisis, and deep fiscal adjustment. This paper examines the income distribution consequences of the recession, and identifies the impact of a broad range of austerity policies on the income distribution. The overall fall in income was just under 8 per cent between 2008 and 2011, but the greatest losses were strongly concentrated on the bottom and top deciles. Tax, welfare and public sector pay changes over the 2008 to 2012 period gave rise to lower than average losses for the bottom decile. Thus, the larger than average losses observed overall are not due to these policy changes; instead, the main driving factors are the direct effects of the recession itself. Policy changes do contribute to the larger than average losses at high income levels. |
| Keywords: | recession, income distribution, tax, welfare |
| JEL: | D31 D78 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7481&r=eec |
| By: | Borys, Paweł; Ciżkowicz, Piotr; Rzońca, Andrzej |
| Abstract: | We identify fiscal impulses in the EU New Member States using four different methods and apply econometric panel data techniques to determine what is the response of output and its components to those impulses. We also directly test the effects of fiscal impulses on labor costs and households’ expectations. The results confirm that the composition of impulses matters for output and its components response. Notably we find evidence that investment and export growth accelerates after fiscal adjustment and decelerates after fiscal stimulus when the impulses are expenditure based. In turn, private consumption seems not to respond to fiscal impulses regardless of their size. The analysis confirms that expenditure based fiscal adjustments enhance wage moderation and thereby competitiveness of domestic enterprises, while expenditure-based fiscal stimuli weaken it. By contrast, we do not find evidence that fiscal impulses have an effect on households’ confidence. |
| Keywords: | expansionary fiscal adjustment, contractionary fiscal stimulus, New Member States, panel data |
| JEL: | C22 D22 E24 E62 H30 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48243&r=eec |