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on European Economics |
| By: | Gilchrist, S.; Mojon, B. |
| Abstract: | We construct credit risk indicators for euro area banks and non-financial corporations. These are the average spreads on the yield of euro area private sector bonds relative to the yield on German federal government securities of matched maturities. The indicators are also constructed at the country level for Germany, France, Italy and Spain. These indicators reveal that the financial crisis of 2008 has dramatically increased the cost of market funding for both banks and non-financial firms. In contrast, the prior recession following the 2000 U.S. dot-com bust led to widening credit spreads of non-financial firms but had no effect on the credit spreads of financial firms. The 2008 financial crisis also led to a systematic divergence in credit spreads for financial firms across national boundaries. This divergence in cross-country credit risk increased further as the European debt crisis has unfolded since 2010. Since that time, credit spreads for both non-financial and financial firms increasingly reflect national rather than euro area financial conditions. Consistent with this view, credit spreads provide substantial predictive content for a variety of real activity and lending measures for the euro area as a whole and for individual countries. VAR analysis implies that disruptions in corporate credit markets lead to sizeable contractions in output, increases in unemployment, and declines in inflation across the euro area. |
| Keywords: | credit cycle, euro area, financial crisis. |
| JEL: | E32 E43 E44 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:482&r=eec |
| By: | Alcidi, Cinzia; Gros, Daniel |
| Abstract: | We consider the real life implementation of some key elements of the new economic governance framework for the euro area. The main findings are the following. The Country Specific Recommendations issued in the context of the European Semester seem to be too little ‘specific’ to constrain governments in general and even less creditor governments, who so far have been able to ignore them. We argue that the Excessive Imbalances Procedure should be based much more on forward looking variables and on deviations from the euro area average instead of absolute thresholds. The emphasis on cyclically adjusted balances in the reformed Stability and Growth Pact, as well as the Fiscal Compact (formally the TSCG) will face serious problems of implementation given the uncertainties surrounding the estimates of the cyclical component and the frequent revisions this component is subject to. Finally we show that the rationale for fiscal policy coordination, namely spill-over effects from national actions to the rest of the euro area, change nature in different economic circumstances. During a financial crisis much more coordination is desirable than during normal times. This implies that the set of ambitious rules for economic policy coordination created under the impression of the euro crisis might not be appropriate for different circumstances. |
| Keywords: | EU governance, policy coordination, macroeconomic imbalances, spillovers, structural balance |
| JEL: | E02 E60 |
| Date: | 2014–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:rif:report:25&r=eec |
| By: | Catherine Mathieu (OFCE); Henri Sterdyniak (OFCE) |
| Abstract: | The economic crisis which started in 2008 led to a strong rise in public debts. The sovereign debt crisis in euro area southern countries broke the unity of the euro area and weakened the “single currency” concept. The paper shows that this situation is not due to a lack of fiscal discipline in Europe, but to drifts in financial capitalism and to an inappropriately designed euro area economic policy framework. Public debts homogeneity needs to be resettled in Europe. European public debts should become safe assets again, and should not be subject to financial markets’ assessment. EU Member States should not be requested to pay for past sins through austerity measures, and should not strengthen fiscal discipline through rules lacking economic rationale. The paper deals with recent proposals made to improve euro area governance (redemption fund, European Treasury, eurobonds, public debt guarantee by the ECB). The paper advocates for a full guarantee of government bonds for the Member States who commit to an economic policy coordination process, which should target GDP growth and coordinated reduction of imbalances. |
| Keywords: | EU fiscal policy; EU Governance |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/7gjmt2p0l896bo3oar8rqd4vvr&r=eec |
| By: | Erik Makela (Department of Economics, University of Turku) |
| Abstract: | The objective of this paper is to figure out how the Economic and Monetary Union in Europe (EMU) has affected on its member’s sovereign risk-premiums and long-term government bond yields. In order to estimate the effect, this paper utilizes synthetic control method. Contrary to the popular belief, this paper finds that the majority of member countries did not receive economic gains from EMU in sovereign debt markets. Synthetic counterfactual analysis finds strong evidence that Austria, Belgium, France, Germany and Netherlands have paid positive and substantial euro-premium in their 10-year government bonds since the adoption of single currency. After the latest financial crisis, government bond yields have been higher in all member countries compared to the situation that would have been without monetary unification. This paper concludes that from the sovereign borrowing viewpoint, it would be beneficial for a country to maintain its own currency and monetary policy. |
| Keywords: | Synthetic Control Method, Monetary Union, Sovereign Risk, Government Bond Yield |
| JEL: | F34 E42 G15 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp90&r=eec |
| By: | Maylis Avaro (École normale supérieure de Cachan); Henri Sterdyniak (OFCE) |
| Abstract: | In June 2012 European Council launched the banking union as a new project expected to contribute to solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? A banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, by establishing common mechanisms to solve banking crises, and by encouraging banks to diversify their activities. The banking union project is based on three pillars: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), a European Deposit Guarantee Scheme (EDGS). Each of these pillars raises specific problems. Some are related to the current crisis (can deposits in euro area countries facing difficulties be guaranteed?); some other issues are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?), some other issues are related to the EU specificity (is the banking union a step towards more federalism?); the more stringent are related to structural choices regarding the European banking system. Banks'solvency and ability to lend, would depend primarily on their capital ratios, and thus on financial markets' sentiment. The links between the government, firms, households and domestic banks would be cut, which is questionable. Will governments be able tomorrow to intervene to influence bank lending policies, or to settle specific public banks? An opposite strategy could be promoted: restructuring the banking sector, and isolating retail banking from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed by the interdiction to run risky activities on financial markets. Can European peoples leave such strategic choices in the hands of the ECB? |
| Keywords: | Banking union; European Construction |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/144pedpca18ff8v7fh3tvnp99m&r=eec |
| By: | Christophe Blot (OFCE); Marion Cochard (OFCE); Jérôme Creel (OFCE); Bruno Ducoudre (OFCE); Danielle Schweisguth (OFCE); Xavier Timbeau (OFCE) |
| Abstract: | Recent evidence has renewed views on the size of fiscal multipliers. It is notably emphasized that fiscal multipliers are higher in times of crisis. Starting from this literature, we develop a simple and tractable model to deal with the fiscal strategy led by euro area countries. Constrained by fiscal rules and by speculative attacks in financial markets, euro area members have adopted restrictive fiscal policies despite strong negative output gaps. Based on the model, we present simulations to determine the path of public debt given the current expected consolidation. Our simulations suggest that despite strong austerity measures, not all countries would be able to reach the 60% debt-to-GDP. If fiscal multipliers vary along the business cycle, this would give a strong case for delaying austerity. This alternative scenario is considered. Our results show not only that delaying austerity would improve growth perspectives and would not be incompatible with public debt converging to 60% of GDP. |
| Keywords: | public debt; fiscal multipliers; debt |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/2g7mhju69b94obeaqlen09s1au&r=eec |
| By: | Catherine Mathieu (OFCE); Henri Sterdyniak (OFCE) |
| Abstract: | The 2007 crisis highlighted the drawbacks of the euro area framework which were already there from the launch of the single currency. There cannot be a single currency between countries with different economic situations and independent economic policies. Euro area governance (no public debts guarantee by the ECB, arbitrary rules focusing on public finances only), was not satisfactory. EU institutions tried to impose a strategy (domestic policies constraints, public deficits cuts, liberal structural reforms) which failed. Before the crisis, imbalances had risen between Northern Member States (MS) and Southern MS, and became unsustainable with the crisis. The Fiscal pact strengthened rules lacking economic rationale. Blind austerity policies led the euro area to fall in depression and undermined euro area cohesion. The procedures implemented strengthen economic policy surveillance between MS, without organising real domestic economic policy coordination. They allow for limited solidarity, at a very high price. Fiscal federalism projects cannot offset the loss of independence for domestic economic policies. MS Public debts should become safe assets again, thanks to the ECB’s guarantee. This requires implementing real economic coordination, which should target growth, full-employment and orderly reduction in imbalances between MS. Europe should reaffirm its specificity: a social model, a will to prepare for ecological transition. These are prerequisites for Europe to make progress. |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/63g6fe7kgp82vpg084ogo3keke&r=eec |
| By: | Fernando Broner (CREI, Universitat Pompeu Fabra and Barcelona GSE); Alberto Martin (CREI, Universitat Pompeu Fabra and Barcelona GSE); Jaume Ventura (CREI, Universitat Pompeu Fabra and Barcelona GSE); Aitor Erce (Banco de España and European stability mechanism) |
| Abstract: | In 2007, countries in the euro periphery were enjoying stable growth, low deficits and low spreads. Then the financial crisis erupted and pushed them into deep recession, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sector, reducing investment and deepening the recession even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the euro zone, and how they may be addressed by policies at the European level. |
| Keywords: | sovereign debt, discrimination, crowding out, rollover crises, economic growth |
| JEL: | F32 F34 F36 F41 F43 F44 G15 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1402&r=eec |
| By: | Luca Arciero (Bank of Italy); Ronald Heijmans (De Nederlandsche Bank); Richard Heuver (De Nederlandsche Bank); Marco Massarenti (European Central Bank); Cristina Picillo (Bank of Italy); Francesco Vacirca (Bank of Italy) |
| Abstract: | This paper develops a methodology, based on Furfine (1999), for identifying unsecured interbank money market loans from the transaction data of the most important euro payment processing system TARGET2, for maturities ranging from one day (overnight) up to three months. The implementation has been verified with (i) interbank money market transactions executed on the e-MID Italian electronic trading platform and (ii) aggregated reporting by the EONIA panel banks. The Type2 (false negative) error for the best performing algorithm setup is 0.92%. We find aggregated interest rates very close to the EONIA but observe a high degree of heterogeneity across countries and market participants. The different stages of the global financial crisis and of the sovereign debt crises are clearly revealed in the interbank money market by significant drops in turnover. The results focus on three levels: euro-area, country group and country (Italy and the Netherlands). |
| Keywords: | euro interbank money market, Furfine, TARGET2, financial stability, EONIA |
| JEL: | E42 E44 E58 G01 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_215_14&r=eec |
| By: | Christophe Blot (OFCE); Jérôme Creel (OFCE); Paul Hubert; Fabien Labondance (Atelier de recherche sur la politique économique et la gestion des entreprises (ARPEGE)) |
| Abstract: | The prevailing consensus on the role of central banks has eroded. The pursuit of the goal of price stability only is now insufficient to ensure macroeconomic and financial stability. A new paradigm emerges in which central banks should ensure price stability, growth and financial stability. Recent institutional developments of the ECB go in this direction since it will be in charge of the micro-prudential supervision. In addition, the conduct of monetary policy in the euro area shows that the ECB also remained attentive to the evolution of economic growth. But if the ECB implements its triple mandate, the question of the proper relationship between these missions still arises. Coordination between the different actors in charge of monetary policy, financial regulation and fiscal policy is paramount and is lacking in the current architecture. Besides, certain practices should be clarified. The ECB has played a role as lender of last resort (towards banks and, to a lesser extent, towards governements) although this mission was not allocated to the ECB. Finally, in this new framework, the ECB suffers from a democratic illegitimacy, reinforced by the increasing role it plays in determining the macroeconomic and financial balance of the euro area. It seems important that the ECB is more explicit with regard to its different objectives and that it fulfils the conditions for close cooperation with the budgetary authorities and financial regulators. Finally, we call for the ex nihilo creation of a supervisory body of the ECB, which responsibility would be to discuss and analyze the relevance of the ECB monetary policy. |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/53ccj34tat80tq7f6ff0qvvjtj&r=eec |
| By: | Aleksandra Kolasa (Faculty of Economic Sciences, University of Warsaw; National Bank of Poland); Barbara Liberda (Faculty of Economic Sciences, University of Warsaw) |
| Abstract: | This paper studies the drivers of total private and household savings in Poland and compares them to those in developed countries. To this end, the two types of saving regressions are estimated: one based on an annual panel of OECD countries and the other using Polish quarterly time series. Compared to an “average” OECD country, the Polish private and household saving rates are more affected by the process of financial deepening. Moreover, they are also more sensitive to changes in government and corporate savings. |
| Keywords: | private savings, household savings, Poland, panel study, saving determinants |
| JEL: | E21 O16 O57 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2014-13&r=eec |
| By: | Bertrand Maître (Economic and Social Research Institute, Dublin); Helen Russell (Economic and Social Research Institute, Dublin); Christopher T Whelan (School of Sociology, Social Policy and Social Work, Queen’s University Belfast & Geary Institute & School of Sociology, University College Dublin) |
| Abstract: | Following an unprecedented boom that attracted the label ‘Celtic Tiger’, since 2008 Ireland has experienced the most severe economic and labour market crisis since the foundation of the State. The rapid deterioration in the labour market, alongside stringent austerity measures, had a widespread impact. Considerable debate persists as to where the heaviest burden has fallen. Conventional measures of income poverty and inequality have a limited capacity to capture the impact of the recession. This is exacerbated by a dramatic increase in the scale of debt problems. Our analysis, which focuses on economic stress, provides no evidence for individualization or class polarization. Instead we find that while economic stress level are highly stratified in class terms in both boom and bust periods, the changing impact of class is highly contingent on life course stage. The affluent income class remained largely insulated from the experience of economic stress, however, it saw its advantage relative to the income poor class decline at the earliest stage of the life-course and remain stable across the rest of the life course. At the other end of the hierarchy, the income poor class experienced a relative improvement in their situation in the earlier life course phase and no significant change at the later stages. For the remaining income classes life-course stage was even more important. At the earliest stage the precarious class experienced some improvement in its situation while the outcomes for the middle classes remain unchanged. In the mid-life course the precarious and lower middle classes experienced disproportionate increase in their stress levels while at the later life-cycle stage it is the combined middle classes that lost out. Additional effects over time relating to social class are restricted to the deteriorating situation of the petit bourgeoisie at the middle stage of the life-course. The pattern is clearly a good deal more complex that suggested by conventional notions of ‘middle class squeeze’ and points to the distinctive challenges relating to welfare and taxation policy faced by governments in the Great Recession. |
| Date: | 2014–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:201407&r=eec |