Euro Crisis Research Articles

U.S. MONETARY POLICY AND SOVEREIGN CDS MARKETS

This paper analyzes the effects of U.S. monetary policy on sovereign credit default swap (CDS) markets in a total of 66 countries including both advanced and emerging market economies at the monthly time horizon from 2001 to 2016. We employ a four-variable vector autoregression (VAR) model to estimate the monetary policy shock and examine the pass-through of U.S. monetary policy shocks to sovereign CDS markets. We find that the effect of monetary policy shocks on CDS markets is strong, especially during the European sovereign debt crisis and the period the U.S. monetary policy rate was near zero. Our analysis indicates that expansionary U.S. monetary policy leads to the widening of the sovereign credit spreads and the heightening of the CDS market volatility.

The implications of the European financial crisis and parties’ positions on European integration on the outcomes of government formation processes in Southern Europe

ABSTRACT This article examines the determinants of the partisan composition of cabinets formed in the last twenty years in Greece, Italy, Portugal, and Spain. Assuming that coalition formation processes take place in three-dimensional political spaces, we assess the impact of the ideological heterogeneity of potential coalitions on economic, EU-related, and socio-cultural issues on the chances that a combination of parties finally forms a cabinet. We find that – in line with the intensified role exerted by EU institutions in domestic affairs – parties were more likely to form a coalition government with those actors who share similar positions on an economic and an EU integration dimension.

Hidden causality between oil prices and exchange rates

This work investigates the interactions between oil prices and exchange rates of 6 typical oil importers (China, Japan, and India) and exporters (Canada, Russia, and Saudi Arabia) from 2006 to 2022. We employ a novel method to capture their causal interactions, namely pattern causality, and compare the results to that based on the volatility spillover method. The empirical analysis supports most existing findings that oil prices are bidirectional correlated with exchange rates. However, unlike previous studies that only investigate positive and negative causalities, we highlight dark causality as a more complex interaction. Moreover, dark causality suggests that successive increases (decreases) in oil prices tend to drive the exchange rates of oil exporters to act in an oscillatory manner rather than in a purely positive or opposite trend, and vice versa. Furthermore, we also reveal that dark causality shows dominance during crises, e.g., the global financial crisis, the European debt crisis, the epidemic of COVID-19, and the Russia-Ukraine conflict. Revealing three types of causalities between oil prices and exchange rates helps policymakers develop more diversified macroeconomic policies. Moreover, the newly identified dark causality can be a useful indicator for investors to risk management.

Banking regulation, credit supply, and Uneven regional development. An exploratory comparison of Italy and Germany

In the wake of the 2008 global financial crisis, first, and of the 2011 European financial crisis, and second, important changes have been brought to the European banking regulatory framework. Banking capital requirements (capital adequacy ratios) have been tightened on a global scale - through the “Basel III” agreements. New liquidity and leverage requirements have been imposed on all European banks, to strictly curtail risk and indebtedness, rightly identified as two significant causes of the 2008 financial crisis. As for any case of regulatory tightening, these changes in banking regulation have been resented by the regulates as excessive constraints on banks’ business - in particular their lending business, especially small and medium-sized firms, which have little access to capital markets, because of significant information asymmetries characterizing credit relations. In this paper, we aim to analyse the implications of these modifications in banking regulation which tend to favor banks organized in the form of joint stock companies to the detriment of banks organized as non-profit enterprises such as credit cooperatives. Thus, the question we are addressing in this paper is the following: to what extent have recent European banking regulatory changes affected regional economic development? We will answer the question by analysing descriptive statistics concerning the structure of the banking system and credit supply in two countries, Italy and Germany. These two countries share important characteristics, which underline the relevance of a strong nexus between banking sector development and growth on a local scale. In particular, both countries are characterized by a high number of small and medium-sized firms and both have a fragmented banking system, with a sizeable number of not-for-profit and local banks. The hypothesis formulated here is that changes in banking regulation can affect local and regional economic development through two channels: a first, direct channel, through which regulatory changes directly and negatively affect banks’ credit supply to small and medium-sized firms; and a second, indirect channel, through which regulatory changes induce changes in the structure of the local and regional banking system, which, in turn, affect (among other things) credit supply. A comparison between Italy and Germany will allow us to assess the relative strength of these two channels, identify those factors, which may allow us to explain outcomes differentials, and thus help identify policy implications.

A Study of Bailie's Monetary Thought -- Textual Interpretation of 1857-1858 Economic Manuscript Under the Economic Crisis

In the last century, when the European economic crisis happened one after another, Marx realized that he needed to intensify his research on the very important economic phenomenon at the beginning of the revolution. From August 1857 to May 1858, he wrote eight books of notes, which were called "Outline". The first part of the Outline is the Chapter on Money. At the beginning of this part, Marx attacked the incorrect ideas of many economists about money and crisis, and pointed out that people must discover the essence of crisis through the phenomena of currency or financial crisis. One of the economists was Bailey. Based on the analysis of the background of the economic crisis at that time, this paper will sum up Bailey's monetary thought, explore Marx's criticism and inheritance of Bailey's thought and the impact on the economic crisis at that time, and elaborate the important influence of Marx's "Outline".

Italy's return to Africa: between external and domestic drivers

AbstractA steadily increasing number of European countries recently adopted their own ‘Africa policies’. The temporal and geographical clustering of such plans suggests that a policy diffusion process might have been at play, with the introduction and the shape of a policy in a given country being influenced by those of other countries. This paper tests the policy diffusion hypothesis through an in-depth analysis of the case of Italy, a country that in recent times stepped up substantially its engagement with sub-Saharan Africa. Tracing the origins and features of Rome's policy towards the region, however, shows that external influences were much more limited than expected. It was primarily two country-specific drivers – namely, the enduring effects of the European debt crisis on the Italian economy and a sudden and massive, if temporary, increase in irregular migration – which pushed Italy towards Africa and shaped its approach. The paper thus sheds light on how the marked resemblance of policies almost contemporaneously adopted by distinct EU member states – that is, a tight succession and a highly interconnected environment strongly pointing at cross-country influences – can hide motives and processes that are actually highly specific to each of them and essentially by-pass policy diffusion dynamics.

This time truly is different: The cyclical behaviour of fiscal policy during the Covid-19 crisis

Fiscal policy was more countercyclical during the Covid-19 crisis than in previous (crisis) episodes. This paper presents empirical evidence in favour of a “this time truly is different” moment based on analysing the cyclical behaviour of fiscal policy for 28 advanced economies over 1995–2021. Discretionary fiscal policy during the Covid-19 crisis (2020–2021) did more to counteract the downturn – especially in the Eurozone –, as we do not find comparable evidence for countercyclicality during the financial crisis or Euro crisis. Automatic fiscal stabilisers, the non-discretionary domain of fiscal policy, significantly contributed to countercyclical stabilisation during the pandemic.

Should fiscal policies be centralized in a monetary union? A dynamic game approach

In this paper we analyze dynamic interactions in a monetary union with three fiscal players (the governments of the countries concerned) and a common central bank in the presence of exogenous shocks. The model is calibrated for the euro area and includes a fiscally more solid core block denoted as country 1 as well as a fiscally less solid periphery block represented by countries 2 and 3. Introducing two periphery countries allows us to capture different attitudes of the periphery countries towards the goal of sustainable fiscal performance. Moreover, different coalition scenarios are modelled in this study including a fiscal union, a coalition of periphery countries and a coalition of fiscal-stability oriented countries. The exogenous shocks are calibrated in such a way as to describe the last major crises in the euro area, namely the financial crisis, the European sovereign debt crisis, the Covid-19 crisis, and the Ukraine war (energy price) crisis. Using the OPTGAME algorithm we calculate a cooperative Pareto and non-cooperative feedback Nash equilibrium solutions for the modelled scenarios. The fully cooperative solution yields the best results. The different non-cooperative scenarios allow insights into the underlying trade-off between economic growth, price stability and fiscal stability.

Inclusion of IMF in Eurozone Crisis Management: Legitimacy Through External Expertise and Internal Depoliticisation

ABSTRACT A new technocratic knowledge regime emerged in Europe in 2010. Known as the Troika, it included the European Commission, the European Central Bank, and the IMF. The Greek Stand-By Arrangement was the IMF’s first Eurozone financial assistance involvement, controversial for both the EU and the IMF. We trace how the IMF entered the process, focusing on why EU institutions involved it. We used official documents, statements, and a unique set of 129 interviews with IMF and EU decision-makers and Member State officials. We argue that the EU sought the IMF’s expertise in loan and conditionality negotiation, public image credibility, perceived guarantee for austerity, and depoliticisation. They were internally motivated by lack of confidence in the European Commission among EU Member States. Legitimacy was sought externally through the IMF’s expertise. The IMF continued its previous depoliticising role, a crucial strategy in crisis management, now in a novel multilevel context.

Dynamical linkages between the Brent oil price and stock markets in BRICS using quantile connectedness approach

The Quantile connectedness approach, which allows for a detailed scrutinization of the connectedness, to analysis the connectedness for oil price and BRICS stock markets. Russia and South Africa plays the net transmitting roles, and similar evidence is obtained in Brazil after 2010. Brent oil, India, and Shanghai are net recipients for most time. The extent of the connectedness is further stronger when facing up the market slump such as the global financial crisis, European debt crisis, and Covid-19 periods. For investors, practitioners, and financial institutions, periodically changing the assets allocating can follow noted above evidence.

The Pandemic and the Long Shadow of Austerity in Southern Europe

Greece, Italy, Spain, and Portugal have suffered some of Europe’s worst health outcomes in the COVID-19 pandemic. The same countries also bore the brunt of the European sovereign debt crisis a decade earlier, when they were forced to undertake severe budget austerity measures in return for financial support from European institutions. Austerity left their economies and health care systems weakened when the pandemic arrived. Yet they were able to avoid another surge in unemployment, showing that some lessons were learned from the financial crisis.

Rehabilitation of the idea of German regional hegemony in German political thought (1989-2013)

The author examines the perception of the idea of German hegemony in Europe in German political thought from the end of the Cold War to the end of the European debt crisis of 2009-2013. During this period, there was a discussion in the German analytical community about the future role of Germany in the region. In the study are distinguished a number of stages in the perception of the idea of the hegemony of the FRG. As part of the first stage, after the end of the Cold War, the so-called "normalization debate" takes place, during which the issue of increasing the political weight of a united Germany was discussed. The next stages were marked by the understanding of German hegemony as a leader in the processes of European integration, the rehabilitation of the use of military force, a temporary period of renationalization, and then, during the leadership of A. Merkel as Chancellor of the Federal Republic of Germany, the adoption of the role of the financial leader of Europe. The conclusion is made about the legitimization of the idea of German regional hegemony in German political thought following the results of the European debt crisis.

Labor costs, KIBS, and export performance: A comparative analysis of Germany and Mediterranean economies

Following the onset of the Eurozone crisis, Mediterranean economies (Greece, Italy, Portugal, Spain) followed the example set by Germany, implementing structural reforms with the aim of restraining labor costs and transitioning to export-led growth. Using input–output tables, this paper analyzes the role of labor costs and non-price factors in the export performance of the manufacturing sectors in these Mediterranean economies and in Germany. We estimate an export model taking subsystems as units of analysis, permitting us to consider how the productive linkages between manufacturing and services affect export growth. Our results show that the effect of labor costs on export performance has been negligible in these five economies, while non-price factors stand out as the main drivers of export growth. In addition, we find that the development of stronger linkages between knowledge-intensive business services (KIBS) and manufacturing provides a substantial stimulus for non-price competitiveness.

Spillovers between European markets

Financial integration has been proven to benefit European economies. However, it may obstruct diversification attempts, and so attracts the attention of investors and researchers. The aim of this paper is to analyze changes in spillovers between European markets, the European Index, and the World Index, over a period of two decades (2000–2021), with regard to the level of development. Mature markets have higher spillovers than emerging and frontier ones. The main finding is that non-developed markets’ spillover levels in tranquil periods did not substantially increase in the last two decades, despite ongoing integration with developed European markets. However, spillover rises in time of global or regional crisis (e.g. Great Financial Crisis, Eurozone Debt Crisis, COVID-19 pandemic) for all markets, regardless of economic development, which can undermine diversification attempts just when they are most needed. Afterwards, the transmission of shocks falls back to the pre-crisis level, with the exception of the spillover between Eurozone markets and European Index, which remained very high even after the end of the particular crisis.

Can narratives about sovereign debt be generally ideologically suspicious? An exercise in broadening the scope of ideology critique

Can narratives about sovereign debt be generally ideologically suspicious? An exercise in broadening the scope of ideology critique

Europeanisation and the Dialectics of Crisis and Solidarity in the Croatian and Serbian Broadsheet Press between 2007 and 2017

Abstract This article explores representations of European solidarity in the aftermath of crisis-like events between 2007 and 2017 in the Croatian and Serbian broadsheet press, as well as their resonance with the discursive construction of Europe and Europeanisation. In order to achieve this goal, corpus-based discourse analysis is performed over a large collection of ca. 20,000 articles, originating in four newspapers. The results demonstrate that discourses on European solidarity rose to particular prominence in 2008–2009, 2011–2013, and 2015. This constitutes a dialectical relation with discourses on crises: the global financial crisis, European debt crisis, and migration crisis – especially the latter – redefined the notion of European solidarity, reflected in Croatian and Serbian discourses as a value promoted by the EU core and related mostly to the EU members. In Serbia, the solidarity discourses were of particular local importance during the first phase of the global financial crisis, coinciding with the country’s application for the EU candidacy, and later losing significance. In Croatia, the notion of European solidarity seems to become more relevant for domestic actors after the 2013 EU accession.

Alternative investments during turbulent times comparison of dynamic relationship

The coronavirus pandemic, like the Russian aggression on Ukraine, had a significant impact on many financial markets and asset prices. The latter additionally led to large fluctuations on financial markets. In this paper, we try to compare the performance of safe haven assets during turbulent times, such as the recent global financial crises, eurozone debt crises, the COVID-19 pandemic and the Russian aggression on Ukraine. We investigate the dynamic relationship between indices from the European countries like the Czech Republic, France, Germany, Great Britain, Poland, Slovakia, Spain, and popular instruments such as gold, silver, Brent Crude Oil, Crude Oil WTI, US Dollar, Swiss Franc, and Bitcoin. The study estimated the parameters of either DCC or CCC models, to compare the dynamic relation between the above-mentioned stock markets and financial instruments. The results showed that in most cases, the US Dollar and Swiss Franc were able to protect investors from stock market losses during turbulent times. In those periods, gold was the closest to being a safe haven instrument for investors from France, Poland, the Czech Republic and Slovakia. Our findings are in line with other literature which points out that safe haven instruments can change over time and across countries. In that literature, we can find research performed for the USA, China, Canada, and Great Britain, but there is no such research for Poland, Italy, the Czech Republic or Slovakia. The purpose of this paper is therefore to try to fill this research gap.

Fiscal consolidation in China: a dynamic computable general equilibrium analysis

ABSTRACT Inflation and overcapacity caused by fiscal expansion have begun to plague China’s economy. The surge in public debt caused by the perennial high deficit rate has led to accumulated debt risk. The lessons of the European debt crisis have forced China to re-examine its debt sustainability. A larger and more systematic fiscal consolidation is urgent. Based on China’s multiple fiscal accounts, this paper constructs a dynamic computable general equilibrium (CGE) model suitable for China’s scenario. By simulation, we evaluated the economic effects of revenue-based and spending-based fiscal consolidation and mixed consolidation and drew the following conclusions: (1) The success of fiscal consolidation requires paying a certain economic price. The industrial sectors closely related to the government bear more pressure from consolidation, which makes spending-based consolidation measures more advantageous in terms of cost because of their lower negative externalities. (2) China’s social security system has mitigated the effect on households during periods of fiscal consolidation, but the social insurance fund bears greater losses. (3) The mixed strategy of combining revenue and spending balance the contradiction between economic development and industrial structure in consolidation. While protecting the industrial structure, this strategy can complete the consolidation goal at a small economic cost.

Foreign exchange market return spillovers and connectedness among African countries

This paper examines the foreign exchange return shock spillovers and network connectedness among African countries during crisis periods using (Diebold & Yilmaz, 2012; 2014; 2016) which is based on generalized VAR and network theory between June 2004 and June 2021. Overall, the study found a low system-wide spillover connectedness among African foreign exchange markets. However, the total systemic spillover index increased during the eurozone sovereign debt crisis followed by global financial crisis, indicating evidence of contagion effects. This offers good diversification opportunities in the African currency market during crisis periods. The study also found no significant evidence of spillover effects among African currencies. Nonetheless, the network connectedness analysis found a positive significant pairwise return spillovers from the South African rand, Moroccan dirham and the CFA francs to Botswana pula, and from Moroccan dirham to CFA francs and South African rand. Furthermore, the study found South African rand, Moroccan dirham and CFA francs as the most significant net-transmitter of return shocks to other currencies whiles the Kenyan shilling and Botswana pula are the net-receivers of return shocks from other currencies. These results have implications for African central banks interventions in stabilizing their exchange rates to facilitate intra and inter-African trade and for international portfolio investors in managing their foreign exchange risk exposures.

Macrofinancial determinants of volatility transmission in a network of European sovereign debt markets

In this paper, we propose a two-step approach for conducting statistical inference in financial networks of volatility, applied to a network of European sovereign debt markets. The static results highlight that, contrarily to the intuition, southern European bonds exhibiting most volatility during the European debt crisis were not necessarily net transmitters to the network. We also find that the best monetary and macroprudential policy stances to achieve low volatility transmission are to target low inflation and low financial stress. The dynamics of the model show that the central bank should adjust which variable targets depending on the time period.