Eurozone Countries Research Articles

50 Years of Capital Mobility in the Eurozone: Breaking the Feldstein-Horioka Puzzle

This paper assesses capital mobility for the Eurozone countries by studying the long-run relationship between domestic investment and savings for the period 1970-2019. Our main goal is to analyze the impact of economic events on capital mobility during this period. We apply the cointegration methodology in a setting that allows us to identify endogenous breaks in the long-run saving-investment relationship. Precisely, the breaks coincide with relevant economic events. We find a downward trend in the saving-investment retention since the 70s for the so-called “core countries”, whereas this trend is not so evident in the peripheral, where the financial and sovereign crises have had a more substantial impact. In addition, our analysis captures other economic events: the Exchange Rate Mechanism (ERM) crisis, the German reunification, the European financial assistance program, and the post-crisis period. Our results also indicate that the original euro design had some flaws that remain unsolved.

Absolute Poverty and Sound Public Finance in the Eurozone

The respect of fiscal parameters is supposed to be – according to the official position of the European institutions – the best recipe for granting stability and growth. This optimistic view appears to be in contrast with the recent increase in poverty. The aim of this paper is to individuate the existence of a relation between governments’ decisions about fiscal policy and absolute poverty in 19 Eurozone countries from 2005 to 2017. The attempt is to answer the question as to whether the effect on growth generated by fiscal policy measures can account for the objective of poverty alleviation. The results support the conclusion that absolute poverty increases in the presence of a restrictive fiscal policy, while it decreases in the opposite case. During declining macroeconomic conditions, national governments belonging to the Eurozone appear to be unable to reconcile the objective of sound public finance with that of poverty alleviation.

Covid-19 Pandemisinin Avro Bölgesinde Büyüme, İşsizlik, Enflasyon ve Endüstriyel Üretim Üzerine Etkileri

The COVID-19 pandemic triggered a financial crisis having deeper effects than the global financial crisis that took place in 2008. Large-scale monetary and fiscal measures have been taken globally to minimize the negative outcomes of the pandemic regarding domestic demand, foreign trade, and tourism activities. The aim of this study is to determine how the changes caused by the COVID-19 pandemic in the Eurozone countries affect the macroeconomic indicators. The findings obtained within the scope of the study were mapped in the Geographic Information Systems (GIS) environment. In this study, the economic effects of the pandemic on the Eurozone countries are evaluated in terms of the gross domestic product (GDP), one of the most important indicators for evaluating the strength of the country's economies and development levels, inflation, unemployment, and industrial production. It was seen that the negative effects of the COVID-19 pandemic on the Eurozone economies manifested themselves in the first quarter of 2020 (Q1) and these effects reached their maximum level in the second quarter (Q2) of the same year. The recovery period and the positive trends signaling a way out of this crisis are observed to start in the third quarter (Q3). The economic developments in this period emerged from the normalization attempts and the relaxation of the tight restriction measures which had been put into practice at the beginning of the pandemic process. The restrictions aiming to prevent the spread of pandemic caused contractions in tourism, industry, and other sectors while resulting in unemployment in these sectors. Switching back to normal, gave way decreases in unemployment rates in the related sectors.

With age comes immaturity: Do countries with older populations issue shorter maturity debt?

Recent work has found that countries with older populations face steeper yield curves and issue shorter maturity debt than do younger countries. We reexamine these findings using a new database of public debt maturity and yields for OECD countries. We first show that the behavior of eurozone countries in the pre-euro period drives these results. Next, including more recent data from the post-euro period, we show that the relationship between population age, maturity, and yield curve slopes disappears. This finding is robust to excluding high-credit-risk countries. Last, we show that these patterns reemerge after the European debt crisis, suggesting that eurozone capital markets have resegmented.

Business confidence as a strong tracker of future growth: is it driven by economic policy uncertainty and oil price shocks in the OECD countries?

Business confidence matters for future growth as it relies on opinion surveys of developments in production activities, orders and stocks of finished products. Is it then affected by economic policy uncertainty and oil price asymmetries in the OECD countries? With limited evidence in the literature, we adopt the Augmented Mean Group (AMG) estimator following the evidence of cross-sectional dependence, non-stationarity and cointegration in the panel series. The full sample results show that business confidence is negatively affected by economic policy uncertainty and oil price. Moreover, the role of asymmetries cannot be neglected as both positive and negative oil price changes show different impacts on business confidence. The sub-sample results further reveal that the impacts of economic policy uncertainty and oil price on business confidence are higher in the Eurozone countries than in their non-Eurozone counterparts. We believe this is due to the central economic coordination and higher net-oil dependence and import status of the Eurozone countries.

Sustainable energy goals and investment premium: Evidence from renewable and conventional equity mutual funds in the Euro zone

Renewable energy sources have significant socio-economic benefits. Usually, the investment in such ventures is financed by the states. However, the growing scale warrants enhanced participation from financial markets. In this paper, we assess the attractiveness of renewable investments by comparing the performance of alternative energy-focused equity funds against their conventional counterparts. The sample spans over ten years from 2010 to 2019 and includes 3886 funds across nineteen Eurozone countries. Our findings suggest that renewable energy funds underperform traditional peers and market benchmarks and lack market and volatility timing. These results indicate that investors willing to opt for environment-friendly investment funds have to pay a premium for their choice, negatively reflecting financial attractiveness. We propose that the EU states intervene with fiscal, regulatory, and legislative steps to make renewables viable and provide a conducive investing environment.

Asymmetries in the transmission of oil price shocks to inflation in the eurozone

Theory predicts that the level of inflation in an economy and the trend in the prevailing inflation rate may affect how oil price shocks, through their influence on firms’ expectations and price-setting behaviors, are transmitted to inflation. However, empirical evidence regarding this relationship is limited and calls for further exploration. Using data for 12 eurozone countries over the period from 1999 to 2020, we analyze how the inflation environment in which an oil price shock occurs influences its transmission. We find that the inflation environment is a determinant in the way oil supply shocks and oil-specific demand shocks are transmitted to inflation, with positive shocks displaying higher transmission in high inflation environments. Furthermore, transmission of shocks to core inflation, which represents an indirect effect, only occurs in high inflation environments. These findings highlight the need to consider the inflation environment in order to define appropriate monetary policies in response to inflationary pressures caused by oil price shocks.

Anti-discrimination Case Law of the Court of Justice of the European Union before and after the Economic Crisis

Abstract Income inequality is at an all-time high in the Europe Union (EU). Implications from the economic crisis which broke out in 2008, and in particularly the austerity measures introduced by Governments in Eurozone countries receiving bailout programmes, created further inequalities, for example between men and women. This paper starts from the hypothesis that whereas other institutions in the EU have played a direct role in tackling the economic crisis, the Court of Justice of the European Union (CJEU) may have played a more indirect role, which nonetheless can have an overlooked value in particular for setting direction for legal norms of equality and anti-discrimination in Europe. The paper therefore addresses a legal-empirical question: To what extent does the anti-discrimination case law of the CJEU reflect the increased inequalities in Europe following the economic crisis? Based on a dataset of all anti-discrimination cases of the CJEU, I conduct a quantitative analysis of changes in the case law from before to after the economic crisis. I find that there is only weak evidence, which suggests that the case law of the CJEU reflects the increased inequalities following the economic crisis.

Institutions and macroeconomic performance: core versus periphery countries in the Eurozone

Abstract We incorporate institutions into a neoclassical growth model so as to account for macroeconomic differences, as in the data, in 12 Eurozone countries. Modelling institutions in a generic way, we assume that weak institutions are reflected in ill-enforced property rights. When we calibrate and solve the model for each country separately, our results are: (i) including weak institutions helps the model vis-à-vis the data more in the periphery than in the core of the Eurozone; (ii) institutional failures, and their adverse effects on incentives, are worse in the periphery countries and this contributes in explaining lower long-term growth and higher output volatility in these countries; (iii) the same shock affects different countries differently depending on their institutional structure and the mix of fiscal policies; and (iv) counterfactual scenarios imply that periphery countries with weak institutions could gain a lot had their institutional quality been like that in the core.

Breakup and default risks in the great lockdown

In this paper, we exploit CDS quotes for contracts denominated in different currencies and with different default clauses to estimate the risk of a breakup of the Eurozone and the propagation of breakup and default risks after the COVID-19 shock. Our main result is that the risk of a Eurozone breakup is significant although, quantitatively, it is not larger than in the period before the COVID-19 shock. In addition, we find that an increase in the redenomination risk in one country is associated with an increase in default premia and bond spreads in other Eurozone countries. Finally, we find that a sizeable fraction of the changes in the cost of insuring against redenomination and default reflects two additional factors: the first captures the insurance cost against a euro depreciation conditional on redenomination, while the second captures liquidity premia.

Do Independent Fiscal Institutions Enhance Parliamentary Accountability in the Eurozone?

Independent fiscal institutions (IFIs) have been established or reformed in all eurozone countries following the reform of economic governance. As they are expected to counter the deficit bias of the governments and the information asymmetry of the legislatures and the public over the management of the budget, IFIs may support or even strengthen parliamentary accountability. This hypothesis is tested with regard to three IFIs, the Irish Fiscal Advisory Council, the Italian Parliamentary Budget Office, and the Spanish Independent Authority for Fiscal Responsibility. Although the economic context in which the IFIs were created was similar in the three eurozone countries, as was their mandate, these institutions have a rather different institutional positioning, being within the Parliament, in Italy; within the Executive, in Spain; and a stand-alone body in Ireland. This is likely to influence the IFIs’ contribution to parliamentary accountability, we hypothesize that the closer the position of an IFI and its contacts to the parliament, the stronger is the scrutiny of the executive on budgetary policies. The analysis of parliamentary questions, hearings, and of the activation of the ‘comply or explain’ procedures shows that, overall, the IFIs’ potential role to enhance parliamentary accountability has remained underexploited by the three legislatures, with no significant differences as for the institutional positioning of the IFI.

Demand and growth regimes in finance-dominated capitalism and the role of the macroeconomic policy regime: a post-Keynesian comparative study on France, Germany, Italy and Spain before and after the Great Financial Crisis and the Great Recession

We contribute to the recent debates on demand and growth regimes in modern finance-dominated capitalism linking them to the post-Keynesian research on macroeconomic policy regimes. We examine the demand and growth regimes, as well as the macroeconomic policy regimes for the big four Eurozone countries, France, Germany, Italy and Spain, for the periods 2001–2009 and 2010–2019. First, our approach supports the usefulness of the identification of demand and growth regimes according to growth contributions of the main demand components and financial balances of the macroeconomic sectors. This allows for an understanding of the demand sources of growth, or stagnation, if there is a lack of demand, of how these sources are financed and of potential financial instabilities and fragilities. Second, when it comes to the macroeconomic policy drivers of demand and growth regimes, as well as their respective changes, we show that the exclusive focus on fiscal policies, as in the previous literature, is too limited and that it is the macroeconomic policy regime which matters here, i.e. the combination of monetary, fiscal and wage policies, as well as the open economy conditions.

“Negative-for-long” interest rates and customer deposit rate

Using Difference-in-Differences method and data from 5115 banks located in 74 countries over 2009-2018, we investigate the effects of a negative interest rate policy (NIRP) on banks' customer deposit rate. Our results highlight that in response to the introduction of NIRP, banks reduced their customer deposit rate. We also show that this effect varies from country to country, especially among eurozone countries. Finally, we find that the reduction in customer deposit rate is not immediate and that it becomes stronger as NIRP persists over time. Overall, our findings confirm that banks are reluctant to reduce customer deposit rate. However, this reluctance decreases as negative interest rates are prolonged over time.

Culture, innovation, and economic development

During recent decades, culture is gaining more and more attention as a factor that determines economic outcomes. Trying to investigate its role on innovation and economic development, this paper uses a dataset that offers the potential for a cross-sectional and time series analysis. Thus, in this paper, the effects of culture on innovation (as measured by patent applications, spending on R&D, number or researchers per 1000 individuals and number of government researchers) and economic development are investigated. Cultural background is captured through the Schwartz’s cultural values, as reported through the European Social Survey (ESS) waves during the period 2002–2018. The dataset is comprised by 18 Eurozone countries. Using principal component analyses to capture the Schwartz’s cultural values, as well as two ways fixed-effects analysis (FE), time dummies for each ESS wave included in the analysis and cluster—robust estimates of the standard errors, in order to examine the above relationships, the main conclusions derived from the analysis are that (a) there is significant effect of culture on innovation and economic development, and (b) the main cultural dimensions that hinder innovation and economic development are the prevalence of hierarchy, affective autonomy, and mastery. These results hold for all different dependent variables used in the analysis. Thus, when hierarchy, affective autonomy, and mastery are present innovation and economic development are hindered, leading to obstacles regarding the sustainability of economic outcomes. The opposite holds in societies where embeddedness, egalitarianism, and harmony prevail.

Investigating the behaviour of sovereign risk for Eurozone countries

ABSTRACT The article examines the determinants of sovereign risk for European Monetary Union countries taking into consideration the global financial crisis, which emerged as a sovereign debt crisis in Europe. Using CDS prices, as a proxy of sovereign risk, this study finds that bond yields, equity prices and exchange rate are the key drivers of CDS prices. Moreover, our findings support models with dynamic components and regional effects between core and peripheral Eurozone countries, providing evidence of major differences in risk evaluation.

Government failures and non-performing loans in European countries: a spatial approach

PurposeThe purpose is to analyze the spatially varying impacts of corruption and public debt as % of GDP (proxies of government failures) on non-performing loans (NPLs) in European countries; comparing two periods: one prior to the crisis of 2007 and another one after that. The authors first modeled the NPLs with an ordinary lest square (OLS) regression and found clear evidence of spatial instability in the distribution of the residuals. As a second step, the authors utilized the geographically weighted regression (GWR) to explore regional variations in the relationship between NPLs and the proxies of “Government failures”.Design/methodology/approachThe authors first modeled the NPL with an OLS regression and found clear evidence of spatial instability in the distribution of the residuals. As a second step, the author utilized the Geographically Weighted Regression (GWR) (Fotheringham et al., 2002) to explore regional variations in the relationship between NPLs and proxies of “Government failures” (corruption and public debt as % of GDP).FindingsThe results confirm that corruption and public debt as % of GDP, after the crisis of 2007, have affected significantly on NPLs of the EU countries and the following countries neighboring the EU: Switzerland, Iceland, Norway, Montenegro, and Turkey.Originality/valueIn a spatial prospective, unprecedented in the literature, this research focused on the impact of corruption and public debt as % of GDP on NPLs in European countries. The positive correlation, as expected, between public debt and NPLs highlights that fiscal problems in Eurozone countries have led to an important rise of problem loans. The impact of institutional corruption on NPLs reports that the higher the corruption, the higher is the level of NPLs.

Monetary Policy within a COVID-19 Environment: The Role of Central Banks and the Main Challenges for the Euro-zone

The last financial crisis in 2008 has weakened the Euro-zone countries. Most of them were deeply affected, and their economic growths have not returned to their pre-crisis rates. Moreover, the inflation rate is still very low despite the European Central Bank’s interventions. Twelve years later, a health crisis occurred. The ECB have reacted to this event by using monetary tools. We can cite for example the famous temporary Pandemic Emergency Purchase Programme (PEPP) to save the Euro-zone countries from a systemic disaster. The current interest rate is negative, and it seems to raise some questions about the efficiency of policies and the threat to economic, monetary, and financial stability. Negative interest rate may also generate the next crisis. This paper is dedicated to recommendations based on the role of Central Banks in the health crisis management and, more generally, environmental crisis management instead of evaluating the impacts of the monetary policies on Eurozone countries because it is too early to measure with acuity the COVID-19 effects.

Economic policy uncertainty spillovers in Europe before and after the Eurozone crisis

AbstractThis paper focuses on economic policy uncertainty spillovers across Europe, before and after the outburst of the Eurozone crisis, using data for seven Eurozone countries for the period 2003–2019. At first, we analyze the spillovers of uncertainty in Europe via the estimation of the Diebold‐Yilmaz spillover index. The results indicate that uncertainty connectedness was 50.5% before the crisis, while it dropped to 30.6% afterwards indicating a sharp drop in uncertainty spillovers across the seven Eurozone countries. We also find that the importance of domestic causes in national uncertainty has increased during the crisis at the expense of imported factors. Dynamic net spillovers reveal that core Eurozone countries are uncertainty exporters before the crisis, while periphery countries transmit uncertainty to other countries during the crisis. An examination of the country which suffered the most during the crisis, using impulse response analysis, reveals that the Greek macroeconomic indicators (stock market, GDP, unemployment, and the Economic Sentiment Index) were affected more by domestic, rather than European uncertainty. The highest responses are indicated during the crisis. Overall, there is positive interdependence between Greek and European uncertainty, which diminishes during the crisis.

Financial and trade relationships between the Eurozone and China in the age of resilience

How did the financial and trade ties between China and the Eurozone develop in the aftermath of the Eurozone sovereign debt crisis? We analyze these trends until the start of the COVID-19 pandemic. Using data from the Bank of International Settlements (BIS) and the International Monetary Fund (IMF), we examine the financial and trade dynamics between the two currency areas and analyze the related risks and opportunities. The data point to several patterns. We find that financial volatility in China has been substantially greater than in the Eurozone. Even so, the largest and strongest Eurozone economies—France and Germany—have largely kept their investments in Chinese assets after a four- to sixfold expansion that started in the mid-2000s. In contrast, the financially weakest countries have accounted for the largest increases in trade volumes between China and the Eurozone. We also find that trade volumes are correlated with holdings of Chinese financial assets but assets rose at a substantially smaller rate than trade. These results show that China and the Eurozone continue to be asymmetrically integrated, whereby Eurozone countries still invest more timidly in Chinese financial assets compared to the aggressive trade and infrastructure partnerships initiated by China. We discuss the implications for future financial and trade integration between the two currency areas, which is bound to deepen in light of the Comprehensive Agreement on Investment.

Public funding of social protection: Impact on social indicators in Eurozone countries

Social protection has long been a relevant subject of scientific debate. Its development is interrelated with the study of fiscal factors (collection of social contributions), establishment of major social protection vectors, and confirmation of hypotheses about the link between social protection policy and the resulting socio-economic indicators.The purpose of the paper is to study the impact of public funding of social protectionon social indicatorsusing the example of Eurozone countries. To this end, a number of economic and mathematical methods of analysis were applied to process panel data of seventeen countries for the last fifteen years, including the calculation of the relative rate of variation, regression dependence statistics, and cluster analysis.The study established the irrelevance between the scope of the fundingof spending on social protection and social contributions (coefficient of determination R2=0.255). As illustrated, social indicators are determined not only by the amount of funding of social spending, but also by the structure of the social protection system, in particular, the focus on assistance to families with children and disability compensation (coefficient of determination R2>0.3). The general level of public funding for social spending items results in the 69% income inequality index andis behind 58% of non-economic parameters affecting life quality. The information outlined in the papercan serve as a basis for the formation of social and budgetary policy, as well as the revision of the structure and scope of social protection funding toensure an efficient impact on the quality of life of the population.