Non-euro Area Countries Research Articles

The ESM Reform and Its Missing Legitimacy in Non-Euro Area Member States

The goal of this article is to analyse whether the European Stability Mechanism (ESM) and its current reform have been subjected to sufficient legal and democratic approval in non-euro area Member States. It is argued that the establishment of the ESM and the consequential obligation to accede to it after entering the euro area is at least to a certain extent legally and democratically underpinned by Article 136(3) Treaty on the Functioning of the European Union (TFEU). The establishment of the prospective euro area entrants’ obligation to join the ESM after adopting the euro is a manifestation of the normative value of Article 136(3) TFEU. However, the 2021 ESM reform has not been accompanied by a similar Treaty amendment and thus lacks legal and democratic legitimacy in non-euro area countries. This may have legal and political consequences for the obligation to adopt the euro in the affected countries. ESM, European Stability Mechanism Reform, ESM Treaty, Economic and Monetary Union, euro adoption, euro area entry criteria, Article 136 TFEU, democratic legitimacy

The transition journey of EU vs. NON-EU countries for waste management.

This study aims to identify macroeconomic indicators that can be used as predictors of waste management on the European continent. The study was conducted taking in account the intensification of urbanizations, the increase of standard of leaving that fuels to consumerism phenomenon, and imposed challenges for waste management. The research focuses on the interval from 2010 to 2020 for 37 European countries grouped according to EU15/EU28/non-EU and EU/non-EU members. As macroeconomic indicators, human development index (HDI), GDP/capita. GNI/capita, general government expenditure with environment protection, people at risk of poverty or social exclusion, population by educational attainment level, sex, and age (%)-less than primary, primary and lower secondary education (levels 0-2) were used. A multilinear regression model with collinearity diagnosis was applied to find out the direction and intensity of the contribution of independent variables and to hierarchy the predictors of waste management.. For multiple comparison between and inside of each grouping of countries, statistical inference methods were used: one-way ANOVA with Bonferroni post hoc test multiple comparisons and independent samples Kruskal-Wallis test with Dunn's post hoc test. The main conclusions of the study are that EU15 countries have the highest average values for most indicators of waste management, comparative with EU28 and with non-EU countries, followed by a group of EU28 countries. For indicators of recycling rate of packaging waste by type of packaging-metallic and recycling rate of e-waste, the non-EU countries have the highest values of mean compared with the EU15 and EU28 groups of countries. This can be explained by the high level of development of the some non-euro area countries (Iceland, Norway, Switzerland, Liechtenstein) that have intense concerns about waste recycling and have the necessary financial strength to carry out complex environmental protection programs.

A panel VAR analysis of macro-financial imbalances in the EU

We investigate the interactions across current account misalignments, real effective exchange rate misalignments and financial gaps within EU countries, applying a Bayesian panel Vector Autoregression to 27 EU members over the period 1994–2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the real effective exchange rate misalignments is the largest. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the real effective exchange rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, increase in the rate or an expansion of the financial gap may help rebalancing the current account. In the central eastern european members, an increase in the real effective exchange rate misalignments may bring larger current account deficits in the medium-long run. Different policies should be applied to different countries in order to reach a balanced current account and to move close to the equilibrium level of the real effective exchange rate, given real and financial fluctuations. The different directions of transmissions are crucial for defining the right path towards equilibrium and they should be taken into account.

Testing Real Convergence as a Prerequisite for Long Run Sustainability

The main objective of this research is to estimate the degree of real convergence of the countries that joined the European Union between 2004–2013 as an essential precondition for sustainable accession to the Euro Area. Through this study, we tried to create a clear, real and comparative image for the downward trend in the dispersion of the GDP/capita and the speed by which countries with different integration stages achieve the real economic convergence to equilibrium level. In this respect, we tested real convergence by regression models. Further, in order to verify the robustness of the results we applied a cluster analysis. The main results show that non-Euro Area countries have a tendency to individually reduce income disparities with the Euro Area average, but do not register a convergent economic growth and do not form a homogeneous convergence cluster, unlike the newer Euro Area Member Countries. Another representative result is that the Czech Republic seems to be the best prepared country to adopt the single currency in a sustainable way, while Bulgaria is at the opposite pole.

Fundamentals vs. Policies: Can the US Dollar's Dominance in Global Trade Be Dented?

The US dollar plays a dominant role in the invoicing of international trade, albeit not an exclusive one as more than half of global trade is invoiced in other currencies. Of particular interest are the euro, with a large role, and the renminbi, with a rising role. These two currencies are well suited to contrast the roles of economic fundamentals and policies, as European policy makers have taken a neutral stance in contrast to the promotion of the international role of the renminbi by the Chinese authorities. We assess the drivers of invoicing using the most recent and comprehensive data set for 115 countries over 1999-2019. We find that standard mechanisms that foster use of a large economy's currency predicted by theory – i.e. strategic complementarities in price setting and integration in cross-border value chains – underpin use of the dollar and the euro for trade with the United States and the euro area. These mechanisms also support the role of the dollar, but not the euro, in trade between non-US and non-euro area countries, making the dollar the globally dominant invoicing currency. Fundamentals and policies have played a contrasted role for the use of the renminbi. We find that China's integration into global trade has further strengthened the dominant status of the dollar at the expense of the euro. At the same time, the establishment of currency swap lines by the People's Bank of China has been associated with increases in renminbi invoicing, with an adverse effect on dollar use that is larger than for the euro.

Procyclicality of fiscal policy in European Union countries

Using real-time data, we examine whether fiscal policy has been counter- or procyclical in a panel of 27 European Union (EU) member states over the period 2000–2015. We also investigate whether fiscal rules and government efficiency improve the cyclical reaction of fiscal policy. Our results suggest that even though fiscal plans in EU countries have an acyclical stance, budgetary outcomes are procyclical. Government efficiency and fiscal rules seem to reduce fiscal procyclicality. Further analysis also reveals that fiscal policy seems to be more procyclical in non-euro area countries and in times of economic prosperity.

Should Denmark and Sweden Join the Banking Union?

Abstract An important policy discussion on joining the banking union is currently taking place in Denmark and Sweden. In this article we review the pros and cons of joining. The main rationale for joining the banking union is the importance of cross-border banking in the EU internal market. Reviewing the banking systems, we find that banks in Denmark and Sweden have the same cross-border characteristics as those in the euro area countries, suggesting a similar rationale for joining the banking union. Moreover, both countries have large banks which may be too big to save at country level, but not at the banking union level. Nevertheless, there are some governance concerns. While euro area countries have an automatic and full say in all banking union arrangements, the non-euro area countries (the ‘out’ countries) lack certain formal powers in ultimate decision-making; however, we find that this may be less of a problem in practice. If necessary, the ‘out’ countries would have the ‘nuclear option’ of leaving the banking union.

The European Bank Recovery and Resolution Directive: A market assessment

This paper provides evidence of the impact of the new European bank resolution regime on the sovereign-bank nexus. The implementation of the Bank Recovery and Resolution Directive (BRRD) is considered as an exogenous shock which provides the setting for a natural experiment. This investigation tests the financial markets’ perception of the effectiveness of the new rules in weakening the tight interconnectedness between sovereign and bank risk. A Difference-in-Differences (DiD) approach is adopted, building evidence from the Credit Default Swap (CDS) market for banks and non-financial corporates over the period 2011-18. The main findings do not indicate a significant weakening in the interaction between bank and sovereign CDS spreads, compared to the corresponding evidence for the non-financial corporate sector. An overall narrowing of the gap between bank and sovereign risk occurs, which initially implies a lack of credibility of the BRRD in financial markets. However, substantial cross-country variations are identified, particularly for Italy and non-euro area countries. These insights make a significant contribution to the policy debate on effective regulation of the sovereign-bank nexus, in the light of recent developments in the EU post-crisis reform agenda.

Do the ECB’s Monetary Policies Benefit Emerging Market Economies? A GVAR Analysis on the Crisis and Post-Crisis Period

This paper studies the spillover effects of the ECB’s monetary policies on non-euro area countries over the period 2004-2016, using a GVAR methodology, applied to a large sample of countries and an ample set of variables. Monetary policies are proxied by short-term interest rates and the Wu and Xia’s (2016) shadow rates in the euro area, the US and the UK. Identification is performed via a Cholesky decomposition in the euro area only. An increase in the euro area shadow interest rate triggers a broad-based and persistent output decline abroad, especially strong in Central Eastern and South-Eastern European economies. The euro area shadow rate increase is also transmitted to the short-term interest rates of a number of countries, although such rises are short-lived and not as widespread as the GDP spillovers. There is evidence that differences in countries’ responses to the euro area monetary shock depend on their characteristics. The spillover effects are transmitted mainly through the trade channel and also, to a lesser extent, the short-term interest rate channel.

Central bank intervention, public debt and interest rate target zones

The euro area crisis has been characterized by speculative attacks reflecting the market fear that some high indebted countries could go bankrupt. What is puzzling, however, is that non-euro area countries with an equally large – and in some cases even larger – public debt-to-GDP ratios have not been subject to attacks. This fact, together with the convex non-linear behavior exhibited by interest rates have been explained by observing that euro area countries could not rely on a lender of last resort, and this made possible the occurrence of self-fulfilling speculative attacks.The model proposed in this article applies the target zones methodology relative to exchange rates, developed in the late 1980s–early 1990s, to the case of the interest rate, given that public debt stability will only be assured if the former does not exceed a given upper bound. The novelty of the paper is that, by considering the presence of a public debt demand stochastic shock – that may originate from different sources – it is possible to endogenize the determinants of the credibility of the interest rate target zone and, as a result, of public debt stability, something that in a previous paper, still based on the idea of interest rate target zones, had to be taken exogenously. Public debt stability, then, is shown to depend on the potential liquidity that the central bank can create thanks to its role of lender of last resort. Full/partial credibility is obtained when such liquidity is expected to be sufficient/insufficient to absorb completely the demand shock. The expected absence of liquidity determines the non-credibility of the interest rate target, while the expectation of a public debt increase produces a destabilizing non-credibility determining the convex interest rate non-linearity that characterized the euro area crisis.

Cash in Circulation and the Shadow Economy: An Empirical Investigation for Euro Area Countries and Beyond

We analyze the net issues of the national euro area central banks in relation to the dynamics of the shadow economy within a panel cointegration framework. Besides the total net issues, we distinguish between large, medium and small euro banknotes and take due account of other determinants of cash demand. We find a significant and positive relationship between the net issues and the size of the shadow economy only for medium notes. And this result seems to be driven by the smaller euro area countries. The use of large and small denominations is obviously not driven by the shadow economy. For comparison purposes, we also present panel results for eight non-euro area countries (Australia, Canada, Japan, Norway, Sweden, Switzerland, UK, US). For these countries, we are not able to establish an economically meaningful and statistically significant cash demand equation including the shadow economy.

Rethinking Prices and Markets Underlying Price-Competitiveness Indicators

A comprehensive analysis of price and cost competitiveness warrants an assessment of a range of alternately deflated nominal effective exchange rates. Here, we focus solely on the price-competitiveness indicator currently published by the Bank of Italy (Felettigh et al., 2015), which is based on the producer prices of domestically-sold manufactures, and we refine its measurement. First, we update the data sources for the producer price index. Revisions mainly refer to non-euro area countries, yet also affect relative prices and therefore the price-competitiveness trends of the four main euro-area economies. These countries have performed better according to the revised indicators, in particular since 2010. Second, we present a novel three-market view of price-competitiveness indicators by splitting destination markets. The overall indicator encompassing competitive pressures on both the import and the export side can indeed be broken down into three components: the domestic market, where local producers are rivalled by foreign competitors with their import penetration; euro-area markets, where all countries compete; and non-euro-area markets, where, similarly, all countries compete. Whereas France and Germany have displayed similar price-competitiveness developments in both the euro and non-euro area markets over the entire period since 1999, Italy and Spain have performed better in the non-euro area than in the euro-area markets. Competitiveness in the domestic market and that in non-euro area markets are the main, equally important, drivers of overall developments since 1999 in Italy and in Germany.

Spillover effects from Euro area monetary policy across Europe: A factor-augmented VAR approach

I analyze spillover effects from a Euro area monetary policy shock to fourteen European countries outside the Euro area. The analysis is based on a factor-augmented VAR model with two blocks, which exploits a large cross-country data set. After a Euro area monetary policy expansion, production increases in most non-Euro area countries, whereas short-term interest rates and financial uncertainty decline. These effects are on average comparable to the responses in the aggregate Euro area. However, the size of spillover effects varies with country characteristics. Spillovers on production are larger in non-Euro area economies with higher trade openness, whereas financial variables react to a higher extent in countries with higher financial integration. Regarding the exchange rate regime, countries with fixed exchange rates show stronger spillovers both in terms of production and interest rates. Finally, prices increase in Western European economies outside the Euro area, but decline or do not respond in Central and Eastern Europe.

Banking union through Hungarian eyes–assessment of a possible close cooperation

Legislation laying down the first two pillars of the institutional system of the Banking Union was finalised in April 2014. In accordance with the regulations, non-euro area Member States, including Hungary, may notify the ECB at any time if they wish to participate in the common system even before the euro is adopted. The paper aims at summarising the possible pros and cons vis-à-vis the Banking Union from a Hungarian perspective. It highlights the reasons for not opting in at the inception of the new supervisory system and also gives indications about those major milestones that could give rise to the reconsideration of the present position. In its existing form, the single supervisory and crisis management mechanism has not achieved the initial target, i.e. the separation of the stability of national banking systems and the fiscal capacity of Member States and the elimination of interdependencies. In addition, close cooperation implies weaker powers than those provided by actual membership, and the separation of central bank and supervisory functions carries risks in non-euro area countries. By contrast, the attraction of Banking Union membership lies in the opportunity to join a uniform European system, a wider analyst base and ultimately, the “ammunition” of the EUR 98 billion available for crisis management in comparison to the Hungarian banking system. In October 2013, a uniform supervisory system integrated into the central bank was set up in Hungary, and the domestic resolution institutional system was complete by the end of 2014. Therefore, until the finalisation of the Banking Union through the creation of the common deposit insurance fund and a common fiscal backstop, it is reasonable to put the decision to join on hold; indeed, such a decision should be made in light of several factors presented in this study.

A Panel VAR Analysis of Macro-Financial Imbalances in the EU

We investigate the interactions across current account misalignments, Real Effective Exchange Rate misalignments and financial (or output) gaps within EU countries. We apply panel techniques, including a Bayesian panel VAR, to 27 EU members over the period 1994-2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the Real Effective Exchange Rate misalignments is the largest and the financial gap can influence the current account misalignments more than the output gap. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the Real Effective Exchange Rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, a raise in the rate or an expansion of the financial gap may help in rebalancing the current account. In the CEE members, an increase in the Real Effective Exchange Rate misalignments may bring larger current account deficits in the medium-long run.

Do European fiscal rules induce a bias in fiscal forecasts? Evidence from the Stability and Growth Pact

Enforcement of European fiscal rules, to a large extent, hinges on fiscal forecasts prepared by the European Commission (EC). The reliability of these forecasts has received little attention in the literature, despite the fact that (i) the forecasts have potentially far-reaching consequences for national governments, especially in the euro area while (ii) the EC depends on information supplied by national officials in preparing its forecasts. We hypothesize that the EC’s forecasts are biased upwards when national governments expect European fiscal rules to bind. Reconstructing this expectation using real-time information, we show that for euro area countries the EC’s fiscal forecasts are indeed biased upwards when the budget deficit threatens to exceed the critical value of 3 % of GDP. For non-euro area countries, which do not face the risk of fines, this bias cannot be established. Our results are robust to various ways of controlling for crisis-induced budgetary problems and the exclusion of various country groups. We offer suggestive evidence that the presence of independent fiscal councils at the national level helps to attenuate the bias induced by the 3 % threshold.

Macroeconomic Imbalances in Euro- and Non-Euro Area Member States

The recent reforms in the European economic governance framework add to the Stability and Growth pact requirements for establishing a new macroeconomic surveillance mechanism for both euro area and non-euro area countries. The early identification and the prevention of imbalances are of vital importance in a monetary union due to the limitations they impose on the tools available to economic policymaking. This paper examines the macroeconomic imbalances in the euro area countries in comparison with the non-euro area countries based on the set of indicators in the Scoreboard that is part of the Macroeconomic Imbalance Procedure (MIP), introduced in 2011.While the aim of the new alert mechanism is to identify potential risks this study goes further in measuring the level of risks by the scope of the deviation from the established thresholds. For this purpose an Integral Macroeconomic Imbalance Indicator (IMII) is constructed. It serves for comparing the level of imbalances between the countries in pre- and post-crisis period. The composed IMII indicates a tangible reduction in the scale of imbalances as compared to the pre-crisis period but the divergence between the countries enlarges. The results undermine the assumptions that the euro area countries will exhibit fewer imbalances as compared to the countries outside of the monetary union. Based on the dynamics of IMII it could be assumed that maintaining the macroeconomic framework within the thresholds is necessary but not sufficient to prevent future crisis. The results further question the ability of the alert mechanism to identify the sources of a future crisis.

A differentiated leap forward: spillover, path-dependency, and graded membership in European banking regulation

The banking union constitutes not only a major advance in supranational economic integration but also increases differentiated integration among the member states of the European Union. Although the banking union is open to all EU member states, only euro area countries participate. Other member states have been opponents, bystanders, or interested non-participants. This article explains the variation in participation as a result of path-dependency arising from the original differentiation between euro area countries and the rest of the EU. In the euro crisis, these two groups of member states were subject to differential pressure to integrate further. In addition, the banking union reinforced the causes that had led to the original differentiation of the monetary union. This path-dependency overrides variation in sector-specific economic interests, governance capacity, and policy paradigms that might otherwise explain governmental preferences in banking regulation. These factors can, however, partly explain variation in preferences among the non-euro area countries.

Three proposals for revitalising the European Union

Widespread perception that convergence on the current set of rules is not capable of producing convergence on results, or anyway generally better results, has increased the socio-political fragmentation inside the European Union. The result has been an increasing demand for a partial re-nationalisation of sovereign powers, whose physiology comes from the necessity of higher national flexibility. Asking how feasible changes in the current set of rules could accommodate the increased demand of national flexibility, the paper focuses on the euro area and proposes to revise the monetary operations of the European Central Bank, current fiscal rules, and the financial regulatory approach. The proposed new design is based on the premise that no changes in the Treaty on the Functioning of the European Union are possible at the moment, even though a minimum political convergence is necessary. If successfully implemented, the proposal would contribute to give a viable perspective to the design of the Economic and Monetary Union, capable of attracting those EU non-euro area countries that consider the mismanagement of the recent crisis and of its after-effects reason enough for resisting further losses of sovereignty. JEL : E52, E62, F33, F36, F45, G28

Macroeconomic Imbalances in Euro- and Non-Euro Area Member States

This paper examines the macroeconomic imbalances in the euro area countries in comparison with the non-euro area countries based on the set of indicators in the Scoreboard that is part of the Macroeconomic Imbalance Procedure (MIP), introduced in 2011. While the aim of the new alert mechanism is to identify potential risks this study goes further in measuring the level of risks by the scope of the deviation from the established thresholds. For this purpose an Integral Macroeconomic Imbalance Indicator (IMII) is constructed. It serves for comparing the level of imbalances between the countries in pre- and post- crisis period. The composed IMII indicates a tangible reduction in the scale of imbalances as compared to the pre-crisis period but the divergence between the countries enlarges. The results undermine the assumptions that the countries in the euro area will show fewer imbalances as compared to the countries outside of the monetary union. Based on the dynamics of IMII it could be assumed that maintaining the macroeconomic framework within the thresholds is necessary but not sufficient to prevent future crisis. The results further question the ability of the alert mechanism to identify the sources of a future crisis.