Non-euro Area Research Articles

Greening Central Bank Policies: Euro Area vs Non-Euro Area EU Member States

Abstract Climate change has become relevant for central banks worldwide, but they are adopting their instruments at different speeds. This article compares the reactions of the Eurosystem with those of the other EU central banks. Do these central banks differ in their efforts to make their own policies “greener”? The article argues that the options and constraints to react to climate change diverge between central banks.

Evaluating the Impact of Energy Price Shocks on Emerging Countries from the Non-Euro Area: A Macroeconomic Analysis

Abstract Exogenous shocks like the COVID-19 pandemic or the Russian conflict affected the global economy, but mostly emerging economies. Even though the critical moments have passed, the negative effects on the economy are still present in the current economic environment, characterized by high levels of uncertainty. Exogenous events, which have an uncertain likelihood of occurring, harm economies regardless of their development. In fact, a framework for unanticipated events is vital, as are steps to achieve low levels of national debt and increased authority stability. In this context, the objective of this paper is to examine the dynamic relationships between energy prices and certain macroeconomic variables, which were affected by the fact that the energy crisis triggered by the Russian-Ukrainian conflict overlapped with the accelerated transition to a green economy and the decarbonization process. The CEE countries are more vulnerable to the energy crisis, and their proximity to the front lines of military conflict can be an important fact to take into account. The research focuses on the Czech Republic, Hungary, Poland, and Romania. The empirical analysis was conducted on monthly frequency data and in order to present an effective method of modeling interactions between macroeconomic variables, the Bayesian technique was employed.

The Efficiency of Economic Growth for Sustainable Development—A Grey System Theory Approach in the Eurozone and Other European Countries

This article builds upon the authors’ previous work on the Synthetic Efficiency Indicator for Economic Growth (SEI-EG), demonstrating the process of transforming economic-growth-related inputs into sustainable development outcomes. This innovative application of the SEI-EG provides a fresh perspective on the effects of eurozone membership on the sustainability efficiency of EU countries, thereby enriching the discourse on economic integration and sustainability efforts within the European Union. By integrating the economic dynamics of the euro area with environmental efficiency metrics, this study offers novel insights into the potential influence of currency union membership on achieving sustainable development goals. Covering the entire European Union, categorized by euro area and non-euro area membership, this study navigates through the risks to sustainability posed by global crises and the ongoing debate over the euro’s integration success and setbacks. Conducted from 2019 to 2021 using grey system theory, this research incorporates a revised set of seven indicators in the domain of industry, innovation, and infrastructure as recommended by the Europe 2020 project. The findings confirm the initial hypothesis that countries outside the euro area tend to exhibit higher efficiency as measured by the SEI-EG indicator. This article is composed of five parts. The first two parts present characteristic features of economies in the euro area and non-euro area, along with a critical trend in the latest literature on the benefits and risks of economic integration. The subsequent sections introduce the methodology for determining the indicator and the authors’ own corrections to it as well as the results of the research and a discussion.

Studying Differing Impacts of Various Monetary Aggregates on the Real Economy

Since we are living in a time of multiple crises and geopolitical unrest, it is important to look at how monetary aggregates affect the real economy. This will help us figure out how uncertainty affects the economy and come up with more stable financial and monetary policy measures, especially for EU member states that are not in the euro area. This study aims to determine a dynamic structured monetary policy model, using information from the literature and the study of the evolution of financial elements of macroeconomic aggregates in a non-euro area Member State (Romania). The methods consist of an empirical study of causality in the monetary aggregates in the literature and an analytical approach to the consolidation of dynamic databases over a period of 16 years (2007–2022) and its statistical modeling. This research will examine the impact of uncertainty on Romania’s monetary policy over the period and how this uncertainty alters the dependence relationships between monetary policy indicators and derivatives of the GDP deflator. The results of the two-step modeling, respectively, for the periods 2007–2019 and 2007–2022, will highlight via a comparison the vulnerabilities induced by periods of uncertainty and pandemics on the evolution of monetary policy indicators and will be useful to financial decision makers in correcting monetary policy elements based on the vulnerability picture instrumented as a result of analysis and modeling. The novelty of this study lies in the multidisciplinary and dynamic approach to the evolution of monetary policy indicators and the construction of the dynamic structured model, which is a useful tool for assessing the vulnerability status of a EU Member State economy outside the euro area under uncertainty.

TVP-VAR Frequency Connectedness Between the Foreign Exchange Rates of Non-Euro Area Member Countries

Abstract Research background The main purpose of monetary integration between EU countries is to eliminate excessive fluctuations in exchange rates. High volatility in exchange rates can cause various negative economic and financial effects, especially during periods of economic shocks. In addition, estimating the volatility between currencies and their interactions is of great importance for effective portfolio management. Purpose The objective of this research is to scrutinize the transmission of volatility between the currencies of those European Union nations that do not participate in the EURO area, focusing on the exchange rate parity of the US Dollar with seven non-EURO zone currencies. Research methodology Daily volatility in exchange rates was calculated using the Garman-Klass-Yang-Zhang (GK-YZ) method. To investigate the connectedness between these volatilities, we used the Time-Varying Parameter Vector Autoregression (TVP-VAR) frequency connectedness approach. Results The Average Total Connectedness Index exhibits a significant degree of connectedness of approximately 71.84%. The Net Total Directional Connectedness Index indicates that the CZK, DKK and RON exchange rates are net beneficiaries in aggregate and in a longer term perspective, whereas the DKK, HUF and PLN exchange rates are net beneficiaries in a shorter term horizon. In the context of major global events such as the onset of the COVID-19 outbreak in March 2020 and the start of the Russia-Ukraine conflict in February 2022, it could be observed that the dynamic Total Connectedness Index exhibited a substantial increase, both overall and from a long-term perspective, corroborating theoretical expectations. According to the Net Pairwise Directional Connectedness index, the highest bilateral connectedness overall and in the short run was between DKK and RON, while in the long run between BGN and DKK. Novelty Examining the connectedness of currencies is of great importance for investors doing business with foreign currency, international cooperation and policies, risk management and portfolio management. Determining the connectedness in different frequency (short and long-term) ranges provides important information for hedging risk. In addition, the bilateral connectedness between currencies is a guide for effective portfolio diversification.

The International Trade of Non-Euro CEE Countries During the Period 2014-2021. A Multiparameter Analysis

On their development path the Central and Eastern European (CEE) countries partially overcame the gap to the developed countries by means of the external trade, acquiring the needed goods and services and satisfying the foreign demand for their products which otherwise was lacking on their territory or seizing an opportunity. In the current paper the authors aim at analysing the evolution of the trade flows of the countries they thought to be the most similar in this aspect, which are the ones belonging to the non-euro area of the European Union (EU) during the period 2014-2021. The research used the Eurostat database, the products being classified after the Standard International Trade Classification (SITC) main categories in order to find out the sectors with the largest contribution to the total surplus or deficit. Moreover, there were identified the main partners of every analysed country and calculated the evolution of respective trade balances at the start and the end of the selected period of time. The authors findings reveal an increasing dependency on exports to Germany, imports from China, decreasing imports of mineral fuels from Russia and also important similarities and differences in the group. The novelty of the manuscript resides in comparing the most profitable sectors during the analysed period and identifying the partners’ contribution to the surplus or the deficit. The current research might be extended with a more in-depth level of multinational enterprises and also in the case of services.

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.

The ECB’s Unconventional Monetary Policy Effects on the Economies of Bulgaria and Ireland

This paper analyzes the impact of the ECB’s euro short-term interest rate – the Euro overnight index average (EONIA) – on the long-term government bond yields in one economy in the non-euro area (Bulgaria) and one economy in the euro area (Ireland) through the interest rate transmission channel. The paper’s main contention is that the ECB’s non-standard monetary policy directly affects the euro area member states, such as Ireland. At the same time, its impact on the changes in the interest rates in Bulgaria is indirect. The result from the econometric modeling demonstrates that if EONIA rises by 0.1 percentage point, the yields on the long-term government bonds in Ireland and Bulgaria will increase, respectively, by 0.175 and 0.123 percentage points. Given fixed levels of EONIA each month, the interest rates on the 10-year government bonds in Ireland and Bulgaria are expected to decline, respectively, by 0.006 and 0.036 percentage points. The large-scale bond-buying programmes and the negative deposit rates have driven significant increases in negative-yielding debt in the euro area, including in Ireland. In contrast, Bulgaria’s long-term government bond yield is positive but dropped significantly during the reviewed period (January 2012 to December 2020).

Energy Transition in Non-Euro Countries from Central and Eastern Europe: Evidence from Panel Vector Error Correction Model

The countries of Central and Eastern Europe, from the non-euro area, have completed the process of economic transition before joining the European Union. Achieving a certain level of economic development and membership in the European Union have generated their involvement in a new transition process, namely the energy transition. Concerns about promoting the low carbon economy have become increasingly complex for those countries that are interested in the environmental impact of economic activity. This study aims to analyze the process of energy transition in the countries of Central and Eastern Europe on the basis of the causality relationship among specific variables for the period 1990–2018. The study is based on cross-sectional panel data and the panel vector error correction model (PVECM). The efforts made by these countries by joining the European Union have generated economic development, with positive effects being recorded on the protection of the environment, a fact due to the strict regulations adopted and rigorous implementation at the national level. Foreign capital had a positive impact on the transition to a low carbon economy because most of the FDI flows attracted by the non-euro countries in the CEE come from Western Europe, i.e., from EU member countries, located either among the founders or among the countries that joined during the first waves of union expansion. Membership in the European Union facilitates the energy transition process for the non-euro countries of Central and Eastern Europe, but the new geopolitical events generate the reconfiguration of the European strategy of considering the need to ensure energy security.

Productivity Change in European Banks in the Post-Crisis Period

The paper analyses the productivity change of a balanced panel of 1915 European banks during the 2013–2018 post-crisis period. To study productivity changes, the paper applies the non-parametric output-oriented Data Envelopment Analysis (DEA) approach and the Malmquist productivity index (MPI). The total productivity change estimated by the MPI is further decomposed into technical efficiency change and technological change. The overall MPI estimates show a modest increase in the productivity of banks in half of the EU countries. Further decomposition of the MPI indicates that the productivity growth was mainly a result of technological improvement, which was particularly high among the new EU member states, whereas there was a significant drop in technical efficiency. The productivity growth was higher among banks in the non-euro area and among savings banks. The practical implications drawn from the paper are that European banks should further develop their business models to rationalize the costs and increase their operational efficiency and stimulate the adoption of fintech solutions and technological development so as to enhance their productivity.

Intangibles and Participation in Global Value Chains in the EU: Evidence from the GLOBALINTO Input-Output Intangibles Database

The scope of this paper is to provide empirical evidence regarding intangible inputs, global value chains (GVCs) participation and their linkage with exports in the EU and the UK, utilizing data from WIOD and the newly constructed GLOBALINTO Input-Output Intangibles Database for the period 2000–2014. GVC participation metrics are calculated based on a production-based decomposition framework and include backward and forward participation indices. Intangible inputs follow a breakdown by origin into domestic and imported intangible inputs. Our empirical results suggest that GVC participation (both backward and forward) is a significant driver for exports and highlight the importance of intangibles’ origin in the exporting activities of the EU economies, especially in the case of the non-Euro Area economies.

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.

A new test for optimum currency area with an application to the Central and Eastern European countries

ABSTRACT This research introduces a new test for optimum currency area that is based on synchronization of monetary policy recommendations. The main advantage over the more traditional synchronization of business cycles is that it takes into account two known determinants of monetary policy: inflation and the output gap. As an application, the test is applied to the EU economies with a particular focus on the Central and Eastern European Countries. Some of these countries have recently joined the euro area, some are the members of ERM II, and the rest are debating whether to fulfill the convergence criteria of adopting the euro. The main findings are that within the last few years the current non-euro area members (with the exception of Bulgaria and Romania) fit the euro area as well as the core euro area countries.

Multilevel cooperation in the EU resolution of cross-border bank groups: lessons from the non-euro area Member States joining the Single Resolution Mechanism (SRM)

Cross-border banking presents a unique set of challenges in the EU from the perspective of arranging administrative oversight structures. Structuring cooperation between different EU and national authorities in a way which is conducive to trust-building and mutual engagement is an essential condition for overcoming disintegrative tendencies in the internal market. To assess how the existing EU arrangements fare in this regard in the context of EU resolution law, this article comparatively analyses the different models of multilevel administrative cooperation in the post-crisis EU framework. These are specifically the centralised model of the European Banking Union (Single Resolution Mechanism) and the relatively looser networked model of the resolution colleges. The multilevel cooperation under both models is nuanced given the distinct roles of the national resolution authorities, EU agencies and the differentiated status of non-euro area Member States in the EBU (Croatia, Bulgaria). The article’s findings allow to identify specific problems of constitutional nature pertaining to the accountability of administrative cooperation, equality of Member States and the implications of Meroni doctrine’s distortive effects.

Costs and benefits of government borrowing in foreign currency: is it a major source of risk for EU member states outside the Euro?

This paper discusses the costs and benefits of government borrowing in foreign currency. In addition to the main costs, such as increased exposure of public finances to currency risk and rollover risk, and limited capacity to respond to financial crisis, this paper identifies two benefits of foreign currency borrowing that are most evident in emerging market countries. The paper also explores to what extent governments of non-euro area EU member states rely on foreign currency borrowing. The analysis suggests that public finances of these countries are not heavily exposed to currency risk. Exceptions to this are Bulgaria and Croatia, whose government debt consists mainly of euro-denominated liabilities, and which also stand out with high loan and deposit euroization. It is therefore not surprising that Bulgaria and Croatia are the first among the remaining non-euro area EU member states to take concrete steps towards the introduction of the euro.

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.

The Reform of the European Stability Mechanism: Process, Substance, and the Pandemic

The European Stability Mechanism (ESM) has been instrumental in safeguarding the financial stability of the Euro area and of its Member States. This article looks at the tumultuous process of reforming the ESM. It analyses the main changes that would be brought about by the draft revised ESM Treaty, whose text was agreed upon in June 2019 and finalized in December 2020. These concern the ESM’s purposes and operations; the procedure for granting stability support to a Euro area Member State; precautionary financial assistance instruments; single-limb collective action clauses; and the common backstop to the Single Resolution Fund. The focus then shifts to the changes agreed upon in response to the COVID-19 crisis. A new credit line has been introduced, the Pandemic Crisis Support, which builds on an existing instrument. It is argued that the reforms posited in the draft revised ESM Treaty would plug important gaps in the framework of the Economic and Monetary Union. Nevertheless, some of the ESM’s underlying vulnerabilities would remain, notably as regards its governance, the status of non-Euro area Member States, and the framework for its transparency and accountability. A more comprehensive reform could have taken place, which would have improved upon the overall structure of the Euro area. European Stability Mechanism, ESM Treaty, ESM reform, Pandemic Crisis Support, European Monetary Fund, economic governance, accountability

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.