Testing the EU fiscal surveillance: How sensitive is it to variations in output gap estimates?

Real-time estimates of the potential output are essential in the EU fiscal surveillance framework. They are used for the calculation of the cyclically-adjusted budget balance, one of the main indicators in the assessment of the fiscal performance of EU Member States. Our paper examines whether and how different degrees of smoothness of potential output would have supported different decisions in the EU budgetary surveillance in terms of both timing and substance. The results of our simulations show that, the accuracy of the diagnostic instruments especially those that measure the risk of breaching the 3% of GDP reference value of the Treaty is surprisingly robust. Only a very high and excessive degree of smoothing of potential output would significantly reduce the reliability of the surveillance indicators. In the light of our results a somewhat higher degree of smoothing compared with the current practice would not seem to be harmful for EU fiscal surveillance. During economic upturns it would guaranty a higher degree of caution by signalling larger and possibly longer periods of economic 'good times' which would in turn warrant more fiscal consolidation.EU fiscal surveillance, potential output, output gap, Langedijk, Larch

Adjustment in EMU: A model-based analysis of country experiences

This paper uses a two-country-three-sector DSGE model to analyse adjustment in the Euro area. A particular distinction is made between tradeables and non tradeables and non tradeables are further disaggregated into housing and services. The experience of six countries which have shown strong divergences in the early years of the euro area, namely Germany, Ireland, Italy, the Netherlands, Portugal and Spain is analysed. The framework allows replication of actual developments in euro-area Member States using a model that is inherently stable. It is found that to a large extent, the diverging growth and inflation developments and current account shifts can be attributed to one-off adjustment to EMU which broadly seems to have run its course. The absence of an exchange risk premium in EMU allows an increase in capital mobility resulting in a lower correlation between domestic savings and investment. Increased capital mobility seems to have been an important driving force behind the current account dynamics. Due to the absence of risk premia, investment - and especially housing investment - responds strongly to exogenous shocks.DSGE model, adjustment in the Euro area, exchange risk premium in EMU, capital mobility, risk premia, exogenous shocks, Langedijk, Roeger

Reviewing adjustment dynamics in EMU: from overheating to overcooling

This paper analyses how adjustment dynamics, in an environment with some degree of price and wage rigidity, may create and strengthen asymmetric developments in a monetary union. It presents a simple illustrative model of adjustment dynamics that reproduces quite nicely actual developments in the first years of EMU. The model is used to analyse adjustments to two types of shocksrelative competitiveness shifts and demand disturbances. It is shown that the interaction between real exchange rate adjustment and real interest rate developments may contribute to periods of overheating and overcooling during which output might be for a number of years either above or below potential.Furthermore, the paper looks at the circumstances in which smooth adjustment to shocks can be expected and, on the other hand, when a cycle with greater amplitude is more likely. Finally, the paper examines policy options that could improve the functioning of EMU. The analysis provides another strong argument for pressing ahead with reforms that increase flexibility in labour and product markets and further integrate the economies of the euro area.economic and monetary union, EMU, adjustment dynamics, demand disturbances, relative competitiveness shifts, overheating, overcooling, Deroose, Langedijk, Roeger

EU fiscal consolidation after the financial crisis. Lessons from past experiences

Summary for non-specialistsThe global financial crisis has led to a sharp deterioration of EU countries' public finances. Views are split regarding the most appropriate consolidation strategy to follow, in particular considering: the timing of fiscal consolidation in relation to the path of economic recovery reflecting (a) the trade-off between consolidation and stabilisation; (b) fiscal consolidation in the context of a distressed banking system where the credit channel is hampered and without which economic recovery can hardly take place, (c) the absence of exchange rate adjustment in the euro area which could make it more difficult for countries with competitiveness problems to achieve successful fiscal consolidation. The existing literature on fiscal consolidations provides only partial evidence on these issues.In this paper our objective is to focus on the above points of discussion drawing on EU (and non-EU OECD) experiences during the period 1970-2008. We estimate econometrically the determinants of successful fiscal consolidations and show that: (i) in presence of a systemic financial crisis, the repair of the banking sector is a pre-condition for a fiscal consolidation to succeed in reducing debt levels (ii) even after the banking sector is repaired, fiscal consolidations are usually less successful than in absence of financial crises, although more vigorous fiscal consolidations (i.e. cold shower) tend to yield higher results (iii) current debt dynamics in the EU are very unfavourable and in some cases, coupled with rising debt servicing costs and much deteriorated growth outlook warranting differentiated consolidation strategies across EU countries (iv) We do not find conclusive evidence in support of exchange rates (including real exchange rate) depreciation/devaluation as enhancing the success of fiscal consolidation as their effect appear to be low and insignificant.Fiscal consolidation financial crisis debt barrios langedijk pench

The mechanisms of cholestasis-associated itch

Itch is, next to fatigue, the most frequent symptom in patients with chronic cholestatic disorders and has serious impact on their lives. Cholestasis is the term for diminished or impaired bile flow. The molecular mechanisms leading to cholestasis-associated itch (pruritus) are still unresolved and the involved pruritogens are indecisive.Lysophosphatidic acid (LPA) is a possible pruritogen in patients with cholestasis. LPA is produced out of lysophosphatidylcholine (LPC) by the enzyme autotaxin (ATX). A significant correlation is present between ATX activity and itch intensity. During cholestasis, not only serum ATX levels are increased, but also serum bile salts and bile salt-like (cholephilic) compounds. The ATX protein contains a hydrophobic tunnel structure, which can bind different hormone-like structures and specific bile salts, leading to (partial) inhibition of the protein. The negative feedback regulation in the expression of the Atx gene is relieved by this inhibition, which can contribute to increased serum ATX activity in patients with cholestasis.In order to study cholestasis-associated itch, we measured scratch activity in different cholestatic mouse models. After induction of cholestasis and increasing serum ATX activity, no increase in scratch activity was observed.We screened diverted bile of patients with cholestasis-associated itch for specific compounds that are able to activate the (itch-) sensor TRPA1. HPODE, a metabolite of linoleic acid, is a TRPA1-specific pruritogen, but did not show a significant correlation with the itch score in cholestatic patients, indicating that a combination of pruritogens is needed to induce cholestasis-associated itch

Invoicing Currencies in International Trade - Drivers and Obstacles to the Use of the Euro

This report aims to deepen the understanding of the micro aspects of the use of the euro in international trade invoicing and/or settlement. What determines the use of a currency in the invoicing of international trade? Is the euro increasingly used as an invoicing currency in international trade? What are the obstacles to the use of the euro in trade invoicing? This report collates existing analyses on the possible obstacles for using the euro in international trade and discusses the theoretical and empirical literature addressing these questions.JRC.G.1-Financial and Economic Analysi

Debt Bias in Corporate Taxation and the Costs of Banking Crises in the EU

During the period 2008-2012, EU governments incurred substantial costs bailing out banks. As corporate income taxation (CIT) in most countries still favors debt- over equity financing, reducing or eliminating this debt bias would complement regulatory reforms reducing costs of financial crises. To estimate this effect, we use a two-step approach. First, using panel regressions on a dataset of 32,833 bank-year observations we find sizable long-run effects of CIT on leverage in the EU. Second, we simulate the effect of tax reforms on bank losses using a Vasicek-based model with actual banks’ balance sheets to estimate costs of systemic crises for six large EU member states. Even if the tax elasticity of bank leverage is taken at the lower end of the ranges found in recent literature, eliminating the debt bias could lead to reductions of public finance losses in the range of 60 to 90%. The results hold even when considering much smaller effects for banks that are close to the regulatory minimum capital requirement of the Basel III framework. Even when asset portfolio risk is allowed to increase endogenously and considering conservative ranges of the parameter space, we conclude that tax reforms to remove the debt bias can result in very sizable reductions in risks and costs of financial crises.JRC.G.1-Financial and Economic Analysi