Self-Fulfilling Crises in the Eurozone: An Empirical Test. CEPS Working Document No. 366, 22 June 2012

This paper tests the hypothesis that government bond markets in the eurozone are more fragile and more susceptible to self-fulfilling liquidity crises than in stand-alone countries. We find evidence that a significant part of the surge in the spreads of the PIGS countries (Portugal, Ireland, Greece and Spain) in the eurozone during 2010-11 was disconnected from underlying increases in the debt-to-GDP ratios and fiscal space variables, and was the result of negative self-fulfilling market sentiments that became very strong since the end of 2010. We argue that this can drive member countries of the eurozone into bad equilibria. We also find evidence that after years of neglecting high government debt, investors became increasingly worried about this in the eurozone, and reacted by raising the spreads. No such worries developed in stand-alone countries despite the fact that debt-to-GDP ratios and fiscal space variables were equally high and increasing in these countries.

The growth effects of EU cohesion policy: a meta-analysis. Bruegel Working Paper 2012/14, October 2012

We run a standard income convergence analysis for the last decade and confirm an already established finding in the growth economics literature. EU countries are converging. Regions in Europe are also converging. But, within countries, regional disparities are on the rise. At the same time, there is probably no reason for EU Cohesion Policy to be concerned with what happens inside countries. Ultimately, our data shows that national governments redistribute well across regions, whether they are fiscally centralised or decentralised. It is difficult to establish if Structural and Cohesion Funds play any role in recent growth convergence patterns in Europe. Generally, macroeconomic simulations produce better results than empirical tests. It is thus possible that Structural Funds do not fully realise their potential either because they are not efficiently allocated or are badly managed or are used for the wrong investments, or a combination of all three. The approach to assess the effectiveness of EU funds should be consistent with the rationale behind the post-1988 EU Cohesion Policy. Standard income convergence analysis is certainly not sufficient and should be accompanied by an assessment of the changes in the efficiency of the capital stock in the recipient countries or regions as well as by a more qualitative assessment. EU funds for competitiveness and employment should be allocated by looking at each region’s capital efficiency to maximise growth generating effects or on a pure competitive.

Fiscal policy, banks and the financial crisis. National Bank of Belgium Working Paper No. 234, October 2012

This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in the macroeconomics literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.