Exports and Capacity Constraints: A smooth transition regression model for six euro-area countries. CEPS Working Document No. 395/May 2014

The significant gains in export market shares made in a number of vulnerable euro-area crisis countries have not been accompanied by an appropriate improvement in price competitiveness. This paper argues that, under certain conditions, firms consider export activity as a substitute for serving domestic demand. The strength of the link between domestic demand and exports is dependent on capacity constraints. Our econometric model for six euro-area countries suggests domestic demand pressure and capacity-constraint restrictions as additional variables of a properly specified export equation. As an innovation to the literature, we assess the empirical significance through the logistic and the exponential variant of the non-linear smooth transition regression model. We find that domestic demand developments are relevant for the short-run dynamics of exports in particular during more extreme stages of the business cycle. A strong substitutive relationship between domestic and foreign sales can most clearly be found for Spain, Portugal and Italy, providing evidence of the importance of sunk costs and hysteresis in international trade.

Options for a Euro-area fiscal capacity. Bruegel Policy Brief 2013/01, January 2013

Europe has responded to the crisis with strengthened budgetary and macroeconomic surveillance, the creation of the European Stability Mechanism, liquidity provisioning by resilient economies and the European Central Bank and a process towards a banking union. However, a monetary union requires some form of budget for fiscal stabilisation in case of shocks, and as a backstop to the banking union. This paper compares four quantitatively different schemes of fiscal stabilisation and proposes a new scheme based on GDP-indexed bonds. The options considered are: (i) A federal budget with unemployment and corporate taxes shifted to euro-area level; (ii) a support scheme based on deviations from potential output;(iii) an insurance scheme via which governments would issue bonds indexed to GDP, and (iv) a scheme in which access to jointly guaranteed borrowing is combined with gradual withdrawal of fiscal sovereignty. Our comparison is based on strong assumptions. We carry out a preliminary, limited simulation of how the debt-to-GDP ratio would have developed between 2008-14 under the four schemes for Greece, Ireland, Portugal, Spain and an ‘average’ country.The schemes have varying implications in each case for debt sustainability