EconPol Working Paper Series

Cover of EconPol Working Paper 68

Current Account Targeting Hypothesis versus Twin Deficit Hypothesis: The EMU Experience of Portugal

António Afonso and José Carlos Coelho (EconPol Europe, ISEG - Lisbon School of Economics & Management, Universidade de Lisboa; REM/UECE)

This Working Papaer analyses the relation between Portugal’s government budget balance and current account balance from 1999 (Q1) – when Portugal joined the Euro – until 2019 (Q4). The study arrives at three main conclusions: First, a tightening of fiscal policy improves the external balance of the Portuguese economy, although not substantially. Second, the share of public consumption on GDP has a negative impact on the current account balance. This means, that any policy that stimulates economic activity leading to an increase in public consumption needs to be applied carefully. Finally, the research shows that the investment rate negatively affects the cyclical component of the current account balance, suggesting a high degree of integration of the Portuguese economy in international financial markets. Even though public policy measures promoting investment have a negative impact on external accounts in the short-term, they contribute to the structural improvement of the government balance in the long-run.

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Cover of EconPol Working Paper 67

European Structural Funds and Resilient and Recovery Facility Governance

Carlos San Juan Mesonada (EconPol Europe, Universidad Carlos III Jean Monnet Chair and the UC3M Economics Institute), Carlos Sunyer Manteiga (EconPol Europe, Universidad Carlos III de Madrid)

The implementation of recovery funds under the EU’s Covid-19 recovery program NextGenerationEU should be aligned with business cycle phases. This could ensure that financial support will have the most even and efficient impact across regions. This is one of the key conclusions derived from this EconPol Working Paper. The study analyzed the impact of the European Structural and Investment Funds on regional development over the period 1986–2018, identifying lessons for the EU's Covid recovery program NGEU. The study finds that European Structural and Investment Funds distributed between 1986 and 2018 had a positive impact overall on regional growth in the recipient regions: In the long run, an increase of 1% in the EU aid led to permanent increases of personal income around 0.03% - 0.04%. However, the research shows that the business cycle affects the speed of convergence of the regions. The funds were least effective during downturn phases, especially in the least developed regions. This effect can partially be attributed to lower absorption rates in these regions and liquidity traps. According to the research, one way to mitigate this effect is to ease co-financing requirements during economic downturn phases and to adapt funds to the business cycle phase.

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Cover of EconPol Working Paper 66

The Existential Trilemma of EMU in a Model of Fiscal Target Zone

Pompeo Della Posta (University of Pisa), Roberto Tamborini (University of Trento)

The EMU should create monetary and fiscal mechanisms to safeguard its irreversibility in exceptional situations, according to this EconPol Working Paper. The financial crisis and the coronavirus crisis have shown that the EMU's integrity can only be saved by relaxing either monetary orthodoxy, or fiscal orthodoxy, or both, when exposed to large, systemic shocks. The authors illustrate how such monetary and fiscal mechanisms could be designed by using a fiscal target zone model, where EU member governments are willing to abide with the commitment to debt stability under the no-bailout clause only up to an upper limit of their feasible fiscal effort. The study also shows that EMU completion means providing a monetary and/or fiscal emergency backstop to the irreversibility principle. The alternative to such mechanisms is to include an explicit exit clause in the treaties, the authors conclude.

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Cover of EconPol Working Paper 65

CO2 Emissions and Energy Technologies in Western Europe

J. Barrera-Santana (Universidad de la Laguna and CEDESOG), Gustavo A. Marrero (Universidad de la Laguna and CEDESOG), Luis A. Puch (Universidad Complutense de Madrid and ICAE), Antonia Díaz (Universidad Carlos III de Madrid)

Economic upswing phases are strongly linked to a rise in CO2 emissions. The effect is strongest in countries that depend on energy-intensive sectors, this latest EconPol Working paper finds. The research further shows that an increase in the share of renewable energy in the primary energy supply during an upswing has the greatest impact on reducing CO2 emissions. According to the authors, the study’s results lead to an important conclusion: European environmental policy should be adjusted over the economic cycle, e.g. by introducing procyclical green taxation.  

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Cover of EconPol Working Paper 64

Calamities, Common Interests, Shared Identity: What Shapes Altruism and Reciprocity?

Cevat Giray Aksoy (European Bank for Reconstruction and Development, King's College London and IZA), Antonio Cabrales (Universidad Carlos III de Madrid), Mathias Dolls (ifo Institute, CESifo, IZA and ZEW), Ruben Durante (ICREA, UPF, IPEG, Barcelona School of Economics, and CEPR), Lisa Windsteiger (Max Planck Institute for Tax Law and Public Finance

Information on the Covid-19 pandemic increases altruistic behavior and reciprocity towards compatriots, citizens of other EU countries, and non-EU citizens. This is one key result of a large-scale survey experiment conducted in August 2020 by EconPol Europe network members in nine European countries. The study also finds that priming common European values boosts altruism and reciprocity, but only towards compatriots and fellow Europeans. In contrast, priming common economic interests (EU trade) has no tangible impact on behaviour. The survey experiment provides novel evidence on how trust, reciprocity, and altruism are affected by a major health crisis (Covid-19), common economic interests (EU trade) and shared values (EU ideals).

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