No Progress On Social Cohesion In Europe

Michael Dauderstädt

Rising income and asset inequality has been a growing concern worldwide. It stifles economic recovery and growth; it is a source of the increasing political protests against elites. In the European Union, it remains stubbornly at the same level it had reached by 2010. It had attained its nadir in 2009, after clear progress in previous years. The latest data for 2014 confirm this worrying trend that has been discernible since 2011.

In 2009, the S80/S20 ratio, which indicates the ratio between incomes in the richest quintile (fifth) and those in the poorest quintile, was around 8.5 measured in euros at current exchange rates and 5.6 in terms of purchasing power standards (PPS). Since 2011 the figure has varied between 9 and 10 in euros and between 6 and 7 in PPS (see Figure 1).

Figure 1 Development of income inequality in the EU (S80/S20 income quintile ratio)

Source: Eurostat, authors’ calculations; PPS = purchasing power standard; for the sake of comparability Croatia was excluded.

This is markedly higher than the value given by Eurostat for the EU as a whole – around 5 (lowest curve in Figure 1) – in its official statistics. This is the average of the S80/S20 ratios of all EU member states without taking into account the enormous income differences between them. Eurostat thus considerably underestimates the real income ratio between the richest and the poorest quintile in the EU as a whole. Its recent rise from 5 to 5.2 (see Fig 1) only reflects the growing income inequality within many member states, which, however, tends to be compensated across the EU by the higher GDP growth in the poorer member states. In order to estimate real inequality across Europe, both dimensions have to be taken into account: inequality between and inequality within countries (see the upper curves in Figure 1). This is done with the method used here, which calculates the pan-European quintiles (each of around 100 million people) and their incomes by adding up the appropriate national quintiles, and comes up with the ratio between them.

Inequality within and between member states

For the period for which the latest Eurostat data are available (2014) it is primarily income inequality within most countries that has risen. Germany – alongside Estonia, Slovakia and the United Kingdom – is among the frontrunners in this respect; its S80/S20 ratio rose by more than 10 per cent (the Gini coefficient rose by 3.4 per cent). On an EU average, the increases were of 4 and 1.3 per cent, respectively. Income inequality between countries, by contrast, has been on a downward trend in the EU for years because growth in the poorer new member states from central and eastern Europe was usually stronger than in the richer north-west of the old EU.

Since 2011 EU-wide income inequality has scarcely changed in either euros or PPS (see Figure 1). In the most recent period of observation presented here, 2013 to 2014, EU-wide inequality in PPS rose minimally to 6.25 and in euros to 9.41. But why do the higher growth rates of the poorer countries not reduce it EU-wide, as they did before 2010? In a nutshell, because incomes in the poorest EU quintile did not grow faster than incomes in the richest. In fact, both hardly changed (less than half a percentage point), which in itself limits the scope for progress. In PPS the figure for the poorest EU quintile even fell slightly in comparison with 2013.

If one compares growth of national quintiles from 2013 to 2014 (see Table 1) it transpires that on an EU average incomes increased more quickly the higher they already were. The incomes of the poorest quintile (Q1) grew by only 0.2 per cent, that of the second poorest (Q2) by 1.6 per cent, that of Q3 by 2.1 per cent, that of Q4 by 2.5 per cent and that of the richest quintile (Q5) by 3.5 per cent (see Table 1, last row). Thus the richest benefitted most from what was overall rather weak growth.

Table 1: Income growth (in euros) by quintile between 2013 and 2014 (%)

Source: Eurostat and authors’ calculations.

This unequal distribution of growth is even more marked in the poorer member states. There, average growth rates rose from zero for the poorest households (Q1) to 4.3 per cent for the richest households (Q5) (see Table 1, penultimate row). Individual national developments should be highlighted: in Germany incomes fell in the lowest quintile by almost 10 per cent, while in all other quintiles they rose. In countries with generally falling incomes (Spain, Greece, Portugal and Cyprus, but also the Czech Republic), as a rule (Greece being the exception) the incomes of the poorest fell most. By contrast, in Austria, Denmark and Malta the poorest quintile did surprisingly well.

This is a shorter version of a paper commissioned and published by the Friedrich Ebert Foundation.