Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

Reducing European Inequality: Cohesion Through Convergence

Michael Dauderstädt 24th April 2017

Michael Dauderstädt

Michael Dauderstädt

When founded in 1957, the then European Economic Community comprised six relative prosperous countries, albeit including a very poor region, the Italian Mezzogiorno. With the first enlargement in 1972, poor Ireland joined the Community, bringing a start to its regional policy to promote growth in its poorer regions. The EU publishes regularly cohesion reports that assess the progress. This effort had to be strengthened substantially after the Southern enlargements (Greece in 1981, Spain and Portugal in 1986). But these challenges pale in comparison with the impact of the Eastern enlargements in 2004, 2007 and 2013, when much poorer post-communist countries joined the EU.

Convergence: the record so far

When Ireland and the Mediterranean countries joined, their Gross Domestic Product (GDP) per capita was about 60 to 70 percent of the EU average at purchasing power parities (PPP). Measured at exchange rates, they reached about 30 to 60 percent with Portugal being by far the poorest and Ireland the relatively richest country of the periphery. Joining the EU did not trigger a rapid catching-up process. Indeed, Greece and Ireland even fell back after their entry. Portugal and Spain performed better thanks to more favorable global economic circumstances in the late 1980s. The only true success has been Ireland after 1990 when it turned into the famous “Celtic tiger” overtaking all other EU countries except super-rich Luxemburg by the end of that decade.

The GDP/capita of the post-communist countries of Central and Eastern Europe (CEE) has been even lower than that of the Southern peripherals. Measured at exchange rates, their income in 2004 ranged from about 10 percent of the Euro area average to about 30 percent with Bulgaria and the Baltics being the poorest. At purchasing power parities the picture improves, reaching between 30 and 50 percent of the Eurozone average.

Table 1 presents the development of the GDP/capita in three subsets of member states since 1998, differentiated in the period before and after the crisis: The rich North West (NW) of the EU provides the benchmark; the Southern periphery (SP) comprises the poorer Mediterranean countries that have been subject to austerity programs, and the CEE plus Cyprus and Malta (CEE+) are the new member states that joined after 2004.

Table 1: Convergence and divergence in Euro (PPP) 1998-2015

Level (in €) Change (in%)
1998 2007 2015 98-15 98-07 07-15
NW GDP/cap 22,800 34,342 37,792 65.8 50.6 10.0
SP GDP/cap 15,000 23,633 22,967 53,1 57,6 -2,8
CEE+ GDP/cap 10,627 18,718 21,744 104.6 76.1 16.2
NW – SP 7,800 10,708 14,825 90.1 37.3 38.4
NW – CEE+ 12.173 15.623 16.048 31.8 28.3 2.7
NW/SP 1.52 1.5 1.6 8.3 -4.4 13.2
NW/CEE+ 2.14 1.8 1.7 -19.0 -14.5 -5.3
Standard deviation 7,501 11,187 12,233 63.1 49.1 9.4
Source: Eurostat; author’s calculations (unweighted averages of the country groups)
NW = Sweden, Finland, UK, Ireland, Belgium, Netherlands, Luxemburg, France, Germany, Austria, Italy
SP = Greece, Portugal, Spain
CEE+ = Baltics, Poland, Czech Republic, Slovakia, Hungary, Slovenia, Bulgaria, Romania, Croatia, Cyprus, Malta

As table 1 shows, growth in both poorer regions was stronger than in the rich core until 2007. But, while the three Southern countries fell back afterwards due to austerity, CEE growth continued to outpace the core’s. Economists call this kind of convergence “beta convergence”. It leads to a better relative quotient, improving the relation between the GDP/capita in CEE+ and NW from 2.14 to 1.7. Perhaps surprisingly, this does not imply “sigma convergence”, i.e. a decline in the absolute inequality measured by the standard deviation (last line in table 1) or the absolute difference between the GDP/capita (NW-CEE+ or NW-SP in table 1). These absolute measures are still increasing in spite of higher growth in the poorer member states. The most shocking fact is the divergence between the core and the Southern periphery, reversing decades of convergence.

Causes: real and nominal convergence

The major cause of the gap between different countries’ GDP/capita is the different level of labour productivity (per hour or per employee). Employees in poorer member states tend, in fact, to work more hours (often more than 2000 hours per year) than those in rich countries (mostly less than 1500 hours). Still much lower productivity (at about 20% of the more advance countries) leads to a big gap in income levels (Dauderstädt).



Don't miss out on cutting-edge thinking.


Join tens of thousands of informed readers and stay ahead with our insightful content. It's free.



Labour productivity depends primarily on the amount of capital used, the technologies employed and the speed of innovation. Thus, capital flows into poorer member states, in particular when they incorporate better technologies, should accelerate productivity growth. Structural reforms are supposed to alleviate adjustment and change from less productive companies and industries to more productive ones. Securing the poor countries’ access to capital remains crucial. The regional funds and cohesion policies are not sufficient to counteract private flows, driven by volatile market sentiments.

Successful catching-up growth processes (as in most countries of the European periphery until the crisis) depend on these structural changes leading to real convergence. But catching-up requires nominal convergence, too. Nominal incomes must appreciate in comparison to richer countries by the way of currency appreciation or higher inflation. The latter is a necessary feature of catching up as incomes and prices in industries with slower or no productivity growth must increase in step with the average productivity growth of the whole economy. Thus, the request for low inflation and stable exchange rates is a recipe to stop or slow down cohesion.

The consequences of high inequality

Persistent high inequality between member states leads to migration from poorer into richer countries. Indeed, some countries in CEE such as Romania, Latvia and Lithuania have lost more than ten percent of their labour force due to emigration. Often, this implies a serious brain drain when the most qualified people (doctors, engineers) leave for better-paid jobs in the core regions of the EU. The low wages in the poorer countries attract foreign investment in labour-intensive, low-skill industries at the same time. Both processes are likely to increase the gross national income, which includes the earnings of national citizens abroad, although only the latter has a direct positive impact on GDP.

In the richer member states, these developments will probably increase inequality as wages of low-skilled workers are under pressure from job-seeking immigrants and the threat of offshoring, i.e. the relocation of parts of the production to low-wage locations. The best remedies are statutory minimum wages and social investment in education and training.

The second in a series on inequality co-sponsored by SE, the Hans Böckler Foundation and the Friedrich Ebert Foundation

Pics
Michael Dauderstädt

Michael Dauderstädt is a freelance consultant and writer. Until 2013, he was director of the division for economic and social policy of the Friedrich Ebert Stiftung.

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u42198344ce 92c9 4f54 9a14 edee35fb9221 3 Europe’s Quest for Technological Sovereignty: A Feasible Path Amidst Global RivalriesChristian Reiner and Roman Stöllinger
u4219834670ab 1 Reclaiming Sutan Sjahrir: The Quiet Moral Core of Democratic Socialism in Southeast AsiaDeny Giovanno
u421983467 4b96 a2b4 d663613bf43e 0 A Fair Future?  How Equality Will Define Europe’s Next ChapterKate Pickett
u42198346742 445d 82f2 d4ae7bb125be 2 A Progressive Industrial Policy for the Global South: A Latin American PerspectiveJosé Miguel Ahumada and Fernando Sossdorf

Most Popular Articles

u4219834676 bcba 6b2b3e733ce2 1 The End of an Era: What’s Next After Globalisation?Apostolos Thomadakis
u4219834675 4ff1 998a 404323c89144 1 Why Progressive Governments Keep Failing — And How to Finally Win Back VotersMariana Mazzucato
09d21a9 The Future of Social Democracy: How the German SPD can Win AgainHenning Meyer
u421983462 041df6feef0a 3 Universities Under Siege: A Global Reckoning for Higher EducationManuel Muñiz

S&D Group in the European Parliament advertisement

Cohesion Policy

S&D Position Paper on Cohesion Policy post-2027: a resilient future for European territorial equity

Cohesion Policy aims to promote harmonious development and reduce economic, social and territorial disparities between the regions of the Union, and the backwardness of the least favoured regions with a particular focus on rural areas, areas affected by industrial transition and regions suffering from severe and permanent natural or demographic handicaps, such as outermost regions, regions with very low population density, islands, cross-border and mountain regions.

READ THE FULL POSITION PAPER HERE

ETUI advertisement

HESA Magazine Cover

With a comprehensive set of relevant indicators, presented in 85 graphs and tables, the 2025 Benchmarking Working Europe report examines how EU policies can reconcile economic, social and environmental goals to ensure long-term competitiveness. Considered a key reference, this publication is an invaluable resource for supporting European social dialogue.

DOWNLOAD HERE

Eurofound advertisement

Ageing workforce
The evolution of working conditions in Europe

This episode of Eurofound Talks examines the evolving landscape of European working conditions, situated at the nexus of profound technological transformation.

Mary McCaughey speaks with Barbara Gerstenberger, Eurofound's Head of Unit for Working Life, who leverages insights from the 35-year history of the European Working Conditions Survey (EWCS).

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Foundation for European Progressive Studies Advertisement

Spring Issues

The Summer issue of The Progressive Post is out!


It is time to take action and to forge a path towards a Socialist renewal.


European Socialists struggle to balance their responsibilities with the need to take bold positions and actions in the face of many major crises, while far-right political parties are increasingly gaining ground. Against this background, we offer European progressive forces food for thought on projecting themselves into the future.


Among this issue’s highlights, we discuss the transformative power of European Social Democracy, examine the far right’s efforts to redesign education systems to serve its own political agenda and highlight the growing threat of anti-gender movements to LGBTIQ+ rights – among other pressing topics.

READ THE MAGAZINE

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

BlueskyXWhatsApp