Reducing Inequality: Social Europe And Cohesion

‘Social Europe’ implies for most experts the development of national welfare states and their protection against the forces of globalization and international competition as most contributions to the present project show. This emphasis has its strong merits as peoples’ welfare depends to a large extent on the growth of their national economies and on the capacities of their governments to redistribute income and provide public goods and services. European integration was supposed to improve growth and state capacities, but has often failed to do so.

But if we consider Europe as a whole the task of reducing inequality and making Europe more equitable becomes more complex. Inequality in Europe has two dimensions: (i) disparities between the member states of the European Union (EU) measured in terms of per capita income; (ii) disparities within countries often measured by the ratio between the incomes of the richest and the poorest quintiles (= 20 percent) of the population (quintile ratio S80/S20). A more social Europe requires both, reducing inequality within and between countries.

Inequality in Europe

In order to achieve an appropriate estimate of inequality in the EU as a whole we need to take both dimensions of inequality into consideration. This is possible by assessing the S80/S20 ratio for the EU as a whole, which has been done for the years 2004-2012 (Dauderstädt and Keltek 2014). As figure 1 shows, this ratio ranges between 9 and 10 (in terms of exchange rates) or between 6 and 7 (in terms of purchasing power). Due to the large disparities between countries it is much higher than the average S80/S20 ratio of member states which is around 5 (a value, which Eurostat reports falsely as the S80/S20 ratio of the EU; lowest curve in figure 1). By comparison, other major economies, according to the UN Human Development Report, have mostly lower values of 4.9 (India), 7.3 (Russia), 8.4 (United States) and 9.6 (China).

Figure 1: Development of inequality in the EU

Note: PPP = purchasing power parity. Source: Dauderstädt and Keltek 2014

But Europe’s high inequality, systematically underestimated by the EU, has been falling for many years thanks to catch-up growth in the poorer countries and despite often increasing inequality within member states. On average the economies of the poorest 15 countries have grown in nominal terms (at current prices) three to four times as rapidly as those of the 12 richest member states. As a result, in 2008 they had an average per capita income of almost three-quarters of the EU average, while in 2000 it had been below two-thirds. The per capita income of the richer countries remained at around 30 per cent above the EU average. In the same period income distribution within countries has deteriorated only slightly in the EU on average, from an S80/S20 ratio of a little under 5 to 5.1. In some countries inequality has fallen (for example, in Poland, Portugal and the Baltic states), while in others (for example, Greece and Spain) it has risen sharply.

The Consequences of the Crisis and Austerity

Crisis and austerity have curbed this convergence process, however. After inequality rose again during the great recession of 2009 and the subsequent brief recovery things are now going sideways in the context of generally weak growth. The global financial crisis and the recession triggered by it have affected EU countries differently. Between 2008 and 2009 growth fell on average by 6.4 per cent in the 12 richest member states and by 8.2 per cent in the 15 poorest member states. This largely explains the resumption of rising inequality. Especially countries with high external debts, such as the Baltic states, plunged into deep depressions, although they differed in length and severity. The GDP falls in the Baltic and other post-communist countries were dramatic, but fairly short (see Table 1).

Table 1: Crisis and recovery: central and eastern Europe and the GIPS countries (percentage change in per capita income)

Source: Dauderstädt and Keltek 2014

The subsequent euro crisis, which was triggered primarily by the EU’s disastrous reaction to Greece’s unexpectedly high debts, stopped the economic recovery that started to emerge in 2010 dead in its tracks, especially for the GIPS countries (Greece, Ireland, Portugal and Spain), which at first had not been so hard hit (see Table 1). In contrast to the generally even poorer new member states from Central and Eastern Europe they were unable to return to growth because of the implementation of drastic austerity policies. Nevertheless, the relatively good growth performance of the poorer countries of Central and Eastern Europe (CEE), despite the crisis in the euro countries implementing austerity policies, was enough to cause inequality in the EU as a whole to fall again slightly or at least not to rise further.

The future development of inequality and cohesion in the EU will depend on the extent to which the east and the southeast continue to grow and the euro crisis countries emerge from the pit of austerity. Inequality in the EU will be determined more by the catching-up of the poorer member states than by improving the income distribution within the countries. A return to growth, above all in the GIPS countries, is key here. But it is primarily inequality within countries, which causes concerns and political repercussions. Wage growth in line with productivity growth, fairer and more efficient tax policies, and better targeted social spending are necessary to reduce inequality within member states. However, reducing disparities between countries would mitigate pressures on the richer welfare states because rising incomes in poorer countries would weaken low-wage competition and immigration.

References:

Michael Dauderstädt and Cem Keltek (2014) Crisis, Austerity and Cohesion: Europe’s Stagnating Inequality, Berlin (FES) (http://library.fes.de/pdf-files/id/ipa/10672.pdf)

Michael Dauderstädt (2014) Convergence in Crisis. European Integration in Jeopardy, Berlin (FES) (http://library.fes.de/pdf-files/id/ipa/11001.pdf)

This column is part of our Social Europe 2019 project.