EU inequality a threat requiring education and jobs

Europe Letter: Income disparity has bad effects and must be tackled, warns ECB chief

Manual labour: Poor EU citizens “are likely to migrate to richer member states to improve their income chances”. But the pressures to migrate to wealthier countries “may have political effects in receiving states, with the rise of anti-immigrant sentiment”. File photograph: Getty Images

Manual labour: Poor EU citizens “are likely to migrate to richer member states to improve their income chances”. But the pressures to migrate to wealthier countries “may have political effects in receiving states, with the rise of anti-immigrant sentiment”. File photograph: Getty Images

 

It sounded strange coming from a banker, not just any banker, but a central banker.

However, European Central Bank (ECB) president Mario Draghi’s message was indeed that Europe’s growing inequality was a danger and a threat to social order. It needed to be tackled with education, innovation and investment in human capital, particularly jobs for young people, he told a town-hall style meeting with university students in Lisbon on Monday.

“Is this a seriously destabilising factor that we should cope with?” he asked. “Yes it is.”

EU-wide income inequality declined notably prior to 2008, driven by a strong process of income convergence between European countries. But the economic crisis broke this trend.

After 2008, income convergence between states has been sluggish, while inequality within many countries has increased significantly, largely due to growing unemployment.

Central objective

The crisis has set back a central objective of EU policy, the levelling of the economic playing field, convergence between member states, supported if necessary by social and cohesion funding, which in the past saw cohesion poster boy Ireland move in 1990 from 65 per cent of EU GNP per capita past the EU average by 2002.

EU-wide income inequality in an integrated economy has significant deleterious effects

Today, depending on the measure used, we are close to the top of the EU league, although our internal inequality has also been exacerbated by the post-2008 crisis.

From a purely economic point of view, and this presumably is Draghi’s point, EU-wide income inequality in an integrated economy has significant deleterious effects.

Poor EU citizens are likely to migrate to richer member states to improve their income chances. Large companies with the capacity to offshore part of their production processes will locate labour-intensive manufacturing to low-wage countries. Both processes affect the income and employment opportunities of low-skill workers in high-wage countries, thus contributing to higher inequality there.

Political effects

The pressures to migrate to wealthier countries may also have political effects in receiving states with the rise of anti-immigrant sentiment. “We have to fight against inequality,” Draghi responded to a student question. And he called on governments to consider better income and wealth redistribution policies.

President of the European Central Bank Mario Draghi at a meeting in Lisbon, Portugal, June 26th, 2017. Europe’s growing inequality is a danger and a threat to social order, he told students present. Photograph: Antonio Cotrim/EPA
President of the European Central Bank Mario Draghi at a meeting in Lisbon, Portugal, June 26th, 2017. Europe’s growing inequality is a danger and a threat to social order, he told students present. Photograph: Antonio Cotrim/EPA

It is a view normally associated with socialist politics but one that is increasingly widespread, and is echoed in the findings of a new survey from Chatham House across 10 EU states. It found strong support for solidarity as an EU ideal and for the idea that the union should be a redistributive union.

Some 50 per cent of those surveyed think richer member countries should provide financial support to poorer states (only 18 per cent disagree with the view), and among policy elites 77 per cent also agree.

Growing inequality is not only morally questionable but economically inefficient

A renewed political preoccupation with inequality on the left and the right of politics – from Bernie Sanders in the US to Theresa May’s alleged concern for the just-about-making-it – stems in part from the work of French economist Thomas Piketty.

Fairness and justice

His research shows how the relatively fair distribution of wealth that was the result of the post-war institutions is disappearing. In a world where the return on capital is outpacing the level of growth, the accumulation of assets by the already rich is challenging ideas of fairness and justice that are fundamental building blocks in Western democracies.

Growing inequality is not only morally questionable but economically inefficient, and as political scientists have noted, rising discontent and support for anti-establishment politics may be fed not so much just by the experience of austerity as by growing suspicions – indeed, certainty – that the pain of austerity is not being shared equally.

‘Utopian project’

At the end of the second World War, sociologist Karl Polanyi argued that “a pure free-market society is a utopian project, and impossible to realise because people will resist the process of being turned into commodities”.

The EU can begin to repair the damage done to its social fabric by the fallout from 2008, and begin to restore its waning legitimacy

In that sense too, a pure European Common Market, or its successor as imagined by some conservative leaders - an EU that is simply a single market and no more - were always also utopian projects, destined to unravel as their commoditised workforce lost its sense of having a stake in someone else’s project.

In taking up the cause of fighting inequality, by making real the idea of a social Europe, the EU can begin to repair the damage done both to its social fabric by the fallout from 2008, and begin to restore its waning legitimacy in the eyes of its poorest citizens. That, I’m sure, is what our central banker Draghi has in mind.

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