How to unite and develop Europe

Equitable growth must be wage-led and based on demand fed by decent earnings

A Bulgarian man collects black grapes east of the capital Sofia: On average, a household in Luxembourg earns more in a month than a Bulgarian household gets in a year. Photograph: Nikolay Doychinov/Reuters

A Bulgarian man collects black grapes east of the capital Sofia: On average, a household in Luxembourg earns more in a month than a Bulgarian household gets in a year. Photograph: Nikolay Doychinov/Reuters

 

Europe is suffering from a wave of alienation between its citizens and their governments, both on the national and the European level.

In Germany, a Eurosceptic, right-wing, populist party recently entered the Bundestag as the third-largest parliamentary group.

In many other member states of the European Union such as Italy, France, the Netherlands, Poland and Hungary, similar forces gained electoral strength or even power. In Great Britain, people opted for Brexit because they felt their interests were neglected in the EU. In Catalonia they want to leave Spain.

People perceived that governments were bailing out the rich and powerful rather than protecting the poor and vulnerable

Much of the discontent focuses on migration and on perceived costs due to redistribution from richer parts to poorer ones – either in the EU or within countries (eg from northern to southern Italy or from Catalonia to the rest of Spain). Both phenomena are closely linked to inequality, which in the EU takes on different dimensions. There is the well-known inequality within countries that has increased in many member states over the last decades – between different societal strata and between regions. There are huge income disparities between rich and poor member states. On average, a household in Luxembourg earns more in a month than a Bulgarian household gets in a year. These two inequalities combined make Europe as a whole a more unequal society than the US, providing strong incentives for migration.

Rich vs poor

On average, the richest 20 per cent (or quintile) of a European country earn five times as much as the poorest fifth of the population. In some member states, such as the Scandinavian countries or some central European states, that ratio is lower (about three), in others it is higher than six. Regional disparities have increased in most member states due to the asymmetric impact of globalisation and European integration. Northern Portugal lost its textile industry, while western Slovakia became an automotive hub linked to German exporters. But if we look at Europe as a whole, the richest quintile (about 100 million people) earns almost 10 times as much as the poorest due to the strong disparities between countries.

Until 2008, income disparities in the EU as a whole declined thanks to stronger growth in the poorer periphery. Between 2000 and 2008, Spain’s 40 million people welcomed and integrated four million immigrants while halving the traditionally high unemployment rate. Nominal incomes in the new member states of central and eastern Europe more than doubled since 1999. But this growth was often accompanied by stagnant wages, exploding household debt, macro-economic imbalances and rising intra-country inequality.

Unfortunately, the Celtic Tiger’s growth model based on a predatory corporate tax regime cannot be extended on a large scale

The financial crisis, the Great Recession and misguided austerity policies stopped the convergence process. Discontent started to rise as Europe, and in particular Germany, reacted with little solidarity and much counter-productive conditionality to the sovereign debt panic in the periphery. People perceived that governments were bailing out the rich and powerful rather than protecting the poor and vulnerable. Migration, which had been met with benign neglect during the good times, became the scapegoat of populist nativism.

Cruel mathematics

After these multiple crises, growth resumed in the East, albeit at a slower pace. But for the South, it has been a lost decade with incomes now hardly approaching pre-crisis levels. Even with higher growth, it will take many years until absolute income differentials start to decline. Actually, the cruel mathematics of slow convergence show that absolute inequality will increase for a long time even when relative inequality is declining. If the per capita income of the poorer country is one-fifth of that of the richer country and it grows by 5 per cent a year, while the gross domestic product of the richer country increases by only 2 per cent, then the absolute gap between the two countries still grows for 25 years; and only after 56 years is income equality achieved. To reduce inequality substantially, growth in the periphery has to be strong and sustained over a prolonged period as it was in Ireland between 1990 and 2007.

Unfortunately, the Celtic Tiger’s growth model based on a predatory corporate tax regime cannot be extended on a large scale. In a similar way, Germany’s export-led model relies on the debt-financed deficits of other countries. Equitable growth must be wage-led and based on demand fed by decent earnings of all people. True prosperity means sustained consumption and social protection, not asset price inflation. Without a new cohesive growth model, the disconnection between people and governments will continue and deepen.

Michael Dauderstädt worked for the Friedrich Ebert Foundation for more than three decades and is currently a freelance consultant and chief executive of Dietz publishing house

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