PERSPECTIVE Austerity and Income Distribution in Europe Cohesion despite Weak Growth MICHAEL DAUDERSTÄDT AND CEM KELTEK July 2013 Europe has reacted to the sovereign debt panic in the Euro area primarily with austerity. The bailouts which were implemented, initially were too small, and the Euro­pean Central Bank(ECB) has been buying up govern­ment bonds, only late in the crisis, after some controversy and with reluctance, while austerity programmes have largely been applied. However, these efforts to consoli­date budgets only made things worse, to the surprise of the European Union(EU). The experts of creditor institu­tions had underestimated the level of the multipliers that indicate how much GDP and thus also employment will fall if one cuts government spending. In the meantime Europe is sliding into an ever more intractable recession, with alarming unemployment in many member states. What have been the effects of this development on in­come distribution in Europe? The present analysis relies on the most recent available data from Eurostat(Statistics on Income and Living Conditions – SILC), which now also include the year 2011. In 2011, the EU showed average real growth of 1.5 per cent. The real recession began in 2012 when real GDP fell by 0.3 per cent. However, growth rates already fell significantly in 2011. In order to assess the effects on inequality in the EU, however, we must first take a closer look at its structure. The Distribution of Income between and within the Member States In a multinational integration area such as the EU, in­come distribution has two dimensions: within states and between states. The EU itself regards these two sides of inequality as strictly separate, which leads to highly dis­torted(under)estimates of the inequality within the EU. 1 Eurostat does not provide realistic data on income distri­bution in the EU27, but only a falsely construed average value. The indicator applied here, also used by Eurostat, for income distribution is the income quintile share ratio, also known as the S80/S20 ratio, which gives the ratio between the incomes of the poorest fifth of the popula­tion and the richest fifth. In 2011, this ratio fluctuated – for distribution within states – between 3.5 in Slovenia and 6.8 in Spain. In Germany, the value remained unchanged at 4.5. For the EU as a whole the average value was around 5.1 and had thus again deteriorated since its relative low of 4.9 in 2009, at the peak of the recession. Hence a trend con­tinued in the old member states(EU15) towards increas­ing inequality, which raised the average income quintile share ratio of 4.5 at the beginning of the century to 5.1. In the 12 new member states, by contrast, inequal­ity within states had fallen constantly, on average, since 2004(from 7.4 to 5.0 in 2010), rising slightly in 2011 to 5.1. This outcome was to be expected given austerity, weaker growth and higher unemployment. Underestimated Level, False Trend However, these average values imply that the poorest and the richest fifths of the EU population(just under 100 million people) comprise the poorest and richest na­tional fifths. In fact, however, the poorest fifth of the EU comprises predominantly inhabitants – and not only from the poorest fifth there! – of the poorest member states 1. Atkinson, A.B.; Marlier, E.; Montaigne, F.; Reinstadler, A.(2010): Income Poverty and Income Inequality, pp. 101–131, here p. 109, in: Atkinson, A.B.; Marlier, E.(eds): Income and Living Conditions in Europe, Eurostat, Publications Office of the EU, Luxembourg.