PERSPECTIVE Crisis, Austerity and Cohesion Europe‘s Stagnating Inequality MICHAEL DAUDERSTÄDT AND CEM KELTEK April 2014 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. Crisis and austerity have curbed this development, 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. Inequality in Europe has two dimensions:(i) differences between the now 28 member states of the European Union(EU) measured in terms of per capita income; (ii) differences within countries, measured by the ratio between the incomes of the richest and the poorest quintiles of the population(quintile ratio S80/S20). Income Convergence since 2000 Since 2000 the first class of differences has diminished as the poorer member states have caught up significantly. 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, since 2008 they have had an average per capita income of almost three-quarters of the EU average, while in 2000 it was still 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. Both forms of inequality provide only a partial perspec­tive on the development of inequality in the EU as a whole, however. If one looks only at inequality in a single country and calculates weighted averages based on national S80/S20 values to get values for the EU as a whole or country groups, such as the new member states or the euro zone, which is what the EU’s Statistical Office(Eurostat) does, one underestimates the level of inequality dramatically because one thereby leaves out major differences between per capita incomes. Gross domestic product(GDP) per capita in the richest country (Luxembourg) is five times as large measured in terms of purchasing power and fifteen times as large measured in euros than that of the poorest member state, Bulgaria. This also underestimates the trend because inequality in the EU as a whole has, due to the above mentioned catch-up processes, fallen much more rapidly than inequality within countries. Inequality in the EU: high, but declining In order to achieve a more realistic 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 quintile ratio for the EU as a whole(see box for the method). This ratio, with values between 9 and 10(in terms of exchange rates) or between 6 and 7(in terms of purchasing power) is well above Eurostat’s official, false average of around 5, although since 2005(for the EU25) and since 2007(for the EU27) the trend has been downwards(see Figure 1). By comparison, other major economies, according to the data of the UN Human Development Report, 1 have values of 4.9(India), 7.3(Russia), 8.4(United States) and 9.6(China). 1. http://hdr.undp.org/sites/default/files/reports/14/hdr2013_en_ complete.pdf