By Will Denayer. This article was first published on Flassbeck Economics.

The Friedrich-Ebert Foundation just published a paper on Social Cohesion in Europe. It is short (8 pages), but more than just interesting. The crisis that has been evident for several years continues unabated. Inequality within countries increased in most member states in 2014, especially in Germany. Cohesion across the EU has made no progress. Social development remains dire in the Mediterranean countries, where the poorest strata are particularly hard hit by austerity.

The data for 2014 confirm the worrying trend that has been discernible in the European Union since 2011: income inequality remains stubbornly at the same level it had reached by 2010. It had attained its nadir in 2009, after clear progress in previous years. The S80/S20 ratio, which indicates the ratio between incomes in the richest quintile (fifth) and those in the poorest quintile, was then around 8.5 measured in euros at current exchange rates and 5.6 in terms of purchasing power standard (PPS). Since 2011 the figure has varied between 9 and 10 in euros and between 6 and 7 in PPS (see Figure 1). So, there is almost no progress. Differences in income between member states are enormous.

The authors engage in a very relevant discussion about these figures as they contradict those given by Eurostat. The Eurostats figures give an average of the S80/S20 ratios (the 80% of the income pyramid set against the top 20%)  without taking into account the enormous income differences between the countries. In doing so, these figures considerably underestimate the real income ratio between the richest and the poorest quintile in the EU as a whole. Another point is that in order to estimate real inequality across Europe both dimensions have to be taken into account: inequality between and inequality within countries. This is done in this study. Dauderstadt and Keltek calculate the pan-European quintiles (each of around 100 million people), their incomes and the overall distribution. This is very good work.

So what can be done against according to the authors? Progress with regard to social cohesion requires a mixed policy approach. Growth must be revived and lower socioeconomic strata must have a larger share of rising incomes. The two are closely linked because if the incomes of poorer households rise aggregate demand rises more strongly because of their lower propensity to save, compared with richer households. Redistribution within countries – for example, through higher taxation of the top incomes, inheritances and wealth – but also between EU member states (by means of a more substantial, autonomously financed and redistributive EU budget) can contribute to this. More efficient taxation of high incomes and profits and capital gains would help to better fund crumbling social protection. But also the distribution of market incomes can and should be improved, for example, by means of adequate minimum wages or a competition policy that reduces excessive income from profits and capital gains. A large economic area such as Europe should set its own virtuous productive circle in motion, where production for the domestic market gives rise to the employment and incomes from which the necessary domestic purchasing power results. And say the authors, prosperity does not arise from an increase in claims against other countries through export surpluses, but from investment and consumption at home. Excellent!

This interesting study can be downloaded here.

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