Where do we stand on income convergence in Europe? Looking at the GDP per capita would imply that a huge gap still exists between east and west, and north and south. In reality, a great deal of convergence has already taken place, especially for the poorest 40% of the population, between the eastern and western peripheries. The gap between eastern Europe and Italy in our view is likely to close by the end of the decade for that segment of the labour market. On the other hand, the gap between north and south instead appears still significant, across income levels, and is actually widening.
We show the changes of the past 20 years or so in the income distribution in Europe, using the Eurostat estimates, both in current Euro terms and PPP-adjusted. Taking the cut-off points of the various chunks of the income distribution allows us to map the income changes of various segments of society, regardless of their labour contracts (employed, self-employed, part-time workers and so on are all captured) and adjusted for the tax burden, which is very diverse across the EU.
Undoubtedly, convergence favours the small and the poor, and the big and “expensive”. Those sitting in the middle are squashed and, in our view, will continue to experience stagnating to falling incomes.
Contrary to the last business cycle, which was fuelled by too much credit everywhere (east and west), this phase of convergence is “credit light”, but showing strong gains in the industrial bases in eastern Europe. The more companies headquarter or operate in the east, the more profitable these businesses become, and the more it is justified that workers across the income spectrum earn more. So, incomes are rising through the income distribution on average in the east, while the west sees the lower bracket gaining modestly compared with the highest income segment.
Convergence does not “have to happen”. In fact, we are quite surprised by the poorest segments of Romania claiming not to have seen much improvement since the EU accession, notwithstanding the high wage growth and a booming corporate sector.
France and Germany have fared well in the past decade – but how much longer can this last? The lower 40% of the French income distribution earns well above most in the EU. We suspect this cannot last forever as labour laws are being loosened and a phase of public sector austerity appears to be ahead. The data for Germany suggest that the poorest quintile is actually much better off than most; however, the continuing rise of the far right (AfD) in the approval ratings tells us that these numbers do not fully reflect the reality on the ground.
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