Inequality is on the rise across the world, but it’s not increasing everywhere at the same pace. In many ways Europe stands out as a positive exception. Despite all the criticism thrown at the EU, it is a global leader in preserving a degree of fairness in the social fabric. This may seem unlikely – Europe is hardly devoid of problems and tensions. Parts of the left depict it as a vehicle for neoliberal economic policies, and parts of the right deride it as an inefficient administrative monster. So how is Europe really doing?
It’s hard to exaggerate the difference between western Europe and the USA when it comes to inequality. In 1980, these blocs of similar population and average income were also similar in income inequality: the top 1% captured around 10% of national income, while the poorest 50% took around 20%.
Things have changed dramatically since then. Today, the top 1% in Europe take 12% of income (in the US, 20%) while the bottom 50% have 22% (in the US, 10%).
It’s often said that globalisation and digitalisation explain the surge in global inequality, but that’s not a very convincing narrative. Since the 1980s, Europe and the US have had similar exposure to global markets and new technologies. But they have differed in policies and institutional direction. To date, Europe has shown that it’s much better at keeping inequality in check.
Put bluntly, the EU has resisted the notion of turning its market economy into a market society. It has partly rejected the thinking of Ronald Reagan and Margaret Thatcher, in which market forces, in the absence of any regulation, provide the best of all worlds in areas such as education, health and wages. There are large differences within Europe, though: the UK and Ireland have followed the American path more closely than continental Europe has. Nor can it be said that recent policy changes all go in the right direction. France’s recent reforms are strikingly similar to Donald Trump’s in how they favour the rich.
That said, social healthcare systems in most European countries still guarantee universal protection for all – hardly the case in the US. Many of those countries offer free access to university. Indeed, when policymakers in Bavaria attempted to introduce university fees in 2007, a referendum later overturned the decision. A young European’s hopes of receiving higher education depend much less on his or her parents’ income than their American counterpart’s.
Labour markets are also more favourable to workers in Europe than in the US, where the minimum wage has fallen by a third in real terms since the 1970s (in France it has risen fourfold). In Sweden and Germany, trade unions are represented in corporate governance bodies, taking part in strategic decision-making.
European regulation against lethal, polluting substances is stricter than elsewhere, and European countries are at the forefront of the global fight against climate change, investing a growing share of their GDP in energy efficiency and renewables. That’s also key to reducing inequality, now and in the future. Studies show that environmental degradation and inequality are closely linked.
Generous welfare states need to be financed, of course. Europe is a patchwork of taxation systems. But overall the continent has been good at protecting progressive taxation – which has not been the case in the US, Britain and also countries such as India, where inequality has mushroomed. Progressive taxation is a proven tool against entrenched privileges at the very top; it also helps finance investment and public expenditure designed to lift income levels at the bottom.
The EU has been instrumental in helping its poorer member states, and its low-income regions, catch up with those that are better off. The picture is not perfect, but EU cohesion funds have done a lot to fill some of the gaps and help its newer members.
But this brings us to the less positive side. Since 2007, Europe has been rocked by economic and institutional crises. Germany’s powerful export-oriented economy – which contained wages and consumption – has benefited from the single currency at the expense of its neighbours, who have been tied down by strict monetary policies. Despite attempts by EU policymakers to solve this problem (and repeated claims that they have), public debt levels in Greece remain unsustainable. Austerity measures in southern Europe have cut into much-needed welfare programmes and led to a rise in poverty, fuelling legitimate resentment against the EU.
Europe stands at a crossroads. If it wants to avoid alienating younger generations, and the risk of implosion, it must find solutions other than austerity. In the 1950s, a combination of debt relief, progressive taxes and inflation were used to bring down public debt and invest in the future. It is no small paradox that those who, in another era, benefited from such measures (think Germany) are today fierce opponents of them. Yet those very policies allowed Europe to experience a true golden age of growth until the 1970s.
Europe’s disparate taxation systems surely need fixing. In recent decades, Ireland, Luxembourg and Malta have reaped the benefits of being tax havens. Other larger countries have paid a price, making the financing of the welfare state all the more difficult. The resulting period of corporate tax cuts has bred resentment among the lower-to-middle classes, who faced tax hikes to compensate for the losses.
Europe has done relatively well in the fight against inequality since 1980, and now it feels buoyed by signs of economic improvement. But European leaders would be naive to assume the status quo can be sustained. To preserve its social model, the EU needs to establish common progressive fiscal rules and relieve younger generations of debts they are not responsible for.
The EU must democratise its economic governance, integrate more – including politically – and establish common fiscal rules. That may seem like a tall order, but it isn’t when it’s set against some of the leaps Europe has taken in the past – which have helped make it, for all its flaws, the fairest region in the world.