Reducing poverty & inequality

Inequality is one of the key drivers of higher immigration, which in turn fuels feelings of anxiety and insecurity and the rise of populism. Immigration was a key factor behind 'Brexit' and is a central rallying cry for many populist parties across Europe, including in Scandinavia, France, the Netherlands, Germany, Italy and central and eastern Europe. High income differences between countries with close economic ties also contribute to the outsourcing of labour-intensive production stages, which in turn threatens wages and employment in regions which previously had enjoyed greater economic prosperity as the home of low-skilled manufacturing industries.

These are all reasons to place greater emphasis on reducing inequality. EU-wide inequality and poverty can be brought down in two ways: (a) by reducing intra-country inequality or (b) by reducing inter-country inequality.

(a) Intra-country inequality is increased by welfare cuts and labour-market deregulation, technological change and globalisation. All these causes can be addressed by government policy. For example, in Germany the introduction of a minimum wage has halted the rise in inequality observable since 1995. In the EU, a stricter Posted Workers Directive could curb wage competition. In his most recently published book, the late Tony Atkinson presented numerous suggestions for how intra-country inequality could be reduced, covering all categories of cause. Unfortunately, the EU's economic-policy advice and the requirements it has imposed on indebted countries have instead tended to increase inequality.

(b) Inter-country inequality is rooted in complex historical causes with social, political and economic dimensions. Several countries have however managed to close the historic gap with other countries, by means of successful growth policies. Worthy of particular note in the EU is Ireland, which rose from being one of the poorest members of the EU-15 to the second-richest on a per-capita-income basis-although this was achieved in part by problematic and not easily generalisable methods (tax competition, transfer-pricing manipulation). But southern and central-eastern Europe have also enjoyed sustained periods of higher growth than the rich EU core countries. Although the EU supported this growth through its regional policy, it then undermined it through its misguided response to the sovereign debt panic, in imposing austerity.

In its new medium-term financial plan for 2021-27, the EU should give high priority to promoting growth, employment and social security in the poorer member states on its periphery, and adopt appropriate fiscal policies, such as a eurozone budget and finance minister. It should support investment activity, stabilise banks in all countries-by introducing EU-wide deposit insurance-and protect sovereign debts from market panic.

The recent drop in Europe's poverty and inequality rates is a welcome break from the stagnation of the preceding years. But, given the vast scale of the problem, which is underestimated in official figures, it represents far too small a step in the right direction. Stronger progress and more decisive policies will be needed if the disintegration of Europe is to be prevented.

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