Why Europe Needs a Policy on Inequality

INTERECONOMICS, Vol 44, No. 6, November/December 2009                                                                                      

Selected articles contributed by CEPS free in PDF; others may be purchased individually (or the entire contents of the journal) from http://www.intereconomics.eu

Introduction

by Felix Roth

The topic of inequality has always played a central role in the research agenda of the social sciences, especially economics and sociology. Indicators such as income inequality are often directly associated with the important issue of social cohesion. In this context, the Laeken indicators on poverty and social exclusion, constructed to monitor progress towards achieving the Lisbon goals, included the Gini coefficient.

Why Europe Needs a Policy on Inequality

by Maurizio Franzini

The article starts off the debate by offering empirical evidence of rising income inequality in individual European countries over the last 25 years and attributes this phenomenon to increased wage dispersion among workers and an increase in top incomes. Franzini continues his argument by stressing the importance of analysing income inequality in Europe as a whole and illustrates that the inequality level in Europe is not very far from that found in the USA. Franzini emphasises the EU’s need to make inequality reduction a priority of European policies as inequality is positively associated with a range of “social bads” and the negative effect of lesser inequality on economic growth is not well corroborated. Furthermore, he recommends that future EU policies should be directed toward the EU as a whole.

Inequality in Emerging Countries: Trends, Interpretations, and Implications for Development and Poverty Reduction

by Stephan Klasen

The article discusses the very important trends of inequality in the emerging economies of China, India and Brazil and shows that whereas the first two countries have suffered from a strong increase in income inequality, inequality in the latter has actually declined since the mid-1990s. The article points out that when one combines growth and inequality in China to construct a measure of well-being, the result is significantly lower than simply using GDP as an indicator. Klasen concludes that the continuing increases in inequality in China and India will likely lead to serious social and economic disruptions. This argument is highly relevant, as one frequently hears the prediction in both academic and non-academic discussions that European economies will soon be overpowered by these three fast-growing countries. Although it is definitely valid to point to their economic strength, one should also evaluate the potential risk of social and economic disruptions. 

Fiscal policy and the Recession: the Case of Greece

by Ersi Athanassiou

This paper presents an analysis of the implications of Greece’s intense and long-lasting fiscal and external imbalances for the potential efficacy of a discretionary fiscal policy response to the current recession. It argues that, given recent developments in interest rate spreads and the credit markets’ increased sensitivity to risk, the interest rates applicable to the entire amount of Greece’s external debt would tend to be higher with a fiscal expansion than without one. Moreover, it deduces from a simple model that the leakages associated with increased interest payments to foreign creditors could well cancel out any positive multiplier effects generated by a fiscal expansion, resulting in a failure to stimulate growth. The implications of this finding for policy is that Greece should continue to avoid the adoption of a fiscal stimulus package, not only out of respect to its fiscal obligations as an EU member but, ultimately, because such a package would be ineffective as an economic recovery tool. While the analysis focuses on the Greek economy, it may be of relevance to other EU economies suffering from serious macroeconomic imbalances.

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