Is the European project anti-social? There are suspicions on the left that it is. In Britain, Lexit — the leftwing claim that EU membership is suspect because it makes Jeremy Corbyn’s policy programme impossible — has reared its head again. Meanwhile, Sabine Weyand, the EU’s number two Brexit negotiator, has commended a “mythbuster” that explains why this is not so. (Free Lunch has also argued that Labour should not be seduced by Lexit.)
It is a fact that Europeans have been drifting apart economically. That does not always show up in the metrics of inequality between individuals or the distribution of market rewards between capital and labour, which tell different stories in different places and time periods. But there is a consistent pattern in how fortune has favoured some places over others.
First, looking at all European (subnational) regions, poorer ones were catching up with richer ones until the 1980s. Since then, richer places (including in particular capital regions) have pulled away from the rest, and the overall dispersion of regional incomes has broadened. Second, with few exceptions, the poorest places within each country have fallen behind the richest ones.
The question is whether European integration is to blame for this. To answer, we must distinguish between economic and political integration; to a unique degree, European countries have been engaged in both. Scepticism of the EU out of concern for social cohesion within nations could be founded on either claim: that European economic integration has produced inequality within countries, and that European political integration has made it harder for national governments to remedy fraying domestic cohesion, whatever its cause.
Start with the first: the effects of economic integration. We should distinguish three separate phases: integration before the 1980s, the 1980-90s and the 21st century. In the pre-1980s phase, economic integration — largely trade integration but some financial integration — took place alongside falling inequality. This is not surprising. Trade theory predicts that liberalisation between rich countries should lead to intra-industry trade, which need not have negative inequality effects, as opposed to liberalisation between very different countries which does alter the market rewards to different types of labour and capital.
In the second phase, social cohesion worsened almost everywhere. But this was not specific to Europe, and economists have concluded that globalisation had little to do with it. Instead the rise in inequality was due to two main factors. One was technical change leading to deindustrialisation and greater market rewards for skill and knowledge. The other encompassed domestic policy changes undoing many of the postwar welfare settlement’s tax, redistributive and regulatory elements. While these happened concurrently with continuing European economic integration, neither can be attributed to it.
The third phase is more complex, with at least four different economic changes taking place at the same time: the deepening of the single market, the adoption of the euro, the EU accession of formerly communist countries and the accelerated globalisation marked especially by China’s entry into the world trading system (the “China shock”).
The single market has created the freest cross-border trade anywhere in the world. But the biggest effect has not been classical specialisation in different finished goods, but a diffusion of supply chains across borders. While this has had winners or losers, who they are is complex and not always systematically related to who was already doing well or badly. But it may have favoured already well-connected and productive regions over more peripheral ones, and also within individual countries.
The adoption of the euro has a lot to answer for; the mismanaged response to the eurozone debt crisis did a lot of damage to both growth and social cohesion. The euro itself, however, did not constitute an economic force for increased inequality. Instead it was the political integration involved in the eurozone, and in particular the power imbalance it produced between debtor and creditor economies, that made it possible to impose policy choices on the debtors that harmed social cohesion. If there is a valid claim here, then, it is of the political not the economic variety.
The last two developments could, in principle, lead to the classical distributive effects of trade between unequal economies, where skilled workers and capitalists in rich countries win and unskilled workers lose (and vice versa in the poorer trading partners). The China shock has demonstrably had such effects — but above all in the US. It is not, then, an effect of European economic integration but rather globalisation in general. As for eastern Europe, liberalising trade with the west should have reduced inequality, though any such effect was swamped by the shift to a market economy domestically. But the fact is that its integration with the richer part of the continent to a large extent took the form of supply-chain integration, facilitated by the single market, rather than classical specialisation. It also, of course, took the form of migration — but here, too, economists have struggled to find a big negative effect on wages in host countries.
There is little here to validate the claim that European integration is an economic cause of inequality. It could still, of course, be a political contributor. I address that claim tomorrow.
- Noah Smith brings some much-needed nuance to the claims that typical US workers are worse off today than in the 1970s. Measuring income rather than just wages, and better inflation measures, things do not look quite as bad. (I also highlighted how much the inflation measure matters in a Free Lunch a few years ago.)