international analysis and commentary

Southern Europe and Piketty’s analysis: inequality and regional differences

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If one were to name a single issue that almost all European countries have in common, it would be increasing economic inequality. The subject has been in the spotlight also as a theoretical and historical question especially since the publication of Capital in the Twenty-First Century, by the French economist Thomas Piketty. According to Piketty, who aims to outline three centuries of the world’s historical trends on the topic , inequality has been rising all over Europe (and in the US) for several decades. However, the level of inequality between European countries differs greatly, and so do the socio-economic effects. Where Piketty provides us with an overview and a prediction for the future, he doesn’t elaborate on the question of why inequality and its effect on different countries differ.

Piketty’s findings have stirred fierce debate all around Europe. The French economist recently said in an interview that he himself is probably amongst the most surprised on how much attention his book has received. Economic inequality today is often discussed as if it were the defining issue of our era. However, one of the (unsurprising) findings of Piketty’s study is that inequality is not a new phenomenon – though its causes can differ and so can its social consequences.

Inequality in wealth and income can increase in times of economic boom as well as crisis. European history provides us with plenty of examples of both. In 19th century Great Britain, economic inequality soared during the start of industrialization. Although on a macro level the economy boomed due to an increase in productivity and mass production, the true wealth expanse only fell to the gain of a small part of the population. It took several decades for this new wealth to trickle down to the rest of the population. In Great Britain inequality eventually dropped after World War I. A clear example of rising inequality in times of economic distress was seen in Germany during the 1920s when the country suffered a period of hyperinflation. While the vast majority of the population was affected by this, a small group of people saw the chance to expand their wealth to unprecedented heights.

When we look at contemporary Europe, we see a few interesting and some worrying developments. During the 1980s and 1990s almost all European countries did experience an increase in welfare, which applied to the population as a whole. In this period inequality amongst people was mainly caused by the fact that a small group of the population – in his study Piketty focuses on the top 10% – became exponentially richer, while the majority of the people saw a much smaller two or threefold increase in their wealth during the same period. The negative socio-economic effect that this form of economic inequality had on society was relatively limited as everyone went forward, some just faster than others.

Since the outbreak of the credit crisis in 2008 inequality took flight, especially in Southern Europe. What is worrying is that the causes are different in respect to cases from the two previous decades. Rising inequality today is not only caused by a small minority gaining wealth faster than the majority, but also by an increasing part of the population losing wealth and getting poorer. As a result of the credit crisis and the European sovereign debt crisis that followed, real estate prices around the continent plummeted and many Europeans, whose home was by far their most valuable asset, saw their wealth evaporate. Probably the clearest example of this development was seen in Spain, where in some regions the price of homes dropped by more than 60% between 2008 and 2012. But the problem did not only occur in Europe’s most troublesome economies, it happened almost everywhere. In the Netherlands for example, a country with a relatively stable economy but with one of the highest private debt rates on the continent, one out of six home owners has technically a negative wealth, because their mortgage tops the current value of their property. Piketty shows that this negative development of wealth in average European households is one of the main reasons for the recent increase in economic inequality. The socio-economic effects of this phenomenon, however, can differ substantially. In countries like Italy and Germany, where most people (partly) bought their home through savings, decreasing real estate prices largely resulted in a loss of paper wealth. But in Spain, where the majority of homes where bought with credit, a plummeted value of the property meant financial disaster and many properties were foreclosed. According to official statistics, wealth inequality in Spain and Italy is relatively similar, but the socio-economic effects differ substantially.

Decreasing real estate prices is one cause of increasing inequality; an explosion of the unemployment rate in Southern European countries is another. Since 2009, when the credit crisis hit the real economy, millions of people in Greece, Italy, Portugal and Spain lost their jobs. In Greece and Spain, the unemployment rate is approaching 25% percent this year. Youth unemployment in these countries shows even more appalling figures – for Spain it stands at a staggering 53%. The socio-economic effects of mass unemployment, at least, are relatively similar across countries: millions of people today lack a structural form of income and are confronted with acute poverty.

For many Europeans, in the South as well as in the North, the future has turned from something to look forward to into something to worry about. Where Piketty mainly focused on historical data derived from Northern European countries and “core Europe” (e.g., France, the UK, Sweden and Germany), ironically it is Southern Europe (the “periphery”) where his prediction for the coming decades – that we are heading for a new Gilded Age – will find the greatest chance of becoming reality. However, discussing inequality without awareness of both its causes and its consequences will not be productive. For Southern European countries like Italy, Greece and Spain, it may not even be inequality as such that causes social instability and dismay, but fast-increasing poverty or at least an overall impoverishment and loss of purchasing power. The cure to poverty is far more complex than the already difficult task of closing the inequality gap. And also one that will need much more attention in the years to come.