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European Union
SPEECH/07/616
Joaquín Almunia
European Commissioner for Economic and Monetary Policy
Matching Efficiency with Fairness
Annual Research Conference
Centre Borschette, 11 October 2007
Ladies and Gentlemen,
It gives me great pleasure to open DG Ecfin's 4th Annual Research
Conference on Growth and Income Distribution in an integrated Europe.
The subject of today's conference is very important for Europe in view
of the new cycle of the Lisbon strategy at the beginning of next year
and the 10th anniversary of EMU next spring.
Indeed, the patterns of distribution of income and wealth in Europe in
comparison with other areas of the world, and whether Economic and
Monetary Union is impacting on such income distribution, have never
been dealt with explicitly and comprehensively. In an age where
concerns about the divide between the rich and the poor are growing
the world over and income inequality is increasingly put under the
microscope, it is time we bring this debate to the EU Europe and open
the way for further investigation.
Inequality in a global context
Rising income inequality is a global phenomenon and a growing concern
worldwide. In the US, rising inequality has been evident for at least
three decades, and is manifest not just in real wages but also in real
household income.
And rising inequality is not only a matter for industrialised
countries like the US, but also for the ex-communist states like
Russia and emerging economies in Asia and South America. For example,
in a marked departure from previous decades, India has experienced a
visible increase in income inequality since the 1990s. China has also
seen a rapid increase in income inequality since it began its reform
process, transforming it from a country with high equality in income
distribution to one with large income gaps.
It is the worldwide recurrence of this trend that is bringing the
question of income distribution to the fore.
Inequality in Europe
Let's now have a look at the evidence for Europe. Let me start with
the issue of the wage share. In Europe it is true that since the 1980s
wage shares have been on a downward trend but they have not fallen
everywhere. In some Member States, such as Belgium, the Netherlands,
Portugal, Sweden and the UK, wage shares have remained relatively
stable. So, so it is hard to discern a common trend for the EU. This
is contrary to the picture in the United States, where since the 1970s
the overall trend for wage shares has been downward.
To a certain degree, the decline in developed economies partly
reflects a correction of strong rises in wage shares during the late
1960s and 1970s but is also linked to the fact that wages are no
longer the sole source of household income. Today, returns on savings
and capital stock appreciation also represent important forms of
revenue for households.
In fact, one could argue that wage shares are poor indicators for
income inequality at the personal or household level. For a proper
appraisal of inequality trends, personal income, which includes other
incomes, besides wages, may be a more telling measurement.
Let me now look at another indicator, namely the gap between high and
low wage earners which appear s to have increased overall. Part of
this increase can be attributed to what is known as a "skill-biased
technical change", the fact that new technologies have tended to
increase the productivity of highly skilled workers relatively more
than less skilled workers.
At the same time, in a larger and wealthier global market, the demand
for the most-gifted individuals, whether the CEO of a corporation or
-for that matter - a sports personality, has significantly increased
the wages of top-earners. Indeed, across the industrialised world, top
income earners appear to have secured a disproportionate share of the
overall income gains, although national experiences vary over the last
decades.
However, again, in Europe there is no overarching trend in this
domain. Income dispersion appears to have increased moderately in the
Nordic countries, Austria and Germany, but there is no such clear
tendency in the Netherlands or France; in Italy, the gap between high
and low wage earners rose significantly in the early 1990s but
stabilised thereafter. On the other hand, the countries which in the
1990's were the poorest in the EU - Portugal, Greece, and Spain - have
all seen a decrease in inequality over the past decade.
This shows, firstly, that there is no widespread fall in the wage
share of wealth in Europe, even if this is the trend in other parts of
the world. Secondly, even when it falls in one or several countries,
the trend does not run uninterrupted. Thirdly, and perhaps most
importantly, the trends in inequality appear to be driven by
developments in the upper half of the distribution. In other words,
amongst those that earn the most.
Although our preliminary findings generally do not support the view
that Europe is suffering from rising inequality, the fight of
inequality has always been at the centre of our economic policy. Over
the last 50 years, European welfare systems established the EU as a
world leader in providing economic wellbeing to its citizens. They
have been the foundation of a society where tax and benefit schemes
and the provision of goods and services establish a more level playing
field and greater equality of opportunity. In fact in Europe,
disposable incomes - that is incomes after taxes and government
benefits - are more equally distributed than market incomes. When the
impact of tax and benefit systems is taken into account, inequality
falls, on average, by about 40% for the six EU countries for which the
respective data is available, namely Denmark, Finland, the
Netherlands, Sweden, Germany and the UK. This is almost twice the
reduction in inequality calculated for the US.
Moreover, the establishment of Economic and Monetary Union has
anchored a stable economic environment and facilitated growth and
social cohesion in Europe. EMU has shielded citizens from the adverse
effects of financial turmoil and exchange rate crises that plagued our
economies during the 1970s and 1980s and has put an end to volatile
and unexpected swings in inflation. Given that high inflation punishes
the poorest sections of a population the most, the euro has had an
important, positive social impact.
Of course, Europe's spirit of integration has not only shaped our
internal dynamics, but also our external economic policies. Indeed,
Europe has everything to gain from an integrated global economy.
Conservative estimates indicate that about one fifth of the increase
in living standards in the EU over the past 50 years is the result of
Europe's integration in the world.
New challenges
Nevertheless European citizens are not immune to insecurities stemming
from the sweeping changes taking place in the global economic
landscape. Moreover, while EU policies are working to the advantage of
European citizens as a whole, the positive effects do not necessarily
benefit all individuals, regions or industries in the same way.
Globalisation and technological change are certainly putting pressure
on the way our economies function, and on the capacity of our social
models to correct its weaknesses. Many Europeans have trouble adapting
to the fast pace of change in today's global economy. Some see the
wider processes of globalisation and liberalisation and the EU's own
drive for greater competitiveness within that, as much as a threat to
their well-being than as a facilitator of it.
Indeed, Against this backdrop of rapid change, there is sometimes the
perception that certain policies at the Community level have
aggravated a trend towards widening income gaps.
How our economic and social models will adapt to accommodate such
changes and dispel these fears requires thorough investigation.
Policies to match efficiency with fairness
Our task as policy makers is to ensure that citizens are offered the
widest possible access to the opportunities offered by European
integration and globalisation.
This will require a more precise adherence to the key principles of
our social models: that is distributing economic opportunity as widely
and equally possible; linking outcomes to the contributions that each
person makes to the economy, and providing insurance against the most
adverse economic outcomes, notably when they cannot be controlled by
the individual. Addressing the insecurity and marginalisation that
many people face in the contemporary labour market has to be
paramount.
Sensible solutions need to be found to combine economic dynamism with
comprehensive social protection systems. There is scope to further
develop economic and social policies along these lines, although the
Lisbon Strategy for growth and Jobs has certainly set us on the right
path to meet this objective.
Product, labour and capital market reforms aim to inject a new
dynamism into the economy that will foster innovation, growth and jobs
and raising the living standards of European citizens as a whole. At
the same time, labour market reforms are increasing employment levels,
playing a key role to not only raise growth but to reduce inequality
as well.
Indeed, helping people to find work is perhaps the most effective way
to tackle social exclusion. In the fast changing world of the 21st
century, it is vital that labour market reforms enable workers to move
smoothly from declining to expanding activities.
We have to go beyond the traditional idea that flexibility is the
enemy of social justice. New economic realities mean that people will
make more transitions, whether from education to employment, from
unemployment to work or from one job to another. Our task is to help
people manage these transitions more successfully.
This is why education and training should form a key element of an
adapted economic and social model. Job security can give way to
employment security, based on continuous updating of skills and backed
up by adequate income support during spells of unemployment. Indeed,
education and training is central to any economic strategy that aims
to promote fairness and equality of opportunity.
Better investment in human capital is essential to facilitate upward
mobility in our societies. It is also crucial to increase
opportunities for both genders in a context where insufficient action
has been taken to close the gender pay gap and reconcile the worlds of
work and family.
Greater investment in education and skills will need to be
complemented by quality in public finances. Taking into account the
size of the public sector in many European countries, striving for a
fair and inclusive society does not necessarily mean higher taxes and
higher public spending, but rather smarter taxes and more effective
spending.
Public expenditure could be channelled towards more growth-enhancing
investment items, such as education and research. Not only does this
approach combine redistribution with efficiency, it also helps make
public finances more sustainable faced with the long term challenge of
ageing.
The counterpart to efficient government spending is improved taxation
systems. Simplifying tax systems and increasing fairness,
transparency, and efficiency of taxation by broadening tax bases,
eliminating unjustified loopholes and combating tax evasion are all
valuable avenues for achieving this objective.
In sum, by implementing the structural reforms of the Lisbon Strategy,
the EU is already seeking ways to match economic efficiency with
social equality. However, further analysis can give us a fuller
picture of our policy options. That is why the work that you are doing
is invaluable to generate ideas and contribute to this debate.
Conclusion
Ladies and Gentlemen, let me conclude.
Openness and integration are key principles in the process of European
construction, principles which have driven prosperity and growth.
Indeed, economic theory and history teach us that open trade,
integration and migration of labour and capital are powerful tools for
raising aggregate living standards. Our social models are designed to
distribute this prosperity as fairly as possible. However, in a
rapidly changing economic landscape, the instruments designed 50 years
ago require some adaptation.
New approaches are needed to ensure individuals are equipped for
gainful employment in the knowledge economy, that the proceeds from
higher growth are fairly shared and that new inequalities are properly
addressed.
I am convinced that this conference will add to our knowledge on these
issues, that it will give us new answers and new perspectives. I am
pleased to see all of you gathered here today and I am looking forward
to some interesting and informative discussion.
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