Europe's curse of wealth

Europe’s curse of wealth

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I have already written before (in a tweet) that no one who travels through Western Europe, especially in Summer, can fail to be impressed by the wealth and beauty of the continent as well as by its quality of life. The latter is less obvious in the United States (despite its higher per capita income) in part because of the greater size of the country and lower population density: America thus does not present to the traveller the spectacle of an impeccably maintained countryside dotted with numerous castles, museums, excellent restaurants with Wi-Fi, that one sees in France, Italy or Spain.

I think one can reasonably argue that no people in the history of the world have lived so well as west Europeans today – and Italians in particular. Yet, as everybody knows, there is a deep malaise and dissatisfaction across the continent, not least in Italy: unhappiness with how European politics work, with immigration, with the prospects of the younger generation, precariousness of jobs, inability to compete with a cheaper labour force from Asia or to catch up with American IT giants and US start-up culture. But I will not write about this today. Instead I would like to focus on two “curses of wealth” which paradoxically European prosperity lays bare.

The first curse of wealth has to do with migration. The fact that the European Union is so prosperous and peaceful, compared both to its eastern neighbours (Ukraine, Moldova, the Balkans, Turkey) and, more importantly, to the Middle East and Africa means that it is an excellent emigration destination. Not only is the income gap between the “core” Europe of the former EU-15 and the Middle East and Africa huge, it has grown in size. Today, west European GDP per capita is just shy of $40,000; sub-Saharan Africa’s GDP per capita is $3,500 (or a gap of about 11 to 1). In 1970, western Europe’s GDP per capita was $18,000, sub-Saharan Africa’s $2,600 (a gap of 7 to 1). Since people in Africa can multiply their incomes tenfold by migrating to Europe, it is hardly surprising that, despite all the obstacles that Europe has recently begun placing in the way of migrants, they keep on coming. (Would, say, a Dutch citizen be indifferent to making 50,000 euro annually in the Netherlands compared to half-a-million in New Zealand?)

Inexorable Movement
Given the size of the income gap, migration pressure will continue unabated or amplify for at least fifty or more years —even if Africa in this century begins to catch up with Europe (that is, to grow at rates higher than those of the EU). Nor is that pressure, in terms of the number of people who are banging on Europe’s doors, static. Since Africa is the continent with the highest expected population growth rate, the numbers of potential migrants will rise exponentially. While the population ratio between today’s sub-Saharan Africa and the EU is 1 billion vs. 500 million, in some 30 years, it will be more like 2.2bn to 500m.

But migration, as everybody knows, creates unsustainable political pressures on European countries. The entire political system is in a state of shock—as Italy’s cries of having been left to fend for itself by its European partners in dealing with migration, or Austria’s and Hungary’s decisions to erect border walls, illustrate. There is hardly a country in Europe whose political system has not been shaken by the question of migration: right-wing shifts in Sweden, the Netherlands, and Denmark; accession to parliament of AfD in Germany, the renewed appeal of Golden Dawn in Greece.

Other than migration, the second issue fuelling European political malaise is rising income and wealth inequality. European inequality is, in part, a “curse of wealth” too. The wealth of the countries whose annual income increases over several decades does not rise only in proportion to income but by even more. This is simply due to savings and the accumulation of wealth. Switzerland is not only richer than India in terms of annual production of goods and services (the ratio between the two countries’ GDP per capita at market exchange rates is about 50 to 1) but Switzerland is even “richer” in terms of wealth per adult (the ratio is almost 100 to 1).

The implication of the rising wealth/income ratio as countries grow more prosperous is that the amount of income from capital tends to increase faster than GDP. When wealth is heavily concentrated, as is the case in all rich countries, the rising capital share in total output almost automatically leads to an increase in inter-personal income inequality. To put it in simple terms: what is happening is that the income source that is very unequally distributed (profits, interest, dividends) is increasing faster than the source that is less unequally distributed (wages). Thus, if the very process of growth tends to produce higher inequality, it is clear that stronger measures to combat its rise are needed. But in Europe, as in the United States, there is lack of political will (and perhaps it is difficult to summon it in the era of globalization when capital is fully mobile) to increase taxes on high earners, to reintroduce in many countries inheritance tax, or to enact policies in favour of small, rather than big, investors. There is thus a policy paralysis in the face of political upheaval.

When one puts these two longer-term trends together – continued migratory pressure and a quasi-automatically rising inequality – or the two problems that today poison European political atmosphere, and one contrasts this with the difficulty of moving decisively towards solving either of them, it is not surprising that one might expect political convulsions to continue. They will not be done and dusted in a couple of years. Nor does it make sense to accuse “populists” of irresponsibility or to believe that people’s preferences have been distorted by “fake news”. The problems are real. They require real solutions.

About Branko Milanovic
Branko Milanovic is a Serbian-American economist. A development and inequality specialist, he is Visiting Presidential Professor at the Graduate Center of City University of New York (CUNY) and an affiliated senior scholar at the Luxembourg Income Study (LIS). He was formerly lead economist in the World Bank’s research department.

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