Economic integration and the distribution of income in Europe: A between country analysis

In this paper we analyse income inequality across EU countries. Monitoring the between-country inequality trend at the EU level provides information about income convergence of EU countries with important implications at highly topical issues such as social cohesion and cross-country migration. In addition to the analysis of the between-country inequality, given that monetary and market integration may affect inequality differently across country-groups, we decompose between-country inequality in its two basic components, that is, inequality between-group and within-group of countries. Groups correspond to non-euro zone, core euro-zone and non- core euro-zone countries. This analysis will allow us to investigate how the observed trend in between-country inequality is related to developments in the between or the within-group component. Three conclusions emerge. First, between-country inequality experienced a trend break at the beginning of the 70s, demarcating of declining inequality to a period where inequality shows no decline up to the introduction of the euro, when betweencountry inequality increased and, consequently, income diverged among European countries. Second, the introduction of the euro was coupled with important recompositional effects of between-country inequality in Europe: from 1999 onwards between-group inequality shapes the developments of between-country inequality, thus, that the observed divergence in income from the beginning of the 2000s is explained by the income divergence between core an non-core countries.Third, shocks to between-country inequality tend to be persistent implying that specific policy measures at the EU level need to be implemented to cope with the undesirable effects of rising inequality.