Opinion of the European Economic and Social Committee on ‘Wealth inequality in Europe: the profit-labour split between Member States’ (own-initiative opinion)
Date: 2017-12-06
Institutions: European Economic and Social Committee
Subjects: EU Member State, distribution of wealth, economic growth, equal pay, fiscal policy, poverty, social inequality, standard of living, wealth








C_2018129EN.01000101.xml










11.4.2018   


EN


Official Journal of the European Union


C 129/1





Opinion of the European Economic and Social Committee on ‘Wealth inequality in Europe: the profit-labour split between Member States’
(own-initiative opinion)
(2018/C 129/01)






Rapporteur:



Plamen DIMITROV











Plenary Assembly decision


22.9.2016




Legal basis:


Rule 29(2) of the Rules of Procedure




 


own-initiative opinion




Section responsible:


Economic and Monetary Union and Economic and Social Cohesion




Adopted in section


7.9.2017




Adopted at plenary


6.12.2017




Plenary session No


530




Outcome of vote
(for/against/abstentions)


188/30/23




1.   Conclusions and recommendations









1.1.


The EESC believes that income and wealth inequalities in the EU have become economic and social challenges that should be addressed with appropriate measures at national level and with the support of EU-level action. We attach greater importance to income inequalities, be they in Europe or worldwide. The EESC stresses the need to also draw attention to wealth inequalities, however, which are a far more variable function and have a far longer-term effect. This implies the need to clarify the reasons for these inequalities and the factors which determine them and to frame policy solutions to address them.












1.2.


A careful analysis and assessment needs to be undertaken of the precise nature of the distribution of wealth in the EU and timely preventive measures taken to avoid such adverse consequences as the rapid evaporation of the ‘middle class’ and more and more people falling into the category of ‘working poor’ or those ‘at risk of poverty and social exclusion’. The market economy should be seen not only as a means of achieving strong economic growth, but also as one of the mechanisms needed to attain objectives important for society.












1.3.


The most important tool at the disposal of Member States for promoting fair redistribution of added value for society as a whole is fiscal policy. Active labour market policies that help to smooth the transition between education, training and working life should also be placed centre stage, together with policies governing taxation and social transfers. The EESC recommends that the Member States as soon as possible implement measures that can diminish inequality and ensure fair redistribution of new added value throughout society as a whole.












1.4.


The EESC thinks a well-functioning system of social transfers and social assistance is needed. Redistribution as a compensation mechanism should to a large extent complement the gaps in the market system. Public assets (social infrastructure, facilities for services in the public interest, etc.) should be developed and their role should be seen as a means of addressing inequalities. Fiscal income should be shifted from labour-based taxation towards a more wealth-based one, with taxation on inheritance and capital income.












1.5.


Concentration of wealth also leads to a concentration of enormous power, which takes many forms, including distortion of competition. The EESC thinks that intensive economic growth is key to reducing poverty and wealth inequalities. This should be promoted through better use of the Structural and Cohesion Funds, encouraging entrepreneurship, protecting competition, programmes to support SMEs and the implementation of policies to prevent discrimination of women and people in disadvantaged situations.












1.6.


The EESC has concerns about the efficacy of current EU policy under the Europe 2020 strategy, which places particular emphasis on poverty. This needs more appropriate political support in order to give sufficient backing to Member States for tackling worsening inequality trends. More vigorous action is needed to grapple with poverty, which has grown in absolute terms over the last few years (1). Policies need to be framed at supranational European level to promote more inclusive growth using an integrated approach. The European Pillar of Social Rights should be tied much more closely in with the European Semester and they, for their part, should be in line with the Europe 2020 strategy, with a view to effectively achieving the Europe-wide and national objectives enshrined therein.












1.7.


Needed along with this are targeted labour-market measures linked to social protection. Given that protecting jobs, which are changing very dynamically, is not always feasible, there is a need to focus on promotion of employment and labour force protection. It is very important to have minimum social standards that guarantee decent pay and working conditions. The accent should be placed on facilitating transitions in working life while at the same time guaranteeing common labour and social rights, including the right to join a trade union and the right to collective bargaining.












1.8.


The EESC believes that a transparent mechanism must be put in place to systematically monitor data on all income and wealth, as well as affording the possibility of consolidating such data. This will, on the one hand, improve administration and, on the other, facilitate the compilation of statistical information on wealth distribution in the Member States. The establishment of a register of corporate shareholders at European level would have an important role to play here.




2.   Background









2.1.


Wealth inequality in Europe goes back a long way. This is an historical process, which did not cease even after the establishment of the euro area — because of the constantly arising internal and external imbalances caused by different levels in factors of economic competitiveness. These include price/cost aspects and are also currently exacerbated by the major political challenges the EU is facing, such as terrorism, populism, national elections and, on the economic side, low investment, low growth, high unemployment, demographic change and the position of Europe in the new global rivalry for power through the prism of trade and of digitisation.












2.2.


A clear distinction must be made between income inequalities and inequalities in wealth, because the latter have a longer-term effect, making it vital to examine them in greater depth. Wealth is systematically distributed more unequally than income. Very often, economic operators can have relatively similar incomes, but differ hugely in their wealth for a number of non-monetary, altruistic, inheritance and other reasons. As a result, focusing on inequalities in wealth gives us a more objective view of real monetary disparities between EU citizens.












2.3.


The EESC takes the view that economic developments in Europe are increasingly dynamic and are a challenge for institutions and their capacity to keep up with change. This issue is also particularly timely with respect to the debate regarding divergences in development between EU Member States. There are substantial differences between developed and developing countries, between western and eastern Europe, between Member States inside and outside the euro area, and between Schengen and non-Schengen Member States.












2.4.


The EESC notes that income and wealth inequality in Europe has gradually increased since 1970. On the whole, globalisation should have a beneficial role to play in narrowing income and material differences between countries, but in recent years the trend has gone into reverse. Not only do the upper 10 % of households earn around 31 % of total income, they also hold over 50 % of total wealth in the EU-28. Growth in wealth has outstripped that of GDP in many countries, leading to yawning disparities (2). These have severe economic, social and political repercussions that demand serious public discussion and a debate among experts and politicians on how to address this issue, and they require policy action.












2.5.


The EESC believes there is a real risk that the problem of inequalities may worsen worldwide because the pace of economic development in Europe is extremely swift and it is becoming increasingly difficult to effect timely macroeconomic policy. Widening inequality of income and wealth over recent decades has been confirmed by an increase in the Gini coefficient, which has risen on average across OECD countries from 0,29 in the mid-1980s to 0,32-0,35 in 2013-2015. The trend in individual EU countries is similar (3). However, it should be noted that in countries such as Bulgaria, Lithuania and Romania it has already reached critical values beyond 0,37 (4). Despite the fact that there is a wealth of data and studies on income inequalities, there is much less evidence on inequality in the distribution of household wealth, both within and between countries. In fact, even today, no international standards exist that national statistical offices and other data producers could use when gathering data on wealth distribution (5).












2.6.


It is worrying that, because of the general lack of trust in many European economies, accumulated profits are not reinvested and this has given rise to a suppression of competition, a sharp fall in investment and a lack of new jobs. Thomas Piketty provides empirical evidence of this in his book (6), examining the European economy in particular. Where profit is simply accumulated and recapitalised it does not help to produce added value or to increase returns on resources in the real economy. It is therefore logical that the rich-poor divide should have been deepening in the EU for decades.












2.7.


There is a risk, the EESC thinks, of the middle classes in the EU coming under pressure in the medium term. In the foreseeable future, more and more jobs will vanish as a result of digitisation and robotisation. In addition, certain kinds of profession are also disappearing, although there is both past and present evidence that these trends are equally likely to produce new jobs and professions. These changes — if not appropriately managed — are expected to contribute to increasing inequalities. The EESC believes that timely action needs to be taken to counteract the adverse consequences of what are otherwise innovative and generally socially beneficial processes of technological renewal.












2.8.


The EESC expresses its concern that the ratio between the profit rate and the value added produced by the labour factor in the Member States is increasingly disproportionate. This leads to growing inequalities in Europe, both in wealth and income.




3.   General comments









3.1.


Inequalities in wealth tend to be far greater than those in income (7). The EESC stresses the fact that it is first and foremost the Member States who have the appropriate instruments at their disposal — such as programmes for investment, economic growth and new jobs, taxation and social transfers — to tackle economic and social inequalities. However, there is scope for European level action as well, and the matter should be treated more seriously by the European institutions, because its effects on the real business cycle would be complex and much more long-term. Existing policies continue to target income more than wealth.












3.2.


The main problem, as the EESC sees it, is that the European economy generates growth that often fails to benefit the financially disadvantaged. The intention is by no means to oppose the functioning of the market economy, which offers opportunities to generate wealth by innovating, setting up businesses, creating jobs and thus contributing to economic growth, employment and the financing of social security. However, the people who are at the bottom of the wealth and income redistribution pyramid do not on the whole benefit from newly created jobs. It follows from this that society will be more financially equal if European Union policy targets measures that enable more and more people to enter the labour market and share the benefits of inclusive economic growth. In this sense, reducing wealth inequality and consolidating long-term economic growth are two sides of the same coin.












3.3.


The EESC is concerned that the growing accumulation of wealth might create a rentier mindset in society, resulting in wealth not being reinvested. It will thus not contribute to the development of the real economy, or to raising potential GDP. This is the core problem that Piketty deals with in his book — the fruit of 15 years of research and collection of empirical data about income and wealth inequality in capitalist societies. The final results — even if some of his methods are contested by some — show significant disparities in the EU. According to Piketty’s data, the annual rate of return on capital is 4 % to 5 %, while annual income growth in central Europe is around 1 % to 1,5 %, depending on the country, given the manifest diversity of the countries concerned.












3.4.


Additional measures are needed, in the EESC’s view, at appropriate levels, in areas such as excessive financialisation, and further coordination and harmonisation of tax policy, measures against tax havens, tax fraud and evasion, in order to combat the long-term trend in the shadow economy: misreported business income, unregistered or hidden employees and ‘envelope’ wages, and measures to optimise the mix of taxes and their relative importance in Member States’ tax revenues. Labour-based tax revenues should be shifted in favour of wealth-based ones.












3.5.


Over the last two decades, tax competition among Member States has led many governments to implement measures that have altered the redistributive nature of fiscal policy and fuelled increased inequality. The EESC recommends that Member States assess the negative implications of tax policies and correct them as soon as possible.












3.6.


The EESC thinks the Juncker Plan should be directed as a matter of priority at countries with the greatest inequalities, whatever their nature. It is imperative to encourage foreign and domestic investment. All this must be implemented in a uniform manner in harmony with European legislation and specific national characteristics, and the utilisation of the funds should be carefully monitored.




4.   Specific comments









4.1.


Germany and Austria are the countries in the euro area where wealth inequalities are the most pronounced. In Germany, the richest 5 % of the population possess 45,6 % of the country’s wealth and in Austria the figure is higher at 47,6 % (8)
 (9). The problem also exists — and the trend is the same — in countries such as Cyprus, Portugal, France, Finland, Luxembourg and the Netherlands (10). This demonstrates the marked diversity in distribution of resources in individual countries. On the one hand, these countries show low levels of income inequality, but on the other, high levels of wealth inequality.












4.2.


In 1910, 10 % of Europe’s population owned 90 % of the wealth, with the richest 1 % holding 50 %. Subsequently, as a result of the two world wars and the Great Depression, which wiped out much of the financial capital, and the various public policies marked by highly progressive taxation on income and inheritance, curbs on financial speculation, increasing salaries at the expense of capital income, and so on, inequality has fallen considerably. In the 1970s and 1980s, the top 1 % held 20 % of wealth, the next 9 % held 30 %, and a middle class of 40 % had 40 %. Income inequality also fell significantly (11). From 1980, however, inequality started growing again. Today, private capital in developed countries in the EU-28 is between 500 % and 600 % of GDP, reaching 800 % in Italy.












4.3.


In the EESC’s view, there is also a substantial problem is wealth distribution by sex. Countries such as Slovakia and France are the most seriously affected, followed by Austria, Germany and Greece. In Slovakia and France, men have more than 75 % of wealth and women only 25 %, despite a very different gender balance in these populations. In Austria, Germany and Greece around 55 % of wealth belongs to men (12). It is important to assess the reasons for such trends and whether this aspect should be covered in EU-wide policy on gender equality.












4.4.


The EESC thinks it is very important how wealth is distributed in terms of meeting needs in education, vocational training, the range of healthcare services, housing and so on. We must, in line with the European Social Model, respect fundamental principles — equal opportunities and equal treatment, gender equality, non-discrimination and intergenerational fairness. Structural reforms aimed at increasing human capital are important for improving living standards and could also reduce labour income and wealth inequalities.












4.5.


About 44 % of people in the euro area are in debt to banks or financial institutions in some way or another. The situation is better than in the USA, for instance, where the figure is 75 %, but the rate of growth in indebtedness in recent years is alarming (13). The responsibility of the banking system is also very great because it could conduct primary prevention against society’s increasing general indebtedness. Responsible behaviour must be placed centre stage.












4.6.


Accelerated globalisation over the last three decades has increased the tax burden on labour and reversed the share of wages and capital in gross domestic product. As a result, wages declined as a share of GDP by an annual average of 0,3 % between 1980 and 2006 in most OECD Member States. Over the same period, the share of profit in GDP increased from around 31 % to 47 % in the EU-15 (14). The EESC believes that Member States and the European Union should urgently implement policies to reverse this trend.












4.7.


The EESC is concerned that in countries such as Britain and France more than 50 % of wealth is in housing. On the one hand, this suggests a lack of diversification of wealth. On the other hand, it means that a large proportion of people accumulate their wealth from real estate income. This wealth is not then reinvested. Recapitalisation itself accumulates. This brings in the issue of capital, which is raised at a much faster rate than the value added. The latest report from Oxfam (15) has revealed that the wealth of the eight richest people in the world equals that held by the poorest 50 % — a source of widespread public disquiet. Capital was an important factor in the industrial period, but when it becomes an end in itself it loses its purpose.





Brussels, 6 December 2017.


The President of the European Economic and Social Committee

Georges DASSIS




(1)  An example is given by Salverda et al. (2013, Tables 2.3 and 5.2).

(2)  Piketty, Capital in the Twenty-First Century, Harvard University Press, 2014, ISBN 978-0674430006.

(3)  Economic Inequality, European Parliament: Economic and Monetary Affairs, Employment and Social Affairs, Briefing, July 2016.

(4)  Eurostat, SILC 2015.

(5)  OECD Statistic Brief, June 2015, No 21.

(6)  Piketty, Capital in the Twenty-First Century, Harvard University Press, 2014, ISBN 978-0674430006.

(7)  In quantitative terms.

(8)  Eurosystem Household Finance and Consumption Survey, 2010.

(9)  Vermeulen 2016 (ECB WP), estimations based on Forbes rich lists.

(10)  HFCS 2010; Sierminska and Medgyesi 2013; Holzner, Jestl, Leitner 2015.

(11)  Piketty, Capital in the Twenty-First Century, Harvard University Press, 2014, ISBN 978-0674430006.

(12)  Rehm, M., Schneebaum, A., Mader, K. Hollan, K., The Gender Gap Wealth Across European Countries, Vienna University of Economics and Business, Department of Economics, Working Paper 232, September 2016.

(13)  HFCS 2010; Sierminska and Medgyesi 2013; Holzner, Jestl, Leitner 2015.

(14)  OECD, In It Together: Why Less Inequality Benefits All, OECD Publishing, Paris 2015.

(15)  An Economy for the 99 % (Oxfam, 2017).


Appendix
to the Opinion of the European Economic and Social Committee
The following amendment was rejected during the discussion but received over a quarter of the votes.

Point 1.4.

Amend as follows:

The EESC thinks a well-functioning system of social transfers and social assistance is needed. Redistribution as a compensation mechanism should to a large extent complement the gaps in the market system. Public assets (social infrastructure, facilities for services in the public interest, etc.) should be developed and their role should be seen as a means of addressing inequalities. Fiscal income should be shifted from labour-based taxation towards a more wealth-based one, with taxation on inheritance and capital income.
Member States should change the focus of their tax revenues, reducing taxes on labour.



Reason

In line with the principle of subsidiarity, and given the differences between the Member States, the changes brought about by the development of the digital society, and the need to ensure sustainable development, the Member States should play a larger role in reforming tax systems. It could be possible to move away from the taxes mentioned here to focus more on environmental taxes, taxation of CO2 emissions, or entirely new forms of taxation (such as taxation of machinery).
The amendment was rejected by 116 votes to 95 with 24 abstentions.