Rich Europe, Poor Europe

From its earliest days, the European Union has aimed for balanced economic development across its many regions. The Maastricht Treaty contains the striking phrase “overall harmonious development.” But, however admirable this sentiment may be, there is no “scientific truth” about the “right” level of disparities and the correct speed of convergence.

Nevertheless, it is useful to compare economic disparities in the EU with those in the United States to assess regional convergence in Europe – bearing in mind, of course, that the US has been a nation-state for more than two centuries, while the EU is best seen as a confederation of 27 states under a supra-national structure.

Let us first take a historical look at the western part of the EU. In 1960, disparities in what later came to be known as the EU-15 were about twice as large as those between US states. Today, they are comparable with American income disparities. Income disparities have halved both in nominal terms when expressed in euros and in real terms when taking into account differences in purchasing power.

Western Europe first saw a period in which real incomes converged, followed by a period of converging prices. In the 1960’s and early 1970’s, disparities in purchasing power declined by about 40%, then stalled, while nominal income disparities fell by a similar margin from the mid-1970’s to 1990. With the introduction of the euro, and with falling inflation, nominal convergence and real convergence have grown similar, both making gradual progress since the mid-1990’s.