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Europe’s shrinking middle class

In the follow blog piece, originally posted on Social Europe, Carlos Vacas-Soriano and Enrique Fernández-Macías look at evolution of household disposable real income levels over the period 2004-2013, and the broader phenomenon on Europe's shrinking middle class.

The Great Recession depressed real income levels across European countries. But the impact was very unequal across countries and income groups. Countries in the European periphery have been more affected than those in the core, halting the process of income convergence between European countries that could be observed pre- crisis. Individuals at the bottom quintile of the income distribution have generally been more affected than their higher-income counterparts, resulting in growing income inequalities among many European countries and, what’s more, a shrinking middle class after years of expansion.

In a previous blog post, we showed how income inequalities increased in a majority of EU countries from the onset of the crisis, although often moderately. Here we focus on the evolution of household disposable real income levels over the period 2004-2013, revealing a generally stronger and more widespread impact of the crisis, especially among the less well-off. This points to the importance of using a wider set of indicators when assessing the impact of the Great Recession on living standards: these may be masked when relying solely on data on GDP or even Gini indices on income inequalities.

The downwards impact of the crisis on disposable income levels

Before the crisis, slow progress in average income levels for the EU as a whole masked an important process of convergence between its core and periphery, with fast catch-up growth in the latter and stagnation or a mild decline in the former economies. (This effect of the crisis on material well-being is illustrated by the evolution of household disposable real income levels shown in Figure 1).

Among the lower-income countries, most eastern European countries registered notable growth in real income levels (only Spain managed to do the same in the Mediterranean region), while progress in real income levels was more subdued among higher-income countries (and even going backwards in Germany).

In most countries, the crisis produced a sharp reversal in the trends of real income levels. For the EU as a whole, real income levels declined from 2008, but this development once more masks a clear core-periphery divide, moving in the opposite direction this time and resulting in a halt in the afore-mentioned process of income convergence. The crisis depressed real income levels across most European countries, but much more so in the European periphery (Mediterranean and some eastern European countries plus Ireland) than in the core (moderate declines occurred in the UK, Germany or France, while progress was registered in other Continental and Scandinavian countries). Among the periphery countries most hit by the recession, only the Baltic trio has bounced back significantly in recent years. Poland and Slovakia weathered the crisis much better than the rest, continuing to expand their real income levels (albeit much more slowly).

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