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2.2.1. Are income, purchasing power and well-being equivalent concepts?

The financial income of a person or a family depends on several factors: the type and duration of the activity involved, for the working family-members, the level of the prior deductions from the wage as tax and the like; the amount of replacement income for those not working (pensions, unemployment and sickness benefit), which are more or less generous depending on the social security scheme; income from moveable property and real estate for those who have accumulated capital or come into an inheritance.

The purchasing power of the same income depends on prices, which are affected by other factors; the degree of competition among distributors, which can vary locally; the extent to which the markets are open; the extent to which the public authorities subsidise some goods and services (public transport, health care, cultural events, etc.).  The cost of accommodation, for instance, can vary a lot within the one same country

Finally, the well-being of an individual vary yet again, just like purchasing power, depending on the accessibility of the public services, the quality and safety of the environment and nuisance by noise, just to mention the factors which can be measured more or less objectively.  All this makes the problem of how to measure disparities in income and particularly how to evaluate them a particularly delicate matter.

2.2.2. How is one to measure disparities in income? Is there a good, unambiguous measurement, which could be a guide for the politicians?

There’s no good measurement of disparities in income – or certainly not a good measurement. This is, firstly, because the distribution of financial income is difficult to establish and you would have to add to it a whole series of types of income in kind which are difficult to gauge and vary with the level of development of the country (how rural or urban) and the age and degree of occupation of the people there.

Despite all these difficulties, one simple measurement is often used: and that’s the Lorenz curve* and the Gini coefficient*, which is associated with it.

See: Illustration 2.a: Lorenz Curve

These measurements enable one of categorise economic systems.  Perfect equity, where each income category receives exactly the same share of the total income, is called “the Communist model” (the 10% of the population with the lowest income receive their 10% of the total income, etc.). In such an economy, growth is curbed by high taxation discouraging enterprise.  The opposite (A highly concave Lorenz curve and equity coefficient over 4) is called the “apartheid model”.  In these economies, global growth is curbed by the mass of the population who cannot develop their creative assets, because they do not have access to fundamental freedoms.

According to “The Theory of Justice” by the philosopher John Rawls*, who thought each person ought to be able to realise his/her capacities and have access to freedoms, the ideal is somewhere in between.



John Rawls

2.2.3. Disparities between and within regions of the European Union

Particularly with the last two enlargements, the interregional disparities in income in the European Union have become very large. According to statistics published by Eurostat in February 2007, the GDP per inhabitant in the 268 regions of the 27-member EU, expressed as “standards of purchasing power” – so taking into account differences between national price levels – ranged from 24% of the average of the EU in the North Eastern Region of Rumania to 303% in Inner London, or a difference equivalent to that between 1 and 12.6.

Obviously, in this last region, just as in the Grand-Duchy of Luxembourg (251% and 2nd in the table) and Brussels  (248% and 3nd in the table), the GDP is swollen by the contribution of numerous commuters working but not living there: so the GDP per inhabitant is over-estimated in these regions and under-estimated in those where the commuters live.  If, in order to minimise this distortion, we compare the GDP per person between countries and not between regions, ignoring Luxembourg, we still get a difference equivalent to that between 1 and 4.16; and that’s the difference between Rumania (with 34% of the European average) and Ireland (with 141.4%).

The measurement of the income within each country in the EU shows that the Czech Republic, Slovenia, Hungary and Finland each have an equitable distribution, Whilst Portugal, the UK, Latvia and Italy have the least equitable distribution.  Taking the world, Japan has a distribution more equitable on average than many European countries, whilst each of  the other big powers (the USA, China, India and Russia) has a less equitable distribution, not to mention Brazil, which is the very epitome of inequitable distribution.  The average for the EU is given only rarely because it involves groupings of dissimilar data.  A 2002 survey would, nevertheless, confirm that the overall distribution in the EU is less equitable than in the United States (see the next section). Admittedly, these coefficients must be corrected for size of the country – or group of countries – concerned : the larger the group, the higher the chances of encountering differences in income levels.                                                                                                                                                                                                                                                                                                                                        

See Illustration 2 b: Gini coefficients for the member countries of the EU and for some of the world’s big powers.

“The problem is not coordinating the pursuit of policies of competitive deflation but cooperating in order to institute policies of interdependent development”  Philippe Herzog*,  “Le Monde”, 15 September 1997. 

2.2.4. Will free movement of labour increase or reduce these disparities in the European Union?

Very large differences in levels of per capita income among the Member countries of the European Union essentially reflect differences in productivity. During the successive waves of accessions to the Union, many new Member States have entered with levels of per-capita income much lower than the Community average: this was the case with Ireland in 1973, Greece in 1981, Spain and Portugal in 1986 and practically all the new member states in 2004 and 2007.  Thanks to joining the Union, they have been able to accelerate their growth sometimes in a spectacular fashion and the process of catching up is continuing.  Ireland, which had a per-capita income equal to 61% of the European average in 1972, is the richest country in the EU in 2007.

The same thing is happening in the new member countries (see Chapter 1.3.3.) through a reallocation of production factors in the enlarged Europe. To describe the process schematically, it operates through migrations of labour from East to West and a flow of capital from West to East.  Movements like this began as early as the 1990s, well before the 1st of May 2004, they have grown since and they will reduce the interregional disparities.      

Their effects on disparities within regions are more difficult to capture and analyse statistically.   If lowly skilled workers from Poland come to the UK looking for work, their arrival can put downward pressure on the wages of lowly skilled workers in that country and so increase the disparity between incomes there. At the same time, those Polish workers who find work in the UK are earning more, on average, than they could have earned by remaining in their own country (if that were not the case, the migration wouldn’t have happened).

That’s why the disparity of income not for each Member State of the EU on its own but for the whole of the EU (as is done for the whole of the United States) gives a higher index of income-difference in Europe than in the United States, but it will come down quickly following the free migration of workers and capital.

Nevertheless, the migrant workers from the new Member countries can be skilled, or even very skilled, and come specifically to fill vacant jobs in areas of work where there are shortages of labour or it has become scarce and dear in the older Member countries. In that case the additional increase in productivity in the country receiving them is offset by a loss of potential growth in the country of emigration. 

2.2.5. What does the “Bolkestein Directive” say?

The “Bolkestein Directive” was a proposal for a European law on services in the internal market put forward by Commissioner Frits Bolkestein and adopted by the whole of the European Commission in January 2004.  It was  intended to create in the EU a real common market in services, the value of which represents 67% of the annual wealth produced, as far as the modern economies are concerned.  This objective had already been enshrined in the EC Treaty of 1957, article 3 of which spoke of the free movement of goods, people, services and capital.

The free movement of goods has been achieved not only through the abolition of customs duties and restrictive trade quotas within the Community, but also through the case law of the European Court of Justice in a still famous 1978 ruling (it was about the import of “cassis de Dijon” – Dijon Blackcurrant drink -  in Germany and has been known by that name ever since).  This decision established the principle that, if a product could be sold in one Member State because it met the standards of that State (as regards health, safety, etc.), it could also be sold in other Member States.  Besides, numerous directives, adopted from 1986 through the initiative of the then Commission and its President Jacques Delors, have harmonised national standards for industrial production “from above”.

2.2.6. What is the import of the “Cassis de Dijon” ruling ?

The “Cassis de Dijon” ruling introduced the principle of “mutual recognition” as a means to bring about the internal market.  For the want of a long and difficult process of harmonisation of national regulations or their replacement by European regulations, the national authorities agreed to trust one another and recognise each others’ competence.  This principle was applied particularly to banks in a 1989 directive: approval given in one country of the European Union, by its national banking control body, for a company to do banking in that country is valid for the whole territory of the Union and enables the company to offer its services throughout that territory, whilst it is still subject to the control of its national controlling authority.

In order to speed up the creation of a single market in services, Mr. Bolkestein proposed applying the “cassis de Dijon” case law to them, envisaging, for a provider of services emanating from a Member State (“the country of origin”), a dual freedom: that to set up in another Member country (“the host country”) and that, without setting up there, to offer its services there and go there temporarily, whilst still remaining subject to the regulations of the country of origin and without having the authorisations and controls of the host country imposed upon it.     

2.2.7. Why has this ruling not been extended to the services sector?

Whilst such an extension appeared logical in itself, difficulties arose when it came to applying it.

Some of these were practical in nature and showed that the draft directive lacked precision where several points were concerned:  for instance, do the authorities in the country of origin really have the means to check that the activities of the service-provider in the host country are being carried on according to their regulations, whilst the authorities in that country have no right in principle to oversee the activities in question? And whom should the consumer approach to make a claim or enforce his/her rights following poor service.

But the main fears where those of “services on the cheap” or “company dumping” which could favour an indiscriminate application of the standards of the country of origin. On the one hand, service-providers from a Member State less demanding about the quality of services and the standards that must be adhered to could, by competing successfully with the firms of the host country, bring down the quality of service to the customer’s detriment.  Moreover, service-providers from member states where the cost of labour is clearly lower could, by offering their services in the older member states at prices defying any competition, lower employment or pay in the sectors concerned there.  In this way the “Polish plumber” has become iconic.

It is this fear in particular that has provoked the strongest opposition to the “Bolkestein”directive and which has even played a role in the rejection of the draft Constitutional Treaty by the majority of the French voters.  To be sure, the directive provided for a safeguard, inasmuch as wages and hours of work were still to be governed by a 1996 directive on the detachment of workers, according to which wage-earning workers of a company can be temporarily detached in another country only so long as the minimum wage and the collective agreements of that country are honoured.  This safeguard (which, moreover,  covers only wage-earning employees, the self-employed being allowed to invoice for their services at any rate they like), has obviously not been enough to reassure the opponents of the “Bolkestein” directive, faced with what they saw as a danger of  “company dumping”  

After a long discussion and much “to-ing and fro-ing” among the European Parliament, the Commission and the Council, the Services Directive concerning the freedom of service-providers to settle and set up and the free movement of services in the internal market – heavily amended compared to the Commission’s initial draft, was adopted by the European Parliament and the Council on the 12th of November 2006, as Directive 2006/123/EC, and published in the EU’s Official Journal on the 27th of December 2006.