One consequence of the project of European integration is that the term “Europe” takes on a kind of double meaning. A reference to “Europe” can be a geographical reference to a set of separate countries that are thought to share cultural or institutional characteristics (like “Latin America” or “the Arab World”) but it can also be a political reference to an integrated unit (like “the United States” or “China”) that just happens to be large enough to contain substantial diversity. This has implications for how we think about the ongoing economic crisis over there, but in some ways the importance of the conceptual double-meaning is best illustrated by looking at a long-term issue. Something that “everyone knows” is that the relatively low-tax United States with its relatively weak labor unions and relatively stingy welfare state has much more wage and income inequality than the high-tax nations of Europe.
One very interesting point that James Galbraith makes in his newish book Inequality and Instability is that if instead of looking at Finland then Spain then Germany then Greece all as separate countries but instead look at “Europe” as an integrated marketplace with perfect capital mobility and legal labor mobility then it’s even more unequal than the United States:
And when you do that, when you take what had been isolated labor market situations and bring them into direct interaction with each other, you have to measure the inequality on the new basis, on the new foundation. And nobody had done that. And what we found was that in fact when you do that, European inequality, taking into account the differences that exist between, let’s say, Germany and Poland or between Norway and Portugal, is actually larger in wages than it is in the United States.
Galbraith melds this into a policy argument that will be very controversial, but I think it would be helpful for people with all different kinds of political perspectives to just consider this isolated fact more clearly. Further analytic issues fall out of it quite clearly. Europe the collection of separate low-inequality places has generally high taxes and generally high levels of income redistribution. But Europe the collective has extremely low taxes and almost no income redistribution. Greg Mankiw suggested in a recent New York Times column that radically decentralizing tax and redistribution policy in the United States would spur huge economic benefits. He might have cited the prevailing dynamic in the European Union as an example of his ideas being put into practice, but I think doing so would have tended to undermine the conclusion.