The 2004 EU enlargement significantly reduced inequality across Europe, study finds

A comprehensive study by Jesper Roine of the Stockholm School of Economics and Svante Strömberg of Uppsala University reveals that the 2004 European Union enlargement markedly reduced income inequality across the eurobloc.

Utilizing data from the World Inequality Database, the researchers demonstrate that the accession of Eastern European countries spurred robust, inclusive income growth across all income levels, narrowing the economic divide between richer and poorer nations.

However, persistent internal inequalities in some countries and economic stagnation in older member states pose ongoing challenges. These findings provide critical insights for future EU enlargements, particularly for potential candidates like Ukraine, Moldova, and Georgia.

How the 2004 enlargement transformed economic dynamics

According to the study, before 2004, Europe faced significant economic disparities. Wealthier northern nations contrasted sharply with poorer southern and Eastern European countries, many of which were navigating post-communist transitions and growing internal income gaps.

The 2004 EU expansion welcomed ten countries, predominantly from Eastern Europe, namely Cyprus, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Malta, Poland, Slovenia and Slovakia. These nations experienced rapid, broad-based income growth that benefited both high- and low-income households. In contrast, older member states, particularly in Southern Europe (e.g., Greece, Italy, Portugal, and Spain), faced stagnating or declining incomes for lower- and middle-income groups, exacerbating internal disparities.

Key findings

– Inclusive growth in new members: Eastern European countries experienced faster income growth across all income levels compared to older EU states, fostering economic convergence.

– Significant gains for the poorest: The bottom 50% of the EU population saw income growth three times higher than the top 10%, significantly reducing EU-wide inequality.

– Shifts in income rankings: Many income groups in Southern Europe fell in EU-wide income rankings, while most groups in new member states rose, reshaping the EU’s economic landscape.

– Overall inequality reduction: Despite rising internal inequality in some countries, the EU as a whole became more equal due to strong, inclusive growth in Eastern Europe.

Analysing income trends

The study identifies two contrasting trends. Among pre-2004 EU countries, higher-income northern nations grew faster, widening the gap with Southern Europe. However, when including new Eastern European members, poorer countries in 2005 grew faster, driving economic convergence across the EU. This convergence persisted despite the 2008 financial crisis, which severely impacted Southern Europe, with some countries failing to recover pre-crisis income levels by 2020.

The 2004 enlargement demonstrates that inclusive growth in new member states can significantly reduce EU-wide inequality. As the EU considers further expansion to include countries like Ukraine, Moldova, and Georgia, these findings suggest that similar inclusive growth could further narrow disparities. However, stagnation in older member states, particularly in Southern Europe, risks deepening political divides and fueling skepticism toward EU integration.

To assess overall inequality, the study treats the EU as a single entity, merging income distributions across countries while accounting for population sizes. This approach reveals that strong growth in Eastern Europe has driven convergence, even as internal inequalities persist in some nations.

The strong economic growth in new member states has been broadly shared, improving real income levels for most of their populations. However, growth has not been uniform across income groups or countries, necessitating careful attention to individual country experiences. In contrast, income growth in many older member states, particularly in Southern Europe, has been minimal, with most income groups experiencing stagnating real incomes.

Economic convergence and its mechanisms

In a macroeconomic context, inequality between countries typically refers to differences in average income levels (e.g., GDP per capita). Basic growth theory suggests that integration fosters income convergence through increased trade and factor mobility, a central EU goal since the 1980s. The study confirms that income convergence since 2004 persists even when accounting for within-country inequality trends. This convergence is driven by robust growth across all income groups in new member states, unlike the divergence observed among pre-2004 members, where Southern Europe lags behind northern nations.

The 2008 financial crisis significantly impacted income trends, with Southern Europe and Cyprus experiencing prolonged downturns. In contrast, new member states showed resilience, with broad-based income growth continuing post-crisis. However, within-country inequality trends vary: some Eastern European countries, like Poland and Bulgaria, saw increased income shares for the top 10% post-accession, while others, like Romania and Hungary, experienced mean reversion after earlier inequality spikes. Bulgaria and Romania joined the EU in 2007, and Croatia in 2013.

Implications for future EU enlargement

The 2004 enlargement highlights the potential for inclusive growth in new member states to reduce EU-wide inequality. However, the stagnation in older member states underscores the need for policies that promote economic cohesion across the EU. As the EU considers further expansion, policymakers must address internal inequalities and regional disparities to maintain political support for integration.

The study’s findings also raise normative questions about the welfare effects of relative income changes across the EU. While Eastern European citizens have generally improved their EU-wide income rankings, many in Southern Europe have seen their rankings decline, potentially influencing attitudes toward EU integration. These dynamics underscore the importance of addressing inequality – within and across countries – in future EU policies.

Caption: File photo. An employee changes the price tags to euros at a supermarket in Vilnius, Lithuania, 1 January 2015. Lithuania became the 19th country to join the eurozone, 15 years after Europe first introduced the single currency. EPA/VALDA KALNINA