Countries in central and Eastern Europe which haven’t join the EU have more room for fiscal spending, and are 2% more redistributive.
Bilyana Petrova is an Assistant Professor in the Department of Political Science at Texas Tech University. Aleksandra Sznajder Lee is an Associate Professor in the Department of Political Science at the University of Richmond.
Cross-posted from LSE EUROPP
How has joining the EU affected the ability of countries in Central and Eastern Europe to alleviate income inequality? In a new study, we examine the impact of EU accession on economic redistribution – or the extent to which governments reduce income differentials between the rich and the poor through taxes and transfers – in Central and Eastern Europe between 2004 and 2018.
Adopting a holistic view of EU membership, we focus on five distinct channels through which the EU can affect redistributive outcomes: trade, the free movement of people within the EU’s borders, Economic and Monetary Union-related budgetary constraints, access to EU funds and EU social policy requirements.
Our analysis uses a cross-sectional time-series analysis of the 11 Central and Eastern European countries that joined the EU in the 2004, 2007, and 2013 enlargement waves, alongside insights from 68 expert interviews with academics, politicians, policy advisers, trade union leaders and business association representatives in Bulgaria and the Czech Republic, two recent member states characterised by very different political and economic dynamics.
With regard to trade, we posit that commercial reorientation toward the EU might have exacerbated economic insecurity, putting pressure on governments to expand social policies to shield people from socio-economic risk. We find that although aggregate trade with the EU does not seem to significantly affect redistribution, manufacturing imports and exports – specifically within the high-skill technology-intensive and the labour-intensive resource-intensive subsectors – are both associated with greater efforts to reduce income inequality. Consistent with Dorothee Bohle and Bela Greskovits’ work, these findings suggest that Central and Eastern European governments have combined industrial production-oriented economic restructuring with social policies designed to compensate vulnerable groups.
As for the free movement of people, we expect higher emigration to undermine long-run economic competitiveness, threaten solvency and thereby motivate governments to invest in redistribution and family support. Too many people leaving might create labour shortages, put pressure on social systems and exacerbate budget constraints. We find that higher migratory outflows are indeed associated with higher redistribution. Additional analyses reveal a more complex story: redistribution itself is a statistically significant predictor of emigration, implying that citizens who lack effective social protection at home are propelled to leave. This incentivises governments to spend more on social safety nets.
Economic and Monetary Union
Turning to Economic and Monetary Union, we argue that the fiscal discipline measures built into the system might have constrained policymakers’ ability to spend on social policies. These measures cap budget deficit and government debt levels at 3 and 60% of GDP, respectively. The 1997 Stability and Growth Pact further reinforced this commitment.
We therefore anticipate membership will be linked to lower economic redistribution. Indeed, we find that redistribution in Central and Eastern European members of the Economic and Monetary Union is on average 2% lower than in Central and Eastern European states that are not part of the Economic and Monetary Union. At the same time, we recognise that the collective pressure to join the Economic and Monetary Union was lower in post-communist Europe than it was in the West, resulting in some self-selection. In other words, governments looking to embrace austerity were able to use membership of the Economic and Monetary Union as a convenient excuse to do so.
The effect of EU funding via cohesion policy can go in both directions. On the one hand, EU funds can stimulate economic activity and relax budget constraints, giving decision-makers additional resources to redistribute. On the other hand, awarded funds require co-financing by the state and, according to the principle of additionality, may not substitute for regular state funding. Consequently, they might decrease the resources policymakers allocate to redistribution by placing additional demands on state budgets. Given these contradictory pressures, we do not expect a clear net effect.
Indeed, cohesion funds fail to reach statistical significance in our models, which suggests that EU funds are not used for redistribution. Nevertheless, different countries react differently to the opportunities generated by EU membership. The Baltic states (Latvia, Lithuania, and Estonia), for example, have used EU funds in multiple projects to promote technology-oriented social investment policies.
Finally, although the EU does not prescribe specific reforms or even a common approach to social policy, it might have influenced the evolution of post-communist welfare states through EU legislation in other areas. Social policy directives can either hamper efforts to alleviate inequality by limiting the scope of acceptable policy options or reduce income differentials by requiring governments to ensure a basic level of benefit provision and risk protection.
Unfortunately, data and methodological limitations do not allow us to conduct a reliable comparison of pre- and post-accession dynamics in Central and Eastern Europe. Nevertheless, our interviews indicated that the EU often elevates specific social policy domains “that would have otherwise been neglected”. Most prominently, these areas encompassed social inclusion, minority integration, pre-school childcare facilities and elder care facilities, all of which have implications for redistribution.
The adoption of a separate European Pillar of Social Rights by the EU in 2017 marked an important symbolic step toward greater attention being paid to the welfare state by decoupling social from economic interests. Even though its principles are not binding, the initiative articulated the values and standards inherent in the European social model that serve as a reference point for future initiatives.
Our findings indicate that EU membership has had profound implications for the ability of new member states to alleviate income differentials. Whether the European Pillar of Social Rights will allow the Union to continue to play an important role in shaping welfare state dynamics in the eastern periphery of the EU remains to be seen.