Essays on the euro and inequality

My thesis investigates the distributional consequences of euro area (EA) membership in the so-called “peripheral” countries (Greece, Spain, Ireland, Italy and Portugal) prior to the eruption of the crisis. I focus on these countries, even though the periphery label hides significant differences among them, because they had to adjust the most to enter to the EA. In the years prior to the introduction of the euro, the dominant narrative was that the delegation of monetary policy to an independent central bank and the fiscal constraints imposed by the Stability and Growth Pact would lock countries into a “golden straitjacket”. This would leave no room for democratic politics and redistributive concerns. After the introduction of the euro, the misfit of the ECB’s monetary policy rate led to new concerns and discussions of why the euro could be detrimental for inequality, this time due to the creation of bubbles and the increasing financialisation of these economies. The question about potential and actual distributional effects of the euro is addressed by identifying and testing empirically policy relevant channels through which EA membership can affect wealth and income inequality (paper 1) above all the channel of interest rate convergence. Then I study these channels with in-depth studies of comparative country cases. The first follows a most different systems design of Greece and Ireland (paper 2) which tries to explain their increased social spending on pensions, and its distributional consequences, when lower costs of public debt and debt-driven growth created “fiscal space”. The other applies a most similar comparative research design of Spain and Italy (paper 3) to examine how EA membership affected wealth inequality through housing and mortgage markets. These comparative case studies identified that the various channels were filtered by domestic institutions, policies and politics. The three papers contribute to a similar conclusion. They do not support the received wisdom that the loss of monetary and fiscal autonomy unduly restrains government’s capacity to tackle inequality. My thesis suggests that a crucial explanatory factor for the effect of monetary integration on inequality in countries of the “periphery” is market forces unleashed by the EA. In particular capital movements did not constrain and in some policy areas might even have expanded national governments’ degrees of freedom. This then still allowed domestic politics and policies to shape the final distributional outcome in the EA