I’d like to highlight two news stories about Romania from this week that caught my attention:
- Romania is the EU member with the biggest gap between the rich and the poor. The average incomes of Romania’s richest 20% were 7.2 times higher than those of the poorest 20%. (26 April – via ‘business24.ro’)
- Romania will no longer have an official target to join the Eurozone. The government takes into consideration to give up 2019 as deadline for joining the Eurozone. (27 April – via romaniajournal.ro)
Regarding the income gap.
Inequality exists in other countries too – in the UK for instance, but on a smaller scale than in Romania. But there, the high earners are at least really taxed as a new report by the Institute for Fiscal Studies published yesterday shows. In the UK, the 1% with the highest salaries is now paying almost 30% of all income tax.
Regarding the Euro adoption.
The convergence criteria set up to join the eurozone is of economic and political nature: price stability, sound public finances, exchange rate stability or the national central bank’s independence of its decision-making bodies and its integration into the European System of Central Banks.
Romanian Finance minister Anca Drahu pointed out that Romania should have a real convergence to Euro, meaning that the population’s incomes should be around 70-80% out of the average monetary zone. Currently this indicator is about 55% in Romania: “We are talking about GDP per capita, about the incomes of the entire society, of the entire population and we have to particularly consider the Romanian economy’s flexibility and competitiveness.”
Her view is correct, but you don’t need to have an economic degree to read between the lines, that it will take at least another decade – if ever – until Romania might close the gap to even the weaker economies of Europe.
Take the former Soviet republics.
As Romania, the Baltics states were severe hit by the financial crisis in 2008, but the region has made a remarkable recovery the last years. The implementation of the Euro in Estonia (2011), Latvia (2014) and Lithuania (2015) has contributed to a financial stability, a booming economy and rise in productivity.
Bottom line: the efforts to join the eurozone were rewarded by economic growth and better salaries.
But for Romanians, the ugly truth is that living standards will remain among the poorest in Europe for at least another generation. I do advocate young people to leave the country, because I can understand them very well.
But, if you think about emigration, be aware, that the grass is not always greener on the other side. That’s why it’s of utmost importance to know the realties in other places first.
When it comes to salaries, a larger pay alone isn’t always better.
Economists call this the ‘purchasing power’ of salaries, or their ‘real value.’
Throughout Europe, there are dramatic differences in cost of living among countries. That means the same pay packet can have a dramatically higher real value in some countries than others as the new Glassdoor-Report ‘Which Countries in Europe Offer the Best Standard of Living? is revealing.
Average (Nominal) Wages
There is considerable disparity within Europe in terms of what people are paid for a given job: nominal wages in the highest paying country are on average over five times those of the lowest.
Nominal wages are:
Highest in: Switzerland at €72,000 followed by Norway, at €61,000; and by Denmark, at €56,000.
Average in: UK, Belgium, Sweden, Finland, Austria, at around €41,000,
Lowest in: Estonia at €13,000; followed by Portugal, at €15,500; and Greece, at €18,500.
Average Wages on a Purchasing Power Parity (PPP) Basis
Comparing nominal wages across countries only tells part of the story. It does not take into account what those incomes can actually buy. One way economists address this issue is to adjust income data from different countries to produce Purchasing Power Parity (PPP). These adjustments take into account differences in relative prices within countries, so as to estimate how much money would be needed to buy the equivalent goods and services in each country. They are:
Highest in: Switzerland, Ireland, and Norway, at around €40,500.
Lowest in: Estonia, Portugal, and Greece, at €20,000
Cost of Living
An alternative way of accounting for cross-country differences in prices is to consider differences in price levels in major cities. How much money is needed to buy a standard basket of goods and services in di erent countries, including groceries, restaurants, transportation, utilities, and rent. On this basis, the cost of living is:
- Highest in: Geneva and Zurich, which are the only two main European cities that are more expensive than New York and London, which has the highest rents in Europe.
- Lowest in: Tartu, Porto, Thessaloniki, Tallinn, Athens, and Lisbon, which are some 60 to 70% cheaper.
Standard of Living
What matters ultimately for standard of living is the gap between the take-home pay and price levels. Taking together both the income (after income tax) and the price-level (including value-added taxes or VAT) information it is possible to derive an indication of after-tax, local purchasing-power-based, “standard of living”. The ranking of countries on the basis of their relative standard of living, as measured by after-tax- purchasing power of the average salary is:
- Highest in: Switzerland, Denmark, and Germany; all of which compare closely with the United States. Although the cost of living can be relatively high in these countries, average wages and purchasing power are also relatively high.
- Lowest in: Estonia, Greece, and Portugal. Although the cost of living is relatively low in these countries, average wages and purchasing power are amongst the lowest in the region. The UK, where the cost of living is relatively high, has an overall standard of living that is similar to that in Austria and France.
Source: Glassdoor-Report: Which Countries in Europe Offer the Best Standard of Living? April 2016
A PDF-version is available for download via glassdoor.com
Romania has the biggest gap between the rich and the poor in Europe.
Zurich offers a high standard of living attached with a price: the swiss city is more expensive than New York and London, which has the highest rents in Europe.