One Market to Rule Them All - How Financial Integration Influenced Inequality in the European Union
29 Pages Posted: 23 May 2019 Last revised: 1 Sep 2019
Date Written: April 1, 2019
Financial integration and the design of financial markets have been regarded as a major driver of economic growth and wealth for a long time and have later been extended to the effects on income inequality by means of natural experiments regarding bank branch deregulation in the U.S. and large-scale entry of foreign banks in India. However, another prominent example of financial integration and liberalization, so far, has been ignored in the scientific discussion: the introduction and progression of the European Single Market. By using a difference-in-difference design, we investigate the effects of the Single Banking License introduced in 1993 on economic growth and several inequality measures. This directive or "banking passport" abolished any cross-country restrictions on banks in EU member states and allowed them to freely branch into other member states and offer their banking services there. This constitutes a fundamental change in the competitive environment for financial markets. Our findings show that the European Single Market positively influenced economic growth across a variety of subsamples of EU member states. The effects on income inequality indicate that inequality across EU member states was reduced. Additional regressions with the unemployment rate and top and bottom 20% income shares support this finding and show a reduction of unemployment in previously less developed countries accompanied with an increase in the bottom income shares across all member states.
Keywords: Financial Development, Economic Growth, Income Inequality, European Union
JEL Classification: D63, E42, E44, G21, O11, O16, O42, O44
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