Debt or Wage-led Growth: the European Integration

Abstract

This study aims to outline the importance of increasing real wages in European Union member countries. Since the 1970s, the European Union’s original member countries (European Union-15) have pursued a neoliberal strategy, favoring exportled growth. This strategy was supposed to increase the European Union’s international competitiveness by reducing labor costs and encouraging investment as profits garnered a greater share of national income. Since the 1990s, the European Union’s newer members, primarily Central Eastern European countries, have pursued debt-led growth as European Union membership opened financial markets to foreign capital. Both strategies adopted wage moderation and both have been associated with weaker and more volatile growth alongside rising unemployment. We argue that the European Union should adopt a Keynesian demand-led growth model and raise real wages to generate higher effective demand, which is crucial for achieving growth in economies operating below full employment.