Making ends meet: The European Income Gap Is Closing

Households in our region have to allocate relatively high shares of their budgets to basic needs. Their ability to buy non-essential items is limited. The consumption structure in our area will converge to the western European average in line with closing the income gap.

Women's hands hold many shopping bags
Photo: iStock.com / Elena Katkova

Over the last decade, the GDPs of the countries in our region have been growing much more dynamically than in Western Europe. It means we are producing more; it also means we can spend more. In nominal terms, the average person in the Three Seas countries spent for consumption purposes around 7000EUR in 2010, whereas in 2021, it was already more than 10000EUR. The consumption spending grew by 49% over 11 years.  Over the same period, average annual per-capita consumption in the western European countries (non-Three Seas Members of the EU) grew by only 16% –  from around EUR 17,000 to EUR 19,500.

Obviously, part of this difference in consumption growth has to be attributed to the higher (on average) inflation in the 3 Seas region. But the bulk of it represents the improvement of actual households’ purchasing power.

How much is basic?

On the other hand, however, one has to see that despite this remarkable growth, the average consumption budgets in our region are still 47% below those in western Europe. Once again, part of this difference can be attributed to still evident differences in price levels, but most of it results simply from lower purchasing power.

The households in the 3 Seas region have to spend a relatively high share of their disposable incomes on basic needs, such as food (see graph). It is quite natural. Food prices – but also prices of other, so-called “tradable goods” – are set globally, so they can not differ “too much” between countries. It means the less you earn, the higher share of one’s consumption spending has to be spent just to eat.

We can clearly see it in the data. The average Romanian spends more than 25% of their consumption budget on food and non-alcoholic, whereas the average German less than 12%. In general, households in Three Seas countries spend around 19% of their budgets on food, and their counterparts in the rest of the EU only 13%.

OK, but if we spend higher shares of our budgets on food, we have to spend less on other items. Which are they? The three with the most significant differences are housing (rent, water, energy, waste, etc.), restaurants and hotels, and so-called miscellaneous goods and services.

It’s expensive to be poor

The average resident of the Three Seas countries spends 21% of their budget on housing, less than 6% on restaurants and hotels, and less than 9% on various “not essential” items. These three categories amount to slightly more than 35% of total consumption. It is much less than the average resident of western European member states, where these items constitute more than 44% of their total consumption.

The difference for other groups of products is much less pronounced, except alcoholic products and tobacco is a much higher burden for the budgets of the consumers of our region – 6,6% compared to 4,5% elsewhere. The differences in consumption structures between the Three Seas and other regions of the EU resemble the widely recognized social patterns. Households with lower incomes have to allocate higher shares of their resources to buy basic items such as food or drinks, but also alcohol and tobacco.

Wealthier consumers can spend relatively more on “non-essential” goods and services, such as holiday travel and/or eating out of the home. The prices of housing services such as water, waste, or heating are relatively frequently regulated to protect more vulnerable groups of the population and tend to be much higher in wealthier countries. The consumption structure in our region will converge to the western European average in line with closing the income gap.

Mateusz Walewski

Chief economist of BGK (Bank Gospodarstwa Krajowego) since 2018. Previously worked among other for PwC and CASE - Center for Social and Economic Research. Participant of numerous research projects and advisory services for the private sector and governments across Central and Eastern Europe. Member of the Team of Strategic Advisors to the Prime Minister of Poland in years 2008-2010. Author of publications and consultancy reports on macroeconomics, labor market and social policy issues. A graduate of the University of Warsaw and the University of Sussex.

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