One Market to Rule Them All: How Financial Integration Influenced Inequality in the European Union

Abstract

Abstract Financial integration is seen as a major driver of economic growth and wealth. Its effects on income inequality have been analyzed for the bank branch deregulation in the USA and foreign bank entry in India. Another prominent example of financial integration and liberalization, so far, has been ignored: 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 abolished any cross-country restrictions on banks in EU Member States and allowed them to freely branch into other Member States. This constitutes a fundamental change in the competitive environment of financial markets. We show that the European Single Financial Market positively influenced economic growth across a variety of subsamples of EU Member States. The effects on income inequality indicate that inequality across 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 by an increase in the bottom income shares across all Member States. (JEL codes: D63, E44, G21 and O11).