Asymmetries in Common Monetary Policy and Inequality in the Euro-Area: The Case of Spain and Italy

The Eurozone crisis has generated a renewed focus on economic inequality and poverty, and an increasing debate on whether the currency unification was a driving factor of increasing economic inequality in Euro land. The aim of this paper is to investigate the links between EMU and inequality, focusing on the distributional impact of the common monetary policy. Since the start of the Eurozone, nominal interest rate is set by the ECB, and applies to all EMU member states. However, inflation experiences have been very different in Eurozone countries leading to very different real interest rate experiences. To investigate how these asymmetries of common monetary policy resulted in different distributional outcomes this paper undertakes a focused case study comparison of Italy and Spain, two of the largest EMU economies, which have been in the epicentre of the Eurozone crisis. While they are often identified to belong to the same “Southern model” of welfare capitalism and both countries have been exposed to similar set of changes in their international policy environment in the form of a low interest rate regime associated with the creation of EMU, real interest rates after the adoption of the common currency were different. By looking at survey micro-data provided by Bank of Italy (SHIW) and Bank of Spain (EFF), and by “zooming into” the countries’ wealth distributions, this paper investigates whether this difference in interest rate policy, operating through asset price channel and the debt channel and combined with different domestic institutions, helps to explain different developments in their wealth inequality trajectories prior to and during the sovereign debt crisis.