Financial Development’s Impact On Inequality In The Original Eurozone Eleven:a Panel Data Approach

Recent years have seen the Eurozone struggling with low economic growth figures. The financial crisis has led to austerity measures, cut backs and increased taxes without increased productivity. At the same time the debate about income inequality in the EU and the Eurozone has been brewing. Constant expansion of member countries makes it harder to have unified policies on how to reduce inequality whilst achieving growth. The amount of suggested policies offered to EU lawmakers is staggering; this paper looks to focus on a different approach than mere redistributive policies to deal with inequality.Previous studies into financial development have advocated that financial development in fact reduces income inequality. With proof that financial development also encourages economic growth, and not just through reverse causality, it sounds like a great combination, a win-win situation.BUT, prior to this paper there has not been a study looking at financial developments impact on income inequality in the EU or the Eurozone original eleven specifically. With a small group of countries which are economically developed, this paper offers a different result to the big,100-country plus, samples often studied and offers interesting results. Through a panel data approach, using available data from1999-2011, we show that the experience is different in the Eurozone original eleven to that of world averages. Stock market size and stability has a negative effect on income inequality whereas the private credit to GDP is shown to have a positive effect, suggesting that different policies are needed in countries at different stages of development.