Financial development and income distribution inequality in the euro area

The paper yields new evidence on real income convergence for euro area (EA) countries since the mid-1980s, with a special focus on the effects of the subprime and sovereign debt financial crises. By conditioning the turning point per capita income of the Kuznets curve (KC) to the level of financial development, we find strong evidence in favor of an EA-wide steady-state financial KC and of ongoing convergence across EA members toward a common per capita income turning point level. By means of a counterfactual analysis, we also point to worsening economic and income inequality conditions for all the EA countries, only partially ensued from “austerity” policies. Hence, a well-functioning financial system and its smooth development appear to be instrumental not only to economic growth, but also to a more egalitarian income distribution.