The dual impact of financial development: growth and inequality in the Eurozone countries

Abstract

Financial development and deregulation have historically driven economic growth but have also exacerbated inequality. The relaxation of financial regulations preceding the 2008–2009 crisis is a prime example of this phenomenon. While initially promoting growth, it exacerbated both labor and profit inequalities. The crisis laid bare vulnerabilities in the financial systems of Eurozone EZ countries, resulting in economic recession and worsening inequality domestically and internationally. This chapter first reviews the theoretical underpinnings of the impact of financialization on growth and inequality, followed by an examination of the components of inequality, including factor, labor, profit, and unemployment indices. Central to our discussion is the imperative of reducing inequality, considered fundamental for fostering growth, welfare, and social cohesion. The empirical investigation is conducted to assess the determinants of total inequality before and after the 2008–2009 financial crisis, with EZ countries categorized into three groups: Northern EZ countries, Southern EZ countries, and Newcomers. Conclusions and policy implications underscore the necessity of regulating the financial system to prevent crises, maintaining low unemployment rates, and ensuring equitable increases in income for both skilled and unskilled workers as for capital owners.