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Wealth gap

June 15, 2010

A new report published Tuesday by the German Institute for Economic Research shows that the gulf between Germany's rich and poor has been growing wider. Critics say planned budget cuts are unlikely to help matters.

A porsche in Duesseldorf drives by a street beggar
More and more Germans are falling into the lowest income categoryImage: picture-alliance/ dpa

When it comes to economic inequality, Germany is finally catching up with the US. Well into the 1990s, the difference between rich and poor remained relatively stable in Europe's largest economy, but in the 21st century, the German Institute for Economic Research, or DIW, has noticed more and more polarization.

Both the number of households that earn less than 70 percent of Germany's median income, and the number earning more than 150 percent have risen significantly in the last ten years.

Back in 2004, 19 percent of households belonged to the bottom category. By 2009, that figure had risen to 22 percent. At the upper end of the wealth spectrum, the number of households earning an average of 3,870 euros a month rose from 16 percent in 2000 to 19 percent. The financial crisis has barely affected this group.

More income polarization

A man opens a wallet full of Euro bills
People in the top income bracket have hardly felt the pinch of the economic crisisImage: picture-alliance/dpa

DIW economic analyst Jan Goebel said the turn of the century marked a new trend in Germany's economic relations.

"We saw a 'relative polarization' in the years up until 1999 - that means that the percentage of people in these two areas, the very rich and the very poor, has risen, but there was also a rise in the lowest incomes," Goebel told Deutsche Welle. "But in the years from 2000, we have seen a so-called 'absolute polarization' - that means there were not only more people in these lower and upper brackets, but their incomes also drifted further apart. The poor got poorer, and the rich got richer."

The result: Germany's middle class - defined as those households earning between 860 and 1844 euros a month - is shrinking. Not by much, Goebel concedes, but he is concerned that the trend towards inequality will remain consistent in the long-term. And a smaller middle class, the report warns, always has a destabilizing effect on society. As the middle class becomes more sensitive to factors that could threaten its status, Germany could see an increase in social developments such as xenophobia, it says.

Goebel identified changes in the job market as the cause of this trend. When the number of available jobs in Germany goes up, he said, the trend towards polarization stops. But when unemployment goes up, more and more people drop into the lowest income category at a faster rate.

Cost-cutting burdening the country's poor?

A homeless man sleeps in a stairwell in Berlin
Efforts to cut social welfare programs disproportionately burden the poorestImage: DW

The report sees its conclusions as an indictment of the German government's recent budget cuts, which targeted social benefits like parental allowances and subsidies for heating costs. Such measures, the DIW says, could easily put more people into the low income bracket.

"In light of this trend, you might ask whether it might not be a good idea to bring the upper income brackets into these [cost-cutting] efforts," Goebel said.

Now the government is set to discuss a further set of budget cuts - it'll be interesting to see whether they heed the advice of the research institute.

Author: Ben Knight (svs)
Editor: Michael Lawton