Low growth and inequality
The macroeconomic problems facing Eurozone countries have attracted much attention in recent years. Some of the repercussions – for example, low growth rates, volatile equity prices and depreciation of the euro relative to the USD – affect household wealth, so the release by the European Central Bank (ECB) of results from the first wave of its Household Finance and Consumer Survey provides a timely and welcome source of additional information on assets and debts in the Eurozone area. Some of the findings from the ECB data were unexpected and highly controversial: for example, the suggestion that average wealth in Germany is significantly lower than that in Cyprus and Malta. Here we review what our data says about wealth trends in the Eurozone, and compare our wealth estimates with those of the ECB.
Figure 5 plots the wealth per adult for the whole Eurozone area since the start of the century and compares the graph with the world and European average. Using current USD exchange rates, Eurozone wealth per adult rose by almost 150% between 2000 and 2007, then dropped by about 20% and has remained relatively flat since 2008. The pattern for Europe as a whole was similar, but average global wealth followed a different path, increasing at a slower pace during the first half of the period, then making up most of the deficit after the financial crisis.
It turns out that the relative performance portrayed in Figure 5 is almost entirely due to appreciation of the euro versus the USD during the early part of the century, and the subsequent depreciation. Using constant USD exchange rates produces the graph depicted in Figure 6. Wealth per adult in the Eurozone now marches in tandem with the rest of Europe for the entire period since 2000, and is also in tandem with the rest of the world until 2007. The rest of the world suffered slightly more than the Eurozone (and Europe) during the financial crisis, but has rebounded with wealth growth about twice as fast in the years since 2008.
Variation in average wealth across the Eurozone
Wealth per adult was EUR 154,900 in mid-2013 for the Eurozone as a whole, but there are significant differences between countries (see Figure 7). Our estimates indicate that average household wealth in Austria, Germany, Ireland and the Netherlands is similar to the Eurozone level, but wealth is about 20% higher in Italy and Belgium, and about 50% higher in France and Luxembourg. Countries lower down the ranking include Spain and Cyprus with about 60% of the Eurozone average, Greece with half of the Eurozone average, and Estonia and Slovakia with less than 20% of the Eurozone level. The country positions remain relatively stable over time, although some variations are evident. For example, France has moved up from mid-table since the year 2000, while Ireland has moved down a little in the last few years.
The ECB results from the Household Finance and Consumer Survey suggest a markedly different pattern across the 15 Eurozone countries for which data was collected (Estonia and Ireland were not included in the first survey). Most of the data were collected in 2010, although figures for Finland, Greece and the Netherlands refer to 2009, and those for Spain refer to 2008. The ECB cross-country comparisons are framed in terms of wealth per household, which complicates matters given that household size varies across the countries. To facilitate comparability with our results, the ECB figures for wealth per household have been converted into corresponding figures for wealth per adult. This causes a few changes in the rankings in the average wealth table, but the differences are not significant.
Figure 8 shows the two sets of estimates for the countries and years concerned, with the countries ordered according to estimates of wealth per adult. The most prominent features are the ECB values for Cyprus and Malta, which are about triple our estimates, and the ECB level for Luxembourg, which is 50% higher. Interestingly, these are the three Eurozone countries to which we give the lowest wealth data quality rating: wealth data for Luxembourg and Malta are classed as “poor”, and Cyprus is regarded as “fair”.
Our estimate of wealth per adult exceeds the ECB value for most of the other countries. Our value is about 20% higher for Finland, Germany and Greece, about 35% higher for Italy and the Netherlands, and 50% above the ECB level for France. This leads to some notable reversals in the country comparisons. For example, the average adult in France has more than double the wealth of that in Cyprus according to our estimates, but less than half the level according to the ECB. Malta has 50% more wealth per adult than the Netherlands according to the ECB, but our calculations suggest that the Dutch are more than twice as rich.
Components of wealth in Eurozone countries
Looking in more detail at the components of wealth reveals even more glaring discrepancies. For the Eurozone as a whole, ECB wealth averaged 84% of our estimated level. The ECB figures capture 115% of our valuation of non-financial assets, but only 59% of our household debts, and just 33% of financial assets (see Table 1). Regarding country level differences, we estimate that the ECB has uncovered only 79% of non-financial assets in France, but exaggerates non-financial assets by a factor of almost five in Cyprus and by a factor of almost eight in Malta. Less than 40% of household debt is revealed in the ECB results for Greece, Italy, Malta, Portugal, Slovakia and Slovenia, and less than 30% of financial wealth appears in the ECB figures for Greece, Italy, Portugal and Slovenia. While some of these discrepancies may have legitimate explanations, it seems implausible that non-financial assets in Cyprus are worth three times as much as in Germany or the Netherlands, or that Cyprus has double the financial assets of Italy. More significantly, the ECB figures suggest that non-financial assets in the Eurozone are worth five times as much as financial assets, and ten times as much as net financial assets (when debts are subtracted). This does not square with everyday experience.
Household balance sheets versus survey data
Some of the discrepancies between the ECB results and our own may arise from the different way in which the figures are calculated. Our estimates are based on household balance sheets (HBS) which have been constructed for financial assets and debts in all Eurozone countries, although only four Eurozone countries have HBS data for non-financial assets as well. The ECB wealth estimates do not make use of these HBS data, but instead rely wholly on household surveys. While HBS data try to cover all household assets, household wealth surveys typically exclude assets that households are unlikely to report accurately, including financial items such as cash, antiques and collectibles, personal loans (as an asset), and equity in occupational pension plans. Together, these comprise over half of all household financial assets in some countries. In addition, the assets of small businesses are treated as real assets in the ECB framework, whereas HBS data apportion the financial assets of small businesses to the financial side of the balance sheet. Finally, non-profit institutions serving households (like churches, hospitals, universities) are often included with the household sector and typically inflate asset values by 5-10%. All of these reasons lead us to expect that our estimates of financial assets will be higher than the ECB results, and that expectation is borne out in practice.
Sources of errors in wealth survey data
Apart from differences in the coverage of assets and debts, the only other source of differences between the Credit Suisse and ECB valuations of financial assets and debts is errors in the data. We believe that the HBS data are less prone to error because they are assembled using the best evidence from a range of sources. Household wealth surveys, on the other hand, are subject to two kinds of non-sampling error: differential response rates – the fact that wealthier people are less likely to respond – and reporting error, which most usually comprises under-reporting of financial assets and debts. Differential response is thought to cause underestimation of 20 – 30% or more, while under-reporting of some financial assets, for example bank accounts, can range up to 50%.
Differential response has less of an impact on non-financial assets because the largest component is owner-occupied housing, and housing is less concentrated in the hands of the wealthier individuals (who may fail to respond to the survey) than stocks and bonds. Reporting error may be even less problematic because, compared to financial assets, homeowners tend to report the value of their houses with much greater accuracy – within 2-6% of the true value according to a number of studies. As regards debts, homeowners may be happy to report an outstanding mortgage, but less comfortable revealing short-term loans and credit card balances. So the 50% shortfall indicated in Table 1 is in line with what might be expected from under-reporting of debts.
While the Global Wealth Report aims to provide the best information on household wealth, we recognize that reliable estimates of household wealth remain a challenge. The ECB data is a welcome new source of evidence which we have used this year to improve our estimates of wealth distribution in Eurozone countries, and may use in future to improve our techniques for estimating wealth levels. On balance, however, the ECB results do not lead us to radically change our view of wealth in the Eurozone. We have confidence in the HBS data which underpin our figures for financial assets and debts throughout the Eurozone, and which also report non-financial assets in the core countries of France, Germany, Italy and the Netherlands. We believe that the differences between the Credit Suisse and ECB figures revealed in Figure 8 and Table 1 are largely due to our wider coverage of financial assets and “teething problems” in the smaller countries where wealth surveys were conducted for the first time. Survey problems of differential response and reporting error can be addressed through careful research and improved survey strategies. It is to be hoped that over time the ECB survey results for the smaller countries will become more reliable through such efforts.
Our estimates for the years 2008 to 2013 suggest that wealth per adult changed very little in the Eurozone countries during that period. Austria may have edged up a little, and the Netherlands shaded down a touch, but we see no significant change in the relative country rankings. When the ECB conducts the next round of wealth surveys, we hope that our predictions for wealth per adult in Eurozone countries can be used as a benchmark for comparison with the survey results.