Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 20 May 2014

The Eurozone Recovery and Household Savings

A follow-up to my last post. The US growth recovery began in 2010 and has been sustained, albeit at a modest pace. The UK recovery did not really begin until 2013, but growth may be quite rapid in 2014. So will it be the Eurozone’s turn in 2014? Furthermore, just as UK growth this year can be quite strong because we have a lot of catching up to do from the lost years of 2010-12, will Eurozone growth also be rapid as it has two recessions (2012 as well as 2009) to recover from?

The chart below suggests perhaps not. It shows household savings rates in these three areas, and also Spain. 

Household Savings Rates. Sources: OECD Economic Outlook and Eurostat

Focus on the changes. During the 2008/9 recession we saw increases in savings everywhere, as we might expect after a financial crisis. In the US and UK savings stayed high until 2013. The 2013 recovery in the UK is all about the subsequent decline in the savings ratio. Once again, this is what you might expect after a financial crisis: a prolonged period of high savings as borrowing is gradually reduced and wealth positions restored, followed by a boost to demand as savings rates are normalised.

So can we expect the same dynamic in the Eurozone in 2014 and beyond? The answer is probably not, because the decline in the savings ratio has already happened. In fact it seems to have happened earlier than in the UK or US. There is one obvious explanation for this, again straight out of the Keynesian playbook. Unlike the financial crisis, the 2012 Eurozone recession was a recession caused in large part by fiscal tightening. And as basic macroeconomics tells you, if the public sector decides to save more, the private sector has to save less.

The Eurozone appears to have already had its growth boost from declines in the savings ratio: it helped moderate the size of the 2012 recession. This also means we do not know to what extent consumers’ financial balances in the Eurozone have been restored: savings may have fallen in 2010/11 not because any correction was complete (as we hope is the case in the UK and US by 2013), but simply because incomes fell. So for 2014 and beyond, the impetus for recovery may have to come from elsewhere. The pace of fiscal tightening may ease, but it is still a drag on growth. Growth in the UK and US will help, but this may be offset by a decline in the rate of growth in emerging markets. Is there anything else that could provide the basis for a strong recovery?  


  1. Why Spain? Why not Italy? Might not support your argument though... and the Italian stockmarket outperformed the German one in the first quarter of this year, 14% up against 2%. Spain however is a different kettle of fish. And as the chart shows, with the overall Euro area savings rate well above that of the other areas the idea there is growth soon to come seems reasonable. The trick of course is to predict where, and on that measure perhaps a more widespread analysis of the 18 very different Eurozone countries would make for a more convincing argument.

    1. I think looking at levels in this way can be misleading - savings rates differ between countries partly because they are defined differently, and also for institutional reasons.

    2. The Italian households saving rate declined from 15.46% in 2007 to 12.9% in 2013 and it actually declined even between 2008 and 2009. This is even more inconsistent with standard theory of what instead should have happened. And possibly paint an even bleaker picture on the future prospects of that country. What is your view? (see Eurostat

  2. The euro area current account has moved from zero in 2011 towards +3% currently. So yes the public sector is saving more, but the euro area private sector is exporting its savings to the rest of the world. With the ECB talking down the exchange rate its a bit surprising that other countries are not pointing to that big current account surplus as a symptom of a lack of domestic demand.

  3. A comparison of the UK and Spain shows so much up in this economic crisis.

    Krugman's blog February 5, 2010 'The Spanish Tragedy' shows in graph form OECD Government debt as % of GDP in 1997 and 2010, with Spain and the UK next to each other on the graph.

    Krugman blog July 6, 2013 'Rationality and the Euro' which begins 'Simon Wren-Lewis, for once, has a happy story to tell', has a graph of UK and Spanish real exchange rates.

    Krugman blog August 24, 2012 'GOP Intellectual Decline, Monetary Edition' gives graphs of UK versus Spain on debt/GDP ratio and long-term interest rates: remember, the Spanish government was in surplus coming into the 2008 crisis.

    The UK is no triumph, but the Eurozone is thoroughly inefficient.

  4. A consideration for a drop in saving could also be fear of a monetary reform, especially in Germany.

  5. Louis Dieffenthaler21 May 2014 at 11:25

    Hello! My question is not entirely on topic but it is related to the savings rate.

    The UK recovery is largely driven by fairly strong consumer demand (?), which in turn is dependent on productivity growth (=>real wage inflation) and/or a reduction in savings. So far, it seems that the latter has been most prominent, but the MPC expects that real wage growth picks up, and it seems that they believe there is some investment/GDP-ratio.

    Andrew Smithers argues (at his ftalphaville blog) that there are factors affecting investment decisions which are beyond the control of the central bank. In particular, he claims that the management of firms earn profits per share, and are therefore incentivized to buy back shares rather than invest in new capital. Therefore, investment is at a "bad" equilibrium.

    Do you think this has much power in explaining the low level of UK investment?

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