Private Wealth and European Solidarity

Many in the eurozone are asking why creditor-country taxpayers should finance debtor countries that often have higher private-wealth/GDP ratios than their more solvent counterparts. By calling on citizens to fund their countries’ debts, governments can fix their own economies – and strengthen European solidarity.

COLOGNE – A little-discussed but crucial factor in the debate over wealth transfers from Europe’s more economically sound north to its troubled south is the relationship between public debt, GDP, and private wealth (households’ financial and non-financial assets, minus their financial liabilities) – in particular, the ratio of private wealth to GDP in the eurozone countries.

While the European Central Bank’s bond-purchasing scheme has calmed financial markets to a considerable extent, some European economies – including Italy, Spain, Greece, and Portugal – are still at risk, because they are not growing fast enough to narrow their deficits and stem the growth of their national debts. The grim irony here is that the ratio of private wealth to GDP in some of the countries that are in need of support from the ECB and northern eurozone members is equal to or higher than that in more solvent countries.

Consider Italy, which has the highest ratio of private wealth to public debt of any G-7 country, and is some 30% to 40% higher than in Germany. Likewise, Italy and France share a private wealth/GDP ratio of five to one, while Spain’s – at least before the crisis hit the country in full – was six to one. By contrast, the ratio in Germany, Europe’s largest creditor, is only 3.5 to one.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

http://prosyn.org/ZG8RDQ7;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.