Why Germans are poor
An article in today’s links deserves a post all of its own because it is so important. Recently the ECB conducted a eurosystem household finance and consumption survey and people have been talking about it because it shows that household wealth in places like Italy and Spain is greater than it is in Germany. About Spain, for example, the question people are asking is “why is Germany bailing out Spain when mean Spanish wealth is greater than mean German household wealth?” Another variant of that question is “why did government need a bank bailout when median net wealth is 182,700 euros and mean net wealth is 291,400 euros?”
These are good questions and I tried to get at some of it in the first part of the weekly on the euro crisis. I don’t have an answer to those questions here because that’s a political question about apportioning losses that invariably will come to involve the question of wealth confiscation in my view. An easier question to answer that I think warrants discussion is why Germans are poor. There are four reasons: property, pensions, eastern Germany and household size.
Belgian Daily De Standaard breaks this down quite well. Let me make the following points based on their four factor highlight:
- Germans are house poor. Only 44% of Germans own residential property, whereas almost 70% of Belgians do for example. The rate of home ownership in Spain and Italy is also much higher. 82.7% of Spaniards and 68.4% of Italians own homes. And this accounts for much of the wealth disparity. Nonetheless, as German blogger egghat points out in a German-language post, this creates a bit of a moving target based on asset prices and mortgage debt. In the Netherlands, mortgage debt is high and property prices are falling. So, despite higher home ownership average net wealth is lower. In Spain, property prices are still falling while mortgage debt is not falling as much. Therefore, we may see some big shifts in net wealth.
- Germans don’t have private pensions. Private pensions are relatively unimportant in Germany as people have a greater vested interest in the public sector pension plan. Germans are also known to be avid savers as a result, with most savings traditionally coming in the form of fixed income and annuity investments. The Sparbuch, savings account, is the tried and true German savings vehicle. I should note two things here. First, Germans got into equities en masse for the first time during the Internet bubble in the late 1990s and their nest eggs were savaged in the downturn. This has chastened them in terms of equity investing. Second, Germans commitment to the Sparbuch also means they like higher interest rates, and this may be one reason that the ECB is relatively hawkish as compared to the central banks of other crisis-wracked regions.
- East Germans are poor. The East Germans have less wealth and income than their west German counterparts. This is true even twenty years after reunification and will likely continue to be true. Certainly, similar divides exist in every country, Andalusia and Extremadura in Spain are less wealthy than the Basque region or Catalonia. Scotland is less wealthy than south east England. And the southern US states are less wealthy than the western or Northern ones. But, the reality is that Germany was two countries just a generation ago and the wealth gap between east and west is a result of that in a way the smaller gap between Bavaria and Nordrhein-Westfalen in the Rhineland is not.
- Household size is small in Germany. Fertility rates of German women are among the lowest in the euro area and with Italy and Japan, in the world. And this means fewer people per household. More than that, Germans marry later and stay in University longer, meaning that there are a lot of single person households in Germany. No country in the euro area has more single family households or households with fewer than four persons as a percentage of total households. That means household income is lower.
These four factor combine to reduce German household wealth. But remember, households are just one of four major domestic groups in national accounts. There is the government, financial institutions, and non-financial business too. There is certainly more wealth in Germany than there is in Spain. That you can count on. However, that wealth is distributed differently and this accounts for the differences in median net worth. One other point I should make here is that in no other euro area country is the wage gap as large as it is in Germany. According to the ECB study, the gap between the top 10% and the bottom 10% is 94 times income in Germany. By contrast, that number is 4 times in the Netherlands, 15 times in Belgium and 56 times in France.