But what about the actual survey? Undoubtedly an important effort to increase the level of data on this aspect of the eurozone economy (important for spotting future crises) but the survey itself suffers from some serious flaws.
Much has been written about this already so we won’t regurgitate all the arguments but here are the key flaws as we see them:
- Much of the data comes from 2010, with some even going back as far as 2008. This makes cross country comparisons tricky (due to distortions from the crisis) but also means that the fall in wealth in the non-core eurozone countries will not be picked up by the data.
- Households are much larger in the southern countries – particularly with more working adults living under the same roof.
- The key distortion comes from the huge disparity in home ownership, it reaches levels around 80% in southern countries compared to 44% in Germany. Not only have house prices fallen significantly since 2010 in the southern countries but they have much further to fall. The point being that these prices remain inflated from the bubble (partly due to bank forbearance and slow adjustment), meaning that the ‘wealth’ they represent is not really there (see more on this below).
- As Luxembourg and Cyprus demonstrate the influence of large financial sectors and huge foreign investments can also have a significant distortionary effect on the figures.
- Various levels of wealth inequality across the economies also skew the figures.
Even with those points in mind though, some have argued that this survey demonstrates that there is huge wealth in the southern countries and that they should not therefore be receiving bailouts.
- A government decides it wants to tap into the ‘wealth’ of its citizens. Since much of this is home ownership, the best way to do this would be a property tax on the value of homes (this could equally be extended to other assets as a wealth tax) – say around 5% for illustrative purposes here.
- The government institutes the tax, but people struggle to pay because, as the survey showed, despite high ‘wealth’ they are struggling with income and cash flows. Many households are also heavily indebted and in negative equity on their mortgages.
- People across the country rush to sell their houses to avoid the impact of the tax. There is little new demand (foreigners certainly don’t want to invest), so the influx of supply cause house prices to crash.
- The tax instantly fails to receive much revenue, but the knock-on effects are worse. Many people are pushed into insolvency and default on their mortgages and other loans.
- Domestic banks (large in many of these countries) are hit hard by this and see their losses spiral. They reduce lending further, harming economic growth and forcing business to lay off more workers.
- Some banks may even need to be recapitalised, something which the government can ill afford and may possibility prompt a bailout request (what we were trying to avoid in the first place).
- Added uncertainty and depressed economic outlook push up government borrowing costs.
Admittedly, this is an extreme scenario (it also works best applying it to a country such as Spain). But it serves to highlight the point that, much of this ‘wealth’ is left over from from the previous boom. This has long been clear to many, including us, who have predicted house prices will fall further in countries such as Spain (which the Commission also said today in its report on macro-economic imbalances) – thereby eroding this wealth. Tapping into such ‘wealth’ is incredibly difficult, since when you move to catch it, it evaporates.
That banks in many of these countries have been pushing forbearance (delaying foreclosure) is further evidence – if this wealth existed in the housing market surely they would have been better of forcing foreclosure and seizing the assets (admittedly some legal questions but the broad point stands). Furthermore, public assets sales such as those pursued in Greece look like great revenue sources on paper but in practice have produced limited success, partly due to lack of demand.
There are plenty of arguments against taxpayer-backed bailouts - moral hazard, political divisiveness, debt sustainability problems, inefficiency and unfairness (to name but a few) - without over-reading this survey.