Energy crisis reduced scale

Despite the reality of the threat of a decline in living standards due to the energy crisis, real calculations show that in the EU, significant and insoluble problems without state support can affect about 5% of households in 2023, the ECB estimated. To the greatest extent, this threat affects the economies of Italy, Greece, Cyprus and Slovenia, while “energy inequality” in the EU, at least now, does not threaten the financial system.

Discussions about the possibility of social protest in the EU countries due to a sharp increase in the cost of utilities and energy in 2022-2023 (the chain of cause and effect begins with the military operation of the Russian Federation in Ukraine) made it necessary to conduct a special study of the issue by analysts of the European Central Bank (ECB). ECB economists Daniel Dickelmann and Julian Metzler, in a special section of the November Financial Stability Report of the European Issuing Bank, show the estimated extent of the impact of an inflationary surge and rate hikes in the euro area in 2022 on short- and medium-term changes in spending inequalities, household spending patterns in euro area countries, as well as an assessment of the impact of what is happening on the stability of the EU financial system in 2022–2023. The summary of the study, based on regular surveys of the ECB situation and national statistical offices for 2018-2022, is as follows: the problem exists, it will affect 20-25% of the lower income quartile (i.e. 5% of the total number) of households in the EU, threats financial stability in the EU is not. This is a short answer to the question of whether mass bankruptcy of families in Europe is possible in the coming months due to the inability to pay current expenses and debts due to the expected increase in fuel and food prices due to restrictions on their import from the Russian Federation.

The commentary of Dickelmann and Metzler builds on several theses that are routinely omitted in discussions on this issue. First, the moment of the “energy crisis” is fortunate for the EU in a number of ways due to previous events – the pandemic and the response of the EU authorities to it. By 2021, the eurozone countries (and most of the EU) arrived with strongly declining household nonperforming debt and inequality, and a stable debt-to-income ratio. Part of the “energy effect” has already been implemented from March to September 2022 – the EU is already living with high energy costs, and there is de facto no evidence that this has destabilized the social world. In addition, the ECB notes that in the EU, even the low-income quintile of households spends an average of 70% of income (against 30-35% on average) on necessary expenses (including energy and food) – and the upcoming income crisis will force these households to stop saving. or build up debt.

ECB economists’ calculations show the marginal scale of this effect given the expected rise in prices and inequality due to inflation, the growth of lending rates and the expected dynamics of unemployment: up to a quarter (20-25%) of the 20% of the poorest households in the EU may become insolvent, i.e. 5% families. Note that Dickelmann and Metzler are more likely alarmists – they believe that this is unacceptable and will require increased payments from EU governments as part of social policy in 2023. Nevertheless, such changes, the authors state, cannot destabilize the EU financial markets in any way, especially since 70% of the debt of households (on which, in theory, a default can be declared) is the debt of rich families, and only 13% is the debt of the poor, who are most exposed to such risk. .

The geography of potential problems of this kind, caused, according to the ECB, more by the growth of interest rates on loans than by inflation, is also predictable. Of the large EU economies, the effect could be strong (5-6% of non-paying households) in Italy and the much smaller Slovenia and Slovakia, as well as in Cyprus, smaller bursts of insolvency can be expected in Greece and Latvia. The minimum effect for France, the Netherlands, Ireland and Lithuania is less than 0.5% of the increase in the number of insolvent people, in the rest of the EU it is expected to be less than 1%.

Dmitry Butrin