How portfolios vary across Europe: The role of beliefs on social and communal insurance

Johannes Fleck, Adrian Monninger 02 October 2020



Household portfolios in the euro area vary profoundly, not only with respect to asset levels but also in terms of their liquidity structures. Figure 1 illustrates these differences by plotting the composition of mean net wealth separately for liquid and illiquid assets and liabilities for a number of European economies. As the figure shows, households in countries like Belgium or Germany hold a much larger share of their savings in liquid assets than households in Greece or Slovenia (approximately 20% versus 5%). For a more detailed bilateral comparison, consider that after controlling for demographics, risk aversion, income and total net wealth, German households hold 11% more liquid wealth than Italian households. For the median household in Germany, this corresponds to a difference of approximately €6700.

Figure 1 European household portfolios (average net wealth)

These compositional idiosyncrasies have grave consequences in terms of the ECB’s unconventional monetary policies and national perspectives on granting taxation rights to the EU. Several recent papers (e.g. Ampudia et al. 2017, Slacalek et al. 2020) document that the positive economic effects of low interest rates are asymmetrically distributed across countries. This is because of national differences in portfolio liquidity structures. Moreover, temporary or permanent EU financial wealth taxes would lead to heterogenous per capita tax burdens across member states (Gros 2020, Landais et al. 2020). Similarly, the incidence of a financial transaction tax would fall disproportionally on countries where liquid assets (e.g. stocks and bonds) are more preferred savings instruments (European Commission 2013).

The existing body of research provides a number of distinct theories explaining general measures of cross-country variation in European household portfolios. Among those are differences in (i) population demographics and economic environments (Christelis et al. 2013); (ii) institutions such as social insurance programmes (Pham-Dao 2019); (iii) shocks such as banking crises (Ampudia and Ehrmann 2017); (iv) product familiarity (Fuchs-Schündeln and Haliassos 2020); and (v) social capital (Guiso et al. 2008).

In contrast to these earlier studies, our recent paper (Fleck and Monninger 2020) focuses on country specific beliefs as a driver of portfolio liquidity discrepancies. This approach allows us to identify variation in portfolios which cannot be explained by assuming perfect rationality in individual decision making. We pursue this approach as a growing literature documents the paramount importance of subjective beliefs for household asset and liability choices (Giglio et al. 2019, 2020). 

The beliefs we study are subjective probabilities regarding the timely availability of financial support from social assistance programmes and private networks (friends, family, colleagues). These views on the effectiveness of social and communal insurance reflect individual assessments of uninsurable risks. Hence, households with strong beliefs (i.e. large subjective probabilities) use their portfolios to a smaller extent for self-insurance compared to those with weak beliefs. Accordingly, these households hold a smaller fraction of their wealth in liquid assets and are more inclined to assume financial liabilities such as mortgages.

Beliefs and environments (social insurance programmes, taxes, asset market regulations) are generally not independent from one another. To isolate the effect of variation in beliefs on financial choices, we apply the ‘Epidemiological Approach’ (Fernandez 2007) in the Household Finance and Consumption Survey (HFCS). This European dataset contains detailed household-level portfolio accounts and since we have access to confidential information, we can identify immigrants from different countries of origin. Since the beliefs we study have been found to be highly persistent and determined by parental transmission, immigrants inherit the beliefs of their origin countries to some extent. Thus, by assigning immigrants residing in the same country belief measures of their origin countries, we obtain a sample of households who face the same environment but are heterogenous with respect to beliefs.

The European Value Study (EVS) and World Value Survey (WVS) ask respondents to rate the efficiency of both communal and social insurance. Hence, we construct country specific belief intensity measures using these sources. Figure 2 displays our measure for beliefs in social insurance for European countries. Interestingly, when we compare these subjective views to objective measures on, for instance, public sector bureaucratic quality (La Porta et al. 1997), we find that they do not always coincide; Ireland and Germany rank low on subjective views but high on objective measures. The opposite applies to Belarus and Turkey. 

Figure 2 Social insurance beliefs in Europe (darker colors indicate stronger beliefs)

We apply several regression estimations to quantify the role of beliefs in explaining variation in household net liquid wealth. To arrive at a clean estimate of this role, we include a comprehensive set of controls (income, level of net illiquid wealth, gender, age, marital status, education, occupation status, risk taking behaviour) in all regressions. Our empirical analysis confirms that households with stronger beliefs in social insurance mechanisms expect them to function as effective safeguards in times of financial distress. Figure 3 displays our findings separately for immigrants from European and from non-European countries of origin. For these groups, we find that a 1% increase in this belief is associated with an average decline of precautionary savings by 1.8% and 3.4%, respectively. 

This relationship is reversed for beliefs in communal insurance. For the analogous immigrant groups, Figure 3 shows that both hold about 2.5% more liquid wealth when beliefs on communal insurance increase by 1%. The dichotomy of the effects is attributable to reciprocity; earlier research has shown that individuals who expect their communities to act as risk sharing networks take precautions to be able to support other network members. Put differently, they take precautions to not only insure against their own risks but against those of others as well. 

We also study the relationship between country-specific beliefs and the most prominent household asset – the main residence. In our analysis, we consider renting as implying less financial risk because the portfolios of renters remain (more) liquid and less leveraged. We find that the probability of becoming a homeowner with a mortgage increases in both beliefs, but communal insurance has a larger effect than social insurance. However, this result is not statistically significant for all immigrant groups. We find the same when we study ‘loan-to-value’ ratios, measured as the relative values of the mortgage and the main residence. These results provide additional support for our postulated mechanism linking beliefs and precautionary behaviour; higher subjective expectations regarding external support in case of financial distress increase the willingness to take financial risks and leverage. 

Figure 3 Effect of 1% belief increase on precautionary savings

Our empirical results add a new dimension to academic and policy discussions on portfolio heterogeneity in the euro area, emphasizing the role of often overlooked cross-country characteristics. This finding has a number of implications. First, it points out that the redistributive effects of ECB policies and the burden of a potential EU financial transaction tax are partly determined by factors outside the common discussion and analysis. Second, it indicates that the contribution of the European capital markets and banking union on portfolio convergence might differ across countries. In this regard, it also suggests that cross-country differences in the erosion of trust in social institutions might lead to portfolio divergence.


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Topics:  EU policies Europe's nations and regions Welfare state and social Europe

Tags:  euro area, ECB, household wealth, financial markets, savings, Cultural bias

PhD candidate in Economics, European University Institute

PhD candidate, Johns Hopkins University


CEPR Policy Research