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How can household wealth be used to stimulate economic growth. The Italian example.

De Koning, Kees (2021): How can household wealth be used to stimulate economic growth. The Italian example.

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Abstract

The Eurozone countries share a common currency: the Euro operated and managed by the European Central Bank (ECB). The implications are that savings and wealth levels are also denominated in the same currency.

Does this mean that wealth factors like home equity and pension savings can be transferred between countries?

The simple answer is that homes are located in a particular country and cannot be moved between countries. Savings for future pensions are also made in a particular country, but the investments can be spread over different categories of investments and over different countries. Money is mobile, but the saver usually is not.

In developed countries, like Italy, home equity and pension savings represent a multiple of annual Government revenues. In 2019 pension savings in Italy were €656.6 billion and the country’s total home equity can be estimated at €4.3 trillion. With Italy’s government revenues in 2019 of €758 billion, the fact that nearly €5 trillion of wealth in aforementioned two categories combined, represents a multiple of 6.6 times the Italian government annual revenues.

In 2019, Italy’s government revenues were 42.4% of GDP, ranking it as the fifth highest country out of 35 countries in the OECD ranking of government revenues compared to GDP. On the other hand, households mortgage borrowings were low and stood at 22% of GDP in 2019, or at nearly €390 billion. 72.4% of Italians own their home.

The real question Italy might need to consider is: “How can the Italian economy be stimulated without continuing to rely on more government funding, especially when this funding, due to the corona crisis, has already reached the level of around 135% of GDP?”

A possible answer lies in a different Quantitative Easing type: QEHE, which stands for “Quantitative Easing Home Equity”. This system does not need more government borrowing; instead it relies on homeowners to convert some of their home equity savings into cash on a temporary basis. It may need the European Central Bank to co-operate as the currency in use is the Euro. How such system of a: “Savings Release and a Savings Replace Method” could work will be set out in this paper.

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