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Do savings promote or hamper economic growth? The Euro area example

De Koning, Kees (2013): Do savings promote or hamper economic growth? The Euro area example.


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Individual households save out of income by postponing consumption. Such savings are used not only by companies to expand production or by some individual households to increase consumption through borrowings: the economic use of savings. For instance in the U.S. in 2005 and 2006 65.5% of the savings allocated to home mortgages were used to increase prices of existing homes over and above the CPI inflation levels. Such use of savings can be called the financial use of savings. Other examples of such financial use are government debt outstanding for longer than a year and share price increases after companies have received the proceeds from share listings.

The difference between the financial and economic use of savings is that the first category does not help output and employment growth. There are periods over an economic cycle that the financial use of savings increase, for instance through house or share price inflation. There is no guiding hand to stop this process early enough to stop the subsequent savings destruction process. The latter process is further complicated by governments’ extensive use of debt financing during the re-balancing period. Government debt outstanding for over a year does not contribute to output or employment growth: it is again a financial use of savings.

The long adjustment period since 2008, which is far from over for the Euro area countries, shows that fiscal and monetary policies have been very slow in getting unemployment levels down. The main reason is not that there is a lack of savings, but that on a temporary basis the savings allocation process needs to be re-balanced away from its financial and towards its economic use.

Why and how this could be done is the subject of this study. The Euro area was chosen as an example as youth unemployment and overall unemployment rates are at historical highs, share prices are still far below 2008 levels and house prices with the exception of Germany and Austria have hit a seven year low.

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