TOWARDS A COMMON OPERATIONAL EUROPEAN DEFINITION OF OVER-INDEBTEDNESS European Commission Directorate-General for Employment, Social Affairs and Equal Opportunities Unit E2 Manuscript completed in February 2008 European Commission This report was financed by and prepared for the use of the European Commission, Directorate-General for Employment, Social Affairs and Equal Opportunities. It does not necessarily represent the Commission's official position. http://Ec.europa.eu/employment_social/spsi Contractor: OEE Etudes www.oee.fr Experts: Didier DAVYDOFF, Grégoire NAACKE and Elodie DESSART OBSERVATOIRE DE L’EPARGNE EUROPEENE (PARIS, FRANCE) Nicola JENTZSCH, Filipa FIGUEIRA, Marc ROTHEMUND and Wolf MUELLER CENTRE FOR EUROPEAN POLICY STUDIES (BRUSSELS, BELGIUM) Elaine KEMPSON, Adele ATKINSON and Andrea FINNEY UNIVERSITY OF BRISTOL, PERSONAL FINANCE RESEARCH CENTRE (BRISTOL, UNITED KINGDOM) If you are interested in receiving the electronic newsletter "ESmail" from the European Commission's Directorate-General for Employment, Social Affairs and Equal Opportunities, please send an e-mail to [email protected] — The newsletter is published on a regular basis in English, French and German. © European Communities, 2008 Reproduction is authorised provided the source is acknowledged. Towards a common operational European definition of over-indebtedness CEPS-OEE-PFRC THE AUTHORS OBSERVATOIRE DE L’EPARGNE EUROPEENE (PARIS, FRANCE) The European Savings Institute (Observatoire de l’Epargne Européenne, OEE) was created in 1999 with two goals: information and data collection on credit and savings and to encourage research that contributes to the public debate. OEE consists of financial institutions, professional associations and public institutions based in Europe. The OEE has in the past worked for the European Commission, the European Parliament and the European Central Bank. The team at the OEE included Didier Davydoff, Elodie Dessart and Grégoire Naacke. The OEE was the project leader and was in charge of the database and the handbook attached to the present report. CENTRE FOR EUROPEAN POLICY STUDIES (BRUSSELS, BELGIUM) The CEPS is a leading Policy Studies institution in Europe. It is situated in the nexus between academia, business and the public sector. It performs independent analysis of European policy matters and has a proven track record in conducting studies for the European Union. CEPS has two subsidiaries, the European Capital Markets Institute (ECMI) and the European Credit Research Institute (ECRI). In the past, CEPS has provided research to several international and national governmental institutions such as European Commission and World Bank. The research team at CEPS included Dr. Nicola Jentzsch, Filipa Figueira, Marc Rothemund and Wolf Mueller. CEPS wrote the third chapter entitled: “Definition and measurement of over-indebtedness”. UNIVERSITY OF BRISTOL PERSONAL FINANCE RESEARCH CENTRE (BRISTOL, UNITED KINGDOM) The Personal Finance Research Centre (PFRC) was established in 1998 by Professor Elaine Kempson, following re-location of the research programme from the independent Policy Studies Institute. Based within the University of Bristol, PFRC has gained a national and international reputation for high-quality policy-focused research encompassing all areas of personal finance. It is well-known in the UK for its work on over-indebtedness, beginning with the first study of credit use and financial difficulties in 1992. PFRC has considerable expertise in designing, undertaking and analyzing both large scale quantitative and in-depth qualitative research. It has conducted research for government departments, trade associations, regulatory bodies, charities and the private sector. The research team at PFRC included Professor Elaine Kempson, Adele Atkinson and Andrea Finney. PFRC wrote the second chapter entitled “Nature and causes of over-indebtedness: a review of literature” with the support of Luisa Anderloni (University of Milan) and the fourth chapter entitled: “Policy responses to over-indebtedness: A review across Europe” 1 Towards a common operational European definition of over-indebtedness CEPS-OEE-PFRC This research project was conducted in close cooperation with the European Commission (Directorate-General for Employment, Social Affairs and Equal Opportunities) representatives. It is impossible to cite all individuals who provided us with assistance across Europe. We are especially grateful to participants and speakers in the conference organised on 11 December 2007 by the European Commission in Brussels, where a preliminary version of this study was discussed. Many of their suggestions were incorporated in the final version of the present report. The report is based upon detailed information provided to us by country experts in 19 European countries. Country experts Country Correspondent Organization Austria Nicola Jentzsch CEPS/ECRI Belgium Didier Noël and Observatoire du Crédit et de l’Endettement Frédéreic Rottier Czech Republic David Smejkal Consumer Defence Association Finland Johanna Leskinen National Consumer Research Center France Georges Gloukoviezoff Université Lyon 2 Germany Nicola Jentzsch CEPS/ECRI Greece Melina Mouzouraki Greek Consumer Association Ireland Caroline Corr Combat Poverty Agency Italy Luisa Anderloni Univerity of Milan Lithuania Dalia Kaupelyte Vytautas Magnus University in Kaunas Luxemburg Didier Noël and Observatoire du Crédit et de l’Endettement Frédéreic Rottier Netherlands Didier Noël and Observatoire du Crédit et de l’Endettement Frédéreic Rottier Poland Dr. Błażej Lepczyński Gdańsk Institute for Market Economics Portugal Teresa Ferreira The Observatory of Consumers' Indebtedness (OEC) Spain Luisa Anderloni University of Milan Sweden Richard Alström Mid Sweden University UK Elaine Kempson University of Bristol Norway Christian Poppe National Institute for Consumer Research Bulgaria Bogomil Nikolov Bulgarian National Consumers Association 2 Towards a common operational European definition of over-indebtedness CEPS-OEE-PFRC Contents 1 Introduction 5 2 Nature and causes of over-indebtedness: A review of the literature 7 2.1 Introduction__________________________________________________________________7 2.2 Levels of over-indebtedness in Europe ____________________________________________8 2.2.1 Family type and number of children ____________________________________ 12 2.2.2 Income ___________________________________________________________ 16 2.2.3 Employment status__________________________________________________ 17 2.2.4 Housing tenure _____________________________________________________ 18 2.2.5 Other factors_______________________________________________________ 19 2.3 The impact of aspects of money management _____________________________________20 2.3.1 Approaches to paying bills and budgeting ________________________________ 20 2.3.2 Unsecured credit commitments ________________________________________ 21 2.3.3 Savings___________________________________________________________ 21 2.3.4 Spending and consumerism ___________________________________________ 22 2.4 Possible causes of over-indebtedness_____________________________________________22 2.4.1 Overview of causes _________________________________________________ 23 2.4.2 Loss of income_____________________________________________________ 23 2.4.3 Low income _______________________________________________________ 24 2.4.4 Money management_________________________________________________ 25 2.4.5 Over-commitment and over-spending ___________________________________ 26 2.4.6 Complex causes ____________________________________________________ 27 References________________________________________________________________________29 3 Definitions and Measurements of Over-indebtedness 33 3.1 Definitions reviewed __________________________________________________________33 3.1.1 Definitions at the European level _______________________________________ 33 3.1.2 Definitions at the national level ________________________________________ 34 3.1.3 Common elements of reviewed definitions _______________________________ 37 3.2 Measurements and indicators reviewed __________________________________________38 3.2.1 Measurements and indicators available at the European level _________________ 40 3.2.2 Measurements and indicators available at national level _____________________ 42 3.2.3 Existing indices in Europe ____________________________________________ 45 3.2.4 Conclusions _______________________________________________________ 46 3.3 Potential over-indebtedness measurements _______________________________________47 3.3.1 Ways to measure over-indebtedness ____________________________________ 47 3.3.2 Measurement of over indebtedness in previous research _____________________ 48 3.4 Developing a common method of measurement____________________________________50 3.4.1 Data available from the EU SILC survey_________________________________ 50 3.4.2 Suggested indicators for a measurement of over-indebtedness ________________ 55 3.4.3 Shortcomings with the associated approach_______________________________ 56 References________________________________________________________________________57 3 Towards a common operational European definition of over-indebtedness CEPS-OEE-PFRC 4 Policy responses to over-indebtedness: A review across Europe 58 4.1 Introduction_________________________________________________________________58 4.1.1 Linking causes and solutions __________________________________________ 59 4.1.2 The building blocks