Sunday, 8 May 2011

Why do Greeks save less - part 2

After a conversation I had on twitter I decided to look into the savings rate divergence between Netherlands and Greece a bit more.

source: AMECO

A further factor which I think plays an important role in defining people’s saving behavior is pension replacement rates (the % of the wage earned before retirement that pensions amount to).

source: OECD

Greece has the highest pension replacement rate of the three, which explains the lower savings rate it displays. What the replacement rate levels don’t explain is the drop in savings rate after 1990. Something like that would stand as logical only if replacement rate in Greece where raised significantly during this period.

But since Portugal has a lower replacement rate than Netherlands, the fact that it also has a lower savings rate is counterintuitive. What could explain a bit of this discrepancy is the lower disposable income for Portugal when compared to the Netherlands. 

source: AMECO

The figures above are not in Euros but in Purchasing Power Standard. According to the Eurostat definition; “one PPS can buy the same amount of goods and services in each country”. 

What the difference in disposable income doesn’t explain is the drop in savings rates in both Portugal and Greece from the 90s onwards, since during this period gross disposable income per head of population doubled for both countries.

There are still some holes in the explaining power of these factors as well then.

Something that could explain the drop observed in savings rate in both Greece and Portugal is the following. I warn you that this lacks any economic sense and is totally wrong, but in the minds of people lacking basic economic education is perfectly justified. I don’t mean to underestimate any people falling in this category, I’m just stating something that I think may be true. I thought of that after a chance conversation I had with people  older than me who were of working age during the 80s, while I was not, although I can remember the situation prevailing back then.

Back then consumer price inflation was significantly higher, as were nominal deposit rates that banking institutions offered. Greek people were used to nominal depo rates like 15% or whereabouts and had the feeling that returns on their savings were satisfactory. Before Greece joined the EMU, CPI declined significantly and nominal deposit rates declined with it, giving people the feeling that returns on their savings were disappointing, so they might as well spend the money.

source: AMECO, OECD

source: AMECO, OECD
source: AMECO, OECD

As you can see, savings rates in Greece and Portugal fell in line with CPI and nominal depo rates, while in Netherlands CPI was essentially flat during this time span as was the savings rate. 

I know that this line of thinking is hellishly wrong, but many people felt that way and adjusted their savings patterns accordingly. It only matters how one perceives reality…

P.S. Here are a couple of charts about deposit rates in Greece over the time examined. Which shows that for the time-span before EMU accession the time when savings rate started falling coincided with perhaps one of the only periods when real depo rates were positive. Since Greece joined the EMU real depo rates were constantly on the red.

source: Bank of Greece

source: Bank of Greece

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