In 2021, the glut of excess savings could generate a double dividend for the Eurozone: first, a consumption boom of EUR170bn, or 1.5% of GDP. In 2020, gross savings in the Eurozone increased by more than +50%, and “excess savings”  stood at more than EUR450bn, or over 4% of GDP, thanks to reduced spending on services amid renewed lockdowns. Extended support measures also played a role: along with partial unemployment schemes, lower taxation (including automatic stabilizers) and higher subsidies and net transfers supported gross disposable incomes , which remained more or less flat in the Eurozone in 2020. Overall, the excess savings in the Eurozone from 2020 represent almost one month of 2019 gross disposable income with more than one month in the UK and the Netherlands. Two thirds of households’ excess financial assets ended up in bank accounts while the remaining one third was invested in capital markets, mainly in equity. In 2020, Eurozone households turned from net sellers of equities into net buyers, with the highest share of excess savings invested into equity seen in Germany (27%) and Italy (21%,) against 15% in France and 8% in Spain. In all countries, however, the share directly invested in equities is significantly above previous years’ levels, indicating a new interest in risky financial assets during the pandemic.

Taking into account the assumed structure of excess savings in 2020 (40% held by the 10% richest households, 50% by the upper-middle class and 10% for the remaining households), we look into the propensity to consume these excess savings over one year by income groups: 20% for the richest, 40% for the upper-middle class and 80% for the 1st to 5th income deciles. Hence, we find that at the Eurozone level, the potential catch-up in household consumption stands at around EUR170bn or 1.5% of GDP. This is eqivalent to more than one third of Covid-19 excess savings. Looking at individual countries, we estimate pent-up consumption in 2021 could reach EUR42bn in Germany, EUR68bn in the UK and EUR29bn in France. This should be seen as a welcome boost to the recovery, with only a limited and temporary effect on prices (mainly in services).

Nevertheless, roughly EUR300bn (2.9% of GDP) of excess savings will still remain at the Eurozone level, not to mention the EUR200bn of excess savings that might be added this year as a result of renewed lockdowns in H1 2021. Generally speaking, households have several options to use excess savings: either their financial assets remain untouched or they are transformed into consumption or into real assets (residential investments) or other financial assets (say, bank deposits into equities). As most households will see the remaining excess savings as a positive “wealth shock”, the most likely outcome might be the first option, i.e. these financial assets stay unchanged on households’ balance sheets. However, since a big chunk of excess savings is in the hands of the richest households, ”the housing option” also cannot be ruled out as these savers have a greater willingness and capability to invest in higher yielding assets, even if they are illiquid. In fact, the residential sector is already in a V-shape recovery. Thus, a scenario in which these funds drive housing prices to even more frothy levels is a clear danger, with possible negative consequences down the road: cemented inequality as a large part of the population is simply barred from entering the housing market and heightened financial risks.