Financial literacy: Keynote by EU Commissioner McGuinness at the Bruegel Annual Meetings

“I really think that this event links to all of the things you have been discussing. And I think the problem we have is we divide things into sections where they shouldn’t be.

So to some extent the issue of financial literacy covers every single policy area. And yet it’s not really a headline billing.

So I am determined for the while I’m in this role, to speak about it on every single occasion. And I want to acknowledge, Patrick [Jenkins], the work of the FT in this area as well.

So it’s a big honour to be here with some short opening remarks. What I really would like to see is that everyone in Europe has the knowledge and confidence to manage their personal finances.

And I think that would be a huge step forward, because today that is not the case.

I mean, can you imagine a utopia where every citizen was able to make the right financial decisions for themselves – I think it would be absolutely transformative.

So just a few points that I’ll address today:

Why financial literacy is important, especially right now,
What the European Commission is doing about it already,
And what we are planning to do next.

OK, so we live in unprecedented times, and that has become almost too much of a cliché.

At the macro level, growth is continuing, but it is of course being revised downwards to 3 percent or under.

We’re looking at 8 percent average inflation in the European Union this year.

I’m old enough to remember when inflation was much more severe and interest rates were incredibly high.

And I wonder around, the whole discussion of financial literacy, if a younger generation quite understands that are almost historic now, that are coming back into the real world. And we need people to understand what’s happening in the financial area.

Now all of the problems I refer to won’t be solved by financial literacy – and I think we’re all aware of that.

Because if your electricity bills – and we know for vulnerable households, the way electricity bills are rising put severe pressure on vulnerable households – so no amount of financial knowledge will make it more affordable.

But I do think it will help people generally to make the right decisions.

And this is something that the President of the Commission, Ursula von der Leyen, will be addressing soon – this emergency intervention and structural reform of the electricity market.

If we look within the financial system, I want to emphasise the importance of consumer protection, access to fair advice, and well-regulated markets.

But – all of that said – I believe that financial literacy has a vital role to play, particularly in these difficult times.

Because a person who is financially literate will understand what’s going on in the wider economy, will understand what impact that is having on them personally, and then how to make the right choices or decisions within that difficult context.

So those who understand all of these concepts will know …

That a higher inflation rate reflects things like rising food and energy prices – something they likely already notice in their bills, and in a squeeze on what they can afford.
They’ll understand that central banks are responding to higher inflation by increasing interest rates.
And that those higher interest rates might make it more expensive for them if they want to take out a mortgage or indeed to re-mortgage.

It’s easier to deal with challenging circumstances when you understand what’s going on.

And we also know that a financially literate person is better able to prepare for difficult times and in a stronger position to make informed decisions.

In other words, they are more resilient. And that word resilience applies not just at the individual level, but also at the communal, family and societal level. Resilience is something that we do need to build in the European Union.

Individuals will know the value of building up a savings buffer in case they face unexpected expenses.

Or they can weigh up the best type of contract for their utilities at home.

And indeed on this particular point, there is huge interest now, and you hear many advertisements, across the Member States around how you can manage the bills you’re paying, particularly electricity, and work around off-peak and peak time supplies.

Those factors at the individual level have a wider impact. So having all this knowledge, understanding what’s going on, has a bigger impact.

And again if we have more resilient individuals, it leads to this much more resilient society.

A better informed society, where people are aware of – and also can share their opinions about – what’s happening in their economies. Because knowledge is power.

Now the truth, and the reason why I’m glad that you’re having this conversation today, is that the levels of financial literacy in the European Union are still too low – with a lot of variation amongst Member States.

And low financial literacy has a disproportionate effect on the most vulnerable groups in our society.

And the most vulnerable groups are more vulnerable now than ever. So the idea that they lack the skills around financial literacy puts them in a particularly difficult place, and we do need to address that.

We also know that women’s financial literacy levels are generally lower than men’s.

At the same time, women also tend to be more financially vulnerable, especially as they grow older, when they face the consequences of living longer – which I’m not against, I rather enjoy that concept.

But here’s where the problem is. If you earn less than men over your lifetime, your pension is less, and indeed I would just mention that today we have a very strong package from the Commission on caring – how we’re going to manage the care of both young and older people because of the demographic changes within the European Union. So those are important points.

Financial vulnerability and lack of financial literacy are problems that compound each other.

And when I took this role back in October 2020, I was aware of this just from general conversations, and I really wanted to make this part of my work within this College of Commissioners.

So I’m glad that people are talking about financial literacy now, and we’re getting Member States engaged.

I do think we can boost financial literacy by taking action at the EU level.

Doing that can help Member States learn from each other and exchange ideas, and boost levels of financial literacy across Europe.

Well of course the big piece of work that I want to reference now is the financial competence framework which the Commission has developed with the OECD.

This framework sets out in detail the different knowledge, skills and attitudes that adults need to have in order to be financially literate.

It could be down to simple things, which sounds simple – like drawing up a budget.

The framework asks individuals if they…

Understand what budgeting is, why it’s important,
How to create a regular budget planning, with their income, their saving and their spending,
And is motivated to consider their budget when they’re making decisions about their spending. So they don’t spend first and then wonder why the coffers are dry at the end of the month.

The framework we’ve developed is flexible, so you can pick out the parts most relevant to the audience you’re delivering the message to.

So if you’re training people who have just started in their job, their first job, it could focus on filing payslips for future reference or indeed thinking about your pension early in your career – and that’s another topic that does and is getting attention.

In creating this framework, we’ve really considered how best to address the world we live in now.

The digitalisation of finance means many new things to learn and understand.

So this framework considers whether an adult knows how to choose between different digital payment methods, and about the risks of crypto.

Sustainability has also moved from the fringes to the very heart of the financial system – including in personal finance.

So the framework asks whether someone understands what greenwashing is, or how they might align their personal finances with their sustainability preferences.

And finally, the framework highlights the competences that help build up financial resilience.

And that could help develop measures aimed at financially vulnerable groups.

So the framework includes competences on balancing short-term and long-term plans, and taking steps to avoid over-indebtedness.

Overall, our goal is for Member States, universities, colleges, banks, companies, or individuals, and anyone who wants to, to use this framework in their work.

It can help develop policies, education programmes or learning materials.

And this initiative will help us build a shared understanding of what financial literacy means across the whole of the European Union.

It will also help us better assess financial literacy levels and evaluate different initiatives.

We launched this initiative at the start of the year, and it’s already being put to good use.

Member States including Austria, Italy and Portugal have stated that they will incorporate the framework into their national financial literacy strategies.

The Croatian National Bank has an initiative for short broadcasts for public TV and radio.

The Latvian Ministry of Education and Science is creating learning modules on digital finance.

The Italian securities regulator is running webinars on sustainable finance.

The private sector is also using this framework for their own initiatives.

For example: game apps about personal finance, financial education guides, or training for experts preparing seminars on financial education.

All of these examples build on the financial competence framework.

And there is more work to do, and more on the way.

Again working with the OECD, we will prepare the next financial competence framework – this one is aimed specifically at children and young people.

We know young people tend to measure lower on financial literacy.

And they are a digital native generation – with all the opportunities and the challenges that brings, including in finance.

So this is a vital piece of work that we will release next year.

Also coming next year is a new Retail Investment Strategy, I’ve mentioned this previously in speeches.

And this will include financial literacy within the wider context of our work to help citizens participate in European capital markets in an informed and confident way.

That context includes the accessibility of disclosures, also in a digital environment; the quality of advice; and the suitability of products.

And finally, I want to give just a sneak preview of something coming later this month.

We will release a Eurobarometer that surveyed people across all 27 Member States on their attitudes and behaviour when it comes to their own personal finances.

Across the EU as a whole, respondents said that they are relatively confident managing their own finances.

In fact 86 percent said they are either quite or very confident.

But there is more food for thought in the detail – whether that relative confidence means people are getting the most out of their money.

Only 29 percent switched provider for one of their financial services or products in the last five years.

So you might ask if people are comparing different offers and choosing the one that suits them best.

Or whether digital finance really widens access for every citizen – with more than a third of respondents aged over 55 not very confident in managing their money online.

So just briefly and in conclusion, the Commission, all of us, my colleagues, we are working really hard to keep financial literacy as a top priority, because it has such a positive impact when we get it right.

But we won’t be able to do this on our own, or by ourselves. We need a push, we need to work with our Member States.

So that’s why I am delighted to join this very distinguished panel.

Anna Maria [Lusardi] is one of those who has been pushing this way before me, so I salute your work in the past and your commitment today. It’s important that you do that.

Patrick [Jenkins], I’ve mentioned already that the FT is doing its work and I commend you for that.

Maria [Demertzis], you and Bruegel are showing commitment by hosting this panel.

And I look forward to our conversations. It troubles me that any citizen in vulnerable households, that their lives are made more difficult because they don’t have access to the knowledge and skills.

And therefore in these very difficult times, as you’ve been discussing, it’s actually much more urgent now that we talk about this. And not only talk about it – deliver at the Member State level and improve the situation. Thank you.

Source – EU Commission

“Check against delivery”

[Introduction]

Ladies and Gentlemen,

Good afternoon. It is a real pleasure to be here today to close this year’s edition of the Bruegel Annual Meetings.

Let me begin by taking this opportunity to thank Guntram Wolff for his leadership over the past decade. During this time, Bruegel has firmly established itself as Europe’s leading economic think tank and one of the best in the world.

And let me also congratulate Jeromin Zettelmeyer for his appointment as new Director. At such an important juncture for both the European and the global economy, Bruegel’s critical analyses and ideas will be needed more than ever – so let me wish you every success!

Today, I would like to touch on three topics:

the current economic outlook;
the ongoing policy response; and
our priorities for the coming months.

[Economic Outlook]

We may well be heading into one the most challenging winters in generations. A number of warning lights are flashing red: energy prices have shattered new records, inflation has continued to climb and economic sentiment is deteriorating. And the Russian war continues.

Developments in European gas markets have dominated the headlines in recent weeks. At the end of August, the TTF gas price stood at more than 15 times the pre-pandemic price, and almost twice the level recorded when we published our Summer Forecast – just two months ago.

Inflation levels in the euro area have continued to rise and now stand at 9.1%. Energy prices remain the main driver of inflation, but price pressures have broadened in recent months. Core inflation is at 5.5%, the highest point since the introduction of the euro.

Survey data point to a worsening economic outlook:

Our Economic Sentiment Indicator as well as other indicators, like the PMI, are heading in the wrong direction.
Financing conditions are tightening, both in Europe and globally.
The euro has slipped below parity with the dollar for the first time in twenty years.
And developments in the US and China mean external demand will remain weak.

And yet, it’s not all doom and gloom. In the first half of the year, the European economy performed better than what many – including ourselves – were expecting: EU GDP grew by 0.8% in the first quarter and another 0.7% in the second quarter. This means that EU GDP is now more than 2% higher compared to pre-pandemic levels.

Labour markets are also performing well. The unemployment rate has decreased further and in July stood at a historic of low of 6.0%.

On the energy front, we have already reached our gas storage target of 80%, two months before the deadline we had set for the end of October. Oil and food prices have come down from recent highs. And supply chain disruptions are easing, as port congestion in the US and China decreased significantly. These developments will reduce inflationary pressures, so inflation may have reached its peak.

Uncertainty remains exceptionally high and the risk of a recession is rising. The outlook crucially depends on developments in energy markets:

[Policy response]

Given the level of uncertainty, extending the application of the General Escape Clause was the right thing to do. I know there are different opinions but I am more than ever convinced that it was the right thing to do.

But we now need to make sure that fiscal policy does not increase inflationary pressures. The goals of fiscal policy in this phase should be three-fold.

First, to protect the most vulnerable from the impact of high energy prices. Measures should be temporary and compatible with the green transition. And better targeted: three quarters of the measures taken so far are untargeted.

Second, to provide humanitarian assistance to those fleeing Ukraine.

Third, to expand public investment for the green and digital transitions, and for energy security.

These are three simple goals for fiscal policy.

The EU has made very good progress in reducing our dependence on Russian fossil fuels. Diversification of supplies has resulted in a substantial increase of non-Russian LNG [+57% year-on-year], meaning we were able to make up for the reduced imports from Russia.

Gas consumption dropped by 14% between March and May 2022 compared to the same period in 2021. Gas storage levels could reach 90% by November. Accelerating the roll-out of energy efficiency measures and boosting the uptake of renewables must also continue at full speed to reduce fossil fuel consumption. And we are at a turning point. We are overcoming our divisions. Now, finally, action is also possible to limit the price of Russian oil and gas and to find ways to intervene in the energy market to decouple electricity and gas prices.

In parallel, the implementation of Member States’ recovery and resilience plans is continuing. We have so far disbursed € 113 billion to Member States and we expect more payment requests soon. And RRF investments are starting to have tangible effects on the ground.

[Future priorities – economic governance review]

Going forward, delivering on what we have agreed on – from the RRF to REPowerEU – will be key. But implementation is not everything. We must continue to raise the level of ambition to make progress in other crucial areas.

One of my top priorities for the coming months is to move forward quickly with our economic governance review. Let me recall the context which, in my view, calls for a reform of our rules.

Our economic governance framework has become far too complex and hard to navigate. It relies on unobservable and backward-looking indicators. National ownership has been too low and enforcement insufficiently effective.

The pandemic has left a legacy of significantly higher public and private debt levels. The need to re-build fiscal buffers is clear. But debt reduction strategies must be realistic if they are to ensure stability and support growth.

At the same time, the challenges of the twin transition and the new geopolitical landscape compel us to undertake major investments and reforms. We have two mountains before us, a mountain of debt and a mountain of investment, and how we reconcile these is a key challenge we must address in the reform of our rules.

So what we need is a governance framework that allows us to better respond to our common policy priorities and the challenges of the next decade.

Since we relaunched the debate on the review of the governance framework in October last year, we’ve had very constructive discussions with governments, fiscal authorities and the broader policy world. Let me also thank Bruegel for its contribution to the debate.

One year later, it’s time to draw our conclusions. In the coming weeks, we will put forward our orientations on possible changes to the framework.

Simplification, stronger national ownership and better enforcement will be the defining features of an improved framework, with the overall objective of supporting debt sustainability and sustainable growth.

One way to do so could be to move towards medium-term macro-fiscal plans that set net expenditure paths over several years and are consistent with the convergence of debt to prudent levels.

Having one expenditure indicator could go a long way towards simplifying the system, while keeping the focus on fiscal risks.

Medium-term macro-fiscal plans could also include investment and reform commitments reflecting EU and national priorities and high-level guidance to Member States. The design, governance and operation of the Recovery and Resilience Facility is a useful blueprint in this respect.

To ensure greater national ownership, Member States could be granted greater leeway in proposing fiscal trajectories, provided common EU principles are respected, not least debt sustainability.

For example, reform and investment commitments could allow for a longer fiscal adjustment period. This would also be a way to ensure fiscal sustainability and growth can be mutually reinforcing.

A greater ex ante national ownership of the design of fiscal trajectories could be balanced by a stronger ex post enforcement at EU level – this is the potential deal, in substance.

I believe that changes to our fiscal rules in this sense, accompanied by an improved macroeconomic imbalances procedure, could deliver a more coherent and integrated framework for economic governance. And I believe that these elements could gather broad support among Member States. It’s time to move on, leaving behind the traditional divide.

Moving quickly towards a common understanding would also send a strong and reassuring message to markets. Let me recall that the ECB has pegged its new ‘Transmission Protection Instrument’ to compliance with our common fiscal rules (among other things). So to have

So to have new agreed fiscal rules is also important in this respect.

[Conclusion]

Winter is coming. The European economy is facing serious challenges. While 2022 as a whole will be a strong growth year, the momentum is slowing and a recession in cannot be ruled out.

High energy prices will test our economic and social fabric. But if we remain united, ambitious and ready to intervene as needed in a spirit of solidarity, we can ensure that the coming months will not be remembered as the winter of our discontent – but as the harbinger of a new European spring.

Thank you.