Wealth Inequality Rising in Eurozone

The concentration of wealth among the eurozone’s richest has increased since the bloc’s debt crisis began, with poor families suffering the biggest drop in asset values, a survey released by the European Central Bank showed.

The eurozone’s top 5% of households owned 37.8% of net wealth in 2014, up from 37.2% in 2010 while the bottom 5% owned only debt, the ECB said, based on a survey of 84,000 households, Reuters quoted the ECB report as saying.

Suffering from waves of recession, the bloc’s protracted debt problem has worsened inequalities as states on the periphery like Italy, Spain, Portugal and Greece struggled, while those in the core, like Germany, were quicker to recover.

The median wealth of a eurozone household dropped around 10% to €104,100 in the four years to 2014, mostly as property prices fell, especially for the poorest fifth of the population, the ECB said.

“The shift was particularly substantial in Greece and Cyprus, where the median fell by roughly 40%... but it is also large in Italy, Portugal, and Spain, where it declined by more than 15%,” the ECB said.

Bucking the trend, median wealth in Germany, the bloc’s economic powerhouse, increased by 10% over the same period. It also edged up in Austria, Finland and Luxembourg.

To reach the top 10%, households needed to hold net wealth of €496,000 or more, while the lowest 10% had €1,000 or less.

Poorest Hurt the Most

“The fall in net wealth was mainly driven by a reduction in the value of assets, in particular real estate,” the ECB said. “The decline in net wealth was higher for leveraged households, especially homeowners with a mortgage, compared with outright homeowners and renters.”

The property price fall, a consequence of the bloc’s economic crunch, hurt the poorest the most–real estate wealth was down by a fifth for the poorest 40%, twice the rate of the drop affecting the richest 20%, the ECB said.

Families in Luxembourg, where the financial sector dominates the economy, were the richest, with a median net wealth of €437,500. In the formerly Soviet, Baltic state of Latvia, it was just €14,200. Malta’s stood at around €175,000.

Malta Fact File

Malta is one of only three eurozone countries where home ownership is over 80%, compared to the eurozone average of 61.2%.

Over a third of Maltese households (34.4%) have real estate property other than their main home–and yet only 6.4% reportedly earned income from renting properties. In an effort to curb this blatant under-declaration, the government launched a 15% withholding tax on rent, applicable on rental income earned as from January 2014.

Almost a quarter of the Maltese hold bonds (22.4%)–the highest rate in the eurozone and dramatically higher than the average of 3.89%.

Over a third of the Maltese (37.1%) had some form of debt, ranging from mortgages to credit card debt. This is pretty much in line with the rest of the eurozone, where the average was 43.31%, with the Netherlands having the highest at 63.1%, and the lowest in Italy where only 21.2% held any debts.

US Situation Startling

The income gap between the classes is growing at a startling pace in the United States. In 1980, the top 1% earned on average 27 times more than workers in the bottom 50%. Today, they earn 81 times more.

The widening gap is “due to a boom in capital income,” according to research by French economist Thomas Piketty. That means the rich are living off their wealth rather than investing it in businesses that create jobs.

For those in the top 1%, income rose 205%. Meanwhile, the average pre-tax income of the bottom 50% of workers was basically unchanged, stagnating “at about $16,000 per adult after adjusting for inflation,” the paper reads.

It notes that this trend has important political consequences: “An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.”