Key Takeaways:
Europe's consumers are saving more than at any point since the pandemic, and that frugality is costing the region as much as 1.3% of GDP.
European households have locked in a savings rate well above pre-pandemic levels, creating a structural drag on an economy already struggling to keep pace with the U.S. Eurozone households saved about 15% of their disposable income last year, up from roughly 12.5% before the pandemic, according to OECD data. In the U.K., the savings ratio has nearly doubled. American households, by contrast, are saving less than they did before 2020.
"It explains quite a large chunk of the growth difference between the U.S. and Europe over the last couple of years," said Marieke Blom, chief economist at ING Groep NV in Amsterdam. If eurozone households returned to their pre-pandemic saving habits, gross domestic product would be 1.3% larger, she estimated.
The divergence is stark. Inflation-adjusted household consumption has risen 5.5% in the eurozone and just 2% in the U.K. since 2019, compared with 18% in the U.S., per OECD data. That gap persists even though real disposable incomes in the eurozone are now 8% above pre-pandemic levels — meaning Europeans have the money to spend but are choosing not to.
The reluctance to consume is reshaping Europe's economic landscape. Luxury brands that produce some of the world's most coveted goods — handbags, watches, clothing — now depend heavily on American and Asian buyers for growth, according to the report. European companies that once counted on local demand are finding their home market increasingly tightfisted.
A Cultural Divide on Spending
Frugality runs deep in northern Europe, where societal norms of thrift and memories of wartime scarcity have made saving both an obsession and a moral imperative. In Dutch and German, the word for debt also means guilt. That cultural inheritance has been reinforced by the inflation shock of 2022, which took a larger psychological toll on Europeans than on Americans, transaction data from Visa Inc. shows.
More than three years after inflation peaked, consumers across the continent are still directing most of their spending toward essentials. The resurgence in prices sparked by the war in Iran now threatens to deepen that caution.
In an affluent part of southwest London, Shelly Perera used to spend freely on theater trips, date nights and overseas vacations. Her salary has risen, but she has downgraded to a budget grocery store and switched to generic brands since the 2022 inflation surge. "We can afford to pay, but we just refuse to do it now," she said.
Younger Europeans are also hoarding cash, driven by anxiety about the future of state pensions. Vincent Boucard, a 32-year-old strategy consultant in Paris, started budgeting with an Excel sheet, moved to a cheaper apartment and aims to save about 50% of his paychecks. "As a European it's not enough to just rely on the pension provided by the state," he said.
Trillions Sitting Idle
Europeans keep about a third of their financial assets in cash or bank accounts, earning low interest rates that can lag behind inflation. Economists argue that channeling even part of the trillions of euros sitting in household accounts into more productive investments would boost both personal returns and the broader economy.
Monika Müller, a financial psychologist based near Frankfurt, said the root problem is that Germans equate money with safety, while Americans equate it with freedom. "To avoid insecurity means you will never grow," she said. She runs seminars helping traders and advisers become more comfortable with risk, including using hand puppets to help one client confront anxieties about investing a family inheritance.
For Pieter Brakenhoff, a software developer in the Netherlands, the need to save was a lesson passed down from his father, who was born during World War II and replaced clothes only when they fell apart. Brakenhoff spent much of his life afraid of spending money but has been trying to relax in recent years. "I had to learn how to spend money," he said.
The stakes for Europe are high. Measures like tax cuts could help boost domestic demand, but many governments are constrained by high debt levels, rising defense spending and aging populations. Without a shift in consumer behavior, the region's economy will continue to lag the U.S., where robust spending — particularly among higher earners — has been the primary engine of growth.
This article is for informational purposes only and does not constitute investment advice.
