FINANCE - Financial literacy

The EU is working to ensure that people throughout Europe have the knowledge and skills they need to make good financial decisions.

date: 28/05/2021

By Lucile Collin

Financial literacy – the knowledge and skills needed to make important financial decisions – is too low in Europe. Every day, thousands of people are deciding which mortgage to choose, where to invest their money and how to save for retirement. However, according to the ‘OECD/INFE 2020 International Survey of Adult Financial Literacy’, about half of the EU adult population does not have a good enough understanding of basic financial concepts. And this will affect the quality of the choices they make. On 26 April 2021, the European Commission and the OECD held a webinar, to discuss these issues and mark the launch of a joint project to address the financial literacy challenge in the EU.

Why now?

The world is changing fast; so are financial services. As well as bringing innovation and progress, the digital transformation also presents us with new challenges, as mobile apps increasingly replace banking advisors to access financial products and services. “Financial literacy is currently too low for many people to make good financial decisions – especially in areas such as risk assessment, insuring, and investing”, says Annamaria Lusardi, Academic Director at the Global Financial Literacy Excellence Center. While the overall figures are low, the problem is more acute in some parts of society than others, with the most vulnerable groups disproportionally affected. Low-income groups, for instance, as well as women, young people and older people, tend to score lower than the rest of the population when it comes to financial knowledge, according to the OECD/INFE survey.

The pandemic has made it more urgent to do something about this. The COVID-19 crisis has deepened existing gaps between financially resilient and financially fragile households and communities. Many people have been hit by a sudden drop in income and unexpected expenses, putting extra strain on them and their families. According to think-tank Bruegel, one third of EU households were unable to handle an unexpected expense in normal times, let alone during a pandemic. Along with strong consumer protection, adequate product development and fair advice, financial literacy has an important role to play in protecting vulnerable groups against economic shocks.

What can we do?

Several projects already exist. Speaking at the joint OECD/European Commission webinar in April, Olaf Simonse from the Dutch Ministry of Finance highlighted the Money Wise Platform, which the ministry launched to bring together partners from government, the financial services industry, NGOs and academia. Also in the Netherlands, the Dutch National Money Week has grown into a European and Global Money Week, a global awareness-raising campaign on the importance of financial literacy from a young age, with thousands of events and organisations.

Industry also has an interest in a financially literate population – and arguably a responsibility too. According to Wim Mijs, CEO at the European Banking Federation, there have been several initiatives by the banking sector, from a partnership with the Salvation Army to reach out to vulnerable groups, to a European money quiz played by 3,000 children in 28 countries.

On the EU’s side, Spanish MEP Susana Solís Pérez is committed to steering the debate in the European Parliament. “Women make up 30% of entrepreneurs but receive only 2% of overall private investment. This is not acceptable”, she says. She has launched a pilot project with other MEPs from different political groups to measure the percentage of women in investment.

What’s next?

The European Commission is acting too. In its September 2020 capital markets union action plan, the Commission reaffirmed that sound financial literacy is at the heart of people’s financial well-being. A recent Commission study concluded that the Commission and the OECD should work together to develop joint ‘financial competence frameworks’ for young people and adults.

These frameworks will set out the knowledge, skills and behaviour that someone needs to develop to ensure their financial well-being throughout their life. The approach would be similar to, for example, the European language competence framework, where a beginner starts out with an A1 level and a fluent speaker has a C2 level. The frameworks will provide a good basis for national strategies and action plans adapted to different national contexts. But most importantly, they are there to be used – by governments, teachers, businesses, civil society, schools, libraries and more.

At her hearing before the European Parliament committee on economic and monetary affairs in October 2020, Commissioner McGuinness said it loud and clear: her vision is about putting people front and centre. Financial education is precisely about empowering people so they are able to make better financial decisions. It will help households become more resilient. It will help make our societies more inclusive. And it will help our economies to recover and become stronger.