The material prosperity of people consists of two main resources: income and wealth. The possession of wealth, in particular, offers extended consumption options, can make good a loss of income and secures one’s own pension – for example, via owner-occupied housing. Furthermore, it can finance the education of children and is built up to enable bequests. Thus, wealth creates a financial independence and great wealth may enhance economic and political power. Therefore, knowledge of the distribution of wealth and its key determinants represents an important factor in the decision-making of social and political actors. So, what does the current situation in Europe look like?

In the euro area around the year 2014 the distribution of household net wealth (real + financial assets – liabilities = net wealth) is heavily skewed. If all households are divided into 100 equal groups (= percentiles) sorted by increasing levels of net wealth, the 50th percentile (median) household holds net wealth of €104,100. However, the 10th percentile holds only €1,000 and the 90th percentile €496,000 – the 95th percentile even €743,900 (see here). This means the top 10 percent of households in the wealth distribution hold over half of total net assets.

Differences between countries

Looking at the 19 individual countries in the euro area (apart from Lithuania, for which no comparable data is available) we see large differences: Households in Luxembourg (€437,500) and Belgium (€217,900) have the highest median net wealth, those in Latvia (€14,200) and Estonia (€43,500) have the lowest.

Figure: Median net wealth and the Gini coefficient in the euro area

Source: ECB 2017 (see here)

The most important real asset in all countries is owner-occupied housing. Home ownership and the value of these homes is one important source for differences in net wealth levels between countries. The structure of the welfare state also plays an important role. In countries with an effective and well-developed welfare state, households accumulate less private wealth, as the (welfare) state takes over some of the securing functions that private wealth performs such as compensating for income loss (see here). Part of the differences between the countries can also be explained by structural differences such as household size. For example, in southern European countries more people live on average within one household compared with in central European countries. However, as it is not clear who holds the assets and liabilities, a per capita calculation is inappropriate.

Differences within countries

Differences are not only visible between countries, but also within them. A standard measure of inequality is the Gini coefficient. The closer the Gini is to the value one, the greater the inequality. The highest Gini can be found in Latvia and Germany with 0.785 and 0.762 respectively. The lowest are found in Slovakia and Malta with 0.492 and 0.586.

A source of different wealth levels within countries is age. Wealth is accumulated via savings from income over the life cycle until retirement age and then consumed or passed on as wealth transfers (gifts or inheritances). Current research e.g. from Thomas Piketty suggests that wealth transfers are (again) an important factor for household wealth in European countries. In 2010 the shares of current household net wealth due to inheritances and gifts vary between close to 13 percent in Cyprus and over 31 percent in western Germany. Looking solely at households, which are already in receipt of a transfer, the shares of current net wealth due to inheritances and gifts are already between over 30 percent in Cyprus and more than 52 percent in western Germany (see here).

Inheritances and gifts are a dominant factor

For high-income households, transfers are less relevant to their current net wealth position. However, they receive significantly higher amounts than low-income households. This can be explained as follows: High-income households are able to build high wealth levels from their regular incomes. Substantial inheritances and gifts point to low intergenerational mobility. It seems that parents of high-income households also shared high incomes and the ability to save.

Inheritances and gifts can be seen as a way of accumulating wealth without effort and here high transfers pose a particular threat to equal opportunities. This development needs to be watched carefully, particularly because taxes on gifts and inheritances has tended to decrease in the euro area and in countries like Austria were even abolished over the last couple of years. Therefore, it is important to discuss how inheritances and gifts can be tapped to co-finance the social welfare state in each country.

This is the latest in a series on inequality in Europe sponsored by SE, the Hans-Böckler-Stiftung and the Friedrich-Ebert-Stiftung. See also our focus page “What is inequality”.