Consumer over‐indebtedness in the EU: measurement and characteristics

Purpose This paper seeks to measure and characterise the extent of consumer over‐indebtedness among the European Union (EU) member states. Design/methodology/approach The study evaluates alternative measures of over‐indebtedness on the basis of the permanent‐income/life‐cycle theories of consumption behaviour and adopts a subjective approach in identifying over‐indebted households on the basis of European household survey data. It then investigates the main characteristics of over‐indebted households. Findings The empirical results reveal that over‐indebtedness was a significant problem across EU member states in the mid‐1990s. Moreover, an inverse relationship emerged between the extent of the over‐indebtedness problem and the extent of consumer borrowing across EU countries. Research limitations/implications Anecdotal evidence seemed to suggest that some main factors behind over‐indebtedness could be “market failure” on the credit market, the existence of liquidity constraints and lack of access to formal credit markets. However, a comprehensive and rigorous investigation of the extent and determinants of over‐indebtedness can only be achieved through analysis of more extended household data sets, particularly panel data. Practical implications The EU credit markets exhibited certain symptoms of “market failure”, on the one hand, and there was also need for further financial liberalisation in the Southern European countries, on the other hand. Originality/value The paper provides a first systematic evaluation of existing measures of consumer over‐indebtedness as well as the first EU‐wide empirical investigation of the problem. It should provide valuable information to the credit industry as well as financial regulatory bodies.