Over-indebtedness in a high inflation and high interest rate landscape

Households have experienced varying credit conditions over the past few years. The Russian invasion of Ukraine created much market uncertainty and during the course of the year, energy prices surged and living costs sharply increased. The European Central Bank (ECB) and other central banks across the EU increased interest rates to counter inflation, raising them to levels that had not been experienced in decades. The deposit facility rate in the eurozone is currently at the highest levels since the introduction of the single currency, at 4 %. 

This very sharp and rapid increase causes consumers to face substantial capital costs, on top of those faced due to the rising cost of living. All of this challenges household economies, endangering their ability to repay their loans and increasing their likelihood of becoming over-indebted. The challenge to access private finance and the capacity to pay back loans has clear economic impacts for households. Its spillover effects also impact the quality of life for many, with decreasing living standards and decreasing individual feelings of wellbeing.

Despite the negative impacts, policymakers can also develop policies to support households that have found themselves in a state of over-indebtedness. The recent review of the Consumer Credit Directive has proclaimed preventing over-indebtedness as one if its main objectives. A review of the other big piece of European legislation addressing over-indebtedness, the Mortgage Credit Directive, should be conducted over the next few years. Further action can also be taken on the remedial side.

Fredrik Andersson is a researcher in ECRI and the Financial Markets and Institutions (FMI) Unit at CEPS. Beatriz Pozo Pérez coordinates the FMI Unit at CEPS.