French household savings as a lever for post-COVID-19 recovery? (Note)

Usefulness of the article : By the end of 2021, French households’ savings will have reached a level one and a half times higher than the government’s stimulus plan launched at the start of the health crisis. This accumulation of savings is a major political issue that needs to be addressed in order to complement state aid with a view to a post-COVID-19 recovery that is more firmly rooted in the regions.

Summary:

• A savings surplus can be beneficial to an economy in the short term, but in the medium term it can lead to significant macroeconomic imbalances.
• Information asymmetries create a wide gap between institutional investors and savers acting on their own behalf.
• The current health crisis presents a unique opportunity to stimulate investment by reducing these disparities, in particular through more accessible and widely disseminated financial information.

Since March 2020, the French government has had to take on unprecedented levels of debt to absorb the economic shock of the health crisis. In this context, redirecting household savings has become a major strategic focus for stimulating economic development.

1) Is excess savings beneficial or harmful to the economy?

When discussing household savings, we must first distinguish between the two main forms that savings can take in an economy (excluding real estate savings, which will not be addressed here). While « liquid » savings include readily available resources used on a daily basis, such as checking accounts or savings accounts, « financial » savings allow capital to grow through capital gains, particularly through life insurance policies or securities accounts, which allow investment in securities. The sum of these two types of savings is commonly referred to as the « gross financial wealth » of households.

Despite numerous disparities at the microeconomic level, the gross financial wealth of French households has risen sharply overall since the start of the health crisis. The savings rate is estimated to have reached 21.3% of disposable income in 2020 (INSEE, 2021), a level not seen in France since 1975.

Although the balance of savings accounts increased by 2.5% during the first lockdown, Figure 1 shows that securities and life insurance assets temporarily declined in March, then rebounded and exceeded their February 2020 levels by December 2020. In addition, the Banque de France (2021) anticipates a savings surplus of €165 billion by the end of 2021, more than one and a half times the stimulus package currently being implemented by the government to support the French economy. With a view to promoting post-COVID-19 economic recovery, it is therefore legitimate to ask whether this savings surplus is beneficial or, on the contrary, detrimental to the economic dynamism of a country such as France.

Graph 1–Change in gross financial assets of households and their components (France, 2019-2020). Note: Sampling from anonymized Crédit Mutuel Alliance Fédérale data, INSEE calculations. The gray areas represent periods of lockdown (source: INSEE, 2021).

In theory, a savings surplus is generally associated with pessimistic thinking. Firstly, because excessive savings would alter the pace of economic recovery due to a structural shortage of demand and investment opportunities falling short of available funds. Secondly, because savings are on average more concentrated among the most affluent socio-professional categories, which may ultimately lead to an explosion of inequality.

Furthermore, savings that significantly exceed investment can have a negative impact on overall demand in an economy, which then faces the threat of secular stagnation in its economic forecasts. Accompanied by low interest rate policies, this context may, however, be conducive to an increase in government debt without undermining its solvency.

Without overlooking the volume of savings accumulated by households, another crucial aspect to consider is the mismatch between the structure of savings and the investment opportunities inherent in economic activity. In the event of a recession, if savers prioritize bond debt securities—considered safer—over equity securities, this may ultimately weaken the economy by exposing it to a cumulative process of bankruptcies among companies lacking equity capital (Davanne, 2016).

Finally, countries also run the risk of investing too much of their savings abroad when there are urgent investment needs at home (Kaufman & Leigh, 2020). The challenge, then, is to determine when these macroeconomic imbalances become excessive and, if so, what are the most appropriate channels for redirecting gross national financial wealth toward domestic consumption and investment spending.

2) Lack of targeted financing

When they want to grow their savings, most French households turn to financial intermediaries, whom they entrust with the responsibility of optimizing their asset portfolio after agreeing on a level of risk exposure. However, this phenomenon masks an underlying trend: the final allocation of savings does not seem to be a top priority for many households, which focus primarily on their future use and on the triptych of liquidity, profitability, and risk (Séjourné, 2014).

This lack of targeted financing can be explained in particular by French savers’ poor knowledge of financial investments, which leads the majority of them to outsource the management of their investments to institutional investors. This results in a growing gap between, on the one hand, these investors with extensive financial resources and, on the other hand, savers acting on their own behalf.

The ability of investors to combat the information asymmetry inherent in financial assets is therefore crucial in explaining this disparity, as financial information ultimately targets players who are able to process it and are likely to subscribe to a large volume of investment products. As a result, the cost of entering the investment market is often a deterrent for individual investors who, faced with highly irregular returns, are tempted to rely on industry experts.

The current health crisis therefore presents a real opportunity to reduce these disparities by promoting more accessible and widely disseminated financial information. In a country in slowdown, which has seen record levels of savings and public debt since March 2020, household savings are a strategic factor in the complex equation of post-Covid recovery. Furthermore, this lever for action is reinforced by public opinion, which is increasingly won over to the cause of strong regional development, enabling the French economy to become more resilient by putting micro-enterprises and SMEs back at the forefront of the economic scene.

It is therefore essential to devise new mechanisms that allow part of the savings potential to be channeled towards French companies that are the lifeblood of the country’s economy. There is no doubt that the success of this operation will depend on the ability of the public authorities and the banking sector to work together to guide savers towards medium-term targeted financing for businesses. The integration of environmental and social criteria is also a way of enhancing the appeal of these targeted products at a time when ecological challenges and inequalities are at the forefront of political debate.

3) Integrating French household savings into the post-COVID-19 recovery: what levers for action?

In response to the need for transparency brought about by the targeting of household savings, last October the Ministry of the Economy, Finance, and Recovery launched the « Relance » label, designed to better identify investments that primarily support the equity and quasi-equity of French SMEs and mid-cap companies. The stated aim of this initiative is to establish an eligibility charter that facilitates the transmission of information between undertakings for collective investment in transferable securities (UCITS) and households with surplus savings. This Charter also includes environmental, social, and corporate governance (ESG) criteria designed to guide the investment and shareholder engagement policies of labeled funds, which, in this context, are subject to semi-annual reporting (Ministry of Economy, Finance, and Recovery, 2021).

Keen to get this project up and running quickly, the Ministry has opted for a fast-track application procedure whereby the companies concerned initially award themselves the label. Bercy then has a maximum of three weeks to reject any label that does not meet the criteria. In parallel with this scheme, Bpifrance is committed to guaranteeing up to €1 billion in equity (or quasi-equity) financing for funds invested primarily in unlisted SMEs and mid-cap companies in France. In practice, labeled funds are accessible via unit-linked life insurance, equity savings plans (PEA), retirement savings plans (PER), and company savings plans (PEE).

Similarly, the « PEA-PME » is a little-known tax scheme that allows individuals to open a share savings plan with a credit institution to finance SMEs and mid-cap companies. This plan involves opening a securities account or signing a capitalization contract for plans opened with an insurance company.

As relatively simple and transparent products, participatory loans are also a useful vehicle for integrating household savings into the equity capital of French SMEs through institutional players and banks. Halfway between a term loan and an equity stake in a company, these loans offer a maturity of eight years and require the companies concerned to repay the funds only after four years, giving them time to reap the rewards of their investments. French SMEs and mid-cap companies therefore have between April 2021 and June 2022 to seize the opportunity by taking out this type of participatory loan, which has recently been authorized by the European Commission.

Finally, at the regional level, several initiatives reflecting the spirit of the « Relance » label, the « PEA-PME » scheme, and participatory loans are underway. For example, the « Épargne Occitanie » plan was recently launched to enable households in southwestern France to invest directly in companies close to home. In this context, the Occitanie Region has joined forces with the Chamber of Commerce and Industry (CCI) and a Toulouse-based crowdfunding platform to help companies headquartered in Occitanie to increase their capital or quickly raise debt in the form of bonds or participatory securities to cope with the financial difficulties caused by the health crisis. Strongly rooted in the Occitan region, this plan also has the advantage of allowing individuals to contribute as little as €100 in exchange for an announced return of around 5%.

The integration of recovery plans specifically dedicated to savers therefore seems to be being implemented at different territorial levels so that each household can find an investment product that meets its aspirations. Communication and promotion around these products will also be decisive in their widespread distribution.

Conclusion

Despite massive support from the European Central Bank (ECB), the French government has had to take on unprecedented levels of debt since March 2020 to absorb the economic shock of the health crisis. In this context, redirecting household savings—and, more specifically, those accumulated in regulated savings accounts—has become a strategic focus for stimulating economic development based on microbusinesses and SMEs with strong local roots.

In a low interest rate environment, investment products specifically dedicated to this type of business could be a hit. But the success of this operation depends on the ability of public authorities to offer products that are transparent, easy to access, and embrace the diversity of French households, particularly in terms of their trade-offs between risk, return, and liquidity. Finally, smooth coordination between local, regional, and national policies will be crucial to this effort.

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