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Organizations that help people manage their financial problems are warning of a dramatic increase in the number of families burdened with bills. Even in countries that are famous for their generous savings, like Germany and Austria, citizens are beginning to worry.
“In some provinces, we are already seeing significantly more people seeking financial advice than last year,” said Maria Kemmetmueller, deputy director of the Austrian organization of debt counseling agencies. “In the fall, we forecast the need for consultations across the country to increase by as much as 40 percent.”
These concerns are just one of many threats to the post-coronavirus economic recovery. As a result, consumer costs are falling and some studies point to the risk of increased financial instability as the number of defaults increases.
The European Consumer Debt Network, which is trying to combat over-indebtedness, says that up to 10% of European Union households already face this problem, and adviser Costa Skliris predicts that this number will at least double in the future.
A study by the Brussels-based think tank Bruegel found that almost a third of European households realized before the crisis that they could not cover unexpected expenses. Southern Europe has been found to have more “financially vulnerable” families.
The Resolution Foundation reported this month that 44 percent of UK households would not be able to cover their bills if they lost their main source of income over the next three months.
Loss of wages is one of the main causes of financial problems, and so far attempts have been made to curb the pandemic frenzy with free vacation programs. However, many governments, concerned about their own debt burden, are planning to end this support, which could lead to a sharp rise in unemployment.
“The need for counseling will increase dramatically,” said Roman Schlag, a debt expert with the German Association of Debt Counselors and Caritas, whose demand for online help has grown by 30 percent.
“Initially, borrowers will try to manage themselves, sometimes asking for disaster,” he says. “At some point, they will find that they can no longer deal with the debt on their own, and then they will ask for advice.”
This problem suggests that the economic crisis is likely to exacerbate income inequality. The OECD warned last month of a particularly severe impact on low-income people, women, migrants and youth. These people are less likely to be able to work from home during quarantine, as a large proportion of them work in the sectors most affected by the coronavirus, such as retail or the tourism and hotel industry.
But those who earn more can also suffer. The self-employed are particularly vulnerable, as they tend to depend on a small number of clients and may not be able to take advantage of the support programs offered by the government.
More generally, the European Central Bank mentioned the sustainability of household debt as a major risk in its last financial stability review in May. A temporary exemption can alleviate the situation, but only for a short time.
Insufficient infrastructure, such as the lack of debt management agencies, makes it difficult to solve the problem. In many countries, borrowers will fall into the hands of private lawyers, unregulated consultants and other organizations without acquiring reliable knowledge.
Skliris says that households are likely to be inclined to seek short-term loans, despite particularly high interest rates. Or try to make some payments at the expense of others.
“People tend to associate debt with feelings of shame and pride,” he says. “They often try to level a hole by digging a new one.”
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