| Common Definition on Overindebtedness: EU-Project reveals its Findings at a Brussels Conference on December 11, 2007 |
SECOND TRY
The second try of the EU-Commission to find a common definition on "overindebtedness" after DG Sanco mandated similar research in 2000 has now be made public in a conference launched by DG Social Policy.
We have already expressed our reservations with regard to the selection of these contractors for such an important research. OEE, CEPS and ECRI are directly linked to the banking sector and cannot be called independent research institutions. PFRC has become known by its campaigning against rate ceilings in Great Britain.
The outcome of this reserach will certainly not only have an impact EU statistics and policies but also on national statistics which dominate the political arguments on the prevention of overindebtedness. Already the development of the Consumer Credit Directive where the prevention of overindebtedness has been finally replaced by a deregulatory goal of legal harmonisation shows that definitions are crucial for political discourse.
A UNIFIED DEFINITION ON OVERINDEBTEDNESS?
The project had already be predefined by the research question where the Commission implicitly stated that a common definition on overindebtedness in all areas is feasible, desirable and necessary.
In its own proposal iff together with ECRC members challenged this presumption and criticised its implications from which we cite:
"In the tender the Commission cites findings of a previous study for DG Social Policy that enumerates six different definitions of overindebtedness which are attributed to different countries. That selection is only an example, as many more definitions used in Europe could be added. Definitions serve a purpose. Unless the use of the term “Overindebtedness” is elaborated within the different political, legal or social contexts, it will be hard to understand that the reason these different definitions exist is not down to the simple lack of scientific elaboration.
The Project will aim to demonstrate that the differences in definition are less attributable to a specific country, but that in reality, most of these various definitions can actually be found alongside one another within the confines of a single Member State. It may depend on the underlying goals and the social, legal and economic policies that are put in place. Thus for example, the practical “30% income level” definition attributed to France, is also prescribed by law in Belgium and Switzerland where however, it does not define overindebtedness directly but the notion of responsible lending, which itself is assumed to prevent overindebtedness.
Besides the dominating interest of this research in the prevention of overindebtedness and social exclusion, namely requiring an appropriate focus on the social consequences of overindebtedness, the need for data on the level of social welfare and exclusion in society (with its focus on issues of poverty and saving transfer payments from the welfare state to creditors) cannot ignore the underlying legal principles of debt and overindebtedness which characterize debt problems in modern society. In addition, many of the measures which are proposed or enacted will have to recurr to the legal system where the definitions of the problem follow their own rules. This makes the participation of legal experts predominant.
In another example, though the Belgian “default definition” governs the statistics of the debt observatory in Charleroi, it actually does so in contrast to official Belgian statistics on overindebtedness which use the gener-ally accepted definition of consumer insolvency which again is only partly reflected in the ECRI definition. The project will have to pay sufficient close attention to bringing together and differentiating those actual definitions effectively used throughout the European Economic Area (and beyond), and understanding the different purposes which are usually formulated in connection with the phenomena of overindebted-ness. “
This critique was certainly no recommendation to get this research grant which went to the three institutions which are linked to bank lobbying (“European Savings Institute, Project Director, Belgium and France” (OEE); the Centre for European Policy Studies (CEPS) and the European Credit Research Institute (ECRI), Belgium as well as the University of Bristol (Personal Finance Research Centre), United Kingdom which has recently be seen lobbying against rate ceilings in the UK.
INTENTIONS OF THE REPORT
The interim report of this group has as we presumed not problems with the implications of a biased tender. It overtakes the assumptions and promises “a better understanding of the phenomenon as well as the empirical analysis of the effectiveness of policy measures for preventing and coping with over-indebtedness” which already indicates that this research is placed into the political discussion on regulatory approaches to overindebtedness.
“The purpose of this study is to establish the foundation for a common European definition of overindebtedness. A common definition will allow for a European-wide comparison of statistics on overindebted households derived from comparable national data. It will facilitate a better understanding of the phenomenon as well as the empirical analysis of the effectiveness of policy measures for preventing and coping with over-indebtedness. The study will lay the foundation for a common operational European definition of over-indebtedness that can be implemented in all European Member States.”
DIVERSITY OF DEFINITIONS
The authors enumerate definitions and presumed causes for overindebtedness without explanation of the the context in which such definitions are used. They often point out that some definitions are restricted because they disguise a lack of data in areas which they arbitrarily exclude. Most of these definitions are taken from official resources. The question is what kind of conclusions the authors want to draw from this patchwork of definitions. It is also strange to find their distinction between “indicators” which “measure overindebtedness” and definitions which “define” overindebtedness. Typically indicators are used in empirical research to make definitions operational. Each indicator implies an underlying definition so that “empty pockets” as an indicator point to an understanding of the phenomenon of poverty which is closely linked to money.
Still the report refers to “different approaches” but there is little to learn about them. Why these definitions have been selected at all and why others from the statistics and definitions on poverty have been omitted remains obscured. The following statement which is rather typical for the material offered on the Internet seems to have no practical information at all besides that there are many differences in Europe.
“Some governments in Europe have started to use definitions but they often apply different approaches. For instance, economic definitions are used by the governments in Austria and Belgium (where households are seen as over-committed if – after subtraction of living expenses – they cannot satisfy all payment obligations). Luxembourg’s definition is similar to Belgium’s. Further variations exist in the public discussions in France, Ireland, Sweden, The Netherlands, Portugal, and Norway. Finally, no definitions were identified for Lithuania, Bulgaria, The Czech Republic, Italy, Spain and Greece.”
In the part on the indicators no underlying definitions and hypothesis are elaborated. Instead they are sorted into “types of economic, legal and subjective (?)” indicators.
The categories do not seem to be exclusive. As for example insolvency law has to refer directly to an economic situation of insolvency legal indicators are mostly just overtaken from economics. The cited subjective indicator of the “ability to cope with financial shocks” may hardly be found in statistics and quite difficult to distinguish from the economic indicator of “financial arrears” as well as the “legal” indicator of “debt write-offs by creditors” (why legal?). One gets the impression that labelling groups of definitions suffices to know something about them.
But while the report has little news about what could be the foundations of a common definition on overindebtedness for the large diversity of definitions it promulgates some interesting observations on the presumed effectiveness of debt prevention which does not seem to need further discussion.
RESPONSIBLE LENDING
The legal instruments which iff together with national experts put together in a study for DG SANCO in 2002 concerning the tools to cope with overindebtedness in the old member states seem to be unknown. Bankruptcy schemes, default handling, exemption laws, institutions for debt advice etc have no category while the informational approach of “responsible lending” favoured by DG Market in its politics on overindebtedness gets a predominant place.
“Most of the countries studied have legislation or codes of practice related to responsible lending” a statement which we would deeply question for other countries than Switzerland and Belgium. Instead the study reports on a previous draft of the pending Consumer Credit Directive and its former principle of responsible lending.
Instead the broader concept of “responsible credit” as laid down in the seven principles of responsible credit by ECRC is unknown.
The option for an informational approach in overindebtedness where education and information are seen as more important that a regulation on predatory lending practices (which are actually the cause of the international subprime mortgage crisis supported by latest statements and measures taken by the US Federal Reserve Board) opposes nearly all claims to the present Draft of the Consumer Credit Directive and will be welcomed by those who think that markets as such are the best remedy against social discrimination.
RATE CEILINGS AND USURY
We find this tendency again where the report mentions rate ceilings.
“Debate around legislation to set interest rate ceilings tends to be emotive. While there is a strong moral
argument for protecting consumers against excessive charges, it can also be argued that ceilings distort
markets and can contribute to financial exclusion. The desirability of a rate ceiling depends on three main
factors: whether a ceiling already exists; the maturity of the credit market and whether there is national
provision of (subsidized) affordable credit for high-risk consumers, for whom the costs of credit are high.
For these reasons, decisions are best made by individual Member States.”
There is no “moral” argument on rate ceilings. This could much more reproached to the “responsible lending” which asks creditors to refrain from credit extension. The qualification as “moral” and “emotive” hides the quest than in a “rational model” usurious credit is seen as necessary to serve the poor. This kind of “rationality” is easy to assess. It is the neo-liberal assumption that creditors alone decide which people they will serve and that only immediate and high profit can induce them to do this business which reduces social policy to a quest for more profit in the banking industry.
Meanwhile we know extensive research on the way minimum wages affect access to jobs in many countries of the world. There is equally research on the welfare derived from rent regulation in the market of homes. Similar research could be easily done in Germany where such ceilings have been introduced in 1981 and their benefits are not disputed by the supplier side.
What we read supposes that we can expect a final report which supports those political currents within the Commission who favour further deregulation while focussing leaving overindebtedness to the three miracles of social policies: financial literacy, microlending and ethical investment. All three by coincidence have no critical implication for the present system of supply.
We annex the iff proposal with references to the literature as well as the Links to this report and other material. |
| ID: |
40662 |
| Author(s): |
UR |
| Publication date: |
13/12/07 |
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URL(s):
Dourmashkin, N.; Rossi, M.C.; Verma, V.; Yin, Y., Study of the Problem of Consumer Indebtedness: Statistical Aspects, Contract No. B5-1000/00/000197, London, October 2001
EU-Tender No VT/2006/017 on a “Common Operational European Definition of Overindebtedness” attributed to a consortium under the French Observatoire d’Épargne Européene (Paris), Personal Finance Resear
Reifner, U; Niemi-Kiesilainen, J.; Huls, N.; Springeneer, H. Emprical Study on Regulation in Overindebtedness in the EU, Hamburg 2003
EU-Project COMMON DEFINITION Interim Report
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Created: 13/12/07. Last changed: 04/11/08.
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