Financial Fragility Across Europe: Is it the Household or the Country that Matters?

This paper investigates households' financial fragility in twelve European countries to assess whether international differences are a matter of household characteristics and/or of country features. Financial fragility is characterized by not having income constraints, but by holding insufficient liquid assets to face unexpected expenses. The estimation results show that this metric is able to capture difficulties other than those related to debt and income and highlight the relevance of accounting for household portfolio decisions. Specifically, an illiquid portfolio increases the likelihood of financial fragility, while indebtedness not always does. Relevant differences among countries are observed in terms of both the estimated average likelihood of financial fragility and its main determinants. A decomposition exercise carried out by means of counterfactual methods shows that most of each country's difference in financial fragility with respect to Germany arises predominantly from household characteristics rather than from its economic-institutional setup, even if in two countries the latter is found to more than compensate for the former.