The World’s Worst Spendthrifts Aren’t Who You Think

Photograph by Freya Ingrid Morales/Bloomberg

Newly-constructed residential apartments in Orestad, on the outskirts of Copenhagen, Denmark.

Bloomberg’s Frances Schwartzkopff reports from Copenhagen on the scandalous behavior of the spendthrift Danes. Already the world’s most indebted people, the Danes are gearing up to borrow even more as their housing market heats up.

Wait a second. You are somehow not familiar with the reckless spending habits of Denmark? The wholesale betrayal of future generations by Scandinavia? Oh, right. You may be under the impression that it’s southern Europe that is burying its children under a mountain of debt. And Americans who just can’t recall what it means to live within your means.

Discussions about the European economy often turn on the stereotypes of the frugal North and careless South. In actuality, many of the stereotypes actually have things backwards.

Schwartzkopff’s story is a study in delicious understatement. She notes that the Danes built this debt up in a housing bubble, followed by a collapse, that many now owe more on their mortgages than their houses are worth … and that they’re happy to do more or less the same thing again. Danish “memories aren’t infinite,” one economist notes in Schwartzkopff’s article. Infinite here seems to mean “> 5 years.”

Above, a chart, compiled using Eurostat data, of household debt in Europe (with the U.S. added for comparison). Denmark is at the top, with debt at 267 percent of income. (Schwartzkopff says 310 percent; that seems to be based on a somewhat broader measure. In any case, it’s No. 1.) Danes have about twice as much debt relative to income as Spaniards–and more than four times that of Italians. Now look further down the list. Of the top six countries, only Ireland fits the the stereotype.

These numbers, it’s worth noting are for personal debt, not national debt. National debt involves years of complex (and often wrongheaded), government decisions. That, too, doesn’t always line up the way you’d expect–Spain’s government debt level is barely higher than Germany’s (and the highest government debt levels of all are, believe it or not, Japan’s). The numbers you see here are for the debt families take on. They go directly to the question of whether folks in some countries are more reckless with their money.

It’s important to bring these numbers out because debt is invariably cast as a moral issue, and whether the discussion is of bailing out U.S. homeowners or European economies, it tends to drift into declamations about character. The idea that countries with struggling economies are filled with the lazy and irresponsible animates discussions of European affairs–and certainly political discussions in Germany, Europe’s financial heavyweight.

The beginning of this post certainly sounds unsparing of the Danes–and just like the stereotypes of Spain or Greece, it’s not really fair. There are good reasons why Scandinavians take on more debt. For one thing, the interest rates are low, so they can afford it better. Scandinavians also feel less pressure to accumulate savings, because they don’t need them as much. They have an excellent social safety net and significant pension holdings; Denmark’s national pension fund has consistently delivered excellent returns.

Nonetheless, seeing these debt levels arrayed side by side may challenge your assumptions about national stereotypes. The reality is that character is rarely the central issue. The chart above is an excellent illustration. Citizens of countries with well-developed banking systems often have a lot of debt; those without like Italy or Slovakia have less, and often at much higher interest rates.

At the moment, the worst of the debt crisis for Spain and Italy seems to have passed, while Denmark’s banks are in trouble. That’s how the wheels of finance turn: Character everywhere is the same; it’s institutions that fail. That’s probably a useful principle to remember, especially for those who think international assistance is best garnished with doses of schadenfreude.

The chart in this post appeared earlier in the Market Now daily email. Click here to register and subscribe. Or here to follow @markgimein on Twitter.

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