Improving financial education, key to greater financial resilience and financial inclusion

Bruegel´s report analyzing the results of the 2023 European Commission survey to measure the level of financial knowledge in the European Union (EU). The report was prepared at the request of the Belgian Presidency of the Council of the European Union as all countries have or are in the process of a financial literacy strategy and there is an urgent need to roll out these strategies, to monitor progress and to establish best practices. Results of the survey shows a low level of financial knowledge across the EU and that financial literacy increases with GDP per capita, with education levels and with age. According to the report, financially literate consumers are more resilient to financial shocks and participate more in the possibilities offered by the financial system as a whole: they invest more in the stock market, save more, manage their debts better and plan their retirement more effectively.

Main takeaways of the report:

• Results of the Survey shows that only half of the respondents answered at least three of the five questions correctly. This represents a low level of financial knowledge and an obstacle for individuals to invest in financial markets.  Regarding inflation, there is a large difference between the least and most educated respondents in terms of answering the relevant question correctly. Gaps in understanding the concept of inflation are also evident between the youngest (18-24) and oldest respondents (55+) and between the poorest and richest households.
  
  
• Greater financial knowledge is linked to greater financial resilience and inclusion. Financially knowledgeable consumers are less financially fragile, in the sense that they cope better with unexpected financial shocks, are more likely to participate in stock markets, save more and plan better for their retirements, and are better at managing debt. Higher levels of financial knowledge have greater percentages of adults saving with and borrowing from financial institutions. Contrary to that, people with low levels of financial knowledge tend to borrow at more expensive terms which is particularly true for young people.
  
  
• Digital finance needs more financial knowledge: For example, evidence from US millennials (broadly, those born in the 1980s and up to the mid-1990s) shows that those who use mobile payments are also more likely to mismanage their funds or experience financial difficulties and are less financially knowledgeable. However, when it comes to online banking, evidence from Cyprus shows that it is used by those with more financial knowledge or similarly, preliminary evidence on holdings of crypto assets (effectively Bitcoin, which dominates the crypto market) shows that countries with higher levels of financial knowledge have more individuals holding crypto assets.
  
  
• Financial literacy strategies should focus on digital skills as financial services are increasingly digitalized and also should help close gender and other gaps in knowledge among vulnerable groups, and should ensure that financial education starts early and in schools.