Leonardo Badea (BNR): Financial education – strengthening the resilience of the population and financial stability in the context of overlapping crises

The current context is still dominated by a series of overlapping crises. As the effects of the COVID-19 pandemic appear to be gradually diminishing throughout Europe and the US, they remain high in China and continue to affect a significant part of supply chains, maintaining supply shortages for many categories of goods. At the same time, the arrival of the autumn seems to potentiate a series of seasonal epidemic outbreaks (other than COVID-19), both in Europe and in other areas of the globe, which not only affect the health systems and public budgets in the respective countries, but can also affect productivity and consumption. Moreover, the prolongation of the war in Ukraine accentuates dysfunctions in the food production and distribution chains, as well as the energy crisis, and implicitly further fuels inflationary pressures. New geopolitical tensions are erupting or intensifying in various other geographic areas, with the potential to further negatively influence international trade and indirectly the prices of certain categories of goods. On top of all these risks materialized during the last 3-4 years, long-term vulnerabilities generated by climate change and the aging of the population in developed countries are superimposed, very difficult to improve as they continue to produce increasing negative effects. That is why the overall situation is and will remain characterized by uncertainty and high risks, and the flexibility of all categories of participants in the economic circuit becomes a necessity.

After the recovery of 2021 (a growth of 6%), in 2022, the global economy was marked by a slowdown (3.2%, according to IMF estimates – World Economic Outlook, October 2022). At the same time, it is obvious that the recovery is uneven and fragile, despite the extensive support programs at governmental and international level (e.g. Next Generation EU; in the USA, the Congress adopted 4 laws in 2020, and later additional measures – through the Consolidated Appropriations Act, American Rescue Plan Act of 2021).

One of the few definitely positive consequences of the situation in recent years is the integration of digital technology into all aspects of social life and the acceleration of digitalization in many sectors, impacting consumers and business models.

Also the financial system is going through a series of transformations due to digitalization, which present as advantages the reduction of costs, the increase of efficiency and competitiveness, and the increase of financial inclusion. But there are also a number of risks – security risks, cyber-attacks, the rapid growth of the shadow banking sector. The year 2023 will probably be just as difficult for the financial system, but the good news is that its resilience has so far remained at a high level, despite all the crises during this period. Trends that are likely to persist in the near future relate to: greater demand for digitalized financial services, increased financial inclusion, greater need to save and protect savings, personalization of services according to the needs of individual consumers, changes in the customer-bank relationship (by increasing online interaction), concern for consumer satisfaction, increased security in use.

The importance of financial education

European and international bodies prioritize the importance of financial education (central banks, OECD, European Commission, IMF, World Bank). The World Bank states that financial education is essential to reducing poverty and promoting prosperity in society. The UN 2030 Agenda establishes the guarantee of quality education as a priority and a key vector for reducing social inequality.

The increase in effort regarding financial education is argued by: the dynamism of the financial system, the need to ensure the stability of the system, studies demonstrating the connection with financial education, changes in consumer behavior and in the relationship with the client, the diversification of services, the high degree of penetration of digitalization in the sector, competition, the tradition – innovation duality.

Financial education has many proven benefits and helps to manage the economic challenges induced by the current crises.

Financial education is necessary for proper and efficient management of the various financial options available. Education and information increase our protection against unwise financial choices. If we discuss the resilience of economies, we must emphasize that it also comes from the financial education of citizens.

Although more than 15 years have passed since Romania’s accession to the European Union, the level of financial inclusion is still very low (68% in mid-2022) compared to the average of the member states (95%), according to the most recent report on financial inclusion made by the Romanian Association of Banks. In the case of poor people, the level is even lower, at 57%. At the same time, in Romania, the level of financial intermediation (27.4% in 2021) is the lowest in the European Union. Financial education plays an important role for increasing financial intermediation and implicitly for economic development as a whole. From this perspective, it is probably no coincidence that a study published in 2020 by OECD/INFE shows that the score regarding the level of financial education for the adult population in Romania is one of the lowest among the countries included in the analysis.

Economic development is significantly influenced by the dynamics of financial intermediation, and numerous studies argue the existence of a link between the degree of intermediation and financial inclusion on the one hand, and the level of financial education and income inequality on the other (e.g. Greenspan, 2005). From the perspective of financial stability, the importance of financial education is widely emphasized in the report of the National Committee for Macroprudential Oversight, which was the basis of Recommendation no. R/3/2022 regarding the sustainable growth of financial intermediation.

Last but not least, I believe that in the medium and long term, as stated by Mac Duke (The Strategist), financial education is more valuable than money, determining economic resilience and development. Financial education adds to the development of human capacities for understanding and decision-making, which is perhaps just as important as the development of economies.