The term financial literacy at its most basic level is having the knowledge and skills to make sound financial decisions. Whether it’s opening a bank account, applying for a mortgage, getting a loan, making an investment or saving for retirement, we all have to make financial decisions throughout our lifetimes – and often on a daily basis. Good financial literacy is what stops us from getting into debt, taking excessive risks and being exposed to cyber-fraud.
Unfortunately, recent studies suggest only half of the EU adult population has a grasp of basic financial literacy. A 2024 policy brief from think tank Bruegel on the state of the EU’s financial knowledge, found that only one in two individuals surveyed was financially knowledgeable. The study specifically highlighted gaps in knowledge in the younger generation, as well as a gender gap (with 18% more men than women answering three of the five survey questions correctly).
This is extremely worrying; not only on an individual level where poor financial choices can sink people into debt, stress and legal issues, but also on a national and EU-wide level where lack of financial literacy can limit access to opportunities for economic growth. The recent Financial-Legal Literacy for Europe project stated that the ‘EU loses substantial financial and investment opportunities due to the low financial and legal literacy of its citizens.’
At a declaratory level, EU policymakers have long given their full support to efforts to further the financial literacy agenda. At a practical level, action has always been meagre at best because education is not an EU competence and there’s been lacklustre follow-through on commitments made.
Growing financial confidence to build the EU capital market
The need to strengthen financial literacy is more crucially important now that the European Commission has committed to deepening the EU’s capital markets. The capital markets union (CMU) aims to get investment and savings flowing across all member states, boosting businesses and supporting a green, digital and inclusive economy which is resilient to global financial shocks. It’s arguably the most significant policy project of the next five years, but it will only be possible if the EU has the funds to match its ambitions and succeeds in mobilising private capital in addition to public funding.
Currently, the EU’s public purse is too stretched to fund Europe’s ambitions alone. Political constraints such as national interests, populist sentiments and resource allocation issues also complicate matters. Therefore the EU must tap into its large reservoir of private household savings – estimated at €33.4 trillion – that are not currently being used because people prefer cash over market investments, which are often perceived as too risky or complex.
Improving financial literacy and educating retail investors about financial markets will help people grow their financial confidence and make informed investment decisions. This is the objective the EU is already trying to support with its Retail Investment Strategy (RIS). The next step is for the EU to take seriously and follow through on the commitments made in the Council’s financial literacy conclusions from May, which found that ‘people who are financially literate make more informed choices about their own finances and are better equipped to prepare and invest for the future…Better knowledge about personal finances would foster retail participation in capital markets and contribute to overall enhanced financial stability in the EU.’
Encouraging wider participation from diverse demographic groups also ensures a more inclusive financial market, which can adapt better to economic changes. It is this financial confidence which is needed for a true CMU to emerge.
Financial literacy and digitalisation
Another factor strengthening the need to improve European financial literacy is the digitalisation of financial services. The proliferation of retail investment platforms, AI and cryptocurrencies requires new money knowledge and skills.
There needs to be a shift towards a wider understanding of financial literacy which goes beyond simple information sharing and traditional teaching of financial knowledge – financial behaviours and habits need to be focused on as well. As an example, financial education could be used to teach people how to use budgeting apps, investment platforms, and automated saving tools to improve their financial health and planning.
The digitalisation of finance has also increased the risk of sophisticated online scams and fraud. Financial literacy can help individuals recognise common red flags and adopt safe practices, reducing their vulnerability to fraud. Enhancing consumer protection through financial literacy is essential to complement, but not replace, consumer protection through legislation.
The need for public and private support
Improving financial literacy in member states won’t happen overnight but there are actions we can take at local and national level to improve the situation. For instance, financial institutions, businesses and educational institutions can collaborate to develop robust financial literacy programmes.
Teaching good money habits today is harder than ever because money has become intangible and invisible – very few people carry physical notes or coins. We need to rethink how we approach financial literacy and good money habits at home, in schools and through public policy.
In Denmark – a country at the forefront of financial literacy rankings in Europe – Danske Bank supports financial education in schools, helping young people and their parents become financially confident. Going back to the difference between financial knowledge and financial habits, our programmes are based on the fact that people often know what they should do with their money, but they still don’t do it.
As part of our efforts, Danske Bank also supports secondary education pupils by teaching entrepreneurship. Working alongside the Danish Foundation for Entrepreneurship we offer financial advice to budding student entrepreneurs and demonstrate how financial literacy skills can be used to build successful companies.
Another route that may be considered, to improve financial literacy, particularly for adults, is the introduction of auto-enrolment pension schemes across EU member states, something Denmark and others have already implemented, with promising results. From a behavioural point of view, it can be a useful way to make people more aware of their retirement savings and the importance of planning for the future. When individuals see their savings grow through auto-enrolment, they may be incentivised to learn more about how pensions work, different investment strategies, and how they can optimise their contributions. This proactive approach to learning can enhance overall financial knowledge.
At the member-state level, integrating financial education into social services, such as welfare programs, housing assistance, and unemployment services, can help individuals in need improve their financial skills and stability.
While these measures will improve financial literacy at a national level, financial competence for all EU citizens will be impossible without direction, coordination and follow-up at central European level.
This means requiring all member states to prepare and activate national financial literacy strategies and firmly anchoring financial literacy actions in a future CMU action plan. Only through these actions can we positively impact the financial outcomes of EU citizens both individually and collectively, as well as build a truly inclusive CMU.
As the European Parliament returns from its summer recess, the European Commission transitions to the new mandate, and schools across Europe start a new school term, now seems a fitting time to put financial literacy at the top of the EU agenda.