Bazot (2018): Financial Consumption and the Cost of Finance in Europe

Summary

Guillaume Bazot's "Financial Consumption and the Cost of Finance: Measuring Financial Efficiency in Europe (1950–2007)" (Journal of the European Economic Association, 2018) does for Europe what Philippon (2015) did for the United States: it measures the unit cost of financial intermediation — the cost of creating and maintaining one euro of intermediated financial asset for one year — over the long run, using the same national-accounts method Philippon developed.[1]

The finance industry's weight in Europe "increased steadily from 2.3 per cent to 8.2 per cent of GDP between 1951 and 2007."[1] Against that growth, the key finding is that efficiency did not improve. The unit cost of intermediation "began to grow in Europe from 1970 and remained high until 2007," rising by about 35 percent (0.6 cents) between 1967 and 2007, and the European and US series sit "around two per cent over the whole period."[1] Deregulation from the 1980s was intended to cut intermediation costs by stimulating competition; three decades later, on Bazot's measure, the cost had gone up, not down.

Why It Matters Here

This is independent, non-US, peer-reviewed corroboration of the single most important piece of finance-rents evidence the wiki carries: that the financial sector's technological and scale gains were not passed through to customers as lower prices. Where the FIRE-sector page rests the income-side case largely on Philippon's American series, Bazot shows the same non-improvement across the major European economies — Germany, France, and the United Kingdom together account for the bulk of the aggregate. Two independent measurements on two continents make the "no efficiency pass-through" fact much harder to dismiss as a US measurement artifact.

Bazot also decomposes the rise. Much of the 1970–1990 increase tracks nominal interest rates (a macro/monetary effect, not necessarily inefficiency), while the high post-1990 values "coincide with the growth of the market activities of banks" — securitization, complex portfolio and risk management — and the associated rise in finance-sector compensation documented by Philippon and Reshef (2012).[1]

The Rent Question — Kept Attributed

Bazot is careful about the inference the wiki must also be careful about. Whether the high, non-falling unit cost "is the fruit of inefficiency" is, he writes, "beyond the scope of this study." He raises — as an explicitly open question for future research, not a finding — whether the finance premium and the sector's capacity to shift risk onto the real economy are "the source of a situational rent that increases the unit cost of financial intermediation."[1] That is exactly the wiki's rent-gradient posture: the measured fact (unit cost flat-to-rising despite deregulation and IT) is stated with evidence; the interpretation (that the excess is rent) stays attributed and contested.

Honest Limits

• Like Philippon's, the method divides finance income by a stock of intermediated assets; a stable-or-rising ratio is consistent with rent but also with rising unmeasured quality, genuinely costly new activities, or measurement error — Bazot says so and does not claim to measure a rent share.
• The series ends in 2007 and does not capture the post-crisis period.
• The openly-accessible copy cited here is the IPP policy brief (2014); the definitive peer-reviewed version is the 2018 JEEA article (see Sources).

See Also

• Philippon (2015): the finance-efficiency puzzle — the US result this replicates
• The FIRE Sector — the finance-rents question this feeds
• Greenwood & Scharfstein (2013) — the composition of finance's growth
• Economic Rent · Rentier
• The Rentier Economy (narrative) — the persuasive deployment
• Geoism — the rent-domain program and its gradient

Sources

1. Guillaume Bazot, "Financial Consumption and the Cost of Finance: Measuring Financial Efficiency in Europe (1950–2007)," Journal of the European Economic Association 16(1), 2018, pp. 123–160 (DOI 10.1093/jeea/jvx008); openly available as IPP Policy Brief n°10, June 2014, and PSE working paper — used for the finance-to-GDP growth (2.3%→8.2%, 1951–2007), the ~2% unit cost sitting close to the US level, the ~35% (0.6-cent) rise 1967–2007, the "began to grow from 1970 / remained high until 2007" finding, the nominal-rate and market-activity decomposition, and the attributed "situational rent" open question (B- and D-claims; verified against the policy brief this session). Free PDF (IPP brief) · HAL working paper · JEEA (DOI, paywalled)