By Scott B. MacDonald
The Dutch are known for their hard work ethic and thriftiness. Within Europe they are identified as part of the wealthy northern bloc of countries, usually aligned with Germany in their hardnosed approach to the Union’s debt-ridden problem children – the so-called peripheral countries, mainly found in southern Europe. Yet, the Netherlands has had its own set of economic troubles.
Although the Dutch have swallowed several rounds of such measures, the country’s political scene is becoming more sharply polarized over austerity, especially with the government’s plans for € 6 billion in new cuts for 2014. This is an important change of sentiment as it is occurring in a northern European country, not one of the peripheral economies. It raises some major issues as to what lies ahead for the euro zone over the next year as Dutch and other European policymakers struggle over the debate between more austerity and the need for growth policies.
The euro zone’s fifth largest economy is in its worst recession since the 1980s due to a sharp downturn in its property markets and high private sector debts following the global financial crisis of 2008. Last year the economy contracted by 0.9 percent and this year it could contract by another 1.4 percent. Growth is expected for 2014, but at best 1 percent. Unemployment is over 6 percent and could well rise again in 2014. In this environment, the coalition government of the center-right Liberals, led by Prime Minister Mark Rutte, and the center-left Labour Party, has sought austerity to bring Dutch finances in line with the EU’s deficit targets. The European Union, for its part, has demanded further cuts, as shown during the European budget commissioner Olli Rehn’s June visit to the Netherlands.
In late August, the Dutch parliament will begin to discuss the new cuts. The looming austerity battle is raising the possibility that the Rutte government may not have enough votes in the parliament’s upper house to pass the new measures. A defeat could force the government to resign, leaving the other parties to form a new government (something that could prove difficult considering the current line-up of parties) or new elections. According to a July 25th poll by the market research firm Ipsos, if an election were held today, the coalition, which won 79 seats in September 2012, would win only 54 seats out of 150.
Opinion polls show growing disenchantment with austerity and the European Union. Support for the two parties most identified as anti-austerity, the far-right populist Freedom Party headed by Geert Wilders and the far-left Socialist Party, has grown considerably. Some polls have even put the Freedom Party, which is also strongly opposed to immigration, in first place. A Gallup poll in early June indicated that the Dutch public is now evenly divided over whether to exit or remain part of the European Union. A Dutch exit out of the euro-zone is something that most analysts do not consider possible, but Europe’s economic policymakers should watch Dutch public opinion closely, especially as the Netherlands is considered a core euro-zone country.
It is important to underscore that austerity fatigue isn’t limited to one part of the population. Both labor unions and business are increasingly voicing their discontent with the cuts – planned to help meet the fiscal targets in the EU’s Maastricht Treaty, which state that a country’s fiscal deficit shouldn’t exceed 3% of GDP. Bernard Wientjes, head of the Netherlands VNO-NCW business group, called in June for the Rutte administration to drop the € 6 billion austerity plan if it meant raising more taxes. He noted in one of the country’s newspapers that deeper austerity measures would “smother growth in the crib.” The labor unions, in contrast, favor raising taxes. Nonetheless, both business and big labor have little stomach for more austerity as both constituents favor a more growth-oriented direction.
There is also an important non-voting constituency – investors who buy Dutch sovereign debt. As revenues have been hard hit by the flaccid economy, the Dutch government has been forced to turn to international markets to finance its debt. While the country’s public sector debt is far from the levels of Italy, Greece, or Portugal, it has grown from 45.3 percent in 2008 to an estimated 71.2 percent for 2013, according to Eurostat. There is a growing risk that, if the ruling coalition fails to implement some type of coherent program for containing public debt, European Union fiscal targets will be missed. This, in turn, will erode confidence in the government and the Dutch may have to sell their debt at a higher yield to attract investors.
Another aspect of the pending austerity debate involves the rating agencies. If the Rutte government passes a compromise bill that does not reach € 6 billion in cuts or tax raises, the result will be a higher fiscal deficit, an ongoing weak economic performance, and investor perceptions that the government is incapable of acting. This could impact the country’s AAA ratings. The Netherlands is one of the few countries to maintain the coveted AAA ratings, but all three major agencies have changed the country’s outlook to negative. Fitch was the last to do so on February 5 due to the rising level of public sector debt, falling property prices, and worries over the financial health of banks. Things have not gotten better since – real GDP contracted by 0.4 percent in the first quarter of 2013.
What is occurring in the Netherlands is an important development in Europe’s quest to redefine itself in the post-2008 world. Dutch economic policymakers must be exceedingly frustrated that austerity measures are not bringing about a reduction in the country’s debt burden or stimulating growth. The country’s debt-to-GDP level has actually risen over the past several years. This is certainly leading some policymakers and elements of Dutch society to question the wisdom of ongoing belt-tightening at the cost of economic growth.
The outcome of this debate has obvious implications for many other European countries grappling with the same problem of finding the balance between fiscal prudence and economic growth. Too much of the same medicine can sometimes kill the patient. The Dutch patient requires balance, not more austerity that increasingly appears to be dictated by the European Union over the demands of the local population and its elected officials.
Dr Scott B. MacDonald is the Head of Research and Senior Managing Director at MC Asset Management Holdings, LLC, based in Stamford, Ct.
[Photo courtesy of Minister-president Rutte]