The Dogs Bark, but the Caravan Moves On for Dutch Economy
Dutch Prime Minister Mark Rutte still staunchly supports austerity in Europe. He's gone from vox populi to vox clamantis in deserto.
And how the French are always so damn hard to please
Options are passed in Brussels, but no one agrees
And no one walks tall -- but no one gets down on their knees.
-- Joe Jackson, "40 Years Ago"
These are lonely days for Prime Minister Mark Rutte of The Netherlands, as he has turned from a popular outspoken proponent of the North European vox populi railing against the PIIGS into a Don Quixote, fighting European windmills.
Initially, The Netherlands seemed to be one of the winners of the European credit crisis: Unemployment had only risen by a tiny amount in 2008/2009 and the exports within the European Union had recovered quickly. The Netherlands was also among the countries with the lowest unemployment in Europe. Rutte was firmly on the team of German chancellor Angela Merkel for the greater part of 2011, defending the line of pro-budget discipline, pro-austerity, and anti-economic stimulus. He put the blame for the crisis squarely on the countries (i.e., the PIIGS) who spent too much money in the past and had difficulties with balancing their state budgets.
For a while, it seemed, The Netherlands seemed to be the Golden Child of Europe. However, since June 2011, it has faced an enormous reversal of fortune.
The Netherlands, which ranks just behind Luxembourg as the biggest exporter of goods in Europe per capita, is specialized in agricultural produce and intra-European transport and redistribution of imported goods from outside the EU. The country's massive export worked like a cloaking device that masked a struggling Dutch economy. If the the sovereign debt crisis hadn't occurred, nobody would have noticed Dutch trade imbalances. However, the sovereign debt crisis did break out in 2010, and it diminished the value of Dutch exports and exposed the weakness of the Dutch domestic economy.
Since 2000, extremely low interest rates, further leveraged by the Mortgage Interest Deductibility ( or MID), led to extremely high housing prices and – as a consequence – enormous mortgage amounts. These mortgage amounts had a restraining effect on the consumption of the Dutch citizens, as an increasing share of the average salary had to be reserved for mortgage payments. High housing prices made it virtually impossible for first-time buyers to purchase a house, forcing them to stay in their relatively expensive rental homes.
In 2007, the interest rate rose sharply for a number of months, which led to a further drop in housing sales. When the credit crisis broke out in 2008, banks became so risk-averse that almost no Dutch citizen was considered worth loaning to. By 2011, the housing crisis was very much on the mind of Dutch citizens, some of whom argued for mortgage interest deductibility, which PM Mark Rutte and Dutch Finance Minister Jan Kees de Jager rejected as a "taboo."
At the same time, across the country, purchases dried up for expensive household appliances, cars, and the like, and the populace in general started hoarding cash. Meanwhile, the deflation that hit the residential real estate market (or RRE) was now affecting commercial real estate (or CRE). Unfortunately, the CRE market had been an enormous jobs driver. With vacancy rates of 14%-17% at the time and 25% predicted in a few years, building and construction jobs dried up.
To stem unemployment (at least 4% of which could be tied directly to the CRE/RRE problems), the Dutch government instituted the part-time unemployment benefit.
By 2011, those companies that had been reluctant to fire personnel over the previous years decided to fire their excess personnel after all.
With The Netherlands facing soaring unemployment and slim prospects that the economy would turn around, the populace began regarding the PIIGs with sympathy as "brothers that temporarily went through a rough time as a result of mistakes made in the past, but that needed help at this very moment."
In March 2012, the government got its first shock. The Dutch Central Planning Bureau calculated that The Netherlands would have a budget deficit of 4.5% in 2013, which is well above the 3% threshold of the Stability and Growth Pact (or SGP). Since The Netherlands had been the main critic of the PIIGS countries in 2011, the Dutch government had to deploy an additional package of at least €10-15 billion in self-austerity measures in order to rein in its own excess budget deficit, if it didn't want to lose face in Europe.
It didn't matter whether these austerity measures helped the Dutch economy or not. The message was, Just do it. Since austerity had been the medicine for the PIIGS, austerity should be the medicine for The Netherlands.
The second shock came when the socialist François Hollande was elected president of France in May 2012. This was the absolute nightmare scenario for Mark Rutte, who saw his political ally Nicolas Sarkozy disappear, in favor of somebody who spoke disrespectfully about eurobonds, a lower retirement age, and loads of stimulus for the ailing economies in Europe, including the French.
The third shock came when another political soulmate of Rutte, Angela Merkel, gave up her long-term resistance against a more unified European Union, by holding the possibility of a bank union and even a political union explicitly open, as a tell-tale favor to her important partner in the Elysee, François Hollande, with whom the new Paris-Berlin axis has to be established.
Although the eurobonds still seem one bridge too far for Merkel, it becomes clear that Hollande will try to reel in additional measures to improve the economies in Europe.
This cautious change of policy in Berlin alienated Rutte, who is now turning into the Don Quixote of Europe; he is fighting his fights against the windmills (economic stimulus, eurobonds, the EFSF/ESM complex, and the banking union), but now he is on his own, as he has lost all his political friends.
In the meantime, these problems in The Netherlands are gaining momentum under Mark Rutte:
- Unemployment is racing toward 8%.
- The intra-European exports, traditionally the motor of The Netherlands, will remain lagging for a number of years, at least as long as the situation in the PIIGS and in France remains difficult.
- The domestic consumption and consumer confidence, further negatively influenced by the additional austerity measures of the Rutte government, will remain at the lowest level in years for a long period of time.
- Economic growth will be a mirage until at least 2014, in my opinion.
- The building and construction industry will have to go through a fierce rationalization and the government is not prepared and ready for this. Thousands more (independent) workers will lose their jobs.
- The deflation of the CRE and RRE bubbles will have increasingly nasty side effects; once again, the Dutch government will not be prepared.
- The Dutch banks will have to write off their CRE/RRE assets in The Netherlands and abroad, forced to do so by the increasingly unfavorable market circumstances. This might lead to a new banking crisis in The Netherlands.
- Europe will – without any doubt – move more into the direction of Hollande's economic policy, as it has been proven beyond reasonable doubt that extending Germany's policy of forced austerity and supplying only the absolute minimum in aid to the PIIGS countries has made the situation in Europe worse rather than better.
- Rutte will become the court jester of the European Union: Annoying, but increasingly irrelevant with his resistance against a more unified European Union. His is now the vox clamantis in deserto, the voice of one crying in the wilderness.
The information on this website solely reflects the analysis of or opin=
ion about the performance of securities and financial markets by the writer=
s whose articles appear on the site. The views expressed by the writers are=
not necessarily the views of Minyanville Media, Inc. or members of its man=
agement. Nothing contained on the website is intended to constitute a recom=
mendation or advice addressed to an individual investor or category of inve=
stors to purchase, sell or hold any security, or to take any action with re=
spect to the prospective movement of the securities markets or to solicit t=
he purchase or sale of any security. Any investment decisions must be made =
by the reader either individually or in consultation with his or her invest=
ment professional. Minyanville writers and staff may trade or hold position=
s in securities that are discussed in articles appearing on the website. Wr=
iters of articles are required to disclose whether they have a position in =
any stock or fund discussed in an article, but are not permitted to disclos=
e the size or direction of the position. Nothing on this website is intende=
d to solicit business of any kind for a writer's business or fund. Miny=
anville management and staff as well as contributing writers will not respo=
nd to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter