Netherlands: Another Spain in the Making?

The prevailing idea about the euro area is wrong-headed. Usually, we divide the monetary union into the problem countries in the South (including France) and the healthy center in the middle. It is seen as consisting mainly of Germany, Austria, the Netherlands and Finland.

But if one examines a key category in those countries – the GDP trend in recent years – a starkly different picture emerges. In real terms, the country whose GDP has developed most since the economic and financial crisis peak in 2008 is France. Germany and Austria follow closely behind. Then, with a big gap, come the Netherlands and Spain.

It is almost shocking to see such a poor performance from the Netherlands. But even though it is routinely – and even reflexively – counted as among the well-performing core of the eurozone, it ain’t so.

Its economic situation is actually very poor. Since 2008, the country has been almost constantly in a recession. The budget deficit amounted to 4.1% last year, above the 3% criterion currently defining the performing core.

The country’s public debt, at 71.2%, is also above the Maastricht criterion. Likewise, the inflation rate, at 2.6 %, is above the target value specified by the European Central Bank.

Why is the Netherlands in such a funk?

The key question is this: Why is the Netherlands in such a funk? And what does its poor performance mean with regard to the eurozone at large?

The problems in the country’s housing market are critical to understanding the crisis the Netherlands finds itself in. Much as in Spain or the United States, Dutch home prices rose sharply in recent decades.

A crucial factor driving this development in Holland was government support via the tax deductibility of mortgage interest. In addition, and in great contrast to the commonplace assumption of the always sober-minded Dutch financiers, the country’s banks handed out housing loans generously and without requiring any real collateral.

As a result, Dutch households accumulated debt at a rapid clip. Their current liabilities, as a percentage of disposable income, amount to almost 300%. This compares with a level of “only” around 100% in Germany or France. Such a high debt level isn’t exactly a reflection of a “sober-minded” country.

Since the financial bubble burst in 2008, house prices in the Netherlands have fallen by about 20%. Experts expect a further reduction in the next two years in the double-digit range.

Given that Dutch households all of sudden faced a mountain of debt that was no longer covered by the value of their homes, they had to curtail their consumption significantly. That had a direct impact on the national economy.

The same applies to the country’s banks. Because they had irresponsibly handed out large stocks of what now were bad loans, these institutions were forced to cut back any new business sharply.

As an indication of the resulting difficulties, the country’s fourth-largest financial services provider, SNS Reaal, had to be taken over by the government.

Meanwhile, the corporate sector, faced with sharply declining private demand, held back on making any new investments.

No help from exports

In that situation, relief could only have come from the export sector. But it, too, could not help compensate for the lack of demand in other parts of the economy.

The reason for that is a very “Southern” one – and one that flew in the face of all one commonly associates with the frugal Dutch: Labor costs had risen excessively in recent years.

This weakened the competitiveness of Dutch firms in international markets. In addition, about 50% of Dutch exports go to the eurozone countries, which have shown no growth or only weak growth for years.

To top it all, the government had to cut back on its expenditures, given the high public deficits. This removed further purchasing power from the private sector.

We find ourselves confronted with the situation that the Netherlands is in uncomfortably close company to Southern Europe’s countries with regard to their common woes and weaknesses. However, it is important to keep some of the crucial differences in mind.

The big advantage that the Dutch had over Southern Europe is that they have no problems financing their public debt in the markets. Up until the end of November 2013, when S&P downgraded the Netherlands, all the credit rating agencies still granted them the top AAA rating. The interest rates that the country pays for its debt on the capital market remain low (2.40% for 10-year government bonds).

It is also important to note that the euro is not material to the Dutch people’s present woes – even though the right-wing conservative party of Geert Wilders calls for an exit from the euro.

Most important, the rise in house prices in the Netherlands began long before the introduction of the common currency.

Three lessons for the euro crisis

What does this country analysis, surprising as it is, imply for the eurozone crisis? I see three main consequences. First, it is by no means only countries in Europe’s southern periphery that mismanage their economy.

Second, because of their entirely homemade problems, the Dutch have greater difficulty in providing their share of the financial aid required for southern Europe. This does not augur well for Germany’s obligations.

Third, we should not overrate the importance of the current eurozone crisis in one regard: Even after the structural problems of Southern Europe are corrected, everything will not necessarily run smoothly in the eurozone.

In a monetary union, problems can arise from a broad variety of member states mismanaging their own economies, which then afflict the others in one way or another. In that sense, the eurozone is no different from a nation state, where different regions can get into trouble and threaten the balance of the rest of the country.

The emergence of such problems is part of human nature – and thus belongs to the reality of life. It should, however, not be attributed to the common currency. That argument is often just made to find a convenient scapegoat to detract from purely homemade mistakes in the management of a national economy.