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Friday, April 12, 2013

Testing the EU's budget discipline


The Netherlands, considered one of the eurozone's fiscal hawks, has become the latest country to test the EU's new instruments for imposing budget discipline (now composed of the Fiscal Compact, Six-pack, Two-pack and European Semester).

The Dutch government yesterday agreed to postpone €4.3 billion in budget cuts for 2014 in a deal with social partners (trade unions, employers groups etc.), counting on economic growth to keep the budget deficit below the EU-mandated ceiling next year. In the autumn, it will reconsider whether to implement the cuts.

The measures for 2014, now postponed, had been promised to EU Economic and Monetary Affairs Commissioner Olli Rehn only last month in return for leniency regarding the Dutch government's 3.3% budget deficit in 2013, which is in breach of EU targets. The country has been in the EU's "excessive deficit procedure" since 2009, and in 2012 the government collapsed over the failure to stick within EU budget limits.

Predictions for the 2014 budget deficit range from 3.4% (The Dutch Bureau for Economic Policy Analysis CPB) to 3.6% (Commission). If the economic growth the Dutch government is hoping for doesn't materialise, the 2014 deficit threatens to be even bigger. The European Commission will reportedly only respond when it gets to see the full package of measures.

Earlier this week, Finance Minister Jeroen Dijsselbloem vowed to respect the EU's 3% budget deficit rule in 2014, so this is being billed by some in the Dutch press as a U-turn by Prime Minister Mark Rutte. Today's headline of the largest Dutch daily, De Telegraaf, reads: "Rutte backs down" (picture) while the newspaper also complains that "important labour market reforms have been watered down and postponed to 2016."

The Dutch economy is currently going through a large-scale correction after a housing boom went bust, partly as a result of the Dutch government's reduction of generous fiscal incentives to buy a house. Last year, Moody's expressed doubts about whether the Netherlands could keep its triple-A rating.

And, in the background, is Geert Wilders' anti-EU PVV party, which is again polling as the country's most popular political party. 

12 comments:

Rik said...

Rutte has made a big mess of things.
1. He should have assured that his cabinet got more support in both houses by getting a third party in.
Now he needs the opposition to get things approved (and these want of course concessions).
2. He completely missed political sensitivities in the formation agreement. That cost his party 40% of their seats in the polls.

His coalitionparty is not really much more successful btw.

Anyway probably in an ideal world his party would have replaced him. He is a huge risk because of the failed formation and he is being found out. A clearly not on top of the Euro-issue and the economy.
His party has however no proper successor.

Probably Rutte is betting on time. Probably has seen that with the Euro-crisis.
So he has not much choice wild ideas are simply not getting approved. The new plan has a lot of backing also from unions and employers as well. Also his party has time to look for a replacement. And his coalitionpartner can look for a new strategy as well as they have in the polls lost half their seats.

Starting from there Rutte could use some success. In that respect a return from certain powers from the EU might do him really well. He is losing most seats to Wilders who is on a anti-immigration/anti-EU/anti-austerity campaign. So it would seem to me the logical things to do.
Coalition partner might be less enthousiastic at first, but at the end of the day as balance against bad-PR for further bail outs it looks welcome to all of the pro-bail out camp. Keeping the UK in is also a big sucess for nearly all Euro-philes certainly at this moment.
Bit strange that Cameron didnot take this one with him.

jon livesey said...

The Netherlands looks be into a pretty solid double-dip recession. Unlike the famous UK "double-dip" that turned out not to be one after revision, the Netherlands version has been GDP decline for five quarters, and looking at a sixth.

http://www.tradingeconomics.com/netherlands/gdp-growth-annual

In an environment like that, I think it would be downright irresponsible to tighten the budget any further. They'd be smarter to aim for a deficit around 5% to stimulate the economy.

Denis Cooper said...

Rik -

Your comments on party politics in the Netherlands are interesting, but completely disregard the real issue that it is supposed to be a sovereign state and yet thanks to the decision to join the euro it is now being instructed how to manage its national finances and economy by a bunch of foreigners who have no electoral mandate in the Netherlands.

And most of the Dutch seem happy to be effectively disenfranchised through the operation of the EU treaties, which makes me wonder why the hell people from other countries paid a heavy price in both treasure and blood to free their country from Nazi, ie German, tyranny.

Even Bolkenstein, with his:

"The Netherlands has to exit the euro as quickly as possible"

seems to think that the Netherlands should not revert to issuing its own national currency with national democratic authority, but should instead remain subjugated within a transnational "Triple A euro" dominated by Germany.

What respect can you have for a people who apparently have so little self-respect that they prefer to have their country run by foreigners and are not bothered that their votes no longer count for anything?

Rik said...

@jon
It is a crisis largely created by themselves. They kicked themselves the bottom out of the residential real estate market with very little short term benefit. But huge short term disadvantages.
Especially when you have a system that effectively stimulates overborrowing on housing and wait with repaying as long as possible.

Nobody is going to buy a house if prices drop several percent a year and still look to be doing that for the years to come. 60-70% homeownership, average mortgage 3-5x annual income. In the dangerous part of the market nearly all guaranted by a stateagency with only a 6-7 Bn Euro buffer. And with the already undercapitalised banks in for amounts 5-10x their capital base.
Huge problem.
If they had:
- cut interest on mortgages (as their banks are financing too expensive say 3/4-1%, but that never was a problem as they could oncharge it to the enduser (homeowner), that much for free market and competition).
- stopped the crap on deductibility of interest for say 10 year.
Inflation would have solved the bubble like it happened in the UK, with much worse conditions than originally in Holland. And for non of these Dutch measures you need the ECB. Or anti-austerity measures.

Anyway with so much downside pressure on people's most important asset, consumer sentiment will first change when the RE market has bottomed out. Simply because the majority didnot want a villasubsidy. 'I ask from Santa abolishing the villasubsidy and all I got was an underwater mortgage'.

Next to increase taxes as so called cuts. Usually not very benificial.

Wagescosts looked structurally also a bit on the high side. Well considerably in some sectors like construction. But it is largely imho the other costs including wages which are the problem not the nett wages themselves.

Another thing they did and a lot of other countries still have to do is the pensionfunding. The calculation interest is lowewer cf market. Which requires much premia. And more saving and lower spending. But that is a bit funny they bumped into it because they for a large part fund pension and not use a pay as you go system. Which is much more dangerous in general terms and something that will come to the surface eventually in a lot of countries were pensions are unfunded.
This is imho more difficult to shuffle under the carpet as it transfers huge capital from babyboomers mainly to the young which are probably less well off anyway.

A bit of a mess, but not really worse than in other countries and at the end of the day waiting too long with structural measures to keep things longer term sustainable (but that is an Eropean disease).

Rollo said...

The cloggies should be natural partners of the UK in wanting to get out of the EU; I cannot understand why it has taken so long to form a NedIP.

Rik said...

@Denis/Rollo
I am to be honest mainly interested in this as I assume that the Swampkrauts might be an essential country for the way the EU and EZ will be shaped.

The Dutch are no Brits and no Germans. They are much more positive towards Europe than the Brits. Their geography and size is different. They donot carry the WW2 legacy with them as a lot of German politicians still do.

They were very pro-EU and that is changing at the moment. And when nothing structurally happens will change even more. But still at the moment majority for the EU and likely the Euro.

To keep the platform in the population and to have people voting for them in the next election one of the few things the 2 Dutch government parties could start up is a Cameron-style reform.
Anti-EU Wilders is now the biggest party in the polls and antis and sceptics combined are at 45% of the virtual seats. With a lot of bad news to come and both governing parties having received their yellow card already so actual elections might go this way.
This is one of the things although pretty difficult they have some room. Economy will be lousy those cards are dealt already.
And the 2 parties both need a big one to get nearly the same number of seats they have now in a next election. For them it looks several times worse as for Cameron.

But donot expect an exit they certainly will go for reform first if they do something at all. Not doing anything looks like a big political mistake, but they have made several lately so one more would not surprise anybody.

Lake Writer said...

Budget discipline will remain key problem for EMU primarily because of the lack of proper measures and instruments to conrtol such a thing and the mistake is not from yesterday but it has been done back in the time of EMU creation and expeciall later when some countries forgered their financial and budget statistics in order to join euro zone.

christina speight said...

MESSAGE TO OPEN EUROPE MANAGEMENT!!

When trying to access "10 things that David Cameron should NOT say to Angela Merkel" by clicking on the link I get the reply

"Sorry, the page you were looking for in this blog does not exist."

OH WOE!

christina speight said...

ANOTHER FOR O:E: MANAGEMENTThisis the only link that works!!!

No response at all to clicking on the link to "Ten areas where the UK and Germany could agree on Europe "

OH WOE - AGAIN!

Open Europe blog team said...

Thanks for flagging that up Christina - is should be sorted now.

christina speight said...

2 hours 20 minutes later and it ain't fixed

PPP Lusofonia said...

The Netherlands are pretty strong exporters, they have done rather well out of the Euro.

Why should they leave a good thing for them?