• Facebook
  • Facebook
  • Facebook
  • Facebook

Search This Blog

Visit our new website.

Friday, October 18, 2013

Dutch contortions on budget highlight potential limits of eurozone rules

Jeroen Dijsselbloem (L) and Olli Rehn (R)
The Netherlands, Germany's most prominent triple A ally, has been through a bout of political upheaval in recent weeks, which could have brought down the government. The troubled coalition of the centre-right VVD and centre-left PvdA was struggling to find a majority in the Dutch Senate for its 2014 budget, which aims to comply with the EU's deficit rules.

After several months of discussions with opposition parties the government narrowly managed to convince three opposition parties last Friday to support measures for the 2014 budget: the left-liberal D66 and two small Christian parties: the Christian Union and the SGP.

European Commissioner Olli Rehn's conflicting statements on the issue illustrate how the Commission now must attempt to cajole the member states into line. He suggested in June that the Netherlands should ideally aim for a 2.8% deficit, with Finance Minister (and Eurogroup Chairman) Jeroen Dijsselbloem responding that the 3% EU deficit target was already difficult enough. This week Rehn praised the Netherlands for reaching a deal on a 3.3% deficit in 2014, even saying that the US should follow the example and "go Dutch". By the way, the government's own economic advisory agency, the CPB, thinks the real deficit will be 3.5%.

Martin Visser, the finance editor of the Netherlands' most-read daily De Telegraaf commented that:
"Even before all the calculations are made, Rehn provides a political judgment instead of a purely economic one."
When push comes to shove, the European Commission is always liable to grant a bit more wiggle room to national governments - illustrating the difficult in enforcing the EU's souped-up budget rules. This week German Finance Minister Wolfgang Schäuble criticised Rehn’s decision to exempt large scale public investments from calculations of member states’ structural deficits, describing it as a “re-interpretation of criteria”. What constitutes a 'structural deficit' is, of course, always open to debate and therefore finessing.

On a side note, Dijsselbloem's role as Eurogruop chair is undoubtedly getting tougher. Telling other eurozone member states to get their house in order when your own country has been in the EU's "excessive deficit procedure" since 2009 must be increasingly difficult.

So, after a whole range of eurozone reforms (think Fiscal Pact, six-pack, two-pack etc) the lesson seems to be that legal rules just won't trump politics.

Plus ça change...


jon livesey said...

While it is diverting to read about the rather silly contortions the EU makes its members go through, it would be more constructive to address the basic issue.

Austerity, or even reducing fiscal deficits too sharply, is economically counter-productive.

If you want to reduce real waste in Government, that's fine, but if you are reducing Government spending willy-nilly just to achieve some arbitrary fiscal goal, you can't avoid cutting your GDP to below its potential, and that means foregoing production that you will never get back, as well as causing unnecessary unemployment.

The argument for austerity is that, unlike nations with their own sovereign currency, eurozone members cannot create money, but have to make do with the limited supply the ECB creates. In other words they can "run out" of money, when nations like the US and UK cannot.

But all that argument boils down to is that eurozone members have given themselves a completely artificial problem, and austerity is the solution to it.

So the euro, which was supposed to bring "growth and stability" now requires less growth, instability and unemployment. And why? To keep the euro in existence.

Anonymous said...

I would not trust Rehn, Barnier or any of the other financially-incompetent eurocrats to bake a cake let alone give sound and unbiased economic advice.

The Dutch are financially competent and must do what they think is best for the Dutch.

It is the EU's stupid rules and the non-enforcement of them that has brought the continent to its knees.


Rik said...

Nothing has been fixed. At the end of the day as this example shows the Commission (and with them the rest of the EZ) simply has to give in when somebody breaks the rules.
Maastricht 2.0 with all its flaws in the set up of it. As could have been easily predicted btw.

Not a problem when it concerns Holland (at least for now) but it is a problem even now with the Greeces of this world (and there are a lot of them in the EZ).
It is still practically possible that one country via ignoring the rules can jeopardise the rest. Basically what Maastricht should have made impossible but didnot and the same applies with the current rules, whichever nice name the put on it. This was and is the main reason criteria were there to avoid one jeopardising the rest and even before the crisis is solved it shows that the rules donot work.

Huge strategic mistake from the Norths imho. They are tying themselves tighter and tighter to the South without especially this issue properly solved. When the next thing goes wrong in the South the North will simply drown with them because of that.
If you cannot solve it legallyt AND practically at least do not tie yourself permanently to the zombie.

As far as Holland goes, this was a 10-20-30% probability event (on the government not making it) they look to have survived it.
So pressure is (a bit) off for now.
But the structural failures still remain so everytime a new issue comes up the same problem will arise. Structural problem being not sufficient support in the Senate while basically all other parties there have conflicting interests (for several different reasons btw) with the government.
Another thing that could easily have been foreseen btw.

On Holland 2. It looks like the popularity/approval disaster for the government parties has bottomed out. This is likely as bad as it gets. However combined they are still behind Wilders and basically they still would be lucky to get half the seats they have now when election would be held now.

Rik said...

Forgot this one.
Clearly the pact cs make it impossible to have local economic policies even if they make a lot of sense.
Holland in order to obey the rules that has to adopt policies that in normal circumstances would very unlikely have been taken. And also these policies would very unlikely have jeopardised the other EZ members, even might have helped them.
But in order to comply with the rules and to give a good example we get this theater.

Simply erodes support for the rules.
Simply make all combined less effective as the sum of parts in this respect as well, because combined all have to stick to these rules.
And simply shows that these European legislators are not able to make rules that work (as this is their second attempt and it basically failed the first test).
Simply shows that the rules donot work properly and in several ways.

Schain said...

EU is in Budget deficit troubles.