Heard On The Street
Netherlands hit by new Dutch Disease
by: RICHARD BARLEY
From: The Wall Street Journal
THE Dutch and German economies are closely linked by trade, geography and history?so closely, in fact, that the guilder was effectively pegged to the deutschmark as long ago as 1983. But now Germany's economy is already well above its pre-crisis peak but the Netherlands is languishing.
The Dutch central bank has slashed its expectations for 2013 and forecasts a contraction of 0.6 per cent of gross domestic product, even as the Bundesbank predicts a return to growth. What has gone wrong in the Netherlands?
Like Germany, the Netherlands is a major exporter; it runs a large and consistent current account surplus. Its government debt level is lower than Germany's and both have strong fiscal track records. It is having to implement austerity, but not on the scale of southern Europe: The budget deficit is forecast to be 4.1 per cent of GDP in 2012. Yet in the last quarter, Dutch GDP plunged 1.1 per cent on the quarter, while Germany eked out 0.2 per cent growth.
Some of the weakness might be temporary and related to poor euro-zone import demand; the Netherlands is a major European trade hub. But there are two key structural problems: the Dutch housing market and Dutch pensions. Dutch house prices have fallen some 16 per cent from their peak in 2008 and are expected to fall further; over half of households in the 25 to 34 year age group have negative home equity, Fitch notes. Dutch households are the most indebted in the euro zone, with household gross debt at 250.5 per cent of disposable income in 2011 versus 86.3 per cent in Germany, according to Eurostat.
Meanwhile, pension contributions are rising while pension payouts are falling. Over 2010-2013, purchasing power for employees will have fallen by 3.75 per cent, for benefit recipients by 4 per cent and for pensioners by 5.25 per cent, the Dutch CPB Bureau for Economic Analysis estimates. With unemployment rising, all of this is clearly hurting consumption.
That underlines the lingering problem many advanced economies still face: high stocks of legacy debt. Policy efforts have understandably focused on reducing debt service costs and keeping credit flowing, avoiding a sudden stop in financing. But only time, growth or restructuring can address legacy debt. For the Netherlands, that means it may be many years before it can once again compare itself favourably to Germany.