What happens to the Euro project if the economy of the Netherlands weakens further?

Whilst some measures of the state of play in the Euro area have been improving in 2012 there are some moving in the background which have not. An example of the former is the way that government bond yields have improved in most of the peripheral nations in trouble. An example of the latter is the way that the economies of what are considered core Euro nations have weakened in 2012 and in particular the way that  the Netherlands economy has behaved.

The Background

On the 15th of November (on my Notayesmanseconomics blog) I discussed the very poor latest Gross Domestic Product figures for the Netherlands and here are the details from her statistics agency.

 the Dutch economy shrank by 1.1 percent in the third quarter of 2012 compared with the second quarter. In the first two quarters of the year, the economy grew slightly, by 0.1 percent

Compared with the third quarter of 2011, the economy shrank by 1.6 percent

This was not an outright shock as I had discussed back on July 10th that her industrial production was weak.

manufacturing output in the period April-May was more than 1 percent down from the period February-March

However the size of the fall was and is a concern. After all the Netherlands is what might be called a core-core nation for the Euro project. Also the heavy lifting of the Euro area bailout programmes (EFSF,ESM etc.) relies on nations such as the Netherlands to counterbalance the weaker nations.

Whilst the founders of the Euro hoped for economic convergence the weakening of a previously strong economy was not quite what they had in mind!

Today’s data

Unemployment and Employment

Unfortunately unemployment is on a rising trend and the unemployment rate rose to 7% in November from 6.8% in October. There are now 547,000 unemployed which is up 99,000 or 18% on a year ago. If we look back unemployment turned higher in June of last year when is was at a rate of 5%.

Regular readers will be aware that employment trends have at times been a leading indicator in the credit crunch era. Here at first the picture looks slightly better as employment is down by 26,000 at 7,366,000 but this hides the fact that it was rising until May and is down 59,000 since then. Also if we look back employment fell in 2011 too if only slightly.

For those who have followed the situation regarding US employment/unemployment you may be interested to know that the participation rate in the Netherlands has risen. Also I have used the Netherlands measure as there is also an international measure where unemployment is now 5.6% up from 4.9% a year ago! How many times do we end up discussing statistics? As if by magic a million more people are employed….

Household Consumption

These numbers are weakening too.

In October 2012, household spending on goods and services was 2.4 percent down from October 2011, the most substantial decline in the past three years

And we have a by now familiar influence on this.

In the Netherlands, the high VAT (value added tax) rate was increased from 19 to 21 percent, effective from 1 October 2012

These numbers turned down in August 2011 and the only positive month (marginally) was September of this year when consumers were presumably trying to beat the VAT (sales tax) rise.

Investment is down too

In October 2012, the volume of private sector investments in tangible fixed assets was more than 4 percent down from October 2011

This number is probably worse than it looks as this October had two working days more than last year’s.

What about prospects?

We get the idea from the headline.

Dutch consumers very pessimistic

If we look into the detail then we see this.

Consumers were much more pessimistic about the economic climate in the past and in the next twelve months than in November. The component indicator economic climate dropped 8 points to -64.


Having looked at this back in July let us examine the latest numbers from earlier this month.

In October 2012, the average daily output of the Dutch manufacturing industry was 1.7 percent down on October 2011

Or if you want some more perspective.

The average daily output of the Dutch manufacturing industry has fluctuated around the same level for two years now.

House prices

This has become a factor in what if it continues will no doubt end up being called the Dutch Disease. The Land Registry tells us that house prices rose from 100 in 2005 to 112.2 in 2008 which is a familiar European move if more moderate than some. They then started to fall but this has accelerated in 2012. For example in the year to October they fell by 7.8% leaving the index at 94.8.

As ever we are left wondering what is happening now?! If we look at the other economic indicators discussed and analysed today which show a weakening economy then we should expect further house price falls in the Netherlands. The annual rate of fall has been steady at a rate of circa 8% since the summer but the fear now must be of an acceleration. One factor that is familiar around Europe now is that the number of houses sold has fallen,so lower prices and lower volumes come as a job lot.

Looking Forwards

The Dutch Central Bank is a little behind the times with its latest update but we can  garner some information from it still. For example even in the more optimistic days of last summer it thought this.

DNB (De Nederlandsche Bank)  calculations show that the Budgetary Agreement will reduce GDP growth in 2013 and 2014 by, respectively,0.5 and 0.3 percentage point.

We now know that this Euro style austerity will yet again impact on a weakening economy. Also even with  what looks now a rose-tinted scenario it thought this.

According to these figures, GDP would grow by a mere 2.2% in the 2008-2014 period, the lowest rate in any seven-year period in post-war history.

With this came a rise in expected unemployment.

Her banking sector

There are two main issues here the first is simply that the Netherlands has a large banking sector. If we add ING and Rabobank together then their combined size is approximately three times the output of her economy. Her taxpayers have already found themselves supporting some of her banks and the danger of the economic situation described above is that they may yet have to do more.


The signs are clearer and clearer that the Netherlands is heading into 2013 with an economy that has not only slowed but is probably shrinking. This will put a strain on her already weakened banking sector. This means that her public-sector finances have a considerable tail risk to them. On the surface they look relatively strong as many nations would like a fiscal deficit of 4.5% of economic output (2011) or a national debt of 68.2% of it (2nd quarter of 2012). However this could rapidly deteriorate if more help is needed by her banks.

If we consider her relationship with her Euro area partners then as of the second quarter of 2012 her contribution to the various bailouts was 1.6% of her economic output. We have seen that since then such bills have continued to rise just as the possibility has arisen that financing them could be problematic for the Netherlands. Whilst her share of the Euro area “rescue” vehicles is only 6% it would create quite a shock if she started to find it difficult to maintain this. This is one of the reasons why I labelled such vehicles as unstable lifeboats.




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  • Anonymous

    Hi Shaun,

    If memory serves me correctly, there are European laws against state aid. The EC have made many cases to prevent relatively small sums being given to private firms.

    When I look at the EU website, I cannot find any illegal state aid cases in the banking sector. Here I have kindly started a list for the EC Directorate Competition – (everyone please add other banks I have missed)

    Allied Irish, RBS, Halifax, Dexia, Rabobank

  • http://www.facebook.com/TheRealFinney Andrew Finney

    Even for a well designed, stable lifeboat, the office in charge will have a side-arm issued to ensure a panicking crowd doesn’t swamp it in their desperation.

  • forbin

    Hello Shaun,

    well its not midnight yet is it ?

    and the Holland question may never be an issue if the Spainish one blows up

    ( then there is the Italian one to follow that….)

    If fact as theres so many issues the politicos are begining to think the current state of affairs are normal

    On the home front after recieving letters from both gas and electric companies about large 8% plus rises this daft BoE and GOP are thinking I’m going out to spend ?

    fat chance !


    PS: gotta to keep some cash for popcorn you know!

  • DaveS

    The BoE and GOP are stuck with out-dated dogmas.

    They have spent 30 years suppressing real incomes – officially known as inflation targeting. They want the plebs to borrow and spend, rather than earn and spend. Wage increases are not good for profits.

    Since the crash, Mervyn seemed to think he can rebalance the economy with a bit of devaluation. Seems not to have noticed that most UK industry packed its bags and left a long time ago – not sure what he thinks he is rebalancing.

    Perhaps that was just a bit of tinkering on the edges. In reality he was assuming that once the Lehmans dust settled, the global credit hoses would be turned on again and the plebs could start borrowing and spending again. He has been blaming the Euro for spoiling the party atmosphere.

    My feeling is they are waking up to the reality. The credit hoses aren’t going to be turned on again and fiddling with exchange rates won’t work – especially when everybody else is trying to do it too. (Although Mervyn still likes this one).

    Mervyn is the old guard with the old dogma. The new kid will go for nominal GDP targets – with Fed and everybody else I expect. As we all know this is code for some real inflation – and that means wage inflation too.

    Question is when ? The BOE mandate comes from government and its hard for Tory George to sanction wage inflation for the plebs. Its easy as pie for Ed. Still George is desperate…..

  • John

    “the Holland question may never be an issue if the Spainish one blows up”

    Might I suggest that if Spain’s situation worsens, in my view, so will Holland’s. If Spain ‘blows up’ Holland will be caught in the back-wash at the very least. (And so will we).

    Is this meant to be austerity working? Seems to me to be a failure. Is the idea of the euro working? Doesn’t seem so to me. The longer this situation goes on the more costly it will be to untangle. I would still like to see the euro abndoned, take the pain that gives and then let each country seek its own destiny each with its own sovereign currency.

  • forbin

    Hi DaveS

    inflation is something we’ve been getting !!

    and yes, wage inflation would “help” however consider the effects on what jobs we have left when ChinIndia can out compete us.

    I posit that too higher wages will worsen the job prospects here…. only left with jobs you can’t offshore ? not that many then, and effects on depressing wages on whats left counters the wage increases required….

    worsens the tax base and they’re hope a cut in corporation tax will encourage investment – why should they be paying less % tax than me? ( actually they don’t if NI is included – cut that? hmmm…)

    its going to be an interesting ride !


  • Noo 2 Economics

    I fear a significant worsening of the Euro crisis in 2013. The politicos and some of the MSM seem to think the EZ is turning the corner! It’s time to call time on the Euro.

    Shaun on a lighter note, as we are near year end, I thought it might be amusing for readers to nominate the funniest posts they’ve seen on your blog this year. What do you think?

    If you agree my nomination goes to Alex Eames on your 30 May post “Why Ireland should vote no to the Fiscal Compact Treaty tomorrow” in which Alex stated (about the ECB or maybe he meant the Bundesbank?)

    “One Bank to rule them all,
    One Bank to fund them,
    One Bank to own them all
    and in the crisis fine them.

    My preciousssssssssssssssssssss”

  • Anonymous

    The fines are a farce – they are small change compared to the taxpayer support given to these same banks.

  • Noo 2 Economics

    Hi ExpatinBG – I agree. If I had my way the loans would never have been made in the first place.

  • DaveS

    Well I am thinking more like 70′s inflation which peaked at 25% – although this time they will be a lot cleverer with how they calculate and report it. The BOE has probably got some researchers in Argentina right now.

    Higher nominal wages – not real wages – they will be paying them Peso Pounds (“the pound in your pocket…..”).

    Of course there is no way it could work. They think they can inflate the debt away and start the whole cycle all over again. Like I said – these idiots think they are in control.

    Forget things like attracting investment (with real rates), encouraging saving (with real rates), investing in engineering (with real wages), forget long terms strategies that might actually achieve something. They are difficult to model in a spreadsheet……,

  • Anonymous

    Hi Expat
    Most of the Irish banking industry,Lloyds TSB, Bankia and many cajas the list could go on and on.

  • Anonymous

    Hi Andrew and welcome to my part of the blogosphere.
    For a badly designed unstable one such an officer will require a machine gun and plenty of ammunition…

  • Anonymous

    Hi Noo2
    A good idea and I will suggest it on my Xmas Eve update.

  • Anonymous

    I’ve said it before, it’s a rotten system that doesn’t enforce the rules equally. Corruption & bureaucratic incompetence destroyed the Warsaw pact centrally planned economies – this should be a warning to the EC in Brussels that failure and dis-integration is possible.

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