This week has seen the crisis in the Euro zone reach the Netherlands as her government has called an election as it cannot get agreement on further austerity measures. So we have now seen the Euro crisis reach what is considered to be the inner core of nations. In my “Three Euros” the Netherlands would be in the Good of “the Good the Bad and the Ugly”. So to see her political parties arguing over 9.5 billion Euros of further austerity has shown that it is not just the periphery of the Euro zone that is struggling with this programme.
Are the public finances of the Netherlands that bad?
If we look at the latest report from statistics Netherlands we see this.
Dutch government deficit amounted to 4.7 percent of gross domestic product (GDP) in 2011. In 2010 the deficit was 5.1 percent of GDP. Government debt rose further to 65.2 percent of GDP.
So we can see that compared to many nations the situation is in fact relatively calm and under control. If we look for a little more detail we see this.
Government revenues rose by only very little, 0.8 percent, while spending was 0.2 percent higher than in 2010. As a result, the deficit fell slightly and came to 28 billion euro in 2011.
Not brilliant perhaps but many countries would like to be in that situation! However there were some troubling signs.
Revenues from VAT were over 1million euro lower because of weaker consumption.
And in another hopeful sign we saw the reverse of something that is becoming rather familiar in the Euro crisis.
Municipal deficits accounted for a significant part of the decrease in government deficit
Spain is of course the leader or perhaps I should say laggard in this area as she is having serious problems in getting her regions to control their spending and hence their deficits.
But with a national debt of 65.2% of economic output which relates to 393 billion Euros the Netherlands seems quite fiscally conservative. However the report does point out a fly in the ointment.
These figures mean that the Netherlands has now exceeded the European norms for deficit and debt for the third year in a row.
So we see the nub of the current crisis where she is supposed to have a deficit of 3% of GDP (in 2013) and a national debt of less than 60% of GDP. Of course the Fiscal Stability Treaty which calls for balanced budgets is also in the background but that particular act of lunacy is likely to be kicked into the long grass before long I think.
Oh and there is a consequence of the Euro crisis for both her deficit and her national debt.
On the other hand, loans of nearly 3billion euro to the ailing EU countries increased the debt slightly.
dividend revenues from the Dutch Central bank were 1.4 billion euro down
I have discussed in my past articles the accountancy standards of central banks and the Dutch one has raised its and begun to account for losses made by the European Central Bank on bond purchases in the peripheral Euro nations. So well done to them.
But we are left with Dutch help to other Euro nations raising both her fiscal deficit and her national debt. Yet by doing so the Dutch have come under pressure from the rules of the Euro to cut further. No wonder her government has found that a hard nut to crack, or rather difficult to get her people to agree too!
And we have a new entry for my new financial lexicon as apparently 3 billion Euros only raises the Dutch national debt “slightly”. Would they be kind enough to increase my bank account slightly?
If we look at the credit crunch era we see that economic growth as represented by Gross Domestic Product or GDP has again been better than many others. Since 2008 her GDP growth has been, 1.8%,-3.5%,1.7%,1.2%. But we know that 2012 is going to be a difficult year so let us look as far as we can into the crystal ball that is the future.
The Dutch statistics agency has this week updated its manufacturing sentiment index and in April it has fallen to -3.3%. Even worse the expected activity index has fallen to -6.1%. Looking back we can see that both numbers have indicated falls since last July and that somewhat ominously there appears to be a build-up of stocks (2.6%). The danger of a stock build-up is that it is temporary and likely to be reversed if the falls continue. So what is called the “stock cycle” could easily turn negative in a falling market.
If we look at industrial production (excluding construction) we see growth in 2011 of 3.3% which in December had risen to 3.6%. But in 2012 we have seen -1.4% in January followed by -3.3% in February.
The Service Sector
Here we intially see a fair bit of optimism as the balance of companies expecting an improvement in the next three months has risen from -2.1% in February to 8.9% in March and now 10.9% in April. However much more worryingly they feel that the economic climate will get worse (-5.9%) and that they will employ less people (-5.4%). Actually their view on the economic climate was much worse in February at -14.8%!
So we will have to see if the optimism translates into improved figures. And with the UK’s recorded drop into a recession yesterday I am minded to recall that this came inspite of quite positive sentiment surveys from her services sector.
Real Wages are falling here too
This is becoming an almost omnipresent theme in Western economies ( France up until now is a rare exception) and this hits hard.
The disposable household income has dropped for the fourth year in a row.
Ouch! And if we look for some detail for 2011 we see this.
Adjusted for inflation, the disposable household income dropped 0.4 percent in 2011, the same as in 2010 and this was largely caused by the fact that the wage increase of 1.8 percent was below the level of inflation (2.3 percent).
It is not quite fair to say that you could copy and paste this theme onto every economic article these days but it is beginning to feel like that.
Will consumers come to the rescue?
With the falling real income levels described above this does not seem likely. The Dutch consumer sentiment balance is not surprisingly at -32 in April. Whilst this is an improvement on the -36 of March it is a considerable deterioration on the -10 of a year ago (April 2011). If we look at their view on the economic climate we see that a year ago it was a balance of -7 and it is now -52. The only solace to be gained is that it is at least better than the -65 of the 4th quarter of 2011.
The actual consumption figures do back up these sentiment indicators although we can only view up to February via this route. The emphasis is mine.
Household spending on goods and services was 1.3 percent down in February 2012 on twelve months previously. The decline was about the same as in the preceding months. Consumption figures are adjusted for price changes and differences in the shopping-day pattern.If the consumption of natural gas had been the same as in 2011, total household consumption would have slumped nearly 3 percent.
The argument for falling real wages in the Euro periphery has in its favour that an improvement in price and wage competitiveness will improve balance of trade figures. However as the Netherlands had a balance of trade surplus of 40 billion Euros in 2011 and ran a services surplus too she needs such a boost much much less.
The statistics office is keen to give us the details of this and she exported some 654 million kilos of cheese (Edam?) in 2010. Apologies if that fact leads to some indigestion!
At the end of 2011 Rabobank wrote a report which asked recession or not? As I have discussed above what it felt were likely problems of slowing world trade growth, weak consumer spending and further public-sector austerity have all come home to roost. What they did not know at that point is that after looking like it had recovered the Dutch economy returned to recession at the end of 2011 as her economic growth figures went -0.3% and then -0.7%.
If we now add the problems apparent in 2012 to the slowdown at the end of 2011 we can see how an economic slowdown can cause a political crisis. Economic contraction does not fit well with austerity as so many nations are discovering. it fits particularly poorly with the type of straightjacket that is the Euro’s Fiscal Stability Treaty. Even the conservative and cautious Eurostat expects the Dutch economy to contract by 0.9% in 2012 and it usually understates contractions.
As the bail out policies for Greece, Ireland and Portugal face calls for more money then the Netherlands will see her national debt rise. It was going to rise anyway to pay for the existing programmes. As the impacting of this seems likely to coincide with economic weakness and outright contraction we will find out if the Dutch are willing to achieve Euro targets which are being moved out of reach by borrowing for other Euro nations.