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Thursday, 31 May 2012

Dutch Finance Minister De Jager listens to the European Council’s recommendations for The Netherlands… and hears something totally different than the objective listener.

Today was the day of the Recommendations from the European Council towards the state budget and economic situation of all 27 countries in the European Union. Also The Netherlands received advice from the European Council, i.e. Olli Rehn, concerning the EC’s assessment of the Dutch stability programme that had been delivered on April 27, 2012.

This stability programme that had been delivered by an unexpected coalition of five parties ("the Spring Coalition") ranging from right to left, had been applauded at the time as a successful last-minute attempt to stick to the demands in the Stability and Growth Pact (SGP) for 2013: the 3% budget deficit threshold and the fiscal budget of no more than 0.75% of Dutch GDP.

Although I considered it a fine achievement of Finance Minister under resignation Jan Kees de Jager and the political leaders of the Spring Coalition to finish the stability programme in time, the measures in the programme itself were very disappointing.

Here are the main snips of the article behind the aforemention hyperlink :

However, it remains questionable whether The Netherlands will reach the 3% budget deficit in 2013 or not:
  • The increased VAT-rate of 21% will further diminish the consumer confidence and spending desire in The Netherlands.
  • The zero wage increase-policy for Civil Servants will have the same effect of reduced consumption
  • Lower consumption will inevitably mean less tax income and fewer jobs and economic growth.
  • The €400 personal liability on healthcare might initially reduce healthcare costs, but this could change eventually as people that initially wait with visiting a doctor, might be confronted with much higher healthcare bills, due to more expensive treatment.
All these measures make it quite uncertain that the demands of the SGP will be met in 2013.

However, what makes things worse is that there is neither a solution for the hopelessly locked-up Dutch housing and Commercial Real Estate (CRE) market, nor for the bad financial situation of many pension funds.
  • The reduced MID-measure is only for new mortgage-loans; the current redemption-free jumbo loans will enjoy MID until eternity. This means that it becomes even more unfavorable to enter the housing market now.
  • The current mortgage-owners stay put when they can, while starters on the housing market don’t have a level playing field at all. The consequences will keep the housing market locked. How is that for kicking the can down the road?!
  • The CRE building frenzy in has hardly stopped in The Netherlands and until this day billions and billions of Euro’s are locked in useless real estate that might be vacant for years to come.
  • The government still increases the retirement age at a very low speed, instead of using the crisis to increase the pension age to 67 at once, cold turkey. This would be harsh for the current prospective retirees, but much fairer to the youngsters that have to work until 67 or older anyway.
The conclusions and recommendations of the European Council on the Dutch stability programme  were crystal clear. Although it was not a very negative advice towards The Netherlands, there certainly isn’t time to lean back yet.

Here are the most important conclusions and recommendations from the European Council, combined with my comments:

Conclusions of the European Council’s  assessment of the Dutch stability programme:

 Based on the assessment of the 2012 [Dutch] stability  programme, the Council is of the opinion that the macroeconomic scenario underpinning the budgetary projections in the programme is optimistic. For 2013, the stability programme projects economic growth of 1¼% without taking into account the negative impact of the additional consolidation measures on growth, whilst, on the basis of the same no-policy change scenario, the Commission's forecast a lower growth rate of 0.7%.

The budgetary projections over the programme period are subject to implementation risks. These are not solely restricted to the newly announced consolidation measures, but also to the implementation of some of the measures agreed upon earlier by the outgoing government. Moreover, the additional measures proposed by the government in April 2012 and their budgetary impact are not sufficiently specified and quantified. Budgetary adjustment has so far relied mostly on expenditure cuts, which also affect growth-enhancing expenditure.

This is Europeanish for: we consider it the chance of ‘a snowball in hell’ that The Netherlands will reach an economic growth of 1.25% in 2013. Our 0.7% prognosis will be much closer to the truth and might even be too optimistic.

Fiscal disincentives for second-income earners have been reduced but not yet sufficiently. Removing remaining disincentives would further contribute to raising labour supply and make human capital allocation more efficient. The labour market integration of vulnerable groups should be improved.

Translated: the Dutch government and companies still make it too hard for women and people from minority groups to work in The Netherlands. The government of PM under resignation Mark Rutte did ‘go through the motions’, but didn’t achieve enough change.

In the field of  enterprise policy, the top sector agendas have  been endorsed  and sectoral ‘innovation contracts’ have been signed between the government and industry representatives. Support to private research is being increased through the introduction of the RDA+ tax deduction scheme as part of the incentives to further promote innovation, private R&D and closer science-business links. However, the focus on ‘top sectors’ should not come at the cost of fundamental research nor exclude innovative firms that do not belong to one of the ‘top sectors’.

Translated: the top sector approach in The Netherlands isn’t bad and could deliver some results, but bears the risk for a government having blinders on towards very successful Dutch companies in lines of industry that are in general not so successfully. Fundamental research might be neglected too by this policy.

Over the last four decades, structural distortions have built up in the Dutch housing market. In the property market, fundamental supply restrictions and tax incentives for home ownership (notably mortgage interest deductibility favouring higher-income households) have led to an inefficient allocation of capital. In the rental market, with its very large social housing segment, social policies and caps on rent levels and on rent  increases have led to a very inelastic supply of rental housing. Modifying the favourable tax treatment of home ownership would contribute to reducing the structural distortions on the Dutch housing market.

Ernst’s translation: The Dutch housing market is a mess, where the rich have been pampered extra at the expense of the not-so-wealthy. On top of that, the Mortgage Interest Deductability (MID) policy created a bubble of impressive proportion. “Holland, please get rid of your beloved MID”

The rental market is extremely inefficient and – as a consequence – very much locked-up too. People are ‘imprisoned’ in their affordable houses, without having the chance for a better or larger one at a reasonable price, due to a complex of too much rules and rental fee-caps and too little houses in the non-social rental sector.

Recommendations of the EU

The Netherlands should take action within the period 2012-2013 to:

1. Ensure progress towards the timely and durable correction of the excessive deficit.To this end, fully implement the budgetary strategy for 2012 as envisaged. Specify the measures necessary to ensure implementation of the 2013 budget with a view to ensuring the structural adjustment effort specified in the Council recommendations under the Excessive Deficit Procedure.

Thereafter, ensure an adequate structural adjustment effort to make sufficient progress towards the medium-term  budgetary objective (MTO), including meeting the expenditure benchmark, and ensure sufficient progress towards compliance with the debt reduction benchmark whilst protecting expenditure in areas directly relevant for growth such as research and innovation, education and training.  To this end, after the formation of a new government, submit an update of the 2012 stability programme with substantiated targets and measures for the period beyond 2013.

Translation: The Netherlands must get rid of the current budget deficit of 4.5% and it must come up with structural measures to keep the budget deficit at a structural 0.75%. Don’t cut away budgets from growth stimulants, like research, innovation, education and training. Warning: a new Dutch government after the September, 2012 elections must stick to the program!

2. Take measures to increase the statutory retirement age, including linking it to life expectancy, and underpin these with labour market measures, whilst improving the long-term sustainability of public finances. Adjust the second pension pillar to mirror the increase in the statutory retirement age, while ensuring an appropriate intra- and inter-generational division of costs and risks. Implement the planned reform in longterm care and complement it with further measures, in view of an ageing population.

My translation: Reform the retirement age more quickly. Do something about the pension funds and don’t pamper the current and coming retirees at the expense of the youngsters. Do something about the soaring healthcare costs as a consequence of the ageing process in The Netherlands.

3. Enhance participation in the labour market, particularly of older people, women, and people with disabilities and migrants, including by further reducing tax disincentives for second-income earners, fostering labour market transitions, and  addressing rigidities.

Translation: older workers, disabled people, women and people from minority groups have a hard time finding an appropriate job. Especially women get in fact a tax-reward when they stay at home and take care of the children, while child care is extremely expensive in The Netherlands. Dutch government, do something about it!

4. Promote innovation, private R&D investment and closer science-business links, as well as foster industrial renewal by providing suitable incentives in the context of the enterprise policy, while safeguarding accessibility beyond the strict definition of top sectors and preserving fundamental research.

Translation: don’t focus exclusively on the top sectors. Don’t focus exclusively on profitable research, while neglecting fundamental research.
5. Take steps to gradually reform the housing market, including by: (i) modifying the favourable tax treatment of home ownership, including by  phasing out mortgage interest deductibility and/or through the system of imputed rents, (ii) providing for a more market-oriented pricing mechanism in the rental market, and (iii)  for social housing, aligning rents with household income.

Translation: stop pampering rich homeowners with the Mortgage Interest Deductabiity (MID). Stop subscribing to the social renting industry how much rent should be asked for a rental house in the social sector. Make sure that people don’t pay too little or too much rent.

In spite of the ample usage of ‘Europeanish’, that strange English of European government officials, making it very hard to understand for normal people, this was a very clear report with conclusions that should not be neglected.

I do not agree with all conclusions: if you liberate the rents in a social renting market with a structural shortage of suitable housing, rents will soar. This would make it effectively impossible for poor people to pay the rent of their house or appartment, unless the government helps them with billions in subsidies. Therefore it is my opinion that the government should have a decisive voice in the social renting market, until there is ample housing supply to host all social tenants in The Netherlands.
Most other conclusions from this report I endorse fully.

While you could say that the Dutch government got a clear dressing-down, in spite of the faint language, this was not the opinion of Dutch Finance Minister under resignation Jan Kees de Jager, when asked by a reporter of my favorite radio station Business News Radio ( The following snip is a summary of this interview in Dutch:

In spite of the fact that the European Council criticized the austerity measures in the Spring Agreement, The Netherlands receives ‘an A- figure’, according to Finance Minister Jan Kees de Jager.

‘The EC put all signals to green for the execution of the budget agreement. We don’t have to do more, but certainly not less. The Netherlands fully meets the budgetary goals. The Council states: what you are doing is good. Read the recommendations: they say that we took adequate measures’. At all terrains wherein recommendations have been received from Brussels, measures have already been taken: the housing market, the labor market and healthcare. This was emphasized by De Jager.

I truly doubt if De Jager read the same recommendations that I have read; mine were certainly from the European Council. I didn’t read anything about The Netherlands getting an A- figure. Although the measures that The Netherlands took seemed about sufficient for reaching the 3% threshold of the SGP, ‘the macroeconomic scenario underpinning the budgetary projections in the programme is optimistic’.

This means that the whole budget concept of the Dutch stability programme is founded on very thin ice and thus very likely to fail next year, as economic growth will almost certainly lag with the predicted 1.25%.

Besides that, as an independent blogger, I can state fullheartedly that the measures that have been taken by the Dutch government until now, are nowhere near the recommendations as desired by the EC. Not in a million miles…

To put it even stronger: the biggest government party VVD stated today, through MP Mark Harbers at BNR news radio, that “reducing the MID for starters on the housing market, as agreed to in the Spring Agreement, is about everything that can be expected from the VVD. The VVD is absolutely not willing to fully abolish the MID in The Netherlands and when the elections in September 2012 run favorably for the VVD, the policy of maintaining the MID will be sustained”.

The European Council will not be amused after hearing this statement. I truly wonder if the VVD:
  • Does not have the courage to understand the desperate situation at the Dutch housing market, or
  • Does not have the brains to understand the desperate situation at the Dutch housing market;
In either case, continuing the MID policy is a disaster for the Dutch housing market that will keep prices artificially high, due to extremely low interest rates that are a consequence of it.

Most other reforms that are planned by the Spring Coalition don't really solve anything within a reasonable amount of time. Most measures are postponing the difficult reforms until a distant future (2020 and beyond), leaving only extra taxes as concrete measures. Courage is hard to find in this agreement.

And concerning the 1.25% growth in 2013? That is a mirage! Just like The Netherlands meeting the 3% budget deficit threshold next year! You can have my word on that.

Tuesday, 29 May 2012

Is the fairytale of unlimited profits in the telecom business finally over? Why investors in Dutch telecom behemoth KPN should consider selling their stock to América Móvil!

The Dutch telecom behemoth KPN is currently under the spell of América Móvil (AM), the Mexican telecom company owned by the world’s richest man, Carlos Slim.

A few weeks ago the news became known that Slim showed interest in collecting a decisive minority share of 28% in KPN for a price of €8 per share.

The former Dutch state monopolist that is currently going through a difficult time on the Dutch and European cellphone and mobile internet market, was not amused and stated that the offered price was much too low. Shareholders of AM on the other hand found that the offered price was too high and punished AM with a substantial drop in market value.

Here are the background details on this deal from two articles in Dutch newspaper Het Financieele Dagblad (, both from Wednesday May 9:

Carlos Slim, the extremely wealthy owner of Mexican-based telecom giant América Móvil (AM), is a smart man. He tries to get the keys of the vulnerable Dutch telecom company KPN at a bargain price.

KPN has a new board of directors and is weakened by a series of profit warnings. With a targeted stake of 28% of outstanding KPN stock, Slim remains under the magical limit of 30%, avoiding the obligation of bringing out an offer on all remaining shares KPN. This saves him €8.2 bln in take-over expenses, but offers in fact the same result: he gets control over KPN.

When this tactic succeeds, the Mexicans of América Móvil book two results at the same time. AM has built up a stake of 4.1% in KPN stock. At the moment that this stake passes the 5% threshold, the Dutch Authority Financial Markets is forced to publish the news on this stake, making the Mexican interest in KPN public information. Normally this would have led to soaring stock rates for KPN. By offering a partial offer of €8 for a 28% stake, the Mexicans prevent the emergence of fantasy prices in KPN stock.

Even more important is that AM with a 28% stake in KPN keeps potential competitors out of the way and gains almost total control in KPN. The reason is that shareholders’ meetings in The Netherlands seldomly attract more than 50% of all shareholders. If the presence at the shareholders' meeting is less than 56% of all shareholders, AM decides with 28% of all shares in fact what happens with KPN in the future.

The supervisory board of KPN stated today that the offer of AM is ‘undesired’.

The shareholders of América Móvil were less enthusiastic on this offer for shares KPN and drew their conclusions. Again the FD:

The stock of América Móvil, the company that announced on Tuesday, May 8, it wanted to purchase a large stake in KPN, dropped dramatically this Tuesday.

Investors devaluated the share by 8% at the Mexican stock exchange.

‘We find this offer in KPN not very cheap for a non-controlling stake in a company whose ebitda-profit and net profit in 2012 might drop by 5.9% and 6.2%, according to our forecasts’, according to Valder Nogueira, Head of Stock Research at Banco Santander in Brazil. ‘We think that the market will take some profits after recent good news in a mixed reaction at a transaction that is not particularly cheap.

Today, Tuesday May 29, América Móvil confirmed their offer of €8 by launching it officially and irrevocably, although it was called ‘substantially too low’ by the KPN management. Between May, 30 and June, 27, shareholders of KPN can offer their shares at the offered price until a stake of 27.7% is reached.

This is a peculiar situation: the KPN management thinks that the offer was too low, while AM shareholders considered the offer to be too high. Who is right?!

Normally, if you looked at the KPN stock rates during the last three years, the €8 offer seems indeed very low.

Exchange rate development of KPN during 2009-2012
Data courtesy of
Click to enlarge
During the vast majority of the last three years, the KPN stock has been well above the €8 threshold. KPN has been a company that offered very solid profit and still possesses stakes in a few important European telecom companies, like E-Plus in Germany and BASE in Belgium. And from a technological point of view, KPN is a modern telco.

The catch, however, for KPN is the development of the international telecom market. While the importance of fixed telephony had already been shrinking for a number of years in a row, it seemed that the cellphone market was the goose with the golden eggs in The Netherlands and beyond.

This changed, however, with the explosive emergence of the smartphone in Europe and the comeuppance of a number of (almost) free apps, limiting strongly the profitability of mobile telecommunication: Skype, Ping, Whatsapp and other free apps enabling telephone traffic and instant messaging over the internet.

Attempts of KPN and two of its main competitors/colleagues T-Mobile and Vodafone to silently pinch off certain internet services hit a wall of protest and eventually legislation. According to the new Dutch legislation, the internet should be fully accessible from a smartphone.

On top of that, the “coincidential”, almost simultaneous price-raises of KPN, Vodafone and T-Mobile within two weeks raised eyebrows at the OPTA, the supervisory body for the Dutch telecom market, who started an investigation concerning this topic.

Since then, the fairytale of unlimited profits in telecom land, that ran throughout the first decade of the new millennium, suddenly seemed over. It was my prediction that mobile internet would eventually turn into a utility:

In my opinion fixed internet and mobile internet will become normal utilities in the near future, just like electricity is a normal utility. You don’t think about it, you don’t compare it often with the offers of other providers (maybe only once a year when the contract expires)… It just needs to be there, when you plug it in; at the highest quality and against the lowest possible price.

Currently, there are lots of tricks and stunts that telecom providers pull to keep customers under contract, while paying lots of money:
  • exclusive phone contracts (Apple(!)) with high subscription and usage fees;
  • cheap or free smartphones (non-Apple) with high subscription and usage fees;
  • opaque contracts and subscription forms that are impossible to comprehend for normal citizens;
  • contract-limits for data usage;
  • very expensive data usage beyond the contract-limits;
  • pinched-off access to free apps that substitute dearly paid telecom services;
I think this business model will disappear to be replaced with a business model that treats fixed and mobile internet as a utility. The customer buys a phone and pays a very limited fee per month for internet bandwidth. All ´classic´ telephone actions (calling, SMS-ing) will go via IP connections, as there is no need anymore to use the classic digital voice or data connections.

Based on this opinion that I still endorse completely, it would be a smart move of the Dutch shareholders of KPN to take the money of América Móvil and run… KPN has been and still is a very good company, that will present its shareholders with decent profits in the future and will remain a leader in innovation in my opinion. However, I strongly doubt that this company will be the money machine with the excess profits it had been before. The same is true for its main competitors in The Netherlands and abroad: T-Mobile, Vodafone, Téléfonica and others.

A further concentration of power in telecom land, in order to save costs, will IMO lead to an intervention from the European Commisioner for Internal Competition: the emerging party after such a merger would become too powerful on a European scale. 

From my ‘mobile internet as a future commodity’- doctrine, it is doubtful that European telecom providers can keep prices for mobile internet as high as today, unless they break every rule concerning a level playing field, by making illegal price agreements and dividing the telecom market between themselves. If the prices for mobile internet will remain too high, powerful competitors from the America’s, Asia and perhaps even Africa will emerge eventually.

One other unique selling point of the current telco’s – the exclusive sales of Apple iPhones in certain countries– will lose its attraction in the near future. The power of the Apple-brand is still strong today, but it will become more and more normal and people won’t be willing anymore to pay €600 plus for an Apple telephone with an exclusive, expensive subscription.

When you look at KPN with these assumptions in mind, €8 suddenly seems a fair offer.

Of course this article reflects my opinion and is not meant as an investment advice. Just to let you know!

Monday, 28 May 2012

The Dutch economy might contract less in June, according to a very optimistic forecast, but the recession in The Netherlands is far from over. The unemployment is following the uphill path; just like I predicted.

It is time for a macro roundup of the Dutch economy. Various sources wrote on the situation in The Netherlands during last week.When these sources are combined, this paints a picture of an economy that might not contract so aggressively in June, but the unemployment and mood are further deteriorating to levels that have not been seen in a long time. Especially the unemployment seems to go past the much too optimistic predicted rates of the Central Planning Bureau for 2012 and towards the 7-8% that I predicted in my Outlook for 2012.

For me this is not a surprising development, as I noticed that Dutch companies were having much less patience with their excess workers than in 2009. Although it is difficult for the people involved, this is not necessarily a bad development. When the economy of a country, economic block or a large part of the world is in a situation of overproduction, the only thing that can happen to help the economy recover is producing less goods and products with less people. In this way the overproduction disappears slowly, but surely, until there is room for slow growth and a balance in production again. This is a natural process that can be postponed, but cannot be avoided.

This contraction of employment happened with blistering speed in the US and the Southern and Eastern European countries in 2008 and 2009, but in The Netherlands the growth of unemployment seemed to lag in those years. What was thought to be a narrow escape at the time, comes now back at The Netherlands with a vengeance. I predict also that Germany won’t escape its fate either. It might take a few years, but then the growth at other country’s expense will be over too for Germany.

The following article on the Dutch economy is printed in Z24 ( , the online economic newspaper in The Netherlands. Here are the pertinent snips:

In June the Dutch economy shrinks by 0.7%; much less than the -1.7% of May. This is forecasted by “De Stand van Nederland “(i.e. Rate of The Netherlands), the conjunctural barometer of Z24.

This forecast is less grim than in the last two months. However, it is too early to conclude that the Dutch economy is improving. Still predictions prove to be worse when new data comes available. May, for instance, turned out far worse than initially thought (-1.7% instead of -1.1%).

Consumers are a fraction less pessimistic about the housing price in their street. At the same time, they are more dismal about the labor market and the state of the Dutch economy.

Other rays of light are missing yet: car sales dropped by 14% last April and the electricity production dropped lightly by 0.15%

A positive factor is that Germany still seems in good shape. German metal workers receive a wage increase by 4.3%. This can stimulate consumption; also in The Netherlands, due to the German tourists.

The Z24 forecast on June seems much too optimistic, just like the forecast on May was much too optimistic too. It seems a prediction in the category: we think the economy will grow. All data point the other way around, but we are sure it will grow anyway… Yeah, right!

In contrast with the overly optimistic Z24, the data of CBS ( is based on past observations, not on predictions of the future. The figures based on the recent past give unfortunately little solace for the immediate future.

Here is the CBS data on the mood among manufacturers:

The mood among Dutch manufacturers deteriorated further in May. The producer confidence indicator stood at – 5.0 versus – 3.3 in April. Manufacturers have gradually become more pessimistic over the first five months of 2012.

Producer confidence consists of three component indicators: manufacturers’ opinions on their order positions, the expected output over the next three months and opinions on their stocks of finished products.

Manufacturers’ opinions on their order positions deteriorated significantly. This indicator fell to the lowest level in twenty-four months. Their opinions on their stocks of finished products also deteriorated marginally. Manufacturers  were as pessimistic about their output in the next three months as in the preceding month.

Just like in the preceding months, manufacturers indicating that the value of the orders they received has grown in the past three months were outnumbered by those reporting a decline. The index order position (orders expressed in months of work) dropped to 100.1.

Manufacturers were more pessimistic about future employment in their sector than in the preceding months. The number of manufacturers anticipating staff cuts in the next three months was distinctly higher than the number of manufacturers expecting employment to improve.

Producer confidence in manufacturing industry
Producer confidence in the manufacturing industry
Data courtesy of
Click to enlarge
These are exactly the kind of news items that make me doubt the optimistic view of Z24. Most entrepreneurs and manufacturers are optimistic people; otherwise they would not be entrepreneurs. When these people are getting more pessimistic, than you better take care of yourself.

This point is proved by the CBS unemployment data:

According to the latest figures released by the CBS, unemployment adjusted for seasonal variation has grown by 24,000 to 489,000 in April 2012.

Unemployment growth was relatively high in April. The average monthly unemployment growth over the past three months was 7,000. Last month, 6.2% of the labour force were unemployed. It is more than six years ago that the unemployment rate in the Netherlands exceeded 6%.

Unemployment increased among both genders in April. Over the past three months, unemployment among men rose more rapidly than among women. During this period, the average monthly unemployment growth was particularly high among people in the age categories 15-25 and 45-65.

I predicted that the unemployment would rise and it is not surprising that this takes place among the two most vulnerable groups: the youngsters that start their careers and the ‘oldtimers’ that will end their career within a limited number of years. The former have problems with finding a good job to start their career with and the latter have problems with finding a new job, when the last one ended for some reason. Whether this is justifiable or not; it is a fact of life.

Companies won’t take any risks at the moment and don’t want to hire workers that are too unexperienced (the youngsters) or too expensive, not motivated enough or too often ill (the older workers; these are cliches of the most terrible kind, but they exists as a cliche because everybody believes them). In my opinion, the rising unemployment won't reside with these groups alone; it won’t be long until unemployment is also hitting the ‘golden category’ between 25 and 45.

The following news item should be a tell-tale signal:

The amount of hours worked in stage A temp jobs was nearly 2% down in the first quarter of 2012 from the fourth quarter of 2011. The number of hours worked in stage A temp jobs declined for the third consecutive quarter. Adjusted for seasonal variation, the index figure (2005=100) for the number of hours worked in stage A was 111.4 versus 113.2 in the fourth quarter of 2011.

Stage A includes people working for temp agencies on a contract basis without regular terms of employment. In stage A, it is easier for both parties – employer and employee – to terminate the contract than in the subsequent stages B and C.

The situation on the labour market has deteriorated over the past few months. The number of job vacancies and the number of hours worked in temp jobs deteriorated for the third quarter running. Unemployment is rising. The number of jobs of employees fell marginally in the first quarter relative to the fourth quarter of 2011.

Temp hours worked in The Netherlands
Data courtesy of
Click to enlarge
Normally, temp jobs are a leading indicator for the economy, as they react more rapidly to situations of growth and decline. The fact that these jobs declined for the third quarter in a row tells two things:
  • The economy will not start to grow very soon, but will rather contract.
  • Unemployment will be further up, as the steady jobs might trail the temp jobs.
This is not an optimistic view, but I know it will be the right one.

Wednesday, 23 May 2012

Battle over Euro-bonds is turning into a nasty brawl between the North and the South of Europe

When there is one subject that you could consider ‘controversial’ within the Euro-zone, than it is the Euro-bond.

The Euro-bond is a bond issued by the Euro-zone as a whole. It is issued and traded at a much lower interest rate than sovereigns bonds of certain Euro-zone countries, like Spain, Italy or Portugal could offer, as it is considered a much saver investment.  Individual countries could default within the Euro-zone, but the chance that the whole Euro-zone defaults is succinct.

Wikipedia describes it as follows:

European bonds (or Stability Bonds) are suggested government bonds issued in Euros jointly by the 17 eurozone nations. Eurobonds are debt investments whereby an investor lends a certain amount of money, for a certain amount of time, with a certain interest rate, to the eurozone bloc as a whole, which then forwards the money to individual governments.

The controversy of the Euro-bond lies in the same reason that makes it such a strong financial instrument: it is backed by the financial firepower of all Euro-zone countries (read: Germany). The problem is that a number of (mostly Northern) Euro-zone countries doesn’t want to financially back-up the peripheral Euro-zone countries that made such a mess of their budgets, in the eyes of these Northern countries.

At this very moment the EU is having an informal summit in Brussels and the expectation is that there will be a fierce battle between the proponents and opponents of the Euro-bonds.

The most prominent proponent of the Euro-bond is ‘rookie’ French president François Hollande, while German chancellor Angela Merkel is the most prominent opponent.

Both camps have dug in with their views and are firing upon the other camp through the media.

Today’s Financial Times ( writes on Hollande’s attempt to change the German opinion on the Euro-bond. Here are the pertinent snips of this story:

François Hollande, France’s new president, said on Wednesday that eurozone bonds would lower sovereign debt costs and should be considered as part of a package of swift measures to boost growth and increase liquidity in the eurozone, despite Germany’s refusal to consider the initiative.

Hours ahead of an informal EU summit in Brussels, Mr Hollande was defiant, saying all ideas should be put on the table, paving the way for decisions to be taken at a summit at the end of June.

 “Among my proposals will be eurobonds – not to be in conflict with anyone but...because it would be a pity not to go to the very end.”

He made clear that he was not limiting himself to infrastructure bonds – which Germany does not oppose. “The idea is not just project bonds but to think about ways of financing that would allow countries to access financing at the lowest possible rate of interest and to put an end to speculation and the doubts of the market.”

The Socialist president asked: “Is it acceptable that some sovereigns can borrow at 6 per cent and others at zero in the same monetary union?”

Yields on 10-year Spanish bonds are around 6.1 per cent, while on Wednesday Germany sold €4.6bn of bonds carrying a zero per cent coupon – its first ever offering with no regular return that underscores its safe haven status.

Mr Hollande […]  said that the eurozone crisis owed its longevity in part to flaws in its decision-making mechanism and that it was too narrowly focused on deficits.
Europe needed “vision, direction, employment and a sense of its common future”, otherwise it would fall victim to populism, he said.

The voice of the other side was represented today by Dutch PM under resignation Mark Rutte in Dutch paper Het Financieele Dagblad ( I also print the pertinent snips of this article.

At the beginning of the informal European summit in Brussels, PM (u.resignation) Mark Rutte made perfectly clear that there will not be joint sovereign bonds in the Euro-zone, i.e. Euro-bonds. If necessary, The Netherlands will veto this plan.

“Euro-bonds, we don’t like those at all. This is really something that The Netherlands should stop”, according to Rutte who points at the legal basis for the introduction of Euro-bonds, which requires a unanimous agreement. Also the German chancellor Angela Merkel stated that the EU-treaty doesn’t allow Euro-bonds.

“It doesn’t lead to growth. It leads to our interest starting to rise which isn’t the solution of the current problems”, states Rutte.

The French president François Hollande, however, repeated that the Euro-bonds, as part of a package of growth-stimulating measures for Europe, are under discussion this evening. This evening’s summit is meant as a preliminary meeting to enable decision-making in the eve of next month’s official meeting.

“You are allowed to talk about it. This is a free country, Belgium”, according to Rutte. “What today is all about is growth. This means that country’s budgets need to be tight, the internal market should function well and the labor market is reformed”.

You could say that Rutte is right with these last remarks from a Dutch point of view. However, that is not the point. The point is that the economies of the peripheral European countries and France have been lagging for years. The structural weakness of these economies turns this into a risk for the Euro-zone as a whole.

As the Euro-bonds profit from the financial firepower of the whole Euro-zone, their diminished risk-profile enables much lower interest rates. If the borrowed money would not only be used to pay interest on sovereign bonds and bank loans for the individual country that needs the bond loan, but instead to stimulate the economy of this country, it would give such a country a chance to see the light at the end of the tunnel.

Of course Hollande is right with his remark (see the red text) that it is odd that one country needs to borrow money for 6% and the other country for 0% within the Euro-zone. Not even to mention the amount of interest that Greece needs to pay on a bond loan. Acting together as a team would make the whole Euro-zone stronger, while acting as a bunch of frogs in a wheel-barrow weakens the Euro-zone: also The Netherlands and Germany eventually.

What Rutte and Merkel fear is that the peripheral countries would say ‘thank you’ for the money that the Euro-bonds would supply and would lean backwards, minding their own business. This is naive.

Countries with unemployment rates of 12-25% and youth unemployment rates of 25-50% have no reason to lean backwards. The people in these countries would simply not accept this from their governments anymore. The argument that this money would not instigate growth is absolutely not true per sé; when this money is invested wisely, it could definitely spur growth in these countries.

The big difference between the infrastructure bonds that Germany is in favor of and the Euro-bonds is that the infra-bonds are too narrow in purpose; a good infrastructure does not instigate jobs per sé and besides that, an infrastructure can also be a money pit that sucks up billions without offering added value. 

Who needs another airport, when planes have no need to land somewhere. Who needs roads or waterways when there is no work and no development possibilities in a certain area.

The Euro-bonds offer possibilities to governments to spend the money on where it is needed most. Here is where the EU could have a role: looking to it that the Euro-bond money is not squandered to fill one financial pothole by creating another one. When the Euro-bond is used wisely, in order to stimulate innovation and business activity and thus enable economic growth at areas-in-need, it could be a very good instrument in my opinion.

The peripheral countries, the East-European countries AND France need a kind of perspective. The Euro-bonds could be a start for this perspective. Therefore I praise Hollande for putting his force behind this plan; it is time to end the single focus on austerity and 'getting your budget in order'. When your budget is financially sound, but your economy is down and counted out, than you have still lost everything.

In my opinion, these considerations turn the German and Dutch objects in a display of selfishness and injured innocence. 

Were it not Germany and The Netherlands that profited most from the import surplus of the peripherals and France? 

Is it not The Netherlands that operates like a tax-haven at the expense of other European countries? 

Was it not Germany that introduced a beggar-thy-neighbour policy by going through five years of wage restraint, lowering its costs of labor dramatically?

Were it not the banks from North-West Europe that gave all these loans to the peripheral countries? 

And aren’t it the same banks that had to be saved from these peripheral loans with the almost free money from the ECB?

If I were Merkel or Rutte, I wouldn’t scream so hard about the Euro-bonds. But who am I anyway?!

Dutch Consumer confidence capsizes after the details of the Spring Agreement get published.

Today the Dutch Central Bureau of Statistics presented the consumer confidence data for May: a tell-tale signal on the Dutch economy, proving that the 2011-recession is gaining momentum currently.

Here is the latest data on the Dutch consumer confidence:

Dutch consumers more pessimistic

In May, the mood among Dutch consumers deteriorated again, after having improved in April. The consumer confidence indicator fell by 6 points to –38, virtually equalling the low level it reached in March.
Consumer confidence

Consumers were obviously more negative about the economic climate in May than in April. This component indicator of consumer confidence dropped by 8 points to reach -61.
The component indicator willingness-to-buy also declined, by 4 points to -23. Consumers’ confidence in their own financial situation over the next 12 months was dented as the indicator plummeted 10 points to -25, the lowest level ever observed. Consumers thought the time was somewhat less favourable to buy durable goods like furniture, washing machines or TV sets. Their opinions on their own financial situation over the past 12 months hardly changed.

Dutch consumer confidence
Click to enlarge
There is no doubt that the Dutch consumer confidence suffered from the consequences of the Dutch Spring agreement. On May 6, I gave my opinion on this agreement, that although it contained some slight improvements compared to the preceding PVV-VVD-CDA policy, was in general nothing more than silly austerity:

Many financial and political reporters were just too relieved to notice that the plans of the new center-leftwing coalition weren’t anything more than an ordinary, visionless cheese-slicer operation (as it is called in The Netherlands): no real economic and social security reforms and bold plans, but just ‘slicing together’ billions in austerity measures.

After the initial euphoria at the press and politicians that the Spring coalition saved the bacon of the Dutch at the European Union by presenting a plan that would theoretically lead to a 3% budget deficit in 2013, the party at the Dutch consumers seems over now.

The Dutch newspaper Telegraaf ( presented last week the integral plan of the Spring coalition. Here are the most important measures of this plan, combined with my comments (please take in consideration that I only show the measures that cost the Dutch citizens money. There are also some tax-breaks and abolishment of earlier fiscal measures in this plan):

Housing market:

  • From January 2013, the interest paid on NEW mortgages can only be deducted when the mortgage is a real loan with total amortization before maturity.
  • Existing mortgages keep the current terms
This is unfair and stupid. Current mortgage borrowers (including yours truly) are saved at the expense of new mortgage borrowers. Besides that it kicks the can down the road on the Mortgage Interest Deduction (MID), which should be abolished at the shortest possible notice in order to set the Dutch housing market free. This is a very, very bad plan.

Social security:

  • The age for Dutch retirement benefit will increase yearly from 2013. In 2019 the retirement age will be 66 and in 2023 67 years.
  • Employers pay for the first 6 months of Unemployment Benefit. Length and height of UB remains unchanged.
The first bullet means kicking the can down to the road until 2023 for a 2 years increase of the retirement age. It would be much fairer to increase the retirement age immediately, instead of spreading it over ten years.


  • The excess of healthcare will be increased to €350. Lower incomes will be compensated.

This excess punishes sick people and especially mid-incomes in the lower ranges with an extra insurance cost of €350 per family member. It won’t have a positive effect on health costs,  as people might wait longer with visiting a doctor, only to have higher health expenses in the process. Ridiculous measure.


  • The high VAT-rate will be increased from 19 to 21% in October 2012. This increase will be returned to the Dutch via income and wage taxes.
  • A promised amount of €430 mln in tax relief for Dutch trade and industry will not be handed out.
  • Traveling expenses for home to work traffic will be taxed, by abolishing the untaxed amount and by laying taxes on company and leased cars.

Concerning bullet one and three: there goes consumption. People are punished for traveling to their work.

Concerning bullet two: a certain amount of jobs goes down the drain here. I’m generally as little in favor of sponsoring companies with tax breaks, as I’m in favor of sponsoring people that enjoy incomes far above the median income. However, suffice it to say that his money - when indeed paid - would have yielded a certain amount of jobs. These jobs will not be created now. This measure will therefore add to the image of the unreliable government.

Other measures:
  • Civil servants and education professionals need to accept a zero wage increase policy for the next two years.
  • Central government will have to save €500 mln at its own expenses.
  • There need to be additional austerity measures to the tune of €400 mln, concerning maintenance of roads and waterways.
  • Communities, provinces and polder boards (government body for dike, polder and waterway maintenance) must mandatory bank at the central government.
Zero wage increase policies are utterly stupid measures that give consumers the creeps. These consumers will act accordingly by saving more money and spending less.

The third bullet will cost 3600 workers in the road and waterway industry their jobs. This has been calculated by the central road and waterway board ( and it will lead to extra costs for road maintenance in the future: penny-wise is pound-foolish.

The consumers gave their opinion on these plans. You can read it in the CBS data.

Sunday, 20 May 2012

Is the future of aviation… the highspeed train?

About 35 years ago when I was young , I had a classmate whose father was pilot on passenger airplanes at KLM (Royal Dutch Airways). In my opinion this was the coolest job in the world and my classmate was a lucky b*stard to have a father like that.

It was a time when aviation was magical; very expensive and virtually out of reach for the normal middle class people to which my family belonged.

That feeling of magic surrounding aviation, being slightly out of reach, stayed throughout my youth until I became 21. Aviation in those days had become cheaper, due to the emergence of cheap charter flights that were sold in combination with travels to popular resorts in Spain and Greece. This was the reason that I could make my first air trip with a Boeing 757 from Amsterdam to Ibiza.

I was amazed during the take-off that such a mighty machine could accelerate to almost 180 miles per hour within 30 seconds and pleasantly surprised that that same mighty machine could bring you in a totally different environment within 2.5 hours of flying.  

Since that year 1987, I flew a number of times and developed a love-hate relation with the airplane. I loved how it brought me anywhere very quickly, but I hated feeling like a sardine in a can and the endless waiting and boredom within a flight.

Something that started to amaze me during those days was how aviation that had been so expensive in the sixties and seventies could in the nineties become so cheap under influence of Easyjet and Ryanair. I was wondering how their business model worked and to be frank, I still wonder today. What I do know now, however, is that ‘leg room’ is a treasure, hard to find at a Ryanair flight and that the ticket price is only a fraction of the amount you have to pay in reality, due to all kinds of ‘hidden features’ and surcharges.

During the nineties, airport security was still quite normal and when you arrived at the airport 1.5 hours before your flight left, you were perfectly on time. Then came the day that changed everything: 11 september 2001.

Since that doomed day, airport security eventually went totally berzerk after a number of stages of increasing security hysteria. Metal scanner-ports, 3 x-ray checks before boarding, explosive-sniffers, total body scanners disclosing all intimate parts of your body, removing your shoes one or even two times at an airport; we started to think it’s normal for a low budget trip to the Turkish sun and the Spanish costas. 

The absolute zero point of aviation came when an intended terrorist attack with fluid bombs had been obstructed at an English airport and the European authorities started to prohibit taking your own drinks and liquid food with you on the plane; a measure that lasts until today and of which I suspect that it is above all maintained after a strong lobby of the food and beverage selling points at the airport.

Today it is normal that you arrive at an airport 3 hours before your flight leaves, having 1.5 hours of humiliating security checks in prospect. My wife has turned into a desperate rage when prepackaged and unopened drinks and babyfood for our three very small children were tossed in the dustbin by an overzealous customs officer, where the official rules stated that you could take it with you.

These days aviation has lost its initial magic, as it has been replaced by boredome, bureaucracy, humiliation and a feeling of being handled like a dangerous suspect at every occasion.

That is the personal point.

Also from an economic point of view, aviation seems a doomed business. In spite of the duty free kerosene and the numerous taxbreaks that the industry receives in comparison to all other means of traveling, it seems impossible to turn aviation into a profitable business.

Last year I wrote in my article of June 6, 2011 on the IATA Profit Outlook for 2011:

My opinion is that there is something structurally wrong within the aviation industry. When an industry has had a net return of 0.1% over the last forty years and when sustainable profitability for the aviation industry is still a mirage, like it is today, then you could seriously question the earnings model for the whole industry.

Especially when you consider that aircraft fuel – the main driver for aviation costs – is still free of taxes, due to an international agreement, where ALL other kinds of fuel for cars, trucks and other means of transport are (heavily) taxed by governments all over the world: gasoline, diesel/gasoil, LPG (Liquified Petroleum Gas) or fuel oil for ships.

I had to think of these lines when I read the 2012Q1 results for AirFrance-KLM:

Marked improvement in passenger unit revenue

Passenger revenues rose by 8.8% after a favourable currency effect of 0.9%, to 4.43 billion euros. The operating result was -504 million euros (-367 million euros a year earlier) due notably to a 224 million euro increase in the fuel bill.

Cargo revenues amounted to 744 million euros (-3.3%) and the operating result was -68 million euros (-9 million euros at 31st March 2011). Third party maintenance revenues progressed by 10.7% to 258 million euros. The operating result stood at 16 million euros (+26 million euros at 31 st March 2011). The engines and components activities performed well during the quarter. Other activities generated revenues of 213 million euros of which 117 million euros for leisure. The operating result was -41 million euros (-53 million euros at 31 st March 2011).

Total revenues stood at 5.65 billion euros, up 6.0% after a positive currency effect of 1.1%. Unit revenue per equivalent available seat kilometer (EASK) rose 6.6% (+5.5% ex. currency) but this was insufficient to compensate for the rise in the fuel bill. Rise in operating costs, notably driven by fuel.

 Operating costs rose 9.0% and by 6.0% ex-fuel. Unit cost per EASK, was up by 7.3%, but by just 1.9% on a constant currency and fuel price basis, for a slight rise in production measured in EASK (+1.3%). The group nevertheless maintains its objective of a slight decrease in unit cost on a constant currency and fuel price basis for Full Year 2012. The fuel bill rose by 255 million euros to 1.68 billion euros (+17.9%) under the combined effect of a 1% rise in volumes, a negative currency effect of 3% and a 13% rise in fuel costs after hedging.

The operating result was -597 million euros (-403 million euros at 31st March 2011).

The economic environment continues to be uncertain, while the fuel price in euros remains at record levels. The annual fuel bill is expected to increase by 1.1 billion euro’s. In this context, the group is highly focused on the negotiations underway, the successful outcome of which will enable it to significantly improve its economic efficiency between now and 2014.

The results of the First Quarter lead the group to maintain its expectations for Full Year 2012, of a reduction in unit cost at constant fuel price and currency and a maximum level of net debt of 6.5 billion at year end. The operating result for the First Half is expected below the level of last year (-548 million euros at 30 June 2011), while the Second Half will see the benefits of the first ‘Transform 2015’ measures feeding through.

After reading this statement of AirFrance-KLM, I think that the company tries to say to the public: “Fuel prices are the reason that aviation companies don’t make money anymore. Fuel is already so expensive that it is virtually impossible for us to make money. Even trying to hedge the fuel prices didn’t bring us the required results. 

Please help us by abolishing those ridiculous EU plans for reducing the CO2 exhaust through the distribution of paid emission rights before it is too late. Then, especially when the fuel prices will drop, we will be OK again”.

What I read is: this entire industry has made less than 0.1% profit during the last 40 years. The chance that the industry will make solid profits in the next 40 years is limited.

The budget companies make money by treating their passengers like cattle and charging them for everything: food, drinks, normal luggage, abnormal luggage, credit card payments, non-creditcard payments. On top of that the budget companies let their passengers take-off and land in the middle of nowhere at 4 am in the  morning.

European high-class aviation companies like AirFrance-KLM, Lufthansa and British Airways have struggled in their price-fight against the budget companies and never could make a solid choice between being expensive enough to offer good service and being cheap enough to fight the budget companies at their own turf. I’m convinced that the same is true for quality airlines all over the world. This led to a schizophrenic business model, trying to make an impossible choice between cheap tickets and high-service: companies became jack of all trades, but successful at none.

This, in combination with the ever increasing security hysteria, turning passengers into self-hating masochists,  makes that I’m quite pessimistic on the viability of aviation as a large industry.

The aviation industry can only be made healthy by charging the passengers a fair and transparent price, based on all-in ticket prices, without all kinds of hidden fees. Quality airliners should in my opinion stop the useless fight with the budget airliners for the lowest price, but should return to delivering service and a little bit more leg-room for a higher, but fair price. However, this will not take place before a big shakeout in the aviation industry has taken place.

Only a few European, (Latin-)American, African and Asian budget companies and a few high-quality companies will survive this shakeout. The battle will be brutal and bloody, but that is the only way to survive the current unhealthy situation in aviation where too many aviation companies make too little money by flying too many air-miles.

Let one thing be clear: there will always be an aviation industry, for cargo as well as passenger flights. There is still no long-distance alternative for flying. In the future this industry might even become healthy and well-financed again, but this will come at a price. Maybe flying will again become something for the elite that can afford it; just like in the seventies.

Therefore it is my opinion that the future of short-distance aviation might be… the highspeed train. Countries all over Europe are currently building a highspeed train network that makes international train traveling possible and even easy to do.

The modern trains can easily reach speeds of 220 miles per hour, making a trip from Amsterdam to f.i. Barcelona possible in 6-7 hours.Of course, an airplane can do the same distance in 2 hours, but if you add the time at the airport of departure (3 hours) and arrival (1 hour), then the train isn’t so slow anymore.

The biggest advantage of trains are the transparent prices (‘you buy a ticket and that’s it), the easy luggage handling and check-in procedure, the ample leg- and headroom and the mobility on board, where you can walk around as much as you can and nobody gets nervous when you stand up.

One of the oldest competitors in mass-transport for aviation, might have a very bright future ahead.