Search This Blog

Sunday, 24 June 2012

The dogs bark, but the caravan moves on. Or, how PM Mark Rutte of The Netherlands puts himself offside in Europe, while driving the Dutch economy slowly into the mud

Here in D.C. - they talk about ’euro-disease’
And how the French are always so damn hard to please
Options are passed in Brussels, but no one agrees
And no one walks tall - but no-one gets down on their knees

These are lonely days for Prime Minister Mark Rutte from The Netherlands, as he turned from the most outspoken interpreter of the North-European ‘vox populi’ against the PIIGS into a Don Quixote, fighting the European windmills.

The Netherlands initially seemed one of the winners of the European credit crisis: the unemployment had only risen by a tiny amount in 2008/2009 and the exports within the European Union had recovered quickly after the credit crisis.  Rutte was firmly in the team of German chancellor Angela Merkel for the greater part of 2011, defending the line of pro-budget discipline, pro-austerity and anti-economic stimulus and blaming the countries (i.e. the PIIGS) who spent too much money in the past or had difficulties with balancing their state budgets. The Netherlands was also among the countries with the lowest unemployment in Europe. Summarized, The Netherlands seemed the Golden Boy of Europe.

However, since June 2011, The Netherlands had to deal with an enormous reversal of fortune.

The Netherlands, behind Luxembourg the biggest exporter of goods in Europe per head of the population, is specialized in agricultural produce and intra-European transport & redistribution of imported goods from outside the EU. This massive export worked like a cloaking device that covered up the view on the struggling Dutch economy; when the sovereign debt crisis wouldn’t have broken out, nobody would have noticed its imbalances. However, the sovereign debt crisis did break out in 2010, dimishing the export of Dutch goods and thus fully exposing the weakness of the Dutch domestic economy.

The very low interest rates since 2000, further leveraged by the Mortgage Interest Deductability (MID), had led to extremely high housing prices and – as a consequence –
enormous mortgage amounts. These mortgage amounts had a restraining effect on the consumption of the Dutch citizens, as a large and increasing share of the salary had to be reserved for mortgage payments, while the high housing prices made it virtually impossible for starters to purchase a house, forcing them to stay in their relatively expensive rental homes.

When in 2007 the interest rate rose sharply for a number of months, the Dutch decided that ‘enough was enough’ for rising housing prices.

This decision led to a steady drop in housing sales from that moment on and a slowly, but surely deflating housing bubble. This effect was reinforced when the credit crisis broke out in 2008 and changed the banks from ignorant, risk-hungry daredevils into risk-averse and anxious scaredy-cats that refused almost any loan to companies and private citizens. This situation lasted until today.

While the Dutch people in 2011 waited for a firm and clear government decision on the future of the housing market, the hesitating response of PM Mark Rutte and Dutch Finance Minister Jan Kees de Jager to the housing crisis was: ‘We are not going to do anything about the Mortgage Interest Deductability. Really! It is a taboo!’. The people considered this to be an implausible policy as they reckoned that the worst had yet to come for the sovereign debt crisis and the Dutch housing market. This led to countrywide frugality, strongly diminished purchases of expensive household appliances , luxury consumption goods and cars and a general hoarding of cash, in order to be able to partially pay back the mortgage when the MID would disappear after all.

While the Dutch Residential Real Estate market (RRE) had turned into a deflating bubble since 2007, the same happened with the Commercial Real Estate (CRE) market.

During the last decade before 2007 the CRE market had been an enormous  driver for jobs in the Building and Construction industry. Communities, project developers and large building companies had started a building frenzy where every free square acre around cities and villages had turned into building ground for industrial and commercial zones. A self-respecting town during the nineties and zeroes could not exist without its own commercial zone. All these building activities started a fierce competition between cities to get small and (especially) large companies within their city limits. These were lured with tax discounts, favorable terms and establishment subsidies.

The B&C industry thrived from this building frenzy and had a ball in those years. In 2007 the party was over: office buildings became vacant. At first seemingly for a short period, but soon this vacancy became structural. Although official figures speak of 14% structural vacancy, 17% is probably a more realistic figure and 25% is in sight within a few years.

When exports diminished and the deflation of the CRE/RRE bubble started to gain momentum in 2011, this had an immediate effect on employment. In 2009, the amount of economic contraction resulting from the credit crisis should have led to 4% loss of employment in The Netherlands. This didn’t happen, as it was postponed by the Parttime Unemployment Benefit arrangement of the Dutch government and by the general reluctancy of companies to fire personnel they thought they might need again in a few years.

In 2011, most companies had a few difficult years behind them that cost them a substantial part of their financial reserves. When the Dutch economy entered into the infamous double dip, the companies decided to fire their excess personnel after all. As there is still of lot of excess capacity in The Netherlands and there is no signal whatsoever that the economy will improve soon, the soaring unemployment will go on well into 2013, is my opinion.

Another factor was that the Dutch and Germans turned more and more hostile against the poorer members of the Euro-zone, i.e. the PIIGS. Instead of looking at these countries as ‘brothers that temporarily went through a rough time as a result of mistakes made in the past, but that needed help at this very moment’, Merkel and especially the dynamic duo PM Rutte and Finance Minister De Jager looked at them like a bunch of parasites that could be bullied at every occasion. While some of the complaints about the peripheral countries were not necessarily wrong by themselves, it was becoming more and more a useless waste of breath to make these points on clientelism, tax evasion, corruption, poor budgetting, waste of government money, outdated labor regulations and the poor competitiveness in the PIIGS economies over and over again.

If you are driving towards an abyss, it is useless to complain about the poor steering of the driver. You better try to get hold of the steering wheel or eventually jump out of the car and start the blame game after you saved your own bacon and that of your co-drivers.

In 2011, this valuable lesson had not been learnt yet. The European governments failed to take decisive action against the spreading sovereign debt crisis and instead, decided to kick the PIIGS-can further down the road again and again. They did so by taking half-hearted measures against the contamination in the peripheral zone and by handing out just enough money for these countries to stay afloat, but not a penny more.

While the peripheral countries, the IMF, the US and the financial markets urged the need for decisive measures, Germany, Finland and The Netherlands banged the drum for budget balancing and relentless austerity measures, while categorically refusing to do something about the ailing economies of the southern European countries. The increasing popularity and influence of the populist parties in The Netherlands, Germany and Finland helped this destructive behavior that led to a contraction of all peripheral economies, with Greece as the absolute negative outlier with an economic growth of about -5% in 2011.

Then there is also the case of Mark Rutte’s schizophrenia: in Brussels, Prime Minister Mark Rutte has been moving cautiously towards stronger European Union bonds, while in The Hague political leader of the VVD Mark Rutte categorically denies that one inch of sovereignty is offered towards Europe. Europe is the boogeyman for Dutch politicians at the outer ends of the political spectrum and it happens to be that these outer ends are currently very popular with the Dutch voters. So Europe has also turned into the boogeyman for party leader Mark Rutte.

In March, 2012 the Dutch government got their first shock when the Dutch Central Planning Bureau ( calculated that The Netherlands would have a budget deficit of 4.5% in 2013, well above the 3% threshold of the Stability and Growth Pact (SGP). As The Netherlands had been the main bully for the PIIGS countries in 2011, the Dutch government had to deploy an additional package of at least €10-15 bln in austerity measures in order to bring back the excess budget deficit, if it didn’t want to lose face in Europe. It didn’t matter whether these austerity measures helped the Dutch economy or not. Just do it… was the message. Austerity had been the recipe of choice and Rutte’s mantra for the PIIGS, so austerity should also be recipe and the mantra for The Netherlands.

The second shock came when the socialist François Hollande was elected as président of France in May, 2012. This was the absolute nightmare scenario for Mark Rutte, who saw his political ally Nicolas Sarkozy disappear, in favor of somebody who shouted terrible things about Eurobonds, a lower retirement age and loads of stimulus for the ailing economies in Europe, including the French.

The third shock came when another political soulmate of Rutte, Angela Merkel, gave up her longterm resistance against a more unified European Union, by holding the possibility of a bank union and even a political union explicitely open, as a tell-tale favor to her important partner in the Elysee, François Hollande, with whom the new Paris-Berlin axis has to be established. Although the Eurobonds still seem one bridge too far for Merkel, it becomes clear that Hollande has smelt blood and will try to reel in additional measures to improve the economies in Europe.

This cautious change of policy in Berlin alienated Rutte, who is now turning into the Don Quixote of Europe: fighting his fights against the windmills (economic stimulus, Eurobonds, the EFSF/ESM complex, the banking union), but knowing that he is on his own, as he lost all his political friends in his European battles.

The outragious televised display of friendship between Chancellor Merkel and PM Rutte of last week – “I love you, Mark. I love you too, Angela” – could not even fool the stupidest television viewer into believing that everything is hunkydory between Rutte and Merkel. If everything IS hunkydory, it ought not to be televised, as everybody already knows it.

In the meantime, the problems in The Netherlands are gaining momentum under the lack of leadership of Mark Rutte:

  • Unemployment will probably reach the 8% that I already predicted in my Outlook for 2012 of December, 2011.
  • The intra-European exports, traditionally the motor of The Netherlands, will remain lagging for a number of years; at least as long as the situation in the PIIGS and in France remains difficult.
  • The domestic consumption and consumer confidence, further negatively influenced by the additional austerity measures of this government, will remain at the lowest level in years for a long period of time.
  • Economic growth will be a mirage until at least 2014, is my expectance.
  • The Building and Construction industry will have to go through a fierce restructuring operation as the overcapacity is dramatically at the moment, while the government will not be prepared and ready for this. This will cost thousands of (independent) workers their job and will further spur unemployment.
  • The deflation of the CRE and RRE bubbles will have increasingly nasty side-effects and again the Dutch government will not be prepared.
  • The Dutch banks will have to write off substantially on their CRE/RRE assets in The Netherlands and abroad, forced by the increasingly unfavorable market circumstances. This might lead to a new banking crisis in The Netherlands.
  • Europe will – without any doubt – move more into the direction of Hollande’s economic policy, as it has been proven beyond reasonable doubt that extending Germany’s policy of forced austerity and supplying only the absolute minimum in aid to the PIIGS countries, has made the situation in Europe rather worse than better.
  • Rutte will become the court jester of the European Union: annoying, but increasingly irrelevant with his resistance against a more unified European Union.

The dog Rutte might bark, but the European caravan moves on.

No comments:

Post a Comment