Dutch government in lockdown as AAA-rated country comes unstuck

The air in Brussels is thick with tales of pots and kettles as the Netherlands breaks new EU rulebook and fiscal pact

Ian Traynor, Europe editor
guardian.co.uk, Tuesday 13 March 2012 12.59 EDT

Dutch PM Mark Rutte, ministers and coalition partners hold a press conference outside his villa in The Hague. Photograph: Roel Rozenburg/EPA


A hush has descended on a handsome 17th century villa in The Hague where the leaders of the Netherlands' rightwing minority government are huddled over spending ledgers, debt projections, budget balances, housing market analyses and deteriorating pension fund figures.

Mark Rutte, prime minister and leader of the liberal-conservative VVD party, has imposed a vow of omerta on his colleagues locked away in his official residence until they chart a path out of a worsening public finances debacle.

Europe's two-year debt and deficit crisis has pitted preachy northern creditors against "feckless" Mediterranean spendthrifts – countries the Dutch are wont to dub the "garlic belt".

But suddenly the air in Brussels and elsewhere is thick with tales of pots and kettles, glass houses and stonethrowing as the triple-A rated Netherlands comes unstuck.

Rutte launched the three-week retreat for the top members of his government at his residence last week after shock budget projections from the CPB Bureau for Economic Analysis, the old and authoritative thinktank which crunches the finance ministry's numbers.

The CPB, accustomed to delivering inarguable verdicts on fiscal and budgetary policy, said the Netherlands was in flagrant breach of the new eurozone rulebook and fiscal pact it has been highly instrumental in drafting.

"The government has the intention of living up to the rules, but it's embarrassed that it can't meet the targets now," says Coen Teulings, director of the CPB.

On current policy, a mild recession would leave the country nursing a budget deficit of 4.5% of gross domestic product next year, 2 points higher than previously projected and 50% above the eurozone ceiling of 3%, – risking the wrath of Brussels and the imposition of automatic penalties the Dutch had been keen to devise for others.

What's more, without a new round of austerity, the Dutch would still be above the eurozone deficit limit by 2015. National debt levels are also running in the wrong direction, from 65.4% of GDP last year to 75.8% in 2015, well above the 60% eurozone threshold.

Most analysts agree the Dutch economy is fundamentally sound and a dogmatic application of the new eurozone rules next year will do much more damage than good.

"The financial markets think the Dutch economy is in good shape, though it needs strong reforms to rebalance," said Teulings.

But as one of the most vocal cheerleaders for the rigid new rules the Rutte government has put its own credibility on the line. The Dutch are the authors of a radical proposal for establishing a new eurozone budget tsar to enforce fiscal rectitude across the 17 countries.

"The government's in a fix," says Paul Nieuwenburg, a political scientist at Leiden University. "It's a problem of image. Having such a big mouth on Greece and seizing the moral high ground, they are now morally obliged to stick by the rules. Things have become very complicated. That's why Rutte has withdrawn into splendid isolation and they won't talk to the media."
What's gone wrong? And how to fix it?

The minority coalition of Rutte's liberals and christian democrats, supported in parliament by the xenophobic populist Geert Wilders in return for concessions on immigration policy, came into office in late 2010 promising €18bn in savings over their four-year term.

In order to meet its pledge of complying with the 3% deficit next year, it now needs to save a further €9bn in a year. That's a very tall order. Teulings calculates that for every €3 in deficit reduction, you need to generate €5, meaning €15bn euros worth of spending cuts and tax increases are needed by next year.
"That's so outrageous and it's not really required by the economics," he said. "Structurally we have to get spending down and revenue up to sustainable levels. Doing that too hastily means tax increases which are bad for the economy. Raising taxes in the middle of a recession is a bad thing. Structural reforms like raising the retirement age are preferable."

A depressed housing market, with prices falling 8% since 2008 and likely to fall further, reduced consumption, shrinking pension funds and spending cuts which have seen disposable income curbed by 2% this year all underpin Holland's budgetary dilemmas.

Away from the economics, there's the politics. Wilders, who combines far-right anti-immigrant and anti-Muslim tubthumping with leftwing welfarism (for white indigenous Dutch only) and europhobia, opposes more austerity except for slashing the foreign aid budget. He will demand policy concessions if he is to support, say, VAT or other tax rises or spending cuts. He is taking part in the villa negotiations.

If the Netherlands has traditionally been a europhile country, that has changed sharply since it voted down the European constitution in 2005. Wilders' strength on the right is currently mirrored on the hard left by the Socialist party which is riding high in the polls and is fiercely hostile to the EU. Between the two of them – Wilders' Freedom party and the socialists – the anti-European stream musters 55% in the opinion polls.

Wilders sought to exploit the crisis by demanding a referendum on a return to the guilder, but this was dismissed by the political mainstream. An opinion poll showed 56% of the Dutch were against a referendum, but 39% were in favour. A sizeable minority, around one third, of supporters of the two governing parties wanted a vote. And while 61% were against bringing back the guilder, two thirds believed there should have been a referendum in the 1990s on joining the euro – 54% would have voted against.

Asked whether the Greek drama and the euro crisis were to blame for the current economic predicament, 56% thought they were.

"Europe will be the main political divide in Holland in the years to come," predicted Nieuwenburg.

The euro crisis has sharpened that political conflict and boosted the sceptics. A clash with Brussels over the deficit some time in the next year could boost them further.

Rutte, some analysts are urging, can go a long way to solving his budget dilemma by abolishing the generous mortgage tax relief regime that costs the public purse €16bn a year. But he campaigned against that to get elected, it would be highly unpopular and would worsen an already dismal housing market.

Rutte's room for manoeuvre is limited, his coalition is fragile.

The euro crisis could yet bring down another eurozone government – even in a country as prosperous and successful as the Netherlands.

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