Dutch Budget Deficit Threatens to Top 3%

It looks like I’ve gotten my comeuppance for my recent preoccupation on these pages with next summer’s European Cup football championship – and with clam penises (yes, sad but true). Edward over at “A Fistful of Euros” has scooped me on the prospect that has now arisen that the even the Netherlands government’s budget deficit might slip above the Stability Pact’s 3% limit – this when it is the Dutch finance minister Gerrit Zalm (apparently known in internal EU circles as Il Duro, or “the hard-assed one” in Italian) who is raising the biggest stink about Germany and France not meeting that obligation for three years in a row now. He scooped me when I’m the one who lives in Holland!

Fortunately, our division of labor still holds – I can take a look into the Dutch on-line press to see what is being written locally about this predicament. (Frans Groenendijk, in comments to Edward’s post, already examines what Zalm has written on the subject in his own (i.e. Zalm’s) weblog. Frans has one, too.)

Coverage in the NRC Handelsblad is extensive, while in some of the other, more down-market papers it is missing entirely – this is a complicated financial affair that risks making Dutch eyes glaze over in boredom, I guess. For those interested nonetheless, a good place is to start is in their lead article.


As was mentioned in Edward’s “Fistful” entry, the immediate cause for alarm is the report (Economierapportage december 2003, or “Economic Report December 2003”) from the Central Planning Bureau which, among its economic predictions, has Dutch unemployment rising from 5.25% this year to 7% next, economic growth climbing from this year’s -0.75% to next year’s 1% – and the budget deficit going from this year’s 3% (i.e. right on the limit) to 3.25% next year. Naturally, this puts Finance Minister Zalm in a difficult position, seeing as how just last week he was leading the – fruitless – charge against French and German behavior under the Stability Pact. Back then, he was confident the Netherlands could never find itself in a similar situation: “That [i.e. a 3% or higher deficit] will never happen,” he affirmed, expecting to see a Dutch deficit of 2.7% at most.

But now that we have the CPB’s new figures, it seems new budget savings will have to be found to correct the situation. (Nowhere in any of the coverage I ran across was the sentiment to be found of “No worries, now that Germany and France can get away with excessive budget deficits, we can too.”) This aspect is covered in the article in Het Parool: The French and Germans Have a Good Laugh at Gerrit Zalm. Het Parool agrees that there’s only one thing to do: take measures to bring the Dutch budget back under 3%. For if not even the Netherlands and Il Duro are willing to hold to the Stability Pact, then, as they put it, you can take the Pact out of the refrigerator and stick it in the freezer. But what that amounts to, if we are to go by the CPB’s calculations, is saving another €1 million in government spending. On the one hand, that doesn’t have to be done immediately; Zalm himself has said that those CPB figures are just predictions, and the next budget-review that offers the opportunity to change spending won’t come along until next April. On the other hand, the prospect of having to make further cuts is already causing tension among the political parties (CDA, VVD, and D66) that currently make up the Dutch governing coalition. Predictably, the VVD (which is Zalm’s party) has already been aggressive in declaring that such further cuts are unavoidable; the CDA and D66 aren’t yet convinced.


The NRC goes deeper into this question of inter-coalition tension in an accompanying article, provocatively entitled The VVD Wants No More Fine Talk. It is the CDA (which happens to be the dominant coalition party, and the one to which Prime Minister Balkenende belongs) which has recently come out with too much “fine talk” on the side of greater social spending than its coalition partners would really prefer, such as in recent debates over money for the chronically sick and handicapped. And now CDA spokeswoman in the Tweede Kamer Gerda Verburg has declared that, in her party’s view, there is no more room in the budget for further cut-backs.

The three coalition parties are really supposed to try to present a united front in Parliament, but these disagreements are tearing at this cooperation, and the recent bad news from the CPB has only made the situation worse. The article quotes one politician as complaining about inter-coalition communication: “We don’t talk to each other anymore, there is no consultation among leaders [torentjesoverleg].” Another observes “With this sort of dualism you don’t even need an opposition.”

What’s more, there are plenty of arguments to be made that the VVD is being rather too hard-core in demanding further cuts, that the doubts of its coalition partners on this score might be valid. To start with, there’s the bald fact that you really only open yourself to punishment-fines from the EU for violating the Stability after the third year in a row that you’ve had a budget deficit exceeding 3% of GDP. The Netherlands is three years away from that. It’s true that breaching that limit at all, even once, is not a very helpful gesture to demonstrate your commitment that each EU government should respect it. But, as an article in Trouw points out (Budget Deficit: Three Percent is Suddenly a Relative Concept), there are plenty of loopholes even in the Stability Pact as it is written. Note that the Netherlands suffered a shrinkage in GDP for 2003; that’s the sort of “special circumstance,” envisioned in the Stability Pact, that tends to make the European Commission (which is the institution that makes the formal ruling that the Pact has been violated) sympathetic to the government running the deficit. What’s more, in the CPB’s view the current Dutch deficits have to do more with temporarily unfavorable economic factors, i.e they are not “structural” – unlike in the French and German cases – and so are not only likely to disappear more easily but also to be more leniently judged by European authorities. And finally, other institutions report on the Dutch economy, too – like the IMF and the OECD (“OESO” in Dutch) – and recent reports from these well-respected organizations basically paint a rather uncertain picture of the near-future of the Dutch economy – i.e. not one that unambiguously shows that the Dutch deficit is headed to 3% of GDP or higher.


In the meantime, the Dutch are continuing their hard-line offensive in support of the Stability Pact, even if France and Germany seemed to get off the hook last week, reports the NRC Handelsblad in Greater Role for the EU in Budgets. You’ll surely recall that this is a very decisive time for the draft EU Constitution; well, the Tweede Kamer back on Tuesday issued a unanimous declaration calling for a firm anchor for the Stability Pact in the new Constitution, in the form of giving the Commission the power to go to the European Court of Justice to push through punishment provisions under the Pact even when a majority on the European Council has voted such punishment down – as happened last week. Actually, in a letter to the Tweede Kamer, Minister Zalm informed legislators that he is waiting right now for the Commission to go to the Court for this purpose, under the present system; if it decides it can’t or doesn’t want to do this (as seems to be the case from a recent appearance by Monetary Commissioner Pedro Solbes before the European Parliament), then the Netherlands will go to the European Court itself. So you can see how important it is that the Dutch remain “more virtuous than Caesar’s wife,” in the Shakespearean phrase, when it comes to budget deficits.


Finally from the NRC comes an opinion piece (The Netherlands Must Give a Good Example) from Lans Bovenberg, director of the Center for Economic Research at the University of Tilburg (in the Netherlands). Recent bad behavior regarding the Stability Pact by the Germans and French have sorely tempted the Dutch, out of sheer pique, to wash their hands of the matter, re-introduce the guilder (!), and vote down the European Constitution, Bovenberg writes. They should resist that temptation, and stay in the game, committed to upholding the soundness of fiscal policy which that Stability Pact was created to support. After all, an old Dutch saying (although not a particularly eloquent one) is that “an agreement is an agreement”; the Netherlands surely will not withdraw from a pact it has signed just because some of the other parties won’t hold themselves to it. Besides, the debate over the draft Constitution offers a good opportunity to build things in there that should make it harder for this sort of thing to happen again in the future – as should the six months of the Dutch EU presidency, coming up in the second half of 2004, which is when the Netherlands can shape the Union’s agenda to deal with any remaining concerns about this topic.

Admittedly, there is much further work to do. Many complain that the Stability Pact is actually a stupid arrangement, that therefore shouldn’t be taken seriously anyway. Whether that is true or not, Bovenberg points out, it is true that the failures of Germany and France to live up to it are ultimately just reflections (“epiphenomena,” perhaps? That’s my contribution, not Bovenberg’s) of the deeper problems of those two economies, of their structural failures. If new rules of the game need to be formulated, then the Netherlands can be well place to take a leading role in that – not only by virtue of the fortunate timing of its upcoming EU presidency, but more importantly by championing the values of budgetary discipline and stability, and adherence to international agreements, that the Dutch have traditionally always stood for.

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