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Wednesday, 11 January 2012

An SMS from Ernst (25): Short Messages Service. The Jubilee edition!

With loads of small news stories, it is a perfect day for the Jubilee edition of my SMS from Ernst.
German GDP in 2011
The German statistical bureau Destatis ( presented today the preliminary GDP for 2011. Germany enjoyed in 2011 a robust growth of its GDP of 3%. Here are the pertinent snips of the GDP press release

The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. This is shown by first calculations of the Federal Statistical Office (
Destatis). Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).
Gross domestic product, price-adjusted, chain-linked
Change on the previous year (in percent):

The impetus for growth was mainly provided by domestic demand in 2011. In particular household final consumption expenditure was a pillar of economic development: in price-adjusted terms, it grew by 1.5%, a rate last reached five years ago. Besides, the year 2011 was again characterised by a strong upward momentum in capital formation: gross fixed capital formation in machinery and equipment (+8.3% in price-adjusted terms) and in construction (+5.4% in price-adjusted terms) was markedly higher than a year earlier.
Although foreign trade contributed less to
 GDP growth than domestic demand, its dynamic development continued: in price-adjusted terms, Germany’s exports of goods and services rose by 8.2% in 2011 from a year earlier. At the same time, imports grew slightly less (+7.2%). The balance of exports and imports contributed 0.8 percentage points to GDP growth in 2011.
In 2011, the production side of the
 GDP was still marked by catch-up effects in almost all economic sectors. Overall, the price-adjusted gross value added of all economic sectors rose by 3.0% from the previous year.

Germany presented again impressive growth in its GDP of 3.0% for 2011. However, there was also a worrisome aspect in the data on 11Q4. This quarter showed a contraction of GDP by 0.25%. Although this is a very limited contraction and these are only a preliminary resultd, it is a warning sign that 2012 could be a lot harder for Germany.

A positive feature in the data was that the domestic consumption grew by 1.5%, where it had been lagging over the years, due to the policy of wage restraint that was introduced in Germany by former chancellor Gerhard Schröder.

Negative for me is that German exports once again grew harder than imports, thus increasing the imbalances on the German external account and - as a consequence – within the Euro-zone. Remember, where Germany and The Netherlands are strong net exporters, the PIIGS-countries are strong net importers.

The Netherlands in its role of corporate tax haven angers Portugal

A few months ago, in my SMS from Ernst (13),  I wrote upon the phenomena that The Netherlands is a tax haven for the largest companies in the world. By establishing their head office in The Netherlands, these companies enjoy the extremely favorable Dutch corporate tax regulation. I wrote this snippet upon it:

I understand that big corporations look for tax havens, as they find it to be in their interest to pay the least tax.

From an American/British/German/Japanese government point-of-view, however, this is antisocial behavior that should be contested.

And as a Dutch citizen, I am not very proud that the Dutch government enables large corporations to avoid tax-payments that are (sometimes desperately) needed in the home-countries of these corporations. Especially as my country hardly gains from this strategy.

How true this last paragraph was, is demonstrated by Portugal, which is one of the PIIGS countries. In Portugal, there is currently widespread anger among government officials, the Portuguese media and the population towards The Netherlands. This anger is caused by the fact that large Portuguese companies also use The Netherland as a tax haven to avoid the corporate taxes in Portugal, thus denying their home country this extremely necessary source of income.

The Dutch worldwide radio service Radio Nederland Wereldomroep ( writes the following snips upon this story:

A debate is raging in the media in Portugal about Portuguese multinational corporations which transfer their assets to accounts held in the Netherlands.

The debate was prompted by the decision of the parent company of supermarket chain Pingo Doce to transfer its shares to the Dutch-registered company Francisco Manuel dos Santos to avoid paying taxes in Portugal.

Portugal is one of the EU member states worst affected by the financial crisis. Widespread economic hardship there has prompted much criticism of corporations which seek to avoid taxes by moving to the Netherlands.

Portuguese media have already published numerous stories about multinationals which profit from low tax rates in the Netherlands and the favourable effects of bilateral tax treaties.

There has been an official statement from chairman Alexandre Soares dos Santos of Jeronimo Martins, the holding company for Pingo Doce.

When asked why he moved the family holding ‘Francisco Manuel dos Santos’ to The Netherlands, he stated that the family was afraid that Portugal might have to leave the Euro-zone and has to return to the old currency, the Escudo. ´We have the right to protect our family capital´, he stated.

Although Dos Santos does the right thing from his own point-of-view, I´m strongly against this kind of tax evasion by the extremely wealthy citizens of a country. When the rich citizens don´t pay taxes in their own country, why should the average citizen do so.

This behavior can have a very negative influence on the tax paying morality in a country that is already at the brink of defaulting. And when Portugal defaults, this would have devastating effects on the Euro-zone that is already in a very dire situation.

More flexibility on the Dutch labor market

In The Netherlands, the long lasting myth exists that the Dutch labor market is extremely rigid and it is almost impossible to fire people, as this would be very expensive. And if you would only look at the position of older workers with fixed contracts that are already at the same company for 15 years or more, this is definitely true. Older workers enjoy various kinds of lay-off protection and op top of that receive a compensation that is dependent from their number of years in service.

However, younger workers definitely don´t have the same position as the older workers. These younger workers in general change their job more often, thus building up less working years at a particular company.  On top of that, they are less frequently in the position to receive a fixed contract.

Dutch labor law states that a worker can only have three ‘one year’-contracts before the company must offer him a fixed contract. But companies often find ways to avoid these fixed contracts in reality; for instance by not continuing the last temporary contract, but instead recontracting their worker after a few months interval, with again a temporary contract.

The biggest setback of this behavior for the worker is that he doesn´t build up a pension in the meantime and he doesn´t have the same form of job security that older workers do have.

The Dutch government, in order to make the Dutch labor market even more flexible, decided that the length of temporary contracts might be increased from one until seven or even ten years. The Dutch financial newspaper Het Financieele Dagblad writes on this story:

Minister Henk Kamp of Social Affairs will soon come with a proposal to deploy long-term temporary labor contracts. He wants to enable contracts with a length of 7 to 10 years.

This is disclosed in a letter from Kamp to the Dutch Second Chamber of Parliament (i.e. House of Representatives). Earlier, Minister Maxime Verhagen of Economic Affairs mentioned already the possibility of long-term temporary contracts.

Kamp states that herewith an ‘extra possibility’ is created to ‘ease the usage of long-term temporary contracts’.  

In my opinion this plan is the wrong solution for the right problem. Sometimes, aging workers of 55 years and older are much less productive and less motivated than younger workers. You could say that these workers are in a gliding flight towards their pension and don’t take one step too much for their job.

In a vivid economy and in jobs with limited time pressure, this behavior could be accepted. But ‘when the going gets tough´, you can’t use people that are working at 60% of their possibilities, especially when they don’t excel in their job in a different way.

It must be possible for a company to fire these mill-stones with a limited compensation in cash, as harsh as this may seem. Now companies are very reluctant to contract older workers that do want to have a job.

Companies think that these older workers are also very expensive to fire when they can´t make it at their new job and don´t hire them in the first place.

But the solution that the cabinet presents to introduce long-term temporary contracts solves absolutely nothing, concerning the aforementioned problem and makes it even harder for younger workers to get a fixed contract. Don´t do it, I would state. 

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