The Netherlands: Closed for the holidays… until further notice.

Last year I wrote an article on the seemingly hopeless political situation in Belgium: Why is Belgium a failed state, without really being a failed state.

At the time, it seemed that the political deadlock between the Flemish and Wallonic parties in Belgium was hopeless, while The Netherlands had an irregular, but functional government.  

The Christian-Democrat / liberal-conservative minority coalition, supported by its silent partner PVV (Party for Freedom) of right-wing populist and professional insulter Geert Wilders, seemed surprisingly stable. At least, as long as PM Mark Rutte (VVD) and vice-PM Maxime Verhagen (CDA) were willing to look the other way and whistle a merry tune, when Geert Wilders and his henchmen started one of their infamous rants against the islam, left-wing politicians, the muslim population or the Polish, Rumanian and Bulgarian workers in The Netherlands.

Now, less than one year later there has been an enormous reversal of fortune.

Belgium finally has a stable government, since December 6, 2011. PM Elio di Rupo of the French-speaking Parti Socialiste (Socialist Party), a Wallonic son of Italian immigrants and renowned for fancying bow-ties, won the hearts and minds of many Belgian citizens, in spite of his mediocre knowledge of the Dutch language.

The Belgian PM managed to do so with his sensitive and emphatic public appearances:

• after the lone wolf-attack at the St-Lambert Square in Liege that claimed five lives;
• after the Sierre, Switzerland schoolbus disaster that claimed the lives of 28 people, of which 22 children; 

Although not all political and financial problems are solved yet, it seems that Belgium has a relatively bright future ahead after its return to political stability.

How different is the situation in The Netherlands nowadays:

Seven weeks ago, the Dutch Central Planning Bureau (CPB) reported that The Netherlands was going to hit a 4.5% budget deficit in 2013, if nothing changed. This figure was later even revised to 4.6%.

Under pressure of the EU Stability and Growth Pact (SGP) and the circumstance that The Netherlands had not been able to meet the budget deficit threshold since 2009, The Netherlands is now forced by the EU to reduce its budget deficit to the maximum 3% limit that the SGP prescribes.
This would be a reduction amounting to €9 bln. 


However, the CPB calculated that The Netherlands needs in reality €12-€16 bln in additional austerity measures to meet this €9 bln threshold. This is caused by the so-called ‘yield-reducing spendings-effect’: extra expenses as a consequence of deployed austerity measures, reducing the effect of these measures.

An aggravating circumstance is that PM Mark Rutte and Finance Minister Jan Kees de Jager behaved themselves like the school-bullies of the EU. During the sovereign debt crisis in the PIIGS-countries, this dynamic duo used very big words against Greece, Spain, Portugal and Italy, as a public display of their gung ho-mentality.

The effect was reinforced by the PVV, that had been steering the relations with several countries in the Euro-zone to the edge of the cliff, with an endless mudflow of platitudes and preconceived opinions on the South- and East-European countries of the EU.

So when Jan-Kees de Jager meekly went to the EU with the painful message that The Netherlands perhaps was not going to make the 3% budget deficit in 2013, he was encountered by scornful laughter and embittered faces of all countries that De Jager himself didn’t want to give a break earlier. “Three percent and not a penny more”, was the message of the EU that De Jager took home to The Hague.

PM Rutte decided to call his own party the VVD, the CDA and PVV together at the official residence of the PM, Het Catshuis, for private and secret talks on mitigating the 1.5% excess budget deficit with additional austerity measures. Since then, The Netherlands is closed for the holidays... until further notice.

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It is understandable and even honourable that Mark Rutte wants the talks to take place in absolute secrecy. These talks are exactly the kind of wheeling and dealing that could give politics a bad name when it was executed in openness, but which is indispensable for getting to real results. Like the former PM Jan Peter Balkenende said once: “you better not disturb a brooding chicken”. At least he was right about that.

However, the process is now in its seventh week and all these weeks the country is in fact without a government and with a parliament that is deaf, dumb and blind as it is hardly informed by the insiders in Het Catshuis.

The situation is very difficult indeed, as all three parties have their pet topics and taboos:

• The PVV is strongly in favor of diminishing development aid, reducing immigration, being harsher against petty crime, especially when coming from foreigners and non-native Dutch people.
• At the same time the party is very much opposed against raising the retirement age, reforming the labor market, reducing social security programs and abolishing the Mortgage Interest Deduction (MID).
• The CDA is strongly in favor of slowly diminishing the MID, reforming the labor market, increasing the retirement age and reducing social security programs
• The party is strongly opposed against diminishing development aid and it is in general getting more and more annoyed by the blunt and ultra-conservative PVV
• The VVD promised to keep the MID unchanged, but wants to strongly reduce the length of Unemployment Benefit, to make it easier to lay off workers and to moderate social security,
• At the same time it makes the entrepreneurs and high-ranked managers the heroes of Dutch society, while largely ignoring the desires of the other 14 million Dutch citizens, by raising their taxes (VAT f.i.) and lowering their subsidies. 

In spite of pictures with exuberant displays of friendliness and cosiness between especially the PVV and VVD and the obligatory chitchat of the ever-laughing and smiling PM Rutte, there is a hardfought battle going on between three parties that cannot afford to blow up the cabinet, but don’t want to give eachother another inch of leeway.

The PVV understands that the current silent partnership is as close to having government power as it will ever get, but doesn’t want to lose votes from its ever dissatisfied grassroots.

The CDA is already very sorry that it ever stepped in the current government with PVV, but understands that it will be blown away if the cabinet stumbles and falls.

The VVD suffers from a lack of longterm goals and ideology, but is extremely proud to deliver the first PM since the beginning of last century.

Here is the perfect recipe for an enduring stalemate and that is exactly what The Netherlands got.

On occasions, there are rumours that a general agreement is very close, but one look at the obligatory smiling faces of the participants of these talks tells a different story.

The stalemate is not only starting to bore and annoy the opposition parties, but also the labor unions, the entrepreneurs and representatives of the employers’ associations. Besides that, there is a deadline: before the end of April, PM Mark Rutte has to report his countermeasures against the budget deficit to the EU. Not meeting this deadline would be an enormous loss-of-face for The Netherlands, as well as not meeting the SGP 3% deficity threshold.

Even Fitch has been firing a warning shot today at ‘The Netherlands and its AAA-ratings”. In this case, Chris Pryce of Fitch was the messenger of bad news in an interview with Ambrose Evans-Pritchard of the Daily Telegraph (www.telegraph.co.uk). Here are the pertinent snips of this interview:

Fitch doubts Dutch AAA as property slump reaches 'coma'

Fitch Ratings has issued the clearest warning to date that Holland faces losing its AAA rating if it fails to deliver austerity cuts or lets political conflict intrude on economic management.

"The Dutch are on the edge of a negative rating action," said Chris Pryce, Fitch’s expert on the Netherlands. The first move is likely to be a switch from stable to negative outlook rather than a full downgrade.

"We will hold a rating committee meeting in June. They run risks if they keep letting debt rise: a cautious approach would be advisable," he told the Telegraph.

The warning comes as Dutch property tips into deeper slump, with the inventory of unsold homes nearing South European levels. Household debt is the eurozone’s highest at 249% of income, compared with 202% in Ireland, 149% in the UK, 124% in Spain, 90% in Germany, 78% in France and 66% in Italy - according to Eurostat data from 2010.

The Netherlands is caught in a "negative feedback-loop" as recession and house price falls feed on each other. Building permits have dropped 9% from a year ago, the lowest since 1953. "The housing market is in a coma," said the Volkskrant newspaper.

Maarten van der Molen from Rabobank said home prices have fallen 11% from their peak in August 2008, or 15% in real terms, leaving up to 500,000 people in negative equity.

The economic woes are infecting state debt dynamics. Public debt will climb to 76% of GDP by 2015, according to the official Bureau for Economic Policy Analysis (CPB). A €32bn bail-out of ABN Amro Bank has not helped but the chief cause is back-to-back recessions.

The Netherlands has been a vocal critic of fiscal excess in Greece but is now in breach of EU rules itself, an unexpected casualty of the eurozone’s contractionary policy mix.

The last sentence of the article tells it all. PM Rutte is stuck between a rock and a hard place, after having a big mouth to other countries. And the odds that the cabinet might implode after all, are becoming bigger and bigger, as the negotiations go as smooth as an engine without lubricant.

While the opposition parties are very much in favor of new elections, the employers’ associations, the Dutch entrepreneurs and various pundits are very much opposed to this plan.

Main complaint: it would take at least nine months to put together a new, elected cabinet and to make it govern. 


Rather these people want to have a so-called business cabinet, existing of the current parties (of course without PVV), with additional representatives of trade and industry and perhaps some special interest groups, like labor unions and employers' associations. Such a government could start without new elections, 'in order to take care of the shop'.

My take: the current lame duck-government with its impossible conformation has wasted two valuable years without really fighting the credit crisis at home and abroad, while alienating everybody and their sister. The sooner it resigns, the better.