“More solvability does not automatically help a bank during a liquidity crisis, which the United States mortgage crisis happened to be”. My response to the Op-Ed of Thomas Gomez, master student in Economics at the Utrecht University

This morning, an Op-Ed was printed in De Volkskrant, written by Thomas Gomez, a master student in Economics at the Utrecht University. 

In this Op-Ed, Gomez argued in favour of drastically increased capital buffers at the Dutch and international banks, in order to prevent a future banking crisis from occuring again in The Netherlands and beyond.

Although I sympathize with most conclusions of his article, Gomez oversimplified the circumstances which led to the US mortgage crisis. Consequently, he missed the real point causing this devastating economic crisis – the overnight vanished liquidity in the US Mortgage Backed Securities market – by a few lightyears. 

Therefore I print his Op-Ed article integrally, while adding my comments to it.

Here is the translated version of Thomas Gomez’s Op-Ed, accompanied by my comments:

Banks should strongly increase their capital buffers

Thomas Gomez: In the aftermath of the financial crisis, there have been many conversations about invigorating the supervision upon the banking industry.

The bank lobby, however, obstructed essential changes in the heart of the bank supervision. Banks still have too small capital buffers. In order to make the banking industry safer, this ought to change. With larger capital buffers, banks will stay out of trouble more easily. And when government intervention is inevitable, it will cost less tax money.

My comments: As this article in the Financial Times shows, Gomez’ remark about the banks watering down the Basel III agreements on bank supervision is true indeed, albeit not so drastically as he seems to state (see red and bold text):

Aimed at preventing a repeat of the 2008 bank collapses, the “liquidity coverage ratio” (LCR) announced on Sunday marks the first time that global regulators have sought to require individual banks to hold enough cash and easy-to-sell assets to allow them to survive a short-term market crisis. The measure is the second critical plank of the Basel III reform package. Tougher new capital rules began to be phased in this month.

But the final rule approved by the supervisors of the Basel Committee on Banking Supervision is significantly more flexible than the draft version put forward more than two years ago. Banks will be able to count a much wider variety of liquid assets towards their buffers, including some equities and high-quality mortgage-backed securities.

The calculation methods have also been changed in ways that will significantly reduce the total size of the liquidity buffers many institutions have to hold against outflows from possible depositor runs and corporate and interbank credit lines.

Also the second part of his remark, about the capital buffers for the bank is partially true, as the following table with the annual data of 2014 for the four largest Dutch banks shows: 

Leverage ratio of the large Dutch banks at the end of 2014
Data courtesy of: ING, ABN Amro, Rabobank and SNS Bank
Click to enlarge

What makes this chart very peculiar, is the fact that the non-stateowned banks ING Bank and Rabobank are actually much BETTER funded than the stateowned banks SNS Bank and ABN Amro. This should be a warning signal towards Finance Minister Jeroen Dijsselbloem, who is the owner in chief of these last two banks.

A sourish conclusion could be, that we all know who is the lender of last resort for these aforementioned two stateowned banks: ‘Jan met de Pet’, also known as the Dutch ‘Joe Sixpack’. He is the one who has to ultimately foot the bill when investments of these stateowned banks go awry.

Thomas Gomez: Before the financial crisis, the buffers were so small, that even small losses on assets could bring a bank to the brink of demise. During the collapse of the US residential real estate (RRE) market, this led to ubiquitous distrust between banks, preventing them from lending to each other. Due to the small capital buffers, the banks had to sell large quantities of investments to compensate for losses, in order to stay financially healthy. 

This had fierce consequences for the rest of the industry, causing the crisis in the financial system to leap to the rest of the economy, with a worldwide recession as a consequence. Securitized mortgages were the spark for the crisis, while they were seen as totally safe in the eve of the crisis.

My comments: The first sentence of this paragraph is true, albeit not for all Dutch banks. As the following table with the 2008 balance sheet data for the aforementioned banks shows, 2 of the 4 banks had an almost ‘suicidal’  leverage in their balance sheets and SNS Bank was also very poorly funded. 

The Rabobank, however, was funded quite reasonably in those days and did hardly change its solvability ratio during the last seven years.

Leverage ratio of the large Dutch banks at the end of 2008
Data courtesy of: ING, ABN Amro, Rabobank and SNS Bank
Click to enlarge

Excerpt of ING's consolidated balance
sheet for Q3 and Q4 of 2008
Data courtesy of : ING Bank
Click to enlarge

I show here both the 2008Q3 and 2008Q4 data of the ING Group (see the Excel table, as well as the excerpt of the balance sheet), in order to make clear that no less than €6.7 billion in equity had "melted away" during this three month period alone. Would the €10 billion in state-aid to the ING Group not have been handed out during 2008Q4, the bank and insurance conglomerate could have become technically bankrupt in those days.

The red and bold sentence in this paragraph shows one of the main problems of this article: its oversimplification. 

Essentially, the US mortgage crisis was not caused by a lack of solvability, as Gomez seems to argue in his article, but due to the fact that the market for mortgage backed securities (MBS) virtually ceased to exist overnight. This earth-shaking event gave a devastating blow to the confidence in each others assets, between the banks.

In other words: the mortgage crisis in the United States started as an acute liquidity issue and not as a solvability issue. This is a big and very important difference.

Here is a short summary of the events in those days: 

Mortgage Backed Securities or MBS’s were bundles of mixed mortgages, originating from specialized US mortgage banks and institutions (a.o. the infamous semi-governmental organizations Fannie Mae and Freddie Mac), with a certain, standardized maturity rate. 

In order for the issuing banks to sell these mortgages to other investors and get them off their own balance sheets, these bundles were packed together in a security (i.e. the MBS) and subsequently rated by one of the three US rating agencies: Standard & Poor’s, Fitch and Moody’s. In hindsight, it has become crystal clear that many of the issued ratings in those days were overly optimistic and even ignorant.

As these MBS securities offered very good yields, in combination with a seemingly limited risk (many of the MBS's had AAA-ratings), these were extremely popular among both sellers and buyers of securities. 

It is important to realize that the MBS securities were available in three risk categories: Prime, Alt-A and Subprime loans:

• Prime mortgages were 'normal' mortgage loans to people with a stable financial position and income, for which all the paperwork was in perfect order. Although the housing prices had soared in the US during the years before 2008, most of these mortgages and the people behind them were sufficiently solid, from a financial point of view;
• Alt-A mortgages already carried much more risk. These mortgages – also known as ‘liar loans’ – were mortgage loans, issued to small entrepreneurs and other less financially solid customers. These were people, whose income was not so certain or people who could or would not provide the necessary financial records to prove their financial soundness, during the acquiring process of a mortgage. Consequently, these mortgages were much more often a question of (misplaced) trust, than the prime category; 
• The real problem, however, were the subprime loans. These were mortgages, issued to people of extremely doubtful financial soundness.
  They were for instance without a job or did not have sufficient income to pay the interest rates and amortization for their mortgage.
  
  The concept behind the subprime loans was that the value of their houses (as collateral) would always be sufficient to pay back the loans, even when the houseowner would not be financially sound after all. This was a blatant misjudgment, to say the least… 

In the years before the crisis, the MBS securities had been sold to everybody and their sister – including the Dutch large banks – as an almost fully liquid asset. They were considered to be virtually without any risk: the Prime loans, but also the dangerous Alt-A and even the Subprime loans. It was an accident waiting to happen…

Merely overnight, a few United States banks ‘found out’ that the prices of the collaterized US Residential Real Estate (RRE) would not go up forever after all and that the number of defaults among the Alt-A and especially Subprime loan holders started to pose a serious risk for the future value-at-maturity and tradeability of these loans.

A series of fire-sales actions started at a few banks and in a panicked response the liquidity of the MBS market totally dried out overnight, leading to the devastating demise of Lehman Brothers.

As a consequence, all banks holding large packages of Alt-A and subprime MBS loans (which were many of them), were virtually stuck with an enormous bunch of ‘toilet paper’ on their balance sheets. 

And to make things worse, they knew that many of their colleagues had the same bunch of toilet paper on THEIR balance sheets. These – slightly simplified – circumstances led to the dramatic stagnation in interbancary loans of 2008; not the poor solvability of the banks, although the fact that the banks had decreased their capital buffers to the bare minimum, did not help to say the least.

The conclusion remains, however, that the crisis started as a liquidity crisis and not as a  solvability crisis. Even a leverage of 1-10 (equity vs assets) or less would not have helped a bank, when it would have had a vast amount of poor MBS securities on its balance sheet in those days. The market for MBS’s was simply… dead!

Thomas Gomez: Since then things have hardly changed. The capital demands have been slightly increased, but they are still dependent on the risks that the banks take in their daily business. This risk is – among others – more or less decided with the help of risk models of the banks themselves. 

This is seen as one of the causes for the crisis. The models painted an overly optimistic picture, allowing the banks to keep their buffers small. Also the required risk rates for the risk-based capital demands are very hard to estimate. Securitized mortgages were the cause for the crisis, while they had been seen as perfectly safe before this very crisis.

My comments: I happen to disagree with this paragraph. Since those wild days in 2008, the banks fully implemented Basel II and made a start with the implementation of Basel III.

Basel II was aimed at getting better insights in the risks of the banks assets, as well as the bank’s underlying pawns and collateral. 

Basel III – albeit slightly watered down as the aforementioned FT article showed – laid down sturdy directions and guidelines, with respect to the required solvability and liquidity of the banks and systemically important financial institutions. Especially the guidelines with respect to the required liquidity ratios of banks are a strong improvement, in comparison with the situation in 2008.

Especially ING, but also the other banks, took a critical look at their assets, securities, pawns and collateral and made substantial write-offs on it, were applicable. Was it enough? I really can’t say that... Yet, I am convinced that the risks of assets and asset categories are now more visible and understood than in those days in 2008.

Even more important, however, is the fact that the risk awareness of the banks, the supervisors and the general public has dramatically changed since then.

As Nout Wellink, the former president of the De Nederlandsche Bank told me at BNR Newsroom:

“Taken apart from the ING, the system in those days was that a bank was assessed upon its solvability ratio, the so-called capital quote. The assets were measured against the lended amounts, which were risk-weighted. When the risk-weighted collateral was taken into consideration, everything was considered to be correct, for this particular bank and other banks.

What wasn't correct, however, was that the collateral for some lended amounts had a risk-weight of 0, like sovereign bonds from the euro-countries. Such were the international regulations in those days, also those from the European Commission

and the international authorities.

These regulations seduced the banks to use their available equity at the most efficient way, which means in practice: with a giant leverage.  This led to the litterally exploding balance sheets in those days: the banks thought that this was without any risk.”

I am convinced that the total lack of risk awareness, among the banks, the rating agencies, the supervisors and even the general public during the eve of the US mortgage crisis, will never show up again within our lifetime. 

The world learned a very costly and valuable lesson in those days. Things aren’t yet far from perfect, but I am convinced that they have become better during the last seven years, as supervision has been intensified and does not trust the banks on their smile alone anymore. 

The implementation of Basel II and Basel III will help to further reduce the remaining risks at the banks balance sheets

Thomas Gomez: In the Basel III agreement between international supervisors, a capital ratio is required which is risk-independent: banks should at least finance 3% of their investments with equity. This is much too low. In the crisis, banks suffered lossed that amounted to more than 6%. When banks invest more with equity, they will have more money to lose, leading to a more balanced choice between risk and yields.

My comments: Again this is a simplification of the Basel III regulations. The mentioned 3% leverage ratio is only the non-risk leverage ratio for assets. 

On top of that, banks have to keep a minimum capital buffer of 4.5% of their risk-weighted assets (loans, mortgages, derivatives etc.), plus an additional 2.5% as a capital conservation buffer. When the amount of credit is soaring in a dangerous fashion, the banks can be forced by the authorities to keep between 0 and 2.5% of their risk-weighed assets in the form of equity, as an additional countercyclical buffer.

And last, but not least: Systemically Important Financial Institutions (i.e. SIFI’s) are forced to keep an additional capital buffer with a size of between 1% and 2.5%, depending on their systemic importance.

Of course, all these risk-based ratios are dependent from the quality of the collateral and pawn in hands of the banks, as well as the importance and risk-appetite of the bank in question. Yet, it will be too simple to say that the banks are still allowed to be dramatically underfunded, when the Basel III rules have been implemented in 2019. 

One of the main problems for SME (small and medium enterprise) lending at this very moment is, that the risk appetite of the banks is still very low at this moment. At the same time, the risks posed by SME loans are still too high. This is the reason that SME lending is still faltering in the first place.

And although I sympathize with Thomas Gomez’ plan to elevate the non-risk capital ratio to 6% or even higher, this would make it so much harder for banks to become profitable and prosperous again in the future, that it would bring many banks in very deep trouble.

Investors would be very reluctant to buy bank shares, as the profits and dividends in exchange for their investments would probably remain very low. And perhaps, it could be that the banks would take even bigger risks with their investments, in order to still make a healthy profit; in spite of the reduced leverage ratios.

Thomas Gomez: Supervisors should force banks to issue new stock at fixed moments and to stop paying profits to their shareholders for a certain period. Thus, the capital buffers would be raised, while at the same time it prevents the banks from selling their investments, in order to meet those stricter capital ratios. The acquired capital could be used productively, for instance for new loans.

The heart of the bank supervision should be reassessed. Banks should be forced to finance 10% of their investments with equity, independent of the risk. A comparison with historical data and other industries suggest that even higher ratios would not be unthinkable. In the US, large banks are forced to maintain a capital ratio of 6%. While this is a step in the right direction, more is required to make the banking industry safer.

My comments: Some of his remarks are so naive. When the banks would be forced to issue new stock at fixed periods and at the same time they were strictly forbidden to pay dividends to their investors, which investor would be enthusiastic to buy or keep this stock anyway; even at gunpoint?! Dilution is an inevitable consequence of this silly proposal.

As I stated before, when banks are forced to fund 10% of their investments with equity capital, I am certain that either their risk appetite and hunt for profits will become greater or they will not invest anything at all and certainly not SME companies.

I agree with some conclusions of Thomas Gomez and I agree that the current capital ratios are not ideal yet. Yet, I am convinced that the unintended consequences of Gomez’ plans will be even worse for the banking industry, than the current situation already is.

And my most important conclusion is that a stronger solvability will not help one bit against an acute and severe liquidity crisis, as the US mortgage crisis turned out to be. That is one of the most important lessons from the mortgage crisis in 2008

Will the newly found economic growth in The Netherlands survive a sudden rise in the unemployment figures, as a consequence of the new labour legislation coming into effect on 1 july 2015?

As I already argued in my last article, regarding the optimism of chairman Hans de Boer of the employers’ organization VNO/NCW with respect to the Dutch economy, there are indeed some clear greenshoots, which could point at a much more prosperous future.

As far as I’m concerned, there is however one factor which could soon spoil the party and trigger another, prolonged period of disappointing economic growth: the (youth) unemployment.

Lately, especially the youth unemployment seemed to reluctantly drop after more than five years of almost steady growth; especially after 2011 this growth soared until the second half of 2013. In the 1.5 years since, youth unemployment started to drop very slowly until the current level was reached.

Unemployment development from 2003 until 2015
for gender and age category
Data courtesey of: www.cbs.nl
Chart created by: Ernst's Economy
Click to enlarge

However, at this moment I suspect that this slow drop in the youth unemployment could soon come to an end. The cause for this expected disruption of the favourable unemployment trend will be the deployment of the new labour legislation on the first of July, by Minister of Social Affairs Lodewijk Asscher.

This legislation has been deployed with the best intentions by Lodewijk Asscher, in order to do something about the unfavorable position of flex workers and workers:

(the following excerpt of this new law has been acquired from De Volkskrant):

Per 1 July 2015, the difference between fixed and so-called flex workers becomes smaller. This is agreed by employers and labour unions in the so-called Social Agreement. It will become cheaper to dismiss fixed employees and the duration of the Dutch unemployment benefit (i.e. WW) will be restricted.

On the other hand, starting from July 2015 flex workers will be entitled to a ‘transition payment’, when they have worked in excess of two years for the same employer. This payment is at least one-third of a monthly salary per service year at the employer, capped at €75,000.

At the same time, these flex workers are entitled to a fixed contract earlier: after three contracts in two years (was three contracts in three years). In order to protect employees against ‘revolving door’ constructions – the employee goes away and magically reappears after a few months for a new series of temp contracts – the employee from now on is only allowed to return to the same company after six months, instead of three.

For the 230,000 temporary employees (acquired through an official temporary employment agency), things remain more flexible: six contracts in four years. The first one-and-a-half years, the temporary employee can be sent away at one day’s notice.

In spite of these good intentions by Lodewijk Asscher, this legislation seemed to work at large employers as a red cloth to a bull.

First, ING Bank started with their scheme to dismiss long-term flexible workers and workers from temporary labour agencies before the 1st of July, in order to avoid the mandatory payment of transition fees. Only after the minister stepped in personally, the flexible layer of personnel, that would be dismissed from their long-term work relation with the bank, received a kind of transition fee after all. Their dismissal itself, however, became an undeniable fact of life for these workers.

And soon, the bank was followed by the large insurance company Nationale-Nederlanden (NN). The following snippets also were printed in De Volkskrant:

Also Nationale-Nederlanden started to send away temporary workers

Nationale-Nederlanden is currently dismissing loyal temporary workers, in advance of new labour legislation, to be deployed on the 1st of July. This new labour legislation should offer more certainty to flex-workers and temps. Just like ING earlier this month, Nationale-Nederlanden tries to avoid the so-called transition fee that it would have to pay to its temporary workers, after a future dismissal in the period after July 2015. This has been disclosed by an internal memo of this insurance company, which is in possession of De Volkskrant.

Temporary workers at Nationale-Nederlanden informed the newspaper that their contracts will not be prolonged, in order to prevent them from unwantedly acquiring a steady job at the company. “We had been promised that we could stay longer at the company than legally allowed, when we would switch to another temporary labour agency”, according to a temporary worker, who spoke on the basis of anonimity, as he still works at NN. However, this revolving door-principle has been explicitely forbidden by the new legislation. At NN there are workers who have worked at the company for more than ten years, using this modus operandi.

The insurance company leaves the dismissal of their temporary workers to the temporary employment agencies themselves. Only when these agencies offer their temps a fixed contract eventually – which happens almost exclusively with specialists who are in very high demand – they are allowed to stay at Nationale-Nederlanden, according to a spokeswoman of the insurance company. ‘When we really want to keep a very talented worker in our service, we offer him or her a fixed contract, of course.

Like I stated in my earlier article (see one of the aforementioned links), this is a very unfavourable development, which could have a substantial impact in the coming months; first and foremost on youth unemployment, but also in other age categories with flexible contracts.

Especially youngsters work at large companies with temporary and flexible contracts, in a majority of the cases. They could become the main victims of this corporate behaviour in the eve of this new legislation.

On top of that, I am convinced that NN and ING are not unique in this behaviour, but rather act as front-runners. They simply caught the heat from the Dutch press, due to their size and importance for the Dutch labour market. Other companies will soon follow in their footsteps and before we know it, the Dutch youth unemployment is on the rise again.

It is impossible to see this development loose from the growing disconnection between (large) employers and employees. Large employers see their personnel more and more as a flexible force of FTE’s, which can be deployed and dismissed at will. The following snippets are again from last week’s article:

While many executives and self-acclaimed leaders at large employers praise themselves for their exceptional qualities and skills, and use this as an excuse for their exceptionally high remuneration, they don’t really search for exceptional qualities among their personnel.

The ideal workers are people, whose knowledge and skills would always be fully up to date. They would not be overly ambitious and would never become bored of their jobs, even when their jobs would be boring, as a matter of fact.

They would be fully skilled and trained at any given moment, and in possession of the latest knowledge and techniques, regarding all important working areas and technical developments. And companies would not have to invest one penny in them, with respect to courses, workshops and trainings!

These workers would only require a moderate salary or hourly fee and when their services would not be required anymore, they would leave the company instantaneously.

Hence: the ideal worker does not require anything special, does not ask for anything and gives his very best on a daily basis, until his services have become superficial.

And an optimal labour market – to the eyes of many entrepreneurs – would be akin to the physical Law of Communicating Vessels: a labour force, which is so flexible that it always appears at the place and time where and when it is needed most. High demand for labour would immediately lead to high supply. Low demand would immediately lead to a magical disappearance of the labour supply…   

While I am an independent, flexible, freelance worker myself, I am one out of my own conviction and at my own choice. Many youngsters, however, do not have the luxury of such a choice: too often large employers simply don’t want to offer them a fixed labour contract.

In order for them to have a job, they are bound to work under a series of temporary or flexible contracts, either until their services are not needed anymore or until maintaining them becomes too risky or expensive for their temporary employers. This is an undesirable situation, which might prevent this youngsters from developing a healthy career, that  leads to a prosperous and financially independent future for them and their future families.

Lodewijk Asscher, the Minister of Social Affairs did a brave attempt to slow down this corporate behaviour, but this development can only really change when the large employers themselves experience the disadvantages and disruptive effects of this corporate behaviour in their own companies. 

Until then, youth unemployment might be on the rise again for quite a while…

Hans de Boer, the flamboyant chairman of employer’s organization VNO/NCW is very optimistical about the Dutch economic growth. He might have a point indeed, but he should carefully watch when the music stops….

You're all invited to the party

You know you didn't have to come

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Get the funk out

Extreme – Get the funk out

It is hardly a secret, that during the last four years my stance has mostly been at the bearish side of the balance, with respect to the Dutch economy. Too often during this period, the economic crisis was declared finished by well-respected pundits, only for us to see a rebound of it a few months later.

My point was traditionally that there had not been enough of the necessary structural changes in the Dutch economy to logically declare a return to autonomous growth.

Nowadays, however, there is a wide array of improvements visible in the Dutch economy, at different areas. And although there is neither a strong impulse from an important economic development (i.e. such as the emerging of the world wide web or the development of the microprocessor) nor a structural driver for jobs (i.e. autonomous economic growth, based upon higher productivity and improved efficiency), it seems that the European quantitative easing program has done the job, in combination with the weaker Euro.

Buying European stuff is simply much cheaper nowadays (exports(!)) and the positive impulse of QE(EU) at the European stockmarkets is unmistakenably. Nevertheless, it is sensible to not forget that this economic revival is like a Roman Chair Dance: you can continue dancing for as long as the music plays, but don’t forget to always keep a keen eye upon an empty chair.

In other words, one should consider that this economic growth is probably the result of quantitative easing and quantitative easing alone: when the program stops, growth could be gone again.

One of the people who has a happy smile on his face these days, is the flamboyant chairman of employer’s organization VNO/NCW Hans de Boer

Hans de Boer of VNO-NCW during a broadcast
of BNR Newsroom in September, 2013
Picture copyright of: Ernst Labruyère
Click to enlarge

In the past, Hans de Boer was chairman of the steering group for youth unemployment and he is still very much involved in the subject. And particularly in the area of youth unemployment great progression has been made of late.

And for him, in his current role as chairman of the employers, the economic revival is also very good news. Exports are soaring again, consumption seems finally on the way back to better results and the housing prices have shown a rising pattern for almost a year in a row now.

So, it is good news all the way for him. Or isn’t it, after all?!

De Telegraaf:

Boss of the employers sees a substantial increase of growth

Party-time in the economy! Our country is doing much better than anticipated earlier. While the Dutch Central Planning Bureau is expecting a general growth figure of 1.7%, the employers’ organization VNO/NCW is much more optimistical.

Chairman Hans de Boer is reckoning with a growth rate of at least 2%, which would bring us at the highest growth level since the economic crisis started in 2008. “Our economy is really doing much better than anticipated. My members told me that”, according to De Boer. “I have never been so optimistical about entrepreneurship in our country, as nowadays”. The improving economy is good news for employment and consumer confidence. On top of that, domestic spending will further increase.

These days, Hans de Boer certainly got what he wanted, albeit with a few important snags. Consumption had indeed increased considerably, but in spite of De Boer’s optimism, the consumer confidence had dropped (un)expectedly.

The following snippets come from the Dutch Central Bureau of Statistics:

CBS: largest increase of consumption in four years time, consumer confidence is declining slightly

In February, consumers spent 2.4% more upon goods and services than one year earlier. This is the largest increase in four years time, according to the CBS today. Consumers spend more money on gas, clothing and home furnishing. Consumer confidence dropped slightly in April, month-on-month. Consumption data have been adjusted for price changes and changes in the number of purchase days during this period.

In February consumers spent 4.1% more on durable goods than one year before. They especially spent more on clothing and home furnishing. Last week, CBS already published data which showed that fashion shops had higher year-on-year sales, for the first time in half a year.

In April the circumstances for consumption by Dutch households have once again improved month-on-month. The confidence of entrepreneurs in the manufacturing industry, with respect to future employment, has improved considerably. Stock ratings and housing prices have increased year-on-year. However, consumers were slightly more negative regarding future employment.

The mood among consumers slightly deteriorated in April 2015, in comparison with March. The consumer confidence dropped by 2 points to 0, which means that there are equal numbers of optimists and pessimists among the consumers. This slight deterioration is mainly caused by a dropping confidence of consumers in the Dutch economy and a declining willingness to purchase goods.

Domestic consumption by households,
adjusted for shopping days
Data and chart courtesy of: www.cbs.nl
Click to enlarge

Consumer confidence, seasonally adjusted
Data and chart courtesy of: www.cbs.nl
Click to enlarge

Oops, the last paragraph could be a small blow for De Boer’s good news story, although it can’t come unexpected.

There are still considerable reorganizations going on in the financial and construction industry – especially among banks and insurance companies, as well as construction companies not involved in residential real estate – and a number of companies is definitely busy to dismiss its workers from temporary labour agencies befory July 1st of this year, in order to prevent themselves from the obligation to pay transition payments.

Yet, there has been quite a lot of other good news, of late. See the following snippets from a number of older publications from the CBS:

Exports continue to rise substantially

The Dutch Central Bureau of Statistics announced today that the volume of exports of goods was 6.6% larger in February 2015 than twelve months previously. The growth was somewhat lower than in January. Exports of transport equipment, natural gas, and oil products grew by most in February. Exports of Dutch products as well as re-exports were higher than in February last year. The volume of imports was 0.5% larger in February than twelve months previously. In January, imports rose by 1.3%.

According to the Central Bureau of Statistics’ Exports Radar, circumstances for Dutch exports improved in April 2015 from March. The real effective exchange rates on an annual basis were far more favourable than in the previous month. Producer confidence in the eurozone and Germany was less negative than in the previous month.

Exports of goods (volume
adjusted for working days)
Data and chart courtesy of: www.cbs.nl
Click to enlarge

Exports have profited dramatically from the depreciation of the Euro, as a consequence of QE(EU). As long as the wages remain stable in The Netherlands, the export to non-Euro countries within the EU as well as outside the continent will remain soaring. However, this “success” has little to do with successful policies of Cabinet Mark Rutte II, as Hans de Boer stated in another article, and everything with quantitative easing Mario (Draghi)-style.

Retail sales 3% up in February

The Central Bureau of Statistics announced today that retail turnover was 1.2% up in February 2015 from the same month last year. Retail sales (volume) continue to grow, by 3% in February. Retail prices fell by 1.8%. Turnover and sales generated by food, drinks and tobacco shops and non-food shops improved in February.

Within the non-food sector, chemist shops and home furnishing shops reported higher turnover figures. This was also the case in the preceding months. For the first time in six months, clothing shops also achieved better results. Consumer electronics shops recorded a 3% turnover loss, versus a turnover growth by nearly 4% in January. Turnover results realised by household appliances shops, DIY shops and textile supermarkets were again below the level of the preceding month in February.

Supermarkets almost entirely accounted for the turnover and volume growth in February. Turnover generated by specialist shops hardly improved relative to one year previously. Mail-order firms and online shops saw turnover rise by more than 12% compared to February last year. The growth rate was higher than in January.

Turnover, price and volume
developments in February 2015
Data and chart courtesy of: www.cbs.nl
Click to enlarge

This information also paints a quite schizophrenical picture of the Dutch consumption. While especially clothing and home furnishing shops, as well as supermarkets show a very favourable picture for the first time in a long period, the consumer electronics shops and stores for household appliances and DIY articles present less favourable data. In my humble opinion, it seems yet much too early to declare the crisis to be defenitely finished, based upon these consumption data alone.

On top of that, there is still a firm hint of deflation in the price development, as you can see in the aforementioned chart. Although many pundits want you to believe that this is caused by the development of oil prices alone and nothing else, please don't believe them.

More people find employment, in particular young people

The Central Bureau of Statistics announced today that the number of people who found jobs has grown by an average of 6,000 a month during the past three months. Most people who found work are young. The labour force remained fairly stable during that period. As a result, the number of unemployed was reduced by an average of 6,000 a month.

Total and employed labour force
Data and chart courtesy of: www.cbs.nl
Click to enlarge

Figures provided by the Employee Insurance Agency indicate that last month, 443,000 unemployment benefits were paid, i.e. 12,000 down from February.

Last month, 626,000 people were unemployed. They were available for the labour market and looking for work, but they could not find work; 7.0% in the labour force were unemployed, versus 7.2% three months ago. The rest of the 15 to 74-year-old population (3.8 million individuals) did not have work and were not looking for jobs, the so-called non-labour force.

More young people found work. In the first three months of this year, the number of employed 15 to 24-year-olds rose by an average of 10,000 a month. The number of young people working twelve hours a week or more has also increased. Over the past three months, the unemployment rate among young people was reduced from 11.8 to 10.8%. The Employee Insurance Agency reports that the number of unemployment benefits also declined, in particular among 15 to 24-year-olds.

Labour force by age: average
monthly change over three months
Data and chart courtesy of: www.cbs.nl
Click to enlarge

Nearly two in three working young have flexible employment contracts (see second graph). The ratio is much higher than among over-25s. Nearly three in ten young people have permanent employment contracts and fixed working hours, as against nearly seven in ten working 25 to 74-year-olds.

Position in the working environment by age
Data and chart courtesy of: www.cbs.nl
Click to enlarge

 The number of employed people also grew among over-45s, though less rapidly than in the young population (see the aforementioned chart). In the first months of 2015, the number of working over-45s rose by an average of nearly 2,000 a month.

There were two very important snags in this CBS good news-article about the labour market, which it definitely is in my humble opinion. First, the employment among 45+ workers did not grow so hard as the employment among youngsters. While I am very happy that so many more youngsters find a job these days, the age group of 45+ is still extremely important for domestic consumption.

This is caused by the fact that this group has the highest salary and consequently the most spending money in general, but also has the highest expenses, due to generally higher consumption, higher spendings on food, beverage and hospitality, growing and studying children, expensive family holidays, as well as different labour circumstances (a higher rate of commuter traffic).

Therefore this statement upon the diminishing unemployment is not such good news as it seems initially.

The second snag is the excessive number of temporary and flexible contracts among youngsters. Only about 3 in 10 youngsters have a fixed contract these days and it is not plausible that this number will rise very soon.  The flex and temporary labour contracts of the vast majority of youngsters mean that they can be fired very easily, when the economy or the relative position of their employer requires that. This is not a firm base for durable economic growth.

Summarizing, I fully understand where the positive feelings of Hans de Boer come from and I agree with him that there are some very positive signals indeed. Yet, I am not so optimistical about the Dutch economy as he is. There are simply too many snags in the CBS data from the last few weeks.

As I told before on a few occasions, there is neither a strong impulse from an important economic or scientific development nor a structural driver for jobs in the economy. The current answer to all questions seems to be quantitative easing, Mario style. 

Therefore my advice to Hans de Boer is: enjoy the dance while the music plays, but always prepare to grab a chair when it stops.

Scratching the surface of civilization off some Dutch citizens: deaths of over 1100 refugees in the Mediterranean Sea applauded and hailed by a (small) number of Dutch people

For me – and probably for many other people – the last week was one of both grief, discomfort, disbelief and shame.

Grief that once again disaster struck upon a few of the numerous small boats in the waters of the Mediterranean Sea, filled to the brim with hundreds and hundreds of economic and political refugees. The mindboggling death toll was well over 1,100 casualties, in little over a week.

My growing discomfort is caused by the fact that the European Union could offer a few solutions to diminish this gruesome number of casualties, but is yet scared away by the consequences:

• When the European Union would more actively pursue the gangs, involved in this kind of human traficking, up to their homes bases and departure points on Libyan and other North-African shores, it would be able to fight the problem at the root cause and stop the massive influx of new refugees. 
  However, such initiatives could easily lead to a more intense military involvement of the European Union, in an area that is already very unstable. An area which could very well form the next home base of extremely dangerous groups, like IS and others.
  Besides that, it would leave the strong impression that the European Union is mainly busy with making sure that the problems remain in the Middle-East and Northern Africa, instead of structurally solving these problems. 
• When a much larger number of navy ships from the EU member states would substantially increase the number and density of the search-and-rescue patrols upon the Mediterranean waters, they would be able to step in earlier and probably save many refugees’ lives.
  The obvious drawbacks of this choice would be that this a. would increase the number of refugees reaching European shores through the ships of their navy saviors and b. could form an extra motivation to refugees and the criminal gangs around them ‘to give it a shot’, as the chances for survival would probably dramatically increase.
  
• And probably the hardest and therefore least popular solution is that the European Union really tries to make a difference in North Africa and the Middle East, by trying to spur economic growth in that region and diminish the political and religious tensions overthere, through the offering of political solutions, financial aid and possibilities to start negotiations between alienated parties.
  The war in Syria has escalated so much and has become so complicated over the last four years, that whatever the European Unions wants to do there, it will always be the wrong choice.
  For North-Africa, the situation is little better. Libya is a mess from a political and military point of view. The political stability in Egypt is hardly better and Tunisia, Algeria and Morocco are also not strongholds of stability and economic wellbeing. The littlest spark could fire up massive tribal, ethnical and religious conflicts in that explosive region. 

And so the European Union still feels forced to sit on its hands and mainly pay lip-service to its desire to diminish the vast numbers of refugees on their wobbly boats.

In spite of the recent initiative of the Polish president of the European Council Donald Tusk, in which he asks for the organization of a European assembly regarding this topic, and the cries for help from Italian officials, I don’t expect much to happen soon.  

“We really want to help, but now we can’t do much about the refugee problem, as there are simply too many complications emerging from every decision that we make…” will be the general tendency of such assemblies, like the one organized tonight between the European Ministers of foreign affairs. And so we just wait for the next gruesome incident to happen… and the one after that one… and the next one after those two.

There is one thing, however, that is bothering me even more than the reluctancy of the European Union to search for really decisive solutions: a (hopefully) small, but probably growing group of angered, resentful and misanthropical respondents to news messages in The Netherlands, was actually applauding and hailing the accidents, which took place last week.

These respondents used words like:  “That is another 700 welfare payments less, times 50 years. K-ching!” or “I regret the 28 survivors. These people will become new parasites on our society, who will receive anti-trauma therapy at our expenses. For me this is a disappointing end to a very uplifting article”.

Of course, the pitying and grieving respondents – all people who were very upset about these enormous accidents – massively outnumbered the people full of ‘schadenfreude’, anger and resentment against these refugees.

Nevertheless, these incidents and the reaction to it proved that even in a country with a centuries-old tradition of hospitality and benevolence for people in need, the shining surface of civilization is only microns in thickness. 

Only seven years of economic crisis and 15-odd years of political agitation from various extremist political parties in The Netherlands were enough to scratch this shiny surface and expose the stinking layer of hardly disguised racism, hatred and resentment underneath.

Seven years alone were enough to dramatically change the concept behind the word “refugee”:  from a person in need, who made a desperate attempt to rescue his life and tries to search for a better future for himself and his family, into a parasite with whom many Dutch people don’t want to have any encounter at all and  who needs to be removed from Dutch and even European soil.

Although virtually none of the refugees poses any threat to the life, wellbeing and economic prosperity of any Dutch person whatsoever, the hatred and resentment among these respondents against the refugees is much stronger than the compassion and understanding for their desperate situation.

This is a development of which many politicians in The Netherlands – both on the right and the left wing – should be very, very ashamed and discomforted.

As it were those same politicians, who have had all the exposure on television to utter their increasingly radical opinions about economic and political refugees looking for a better future, accessible as they were for the political succes of such radicalizing opinions. Airplay, that worked to reinforce the already resident feelings of hatred and resentment against refugees among some Dutch citizens.

And it were almost the same politicians, who left the South-European refugee problem as a simmering stew of discontent, because they have been scared away from finding real and viable solutions for this mounting problem, until it is almost too late. 

Suddenly, it becomes so much easier to see how things could go wrong in the years before the Second World War: not only in Germany, but also in countries like The Netherlands.  The radical people in those ages could not become so successful because of their radicalism, but as a result of the fact that a growing part of the population silently or openly agreed with them.

The European Commission is taking a massive swing at Google. Is it an attack against the free market? Or a fair and necessary attempt to stop a company with too much power, which abuses this power to gain even more dominance on the world market.

The European Commission has a fierce reputation of occasionally targeting large and high-profile, multinational companies, when they don’t stick to the European laws and regulations, and penalizing these companies with massive penalties. 

Perhaps the most high-profile company in the past, being penalized by the European Commission, has been Microsoft, which received a big blow on the chin about a decade ago.  

The next, extremely high-profile target on the list of the European Commission is Google: the giant US information management company, which issues, among many other services, the world-famous Google search engine and the Android operating system for smartphones and tablets.

The company is currently under threat of a gargantuous penalty of up to € 6 billion; allegedly for: 

• Unlegally tampering with search results, thus favouring search results from companies affiliated to itself and aggrieving competing companies, whose offer would be equal to or better, compared with the offers that Google favoured;
• Shutting some competing companies in the area of mobile services, when these offer services for the Android platform and don't agree to some of Google's arrangements and conditions.

These are the reasons that the European Commission is targeting two of the most important pillars of Google's business, through two separate legal cases against Google:

• The Google Search Engine itself and the sequence of the results that it provides to its numerous users;
• The Android operating system for mobile appliances. 

Probably the main target in this unprecedented, legal battle is the so-called source code of the search algorithm, which Google uses for its world-famous and globally leading search engine; an engine so powerful and widely used, that it is the favorite search engine of over 90% of the European population in average.

The secrecy, importance and impact of this search algorithm can be compared with the legendary recipe of Coca Cola. 

This is the reason that Google is adamantly against handing this search algorithm over to the European Commisson and goes through great, great lenghts to prevent this from happening.

I will show you parts of the two press releases, which were issued by the European Commission and have been published two days ago.

The following snippets are applicable to the Google search engine and search results:

Antitrust: Commission sends Statement of Objections to Google on comparison shopping service

Brussels, 15 April 2015

The European Commission has sent a Statement of Objections to Google outlining the Commission's preliminary view that the company is abusing a dominant position, in breach of EU antitrust rules, by systematically favouring its own comparison shopping product in its general search results pages in the European Economic Area (EEA). The Commission is concerned that users do not necessarily see the most relevant results in response to queries – to the detriment of consumers and rival comparison shopping services, as well as stifling innovation.

Google has a dominant position in providing general online search services throughout the EEA, with market shares above 90% in most EEA countries.

Since 2002, Google has also been active in providing comparison shopping services, which allow consumers to search for products on online shopping websites and compare prices between different vendors. The first product it offered, "Froogle", was replaced by "Google Product Search", which in turn was replaced by its current product "Google Shopping".

The Statement of Objections outlines that the markets for general search and comparison shopping are two separate markets. In the latter market, Google faces competition from a number of alternative providers.

The Commission's preliminary conclusions in the Statement of Objections

The Statement of Objections alleges that Google treats and has treated more favourably, in its general search results pages, Google's own comparison shopping service "Google Shopping" and its predecessor service "Google Product Search" compared to rival comparison shopping services.

Google's conduct may therefore artificially divert traffic from rival comparison shopping services and hinder their ability to compete, to the detriment of consumers, as well as stifling innovation.

The Statement of Objections takes the preliminary view that in order to remedy the conduct, Google should treat its own comparison shopping service and those of rivals in the same way. This would not interfere with either the algorithms Google applies or how it designs its search results pages. It would, however, mean that when Google shows comparison shopping services in response to a user's query, the most relevant service or services would be selected to appear in Google's search results pages.

And the following snippets are applicable to the Android operation system for smartphones and tablets:

Antitrust: Commission opens formal investigation against Google in relation to Android mobile operating system

Brussels, 15 April 2015

The European Commission has opened formal proceedings against Google to investigate in-depth if the company’s conduct in relation to its Android mobile operating system as well as applications and services for smartphones and tablets has breached EU antitrust rules.

The Commission will assess if, by entering into anticompetitive agreements and/or by abusing a possible dominant position, Google has illegally hindered the development and market access of rival mobile operating systems, mobile communication applications and services in the European Economic Area (EEA). This investigation is distinct and separate from the Commission investigation into Google's behaviour in internet search.

Since 2005, Google has led the development of the Android mobile operating system. In recent years, Android has become the leading operating system for smart mobile devices in the EEA, to the extent that today, the majority of smartphones in Europe are based on Android.

Android is an open-source mobile operating system, meaning that it can be freely used and developed by anyone. The majority of smartphone and tablet manufacturers, however, use the Android operating system in combination with a range of Google's proprietary applications and services. In order to obtain the right to install these applications and services on their Android devices, manufacturers need to enter into certain agreements with Google.

Following the receipt of two complaints, as well as an initial investigation carried out by the Commission on its own initiative, the Commission has now opened a formal investigation to assess if certain conditions in Google's agreements associated with the use of Android and Google’s proprietary applications and services breach EU antitrust rules.

Of course, Google went through great lengths to deny all allegations from the European Commission. It tried to make these two high profile cases seem like an attack from the European leaders against the free market in general and extremely successful businesses in particular: as the result of envy, instead of the fruit of thorough research.

Yet, I have the opinion that these investigations probably aren’t that and I am quite certain that the European Commission has a viable case against Google. Although both investigations cover a different area of operations within the Google company, there is one common factor in it:

From a position of sheer global dominance, an almost unbelieve coverage and usage ratio in the whole EU in particular, as well as an overwhelming financial fire-power, the company Google does everything to maintain and expand its position of market leader on the markets for search engines, online adverts, content management (blogger) and mobile operating systems. In the process, Google tries to maximize the yields of these business areas, which is by itself justifiable.

Google does so using legally accepted methods; f.i. by continuously improving their main products and thus offering the best quality in products and services or through the acquisition of companies in the same business areas and incorporating their products in Google’s services portfolio. Both are of course perfectly legal.

However, allegedly Google also uses a illegal modus operandi in both its search engine and its mobile operating systems, in which the competition eventually bites the dust, without ever having had a chance for a fair fight against this information behemoth.

These allegations are especially serious, as perhaps not “de jure”, but definitely “de facto”, Google has a near monopoly (actually an oligopoly) in the market for search engines, online adverts and mobile operating systems: all markets, in which Google is the strongest party, leading in sheer numbers by lightyears.

When this company is using its company size, financial firepower, coverage and usage ratio and dominance in the European and global markets to press its competitors away from the market, allegedly by deploying a set of ‘foul tricks” and dishonest working methods, it is justifiable that the European Commission steps in.

Not only will these steps of the European Commission be a painful warning towards Google itself, but also a firm warning from the European Union in the direction of other near-monopoly players in the information and social media industry: Facebook, LinkedIn, Twitter, Apple and Uber, to name a few.

“Play by our rules or face the grim consequences from our policies and regulations!”

These days, it is not yet certain that the European Commission has an ironclad case, in which it can prove all of its allegations against Google. However, the EC's past of similar allegations against other companies, has proven beyond a reasonable doubt that the Commission does not shoot with rubber bullets and can inflict some serious pain among companies, offending its rules.

I sympathize with the commission in this matter and hope for a firm but fair investigation. I am always very reluctant when companies get such a powerful position on the world market, especially when they have the smell of abuse floating around them.

And when Google would be freed from all allegations after all and it would be decided by the European Commission that the company does business firmly, but fair, that would also be good news for the rest of the world.

So let’s find that out!