The current market turmoil and the end-of-the-eurozone prophecies raise two questions in my mind:
Are the prescriptions given in the latest spate of Council opinions wrong?
If not, do the governments lack credibility when it comes to restoring sustainable growth and budget discipline?
These questions are especially acute with regard to the PIIGS, but how about the Dutch, often seen as a hard-working Northern breed of the Germanic type?
This long blog series invites readers to judge the Council opinions and the prospects for corrective action for themselves.
The economic policies of the EU member states are regarded as a matter of common concern, but left to be coordinated among the governments (Article 121 TFEU). Some of these governments were really proud of this, when they announced the contents of the Lisbon Treaty.
With markets suddenly distrustful and many economists appearing as doomsday prophets, the economic policies have become a real concern – for everyone – but potential remedies seem to take a lot of flak.
As it is, stability programmes for eurozone countries on the one hand, and convergence programmes for member states still without the euro on the other hand, are part of the ongoing dialogue between the European Union and the member states.
There are some background remarks on economic policy coordination in the European Union in the blog post EU: Useful stability and convergence programmes? (3 June 2010). For a fuller view, you can read the provisions on economic policy in the Treaty on the Functioning of the European Union as well as the relevant protocols.
The Council issues its assessments and recommendations individually for each member state.
Now in turn is the EU Council opinion on the stability programme of the Netherlands, which has been a member of the eurozone since 1999:
COUNCIL OPINION on the updated stability programme of the Netherlands, 2009-2012; published OJEU 4.6.2010 C 146/12
Even if it has taken the European Union more than a month to publish the Council opinions officially in the OJEU, they concern the economic prospects in the medium term. As such, they should be useful with regard to our initial questions.
On 26 April 2010 the Council of the European Union examined the updated stability programme of the Netherlands, which covers the period 2009 to 2012. The Council began its assessment with a brief description of the economic situation:
In 2009, economic activity experienced a severe contraction of 4 %. The fall in world trade hit the Dutch economy relatively hard, resulting in a negative contribution of net exports to growth. Domestic demand also put a drag on growth throughout the year as private consumption decreased due to important negative wealth and confidence effects, and investment suffered from decreasing demand, lower profitability and tightening credit conditions. Government consumption was the only demand component supporting economic activity, mainly due to the 1 % of GDP stimulus package implemented in line with the EERP [European Economic Recovery Plan]. For 2010, GDP growth is expected to be positive again, most likely driven by net exports on the back of the recovery in world trade. Private consumption is set to remain subdued, as real disposable income is negatively affected by lower wage growth and increasing unemployment and investment is expected to suffer from the low capacity utilisation rate, decreased profitability and still difficult credit conditions. The budgetary position eroded very quickly in 2009 from a surplus of 0.7 % of GDP in 2008 to a deficit of 4.9 % of GDP as a result of the recovery measures taken by the government in response to the economic crisis, the full working of the automatic stabilisers, and decreasing gas revenues. For 2010, a further deterioration is foreseen. The 2009 budget deficit in excess of the 3 % of GDP reference value triggered an excessive deficit procedure. In this context, the Council issued recommendations to the Netherlands in December 2009, setting 2013 as the deadline for correcting the excessive deficit. Bringing the deficit below 3 % of GDP by that date will be one of the main policy challenges for the Netherlands. Other challenges include addressing the long-term sustainability of public finances, the continued strengthening of confidence in the financial sector, and ensuring access to finance for the corporate sector.
After a detailed discussion, and in the light of the recommendation under Article 126 TFEU of 2 December 2009, the Council of the European Union invited the Netherlands to:
(i) in the context of the fundamental budget review, specify the measures supporting the consolidation from 2011 and especially in the following years, further strengthen the consolidation effort to secure the required average annual fiscal effort to bring the deficit below 3 % of GDP by 2013, and throughout the programme period use windfalls related to an improvement of the macroeconomic and fiscal outlook to accelerate the deficit reduction and the decline of the gross debt ratio back towards the reference value;
(ii) further improve the long-term sustainability of public finances by implementing structural reforms that curb the projected increase in age-related expenditure.
The Netherlands are also invited to provide more information on the path and the broad measures underpinning the envisaged consolidation in the outer years as soon as the information becomes available and at the latest in the EDP [excessive deficit procedure] chapter of the forthcoming Stability Programme.
Eurozone financial stability
On 31 May the European Central Bank (ECB) published its Financial Stability Review June 2010, which assesses the stability of the euro area financial system both with regard to the role it plays in facilitating economic processes and with respect to its ability to prevent adverse shocks from having inordinately disruptive impacts (page 7).
The Financial Stability Review (225 pages) offers a view of the inter-related financial markets and the consolidation measures of eurozone governments.
Naturally, the Netherlands is represented in the unofficial Euro Group, which plays an important part in the efforts to restore fiscal stability in the euro area. The Euro Group president is Jean-Claude Juncker, the prime minister of Luxembourg, where the finance ministers of the eurozone countries met today, Monday 7 June 2010.