While all the current focus is on the challenge to austerity thrown up by the French and Greek elections, it may be salutary to look at an equally recent challenge that failed. Towards the end of April the Dutch conservative coalition government collapsed, when the far right party refused to discuss further budget cuts. The Prime Minister resigned. And yet a few days later other parties rallied round to give their support to a similar package of austerity measures, which now have majority support in parliament.
This austerity was not required by the bond markets. The government can borrow at very low interest rates: 2.3% on 10-year bonds. (Predictably a ratings agency made noises about the country losing its triple AAA after the government collapsed, although not the same one that infamously downgraded US debt last year.) It is definitely not required by the state of the Dutch economy: GDP is expected by the IMF to fall by 0.5% this year (that’s a -0.5% growth rate), with unemployment rising from 4.5% to 5.5%. So what could have led a government to try and cut spending and raise taxes at such a time to the extent that it brings the government down? The answer is the ‘Excessive
Debt Deficit Procedure’ (EDF)
of the EU’s Stability and Growth Pact. The budget deficit as a percentage of
GDP was 4.7% in 2011, down from 5.6% in 2009. Without these measures it would probably
have stabilised at around 4.5% of GDP, and the objective of these additional
cuts is to bring it down to 3% by 2013.
This is worse than trying to balance the budget in a recession – it is trying to reduce the budget deficit in a recession. (A small caveat – part of the package is an increase in VAT, which if delayed and phased could stimulate demand in the short run.) Now these measures, like raising the retirement age, may be perfectly sensible from a longer term perspective. But, VAT aside, they should not be introduced in a recession. What is really depressing from a Eurozone perspective is why the package appears to have been implemented now at such great political cost. The timing is all about the EU’s deficit limits, and a belief that Netherlands has to show the rest of Europe an example. The finance minister said the plan would send Europe “a signal of solid government finances”.
An irony here is that the Netherlands has a longstanding and very well regarded fiscal council in the form of the Central Planning Bureau (CPB). One of things the CPB does is cost both government and opposition budget plans before an election, something Simon Johnson has recently suggested the CBO could do in the US. So the argument that austerity has to be implemented now rather than later because institutions are weak is even flimsier in the Netherlands than elsewhere. Unfortunately, it appears the CPB has not managed to educate the majority of politicians about the foolishness of pro-cyclical fiscal policy.
From a Eurozone perspective this is a disaster. The Eurozone is cutting its cyclically adjusted deficit faster than the US or even the UK and heading for a second recession, and possible political disintegration. As I and others have discussed, with Germany there is at least an argument that with unemployment falling there is no scope for any fiscal stimulus there. Yet unemployment is rising in the Netherlands. There is no, and I repeat no, good macroeconomic reason why a stimulus package should not be implemented here. And yet we get exactly the opposite.
"This is an unbelievable achievement," the now caretaker Prime Minister told MPs after clinching the new deal.