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Dutch political crisis and Lombard Street
The Dutch government is entering a highly uncertain phase. Late March, the goverment was robbed of its one seat majority in Parliament. A prominent politician of the PVV, the party of Mr. Geert Wilders that supports the minority government of prime minister Mark Rutte, defected from his party. As of yet, it is not clear how long Mr. Rutte will be able to muster sufficient support for his policies in Parliament. Meanwhile, the coalition parties and the PVV are struggling with measures to lower the budget deficit, currently at 4,5 percent, to 3 percent of GDP. Budget cuts of at least 9 billion euro are needed in order to meet the fiscal demands of the European Commission in 2013.
A few weeks before this political mess erupted, the PVV presented a report on the benefits of the Netherlands leaving the eurozone and returning to the guilder. The report was commissioned by the party of Geert Wilders in order to substantiate its anti-euro sentiments. Though Wilders is best known for his anti-muslim and anti-immigration stance, ever since the crisis of the eurozone broke out, he has objected any kind of support for embattled euro-countries. In fact, the PVV refuses to support the government’s European policies.
The report, The Netherlands and the euro, was written by Lombard Street Research, a London based financial consultancy firm.
The publication was largely derided, ignored and dismissed as irrelevant. The research, Dutch critics stressed, was tainted by the acknowledged eurosceptic position taken by Lombard Street. Charles Dumas, the chairmain and chief economist of LSR who gave a technical explanation at the presentation of the report on March 5th, started saying: ‘We are eurosceptical. We said it [monetary union] would not work. And it has become clear that it has not worked.’
As the outcome was predicatable, attention for the Lombard Street report evaporated quickly. In fact, LSR’s analysis of what went wrong in the monetary union, is not that controversial. It stresses hat the eurocrisis not a problem of budgetary deficits, like the European Central Bank and European Commission maintain, but a balance of payments problem. It highlights that one monetary policy and differences in economic performances undermine competiteveness in weak countries and cause the euro exchange rate to be undervalued for strong countries like Germany and the Netherlands. It also highlights the strong capital demands that not just Greece, but also Portugal, Spain and Italy have to make in the years to come.
This eurosceptical views of Lombard Street is obvious throughout the report. It argues that 1. The Netherlands has lost economic growth and Dutch citizens have lost purchasing power in the ten years of the euro when compared to Switserland and Sweden; 2. Costs of continued support for the ‘Med-Europe’ countries and Ireland are huge and there is a high probability of a break-up of the eurozone and 3. Though costly in the first year, the Netherlands would be best off leaving the eurozone at the earliest possible moment.
The brings Lombard Street to the conclusion: ‘While unquantifiable, no spurious counterfactual story is required to show that EMU membership to date has imposed substantial welfare losses on Dutch citizens. Their own superior pre-euro performance, coupled with their subsequent inferiority compared with Sweden and Switzerland, is undeniable. Wasteful investment and intractable Med-Europe deficits, with continued dependency, make for a stressful future. It is difficult to see what explanation there could be other than the euro.’
Satisfied with this outcome, Mr. Wilders claimed that Lombard Street had proven that a Dutch exit of the eurozone was economically possible and politically desireable. He called for a referendum on a return of the guilder. Those who warned about the dire consequences of exiting the euro, he called ‘fear mongerers’. It wasn’t clear if Wilders understood the complex graphs that Charles Dumas presented, but he echoed Dumas’ remark that the monetary union suffers of a flaw called ‘one size fits none’.
As soon as the report became public, criticism on the outcome of the research prevailed. For one, there was no quantified proof that leaving the eurozone would actually be profitable. The effects on the exchange rate of a ‘new guilder’ were dismissed. The income comparisons with Sweden and Switserland were contested: no comparisons were made with non-euro countries like Denmark and the UK. Besides, specific Dutch aspects of recent years that have hampered growth - like the housing bubble and the pension crisis - were simply ignored.
Economists derided the qualitiy of the report. A well-respected professor of monetary economics of the Rotterdam Erasmus University, Ivo Arnold, bluntly stated that if a student had handed in this report as an academic paper, he would have failed him.
Politicians of all parties except the PVV also dismissed the results of Lombard Street. Even the Socialist Party, critical of the euro and like the PVV against pouring Dutch money into Greece, distanced itself from the report. Prime minister Mark Rutte shrugged his shoulders and a leading opposition politician defied Geert Wilders to present the presumed benefits of reintroducing the guilder in the political negotiations on the budget cuts for next year.
The problems for the government of Mr. Rutte have not subsided, though. After the defection of the parliamentarian of the PVV and with new, vigorous leadership of the main opposition party, mustering a majority in Parliament for its euro policies and for tough budget cuts have become a hard nut to crack.
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