Economic and Political Setup of the Netherlands


Introduction: The Netherlands is a parliamentary democracy in North-west Europe and has been playing a special role in the European economy for many centuries. The country capital is Amsterdam and the seat of government is The Hague. The Netherlands’ location gives it prime access to markets in the UKand Germany, with the port of Rotterdam being the largest port in Europe.

The country is a founding member of the EU, NATO, OECD and WTO. According to the IMF, Netherlandshas the tenth highest per capita income in the world.

In October 2010, the former Netherlands Antilles was dissolved and the three smallest islands – Bonaire, Sint Eustatius, and Saba – became special municipalities in the Netherlands administrative structure. The larger islands of Sint Maarten and Curacao joined the Netherlands and Aruba as constituent countries forming the Kingdom of the Netherlands.

Credit Rating: Netherlands has been given the highest credit rating by S&P, Moody’s and Fitch rating agencies. In July, Fitch in its release added that the stable rating outlook reflected its “assessment that theNetherlands ‘AAA’ status remains resilient to the eurozone crisis. However, later that month, Moody’s changed its sovereign ratings outlook to negative.

 

Agency S&P Moody’s Fitch
Rating AAA Aaa AAA
Outlook Negative Negative Stable

Economic Analysis: The Netherlands has a market-based mixed economy, ranking 13th of 157 countries according to the Index of Economic Freedom. In Q2 2012, GDP expanded 0.1% qoq. According to a report published by the World Bank, the GDP of the country was worth $836.3 bn in 2011. The economy is noted for stable industrial relations, moderate unemployment and inflation, a sizable current account surplus, and an important role as a European transportation hub. Inflation rose 2.3% yoy in July 2012, compared with a figure of 2.1% in June. The unemployment rate was last reported at 6.6% in September. Unemployment has been increasing since the middle of 2011, particularly due to an increase in labour supply. The CPB expects the 2013 budget deficit to be 2.7% of GDP. It also forecasts that static purchasing power will decline by 1.75% this year, mainly due a decline in real wages and increases in pension fund contribution. At the end of 2011, the debt to GDP ratio was 65.2%. Being a member of the EU, the Euro (€) is the official currency of the Netherlands.

Industrial activity is predominantly in food processing, chemicals, petroleum refining, and electrical machinery. A highly mechanized agricultural sector employs only 2% of the labor force but provides large surpluses for the food-processing industry and for exports. However, each sector has its own challenges and opportunities. For instance, the port of Rotterdam and Schiphol airport are both working hard to stay ahead of other ports and airports competing in the global logistics sector. Some of the sectors in which theNetherlands excels globally include agri-food, horticulture, logistics, life sciences and chemicals. The services sector contributes approx. 73% to the GDP.

ECONOMIC POLICIES

The Netherlands has strongly advocated European integration, and most aspects of their foreign, economic, and trade policies are coordinated through the European Union (EU).

The Netherlands Central Planning Bureau for Economic Policy Analysis (CPB) is the world’s oldest fiscal watchdog and was founded directly after World War II in 1945 by Jan Tinbergen. In the course of its lifetime, CPB has obtained a strong reputation in Dutch society. It is a widely trusted source of economic analysis on a wide range of issues. CPB provides, for example, the short-run macroeconomic forecast used in the budgetary process, the mid- and long-term prospects for public finance, and cost-benefit analyses of all kinds of policy proposals (ranging from tax policy to social security and from education to physical infrastructure). A special feature is CPB’s assessment of a political party’s election platforms prior to general elections. Though participation in this assessment is voluntary, all major parties do so. CPB plays therefore a central role in the Dutch debate on economic policy.

Trade Data: The Netherlands is in the top 15 of main trading partners for all EU countries. TheNetherlands is the main trading partner for Germany and the second most important for Belgium. Dutch trade is also very important for the UK and Luxembourg, as the Netherlands takes a third and a fourth place respectively. The reason why the Netherlands is also the fourth trading partner of Finland and theCzech Republic is due among other things to the relatively large flows of re-exports from the Netherlandsto these countries. The Dutch economy is very open and relies on international trade. One of the more controversial international issues surrounding the Netherlands is its liberal policy towards soft drugs and position of the Netherlands as one of the major exporters of hard drugs.

Monetary policy: The Dutch economy is highly dependent on economic developments in Europe. A financially healthy Europe and a stable euro are therefore very important to the Netherlands. Every EU member state pays an annual contribution to the European Union (EU). The amount it pays depends on the amount of the EU budget, the national incomes of all the member states combined, and the national income of the member state concerned. With the money it receives from the member states, the EU formulates a common monetary policy and also aims to tackle cross-border problems in areas like economic development, the fight against crime, agriculture and infrastructure. In 2012, the Netherlands is expected to contribute €6.7 billion to the EU budget, from which it will also receive approximately €2 billion, mainly in the form of agricultural grants, structural funds and research grants. The European Central Bank (ECB) has adopted a specific strategy to ensure the successful conduct of monetary policy. Its primary objective is to maintain price stability by keeping inflation rates below, but close to 2% over the medium term. In June, the ECB lowered the main refinancing rate and the deposit rate by 25 basis points to 0.75% and zero respectively.

Fiscal Policy: Dutch fiscal policy is in line with the EU framework of a balanced budget,

which seeks to reduce public spending and lower tax and social security contributions. After the financial crisis, the government aimed to stimulate the domestic economy by accelerating infrastructure programs, offering corporate tax breaks for employers to retain workers, and expanding export credit facilities. While the government will remain heavily involved in financial sector in the short run, the government will seek to divest from its equity investments in major banks.

CURRENT CHALLENGES

 

  1. Break up of the Eurozone: Netherlands has benefitted a lot from the EU which facilitated free movement of goods and services to the other member nations, thus contributing to the increase in Dutch exports. If the European economy performs poorly, Dutch exports will be affected, as will pensions, savings and employment prospects.
  2. Burden of austerity measures: Dutch economic growth is dampened somewhat by the austerity measures and tax increases introduced by the cabinet coupled with the impact of the worldwide slowdown in growth that commenced in early 2011. Consumption taxes will rise, health care will be slashed and pensions cut. Following the re-instatement of the Mark Rutte led coalition, economists expect that the unemployed will be forced into low-wage work by a reform of unemployment benefits modelled on Germany’s Hartz IV program, introduced by German social democrats (SPD) and Greens.
  3. Growth slowdown: According to the CPB’s macro economic outlook, GDP growth is projected not to increase during the second half of 2012 and for the year as a whole will show a decline of 0.5%.
  4. Fiscal consolidation: Another major challenge for the Dutch Government is to maintain its current fiscal consolidation efforts, which are necessary for restoring fiscal sustainability. The consolidation package seems to be somewhat back-loaded as of now, with roughly equal consolidation efforts up to 2012 and in the period 2013-15. 80% of its consolidation measures are based on expenditure-reduction, progress still needs to be made on the revenue enhancement front.
  5. Labour productivity: Over the past two decades, hourly labour (and multifactor) productivity growth has tended to be below those in many other countries (see Figure 4). Part of this reflects the extensive labour hoarding that has characterised the labour market during recessions, but it is also an indication that the labour market may not be sufficiently effective in transferring labour resources to new and faster growing sectors and adapting to new productivity-enhancing technologies.

RECOMMENDATIONS

Looking ahead into the near future, the recovery is likely to resume in the second half of FY2012-13. In the longer term, the government is faced with the challenge of ensuring that the economy continues to benefit from globalisation, which requires efforts in adjusting business sector and labour market policies. Current fiscal targets imply a pro-cyclical stance for the next couple of years.

The Netherlands is likely to benefit more than other countries from a recovery in world trade. The Dutch export market performance has been relatively good with an overall gain in export market shares over the past decades, in contrast to the falling export market shares experienced in many other OECD countries. The export of domestically produced goods profits from the low value of the euro and from a relatively limited rise in labour costs, and therefore is projected to develop more positively than could be expected based on international trade.

Its strength will depend mostly on the vigour of the expected pick-up in world trade. The associated acceleration in exports will feed into the domestic economy largely via business investment, which, however, will be restrained by the low capacity utilisation rate.

However, domestic demand consumption is likely to remain subdued over the next two years. The slow expansion of domestic demand also means that unemployment is set to increase further, possibly until end-2013. The rise in VAT, persistent problems in the housing market and negative real wage growth are likely to continue to pressure households and consumption should remain lacklustre into 2013. Hence, I would remain NEUTRAL on Netherlands and wait for further improvements in the euro area before investing in the country.


This article has been written by Vernon Fernandes, a first year management student at SIMSREE.

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