Posts Tagged ‘holland’

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It’s an odd thing, isn’t it? Not so long ago, people were talking about Belgium as being the country in northern Europe that was most in danger of going the way of Spain, Portugal and co. And for a long time, Holland – along with Germany and Finland – had been lecturing the rest of Europe about the need to live within one’s means. All of a sudden it looks a lot different. Holland is fast becoming the sick man of northern Europe, and the reason? Well, let’s hope George Osborne is paying attention, because it is a lesson he could do with learning.

According to data out recently, the Eurozone is out of recession. The German economy grew by 0.7 per cent, France by 0.5 per cent, and at face value it was encouraging stuff, but among all that good news there was one piece of worrisome news. The Dutch economy contracted by 0.2 per cent. It was not really a surprise. It contracted in the last quarter too, and the one before that and before that. In fact the country has been in recession for 18 months now. That makes this one nasty recession, but just remember, it was also in recession in 2008/09, so for Holland it has been a double dip of truly unpleasant proportions.

The reason is not rocket science.

During the boom years Dutch house prices rose too high – way too high. Seduced by the idea that owning a house in Holland was a sure-fire investment winner, sucked into the narrative that a shortage of land meant that house prices across the Netherlands were guaranteed to rise, urged on by a government that subsidised mortgages, the Dutch borrowed against their home, and borrowed against the belief their home would rise in value and they ran-up huge debts.

It really is a puzzle. Among those who lecture us the most about the need to live within our means – so that is Dutch and British finance ministers for example – there seems to be a kind of casual disregard for household debt. We must live within our means, unless that is to say you are a voter, in which case, borrow, put it on the plastic – it matters not, your home will rise in value.

According to OECD data, household gross debt to gross disposable income in the Netherlands is 285 per cent. This is the highest ratio across the OECD. To put those numbers in context, the equivalent ratio in the US for 2008 was just 108 per cent. In the UK the ratio is 146 per cent – which most would agree is worryingly high – and yet the UK household debt levels seem like prudence personified compared to those of the Dutch. Dutch house prices fell sharply in the first quarter of 2013, in 2012 and 2011. Yet despite the falls, Dutch house prices to incomes are still above the average for the country – although admittedly not by much.

Government debt is not so bad. Gross government debt is 71 per cent of GDP, net debt just 33 per cent, which is the lowest among the Eurozone’s bigger economies. Holland’s government appears to be in love with the idea of austerity; of prudence keeping government debt under control.

Yet consider what might happen if households find they just can’t afford their debt. Imagine what might happen if global interest rates rise, which they are likely to do over the next few years. If households find they cannot pay their way; if there is a surge in the number of properties repossessed by the banks, the chances that Holland will experience its own Northern Rock type moment seems real. The possibility of a Dutch banking crisis is very real. Yet the consensus among economists towards Holland seems to be one of relaxation. The country still boasts a top notch credit rating, for example.

The thing about austerity is that it matters not how prudent a government is, how clearly it balances its books (not that the Dutch government is balancing its books), when households run-up debts, and house prices crash, household debt can become government debt. This is what happened in Spain two years ago. It may happen in Holland, and may well happen in any country where the government tries to stimulate house prices, creating consumer confidence, in turn creating growth. Are you listening Mr Osborne?

© Investment & Business News 2013

And so it came to pass that the Cyprus parliament was not happy and rejected what was possibly the maddest idea ever put forward to bail-out a country. The vote was a close run thing, with 36 members of the Cyprus parliament voting against the bank levy and 19 abstaining. The number of MPs voting for the proposal reached a grand total of zero.

Good for Cyprus. Now it has to decide what to do next.

It could do a lot worse than consider the lesson of Iceland. In 2007 Iceland’s GDP was 1.293 trillion kronor. In 2008, its external debt was 9.533 trillion.

You may remember that when the scale of Iceland’s problem emerged, and when the UK press found out that UK citizens and local authorities had exposure to Icelandic banks, the country was made to do the walk of shame. Its representatives were hauled up by the British media: “Are you ashamed?” they were asked, and: “What are you going to do about our money?”

The UK used anti-terrorism legislation to freeze Landbanki assets. This was not a move that endeared Britain to the Icelandic people, but maybe the UK felt it had an opportunity to exert revenge over the cod wars, and the Viking invasions before that.

Back in January of this year, the court of the European Free Trade Association – one of those cursed EU courts that should be banned because it tries to consider all points of view and not just the UK’s position, or indeed the position of the UK tabloids – ruled in favour of Iceland over the UK and Holland. Its decision means that the little island to the north west corner of Europe will repay the money it owes to the UK and the Netherlands gradually, and under its terms.

Today, Iceland and its people are still suffering. But then again, it has enjoyed seven successive quarters of growth. It is not easy repaying debts when the money you owe is valued in a foreign currency and the currency in which you receive your salary crashes. Iceland was pretty much left high and dry by the international community (you are on your own mate, was the general feeling attitude in the UK). The IMF did loan out money, but as usual under terms that were very painful. Iceland eventually responded by having bank loans to its citizens valued in foreign currencies declared illegal. Other legalization enabled many homeowners with negative equity to write-off much of their debt.

Ironically, Iceland may yet see a pretty sensational turnaround, and become one of the wealthiest countries in the world on a per capita basis thanks to its one of the island’s most famous natural resources, but one we don’t usually think of as resource at all. Plans are afoot to pipe heat from Iceland’s volcanoes and lava flows, and – via the magic of thermal energy – heat northern Europe. Iceland may yet have the answer, or at least a partial answer, to the energy crisis, and one that does not risk exacerbating global warming.

Iceland also has rather a lot of something else. What is it now? Oh yes, that’s right, ice. Maybe it could use that to cool down the Sahara – all we have to do to achieve that is to solve the minor problem of working out how to transport ice a few thousand miles without it melting.

Cyprus has neither ice nor lava, but it does have a lot of natural beauty.

Its future will be best served outside a Eurozone that has completely failed to come to its rescue in its hour of need. It may be better off with a cheaper currency, and laws designed to protect its citizens over the interests of foreign investors, whilst at the same time welcoming foreigners who can boost its economy. Best of luck to you, Cyprus. Anyone fancy moving there?

©2013 Investment and Business News.

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The political entanglements in the euro area are escalating. Last week a triumvirate of finance ministers from Germany, Holland and Finland put a rather large spoke in the wheel. You may know that during the summer it was agreed that Spain’s banks could be bailed out directly by the IMF, EU Commission and the ECB via the organisation called the European Stability Mechanism (ESM).  But last week the three finance ministers issued a statement saying: “The ESM can take direct responsibility for problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities.”  So what was that: “legacy issues”? What does that mean? Were they referring to bank bail-outs that occurred some time ago, such as Ireland’s? If this is the case, their statement seems pretty reasonable. Alternatively, were they referring to the bail-out of Spain’s banks? Many interpreted it that way, leading to claims that Spain had been betrayed.

Meanwhile, Helmut Kohl – who as you may recall was German Chancellor during German reunification, and an out and out supporters of the euro – made a speech in which he said of Angela Merkel: “She is destroying my Europe.” He called for giving Greece more time to make its reforms.

Then there was Vaclav Klaus, President of the Czech Republic. When his country joined the EU, its leaders signed a treaty agreeing to also join the euro at some point in the future. But the treaty imposed no time frame. So when did Mr Klaus think this will happen?

“Perhaps in the year 2074 we can join the European Monetary Union,” he said last week.

So that wasn’t very nice about the euro, was it?

In the UK, calls for a referendum on staying in the EU are growing, and the talk is that David Cameron will pledge to hold such a referendum if he wins the next election.

That’s the snag. Either the euro falls apart, which – according to many – will be a disaster for the world economy, or we see closer political union, which will probably leave the UK’s membership of the EU in tatters.

But there is a third way. The euro could survive, without political union.

Also see the following related articles:

Is there hope for the euro? Catalonia’s rift with Spain
Spain’s woes are not down to debt
Catalonia’s strife; currency’s knife
Political shenanigans in Europe
The fix to the euro crisis

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here