The Dutch Auction

Following points made by both Frans and Elliott in the comments sections, the Netherlands may well in fact breach the 3% growth and stability pact limit next year. I bet Zalm is blogging away more furiously than ever. But who will be the object of his wrath this time?

The Dutch Central Planning Bureau, a government sponsored think-tank which prepares the economic forecasts underlying the official government budget projections, released a new set of estimates yesterday. They show the budget deficit at 3% of GDP this year and slightly above the 3% Maastricht limit in 2004. The underlying assumptions for GDP growth are -0.75% for 2003 and 1.0% for 2004, broadly in line with our own growth forecasts. The Finance Ministry still expects a deficit of only 2.7% of GDP this year. While the new CPB forecasts caused a stir in the media and markets, we have long warned about the risk of a sharper than expected deterioration in the Dutch budget deficit. A breach of the 3% Maastricht limit would be especially poignant for the Netherlands, which is one of the leading proponents of the Stability and Growth Pact. Note that the EU Commission clarified yesterday that they so far don’t see the Dutch budget deficit breaching the 3% limit, so the excessive deficit procedure will not yet be triggered.

Source: Morgan Stanley Global Economic Forum

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

6 thoughts on “The Dutch Auction

  1. After the way France and Germany were left off, there is now no incentive for the Netherlands government to comply with the terms of the Stability and Growth Pact either and the EU Commission is hardly placed to do anything about it without applying double standards. No wonder Trichet is concerned about the credibility of the Euro being at stake.

  2. If the Stability Pact’s requirements were truly to the ultimate benefit of the member countries, then there would be no reason for the Netherlands to abandon the Stability pact just because France and Germany can’t/won’t comply.

    More importantly: What does the E.U. do to get beyond this ? That’s the true credibility test.

  3. I don’t follow your logic Patrick.
    Not to defend Zalm nor the SGP but the pact was a contract, an agreement in the first place.
    If almost all involved parties do not comply with what is agreed upon it can be wrong for all countries if one sticks to it.

  4. Zalm wrote very little in his log ( on the subject.
    He reports being praised by Wellink (head of the national bank) and critics in his e-mail. On the later he comments: (my translation)
    ?I don?t see leaving Europe or the Euro as realistic alternatives. Two thirds of our export goes to Europe and so absence of riscs on the exchange rates is very important. Look at Sweden and Denmark: the had to link their coins to the Euro. So they have higher interest rates then we while international investors avoid them.?

  5. ?I don?t see leaving Europe or the Euro as realistic alternatives”

    What’s interesting here is that he’s even pontificating in public on this. If exchange rate hedging is all he’s worried about the euro really is skating on thin ice.

    “If the Stability Pact’s requirements were truly to the ultimate benefit…..”

    I don’t follow your logic here either Patrick. Obviously lots of people would benefit from giving up smoking, but when push comes to shove they take it up again (90% or something). This doesn’t imply that smoking is good for you.

    You can of course argue the stability pact was a bad thing, but I doubt that this point will help you.

    The big question is what comes next.

    The interest rate question is interesting. If deflation comes, then the ECB could be pegging close to zero, and those countries with the biggest mid-term deficit problems – Italy, Spain etc could be paying quite a high risk premium to attract finance for the debt. In Spain this would have the consequence of virtually bankrupting all those young people who have recently taken out giant mortgages.

  6. With this, it looks as though Eurozone interest are set to rise:

    “The European Central Bank is set to increase its inflation forecast for 2004, raising fears that it might come under pressure to lift interest rates from their post-war low of 2 per cent sooner than expected.

    “The ECB’s twice yearly projections are expected to forecast inflation of close to 2 per cent next year, well above the 1.3 per cent estimated in June this year. . .

    “The ECB’s June inflation forecast, a key factor behind its decision to slash rates this year amid fears of eurozone deflation, has proved wildly optimistic. Instead of steep price falls, eurozone inflationary pressures have been far more stubborn than expected and again threaten to bruise the inflation fighting credibility of the ECB.”

    – from Financial Times 1 December 2003

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