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3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

Why is the Netherlands doing so badly?

Eurozone economy Euro Why is the Netherlands doing so badly? 39 JUNE 16, 2016 9:29 PM

39

JUNE 16, 2016 9:29 PM

for residents of the euro area: Some might blame the weak growth figures on the failure

Some might blame the weak growth figures on the failure of many European governments, particularly France and Italy, to sufficiently embrace “reform”, whatever that means. (We’ve also been told Greek governance leaves something to be desired, especially by people who think the debate over the true size of the debt misses the point.)

While we happily admit better institutions can make countries richer and improve their resilience to the vicissitudes of the business cycle, this explanation fails to convince.

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

Consider the Netherlands.

By any Teutonic measure of “competitiveness”, the Netherlands is a standout performer. It has the biggest current account surplus (https://www.imf.org/external/pubs/ft/weo/2016/01/weodata/

Davos), effectively tied with Germany. By comparison, France is ranked 22nd, Spain is 33rd, Portugal is ranked 38th, and Italy is ranked 43rd.

3.%23%23%23), a reasonable measure of the economy’s underlying vigour, is still about 5 percentage points below the pre-crisis peak. That’s basically the same situation as in Italy (note the different y-axes, which we used because the starting levels are different):

which we used because the starting levels are different): The chart below compares changes, in percentage

The chart below compares changes, in percentage points, in the share of people aged 25-54 with a job in the Netherlands against the changes in euro area countries that at one point or another were considered to be in the “periphery”:

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

Why is the Netherlands doing so badly? | FT Alphaville From this perspective, the Netherlands has

Real household consumption per person (http://next.ft.com/content/35905817-573d-3aa6-8ebd-1 3b494e799dc) is probably the single best proxy of living standards. The Dutch are still consuming about 5 per cent less, on average, than they were almost a decade ago. That’s slightly better than Italy but significantly worse than France and Portugal:

than Italy but significantly worse than France and Portugal: What can explain this? If the problem

What can explain this? If the problem can’t be blamed on an “uncompetitive” economy suddenly forced to reckon with a reversal of capital flows, something else has to be to blame.

An interesting comparison, which we’ve looked at before, is Belgium (http://next.ft.com/content/ f60117b0-2dbb-3c84-a1df-f982c07ba97b). Unlike the Netherlands, but very much like an unhealthy combination of Greece, Italy, and Spain, Belgium entered the crisis with high government indebtedness, ultra-expensive labour costs, a worsening external position, a massive increase in house prices, and a dysfunctional political system. During the crisis, Belgian sovereign spreads widened sharply. Yet Belgium escaped unscathed (http://appsso.eurostat.ec.eur

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

3) , while the Netherlands has suffered: We’d identified several reasons Belgium did so much better

We’d identified several reasons Belgium did so much better than the other members of the “periphery” in our earlier post. Some — tight economic integration with the German export machine and a massive net foreign asset position — also apply to the Netherlands, so they can’t be sufficient to explain the disappointing Dutch data.

That leaves two other potential differences.

Belgium had somewhat looser fiscal policy than its neighbours, thanks in part to the absence of an elected government with the legitimacy to do anything. Excluding interest payments, Belgium’s budget deficit has only shrunk by about 1.5 percentage points of GDP (https://www.im

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

Why is the Netherlands doing so badly? | FT Alphaville From the peak in mid-2008 until

From the peak in mid-2008 until the trough at the end of 2013, Dutch house prices fell by 21 per cent. They’ve been recovering slowly since then, along with employment, but are still about 15 per cent below peak. By contrast, Belgian house prices continue to breach new highs.

As we discussed in our post on Belgium, its boom occurred from a low base and wasn’t fueled by excessive borrowing. Unusually, Belgian loan-to-value ratios were falling even as prices soared, while household debt remained tiny relative to income.

Past profligacy made the Dutch economy highly vulnerable to a reversal of fortune. Making matters worse, the Dutch legal system provides limited options for debt restructuring. (That’s a big difference from America’s system.) From box 2.4.1. of the latest European Commission report on the country’s macroeconomic imbalances (http://ec.europa.eu/europe2020/pdf/csr2016/ cr2016_netherlands_en.pdf), emphasis ours:

According to Statistics Netherlands, 1.5 million households held negative housing equity in 2014. Despite this still high number, the consumer insolvency procedure is not so attractive for holders of negative housing equity, because debt discharge may not be granted…An important feature of the consumer insolvency procedure is that the outcome of a debt restructuring or bankruptcy does not necessarily entail a debt discharge. The Wsnp

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

[acronym for Dutch name of bankruptcy law] establishes an elaborate settlement procedure. Applications are only admissible if previous out-of-court negotiations have failed.

When Wsnp debt restructuring is launched, a period of good conduct is imposed, generally three years, but possibly up to five years. During this period the debtor has to work and is granted an income comparable to the minimum wage by the rescheduling administrator. Other earnings and any income from foreclosed property flow into debt repayment. The administrator directly receives and checks all of the debtor’s mail during the first 13 months of the period of good conduct.

This draconian regime encourages Dutch households to slash consumption and prioritise debt repayment, a prescription that may sound familiar in the context of the euro crisis. In the Dutch case, the household savings rate (http://statline.cbs.nl/Statweb/publication/?DM=SLEN&PA=825

2,54-57,59-62,64-67,69-72,74-88&LA=EN&HDR=G1&STB=T&VW=T) rocketed up from around 5-6 per cent of disposable income to about 9 per cent:

5-6 per cent of disposable income to about 9 per cent: So what does all this

So what does all this tell us?

The Dutch economy began to recover around the end of 2013. Employment started picking up, house prices bottomed, and even real household consumption began to show signs of life. The same patterns can be seen in the Italian data. The question is why. Whatever the explanation, it likely tells us much more about the euro area’s weakness than any diatribe about the need for “structural reforms”.

Related links:

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

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3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

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Musso

Jul 7, 2016

A good article who tells why levels of households' debt shall be looked at always very carefully.

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Ewald Engelen

Jun 18, 2016

Lots of cognitive dissonance from Dutch commentators here: point of the piece is that pensions as well as mortgage savings are illiquid, and since loans are full recourse, negative equity as a result of a collapsing real estate bubble forces households to cut consumption to bring down their nominal mortgage debt. Add € 52 bn in mistimed and miscomposed (almost half consisted of tax increases) and you have the perfect recipe of a prolonged balance sheet recession.

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fazil.es

Jun 18, 2016

@Ewald Engelen not only Dutch people commenting here :-). Of course it is true that pensions saving are illiquid, would you recommend not to save instead? There might be room for improvement, but It seems to me that with their fixed rate mortgages and pension saving the Dutch might be quite secured, although it could have a negative impact in the short-term. What will happen in Spain for example when rates go up with variable mortgage rates and no pension saving? You might see a short-term benefit now on spending, but what will happen long-term? Very keen on getting to know your view thanks in advance.

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Ewald Engelen

Jun 20, 2016

@fazil.es 20 percent of Dutch mortgage loans have variable interest rates, a further 35 percent have fixed rates of 1-5 years, a further 40 percent have fixed rates of 5 to 10 years, and only 5 percent have fixed rates of more than 10 years. Plenty of accidents waiting to happen. Was not suggesting that saving for pensions was not a good idea, although it does mean that Dutch households run double risks when financial crises occur. On the liability side they (or their banks) may have trouble refinancing their mortgage loans, and the asset side they may be confronted with asset depreciation, again depressing domestic consumption.

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3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

I am a bit afraid of the effect when rates rise (hopefully they will at some point or we are the next Japan). As an analogy, on avg probably cheaper to drive without car insurance, however if you have an accident you will be suffering financially the rest of your life. If rates go up we have a car accident impacting millions of homeowners with variable rates. Please tell me who is better of long-term fixed rates and pension saving, or variable and no savings.

As someone who has lived all around Europe including the Netherlands I can attest that we probably should look them and the Nordic countries as examples instead of looking at incomplete analysis why they might do badly (of course there is room for improvement there as well).

If we would like a future as one collaborative EU we should focus less on transferring funds north to south, instead on focus on collaborative knowledge transfer projects. We laid this out on an article on our blog: "Pesetas? The united states of Europe the roadmap: the USE are far away. Will we ever get there?" If interested please read (just google the title) and let us know what you think.

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fazil.es

Apologies did not mean to write so much text in bold.

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Jun 18, 2016

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Egmont

Jun 18, 2016

@fazil.es About mortgage rates the situation is as follows now.

10 years ago rates dropped to 3,5% and many home owners fixed the rate for 10 years. So around this time the rate is renewed.

The options are multiple: fix at say 2,2% for another 10 years, put on variable and wait till the rates drop further (which they will) and fix long term then or fix for 1 year at 1,5-1,7% and then for a long term rate next year.

Others who are still in a fixed rate period paid a fine to get the freedom to chose a lower rate etc.

The bottom line is that the vast majority will be able to fix the rate at an ultra low figure once the rates start rising again (or they have already done so at the low rates). The result is that for the bulk of the home owners the low rates will be with us for the next 20-30 years.

The effects on disposable income are important as you can imagine. At the same time housing values rise considerably.

New home owners can get a 100% mortgage if their income allows it. Mortgages up to a quarter million euro are guaranteed by the state. This guarantee also kicks in when there is a financial problem

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

because of divorce f.i. This is all very different from Germany f.i. where one needs to bring in one's own home equity.

Finally the interest payed is deductible.

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fazil.es

Jun 18, 2016

@Gesytwenssen thank you for your reply, I did understand this. Apologies if I did not write it down clearly. My point was that in the Netherlands we see the impact of the low rates on disposable income much later due long-term fixed rates. In other countries (used in the article as comparison) almost all people have variable rates so direct impact of low rates. As a conclusion, fixed rates together with large savings locked up in pension will have a short-term drag on the economy, but long-term you might be better of.

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Egmont

Jun 17, 2016

Mortgage debt roughly equals savings in savings accounts. This phenomenon is tax induced because of the deductibility of mortgage interest from taxable income.

That is a huge incentive to maximize the mortgage and we have been doing that for 40 years (in my case at least).

Taken as a whole homeowners could in theory repay their mortgages and have their homes mortgage free. Exceptional situation, but there it is.

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Egmont

Jun 17, 2016

This is confused thinking. Measuring consumption by what is spent in money is questionable.

The whole point of the EU is to make the internal market more competitive. The objective is to benefit consumers by lowering prices in a competitive environment.

Judging by the graph it works well and that confirms my personal impression that life has become cheaper. Telecom charges are an obvious example but there are many more day to day expenses that came down drastically. Furthermore interest rates have come down so much that f.i. my mortgage interest is one third of what it was not so long ago.

It doesn’t mean we consume less, we pay less. We don't spend that windfall, we save it. It is in our genes.

What's more: being probably the wealthiest nation together with the Norwegians there is less incentive to spend even more than we already do.

The Dutch work on average not more tha 3,5 days per week. That tells you something about the work/leisure (im)balance we favor.

Belgium is a different culture, very Burgundian, they are affleunt too and spend far more of it than the Protestant culture in Holland (that frowns on excessive consumption).

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

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Frisian

Jun 17, 2016

This is a decent collection of facts and graps followed by a very disappointing final paragraph. It's almost as if the writer is looking for a negative conclusion about Eurozone economic strength but can't quite find it. So here is a summary with a logical conclusion.

1) The Netherlands happily borrowed at 100% LTV or more to buy their homes pre-crisis. They did not repay their mortgages but saved in endowment type structures for tax reasons. This is a market feature that causes much confusion about the actual size of mortgage debt in the Netherlands.

2) The crisis caused house prices to fall and the government to change affordability calculations for mortgages, as well as lower the tax advantages for interest only mortgages. The result was that the housing market seized up - borrowers could get a new mortgage deal from their existing lenders (who are legally obliged to offer new deals), at similar or lower fixed rates than before because market rates had fallen, but they could not typically get a new mortgage from another lender because the new rules would apply.

3) The government acknowledged the issues these STRUCTURAL REFORMS had caused and put in place a number of temporary tax incentives for people to pay down their mortgages, which they started doing.

4) housing market bottomed out, LTVs came down further as people paid down mortgages and the market started recovering. In Amsterdam, the effect was strong, a 20% rise in house prices over 2015.

So the Dutch people, who have a general propensity to save anyway, swapped consumption for savings for 5 years after the crisis. The effects can be seen in flat consumption. This has now run its course. Transaction numbers in the housing market are nearly back to pre-crisis level;s. Consumption will rise faster in the coming years.

Parallel to this, the number of flex workers and self-employed people in the Netherlands has skyrocketed in the past 5 years, making it the country with the most flexible labour market in the EU (ahead of the UK).

Now for the final paragraph as it should have been,

So what does all of this tell us? The Netherlands has gone through a country-specific adjustment process that leaves it well placed to show faster growth in consumption in the coming years. It is an example of how targeted adjustments can have a significant impact on potential economic growth. Other EU countries can take heart from this, if they can find the right adjustments for their country.

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Pharma

Jun 17, 2016

@Frisian Interesting perspective. I'm curious about the annuity element of Dutch mortgages. We tried that in the UK (endowments), and it didn't end well when the final returns were below forcasts.

With negative bond yields and volatile stock markets, are the returns on these policies keeping up with requirements for end-of-term repayment?

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3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

@Frisian Somewhat off-topic, but does the rise in flex-work / self-employment affect housing affordability and/or the ability to service current mortgages?

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Frisian

Jun 17, 2016

@Pharma @Frisian the endowment plans used to be around 50% investment plans and 50% savings,

typically with some safety valve in the loan itself in case investment returns disppointed. for example, principal repayment could be extended. all very sensible, although I did see cases where the mortgage

could remain outstanding until the age of 105

after which it would be cancelled.

These days, the vehicles are mostly savings focused. You can get a 20y fixed rate deal paying 3% if your LTV is low enough, and any new mortgage has to be annuity style. Refinacing existing mortgates still allows you to use the endowment structure, but as the tax benefit is reduced over time anyway the incentive to repay is stronger - as you say that produces a highe return than most savings options.

A Smith

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5 replies
5 replies

Jun 17, 2016

Matt, I used this data set once and was roundly criticised by a Dutch person who said that the residential mortgage debt outstanding figure doesn't take account of the portion of the mortgage that has been paid down. ie actual outstanding is far less. I tried to research this but didn't get very far although I'm led to believe it has something to do with the nature of Dutch mortgage contracts.

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Frisian

Jun 17, 2016

@A Smith the reason is that mortgage interest was tax deductible, so everyone took out interest only mortgages with a (tax efficient) endowment savings product on the side. tax deductibility is now on the amortising principal of a fictitious annuity mortgage, so this benefit is getting reduced slowly.

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A Smith

@Frisian @A Smith Thank you for the explanation.

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Jun 17, 2016

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ukrainewatcher

Jun 17, 2016

My pet theory is that in the richest countries in the world we more or less hit limit of economic GDP per capita from which it is very hard to grow from without pumping a credit bubble. I moved to Copenhagen last year, and they complain that their economy is sluggish, but Denmark is crazily rich and efficient already.

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

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divisia1

Jun 17, 2016

Well if you are an economy that is very open and depends heavily on growth prospects in the neighbouring countries, and those countries as a group barely grow in eight years, it isn't too surprising if you also grow slowly.

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Scourge of the Economists

Jun 17, 2016

Debt is meant to be repaid. That is why one should be wary of creating it.

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SMan

Jun 17, 2016

An important issue missed is the state of the banking system. Heard of any belgiAn banks in trouble?

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A. M.

Jun 17, 2016

(thought it's a Dutch-Belgian affair, to be honest)

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ohneeigenschaften

@SMan

Dexia

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Jun 17, 2016

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Bootvis

@SMan Optima

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Jun 17, 2016

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Egmont

Jun 17, 2016

I don't even know where to start to correct all the mistakes and erroneous conclusions in this article.

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UK Taxpayer

@Gesytwenssen Try us?

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Jun 17, 2016

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3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

Egmont

Jun 17, 2016

@UK Taxpayer @Gesytwenssen you have been reported for offensive language

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Paul Murphy

FT
FT

Jun 17, 2016

@UK Taxpayer @Gesytwenssen Please. If you are abusive towards either the author or other commenters you will be banned from these pixels. No further warnings. Murphy/Alphaville

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stimpy25

Jun 16, 2016

On a side note: the dutch housing market is showing signs of getting overheated. Offer a house for sale in one of the four big cities, and it is gone in a matter of days.

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ukrainewatcher

Jun 17, 2016

@stimpy25 It was overheated since 2014. Before I moved back to London, I tried to buy a house and it was mad - like London style 5 wide-eyed people for first viewing and offer on spot mad. so I am surprised it didn't really feed into the prices.

But Amsterdam lovely to live in.

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Obruni

So you're saying that the Dutch economy is

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clogged?

Jun 16, 2016

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MML

Jun 16, 2016

Surely a "structural reform" of the bankruptcy law prior to (or during) the crisis might have helped?

Regardless, if you're interested in the various cases of the ongoing European lost decade(s), take a look at Finland. I believe only Greece has done worse since 2008.

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Smurf in Kent

Jun 17, 2016

@MML Would have done OK-ish without the Nokia meltdown, so not sure Finland is a good example for anything.

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3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

Fhui1975

@Smurf in Kent @MML

Jun 21, 2016

Isn't overreliance on a single sector or a very small set of sectors/employers a common theme in the Finnish, Irish, Greek and Portugese economies?

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3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville

3/13/2017

Why is the Netherlands doing so badly? | FT Alphaville