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Sinking Dutchman haunts the eurozone
Wednesday, 25 April 2012 09:48
The political crisis in The Hague shows another core country going soft on the eurozone's chosen strategy of universal austerity, with the hardcore fiscal disciplinarians looking increasingly under siege.
The domestic political debate will no doubt centre on what might happen after prime minister Mark Rutte's resignation, and in particular whether Geert Wilders, the rightwing populist at whose mercy Mr Rutte's governing coalition ruled, will gain or lose from withdrawing his support, ostensibly in protest against austerity measures required by Brussels.
But the wider economic and political significance of the fall of Mr Rutte's government for the eurozone as a whole is already clear. The Netherlands – until recently a hard-as-nails ally of Germany in resisting help for peripheral eurozone members before they get their public finances in order – has seen its chickens come home to roost. Last year's government deficit of 4.7 per cent of national output was an embarrassment for The Hague, which has acted as a cheerleader for the European treaty forcing governments to keep their borrowing below a 3 per cent limit.
Markets have been rattled by the inability of one of Europe's dwindling band of triple A rated states to do what it demands from others – and by the resulting political uncertainty, which compounds that of election-frenzied France. Stocks dipped and sovereign bond yields rose around the world on Monday, although markets found their feet the next day. Dutch credit default swaps have parted company with German ones.
The Dutch case is a horrific display of Europe's self-harming. In pressurised states with no fiscal space, deficit cuts are of course imperative, but countries that can should let deficits widen to buoy aggregate demand in the eurozone until the recovery is firm. There is no reason for the Netherlands, whose 65 per cent debt to output ratio puts it among the eurozone's most solvent, to fear moderate deficits in a recession. But Europe's policy of austerity for all is dragging one economy after another back into recession – and the effect is not limited to the periphery.
The bankruptcy of universal austerity is political as well as economic. The more clearly the eurozone's favoured policy is failing, the less credible mainstream politicians – still too loyal to Germany's demand for deficit cuts – will seem to voters. If leaders are seen as oblivious to common sense, they will leave the field open for the likes of Mr Wilders.
Financial Times, 25 april 2012