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Dutch Austerity Demands Risk Backfiring on Premier: Euro Credit

Netherlands's Prime Minister Mark Rutte
Mark Rutte, prime minister of the Netherlands. Photographer: Jock Fistick/Bloomberg

Dutch Prime Minister Mark Rutte’s demand for budget cuts in debt-laden southern Europe may backfire as the leader of one of the four remaining AAA euro countries struggles to narrow a bigger-than-planned deficit.

His coalition must find 9 billion euros ($11.8 billion) in budget cuts this year, equal to 1.5 percent of the nation’s gross domestic product, to meet European rules and protect the top credit grade that France and Austria lost in January.

Rutte, who led demands that Greece deepen spending cuts and overhaul its economy in exchange for a rescue, is squeezed by mounting domestic dissent and a campaign by nationalist leader Geert Wilders to exit the euro. The risk premium demanded by investors to own Dutch 10-year bonds relative to Germany’s almost doubled since January. Dutch yields surpassed those of AAA Finland last month for the first time since August.

“Rutte has brought himself into a very difficult position and he either loses face in Europe in order to save the coalition or his coalition collapses to meet the European budget rules,” Bas Jacobs, professor of economics and public finance at the Erasmus University of Rotterdam, said in a March 13 interview. “There’s a substantial probability the government will collapse.”

Yields on 10-year Dutch bonds climbed to 2.48 percent today from a low of 2.03 percent as recently as Jan. 16. German rates were at 1.97 percent today, while Finnish bonds of similar maturity were at 2.39 percent.

Deficit Blowout

The Dutch economy entered its second recession in three years during the second half of 2011 and unemployment has risen for two quarters to 5 percent. That’s far less dire than Spain, where the unemployment rate is 23 percent. January consumer confidence was at minus 37, the lowest since 2003, according to the Central Bureau of Statistics.

Rutte and Finance Minister Jan Kees de Jager say the deficit is too high and have committed to more cuts. Their government, which took office in October 2010 and vowed to trim spending by 18 billion euros by 2015, forecast March 1 a deficit of 4.5 percent of GDP next year -- the same as 2012 -- exceeding the 3 percent EU limit for a fifth year. The estimate represents a “big setback,” Rutte said.

Government debt would rise to 73 percent of GDP from an expected 69.7 percent this year, the government forecast. The EU limit is 60 percent. The Dutch debt-to-GDP ratio is compared with 81.8 percent in Germany and 47.2 percent in Finland at the end of September, data compiled by Bloomberg show.

“The budget deficit, when compared with other countries that are doing well like Germany, Finland and Luxembourg, really is too high,” De Jager said March 1 at a regional meeting of finance ministers in Brussels.

‘Huge Problem’

“It is uncertain if the parties involved eventually are able to take those measures,” De Jager told RTL on March 6 during his weekly interview with the television station. “I hope so, it is important for everyone but if not, it is clear that we will have a huge problem.”

Rutte has said he wants to make “smart cuts.” Opposition parties want reforms ranging from raising the pension age sooner to 66 to making it easier to fire people. The cabinet has also said it will present a new vision before the beginning of July on the tax break for mortgage-interest payments while Wilders wants to curb aid to developing countries in return for the additional cuts.

Opposition Pushback

Rutte may not even get a parliamentary majority for the EU treaty as the Labor party says measures to reach the 3 percent budget deficit limit will hurt the economy, NRC Handelsblad reported yesterday, citing lawmakers Ronald Plasterk and Diederik Samson, who are competing for the party’s leadership.

Economists say the cabinet may risk a deeper slump or half-measures that would fail to satisfy investors. The AEX stock index, the benchmark for the biggest Dutch companies, has gained about 7 percent percent this year, trailing the 20 percent advance of Germany’s DAX Index.

“Additional short-term austerity measures will unnecessarily damage the economy, which already slipped into a new recession,” said Danijela Piljic, an economist at Amsterdam-based Rabobank, in a March 8 note to clients. “The political inability to deal with hot potatoes like pensions, the labor market, healthcare and the housing market, can for financial markets and credit-rating agencies be the main reason to doubt the solvency of Dutch state finances.”

Euro Referendum

Just as the negotiations began last week, Wilders, an anti-immigration activist and leader of the Freedom Party, said the country would profit from returning to the guilder, citing a report by London-based Lombard Street Research commissioned by his party. Wilders said a referendum is needed on whether the Dutch should stay in the euro area.

Wilders is tapping into rising discontent. Cleaners working at offices of Royal Philips Electronics NV, public train stations and other offices, are in their 10th week of a strike.

Police in four provinces refused to fine people for minor violations such as speeding, while the Amsterdam ArenA stadium was filled on March 6 by 50,000 teachers who voiced their protest over funding cuts. Municipal civil servants also plan labor stoppages in April and May.

The ruling Liberals and Christian Democrats, together with the Freedom Party, would drop six of 76 seats in the 150-member parliament if elections were held today, losing its lower-house majority, according to a March 8 poll by Ipsos Synovate.

Given their advocacy of German-inspired demands for more austerity to cut debt throughout Europe, Rutte and De Jager aren’t likely to get much room to maneuver from the EU.

“We think that the Netherlands is one country that has been very vocal when supporting the reinforcement of our fiscal surveillance rules,” Amadeu Altafaj, European Commission economy spokesman, said in e-mailed comments March 7. “So it’s absolutely normal to believe that the Netherlands will apply this same approach to its own fiscal policies,” he added.

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