The `Tulip Model' May Be Wilting

Troubles are cropping up in the enviable Dutch economy

Around Europe, it's called the Dutch miracle. As Germany and France struggle with low growth, soaring unemployment, and stubborn budget deficits, little Holland has generated jobs while preserving most of its generous welfare state. Before the mid-June summit of European leaders in Amsterdam, the attendees praised the Dutch for finding a happy medium between Anglo-Saxon-style capitalism and the bloated social democracies prevalent on the Continent.

But the bloom may be coming off the "tulip model." After years of wage moderation and government budget cuts, salaries and disability benefits are rising again, threatening to undermine the Netherlands' competitiveness. Meanwhile, soaring property prices are artificially driving up consumption. Cautions Jan Klaver, chief economist for the Dutch Employers' Assn.: "We must not get caught up in premature euphoria."

PAY HIKES? Signs of overheating are proliferating. By encouraging temporary and part-time work, the Dutch are creating 100,000 jobs a year for their 15 million-strong population. Unemployment fell last month to 6%, less than half the rate in France. But as the labor market tightens, demands for salary hikes are getting shriller. When hotel workers received an offer for a 1.1% raise on June 1, their union refused to sign a new contract and threatened to strike. Since much of the Dutch success is due to cooperation from unions on holding down wages, such demands are potentially disastrous. Kristin Vandenbergen, an economist at Banque Bruxelles Lambert in Brussels, predicts that Dutch salaries will rise by 2.5% in 1997 vs. 1.8% in neighboring Belgium.

Another danger could be a housing bubble, inflated by a five-year, 50% jump in property prices. Interest on home loans is tax-deductible, a big advantage when taxes take a 40% bite out of even minimum-wage paychecks. The rising market is an incentive to upgrade real estate, too. Salesman Ronald Tiller is investing more than $40,000 to add a third floor to his Amsterdam home. "My house will increase enough in value to pay for the construction," he says.

The government is living beyond its means as well. Social welfare spending has fallen only slightly at a time when many companies are desperate to trim costs to stay competitive. Dutch labor law still requires employers to cough up at least 70% of a worker's salary in sick pay. Often, unions insist on 100% of wages for up to a year of illness. KLM Royal Dutch Airlines spent $219 million on worker benefits last year--$60 million on absentees. Like other Dutch companies, it has asked workers to take cuts. But even though KLM suffered an operating loss of $105 million in 1996, its unions are resisting.

While companies worry about their benefits costs, a political clash has underlined the difficulty of reining in public spending. Although the deficit now stands at 2.25% of gross domestic product, down from 4% in 1995, Central Bank President Wim Duisemberg is concerned that the Netherlands' public debt still totals a heavy 74% of GDP, well above the 60% limit laid out in the Maastricht criteria for European monetary union.

But Prime Minister Wim Kok, a Social Democrat and former union leader, faces parliamentary elections next May. "There's a feeling that the population should finally see some benefits from all the past austerity," says Fred Pallada, an economist at ING Nederland. So instead of pushing through more budget cuts, Kok plans to reduce taxes for low-income earners--and increase spending on public care for the elderly.

For other European nations searching for a way out of their own fiscal messes, the Dutch model is looking less and less like a viable blueprint. The mood on the Continent after the recent French Socialist victory and German budget war is hardly conducive to discipline. "We have gone through 15 years of restructuring," says Paul Van der Ven, chief economist at Rabobank. "You cannot expect Germany or anybody else to do it in one year." Now it looks as if the Dutch themselves are losing patience with austerity.