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Report
Shows Netherlands Would Benefit by Leaving Eurozone
Inquiring minds are reading a 73 page detailed report The Netherlands & The Euro that explains country
by country why Italy, Greece, Portugal, and Spain are going to need lots more
money, and the Netherlands and Germany will end up footing the bill.
The study highlights the fundamental flaws of the Economic and Monetary Union
(EMU), the damage done by the euro to date to the Netherlands, and the
potential costs down the road. The report conclusion is Netherlands should
exit the EMU.
Here are some snips from the report regarding the finances of Italy, Spain,
and Portugal.
Italian Projections
It cannot be assumed that roll-over of existing debt as it matures can be
done with private lenders, as in the past. Italy has virtually zero real growth, and interest rates that, at 6% or so,
are 4-5% ahead of likely future inflation. A government debt burden well over
100% of GDP in a country whose real interest rate exceeds its real growth
rate by 4% or more is theoretically unsustainable. The debt ratio is almost
certain to mount indefinitely. In this context, it is realistic to analyse a scenario in which financial markets conclude
that Italy has slipped into the “Greek trap”. In that case,
official Eurozone financing will be needed not just for the budget deficit,
but to refinance maturing debt as well. This would be a major added burden,
as Italy’s maturities are €305 billion in 2012, €175
billion in 2013, and €140 billion in 2014 and 2015, before falling
below €100 billion a year. In this scenario, financing Italy within the
Eurozone could quadruple in cost to a five-year average of €250 billion
a year.
All of the above highlights the risk that Italy’s debt will increase
its net ratio to GDP from 100%. But the SGP, Maastricht criteria, and recent
pact to “save” the euro, all require that Italy reduce its gross
debt ratio to 60% of GDP or less. Clearly there is not the slightest chance
of this within decades, unless Italy quits the euro and inflation rises. The
setting of this target is fantasy – the 60% number is arbitrary,
relating to no rational (or achievable) objective, though for Italy in the
euro, with negligible potential nominal growth, the sustainable limit of
government debt is clearly far below the current level.
Spanish Projections
Portugal is in desperate trouble – well beyond rescue, with business
net debts at 16 times net cash flow – and
Spain, and possibly France, in serious trouble: their ratios of around 12
times net cash flow being about that of Japan in 1996 that was followed by
six years of zero growth. The analysis here will focus on Spain, its grim
conclusions simply being grimmer for Portugal. French risks will be seen to
be less.
The Spanish government has actively pursued a tighter fiscal stance, in line
with the current Eurozone insistence on austerity. It is likely to prove
counter-productive. Unemployment has already mounted from 8% in late 2007 to
over 20%. The government’s GDP estimates have ceased to be credible,
registering a real decline of just under 5% in the recession, with negligible
recovery since. It is highly improbable that such a recession, less than that
of the US, Germany or Britain, would lead to a 12 percentage-point rise in
unemployment, even with the lay-off of masses of low-productivity casual
construction labour, much of it migrants from
eastern Europe. But, as elsewhere, denial followed by bluff has been the
standard Eurozone response to critics throughout the crisis. Almost
certainly, the true fall in GDP has been much greater.
Spain’s business finances, in the context of austerity, are caught in
the same vice as Italy’s government finances. As long as they stay in
the Euro, austerity is worsening, not reducing, the debt problem. The only
solution to these debt problems is growth, and that is precisely what the
Berlin-Brussels-Paris political élite is ensuring will not happen.
The risk, obviously, is to the Spanish banking system. Even after Japan’s
six-year “drying-out” period, its banks had to undergo a
substantial debt write-down in early 2003 (8% of GDP) before economic
recovery became sound. In Spain, it is unlikely that exaggerated asset values
– especially in real estate, but also in business generally – can
withstand the coming economic downswing. Once they start to tumble, the call
on the government to bail out the banks could cause its debt to soar. This is
like Ireland a couple of years ago, when it dealt with the business debt
problem, so that government debt, which has soared, now accommodates the
business debt excesses of the boom. A recession in Spain now probably implies
serious debt service problems in business, asset liquidation leading to
falling asset prices, and major bank write-offs requiring government recapitalisation. There is a major danger that current
austerity policies will lead straight to depression.
Portugal Projections
Portugal will probably be out of the EMU quickly if Greece goes, and this
will bring the focus onto the two large Med-Europe countries, Italy and
Spain, of which Italy will probably be “next up”. The debt crises
of Ireland, Portugal and Spain (in order of overall debt/GDP ratio, all of
them with a higher ratio than Greece or Italy) lie in the private sector, and
are therefore “slowburn”.
In Portugal, where the chief export market is potentially recessionary Spain,
where cost competitiveness is worse than Spain, and the business debt burden
much higher at 16 times net cash flow, as is government debt relative to GDP,
the private sector is actually still in deficit – the current-account
deficit is larger than the budget deficit.
It is almost impossible to see how Portugal can avoid a crash. It is a poorer
country than Greece, so the Franco-German decision to insist on no further
government debt write-offs after Greece means the country is likely to be
returned to penury – having in any case had very little growth since it
joined the euro at its inception.
In this projection of Portuguese financial needs, the assumption is that
coping with the extremity of business debt ratios creates a crisis that requires
the write-off of existing debt over three years, as in Greece above. The
projected government debt of zero in 2015 is therefore fictitious in the
sense that the existing debt will have been replaced by a large volume of
government debt to finance a banking recapitalisation.
This could be substantially larger than Ireland’s 2010 31% of GDP, as
Portugal’s business debt is larger than Ireland’s was.
Portugal’s future debt capacity will be extremely low, as it has
negligible potential growth and, assuming it stays in the euro, no inflation
either – yet market interest rates are likely to be quite high.
Austerity + Subsidy – Not a Cure
In summary terms, curing a country’s excessive debt problem requires
one (or more) of the three ‘de’s:
devaluation, default or deflation. The Eurozone has ruled out the first two
– and adopting the third seems likely to achieve a fourth
‘de’: depression.
With unchanged Eurozone membership, the only method of adjusting costs and
prices in Med-Europe to be competitive without extreme and constantly
reinforced austerity, leading to depression, would be stimulation of rapid
inflation in The Netherlands and Germany for a decade or two; and acceptance
over that adjustment period of large fiscal subsidy payments to the deficit countries
– not loans to be repaid later, but unrequited transfers. Such
transfers are already happening through banking systems being subsidised by access to the ECB’s repo
“window” to finance themselves at interest rates well below those
paid by their own governments
The danger for The Netherlands is that the potential for subsidy needed by
Med-Europe is open-ended. All official scenarios are based on a rapid
reversion to recovery, both in Eurozone economies and financial markets.
Official scenarios never anticipate recession or financial crisis. This is
part of the problem. The imbalances that are poisoning the Eurozone economies
cannot be acknowledged because their cure, once they are acknowledged,
clearly requires major exits from the euro, or its disbandment.
Unacknowledged, they remain unaddressed, so continued financial deterioration
is likely, unless the core Eurozone countries step in and provide the
continuing subsidies outlined above.
Aggregate Potential Costs of Current EMU Membership
Dutch Freedom Party
Wants Euro Exit Referendum
Bloomberg reports Dutch Freedom Party Wants Euro Exit Referendum
The Dutch Freedom
party wants voters in the Netherlands to decide in a referendum whether the country
should return to the guilder, De Telegraaf reported
today, citing an interview with party leader Geert Wilders.
The Freedom Party hired Lombard Street Research to investigate the cost of
maintaining the Euro zone and alternative scenarios if countries elect to
leave, according to a statement by London-based FTI Consulting. The report
will be presented in The Hague on March 5.
How Significant is
the Dutch Freedom Party?
Inquiring minds may be wondering how big and influential the Dutch Partij voor de Vrijheid (‘PVV’, the Party for Freedom) might
be. It's a good question, too. The short answer is the PVV is a critical part
of the coalition holding the Netherlands government together.
Reuters explains in commentary from November, Analysis: Populists exploit euro zone crisis to gain
influence
In the Netherlands, eurosceptic politician Geert Wilders is staging a
campaign which could push the minority government to the brink of collapse
after barely a year in power.
Last week, Wilders proposed that the Netherlands should hold a referendum on
whether to ditch the euro and embrace the Dutch guilder again, pending a
study of the long-term economic costs.
The government relies on the support of Wilders's
Freedom Party (PVV), even though it is not in the ruling coalition.
PVV won the third-largest number of seats in parliament in elections last
year, mainly because of its tough stance on immigration and Islam. It has a
pact with the coalition of Liberals (VVD) and Christian Democrats (CDA),
giving the pro-euro government the majority it needs to pass legislation.
Wilders denies he wants to bring down the government over the euro but he is
playing up a split on a major issue between the coalition and the party on
which it relies for survival.
"The euro and Europe is the key element of our foreign policy. How can
we have a split between VVD-CDA who strongly support Europe, and PVV? This is
the most dangerous issue for our cabinet," Eijffinger
told Reuters.
"If you disagree on such enormously important issues then it becomes
harder and harder to avoid accidents. At a certain moment it will
accelerate."
The Freedom Party has become the second-most popular party in Dutch opinion
polls, mainly because it opposes the costly bailouts of the euro zone's
heavily indebted members.
By proposing a referendum, Wilders has heightened tensions between his party
and the government. The euro zone debt crisis has already toppled several
governments and now threatens to engulf Dutch Prime Minister Mark Rutte.
Rutte has shot down the idea of quitting the euro,
saying it would be disastrous for the export-oriented Dutch economy.
But his government has been criticized for supporting bailouts of countries
such as Ireland and Portugal, and a stability fund intended for future
rescues as the euro zone debt crisis spreads like wildfire to bigger
economies like Italy.
Opinion polls suggest many Dutch still hanker for the guilder, and resent
having to pay for Europe's more profligate members, particularly while the
Dutch government is cutting spending on healthcare, education, and social
security benefits.
A poll at the weekend found 32 percent favored quitting the euro, 60 percent
were against leaving, and 43 percent wanted a referendum on whether to return
to the guilder. Another poll found that a majority wished the country had
stuck with the guilder.
With elections due in 2013, Austria's Freedom Party is neck and neck with the
governing Social Democrats and ahead of the conservative People's Party, the
junior party in the coalition.
"Now even Paris and Berlin are thinking about splitting up the euro
zone. We in the Freedom Party suggested this at the start of the euro crisis
because in truth it is the only correct solution. This is the only way to
save Europe," Strache said.
In an interview with the newspaper Oesterreich in
May, he warned: "We have to get out of the euro before it plunges us
into the abyss. We need a new currency along with other strong-currency
countries."
Critical Juncture for Eurozone
This new report could very well topple the government of Dutch Prime Minister
Mark Rutte. Put that bit of news together with the
fact that French Presidential candidate wants to redo portions of the just
signed "Merkozy" treaty. Polls show
French president Nicolas Sarkozy will not survive the next set of elections.
German chancellor Angela Merkel is rapidly losing support as well.
Ironically, the breakup of Merkel's coalition might be to a coalition wanting
to lend still more support the nanny-zone.
Regardless, the net effect of the demise of the governments of Germany,
France, and the Netherlands would be for far more feuding, adding to the
overall pressure for a eurozone breakup.
The eurozone is at a critical juncture now. If
governments in the Netherlands, Germany, and France collapse, and I think
they will, the eurozone could be nearing the
inevitable breakup stage already.
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