A natural advantage

The Dutch economy seemed slow to catch on that there was a global economic crisis. In fact the Netherlands has at various times over the past ten years performed well above its European neighbours. Between 1998 and 2000 GDP growth averaged more than four per cent compared to around three per cent in the European Union as a whole.
It helps your chances of doing well when you are holding an ace card. A factor underpinning the Dutch economy for almost 50 years has been its huge natural gas reserves. Demand and price trends of this resource have had a significant influence on GDP growth trends.

However, no amount of natural gas, within reason, could long protect an economy heavily dependent on foreign trade from this current economic crisis. A surprising fact for a relatively small country is that the World Trade Organisation ranked the Netherlands the world's fifth largest exporter in 2008, with exports worth about $600 billion (about Dh2.2 trillion), which is about 40 per cent of Germany's leading total.
 

Trade intensive
Indeed, the Netherlands derives more than two-thirds of its GDP from trade, with Germany its top partner, and very high exposure to the euro zone generally. Besides its local products, re-exports make a considerable contribution, the Port of Rotterdam being Europe's major trans-shipment hub. The range of domestically produced exports reflects some world-renowned entities and household names, such as Unilever (food processing), Royal Dutch Shell (petroleum refining) Philips (electrical machinery), and DSM (chemicals).

It's an impressive list for a country with a population of only 16.5 million.
Such global brands ordinarily boost the balance of payments, but in the current climate they too have reflected the severity of the downturn. Recently released figures from the Netherlands Bureau for Economic Policy Analysis (CPB) anticipate that domestic exports will be down some 15 per cent this year, with the re-export trade being almost equally hard hit (12.5 per cent).

This year is meant to be the bottom of the cycle, with a return to positive export growth, albeit meagre at 1.5 per cent and 4.5 per cent for domestic exports and re-exports respectively, in 2010.

The financial services industry has also taken the brunt of the recession. It was not just about the liquidity crisis caused by the credit crunch. That factor was exacerbated by the ill-timed acquisition of Dutch giant ABN-Amro by a consortium of overseas banks consisting of the Benelux-owned Fortis Bank, Royal Bank of Scotland and Spain's Santander. The government found it necessary to nationalise and bail out a number of struggling banks and insurance companies in the past year.

The cumulative impact on the economy, according to data published last month by CPB, is that GDP will contract by 4.75 per cent this year, while for 2010 zero growth is expected. While that's some setback to digest, the situation is not quite as bad as for Germany, with its unfortunate knock-on effect through trade.

Stimulating growth
With the Netherlands being one of the 16 members of the euro zone, responsibility for monetary policy lies with the European Central Bank, which has lowered interest rates from 4 per cent at the end of last year to a current one per cent. However, the Dutch government has been able to launch three complementary stimulus packages since November 2008, amounting to approximately 2 per cent of GDP. These funds have partly consisted of government guarantees to stimulate lending and exports. Unavoidably, the aftermath of the crisis will be far-reaching. Unemployment is set to double to eight per cent in the two years to 2010, says the CPB.

Stringent moves
The Dutch government has chosen to act boldly in accepting that a measure of austerity is required, so is embarking on a programme of serious budget cuts. There are due to be amendments to fiscal subsidies, rules and taxes in the housing market, a cutback in overseas development aid, foreign postings and peacekeeping missions. Changes also loom for health care spending, child allowances and subsidies for projects in non-sustainable energy.

Yet, with an eye to medium-term needs, and the multiplier effect of certain public works, there are plans to stimulate the economy by accelerating already planned projects. After three consecutive years of surplus, the general government budget balance is expected to show a deficit of 4.6 per cent of GDP in 2009 and 6.2 per cent in 2010; that's substantially cyclical in nature, with the cost of unemployment benefits and dwindling tax revenues.

But the strong intervention in the financial sector creates a further burden, with a significant rise in net public debt, from 25.4 per cent of GDP in 2008 to an expected 37.7 per cent in 2010. Although medium-term debt analysis is a fraught subject, that increase does not appear as drastic as some of its neighbours, for instance 56.9 per cent and 57 per cent respectively in Germany and France.

Despite a forecast drop to 12 billion euros (about Dh64 billion) this year and 7.5 billion euros (about Dh40 billion) in 2010 from the delayed effect of a lower oil price and declining output, Dutch finances will continue to be underpinned by gas revenues for a couple of decades yet. Now efforts are needed to extend that lifespan by technological means, as well as building a strategic gas hub role for Europe.

With that advantage, you might say the Netherlands has had a flare for stability. But as critical studies of the energy windfall have demonstrated, even luck has to be
well-managed, and that challenge still remains.