In memory of Dr. Andreas Höfert

Focusing on Holland instead of Hollande

Despite the complexity of the European crisis, categorizing the characters has been quite simple so far. First we have Greece, the country where it all started and which could now be the first to exit the Eurozone. Then there are the so-called “weak” countries like Ireland, Portugal, Spain and Italy, and the so-called “strong” countries, chief among them Germany but also the Netherlands, Austria and Finland. Finally, there are some countries in between, like France or Belgium.

Many investors have focused almost exclusively on the “weak” countries throughout the crisis, worrying about their need for fiscal consolidation and their dismal economic environments. With the exception of Germany, where the economy continues to defy gravity, not much attention is devoted to the “strong” countries. However, we see some rather interesting developments in these countries, developments that challenge the dichotomy between “weak” and “strong.” The Netherlands provides a particularly instructive example.

Indeed, taken as a whole, the Dutch statistics do not look as strong as many people might expect. The country was already in recession by the fourth quarter of 2011, having shrunk for two quarters in a row, and this trend continued in the first quarter of 2012. Thanks to this double dip, the Dutch real gross domestic product currently sits 2% below its peak from the first quarter of 2008. In fact, in Europe numbers like this have become the norm. With the notable exception of Germany, all major Eurozone economies are currently nose-diving.

The long-term trends in the Netherlands are also not as sound as one might think. The country is facing a significant price correction in its housing market, with prices dropping roughly 10% since their peak August 2008 highs. This is not a crash like the ones we have seen in Ireland and Spain, but it is still far from over and is certainly adding stress to Dutch consumers, who also have rising unemployment to contend with.

In terms of competitiveness, labor costs have increased by almost 30% in the Netherlands since the introduction of the euro, but only by 3% in Germany, according to the OECD statistics unit. This discrepancy hasn’t yet materialized in the form of a negative trade or current account balance, but could become a hindrance in the longer run.

Moreover, the country also faces significant political uncertainty following the resignation of conservative prime minister Mark Rutte and his government on 23 April. The fragile coalition fell apart as Geert Wilders’ populist euro-skeptic party, which until then had backed the government, walking out of austerity talks. Polls currently suggest that the new Dutch parliament to be elected in the fall could be much more left-leaning and much less austerity-minded. This in turn could jeopardize the AAA rating of the Netherlands, which is currently under review by the agencies.

The Netherland is not what one would call a particularly strong country. Its deficit-to-GDP ratio has been quite high in the last couple of years, and is also projected to stay well above the Maastricht criteria of 3% this year. Nevertheless, the Netherlands is clearly not what one would call one of the weaker countries in the Eurozone. Beside the strong current account surplus mentioned above, its debt-to-GDP ratio of 65.2% at the end of 2011 is still relatively low.

The Netherlands example shows that labeling countries simply as weak or strong doesn’t capture the full complexity of the situation. Ultimately, there is only one strong country in the Eurozone: Germany. All the others have problems – from a German perspective, at least – and the issue is their degree of severity.