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The (New) Dutch Disease

In the second half of 2011 the Dutch economy experienced a sharp downturn, recording negative q-o-q growth of 0.4% in the third quarter and 0.7% in the fourth quarter, in and implying that the Netherlands is now in a recession. Both quarterly growth rates are significantly lower than the corresponding projections of 0.1% and 0.0% in the autumn 2011 forecast. This reflects a pronounced weakening of both internal and external demand. Consumer confidence, which was already markedly negative in the summer, deteriorated  further at the end of 2011 and was at its lowest level since 2003 in January 2012. For 2012, the outlook for growth remains subdued. Real GDP is projected to decrease by 0.9%, a marked deterioration compared to the autumn 2011 forecast, which projected modest positive growth of 0.5%. The growth rate of private consumption – already negative for four consecutive quarters in 2011 – is expected to remain negative in 2012, as a result of government consolidation measures, mainly affecting households, and negative wealth effects. The latter mainly emanate from falling prices in the housing market. On top of this, announced pension cuts as of 2013, along with the expectation of additional consolidation measures, may give rise to anticipatory behaviour by households in the form of precautionary savings. Investment is likely to remain weak, on the back of the weak growth.

From the European Commission Interim Report

The term Dutch disease was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959. The mechanism is that an increase in revenues from natural resources (or inflows of foreign aid) will make a given nation’s currency stronger compared to that of other nations (manifest in an exchange rate), resulting in the nation’s other exports becoming more expensive for other countries to buy, making the manufacturing sector less competitive. Wikipedia.

There is today a new version of Dutch disease circling around, beware. The new version of the Dutch disease explains a decline in economic activity after the discovery of a new field of austerity in 2012. Welcome to the Club, the Netherlands.

Now, allying with the socialists – that favor less austerity and a Spain-like approach to the budget deficit, that implies not reaching the goal of 3% of GDP for this year – implies for the current conservative government escaping the mortal embrace of the far-right wing party Geert Wilders’, Party for Freedom (PVV – 14 per cent),  which in the past 2 years has climbed in the polls also thanks to the bad handling of this recession by the EU. In Wilder’s party website you can read statements like: “Do you have problems with people from Central and Eastern Europe? Have you lost your job to a Pole, Bulgarian, Romanian or other Eastern European? We want to know”.

How far do we want to take stupidity in Europe? Is it not clear that the Austere Fiscal Pact destroys the European social tissue and favors extremist parties? Really not clear?

Picture by Van Gogh, the Wood cutter.

Thank you Ale.

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